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Effective Date 6/29/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 29, 2012
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period                  to
Commission File Number 000-51333
 
SILICON GRAPHICS INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
32-0047154
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
46600 Landing Parkway
Fremont, California 94538
(Address of principal executive offices, including zip code)
(510) 933-8300
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value per share
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o   No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o     No  x
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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
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 definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o
Accelerated filer  x
Non-accelerated filer  o
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o

    No  x

As of December 30, 2011, the aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sale price of such stock as of such date on the NASDAQ Global Select Market, was approximately $162,212,805.
As of August 31, 2012, there were 32,326,156 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the registrant's definitive proxy statement for its 2012 Annual Meeting of Stockholders, scheduled to be held on December 7, 2012, are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. Except as expressly incorporated by reference, the registrant's proxy statement shall not be deemed to be part of this Annual Report on Form 10-K.




SILICON GRAPHICS INTERNATIONAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 29, 2012
TABLE OF CONTENTS
 
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Mine Safety Disclosures
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
 
 
 



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included or incorporated by reference in this Form 10-K other than statements of historical fact, are forward-looking statements. Investors can identify these and other forward-looking statements by the use of words such as “estimate,” “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other similar expressions. Forward-looking statements also include the assumptions underlying or relating to such statements.
Our actual results could differ materially from those projected in the forward-looking statements included herein as a result of a number of factors, risks and uncertainties, including, among others, the risk factors set forth in “Item 1A—Risk Factors,” and "Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K and elsewhere in this Form 10-K and the risks detailed from time to time in Silicon Graphics International Corp.’s future U.S. Securities and Exchange Commission reports. The information included in this Form 10-K is as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ materially from the forward-looking statements included herein. We disclaim any intent to update any of the forward-looking statements after the date of this report or to conform these statements to actual results except as required by law. Accordingly, we caution readers not to place undue reliance on such statements.
“Silicon Graphics,” “SGI,” “Eco-Logical,” “RapidScale,” “Roamer,” “CloudRack,” “ICE Cube,” “MobiRack,” “Rackable,” “Altix,” “CXFS,” “NUMAlink,” “Octane,” “Origin,” “REACT,” “SGI FullCare,” “SGI FullExpress,” “SGI Global Developer Program,” "SGI Tempo," "OpenFOAM," "SGI ArcFiniti," "SGI Accelerate," “COPAN” and the “Silicon Graphics” logo are trademarks or registered trademarks of Silicon Graphics International Corp. or its subsidiaries in the U.S. and/or other countries. Other trademarks or service marks appearing in this report may be trademarks or service marks of other owners.

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PART I
Item 1. Business
Overview
We are a global leader in technical computing. We are focused on helping customers solve their most demanding business and technology challenges by delivering large-scale computing and storage, high-performance compute and storage, and data center solutions. We develop, market, and sell a broad line of low cost, mid-range and high-end computing servers and data storage as well as differentiating software. We sell data center infrastructure products purpose-built for large-scale data center deployments. In addition, we provide global customer support and professional services related to our products. We enable enterprises to meet their computing and storage requirements at a lower total cost of ownership and provide them greater flexibility and scalability. We are also a leading developer of enterprise class, high-performance features for the Linux operating system that provide our customers with a standard Linux operating environment combined with our differentiated yet un-intrusive Linux capabilities that are designed to improve performance, simplify system management, and provide a more robust development environment.
Our products and services are used by the scientific, technical, and business communities to solve challenging data-intensive computing, data storage and management problems. These problems typically require large amounts of computing power, along with fast and efficient data movement both within the computing system and to and from large-scale data storage installations. Enterprises have also begun to deploy large-scale computing and storage installations by aggregating large numbers of relatively inexpensive, open-standard modular computing and storage systems. 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 by running low-cost operating systems such as Linux® and Microsoft® Windows® and, we believe, enable enterprises to meet their computing and storage requirements at a lower total cost of ownership and provide enterprises with greater flexibility and scalability. The vertical industry 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, semiconductor design, manufacturing, financial services, data centers, 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, providing real-time fraud detection, streaming media from internet-video to film and gaining business intelligence through data-mining. Our global services organization facilitates rapid installation and implementation of our products, assists in optimizing the use of our products, maintains their availability to serve our customers and educates customers to increase productivity.
From developing custom semiconductors to data center solutions, we differentiate by scaling for compute and data intensive workloads of our customers’ most demanding applications. We have over 1,500 employees worldwide. We sell and market our systems, technologies, software, and services to enterprises in over 25 countries through our direct and indirect sales force including original equipment manufacturers, system integrators and value added resellers. In the fiscal years ended June 29, 2012, June 24, 2011 and June 25, 2010, international revenue was approximately 41%, 38% and 25%, respectively, of our total revenue.
Acquisitions
SGI Japan, Ltd.
On March 9, 2011, (the "Closing Date"), our wholly-owned subsidiary, Silicon Graphics World Trade BV ("SGI BV") acquired the remaining outstanding shares of SGI Japan, Ltd., a Japanese corporation (“SGI Japan”). Prior to the Closing Date, we owned approximately 10% of the outstanding shares of SGI Japan and accounted for such investment as a cost method investment. SGI Japan operates primarily as a seller and servicer of high-performance computing ("HPC"), visualization, data center, and media and archive systems in Japan.

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The total purchase price was approximately $17.9 million in cash. The acquisition provided us with a strategic entry into the large technical computing market of Japan and has enabled us to extend our global reach, accelerate growth opportunities, and strengthen the relationships with our partners and customers in Japan. Furthermore, the acquisition has enabled us to more fully participate in the Japanese HPC market and benefit from SGI Japan's extensive service business.
Copan Systems, Inc.
On February 23, 2010, we completed the acquisition of substantially all the assets of Copan Systems, Inc. (“Copan”) and assumed certain liabilities for $2.0 million in cash.
Silicon Graphics, Inc.
On May 8, 2009, we completed the acquisition of substantially all of the assets of Silicon Graphics, Inc. (“Legacy SGI”), excluding certain assets unrelated to the ongoing business, including certain of Legacy SGI’s non-U.S. subsidiaries and operations and assumed certain liabilities (together, the “Net Assets”). As Legacy SGI and certain of its affiliates had filed bankruptcy petitions and motions for voluntary Chapter 11 reorganization, the acquisition was subject to the approval of the United States Bankruptcy Court for the Southern District of New York. The acquisition was approved and we acquired the Net Assets for a purchase price of approximately $42.5 million in cash.
Change in Corporate Name and Trading Symbol
We were originally incorporated as Rackable Corporation and later changed to Rackable Systems, Inc. On May 18, 2009, in connection with our purchase of the Legacy SGI assets, we changed our name to Silicon Graphics International Corp. (“SGI”) and changed our NASDAQ stock ticker symbol from “RACK” to “SGI.”
Change in fiscal year
On June 19, 2009, the Board of Directors approved a change in our fiscal year end from the Saturday closest to December 31st of each year to the last Friday in June of each year. As a result of this change, we had a six-month transition period beginning on January 4, 2009 and ending on June 26, 2009, consisting of 25 weeks. Accordingly, our fiscal year 2010 began on June 27, 2009 and ended on June 25, 2010.
Included in this report are our consolidated balance sheets as of June 29, 2012 and June 24, 2011, the consolidated statements of operations, the consolidated statements of stockholders’ equity, and the consolidated statements of cash flows for the fiscal years ended June 29, 2012 ("fiscal 2012"), June 24, 2011 ("fiscal 2011") and June 25, 2010 ("fiscal 2010").
Segment Information
Our operating segments are determined based upon several criteria including: our internal organizational structure; the manner in which our operations are managed; the criteria used by our Chief Executive Officer, who functions as our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the availability of separate financial information. Our business is organized as two operating segments, products and services. Due to their similar economic characteristics, production processes, and distribution methods, we group the product lines as the product operating segment and service offerings as the service operating segment. Our CODM reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by product and service for purposes of allocating resources and evaluating financial performance. The products and services metrics are derived on a contractual basis.
Our product revenue is comprised of sales of our broad line of low-cost, mid-range and high-end scale out and scale up servers and data storage solutions, as well as sales of a variety of software products that increase the efficiency, performance, and manageability of the systems or software applications for server and storage management. Our servers and data storage solutions are based on Intel® Xeon® or AMD Opteron processors, NVIDIA® graphics processors, and the Linux or Microsoft® Windows® operating systems. Our servers include products sold under the SGI® UV™ Supercomputer, SGI ICE Clusters, CloudRack™, and Rackable™ rack mount server brand names. Our data storage solutions are sold under the SGI® InfiniteStorage, SGI Modular InfiniteStorage, ArcFiniti™ and COPAN™ brand names. We also sell third-party products if these products are needed to complete customer installations as part of our service offerings.
Our service revenue is comprised of sales from two types of services: customer support services and professional services. Our customer support organization provides ongoing maintenance and technical support for our products and some third-party products, as well as 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, project management, managed services, and customer education, all of which help our customers realize the full value of their information technology investments.

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During fiscal 2012, 2011 and 2010, product revenue represented approximately 74%, 74% and 63% of total revenue, respectively, and service revenue represented approximately 26%, 26% and 37% of total revenue, respectively, on a contractual basis. Further information regarding our operating segments is presented in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K and in Note 21 "Segment Information" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Customers
For fiscal 2012, 2011 and 2010, Amazon accounted for approximately 16%, 12% and 20% of our revenue, respectively. No other customers accounted for more than 10% of our revenue for fiscal 2012, 2011 and 2010. Our sales to the U.S. government, which have been historically less than 10% of our revenues, are made to and through numerous government agencies.
Information regarding revenue and gross profit by reportable segments and revenue from our customers and long-lived assets by geographic region is presented in Note 21 "Segment Information" to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K.

Solutions
We provide a broad line of solutions designed to address the demands of market verticals such as government intelligence, life sciences, media and entertainment, virtual product development in the manufacturing industry, cloud and web computing, and financial services. These solutions allow our customers to run data-intensive applications rapidly and to store their data safely and economically. Our core solutions are computing and storage solutions based on Intel and AMD processors, NVIDIA graphics processing units ("GPUs"), and the Linux operating system. Our storage product lines integrate disk systems, ranging from entry-level disk arrays to complex storage systems. We have 'zero watt' technology in our archive systems that allows the same archives to be stored safely for long periods of time with no power usage, but rapid access and high usability. 
Our products predominantly utilize a software environment that is based on the industry-standard Linux operating system and comprehensive data management tools, as well as open source software and our own execution, development and administrative tools and utilities. We have key differentiation in our storage software in handling very large data archives with demonstrated ability to safely store files for decades, but with significant ease-of-use to the user. We believe that our integrated software stack and the features of our architecture and hardware differentiate our product offerings in performance and ease of use. Our products can be customized to meet end-user requirements and were developed to permit easy hardware and software installation, both to add capacity and to take advantage of future technology advances.
 
We design our solutions for performance, quick deployment, efficient operation, high system availability and efficient serviceability. Our compute solutions incorporate premium quality components, selected for superior functionality and reliability. In addition, we design our compute solutions to minimize the number and complexity of interconnects for power and data transfer in order to improve reliability, speed of implementation and serviceability. We also integrate third- party hardware and software products into the solutions we sell and provide a single source for our customers.
 
We group our solutions into four categories: Big Data, Data Storage, Scale-out Compute, and Scale-up Compute:

Big Data Solutions:

SGI® Hadoop Solutions. SGI has implemented the largest single Hadoop clusters and the largest Hadoop installation in the industry. The solutions start with a deep software stack including our proprietary SGI Management Center, cluster management software that offers ease of management of thousands of server nodes, complete monitoring of all key system aspects, and fine-grained power management. Underneath the SGI Management Center are open components including the Linux operating system and the Apache-based Hadoop distribution. SGI Hadoop solutions are completely factory-integrated and tested, and arrive at the customer site ready to be plugged in and provide an immediate resource. For customers interested in experimenting with Hadoop for the first time, SGI offers Hadoop Starter Kits in sizes ranging from a half-rack to multiple racks.

SGI Graph, Fraud Analysis, Social Analytics, and Genomics Solutions. These solutions achieve real-time results and ease of use management and application development environments, allowing customers to develop new analyses quickly, and provide instant feedback versus batch jobs that might take hours or days to complete. The solutions use the SGI® UV™ 2, the second generation of our Intel® Xeon® based scale-up servers. UV 2 targets large-scale in-memory databases and data analytic environments. UV 2 leverages nearly twenty years of SGI technology to deliver

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the fastest and most scalable shared memory computer in the world, scaling from 16 to 4,096 processing cores with architectural provisioning for up to 262,144 cores, while supporting up to 64 terabytes of global shared memory in a single system image. UV 2 can support Novell® SLES® Linux and Red Hat® Enterprise Linux®. Superior performance is built into every SGI UV 2 system, leveraging our high speed proprietary interconnect NUMAlink® 6 and MPI Offload Engine acceleration. Based on open standards, the system's x86 architecture leverages the quad-, six- or eight-core Intel® Xeon® E5-4600 series processor family, and allows for the use of completely unmodified Novell® SLES® or Red Hat® Enterprise Linux operating systems.

Data Storage Solutions:

Our data storage solutions are comprised of cloud storage, network-attached storage ("NAS"), data archive and HPC storage solutions designed to meet the needs of technical and cloud computing and persistent data archiving.
 
Cloud Storage Solutions: Cloud storage is the fastest growing portion of the storage market. Optimal cloud storage solutions combine high density, flexibility, reliability and serviceability. Cloud storage solutions should install and be storing data in hours versus days and weeks. In 2012, SGI created a new ultra-dense storage offering that has leading drive density, with up to eighty-one 3.5 inch drives or one-hundred sixty-two 2.5 inch drives in the just a bunch of disks ("JBOD") version, which is a chassis of disks with no fail-over capacity. SGI® Modular Infinite Storage ("MIS") has a storage server and a JBOD version, and is a highly flexible platform. It can form the basis for many different storage solutions with different disk size and types (including SSDs). MIS forms an ideal cloud storage solution, or when bundled with software a NAS, archive gateway, or object store server. MIS has a unique, patent-pending, design that allows it to be maintained from the front or rear of the chassis. The 'drive-brick' concept allows for faster installation (one drive brick can have up to 18 drives in it) since one drive brick can be installed in a much shorter time than 18 separate drives as with competing designs.

SGI®NAS: Based on the new SGIMIS platforms, SGI NAS offers performance, feature-rich and dense network attached storage and file-serving solutions. These enable multiple node file-based NAS access to serial attached small computer system interface ("SAS"), Infiniband and Fiber Channel storage area network ("SAN") infrastructures.

DMF™: Our Data Migration Facility ("DMF") storage software creates and automatically manages a tiered virtual storage environment that significantly reduces customer equipment and operating costs, improves service levels and lowers customer data risks. Currently, DMF is deployed at customer sites managing tens of petabytes of data, nearly one billion files, and runs storage devices at their maximum rated speed. DMF operates in the background so there is no interruption or degradation of service to end-users and applications. DMF is one of the core components of our ArcFiniti™ archive solution, providing the top capabilities of DMF in an easy-to-administer and use package, and is often implemented as a part of many of our HPC storage solutions.
 
CXFS™: Our CXFS file system software provides no-compromise data sharing, enhanced workflow, and reduced costs in data-intensive environments. It eliminates file duplication and the time it takes to move large files over networks. CXFS significantly boosts productivity where large files are shared by multiple processes in a workflow. Because it uses a SAN infrastructure, CXFS delivers much greater I/O performance and bandwidth than any network data-sharing mechanism, such as network file system or common internet file system.

ArcFiniti™: ArcFiniti brings together SGI's data management hardware and software tools in a fully-integrated, persistent data archive solution aimed specifically at unstructured file-based data. Leveraging patented SGI zero-watt and disk aerobics technology to reduce power consumption and ensure data integrity, ArcFiniti is available in five different factory-integrated configurations, ranging from 154 terabytes to 1.4 petabytes of usable storage in a single rack before compression. This solution can provide significant infrastructure savings over conventional archive systems, while also enabling immediate access to archived data to users. Future ArcFiniti solutions will be implemented with the SGI MIS platform allowing for standard 19-inch rack compatibility, and SGI will develop archive gateway solutions with SGI MIS, allowing for tiered storage access to ArcFiniti and to tape solutions.

HPC Storage Solutions: SGI HPC storage solutions typically combine either direct-attached or SAN RAID solutions offering a variety of density, performance and price points. HPC storage is typically used in combination with SGI storage software such as DMF or CXFS, SGI storage management software. Our Infinite Storage 5000 and 5500 series entry level ("RAID") products are focused on delivering a high price/performance ratio. Our InfiniteStorage 16000 and 17000 solutions are designed to meet high performance, guaranteed I/O rate and capacity requirements found in many high-end HPC environments. Offering scalability to 1,200 disk drives, guaranteed latency and extremely high bandwidth, our InfiniteStorage 16000 and 17000 solutions are suitable for the requirements of digital media,

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supercomputing, life sciences and remote sensor acquisition.

Scale-out Compute Solutions:
 
SGI HPC Cluster Solutions. Clusters are the workhorses of many applications in high-performance computing, or HPC, running compute workloads as diverse as Computational Fluid Dynamics and bioinformatics. The design for SGI HPC cluster solutions begins with our Applications Engineering team of engineers and scientists, many at the Ph. D. level, who have years of experience working with customers and their applications in a variety of engineering and technical fields. This understanding of customer needs helps us to provide cluster solutions for customer workflows and data sets. SGI HPC cluster solutions offer solutions for small design shops all the way up to the largest corporations in the world. The HPC cluster solutions are made up of the following components:

SGI Management Center, used in our Hadoop solutions, is also used to manage HPC cluster solutions. Adding features such as GPU monitoring to the capabilities allows our customers to take advantage of the latest processors for accelerating the speed of their codes.

