UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended DECEMBER 31, 2000.
or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from_________ to _________.
COMMISSION FILE NUMBER 1-10441
SILICON GRAPHICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2789662
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 AMPHITHEATRE PKWY., MOUNTAIN VIEW, CALIFORNIA 94043-1351
(Address of principal executive offices) (Zip Code)
(650) 960-1980
(Registrant's telephone number, including area code)
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of February 2, 2001 there were 191,359,611 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 Statements of Operations........................................................ 3
Condensed Consolidated Balance Sheets.................................................................. 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...................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K...................................................................... 20
Signatures ................................................................................................... 21
TRADEMARKS USED IN THIS FORM 10-Q: Silicon Graphics, Octane, Onyx, Onyx2, O2 and
IRIX are registered trademarks and Origin, Octane2 and SGI are trademarks of
Silicon Graphics, Inc. MIPS is a registered trademark of MIPS Technologies, Inc.
used under license by Silicon Graphics, Inc. UNIX is a registered trademark in
the United States and other countries, licensed exclusively through X/Open
Company Ltd. Windows NT is a registered trademark of Microsoft Corporation.
Intel is a registered trademark of Intel Corporation. Linux is a registered
trademark of Linus Torvalds in the U.S. and other countries. Red Hat is a
registered trademark of Red Hat, Inc. Cray is a registered trademark, and Cray
T90 is a trademark of Cray Inc.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
Product and other revenue............................ $ 326,142 $ 478,246 $ 606,141 $ 903,247
Service revenue...................................... 160,765 169,947 307,102 330,149
----------- ----------- ------------ ------------
Total revenue................................... 486,907 648,193 913,243 1,233,396
Costs and expenses:
Cost of product and other revenue............... 213,412 267,161 380,319 579,339
Cost of service revenue......................... 126,451 122,510 242,669 251,595
Research and development........................ 58,111 78,607 115,460 163,957
Selling, general and administrative............. 182,237 183,487 367,900 411,847
Other operating expense (1)..................... -- (16,000) (6,221) 128,538
----------- ----------- ------------ ------------
Total costs and expenses.................... 580,211 635,765 1,100,127 1,535,276
----------- ----------- ------------ ------------
Operating (loss) income.............................. (93,304) 12,428 (186,884) (301,880)
Gain on sale of marketable investments .............. 10,756 -- 49,561 --
Interest and other income (expense), net............. 14,770 2,165 24,073 (1,854)
----------- ----------- ------------ ------------
(Loss) income before income taxes.................... (67,778) 14,594 (113,250) (303,734)
Income tax provision (benefit)....................... 3,338 5,513 6,854 (99,914)
----------- ----------- ------------ ------------
Net (loss) income.................................... (71,116) 9,081 (120,104) (203,820)
Preferred stock dividend requirement................. (131) (131) (262) (262)
----------- ----------- ------------ ------------
Net (loss) income available to common stockholders... $ (71,247) $ 8,950 $ (120,366) $ (204,082)
=========== =========== ============ ============
Net (loss) income per share - basic and diluted...... $ (0.38) $ 0.05 $ (0.64) $ (1.12)
=========== =========== ============ ============
Common shares outstanding - basic ................... 189,808 182,789 188,840 182,357
=========== =========== ============ ============
Common shares outstanding - diluted.................. 189,808 183,143 188,840 182,357
=========== =========== ============ ============
(1) Amount represents a change in previously estimated restructuring costs in
the six-month period ended December 31, 2000. Amount represents a change in
previously estimated restructuring costs in the three-month period ended
December 31, 1999 and a net charge for estimated restructuring costs in the
six-month period ended December 31, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-3-
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, June 30,
2000 2000(1)
------------------------------
(unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 214,774 $ 251,811
Short-term marketable investments 6,038 6,270
Short-term restricted investments 47,600 --
Accounts receivable, net 394,538 347,515
Inventories 185,498 181,594
Prepaid expenses and other current assets 124,531 133,119
----------- -----------
Total current assets 972,979 920,309
Restricted investments 104,385 126,408
Property and equipment, net 324,374 466,726
Other assets 254,300 325,768
----------- -----------
$1,656,038 $1,839,211
=========== ===========
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 166,269 $ 147,366
Accrued compensation 73,719 79,289
Deferred revenue 246,435 292,772
Other current liabilities 272,798 342,101
----------- -----------
Total current liabilities 759,221 861,528
Long-term debt and other 452,652 385,133
Stockholders' equity:
Preferred stock 16,998 16,998
Common stock and additional paid-in-capital 1,418,979 1,410,663
Accumulated deficit (970,617) (832,219)
Treasury stock (505) (21,458)
Accumulated other comprehensive (loss) income (20,690) 18,566
----------- -----------
Total stockholders' equity 444,165 592,550
----------- -----------
$1,656,038 $1,839,211
=========== ===========
(1) The balance sheet at June 30, 2000 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.
-4-
SILICON GRAPHICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Six Months Ended December 31,
---------------------------------
2000 1999
---------------- --------------
Cash Flows From Operating Activities:
Net loss $ (120,104) $ (203,820)
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Depreciation and amortization 66,239 96,320
Gain on sale of real estate (7,513) --
Gain on sale of marketable investments (49,561) --
Gain on sale of Cray product line (23,506) --
Restructuring (6,221) 128,538
Other (6,702) (97,053)
Changes in operating assets and liabilities:
Accounts receivable (47,022) 161,996
Inventories (3,696) (22,082)
Accounts payable 18,902 (16,180)
Other assets and liabilities 5,819 (27,406)
------------ ------------
Total adjustments (53,261) 224,133
------------ ------------
Net cash (used in) provided by operating activities (173,365) 20,313
Cash Flows From Investing Activities:
Proceeds from sale of real estate 184,723 --
Short-term investments:
Purchases (1,178) (41,620)
Maturities 1,405 32,573
Purchases of restricted investments (125,356) (184,602)
Proceeds from the maturities of restricted investments 99,783 153,526
Capital expenditures (71,476) (195,397)
Decrease in other assets 43,237 2,046
------------ ------------
Net cash provided by (used in) investing activities 131,138 (233,474)
Cash Flows From Financing Activities:
Issuance of debt 93 --
Payments of debt principal (3,527) (11,668)
Sale of SGI common stock 8,886 35,431
Repurchase of SGI common stock -- (24,420)
Cash dividends-preferred stock (262) (262)
------------ ------------
Net cash provided by (used in) investing activities 5,190 (919)
------------ ------------
Net decrease in cash and cash equivalents (37,037) (214,080)
Cash and cash equivalents at beginning of period 251,811 571,117
------------ ------------
Cash and cash equivalents at end of period $ 214,774 $ 357,037
============ ============
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 SGI and our
wholly-owned subsidiaries. The unaudited results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire fiscal year. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position, results of operations and cash flows for all periods presented have
been made. The unaudited condensed consolidated financial statements included in
this Form 10-Q should be read in conjunction with the audited consolidated
financial statements and notes thereto for the fiscal year ended June 30, 2000.
