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Graphics Properties Holdings, Inc. – ‘10-Q’ for 12/26/08

On:  Monday, 2/9/09, at 5:14pm ET   ·   For:  12/26/08   ·   Accession #:  1193125-9-22663   ·   File #:  1-10441

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 26, 2008.

Or

For the transition period from                      to                     .

Commission File Number 001-10441

SILICON GRAPHICS, INC.

(Exact name of registrant as specified in its charter)

1140 East Arques Avenue, Sunnyvale, California 94085-4602

(Address of principal executive offices) (Zip Code)

(408) 524-1980

(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  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer,” large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  x    No  ¨

As of January 30, 2009, the registrant had 11,648,568 shares of common stock, par value $0.01 per share, outstanding.

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SILICON GRAPHICS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Silicon Graphics, SGI, the SGI logo, Silicon Graphics Onyx, SGI Origin, Silicon Graphics Tezro, Silicon Graphics Fuel, InfiniteStorage, IRIX, SGI Altix, Altix ICE and Altix XE are our trademarks in the U.S. and/or other countries. All other brand names, service marks, trademarks and trade names appearing in this form 10-Q are the property of their respective owners.

As used in this report, “Predecessor Company” refers to Silicon Graphics, Inc. prior to September 29, 2006, the end of the last fiscal quarter prior to our emergence from federal bankruptcy protection. References to “Successor Company” refer to Silicon Graphics, Inc. on and after September 29, 2006. Unless the context requires otherwise, the words “SGI,” “we,” “company,” “us” and “our” refer to Silicon Graphics, Inc. and its subsidiaries.

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PART I—FINANCIAL INFORMATION

SILICON GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts, unaudited)

See accompanying notes to these condensed consolidated financial statements.

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SILICON GRAPHICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts, unaudited)

See accompanying notes to these condensed consolidated financial statements.

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SILICON GRAPHICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

See accompanying notes to these condensed consolidated financial statements.

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SILICON GRAPHICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We are a leader in high-performance computing (“HPC”) and data management. We sell a broad line of mid-range to high-end computing servers, data storage and visualization systems. In addition, we provide customer support and professional services related to our products. We are a leading developer of enterprise-class, high performance features for the Linux operating system. We provide our customers with a standard Linux operating environment combined with our differentiated Linux extensions that improve performance, simplify system management and provide a more robust development environment. Our shared memory and cluster computing systems incorporate predominantly Intel Itanium and Xeon processors and our storage product lines integrate disk systems, ranging from entry-level disk arrays to complex storage systems, from LSI and DataDirect Networks.

Our products and services are used by the scientific, technical and business communities to solve challenging data-intensive computing, data management and visualization problems. These problems typically require large amounts of computing power and fast and efficient data movement both within the computing system and to and from large-scale data storage installations. Our end users employ our systems to access, analyze, transform, manage, visualize and store very large amounts of data in real time or near real time. The vertical markets we serve include defense and strategic systems, weather and climate, physical sciences, life sciences, energy (including oil and gas), aerospace and automotive, media and entertainment, and business intelligence and data analytics. Applications for our systems within these vertical markets include simulating global climate changes, accelerating engineering of new automotive designs, supporting homeland security initiatives, enabling real-time fraud detection and gaining business intelligence through data-mining. Our services facilitate rapid installation and implementation of our products, optimizing their use, maintaining their availability and educating customers to increase productivity.

We perform final assembly and testing for our products in Chippewa Falls, Wisconsin. We distribute our products through our direct sales force and through channels including resellers, distributors and systems integrators.

The accompanying condensed consolidated financial statements include the accounts of Silicon Graphics, Inc. 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 adjustments necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 27, 2008 filed with the Securities and Exchange Commission.

The preparation of interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent liabilities in the financial statements and the accompanying notes. On an ongoing basis, we evaluate these estimates, including those related to customer programs and incentives, bad debts, inventory, lease residual values, warranty obligations, values of intangible and long-lived assets, restructuring, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates. Certain comparative figures have been reclassified to conform to the current basis of presentation.