SGI Foundation Software is our software suite of support tools and utilities that enable our servers to run more reliably, with improved support, and enable new server capabilities. SGI Foundation software includes key capabilities to monitor memory component failures in our servers, which minimizes or eliminates the impact of these failures on system users. SGI Foundation Software also includes customized simple network management protocol interfaces for many of our systems, allowing them to interface easily to enterprise management systems.

SGI Performance Suite software improves performance and provides key additional capabilities for developers of technical computing and big data applications on all of our systems supported on standard Linux distributions. SGI Performance Suite software contains the following components: SGI® Accelerate™, SGI MPT, SGI REACT™ and SGI UPC. SGI Accelerate provides features that accelerate applications, enable development of parallel and real-time applications, and manage system resources for SGI's large scalable servers, clusters and storage. SGI Message Passing Interface ("MPI") contains the SGI Message Passing Toolkit ("MPT") for very high levels of scalability and performance of MPI applications on our systems and software library. SGI REACT software provides features that enable real-time, guaranteed response time applications to run on SGI systems. SGI UPC is the SGI Unified Parallel Compiler which has optimization for the SGI UV 2 server features.

SGI Rackable™ standard depth server clusters are solutions for small to medium-sized installations, typically of a few servers to a few hundred. Standard depth servers consist of several models, including I/O and memory rich models, dense models with four slim nodes in a single 2U chassis, and models specifically designed to support NVIDIA Tesla GPUs and Intel Xeon Phi accelerators. The clusters include a broad range of GigE and Infiniband interconnect options.

SGI® ICE™ X, the fifth generation of our award-winning SGI ICE architecture, was launched in November, 2011, and is for HPC cluster solutions requiring from a few hundred to tens of thousands of nodes. ICE X continues the tradition of the ICE product line with its innovative blade design and integrated Infiniband interconnect. ICE X is the performance leader for its class of applications. It introduces a variety of new technologies including FDR Infiniband, double-density blades, flexible power shelves, on-processor liquid cooling, and “M-Cell” closed-loop cooling environment that allows warm water cooling. ICE X makes it easy to affordably scale up to 73,728 compute nodes. Its open x86 architecture makes it equally simple to deploy commercial, open source or custom applications on completely unmodified Novell® SLES® or Red Hat® Enterprise Linux® operating systems. ICE X supports the latest Intel E5-2600 processors. We have deployed a Petascale computer at NASA-Ames in Mountain View, California, based on SGI ICE technology, and have a roadmap to Exascale computing at both the hardware and software level. Future ICE X blades will support both the latest NVIDIA Tesla GPUs as well as Intel Xeon Phi accelerators.

SGI Cloud/Web Solutions. SGI has leading cloud/web solutions that power some of the largest properties on the internet, as well as provide private and government cloud solutions. These solutions consist of:

SGI Rackable™ half-depth servers are high-density, rack-mounted systems designed specifically for large-scale data center environments. This line of servers utilizes either our back-to-back or flow through cabinet design to facilitate increased physical server density, reducing floor space requirements. We are generally

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able to offer approximately twice the server or processor density of traditional rack mount solutions, or we can provide similar densities but with larger server sizes, yielding better air flow characteristics, and lower cooling requirements. We offer both AC and DC powered servers, with DC power servers offering the advantage of rack-level uninterruptible power supply versus individual server-level server power supplies. These servers also provide configurable components, front-facing cable connections for enhanced serviceability and remote management functionality either based on our proprietary Roamer™ or industry-standard IPMI-based technologies.

Sold as a rack-level solution, CloudRack™ C2 cabinets support up to 38 trays —a proprietary, coverless form factor that yields a high degree of flexibility and server density while conforming to industry-standard hot-aisle/cold-aisle data center environments. In addition to improved serviceability due to easy access to server components, the tray form factor enables CloudRack to be optimized for use of open-standard components at the motherboard, processor, dynamic random access memory ("DRAM") and disk drive level. CloudRack's advanced thermal design eliminates all cooling fans and power supplies at the server level, relying instead on larger cabinet-level cooling and DC rectification technology. This increases reliability while reducing power consumption. This design offers advantages for many data center environments, especially those focused on cloud computing. We also offer CloudRack X2, which supports up to nine trays in an industry-standard rack mount enclosure. We recently deployed AC powered CloudRack for some of our large customers, versus the traditional DC power.

Scale-up Compute Solutions:

SGI UV 2. In addition to being a Big Data solution, SGI UV 2 can run many compute workloads, using similar programming tools such as SGI Performance Suite as with the scale-out cluster solutions listed above. Some programming jobs and sizes of data in CAE, Life Sciences, and other markets where customers exceed the capacity of a standard two or even four socket server can utilize the UV2 large node in any cluster deployment. With SGI Management Center able to manage both our scale-out and our scale-up solutions, this becomes an easy-to-use environment for the customer. UV2 also provides solutions for smaller companies where there is no information technology ("IT") support to manage a complex scale-out cluster deployment with lots of parts. The UV2 can be utilized as the sole compute resource, with only a single server and operating system image. Finally, customers interested in developing new applications will be able to prototype new algorithms with the architecture available for UV2.
SGI Global Services

The SGI Global Services organization is comprised of customer support services and professional services, which function as a single business unit. As of June 29, 2012, the organization employed more than 500 employees in over 20 countries.

Both customer support services and professional services develop and implement services solutions for our customers, as well as provide a complete suite of support and maintenance offerings to address the requirements and business strategies of our customers, distributors and resellers.

The SGI Global Services organization offers market competitive warranties, generally from one (1) to three (3) years, and warranty upgrade options for products sold by our direct sales team and approved distributors and resellers. We are committed to meeting our customers' maintenance and support needs by providing a broad range of support programs from cost effective SGI® FullCare™ plans to the SGI® FullExpress™ 7X24 for mission critical environments. SGI services may include hardware and software maintenance, system installation, configuration and management services, spares management, site preparation, technical training, as well as software upgrades and updates. Service is provided to our customers directly and through approved distributors, resellers and third-party provider partners.

Customer Support Services. SGI customers may purchase a variety of support services plans. We offer several levels of support that vary depending on specific services, response times, coverage hours and duration. In addition to our industry leading standard support plans, our customer support services provide competitive advantages in the form of long-standing relationships with our customer base and the extensive expertise of our systems engineers.

Professional Services. Our professional services group provides fee-based consultative services to our customers and system integrators. We architect, design, implement and manage complex and complete solutions for our customers' technical

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computing infrastructures as well as provide installation service offerings. Our engagements are designed to ensure our customers' success with our products and technologies. The SGI professional services portfolio is designed to meet a variety of consulting needs, including custom time and materials, fixed price contract consulting services, standard assessments and implementation offerings or long-term on-site staff augmentation services. In particular, our on-site staff augmentation services enable us to develop and maintain ongoing relationships with our customers whereby we gain a deeper understanding of industry-specific information technology needs.
Sales and Distribution
We sell our systems and services primarily through our direct sales force and distributors, system integrators, value-added resellers, original equipment manufacturers ("OEMs") and channel partners. Our sales teams consist of sales representatives and sales engineers, who are supported by channel, inside sales, sales support and professional services personnel. Our professional services and engineering personnel collaborate with our sales teams in all stages of the sales and integration process, including developing proposals that address the technical requirements of our customers, performing proofs of concept and benchmarking system performance.
By selling our products through our direct sales team, we are able to maintain close client contact and feedback throughout the entire sales process. Our sales process begins with leads generated through targeted marketing programs and by our inside sales team, which are then logged, qualified and assigned to an account executive. After an initial lead qualification, our sales executives and sales engineers collect information regarding the customer’s data center environment and application requirements. We then collaborate with the customer’s technical point of contact and our own internal technical resources to agree upon a particular system configuration for the customer. For larger customers, we allow evaluation of one or more hardware configurations to enable the customer to conduct their own benchmarking analyses.
We currently have direct sales personnel in various countries, including the United States, United Kingdom, France, Germany, Japan, Australia, Brazil, Canada, China, Czech Republic, India, Netherlands, and Singapore. We augment our sales coverage with indirect coverage via distributor and channel partner arrangements in countries in which we have a presence. In markets where we have no direct sales personnel, we provide our products through our distributors and channel partners. We are engaged in a multi-year program to further develop additional channel partner relationships in order to improve our indirect sales efforts, expand our customer base and enter new markets. Our direct sales personnel are responsible for managing all direct or indirect sales with specific named accounts and our channel sales personnel are responsible for managing all sales that are not with specific named accounts.
In our largest markets, our sales representatives have a vertical industry market focus to more effectively leverage their domain expertise. We establish direct sales groups focused on different industry markets. One group concentrates on the defense and intelligence, scientific research and higher education markets while the second focuses on the commercial business intelligence and data analytics markets. We have developed expertise in a number of vertical industry markets, including weather and climate; physical sciences; life sciences; energy, aerospace and automotive; financial services; internet and media and entertainment. As part of our emphasis on increased sales within these vertical industry markets, we have a program to identify and develop customer workflows in each of the vertical industry markets. The customer workflows allow us to offer our customers standard solutions that include our hardware, software, storage and professional services.
We have increased our sales and marketing efforts recently in the commercial business intelligence and data analytics markets in an effort to expand our penetration of these markets. We continue to expand our targeted customer base to include all organizations with technical computing requirements, the largest firms through our direct selling force and other firms through our channel partners. Our channel program is designed to work with those partners who provide additional geographic and vertical market coverage for SGI-based solutions. We have created a channel council to increase communication between channel partners and our executive team in order to guide this program.
Marketing
Our marketing organization is active in all markets in which we sell products and services and continuously executes on programs that encompass sales tools, brand awareness, and demand generation. The marketing team consists of product marketing, field marketing, corporate marketing, and channel marketing. In order to drive market demand, we create and deliver a number of marketing vehicles, including industry and customer events, webinars, case studies, advertisements and white papers to showcase and demonstrate the capabilities of our systems. Our marketing channels include a mix of product-based activities which leverage our hardware and software expertise and our industry-based activities which leverage our understanding of customer challenges and applications. Our marketing team also works with industry experts, analysts and members of the press to generate awareness about our products and services. Using our history and experience in
the technical computing community, we issue white papers on technology trends such as performance ratings, benchmark

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results, power, cooling and system management. We participate in worldwide business and industry events throughout the year as both exhibitors and speakers, thereby maintaining a constant presence with our customers, prospects, and industry influencers.
We maintain active programs to encourage independent software development on our differentiated platforms. Through our Solution Partners Network program, we provide software, marketing support and access to hardware to attract and enable software developers to leverage the differentiations in our hardware and software products in their applications and hence add value to our customers. This program includes the key independent software vendor’s (“ISV”) covering all our target market segments and provides technical information to ISVs for developing, porting, tuning and differentiating their applications and opportunities for promoting their SGI-based solutions. We also engage in co-marketing activities with many of our ISVs.
We also develop co-marketing partnerships with our major customers and suppliers. We provide and maintain a comprehensive channel portal and marketing program, which provides significant marketing support to an active and established base of worldwide channel partners.
Research and Development
Our research and development organization includes hardware design engineers and software architects, as well as benchmarking, application, and storage engineers. We focus our research and development efforts where we believe differentiation from a standard component, product or technology holds the highest potential for increasing our market share. These include shared memory computing system architecture; integrated system implementation optimized for space, power, performance, reliability and usability; the Linux development and operating environment; software to exploit the differentiated features of our computing platforms; storage software to enable better performance, scalability and ease of management of large amounts of data; and innovative solutions that help solve our customer's toughest problems. We have developed cooperative working relationships with many of the world’s most advanced technology companies, such as Intel and AMD, to leverage their research and development capabilities. Additionally, we work closely with our customers to develop product innovations and incorporate these into subsequent product design. This cooperative approach allows us to develop products that meet our customers’ needs in a cost-effective manner. We monitor new technology developments, new component availability, and the impact of evolving standards through customer and supplier collaboration. From time to time, we accept third-party funding, provided the work being funded is consistent with and contributes to our strategic roadmap.
SGI UV System Development. We have invested significantly in the development of application-specific integrated circuits ("ASICs") and interconnect technology in order to create next-generation shared-memory systems. We have recently completed the introduction of the Altix UV shared-memory system based on the sixth-generation of our NUMAlink interconnect and NUMAflex architecture. This architecture is intended to increase substantially the performance and scalability of our single system image shared-memory products, as well as to incorporate hybrid processing elements and provide optimized features to enhance in-memory application performance on a cluster computing system.
SGI ICE X System Development. Through superior system architecture and hardware design, we also recently introduced the SGI ICE X, which offers market leading system configuration flexibility and is based on InfiniBand interconnect. We continue to emphasize scalability, extremely dense packaging, dramatic power and thermal efficiency, enterprise-class reliability, availability and serviceability features, impressive configurability, and strong interoperability in our designs. We expect these design efforts to enable us to introduce products that reach broader market segments.
Storage. We develop software and solutions for file serving, data management and energy efficient data archival for petascale environments. We select “best-in-class” storage hardware, including disk arrays and controllers from OEM suppliers that meet the particular needs of our customers’ applications and environments. Our engineers design software for efficient data access and management of these storage systems and we qualify storage systems ranging from small appliances to enterprise-class storage systems. We strive to tightly integrate the storage software and the hardware systems. We optimize the software that we include in our storage solutions for capacity-driven and performance-driven applications and environments.
Software. Our research and development efforts include the development of software libraries, tools and utilities that facilitate more efficient management and operation of our systems as well as enable software applications to run faster on our systems. In addition, we continue to enhance our software development and operating environments. Our experience in creating and implementing complex systems benefits our development of new tools. Leveraging this experience, we have developed the SGI Management Center as a means for managing all SGI compute nodes. SGI Management Center is a premier policy-based software tool for managing high performance, highly scalable SGI technical computing environments. It is a complete, integrated environment from desk side to supercomputer. It consists of extensible SGI software based on open standards and services that improve the productivity of developers and system administrators.
Modular Data Center. We have revolutionized data center design principles through the development of our ICE Cube

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product. ICE Cube meets the need for data center facility capacity with a just-in-time approach, minimizing up-front costs. Our engineers have designed multiple container models to provide the configurability to address varying IT and site requirements—all while delivering extraordinary density levels and market leading power usage effectiveness ("PUE") levels. We have designed ICE Cube models to accommodate varying types of IT equipment with ease, including third-party equipment as well as SGI server and storage systems. These many advantages make ICE Cube the ideal data center solution for a wide range of deployment scenarios, augmenting or replacing traditional data centers of any size.
Benchmarking. Through our global benchmarking and solutions centers, we provide access to a full range of our server and storage hardware and software, integrated in a wide variety of configurations, for application testing, benchmarking and performance tuning by end-users. At these centers, our personnel, including our application engineering and benchmarking teams work with end-users to build and optimize large-scale cluster computing systems, conduct proof-of-concept testing and simulate end-user applications. Through these centers, we also provide demonstrations of the standardized SGI workflow solutions that we have developed and are developing for their vertical markets. In addition, the SGI® Global Developer Program provides ISVs, systems integrators and consultants technical information for developing and porting their applications, as well as access to our online systems to streamline the implementation.
During fiscal 2012, 2011 and 2010, our research and development expenses were $62.4 million, $54.1 million and $56.9 million, respectively, representing 8%, 9% and 14% of total revenue in each respective period. During fiscal 2012, 2011 and 2010, we received $1.6 million, $1.3 million and $2.0 million, respectively, in third-party funding which offset a portion of our research and development expenses.
We believe that focused investments in research and development are critical to our future performance and competitiveness in the marketplace. Our investments in this area will directly relate to enhancement of our current product line, development of new products that achieve market acceptance, and our ability to meet an expanding range of customer requirements. As such, we expect to continue to spend on current and future product development efforts.
Manufacturing and Operations
Our sole manufacturing facility, located in Chippewa Falls, Wisconsin, is responsible for worldwide production, supply-chain management and order fulfillment. Our manufacturing operations involve the on-site assembly and testing of high-level subassemblies, subsystems and complete systems, configured to customer specifications. Our consolidated worldwide manufacturing operations increase our control over our supply chain and our inventories. Our manufacturing facility is ISO 9001:2008 certified.
Our supply base is composed of suppliers that meet our rigorous quality and technology standards. We maximize the use of industry-standard components in our products to reduce cost, and we custom design components where we believe that doing so adds value to the customer. We have established close relationships with key suppliers and work closely with them on new product introduction plans, strategic inventories, quality and delivery commitments. We depend on a limited number of key sub-contractors for the production of certain assemblies and multi-source standard components to minimize supply chain risk. Consistent with industry practice, we acquire components through a combination of formal purchase orders, supplier contracts and open orders based on projected demand information. These purchase commitments typically cover our requirements for periods ranging from 30 to 120 days.
Competition
The server and storage markets are highly competitive, with rapid technological advances and constantly improving price/performance ratios. These advances and pricing pressures result in frequent product introductions and short product life cycles. We believe that purchasers make buying decisions based on many factors, including: product quality and reliability, ease of system management, application availability, price/performance ratios, software functionality, product features, total cost of ownership, and quality customer service and support. We believe we compete effectively in each of these areas by providing differentiated products, services and support that address the needs of our customers.
The market for our products is highly competitive, rapidly evolving and subject to changing technology, customer needs and new product introductions. In the server market, we compete primarily with large and build-to-order vendors of x86 servers based in the United States, such as Dell Inc. (“Dell”), Hewlett-Packard Company (“HP”), International Business Machines Corporation (“IBM”), Oracle Corporation (“Oracle”) and Cray, Inc. (“Cray”). In the storage market, we compete primarily with EMC Corporation (“EMC”), NetApp Inc. (“NetApp”) and Hitachi Data Systems, Inc. (“HDS”). In all of our markets we compete principally on the basis of product features and performance, design-to-order capabilities, total cost of ownership, customer service, configurability and manageability and the ability to deliver environmentally friendly solutions. The ability of competitors to leverage multiple business lines, which we historically have not offered, allows them to target customers with benefits and deeper discounted pricing. Also, as we continue to enter international markets, we anticipate facing additional

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competition from foreign vendors.

