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Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Form 10-Q includes forward-looking statements regarding our business, objectives, financial condition, and future performance that involve risks and uncertainties. These forward-looking statements include, among others, statements relating to the following: expected emergence from Chapter 11, expected levels of revenue, gross margin, operating expense, future profitability, our expectations for new product introductions and market conditions, our assessment of the adequacy of our liquidity and capital resources, our belief regarding capital levels required for fiscal 2006 and fiscal 2007, headcount reductions, and the expected impact on our business of restructuring actions, legal proceedings, and government 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 similar terms. These forward-looking statements are only predictions and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Factors that might cause such a difference in results include, but are not limited to: the effects of our Chapter 11 filing; our ability to maintain adequate liquidity; our ability to obtain and maintain normal terms with customers, suppliers and service providers; our ability to continue as a going concern; our ability to operate pursuant to the terms of our credit agreement; our ability to consummate our plan of reorganization with respect to our Chapter 11 Cases; our ability to maintain contracts that are critical to our operation;; risks associated with the volatility of our stock price; risks associated with the timely development, production and acceptance of new products and services; increased competition; dependence on third party partners and suppliers; the failure to achieve expected product mix and revenue levels; failure to manage costs and generate improved operating results and cash flows; failure to maintain compliance with debt covenants; and failure to maintain adequate cash resources for the operation of the business. Additional risks and uncertainties include the following: risks related to liquidity and the adequacy of our capital resources; risks related to our ability to achieve profitable operations or limit losses; risks related to the impact on our business of the restructuring effected in fiscal 2005 and the significant restructuring effected and to be effected in fiscal 2006 and fiscal 2007; risks related to our compliance with debt covenants; changes in customer order patterns; the impact of employee attrition and our ability to hire certain key professionals in areas such as sales, marketing, finance, engineering and product management in order to execute our business strategies; adverse changes in general economic or business conditions; adverse changes in the markets for our products, including expected rates of growth and decline in our current markets; 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 the acceptance of new product introductions; risks related to dependence on our partners and suppliers; risks related to foreign operations (including weak or disrupted economies, unfavorable currency movements, and export compliance issues); risks associated with intellectual property disputes and other claims and litigation; and other factors, including, but not limited to, those discussed below under the heading "Risks That Affect Our Business".
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. We undertake no obligation to publicly update or revise any forward-looking statements, whether changes occur as a result of new information, future events, changed assumptions, or otherwise.
Chapter 11 Reorganization
On May 8, 2006, we and certain of our subsidiaries filed voluntary petitions for relief under Chapter 11. For further information regarding these petitions, see Note 2 to our Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
Under Chapter 11, we are continuing to operate our business and that of the Debtors without interruption during the restructuring process as debtors-in-possession under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, applicable court orders, as well as other applicable laws and rules. In general, a debtor-in-possession is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Court.
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Although we cannot currently estimate the impact of the Chapter 11 filings on our financial statements, we have determined that we will be required to review certain assumptions used in determining the fair values of our long-lived assets and other intangibles, deferred revenue, and the realizability of our accounts receivable among other items. These charges will have a significant non-cash impact on our future results of operations, but will have no impact on the underlying cash, working capital assumptions or the underlying operation of the business.
In the latter part of fiscal 2006 and through the first half of fiscal 2007, we have allocated or will allocate a substantial resources to bankruptcy restructuring, which includes resolving claims disputes and contingencies; determining enterprise value and capital structure; negotiating a plan of reorganization with key creditor constituents and evaluating the impact of and implementing fresh start accounting. In addition to financial restructuring activities, we are preparing to operate after our emergence from Chapter 11 protection. At a hearing held on September 19, 2006, the Court confirmed the Company's Plan of Reorganization. Under this Plan, all of SGI's existing common stock, stock options and restricted stock awards will be cancelled upon our exit from Chapter 11, and will receive no recovery. Accordingly, our common stock will have no value. We currently plan to emerge from Chapter 11 in October 2006.
Overview
SGI is a leading provider of products, services, and solutions for use in high-performance computing and storage. We sell highly scalable servers, storage solutions, and associated software products that enable our customers in the scientific, technical and business communities to solve their most challenging problems and that provide them with strategic and competitive advantages. Whether analyzing images to aid in brain surgery, studying global climate changes, accelerating the engineering of new automotive designs, providing technologies for homeland security, or gaining business "intelligence" insights from mining a company's massive databases, SGI's systems are designed to compute vast amounts of data, translate data into high-resolution images in a realistic timeframe and scale, and provide high-speed storage. We also offer a range of services and solutions, including professional services, customer support, and education. These products and services are used in a range of industries including defense and intelligence, sciences, engineering analysis, and enterprise data management.
