-----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, VBtauppiEFa3CVnWg182hohzefcYOFtp/C/c9X9T9Dz0tnDijGAeoAwu74DgS5/I D/giFxBCvQEvBGNCfUfHzg== 0000912057-96-021577.txt : 19961001 0000912057-96-021577.hdr.sgml : 19961001 ACCESSION NUMBER: 0000912057-96-021577 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10441 FILM NUMBER: 96637339 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-K (Mark One) [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended June 30, 1996. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . Commission File Number 1-10441 SILICON GRAPHICS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2789662 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 2011 North Shoreline Boulevard, Mountain View, California 94043-1389 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (415) 960-1980 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED: ------------------- -------------------- Common Stock, $0.001 par value New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's voting stock held by non- affiliates of the registrant, based upon the closing sale price of the Common Stock on September 3, 1996 on the New York Stock Exchange as reported in The Wall Street Journal, was approximately $3,726 million. Shares of voting stock held by each executive officer and director and by each person who owns 5% or more of any class of registrant's voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. AS OF SEPTEMBER 3, 1996, THE REGISTRANT HAD OUTSTANDING 173,158,255 SHARES OF COMMON STOCK. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference to this Form 10-K Report: (1) Proxy Statement for registrant's Annual Meeting of Stockholders to be held October 30, 1996 (Part III), and (2) registrant's Annual Report to Stockholders for the fiscal year ended June 30, 1996 (Parts I, II and IV). PART I ITEM 1. BUSINESS GENERAL Silicon Graphics provides computing solutions that range from cost- effective high performance desktop workstations to database and compute servers to Cray Research supercomputers. The Company's systems enhance the productivity of organizations engaged in technical, scientific, corporate and entertainment applications across a wide range of industries. Silicon Graphics' Cray Research subsidiary, acquired in fiscal 1996, provides supercomputing tools and services to help solve customers' most challenging problems. Another subsidiary, MIPS Technologies, designs the industry-leading MIPS-Registered Trademark- RISC microprocessor. The Company licenses its designs to semiconductor partners, who manufacture MIPS microprocessors for use in the computer, embedded control and consumer markets. The Company's Alias|Wavefront subsidiary provides innovative animation and advanced modeling software for entertainment and industrial applications. CORE TECHNOLOGIES The Company's strategy has been to identify and to invest heavily in the key technologies that will enable it to set the pace of innovation. With respect to these core elements, the Company's objective is to have the world's leading technology and to be the first to deliver that technology in new products. This approach has given Silicon Graphics a clear strategic focus and has allowed it to obtain high productivity from its research and development investment. With respect to the other, non-core elements required to develop its products, the Company seeks to form strategic relationships with leading suppliers worldwide. The Company's core technologies are: GRAPHICS Leading graphics performance has been a distinguishing characteristic of Silicon Graphics' products since its inception. The Company's systems use its proprietary dedicated graphics subsystems, which not only provide strong graphics capability but also improve overall system performance by freeing up the central microprocessor for other tasks. These subsystems, such as the Onyx-TM- InfiniteReality-TM- and Indigo2 Impact-TM- family of graphics subsystems, perform complex functions that allow the user to render, display and manipulate realistic 3D objects and images in real time. In addition, Silicon Graphics has developed the OpenGL-Registered Trademark-, an application programming interface (API) that evolved from the Company's IRIS GL-TM- API and has become an industry standard for developing 2D and 3D graphics applications. The OpenGL API is controlled by an independent architecture review board that governs its direction and is licensed to more than 30 leading companies, including all of the principal UNIX-Registered Trademark- workstation manufacturers. RISC MICROPROCESSORS The acquisition of MIPS Computer Systems in 1992 gave the Company ownership of what it believes to be the industry's leading reduced instruction set computing (RISC) technology, and the Company continues to devote substantial resources to extending this technology. Since 1992, the Company and its semiconductor partners have developed and introduced several new families of MIPS RISC microprocessors optimized for use in products ranging from consumer electronic products to high-performance supercomputers. SCALABLE COMPUTING The ability to build computer systems that use more than one processor without major changes in applications software has been an important factor in the performance of the Company's systems, particularly for the technical and scientific markets. This multiple CPU design optimizes the performance of a single application or maximizes system throughput when handling many applications or users at one time. Silicon Graphics' substantial investments in symmetric multiprocessing since the late 1980s have enabled it to become the leading supplier of low and midrange supercomputers. The acquisition of Cray Research in 1996 has enhanced the Company's capability to deliver large multiprocessing systems involving hundreds of processors. DIGITAL MEDIA Digital media integrates 3D graphics, animation and text with video, audio and video conferencing capabilities. The Company believes that digital media technology delivers a fundamentally better way to work and communicate, especially in a networked computing environment enabling cooperative work in real-time. Examples include "collaborative engineering", where engineers in different countries share visual information and work concurrently on 3D models and designs. COMPUTER SYSTEM PRODUCTS The Company's computer systems range from desktop workstations to servers and supercomputers. All of these systems (other than the current Cray Research product families) are designed around MIPS RISC microprocessors developed by MTI and the IRIX-TM- operating system, which is the Company's enhanced version of the System V Release 4 (SVR4) UNIX operating system. The IRIX operating system includes the Indigo Magic-TM- user environment, a complete family of tools including desktop utilities, digital media applications and collaborative tools. Because of their common microprocessor and operating system technology, the Company's systems generally are binary-compatible, meaning that software applications run without modification across the entire product line. DESKTOP SYSTEMS Silicon Graphics desktop workstations combine key elements of workgroup collaboration, interactive media and computing at a range of prices and performance. Systems in this family can be used for tasks as diverse as manipulating 3D models for computer-aided design (CAD), crunching numbers for chemistry and geographic information systems applications, or functioning as a tool for video editing, animation rendering, technical publishing, World Wide Web and intranet authoring and serving, and software development. INDY The Indy-TM- family of entry-level desktop workstation features advanced 3D graphics and imaging, real-time video capability and interactive and professional quality graphics, audio and imaging capabilities. The Indy has significant appeal in markets such as mechanical CAD, chemistry, color publishing, film and video, software development, education and media authoring. INDIGO(2) The Indigo(2)-TM- family of workstations is designed to provide the strongest graphics and computational capability available in the desktop category, for applications such as 3D solids modeling, mechanical CAD, digital prototyping, 3D visualization, animation, architectural design and professional audio and video production. WEBFORCE The WebFORCE-TM- family of computer systems, one of the first product lines for creating and serving content for the World Wide Web, integrates hardware and software for professional Web content authoring and commercial Web serving, and includes Indy and Indigo(2) Impact desktop systems as well as Challenge-Registered Trademark- servers. HIGH END SYSTEMS -2- ONYX This family of graphics supercomputers uses multiple microprocessors and sophisticated graphics subsystems to handle the most demanding visual computing tasks. Graphics subsystems available with the Onyx systems include the InfiniteReality and Reality Engine(2)-TM- graphics subsystems. The Onyx family is well-suited for applications such as computational chemistry, oil and gas research, molecular modeling, global weather modeling, structural dynamics, fluid dynamics, image processing, visual simulation, medical imaging and chemistry, interactive entertainment and digital film and video production. CHALLENGE The Challenge family of network resource servers includes a range of capabilities, from single processor deskside systems used by small to mid-size workgroups up to systems employing dozens of processors and capable of supporting enterprise-wide distributed computing environments. Challenge servers efficiently store, manage and move large amounts of audio, video and graphics data as well as traditional databases and textual data for a wide range of commercial and other applications. Key uses include data mining (to analyze and organize database information), product data management for manufacturing, and commercial transaction processing. Challenge servers also are used as media servers, World Wide Web site servers and file servers. POWER CHALLENGE The POWER Challenge-TM- family of supercomputing servers combines low-cost, high-performance CMOS RISC technology, advanced parallel system architecture and a simple shared-memory programming model. Key applications in the technical and scientific markets include finite element analysis (to determine the impact of elements like stress and temperature), quantum chemistry calculation, seismic analysis and computational fluid dynamics. CRAY RESEARCH PRODUCTS Cray Research, founded in 1973 and acquired by the Company in 1996, is the world's leading supplier of advanced supercomputers. Cray Research has continued as a separate division of Silicon Graphics focused on the high end of the supercomputing market. Cray Research is working closely with the Silicon Graphics advanced systems division to develop and introduce over the next several years an integrated family of highly scalable systems that will eventually cover the full range from affordable deskside servers to the world's most powerful supercomputers. The CRAY T90-TM- family of supercomputers deliver maximum performance for vectorized supercomputing applications. The large memory bandwidth of T90 systems make them ideal for problems involving huge amounts of data, such as weather and climate modeling and large-scale auto engineering. The CRAY J90-TM- family uses low-cost CMOS technology to deliver affordable supercomputing for vectorized applications like molecular modeling, ecosystem simulation, medical imaging and vehicle dynamics simulation. The CRAY T3E-TM- highly scalable supercomputing systems employ a massively parallel architecture ranging from 16 to as many as 2,048 processors for a broad range of scientific and industrial applications as diverse as petroleum exploration, aerospace enginering and traffic system simulation. MIPS RISC MICROPROCESSORS All of the Company's system products (other than the current Cray Research families) incorporate the MIPS RISC microprocessor architecture. The Company's MIPS RISC microprocessor designs incorporate a general purpose architecture and instruction set designed for high performance over a wide range of applications. The MIPS RISC microprocessor designs make efficient use of instruction "pipelining" techniques and proprietary compilers, allowing significant performance gains to be realized by optimizing the tradeoff between compiler and microprocessor functions. The versatility of the MIPS -3- RISC architecture makes it suitable for computer applications from entry-level desktop systems up to supercomputers. MIPS RISC microprocessors are also used in a wide variety of noncomputer applications, including disk drives, printers and copiers and, increasingly, consumer electronics products. Silicon Graphics computers represent only a small percentage of the worldwide consumption of MIPS RISC microprocessors. The Company does not manufacture or sell MIPS RISC microprocessors and related devices. It licenses its designs to "semiconductor partners" who manufacture and sell the parts. The Company's current licensees are: Integrated Device Technology, Inc.; LSI Logic Corporation; NEC Corporation; NKK Corporation; Philips Semiconductor; and Toshiba Corporation. Each semiconductor partner paid an initial license fee at the beginning of the license period and pays unit royalties based upon sales. APPLICATIONS SOFTWARE Because the Company has historically developed only a very limited set of applications software, its customers must either develop or license from a third party the software necessary to address their needs. The Company maintains active programs to encourage independent software development for its systems, including training, technology support and cooperative marketing. The Company believes that there currently are over 2,000 registered application software programs offered for use on its systems. The Company's Alias|Wavefront division supplies modeling and animation application software used by creative professionals in the entertainment, industrial design and visualization and graphic design markets. Its industry- leading products include Alias PowerAnimator-TM-, Alias Studio-TM-, and Wavefront Composer-TM-. Alias|Wavefront has also announced the next generation Maya-TM- product architecture, which will be incorporated in products beginning in fiscal 1997. Alias|Wavefront is based in Toronto, Canada with sales offices across North America, Europe and Asia and worldwide distribution. In fiscal 1996 the Company introduced the Cosmo-TM- family of content creation, browsing and management tools for the World Wide Web and intranet markets. The Cosmo products are intended to facilitate the creation of media- rich three dimensional environments and especially to take advantage of the power of the industry standard Virtual Reality Modeling Language (VRML) developed by Silicon Graphics. MARKETING, SALES AND DISTRIBUTION The Company sells its products through its own direct sales force and through several indirect channels. In fiscal 1996 direct sales accounted for approximately half of the Company's product revenues. The direct sales and support organization operates throughout the United States and in all significant international markets. The Company serves smaller international markets through distributors. The principal indirect channels through which the Company operates are the following: _ VARS, or value added resellers, are software companies that develop or customize their proprietary software specifically for use with the special graphics hardware of the Company's workstations. VARs purchase workstations from the Company or its North American distributor, incorporate their applications software and resell the systems to end-users. _ VADS, or value added dealers, are typically direct sales organizations that sell primarily into a single vertical market and incorporate appropriate specialized third-party software with the Company's hardware for sale to their customers. -4- _ OEM ("original equipment manufacturer") customers generally are computer systems vendors that customize applications software for use on the Company's workstations and sell turnkey systems under the OEM's product name. OEMs also provide independent marketing, service and support programs to their customers. The Company's principal OEMs include Tandem Computers Incorporated and Siemens Nixdorf AG. _ SYSTEMS INTEGRATORS include Silicon Graphics systems in much larger systems customized for use by the federal government and large commercial clients. Information with respect to international operations and export sales may be found on page 60 of the 1996 Annual Report to Stockholders, which is incorporated herein by reference. See also "Risks That Affect Our Business" below. Although no customer accounted for 10% or more of the Company's total revenues for fiscal 1996, 1995 or 1994, a significant reduction or delay in sales to major customers could adversely affect the Company's operating results. CUSTOMER SERVICE AND SUPPORT The Company believes that the quality and reliability of its system products and the ongoing support of such products are important elements of its competitive strategy. The Company's customer service organization includes field service engineers, field product and applications specialists, product support engineers, training specialists and administrative support personnel. In addition, the Company provides customer education through regularly scheduled courses in system software administration, applications programming and hardware maintenance. The Company provides local customer support from its regional sales and service offices located in North America, Western Europe and the Pacific Rim, with spare parts inventory stored at each location. International distributors provide training and support for products sold by them. The Company typically provides a standard "return to factory" hardware warranty against defects in materials and workmanship for periods of up to one year. RESEARCH AND DEVELOPMENT The Company's research and development program is directed principally toward maintaining and enhancing the Company's competitive position through incorporating the latest advances in microprocessor, hardware, software and networking technologies. This effort is focused specifically on developing and enhancing its computing architectures, MIPS RISC microprocessors, graphics subsystems, VLSI technology, compiler software, operating system, applications software and development tools. Simultaneously, the Company seeks to develop new ways in which to increase product reliability, reduce manufacturing costs and improve product development lead times. During fiscal 1996, 1995 and 1994, the Company spent approximately $353 million, $248 million and $191 million, respectively, on research and development. Those amounts represented 12.1%, 11.1% and 12.4%, respectively, of revenues. MANUFACTURING The Company's manufacturing operations primarily involve assembling high level subassemblies and systems and testing major purchased subassemblies. All products are subjected to substantial environmental stress and electronic testing prior to shipment to customers. The Company primarily manufactures and ships its products from its main facility in Mountain View, California and the Cray -5- Research facility in Chippewa Falls, Wisconsin. The Company also has a European manufacturing and support center near Neuchatel, Switzerland. The Company continually evaluates the allocation of manufacturing activities among the Company's own operations and those of suppliers and subcontractors. This allocation may be affected by fluctuations in the volume of business, geopolitical, economic and technological developments and other factors. The Company attempts to utilize standard parts and components available from multiple vendors rather than to integrate its manufacturing operations vertically. The Company believes that there are a number of competent vendors for most of the parts and components used in its system products. In certain circumstances, despite the availability of multiple sources, the Company may select a single source or a very limited number of sources in order to maintain quality or price control or to develop a more strategic relationship with the supplier. Reliance on single or limited source vendors involves several risks, including the possibility of a shortage of certain key components that meet the Company's product specifications and reduced control over delivery schedules, manufacturing yields, quality and costs. These issues tend to be especially acute in the early or "ramp-up" stage as the Company attempts to reach volume production of new products. In particular, the Company is dependent on a limited number of semiconductor manufacturers with state of the art fabrication facilities. During fiscal 1996, for example, the Company was dependent on a single supplier, NEC, for the great majority of its requirements of MIPS R10000 microprocessors, a dependency that will continue through at least the first half of fiscal 1997 until a second source begins volume production. Other components for which the Company currently does not have multiple sources include certain application-specific integrated circuits ("ASICs"). These are currently obtained from IBM, LSI Logic, Motorola, VLSI Technology and Toshiba. Components available from limited sources include floating point coprocessors and certain memory circuits. The Company also has single sources for certain peripherals, communications controllers and power supplies, and the monitors and plastic cabinets used across the Company's system products. The Company believes that, in most of these cases, alternative sources of supply could be developed over a period of time. However, a reduction or interruption in supply or a significant increase in the price of one or more single or limited source components would, at least in the short term, adversely affect the Company's operating results. Many of the Company's suppliers are located outside the United States, especially in Japan. The prices of parts from these suppliers have been and may be affected significantly by such factors as protectionist measures and changes in currency exchange rates between the United States and other countries. In addition, changes in the availability of certain memory chips (DRAMs, SRAMs and VRAMs) have caused, and in the future may cause, significant changes in their prices. COMPETITION The computer industry is highly competitive and is characterized by rapid technological advances in both hardware and software development. These advances result in frequent new product introductions, short product life cycles and increased new product capabilities, typically representing significant price/performance improvements. The principal competitive factors in the Company's market are product features, price/performance, networking capabilities, product quality and reliability, ease of use, capabilities of the system software, availability of applications software, customer support, product availability, corporate reputation and price. The strong competition faced throughout the Company's product line can result in significant discounting from list price. -6- The Company's principal competition has historically come from other workstation and computer system manufacturers and, to a lesser extent, from graphics subsystem and terminal vendors and graphics integrated circuit manufacturers. The principal workstation and computer manufacturers that compete in the Company's markets are Digital Equipment, Hewlett Packard, IBM and Sun Microsystems. The Company is facing increasing competition at the lowest end of the workstation market from systems based on personal computer technologies such as the Windows NT operating system, Intel microprocessors and graphics acceleration cards. In the high end of the supercomputer market, the Company faces competition from IBM as well as from NEC, Hitachi and Fujitsu. In the applications software market and certain other emerging markets the Company's principal competitor is Microsoft. The Company's MIPS RISC microprocessor architecture and technology compete directly with microprocessor products offered by manufacturers of other microprocessor designs, in particular those offered by IBM, Digital, HP, Intel, Motorola and Sun. Although the Company believes its RISC architecture offers advantages over these other designs, some of these architectures have a larger installed base and wider availability of application software, which may adversely affect the adoption of the Company's RISC architecture. 