Our largest competitors have far greater resources, greater name recognition, larger customer bases and greater financial, technical, sales and marketing resources than we do. For the largest systems in the supercomputing category, our principal competitor is IBM. We also compete with other systems manufacturers and resellers of systems based on x86 processors. Because a computing system is a substantial investment that can require extensive service and support commitments, our company size can have a significant impact on purchase decisions. In some instances, the diversified business of our competitors can support deep discounting to gain market share in the high performance computing market. In addition, particularly in the storage market, there are many new companies competing with us and rapidly introducing new products and technology.
Proprietary Rights and Licenses
We rely on a combination of patent, trademark, copyright and trade secret laws and disclosure restrictions to protect our intellectual property rights. We also enter into confidentiality and proprietary rights agreements with our employees, consultants and other third parties. We currently have issued and have pending approximately 575 U.S. patents in the United States and abroad, and we intend to continue to protect our intellectual property with patents. We also hold various U.S. and foreign trademarks as well as copyrights in our original software. Although we believe the ownership of patents, copyrights, trademarks and service marks, and trade secrets is an important factor in our business and that our success depends in part on ownership rights, we rely primarily on the innovative skills, technical competence and marketing abilities of our personnel to differentiate our products and services within the marketplace.
As is customary in our industry, we license from third-parties a wide range of software, including the Linux, Microsoft CCS and UNIX operating systems, for internal use and use by our customers. We also license various patents and trade secrets of third-parties through agreements such as patent or technology licenses or cross-licenses. We expect the extent of such intellectual property license and cross-license activities may increase as the scope of our product line increases. In some cases, our intellectual property is licensed to third-parties.
Our success will depend in part on our ability to protect our intellectual property portfolio and proprietary information. From time to time, we may need to enforce our intellectual property rights through litigation. If a claim is asserted that we have infringed the intellectual property rights of a third-party, we may be required to seek licenses under those intellectual property rights, if available, pay damages and/or redesign our products. If we were to litigate, we would incur significant costs, litigation may be a significant distraction for our management team, and we might not ultimately prevail. Litigation or changes in the interpretation of intellectual property laws could expand or reduce the extent to which we or our competitors are able to protect intellectual property and could require significant changes in product design. Because of technological changes and the extent of issued patents in our industry, it is possible certain components of our products and business methods may unknowingly infringe existing patents of others. Our industry has seen a substantial increase in litigation with respect to intellectual property matters, and we have been engaged in intellectual property disputes as a defendant as well as in an effort to protect our rights. We expect that we will engage in patent infringement litigation from time to time. See Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K.
Backlog
We manufacture products based on a combination of specific order requirements and forecasts of our customers’ demand. Orders are generally placed by customers on an as-needed basis. An accepted order can be canceled only with our written consent, and only on terms that will indemnify us against resulting losses, including, but not limited to, any costs already incurred in performing the order. In certain circumstances, purchase orders are subject to change with respect to quantity of product or timing of delivery resulting from changes in customer requirements. We experience some quarterly variability in our product and service revenues in any given period. Factors impacting the amount of product and service revenue in any given period includes deployment time of our larger systems, manufacturing and delivery schedules, changes in delivery schedules requested by our customers and the timing of our product development. Our business is also characterized by intra-quarter variability in demand and varying customer delivery and acceptance schedule. Accordingly, the timing for recognition of our backlog as revenue may be difficult to predict and current levels of backlog may not be a meaningful indicator of future revenue in any given quarter.
Environmental Laws
Our products and certain aspects of our operations are regulated under various environmental laws in the U.S., Europe and other parts of the world. These environmental laws are broad in scope and regulate numerous activities including the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of

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contaminated sites, the content of our products and the recycling and treatment and disposal of our products. Certain of these laws also pertain to tracking and labeling potentially harmful substances that have been incorporated into our products. These laws require us to know whether certain substances are present in our products, and to what degree. Environmental laws may limit the use of certain substances in our products, or may require us to provide product safety information to our customers if certain substances are present in our products in sufficient quantities. Additionally, we may be required to recycle certain of our products when they become waste. Compliance with environmental laws and regulations across multiple jurisdictions is complex and will require further capital expenditures in future periods, including expenditures for the implementation of new processes in supply chain management and order fulfillment. We believe that these expenditures are necessary to maintain our presence and competitive position in certain markets, including in particular the European Union. No material capital expenditures for environmental control facilities were made in fiscal 2012 and none are planned for the fiscal year ending June 28, 2013 ("fiscal 2013"). See Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K.
Employees
As of June 29, 2012, we had over 1,500 employees worldwide. Our future success will require that we continue to retain and motivate highly qualified technical, sales, marketing, finance and management personnel. We have never had a work stoppage, and none of our U.S. employees are represented by a labor union. We have workers’ councils where required by the European Union or other applicable laws.
Corporate Data
We were originally incorporated as Rackable Corporation and later changed our name to Rackable Systems, Inc. (“Rackable Systems”). Rackable Systems® was incorporated in the state of Delaware in December 2002 in connection with the acquisition of substantially all of the assets and liabilities of Rackable Systems’ predecessor company. On May 8, 2009, we completed the acquisition of substantially all of the assets, excluding certain assets unrelated to the ongoing business, and assumed certain liabilities of Silicon Graphics, Inc. Effective May 18, 2009, Rackable Systems changed its name to Silicon Graphics International Corp.
Our website address is www.sgi.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and 10-QT, current reports on Form 8-K, and amendments to those reports are available, without charge, on the investor relations section of our website, www.sgi.com, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of the Audit Committee, Compensation Committee, Strategic Planning Committee and Nominating and Corporate Governance Committee of our Board of Directors are also posted on our website at http://investors.sgi.com/. Copies are also available, without charge, from the Corporate Secretary, Silicon Graphics International Corp., 46600 Landing Parkway, Fremont, CA 94538. The information contained in, or that can be accessed through, our website is not incorporated by reference herein.
Executive Officers of the Registrant
Our executive officers, their ages and positions as of September 10, 2012 are as follows:
Name
 
Age
 
Position
Jorge Titinger
 
51
 
Chief Executive Officer, President and Director
Robert Nikl
 
57
 
Executive Vice President and Chief Financial Officer
Anthony Carrozza
 
57
 
Executive Vice President of Field Operations
Jennifer Pileggi
 
48
 
Senior Vice President, General Counsel and Corporate Secretary

Jorge Titinger joined SGI in February 2012 as our President and Chief Executive Officer and as a member of our board of directors. Previously, Mr. Titinger served as President and Chief Executive Officer of Verigy Ltd. (a company in the semiconductor automated test equipment business) from January 2011 to July 2011, as President and Chief Operating Officer from July 2010 to January 2011, and as Chief Operating Officer from June 2008 to July 2010. Verigy was acquired by Advantest Corporation in July 2011, and from such time until October 2011, Mr. Titinger provided transitional services as President and Chief Executive Officer of Verigy, then a subsidiary of Advantest. Prior to Verigy, Mr. Titinger was Sr. Vice President and General Manager of Product Business Groups at Form Factor, Inc. (a company in the computer chip technology business) from November 2007 to June 2008. Mr. Titinger previously held management positions at KLA-Tencor Corporation (a company in the semiconductor equipment industry), Applied Materials, Inc. (a company involved in the business of semiconductor manufacturing) and Hewlett-Packard Company. Mr. Titinger holds a Bachelor of Science degree in electrical engineering, a Master of Science degree in electrical engineering and a Master of Science degree in engineering management, each from Stanford University.

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Robert Nikl joined SGI in May 2012 as our Executive Vice President and Chief Financial Officer. Mr. Nikl served as Executive Vice President and Chief Financial Officer of Verigy Ltd. (a company in the semiconductor automated test equipment business) from June 2006 to October 2011. Verigy was acquired by Advantest Corporation in July 2011. Prior to Verigy, Mr. Nikl was Sr. Vice President and Chief Financial Officer of Asyst Technologies, Inc. (a company in the semiconductor business) from September 2004 to June 2006. Mr. Nikl previously held financial management positions at Solectron Corporation (an electronics manufacturing company) and Xerox Corporation and began his career in public accounting at KPMG Peat Marwick. Mr. Nikl is a certified public accountant with active licenses in California and New York and holds an MBA from the University of Connecticut as well as a Bachelor of Business Administration from Pace University in New York.

Anthony Carrozza joined SGI in March 2008. In his role as Executive Vice President of Field Operations, Mr. Carrozza is responsible for SGI's product sales for both direct and indirect customers on a worldwide basis. Mr. Carrozza brings more than twenty five years of worldwide sales experience in the technology sector. Prior to joining SGI, Mr. Carrozza was with Neterion, Inc. from 2006 to 2008 (a company that designed and manufactured 10 gigabyte Ethernet ASICs), where he was vice president, sales. Mr. Carrozza was with Quantum Corporation (a manufacturer of storage systems) from 1987 to 2006. When Mr. Carrozza left Quantum, he held the title of senior vice president, worldwide sales and was a member of the executive management team. Mr. Carrozza holds a Bachelor of Arts degree in political science from Iona College.

Jennifer Pileggi joined SGI in September 2011 as our Senior Vice President, General Counsel and Corporate Secretary. Prior to joining SGI, Ms. Pileggi served as Executive Vice President, General Counsel and Corporate Secretary of Con-way Inc., a global transportation and logistics services company, from December 2004 until June 2011.  She originally joined Con-way in 1996 and previously served as Vice President and Corporate Counsel for Menlo Worldwide, Con-way's $1.5 billion supply chain management business segment.  Ms. Pileggi earned a Bachelor of Arts degree in Art History from Yale University and a Juris Doctorate from New York University School of Law.  Ms. Pileggi is a member of the American Bar Association and the California State Bar Association. She served on the board of directors of the California Chamber of Commerce, and is a member of the General Counsel Executive Advisory Council of the Bay Area Chapter of the Association of Corporate Counsel.





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Item 1A. Risk Factors
Our periodic operating results have fluctuated significantly in the past and will continue to fluctuate in the future, which could cause our stock price to decline.
Our quarterly and annual periodic operating results have fluctuated significantly in the past, and we believe that they will continue to fluctuate in the future, due to a number of factors, many of which are beyond our control. We expect that our revenue, gross margin, and earnings per share will fluctuate on a periodic basis in future periods. If in future periods our operating results do not meet the expectations of investors or analysts who choose to follow our company, our stock price may fall. Factors that may affect our periodic operating results include the following:
fluctuations in the buying patterns and sizes of customer orders from one quarter to the next;
increased competition causing us to sell our products or services at low margins;
location and timing requirements for the delivery of our products and services;
lengthy acceptance cycles of our products by certain customers, development or product delivery delays, and delays in obtaining necessary components from our suppliers, contractual provisions or other reasons;
addition of new customers or loss of existing customers;
gross margin pressures from the sales of products and services due to discounted pricing, especially to our largest customers;
lack of reliability of our estimates to forecast sales and trends in our business to generate a sales pipeline;
uncertainty regarding our estimated sales pipeline resulting in actual contracts, which can be affected by slowdowns in our customers' IT spending (which may cause purchasing decisions to be delayed, reduced in amount or canceled), the tendency of some of our customers to wait until the end of a fiscal period to execute a contract in the hope of obtaining more favorable terms and, for new customers or customers who have recently undergone a change in control, our ability to predict how their pipelines will convert into sales or revenues is limited;
our ability to align our product and service offerings and cost structure with customer needs;
our ability to reduce operating expenses and total costs in procurement, which may involve delays in the anticipated timing of activities related to our cost savings plans and higher than expected or unanticipated costs to implement the plans;
changes in the mix of products sold due to differences in profitability among our products;
write-off of excess and obsolete inventory;
impairment and shortening of the useful life of components from our suppliers;
unexpected changes in the price for, and the availability of, components from our suppliers;
our ability to enhance our products with new and better designs and functionality;
our ability to timely bring new capabilities to market combining our products and technologies with those produced by our strategic partners and OEMs to address new opportunities, such as in the “Big Data” or “Hadoop” markets;
costs associated with obtaining components to satisfy customer demand;
productivity and growth of our sales force;
actions taken by our competitors, such as new product announcements or introductions or changes in pricing;
market acceptance of newer products, such as UV™2, ICE X™ and SGI® Modular InfiniteStorage™;
technology regulatory compliance, certification and intellectual property issues associated with our products;
the payment of unexpected legal fees and potential damages or settlements resulting from protecting or defending our intellectual property or other matters;
the payment of significant damages, settlements or contractual penalties resulting from faulty or malfunctioning products or the provision of services unsatisfactory to our customers;
the market downturn and delay in orders of our products;
compliance costs associated with new laws, rules and regulations, including environmental regulations;
the payment of unexpected intellectual property licensing royalties to third parties who successfully assert that our product(s) infringe their intellectual property rights;
the departure and acquisition of key management and other personnel; and
general economic trends, including changes in information technology spending or geopolitical events such as war or incidents of terrorism.
If our U.S. government-related sales decrease, or our ability to do business with the U.S. government or entities funded by the U.S. government is disrupted or limited, our operating performance could be adversely affected.
We generally derive a significant portion of our revenue from U.S. government entities, research institutions funded by the U.S. government and third parties that sell directly to the U.S. government through our subsidiary, Silicon Graphics Federal, Inc. In fiscal 2012, such sales represented approximately 8% of our total revenue. These sales present risks in addition to those involved in sales to commercial customers, including potential disruptions and delays due to changes in appropriation and spending priorities by the U.S. government. In addition, the U.S. government can terminate or modify its contracts with us

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at any time for its convenience. A significant reduction in such sales could adversely affect our operating performance.
Our U.S. government business is also subject to specific procurement regulations and a variety of other requirements applicable to companies doing business with the U.S government. Sales to the defense sector require us to comply with additional defense-specific regulations, including maintaining a compliant security program, obtaining security clearances for employees, and passing various inspections. Failure to comply with applicable regulations and requirements could lead to our suspension or debarment from U.S. government contracting or subcontracting for a period of time as well as fines against the Company.
Any disruption or limitation in our ability to do business with the U.S. government or entities funded by the U.S. government could materially adversely affect our revenue and operating results.
Our sales cycle requires us to expend a significant amount of resources, and could have an adverse effect on the amount, timing and predictability of future revenue.
The sales cycle of our products, beginning from our first customer contact to closing of the sale, often ranges from three to six months. We may expend significant resources during the sales cycle and ultimately fail to close the sale. The success of our product sales process is subject to factors over which we have little or no control, including:
the timing of our customers' budget cycles and approval processes;
our customers' existing use of, or willingness to adopt, open standard server products, or to replace their existing servers or expand their processing capacity with our products;
the announcement or introduction of competing products; and
established relationships between our competitors and our potential customers.
We expend substantial time, effort and money educating our current and prospective customers as to the value of our products. Even if we are successful in persuading lower-level decision makers within our customers' organizations of the benefits of our products, senior management might nonetheless elect not to buy our products after months of sales efforts by our employees or resellers. If we are unsuccessful in closing sales after expending significant resources, our revenue and operating expenses will be adversely affected.
Even if we are successful in closing sales, several large transactions that we have entered into require us to invest cash up front to fund working capital without collecting cash for several periods. If we are unable to negotiate for more favorable cash collection terms in the future, our liquidity and ability to fund our operations could be adversely affected.
A concentrated number of customers that purchase our products in large quantities have historically accounted for a significant portion of our revenues. If we are unable to maintain or replace our relationships with such customers and/or diversify our customer base, our revenue may fluctuate or decline and our growth may be limited.
Historically, a significant portion of our revenue has come from a limited number of customers. There can be no guarantee that we will be able to sustain our revenue levels from these customers. For fiscal 2012, our top five customers worldwide accounted for approximately 41% of our total revenues, with Amazon accounting for 16% and the U.S. government accounting for 8%.
This customer concentration increases the risk of quarterly fluctuations in our revenues and operating results. The loss or reduction of business from one or a combination of our significant customers, for example as a result of a customer's capital expenditure budget reductions or U.S. Government spending reductions, could materially adversely affect our revenues, financial condition and results of operations.
Our stock price in the past has been volatile, and may continue to be volatile or may decline regardless of our operating performance, and investors may not be able to resell shares at or above the price at which they purchased the shares.
Our stock price has experienced high volatility. For example, during fiscal 2012, our stock price fluctuated from a high of $17.71 to a low of $5.02. Investors may not be able to sell the shares at or above the price at which they purchase them. The market price of our common stock may fluctuate significantly in response to numerous factors, including without limitation:
price and volume fluctuations in the overall stock market;
the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
actual or anticipated fluctuations in our operating results;
changes in operating performance and stock market valuations of other technology companies generally, or those that sell enterprise computing products in particular;
changes in financial estimates by any securities analysts who follow our company, our failure to meet these estimates or failure of those analysts to initiate or maintain coverage of our stock;