Business Strategy
The following describes key elements of our business strategy and our results achieved during the first nine months of fiscal 2006:
Leadership in High-Performance Standards-Based Computer Systems. During the past several years, we have transitioned our focus from our legacy systems based on our MIPS processors and IRIX® operating system to our core systems based on industry-standard processors and the Linux operating system. However, competition is putting pressure on the growth rates and gross margins for our Linux (or core systems) product families. These pressures include increasing acceptance of commodity clusters (large groups of low cost, small computers including connected PCs) in the high-performance computing market. Our revenue growth prospects, and our ability to return to profitability, depend on our ability to grow the server and storage (or core system) product families at a rate that will more than offset the expected continued decline of the legacy products and our maintenance business. In addition, our product strategy and business depend on the continued availability and competitiveness of our microprocessors and could be adversely affected by any delays and/or discontinuance of these microprocessors. See "-Risks that Affect Our Business".
Maintain Gross Margins to Support R&D and Other Investments. Our strategy is to develop differentiated products that provide our customers with strategic and competitive advantages. However, this requires continued substantial investments in research and development. In addition, maintaining acceptable gross margins will require achieving an overall revenue level adequate to absorb our fixed costs, striking the appropriate balance between large, lower margin transactions and our more normal sales transactions, and working with suppliers to continue to structure favorable component pricing.
Targeting our Product Portfolio on New Business Opportunities. While SGI has traditionally focused in technical and scientific computing, in addition we are expanding into targeted areas of the enterprise segment that are well served by SGI's high performance systems. At the same time, we have made changes in our product strategy by ceasing development of future generations of differentiated visualization products and concentrating our development efforts in computer systems and storage to better capitalize on these trends. In June 2006, SGI introduced a new line of x86-based products, the Altix XE family, to more effectively address the expanding market for cluster computing.
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Further Restructurings to Reduce Expenses. We continue to reduce our total operating cost structure, principally from headcount reductions and geographic consolidation of functions and facilities. Costs for manufacturing and service, research and development, sales, marketing and administration declined 21% and 7% for the first nine months of fiscal 2006 and for fiscal year 2005 respectively, from the comparable prior year periods. However, our revenue declined at a faster rate than the decline in our costs in fiscal 2005, and during the first nine months of fiscal 2006, resulting in continued operating losses and cash consumption in those periods. During the fourth quarter of fiscal 2005, we retained the turnaround firm AlixPartners LLC to assist us in developing and implementing a restructuring program aimed at further substantial expense reductions, revenue and margin improvement initiatives and improved cash flow and liquidity.
During the first nine months of fiscal 2006, we implemented restructuring activities under two fiscal 2006 restructuring plans. These actions included headcount reductions; initiatives to reduce costs in other areas, including procurement costs for goods and services; consolidation and reorganization of operations in several locations; focusing marketing spending on the highest priority activities; renegotiated services contracts with vendors to improve terms and other spending controls. The original goal of our fiscal 2006 restructuring actions was to achieve $80 to $100 million in annualized cost savings when fully realized. In the third quarter of fiscal 2006, we increased our goal from $100 million in annualized savings to $150 million in annualized savings. As of March 31, 2006, we have taken the actions that we believe will achieve approximately 80% of these savings and are implementing the actions we believe will support the remaining 20% of our goal. We expect the impact of all of these initiatives to be more fully reflected in our fourth quarter and fiscal 2007 operating results.
Leadership Transition
On January 27, 2006, the Board of Directors appointed Mr. Dennis McKenna as our new President and Chief Executive Officer in order to effectuate the turnaround of our business. In addition, our Board of Directors appointed Mr. McKenna as a director and Chairman of the Board on February 1, 2006. We are currently in a transition period as a result of this leadership change. Although we have announced changes to our overall business strategy, operations and leadership and we expect to have strategic, operational or leadership changes to our business in the future, we cannot assure you that such strategic, operational or leadership changes, if any, will lead to an improvement of our business and financial condition.
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Results of Operations
The financial information and the discussion below should be read in conjunction
with the accompanying Condensed Consolidated Financial Statements and Notes
thereto. During the first nine months of fiscal 2006, our accounting calendar
had 40 weeks compared with 39 weeks during the first nine months of fiscal 2005.