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. 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 the basis that its revenue will continue to grow, 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. The Company plans to introduce several new product families in the first half of fiscal 1997, including products that will replace virtually the entire current product line. A number of risks are inherent in this process. -7- 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. Short product life cycles place a premium on the Company's ability to manage the transition from current products to new products. In order to minimize product transition issues, 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, and delays in customer purchases of existing products in anticipation of the introduction of new products. On September 25, 1996 the Company announced that its revenues for the first quarter of fiscal 1997 would be only slightly higher than for the same period in the prior year and that its net income for that period would be materially below expectations. The results for the quarter are attributable, at least in part, to customer anticipation of new high-end and desktop products that the Company plans to introduce 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 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 can 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 has created a new business unit, the Silicon Desktop Group, with 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. 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 -8- also require the dedication of management resources, which may temporarily distract attention from the day-to-day business of the Company. 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 June 30, 1996, the combined Company's backlog was $572 million, representing orders scheduled to ship during fiscal 1997. This backlog primarily consists of orders for Cray Research T90 and T3E 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. In the second quarter of fiscal 1996, for example, the Company's results were adversely affected by purchasing slowdowns related to the federal government budget impasse. 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 more than half 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. -9- 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 extend through December 1999. Beginning in fiscal 1997, the Company also expects to hedge a portion of anticipated quarterly revenues from international operations. The Company utilizes foreign currency forward contracts to hedge non-U.S. dollar intercompany receivables. 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. 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 Company's international operations and to the Cray Research business. 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. -10- 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. 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. PROPRIETARY RIGHTS AND LICENSES The Company has been granted or has applications pending for a significant number of U.S. patents, and will continue to seek patent coverage for its inventions in both the United States and foreign countries. The Company also has applied for and holds various trademark registrations in the United States and in selected foreign countries. The Company will continue to seek protection for its inventions, trademarks, maskworks and copyrights where appropriate. As is customary in its industry, the Company licenses from third parties a wide range of software for its internal use and for the use of its customers. The Company licenses the UNIX operating system on a non-exclusive basis from Novell, Inc., and sublicenses it to its customers. The Company's ability to compete may be affected by its ability to protect proprietary information and to obtain necessary licenses on commercially reasonable terms. The extent to which U.S. and international intellectual property laws protect the Company's products, and the enforceability of end-user license agreements, have not been fully determined, and the computer industry has seen a substantial increase in litigation with respect to intellectual property matters. Such litigation or changes in the interpretation of intellectual property laws could expand or reduce the extent to which the Company or its competitors are able to protect their intellectual property or require changes in the design of products which could have an adverse impact on the Company. There can be no assurance that the Company will not be made a party to litigation regarding intellectual property matters in the future. See "Legal Proceedings." EMPLOYEES As of June 30, 1996, the Company had approximately 10,485 full-time employees. The Company's future success will depend, in part, on its ability to continue to attract, retain and motivate highly qualified technical, marketing and management personnel, who are in great demand. The Company has never had a work stoppage, and no employees are represented by a labor union. The Company believes that its employee relations are good. CORPORATE DATA The Company was originally incorporated as a California corporation in November 1981, and reincorporated as a Delaware corporation in January 1990. The Company acquired MIPS Computer Systems, Inc. through a merger in June 1992, and acquired Alias Research Inc. and Wavefront Technologies, Inc. through mergers in June 1995. The Company recently acquired Cray Research, Inc. through a merger effective June 30, 1996. ITEM 2. PROPERTIES The Company believes that, while it currently has or is developing sufficient facilities to conduct its operations during fiscal 1997, it will continue to acquire both leased and owned facilities throughout the world as its business requires. The Company's corporate offices and its primary research and -11- development and manufacturing operations are located in Mountain View, California. The Company leases twelve adjacent buildings comprising a total of approximately 726,500 square feet under leases terminating during 2000 through 2005. The Company owns 7.5 acres near its Mountain View headquarters, on which a 112,000 square foot headquarters building for its sales organization was completed in fiscal 1995. The Company also leases sixteen other buildings near its Mountain View headquarters, comprising approximately 736,000 square feet. The Company also has leased 22 acres of land near its other facilities in Mountain View on which a four-building, 500,000 square foot general office complex is being constructed to be leased to the Company for occupancy in fiscal 1997. As a result of the acquisition of Cray Research, the Company also owns manufacturing, research and development and service facilities comprising approximately 747,000 square feet in Chippewa Falls, Wisconsin and manufacturing, research and development, sales and administrative facilities comprising 479,300 square feet in Eagan, Minnesota. The Company has vacated and intends to sell a general and administrative and sales office comprising approximately 118,900 square feet in Mendota Heights, Minnesota. The Company's computing services operation leases approximately 100,100 square feet in Minneapolis. The Company's European manufacturing and support center near Neuchatel, Switzerland is located in a facility owned by the Company, consisting of approximately 75,000 square feet An additional facility comprised of approximately 60,000 square feet is under construction and due for occupancy in January 1997. The Company also leases sales, service and administrative offices worldwide. ITEM 3. LEGAL PROCEEDINGS The Company is defending the lawsuits described below. The Company believes that it has good defenses to the claims in each of these lawsuits and is defending each of them vigorously. The Company is defending 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. These suits allege that the Company and certain of its officers and directors made material misrepresentations and omissions during the period from October to December 1995. On September 25, 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. The Company also is defending securities class action lawsuits involving MIPS Computers Systems, Inc., which the Company acquired in June 1992, and Alias Research Inc., which the Company acquired in June 1995. The MIPS case, which was filed in the U.S. District Court for the Northern District of California in 1992, alleges that MIPS and certain of its officers and directors made material misrepresentations and omissions during the period from January to October of 1991. On September 11, 1996, the United States Court of Appeals for the Ninth Circuit reversed the summary judgment granted in defendants' favor in June 1994. The Company intends to seek rehearing of the Court of Appeals' decision. The Alias case, which was filed in the U.S. District Court for the District of Connecticut in 1991, alleges that Alias and certain of its officers and directors made material misrepresentations and omissions during the period from May 1991 to April 1992. Alias' motion to dismiss the amended complaint is pending. The Company also is defending a patent infringement lawsuit filed by Martin Marietta Corp. in the U.S. District Court for the Middle District of Florida in September 1995. The Company has filed a counterclaim seeking to invalidate the principal patent at issue in the lawsuit, and Martin Marietta has requested the U.S. Patent and Trademark Office to re-examine the patent. The District Court has set a trial date for the lawsuit in February 1998. -12- The Company routinely receives communications from third parties asserting patent or other rights covering the Company's products and technologies. Based upon the Company's evaluation, it may take no action or it may seek to obtain a license. There can be no assurance in any given case that a license will be available on terms the Company considers reasonable, or that litigation will not ensue. Management is not aware of any pending disputes, including those described above, that would be likely to have a material adverse effect on the Company's financial condition, results of operations or liquidity. However, management's evaluation of the likely impact of these pending disputes could change in the future. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their ages as of September 20, 1996, are as follows:
Executive Officer Name Age Position and Principal Occupation Since ---- --- --------------------------------- ----- Edward R. McCracken 52 Chairman, Chief Executive Officer and Director 1984 Robert R. Bishop 53 Chairman, Silicon Graphics World Trade Corporation 1991 and Director, Silicon Graphics, Inc. Gary L. Lauer 43 Executive Vice President, Worldwide Sales and Marketing, 1988 Silicon Graphics, Inc. and President, Silicon Graphics World Trade Corporation Javaid Aziz 44 Senior Vice President, European Field Operations 1995 Forest Baskett 53 Senior Vice President, Research and Development and 1986 Chief Technology Officer Ross A. Bott 45 Senior Vice President, Enterprise Technologies 1996 John E. Bourgoin 50 President, MIPS Technologies, Inc. and Senior Vice 1996 President, Silicon Graphics, Inc. Kenneth L. Coleman 53 Senior Vice President, Administration 1987 Robert H. Ewald 48 President, Cray Research, Inc. and Senior Vice President, 1996 Silicon Graphics, Inc. Stephen Goggiano 43 Senior Vice President, Manufacturing and Customer Service 1989 William M. Kelly 43 Senior Vice President, Silicon Interactive Group, General 1994 Counsel and Secretary Stanley J. Meresman 49 Senior Vice President, Finance and Chief Financial Officer 1989 David E. Orton 40 Senior Vice President, Scalable Systems Group 1996 Michael Ramsay 46 Senior Vice President, Silicon Desktop Group 1987 Teruyasu Sekimoto 57 Senior Vice President, East Asian Field Operations 1995 Dennis P. McBride 44 Vice President, Controller 1988 Robert W. Saltmarsh 46 Vice President, Treasurer 1996
Executive officers of the Company are elected annually by the Board of Directors and serve at the Board's discretion. There are no family relationships among any directors, nominees for director or executive officers of the Company. Except as set forth below, all of the officers have been associated with the Company in their present positions for more than five years. Mr. McCracken became Chairman of the Company in 1994. -13- Mr. Bishop, who has been an officer of the Company since 1991 and President of Silicon Graphics World Trade Corporation since 1986, was named Chairman of the Board of Silicon Graphics World Trade Corporation in July of 1995. Mr. Lauer joined the Company in 1988 as Vice President, North American Marketing, became Vice President, North American Field Operations in 1989, was named Senior Vice President, North American Field Operations in 1991 and became Executive Vice President, Silicon Graphics, Inc. and President of Silicon Graphics World Trade Corporation in 1995. Mr. Aziz joined the Company in 1995 as Senior Vice President, Europe. Prior to joining the Company, Mr. Aziz spent 20 years at IBM Corporation in technical, marketing and management positions, most recently as chief executive officer of the United Kingdom operations. Mr. Bott joined the Company in 1993 as Vice President/General Manager of the Company's Network Systems Division. In 1996, he was named Senior Vice President, Enterprise Technologies. Prior to joining the Company, Mr. Bott was Vice President of Advanced Development and chief technical officer at Pyramid Technology. John E. Bourgoin joined the Company in 1996 as President of MIPS Technologies, Inc. and Senior Vice President of Silicon Graphics, Inc. Prior to joining the Company, Mr. Bourgoin served as Vice President, Computation Products Group at Advanced Micro Devices, Inc. Robert H. Ewald joined the Company in 1996 as a result of the Company's acquisition of Cray Research, Inc. and now serves as President of Cray Research and Senior Vice President of Silicon Graphics, Inc. Prior to the acquisition, Mr. Ewald had been President and Chief Operating Officer of Cray since late 1994. Prior to that, he was Chief Operating Officer of Cray's Supercomputer Operations and in 1993 served as Executive Vice President and General Manager, Supercomputer Operations. During 1991 through 1993, Mr. Ewald was Cray's Executive Vice President, Development. Mr. Goggiano joined the Company in 1989 as Director of Operations, Advanced Systems Division. In 1990, Mr. Goggiano was named Vice President/General Manager, Operations and, in 1993, he was named Senior Vice President. Prior to joining the Company, Mr. Goggiano was Vice President, Manufacturing for Altos Computer Systems. Mr. Kelly joined the Company in 1994 as Vice President, Business Development, General Counsel and Secretary. In 1996, Mr. Kelly was named Senior Vice President, Silicon Interactive Group and remains General Counsel and Secretary of the Company. Prior to joining the Company, Mr. Kelly had practiced law since 1978 with the firm of Shearman & Sterling, most recently as co-managing partner of that firm's San Francisco office. In 1990, Mr. Orton became Vice President/General Manager of the Advanced Systems Division and in 1996 was named Senior Vice President, Scalable Systems Group. Mr. Ramsay was named Vice President/General Manager, Entry Systems Division in 1988, and became Senior Vice President/General Manager, Entry Systems Division in 1991. In 1992, Mr. Ramsay was named Senior Vice President, Visual Systems Group, in 1994, became President of Silicon Studio, Inc. and in 1996 was named Senior Vice President, Silicon Desktop Group. Mr. Saltmarsh joined the Company in 1996 as Vice President, Treasurer. In 1994 and 1995, Mr. Saltmarsh served as Chief Financial Officer at Radius, Inc. and prior to that was Vice President of Finance at Apple Computer, Inc. -14- PART II With the exception of the information specifically incorporated by reference from the Company's 1996 Annual Report to Stockholders (the "1996 Annual Report") in Parts I, II and IV of this Form 10-K, the 1996 Annual Report is not to be deemed filed as part of this Report. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference to the section entitled "Price Range of Common Stock" on page 35 of the Company's 1996 Annual Report. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated by reference to the section entitled "Selected Consolidated Financial Data" on page 34 of the Company's 1996 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference to the section entitled "Management's Discussion and Analysis" on pages 36 through 43 of the Company's 1996 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference to the consolidated financial statements and notes thereto and to the section entitled "Quarterly Data" on pages 35 and 44 through 61 of the Company's 1996 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -15- PART III Certain information required by Part III is omitted from this Report in that the Company has filed its definitive proxy statement pursuant to Regulation 14A (the "1996 Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors required by this Item is incorporated by reference to pages 3 and 4 of the 1996 Proxy Statement under the heading "Proposal No. 1 -- Election of Directors - Directors and Nominees for Director." The information concerning executive officers and family relationships required by this Item is incorporated by reference to the section in Part I hereof entitled "Executive Officers of the Registrant." The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, required by this Item is incorporated by reference to page 9 of the 1996 Proxy Statement under the heading "Executive Officer Compensation - Compliance with Section 16(a) of the Exchange Act." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to page 5 under the headings "Proposal No. 1 - Election of Directors - Compensation Committee Interlocks and Insider Participation" and " - Director Compensation", pages 7 through 9 under the headings "Executive Officer Compensation - Summary Compensation Table", " - Option Grants in Fiscal 1996" and " - Option Exercises in Fiscal Year 1996 and Fiscal Year-End Option Values", pages 10 and 11 under the heading "Report of the Compensation and Human Resources Committee of the Board of Directors", and page 12 under the heading "Company Stock Price Performance Graph" of the 1996 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to pages 1 and 2 of the 1996 Proxy Statement under the headings "Information Concerning Solicitation and Voting - Record Date and Principal Share Ownership" and " - Voting and Solicitation" and page 6 of the 1996 Proxy Statement under the heading "Other Information - Security Ownership of Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to pages 9 and 10 of the 1996 Proxy Statement under the heading "Certain Transactions." -16- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. FINANCIAL STATEMENTS. The following consolidated financial statements and supplementary information of Silicon Graphics, Inc. and Report of Independent Auditors are incorporated by reference to pages 35 and 44 through 62 of the Registrant's 1996 Annual Report: Consolidated Statements of Operations - Years Ended June 30, 1996, 1995 and 1994 Consolidated Balance Sheets - June 30, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended June 30, 1996, 1995 and 1994 Consolidated Statements of Stockholders' Equity - Years Ended June 30, 1996, 1995 and 1994 Notes to Consolidated Financial Statements Report of Independent Auditors Supplementary Information Quarterly Data (Unaudited) 2. FINANCIAL STATEMENT SCHEDULES. The following financial statement schedule of Silicon Graphics, Inc. is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Silicon Graphics, Inc. Schedule Description Page - -------- ----------- ---- II Valuation and Qualifying Accounts S-1 Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. -17- 3. EXHIBITS. The following Exhibits are filed as part of, or incorporated by reference into, this Report: 2.1(14) Agreement and Plan of Merger and Reorganization, dated as of February 6, 1995, among Silicon Graphics, Inc., S Acquisition Corporation and Wavefront Technologies, Inc. 2.2(14) Agreement and Plan of Acquisition and Arrangement dated as of February 6, 1995 by and among Silicon Graphics, Inc., 1103707 Ontario Inc., Silicon Graphics Manufacturing S.A. and Alias Research Inc. 2.3(20) Agreement and Plan of Merger dated as of February 25, 1996 by and among Silicon Graphics, Inc., C. Acquisition Corporation and Cray Research, Inc. 3.1.1(12) Restated Certificate of Incorporation of the Company. 