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ratings downgrades by any securities analysts who follow our company;
the public's response to our press releases or other public announcements, including our filings with the SEC;
increases in the total short position in our common stock;
announcements by us or our competitors of significant technical innovations, customer wins or losses, acquisitions, strategic partnerships, joint ventures or capital commitments;
introduction of technologies or product enhancements that reduce the need for our products;
market conditions or trends in our industry or the economy as a whole;
the loss of one or more key customers;
the loss of key personnel;
the development and sustainability of an active trading market for our common stock;
lawsuits threatened or filed against us;
future sales of our common stock by our officers, directors and significant stockholders; and
other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock markets, and in particular the NASDAQ Stock Market, have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. We could become involved in securities litigation in the future, which could have substantial costs and divert resources and the attention of management from our business.
Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.
We face intense competition from the leading enterprise computing companies in the world as well as from emerging companies. If we are unable to compete effectively, we might not be able to achieve sufficient market penetration, revenue growth or profitability.
The markets for compute server products and storage products are highly competitive. In addition to intensely competitive smaller companies, we face challenges from some of the most established companies in the computer industry, such as Dell Inc., Hewlett-Packard Company, International Business Machines Corporation, Cray, Inc. and Oracle Corporation in the computer server market. In the storage market, we compete primarily with EMC Corporation, HP, Hitachi Data Systems, Inc., and NetApp, Inc. Our largest competitors have several advantages over us, such as:
substantially greater market presence and greater name recognition;
substantially greater financial, technical, research and development, sales and marketing, manufacturing, distribution and other resources;
longer operating histories;
a broader offering of products and services;
more established relationships with customers, suppliers and other technology companies; and
the ability to acquire technologies or consolidate with other companies in the industry to compete more effectively.
Because these competitors may have greater financial strength than we do and are able to offer a more diversified bundle of products and services, they may have the ability to severely undercut the pricing of our products or provide additional products or servicing at little or no cost, which would make us less competitive or force us to reduce our selling prices, negatively impacting our margins. We have had transactions where one or more competitors undercut our prices causing us to reduce our price, which negatively impacted our gross margin on that transaction and our overall gross margin. In addition, we have, on occasion, lost sales opportunities due to a competitor undercutting the pricing of our products or maintaining superior brand recognition. These competitors may be able to develop products that are superior to the commercially available components that we incorporate into our products, or may be able to offer products that provide significant price advantages over those we offer. For instance, a competitor could use its resources to develop proprietary motherboards with specifications and performance that are superior in comparison with the platforms that are currently available to the marketplace, which could give that competitor a distinct technological advantage. In addition, if our competitors' products become more widely accepted than our products, our competitive position will be impaired.
The intense competition we face in the sales of our products and services and general economic and business conditions can put pressure on us to change our prices. If our competitors offer deep discounts on certain products or services or develop products that the marketplace considers more valuable, we may need to lower prices or offer other favorable terms in order to compete successfully. Any such changes may reduce margins and could adversely affect operating results.

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As the enterprise computing industry evolves, we expect to encounter additional competitors, including companies in adjacent technology businesses such as storage and networking infrastructure and management, companies providing technology that is complementary to ours in functionality, such as data center management software, contract manufacturers, and other emerging companies that may announce server product offerings. Moreover, our current and potential competitors, including companies with whom we currently have strategic alliances, may establish cooperative relationships among themselves or with other third parties. If this occurs, new competitors or alliances may emerge that could negatively impact our competitive position.
We may not be able to realize the potential financial or strategic benefits of acquisitions that we may complete in the future, or find suitable target businesses or technologies to acquire, which could impair our ability to grow our business, develop new products or sell our products.
If appropriate opportunities present themselves, we may consider acquiring or making investments in companies, assets or technologies that we believe are strategic. Acquisitions are difficult, time consuming and pose a number of risks, including:
the acquired products may fail to achieve projected sales or operating margin targets;
the acquired business, asset or technology may not further our business strategy or we may not realize expected synergies or cost savings;
we might overpay for the acquired business, asset or technology;
we might experience difficulties integrating the acquired assets, technologies, operations or personnel or retaining the key personnel of the acquired company;
disruption of ongoing business, including diversion of management's attention;
we might experience difficulties entering and competing in new product or geographic markets in which we are not experienced;
assumption of unknown liabilities, including tax and litigation or problems with product quality, and the related expenses and diversion of resources;
potential downward pressure on operating margins due to lower operating margins of acquired businesses, increased headcount costs and other expenses associated with adding and supporting new products;
potential negative impact on our relationships with customers, distributors and business partners; and
potential negative impact on our earnings per share/negative impact on our earnings resulting from the application of ASC 805, Business Combinations, which became applicable to us in January 2009.
In addition, if we were to proceed with one or more significant acquisitions or investments in which the consideration included cash, we could be required to use a substantial portion of our available cash. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options and warrants, existing stockholders might be diluted and earnings per share might decrease. In addition, acquisitions and investments may result in the incurrence of debt, large one-time write-offs, such as acquired in-process research and development costs and restructuring charges.
If we do not appropriately manage these risks, any acquisitions that we complete may have an adverse effect on our business and financial condition. Additionally, if we determine that we cannot use or sell the acquired products or technology, we will be required to write down the associated intangible assets, which would negatively impact our operating results.
The global nature of our operations exposes us to increased risks and compliance obligations, which may adversely affect our business.
During fiscal 2012, 2011 and 2010, we derived approximately 41%, 38% and 25% of our revenue from sales outside of the United States, respectively. Our international business operations require us to recruit and retain qualified technical and managerial employees, manage multiple, remote locations and ensure intellectual property protection outside of the United States. Our international operations subject us to increased risks, including:
supporting multiple languages;
recruiting sales and technical support personnel internationally with the skills to design, manufacture, sell and support our products;
complying with governmental regulations, including obtaining required import or export approval for our products;
increased complexity and costs of managing international operations;
increased exposure to foreign currency exchange rate fluctuations;
commercial laws and business practices that favor local competition;
longer sales cycles and manufacturing lead times;
financial risks such as longer payment cycles and difficulties in collecting accounts receivable;
difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;
ineffective legal protection of intellectual property rights;
more complicated logistics and distribution arrangements;

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additional taxes and penalties;
inadequate local infrastructure that could result in business disruptions;
political and economic instability, including the current credit crisis in Europe; and
other factors beyond our control such as natural disasters, terrorism, civil unrest, war and infectious diseases.

If any of the foreign economies in which we do business deteriorate or if we fail to effectively manage our global operations, our business and results of operations would be harmed.
In addition, our global operations are subject to numerous U.S. and foreign laws and regulations, including those related to anti-corruption, tax, corporate governance, imports and exports, financial and other disclosures, privacy and labor relations. These laws and regulations are complex and may have differing or conflicting legal standards, making compliance difficult and costly. If we or our employees, contractors or agents violate these laws and regulations, we could be subject to fines, penalties or criminal sanctions, and may be prohibited from conducting business in one or more countries. Any violation individually or in the aggregate could have a material adverse effect on our operations and financial condition.
We may experience foreign currency gains and losses.
We conduct a significant number of transactions in currencies other than the U.S. Dollar. Changes in the value of major foreign currencies, particularly the Euro, Japanese Yen, and British Pound relative to the U.S. Dollar can significantly affect revenues and our operating results. Our revenues and operating results are adversely affected when the U.S. Dollar strengthens relative to other currencies and are positively affected when the U.S. Dollar weakens. Our revenues and operating results in fiscal 2012 have been unfavorably affected by the recent strengthening of the U.S. Dollar relative to other major foreign currencies. Although we have recently started to engage in foreign currency hedging activity, we may be unable to hedge all of our foreign currency risk, which could have a negative impact on our results of operations. For fiscal 2012, 2011 and 2010, our combined revenue from our EMEA and APJ segments was $279.2 million, $217.5 million and $90.0 million, respectively. As of June 29, 2012 and June 24, 2011, the balance in our foreign currency cash accounts was $38.6 million and $70.2 million, respectively. As of June 29, 2012 and June 24, 2011, we had no foreign currency forward contracts or option contracts. As a result, an increase in the value of the U.S. Dollar relative to foreign currencies could make our products more expensive and, thus, not competitively priced in foreign markets. On the other hand, a decrease in the value of the U.S. Dollar relative to foreign currencies could increase our operating costs in foreign locations. In the future, a larger portion of our international revenue may be denominated in foreign currencies, which will subject us to additional risks associated with fluctuations in those foreign currencies. In addition, we may be unable to successfully hedge against any such fluctuations.
Our international sales may require export licenses and expose us to additional risks.
Our sales to customers outside the United States are subject to U.S. export regulations. Under these regulations, sales of many of our high-end products require approval and export licenses from the U.S. Department of Commerce. Our international sales would be adversely affected if these regulations were tightened, or if they are not adjusted over time, as technology changes, to reflect the increasing compute performance of our systems. Delay or denial in the approval of any required licenses could make it more difficult to sell to non-U.S. customers. In addition, we could be subject to regulations, fines and penalties for violations of import and export regulations if we were found in violation of these regulations. End users could circumvent end-user documentation requirements that are intended to aid in our compliance with export regulations, potentially causing us to violate these regulations. These violations could result in penalties, including prohibitions from exporting our products to one or more countries, and could materially harm our business, including our sales to the U.S. government.
We are continuing to develop and execute upon a channel strategy to generate additional sales and revenue, and the failure to successfully expand channel sales might affect our ability to sustain revenue growth and may harm our business and operations.
An increasing portion of our sales strategy is to develop our sales efforts through the use of resellers and other third parties to sell our systems. We may not be successful in building or expanding relationships with these third parties. Further, even if we do develop and expand these relationships, they may conflict with our direct sales efforts in some territories. Ineffective marketing of our products by our resellers or disruptions in our distribution channels could lead to decreased sales or slower than expected growth in revenue and might harm our business and operations.

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Our customers require a high degree of reliability in our products and services, and if we cannot meet their expectations our relationships with our customers could be damaged and demand for our products and services will decline.
Because our customers rely on our products and services for their enterprise or mission critical applications, any failure to provide high quality products and reliable services, whether caused by our own failure or failures by our suppliers or contract manufacturers, could damage our reputation and reduce demand for our products and services. Some of our HPC products are particularly complex and carry a higher per unit price. A failure of our HPC products would therefore potentially be more costly to us, with the risk and potential cost to us increasing proportionately with the number of products we sell in this line. Most of our customers use our systems for applications that are critical to their organization; as a result system reliability is critical to the success of our products. In addition, delays in our ability to fill product orders as a result of quality control issues, such as an increase in failure rates or the rate of product returns, may negatively impact our relationships with our customers and harm our revenue and growth.
Our business depends on decisions by potential customers to adopt our modular, open standard-based products and to replace their legacy server systems with our products, and they may be reluctant to do so, which would limit our growth.
Our business depends on companies moving away from large proprietary RISC/UNIX servers to standardized servers that utilize commercially available x86 processor architectures and can deploy a variety of operating systems, including Linux and Microsoft Windows. A majority of the server systems that we sold in fiscal 2012, 2011 and 2010 ran on the Linux® operating system. Products based on the Linux operating system and sold by other software vendors have been the subject of intellectual property infringement litigation, including litigation by Microsoft Corporation.
It is possible that a party could prove a claim for proprietary rights in the Linux operating system or other programs developed and distributed under the GNU General Public License or other open source software licenses. In addition, the GNU General Public License has itself been, and may be in the future, a subject of litigation, and it is possible that a court could hold these licenses to be unenforceable in that litigation. Any ruling by a court that the Linux operating system or significant portions of it may not be copied, modified or distributed, that users or distributors of Linux must pay royalties to Microsoft or others or that these licenses are not enforceable could also impede broader Linux adoption and materially harm our ability to sell our products based on the Linux operating system. Further, because potential customers have often invested significant capital and other resources in existing systems, many of which run mission-critical applications, customers may be hesitant to make dramatic changes to their data center systems. The failure of our customers and potential customers to replace their legacy server systems and adopt open standard-based modular technologies could have a material adverse impact on our ability to maintain or generate additional revenue.
Our products have incorporated or have been dependent upon, open standards, commoditized components and materials that we obtain in spot markets, and, as a result, our cost structure and our ability to respond in a timely manner to customer demand are sensitive to volatility of the market prices for these components and materials.
A significant portion of our cost of revenue is directly related to the pricing of commoditized materials and components utilized in the manufacture of our products, such as memory, hard drives, central processing units (“CPUs”), or power supplies. As part of our procurement model, we generally do not enter into long-term supply contracts for these materials and components, but instead purchase these materials and components in a competitive bid purchase order environment with suppliers or on the open market at spot prices. As a result, our cost structure is affected by the availability and price volatility in the marketplace for these components and materials, including new versions of hard drives and CPUs that are introduced by our suppliers. This volatility makes it difficult to predict expense levels and operating results and may cause them to fluctuate significantly. Further, if we are successful in growing our business, we may not be able to continue to procure components solely on the spot market, which would require us to enter into contracts with component suppliers to obtain these components.
In addition, because our procurement model involves our ability to maintain low inventory and to acquire materials and components as needed, and because we do not enter into long-term supply contracts for these materials and components, our ability to effectively and efficiently respond to customer orders may be constrained by the then-current availability or the terms and pricing of these materials and components. Our industry has experienced component shortages and delivery delays in the past, including a shortage for hard drives related to flooding in Southeast Asia in 2011, which affected hard drive manufacturing facilities. In the future, we may experience other shortages or delays of critical components as a result of strong demand, capacity constraints, supplier financial weaknesses, inability of suppliers to borrow funds in the credit markets, disputes with suppliers (some of whom are also customers), disruptions in the operations of component suppliers, natural disasters, other problems experienced by suppliers or problems faced during the transition to new suppliers.
The price of components may increase due to potential shortages or delays, and we may be exposed to quality issues or the components may not be available at all. We may therefore not be able to secure enough components at reasonable prices or

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of acceptable quality to build products or provide services in a timely manner in the quantities or according to the specifications needed. Accordingly, our revenue and gross margin could suffer as we could lose time-sensitive sales, incur additional freight costs or be unable to pass on price increases to our customers. If we cannot adequately address supply issues, we may have to reengineer some products or service offerings, resulting in further costs and delays.
In order to secure components for the provision of products or services, at times we may enter into non-cancelable commitments with vendors. In addition, we may purchase components strategically in advance of demand to take advantage of favorable pricing or to address concerns about the availability of future components. If we fail to anticipate customer demand properly, a temporary oversupply could result in excess or obsolete components. Further, we compete in an industry that is characterized by rapid technological advances in hardware with frequent introduction of new products. With new product introductions, we face risks in predicting customer demand for the new products as well as the transition from existing products. If we do not make an effective transition from existing products to future products, we could have an oversupply of components. For example, DRAM can represent a significant portion of our cost of revenue, and both the price and availability of various kinds of DRAM are subject to substantial volatility in the spot market. Additionally, if any of our suppliers of CPUs such as Intel or GPUs such as NVIDIA were to increase the costs to us for components we use, we would either pass these price increases on to our customers, which could cause us to lose business from these customers, or we would need to absorb these price increases, which would cause our margins to decrease, either of which could adversely affect our business and financial results.
If we fail to maintain or expand our relationships with our suppliers, in some cases single-source suppliers, we may not have adequate access to new or key technology necessary for our products, which may impair our ability to deliver leading-edge products.
In addition to the technologies we develop, our suppliers develop product innovations at our direction that are requested by our customers. In many cases, we retain the ownership of the intellectual property developed by these suppliers. Further, we rely heavily on our component suppliers, such as Intel and NVIDIA, to provide us with leading-edge components on time and in accordance with a product roadmap. If we are not able to maintain or expand our relationships with our suppliers or continue to leverage their research and development capabilities to develop new technologies desired by our customers, our ability to deliver leading-edge products in a timely manner may be impaired and we could be required to incur additional research and development expenses.
Unforeseen environmental costs could impact our future net earnings.
We are subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of our products and the recycling, treatment and disposal of our products. In particular, we face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and materials composition of our products, their safe use, the energy consumption associated with those products, and climate change laws and regulations. We could incur substantial costs, our products could be restricted from entering certain jurisdictions, and we could face other sanctions, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws. Our potential exposure includes fines and civil or criminal sanctions, third-party property damage, personal injury claims, compliance-related costs and clean-up costs. Further, liability under some environmental laws relating to contaminated sites can be imposed retroactively, on a joint and several basis, and without any finding of noncompliance or fault. The amount and timing of costs under environmental laws are difficult to predict and such costs could have a negative effect on our profitability. If we are found to be in violation of any environmental laws, costs associated with such liability may have an adverse effect on our financial results.
We have historically relied on contract manufacturers and partners to assemble and test certain of our products, and our failure to successfully manage our relationships with these contract manufacturers and partners could impair our ability to deliver our systems in a manner consistent with required volumes or delivery schedules, which could damage our relationships with our customers and decrease our revenue.
We have historically relied on a small number of contract manufacturers and partners to assemble and test certain of our products. None of these third-party contract manufacturers or partners are obligated to perform services or supply products to us for any specific period, or in any specific quantities, except as may be provided in a particular purchase order. For example, we design custom silicon chips for ASICs, but rely on a third-party to manufacture the ASICs for us. None of our contract manufacturers has provided contractual assurances to us that adequate capacity will be available to us to meet future demand for our products. If our contract manufacturers or partners are not able to meet our capacity requirements or maintain our high standards of quality, our ability to deliver quality products to our customers on a timely basis may decline, which would damage our relationships with customers, decrease our revenue and negatively impact our growth.

