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SGI shakeup came at hefty price

Though it has yet to turn around financially as a result, SGI paid a pretty penny to replace its top management team nearly eight months ago.

Though it has yet to turn around financially as a result, Silicon Graphics paid a hefty sum to replace its top management team nearly eight months ago, including a $5.3 million "golden parachute" to outgoing chief executive Ed McCracken, the company's proxy statement disclosed today.

McCracken's replacement, Richard Belluzzo, who was recruited from Hewlett-Packard in January to energize the once high-flying workstation maker, received about $1.5 million in compensation for fiscal 1998, including a $1 million bonus. He also received stock options for 3 million shares, which would be worth $53.8 million if the company's stock appreciates at 10 percent annually during the next ten years--not inconceivable in the technology sector.

Longtime CEO Ed McCracken, who resigned his post to make way for Belluzzo, received a $3.25 million severance payment and a $2.05 million bonus under the agreement, See special report:
Fat cats the proxy also shows. SGI said the payments were well-deserved: McCracken helped ensure a smooth management transition, while Belluzzo is getting the giant back on track, executives argued.

This has been a tough one-year period for the company widely known for helping to create the dinosaurs in the movie Jurassic Park.

Hit by stiff competition and a market slowdown, SGI announced the layoffs of 1,000 workers in November 1997. In March the company said it expected to post a wider-than-expected loss, and missed analysts' expectations for the fourth fiscal quarter. Its stock now is trading near its 52-week low.

According to the proxy, Belluzzo's stock options expire in 2008 with an exercise price of $11.25 per share. They are estimated to be worth between $21.2 million and $53.8 million, based on appreciation of SGI stock of between 5 percent and 10 percent annually for a ten-year period. The company's stock now is trading at 10.6875 per share, below the exercise price.

In addition, SGI paid $1.25 million for an annuity to compensate Belluzzo for long-term pay that he forfeited when he left HP. He also received a $3.4 million loan at an interest rate of 6 percent in order to exercise options to buy his former employer's stock. The loan was repaid in March 1998. Belluzzo spent 22 years at HP, most recently as executive vice president.

McCracken's "golden parachute" was $5.3 million, including a bonus of $2.05 million, according to the proxy. The severance pact also called for McCracken's unvested stock options to become fully vested as of Belluzzo's appointment. In fiscal 1998, SGI recorded a $5.5 million non-cash expense associated with the vesting of McCracken's stock options.

He also received monthly compensation of $100,000 per month through June 1998 SGI stock performance and will receive monthly payments of $10,000 per month through June 1999. According to the proxy, his annual compensation for fiscal year 1998 ended June 30 totaled $1.13 million. McCracken also received a grant of 30,000 shares of restricted stock in July 1997, which was canceled in June 1998 in connection with his resignation.

He then received $1 million for exercising some of his stock options.

McCracken said that he planned to resign as CEO and chairman in October 1997, but that he would continue to serve during the search for a successor.

Robert Ewald, executive vice president of computer systems at SGI, received severance payments equal to $1.15 million . He left SGI on June 30.

In explaining the compensation for the management transition, SGI "determined it was appropriate to enter into retention arrangements with members of the existing management team, to make certain one-time payments to reflect the amount necessary to attract new employees to the company, and to compensate them for amounts forfeited as a result of leaving their former employers." The proxy added, "the company made severance and other termination payments to departing executives."

Added Bill Kelly, SGI's senior vice president of corporate operations: "Having a stable management team and a stable transition was extremely important to the momentum of our business."

McCracken provided the "interim leadership" that made that possible, he added. Under McCracken's tenure, SGI enjoyed robust growth, as well as the more recent downturn.

As for Belluzzo, Kelly said: "We're only in the second inning of the ball game. This is a turnaround situation. The right way to measure this is the longer term."

SGI's proxy also shows that the stock options in its stock option program for rank-and-file employees was repriced in July 1998 at $11.125 per share.

The company's annual shareholder meeting is set for October 27 at the Hyatt Regency in Burlingame, California.