(Dollars in millions, except
per share amounts; Three Months Ended Nine Months Ended
numbers may not add due to
rounding) Mar. 31, 2006 Mar. 25, 2005 Mar. 31, 2006 Mar. 25, 2005
Total revenue $ 106 $ 159 $ 403 $ 558
Cost of revenue 68 104 250 356
Gross profit 38 55 153 202
Gross profit margin 35.4 % 34.5 % 38.0 % 36.2 %
Total operating expenses (1) 93 100 271 282
Operating loss (55 ) (45 ) (118 ) (80 )
Interest and other income
(expense), net (4 ) (1 ) (12 ) (10 )
Loss from continuing operations
before income taxes (59 ) (46 ) (130 ) (91 )
Net loss from continuing
operations (54 ) (45 ) (126 ) (84 )
Net loss $ (54 ) $ (45 ) $ (126 ) $ (84 )
Net loss per share - basic and
diluted:
Continuing operations $ (0.20 ) $ (0.17 ) $ (0.47 ) $ (0.32 )
Discontinued operations - - - (0.00 )
Net loss per share - basic and
diluted $ (0.20 ) $ (0.17 ) $ (0.47 ) $ (0.32 )
--------------------------------------------------
(1) Total operating expenses include charges of approximately $1 million and $5 million in the three- and nine-month periods ended March 31, 2006 for the acceleration of depreciation associated with changes in the estimated useful lives of certain leasehold improvements and furniture and fixtures associated with one of our buildings at our U.S. corporate headquarters that is in the process of being vacated and approximately $1 million of operating asset write downs in both the three- and nine-month periods ended March 31, 2006 for fixed assets and demonstration units associated with the end of production of existing Prism and Prism Deskside products and the cancellation of future Prism products. These charges represent increases in net loss per share - basic and diluted of $0.01 and $0.02, respectively, in the three- and nine-month periods ended March 31, 2006.
Revenue
The following discussion of revenue is based on the results of our reportable segments as described in Note 16 to our Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. Total revenue is principally derived from two reportable segments, Products and Global Services. We have realigned our Products segment into our Core Systems, comprised of our high-performance servers and visualization systems based on Intel Itanium 2 microprocessors and the Linux operating system, and storage solutions, and our Legacy Systems, comprised of our high-performance servers and visualization systems based on MIPS RISC microprocessors and the IRIX operating system. This change was made in order to align reportable segments with the process by which executive management makes operating decisions and evaluates performance. Prior year amounts have been reclassified to conform to the current year presentation.
Revenue for the third quarter of fiscal 2006 decreased $54 million or 34% compared with the corresponding period of fiscal 2005 reflecting declines in sales across all reportable segments. Revenue for the first nine months of fiscal 2006 declined $155 million or 28% compared with the corresponding period of fiscal 2005, principally due to declines in sales of our Legacy Systems and to a lesser extent in sales of our Core Systems and Global Services. In conjunction with the completion of our audit for fiscal 2006, we concluded that certain of our sales transactions where software was more than incidental to the overall solution should have been more appropriately recorded under Statement of Position (SOP) 97-2, Software Revenue Recognition. In conjunction with business turnaround activities initiated during fiscal 2006, we shifted our sales and marketing efforts for certain of our products that include SGI proprietary software to drive a total solution sales approach. We evaluated this shift in strategy against the indicators offered in footnote 2 of SOP 97-2, along with other considerations, in reaching the conclusion that, effective for fiscal 2006, these same products need to be accounted for under the provisions of SOP 97-2. This change resulted in adjustments to revenue of approximately $19 million and contributed to the decline in revenue for the first nine months of fiscal 2006 compared with the corresponding period of fiscal 2005. Excluding any impairment from fresh start accounting, this revenue reduction in fiscal 2006 would be expected to amortize into revenue in future periods.
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The following table presents total revenue by reportable segment (dollars in millions; numbers and percentages may not add due to rounding):
Three Months Ended Nine Months Ended
Mar. 31, 2006 Mar. 25, 2005 Mar. 31, 2006 Mar. 25, 2005
Core Systems $ 32 $ 51 $ 139 $ 198
Legacy Systems 14 34 64 130
Total Products $ 46 $ 85 $ 203 $ 328
% of total revenue 43.7 % 53.4 % 50.4 % 58.7 %
Global Services $ 59 $ 74 $ 200 $ 230
% of total revenue 56.3 % 46.6 % 49.6 % 41.3 %
Products. Revenue from our Products segment for the third quarter and first nine months of fiscal 2006 decreased $39 million or 46% and $125 million or 38%, respectively, compared with the corresponding periods in fiscal 2005. The overall decline in product revenue was primarily attributable to a smaller number of large dollar transactions, especially in the Altix family of servers, and an overall decline in volume, coupled with a fiscal 2006 change in how we account for certain transactions where software was more than incidental to the overall solution as noted above.
Revenue from Core Systems for the third quarter and first nine months of fiscal 2006 decreased $19 million or 37% and $59 million or 30%, respectively, compared with the corresponding periods in fiscal 2005. The decline is primarily a result of reduced volumes of our Altix servers. For the first nine months of fiscal 2006, this decrease was offset in part by increased volume of our Prism family of visualization systems, which occurred during the first six months of fiscal 2006. As noted above, fewer large dollar transactions for Altix servers for the third quarter and first nine months of fiscal 2006 compared with the corresponding periods of fiscal 2005 also contributed to the decline in Core Systems revenue. Despite reduced sales volumes, storage system revenue remained relatively constant for the third quarter of fiscal 2006 compared with the corresponding period in fiscal 2005, primarily due to an increase in average selling prices. Storage system revenue declined for the first nine months of fiscal 2006 compared with the corresponding period of fiscal 2005 despite an increase in average selling prices, primarily due to reduced sales volumes coupled with a fiscal 2006 change in how we account for certain transactions where software was more than incidental to the overall solution as noted above.