We emerged from federal bankruptcy protection on the Effective Date and adopted fresh-start accounting as of September 29, 2006 in accordance with Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). We were required to use fresh-start accounting because holders of existing voting shares immediately before filing and confirmation of the Plan received less than 50% of the voting shares of the emerging entity and reorganization value was less than post-petition liabilities and allowed claims. Under fresh-start accounting, we are required to allocate reorganization value to assets and liabilities in a manner similar to that which is required under Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS 141”). In addition, under the provisions of fresh-start accounting, a new entity was deemed created for financial reporting purposes. Accordingly, our financial information related to the Successor Company is on a basis different from, and is therefore not comparable to, our financial information related to the Predecessor Company. For further information on fresh-start accounting, see Note 3, Fresh-Start Accounting. Certain capitalized terms used in this report are defined in our Annual Report on Form 10-K for the year ended June 27, 2008.

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The condensed consolidated balance sheet as of December 26, 2008 includes the remaining effect of adjustments to the carrying value of assets or amounts and classifications of liabilities that were necessary when adopting fresh-start accounting. The adoption of fresh-start accounting had a material effect on the condensed consolidated financial statements as of December 26, 2008 and will have a material impact on condensed consolidated statements of operations for periods subsequent to December 26, 2008.

Based on current information, we estimate that our liquidity during the next two quarters will be at or near the minimum amount necessary to operate our business and, if business conditions are worse than we anticipate, could fall short of such minimum amount. As a result we are continuing to seek additional sources of financing, reduce operating expenses and manage working capital to enhance our liquidity. We cannot provide assurance that our lenders will agree to a restructuring, that asset sales will occur, or that we can secure additional sources of financing.

Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our ability to continue as a going concern is substantially dependent on the successful execution of several actions including restructuring our debt, reducing our operating expenses and securing additional financing, on the timeline contemplated by our plan. Our interim condensed financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

On September 19, 2006, the Court confirmed the Plan. Our emergence from Chapter 11 proceedings on the Effective Date resulted in a new reporting entity and adoption of fresh-start accounting in accordance with SOP 90-7 as of September 29, 2006. Reorganization adjustments were made to reflect the discharge of certain pre-petition liabilities and the adoption of fresh-start accounting.

Reorganization adjustments resulted primarily from:

The fair value allocated to the assets and liabilities of the Successor Company is in conformity with SFAS No. 141, Business Combinations. These adjustments are based upon the work of management to determine the relative fair values of our assets and liabilities. The estimates and assumptions utilized are inherently subject to significant uncertainties and contingencies beyond our control. Accordingly, there can be no assurance that the estimates, assumptions and values reflected in the valuations will be realized, and actual results could vary materially. Moreover, the market value of our common stock may differ materially from the equity valuation.

As a result of the adoption of fresh-start accounting, our post-emergence financial statements are not comparable with our pre-emergence financial statements, because they are, in effect, those of a new entity.

Management Incentive Plan

The amended and restated Silicon Graphics, Inc. Management Incentive Plan (“MIP”) permits us to issue a variety of equity incentives, including options to purchase our common stock and restricted stock units (“RSUs”). A total of 2,473,750 shares have been reserved for issuance under the MIP, of which a maximum of 924,375 may be issued as RSUs. As of December 26, 2008, 1,747,899 equity grants were outstanding under the MIP, of which 221,241 were RSUs and 1,525,658 were stock options. The total shares available for issuance pursuant to future equity grants as of December 26, 2008 was 606,766.

Employee Stock Purchase Plan

A maximum of 500,000 shares of our common stock may be sold pursuant to purchase rights granted under the Silicon Graphics, Inc. 2007 Employee Stock Purchase Plan (the “ESPP”). As of December 26, 2008, no purchase rights had been granted under the ESPP and 500,000 shares of common stock remained available for issuance.

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Non-MIP Equity Grants

In April 2007, Robert “Bo” Ewald received 46,348 RSUs that were authorized as a non-MIP equity grant. The fair value of the RSUs on the date of grant was $30.26 per unit. The RSUs vest in 48 equal monthly installments, which are released annually each December 31. As of December 26, 2008, 7,726 RSUs had been released and 38,632 were outstanding, of which 11,590 were vested but not yet releasable.