2. INVENTORIES.
(In thousands) December 31, 2000 June 30, 2000
-----------------------------------------------------------------------------
Components and subassemblies $ 53,727 $ 38,855
Work-in-process 41,902 50,051
Finished goods 34,930 45,896
Demonstration systems 54,939 46,792
--------- ---------
Total inventories $ 185,498 $ 181,594
========= =========
3. RESTRICTED INVESTMENTS.
Restricted investments consist of short- and long-term investments pledged as
collateral against letters of credit and an equity forward purchase arrangement.
Restricted investments are held in the Company's name by major financial
institutions.
4. PROPERTY AND EQUIPMENT.
(In thousands) December 31, 2000 June 30, 2000
------------------------------------------------------------------------------------
Property and equipment, at cost $ 919,499 $ 1,050,991
Accumulated depreciation and amortization (595,125) (584,265)
----------- -------------
Property and equipment, net $ 324,374 $ 466,726
=========== =============
5. OTHER ASSETS.
(In thousands) December 31, 2000 June 30, 2000
------------------------------------------------------------------------------------
Investments $ 93,857 $ 152,642
Spare parts 94,674 98,601
Software licenses, goodwill and other 65,769 74,525
---------- ----------
$ 254,300 $ 325,768
========== ==========
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6. RESTRUCTURING AND RELATED CHARGES.
During the first quarter of fiscal 2000, we announced and began to implement
restructuring actions that resulted in aggregate charges of $145 million.
These charges included $65.8 million for the elimination of approximately
1,100 positions across essentially all of our functions and locations. We
also recorded operating asset write downs of $26.6 million for fixed assets
and evaluation units, prepaid license agreements and other intangible assets
associated with the end of life of our Silicon Graphics-Registered Trademark-
320 and Silicon Graphics-Registered Trademark- 540 visual workstations and
certain high-end graphics development projects that were canceled. Third
party contract cancellation charges associated with the above actions totaled
$8.5 million. We planned to vacate approximately 1,500,000 square feet of
leased sales and administrative facilities throughout the world, with lease
terms expiring through fiscal 2004. We estimated this would require ongoing
lease payments of $26 million until subleases could be arranged, abandoning
$11 million of leasehold improvements and other fixed assets and incurring $7
million in exit costs, including costs to restore facilities to original
condition.
During the second through fourth quarters of fiscal 2000, we lowered our
estimate of the total costs associated with the fiscal 2000 restructuring
activities described above. As a result, a cumulative adjustment of
approximately $35 million was recorded in fiscal 2000. The adjustment primarily
reflected far more favorable settlements of lease obligations attributable to
extremely high demand for facilities in Mountain View, California. It also
reflected our new approach to structuring our field organization. The adjustment
further reflected lower than estimated severance and related charges due to
higher than expected attrition and lower per person costs. We estimated that
there would now be approximately 900 involuntary employee terminations
associated with the fiscal 2000 restructuring activity. Estimated costs of
contract cancellations were also adjusted due to favorable settlements.
During the first quarter of fiscal 2001, we again lowered our estimate of the
total costs associated with the fiscal 2000 restructuring activities and
recorded an adjustment of $6 million. The adjustment primarily reflected lower
than estimated facilities closure costs due to negotiating better than
anticipated sublease arrangements. The adjustment also reflected lower than
estimated severance and related charges attributable to higher than expected
attrition and lower per person costs. As of December 31, 2000, all of the
estimated positions have been eliminated. All remaining severance related
charges are expected to be paid by March 31, 2001. The remaining facilities
related accrual balance of approximately $3 million at December 31, 2000 is
expected to result in cash expenditures through fiscal 2004.
The following table depicts the restructuring activity during the first six
months of fiscal 2001:
Severance
and Related Vacated
Category Charges Facilities Total
--------------------------------------------------------------------------------------
Balance at June 30, 2000 $ 3,265 $ 6,440 $ 9,705
Adjustments:
Decrease (2,590) (3,631) (6,221)
Increase -- 3,619 3,619
Expenditures:
Cash (533) (2,692) (3,225)
Non-cash -- (756) (756)
--------------------------------------
Balance at December 31, 2000 $ 142 $ 2,980 $ 3,122
======================================
-7-
7. EARNINGS PER SHARE.
The following table sets forth the computation of basic and diluted (loss)
income per share:
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------------------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (71,116) $ 9,081 $ (120,104) $ (203,820)
Less preferred stock dividends (131) (131) (262) (262)
------------- ----------- ----------- -----------
Net (loss) income available to common stockholders $ (71,247) $ 8,950 $ (120,366) $ (204,082)
============= =========== =========== ===========
Weighted average shares outstanding--basic 189,808 182,789 188,840 182,357
Employee stock options and restricted shares -- 354 -- --
------------- ----------- ----------- -----------
Weighted average shares outstanding--diluted 189,808 183,143 188,840 182,357
============= =========== =========== ===========
Net (loss) income per share--basic and diluted $ (0.38) $ 0.05 $ (0.64) $ (1.12)