Revenue from Legacy Systems for the third quarter and first nine months of fiscal 2006 decreased $20 million or 58% and $66 million or 51%, respectively, compared with the corresponding periods in fiscal 2005 principally due to a decrease in sales associated with all our MIPS/IRIX-based systems. The continuing long-term decline in the overall UNIX workstation market, an industry-wide trend that we expect will continue as lower-cost personal computers continue to gain market share, largely contributed to the revenue decline. The decline for the third quarter and first nine months of fiscal 2006 compared with the corresponding periods in fiscal 2005 is primarily a result of reduced volumes of both our Fuel and Tezro visual workstations. The decline in both our MIPS/IRIX-based servers and graphics systems revenue was principally due to reduced volumes due to customers transitioning away from the legacy system technology into Linux based systems. Revenue from our remarketed products for the third quarter and first nine months of fiscal 2006 decreased compared with the corresponding periods in fiscal 2005 primarily due to a decrease in sales of both our remarketed MIPS/IRIX-based workstations and graphics systems and our remarketed storage systems.
Global Services. Revenue from our Global Services segment is comprised of hardware and software support, maintenance and professional services. Professional services revenue includes revenue generated from the sale of third party products and SGI consulting and managed services.
Revenue from Global Services for the third quarter and first nine months of fiscal 2006 decreased $14 million or 19% and $30 million or 13%, respectively, compared with the corresponding periods in 2005. The decline was primarily due to a reduction in our traditional customer support revenue resulting from lower pricing for new contracts generated in the third quarter and first nine months of fiscal 2006 compared with previously existing contracts, coupled with a decline in the overall installed base resulting from fewer contract renewals and from lower contract renewal rates. To a lesser extent, a decline in revenue generated from professional services contracts also contributed to the overall decline in Global Services revenue.
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Geographic Revenue. Total revenue by geographic area was as follows (dollars in millions):
Three Months Ended Nine Months Ended
Area Mar. 31, 2006 Mar. 25, 2005 Mar. 31, 2006 Mar. 25, 2005
Americas $ 64 60 % $ 93 59 % $ 238 59 % $ 334 60 %
Europe 29 28 % 46 29 % 99 25 % 137 24 %
Rest of World 13 12 % 20 12 % 66 16 % 87 16 %
Total revenue $ 106 $ 159 $ 403 $ 558
Geographic revenue mix as a percentage of total revenue in the third quarter and first nine months of fiscal 2006 was relatively consistent with the mix in the corresponding periods in fiscal 2005.
Backlog. Our consolidated backlog at March 31, 2006 was $131 million, up from $103 million at March 25, 2005. Backlog is comprised of committed purchase orders for products and professional services deliverable within nine months. Backlog increased primarily in Europe and Japan with slight decreases experienced in all other regions. The increase in backlog in Europe is primarily associated with significant orders from Leibniz Computing Center in Munich, Germany and the Technical University in Dresden, Germany, for which approximately 48% of the two orders have been booked in accordance with our order booking policy noted above. These orders are not expected to be recognized as revenue until fiscal 2008. Backlog increased both within the Products segment, specifically with regard to our Linux-based Altix servers, storage systems and for professional services.
We generally do not maintain sufficient backlog to meet our quarterly objectives for product revenue without obtaining significant new orders that are booked and shipped within the quarter. Our backlog reflects only orders for which a firm purchase order has been issued or a contract has been made, although orders in backlog are subject to customer cancellation or rescheduling in certain circumstances, and government customers typically have rights of cancellation for convenience. SGI systems have also been selected for a number of multi-year U.S. government programs, with expected purchases that are not reflected in our current backlog. In addition, we have several longer delivery-cycle contracts as noted above for which a portion of the value is not reflected in our current backlog. These orders are currently scheduled to ship outside the time provided in our bookings policy and are not expected to be recognized as revenue until fiscal 2008. These orders generally also require us and our partners to develop and deliver future products, and are subject to performance guarantees collateralized by letters of credit and additional penalties for delays in delivery or non-performance.
