-----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, M9vyI0SVxqedndI6QKkU5i0rgDPr5kJpauhPxVzZwXPQuqYXu2D7/4W1GuHBVgh+ TR7ysx9qxefqYYth9wo2xw== 0001047469-98-041299.txt : 19981118 0001047469-98-041299.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041299 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SILICON GRAPHICS INC /CA/ CENTRAL INDEX KEY: 0000802301 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 942789662 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10441 FILM NUMBER: 98752392 BUSINESS ADDRESS: STREET 1: 2011 N SHORELINE BLVD STREET 2: MS 6U-710 CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-1389 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: 94043-1389 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended SEPTEMBER 30, 1998. or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to . COMMISSION FILE NUMBER 1-10441 SILICON GRAPHICS, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2789662 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2011 N. SHORELINE BOULEVARD, MOUNTAIN VIEW, CALIFORNIA 94043-1389 (Address of principal executive offices) (Zip Code) (650) 960-1980 (Registrant's telephone number, including area code) ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- As of October 31, 1998 there were 187,439,699 shares of Common Stock outstanding. SILICON GRAPHICS, INC. QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS
PAGE NO. PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Condensed Consolidated Balance Sheets. . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations. . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows. . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements . . . . . . 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition . . . . . . . . 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . 17 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 18 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 18 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
TRADEMARKS USED IN THIS FORM 10-Q: Silicon Graphics, OCTANE and Onyx are registered trademarks and O2, Origin and Onyx2 are trademarks of Silicon Graphics, Inc. CRAY is a registered trademark of Cray Research, Inc., a wholly owned subsidiary of Silicon Graphics, Inc. MIPS is a registered trademark of MIPS Technologies, Inc. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open Company Ltd. Windows NT is a registered trademark of Microsoft Corporation. Intel is a registered trademark of Intel Corporation. -2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SILICON GRAPHICS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
September 30, June 30, 1998 1998 ---- ---- (unaudited) (1) ASSETS Current assets: Cash and cash equivalents......................................... $ 473,070 $ 506,639 Short-term marketable investments................................. 230,904 230,081 Restricted investments............................................ 53,207 -- Accounts receivable, net.......................................... 481,774 665,420 Inventories....................................................... 284,125 322,823 Prepaid expenses and other current assets......................... 356,605 340,409 ----------- ----------- Total current assets.......................................... 1,879,685 2,065,372 Property and equipment, net............................................ 445,214 445,420 Other assets........................................................... 509,623 453,914 ----------- ----------- $ 2,834,522 $ 2,964,706 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts and notes payable........................................ $ 160,123 $ 215,260 Other current liabilities......................................... 855,514 881,412 ----------- ----------- Total current liabilities..................................... 1,015,637 1,096,672 Long-term debt and other............................................... 399,612 403,522 Stockholders' equity: Preferred stock................................................... 16,998 16,998 Common stock and additional paid-in capital....................... 1,421,389 1,407,108 Retained earnings................................................. 17,915 65,415 Treasury stock.................................................... (47,787) (25,976) Accumulated other comprehensive income............................ 10,758 967 ----------- ----------- Total stockholders' equity.................................... 1,419,273 1,464,512 ----------- ----------- $ 2,834,522 $ 2,964,706 ----------- ----------- ----------- -----------
(1) The balance sheet at June 30, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -3- SILICON GRAPHICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except per share amounts)
Three Months Ended September 30, ------------------------------------------- 1998 1997 ----- ---- Product and other revenue............................ $ 456,984 $ 620,696 Service revenue...................................... 159,372 147,297 -------------- -------------- Total revenue................................... 616,356 767,993 Costs and expenses: Cost of product and other revenue............... 284,189 351,660 Cost of service revenue......................... 94,551 86,263 Research and development........................ 102,138 116,354 Selling, general and administrative............. 232,928 261,421 Other operating expense (1)..................... -- 19,101 -------------- -------------- Total costs and expenses.................... 713,806 834,799 -------------- -------------- Operating loss....................................... (97,450) (66,806) Gain on sale of a portion of SGI interest in MIPS (2).......................................... 53,963 -- Interest and other income (expense), net............. (2,709) (2,307) -------------- -------------- Loss before income taxes ............................ (46,196) (69,113) Benefit for income taxes............................. (2,530) (13,575) -------------- -------------- Net loss............................................. (43,666) (55,538) Preferred stock dividend requirement................. (131) (131) -------------- -------------- Net loss available to common stockholders............ $ (43,797) $ (55,669) -------------- -------------- -------------- -------------- Net loss per share - basic and diluted............... $ (0.24) $ (0.31) -------------- -------------- -------------- -------------- Common shares outstanding - basic and diluted........ 186,329 182,160 -------------- -------------- -------------- --------------
(1) Consists of a charge for in-process R&D ($17 million) and merger-related expenses (2) Relates to the initial public offering of a minority interest in the Company's subsidiary, MIPS Technologies, Inc. ("MIPS") THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -4- SILICON GRAPHICS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
Three Months Ended September 30, ------------------------------------ 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .............................................................. $ (43,666) $ (55,538) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization..................................... 62,995 80,009 Write-off of acquired in-process technology....................... -- 16,900 Gain on sale of a portion of SGI interest in MIPS................. (53,963) -- Other............................................................. 27,319 (4,868) Changes in operating assets and liabilities: Accounts receivable............................................. 183,646 437,699 Inventories..................................................... 40,767 (9,771) Accounts payable................................................ (55,381) (59,398) Other assets and liabilities.................................... (80,252) (10,293) ----------- ----------- Total adjustments............................................. 125,131 450,278 ----------- ----------- Net cash provided by operating activities......................... 81,465 394,740 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures................................................... (48,583) (44,112) Proceeds from sale of a portion of SGI interest in MIPS................ 53,963 -- Increase in other assets............................................... (55,110) (64,861) Purchases of restricted investments.................................... (53,207) -- Available-for-sale investments: Purchases......................................................... (73,072) (25,171) Sales............................................................. 