3.1.2(18) Certificate of Designation of the Series E Preferred Stock filed June 13, 1995. 3.2 Bylaws of the Company, as amended. 4.1(5) Silicon Graphics, Inc. $25,000,000 8.98% Senior Notes Due February 1, 1996, Note Agreement and Note, dated February 1, 1991. 4.2(7) Amended and Restated Preferred Shares Rights Agreement, dated as of May 6, 1992 between the Company and The First National Bank of Boston, including the Certificate of Designation of Rights, Preferences and Privileges of Series B Participating Preferred Stock, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B, and C respectively. 4.3(12) Indenture dated November 1, 1993 between the Company and The First National Bank of Boston, as Trustee. 4.4(15) First Amendment to Rights Agreement dated as of May 2, 1995 between the Company and The First National Bank of Boston. 9.1(18) Voting and Exchange Trust Agreement between the Company and Montreal Trust Company of Canada dated June 15, 1995. 10.1(6)* 1984 Incentive Stock Option Plan, as amended, and amended form of Incentive Stock Option Agreement. 10.2(8)* 1986 Incentive Stock Option Plan, as amended, and amended forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement. -18- 10.3(1) Software Agreement dated as of January 4, 1986, as supplemented June 6, 1986, and Sublicensing Agreement dated as of June 9, 1986 between the Company and AT&T Information Systems Inc. 10.4(4)* 1987 Stock Option Plan and form of Stock Option Agreement. 10.5(2) Software License Agreement dated January 24, 1986, between the Company and AT&T Information Systems Inc. 10.6(3) Stock Purchase Agreement dated March 2, 1990 among the Company, NKK Corporation and NKK U.S.A. Corporation. 10.7(12)* Directors' Stock Option Plan and form of Stock Option Agreement as amended as of October 31, 1994. 10.8(8) Form of Indemnification Agreement entered into between the Company and its directors, executive officers and certain other agents. 10.9(8) Form of Indemnification Agreement entered into between the Company and its directors, executive officers and certain other agents. (Revised) 10.10(8)* 1985 Stock Incentive Program. 10.11(8) Exchange Agreement dated August 14, 1992 among the Company, NKK Corporation and NKK U.S.A. Corporation. 10.12(13) Credit Agreement dated December 31, 1994 between the Company and Bank of America, National Trust and Savings Association. 10.13(9) Purchase and Sale Agreement, as amended, between Richard T. Peery, John Arrillaga and Silicon Graphics, Inc. executed on April 30, 1993. 10.14(9) Waiver and Release Agreement between Richard T. Peery, John Arrillaga and Silicon Graphics Real Estate, Inc. dated May 7, 1993. 10.15(10)* 1993 Long-Term Incentive Stock Plan and form of stock option agreement. 10.16(18)* Employee Stock Purchase Plan, as amended as of June 12, 1995. 10.17(10)* Form of Employment Continuation Agreement entered into between the Company and its executive officers, as amended as of October 21, 1993. 10.18(10)* Consulting Agreement dated as of October 25, 1993 between the Company and Mark W. Perry. -19- 10.19(11)* Non-Qualified Deferred Compensation Plan dated as of September 9, 1994. 10.20(13)* Employment Agreement dated February 1, 1995 between the Company and Thomas A. Jermoluk. 10.21(15)* Employment Agreement dated as of February 13, 1995 between the Company and Javaid Aziz. 10.22(18)* Letter agreement dated as of July 6, 1995 between the Company and Robert K. Burgess. 10.23(18)* Convertible Debenture dated as of February 3, 1993 issued to Robert K. Burgess. 10.24(18) Ground Lease between Silicon Graphics Real Estate Inc. and the City of Mountain View dated March 7, 1995. 10.25(18) Agreement for Lease between the Company and Virtual Funding, Limited Partnership dated November 18, 1993. 10.26(18) Amendment No. 1 to Agreement for Lease between the Company and Virtual Funding, Limited Partnership dated March 15, 1995. 10.27(18) Lease Agreement between the Company and Virtual Funding, Limited Partnership dated November 18, 1993. 10.28(18) Amendment No. 1 to Lease Agreement between the Company and Virtual Funding, Limited Partnership dated March 15, 1995. 10.29(16)* Alias Research Inc.'s 1988 Employee Share Ownership Plan Option Agreement. 10.30(16)* Alias Research Inc.'s 1989 Employee Share Ownership Plan Option Agreement. 10.31(16)* Alias Research Inc.'s 1990 Employee Share Ownership Plan and standard forms of Option Agreements. 10.32(16)* Alias Research Inc.'s 1994 Stock Plan and standard forms of Option Agreements. 10.33(17)* Wavefront Technologies, Inc. 1990 Stock Option Plan with standard form of Option Agreement. 10.34(19)* Consulting Agreement dated as of December 21, 1995 between the Company and Tom Oswold. 10.35(19)* Addendum to the Non-Qualified Deferred Compensation Plan (previously filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended June 30, 1995). -20- 10.36(21)* Consulting Agreement dated as of March 5, 1996 between the Company and Wei Yen. 10.37(21) Credit Agreement dated as of April 12, 1996. 10.38(21)* 1996 Supplemental Non-Executive Equity Incentive Plan and form of stock option agreement. 10.39(22)* Cray Research, Inc. Amended and Restated 1989 Employee Benefit Stock Plan and form of stock option agreement. 10.40(22)* Cray Research, Inc. 1989 Non-Employee Directors' Stock Option Plan and form of stock option agreement. 11.1 Statement of Computation of Per Share Earnings. 13.1 Excerpts from Annual Report for the year ended June 30, 1996. 21.1 List of Subsidiaries. 23.1 Consent of Independent Auditors (see page 27). 27.1 Financial Data Schedule. - ------------------------- * This exhibit is a management contract or compensatory plan required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). (1) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (No. 33-8892), which became effective October 29, 1986. (2) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-1 (No. 33-12863), which became effective March 31, 1987. (3) Incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated March 16, 1990. (4) Incorporated by reference to exhibits to the Company's Post-Effective Amendment to Registration Statement on Form S-8 (No. 33-16529), which became effective June 18, 1990. (5) Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1990. (6) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1991. (7) Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1992. (8) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1992. -21- (9) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1993. (10) Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1993. (11) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1994. (12) Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1994. (13) Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1994. (14) Incorporated by reference to exhibits to the Company's Current Report on Form 8-K dated February 13, 1995. (15) Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1995. (16) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (No. 33-60215), which became effective June 14, 1995. (17) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (No. 33-60213), which became effective June 14, 1995. (18) Incorporated by reference to exhibits to the Company's Annual Report on Form 10-K for the year ended June 30, 1995. (19) Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended December 31, 1995. (20) Incorporated by reference to exhibits to the Company's Schedule 14D-1, Tender Offer Statement dated February 29, 1996. (21) Incorporated by reference to exhibits to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1996. (22) Incorporated by reference to exhibits to the Company's Registration Statement on Form S-8 (No. 333-06403), which became effective June 20, 1996. (b) REPORTS ON FORM 8-K. No Current Reports on Form 8-K were filed during the quarter ended June 30, 1996. -22- TRADEMARKS USED IN THIS FORM 10-K Silicon Graphics, CHALLENGE, Indigo, Onyx, OpenGL and the Silicon Graphics logo are registered trademarks, and Cosmo, Indigo(2), Indigo(2) IMPACT, Indigo Magic, InfiniteReality, IRIS GL, IRIX, Maya, POWER CHALLENGE, RealityEngine(2) and WebFORCE 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 are trademarks of MIPS Technologies, Inc. Cray is a registered trademark and Cray J90, Cray T3E and Cray T90 are trademarks of Cray Research, Inc. Alias|Wavefront, Alias Studio, Alias PowerAnimator, and Wavefront Composer are trademarks of Alias|Wavefront, a division of Silicon Graphics Limited. Pentium is a registed trademark of Intel Corporation. UNIX is a registered trademark licensed exclusively through X/Open Company Limited. Windows NT is a trademark of Microsoft Corporation. -23- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SILICON GRAPHICS, INC. By: /s/ Edward R. McCracken ------------------------------ Edward R. McCracken Chairman and Chief Executive Officer Dated: September 27, 1996 -24- Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - ---------------------------------------- ---------------------------------------- ------------------ /s/ Edward R. McCracken Chairman, Chief Executive Officer September 27, 1996 - ---------------------------------------- and Director (Principal Executive Edward R. McCracken Officer) Chairman, Silicon Graphics World - ---------------------------------------- Trade Corporation, and Director Robert R. Bishop /s/ Stanley J. Meresman Senior Vice President, Finance September 27, 1996 - ---------------------------------------- and Chief Financial Officer Stanley J. Meresman (Principal Financial Officer) /s/ Dennis P. McBride Vice President, Controller September 27, 1996 - ---------------------------------------- (Principal Accounting Officer) Dennis P. McBride /s/ Allen F. Jacobson Director September 27, 1996 - ---------------------------------------- Allen F. Jacobson /s/ C. Richard Kramlich Director September 27, 1996 - ---------------------------------------- C. Richard Kramlich /s/Robert A. Lutz Director September 27, 1996 - ---------------------------------------- Robert A. Lutz Director - ---------------------------------------- James A. McDivitt -25- Signature Title Date - ---------------------------------------- ---------------------------------------- ------------------ /s/ Lucille Shapiro Director September 27, 1996 - ---------------------------------------- Lucille Shapiro /s/ Robert B. Shapiro Director September 27, 1996 - ---------------------------------------- Robert B. Shapiro /s/ James G. Treybig Director September 27, 1996 - ---------------------------------------- James G. Treybig
-26- Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Silicon Graphics, Inc. of our report dated July 19, 1996, included in the 1996 Annual Report to Stockholders of Silicon Graphics, Inc. Our audits also included the consolidated financial statement schedule of Silicon Graphics, Inc. listed in item 14(a)2. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 File Nos. 33-11703, 33-16529, 33-18717, 33-26003, 33-34919, 33-38536, 33-40879, 33-44305, 33-44333, 33-48890, 33-59098, 33-65190, 033-50999, 033-51275, 33-58017, 33-60213, 33-60215, 333-01211, 333-06403 and 333-08651) pertaining to the Employee Stock Purchase Plan, 1987 Stock Option Plan, 1986 Incentive Stock Option Plan, 1985 Stock Incentive Program, 1984 Incentive Stock Option Plan, 1982 Stock Option Plan, Directors' Stock Option Plan and Subsidiary Stock Agreement, 1993 Long-Term Incentive Stock Plan and the 1996 Supplemental Non-Executive Equity Incentive Plan of Silicon Graphics, Inc.; the 1990 Stock Option Plan of Wavefront Technologies, Inc.; and the 1988 Employee Share Ownership Plan, 1989 Employee Share Ownership Plan, 1990 Employee Share Ownership Plan, and the 1994 Stock Plan of Alias Research Inc. and the Amended and Restated 1989 Employee Benefit Stock Plan and 1989 Non-Employee Directors' Stock Option Plan of Cray Research, Inc. of our report dated July 19, 1996 with respect to the consolidated financial statements of Silicon Graphics, Inc. incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K). /s/ Ernst & Young LLP Palo Alto, California September 27, 1996 -27- Schedule II SILICON GRAPHICS, INC. Valuation and Qualifying Accounts (in thousands)
Additions ----------------------------------- Balance at Charged to Balance at Beginning Costs and Deductions End of Description of Period Expenses Other Write-offs Period ----------- --------- -------- ------ ---------- ------ Year ended June 30, 1994 Accounts receivable allowances $10,875 $3,226 $0 $(4,609) $9,492 Year ended June 30, 1995 Accounts receivable allowances $9,492 $11,534 $0 $(7,561) $13,465 Year ended June 30, 1996 Accounts receivable allowances $13,465 $4,292 $6,383* $(373) $23,767
* Acquired Cray Research valuation allowance. S-1 EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF SILICON GRAPHICS, INC. ARTICLE I CORPORATE OFFICES 1.1 REGISTERED OFFICE The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II STOCKHOLDERS 2.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING The annual meeting of stockholders shall be held, each year, on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the third Thursday of October in each year at 2:00 p.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected and any other proper business may be transacted. To be properly brought before an annual meeting business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before the meeting by a stockholder, the secretary of the corporation must have received notice in writing from the stockholder not less than one hundred twenty (120) calendar days in advance of the date of the corporation's proxy statement released to stockholders in connection with the annual meeting of the corporation's stockholders for the immediately prior year; provided, however, that if no such annual meeting was held or the date of such annual meeting is more than thirty (30) calendar days different from the date contemplated for the current year's annual meeting, then such written notice from a stockholder to be timely must be received not later than the close of business on the tenth day following the date on which notice of the date of the current year's annual meeting was mailed or on which such date was otherwise publicly disclosed. . Such written notice to the secretary shall set forth, as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the number of shares of stock of the corporation beneficially owned by such stockholder, and (iv) any material interest of such stockholder in such business. Notwithstanding any provision in the bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.2. 2.3 SPECIAL MEETING A special meeting of the stockholders may be called at any time by the board of directors, by the chairman of the board, or by the chief executive officer of the corporation. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, chief executive officer or the secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5, that a meeting will be held at the time requested by the person or persons who called the meeting, not less than sixty (60) nor more than ninety (90) days after the receipt of the request. If the notice is not given within twenty (20) days after the receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the board of directors may be held. -2- 2.4 NOTICE OF STOCKHOLDERS MEETINGS All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the General Corporation Law of Delaware or the certificate of incorporation of the corporation). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.6 QUORUM At any meeting of the stockholders, the holders of a majority, present in person or by proxy, of all of the shares of the stock entitled to vote at the meeting shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority, present in person or by proxy, of the shares of such class or classes entitled to take action with respect to that vote on that matter shall constitute a quorum. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, those present at such adjourned meeting shall constitute a quorum (but in no event shall a quorum consist of less than one- third of the shares entitled to vote at the meeting), and all matters shall be determined by a majority of the votes cast at such meeting, except as otherwise required by law. -3- 2.7 ADJOURNED MEETING; NOTICE When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of the General Corporation Law of Delaware. Each stockholder shall have one (1) vote for every share of stock entitled to vote that is registered in his or her name on the record date for the meeting (as determined in accordance with Section 2.11 of these bylaws), except as otherwise provided herein or required by law. At a stockholders' meeting at which directors are to be elected, each stockholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such stockholder normally is entitled to cast) if the candidates' names have been properly placed in nomination (in accordance with these bylaws) prior to commencement of the voting and the stockholder requesting cumulative voting has given notice prior to commencement of the voting of the stockholder's intention to cumulate votes. If cumulative voting is properly requested, each holder of stock, or of any class or classes or of a series or series thereof, who elects to cumulate votes shall be entitled to as many votes as equals the number of votes which (absent this provision as to cumulative voting) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected by him, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or for any two or more of them, as he may see fit. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or provided herein, all other matters shall be determined by a majority of the votes cast. -4- 2.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING Any action required or able to be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice, and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation at its registered office in Delaware, its principal place of business, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery to the corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days after the date the earliest dated consent is delivered to the corporation, a written consent or consents signed by holders of a sufficient number of votes to take action are delivered to the corporation in the manner prescribed in the first paragraph of this section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. If the action which is consented to is such as would have required the filing of a certificate under any section of the General Corporation Law of Delaware if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of -5- stockholders, that written notice and written consent have been given as provided in Section 228 of the General Corporation Law of Delaware. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall neither precede nor be more than ten (10) days after the date upon which such resolution is adopted by the board of directors. Any stockholder of record seeking to have the stockholders authorize or take action by written consent shall, by written notice to the secretary, request the board of directors to fix a record date. The board of directors shall promptly, but in all events within ten (10) days after the date on which such notice is received, adopt a resolution fixing the record date. If the board of directors has not fixed a record date within such time, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in the manner prescribed in the first paragraph of Section 2.10 of these bylaws. If the board of directors has not fixed a record date within such time and prior -6- action by the board of directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the board of directors adopts the resolution taking such prior action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.12 PROXIES Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by a written proxy, filed in accordance with the procedure established for the meeting or taking of action in writing, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 2.12 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. 2.13 CONDUCT OF BUSINESS Such person as the board of directors may have designated or, in the absence of such a person, any executive officer of the corporation, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the secretary of the corporation, the secretary of the meeting shall be such person as the chairman appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. 2.14 INSPECTORS OF ELECTION The corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the -7- meeting and make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. 