Gross Profit Margin
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Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Form 10-Q includes forward-looking statements regarding our business, objectives, financial condition, and future performance that involve risks and uncertainties. These forward-looking statements include, among others, statements relating to the following: expected emergence from Chapter 11, expected levels of revenue, gross margin, operating expense, future profitability, our expectations for new product introductions and market conditions, our assessment of the adequacy of our liquidity and capital resources, our belief regarding capital levels required for fiscal 2006 and fiscal 2007, headcount reductions, and the expected impact on our business of restructuring actions, legal proceedings, and government 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 similar terms. These forward-looking statements are only predictions and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in such statements. Factors that might cause such a difference in results include, but are not limited to: the effects of our Chapter 11 filing; our ability to maintain adequate liquidity; our ability to obtain and maintain normal terms with customers, suppliers and service providers; our ability to continue as a going concern; our ability to operate pursuant to the terms of our credit agreement; our ability to consummate our plan of reorganization with respect to our Chapter 11 Cases; our ability to maintain contracts that are critical to our operation;; risks associated with the volatility of our stock price; risks associated with the timely development, production and acceptance of new products and services; increased competition; dependence on third party partners and suppliers; the failure to achieve expected product mix and revenue levels; failure to manage costs and generate improved operating results and cash flows; failure to maintain compliance with debt covenants; and failure to maintain adequate cash resources for the operation of the business. Additional risks and uncertainties include the following: risks related to liquidity and the adequacy of our capital resources; risks related to our ability to achieve profitable operations or limit losses; risks related to the impact on our business of the restructuring effected in fiscal 2005 and the significant restructuring effected and to be effected in fiscal 2006 and fiscal 2007; risks related to our compliance with debt covenants; changes in customer order patterns; the impact of employee attrition and our ability to hire certain key professionals in areas such as sales, marketing, finance, engineering and product management in order to execute our business strategies; adverse changes in general economic or business conditions; adverse changes in the markets for our products, including expected rates of growth and decline in our current markets; 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 the acceptance of new product introductions; risks related to dependence on our partners and suppliers; risks related to foreign operations (including weak or disrupted economies, unfavorable currency movements, and export compliance issues); risks associated with intellectual property disputes and other claims and litigation; and other factors, including, but not limited to, those discussed below under the heading "Risks That Affect Our Business".
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. We undertake no obligation to publicly update or revise any forward-looking statements, whether changes occur as a result of new information, future events, changed assumptions, or otherwise.
Chapter 11 Reorganization
On May 8, 2006, we and certain of our subsidiaries filed voluntary petitions for relief under Chapter 11. For further information regarding these petitions, see Note 2 to our Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q.
Under Chapter 11, we are continuing to operate our business and that of the Debtors without interruption during the restructuring process as debtors-in-possession under the jurisdiction of the Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, applicable court orders, as well as other applicable laws and rules. In general, a debtor-in-possession is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Court.
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Table of Contents
Although we cannot currently estimate the impact of the Chapter 11 filings on our financial statements, we have determined that we will be required to review certain assumptions used in determining the fair values of our long-lived assets and other intangibles, deferred revenue, and the realizability of our accounts receivable among other items. These charges will have a significant non-cash impact on our future results of operations, but will have no impact on the underlying cash, working capital assumptions or the underlying operation of the business.
In the latter part of fiscal 2006 and through the first half of fiscal 2007, we have allocated or will allocate a substantial resources to bankruptcy restructuring, which includes resolving claims disputes and contingencies; determining enterprise value and capital structure; negotiating a plan of reorganization with key creditor constituents and evaluating the impact of and implementing fresh start accounting. In addition to financial restructuring activities, we are preparing to operate after our emergence from Chapter 11 protection. At a hearing held on September 19, 2006, the Court confirmed the Company's Plan of Reorganization. Under this Plan, all of SGI's existing common stock, stock options and restricted stock awards will be cancelled upon our exit from Chapter 11, and will receive no recovery. Accordingly, our common stock will have no value. We currently plan to emerge from Chapter 11 in October 2006.
Overview
SGI is a leading provider of products, services, and solutions for use in high-performance computing and storage. We sell highly scalable servers, storage solutions, and associated software products that enable our customers in the scientific, technical and business communities to solve their most challenging problems and that provide them with strategic and competitive advantages. Whether analyzing images to aid in brain surgery, studying global climate changes, accelerating the engineering of new automotive designs, providing technologies for homeland security, or gaining business "intelligence" insights from mining a company's massive databases, SGI's systems are designed to compute vast amounts of data, translate data into high-resolution images in a realistic timeframe and scale, and provide high-speed storage. We also offer a range of services and solutions, including professional services, customer support, and education. These products and services are used in a range of industries including defense and intelligence, sciences, engineering analysis, and enterprise data management.
Business Strategy
The following describes key elements of our business strategy and our results achieved during the first nine months of fiscal 2006:
Leadership in High-Performance Standards-Based Computer Systems. During the past several years, we have transitioned our focus from our legacy systems based on our MIPS processors and IRIX® operating system to our core systems based on industry-standard processors and the Linux operating system. However, competition is putting pressure on the growth rates and gross margins for our Linux (or core systems) product families. These pressures include increasing acceptance of commodity clusters (large groups of low cost, small computers including connected PCs) in the high-performance computing market. Our revenue growth prospects, and our ability to return to profitability, depend on our ability to grow the server and storage (or core system) product families at a rate that will more than offset the expected continued decline of the legacy products and our maintenance business. In addition, our product strategy and business depend on the continued availability and competitiveness of our microprocessors and could be adversely affected by any delays and/or discontinuance of these microprocessors. See "-Risks that Affect Our Business".
