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Rating Action:

MOODY'S LOWERS RATINGS TO Ca ON SGI'S CONVERTIBLE SENIOR NOTES AND TO C ON CRAY RESEARCH, INC.'S CONVERTIBLE SUBORDINATED DEBENTURES

25 Apr 2001
MOODY'S LOWERS RATINGS TO Ca ON SGI'S CONVERTIBLE SENIOR NOTES AND TO C ON CRAY RESEARCH, INC.'S CONVERTIBLE SUBORDINATED DEBENTURES

Approximately $277.3 Million of Debt Securities Affected.

New York, April 25, 2001 -- Moody's Investors Service lowered the rating to Ca from B3 on the outstanding $231 million 5-1/4% senior convertibles notes, due 2004, of SGI, formerly known as Silicon Graphics, Inc. At the same time, Moody's lowered the rating to C from Caa2 on the outstanding $47 million 6-1/8% Cray Research, Inc. convertible subordinated debentures, due 2011. SGI continues to be obligated for the repayment of these debentures in the wake of its March, 2000 sale of Cray Research to Tera Computer Company. SGI's senior implied rating was lowered to Caa2 from B2, and its senior unsecured issuer rating was lowered to Caa3 from B2, reflecting the company's arrangement of an asset based credit facility in FY2001Q3. The ratings outlook remains negative.

The ratings downgrade is based on the dramatic deterioration in SGI's balance sheet and liquidity over the past two quarters, and reflects Moody's concern over the company's ability, as a developer of computer systems, to survive as an independent concern with such a precariously low level of unrestricted funds. With the operational status of the company in the balance, recovery of principal becomes the dominant focus of analysis. Although SGI sold $335 million of non-core assets, consisting of six buildings and one building under construction, in FY2001Q2 and FY2001Q3, for which it received $270 million as of March 31, 2001, the company concluded FY2001Q3 with cash and unrestricted investments of only $118 million, a decline from $259 million as of June 30, 2000, the close of FY2000. As of March 31, 2001, SGI's capitalization was comprised of $202 million equity (37.4%), including $104 million of "temporary equity", and $338 million debt (62.6%). The company's leverage would be even higher if the capitalized valuation of its operating leases was factored into the analysis. However, the operating lease requirements have changed since the onset of the current fiscal year as a result of the various sale and leaseback transactions that have been negotiated. As of the fiscal year ended June 30, 2000, SGI's balance sheet featured equity of $593 million (45.1%) against debt and capitalized leases totaling $721 million (54.9%).

SGI recorded a $47 million FY2001Q3 operating loss, bringing year-to-date losses to $227 million. The company announced that it will record a loss for FY2001Q4, including a restructuring charge of $60-80 million, and will be cash flow negative. Among various uses of cash going forward, the company will likely incur severance expenses in conjunction with 1,000 regular, temporary and contractor positions that will be eliminated. SGI has already drawn $43 million for letters of credit from a recently arranged asset based credit facility under which it may borrow up to $75 million. In September, 1999, SGI acquired for $125 million five buildings in Mountain View, California under the respective lease purchase options on the facilities. While successfully consummating $335 million of transactions which were contemplated to generate cash in FY2001, the company has fallen short of its earlier goal to raise $400 million, having determined, based on the recent softening in the local commercial real estate market stemming from the contraction in the high technology sector, to defer additional sales.

SGI's FY2001 revenues through the third quarter declined to $1.42 billion from $1.8 billion year-over-year, or by 20.8%. Product revenues increased to $340 million in FY2001Q3, a 4.2% increase over $326 million in FY2001Q2, but were disappointing in light of the $386 million consolidated backlog at December 31, 2000. The company's performance was expected to benefit substantially from the availability of high performance custom ASICs (application specific integrated circuits) that it had not been able to timely source from its sole supplier during FY2001H1. Backlog has been pared to $276 million as new orders declined to $329 million in FY2001Q3 from $391 million in FY2001Q2. SGI received favorable customer response to its much awaited third generation of NUMA (non-uniform memory access) products, the 3000 series, introduced in July, 2000. However, the company discovered that certain of its customers, whose research imperatives would have led them to rapidly adopt the newest technology upon availability, are deferring purchasing commitments for new hardware due to economic uncertainty. FY2001Q1-Q3 segment revenues totaled $1.42 billion with $534 million derived from the sale of servers (37.5%, a 25.6% decline in sales year-over-year), $292 million from visual workstations (20.5%, a 28.8% decline), and $477 million from professional services (33.5%, an 8.1% decline).

SGI's common stock closed Monday at $2.81 per share. The 5-1/4% senior convertibles, which are currently subject to redemption at a price of 103, may be converted at any time into shares of common stock at an adjusted price of $18.70 per share. The 6-1/8% Cray convertible subordinated debentures, which are currently subject to redemption at par, may be converted at any time into shares of SGI common stock at an adjusted price of $39.17 per share.

SGI, a provider of scalable, high-performance computing and visualization solutions for technical and creative applications in the manufacturing, sciences, government, telecommunications, and media market segments, is headquartered in Mountain View, California.

New York
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Howard Sitzer
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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