September 19, 2006 2:03 PM PDT

SGI set to exit bankruptcy protection

A judge accepted computer maker Silicon Graphics Inc.'s reorganization plan Tuesday, setting the stage for the company to emerge from Chapter 11 bankruptcy protection in October, the company said.

Under the plan, SGI has new top management and will get an entirely new board of directors, said Dennis McKenna, who took over as chief executive in January. The company's goal is to return to profitability in fiscal 2007, which ends June 30, he said.

The Silicon Valley icon, which rose to prominence with computer graphics systems for movies such as "Jurassic Park," has struggled for years as mainstream computers from companies such as IBM, Hewlett-Packard, Sun Microsystems and Dell have grown more powerful. But the company has taken several steps toward recovery, appointing McKenna, laying off 12 percent of employees in March, filing for bankruptcy protection in May, and dropping its older computers based on its own MIPS processors and Irix version of the Unix operating system.

"For us it feels like a new SGI. It's a relaunch of the company," McKenna said.

McKenna said the company will be smaller, too. Before the restructuring, it employed 2,200, but only 1,600 remain. The reduced payroll costs contribute to a cut of $150 million in annual expenses, McKenna said.

In addition, three-quarters of SGI's products now on the market were introduced in the last nine months, and the company is trying to tackle a larger market by expanding from high-end systems with Intel Itanium processors to lower-end models using Intel's Xeon. The latter approach links numerous systems together in a cluster.

SGI will continue selling products for engineering, scientific and research tasks. The company also is gunning for a larger market in managing corporate data, for example mining it for useful trends or selling servers with very large memory capacity.

Judge Burton Lifland in U.S. Bankruptcy Court for the southern district of New York ruled Tuesday that SGI has met all the necessary requirements to implement its reorganization plan, SGI said. "Every voting class of creditors voted overwhelmingly in favor of the plan," the company said in a statement.

As part of the plan, SGI said it has obtained financing to exit bankruptcy, McKenna said. Specifically, Morgan Stanley provided an $85 million loan and General Electric Capital provided a $30 million line of credit. The funds will be used to pay off Chapter 11 bridge financing and for ordinary business operations, McKenna said.

The company once had a strong business selling high-powered graphics systems for tasks such as visualizing 3D automobile models or underground oil reserves. Those days are gone.

"Visualization...is an insignificant portion of our business today," McKenna said. Accordingly, the company will refer to itself only by its initials.

"Our legal name is Silicon Graphics. But our branding and messaging will all be around 'SGI,'" McKenna said.

Intel delayed its new "Montecito" Itanium processor that had been scheduled to ship in 2005 but that only now is arriving in servers. That delay hurt SGI, McKenna said.

"As a result of those delays, there were delays in the procurement process at our customers. Clearly it was an opportunity for the competition," McKenna said. Customers were concerned about the longer-term commitment of Intel to the Itanium product line. I think that's been confirmed over and over that they remain committed to that."

When it comes to x86 chips, Advanced Micro Devices has provided new competition to Intel. But McKenna said Intel has the winning processor in that market today with its new "Woodcrest" Xeon chips.

"We looked at that very strongly in making our decision on our Xeon 'Woodcrest' cluster solution. Clearly AMD has done an excellent job with the Opteron, but that's looking in the rearview mirror," McKenna said. "Intel's solution going forward was compelling and provided better price performance, thermal performance, and die size versus Opteron," and now speed tests put Xeon in the lead as well, he said.

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