Maintain Gross Margins to Support R&D and Other Investments. Our strategy is to develop differentiated products that provide our customers with strategic and competitive advantages. However, this requires continued substantial investments in research and development. In addition, maintaining acceptable gross margins will require achieving an overall revenue level adequate to absorb our fixed costs, striking the appropriate balance between large, lower margin transactions and our more normal sales transactions, and working with suppliers to continue to structure favorable component pricing.
Targeting our Product Portfolio on New Business Opportunities. While SGI has traditionally focused in technical and scientific computing, in addition we are expanding into targeted areas of the enterprise segment that are well served by SGI's high performance systems. At the same time, we have made changes in our product strategy by ceasing development of future generations of differentiated visualization products and concentrating our development efforts in computer systems and storage to better capitalize on these trends. In June 2006, SGI introduced a new line of x86-based products, the Altix XE family, to more effectively address the expanding market for cluster computing.
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Further Restructurings to Reduce Expenses. We continue to reduce our total operating cost structure, principally from headcount reductions and geographic consolidation of functions and facilities. Costs for manufacturing and service, research and development, sales, marketing and administration declined 21% and 7% for the first nine months of fiscal 2006 and for fiscal year 2005 respectively, from the comparable prior year periods. However, our revenue declined at a faster rate than the decline in our costs in fiscal 2005, and during the first nine months of fiscal 2006, resulting in continued operating losses and cash consumption in those periods. During the fourth quarter of fiscal 2005, we retained the turnaround firm AlixPartners LLC to assist us in developing and implementing a restructuring program aimed at further substantial expense reductions, revenue and margin improvement initiatives and improved cash flow and liquidity.
During the first nine months of fiscal 2006, we implemented restructuring activities under two fiscal 2006 restructuring plans. These actions included headcount reductions; initiatives to reduce costs in other areas, including procurement costs for goods and services; consolidation and reorganization of operations in several locations; focusing marketing spending on the highest priority activities; renegotiated services contracts with vendors to improve terms and other spending controls. The original goal of our fiscal 2006 restructuring actions was to achieve $80 to $100 million in annualized cost savings when fully realized. In the third quarter of fiscal 2006, we increased our goal from $100 million in annualized savings to $150 million in annualized savings. As of March 31, 2006, we have taken the actions that we believe will achieve approximately 80% of these savings and are implementing the actions we believe will support the remaining 20% of our goal. We expect the impact of all of these initiatives to be more fully reflected in our fourth quarter and fiscal 2007 operating results.
Leadership Transition
On January 27, 2006, the Board of Directors appointed Mr. Dennis McKenna as our new President and Chief Executive Officer in order to effectuate the turnaround of our business. In addition, our Board of Directors appointed Mr. McKenna as a director and Chairman of the Board on February 1, 2006. We are currently in a transition period as a result of this leadership change. Although we have announced changes to our overall business strategy, operations and leadership and we expect to have strategic, operational or leadership changes to our business in the future, we cannot assure you that such strategic, operational or leadership changes, if any, will lead to an improvement of our business and financial condition.
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Table of Contents
Results of Operations
The financial information and the discussion below should be read in conjunction
with the accompanying Condensed Consolidated Financial Statements and Notes
thereto. During the first nine months of fiscal 2006, our accounting calendar
had 40 weeks compared with 39 weeks during the first nine months of fiscal 2005.
(Dollars in millions, except
per share amounts; Three Months Ended Nine Months Ended
numbers may not add due to
rounding) Mar. 31, 2006 Mar. 25, 2005 Mar. 31, 2006 Mar. 25, 2005
Total revenue $ 106 $ 159 $ 403 $ 558
Cost of revenue 68 104 250 356
Gross profit 38 55 153 202
Gross profit margin 35.4 % 34.5 % 38.0 % 36.2 %
Total operating expenses (1) 93 100 271 282
Operating loss (55 ) (45 ) (118 ) (80 )
Interest and other income
(expense), net (4 ) (1 ) (12 ) (10 )
Loss from continuing operations
before income taxes (59 ) (46 ) (130 ) (91 )
Net loss from continuing
operations (54 ) (45 ) (126 ) (84 )
Net loss $ (54 ) $ (45 ) $ (126 ) $ (84 )
Net loss per share - basic and
diluted:
Continuing operations $ (0.20 ) $ (0.17 ) $ (0.47 ) $ (0.32 )
Discontinued operations - - - (0.00 )
Net loss per share - basic and
diluted $ (0.20 ) $ (0.17 ) $ (0.47 ) $ (0.32 )
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(1) Total operating expenses include charges of approximately $1 million and $5 million in the three- and nine-month periods ended March 31, 2006 for the acceleration of depreciation associated with changes in the estimated useful lives of certain leasehold improvements and furniture and fixtures associated with one of our buildings at our U.S. corporate headquarters that is in the process of being vacated and approximately $1 million of operating asset write downs in both the three- and nine-month periods ended March 31, 2006 for fixed assets and demonstration units associated with the end of production of existing Prism and Prism Deskside products and the cancellation of future Prism products. These charges represent increases in net loss per share - basic and diluted of $0.01 and $0.02, respectively, in the three- and nine-month periods ended March 31, 2006.