27,990 -- Maturities........................................................ 44,371 -- ----------- ----------- Net cash used in investing activities............................. (103,648) (134,144) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debt....................................................... 180 5,134 Payments of debt principal............................................. (1,279) (48,444) Sale of SGI common stock............................................... 2,303 40,228 Repurchase of SGI stock................................................ (28,331) -- Sale of MIPS common stock.............................................. 15,872 -- Cash dividends - preferred stock....................................... (131) (131) ----------- ----------- Net cash used in financing activities............................. (11,386) (3,213) ----------- ----------- Net (decrease) increase in cash and cash equivalents................... (33,569) 257,383 Cash and cash equivalents at beginning of period....................... 506,639 227,222 ----------- ----------- Cash and cash equivalents at end of period............................. $ 473,070 $ 484,605 ----------- ----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. -5- SILICON GRAPHICS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. CONSOLIDATED FINANCIAL STATEMENTS. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and MIPS after elimination of significant intercompany transactions and balances. The unaudited results of operations for the interim periods shown herein are not necessarily indicative of operating results for the entire fiscal year. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. The unaudited condensed consolidated financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 1998. Certain amounts for the prior year have been reclassified to conform to current year presentation. 2. SALE OF INTEREST IN MIPS TECHNOLOGIES, INC. The public offering of a 14.8% interest in the Company's subsidiary, MIPS, closed on July 6, 1998. Proceeds, net of issuance costs, to the Company and MIPS were $54 million and $16 million, respectively. The accompanying condensed consolidated financial statements include the operations of MIPS on a fully consolidated basis. The publicly held minority interest in the earnings of MIPS for the first quarter of fiscal 1999 ($0.5 million) is included in interest and other income (expense), net in the condensed consolidated statement of operations. The publicly held minority interest in the net assets of MIPS ($3 million) is included in long-term debt and other in the condensed consolidated balance sheet. 3. INVENTORIES. Inventories consist of (in thousands):
September 30, 1998 June 30, 1998 ------------------ ------------- Components and subassemblies $ 19,202 $114,139 Work-in-process 116,220 74,961 Finished goods 54,407 47,917 Demonstration systems 94,296 85,806 -------- --------- Total inventories $284,125 $322,823 -------- --------- -------- ---------
4. RESTRICTED INVESTMENTS. Restricted investments consist of short-term investments pledged as collateral against letters of credit and an equity forward purchase arrangement. Restricted investments are held in the Company's name and custodied with a major financial institution. 5. PROPERTY AND EQUIPMENT. (in thousands)
September 30, 1998 June 30, 1998 ------------------ ------------- Property and equipment, at cost $ 864,710 $ 865,926 Accumulated depreciation and amortization (419,496) (420,506) --------- --------- Net property and equipment $ 445,214 $ 445,420 --------- --------- --------- ---------
-6- 6. SHORT-TERM BORROWINGS Effective November 5, 1998, the Company elected to terminate its commitment related to an unsecured $250 million revolving credit facility. This facility was unused in fiscal 1998 and 1997. 7. RESTRUCTURING CHARGES. In the second quarter of fiscal 1998, the Company announced and began to implement a restructuring program aimed at bringing its expenses more in line with revenue levels and restoring long-term profitability to the Company. The process of developing this program continued during the balance of fiscal 1998 and included a reevaluation of the Company's core competencies, technology roadmap and business model, as well as development of its fiscal 1999 operating plan. The Company's restructuring activity in fiscal 1998 consisted primarily of eliminating approximately 1,700 positions, approximately 1,200 of which were eliminated as of September 30, 1998, writing down certain operating assets, vacating certain leased facilities and canceling certain contracts. Through September 30, 1998, these actions have resulted in aggregate charges of $144 million, of which approximately $93 million have used or will use cash, and $51 million were non-cash charges. The Company expects that the remaining $44 million accrued balance at September 30, 1998 will result in cash expenditures of approximately $41 million over the next nine months and will be funded from working capital. The following table depicts the restructuring activity during the first quarter of fiscal 1999:
Balance at Spending/ Balance at Category June 30, 1998 Charges September 30, 1998 - ------------------------------------------------------------------------------------------------------- (in thousands) Severance and related charges $ 49,403 $ (17,019) $ 32,384 Operating asset reserves 4,220 (1,556) 2,664 Canceled contracts 2,055 (300) 1,755 Vacated facilities 7,274 (643) 6,631 Other 894 (346) 548 --------- --------- --------- $ 63,846 $ (19,864) $ 43,982 --------- --------- --------- --------- --------- ---------
8. EARNINGS PER SHARE. The following table sets forth the computation of basic and diluted loss per share:
Three Months Ended September 30, ---------------------------------- (in thousands, except per share amounts) 1998 1997 - ---------------------------------------------------------------------------------------------------- Net loss $ (43,666) $ (55,538) Less preferred stock dividends (131) (131) --------- --------- Net loss available to common stockholders $ (43,797) $ (55,669) --------- --------- --------- --------- Weighted average shares outstanding--basic and diluted 186,329 182,160 --------- --------- --------- --------- Net loss per share--basic and diluted $ (0.24) $ (0.31) --------- --------- --------- --------- Potentially dilutive securities excluded from computations because they are anti-dilutive 9,984 18,045 --------- --------- --------- ---------
-7- 9. COMPREHENSIVE INCOME. The Company has adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") as of the first quarter of fiscal 1999. SFAS 130 establishes new standards for the reporting and display of comprehensive income and its components, however it has no impact on the Company's consolidated financial position or results of operations. The components of comprehensive income, net of tax, are as follows:
Three Months Ended September 30, ------------------------------ 1998 1997 - -------------------------------------------------------------------------------------------- (in thousands) Net loss $ (43,666) $ (55,538) Change in unrealized gain on available-for-sale investments 77 311 Foreign currency translation adjustments 9,714 (7,918) --------- --------- Comprehensive income $ (33,875) $ (63,145) --------- --------- --------- ---------
The components of accumulated other comprehensive income, net of tax, are as follows:
Three Months Ended --------------------------------- September 30, 1998 June 30, 1998 - --------------------------------------------------------------------------------------------- (in thousands) Unrealized gain (loss) on investments $ 7 $ (70) Foreign currency translation adjustments 10,751 1,037 -------- -------- Accumulated other comprehensive income $ 10,758 $ 967 -------- -------- -------- --------