2.15 INSPECTORS OF ELECTION AND PROCEDURES FOR COUNTING WRITTEN CONSENTS Within two business days after receipt of written requests or revocations of stockholders purporting to own a sufficient number of shares of the capital stock of the corporation issued and outstanding and entitled to vote to take action pursuant to Section 2.10 hereof or Section 228(c) of the Delaware General Corporation Law or prevent such action from being taken, respectively, the secretary may engage nationally recognized independent inspectors of elections for the purpose of performing a ministerial review of the validity of the requests and revocations. The cost of retaining inspectors of elections shall be borne by the corporation. Within five (5) business days after such written requests and revocations are provided to the inspector, the inspector shall issue a preliminary report to the corporation and to the stockholder or stockholders soliciting the consents or revocations in opposition to action by consent proposed by the corporation (the "Soliciting Stockholders") stating: (i) the number of valid requests, (ii) the number of valid revocations, (iii) the number of valid and unrevoked requests, (iv) the number of invalid requests, (v) the number of invalid revocations, and (vi) whether, based on its preliminary count, written requests of stockholders owning a sufficient number of shares of the capital stock of the corporation issued and outstanding and entitled to vote to take action pursuant to Section 2.10 hereof or Section 228(c) of the Delaware General Corporation Law have been obtained. Unless the corporation and the Soliciting Stockholders shall agree to a shorter or longer period, the corporation and the Soliciting Stockholder shall have two business days to review the requests and revocations and to advise the inspector and the opposing party in writing as to whether they intend to challenge the preliminary report of the inspector. If no written notice of an intention to challenge the preliminary report is received within two business days after issuance of the preliminary report, the inspector shall issue to the corporation and the Soliciting Stockholder its final report containing the information included in the preliminary report. If the corporation or the Soliciting Stockholders issue written notice of an intention to challenge the -8- preliminary report within two business days after its issuance, the inspector shall schedule a challenge hearing as promptly as practicable. Following the challenge hearing, the inspector shall issue to the corporation and the Soliciting Stockholder as promptly as practicable its final report containing the information included in the preliminary report, as such information may have been modified based on the challenge hearing, and a certification of whether written requests of stockholders owning a sufficient number of shares of the capital stock of the corporation issued and outstanding and entitled to vote to take action pursuant to Section 2.10 hereof or Section 228(c) of the Delaware General Corporation Law have been obtained. Any action taken by the stockholders without a meeting shall be effective upon the receipt by the corporation of a certification of the inspector of elections that written requests of stockholders owning a sufficient number of shares of the capital stock of the corporation issued and outstanding and entitled to vote to take action pursuant to Section 2.10 hereof or Section 228(c) of the Delaware General Corporation Law have been obtained. ARTICLE III DIRECTORS 3.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER OF DIRECTORS The number of directors of the corporation shall be such number between nine (9) and twelve (12) as may be established from time to time by a resolution adopted by a majority of the board of directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, at each annual meeting of stockholders, directors of the corporation shall be elected to hold office until the expiration of the term for which they are elected, and until their successors have been duly elected and qualified; except that if any such election shall not be -9- so held, such election shall take place at a stockholders' meeting called and held in accordance with the Delaware General Corporation Law. The directors of the corporation shall be divided into three classes as nearly equal in size as is practicable, which classes are hereby designated Class I, Class II and Class III. The term of office of the initial Class I directors shall expire at the next regularly-scheduled annual meeting of stockholders after the date of this amendment; the term of office of the initial Class II directors shall expire at the second succeeding annual meeting of stockholders; and the term of office of the initial Class III directors shall expire at the third succeeding annual meeting of the stockholders. For the purposes hereof, the initial Class I, Class II and Class III directors shall be those directors so designated and elected at the annual meeting of stockholders scheduled to be held in October 1992. At each annual meeting after the annual meeting of stockholders scheduled to be held in October 1992, directors to replace those of the class whose terms expire at such annual meeting shall be elected to hold office until the third succeeding annual meeting and until their respective successors shall have been duly elected and qualified. If the number of directors is hereafter changed, any newly created directorships or decrease in directorships shall be so apportioned among the classes so as to make all classes as nearly equal in number as is practicable. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Nominations for election to the board of directors of the corporation at an annual meeting of stockholders may be made by the board or on behalf of the board by a nominating committee appointed by the board, or by any stockholder of the corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by or on behalf of the board, shall be made by notice in writing received by the secretary of the corporation not less than ninety (90) days nor more than one hundred twenty (120) days in advance of the date of the annual meeting of the corporation's stockholders for the immediately prior year; provided, however, that if no such annual meeting was held or the date of such annual meeting is more than thirty (30) calendar days different from the date contemplated for the current year's annual meeting, then such written notice from a stockholder to be timely must be received not later than the close of business on the tenth day following the date on which notice of the date of the current year's annual meeting was mailed or on which such date was otherwise publicly disclosed. Such notice shall set forth (i) the name and address of the stockholder who intends to make the nomination; (ii) a -10- representation that the nominating stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting and nominate the person or persons specified in the notice; (iii) the number of shares of stock held beneficially and of record by the nominating stockholder; (iv) the name, age, business address and, if known, residence address of each nominee proposed in such notice; (v) the principal occupation or employment of such nominee; (vi) the number of shares of stock of the corporation beneficially owned by each such nominee; (vii) a description of all arrangements or understandings between the nominating stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the nominating stockholder; (viii) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934; and (ix) the consent of such nominee to serve as a director of the corporation if so elected. The chairman of the annual meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure. If such determination and declaration is made, the defective nomination shall be disregarded. 3.4 RESIGNATION AND VACANCIES Any director may resign at any time upon written notice to the corporation. When one or more directors so resign and the resignation is effective at a future date, only a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these bylaws: (i) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (ii) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled only by a majority of the directors elected -11- by such class or classes or series thereof then in office, or by a sole remaining director so elected. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS Regular meetings of the board of directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the board of directors and publicized among all directors. A notice of each regular meeting shall not be required. 3.7 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the chief executive officer, the president or the secretary of the corporation, or by one-third of the directors then in office (rounded up to the nearest whole number) and shall be held at a place, on a date and at a time as such officer or such directors shall fix. Notice of the place, date and time of special meetings, unless waived, shall be given to each director by mailing written notice not less than two (2) days before the meeting or by sending a facsimile transmission of the same not less than two (2) hours before the time of the holding of the meeting. If the circumstances warrant, notice may also be given personally or by telephone not less than two (2) hours before the time of the holding of the meeting. Oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. -12- 3.8 QUORUM At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 3.10 ADJOURNED MEETING; NOTICE If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.11 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. -13- 3.12 FEES AND COMPENSATION OF DIRECTORS Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance of each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.13 APPROVAL OF LOANS TO OFFICERS The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a director of the corporation or its subsidiaries, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.14 REMOVAL OF DIRECTORS Any director may be removed from office by the stockholders of the corporation only for cause. For purposes of the foregoing paragraph, 'cause' shall mean (i) continued willful failure to perform the obligations of a director, (ii) gross negligence by the director, (iii) engaging in transactions that defraud the corporation, (iv) fraud or intentional misrepresentation, including falsifying use of funds and intentional misstatements made in financial statements, books, records or reports to stockholders or governmental agencies, (v) material violation of any agreement between the director and the corporation, (vi) knowingly causing the corporation to commit violations of applicable law (including by failure to act), (vii) acts of moral turpitude or (viii) conviction of a felony. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. -14- 3.15 CONDUCT OF BUSINESS At any meeting of the board of directors, business shall be transacted in such order and manner as the board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designation and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (ii) adopt an agreement of merger or consolidation under Section 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, a supplemental -15- resolution of the board of directors, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment and notice of adjournment), and Section 3.11 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolutions of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS The officers of the corporation shall be a chief executive officer, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, a vice chairman of the board, a president, one or more vice presidents, one or more assistant secretaries, a controller, one or more assistant controllers, a treasurer, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. -16- 5.2 APPOINTMENT OF OFFICERS The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or 5.5 of these bylaws, shall be appointed by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the chief executive officer to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES Any vacancy occurring in any office of the corporation shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no chief executive officer, then the chairman of the board shall also be the chief executive officer of -17- the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 CHIEF EXECUTIVE OFFICER; PRESIDENT Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer of the corporation shall , subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of the chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. He shall also function as president of the corporation unless the board of directors names another person as president, in which case, the president shall have such powers and duties as may be prescribed by the board of directors. 5.8 VICE PRESIDENTS In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the chief executive officer or the chairman of the board. 5.9 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or -18- registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the chief executive officer and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. The duties of the chief financial officer may be allocated by the board of directors among one or more persons, in its discretion. 5.11 TREASURER The treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts or the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The treasurer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be -19- ordered by the board of directors, shall render to the chief executive officer and directors, whenever they request it, an account of all of his transactions as treasurer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.12 ASSISTANT SECRETARY The assistant secretary, or, if there is more than one, the assistant secretaries in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.13 ASSISTANT TREASURER The assistant treasurer, or, if there is more than one, the assistant treasurers in the order determined by the stockholders or board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors or the stockholders may from time to time prescribe. 5.14 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. 5.15 REPRESENTATION OF SHARES OF OTHER CORPORATIONS The chairman of the board, the chief executive officer, the president, any vice president, the treasurer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors, the chief executive officer, the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. -20- ARTICLE VI INDEMNITY 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was a director, officer, employee or agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS The corporation shall have the power, to the extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorney's fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 INSURANCE The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation -21- would have the power to indemnify him against such liability under the provisions of the General Corporation Law of Delaware. ARTICLE VII RECORDS AND REPORTS 7.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. -22- ARTICLE VIII GENERAL MATTERS 8.1 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. -23- The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. -24- 8.6 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS The directors of the corporation, subject to any restrictions contained in (i) the General Corporation Law of Delaware or (ii) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 SEAL The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. -25- 8.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 8.13 NOTICES Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery, by mail, postage paid, or by facsimile transmission. Any such notice shall be addressed to such stockholder, director, officer, employee or agent at his last known address as it appears on the books of the corporation. The time when such notice shall be deemed received, if hand delivered, or dispatched, if sent by mail or facsimile, transmission, shall be the time of the giving of the notice. ARTICLE IX AMENDMENTS Any of these bylaws may be altered, amended or repealed by the affirmative vote of a majority of the board of directors or, with respect to bylaw amendments placed before the stockholders for approval and except as otherwise provided herein or required by law, by the affirmative vote of the holders of a majority of the shares of the corporation's stock entitled to vote in the election of directors, voting as one class. -26- ARTICLE X DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. Whenever all the stockholders entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation. -27- EX-11.1 3 EXHIBIT 11.1 EXHIBIT 11.1 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (In thousands except per share amounts)
Twelve Months Ended June 30, 1996 1996 1995 1994 - - ---------- --------- --------- PRIMARY: Weighted Average Shares Outstanding: - ------------------------------------ Common shares 162,658 156,437 144,301 Convertible preferred shares -- 1,610 3,048 Stock options 13,132 17,388 17,800 --------- -------- -------- Total weighted average shares outstanding 175,790 175,435 165,149 --------- -------- -------- --------- -------- -------- Income Per Share: - ----------------- Net income available to common stockholders $114,512 $224,802 $141,570 --------- -------- -------- --------- -------- -------- Net income per share $0.65 $1.28 $0.86 --------- -------- -------- --------- -------- -------- FULLY DILUTED: Weighted Average Shares Outstanding: - ------------------------------------ Common shares 162,658 156,437 144,301 Convertible preferred shares -- 1,610 3,048 Zero coupon convertible subordinated debentures -- 7,402 4,888 Stock options 13,143 17,946 18,575 --------- -------- -------- Total weighted average shares outstanding 175,801 183,395 170,812 --------- -------- -------- --------- -------- -------- Income Per Share: - ----------------- Net income available to common stockholders $114,512 $224,802 $141,570 Add discount amortization on zero coupon convertible subordinated debentures -- 5,433 3,951 --------- -------- -------- Adjusted net income $114,512 $230,235 $145,521 --------- -------- -------- --------- -------- -------- Net income per share $0.65 $1.26 $0.85 --------- -------- -------- --------- -------- --------
EX-13 4 EXHIBIT 13 [LOGO] SELECTED CONSOLIDATED FINANCIAL DATA
Years ended June 30 1996(1) 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Operating Data (in thousands, except per share amounts): Total revenue $ 2,921,316 $ 2,228,268 $ 1,537,766 $ 1,132,869 $ 906,713 Costs and expenses: Cost of revenue 1,482,439 1,032,059 735,388 532,213 437,575 Research and development 353,461 247,678 190,796 143,981 137,134 Selling, general and administrative 807,830 619,259 417,753 336,054 329,204 Write-off of acquired in-process technology and merger-related expenses 103,193 22,000 -- -- 110,000 Restructuring costs -- -- -- 650 28,895 ----------- ----------- ----------- ----------- --------- Operating income (loss) from continuing operations 174,393 307,272 193,829 119,971 (136,095) Interest and other, net 10,413 9,447 4,779 520 5,961 Minority interest in net loss of Cray Research 3,982 -- -- -- -- ----------- ----------- ----------- ----------- --------- Income (loss) from continuing operations before income taxes 188,788 316,719 198,608 120,491 (130,134) Income (loss) from continuing operations 115,037 224,856 141,414 82,803 (101,318) Net income (loss) 115,037 224,856 141,814 73,540 (101,183) Income (loss) per share: Income (loss) from continuing operations $ 0.65 $ 1.28 $ 0.86 $ 0.53 $ (0.89) Net income (loss) $ 0.65 $ 1.28 $ 0.86 $ 0.47 $ (0.89) Common and common equivalent shares used in the calculation of income (loss) per share 175,790 175,435 165,149 154,887 119,233 Balance Sheet Data (in thousands): Cash, cash equivalents and marketable investments $ 456,937 $ 780,012 $ 604,444 $ 208,538 $ 195,088 Working capital 994,817 889,371 645,296 398,053 362,529 Total assets 3,158,246 2,206,619 1,567,052 1,048,294 892,673 Long-term debt and other 381,490 287,267 252,645 56,832 71,900 Stockholders' equity 1,675,318 1,346,170 937,169 696,649 562,230 Statistical Data: Number of employees 10,485 6,308 4,707 4,023 3,946 Revenue/employee (average; in thousands) $ 373 $ 400 $ 346 $ 293 $ 237 Long-term debt and other/total capitalization 19% 18% 21% 8% 11%
(1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was accounted for as a purchase. See Notes 2 and 3 to the consolidated financial statements. (34) QUARTERLY DATA
Fiscal 1996 (unaudited) (In thousands, except per share amounts) June 30(1) March 31 Dec. 31 Sept. 30 - ---------------------------------------------------------------------------------------------------------------------------- Total revenue $ 977,373 $ 676,931 $ 671,733 $ 595,279 Cost and expenses: Cost of revenue 548,395 330,077 331,356 272,611 Research and development 121,915 78,006 80,797 72,743 Selling, general and administrative 246,593 195,897 193,151 172,189 Write-off of acquired in-process technology and merger-related expenses 101,918 -- 561 714 ---------- ---------- ---------- ---------- Operating income (loss) (41,448) 72,951 65,868 77,022 Interest and other, net (4,367) 1,740 6,699 6,341 Minority interest in net loss of Cray Research 3,982 -- -- -- ---------- ---------- ---------- ---------- Income (loss) before income taxes (41,833) 74,691 72,567 83,363 Net income (loss) (48,704) 53,031 52,353 58,357 Net income (loss) per share $ (0.30) $ 0.31 $ 0.30 $ 0.33 Common and common equivalent shares used in the calculation of income (loss) per share 164,388 173,545 177,319 179,236 Fiscal 1995 (unaudited) (In thousands, except per share amounts) June 30 March 31 Dec. 31 Sept. 30 - ---------------------------------------------------------------------------------------------------------------------------- Total revenue $ 653,210 $ 576,984 $ 549,571 $ 448,503 Cost and expenses: Cost of revenue 305,294 263,395 255,535 207,835 Research and development 69,191 61,416 60,841 56,230 Selling, general and administrative 190,221 159,818 145,687 123,533 Merger-related expenses 22,000 -- -- -- ---------- ---------- ---------- ---------- Operating income 66,504 92,355 87,508 60,905 Interest and other, net 6,034 4,457 (3,935) 2,891 ---------- ---------- ---------- ---------- Income before income taxes 72,538 96,812 83,573 63,796 Net income 52,745 67,972 59,038 45,101 Net income per share $ 0.30 $ 0.38 $ 0.34 $ 0.26 Common and common equivalent shares used in the calculation of income per share 177,927 177,781 174,065 171,999
(1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was accounted for as a purchase. See Notes 2 and 3 to the consolidated financial statements. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the New York Stock Exchange under the symbol of SGI. The following table sets forth, for the periods indicated, the high, low, and close prices for the Common Stock as reported on the NYSE.