============= =========== =========== ===========
Potentially dilutive securities excluded from
computations because they are anti-dilutive 12,662 8,578 13,891 10,856
============= =========== =========== ===========
8. COMPREHENSIVE (LOSS) INCOME.
The components of comprehensive (loss) income, net of tax, are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------------------------------
(In thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (71,116) $ 9,081 $(120,104) $ (203,820)
Change in unrealized (loss) gain on available-for-sale
investments (1,870) 262,628 (2,623) 262,718
Reclassification adjustment of accumulated unrealized
gain related to the sale of investments (6,776) -- (31,226) --
Change in unrealized loss on derivative instruments
designated and qualifying as cash flow hedges (4,633) (1,095) (286) (488)
Foreign currency translation adjustments (1,253) (6,374) (5,121) 3,636
----------- ---------- ---------- -----------
Comprehensive (loss) income $ (85,648) $ 264,240 $(159,360) $ 62,046
=========== ========== ========== ===========
The components of accumulated other comprehensive (loss) income, net of tax, are
as follows:
December 31, June 30,
(In thousands) 2000 2000
-----------------------------------------------------------------------------------------------
Unrealized (loss) gain on available-for-sale investments $ (3,150) $ 30,699
Unrealized loss on derivative instruments designated
and qualifying as cash flow hedges (2,947) (2,661)
Foreign currency translation adjustments (14,593) (9,472)
---------- ---------
Accumulated other comprehensive (loss) income $ (20,690) $ 18,566
========== =========
-8-
9. SEGMENT INFORMATION.
SGI is a leader in high-performance computing and advanced graphics
solutions, offering powerful servers and visual workstations. We have three
reportable segments: Servers, Visual Workstations and Global Services.
Reportable segments are determined based on several factors including
customer base, homogeneity of products, technology, delivery channels and
other factors. The Server segment's current products include Silicon
Graphics-Registered Trademark- Onyx2-Registered Trademark- and the next
generation Onyx-Registered Trademark- 3000 family of graphics systems, the
SGI-TM- Origin-TM- 200 family of servers, the SGI-TM- 1000 family of servers
and the Origin-TM- 2000 and the next generation Origin-TM- 3000 family of
high-performance servers. Fiscal 2000 results include the Cray-Registered
Trademark- product line which was sold to Tera Computer Company ("Tera") in
the third quarter of fiscal 2000. The Visual Workstation segment's current
products include the Silicon Graphics-Registered Trademark- O2-Registered
Trademark- and Silicon Graphics-Registered Trademark- Octane-Registered
Trademark- visual workstations based upon the MIPS-Registered Trademark-
microprocessor and the IRIX-Registered Trademark- operating system and the
Silicon Graphics-Registered Trademark- 230, Silicon Graphics-Registered
Trademark- 330 and Silicon Graphics-Registered Trademark- 550 visual
workstations based upon the Intel-Registered Trademark- microprocessor and
the Windows NT-Registered Trademark- and Red Hat-Registered Trademark-
Linux-Registered Trademark- operating systems. Fiscal 2000 results include
the Silicon Graphics 320 and 540 visual workstations based upon the Intel
microprocessor and the Windows NT operating system which were discontinued in
favor of more industry standard architectures. The Global Services segment
supports our computer hardware and software products and provides
professional services to help customers realize the full value of their
information technology investments. Our professional services organization
provides technology consulting, education, communication and entertainment
services. We evaluate performance for each of these segments based on profit
or loss from operations before interest and taxes.
In addition to the aforementioned reportable segments, expenses of the sales
and marketing, manufacturing, finance and administration groups are allocated
to the operating units and are included in the results reported. The revenue
and related expenses of our wholly-owned software subsidiary Alias|Wavefront,
as well as certain corporate-level operating expenses are not allocated to
operating units and are included in "Other" in the reconciliation of reported
revenue and operating profit. In addition, the revenue and related expenses
of MIPS Technologies, Inc. ("MIPS"), a designer of high-performance
processors and related intellectual property that was a majority-owned
subsidiary until SGI distributed its interest in MIPS to its shareholders
through a spin-off effective June 20, 2000, are also included in "Other" in
the reconciliation of reported revenue and operating profit.
We do not identify or allocate assets or depreciation by operating segment, nor
do we evaluate segments on these criteria. Operating units do not sell product
to each other, and accordingly, there is no inter-segment revenue to be
reported. Information on reportable segments is as follows (in thousands):
Three Months Ended December 31, Six Months Ended December 31,
-----------------------------------------------------------------------------
Visual Global Visual Global
Servers Workstations Services Servers Workstations Services
------------------------------------------------------------------------------------------------------------------------
2000:
Revenue from external customers $ 184,615 $ 98,316 $ 175,854 $ 330,492 $ 194,458 $ 337,092
Segment (loss) profit $ (70,503) $(35,048) $ 7,980 $(142,522) $ (65,775) $ 10,281
------------------------------------------------------------------------------------------------------------------------
1999:
Revenue from external customers $ 273,484 $141,320 $ 180,556 $488,377 $ 301,355 $ 346,640
Segment (loss) profit $ (32,488) $ 12,079 $ 434 $(89,074) $ (101,631) $ (6,112)
Significant items:
Non-recurring charges for contract
cancellations and inventory and future
support costs related to the Silicon
Graphics 320 and 540 visual workstations $ -- $ 18,000 $ (3,300) $ -- $ (47,790) $(23,050)
Vector supercomputer warranty-related
charges $ (15,300) $ -- $ -- $(15,300) $ -- $ --
-----------------------------------------------------------------------------------------------------------------------
-9-
Reconciliation to SGI as reported (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------
REVENUE:
Total reportable segments $ 458,785 $ 595,360 $ 862,042 $ 1,136,372
Other 28,122 52,833 51,201 97,024
--------------------------------------------------------
Total SGI consolidated $ 486,907 $ 648,193 $ 913,243 $ 1,233,396
========================================================
OPERATING (LOSS) PROFIT:
Total reportable segments $ (97,571) $ (19,975) $(198,016) $ (196,817)
Other 4,267 16,403 4,911 23,475
Restructuring -- 16,000 6,221 (128,538)
--------------------------------------------------------
Total SGI consolidated $ (93,304) $ 12,428 $(186,884) $ (301,880)
========================================================
10. SALE LEASEBACK TRANSACTION
In December 2000, we completed the sale of a portion of our corporate real
estate in Mountain View, California for approximately $276 million. The
transaction resulted in initial net proceeds of $185 million with the balance of
the transaction to be completed and the proceeds received prior to December 31,
2001. As part of the transaction, we leased back specific buildings on our
current campus over periods ranging from 2 to 12 years. All of the leases
involved in this transaction are classified as operating leases.