10. STOCK REPURCHASE PROGRAM. The Company's board of directors has authorized the repurchase of up to 22.5 million shares of its common stock in the open market or in private transactions. The Company has entered into a series of transactions to effect the repurchase of its common stock. To date, the Company repurchased approximately 9.7 million shares of its common stock in the open market, of which 2.6 million shares were repurchased in the first quarter of fiscal 1999. In addition, the Company purchased approximately 2.0 million shares of common stock using a forward purchase arrangement during the first quarter of fiscal 1999 under an agreement with an independent third party. Under this forward purchase arrangement, the purchase price will be paid in the next three years at a pre-determined price based on third-party acquisition cost. The timing and method of payment (net-share or full physical settlement) is at the discretion of the Company. At September 30, 1998, the Company also has outstanding sold put obligations covering approximately 1.8 million shares at an average exercise price of $13.17. The put obligations are exercisable only at expiration, with expiration dates in the second quarter of fiscal 1999. Repurchased shares are available for use under the Company's employee stock plans and for other corporate purposes. 11. 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 putative securities class action lawsuits filed in the U.S. District Court for the Northern District of California (the "Northern District") and in California Superior Court for the County of Santa Clara in December 1997 and January 1998 alleging that the Company and certain of its officers made material misrepresentations and omissions during the period from July to October 1997. The Company is also defending a securities class action lawsuit filed in January 1996 in the Northern District of California alleging that the Company and certain of its officers and directors made material misrepresentations and omissions during the period from September to December 1995. The lawsuit was dismissed with prejudice by the District Court in May 1996. The plaintiffs' appeal to the U.S. Court of Appeals for the Ninth Circuit is pending. -8- The Company is also defending a securities class action lawsuit involving MIPS Computer Systems, Inc., ("MCSI") which the Company acquired in June 1992. The MCSI case, which was filed in 1992 in the Northern District of California, alleges that MCSI and certain of its officers and directors made material misrepresentations and omissions during the period from January to October of 1991. In September 1996, the U.S. Court of Appeals for the Ninth Circuit reversed the summary judgment granted in defendants' favor in June 1994. In October 1997, the defendants' petition for review by the U.S. Supreme Court was denied. The case is presently pending before the District Court. A trial date for the lawsuit is currently set for March 1999. The Company also is defending a securities class action lawsuit involving Alias Research Inc., which the Company acquired in June 1995. The Alias case, which was filed in 1991 in the U.S. District Court for the District of Connecticut, alleges that Alias and certain of its former officers and directors made material misrepresentations and omissions during the period from May 1991 to April 1992. In October 1997, the defendants' motion to dismiss the amended complaint was granted. The plaintiffs' appeal to the U.S. Court of Appeals for the Second Circuit is pending. 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. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. The Quarterly Report on Form 10-Q includes forward looking statements regarding the Company's business, objectives, financial condition and future performance. These forward looking statements include, among others, statements relating to expected levels of revenue, gross margin, operating expense, and future profitability, the benefits expected to result from the transition of our business from declining markets to growth markets, headcount reductions, conversion to the Euro, year 2000 issues and legal proceedings. We have based these forward looking statements on our current expectations about future events. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in such forward looking statements. Such risks and uncertainties include, among other things: adverse changes in general economic or business conditions; adverse changes in the specific markets for the Company's products, including expected rates of growth and decline in the Company's current markets; adverse business conditions; changes in customer order patterns; heightened competition, reflecting rapid technological advances and constantly improving price/performance, which may result in significant discounting and lower gross margins; continued success in technological advancements and new product introduction, including development and successful introduction of strategic products for specific markets; inability to effectively implement the Company's desktop and server strategy, including the development of appropriate distribution, marketing and customer support models; risks related to dependence on the Company's partners and suppliers; risks related to foreign operations (including the downturn of economic trends, unfavorable currency movements, and export compliance issues); risks associated with year 2000 requirements; risks associated with implementation of the Company's new business practices, processes and information systems; litigation involving intellectual property or other issues; and other factors including those listed under the heading "Risks That Affect Our Business." We undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events or otherwise. RESULTS OF OPERATIONS OPERATING ITEMS AS A PERCENTAGE OF TOTAL REVENUE - -------------------------------------------------------------------------------- (PERCENTAGES MAY NOT ADD DUE TO ROUNDING)
Three Months Ended September 30, ------------------------- 1998 1997 ---- ---- Product and other revenue....................... 74.1% 80.8% Service revenue................................. 25.9 19.2 ------ ------ Total revenue................................... 100.0% 100.0% Gross margin.................................... 38.6 43.0 Research and development........................ 16.6 15.2 Selling, general and administrative............ 37.8 34.0 Other operating expense......................... -- 2.5 ------ ------ Operating loss.................................. (15.8) (8.7) Interest and other income (expense), net........ 8.3 (0.3) ------ ------ Loss before income taxes........................ (7.5) (9.0) Benefit for income taxes........................ (0.4) (1.8) ------ ------ Net loss........................................ (7.1)% (7.2)% ------ ------ ------ ------
REVENUE BY GEOGRAPHY - --------------------------------------------------------------------------------
Year/Year Three Months Ended September 30, Increase (Decrease) -------------------------------- ------------------- ($ in millions) 1998 1997 ---- ---- Americas $325 $423 (23)% Europe 184 191 (4)% Rest of World(1) 107 154 (31)% --- --- Total revenue $616 $768 (20)% --- --- --- --- Three Months Ended September 30, -------------------------------- 1998 1997 ---- ---- (as a percentage of total revenue) Americas 53% 55% Europe 30% 25% Rest of World(1) 17% 20%
(1) "Rest of World" includes principally Japan and the Asia-Pacific region. -10- REVENUE BY PRODUCT LINE - --------------------------------------------------------------------------------
Three Months Ended September 30, (as a percentage of product -------------------------------- revenue, excluding other revenue) 1998 1997 ---- ---- Servers (primarily from the Origin-TM- and CRAY-Registered Trademark- families) 53% 50% Graphics Systems (primarily from the O2-TM-, OCTANE-Registered Trademark- and Onyx2-TM- families) 47% 50%