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If we are unable to retain and attract adequate qualified personnel, we may not be able to execute on our business strategy.
We have recently experienced significant turnover in our management team. In December 2011, Mark Barrenechea resigned from the positions of Chief Executive Officer and President effective January 1, 2012 and Ron Verdoorn, the Chairman of our Board of Directors, was appointed Interim Chief Executive Officer in accordance with the succession plan in place by the Nominating and Corporate Governance Committee of the Board of Directors. The Board of Directors appointed Jorge L. Titinger as Chief Executive Officer and President, effective February 27, 2012. In addition, Timothy Pebworth resigned as Vice President and Chief Accounting Officer effective April 20, 2012, and James Wheat resigned as Senior Vice President, Chief Financial Officer and Chief Accounting Officer effective May 14, 2012, each for personal reasons. On April 30, 2012, Robert Nikl was appointed as Executive Vice President and Chief Financial Officer effective May 15, 2012. On June 27, 2012, Mekonnen Asrat joined the Company as Vice President and Corporate Controller. Our future success depends in large part upon the continued service and enhancement of our management team and our employees. If there are further changes in management, such changes could be disruptive and could negatively affect our operations, our culture and our strategic direction.
Further, our employees may terminate their employment with us at any time. Our U.S. employees are “at will,” while outside of the U.S., notice or severance may be required if we wish to terminate an employee. The failure of our management team to seamlessly manage employee transitions, or the loss of services of any of these executives or of one or more other members of our executive management or sales team or other key employees could seriously harm our business. Competition for qualified executives is intense and if we are unable to continue expanding our management team, or successfully integrate new additions to our management team in a manner that enables us to scale our business and operations effectively, our ability to operate effectively and efficiently could be limited or negatively impacted.
Additionally, to help attract, retain, and motivate certain qualified employees, we use share-based incentive awards such as employee stock options and non-vested share units (restricted stock units). If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations.
We are subject to restrictions under our credit facility that may result in our inability to engage in favorable business activities or finance future operations or capital needs.
On December 5, 2011, we entered into a five-year senior secured credit facility in the aggregate principal amount of $35.0 million, which amount was increased to $40.0 million on May 1, 2012. The credit facility contains various financial and other covenants that, among other things:
require us to maintain a fixed charge coverage ratio (applicable during certain periods);
limit our ability to incur indebtedness, grant liens, or consign inventory; and
require us to obtain the bank's consent prior to selling the Company via a consolidation, merger or transfer of substantially all of our assets. 

Although we can terminate the facility for convenience at any time, such termination would require repayment of any outstanding indebtedness. If we were unable to repay such indebtedness, we could not terminate the facility and we would be subject to its covenants and conditions. As a result of these covenants we may be restricted in the manner in which we conduct our business.  In addition, we may be unable to engage in favorable business activities or finance future operations or capital needs, including without limitation, funding acquisitions or repurchasing our stock. This indebtedness may also adversely affect our ability to access sources of capital or incur certain liens. Accordingly, these restrictions may limit our ability to successfully operate our business. A failure to comply with these restrictions could lead to an event of default, which could result in an acceleration of the indebtedness and could adversely affect our cash flow and operating results. If any of the Company's indebtedness is accelerated, the Company may not have sufficient funds available to repay such indebtedness.
We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our results of operations.
In connection with the preparation of our consolidated financial statements, we use certain estimates and assumptions based on historical experience and other factors. Our most critical accounting estimates are described in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report on Form 10-K. While we believe that these estimates and assumptions are reasonable under the circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material adverse effect on our results of operations, and we may be required to restate our financial results for prior periods which could cause our stock price to decline.

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If we are unable to maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and effectively prevent fraud. As a publicly traded company we must maintain effective disclosure controls and procedures and internal control over financial reporting, which can be difficult to do. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A failure to have effective internal controls and procedures for financial reporting in place could result in a restatement of our financial statements, impact our ability to accurately report financial information on a timely basis, make it difficult or impossible to obtain an audit of our financial statements or result in a qualification of any such audit. Any such event could lead to a loss of market confidence in our financial statements, delisting from the NASDAQ Global Select Market, loss of financing sources, and litigation, any of which could adversely affect our stock price.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Our tax liabilities are affected by the amounts we charge for inventory, services, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions. Tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. For example, we have been assessed tax and interest by the Canada Revenue Agency ("CRA") in connection with excess research credits claimed by our Canadian subsidiaries in prior periods. The assessment has not been paid because the CRA has not yet accepted our claim that the assessment should be reduced due to overstatement of taxable income of our Canadian subsidiaries during these periods. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the amounts ultimately paid upon resolution of audits could be materially different from the amounts previously included in our income tax expense and therefore could have a material impact on our tax provision, net income and cash flows.
In addition, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws and the discovery of new information in the course of our tax return preparation process.
Unsuccessful deployment of new transaction processing applications and other systems integration issues could disrupt our internal operations and any such disruption could reduce our expected revenue, increase our expenses, and damage our reputation.
Portions of our IT infrastructure may experience interruptions, delays or cessations of service or produce errors in connection with systems integration and implementation of new transaction processing applications, including accounting, manufacturing and sales system. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive to remediate. Such disruptions could adversely impact our ability to fulfill orders and negatively impact our business or interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions have adversely affected us in the past, and in the future could adversely affect our financial results, public disclosures and reputation.
We maintain confidential and proprietary information on our computer networks and employ security measures designed to protect this information from unauthorized access. If our security measures are breached and unauthorized access is obtained, we may lose proprietary data and may suffer economic losses.
We maintain confidential information on our computer networks, including information and data that are proprietary to our customers and third parties, as well as to our company. Although we have designed and employed security measures to protect this information from unauthorized access, our security measures may be breached as a result of third-party action, including computer hackers, employee error, malfeasance or otherwise, and result in someone obtaining unauthorized access to our customers' data or our data, including our intellectual property and other confidential business information. Because the techniques employed by hackers to obtain unauthorized access or to sabotage systems change frequently, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in disclosure of our trade secrets or disclosure of confidential customer, supplier or employee data. If this should happen, we could be exposed to potentially significant legal liability, harm to our reputation and other harm to our business.
Business disruptions could affect our operating results.
A significant portion of our manufacturing, research and development activities and certain other critical business operations is concentrated in a few geographic areas. We are a highly automated business and a disruption or failure of our

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systems could cause delays in completing sales and providing services. A major earthquake, fire, tornado or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be materially and adversely affected.
Further, we maintain a program of insurance coverage for various types of property, casualty, and other risks. We place our insurance coverage with various carriers in numerous jurisdictions. However, there is a risk that a claim may go unpaid, such as in the event of a widespread catastrophic event that materially affects the resources of our insurer. The types and amounts of insurance that we obtain vary from time to time and from location to location, depending on availability, cost, and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance basis. Losses not covered by insurance may be substantial and may increase our expenses, which could harm our results of operations and financial condition.
Unstable market and economic conditions may have serious adverse consequences on our business.
As a result of the recent global recession, the global economy experienced significant uncertainty, stock market volatility, tightened credit markets, concerns about both deflation and inflation, reduced demand for products, lower consumer confidence, reduced capital spending, liquidity concerns and business insolvencies. Further declines and uncertainty about economic conditions could negatively impact our customers' businesses, causing our customers to postpone their decision-making or decrease their spending or affecting our customers' ability to pay for our products, which would harm our operating results. In addition, one or more of our current service providers, manufacturers and other partners may go out of business, which could directly affect our ability to attain our operating goals on schedule and on budget.
If the global economy continues to experience uncertainty, our ability to obtain credit on favorable terms could be jeopardized. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our financial performance and stock price and could require us to change our business plans. Furthermore, should any of our banking partners declare bankruptcy or otherwise default on their obligations, it could adversely affect our financial results and our business.
We cannot predict if or when global economic confidence will be restored. Accordingly, our future business and financial results are subject to considerable uncertainty, and our stock price is at risk of volatile change.
If we are unable to protect our intellectual property adequately, we may not be able to compete effectively.
Our intellectual property is critical to our success and our ability to compete. If we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology. Unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technology despite our efforts to protect our intellectual property. In addition, we license our technology and intellectual property to third parties, including in some cases, our competitors, which could under some circumstances make our patent rights more difficult to enforce. Third parties could also obtain licenses to some of our intellectual property as a consequence of a merger or acquisition. Also, our participation in standard setting organizations or industry initiatives may require us to license our patents to other companies that adopt certain standards or specifications. As a result of such licensing, our patents might not be enforceable against others who might otherwise be infringing those patents and the value of our intellectual property may be impaired.
Monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as the laws of the United States. Any claims or litigation that we have initiated or that we may initiate in the future to protect our proprietary technology could be time consuming and expensive and divert the attention of our technical and management resources whether or not the claims or litigation are decided in our favor. Litigation is inherently uncertain, and there is no assurance that any litigation we initiate will have a successful outcome. Enforcing our rights could subject us to claims that the intellectual property right is invalid, is otherwise not enforceable, or is licensed to the party against whom we are asserting a claim. Also, assertion of our intellectual property rights could result in the other party seeking to assert alleged intellectual property rights of its own or assert other claims against us, which could harm our business.
We currently have numerous patents issued and a number of patent applications pending in the United States and other countries. These patents may be limited in value in asserting our intellectual property rights against more established companies in the computer technology sector that have sizable patent portfolios and greater capital resources. In addition, patents may not be issued from these patent applications, and even if patents are issued, they may not benefit us or give us adequate protection from competing products. For example, issued patents might be circumvented or challenged, and could be declared invalid or unenforceable. Moreover, if other companies develop unpatented proprietary technology similar to ours or competing technologies, our competitive position will be weakened.
If we are found to have violated the intellectual property rights of others, we could be required to indemnify our

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customers, resellers or suppliers, redesign our products, pay significant royalties and enter into license agreements with third parties.
Our industry is characterized by a large number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. As we continue our business, expand our product lines and our product functionality, and expand into new jurisdictions around the world, third parties may assert that our technology or products violate their intellectual property rights. Because of technological changes and the extent of issued patents in our industry, it is possible that certain components of our products and business methods may unknowingly infringe existing patents of others. Any claim, regardless of its merits, could be expensive and time consuming to defend against. Such claims would also divert the attention of our technical and management resources. Successful intellectual property claims against us could result in significant financial liability, impair our ability to compete effectively, or prevent us from operating our business or portions of our business. In addition, resolution of claims may require us to redesign our technology, to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms or at all, to cease using the technology covered by those rights, and to indemnify our customers, resellers or suppliers. Any of these events could result in unexpected expenses, negatively affect our competitive position and materially harm our business, financial condition and results of operations.
In addition, we are also subject to risks related to ownership of our patentable inventions as a result of recent changes in U.S. patent law under the America Invents Act, pursuant to which the United States is transitioning from a “first-to-invent” system to a “first-to-file” system for patent applications filed on or after March 16, 2013. Accordingly, with respect to patent applications filed on or after March 16, 2013, even if we are the first to invent, we will not obtain ownership of an invention unless we are the first to file a patent application or can establish that such an earlier filing is derived from a previous public disclosure of our inventive work. If we are the first to invent but not the first to file a patent application, we will not be able to fully protect our intellectual property rights and may be found to have violated the intellectual property rights of others if we continue to operate in the absence of a patent issued to us. If we are not the first to file one or more patent applications to protect our intellectual property rights when the new patent regime becomes effective, we may be required to redesign our technology, cease using the related technology or attempt to license rights from another party, any of which could materially harm our business, financial condition and results of operations.
Our use of open source and third-party software could impose unanticipated conditions or restrictions on our ability to commercialize our products.
We incorporate open source software into our products. Open source software is made available to us and to the public by its authors or other third parties under licenses that impose certain obligations on licensees in the event those licensees re-distribute or make derivative works of the open source software. The terms of many open source licenses have not been interpreted by United States or other courts, and these licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products. In this event, we could be required to seek licenses from third parties in order to continue offering our products, to make generally available, in source code form, proprietary code that links to certain open source modules, to re-engineer our products, or to discontinue the sale of our products if re-engineering could not be accomplished on a timely basis, any of which might harm our business, operating results and financial condition.
Adverse litigation results could affect our business.
We may be subject to legal claims or regulatory matters involving consumer, stockholder, competition and other issues on a global basis. Litigation can be lengthy, expensive and disruptive to our operations, and results cannot be predicted with certainty. An adverse decision could include monetary damages or, in cases for which injunctive relief is sought, an injunction prohibiting us from manufacturing or selling one or more of our products. If we were to receive an unfavorable ruling on a matter, our business, operating results or financial condition could be materially harmed. Additional information regarding certain of the lawsuits we are involved in is discussed under "Legal Proceedings" in Part I, Item 3 of this Annual Report on Form 10-K.
We may not fully realize the anticipated positive impacts to future financial results from our restructuring efforts.
We are currently undergoing restructuring efforts to streamline operations and reduce operating expenses in Europe and we may undergo additional restructuring efforts in the future. Our ability to achieve the anticipated cost savings and other benefits from our restructuring efforts within expected time frames is subject to many estimates and assumptions, and may vary materially based on factors such as negotiations with third parties. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. There can be no assurance that we will fully realize the anticipated positive impacts to future financial results from our current or future restructuring efforts. If our estimates and assumptions are incorrect or if other unforeseen events occur, we may not achieve the cost savings expected from such restructurings, and our business and results of operations could be adversely affected.

24


Changes in accounting principles or standards, or in the way they are applied, could result in unfavorable accounting charges or effects and unexpected financial reporting fluctuations, and could adversely affect our reported operating results.
We prepare our consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP"). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles and guidance. A change in existing principles or guidance can have a significant effect on our reported results and may retroactively affect previously reported results. Additionally, proposed accounting standards could have a significant impact on our operational processes, revenues and expenses, and could cause unexpected financial reporting fluctuations.
For example, the Financial Accounting Standards Board ("FASB") is currently working together with the International Accounting Standards Board ("IASB") to converge certain accounting principles and facilitate more comparable financial reporting between companies that are required to follow GAAP and those that are required to follow International Financial Reporting Standards ("IFRS"). These efforts may result in different accounting principles under GAAP, which may have a material impact on the way in which we report financial results in areas including, but not limited to, revenue recognition, lease accounting, and financial statement presentation. We expect the SEC to make a determination regarding the incorporation of IFRS into the financial reporting system for U.S. companies. A change in accounting principles from GAAP to IFRS may have a material impact on our financial statements and may retroactively adversely affect previously reported transactions.
We are subject to evolving corporate governance and public disclosure regulations that have increased both our compliance costs and the risk of noncompliance, which could have an adverse effect on our stock price.
We are subject to changing rules and regulations promulgated by a number of governmental and self-regulated organizations, including the SEC, the NASDAQ Global Select Market, and the Financial Accounting Standards Board. These rules and regulations continue to evolve in scope and complexity and many new requirements have been created in response to laws enacted by Congress, making compliance more difficult and uncertain. For example, Congress recently passed the Dodd-Frank Wall Street Reform and Protection Act. Our efforts to comply with the Dodd-Frank Act and other new regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
Some provisions in our certificate of incorporation and bylaws may deter third parties from acquiring us.
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our board of directors, including the following:
limitations on persons authorized to call a special meeting of stockholders;
our stockholders may take action only at a meeting of stockholders and not by written consent;
our certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval; and
advance notice procedures required for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and cause us to take other corporate actions they desire.

Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Our properties consist of leased and owned facilities used for manufacturing, warehouse, sales and marketing, research and development, services and support, and administrative purposes worldwide. As of June 29, 2012, we owned or leased approximately 746,000 square feet of space in our domestic and international locations. We owned 36% of this space and leased the remaining 64%. Included in these amounts are approximately 4,000 square feet of vacated space, which we sublease to a third-party.
Approximately 85% of our owned and leased properties are located in the United States. These domestic locations are primarily located in Fremont, California, which is our corporate headquarters, and in Chippewa Falls, Wisconsin, which is where our manufacturing and warehouse facilities are located. Our international locations, which comprise approximately 15% of all our properties, are mainly located in Tokyo, Japan, Shanghai, China, and Winnersh, United Kingdom. Our international

25


properties are primarily used for sales, services, research and development and administrative offices.
We believe that our existing properties are in good condition, are suitable for the conduct of our business, and appropriately support our current business needs.

Item 3. Legal Proceedings
We are involved in various legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, patent infringement actions, contract disputes, and other matters. We do not know whether we will prevail in these matters nor can we assure that any remedy could be reached on commercially viable terms, if at all. Based on currently available information, we believe that we have meritorious defenses to these actions and that the resolution of these cases is not likely to have a material adverse effect on our business, financial position or future results of operations. We record a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case.
On May 1, 2007, Legacy SGI received a legal notice from counsel to Bharat Heavy Electricals Ltd. (“BHEL”), located in India, alleging delay in and failure to deliver products and technical problems with its hardware and software in relation to the establishment of a facility in Hyderabad. We assumed this claim in connection with our acquisition of Legacy SGI assets, and are currently engaged in arbitration. On January 21, 2008, BHEL filed its statement of claim against Silicon Graphics Systems (India) Pvt. Ltd. for a sum of Indian Rupee (“INR”) 78,478,200 ($1.4 million based on the conversion rate on June 29, 2012) plus interest and costs. On February 29, 2008, we filed our reply as well as a counter claim for a sum of INR 27,453,007 ($0.5 million based on the conversion rate on June 29, 2012) plus interest and costs. The proceeding has commenced, witness testimony is now complete and the parties have been instructed to submit final arguments by the next hearing date. A date for the next hearing has not been set. We cannot currently predict the outcome of this dispute nor determine the amount or a reasonable range of potential loss, if any.