As a result of the transaction, we will recognize an overall gain of
approximately $64 million, of which $8 million was recognized during the three
month period ended December 31, 2000. The remaining gain will be recognized over
the terms of the respective leases and will be recorded as an offset to rent
expense.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), and
amended it in March and June 2000. SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements for all public
registrants. Changes in our revenue recognition policy, if any, resulting from
the interpretation of SAB 101 will be reported as a change in accounting
principle. We are currently reviewing the impact of SAB 101 on our previously
reported results of operations and will adopt SAB 101 during the fourth quarter
of fiscal 2001.
12. CONTINGENCIES.
We are defending the lawsuits described below. We believe we have good defenses
to the claims in each of these lawsuits and we are defending each of them
vigorously.
We are defending putative securities class action lawsuits filed in the U.S.
District Court for the Northern District of California and in California
Superior Court for the County of Santa Clara in December 1997 and January 1998
alleging that SGI and certain of its officers made material misrepresentations
and omissions during the period from July to October 1997. The U.S. District
Court is considering plaintiffs' motion for a voluntary dismissal of the case
without prejudice and defendants' motion for partial summary judgment. Discovery
is proceeding in the California Superior Court case.
We are also defending a securities class action lawsuit involving Alias Research
Inc., which we acquired in June 1995. The Alias case, which was filed in 1991 in
the U.S. District Court for the District of Connecticut, alleges that Alias and
a former officer and
-10-
director made material misrepresentations and omissions during the period
from May 1991 to April 1992. The case has been remanded to the U.S. District
Court. In December 2000, the District Court granted Plaintiffs' motion to
amend their Complaint and the case is proceeding through discovery.
The U.S. Departments of Commerce and Justice are currently conducting civil and
criminal investigations into SGI's compliance with export regulations in
connection with several export sales to Tier 3 countries. See "Risks That Affect
Our Business - Export Regulation."
We routinely receive communications from third parties asserting patent or other
rights covering our products and technologies. Based upon our evaluation, we may
take no action or we may seek to obtain a license. There can be no assurance in
any given case that a license will be available on terms we consider reasonable,
or that litigation will not ensue.
We are not aware of any pending disputes, including those described above, that
would be likely to have a material adverse effect on SGI's financial condition,
results of operations or liquidity. However, our evaluation of the likely impact
of these pending disputes could change in the future.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Quarterly Report on Form 10-Q includes forward-looking statements regarding
our business, objectives, financial condition and future performance. These
forward-looking statements include, among others, statements relating to
expected levels of revenue, gross margin, operating expense, and future
profitability, our business transition objectives, headcount reductions and the
expected impact on our business of legal proceedings and government regulatory
actions. We have based these forward-looking statements on our current
expectations about future events. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms or other comparable
terminology. These statements are only predictions.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those expressed or implied
in such forward-looking statements. Such risks and uncertainties include, among
other things: adverse changes in general economic or business conditions;
adverse changes in the specific markets for our products, including expected
rates of growth and decline in our current markets; adverse business conditions;
changes in customer order patterns; the impact of employee attrition rates;
heightened competition, reflecting rapid technological advances and constantly
improving price/performance, which may result in significant discounting and
lower gross profit margins; continued success in technological advancements and
new product introduction, including timely development and successful
introduction of strategic products for specific markets; inability to
effectively implement our visual workstation and server strategy, including the
development of appropriate distribution, marketing and customer support models;
risks related to dependence on our partners and suppliers; risks related to
foreign operations (including the downturn of economic trends, unfavorable
currency movements, and export compliance issues); risks associated with
implementation of our new business practices, processes and information systems;
litigation involving export compliance, intellectual property or other issues;
and other factors including those listed under the heading "Risks That Affect
Our Business."
We undertake no obligation to publicly update or revise any forward-looking
statements, whether changes occur as a result of new information, future
events or otherwise. The matters addressed in this discussion, with the
exception of the historical information presented, are forward-looking
statements involving risks and uncertainties, including business transition
and other risks discussed under the heading "Risks That Affect Our Business"
and elsewhere in this report. Our actual results may differ significantly
from the results discussed in the forward-looking statements.
The following tables and discussion present certain financial information on a
comparative basis. During the third and fourth quarters of fiscal 2000,
respectively, we sold our Cray product line and distributed our remaining
interest in MIPS through a spin-off. We believe it more relevant if certain
current fiscal year results (revenue, gross margin and operating expenses other
than restructuring activity) are compared with pro forma fiscal 2000 results.
The pro forma results for the three and six month periods of fiscal 2000 used
throughout this discussion are adjusted to exclude the results of operations of
the Cray product line and MIPS.
-11-
RESULTS OF OPERATIONS Pro Forma Pro Forma
Three Months Six Months
(Numbers may not add due to rounding) Three Months Ended Six Months Ended Ended Ended
December 31, December 31, December 31, December 31,
---------------------------------------------------------------------------------------------------------------------
$ in millions, except per share amounts 2000 1999 2000 1999 1999 1999
---------------------------------------------------------------------------------------------------------------------
Total revenue $ 487 $ 648 $ 913 $ 1,233 $ 563 $ 1,077
Cost of revenue 340 390 623 831 350 758
---------------------------------------------------------------------------------------------------------------------
Gross profit 147 259 290 402 213 319
Gross profit margin 30.2% 39.9% 31.8% 32.6% 37.9% 29.6%
Total operating expenses 240 246 477 704 227 663
---------------------------------------------------------------------------------------------------------------------
Operating (loss) income (93) 12 (187) (302) (14) (344)
Interest and other income (expense), net 26 2 74 (2) 4 2
---------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (68) 15 (113) (304) (9) (342)
---------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (71) $ 9 $ (120) $ (204) $ (9) $ (233)
---------------------------------------------------------------------------------------------------------------------
Net (loss) income per share - basic
and diluted $(0.38) $ 0.05 $ (0.64) $ (1.12) $(0.05) $ (1.28)
---------------------------------------------------------------------------------------------------------------------
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REVENUE
The following discussion of revenue is based on the results of our reportable
segments as described in Note 9 to the Condensed Consolidated Financial
Statements. Total revenue is principally derived from three reportable segments:
Servers, Visual Workstations and Global Services. These segments were determined
based on factors such as customer base, homogeneity of products, technology,
delivery channels and other factors.