REVENUE. The Company's product and other revenue are derived primarily from shipment of computer system products, with subsystem and software revenue, fees and royalty payments comprising the remainder. Service revenue is comprised of hardware and software support and maintenance. Revenue for the first quarter of fiscal 1999 decreased $152 million or 20% compared with the first quarter of fiscal 1998, reflecting a decline in product and other revenue across all product lines and regions, offset somewhat by an increase in service revenue. The effects of strong competition, particularly in the shrinking UNIX-Registered Trademark- workstation market, as well as a weakening vector supercomputer market, were the principal factors contributing to a decline in unit volumes. The effect of the shrinking UNIX workstation market was far less pronounced in Europe compared with other regions. Europe experienced relatively higher growth in customer and professional services as well. The Company believes that the declines in the UNIX workstation and vector supercomputer markets are long-term trends, and that its future success will require that a larger proportion of its revenues come from growing markets including the market for scalable servers such as the Origin family and Windows NT-Registered Trademark- based workstations such as those planned for introduction in the second half of fiscal 1999. See "Risks That Affect Our Business." The Company's consolidated backlog at September 30, 1998 was $317 million, compared with backlog of $360 million at June 30, 1998. 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. Cost of service revenue includes all costs incurred in the support and maintenance of the Company's products. Gross margin of 38.6% for the first quarter of fiscal 1999 declined compared with gross margin of 43.0% for the first quarter of fiscal 1998. This decline is primarily due to competitive pricing pressures noted across all product lines and proportionately higher service revenue, offset in part by a reduction in inventory reserve charges year over year. The Company believes it will continue to experience margin pressure, particularly in its supercomputer and desktop product lines. In particular, the Company's forthcoming windows NT based systems will compete directly in the high-end of the personal computer marketplace in which gross margins are typically well below the average gross margin levels that the Company has historically recorded. See "Risks That Affect Our Business." OPERATING EXPENSE (EXCLUDING OTHER OPERATING EXPENSE). Operating expense for the first quarter of fiscal 1999 declined 11% in absolute dollars compared with the same period a year ago, but increased as a percentage of total revenue from 49.2% to 54.4%. The decrease in absolute dollars resulted from comparatively lower headcount of approximately 1,300 positions and efforts to control spending through more focused project selection and management. As a percentage of total revenue, operating expense increased principally due to the decrease in revenue. OTHER OPERATING EXPENSE. Other operating expense for the first quarter of fiscal 1998 consists of a $17 million charge for acquired in-process technology recorded in connection with the acquisition of ParaGraph and $2 million of merger-related expenses. -11- INTEREST AND OTHER INCOME (EXPENSE), NET. Interest and other income (expense), net for the first quarter of fiscal 1999 was $51.3 million compared with ($2.3) million for the first quarter of fiscal 1998. The increase in income primarily reflects a $54 million gain on the sale of a portion of the Company's interest in MIPS, higher interest income attributable to higher invested cash balances and a favorable impact resulting from the Company's balance sheet hedging program. The increase was partially offset by expense associated with the Company's economic hedging program and the write-off of an investment. TAXES. The Company's effective tax benefit rate for the first quarter of fiscal 1999 was 23%, excluding the impact of the $54 million gain on the sale of a portion of its interest in MIPS. The Company's effective tax benefit rate for the first quarter of fiscal 1998 was 26%, excluding the impact of the $17 million non-deductible write-off of acquired in-process technology. The fiscal 1998 and 1999 benefit rates differ from the federal statutory rate primarily due to foreign losses for which no benefit has been recognized. At September 30, 1998, the Company had net deferred tax assets of $533 million. Realization of the majority of the net deferred tax assets is dependent on the Company's ability to generate approximately $1 billion of future taxable income. Management believes that it is more likely than not that the assets will be realized based on forecasted income. However, there can be no assurance that the Company will meet its expectations of future income. Management will evaluate the realizability of the deferred tax assets quarterly and assess the need for additional valuation allowances. FINANCIAL CONDITION At September 30, 1998, cash and cash equivalents and marketable and restricted investments totaled $757 million, up from $737 million at June 30, 1998. Included in the September 30, 1998 balance is approximately $53 million of restricted investments that collateralize letters of credit and an equity forward purchase arrangement. Operating activities generated $81 million during the first three months of fiscal 1999 compared with $395 million during the first three months of fiscal 1998. Despite the net loss for the first three months of fiscal 1998, cash flow from operating activities was positive principally due to a significant decrease in accounts receivable due in part to shorter collection cycles and a reduction in inventory levels, offset in part by a reduction in accounts payable. Investing activities, other than changes in the Company's available-for-sale and restricted investments, consumed $50 million in cash during the first three months of fiscal 1998, principally for the acquisition of capital equipment and spare parts and an investment in a computer graphics technology company. This use of cash for investing activities was offset in part by proceeds from the sale of a portion of the Company's interest in MIPS. The principal financing activities during the first three months of fiscal 1999 included the use of $28 million to repurchase shares of the Company's common stock, offset in part by the proceeds from the public offering of MIPS common stock. In the second quarter of fiscal 1998, the Company announced and began to implement a restructuring program aimed at bringing operating expenses more in line with the current environment and restoring profitability to the Company's operations. For more information, see Note 7 of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in Part I of this Quarterly Report. Restructuring charges have been and will be funded through current working capital. At September 30, 1998, the Company's principal sources of liquidity included cash and cash equivalents and marketable investments of $704 million. The Company believes that these principal sources of liquidity along with cash generated from operations and other resources available to the Company should be adequate to fund the Company's projected cash flow needs. As a result of the Company's strong cash position, it has elected to terminate its $250 million revolving credit facility effective November 5, 1998. 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. -12- RISKS THAT AFFECT OUR BUSINESS Silicon Graphics operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company's control. The following discussion highlights some of these risks. BUSINESS TRANSITION. Two of the principal market sectors in which the Company competes -- UNIX workstations and vector supercomputers -- have declined over the past year, and the Company believes that these declines represent long-term trends. The Company's goal is to transition an increasing proportion of its revenues to growing markets, including Intel-Registered Trademark- -based Windows NT workstations and UNIX based scalable servers such as the Company's Origin server product family. The Company's ability to achieve its revenue objectives over the next several quarters will largely depend on the extent to which growth in the Origin family and (beginning in the second half of fiscal 1999) Windows NT workstation products compensates for the expected decline in the other market sectors. In April 1998, the Company made a series of announcements concerning its strategic plans for the next several years. Key elements of the strategy include a continued focus on the technical and technical enterprise markets, with a product roadmap that will, over the next several years, merge the Company's vector supercomputer and scalable server families. The Company also announced an alliance with Intel Corporation that will result in the Company's transition to the Intel microprocessor architecture. While the Company believes that its strategies will result in its return to growth and profitability, the effects will not be reflected in any significant way in the Company's results until the latter half of fiscal 1999, and may not be fully reflected until fiscal 2000. DESKTOP SYSTEM STRATEGY. The Company has under development a family of desktop systems that will be based upon Intel microprocessors and the Windows NT operating system. These systems are scheduled for introduction