SGI reorganizes to pare down $250m in debt
Silicon Graphics will reorganize under Chapter 11 Bankruptcy in order to reduce its debt by approximately $250 million and Dennis McKenna, chairman and CEO, says customers and employees should expect business as usual.
“Our customers can
continue to rely on SGI for its mission-critical products, services,
and support,” McKenna said in a statement.
As part of this agreement with many of its major stakeholders, and as the next step in its previously announced plan to reorganize its businesses, SGI and its U.S. subsidiaries have filed voluntary petitions under chapter 11 of the U.S. Bankruptcy Code. SGI’s non-U.S. subsidiaries, including European, Canadian, Mexican, South American and Asia Pacific subsidiaries were not included in the filing; will continue their business operations without supervision from the U.S. courts; and will not be subject to the requirements of chapter 11. The Company expects to file its Plan of Reorganization reflecting the agreement shortly, and to emerge from Chapter 11 within six months.
The move culminates an aggressive 100 day plan that says the company assemble a new management team (including a new CEO and CFO), closed on significant sales, and also completed a program that has resulted in $100 million in annualized cost savings with an additional $50 million savings underway.
“This is a necessary and responsible step that will strengthen the Company and foster a sustained turnaround at SGI,” McKenna continued. “Our customers and partners want SGI to succeed because of the value it continues to bring to the disciplines and capabilities of discovery, innovation, engineering and information transformation which are at the center of the world’s achievements and business processes.”
SGI revenue for the three months ended March 31, 2006 was $108 million, in line with the preliminary results announced April 25, 2006. For comparison, revenue was $144 million in the prior quarter and $159 million in the same quarter one year ago.
On a GAAP basis, net loss for the three months ended March 31, 2006 was $43 million or $0.16 per share, compared to a net loss of $45 million or $0.17 per share in the same quarter one year ago.
Certain holders of SGI’s existing Senior Secured notes are providing SGI with a $70 million financing facility. The Senior Secured notes represent a majority of the Company’s total outstanding debt. Subject to court approval, the proceeds from the financing together with cash generated from daily operations and cash on hand, will be used to paydown a portion of SGI’s pre-petition debt and to fund operating expenses including post-petition supplier payments, employee wages and benefits, and other operating expenses.
The agreement contemplates that the Company’s existing Senior Secured bondholders will be converting their existing debt into the new equity of SGI and, through a rights offering, will have the opportunity to purchase $50 million of additional new equity. The $50 million rights offering is being backstopped by certain of these bondholders to ensure that the Company raises the full $50 million of new equity capital. It is contemplated that the $50 million of new capital will be used to reduce debt and further enhance the Company’s liquidity.
Upon confirmation of the plan, the new common stock of the Company will be issued to the holders of SGI’s Senior Secured bonds in the manner described above. All of SGI’s existing common stock and the unsecured subordinated debentures will be cancelled upon confirmation of the plan by the court and receive no recovery. Accordingly, the Company believes that SGI’s currently outstanding common stock and unsecured subordinated debentures have no value.
McKenna concluded by stating “We regret the effect that this will have on SGI’s shareholders and other unsecured creditors. SGI plays a critical role in the world’s infrastructure. This needs to be preserved.”
SGI’s principal bankruptcy counsel is Weil, Gotshal & Manges LLP.