Fiscal 1996 Fiscal 1995 Low High Close Low High Close - ------------------------------------------------------------------------------------------- First Quarter $ 33.00 $ 45.63 $ 34.38 $ 21.25 $ 26.88 $ 25.75 Second Quarter 26.88 38.75 27.50 24.13 33.13 31.00 Third Quarter 21.25 30.38 25.00 29.13 38.00 35.50 Fourth Quarter 23.13 30.13 24.00 33.75 42.00 39.88
The Company had 10,597 stockholders of record as of June 30, 1996. The Company has not paid any dividends on its common stock. The Company currently intends to retain earnings for use in its business and does not anticipate paying cash dividends to common stockholders. (35) MANAGEMENT'S DISCUSSION AND ANALYSIS 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" and elsewhere in this report. INTRODUCTION During the fourth quarter of fiscal 1996, Silicon Graphics acquired Cray Research. The acquisition, which resulted in significant fourth quarter charges, will continue to negatively affect the Company's results in fiscal 1997 as a result of the different financial models of the Cray Research and Silicon Graphics businesses and certain ongoing purchase accounting effects, as well as expenses expected to be incurred to integrate the companies. The following discussion begins with a detailed review of Silicon Graphics' pro forma standalone results for fiscal 1996 and the combined company's results. The discussion of the combined results includes a review of the impact of the purchase method of accounting, which will affect fiscal 1997 results as well as those reported for fiscal 1996. The discussion concludes with a review of certain risk factors that investors should consider. STANDALONE YEAR-TO-YEAR COMPARISONS The information in the following tables is presented for Silicon Graphics' standalone business on a pro forma basis, excluding any impact of the Cray Research acquisition, to facilitate year-to-year comparisons. Operating Items as a Percentage of Total Revenue - ------------------------------------------------------------------------- Fiscal Years Ended June 30 (Percentages may not add due to rounding) 1996 1995 1994 - ------------------------------------------------------------------------- Product and other revenue 88.6% 89.3% 88.8% Service revenue 11.4 10.7 11.2 ------ ------ ------ Total revenue 100.0 100.0 100.0 Gross margin 51.0 53.7 52.2 Research and development expenses 11.7 11.1 12.4 Selling, general and administrative expenses 27.8 27.8 27.2 Alias/Wavefront merger-related expenses * 1.0 -- ------ ------ ------ Operating margin 11.5% 13.8% 12.6% ------ ------ ------ ------ ------ ------ * Less than one percent Growth Rates - ------------------------------------------------------------------------- Increase Fiscal 1996/ Fiscal 1995/ Fiscal 1995 Fiscal 1994 - ----------------------------------------------------------------------- Product and other revenue 23% 46% Service revenue 32% 38% Total revenue 24% 45% Gross profit 18% 49% Research and development expenses 31% 30% Selling, general and administrative expenses 24% 48% Revenue by Geography - ------------------------------------------------------------------------ Fiscal Years Ended June 30 Year/Year Increase ($ in millions) 1996 1995 1994 96/95 95/94 - ------------------------------------------------------------------------ United States $ 1,293 $ 1,094 $ 787 18% 39% Europe 819 635 409 29% 55% Rest of World* 658 499 342 32% 46% ------- ------- ------- Total revenue $ 2,770 $ 2,228 $ 1,538 24% 45% ------- ------- ------- ------- ------- ------- Fiscal Years Ended June 30 (As a percentage of total revenue) 1996 1995 1994 - ------------------------------------------------------------------------ United States 47% 49% 51% Europe 29% 29% 27% Rest of World* 24% 22% 22% * Includes Japan, other Asia/Pacific countries, Canada and Latin America. Revenue by Product Line - ------------------------------------------------------------------------- (As a percentage of product revenue, Fiscal Years Ended June 30 excluding other revenue) 1996 1995 1994 - ------------------------------------------------------------------------- High-end products (primarily from the POWER Challenge-TM-, Challenge-Registered Trademark- and Onyx-TM- families) 37% 38% 36% Desktop products (primarily from the Indy and Indigo(2)-TM- families) 63% 62% 64% REVENUE Revenue growth in fiscal 1996 and fiscal 1995 reflected increased shipments across the entire product line, as well as increased service revenue supporting a larger installed base. The revenue growth rate declined substantially from 45% in fiscal 1995 to 24% in fiscal 1996. Factors contributing to the fiscal 1996 decline in the revenue growth rate included: * the effects of reorganization within the Company's United States sales organization, which hampered field productivity, particularly in the first half of the fiscal year; (36) * significant product transitions involving new microprocessors and graphics architectures across the product line, which affected results both because of parts availability delays in the ramp-up of production of the new products and because some customers delayed purchases in anticipation of the new products; and * various transitory developments that affected particular quarters, such as the U.S. federal government budget impasse, which curtailed government sales in the second quarter. Most of the Company's revenue in fiscal 1996 came from products introduced during the year. The Company expects this pattern to continue in fiscal 1997. As illustrated by the Company's fiscal 1996 results, the process of completing new products and rapidly bringing them into volume production entails substantial risks. See "Risks That Affect Our Business--Product Development and Introduction." The mix of revenue from the Company's high-end and desktop products has not changed significantly over the past three years as the Company continues to develop and deliver a wide range of products to a broadening marketplace. However, as a result of the Cray Research acquisition, high-end product revenue is expected to represent a higher proportion of product revenue in fiscal 1997. Unit volumes increased in each of fiscal 1995 and 1996 while overall product revenue per unit has remained substantially unchanged. Other revenue comes primarily from subsystem products, royalties, licensing fees and non-recurring engineering contracts. In fiscal 1997, computer system leasing will also contribute to other revenue. Service revenue, which is comprised of hardware and software support and maintenance, has remained fairly constant as a percentage of total revenue over the past three years. However, the Company expects that service revenue will increase as a percentage of total revenue in fiscal 1997 as a result of the Cray Research acquisition. The Company's geographic revenue mix has in recent years shifted towards its international operations. The Company believes this trend will continue. Revenue from Japan represented approximately 12% of total revenue in fiscal 1996 and 13% in both fiscal 1995 and 1994. Revenue growth in Japan slowed in fiscal 1996 as a result of a strengthened U.S. dollar. European revenue was not significantly affected by currency changes. GROSS 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 recognized in research and development expense. Cost of service revenue includes all costs incurred in the support and maintenance of the Company's products. Silicon Graphics' standalone overall gross margin decreased from 53.7% in fiscal 1995 to 51.0% in fiscal 1996. Gross margins also decreased during fiscal 1996, to 48.9% in the fourth quarter. The year to year decline was due principally to discounting on product sales resulting from increased competition. Fourth quarter gross margins were primarily affected by aggressive pricing programs, an increase in the percentage of revenues from the United States and costs associated with the ramp-up to volume production of new microprocessors, including expediting costs. In fiscal 1995, the overall gross margin increased to 53.7% from 52.2% in fiscal 1994. The increase was primarily due to manufacturing efficiencies due to higher volumes, the weaker U.S. dollar, and the increased proportion of international business. The Company's gross margin for fiscal 1995 was higher than normal largely due to rapid revenue growth and efficiencies associated with purchasing and manufacturing high volumes of products. The Company's gross margins are affected by a number of factors, including geographic and product mix, and will fluctuate from period to period. The Company expects its gross margins, before the impact of purchase accounting, to be lower in fiscal 1997 than in fiscal 1996. A significant reason for this expected decline is the impact of the Cray Research acquisition, reflecting Cray Research's lower product and service gross margins. 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's business on the combined organization. Gross margin is also expected to be negatively affected in fiscal 1997 by competitive pricing programs and increased volumes of lower priced desktop systems in the Silicon Graphics product line. See "Risks That Affect Our Business." OPERATING MARGIN 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 (37) 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 the basis that its revenue will continue to grow, 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 margin for fiscal 1996, which was significantly lower than in fiscal 1995 or 1994, principally due to a lower than expected revenue growth rate. Research and development spending has increased at approximately the same rate in each of the past three fiscal years reflecting the Company's belief that success in its marketplace requires a continuous flow of new products. The Company expects to continue to increase the dollar amount of research and development spending in fiscal 1997 and to plan its investment in research and development based on a target range of 10.5% - 12.5% of expected revenue. Selling, general and administrative expenses have remained substantially unchanged as a percentage of total revenue over the past three years. The Company invested heavily in its sales organization during fiscal 1995 and the first part of fiscal 1996. The Company ended fiscal 1996 with an increased focus on tight operating expense control and expects to plan selling, general and administrative expenses for fiscal 1997 based on a target range of 25% - 27% of expected revenue. The Company expects operating margins for at least the first half of fiscal 1997 to be significantly below the levels of the last few fiscal years. The Company's ability to achieve operating margins approaching its historical range during fiscal 1997 will depend in part on its success in achieving revenue growth, including expected revenue synergies from the joint marketing and sale of Silicon Graphics and Cray Research systems, as well as in achieving expense synergies. These expense synergies are expected to result from such factors as joint materials purchasing, the combination of the field sales and service organizations, research and development efficiencies and the elimination of redundant administrative functions. The Company's strategy is to effect a measured and deliberate consolidation of the Silicon Graphics and Cray Research organizations, based on the primary goal of providing a smooth technology, product and support transition path for customers. While some of these synergies may be realized almost immediately, others will not be fully realized for several quarters or even longer. IMPACT OF CURRENCY The net effect of currency changes was not significant in any of the past three fiscal years. CONSOLIDATED YEAR-TO-YEAR COMPARISONS The Company acquired approximately 75% of the outstanding common stock of Cray Research in a cash tender offer that closed on April 2, 1996, and acquired the remaining Cray Research shares in a merger by exchanging one share of Silicon Graphics common stock for each remaining outstanding share of Cray Research common stock on June 30, 1996. The aggregate purchase price (including acquisition costs) was approximately $767 million in cash, common stock and the value associated with options to purchase common stock. The acquisition has been accounted for using the purchase method. IMPACT OF CRAY ACQUISITION ON FISCAL 1996 RESULTS The principal effects of the acquisition on Silicon Graphics' fiscal 1996 results were as follows: CONSOLIDATION Cray Research generated $151.4 million in revenue for an operating loss of $22.7 million in the fourth quarter of fiscal 1996. These results were consolidated with the Company's for that quarter, subject to adjustment for the minority interest held by public stockholders prior to the closing of the merger. The effects of this consolidation on the results for fiscal 1996 as a whole are illustrated as follows (in thousands): Silicon Graphics Fiscal Year Ended June 30, 1996 Pro Forma Standalone Consolidated - ----------------------------------------------------------------------- Revenue: Product and other revenue $ 2,454,180 $ 2,553,128 Service revenue 315,707 368,188 Total revenue 2,769,887 2,921,316 ----------- ----------- Costs and expenses: Cost of product and other revenue 1,191,171 1,279,742 Cost of service revenue 165,324 202,697 Research and development 323,722 353,461 Selling, general and administrative 769,352 807,830 Write-off of acquired in-process technology and merger-related expenses 1,275 103,193 Total costs and expenses 2,450,844 2,746,923 ----------- ----------- Operating income $ 319,043 $ 174,393 ----------- ----------- ----------- ----------- ----------- ----------- (38) MANAGEMENT'S DISCUSSION AND ANALYSIS ACQUIRED IN-PROCESS TECHNOLOGY The Company recognized a one-time charge of $98.2 million in the fourth quarter of fiscal 1996 for acquired in-process technology that had not yet reached technological feasibility and that had no alternative future use. MERGER-RELATED EXPENSES Merger-related expenses associated with the Cray Research acquisition of $3.7 million were recorded in the fourth quarter of fiscal 1996. These expenses related to integrating Silicon Graphics and Cray Research operations. The Company expects to incur an additional $15 million to $25 million of similar merger-related expenses during fiscal 1997. GROSS MARGIN IMPACT Because purchase accounting requires that purchased work- in-process and finished goods inventories be written up to fair value at the time of acquisition, gross margins were adversely affected in the fourth quarter of fiscal 1996 as a portion of the inventory was sold to customers. The effect of this write-up was to reduce fourth quarter gross margins by approximately $18 million. The Company expects that the continuing effect of the sell-through of this inventory will reduce gross margins by an aggregate of approximately $41 million, primarily during the first three quarters 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 fourth quarter gross margins by approximately $1.7 million. The effect on gross margins will be approximately $6.5 million during the first three quarters of fiscal 1997. OTHER OPERATING RESULTS The discussion that follows focuses on certain other consolidated operating results for fiscal 1996. INTEREST EXPENSE Consolidated interest expense increased in fiscal 1996 principally as a result of borrowings associated with the Cray Research acquisition. Interest expense increased in fiscal 1995 as a result of increased market interest rates, and a full year of interest expense on the zero coupon convertible subordinated debentures issued in November 1993. INTEREST INCOME AND OTHER, NET Consolidated interest income and other, net for fiscal 1996 increased by 19% over the prior year. This was primarily the result of higher invested cash balances prior to the closing of the Cray Research tender offer on April 2, 1996, offset by the Company's $10 million share of losses of Interactive Digital Systems ("IDS"), its joint venture with AT&T. IDS, which was formed in June 1994, was dissolved at the end of fiscal 1996 in conjunction with the reorganization of AT&T. The Company expects interest income and other for fiscal 1997 to continue to be affected by lower invested cash balances as the result of the Cray Research acquisition. Interest income and other, net for fiscal 1995 increased 111% from fiscal 1994 as a result of higher cash balances and higher interest rates on investments. In the second quarter of fiscal 1995, the Company recorded a charge of $7.3 million related to its long-term investment in Control Data Systems, Inc., which the Company disposed of in the third quarter of fiscal 1995. PROVISION FOR INCOME TAXES The consolidated effective tax rate for fiscal 1996 was approximately 39%. Silicon Graphics' standalone tax rate, excluding the effect of the Cray Research acquisition, was approximately 27% for fiscal 1996 compared to 29% in 1995 and 1994, reflecting an increase in foreign earnings taxed at lower rates. The standalone tax rate was lower than the federal statutory rate primarily due to the tax benefit from the Company's foreign sales corporation and foreign earnings taxed at lower rates. The consolidated tax rate was higher than the standalone rate principally because of the write-off of acquired in-process technology for which there was no tax benefit. The Company does not provide for U.S. federal income taxes on undistributed earnings of foreign subsidiaries which it intends to permanently reinvest in those operations. The effective tax rate for fiscal 1997 is expected to increase due to the acquisition of Cray Research, which does not have manufacturing facilities in tax-favored jurisdictions. FINANCIAL CONDITION The Company's financial condition changed significantly in fiscal 1996 compared with 1995 principally as a result of the Cray Research acquisition. At June 30, 1996, cash, cash equivalents and short- and long-term investments, net of short- term borrowings, totaled $320 million, down from $780 million at June 30, 1995. Operating activities generated $212 million in fiscal 1996, compared with $234 million in fiscal 1995 and $276 million in fiscal 1994. Fiscal 1996 net income was affected (39) MANAGEMENT'S DISCUSSION AND ANALYSIS by a number of charges that did not use cash, including the $98 million write- off of acquired in-process technology and $18 million of reduced gross margin associated with the write-up of acquired Cray Research inventories. The impact of those charges was somewhat offset by increased deferred tax benefit provisions, as well as the minority interest in Cray Research loss, which do not provide cash. The growth in receivables, excluding the effects of the Cray Research acquisition, reflects both higher sales levels and longer collection cycles. Inventories, excluding the effects of the Cray Research acquisition, grew at a much lower rate than in fiscal 1995 due to the lower sales growth rate and increased focus on inventory management. Investing activities, other than changes in the Company's marketable investments, consumed $659 million in cash during fiscal 1996, compared with $127 million during fiscal 1995 and $123 million during fiscal 1994. The acquisition of Cray Research used approximately $408 million of cash, net of cash acquired. Capital expenditures of $189 million in fiscal 1996 included expansion of manufacturing capacity as well as costs related to the Company's new information system. In each of the past three years the Company's employee stock plans have been an additional source of cash. In October 1995, the Company announced a program to repurchase seven million shares of common stock to manage the dilution created by employee stock plans. Under this program, 2,452,600 shares of common stock were repurchased for $76 million. The Company has not repurchased any shares since it entered into its merger agreement with Cray Research in February 1996. At June 30, 1996, the Company's principal sources of liquidity included cash, cash equivalents and marketable investments of $457 million ($320 million, net of short-term borrowings) and up to $250 million available under its three- year revolving credit facility. At this time the Company expects capital expenditures to be slightly lower as a percentage of total revenue in fiscal 1997 than they were in fiscal 1996. In connection with the acquisition of Cray Research the Company also has recorded an accrual of approximately $39 million related to costs of exiting facilities and streamlining duplicate administrative activities. During fiscal 1996, cash outlays for these activities were $1.7 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. 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 the basis that its revenue will continue to grow, 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 (40) MANAGEMENT'S DISCUSSION AND ANALYSIS 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. The Company plans to introduce several new product families in the first half of fiscal 1997, including products that will replace virtually the entire current product line. 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 introduction 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. Short product life cycles place a premium on the Company's ability to manage the transition from current products to new products. In order to minimize product transition issues, 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, and delays in customer purchases of existing products in anticipation of the introduction of new products. 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 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 can result in significant discounting and lower gross margins. VOLUME STRATEGY The Company believes that its long-term success is dependent upon achieving substantial increases in its unit volumes over the next several years. The Company has created a new business unit, Silicon Desktop, with 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 up market 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. 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. (41) MANAGEMENT'S DISCUSSION AND ANALYSIS 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. 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 June 30, 1996, the combined Company's backlog was $572 million, representing orders scheduled to ship during fiscal 1997. This backlog primarily consists of orders for Cray Research T90 and T3E 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. In the second quarter of fiscal 1996, for example, the Company's results were adversely affected by purchasing slowdowns related to the federal government budget impasse. 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 more than half 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 (42) MANAGEMENT'S DISCUSSION AND ANALYSIS hedge firmly committed Cray Research backlog. Currently, these hedges extend through December 1999. Beginning in fiscal 1997, the Company also expects to hedge a portion of anticipated quarterly revenues from international operations. The Company utilizes foreign currency forward contracts to hedge non-U.S. dollar intercompany receivables. 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. 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 SYSTEM 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 as the system is extended to the Company's international operations and to the Cray Research business. DEVELOPMENT AND ACCEPTANCE OF MIPS -Registered Trademark- 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. 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. (43) CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30 (In thousands, except per share amounts) 1996(1) 1995 1994 - ----------------------------------------------------------------------------------------- Revenue: Product and other revenue $ 2,553,128 $ 1,989,969 $ 1,365,513 Service revenue 368,188 238,299 172,253 ----------- ----------- ----------- Total revenue 2,921,316 2,228,268 1,537,766 Costs and expenses: Cost of product and other revenue 1,279,742 908,516 644,979 Cost of service revenue 202,697 123,543 90,409 Research and development 353,461 247,678 190,796 Selling, general and administrative 807,830 619,259 417,753 Write-off of acquired in-process technology and merger-related expenses 103,193 22,000 -- ----------- ----------- ----------- Total costs and expenses 2,746,923 1,920,996 1,343,937 ----------- ----------- ----------- Operating income from continuing operations 174,393 307,272 193,829 Interest expense (22,365) (18,188) (8,321) Interest income and other, net 32,778 27,635 13,100 Minority interest in net loss of Cray Research 3,982 -- -- ----------- ----------- ----------- Income from continuing operations before income taxes 188,788 316,719 198,608 Provision for income taxes 73,751 91,863 57,194 ----------- ----------- ----------- Income from continuing operations 115,037 224,856 141,414 Discontinued operations: Reduction of loss on disposal -- -- 400 ----------- ----------- ----------- Net income $ 115,037 $ 224,856 $ 141,814 ----------- ----------- ----------- ----------- ----------- ----------- Income per share: Income from continuing operations $ 0.65 $ 1.28 $ 0.86 ----------- ----------- ----------- ----------- ----------- ----------- Net income $ 0.65 $ 1.28 $ 0.86 ----------- ----------- ----------- ----------- ----------- ----------- Common and common equivalent shares used in the calculation of income per share 175,790 175,435 165,149