in early calendar 1999, and there is no assurance that they will account for significant revenue in the latter half of fiscal 1999. Success in this market segment will require that the Company adapt to very different requirements: high volume, lower margins, low-cost manufacturing and distribution, marketing to a broader audience, and new approaches to customer interface and support. The Company will also be required to maintain and extend its customer relationships through a complex product transition and to support a product line which includes multiple operating systems. In particular, although the Company plans to continue to invest in and support its current line of UNIX for MIPS-Registered Trademark- based workstations, there is a risk that revenue from this business will be materially reduced by the announcement of the new product family. The Company believes that its future success in this market segment will largely depend on its making the right strategic choices and on effective execution. SERVER STRATEGY. Sustaining growth in the Company's scalable server business is an important element of its strategic plans for the next several years. Sustained growth will require, among other things, adapting to a longer sales cycle and the need to deliver more complete solutions, establishing a presence in emerging enterprise markets in which the Company has not traditionally participated, working effectively with independent software providers to ensure that important applications for the market segments targeted by the Company are available on the Company's platform, and ultimately, managing a successful and timely transition to the Intel architecture. EXPENSE REDUCTION PROGRAM. During fiscal 1998, the Company announced and began to implement a restructuring program aimed at bringing its expenses more in line with current revenue levels and restoring long-term profitability to the Company. The Company is seeking to further reduce its fiscal 1999 operating expenses significantly below the level of fiscal 1998 operating expenses. Through an overall program including the elimination of positions, managed hiring and generally tighter operating expense controls, the Company is seeking to achieve a sustainable reduction in its expense structure. The Company's success in reducing its operating expenses significantly in the first quarter of fiscal 1999 must be maintained through the -13- balance of the fiscal year. While the Company's objective is to reduce its costs in ways that will not have a material impact on revenue levels, there can be no assurance that this will be achieved. DEPENDENCE ON PARTNERS AND SUPPLIERS. The Company's business has always involved close collaboration with partners and suppliers. However, many elements of the Company's current business strategy, including the introduction of Intel-based Windows NT workstations, the longer-term transition to the Intel architecture, and additional outsourcing of manufacturing, will increase the Company's dependence on Microsoft, Intel and other partners, and on its manufacturing partners and other component suppliers. The Company's business could be adversely affected, for example, if Intel or Microsoft fail to meet product release schedules, or if unanticipated quality issues arise with products from these suppliers. PERIOD TO PERIOD FLUCTUATIONS. The Company's operating results may fluctuate for a number of reasons. Delivery cycles are typically short, other than for supercomputer and certain large-scale server products. Well over half of each quarter's revenue results from orders booked and shipped during the third month, and disproportionately in the latter half of that month. These factors make the forecasting of revenue inherently uncertain. Because the Company plans its operating expenses, many of which are relatively fixed in the short term, on expected revenue, even a relatively small revenue shortfall may cause a period's results to be substantially below expectations. Such a revenue shortfall could arise from any number of factors, including lower than expected demand, supply constraints, delays in the availability of new products, transit interruptions, overall economic conditions or natural disasters. Demand can also be adversely affected by product and technology transition announcements by the Company or its competitors. The timing of customer acceptance of certain large-scale server products may also have a significant effect on periodic operating results. Margins are heavily influenced by mix considerations, including geographic concentrations, the mix of product and service revenue, and the mix of server and desktop product revenue including the mix of configurations within these product categories. The Company's results have followed a seasonal pattern, with stronger sequential growth in the second and fourth fiscal quarters, reflecting the buying patterns of the Company's customers. The Company's stock price, like that of other technology companies, is subject to significant volatility. If revenue or earnings in any quarter fail to meet the investment community's expectations, there could be an immediate impact on the Company's stock price. The stock price may also be affected by broader market trends unrelated to the Company's performance. PROCESS RE-ENGINEERING. The Company is undertaking a series of programs aimed at redesigning some of its core business processes and related information technology. The goals of these programs include more predictable operational performance, lower operating expenses, greater quality and customer satisfaction, and improved asset management. The Company believes that the success of these programs is critical to its long-term competitive position. Implementing these changes will require, among other things, enhanced information systems, substantial training and disciplined execution. There can be no assurance that these programs will be implemented successfully, or that disruptions to the Company's operations will not occur in the process. PRODUCT DEVELOPMENT AND INTRODUCTION. The Company's continued success depends on its ability to develop and rapidly bring to market highly differentiated, technologically complex and innovative products. Product transitions are a recurring part of the Company's business. A number of risks are inherent in this process. The development of new technology and products is increasingly complex and uncertain, which increases the risk of delays. The introduction of a new computer system requires close collaboration and continued technological advancement involving multiple hardware and software design teams, internal and external manufacturing teams, outside suppliers of key components such as semiconductor and storage products and outsourced manufacturing partners. The failure of any one of these elements could cause the Company's -14- new products to fail to meet specifications or to miss the aggressive timetables that the Company establishes. There is no assurance that acceptance of the Company's new systems will not be affected by delays in this process. Short product life cycles place a premium on the Company's ability to manage the transition to new products. The Company often announces new products in the early part of a quarter, while the product is in the final stages of development, and seeks to manufacture and ship the product in volume during the same quarter. The Company's results could be adversely affected by such factors as development delays, the release of products to manufacturing late in any quarter, quality or yield problems experienced by suppliers, variations in product costs and excess inventories of older products and components. In addition, some customers may delay purchasing existing products in anticipation of new product introductions. YEAR 2000 COMPLIANCE Many computer systems and applications experience problems handling dates beyond the year 1999 and will need to be modified before the year 2000 in order to remain functional. As for many other companies, the year 2000 computer issue poses a potential risk for the Company both as a user of information systems in the operation of its business and as a supplier of computer systems and related software, including operating system software, to customers. The Company has completed an assessment of its core business information systems, many of which are provided by outside suppliers, for year 2000 readiness and is extending that review to include a