Item 4. Mine Safety Disclosures
Not applicable.

26


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
Market Information
Our common stock started trading on the NASDAQ National Market under the symbol “RACK” on June 10, 2005 and, commencing in 2006, on the NASDAQ Global Select Market. On May 18, 2009, we changed our name to Silicon Graphics International Corp. and changed our NASDAQ stock ticker symbol to “SGI”. Prior to June 10, 2005, there was no public market for our common stock. The following table sets forth for the periods indicated the high and low sale prices of our common stock, as reported by the NASDAQ Markets.
Fiscal Year Ending June 29, 2012
 
High
 
Low
Fourth Quarter
 
$
10.11

 
$
5.02

Third Quarter
 
14.93

 
8.36

Second Quarter
 
16.10

 
10.24

First Quarter
 
17.71

 
11.29

 
 
 
 
 
Fiscal Year Ending June 24, 2011
 
High
 
Low
Fourth Quarter
 
$
22.95

 
$
14.56

Third Quarter
 
19.92

 
8.77

Second Quarter
 
9.72

 
6.83

First Quarter
 
8.28

 
5.84

Holders
As of August 31, 2012, there were 32,719,006 shares of our common stock outstanding held by ten registered holders of record. A substantially greater number of holders of our outstanding common stock are “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.
Dividends
We have never declared or paid any dividends on our capital stock. Our current credit facility restricts our ability to declare or pay dividends. We currently intend to retain any future earnings to fund the development and expansion of our business, and therefore we do not anticipate paying cash dividends on our common stock in the foreseeable future.
Recent Sale of Unregistered Securities
None
Issuer Purchases of Equity Securities
None

27


Performance Graph (2)
The following graph shows the cumulative total stockholder return of an investment of $100 in cash on December 31, 2006 through June 29, 2012, for (i) our common stock, (ii) the NASDAQ Composite Index and (iii) the RDG Technology Composite Index. Pursuant to applicable SEC rules, all values assume reinvestment of the full amount of all dividends; however, no dividends have been declared on our common stock to date. The stockholder return shown on the graph below is not necessarily indicative of future performance, and we do not make or endorse any predictions as to future stockholder returns.
 
 
12/31/2006
 
12/29/2007
 
1/3/2009
 
6/26/2009
 
6/25/2010
 
6/24/2011
 
6/29/2012
Silicon Graphics International Corp.
 
100.00

 
31.39

 
13.27

 
14.79

 
26.19

 
49.69

 
20.73

NASDAQ Composite
 
100.00

 
103.55

 
93.91

 
77.90

 
88.40

 
117.68

 
122.98

RDG Technology Composite
 
100.00

 
115.01

 
105.13

 
81.51

 
94.72

 
122.65

 
133.06

 
(2)
This graph and data are not “soliciting material,” are not deemed “filed” with the SEC and are not to be incorporated by reference in any filing of Silicon Graphics International Corp. under the 1933 Act or the 1934 Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

28


Item 6. Selected Financial Data
The following selected summary consolidated financial data should be read in conjunction with Part II, Item 8. “Financial Statements and Supplementary Data,” and with Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.
On June 19, 2009, our Board of Directors approved a change in our fiscal year end from the Saturday closest to December 31st of each year to the last Friday in June of each year. As a result of this change, we had a six month transition period, which began on January 4, 2009 and ended on June 26, 2009. Accordingly, our fiscal year 2010 began on June 27, 2009 following a transition period that ended June 26, 2009. Additionally, this change in year end resulted in the quarter ended June 26, 2009 containing 83 days versus a standard 91 day quarter. The change in fiscal year end was made to facilitate the integration and consolidated reporting of the businesses and other related assets acquired and liabilities assumed from the acquisition of Legacy SGI.
 
 
Fiscal Year Ended
 
Six Months
Ended
June 26,
2009
June 29,
2012 
 
June 24,
2011 
 
June 25,
2010 
 
January 3,
2009 (3)
 
December 29,
2007 (3)
 
 
(in thousands, except per share amounts)
Revenue
 
$
752,987

 
$
629,568

 
$
403,717

 
$
247,430

 
$
350,684

 
$
102,777

Gross profit (1)
 
193,817

 
169,812

 
89,589

 
29,438

 
47,244

 
7,777

Loss from continuing operations before income taxes (2)
 
(23,460
)
 
(19,991
)
 
(93,302
)
 
(30,911
)
 
(29,049
)
 
(16,433
)
Income tax provision (benefit) from continuing operations
 
1,001

 
1,242

 
(4,441
)
 
376

 
12,531

 
(2,242
)
Net loss from continuing operations
 
(24,461
)
 
(21,233
)
 
(88,861
)
 
(31,287
)
 
(41,580
)
 
(14,191
)
Income (loss) from discontinued operations
 

 

 
409

 
(25,896
)
 
(33,941
)
 
(20
)
Income tax benefit from discontinued operations
 

 

 

 
(2,955
)
 
(5,964
)
 

Income (loss) from discontinued operations, net of tax
 

 

 
409

 
(22,941
)
 
(27,977
)
 
(20
)
Net loss
 
$
(24,461
)
 
$
(21,233
)
 
$
(88,452
)
 
$
(54,228
)
 
$
(69,557
)
 
$
(14,211
)

 
 
 
 
 
 
 
 
 
 
 
 
Basic and diluted net (loss) income per share:
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.77
)
 
$
(0.69
)
 
$
(2.95
)
 
$
(1.06
)
 
$
(1.45
)
 
$
(0.48
)
Discontinued operations
 

 

 
0.01

 
(0.77
)
 
(0.97
)
 

Net loss per share
 
$
(0.77
)
 
$
(0.69
)
 
$
(2.94
)
 
$
(1.83
)
 
$
(2.42
)
 
$
(0.48
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares used in computing basic and diluted net loss per share:
 
31,653

 
30,608

 
30,130

 
29,583

 
28,786

 
29,798

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
June 29,
2012 
 
June 24,
2011
 
June 25,
2010
 
June 26,
2009
 
January 3,
2009
 
December 29,
2007
 
 
(in thousands)
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
104,851

 
$
139,868

 
$
129,343

 
$
128,714

 
$
171,954

 
$
49,897

Working capital
 
112,960

 
133,970

 
124,495

 
168,687

 
216,315

 
249,929

Total assets
 
496,880

 
538,009

 
497,212

 
441,636

 
285,493

 
352,458

Total liabilities
 
385,988

 
414,723

 
362,283

 
223,537

 
54,004

 
76,340

Total stockholders’ equity
 
110,892

 
123,286

 
134,929

 
218,099

 
231,489

 
276,118

(1)
Gross profit includes the following items:

29


 
 
Fiscal Year Ended
 
Six Months
Ended
June 26,
2009
 
 
June 29,
2012 
 
June 24,
2011
 
June 25,
2010
 
January 3,
2009
 
December 29,
2007
 
 
 
(in thousands)
Share-based compensation
 
$
1,359

 
$
685

 
$
691

 
$
1,120

 
$
2,152

 
$
423

(2)
Loss from continuing operations before income taxes includes the following items:
 
 
Fiscal Year Ended
 
Six Months
Ended
June 26,
2009
 
 
June 29,
2012 
 
June 24,
2011
 
June 25,
2010
 
January 3,
2009
 
December 29,
2007
 
 
 
(in thousands)
Share-based compensation
 
$
10,061

 
$
5,898

 
$
4,827

 
$
9,152

 
$
21,083

 
$
3,215

Restructuring charges
 
2,469

 
5,072

 
5,213

 
685

 

 
1,270

Acquisition-related
 

 
1,271

 
(3,264
)
 

 

 
6,070

Impairment of investments and long-lived assets
 
527

 

 

 

 
2,820

 

Gain from settlement agreement
 

 

 

 

 

 
(5,000
)
Gain from acquisition
 

 

 

 

 

 
(19,831
)
Total charges
 
$
13,057

 
$
12,241

 
$
6,776

 
$
9,837

 
$
23,903

 
$
(14,276
)
(3)
Information has been restated to present the results of our Rapidscale™ product line as discontinued operations. See Note 20 "Discontinued Operations" to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

30


ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The discussions in this section contain forward-looking statements that involve risks and uncertainties, and actual results could differ materially from those discussed below. See “Item 1A—Risk Factors” and “Cautionary Statement Regarding Forward-Looking Information” at the beginning of this Annual Report on Form 10-K for a discussion of these risks and uncertainties.
Overview
Business Summary
We are a global leader in technical computing. We are focused on helping customers solve their most demanding business and technology challenges by delivering large-scale computing and storage, high-performance compute and storage, and data center solutions. We develop, market, and sell a broad line of low cost, mid-range and high-end computing servers and data storage as well as differentiating software. We sell data center infrastructure products purpose-built for large-scale data center deployments. In addition, we provide global customer support and professional services related to our products. We enable enterprises to meet their computing and storage requirements at a lower total cost of ownership and provide them greater flexibility and scalability. We are also a leading developer of enterprise class, high-performance features for the Linux operating system that provide our customers with a standard Linux operating environment combined with our differentiated yet un-intrusive Linux capabilities that are designed to improve performance, simplify system management, and provide a more robust development environment.
Management has implemented a strategic plan which will drive changes in three major areas. Going forward we will target our investments towards the vertical markets where we can provide the highest value to our customers and differentiate our offerings to gain both market share and margin. We will also align with key partners in order to provide our customers with integrated solutions. Management is also focusing on initiatives to improve our operational performance and cost structure. We have ongoing efforts to reduce material and other manufacturing costs and have plans to execute additional restructuring in fiscal 2013. We believe that this strategic plan will help create a strong foundation for our business results in the long-term.
Technical computing
We remain focused on expanding our opportunities within the technical computing market. We are focused on scientific and commercial HPC, public and private clouds, persistent and real time data storage, and emerging big data opportunities. The barriers to enter the technical computing market are high and the technical computing marketplace requires the ability to translate complex customer requirements into architected, ready-to-deploy solutions with an expert sales force. Customer trust and proven relationships, deep technical and scientific domain expertise, strategic industry partnerships, expertise across many vertical industry markets, global delivery capabilities, and products designed at extremes of scale and speed are all key criteria for competing in the technical computing market. We have a strong track record of driving innovation in this market. During fiscal 2012, we introduced new product offerings, including SGI® UV™ 2, SGI® ICE™ X and and SGI® Modular InfiniteStorage™ products.
Diversifying our business
On March 9, 2011, we acquired the remaining outstanding shares of SGI Japan and SGI Japan became our wholly-owned subsidiary. We acquired SGI Japan to serve as a strategic entry into the large technical computing market of Japan and to enable us to extend our global reach, accelerate growth opportunities, and strengthen the relationships with our partners and customers in Japan.
Our revenue mix by geography shows that we are expanding our international presence. In fiscal 2012, 41% of our total revenue was generated from our international locations compared to 38% in fiscal 2011 and 25% in fiscal 2010. For each of fiscal 2012, 2011 and 2010, Amazon was our only customer that contributed to more than 10% of total revenue. Our customer base continues to expand in various sectors, including the public, cloud and manufacturing sectors.
Basis of Presentation
Financial periods presented and discussed will be as follows: (i) the year ended June 29, 2012 represents the 53-week fiscal year ended June 29, 2012 ("fiscal 2012"); (ii) the year ended June 24, 2011 represents the 52-week fiscal year ended June 24, 2011 ("fiscal 2011"); and (iii) the year ended June 25, 2010 represents the 52-week fiscal year ended June 25, 2010 ("fiscal 2010").

31


Significant events
Our financial results during fiscal 2012, 2011 and 2010 were affected by certain significant events that should be considered in comparing the periods presented.
Acquisition of SGI Japan, Ltd.
On March 9, 2011, we acquired the remaining outstanding shares of SGI Japan. Prior to the Closing Date, we owned approximately 10% of the outstanding shares of SGI Japan and accounted for such investment as a cost method investment. SGI Japan operates primarily as a seller and servicer of high-performance computing, visualization, data center, and media and archive systems in Japan. The total purchase price was approximately $17.9 million in cash, $1.8 million of which was placed in escrow to secure our indemnification rights under the Stock Purchase Agreement. The acquisition provided us with a strategic entry into the large technical computing market of Japan and has enabled us to extend our global reach, accelerate growth opportunities, and strengthen the relationships with our partners and customers in Japan. Furthermore, the acquisition has enabled us to more fully participate in the Japanese HPC market and benefit from SGI Japan's extensive service business.
Copan Systems, Inc.
On February 23, 2010, we completed the acquisition of substantially all the assets of Copan Systems, Inc. (“Copan”) and assumed certain liabilities for $2.0 million in cash.
Change in Segment Reporting
In the quarter ended September 30, 2011, we started managing our business primarily on a geographic basis. Our operating and reporting segments consist of the Americas, Europe, and Asia-Pacific operations. The Americas segment includes both North and South America. The Europe segment ("EMEA") includes European countries, as well as the Middle East and Africa. The Asia-Pacific segment ("APJ") includes Australia, Japan, and other Asian countries. Each operating segment provides similar hardware and software products and similar services. We do not aggregate any of the operating segments in determining our reporting segments. Prior to this change, we reported our operating segments as product and service segments.
Restructuring action in Europe
On March 16, 2012, our Board of Directors approved a restructuring action (the "Fiscal 2012 Restructuring Action") to reduce approximately 25% of our European workforce and close certain legal entities and offices in Europe. We adopted the Fiscal 2012 Restructuring Action to streamline operations and reduce operating expenses in Europe.
In connection with the Fiscal 2012 Restructuring Action, we expect to incur pre-tax cash charges between $14.0 million and $17.0 million, which consist of pre-tax cash charges between $13.0 million and $16.0 million for employee termination benefits, and up to $1.0 million for the planned office and legal entity closures, which expenses include contract termination costs and other associated costs. We expect to recognize the majority of the expense associated with the employee termination benefits prior to the third quarter of fiscal 2013. The closure of offices and legal entities are expected to take up to 18 months and the related expenses are expected to be recognized over that period of time. Upon completion of the Fiscal 2012 Restructuring Action, we expect to realize annualized savings of approximately $7.0 million to $7.5 million in the aggregate.



32


Results of Operations
We have included the operating results associated with the acquisitions of SGI Japan and Copan in our consolidated financial statements only for the periods since the date of the acquisition in March 2011 and February 2010, respectively. This inclusion has significantly affected our revenues, results of operations and financial position.
Comparison of the Fiscal Years Ended June 29, 2012 and June 24, 2011
Financial Highlights
Our total revenue increased $123.4 million or 20% to $753.0 million in fiscal 2012 from $629.6 million in fiscal 2011. The increase in revenue was primarily due to higher sales from our scale out server and storage products as well as from customer support and professional service offerings. We also generated a significant amount of revenue from SGI Japan, which we acquired in March 2011.
Our overall gross margin decreased by130 basis points from 27.0% in fiscal 2011 to 25.7% in fiscal 2012. Our gross margin was negatively impacted by a $10.1 million inventory write down to reflect reduced demand for manufacturing parts for earlier generation products and a revaluation of spare inventories to reflect reduced expected usage. The decrease in gross margin was primarily caused by the excess and obsolete charges.
Total operating expenses increased $26.5 million or 14% to $215.3 million in fiscal 2012 from $188.8 million in fiscal 2011. The increase was primarily due to incremental expenses incurred as a result of our acquisition of SGI Japan primarily for employee compensation and facilities costs. Our fiscal 2011 results only include expenses for SGI Japan from March 2011 or about four months, compared to a full year of expenses in fiscal 2012. Our total headcount was about flat from fiscal 2011 with over 1500 employees worldwide as of June 29, 2012. This included approximately 230 employees which were brought on as part of the SGI Japan acquisition.
We incurred restructuring expense of $2.5 million for fiscal 2012, as compared to $5.1 million for fiscal 2011 related to the restructuring actions.
Revenue
The following table presents revenue by operating segment for fiscal 2012 and 2011 (presented on a contractual basis):
 
 
 
Fiscal Year Ended
 
Change
 
June 29,
2012
 
June 24,
2011
 
$
 
%
 
 
 
 
(in thousands, except percentages)
 
Total Revenue
 
 
 
 
 

 

 
Americas
 
473,746

 
412,102

 
61,644

 
15
 %
 
APJ
 
170,392

 
102,327

 
68,065

 
67
 %
 
EMEA
 
108,849

 
115,139

 
(6,290
)
 
(5
)%
 
Total revenue
 
752,987

 
629,568

 
123,419

 
20
 %
 
 
 
 
 
 
 
 
 
 
 
Product Revenue
 
 
 
 
 
 
 
 
 
Americas
 
387,165

 
311,973

 
75,192

 
24
 %
 
APJ
 
94,494

 
68,641

 
25,853

 
38
 %
 
EMEA
 
75,074

 
84,563

 
(9,489
)
 
(11
)%
 
Total product revenue
 
556,733

 
465,177

 
91,556

 
20
 %
 
 
 
 
 
 
 
 
 
 
 
Service Revenue
 
 
 
 
 
 
 
 
 
Americas
 
86,581

 
100,129

 
(13,548
)
 
(14
)%
 
APJ
 
75,898

 
33,686

 
42,212

 
125
 %
 
EMEA
 
33,775

 
30,576

 
3,199

 
10
 %
 
Total service revenue
 
196,254

 
164,391

 
31,863

 
19
 %
 
 
 
 
 
 
 
 
 
 

Revenue. We derive revenue from the sale of products and services directly to end-users as well as through resellers and