The accompanying notes are an integral part of these financial statements. (1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was accounted for as a purchase. See Notes 2 and 3 to the consolidated financial statements. (44) CONSOLIDATED BALANCE SHEETS AS OF JUNE 30 (Dollars in thousands) 1996(1) 1995 - ----------------------------------------------------------------------------- ASSETS: Current assets: Cash and cash equivalents $ 257,080 $ 307,875 Short-term marketable investments 38,316 208,094 Accounts receivable, net of allowance for doubtful accounts of $23,767 in 1996; $13,465 in 1995 978,874 627,738 Inventories 520,045 245,267 Deferred tax assets 198,239 44,006 Prepaid expenses and other current assets 103,701 29,573 ----------- ----------- Total current assets 2,096,255 1,462,553 Other marketable investments 161,541 264,043 Property and equipment, net of accumulated depreciation and amortization 464,879 254,446 Other assets 435,571 225,577 ----------- ----------- $ 3,158,246 $ 2,206,619 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Short-term borrowings $ 136,718 $ -- Accounts payable 261,120 165,152 Accrued compensation 103,996 75,483 Income taxes payable 59,827 62,567 Accrued merger liabilities 56,251 22,191 Other current liabilities 204,789 112,371 Deferred revenue 273,549 122,748 Current portion of long-term debt 5,188 12,670 ----------- ----------- Total current liabilities 1,101,438 573,182 Long-term debt and other 381,490 287,267 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value, issuable in series, 2,000,000 shares authorized; shares issued and outstanding: 17,500 16,998 16,998 Common stock, $.001 par value, 500,000,000 shares authorized; shares issued : 172,410,082 in 1996; 160,478,815 in 1995 173 161 Additional paid-in capital 1,172,787 903,139 Retained earnings 461,311 385,915 Treasury stock, at cost: 35,614 shares in 1996 (867) -- Accumulated translation adjustment and other 24,916 39,957 ----------- ----------- Total stockholders' equity 1,675,318 1,346,170 ----------- ----------- $ 3,158,246 $ 2,206,619 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these financial statements. (1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was accounted for as a purchase. See Notes 2 and 3 to the consolidated financial statements. (45) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three years ended June 30, 1996 (In thousands) Accumulated Additional Translation Total Preferred Stock Common Stock Paid-In Retained Treasury Stock Adjustment Stockholders' Shares Amount Shares Amount Capital Earnings Shares Amount and Other Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1993 809 $ 37,796 140,011 $ 140 $ 646,847 $ 16,855 -- $ -- $ (4,989) $ 696,649 Common stock issued under employee stock option and purchase plans including related tax benefits -- -- 7,774 8 77,084 -- -- -- -- 77,092 Convertible preferred stock, Series A preferred dividends -- -- -- -- -- (1,050) -- -- -- (1,050) Currency translation adjustment -- -- -- -- -- -- -- -- 17,944 17,944 Exercise of warrants -- -- 112 -- 1,000 -- -- -- -- 1,000 Common stock issued upon purchase of Thomson Digital Image -- -- 302 -- 1,847 -- -- -- -- 1,847 Conversion of redeemable preferred stock to common stock -- -- 251 -- 2,762 -- -- -- -- 2,762 Accreted mandatory redemption premium of preferred stock -- -- -- -- (889) -- -- -- -- (889) Net income -- -- -- -- -- 141,814 -- -- -- 141,814 ---- -------- ------- ----- ----------- --------- ------ ------- -------- ----------- Balance, June 30, 1994 809 37,796 148,450 148 728,651 157,619 -- -- 12,955 937,169 Common stock issued under employee stock option and purchase plans including related tax benefits -- -- 7,443 8 108,501 -- -- -- -- 108,509 Conversion of preferred stock (476) (19,703) 688 1 19,702 -- -- -- -- -- Convertible preferred stock, Series A preferred dividends -- -- -- -- -- (1,006) -- -- -- (1,006) Currency translation adjustment -- -- -- -- -- -- -- -- 25,885 25,885 Unrealized gain on available-for-sale securities, net of tax -- -- -- -- -- -- -- -- 1,157 1,157 Net income -- -- -- -- -- 224,856 -- -- -- 224,856 Net transactions of Alias and Wavefront from February 1, 1994 through July 31, 1994 and January 1, 1994 through June 30, 1994, respectively (316) (1,095) 3,898 4 46,285 4,446 -- -- (40) 49,600 ---- -------- ------- ----- ----------- --------- ------ ------- -------- ----------- Balance, June 30, 1995 17 16,998 160,479 161 903,139 385,915 -- -- 39,957 1,346,170 Common stock issued under employee stock option and purchase plans including related tax benefits -- -- 4,606 5 72,613 (39,116) 2,417 75,147 -- 108,649 Common stock issued for Cray Research acquisition -- -- 7,325 7 197,035 -- -- -- -- 197,042 Convertible preferred stock, Series A preferred dividends -- -- -- -- -- (525) -- -- -- (525) Treasury stock purchased -- -- -- -- -- -- (2,453) (76,014) -- (76,014) Currency translation adjustment -- -- -- -- -- -- -- -- (12,047) (12,047) Unrealized loss on available-for-sale securities, net of tax -- -- -- -- -- -- -- -- (2,994) (2,994) Net income -- -- -- -- -- 115,037 -- -- -- 115,037 ---- -------- ------- ----- ----------- --------- ------ ------- -------- ----------- Balance, June 30, 1996(1) 17 $ 16,998 172,410 $ 173 $ 1,172,787 $ 461,311 (36) $ (867) $ 24,916 $ 1,675,318 ---- -------- ------- ----- ----------- --------- ------ ------- -------- ----------- ---- -------- ------- ----- ----------- --------- ------ ------- -------- -----------
The accompanying notes are an integral part of these financial statements. (1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was accounted for as a purchase. See Notes 2 and 3 to the consolidated financial statements. (46) (47) CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30 (In thousands) 1996(1) 1995 1994 - ------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 115,037 $ 224,856 $ 141,814 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 197,836 115,537 93,300 Interests in equity investments 5,927 7,370 -- Write-off of acquired in-process technology 98,208 -- -- Changes in deferred tax assets and liabilities (66,776) 7,912 (1,777) Other (8,977) 27,159 23,756 Changes in operating assets and liabilities (net of effects of Cray Research acquisition): Accounts receivable (202,061) (222,482) (77,808) Inventories (19,632) (115,929) (1,287) Accounts payable 38,109 71,238 (5,328) Other assets and liabilities 54,015 117,983 102,947 --------- --------- --------- Total adjustments 96,649 8,788 133,803 --------- --------- --------- Net cash provided by operating activities 211,686 233,644 275,617 CASH FLOWS FROM INVESTING ACTIVITIES: Available-for-sale investments: Purchases (1,006,107) (575,191) (394,406) Sales 1,232,419 178,928 72,942 Maturities 52,938 209,873 99,293 Acquisition of Cray Research, net of cash acquired (408,144) -- -- Capital expenditures (188,853) (147,933) (92,490) Increase in other assets (62,388) (23,879) (30,716) Net increase in cash and cash equivalents of Alias for the period February 1994 to July 1994, and Wavefront for the period January 1994 to June 1994 -- 44,479 -- --------- --------- --------- Net cash used in investing activities (380,135) (313,723) (345,377) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debt 137,509 2,286 204,006 Payments of debt principal (24,894) (16,077) (9,988) Sale of common stock 81,578 75,334 50,527 Repurchase of common stock (76,014) -- -- Cash dividends-preferred stock (525) (1,050) (1,050) --------- --------- --------- Net cash provided by financing activities 117,654 60,493 243,495 --------- --------- --------- Net (decrease) increase in cash and cash equivalents (50,795) (19,586) 173,735 Cash and cash equivalents at beginning of year 307,875 327,461 153,726 --------- --------- --------- Cash and cash equivalents at end of year $ 257,080 $ 307,875 $ 327,461 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. (1) Amounts reflect the April 2, 1996 acquisition of Cray Research which was accounted for as a purchase. See Notes 2 and 3 to the consolidated financial statements. (48) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF OPERATIONS Silicon Graphics, Inc. ("Silicon Graphics" or the "Company") is a leading provider of high-performance computing systems and software to customers throughout the world. The Company delivers three-dimensional graphics, digital media and symmetric multiprocessing technologies for a wide range of technical, scientific, corporate and entertainment applications. The Company's product portfolio ranges from desktop workstations to database and compute servers through multi-million dollar, high-performance, supercomputing systems. The Company's products are primarily manufactured in Mountain View, California with other manufacturing facilities located in the Midwest and Europe. The Company distributes its products through its direct sales force, as well as through indirect channels including resellers and distributors. Product and other revenue consists primarily of revenue from system and software product shipments, as well as the sale of software distribution rights, system leasing, technology licensing agreements and non-recurring engineering ("NRE") contracts. Service revenue results primarily from customer support and maintenance contracts. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of significant intercompany transactions and balances, including transactions between the Company and Alias Research Inc. ("Alias") and Wavefront Technologies, Inc. ("Wavefront"). The mergers with Alias and Wavefront were accounted for as a pooling of interests and as such, all periods prior to fiscal 1995 were restated. The consolidated financial statements for all fiscal years prior to fiscal 1995 were not restated to adjust Alias' and Wavefront's fiscal year-ends to that of the Company. Thus, such periods include the Company's results of operations and balance sheet data on a June 30 fiscal year basis, Alias' on a January 31 fiscal year basis, and Wavefront's on a prior calendar year basis. The operating results of Cray Research, Inc. ("Cray Research") were consolidated with those of the Company as of April 2, 1996, and the consolidated results reflect a 25% minority interest in the operating results of Cray Research for the period from April 2, 1996 through June 30, 1996. Certain amounts for prior years have been reclassified to conform to current year presentation. FOREIGN CURRENCY TRANSLATION The Company translates the assets and liabilities of its foreign subsidiaries stated in local functional currencies to U.S. dollars at the rates of exchange in effect at the end of the period. Revenues and expenses are translated using rates of exchange in effect during the period. Gains and losses from currency translation are included in stockholders' equity. Currency transaction gains or losses are recognized in current operations and, net of hedging gains or losses, have not been significant to the Company's operating results in any period. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. CASH EQUIVALENTS AND MARKETABLE INVESTMENTS Cash equivalents consist of high quality money market instruments with original maturities of 90 days or less. Short-term marketable investments consist of high quality money market instruments with original maturities greater than 90 days, but less than one year, and are stated at fair value. Other marketable investments consist primarily of high quality debt securities with maturities greater than one year and less than three years, and are stated at fair value. At June 30, 1996, the Company's cash equivalents and marketable investments are all classified as available-for-sale. The cost of securities when sold is based upon specific identification. Realized gains and losses and declines in value judged to be other-than- temporary on available-for-sale securities are included in interest income and other, net. Unrealized gains and losses (net of tax) on securities classified as available-for-sale are included in "accumulated translation adjustment and other" in stockholders' equity. (49) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of cash equivalents and short-term debt approximate cost due to the short period of time to maturity. Fair values of marketable investments, long-term debt, foreign exchange forward contracts and interest swaps are based on quoted market prices or pricing models using current market rates. DERIVATIVE FINANCIAL INSTRUMENTS Silicon Graphics uses derivatives only for the purpose of reducing the financial market risks of its business operations. The Company uses derivative products to hedge the foreign currency and interest rate market exposures underlying certain assets and liabilities and commitments related to customer transactions. The Company does not use any derivative instruments for trading purposes. The Company's accounting policies for these instruments are based on its designation of such instruments as hedging transactions. The criteria the Company uses for designating an instrument as a hedge include its effectiveness in risk reduction and one-to-one matching of derivative instruments to underlying transactions. Gains and losses on foreign exchange forward contracts for which a firm commitment related to a customer transaction has been attained are deferred and recognized in revenue in the same period that the underlying transactions are settled. Gains and losses on foreign currency forward contracts that are designated and effective as hedges of existing assets and liabilities are recognized in interest and other income, net, in the same period as losses and gains on the underlying transactions are recognized and generally offset. Forward points, premiums and discounts, if any, are amortized over the life of the contract and are included in interest and other, net. The differential between fixed and floating rates to be paid or received on interest rate swaps is accrued and recognized as an adjustment to interest expense. The related amount payable or receivable is included in other current assets or accrued liabilities. INVENTORIES Manufacturing inventories are stated at the lower of cost (first- in, first-out) or market. Marketing inventories are stated at cost less depreciation generally based on a two-year life. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciation is computed using the straight-line method. Useful lives of two to seven years are used for machinery and equipment and furniture and fixtures; leasehold improvements are amortized over the shorter of their useful lives or the term of the lease. The Company's buildings are depreciated over twenty-five to thirty years and improvements over eight to fifteen years. Leased systems under operating leases are capitalized and carried at cost. Depreciation is computed using the sum-of-years-digits method over an estimated useful life of two to four years. Depreciation commences upon system acceptance. OTHER ASSETS Included in other assets are intangible assets related to the acquisition of Cray Research in fiscal 1996 and goodwill associated with the acquisition of Silicon Graphics World Trade Corporation in fiscal 1991. Amortization of these purchased intangibles and goodwill is provided on a straight-line basis over the respective useful lives of the assets ranging from four to twenty years. Also included in other assets are purchased technologies and spare parts that are generally amortized on a straight-line basis over the course of their respective useful lives ranging from two to 10 years, as well as deferred tax assets. In March 1995, the Financial Accounting Standards Board issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS 121"), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt SFAS 121 in the first quarter of fiscal year 1997 and, based on current circumstances, does not believe the effect of adoption will be material. REVENUE RECOGNITION Revenue from Cray Research supercomputing system sales (net of trade-in allowances) is recognized upon acceptance by the customer or independent distributor, or in the case of a conversion from lease to purchase, at the time of the customer's election to convert. Revenue from systems under operating lease contracts is recorded as earned over the lease term. All other product revenues are recognized when the product is shipped to the customer and the Company has no additional performance obligations. Initial software fees are recognized when the product has been shipped, provided that the Company has no additional performance obligations. Revenue recognition under technology agreements (50) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- is dependent on the nature and level of effort required to deliver and/or support the technology transfer. Generally, technology revenue is recognized upon the completion of contract requirements or milestones. Revenue related to future commitments under service contracts is deferred and recognized ratably over the related contract term. PRODUCT WARRANTY The Company provides at the time of sale for the estimated cost to warrant its products against defects in materials and workmanship for a period of up to one year. ADVERTISING COSTS The Company accounts for advertising costs as expense in the period in which they are incurred. Advertising expense for the years ended June 30, 1996, 1995 and 1994 was $37.5 million, $16.9 million and $6.7 million, respectively. PER SHARE DATA Primary earnings per share are computed using the weighted average number of shares of common stock and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents include stock options or warrants using the treasury stock or modified treasury stock method (whichever applies) and, if dilutive, convertible securities on an as-if- converted basis. For the purpose of calculating earnings per share, the Company's convertible preferred stock is considered to be a common stock equivalent. Fully diluted earnings per share are substantially the same as reported earnings per share. STOCK COMPENSATION The Company accounts for stock awards granted to employees in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. NOTE 3. BUSINESS COMBINATIONS Acquisition of Cray Research On April 2, 1996, Silicon Graphics acquired approximately 75% of the outstanding shares of common stock of Cray Research for cash. On June 30, 1996, the Company acquired the remaining outstanding Cray Research shares in a merger by exchanging one share of Silicon Graphics common stock for each remaining share of Cray Research common stock. Silicon Graphics also assumed the outstanding Cray Research employee stock options. Cray Research is widely recognized as a leader in the market for large-scale supercomputer systems and solutions used in government, industry and academia. The aggregate purchase price (including direct acquisition costs) was $767 million in cash, common stock and the value associated with options to purchase the Company's common stock. The Company has accounted for the acquisition using the purchase method. The following is a summary of the purchase price allocation (in millions): Inventories and service contracts $ 281.5 Property, plant & equipment 143.7 Intangible assets 84.3 Accrual for exit costs (39.4) Other assets/liabilities, net 198.5 Acquired in-process technology 98.2 ---------- $ 766.8 ---------- ---------- Intangible assets consist of customer lists, trade name, completed technology and workforce-in-place, as determined by an independent appraisal. To determine the value of the completed technology, the expected future cash flows of each existing technology product were discounted taking into account risks related to the characteristics and applications of each product, existing and future markets, and assessments of the life cycle stage of each product. Based on this analysis, the existing technology that had reached technological feasibility was assigned a value of $24.5 million and capitalized. Completed technology has been assigned a four year life, workforce-in-place a five year life and customer lists and trade name 15 year lives. The lives were assigned based on their estimated useful lives. The accrual for exit costs includes only those direct costs related to exiting facilities and operations acquired from Cray Research and does not include any costs related to modifications of the previous Silicon Graphics business. As part of the acquisition completed in June 1996, the Company developed a plan regarding utilization and deployment of the assets and operations acquired from Cray Research. The plan involved primarily streamlining duplicate administrative activities and consolidating sales office locations. The Company expects to have substantially completed the plan regarding the utilization and deployment of the acquired Cray Research assets and operations by June 1997. The composition of costs related to the exit activities are as follows (in millions): non-cancelable lease commitments after closure and related costs -- $16.6; severance and related costs -- $20.5; and other costs -- $2.3. (51) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Exit activities through June 30, 1996 have consisted principally of severance payments resulting in cash outlays of $1.7 million. Approximately $37.7 million of the exit accrual remains at June 30, 1996, a majority of which the Company expects will be spent in fiscal 1997. The $98.2 million allocated to acquired in-process technology, as determined by an independent appraisal, was expensed immediately as required under generally accepted accounting principles. To determine the value of the technology in the development stage, the Company considered, among other factors, the stage of development of each project, the time and resources needed to complete each project, expected income and associated risks. Associated risks included the inherent difficulties and uncertainties in completing the project and thereby achieving technological feasibility, and risks related to the viability of and potential changes to future target markets. This analysis resulted in the value assigned to the in-process technology that had not yet reached technological feasibility and that did not have alternative future uses. The unaudited pro forma combined condensed results of operations of the Company for fiscal 1996 and 1995, had the acquisition occurred at the beginning of each fiscal year presented and which eliminates the non-recurring charges, are as follows (in thousands, except per share amounts): 1996 1995 - -------------------------------------------------------------------------------- Net revenue $ 3,447,480 $ 2,955,991 Net income $ 108,044 $ 5,343 Net income per share $ 0.59 $ 0.03 The unaudited pro forma combined results for fiscal 1996 and 1995 exclude the effects of the write-off of acquired in-process technology and other merger costs of $102 million, as such amounts are non-recurring. In addition to combining the historical results of operations of the two companies, the pro forma calculations include the estimated effect on the Company's historical results of operations from adjustments to the historical carrying values of Cray Research inventories and property, plant and equipment; intangible asset amortization; and loss of interest income as a result of making the acquisition. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred had the transaction been completed at the beginning of the periods indicated, nor is it necessarily indicative of future operating results. MERGERS WITH ALIAS AND WAVEFRONT On June 15, 1995, the Company merged with Alias and Wavefront. Alias and Wavefront outstanding common stock was converted to common stock of Silicon Graphics at rates of .90 and .49, respectively. Silicon Graphics issued 14,100,577 shares in connection with the mergers. The mergers were accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements and Notes to Consolidated Financial Statements have been restated to include the results of Alias and Wavefront for all periods presented. Adjustments to combine these entities, consisting primarily of intercompany transactions, were not significant. The Company incurred costs in connection with the mergers and consolidation of operations. Included in the accompanying consolidated statement of operations for the year ended June 30, 1995 are merger-related expenses totaling $22.0 million, consisting primarily of charges for transaction and professional fees, personnel severance costs, and elimination of duplicate facilities. Separate results of operations for the periods prior to the mergers are as follows (in thousands):
Merger Silicon Related Year ended June 30, 1995 Graphics Alias Wavefront Expenses Adjustments Combined - ------------------------------------------------------------------------------------------------------------------- Total revenue $ 2,142,080 $ 64,270 $ 25,691 $ -- $ (3,773) $ 2,228,268 Net income 231,550 13,164 663 (22,000) 1,479 224,856 Year ended June 30, 1994 - ------------------------------------------------------------------------------------------------------------------- Total revenue $ 1,481,602 $ 38,306 $ 17,858 $ -- $ -- $ 1,537,766 Net income (loss) 140,674 4,167 (3,027) -- -- 141,814
(52) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The adjustments for the year ended June 30, 1995 relate to product sales by Silicon Graphics to Alias and Wavefront during the fourth quarter of fiscal year 1995. Product sales by Silicon Graphics to Alias and Wavefront in prior periods were not significant. The net income adjustment amount for June 30, 1995 includes a $1.6 million benefit for the effect of the $22.0 million merger related expenses on the tax provision. NOTE 4. FINANCIAL INSTRUMENTS CASH EQUIVALENTS AND MARKETABLE INVESTMENTS The Company's cash equivalents and marketable investments as of June 30, 1996 and 1995 are as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Estimated June 30, 1996 Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. government agencies $ 203,975 $ -- $ (2,624) $ 201,351 Repurchase agreements 55,500 -- -- 55,500 Certificates of deposit and Euro certificates of deposit 52,731 -- -- 52,731 U.S. commercial paper 15,277 -- -- 15,277 Other 901 -- -- 901 ----------- ----------- ----------- ----------- Total 328,384 -- (2,624) 325,760 Less amounts classified as cash equivalents (125,903) -- -- (125,903) ----------- ----------- ----------- ----------- Total marketable investments $ 202,481 $ -- $ (2,624) $ 199,857 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross Gross Amortized Unrealized Unrealized Estimated June 30, 1995 Cost Gains Losses Fair Value - ------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. government agencies $ 285,534 $ 1,972 $ (944) $ 286,562 U.S. corporate notes 111,186 1,128 (551) 111,763 Certificates of deposit and Euro certificates of deposit 38,003 161 -- 38,164 Floating rate notes 23,111 -- (128) 22,983 U.S. commercial paper 12,650 15 -- 12,665 ----------- ----------- ----------- ----------- Total marketable investments $ 470,484 $ 3,276 $ (1,623) $ 472,137 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
At June 30, 1995, the Company also had $206.4 million in cash equivalents designated held-to-maturity and consisting of repurchase agreements--$89.7 million; U.S. commercial paper--$56.8 million; floating rate notes--$34.4 million; certificates of deposit--$14.0 million; U.S. government securities-- $10.6 million and other securities--$0.9 million; all of which matured in fiscal 1996. At June 30, 1995, fair values of held-to-maturity investments approximated amortized cost and unrealized gains and losses were not material. Realized gains or losses on sales of available-for-sale securities in fiscal 1996 were not significant. In fiscal 1995, the Company recognized a $7.3 million loss on the sale of its marketable investment in Control Data Systems, Inc. The amortized cost and estimated fair value of marketable investments at June 30, 1996, by contractual maturity, are as follows (in thousands): Estimated Cost Fair Value - ------------------------------------------------------------------------------- Due in one year or less $ 38,388 $ 38,316 Due after one year through two years 76,240 75,302 Due after two years through three years 87,853 86,239 ----------- ----------- Total $ 202,481 $ 199,857 ----------- ----------- ----------- ----------- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The table below shows the notional principal, fair value, and credit risk amounts of the Company's foreign exchange and interest rate instruments as of June 30, 1996 and 1995. The notional principal amounts for off-balance-sheet instruments provide one measure of the transaction volume outstanding as of year end, and do not represent the amount of the Company's exposure to credit loss or market risk. The credit risk amount represents the Company's gross exposure to potential accounting loss on these transactions if all counterparties failed to perform as agreed at the contracted rates and contracts had to be replaced at rates prevailing at each respective date. The Company's exposure to credit loss and market risk will vary over time as a function of currency exchange rates and interest rates. Although the table below reflects the notional principal, fair value, and credit risk amounts of the Company's foreign exchange and interest rate instruments, it does not reflect the gains or losses associated with the exposures and transactions that the foreign exchange and interest rate instruments are intended to hedge. The amounts ultimately realized upon settlement of these (53) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.