wide variety of other information systems and related business processes used in its operations. The Company plans to have changes to critical systems implemented by the third quarter of calendar 1999 to allow time for testing. Most of the Company's mission critical applications are believed to be year 2000 compliant, including the Company's Oracle information system which was recently upgraded to the most recent version. Although its assessment is ongoing, the Company currently believes that resolving these matters will not have a material adverse effect on its financial condition or results of operations. The Company is implementing a program to support customer efforts to achieve year 2000 compliance. This program includes encouraging customers and independent software vendors to adopt the Company's recently released IRIX 6.5 operating system, which the Company believes is year 2000 compliant, and additional customer support procedures. The Company also has made available software upgrades for some earlier releases of its IRIX operating system. The Company believes that the hardware systems it expects to support beyond 1999, when running on compliant operating systems, will be year 2000 compliant. The Company's older products may require upgrade or replacement to become year 2000 compliant. The Company believes that it generally is not legally responsible for costs incurred by customers to achieve their year 2000 compliance. However, the Company may experience increasing customer satisfaction costs relating to these issues over the next few years. The Company is also assessing the possible effect on its operations of the year 2000 readiness of critical suppliers of products and services. The Company's reliance on its key suppliers, and therefore on the proper functioning of their information systems and software, is increasing, and there can be no assurance that another company's failure to address year 2000 issues could not have an adverse effect on the Company. The Company expects to complete a preliminary estimate of year 2000 project costs during the second quarter of fiscal 1999. The Company believes that it is unlikely to experience a material adverse impact on its financial condition or results of operations due to year 2000 compliance issues. However, since the assessment process is ongoing, year 2000 complications are not fully known, and potential liability issues are not clear, the full potential impact of the year 2000 on the Company is not known at this time. The Year 2000 disclosure set forth above is a "year 2000 statement" as defined in the Year 2000 Information and Readiness Disclosure Act of 1998 (the "Year 2000 Act") and, to the extent the disclosure relates to year 2000 processing of the Company or to products or services offered by the Company, is also a "year 2000 readiness disclosure" as defined in the Year 2000 Act. COMPETITION. The computer industry is highly competitive, with rapid technological advances and constantly improving price/performance. Most of the Company's competitors have substantially greater technical, marketing and financial resources and, in some segments, a larger installed base of customers -15- and a wider range of available applications software. Competition may result in significant discounting and lower gross margins. IMPACT OF GOVERNMENT CUSTOMERS. A significant portion of the Company's revenue is derived from sales to the U.S. government, either directly by the Company or through system integrators and other resellers. Sales to the government present risks in addition to those involved in sales to commercial customers, including potential disruptions due to appropriation and spending patterns and the government's reservation of the right to cancel contracts for its convenience. EXPORT REGULATION. The Company's sales to foreign customers are subject to export regulations. Sales of many of the Company's high-end products require clearance and export licenses from the U.S. Department of Commerce under these regulations. The Department of Commerce is currently investigating the Company's compliance with the export regulations in connection with the sale of several computer systems to a customer in Russia during fiscal 1997. The Company believes that this matter will be resolved without a significant adverse effect on the Company's business. However, there is no assurance that this matter will not have an unforeseen outcome that could impair the conduct of the Company's business outside the United States. The Company's international sales would also be adversely affected if such regulations were tightened, or if they are not modified over time to reflect the increasing performance of the Company's products. INTELLECTUAL PROPERTY. The Company routinely receives communications from third parties asserting patent or other rights covering the Company's products and technologies. Based upon the 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 competition in the markets addressed by the Company intensifies, the volume of these intellectual property claims will also increase. EMPLOYEES. The Company's success depends on its ability to continue to attract, retain and motivate highly qualified technical, marketing and management personnel, who are in great demand. The current uncertainties surrounding the Company have increased the challenges of retaining world-class talent. BUSINESS DISRUPTION. The Company's corporate headquarters, including most of its research and development operations and manufacturing facilities, are located in the Silicon Valley area of Northern California, a region known for seismic activity. A significant earthquake could materially affect operating results. The Company is not insured for most losses and business interruptions of this kind. EURO CONVERSION. As with many multinational companies operating in Europe, beginning in January 1999, Silicon Graphics will be affected by the conversion of 11 European currencies into a common business currency, the euro. Based on its preliminary assessment, the Company does not believe the conversion will have a material impact on the competitiveness of its products in Europe, where there already exists substantial price transparency, or increase the likelihood of contract cancellations. The Company also believes its current accounting systems will accommodate the euro conversion with minimal intervention and does not expect to experience material adverse tax consequences as a result of the conversion. The convergence of currencies into the euro is expected to reduce the Company's overall currency risk and simplify the Company's currency risk management process, including its use of derivatives to manage that risk. The costs of addressing the euro conversion are not expected to be material and will be charged to operations as incurred. MARKET RISK. In the normal course of business, the financial position of the Company is routinely subjected to a variety of risks, including market risk associated with interest rate movements and currency rate movements on non-U.S. dollar denominated assets and liabilities, as well as collectibility of accounts -16- receivable. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, the Company does not anticipate material losses in these areas. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required under this Item 3 is included in the section above entitled Market Risk. -17- PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held its Annual Meeting of Stockholders on October 27, 1998. Proxies for the meeting were solicited pursuant to Regulation 14A. (b) The Company's Board of Directors is divided into three classes, with directors in each class serving for three-year terms. Accordingly, not all Directors are elected at each Annual Meeting of Stockholders. Richard E. Belluzzo was elected a Director at the meeting. The Directors whose terms of office continued after the meeting are C. Richard Kramlich, Lucille Shapiro, Robert B. Shapiro, Robert R. Bishop, Robert A. Lutz and James A. McDivitt. Allen F. Jacobson and James G. Treybig did not stand for re-election and the Board adopted an amendment to the bylaws to reduce the number of directors from nine to seven effective October 27, 1998. (c) The matters described below were voted on at the Annual Meeting of Stockholders, and the number of votes cast with respect to each matter and, with respect to the election of a director, were as indicated. 1. To elect a Class III Director of the Company to serve for a three-year term. RICHARD E. BELLUZZO: For: 158,757,725 Withheld: 1,640,210 2. To approve the adoption of the Company's 1998 Employee Stock Purchase Program. For: 82,752,577 Against: 18,254,325 Abstain: 558,541 Non-vote: 58,832,492 3. To ratify the appointment of Ernst & Young LLP, as independent auditors of the Company for the fiscal year ending June 30, 1999. For: 159,527,244 Against: 558,161 Abstain: 312,530 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.40 Termination letter dated October 28, 1998 from the Company to Bank of America, National Trust and Savings Association. 10.41 Amendment No. 4 to Guaranty from the Company to Virtual Funding Limited Partnership dated as of August 25, 1998. 27.1 Financial Data Schedule. (b) Reports on Form 8-K. None -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 13, 1998 SILICON GRAPHICS, INC. a Delaware corporation By: Steven J. Gomo ---------------------------------------- Steven J. Gomo Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -19- SILICON GRAPHICS, INC. INDEX TO EXHIBITS