Determining Fair Value of Stock Options

The fair value of each option is estimated on the date of grant using the Black-Scholes-Merton closed-form option valuation model that uses the assumptions noted in the following table. Expected volatility is primarily a weighted average of peer companies’ historical and implied volatility and our historical volatility. The expected life has been calculated for all outstanding grants using the “simplified” approach as described in SEC Staff Accounting Bulletins No. 107 and 110 (“SAB 110”). We selected the simplified approach because we grant “plain vanilla” options as defined in SAB 110 and we have insufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time our new common stock has been publicly traded. For purposes of performing our valuation, we combine the employees and directors into one group. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The amounts listed below represent the weighted averages.

Stock-based Compensation Expense

The compensation costs that have been included in our results of operations and the total income tax benefit, if any, that we recognized in our condensed consolidated statements of operations for these stock-based compensation arrangements were as follows (in thousands):

As of December 26, 2008, there was $6.5 million of total unrecognized compensation expense related to unvested stock options that we expect to vest over a weighted-average period of 2.82 years. Additionally, as of December 26, 2008, there was $4.0 million of unrecognized stock-based compensation expense related to unvested RSUs that we expect to vest over a weighted-average period of 2.6 years.

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Summary of Stock Options

A summary of options under all of our share-based compensation plans as of December 26, 2008 and changes during the six months ended December 26, 2008, were as follows (in thousands, except exercise price and contractual term):

The aggregate intrinsic value represents the difference between $3.08, our closing stock price on the last trading day of the fiscal period, December 26, 2008, and the exercise price per share, multiplied by the number of “in the money” options that would have been received by the option holders had all option holders exercised their options on December 26, 2008. The weighted-average fair value of options granted during the six months ended December 26, 2008 was $2.16 per share.

Summary of Restricted Stock Units

RSUs are generally subject to forfeiture if employment terminates prior to the release of vesting restrictions. We expense the cost of the RSUs, which is determined to be the fair market value of the shares underlying the RSU at the date of grant, ratably over the period during which the vesting restrictions lapse.

Unvested RSUs outstanding as of December 26, 2008 and changes during the six months ended December 26, 2008, including non-MIP grants, were as follows (in thousands, except weighted average grant date fair value):

Of the RSUs released during the six months ended December 26, 2008, 19,766 units were withheld to satisfy the tax withholding requirement (valued at $89 thousand) for the total number of units that vested. The aggregate intrinsic value of RSUs outstanding was $800 thousand and $1.6 million as of December 26, 2008 and June 27, 2008, respectively. The weighted average fair value of the RSUs that vested during the six months ended December 26, 2008 was $4.30 per share.

Other Disclosures Pertaining to All Share-Based Compensation Plans

Since no options were exercised, no cash was received from option exercises under share-based payment arrangements during the three months ended December 26, 2008. Because of our net operating losses, we did not realize any tax benefits for the tax deductions from share-based payment arrangements during the three months ended December 26, 2008.

Inventories were as follows (in thousands):

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The inventory values above are net of reserves totaling $32.7 million and $41.1 million at December 26, 2008 and June 27, 2008, respectively.

Pursuant to fresh-start accounting, in the Successor Company’s opening September 29, 2006 balance sheet, inventory amounts were stated at fair market value. Components and subassemblies were not adjusted as the carrying value reflected fair value. Work-in-process and finished goods inventories were recorded at selling price less cost to sell, cost to complete and a reasonable apportionment of the profit margin associated with the selling and the post emergence completion effort. The resulting impact of fresh-start accounting to inventories as of September 29, 2006 was an increase of approximately $28.3 million. At June 27, 2008, this valuation adjustment had been fully amortized. As a result, the amount of cost of goods sold recognized in the first six months of fiscal 2008 is higher compared to the first six months of fiscal 2009. Amortization of the inventory fair value adjustment was zero and $4.2 million in the first six months of fiscal 2009 and fiscal 2008, respectively.

Other current assets were as follows (in thousands):

Other intangibles, net of accumulated amortization, were approximately $46.8 million as of December 26, 2008. Other intangible assets were primarily established in connection with our adoption of fresh-start accounting in fiscal 2007. See Note 3, Fresh-Start Accounting, for additional information. See Note 11 in our Annual Report on Form 10-K for the year ended June 27, 2008 for information about LXNI.