June 30, 1996 June 30, 1996 Notional Notional (In thousands) Amount Fair Value Credit Risk Amount Fair Value Credit Risk - ---------------------------------------------------------------------------------------------------------------------------------- Foreign exchange instruments: Forward contracts German Mark $ 106,584 $ 2,694 $ 1,631 $ 24,753 $ 137 $ -- French Franc 71,180 322 334 23,631 (62) 110 Swiss Franc 60,723 769 918 158,913 1,703 -- British Pound 59,204 (452) 93 38,094 126 -- Japanese Yen 57,235 430 341 26,609 13 -- Other 156,722 (538) 281 80,004 305 226 ----------- ----------- ----------- ----------- ----------- ----------- Total forward exchange contracts $ 511,648 $ 3,225 $ 3,598 $ 352,004 $ 2,222 $ 336 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Sold put options $ -- $ -- $ -- $ 7,646 $ (18) $ -- Purchased call options $ -- $ -- $ -- $ (7,646) $ 32 $ -- Interest rate instruments: Receive fixed, pay floating rate swap $ 200,095 $ (1,312) $ -- $ 200,095 $ (3,745) $ --
The foreign exchange forward contracts were entered into to hedge the U.S. dollar value of the Company's net non-U.S. dollar-based intercompany transactions, as well as certain firmly committed non-U.S. dollar-based customer transactions. All foreign exchange forward contracts related to recorded transactions expire within one year. All foreign exchange forward contracts related to firmly committed customer transactions expire within one to three and one-half years. Deferred gains and losses on contracts related to firm commitments were immaterial at June 30, 1996. The options, entered into by Alias and assumed by Silicon Graphics at the time of the mergers, were part of a put-call strategy to hedge a fixed monthly amount of Canadian dollar denominated expenses. This strategy was discontinued in fiscal 1996. The Company entered into an interest rate swap agreement, expiring November 1996, on a notional amount of $200.1 million reflecting the gross proceeds of its zero coupon convertible subordinated debentures (see Note 9). Under the agreement, the Company receives a fixed rate of interest on the notional amount at 4.15% in exchange for payment of a variable interest rate based on the six- month U.S. dollar London Interbank offered rate ("LIBOR") less 47 basis points. The pay rates at June 30, 1996 and 1995 were 5.32% and 5.53%, respectively. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of the Company's financial instruments at June 30, 1996 and 1995 are summarized as follows (in thousands):
1996 1995 Carrying Carrying Amount Fair Value Amount Fair Value - ----------------------------------------------------------------------------------------------- Cash and cash equivalents $ 257,080 $ 257,080 $ 307,875 $307,875 Marketable investments 199,857 199,857 472,137 472,137 Debt instruments 443,935 452,708 246,005 329,816 Foreign exchange contracts 2,400 3,225 2,222 2,222 Sold put options -- -- -- (18) Purchased call options -- -- -- 32 Interest rate swap (380) (1,312) (468) (3,745)
NOTE 5. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentration of credit risk consist principally of cash investments and trade receivables. The Company places its investments with high-credit-quality counterparties and, by policy, limits the amount of credit exposure to any one counterparty. The Company performs ongoing credit evaluations of its customers and except in connection with the sales of supercomputers, generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. (54) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6. CONCENTRATIONS OF OTHER RISKS MATERIALS Certain of the components used by the Company in the manufacture of its products are available from a limited number of suppliers and frequently in the initial stages of new product introductions are available from only a single source. Shortages of various essential materials could occur due to interruption of supply or increased demand in the industry. If the Company were unable to procure certain such components, it could affect the Company's ability to meet demand for its products which would have an adverse short-term effect upon its results. INTERNATIONAL OPERATIONS Because more than half of the Company's revenue is derived from sales outside the United States, and many key components are produced outside the United States, the Company's results could be negatively affected by such factors as changes in foreign currency exchange rates, trade protection measures, longer accounts receivable collection patterns, changes in regional or worldwide economic or political conditions, 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. The risks of its international operations are mitigated in part by the Company's foreign exchange hedging program and by the extent to which the Company's sales and manufacturing activities are diversified. NOTE 7. INVENTORIES Inventories at June 30, 1996 and 1995 are as follows (in thousands): 1996 1995 - ------------------------------------------------------------------------------- Components and subassemblies $ 199,441 $ 43,640 Work-in-process 177,744 84,049 Finished goods 74,997 31,887 Marketing 67,863 85,691 ----------- ----------- Total inventories $ 520,045 $ 245,267 ----------- ----------- ----------- ----------- NOTE 8. PROPERTY AND EQUIPMENT Property and equipment at June 30, 1996 and 1995 is as follows (in thousands): 1996 1995 - ------------------------------------------------------------------------------- Land and buildings $ 115,547 $ 36,531 Machinery and equipment 487,122 342,481 Furniture and fixtures 99,332 73,397 Leasehold improvements 102,523 63,061 Leased systems 20,835 -- ----------- ----------- 825,359 515,470 Accumulated depreciation & amortization (360,480) (261,024) ----------- ----------- Net property and equipment $ 464,879 $ 254,446 ----------- ----------- ----------- ----------- NOTE 9. BORROWING ARRANGEMENTS SHORT-TERM BORROWINGS Short-term borrowings consist of $136.7 million in reverse repurchase agreements bearing interest at 5.37%, collateralized by marketable investments. The Company also has an unsecured revolving credit facility totaling $250.0 million, expiring in April 1999. There were no cash borrowings under this facility at June 30, 1996. Interest on borrowings is based upon either a prime rate, LIBOR rate or competitive bid rate at the Company's option. Under this credit facility, the Company is subject to certain commitment and utilization fees on the unused portion of the committed amount. At June 30, 1996, fees incurred were not material. Covenants governing the credit facility require the maintenance of certain financial ratios. At June 30, 1996, the Company was in compliance with these covenants. LONG-TERM DEBT Long-term debt at June 30, 1996 and 1995 is as follows (in thousands): 1996 1995 - ------------------------------------------------------------------------------- Zero coupon convertible subordinated debentures, due 2013 at 4.15%, net of unamortized discount of $231,731 ($240,717 in 1995) $ 223,269 $ 214,283 Convertible subordinated debentures, due 2011 at 6.125%, net of unamortized discount of $17,529 64,471 -- 8.98% Senior Notes due 1996 -- 6,250 Swiss Franc mortgage due 2013 at 3.54%, which resets quarterly 13,691 16,402 Other 5,786 9,070 ----------- ----------- 307,217 246,005 Less amounts due within one year (5,188) (12,670) ----------- ----------- Amounts due after one year $ 302,029 $ 233,335 ----------- ----------- ----------- ----------- (55) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- In November 1993, the Company issued zero coupon convertible subordinated debentures (the "Debentures") with an ultimate maturity amount of $455.0 million. Effective November 2, 1998, the Debentures will be redeemable at any time, at the option of the Company, at redemption prices equal to the issue price ($439.77 per debenture) plus accrued original issue discount to the date of redemption. At the option of the holder, each Debenture is convertible into 16.269 shares of common stock of the Company at any time. Also at the option of the holder, the Debentures will be purchased by the Company on November 2, 1998, November 2, 2003 or November 2, 2008, at purchase prices equal to the issue price plus accrued original issue discount to such purchase date. The Company, at its option, may elect to pay any such purchase price in cash or shares of common stock, or any combination thereof. At June 30, 1996 and 1995, the fair values of the outstanding Debentures were $230.9 million and $298.0 million, respectively. Related to the Debentures, the Company has entered into an interest rate swap agreement on a notional amount of $200.1 million resulting in a variable interest rate of six-month LIBOR less 47 basis points (5.32% at June 30, 1996). The swap expires in November 1996. In connection with the Cray Research acquisition, the Company assumed the Cray Research convertible subordinated debentures. These debentures are convertible into the Company's common stock at a conversion price of $78 per share at any time prior to maturity and may be redeemed at the Company's option at a price of 100%. In 1994 Cray Research repurchased a portion of the debentures with a face value of $23.0 million. The repurchase satisfied the first four required annual sinking fund payments of $5.8 million originally scheduled for the years 1997 through 2000. Remaining annual sinking fund payments of $5.8 million each are scheduled from 2001 to 2010 with a final maturity payment of $24.5 million in 2011. At June 30, 1996 the fair value of these debentures was $65.6 million. Principal maturities of long-term debt at June 30, 1996, are as follows (in millions): 1997 - $5.2; 1998 - $2.7; 1999 - $2.0; 2000 - $1.5; 2001 - $1.4; and $294.4, thereafter. NOTE 10. LEASING ARRANGEMENTS AS LESSOR In connection with the acquisition of Cray Research, the Company assumed certain computer leasing arrangements pursuant to which it leases computer equipment to customers under operating leases with terms that generally range from one to four years. Contracts with U.S. Government agencies generally provide for cancellation upon 30 days notice. At June 30, 1996, leased systems aggregate $20.8 million less accumulated depreciation of $4.6 million. The Company also assumed Cray Research lease arrangements which are accounted for as sales. The net investment in sales-type leases at June 30, 1996 is summarized as follows (in thousands): Total minimum lease payments receivable $ 43,254 Less unearned interest income (4,927) ---------- Net investment in sales-type leases 38,327 Less current portion included in current receivables (10,443) ---------- Long-term portion included in other assets $ 27,884 ---------- ---------- Future minimum lease rents on noncancelable sales-type lease agreements as of June 30, 1996 are as follows (in millions): 1997-$13.2; 1998-$18.0; 1999- $6.9; 2000-$3.3; and 2001-$1.9. Future minimum lease rents on noncancelable operating lease agreements as of June 30, 1996 are not material. NOTE 11. LEASING ARRANGEMENTS AS LESSEE The Company leases certain of its facilities and some of its equipment under non-cancelable operating lease arrangements. Future minimum annual lease payments under operating leases, net of subleases and rental income, at June 30, 1996, are as follows (in millions): 1997-$73.9; 1998-$69.5; 1999-$54.2; 2000-$43.8; 2001-$28.8; and $147.8, thereafter. Leases for facilities that will be vacated as a result of the acquisition of Cray Research are included in the preceding payment amounts. Future payments associated with these leases were provided for in the Company's exit cost accrual (see Note 3) and therefore do not represent future operating expenses. Aggregate operating lease rent expense was (in millions): $76.7, $49.6 and $44.7, in 1996, 1995 and 1994, respectively. (56) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Under one of its lease agreements, the Company is contingently liable for the residual value of five buildings at the end of their lease terms. The lease for one of the buildings expires in 2000 and the lease for the additional four buildings expires in 2002. However, the Company has the option to extend these leases for an additional 35 years after expiration. If at the end of the final lease renewal, or upon the Company's option to terminate the lease at any time, the Company does not purchase the property or arrange a third-party purchase, then the Company would be obligated to the lessor for a guaranteed payment equal to a specified percentage of the lessor's purchase price for the properties. The Company would also be obligated to the lessor for all or some portion of this amount if the price paid by a third party for the property is below a specified percentage of the lessor's purchase price. The total amount related to the five properties, for which the Company would be contingently liable, is approximately $95.9 million at the end of the lease terms. NOTE 12. STOCKHOLDERS' EQUITY PREFERRED STOCK TRANSACTIONS NKK Corporation ("NKK") of Japan, through a wholly-owned U.S. subsidiary, owns 17,500 shares of Series A Convertible Preferred Stock. The Series A Preferred stock pays a 3% cumulative annual dividend, has preference upon liquidation in the amount of the purchase price and has aggregate voting rights equivalent to 1,400,000 shares of common stock. The preferred stock is convertible into the common stock of the Company at certain times at the then-current price of the common stock. The preferred is perpetual, but is subject to redemption at the option of the Company at certain times if the market price of the common stock is below $8.75 per share. STOCK AWARD PLANS The Company has various stock award plans which provide for the grant of incentive and nonstatutory stock options and the issuance of restricted stock to employees. Incentive stock options are granted at not less than the fair market value on the date of grant; the prices of nonstatutory stock option grants and restricted stock are determined by the board of directors. Under the plans, options and restricted stock generally vest over a fifty-month period from the date of grant. Under one of the plans, the number of shares available for grant or issuance will be automatically increased each July 1, through 1997 by a number of shares equal to 3.5% of the total common shares issued and outstanding on the preceding June 30. In addition, the Company has a Directors' Stock Option Plan which allows for the grant of nonstatutory stock options to nonemployee directors at not less than the fair market value at the date of grant. Eligible directors are granted an option to purchase 30,000 shares of common stock on the date of their initial election as a director. On November 1 of each year, each eligible director is granted an option to purchase an additional 10,000 shares of common stock. These options generally vest in installments over a four year period. At June 30, 1996, 133,100 shares were available for future option grants under the Directors' Stock Option Plan. In connection with the mergers (see Note 3), all outstanding stock options of Alias and Wavefront converted to stock options for Silicon Graphics common stock at ratios of .90 and .49, respectively. As a result, outstanding options to purchase 2,190,153 shares were assumed. In connection with the acquisition of Cray Research (see Note 3), each outstanding stock option of Cray Research was converted to an option for Silicon Graphics common stock. As a result, outstanding options to purchase 3,894,570 shares were assumed. As of June 30, 1996 and 1995, outstanding options to purchase 20,442,299 and 20,025,442 shares, respectively, were exercisable and 213,855 shares and no shares of restricted stock, respectively, were subject to repurchase. (57) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Activity under all of the stock award plans was as follows:
Shares Available Outstanding Options For Grant Shares Price - ----------------------------------------------------------------------------------------------------------- Balance at June 30, 1993 4,006,818 30,817,016 $ 0.18 - $ 25.83 Additional shares authorized for issuance 5,063,622 -- -- Options granted (6,664,519) 6,664,519 $ 4.08 - $ 25.63 Options exercised -- (5,205,003) $ 0.25 - $ 22.88 Options canceled 979,079 (979,079) $ 0.96 - $ 25.63 Plan shares expired (946) -- -- ----------- ----------- Balance at June 30, 1994 3,384,054 31,297,453 $ 0.18 - $ 25.83 Additional shares authorized for issuance 5,902,569 -- -- Options granted (6,531,385) 6,531,385 $ 24.00 - $ 37.13 Options exercised -- (5,712,687) $ 0.18 - $ 31.38 Options canceled 928,870 (928,870) $ 2.78 - $ 37.13 Restricted shares granted (4,740) -- -- Plan shares expired (1,848) -- -- Net transactions of Alias and Wavefront during eliminated periods from February 1, 1994 to July 31, 1994 and January 1, 1994 to June 30, 1994, respectively. (1,185,384) 787,656 $ 1.88 - $ 25.83 ----------- ----------- Balance at June 30, 1995 2,492,136 31,974,937 $ 0.38 - $ 37.13 Additional shares authorized for issuance 7,116,758 -- -- Cray Research options assumed 2,540,543 3,894,570 $ 14.75 - $ 47.63 Options granted (9,305,575) 9,305,575 $ 12.69 - $ 42.50 Options exercised -- (5,283,368) $ 0.38 - $ 37.09 Options canceled 1,835,013 (1,835,013) $ 3.56 - $ 42.50 Restricted shares granted (232,500) -- -- Restricted shares returned 20,000 -- -- Plan shares expired (160) -- ----------- ----------- Balance at June 30, 1996 4,466,215 38,056,701 $ 0.96 - $ 47.63 ----------- ----------- ----------- -----------