Exhibit Description - ------- ----------- 10.40 Termination letter dated October 28, 1998 from the Company to Bank of America, National Trust and Savings Association. 10.41 Amendment No. 4 to Guaranty from the Company to Virtual Funding Limited Partnership dated as of August 25, 1998. 27.1 Financial Data Schedule
-20- EX-10.40 2 EXHIBIT 10.40 October 28, 1998 VIA TELECOPY AND REGULAR MAIL Bank of America National Trust and Savings Association Agency Management Services, #5596 1455 Market Street, 12th Floor San Francisco, CA 94103 Attn: Wendy Young, Vice President Re: Credit Agreement dated as of April 12, 1996 (as extended, renewed, amended or restated from time to time, the "Credit Agreement") among Silicon Graphics, Inc. (the "Company"), the several financial institutions from time to time party to the Credit Agreement (the "Banks"), and Bank of America National Trust and Savings Association, as Agent (the "Agent") Ladies and Gentlemen: The Company hereby terminates the Commitments in their entirety effective as of November 5, 1998 in accordance with the terms of the Credit Agreement. All accrued commitment fees to, but not including the effective date of termination, will be paid by the Company to Agent on account of the Banks on or before the effective date of termination. This letter will serve as notice to Agent of the Company's voluntary termination of all Commitments pursuant to Section 2.07 of the Credit Agreement. Except for the Company's obligation to pay accrued commitment fees as described above, the Company's obligations under the Credit Agreement will cease as of the effective date of termination, including, without limitation, the Company's obligations under Articles VI and VII of the Credit Agreement. SILICON GRAPHICS, INC. a Delaware corporation By: /s/ Steven J. Gomo ---------------------------------------- Steven J. Gomo, Senior Vice President, CFO By: /s/ Robert Saltmarsh ---------------------------------------- Robert Saltmarsh Vice President, Treasurer EX-10.41 3 EXHIBIT 10.41 AMENDMENT NO. 4 TO GUARANTY AMENDMENT NO. 4 ("Amendment No. 4"), dated as of August 25, 1998, from SILICON GRAPHICS, INC., a Delaware corporation (the "GUARANTOR"), to VIRTUAL FUNDING, LIMITED PARTNERSHIP, a Delaware limited partnership (the "Lessor"). WHEREAS, the Lessor and Silicon Graphics Real Estate, Inc. entered into an Agreement for Lease dated as of November 18, 1993, as amended by Amendment No. 1 to Agreement for Lease dated as of March 15, 1995; and WHEREAS, the Lessor and Silicon Graphics Real Estate, Inc. entered into a lease Agreement dated as of November 18, 1993, as amended by Amendment No. 1 to Lease Agreement dated as of March 15, 1995 and Amendment No. 2 to Lease Agreement dated as of July 1, 1996 (as amended, the "LEASE AGREEMENT"); and WHEREAS, the Guarantor and the Lessor entered into a Guaranty, dated as of November 18, 1993, as amended by Amendment No. 1 to Guaranty dated as of March 15, 1995, Amendment No. 2 to Guaranty dated as of March 7, 1997 and Amendment No. 3 to Guaranty dated as of May 29, 1998 (as amended, the "Guaranty"); and WHEREAS, the Lessor, with the consent of the Guarantor, assigned and pledged to The Dai-Ichi Kangyo Bank, Limited, New York Branch, as collateral agent (in such capacity, the "Agent") all of its rights, title and interest in, to and under the Guaranty; and WHEREAS, the Guarantor and the Lessor now desire to amend further the Guaranty as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants herein contained and for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Section 3 of the Guaranty is hereby amended by the addition of the following to the second paragraph thereof, immediately prior to the last sentence of said paragraph: Accordingly, the Guarantor waives all rights and defenses that the Guarantor may have because the Obligations are secured by real property. This means, among other things: (i) the Lessor may collect from the Guarantor without first foreclosing on any real or personal property collateral pledged by the Guaranteed Subsidiaries; and (ii) if the Lessor forecloses on any real property collateral pledged by the Guaranteed Subsidiaries: (a) the amount of the debt may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (b) the Lessor may collect from the Guarantor even if the Lessor, by foreclosing on the real property collateral, has destroyed any right the Guarantor may have to collect from the Guaranteed Subsidiaries. This is an unconditional and 1 irrevocable waiver of any rights and defenses the Guarantor may have because the Obligations are secured by real property. These rights and defenses include, but are not limited to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure. 2. Section 11(d) of the Guaranty is hereby amended by deleting the last sentence thereof in its entirety and inserting in its place the following: The Guarantor shall deliver to the Lessor promptly, and in any event not more than 100 days after the end of each fiscal year of the Guarantor, and in any event not more than 60 days after the end of each fiscal quarter of the Guarantor (other than the last fiscal quarter), a certificate of an appropriate officer of the Guarantor (a "COMPLIANCE CERTIFICATE") setting forth the calculations and/or information in respect of (1) the Guarantor's Consolidated Tangible Net Worth as of the end of such fiscal period, determined in accordance with this Section 11(d), (2) the Guarantor's Fixed Charge Coverage Ratio (as defined in Section 11 (e)) as of the end of such fiscal period, determined in accordance with Section 11 (e) hereof in respect of the Measurement Period then ended and in respect of the fiscal quarter then ended, (3) for so long as the Guarantor is required to comply with the terms of Section 11 (f) hereof, the Guarantor's Quick Ratio (as defined in Section 11(f) determined as of the end of such fiscal quarter, in accordance with Section 11(f) hereof, (4) for so long as the Guarantor is required to comply with the terms of Section 11 (h) hereof, the Guarantor's Liquid Assets (as defined in Section 11 (h)), determined as of the end of each such fiscal quarter, in accordance with Section 11(h) hereof, (~) the Guarantor's Operating Losses (as defined in Section 11 (i)) determined at the end of each such fiscal quarter and (6) any purchases, redemptions or acquisitions by Guarantor or any of its subsidiaries of the capital stock of the Guarantor other than the type described in clause (ii) of Section 11(h) hereof made during such fiscal period. 3. Section 11(e) of the Guaranty is hereby amended by deleting Section 11(e) in its entirety and inserting in its place the following: (e) FIXED CHARGE COVERAGE RATIO. The Guarantor shall not permit, for each Measurement Period set forth below, the Fixed Charge Coverage Ratio to be less than the ratio set forth opposite such Measurement Period:
Fixed Charge Measurement Period Ending Coverage Ratio ------------------------- -------------- June 30, 1999 1.5 : 1.0 September 30, 1999 2.5 : 1.0 December 31, 1999 3.0 : 1.0 March 31, 2000 and each Measurement 3.5 : 1.0 Period thereafter