Revenue for the second quarter and the first six months of fiscal 2001 decreased
$77 million or 14% and $164 million or 15%, respectively, compared with the
corresponding periods of fiscal 2000 on a pro forma basis.
The following table presents total revenue by reportable segment:
(Numbers may not add Three Months Ended Six Months Ended Pro Forma Three Pro Forma Six
due to rounding) December 31, December 31, Months Ended Months Ended
December 31, December 31,
-----------------------------------------------------------------------------------------------------------
$ in millions 2000 1999 2000 1999 1999 1999
-----------------------------------------------------------------------------------------------------------
Servers $ 185 $ 273 $ 330 $ 488 $ 236 $ 426
% of total revenue 38% 42% 36% 40% 42% 40%
Visual Workstations $ 98 $ 141 $ 195 $ 301 $ 141 $ 301
% of total revenue 20% 22% 21% 24% 25% 28%
Global Services $ 176 $ 181 $ 337 $ 347 $ 155 $ 293
% of total revenue 36% 28% 37% 28% 27% 27%
Other $ 28 $ 53 $ 51 $ 97 $ 31 $ 57
% of total revenue 6% 8% 6% 8% 6% 5%
-----------------------------------------------------------------------------------------------------------
Server revenue for the second quarter and the first six months of fiscal 2001
decreased 22%, or $51 million and $96 million, respectively, compared with
the corresponding periods of fiscal 2000 on a pro forma basis.
Visual Workstation revenue for the second quarter and the first six months of
fiscal 2001 decreased $43 million, or 30%, and $107 million, or 35%,
respectively, compared with the corresponding periods of fiscal 2000 on a pro
forma basis.
Revenue for the first six months of fiscal 2001 was affected by limited
availability of the industry-standard ceramic packaging used by our supplier
of custom ASICs for our Origin 3000 family of high-performance servers, Onyx
3000 family of graphics systems and Octane2-TM- graphics workstations.
Although we do expect to receive significantly more of the constrained
components in the third quarter of fiscal 2001 than we received in the second
quarter of fiscal 2001, the timing of delivery of these components will be a
critical factor in our ability to achieve our goals for the third quarter of
fiscal 2001.
Global Services revenue is comprised of hardware and software support and
maintenance, professional services and remanufactured systems sales. Global
Services revenue for the second quarter and the first six months of fiscal
2001 increased $21 million, or 13%, and $45 million, or 15%, respectively,
compared with the corresponding periods of fiscal 2000 on a pro forma basis.
These increases primarily reflect an increase in professional services
revenue and remanufactured systems sales, offset in part by a decline in our
traditional customer support revenue.
Other revenue is principally comprised of our operating units that are not
reportable segments, including the product and service revenue of our software
subsidiary, Alias|Wavefront.
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Total revenue by geographic area was as follows (in millions):
Pro Forma Three Pro Forma Six
Three Months Ended Six Months Ended Months Ended Months Ended
December 31, December 31, December 31, December 31,
----------------------------------------------------------------------------------------------------
Area 2000 1999 2000 1999 1999 1999
----------------------------------------------------------------------------------------------------
Americas $ 268 $ 345 $ 514 $ 696 $ 310 $ 628
Europe 119 171 216 321 141 269
Rest of World 100 132 183 216 112 180
----------------------------------------------------------------------------------------------------
Total revenue $ 487 $ 648 $ 913 $ 1,233 $ 563 $ 1,077
====================================================================================================
Geographic revenue as a percentage of total revenue was as follows:
Three Months Ended Six Months Ended Pro Forma Three Pro Forma Six
December 31, December 31, Months Ended Months Ended
December 31, December 31,
----------------------------------------------------------------------------------------------------
Area 2000 1999 2000 1999 1999 1999
----------------------------------------------------------------------------------------------------
Americas 55% 53% 56% 56% 55% 58%
Europe 24% 26% 24% 26% 25% 25%
Rest of World 21% 21% 20% 18% 20% 17%
====================================================================================================
The geographic revenue mix in the second quarter of fiscal 2001 did not shift
significantly when compared with the corresponding period in fiscal 2000 on a
pro forma basis. In terms of absolute dollars, a decline in revenue was
experienced across all regions. The increase in Rest of World business as a
percentage of total revenue in the fist six months of fiscal 2001 compared
with the corresponding period of fiscal 2000 on a pro forma basis is
principally due to an increase in professional services revenue in Japan.
Our consolidated backlog at December 31, 2000 was $386 million compared with
$298 million at June 30, 2000. The increase is primarily due to material
shortages of wafer-starts and the ceramic packaging for many of our custom ASICS
that impacted our ability to ship new products which contain these components.
GROSS PROFIT MARGIN
Cost of product and other revenue includes costs related to product shipments,
including materials, labor, overhead and other direct or allocated costs
involved in their manufacture or delivery. Costs associated with non-recurring
engineering revenue are included in research and development expense. Cost of
service revenue includes all costs incurred in the support and maintenance of
our products, as well as costs to deliver professional services.