STOCK PURCHASE PLAN The Company has an employee stock purchase plan under which eligible employees may purchase stock at 85% of the lower of the closing prices for the stock at the beginning of a twenty four-month offering period or the end of each six-month purchase period. The purchase periods generally begin in May and November. Purchases are limited to 10% of each employee's compensation. As of June 30, 1996, 11,972,311 shares had been issued under the plan and 1,087,689 shares were reserved for future issuance. STOCKHOLDER RIGHTS PLAN The Company has a stockholder rights plan (the "Rights Plan") which provides existing stockholders with the right to purchase one one- thousandth (0.001) preferred share for each share of common stock held in the event of certain changes in the Company's ownership. The Rights Plan may serve as a deterrent to certain abusive takeover tactics which are not in the best interests of stockholders. STOCK REPURCHASE PROGRAM On October 19, 1995, the Company announced that its board of directors had authorized the repurchase of up to seven million shares of its common stock, either in the open market or in private transactions. The Company has purchased approximately 2.5 million shares since the commencement of the repurchase program at an average price of approximately $31.00 per share. The repurchased shares are available for use under the Company's employee stock plans and for other corporate purposes. COMMON SHARES RESERVED The Company has reserved in the aggregate 52,064,281 shares of common stock issuable upon conversion of all convertible subordinated debentures, as well as shares issuable under its stock award and purchase plans. (58) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 13. INCOME TAXES The components of income from continuing operations before income taxes are as follows (in thousands): Years Ended June 30 1996 1995 1994 - ------------------------------------------------------------------------------- United States $ 106,176 $ 201,131 $ 107,401 International 82,612 115,588 91,207 ----------- ----------- ----------- $ 188,788 $ 316,719 $ 198,608 ----------- ----------- ----------- ----------- ----------- ----------- The provision for income taxes consists of the following (in thousands): Years Ended June 30 1996 1995 1994 - ------------------------------------------------------------------------------- Federal: Current $ 111,970 $ 44,781 $ 31,180 Deferred (49,246) (733) (9,303) State: Current 13,540 7,761 8,148 Deferred (4,299) 4,929 959 Foreign Current 17,021 31,905 19,643 Deferred (15,235) 3,220 6,567 ----------- ----------- ----------- $ 73,751 $ 91,863 $ 57,194 ----------- ----------- ----------- ----------- ----------- ----------- The provision for income taxes reconciles to the amounts computed by applying the statutory federal rate to earnings before taxes as follows (in thousands): Years Ended June 30 1996 1995 1994 - ------------------------------------------------------------------------------- Tax at U.S. federal statutory rate $ 66,076 $ 110,852 $ 69,513 State taxes, net of federal tax benefit 6,006 8,249 5,877 Earnings subject to foreign taxes at lower rates (33,149) (18,751) (11,302) Income of Foreign Sales Corporation not subject to U.S. tax (8,355) (9,059) (4,660) Acquired in-process technology 34,373 -- -- Research and experimentation credits -- (4,625) (944) Net operating loss without tax benefit -- -- (664) Nondeductible professional fees -- 2,789 -- Other 8,800 2,408 (626) ----------- ----------- ----------- Provision for income taxes $ 73,751 $ 91,863 $ 57,194 ----------- ----------- ----------- ----------- ----------- ----------- No provision for residual federal taxes has been made on approximately $211.8 million of 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. The Company has been granted exemptions from tax on income from certain manufacturing operations located outside the U.S. for years through 2006. The cumulative income tax benefits attributable to the tax status of this subsidiary are estimated to be $74.0 million at June 30, 1996. The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities are as follows (in thousands): Years ended June 30 1996 1995 1994 - ------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 36,266 $ 4,958 $ 19,024 Foreign taxes on unremitted foreign earnings net of related U.S. tax liability 23,389 9,418 8,158 General business credit carryforwards 31,362 16,732 25,296 Foreign tax credit carryforwards 38,561 1,537 4,434 Depreciation 55,993 15,793 12,626 Inventory valuation 59,279 21,586 13,948 Nondeductible vacation pay accrual 14,172 9,382 8,409 Intercompany profit elimination 10,634 10,690 10,353 Merger expenses 51,468 5,456 6,022 Other 43,161 2,895 9,084 ----------- ----------- ----------- Subtotal 364,285 98,447 117,354 Valuation allowance (60,819) -- (10,995) ----------- ----------- ----------- Total deferred tax assets 303,466 98,447 106,359 Deferred tax liabilities: Intangibles 40,758 -- -- Other 6,012 -- -- ----------- ----------- ----------- Total deferred tax liabilities 46,770 -- -- ----------- ----------- ----------- Total $ 256,696 $ 98,447 $ 106,359 ----------- ----------- ----------- ----------- ----------- ----------- At June 30, 1996, the Company had federal net operating loss carryforwards of approximately $89.4 million for United States federal income tax purposes expiring in the years 2005 through 2011. At June 30, 1996, the Company also had general business credit carryovers of approximately $31.3 million for United States federal tax purposes, expiring in the years 1999 through 2010. In addition, the Company had foreign tax credit carryforwards of approximately $38.5 million which expire in the years 1998 through 2001, and a capital loss carryforward of $7.6 million expiring in 2000. 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 carry- (59) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- forwards. 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 defered 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. NOTE 14. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION The Company, operating in a single industry segment, designs, manufactures and services high-performance computing systems and software. Information regarding operations in different geographic areas at June 30, 1996, 1995 and 1994, and for the years then ended, is as follows (in thousands): 1996 1995 1994 - ------------------------------------------------------------------------------- Net sales to unaffiliated customers: United States $ 1,412,137 $ 1,093,694 $ 786,832 Europe 836,053 635,268 408,766 Rest of World 673,126 499,306 342,168 ----------- ----------- ----------- Total net sales $ 2,921,316 $ 2,228,268 $ 1,537,766 ----------- ----------- ----------- ----------- ----------- ----------- Transfers between geographic areas (eliminated in consolidation): United States $ 698,816 $ 485,303 $ 289,776 Europe 65,583 -- -- Rest of World -- -- -- ----------- ----------- ----------- Total transfers $ 764,399 $ 485,303 $ 289,776 ----------- ----------- ----------- ----------- ----------- ----------- Operating income: United States $ 67,466 $ 190,725 $ 88,556 Europe 121,049 114,837 74,075 Rest of World (12,847) 20,877 34,992 Eliminations (1,275) (19,167) (3,794) Corporate income, net 14,395 9,447 4,779 ----------- ----------- ----------- Income before income taxes $ 188,788 $ 316,719 $ 198,608 ----------- ----------- ----------- ----------- ----------- ----------- Identifiable assets: United States $ 1,802,261 $ 564,187 $ 538,259 Europe 596,818 844,816 313,047 Rest of World 315,740 209,517 148,061 Eliminations (531,197) (406,807) (204,364) Corporate assets 974,624 994,906 772,049 ----------- ----------- ----------- Total assets $ 3,158,246 $ 2,206,619 $ 1,567,052 ----------- ----------- ----------- ----------- ----------- ----------- "Europe" includes Europe and the Middle East. "Rest of World" includes Japan, other Asia/Pacific countries, Canada and Latin America. Net revenue from sales to unaffiliated customers is based on the location of the customer. Intercompany transfers between geographic areas are accounted for by using the transfer prices in effect for the respective subsidiaries. Operating income and identifiable assets are classified based on the location of the Company's facilities. Corporate assets include cash and cash equivalents, marketable investments, deferred tax assets and certain other assets. Corporate income is interest and other income, net. NOTE 15. BENEFIT PLANS 401(k) RETIREMENT SAVINGS PLAN The Company provides a 401(k) investment plan covering substantially all of its U.S. employees. The plan provides for a minimum 25 percent Company match of an employee's contribution up to a specified limit, but allows for a larger matching subject to certain regulatory limitations. The Company's matching contributions to the investment plan became effective October 1, 1994, and for fiscal 1996 and 1995, the Company contributed $4.7 million and $13.7 million, respectively. DEFERRED COMPENSATION PLAN The Company has a Non-Qualified Deferred Compensation Plan that allows eligible executives and directors to defer a portion of their compensation. The deferred compensation, together with Company matching amounts and accumulated earnings, is accrued but unfunded. Such deferred compensation is distributable in cash and at June 30, 1996 and 1995, amounted to approximately $3.3 million and $1.0 million, respectively. A participant may elect to receive such deferred amounts in one payment or in annual installments no sooner than two years following each annual election. Participant contributions are always 100% vested and Company matching contributions vest as directed by the board of directors. There have been no Company matching contributions to date. DEFINED POSTRETIREMENT BENEFIT PLAN In connection with the acquisition of Cray Research, the Company assumed responsibility for the defined postretirement health benefit plan covering substantially all active U.S. Cray Research employees. The plan is unfunded. At June 30, 1996, there were no retirees receiving benefits under the plan and the accumulated postretirement obligation was $7.5 million. Ongoing cost of the plan is not expected to be material. (60) - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16. RELATED PARTY TRANSACTIONS The Company has from time to time engaged in significant transactions with related parties in the ordinary course of business. Related parties have included: Tandem Computers, Incorporated, as a director of Tandem is also on the Company's board of directors; Chrysler Corporation, as the president of Chrysler became a member of the Company's board of directors in fiscal 1996; Control Data Systems, Inc. (CDSI) due to the Company's investment in common stock of CDSI through March 31, 1995; and NKK through its indirect ownership of 100% of Series A Convertible Preferred Stock (See Note 12). Product and other revenue for the years ended June 30, 1996, 1995 and 1994 included, in the aggregate, sales to related parties in the amount of $72.9 million, $119.6 million and $83.1 million, respectively. Purchases and amounts receivable from and amounts payable to such related parties were immaterial at June 30, 1996, 1995 and 1994. NOTE 17. STATEMENT OF CASH FLOWS Supplemental disclosures of cash flow information (in thousands): Years ended June 30 1996 1995 1994 - ------------------------------------------------------------------------------- Cash paid during the year for: Interest $ 9,600 $ 4,600 $ 3,200 Income taxes, net of refunds 122,000 42,200 22,000 Supplemental schedule of noncash investing and financing activities (in thousands): Tax benefit from stock options $ 23,000 $ 31,500 $ 26,900 Equipment purchased under capital leases 200 4,300 6,000 Conversion of preferred stock -- 20,800 -- NOTE 18. CONTINGENCIES The Company is defending the lawsuits described below. The Company believes that it has good defenses to the claims in each of these lawsuits and is defending each of them vigorously. The Company is defending 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. These suits allege that the Company and certain of its officers and directors made material misrepresentations and omissions during the period from October to December 1995. The Company also is defending securities class action lawsuits involving MIPS Computer Systems, Inc., which the Company acquired in June 1992, and Alias Research Inc., which the Company acquired in June 1995. The MIPS case, which was filed in the U.S. District Court for the Northern District of California in 1992, alleges that MIPS and certain of its officers and directors made material misrepresentations and omissions during the period from January to October of 1991. In June 1994 summary judgment was granted in the defendants' favor on all counts. Plaintiffs appeal to the U.S. Court of Appeals for the Ninth Circuit is pending. The Alias case, which was filed in the U.S. District Court for the District of Connecticut in 1991, alleges that Alias and certain of its officers and directors made material misrepresentations and omissions during the period from May 1991 to April 1992. Alias's motion to dismiss the amended complaint is pending. The Company also is defending a patent infringement lawsuit filed by Martin Marietta Corp. in the U.S. District Court for the Middle District of Florida in September 1995. The Company has filed a counterclaim seeking to invalidate the principal patent at issue in the lawsuit, and Martin Marietta has requested the U.S. Patent and Trademark Office to re-examine the patent. The District Court has set a trial date for the lawsuit in February 1998. The Company routinely receives communications from third parties asserting patent or other rights covering the Company's products and technologies. Based upon the Company's evaluation, it may take no action or it may seek to obtain a license. There can be no assurance in any given case that a license will be available on terms the Company considers reasonable, or that litigation will not ensue. Management is not aware of any pending disputes, including those described above, that would be likely to have a material adverse effect on the Company's financial condition, results of operation or liquidity. However, management's evaluation of the likely impact of these pending disputes could change in the future. (61) EX-21.1 5 EXHIBIT 21.1 Exhibit 21.1 SILICON GRAPHICS, INC. SUBSIDIARIES Jurisdiction of Name Incorporation ---- ------------- Alias|Wavefront, Inc. California Cray Asia/Pacific, Inc. Delaware Cray Financial Corporation Delaware Cray Research (America Latina) Ltd. Delaware Cray Research (Eastern Europe) Ltd. Delaware Cray Research, Inc. Delaware Cray Research (India) Ltd. Delaware Cray Research International, Inc. Delaware MIPS Technologies, Inc. Delaware Silicon Graphics Real Estate, Inc. Delaware Silicon Graphics World Trade Corporation Delaware Silicon Studio, Inc. Delaware Research Equipment, Inc. dba Minnesota Minnesota Supercomputer Center, Inc. Silicon Graphics S.A. Argentina Cray Research (Australia) Pty. Ltd. Australia Silicon Graphics Pty Limited Australia Silicon Graphics Computer Systems Ges.m.b.H. Austria Silicon Graphics International Inc. Barbados Silicon Graphics S.A./N.V. Belgium Wavefront Technologies N.V. Belgium Cray Research Computadores do Brasil Ltda. Brazil Silicon Graphics Comercio e Servi os Limitada Brazil 831495 Ontario Ltd. Canada Cray Research (Canada) Inc. Canada Silicon Graphics Limited Canada Wavefront Canada Limited Canada Silicon Graphics spolecnost s rucerum omezenym Czech Republic Silicon Graphics A/S Denmark Cray Research OY Finland Silicon Graphics OY Finland Alias sarl France Cray Research France S.A. France Cray Research Superservers S.A.R.L. France Silicon Graphics France Wavefront Technologies S.A. France Alias Research GmbH Germany APTOS Application Software Technologies GmbH Germany Cray Research GmbH Germany Cray Research Business Systems GmbH Germany Silicon Graphics GmbH Germany Wavefront Technologies GmbH Germany Silicon Graphics Limited Hong Kong Silicon Graphics Kft. Hungary Jurisdiction of Name Incorporation ---- ------------- Silicon Graphics Systems (India) Private Ltd India Cray Research (Israel) Ltd. Israel Silicon Graphics Computer Systems Limited Israel Silicon Graphics Biomedical 1995 Ltd Israel Alias Srl Italy Cray Research Srl Italy Silicon Graphics S.p.A. Italy Wavefront Technologies Srl Italy Cray Foreign Sales Corporation, Ltd. Jamaica Alias Research K.K. Japan Cray Research Japan, Ltd. Japan Nihon Silicon Graphics K.K. Japan Wavefront Japan, Ltd. Japan Yokogawa Cray ELS, Ltd. Japan Cray Research (Korea) Ltd. South Korea Korea Silicon Graphics Ltd. South Korea Cray Research (Malaysia) Sdn. Bhd. Malaysia Cray Research de Mexico, S.A. de C.V. Mexico Silicon Graphics S.A. de C.V. Mexico Cray Research B.V. Netherlands Silicon Graphics B.V. Netherlands Silicon Graphics World Trade B.V. Netherlands Silicon Graphics Limited New Zealand Cray Research Scandinavia A/S Norway Silicon Graphics A/S Norway Beijing Silicon Graphics Computer People's Republic of Engineering and Technology Co., Ltd. China Cray Research (Singapore) Pte. Ltd. Singapore Silicon Graphics Pte. Limited Singapore Cray Research (Proprietary) Limited South Africa Silicon Graphics (Pty) Limited South Africa Cray Research S.A.E. Spain Silicon Graphics, S.A. Spain Cray Research AB Sweden Silicon Graphics AB Sweden Cray Research (Suisse) S.A. Switzerland Silicon Graphics S.A. Switzerland Silicon Graphics Manufacturing S.A. Switzerland Silicon Graphics Limited Taiwan Cray Research Supercomputer Turkey Trade and Services A.S. Alias Research Limited United Kingdom Alias Sonata Limited United Kingdom Cray Research Europe Ltd. United Kingdom Cray Research (UK) Ltd. United Kingdom Silicon Graphics Application Systems Limited United Kingdom Silicon Graphics Limited United Kingdom Wavefront Technologies Ltd. United Kingdom Silicon Graphics Manufacturing Finance Limited Jersey Channel Islands -2- EX-27.1 6 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-K for the period ending June 30, 1996, and is qualified in its entirety by reference to such financial statements and the notes thereto. 1,000 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 257080 38316 1002641 23767 520045 2096255 825359 360480 3158246 1101438 302029 0 16998 173 1658147 3158246 2553128 2921316 1279742 1482439 456654 4292 22365 188788 73751 115037 0 0 0 115037 0.65 0.65
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