2 For purposes hereof, the term "Fixed Charge Coverage Ratio" means, for any Measurement Period, determined on a consolidated basis in accordance with generally accepted accounting principles ("GMP"), the ratio of (i) the sum of the Guarantor's earnings before interest expense, rent expense, income taxes, depreciation, amortization and non-recurring charges (i.e., restructuring and merger related charges) for such Measurement Period, but including interest income for such Measurement Period, TO (ii) all obligations of the Guarantor paid in such Measurement Period in respect of interest expense and rent expense. For purposes hereof, the term "Measurement Period" means, with respect to any fiscal quarter of the Guarantor, the period of four fiscal quarters ending on the last day of such fiscal quarter. 4. Section 11(g) of the Guaranty is hereby amended by deleting Section 11(g) in its entirety and inserting in its place the following: (g) COVENANT AMENDMENT. Notwithstanding anything to the contrary set forth in Sections 11 (e), 11 (f) and 11 (h) hereof, (i) upon the occurrence of two consecutive Measurement Periods for which the Guarantor's Fixed Charge Coverage Ratio equals or exceeds 3.5:1.0 as shown in the Compliance Certificates delivered in respect of such Measurement Periods, then automatically without any further notice to or by any party, (A) the terms and provisions of Section 11(f) hereof shall immediately have no further force or effect, the Guarantor having no further obligation to comply with the terms thereof and (B) the required Fixed Charge Coverage Ratio for each remaining Measurement Period set forth in Section 11(e) hereof shall immediately be amended to be 3.5:1.0 and (ii) upon the occurrence of any one Measurement Period for which the Guarantor's Fixed Charge Coverage Ratio equals or exceeds 3.5:1.0, as shown in a Compliance Certificate delivered in respect of such Measurement Period, then automatically without any further notice to or by any party, the terms and provisions of Section 11(h) hereof shall immediately have no further force or effect, the Guarantor having no further obligation to comply with the terms thereof. 5. Section 11(h) of the Guaranty is hereby renumbered as Section 11(k) and new Sections 11(h), 11(i) and 11(j) are hereby added to Section 11 of the Guaranty as follows: (h) MINIMUM LIQUID ASSETS. The Guarantor shall not permit its Liquid Assets at any time to be less than $350 000,000. For purposes hereof, the term "Liquid Assets" means, on a consolidated basis in accordance with GMP, all of the Guarantor's unrestricted and unencumbered cash, cash equivalents and short-term marketable investments (defined as current assets in accordance with GMP) and other short-term marketable investments. (i) OPERATING LOSSES. The Guarantor shall not permit its Operating Losses for each fiscal quarter ended on the date set forth below to exceed 3 the sum of (i) one-half of the Unused Allowances for such fiscal quarter and (ii) the amount set forth opposite each such fiscal quarter: September 30, 1998 $150,000,000 December 31, 1998 $75,000,000 March 31, 1999 S25,000,000
For purposes hereof, the term "Operating Losses" means on a consolidated basis, the operating losses of the Guarantor determined in accordance with GMP and consistent with the calculation of Operating Losses shown as a separate line item on the financial statements and balance sheet previously delivered to the Banks (but in any event, excluding those restructuring and merger related changes shown as a separate line item on the income statement(s) of the Guarantor previously delivered to the Banks). For purposes hereof, "Unused Allowances" means (a) with respect to the fiscal quarter ending September 30, 1998, 0 and (b) with respect to the fiscal quarters ending December 31, 1998 and March 31, 1999, as of the last day of each such fiscal quarter, the sum of the excess, if any, of the Operating Loss limitation set forth in this Section 11(i) for each fiscal quarter ending prior to such date over the actual Operating Losses for the corresponding prior fiscal period. (j) MORTGAGES. On or before December 31, 1998, the Guarantor shall: (i) cause the Lessee to execute, deliver and cause the recording of a [memorandum of lease and leasehold deed of trust and security agreement] in form and substance reasonably satisfactory to the Lessor and the Agent encumbering the Lessee's leasehold interests arising under the Lease Agreement in respect of each Property subject to the Lease Agreement; (ii) cause the delivery to the Lessor of a title insurance policy or endorsement to the Lessor's existing title insurance policy in form and substance satisfactory to the Lessor; and (iii) cause the delivery of an opinion of counsel to the Lessee and the Guarantor in form and substance satisfactory to the Company and the Agent regarding such makers as the Company may request. 6. The Guarantor hereby agrees to deliver to the Lessor on the date hereof a certificate dated the date of this Amendment No. 4, from the Secretary or Assistant Secretary of the Guarantor certifying (i) as to the incumbency and signature of each officer of the Guarantor authorized to execute and deliver this Amendment No. 4, (ii) that attached thereto are true and complete copies of the Restated Certificate of Incorporation and By-Laws of the Guarantor as in full force and effect on the date of this Amendment No. 4 and (iii) that attached thereto is a true and complete copy of the resolutions of the Board of Directors of the Guarantor authorizing the execution, delivery and performance of this Amendment No. 4 and the transactions contemplated hereby, together with a certificate of another officer of the Guarantor as to the incumbency and signature of such Secretary or Assistant Secretary. 4 7. The Guarantor hereby represents and warrants that each of the representations and warranties made in Section 4 of the Guaranty (as amended by this Amendment No. 4) are Accurate and Complete with the same force and effect as though made on and as of the date of this Amendment No. 4, except to the extent that any such representations or warranties expressly relate to an earlier date, in which case, such representations and warranties were Accurate and Complete on and as of such earlier date. For purposes of this paragraph, the term "Accurate and Complete" means, when referring to any representation or warranty, that such representation and warranty is true in all material respects and that the Guarantor has not failed to disclose to the Lessor in writing any fact which if not disclosed to the Lessor would make the facts actually stated materially misleading. 8. The Lessor hereby waives, with the consent of the Agent on behalf of the Majority Banks, compliance by the Guarantor with the Fixed Charge Coverage Ratio as of June 30, 1998 and any Potential Default or Event of Default (as defined in the Lease Agreement) arising out of such non-compliance. 9. The Guarantor agrees to pay or cause to be paid to the Lessor all costs and expenses incurred by the Lessor (including the fees and expenses of its counsel and the costs and expenses incurred by The Dai-Ichi Kangyo Bank, Limited, as agent for the Lessor's lenders) in connection with the preparation, execution and delivery of this Amendment No. 4 and the other documents to be executed and delivered in connection herewith. 10. Except as expressly modified and amended hereby, the Guaranty remains unchanged and in full force and effect in all respects. As expressly modified and amended hereby, the Guarantor hereby affirms the Guaranty in all respects. 11. THIS AMENDMENT NO. 4 SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 12. This Amendment No. 4 may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Amendment No. 4. [signatures begin on next page] 5 IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 4 to be executed as of the date first above written. SILICON GRAPHICS, INC., as Guarantor By: /s/ Steve Gomo --------------------------------------- Name: Steve Gomo Title: Senior Vice President, Chief Financial Officer By: /s/ Robert Saltmarsh --------------------------------------- Name: Robert Saltmarsh Title: Vice President, Treasurer Acknowledged and Agreed: VIRTUAL FUNDING, LIMITED PARTNERSHIP By: Virtual Capital, Inc., General Partner By: ---------------------------- Name: Title: 6 EX-27.1 4 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO. 1,000 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 526,277 230,904 500,128 18,354 284,125 1,879,685 864,710 419,496 2,834,522 1,015,637 368,672 0 16,998 168 1,402,107 2,834,522 456,984 616,356 284,189 378,740 102,138 815 1,297 (46,196) 2,530 (43,666) 0 0 0 (43,666) (0.24) (0.24)
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