33


system integrators. Product revenue is derived from the sale of mid-range to high-end computing servers and data storage systems as well as software. We enter into sales contracts to deliver multiple products and/or services. In accordance with our revenue recognition policy, certain sales contracts are deferred and recognized over the service period. Service revenue is generated from the sale of standard maintenance contracts as well as custom maintenance contracts that are tailored to individual customers' needs. We recognize service revenue ratably over the service periods. Maintenance contracts are typically between one to three years in length and we actively pursue renewals of these contracts. We also generate professional services revenue related to implementation of and training on our products.
Our continuous introduction of new products and improvements of our product's performance and data storage capacity means that we are unable to directly compare our products from period to period, and therefore, we are unable to quantify the changes in pricing of our products from period to period. We believe that our on-going introduction of new products and product features help mitigate competitive pricing pressures by shifting the competitive landscape to differentiated value rather than price.
Consistent with our strategy to extend our global reach and accelerate our growth opportunities, our international revenues grew to 41% of our total revenue during fiscal 2012 compared to 38% during fiscal 2011. The increase in international revenue as a percentage of total revenue is attributable primarily to the acquisition of SGI Japan for fiscal 2012.
Americas
Revenue increased $61.6 million or 15% to $473.7 million in fiscal 2012 from $412.1 million in fiscal 2011. The increase in Americas revenue was driven by higher product revenue partially offset by a decline in service revenue. Product revenue increased by $75.2 million driven by the strength in sales of our scale out servers and storage products. Service revenue decreased $13.5 million despite having one additional week in fiscal 2012 compared to fiscal 2011. The decrease is primarily attributable to lower support revenue as our new products replace our installed base of older generation products with higher margin support contracts. The Americas segment represented 63% and 66% of the total revenue in fiscal 2012 and 2011, respectively.
APJ
Revenue increased $68.1 million or 67% to $170.4 million in fiscal 2012 from $102.3 million in fiscal 2011. Our higher revenue in APJ was primarily due to the acquisition of SGI Japan in March 2011, which contributed $130.9 million of revenue in fiscal 2012 compared to $67.4 million in fiscal 2011. Of the $67.4 million of revenue, $15.7 million is the revenue we recognized during the period SGI Japan was a customer and $51.7 million is revenue recognized by the Company after the acquisition of SGI Japan. Our revenue for fiscal 2012 is comprised of $94.5 million from product sales and $75.9 million from services compared to product and service revenue of $68.6 million and $33.7 million, respectively, for fiscal 2011. The APJ segment represented 23% and 16% of the total revenue in fiscal 2012 and 2011, respectively.
EMEA
Revenue decreased $6.3 million or 5% to $108.8 million in fiscal 2012 from $115.1 million in fiscal 2011. The decrease in revenue was primarily attributable to a decrease in product revenue of $9.5 million as a result of lower server and storage sales. This decrease was partially offset by an increase in service revenue of $3.2 million due to one additional week in fiscal 2012 compared to fiscal 2011. The EMEA segment represented 14% and 18% of the total revenue in fiscal 2012 and 2011, respectively.

34


Cost of revenue, gross profit and gross margin.
The following table presents cost of revenue, gross profit and gross margin for fiscal 2012 and 2011 (presented on a contractual basis as fully described in Note 21 to our Consolidated Financial Statements at Item 8):
 
 
 
Fiscal Year Ended
 
Change
 
June 29,
2012
 
June 24,
2011
 
$
 
%
 
 
 
 
(in thousands, except percentages)
 
Product revenue
 
$
556,733

 
$
465,177

 
$
91,556

 
20
%
 
Service revenue
 
196,254

 
164,391

 
31,863

 
19
%
 
Total revenue
 
$
752,987

 
$
629,568

 
$
123,419

 
20
%
 
 
 
 
 
 
 
 
 
 
 
Cost of product revenue
 
$
447,147

 
$
367,393

 
$
79,754

 
22
%
 
Cost of service revenue
 
112,023

 
92,363

 
19,660

 
21
%
 
Total cost of revenue
 
$
559,170

 
$
459,756

 
$
99,414

 
22
%
 
 
 
 
 
 
 
 
 
 
 
Product gross profit
 
$
109,586

 
$
97,784

 
$
11,802

 
12
%
 
Service gross profit
 
84,231

 
72,028

 
12,203

 
17
%
 
Total gross profit
 
$
193,817

 
$
169,812

 
$
24,005

 
14
%
 
 
 
 
 
 
 
 
 
 
 
Product gross margin
 
19.7
%
 
21.0
%
 


 
 
 
Service gross margin
 
42.9
%
 
43.8
%
 


 
 
 
Overall gross margin
 
25.7
%
 
27.0
%
 


 
 
Cost of revenue consists of costs associated with direct material, labor, manufacturing overhead, shipment of products, inventory write downs and share-based compensation. Cost of revenue also includes personnel costs for providing maintenance and professional services. Our manufacturing overhead and professional services personnel costs are fixed or semi-variable. Our gross margins are impacted by changes in customer and product mix, pricing actions by our competitors and commodity prices that comprise a significant portion of cost of revenue from period to period. Further when certain sales contracts are deferred in accordance with our revenue recognition policy, the related cost of revenue is deferred and recognized upon recognition of revenue.
Our cost of revenue and gross profit are impacted by price changes, product configuration, revenue mix and product material costs. Our service cost of revenue and gross margin are impacted by timing of support service initiations and renewals, and incremental investments in our customer support infrastructure.
Our headcount in the manufacturing and services organization decreased from 680 employees at June 24, 2011 to 649 employees at June 29, 2012.
Overall gross profit increased $24.0 million or 14% to $193.8 million in fiscal 2012 from $169.8 million in fiscal 2011. However, overall gross margin percentage decreased to 25.7% in fiscal 2012 from 27.0% in fiscal 2011 due to a $10.1 million inventory write down to reflect reduced demand for manufacturing parts for earlier generation products and a revaluation of spare inventory to better reflect expected usage.
Product gross profit increased $11.8 million or 12% to $109.6 million in fiscal 2012 from $97.8 million in fiscal 2011. Product gross margin percentage decreased to 19.7% in fiscal 2012 from 21.0% in fiscal 2011. Our increase in product gross profit during fiscal 2012 is driven by the incremental volume of sales primarily due from our acquisition of SGI Japan in March 2011. The total product gross margin decrease is attributable to an increase in inventory write offs of $10.0 million from $3.0 million in fiscal 2011 related to the write down of earlier generation products as discussed above as well as unfavorable product mix shifts to lower margin products and competitive pricing in EMEA.
Service gross profit increased $12.2 million or 17% to $84.2 million in fiscal 2012 from $72.0 million in fiscal 2011. Service gross margin slightly decreased to 42.9% in fiscal 2012 from 43.8% in fiscal 2011. The total service gross margin decrease is attributable to an increase in the valuation charge of spare parts of $6.3 million from $2.7 million in fiscal 2011 related to the earlier generation products and to better reflect the expected usage.

35


Operating expenses
Operating expenses for fiscal 2012 and 2011 were as follows:
 
 
 
Fiscal Year Ended
 
Change
 
 
 
June 29,
2012
 
June 24,
2011
 
$
 
%
 
 
 
 
(in thousands, except percentages)
 
Research and development
 
$
62,356

 
$
54,067

 
$
8,289

 
15
 %
 
Sales and marketing
 
88,414

 
75,813

 
12,601

 
17
 %
 
General and administrative
 
62,021

 
52,578

 
9,443

 
18
 %
 
Restructuring
 
2,469

 
5,072

 
(2,603
)
 
(51
)%
 
Acquisition-related
 

 
1,271

 
(1,271
)
 
(100
)%
 
Total operating expense
 
$
215,260

 
$
188,801

 
$
26,459

 
14
 %
Research and development. Research and development expense consists primarily of personnel and related costs, contractor fees, new component testing and evaluation, test equipment, new product design and testing, other product development activities, share-based compensation, and facilities and information technology costs.
Research and development expense increased $8.3 million or 15% to $62.4 million in fiscal 2012 from $54.1 million in fiscal 2011. The increase in research and development expense is primarily due to incremental expenses incurred as a result of our acquisition of SGI Japan. Our fiscal 2011 results only include expenses for SGI Japan from March 2011 or about four months, compared to a full year of expenses in fiscal 2012. Our headcount in research and development also increased by 45 employees from 293 at June 24, 2011 to 338 employees at June 29, 2012 as we continue to invest in research and development activities. As a result of the acquisition and the increased headcount, compensation and related expenses increased $3.9 million and share-based compensation increased $1.3 compared to fiscal 2011. These costs were partially offset by a decrease in third-party expenses of $1.1 million. We also incurred incremental expenses for materials and supplies primarily driven by the new product introductions of our UV2, ICEX and MIS products that were introduced during fiscal 2012.
We believe that focused investments in research and development are critical to our future performance and competitiveness in the marketplace. Our investments in this area will directly relate to enhancement of our current product line, development of new products that achieve market acceptance, and our ability to meet an expanding range of customer requirements. As such, we expect to continue to spend on current and future product development efforts.
Sales and marketing. Sales and marketing expense consists primarily of salaries, bonuses and commissions paid to our sales and marketing employees, amortization of intangible assets, share-based compensation, and facilities and information technology costs. We also incur marketing expenses for activities such as trade shows, direct mail and advertising.
Sales and marketing expense increased $12.6 million or 17% to $88.4 million in fiscal 2012 from $75.8 million in fiscal 2011. This increase was primarily due to incremental expenses incurred as a result of our acquisition of SGI Japan. Our fiscal 2011 results only include expenses from March 2011 or about four months, compared to a full year of expenses in fiscal 2012. Although headcount in sales and marketing decreased slightly as of the end of fiscal 2012 compared to the end of fiscal 2011, compensation and related expenses increased by $9.6 million due to the costs of the incremental headcount of approximately 100 employees from the SGI Japan acquisition for the full year compared to about four months for the prior year. In addition, commissions increased $1.2 million due to the increase in revenues. The increase in sales and marketing expense was also attributable to an increase in travel expenses of $1.1 million and share-based compensation expense of $0.6 million.
We will continue to deploy our sales and support organizations to focus on key vertical markets such as defense and strategic systems, weather and climate, physical sciences, life sciences, energy (including oil and gas), aerospace and automotive, media and entertainment, semiconductor design, manufacturing, financial services, data centers, and business intelligence and data analytics.
General and administrative. General and administrative expense consists primarily of personnel costs, legal and professional service costs, depreciation, share-based compensation, and facilities and information technology costs.
The general and administrative expense increased $9.4 million or 18% to $62.0 million in fiscal 2012 from $52.6 million in fiscal 2011. The increase in general and administrative expense is primarily due to incremental expenses incurred as a result of our acquisition of SGI Japan. Our fiscal 2011 results only include expenses from March 2011 or about four months, compared to a full year of expenses in fiscal 2012. As a result of the acquisition and a slight increase in headcount, compensation and related expenses increased by $3.2 million. Share-based compensation increased by $1.6 million compared to fiscal 2011, of which $1.4 million was due to the modification of certain terms of the vested options held by the Company's

36


former Chief Executive Officer and former Chief Financial Officer. The increase in general and administrative expense was also attributable to an increase in professional fees, including legal related expenses of $0.9 million, and $0.9 million of supplies and small equipment.
Restructuring. On March 16, 2012, the Company's Board of Directors approved a restructuring action to reduce approximately 25% of the Company's European workforce and close certain legal entities and offices in Europe in order to streamline operations and reduce operating expenses. Restructuring expense for fiscal 2012 was $2.5 million. As a result of the restructuring action undertaken, we anticipate future cash outflow of $14 million to $17 million, primarily during fiscal 2013. Prior to this action, on February 18, 2011, management approved the 2011 restructuring action, which resulted in restructuring expenses of $5.1 million for fiscal 2011.
Acquisition-related. On March 9, 2011, pursuant to a Stock Purchase Agreement dated March 8, 2011, we acquired the remaining outstanding shares of SGI Japan. In connection with the acquisition during fiscal 2011, we incurred acquisition-related costs of $1.3 million, which consisted primarily of costs related to due diligence, legal and other professional fees.
Total other (expense) income, net
Total other (expense) income, net for fiscal 2012 and 2011 was as follows:
 
 
Fiscal Year Ended
 
Change
 
 
June 29,
2012
 
June 24,
2011
 
$
 
%
 
 
 
 
(in thousands, except percentages)
Interest (expense) income, net
 
$
(297
)
 
$
95

 
$
(392
)
 
(413
)%
Other (expense) income, net
 
(1,720
)
 
(1,097
)
 
(623
)
 
57
 %
Total other (expense) income, net
 
$
(2,017
)
 
$
(1,002
)
 
$
(1,015
)
 
101
 %
Interest (expense) income, net. Interest (expense) income, net primarily consists of interest earned on our interest-bearing investment accounts which include money market funds, U.S. treasury bills, and auction rate securities ("ARS"), as well as interest expense relating to our credit facility and for certain tax payments. Interest (expense) income, net for fiscal 2012 consisted of interest expense from our credit facility of $0.6 million, offset by interest income of $0.2 million.
Other (expense) income, net. Other (expense) income, net in fiscal 2012 consisted primarily of foreign exchange losses as a result of the strengthening of the U.S. Dollar against the Euro. We plan to implement a balance sheet hedging program in order to actively manage and mitigate foreign exchange risk in fiscal 2013. In fiscal 2011, other (expense) income, net consisted primarily of impairment of our investment in SGI Japan of $2.9 million and $0.8 million in recognized losses on our investments in ARS. These losses were partially offset by foreign exchange gains of $2.6 million that resulted from the favorable exchange rate effect due to the strengthening of the Euro against the U.S. Dollar. We accounted for SGI Japan as a cost method investment prior to our acquisition in March 2011.
Income tax provision from continuing operations
Income tax provision from continuing operations for fiscal 2012 and 2011 was as follows:
 
 
Fiscal Year Ended
 
Change
 
 
June 29,
2012
 
June 24,
2011
 
$
 
%
 
 
 
 
(in thousands, except percentages)
Income tax provision from continuing operations
 
$
1,001

 
$
1,242

 
$
(241
)
 
(19
)%
We recorded tax expense of $1.0 million for fiscal 2012. Our tax expense for fiscal 2012 includes current and deferred tax expense primarily related to our foreign operations of $2.0 million, current tax expense attributable to the U.S. state income taxes of $0.2 million, and an offsetting benefit of $1.2 million for unrecognized tax benefits and related interest. The Company believes that it is more likely than not that the majority of the deferred tax assets of its foreign subsidiaries will not be realized. As such, the Company recorded deferred tax expense of $1.7 million related to the recording of valuation allowance for its foreign subsidiaries. The effective tax rate differed from the combined U.S. federal and state statutory income tax rates for fiscal 2012 primarily due to domestic operating losses generated during the period from which the Company does not benefit, current and deferred tax expense incurred by the Company's foreign subsidiaries, and a tax benefit associated with unrecognized tax benefits and related interest.
We recorded a tax expense of $1.2 million for fiscal 2011. Our tax expense for fiscal 2011 primarily related to our foreign

37


operations and included $1.2 million of unrecognized tax benefits and related interest. Additional amounts recorded include a discrete tax benefit of $1.6 million attributable to release of valuation allowance. The effective tax rate used to record the tax expense differed from the combined federal and net state statutory income tax rate for fiscal 2011 primarily due to domestic operating losses generated during the period from which the Company does not benefit, tax expense incurred by the Company's foreign subsidiaries with operating income, tax benefit attributable to release of valuation allowance, and tax expense associated with our unrecognized tax benefits and related interest.
As of June 29, 2012, we recorded a valuation allowance against the majority of our net deferred tax assets. Based on all available positive and negative evidence, on a jurisdictional basis, including our historical operating results, and the uncertainty of predicting our future income, the valuation allowance reduces the majority of our deferred tax assets to an amount that is more likely than not to be realized. The valuation allowance is attributable to U.S. federal, state and certain foreign deferred tax assets primarily consisting of net operating loss carryovers, tax credit carryovers, accrued expenses, and other temporary differences. We continue to evaluate the future realization of our deferred tax assets. If our assessment of deferred tax assets or the corresponding valuation allowance were to change, we would record the related adjustment to income tax expense during the period in which management makes the determination.
Comparison of the Fiscal Years Ended June 24, 2011 and June 25, 2010
Financial Highlights
Our total revenue significantly increased in fiscal 2011 compared to fiscal 2010. Our higher total revenue resulted partially from the required adoption of new accounting standards for revenue recognition which resulted in us recognizing more revenue upon delivery or acceptance and from an increase in sales of high performance compute server and storage products. The required adoption of these new accounting standards for revenue recognition resulted in $166.2 million and $104.1 million increases in total revenue and total cost of revenue in fiscal 2011, respectively. In addition, our acquisition of SGI Japan increased our total revenue by $51.7 million during fiscal 2011. We increased our overall gross margin by 480 basis points from 22.2% in fiscal 2010 to 27.0% in fiscal 2011. An approximate 370 basis point increase in our overall gross margin percentage is attributable to the adoption of the new revenue recognition standards.
As a result of increased total revenue and overall gross margin, our total gross profit increased $80.2 million or 90% to $169.8 million in fiscal 2011 from $89.6 million in fiscal 2010. Of the $80.2 million increase in total gross profit, $62.0 million is attributable to the adoption of the new accounting standards for revenue recognition required for fiscal 2011.
We incurred acquisition related costs of $1.3 million resulting from our purchase of all the remaining shares of SGI Japan. Prior to this acquisition, we owned approximately 10% of the outstanding shares of SGI Japan.
We incurred restructuring expense of $5.1 million for fiscal 2011, as compared to $5.2 million for fiscal 2010 related to the restructuring actions.