Subsequent to June 27, 2008, additional adjustments were made to the intangible assets established in connection with our adoption of fresh start accounting. The adjustments were a decrease of $2.1 million, for the six months ended December 26, 2008, to the fresh-start valuation previously disclosed in our Annual Report on Form 10-K for fiscal 2008 and are reflected in the table below. The adjustments were principally due to utilization of the Predecessor Company’s foreign tax net operating loss carryforwards, and to a lesser degree, adjustments for foreign tax audits.

Other intangible assets consisted of the following (in thousands, except years):

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Total amortization expense for other intangible assets for the six months ended December 26, 2008 and December 28, 2007 was approximately $6.4 million and $6.3 million, respectively. Future annual amortization expense for other intangible assets is estimated to be as follows (in thousands):

Other non-current assets were as follows (in thousands):

Deferred cost of goods sold will be recognized over the respective contract terms ranging up to five years.

In October 2006, we entered into a Senior Secured Credit Agreement (the “Agreement”), providing us with an $85 million term loan from Morgan Stanley Senior Funding, Inc. and a $30 million line of credit from General Electric Capital Corporation (“GE”).

In September 2007, the lenders under the $85 million term loan, including Quadrangle Master Funding Ltd. (“Quadrangle”) and Watershed Technology Holdings, LLC (“Watershed”), or their affiliates, which are significant stockholders of SGI, purchased and assumed the position of GE under the Agreement and substituted themselves as the lenders under the $30 million line of credit. Interest on the $85 million term loan is based on the three-month LIBOR plus 7%, and the term loan is secured by the assets of the Company. On the same day, we entered into a Second Amendment to the Agreement (the “Second Amendment”) with Morgan Stanley Senior Funding, Inc., as agent for the lenders. The Second Amendment eliminated our obligations to comply with the maximum leverage ratio and minimum consolidated EBITDA covenants originally set forth in the Agreement through December 2008. After December 2008, we were required to comply with maximum leverage ratio and minimum consolidated EBITDA requirements, which have been adjusted as set forth in the Second Amendment. The Second Amendment eliminated our obligation to comply with the minimum liquidity requirement set forth in the Agreement and also set the total line of credit at $20 million. Under the Second Amendment, the interest rates on line of credit advances were increased to the LIBOR rate plus 4.75% or the Alternative Base Rate plus 3.50%, at our option. The financing facility matures in October 2011.

On January 2, 2008, Quadrangle Debt Recovery Advisors LP (“QDRA”), an investor in the Company, announced the completion of its spin-off from Quadrangle Group LLC. As part of the separation, QDRA changed its name to Monarch Alternative Capital LP (“Monarch”). Monarch holds the investment in the Company’s stock previously held by QDRA. Also, on January 2, 2008, Quadrangle’s position in the term loan was assumed by Monarch.

On February 4, 2008, we entered into a Third Amendment to the Agreement (the “Third Amendment”) with Morgan Stanley Senior Funding, Inc., as agent for the lenders, to increase the principal amount of the term loan from $85 million to $127.5 million. The prepayment premiums for the term loan and revolving credit commitments were increased to 2%. The interest rates on both the term loan and the line of credit remained the same, with floors added for the LIBOR rate of 3.5% and the Alternative Base Rate of 6.25%. The Third Amendment also allowed us to establish securities, deposit or other accounts of up to $3 million to secure performance bonds and guarantees, surety bonds, letters of credit and other similar obligations. A $1.3 million fee was incurred on the $42.5 million added to the term loan. This fee was deferred and is being amortized as an adjustment to interest expense over the term of the loan.

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On February 14, 2008, we entered into the Fourth Amendment and Limited Waiver and Consent to the Senior Secured Credit Agreement (the “Fourth Amendment”) with Morgan Stanley Senior Funding, Inc., as administrative agent and revolving agent, Morgan Stanley & Co., Inc., as collateral agent, and the other Credit Parties thereto. The Fourth Amendment increased the principal amount of the term loan from $127.5 million to $132.5 million. A fee of $50,000 was incurred in connection with the $5 million added to the term loan.