Revenue
The following discussion of revenue is based on the results of our reportable segments as described in Note 16 to our Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q. Total revenue is principally derived from two reportable segments, Products and Global Services. We have realigned our Products segment into our Core Systems, comprised of our high-performance servers and visualization systems based on Intel Itanium 2 microprocessors and the Linux operating system, and storage solutions, and our Legacy Systems, comprised of our high-performance servers and visualization systems based on MIPS RISC microprocessors and the IRIX operating system. This change was made in order to align reportable segments with the process by which executive management makes operating decisions and evaluates performance. Prior year amounts have been reclassified to conform to the current year presentation.
Revenue for the third quarter of fiscal 2006 decreased $54 million or 34% compared with the corresponding period of fiscal 2005 reflecting declines in sales across all reportable segments. Revenue for the first nine months of fiscal 2006 declined $155 million or 28% compared with the corresponding period of fiscal 2005, principally due to declines in sales of our Legacy Systems and to a lesser extent in sales of our Core Systems and Global Services. In conjunction with the completion of our audit for fiscal 2006, we concluded that certain of our sales transactions where software was more than incidental to the overall solution should have been more appropriately recorded under Statement of Position (SOP) 97-2, Software Revenue Recognition. In conjunction with business turnaround activities initiated during fiscal 2006, we shifted our sales and marketing efforts for certain of our products that include SGI proprietary software to drive a total solution sales approach. We evaluated this shift in strategy against the indicators offered in footnote 2 of SOP 97-2, along with other considerations, in reaching the conclusion that, effective for fiscal 2006, these same products need to be accounted for under the provisions of SOP 97-2. This change resulted in adjustments to revenue of approximately $19 million and contributed to the decline in revenue for the first nine months of fiscal 2006 compared with the corresponding period of fiscal 2005. Excluding any impairment from fresh start accounting, this revenue reduction in fiscal 2006 would be expected to amortize into revenue in future periods.
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The following table presents total revenue by reportable segment (dollars in millions; numbers and percentages may not add due to rounding):
Three Months Ended Nine Months Ended
Mar. 31, 2006 Mar. 25, 2005 Mar. 31, 2006 Mar. 25, 2005
Core Systems $ 32 $ 51 $ 139 $ 198
Legacy Systems 14 34 64 130
Total Products $ 46 $ 85 $ 203 $ 328
% of total revenue 43.7 % 53.4 % 50.4 % 58.7 %
Global Services $ 59 $ 74 $ 200 $ 230
% of total revenue 56.3 % 46.6 % 49.6 % 41.3 %
Products. Revenue from our Products segment for the third quarter and first nine months of fiscal 2006 decreased $39 million or 46% and $125 million or 38%, respectively, compared with the corresponding periods in fiscal 2005. The overall decline in product revenue was primarily attributable to a smaller number of large dollar transactions, especially in the Altix family of servers, and an overall decline in volume, coupled with a fiscal 2006 change in how we account for certain transactions where software was more than incidental to the overall solution as noted above.
Revenue from Core Systems for the third quarter and first nine months of fiscal 2006 decreased $19 million or 37% and $59 million or 30%, respectively, compared with the corresponding periods in fiscal 2005. The decline is primarily a result of reduced volumes of our Altix servers. For the first nine months of fiscal 2006, this decrease was offset in part by increased volume of our Prism family of visualization systems, which occurred during the first six months of fiscal 2006. As noted above, fewer large dollar transactions for Altix servers for the third quarter and first nine months of fiscal 2006 compared with the corresponding periods of fiscal 2005 also contributed to the decline in Core Systems revenue. Despite reduced sales volumes, storage system revenue remained relatively constant for the third quarter of fiscal 2006 compared with the corresponding period in fiscal 2005, primarily due to an increase in average selling prices. Storage system revenue declined for the first nine months of fiscal 2006 compared with the corresponding period of fiscal 2005 despite an increase in average selling prices, primarily due to reduced sales volumes coupled with a fiscal 2006 change in how we account for certain transactions where software was more than incidental to the overall solution as noted above.