Gross margin for the second quarter decreased to 30.2% compared with the pro
forma gross margin of 37.9% in the second quarter of fiscal 2000. Our second
quarter gross margin was affected by the residual impact of several quarters
of component issues which affected shipping patterns and was a factor in
causing a higher percentage of our revenue to come from lower margin products
during the quarter. In particular, we shipped a number of high end systems
with low margin in the second quarter that ideally would have been delivered
over a period of several quarters. Competition in the market for high
performance servers and UNIX-Registered Trademark- workstations was also a
factor. Despite the impact that decreased volumes and continuing pricing
pressures has had on gross profit margin in both the Server and Visual
Workstation segments, as well as in our Global Services business, we have
been able to partially mitigate these effects by consolidation and
outsourcing of certain manufacturing operations and continued improvements in
manufacturing efficiencies and procurement practices.
Gross margin for the first six months of fiscal 2001 was 31.8% compared with
pro forma gross margin of 29.6% in the first six months of fiscal 2000
reflecting certain adjustments related to our decision to discontinue the
Silicon Graphics 320 and 540 visual
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workstations. Without these adjustments, our gross profit margin for the
first six months of fiscal 2000 would have been 37.6%. The adjustments that
affected the pro forma gross margin for the first six months of fiscal 2000
include charges of approximately $48 million for third party manufacturing
contract cancellations and purchase commitments and for excess product
demonstration inventory related to our Silicon Graphics 320 and 540 visual
workstations, charges of $23 million to cost of service revenue for future
unrecoverable visual workstation support costs, and charges of $15 million
to cost of service revenue for estimated warranty related costs
associated with the Cray T90-TM- supercomputer product line.
Pro Forma Three Pro Forma Six
OPERATING EXPENSES Three Months Ended Six Months Ended Months Ended Months Ended
December 31, December 31, December 31, December 31,
-------------------------------------------------------------------------------------------------------------------
$ in millions 2000 1999 2000 1999 1999 1999
-------------------------------------------------------------------------------------------------------------------
Research and development $ 58 $ 79 $ 115 $ 164 $ 67 $ 137
% of total revenue 11.9% 12.1% 12.6% 13.3% 11.9% 12.7%
Selling, general and administrative $ 182 $ 183 $ 368 $ 412 $ 176 $ 398
% of total revenue 37.4% 28.3% 40.3% 33.4% 31.4% 36.9%
Other -- $ (16) $ (6) $ 129 $ (16) 129
% of total revenue 0% (2.5%) (0.7%) 10.4% (2.8%) 11.9%
===================================================================================================================
OPERATING EXPENSES (EXCLUDING OTHER OPERATING EXPENSE). Operating expenses
for the second quarter and first six months of fiscal 2001 declined 1% and
10%, respectively, in absolute dollars, and increased as a percentage of
total revenue, from 43% to 49% and from 50% to 53%, respectively, compared
with the corresponding periods of fiscal 2000 on a pro forma basis. The
decrease in operating expenses, in absolute dollars, resulted primarily from
lower headcount as a result of restructuring activities and attrition. In
addition, concentrated research and development spending and management
focus on expense control contributed to the decline in operating expenses
year over year. The increase in operating expenses as a percentage of revenue
is directly attributable to the lower volume of sales in the first six months
of fiscal 2001 compared with the corresponding periods in fiscal 2000. Our
current goals require us to achieve sequential declines in operating expenses
in the second half of fiscal 2001.
OTHER OPERATING EXPENSE. Other operating expense for the first six months of
fiscal 2001 represents a $6 million reduction to the restructuring costs we
estimated during the first quarter of fiscal 2000. Other operating expense for
the first six months of fiscal 2000 includes a charge for estimated
restructuring costs of $145 million, offset in part by a $16 million reduction
to these estimated restructuring costs. See Note 6 to the Condensed Consolidated
Financial Statements, "Restructuring and Related Charges," for further
information regarding these activities.
INTEREST AND OTHER
INTEREST EXPENSE Interest expense for the second quarter and the first six
months of fiscal 2001 remained relatively consistent compared with the
corresponding periods of fiscal 2000.
INTEREST INCOME AND OTHER, NET Interest income and other, net includes
interest on our cash investments, gains and losses on other investments, and
other non-operating items. Interest income and other, net for the second
quarter of fiscal 2001 increased $21 million compared with the second quarter
of fiscal 2000 on a pro forma basis principally due to an $11 million gain on
the sale of marketable securities, a $12 million gain related to the sale of
the Cray product line, and an $8 million gain on the sale of corporate real
estate, partially offset by lower interest income as a result of lower cash
balances. The increase in interest and other income, net for the first six
months of fiscal 2001 compared with the pro forma first six months of fiscal
2000 was primarily due to a $50 million gain on the sale of marketable
investments and a $24 million gain related to the sale of the Cray product
line.
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TAXES Our provision for income taxes for the first six months of fiscal 2001
arose principally from taxes currently payable in foreign jurisdictions. The
effective tax benefit rate for the first six months for fiscal 2000 was 23%,
excluding the impact of the $71 million year-to-date charge related to the
Silicon Graphics 320 and 540 visual workstation product line, the impact of
the $15 million charge related to the Cray T90 supercomputer product line and
the $129 million year-to-date charge for estimated restructuring costs, which
were tax effected at 37%. The fiscal 2000 benefit rate, excluding the charges
related to the Silicon Graphics 320 and 540 products, the Cray T90 product
line and estimated restructuring charges, differed from the Federal statutory
rate primarily due to foreign losses for which no benefit was recognized.
FINANCIAL CONDITION
At December 31, 2000, cash and cash equivalents and marketable and restricted
investments totaled $373 million, down from $384 million at June 30, 2000.
Included in the December 31, 2000 and June 30, 2000 balances are approximately
$152 million and $126 million, respectively, of restricted investments that
serve as collateral for letters of credit and an equity forward purchase
arrangement.
Operating activities used $173 million during the first six months of fiscal
2001 compared with providing $20 million during the first six months of
fiscal 2000. To present cash flows from operating activities, net loss for
the first six months of fiscal 2001 was adjusted for certain significant
items. The first half of fiscal year 2001 net loss is adjusted to remove the
impact of the $50 million gain on the sale of marketable investments that is
reflected as a cash flow from investing activities. The increase in accounts
receivable, mainly attributable to the shipping of a significant percentage
of products in the last month of the second quarter, negatively impacted
operating cash flows.