On August 25, 2008, we entered into the Fifth Amendment to the Senior Secured Credit Agreement (the “Fifth Amendment”) with Morgan Stanley Senior Funding, Inc. as administrative agent and revolving agent, Morgan Stanley & Co., Inc. as collateral agent, and the other Credit Parties thereto. The Fifth Amendment modified permitted indebtedness restrictions to allow us to add a maximum of $20 million of permitted indebtedness through a combination of entering into an agreement with ECS United Kingdom plc to incur up to $20 million in debt in a financing arrangement and to enter into an agreement for a six month, $10 million line of credit to fund a guarantee in connection with a multi-year product deployment with the North German Group for High- and Highest- Performance Computers. The total leverage ratio and the minimum EBITDA requirement were effectively waived until the end of the first quarter in fiscal 2010. The total leverage ratio was amended to be 5.75 for the period ending September 25, 2009; 4.50 for the period ending December 25, 2009; 4.25 for the period ending March 26, 2010 and 3.5 for each fiscal quarter-end thereafter until and including September 30, 2011. Minimum EBITDA was amended to be $30 million as of September 25, 2009; $37.5 million as of December 25, 2009; $40 million as of March 26, 2010; and $45 million on June 25, 2010 and for each fiscal quarter-end until and including September 30, 2011. Also, a minimum global liquidity requirement of $15 million was established and fiscal year 2009 capital expenditures were limited to $10 million, and for following fiscal years to $15 million. Also, the interest rate on the Term Loan was increased by 2% with the entire increment payable at maturity on October 17, 2011. A fee of $662,500 was added to the principal , payable at maturity.

On September 19, 2008, we entered into the Sixth Amendment to the Senior Secured Credit Agreement (the “Sixth Amendment”) with Morgan Stanley Senior Funding, Inc. as administrative agent and revolving agent, Morgan Stanley & Co., Inc. as collateral agent, and the other Credit Parties thereto. The Sixth Amendment eliminated the revolving agent’s right to impose and adjust the amount of reserves in respect of the total revolving commitment.

On December 24, 2008, we entered into the Seventh Amendment to the Senior Secured Credit Agreement (the “Seventh Amendment”) with Morgan Stanley Senior Funding, Inc. as administrative agent and revolving agent, Morgan Stanley & Co., Incorporated as collateral agent, and the other Lenders and Credit Parties thereto. The Seventh Amendment modified the Agreement to permit interest due to be paid-in-kind by adding the amount of such interest to the principal amount of the term loan or revolving advances, as applicable, in the period from December 24, 2008 through December 24, 2010, unless certain Consolidated EBITDA levels are reached. Principal repayments due on or prior to September 24, 2010 are deferred to the Agreement Maturity Date (October 17, 2011). A new covenant regarding minimum required levels of Consolidated EBITDA was added, setting the minimum Consolidated EBITDA requirement at $1 million as of March 27, 2009; $5 million as of June 26, 2009; and $10 million on September 25, 2009 and for each fiscal quarter-end thereafter until and including September 30, 2011. The minimum liquidity required was amended to $10 million on an average weekly basis. These levels of EBITDA and liquidity are materially higher than those we have recently achieved and we may not be in compliance with these requirements in the quarter ending March 27, 2009. If we do not achieve the required levels then an event of default will occur and the lenders may, among other things, accelerate the debt and otherwise exercise their rights. We are discussing with our lenders a longer-term restructuring that would reduce or eliminate our short-term debt service requirements and that would allow us to access additional sources of financing to enhance our working capital position. Such a debt restructuring would likely be highly dilutive to our shareholders.

Annual principal payments over the next four years for all amounts borrowed under the Agreement are as follows: fiscal 2009 — none; fiscal 2010 — none; fiscal 2011 — $18.8 million and fiscal 2012 — $138.6 million. See Risk Factors, including the risk factor entitled “our cash position may be insufficient to meet our operating needs, and we are seeking to, but may be unable to, restructure our debt and raise additional capital.”

In October 2008, we fully drew the $20 million line of credit and it remained fully drawn as of December 26, 2008.

Impairment of Investment

During the three months ended December 28, 2007, we determined that there had been an other-than-temporary impairment of our remaining investment in SGI Japan. As a result, we wrote down the investment by approximately $6 million, which represented the difference between the investment’s carrying value and the estimated fair value of the investment as of December 28, 2007. We included the impairment loss in other income (expense), net in the second quarter of fiscal 2008. The value of the investment after the write down was approximately $15 million, which represented the estimated fair value of the investment at September 26, 2008.