Revenue from Legacy Systems for the third quarter and first nine months of fiscal 2006 decreased $20 million or 58% and $66 million or 51%, respectively, compared with the corresponding periods in fiscal 2005 principally due to a decrease in sales associated with all our MIPS/IRIX-based systems. The continuing long-term decline in the overall UNIX workstation market, an industry-wide trend that we expect will continue as lower-cost personal computers continue to gain market share, largely contributed to the revenue decline. The decline for the third quarter and first nine months of fiscal 2006 compared with the corresponding periods in fiscal 2005 is primarily a result of reduced volumes of both our Fuel and Tezro visual workstations. The decline in both our MIPS/IRIX-based servers and graphics systems revenue was principally due to reduced volumes due to customers transitioning away from the legacy system technology into Linux based systems. Revenue from our remarketed products for the third quarter and first nine months of fiscal 2006 decreased compared with the corresponding periods in fiscal 2005 primarily due to a decrease in sales of both our remarketed MIPS/IRIX-based workstations and graphics systems and our remarketed storage systems.
Global Services. Revenue from our Global Services segment is comprised of hardware and software support, maintenance and professional services. Professional services revenue includes revenue generated from the sale of third party products and SGI consulting and managed services.
Revenue from Global Services for the third quarter and first nine months of fiscal 2006 decreased $14 million or 19% and $30 million or 13%, respectively, compared with the corresponding periods in 2005. The decline was primarily due to a reduction in our traditional customer support revenue resulting from lower pricing for new contracts generated in the third quarter and first nine months of fiscal 2006 compared with previously existing contracts, coupled with a decline in the overall installed base resulting from fewer contract renewals and from lower contract renewal rates. To a lesser extent, a decline in revenue generated from professional services contracts also contributed to the overall decline in Global Services revenue.
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Geographic Revenue. Total revenue by geographic area was as follows (dollars in millions):
Three Months Ended Nine Months Ended
Area Mar. 31, 2006 Mar. 25, 2005 Mar. 31, 2006 Mar. 25, 2005
Americas $ 64 60 % $ 93 59 % $ 238 59 % $ 334 60 %
Europe 29 28 % 46 29 % 99 25 % 137 24 %
Rest of World 13 12 % 20 12 % 66 16 % 87 16 %
Total revenue $ 106 $ 159 $ 403 $ 558
Geographic revenue mix as a percentage of total revenue in the third quarter and first nine months of fiscal 2006 was relatively consistent with the mix in the corresponding periods in fiscal 2005.
Backlog. Our consolidated backlog at March 31, 2006 was $131 million, up from $103 million at March 25, 2005. Backlog is comprised of committed purchase orders for products and professional services deliverable within nine months. Backlog increased primarily in Europe and Japan with slight decreases experienced in all other regions. The increase in backlog in Europe is primarily associated with significant orders from Leibniz Computing Center in Munich, Germany and the Technical University in Dresden, Germany, for which approximately 48% of the two orders have been booked in accordance with our order booking policy noted above. These orders are not expected to be recognized as revenue until fiscal 2008. Backlog increased both within the Products segment, specifically with regard to our Linux-based Altix servers, storage systems and for professional services.
We generally do not maintain sufficient backlog to meet our quarterly objectives for product revenue without obtaining significant new orders that are booked and shipped within the quarter. Our backlog reflects only orders for which a firm purchase order has been issued or a contract has been made, although orders in backlog are subject to customer cancellation or rescheduling in certain circumstances, and government customers typically have rights of cancellation for convenience. SGI systems have also been selected for a number of multi-year U.S. government programs, with expected purchases that are not reflected in our current backlog. In addition, we have several longer delivery-cycle contracts as noted above for which a portion of the value is not reflected in our current backlog. These orders are currently scheduled to ship outside the time provided in our bookings policy and are not expected to be recognized as revenue until fiscal 2008. These orders generally also require us and our partners to develop and deliver future products, and are subject to performance guarantees collateralized by letters of credit and additional penalties for delays in delivery or non-performance.
Gross Profit Margin
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haett's ja auch getan. Aber gut mal zu sehen, wie's so im 1. Quartal war.
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In the latter part of fiscal 2006 and through the first half of fiscal 2007, we have allocated or will allocate a substantial resources to bankruptcy restructuring, which includes resolving claims disputes and contingencies; determining enterprise value and capital structure; negotiating a plan of reorganization with key creditor constituents and evaluating the impact of and implementing fresh start accounting. In addition to financial restructuring activities, we are preparing to operate after our emergence from Chapter 11 protection. At a hearing held on September 19, 2006, the Court confirmed the Company's Plan of Reorganization. Under this Plan, all of SGI's existing common stock, stock options and restricted stock awards will be cancelled upon our exit from Chapter 11, and will receive no recovery. Accordingly, our common stock will have no value. We currently plan to emerge from Chapter 11 in October 2006.
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http://finance.yahoo.com/q?s=SGID.PK
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wir sollten alle ruhig bleiben und abwarten, was der amerikanische markt heute für zeichen setzt.
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Ich kann eh nicht in Panik versinken. Mein Hauptanteil von Sgi´s ist im Moment nicht handelbar. ich kann mich nur zurücklegen und abwarten. Auch ok so.
Viel Glück an alle
Angus
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Ich gebe hier eh erst auf, wenn alles verloren ist!
Gruß
Sorccerer
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