Investing activities, other than changes in available-for-sale and restricted
investments, provided $156 million in cash during the first six months of
fiscal 2001 compared with consuming $193 million during the first six months
of fiscal 2000. The principal source of cash during the first six months of
fiscal 2001 was the $185 million net cash proceeds received as a result of
the sale-leaseback transaction involving a portion of our corporate real
estate. The significant investing activity during the first six months of
fiscal 2000 was our election to exercise an option to purchase five buildings
on our Mountain View campus for approximately $125 million that had been held
under an off-balance sheet financing arrangement.
Financing activities provided $5 million during the first six months of fiscal
2001 compared with using $1 million during the first six months of fiscal 2000.
The principal financing activities during the first six months of fiscal 2001
included $9 million in proceeds from the issuance of stock, offset in part by $4
million in debt payments. The principal financing activities during the first
six months of fiscal 2000 included the use of $24 million to repurchase shares
of our common stock and $12 million to retire debt, offset in part by proceeds
from employee stock purchase plan issuances and employee stock option exercises.
At December 31, 2000, our principal sources of liquidity included cash and
cash equivalents and marketable investments of $221 million. We believe that
these principal sources of liquidity, along with cash generated from our
expected results of operations and the sale or refinance of certain
non-strategic assets such as real estate, should be adequate to fund our
projected cash flow needs.
RISKS THAT AFFECT OUR BUSINESS
SGI operates in a rapidly changing environment that involves a number of risks,
some of which are beyond our control. This discussion highlights some of these
risks.
Business Transition. SGI has had declining revenue and has been unprofitable
on an operating basis for each of the past three fiscal years. Our plan to
restore growth and profitability will require significant transitions in
product strategy and in operating expenses. We have announced product
roadmaps for both the server and workstation businesses that will, over the
next five years, supplement our products based on the MIPS processor
architecture with products based on the Intel processor architecture, and
from the IRIX operating system to Linux and Windows NT. This process will
involve our supporting both architectures indefinitely in order to provide
flexibility and support to our customers. Risks associated with this strategy
include uncertainty among employees, customers and partners, potential
customer defection and higher operating expenses. There can
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be no assurance that we will introduce the new products required for these
transitions as planned, successfully support our customer and partner base as
they adopt these new products or otherwise manage this process in a way that
will allow us to recover from this uncertainty.
New Products. In the last quarter of fiscal 2000 and the first quarter of
2001 we introduced major new products in every segment of our computer system
business, including the Origin 3000 family of high-performance servers, new
graphics subsystems both in the visual workstation and Onyx high-performance
graphics systems families, and new Intel processor-based workstations and
servers. Our ability to meet our objectives for fiscal 2001 is highly
dependent on the success of these new products. Our second quarter results
suffered from various industry-wide and world-wide supply constraints,
including, in particular constraints on the ceramic packaging for ASICs that
are critical components of our systems. We are working with our suppliers to
resolve these supply issues and while the impact during the second quarter
was less significant than during our first quarter, we cannot be assured that
we will receive sufficient supplies at the delivery dates that will enable us
to meet our objectives for the third quarter and beyond. Any extended failure
to meet these objectives could affect not only our ability to ship our
backlog but to continue to attract new orders.
Working Capital Requirements. Primarily as a result of net losses, our
operating activities consumed $173 million in cash during the first six
months of fiscal 2001. At December 31, 2001 we had $221 million in
unrestricted cash and marketable investments. While we believe that this
level of liquidity should be adequate to fund our business, this belief is
based upon our expectations for operating results over the next several
quarters. If we fail to a material extent to meet these expectations then we
could consume more cash than we anticipate, in which case we would need to
obtain alternative sources of liquidity, such as sales of assets, sales of
securities or borrowings. We have no assurance that these alternatives would
be available.
Expense Reduction Program. While our operating expenses, excluding other
operating expenses, have declined from $1.5 billion in fiscal 1998 to $1.3
billion in fiscal 1999 and to $1.1 billion in fiscal 2000, our expenses remain
out of line with our revenues. We expect that we will be designing and
implementing global systems for Enterprise Resource Planning and Customer
Relationship Management, improving the efficiency of related business processes,
and taking other additional steps in fiscal 2001 to address this issue. While
our objective is to reduce our costs in ways that will not have a material
impact on revenue levels, there is no assurance that this will be achieved.
Dependence On Partners And Suppliers. Our business has always involved close
collaboration with partners and suppliers. However, many elements of our current
business strategy, including the longer-term transition to the Intel
architecture and additional outsourcing of manufacturing, will increase our
dependence on Intel and other partners, and on our manufacturing partners and
other component suppliers. Our business could be adversely affected, for
example, if Intel fails to meet product release schedules, if we experience
supply constraints such as those that currently exist, or if we experience any
other interruption or delay in the supply chain. The competitiveness of our
system products, particularly our servers, is significantly affected by the
availability on our platform of third-party software applications that are
important to customers in our target markets. Our ability to work with our
software partners to ensure porting of these applications to our IRIX operating
system and, in the future, to Linux, is a key factor to our business success.
Employees. Our success depends on our ability to continue to attract, retain
and motivate highly qualified technical, marketing and management personnel,
who are in great demand. The uncertainties surrounding SGI's business
prospects have increased the challenges of retaining world-class talent. We
have initiated hiring programs to attract key employees and are taking steps
to retain employees, but there is no assurance that these programs will
succeed.
Product Development And Introduction. Our continued success depends on our
ability to develop and rapidly bring to market technologically complex and
innovative products. Product transitions are a recurring part of our business. A
number of risks are inherent in this process.
The development of new technology and products is increasingly complex and
uncertain, which increases the risk of delays. The introduction of new computer
systems requires close collaboration and continued technological advancement
involving multiple hardware and software design teams, internal and external
manufacturing teams, outside suppliers of key components such as semiconductor
and storage products and outsourced manufacturing partners. The failure of any
one of these elements could cause our new products to fail to meet
specifications or to miss the aggressive timetables that we establish. There is
no assurance that acceptance of our new systems will not be affected by delays
in this process. As noted above, our ability to successfully attract and retain
key technical, marketing and management personnel in a competitive hiring
environment has a direct impact on our ability to maintain our product
development timetables.