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During the three months ended December 28, 2008, we again determined that there had been an other-than-temporary impairment of our remaining investment in SGI Japan. As a result, we wrote down the investment by approximately $7 million, which represented the difference between the investment’s carrying value and the estimated fair value of the investment as of December 28, 2008. We included the impairment loss in other income (expense), net in the second quarter of fiscal 2009. The value of the investment after the write down was approximately $8 million, which represented the estimated fair value of the investment at December 26, 2008.

Given the current global economic circumstances, we will continue to assess this investment for impairment and it may be necessary to take further impairment charges in the future. See Note 15, Related Party Transactions, for further information on our related party relationship with SGI Japan.

Financial Guarantees

We have issued financial guarantees to cover rent on leased facilities and equipment; to government authorities for VAT and other taxes; and, certain other parties support payments in advance of future delivery on our goods and services. The majority of our financial guarantees have terms of one year or less. Our maximum potential obligation under financial guarantees at December 26, 2008 was $3.1 million for which we had $5.9 million of assets held as collateral. The full amount of the assets held as collateral was included in restricted investments.

The cost of the assets held as collateral approximates fair value. At December 26, 2008, we did not have any obligations associated with our guarantees that met the criteria to be recorded as liabilities in our condensed consolidated balance sheet.

Product Warranties

At the time of sale of our products, we provide for an estimated cost to warrant these products against defects in materials and workmanship for a period of up to three years. This accrual was reflected under other current liabilities and other long-term liabilities in the condensed consolidated balance sheets of this Quarterly Report on Form 10-Q.

Product warranty activity was as follows (in thousands):

Set forth below is a reconciliation of basic and diluted loss per share (in thousands, except per share amounts):

As of December 26, 2008, there are approximately 260,000 restricted stock units in the money and, to the extent we had net income, these could potentially be dilutive.

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Other comprehensive income totaling $3.4 million for the six months ended December 26, 2008, consisted of net unrecognized pension losses and the gains in foreign currency hedges in accordance with our hedge accounting under FAS 133.

We have two reportable segments, products and services. Our reportable segments are determined after assessment of factors such as quantitative thresholds of business components to be included into reportable segments, customer base, economic characteristics, homogeneity of products, technology, delivery channels and other factors, and are aligned with the process by which the chief operating decision maker (our Chief Executive Officer) makes operating decisions and evaluates performance.

Products

Our products segment consists of HPC servers, storage and visualization systems based on the Intel Itanium or Intel Xeon processors, industry standard graphics processors, the Linux or Microsoft Windows operating systems and the software that provides the additional differentiation for these products. Our products are distributed through our direct sales force and through channels, including resellers, distributors and systems integrators.

Our products include our server products sold under the Altix brand name, our storage systems sold under the InfiniteStorage brand name, and our recently introduced visualization systems sold under the Virtu brand name. Additionally, we have high-performance servers and visualization systems based on MIPS RISC processors and the IRIX operating system. They include the SGI Origin family of high-performance servers, Silicon Graphics Tezro and Silicon Graphics Fuel workstations and the Silicon Graphics Onyx family of graphics systems.

Services

Our services organization supports our computer hardware and software products and provides professional services to help customers realize the full value of their information technology investments. Our customer support organization provides ongoing maintenance and technical support, including contracted maintenance services, hardware deployment services (install and de-install), time and materials-based services and spare parts. Our professional services organization provides technology consulting, customer education, managed services and third-party products.

Segment Results

The following table presents revenues and gross margin for our segments (in thousands).

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Revenues and cost of revenues is the only discrete financial information we have available for our segments. For this reason, we are not able to provide other financial results or assets by segment (e.g. operating expenses, net income, long-lived assets, etc.).

Operating segments do not sell products to each other, and accordingly, there is no inter-segment revenue to be reported.

In the second quarter of fiscal 2009 and fiscal 2008, no single customer represented 10% or more of our total revenue.

Product Information

Our Product revenue is primarily comprised of revenue from our server and storage products along with our software. Our Services revenue consists of sales from two classes of services: (1) Customer Support Services and (2) Professional Services.

The following table provides revenue for similar classes of products and services (in thousands):

Geographic Information

The following table provides revenue for our geographic locations (in thousands):