Short product life cycles place a premium on our ability to manage the
transition to new products. We often announce new products in the early part of
a quarter while the product is in the final stages of development and testing,
and seek to manufacture and ship the product in volume during the same quarter.
Our results could be adversely affected by such factors as development delays,
the release of products to manufacturing late in any quarter, quality or yield
problems experienced by
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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.
Most products are upgraded during their product life cycle. The ability to
upgrade products in a timely fashion is necessary to compete in the computer
industry. Delay in introducing updates and upgrades can adversely affect
acceptance and demand for product.
Period To Period Fluctuations. Our operating results may fluctuate for a
number of reasons. Delivery cycles are typically short, other than for
large-scale server products. A little over half of each quarter's product
revenue results from orders booked and shipped during the third month, and
disproportionately in the latter half of that month. These factors make the
forecasting of revenue inherently uncertain. Because we plan our operating
expenses, many of which are relatively fixed in the short term, on expected
revenue, even a relatively small revenue shortfall may cause a period's
results to be substantially below expectations. Such a revenue shortfall
could arise from any number of factors, including lower than expected demand,
supply constraints, delays in the availability of new products, transit
interruptions, overall economic conditions, the California energy situation
or natural disasters. Demand can also be adversely affected by product and
technology transition announcements by SGI or our competitors. The timing of
customer acceptance of certain large-scale server products may also have a
significant effect on periodic operating results. Margins are heavily
influenced by mix considerations, including geographic concentrations, the
mix of product and service revenue, and the mix of server and desktop product
revenue including the mix of configurations within these product categories.
Our results have typically followed a seasonal pattern, with stronger sequential
growth in the second and fourth fiscal quarters, reflecting the buying patterns
of our customers.
Our stock price, like that of other technology companies, is subject to
significant volatility. If revenue or earnings in any quarter fail to meet the
investment community's expectations, there could be an immediate impact on our
stock price. The stock price may also be affected by broader market trends
unrelated to our performance.
Competition. The computer industry is highly competitive, with rapid
technological advances and constantly improving price/performance. Most of our
competitors have substantially greater technical, marketing and financial
resources and, in some segments, a larger installed base of customers and a
wider range of available applications software. Competition may result in
significant discounting and lower gross margins.
Impact Of Government Customers. A significant portion of our revenue is derived
from sales to the U.S. government, either directly by us or through system
integrators and other resellers. Sales to the government present risks in
addition to those involved in sales to commercial customers, including potential
disruptions due to appropriation and spending patterns and the government's
reservation of the right to cancel contracts for its convenience. A portion of
our business requires security clearances from the United States government. We
have implemented measures to maintain our clearances in light of the fact that
our CEO, Mr. Robert Bishop, is not a United States citizen. However, these
arrangements are subject to customer review and approval and periodic review by
the Defense Security Service of the Department of Defense. Any disruption or
limitation in our ability to do business with the United States government could
have an adverse impact on SGI.
Export Regulation. Our sales to foreign customers are subject to export
regulations. Sales of many of our high-end products require clearance and export
licenses from the U.S. Department of Commerce under these regulations. The
Departments of Commerce and Justice are currently conducting civil and criminal
investigations into SGI's compliance with the export regulations in connection
with several export sales to Tier 3 countries. We believe that these matters
will be resolved without a significant adverse effect on our business. However,
there is no assurance that these matters will not have an unforeseen outcome
that could impair the conduct of our business with the U.S. government or our
sales outside the United States.
Our international sales would also be adversely affected if such regulations
were tightened, or if they are not modified over time to reflect the increasing
performance of our products.
Intellectual Property. We routinely receive communications from third parties
asserting patent or other rights covering our products and technologies. Based
upon our evaluation, we may take no action or may seek to obtain a license. In
any given case there is a risk that a license will not be available on terms
that we consider reasonable, or that litigation will ensue. We expect that, as
the number of hardware and software patents issued continues to increase, and as
competition in the markets we address intensifies, the volume of these
intellectual property claims will also increase.
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Market Risk. In the normal course of business, our financial position is
routinely subjected to a variety of risks, including market risk associated with
interest rate movements and currency rate movements on non-U.S. dollar
denominated assets and liabilities, as well as collectibility of accounts
receivable. We regularly assess these risks and have established policies and
business practices to protect against the adverse effects of these and other
potential exposures. As a result, we do not anticipate material losses in these
areas.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required under this Item 3 is included in the section above
entitled Market Risk.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are defending putative securities class action lawsuits filed in the U.S.
District Court for the Northern District of California and in California
Superior Court for the County of Santa Clara in December 1997 and January 1998
alleging that SGI and certain of its officers made material misrepresentations
and omissions during the period from July to October 1997. The U.S. District
Court is considering plaintiffs' motion for a voluntary dismissal of the case
without prejudice and defendants' motion for partial summary judgment. Discovery
is proceeding in the California Superior Court case.
We are also defending a securities class action lawsuit involving Alias Research
Inc., which we acquired in June 1995. The Alias case, which was filed in 1991 in
the U.S. District Court for the District of Connecticut, alleges that Alias and
a former officer and director made material misrepresentations and omissions
during the period from May 1991 to April 1992. The case has been remanded to the
U.S. District Court. In December, the District Court granted Plaintiffs' motion
to amend their Complaint and the case is proceeding through discovery.
The U.S. Departments of Commerce and Justice are currently conducting civil and
criminal investigations into SGI's compliance with export regulations in
connection with several export sales to Tier 3 countries. See "Risks That Affect
Our Business - Export Regulation."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 13, 2001 SILICON GRAPHICS, INC.
a Delaware corporation
By: Harold L. Covert
-----------------------------------------
Harold L. Covert
Executive Vice President, Chief
Financial Officer and Chief
Administrative Officer
(Principal Financial Officer)
Jeffrey Zellmer
-----------------------------------------
Jeffrey Zellmer
Vice President, Corporate Controller
(Principal Accounting Officer)
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