38


Revenue
The following table presents revenue for fiscal 2011 and 2010 (presented on a contractual basis):
 
 
Fiscal Year Ended
 
Change
June 24,
2011
 
June 25,
2010
 
$
 
%
 
 
(in thousands, except percentages)
Total Revenue
 
 
 
 
 
 
 
 
Americas
 
$
412,102

 
$
313,699

 
$
98,403

 
31
 %
APJ
 
102,327

 
37,531

 
64,796

 
173
 %
EMEA
 
115,139

 
52,487

 
62,652

 
119
 %
Total revenue
 
$
629,568

 
$
403,717

 
$
225,851

 
56
 %
 
 
 
 
 
 
 
 
 
Product Revenue
 
 
 
 
 
 
 
 
Americas
 
$
311,973

 
$
208,745

 
$
103,228

 
49
 %
APJ
 
68,641

 
26,515

 
42,126

 
159
 %
EMEA
 
84,563

 
20,747

 
63,816

 
308
 %
Total product revenue
 
$
465,177

 
$
256,007

 
$
209,170

 
82
 %
 
 
 
 
 
 
 
 
 
Service Revenue
 
 
 
 
 
 
 
 
Americas
 
$
100,129

 
$
104,954

 
$
(4,825
)
 
(5
)%
APJ
 
33,686

 
11,016

 
22,670

 
206
 %
EMEA
 
30,576

 
31,740

 
(1,164
)
 
(4
)%
Total service revenue
 
$
164,391

 
$
147,710

 
$
16,681

 
11
 %
 
 
 
 
 
 
 
 
 

Our products are highly configurable for customer requirements. Price changes, unit volumes, customer mix and product configuration can impact our revenues, cost of revenues and gross profit. Effective June 26, 2010, we adopted the provisions of Accounting Standards Update ("ASU") No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements, and ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements for new and materially modified arrangements originating after June 25, 2010. The new revenue recognition standards allows for deliverables for which revenue would have been previously deferred to be separated and recognized as delivered, rather than over the longest service delivery period as a single unit of accounting with other elements in the arrangement. The new revenue recognition standards were required to be adopted for fiscal years beginning on or after June 15, 2010. For fiscal 2011 and future periods, pursuant to the guidance of ASU 2009-13, when a sales arrangement contains multiple elements, such as products, software, customer support services, and or professional services, we will allocate revenue to each element based on a selling price hierarchy as described in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the Critical Accounting Policies and Estimates - Revenue Recognition below. In multiple element arrangements where software is essential to the functionality, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then recognized as one unit of accounting using the guidance for recognizing software revenue, as amended. The new revenue recognition standards permit prospective or retrospective adoption, and we elected prospective adoption.
Prior to the adoption of the new revenue recognition standards, we did not have a reasonable basis for separating product and service revenue as we had not been able to establish vendor-specific objective evidence of fair value of both the delivered and undelivered elements for our multiple-element arrangements. These multiple-element arrangements may include software products integrated with our hardware or include post-contract customer support. As a result of the adoption of the new revenue recognition standards, we now have a reasonable basis for separately presenting product and service for new and materially modified arrangements originating after June 25, 2010 as we are able to allocate revenue to each element within a multiple-element arrangement based on the aforementioned selling price hierarchy. However, as we did not have a reasonable basis for separating product and service revenue prior to the adoption of the new revenue recognition standards, revenue and related cost of revenue are presented in the table above on a contractual basis, which are the same metrics used by management for segment reporting, for fiscal 2011 and 2010.

39


Product revenue increased $209.2 million or 82% to $465.2 million in fiscal 2011 from $256.0 million in fiscal 2010. Of the $209.2 million increase in product revenue, $166.2 million is attributable to the adoption of the new revenue recognition standards which allows for us to generally recognize more product revenue upon shipment or acceptance. Excluding the impact from the adoption of the new revenue recognition standards, product revenue increased $43.0 million or 17% in fiscal 2011. During fiscal 2011, our product mix continued to shift to higher margin high performance compute server and storage products, driven by the strength in sales of our new Altix® UV and COPAN™ products. Both Altix® UV and COPAN™ products are new product offerings introduced in fiscal 2011. Altix® UV is our next generation shared-memory computer and continues to be well received in the marketplace. Consistent with the shift in product mix, our Amazon customer concentration moved from 20% of total revenue during fiscal 2010 to 12% during fiscal 2011. In addition, we recorded $29.1 million of product revenue from SGI Japan since its acquisition in the third quarter of fiscal 2011. If SGI Japan had not been acquired, we would have recorded $9.6 million of product revenue related to products sold to SGI Japan.
Service revenue increased $16.7 million or 11% to $164.4 million in fiscal 2011 from $147.7 million in fiscal 2010. This increase was primarily due to the service revenue of $22.5 million from SGI Japan that we recorded since its acquisition in the third quarter of fiscal 2011. If SGI Japan had not been acquired, we would not have recognized any service revenue from SGI Japan as prior to the acquisition, we did not sell services in Japan.
Consistent with our strategy to extend our global reach and accelerate our growth opportunities, our international revenues grew to 38% of our total revenue during fiscal 2011 compared to 25% during fiscal 2010. The increase in international revenue as a percentage of total revenue is attributable to the acquisition of SGI Japan and to the increase in total revenue in European region for fiscal 2011.
Our continuous introduction of new products and improvements of our product's performance and data storage capacity means that we are unable to directly compare our products from period to period, and therefore, we are unable to quantify the changes in pricing of our products from period to period. We believe that our on-going introduction of new products and product features help mitigate competitive pricing pressures by forcing our competitors to compete on the basis of product features, rather than on pricing.
Cost of revenue, gross profit and gross margin
The following table presents cost of revenue, gross profit and gross margin for fiscal 2011 and 2010 (presented on a contractual basis):
 
 
Fiscal Year Ended
 
Change
 
 
June 24,
2011
 
June 25,
2010
 
$
 
%
 
 
(in thousands, except percentages)
Product revenue
 
$
465,177

 
$
256,007

 
$
209,170

 
82
%
Service revenue
 
164,391

 
147,710

 
16,681

 
11
%
Total revenue
 
$
629,568

 
$
403,717

 
$
225,851

 
56
%
 
 
 
 
 
 
 
 


Cost of product revenue
 
$
367,393

 
$
229,913

 
$
137,480

 
60
%
Cost of service revenue
 
92,363

 
84,215

 
8,148

 
10
%
Total cost of revenue
 
$
459,756

 
$
314,128

 
$
145,628

 
46
%
 
 
 
 
 
 
 
 


Product gross profit
 
$
97,784

 
$
26,094

 
$
71,690

 
275
%
Service gross profit
 
72,028

 
63,495

 
8,533

 
13
%
Total gross profit
 
$
169,812

 
$
89,589

 
$
80,223

 
90
%
 
 
 
 
 
 
 
 
 
Product gross margin
 
21.0
%
 
10.2
%
 
 
 
 
Service gross margin
 
43.8
%
 
43.0
%
 
 
 
 
Overall gross margin
 
27.0
%
 
22.2
%
 
 
 
 

Our headcount in the manufacturing and services organization increased from 576 employees at June 25, 2010 to 680 employees at June 24, 2011. This includes 133 employees working in SGI Japan.

40


Overall gross profit increased $80.2 million or 90% to $169.8 million in fiscal 2011 from $89.6 million in fiscal 2010. Overall gross margin percentage increased to 27.0% in fiscal 2011 from 22.2% in fiscal 2010. An approximate 370 basis point increase in our overall gross margin percentage is attributable to the adoption of the new revenue recognition standards. Historically, our high performance compute server and storage products were deferred and amortized under the previous revenue recognition standards. With the adoption of the new revenue recognition standards, we are able to recognize revenue and gross profit on these products at the time of delivery or acceptance.
Product gross profit increased $71.7 million or 275% to $97.8 million in fiscal 2011 from $26.1 million in fiscal 2010. Product gross margin percentage increased to 21.0% in fiscal 2011 from 10.2% in fiscal 2010. Of the $71.7 million increase in product gross profit, $62.0 million is attributable to the adoption of the new revenue recognition standards. The adoption of the new revenue recognition standards impacted cost of product revenue by $104.2 million during fiscal 2011. In addition to the adoption of the new accounting standards for revenue recognition, our product gross profit and product gross margin percentage increased due to a change in mix shift to higher margin high performance compute server and storage products, including the increase in sales of our new Altix UV and COPAN products. Our increase in product gross profit and product gross margin during fiscal 2011 is also attributable to a decrease in inventory obsolescence to $3.0 million from $10.6 million in fiscal 2010. In addition, we recorded product gross profit of $4.8 million from SGI Japan since its acquisition in the third quarter of fiscal 2011. If SGI Japan had not been acquired, we would have recorded $3.0 million of product gross profit related to products sold to them.
Service gross profit increased $8.5 million or 13% to $72.0 million in fiscal 2011 from $63.5 million in fiscal 2010. Service gross margin slightly increased to 43.8% in fiscal 2011 from 43.0% in fiscal 2010. Of the $8.5 million increase in service gross profit, $7.2 million is attributable to service gross profit from the acquisition of SGI Japan.
Operating Expenses
Operating expenses for fiscal 2011 and 2010 were as follows:
 
 
Fiscal Year Ended
 
Change
 
 
June 24,
2011
 
June 25,
2010
 
$
 
%
 
 
 
(in thousands, except percentages)
Research and development
 
$
54,067

 
$
56,865

 
$
(2,798
)
 
(5
)%
Sales and marketing
 
75,813

 
64,831

 
10,982

 
17
 %
General and administrative
 
52,578

 
52,594

 
(16
)
 
 %
Restructuring
 
5,072

 
5,213

 
(141
)
 
(3
)%
Acquisition-related
 
1,271

 
(3,264
)
 
4,535

 
(139
)%
Total operating expense
 
$
188,801

 
$
176,239

 
$
12,562

 
7
 %
Research and development. Research and development expense decreased $2.8 million or 5% to $54.1 million in fiscal 2011 from $56.9 million in fiscal 2010. The decrease in research and development expense was due to a decrease in facilities related expenses of $1.9 million, of which $1.5 million is due to a decrease in depreciation expense as some of our fixed assets were fully depreciated as of June 25, 2010. In addition, the decrease in research and development expense is due to a decrease in purchases of materials and test equipment used for research and development activities of $1.3 million, a decrease in third-party consulting fees of $0.5 million, and a decrease in losses on disposal of property and equipment of $0.3 million. This decrease in research and development expenses was partially offset by an increase in compensation and related expenses of $0.6 million. Compensation and related expenses increased in fiscal 2011 compared with fiscal 2010 due to an increase in headcount from 270 employees at June 25, 2010 to 293 employees at June 24, 2011, including five employees from SGI Japan. In addition, during fiscal 2011, research and development reimbursements from our business partners decreased by $0.7 million to $1.3 million from $2.0 million in fiscal 2010.
Sales and marketing. Sales and marketing expense increased $11.0 million or 17% to $75.8 million in fiscal 2011 from $64.8 million in fiscal 2010. This increase was primarily due to an increase in compensation and related expenses of $8.7 million in fiscal 2011 compared to fiscal 2010. Headcount increased from 291 employees at June 25, 2010 to 344 employees at June 24, 2011. This includes 106 employees from SGI Japan. The increase in headcount together with higher commission expense paid during fiscal 2011 compared to fiscal 2010 resulted to an overall increase in compensation and related expenses. In addition to compensation and related expenses, the increase in sales and marketing expense was also due to an increase in intangible amortization of $1.5 million, third-party sales and marketing services of $0.5 million, share-based compensation expense of $0.5 million, travel expenses of $0.6 million, and marketing supplies and equipment of $0.4 million. The increase in sales and marketing expense was partially offset by a decrease in facility related expenses of $1.2 million, of which $0.5 million is due to a decrease in depreciation expense as some of our fixed assets were fully depreciated as of June 25, 2010.

41


General and administrative. The change in our general and administrative expense is not material in fiscal 2011 compared with fiscal 2010. Our compensation related expenses, hiring expenses, and share-based compensation expenses increased by $3.1 million, $0.8 million, and $0.7 million, respectively. This increase in general and administrative expenses is offset by decreases in professional and consulting fees of $1.4 million, decrease in bad debt expense of $1.0 million, decrease in insurance of $0.9 million, decrease in facility related expenses of $0.4 million, and decrease in supplies and small equipment expenses of $0.8 million. Compensation and related expenses increased due to increase in headcount from 188 employees at June 25, 2010 to 246 employees, which includes 34 employees in SGI Japan, at June 24, 2011.
Restructuring. On February 18, 2011, management approved the 2011 restructuring action as part of a worldwide workforce reduction to streamline operations and reduce operating expenses. Restructuring expense for fiscal 2011 related to these actions was $5.1 million. Prior to this action, on July 27, 2009, management approved the 2010 restructuring action to reduce our European workforce and vacate certain facilities, which resulted in a restructuring expense charge of $5.2 million for fiscal 2010.
Acquisition-related. On March 9, 2011, pursuant to a Stock Purchase Agreement dated March 8, 2011, we acquired the remaining outstanding shares of SGI Japan. In connection with the acquisition, during fiscal 2011, we incurred acquisition-related costs of $1.3 million, which consisted primarily of costs related to due diligence, legal and other professional fees. In fiscal 2010, we recorded a net gain of $3.3 million related to our acquisition of Legacy SGI. During fiscal 2010, we received a $1.0 million payment from Legacy SGI related to potential liabilities of Legacy SGI, which, pursuant to the Asset Purchase Agreement, were to be remitted to the Company if not paid to a third-party. In addition, we received $2.3 million from a Legacy SGI customer, resulting from a settlement of a dispute with this customer that existed prior to the acquisition of Legacy SGI. Accordingly, we have recorded the $3.3 million payments received as a gain in our statement of operations in fiscal 2010.
Total other (expense) income, net
Total other (expense) income for fiscal 2011 and 2010 was as follows:
 
 
Fiscal Year Ended
 
Change
 
 
June 24,
2011
 
June 25,
2010
 
 
 
 
$
 
%
 
 
(in thousands, except percentages)
Interest (expense) income, net
 
$
95

 
$
436

 
$
(341
)
 
(78
)%
Other (expense) income, net
 
(1,097
)
 
(7,088
)
 
5,991

 
(85
)%
Total other (expense) income, net
 
$
(1,002
)
 
$
(6,652
)
 
$
5,650

 
(85
)%
Interest (expense) income, net. The decrease in interest income, net for fiscal 2011 compared to fiscal 2010, was due to lower interest rates on our investment portfolio, as we sold our ARS during the second quarter of fiscal 2011.
Other (expense) income, net. Other (expense) income, net in fiscal 2011 consisted primarily of impairment of our investment in SGI Japan of $2.9 million and $0.8 million in recognized losses on our investments in ARS. These losses were partially offset by foreign exchange gains of $2.6 million that resulted from the favorable exchange rate effect due to the strengthening of the Euro against the U.S. Dollar. We accounted for SGI Japan as a cost method investment prior to our acquisition in March 2011. During fiscal 2010, other (expense) income, net consisted of foreign exchange losses of $7.2 million that resulted from the unfavorable exchange rate effect due to the strengthening of the U.S. dollar against the Euro.

42


Income tax provision (benefit) from continuing operations
Income tax provision (benefit) from continuing operations for fiscal 2011 and 2010 was as follows:
 
 
Fiscal Year Ended
 
Change
June 24,
2011
 
June 25,
2010
 
 
 
 
$
 
%
 
 
(in thousands, except percentages)
Income tax provision (benefit) from continuing operations
 
$
1,242

 
$
(4,441
)
 
$
5,683

 
(128
)%
We recorded a tax expense of $1.2 million for fiscal 2011. Our tax expense for fiscal 2011 primarily related to our foreign operations and included $1.2 million of unrecognized tax benefits and related interest. Additional amounts recorded include a discrete tax benefit of $1.6 million attributable to release of valuation allowance. The effective tax rate used to record the tax expense differed from the combined federal and net state statutory income tax rate for fiscal 2011 primarily due to domestic operating losses generated during the period from which the Company does not benefit, tax expense incurred by the Company's foreign subsidiaries with operating income, tax benefit attributable to release of valuation allowance, and tax expense associated with our unrecognized tax benefits and related interest.
We recorded a net tax benefit of $4.4 million for fiscal 2010. The net income tax benefit includes a discrete tax benefit of $4.9 million resulting from the November 6, 2009 enactment of the Worker, Homeownership, and Business Assistance Act of 2009 (the "Act"). The Act provides an election for federal taxpayers to increase the carry back period for an applicable net operating loss to three to five years from two years. Additional amounts recorded include a discrete tax benefit of $1.0 million attributable to release of valuation allowance and tax expense of $1.1 million for unrecognized tax benefits and related interest. The effective tax rate used to record the tax expense differed from the combined federal and net state statutory income tax rate for fiscal 2010 primarily due to the discrete items noted above and the fact that we do not record a benefit for operating losses generated during the period due to uncertainties regarding the realizability of the resulting loss carryforwards.
Income from discontinued operations, net of tax
Income from discontinued operations, net of tax, for fiscal 2011 and 2010 was as follows:
 
 
Fiscal Year Ended
 
Change
 
 
June 24,
2011
 
June 25,
2010
 
$
 
%
 
 
 
 
(in thousands, except percentages)
Income from discontinued operations, net of tax
 
$

 
$
409

 
$
(409
)
 
(100
)%
During the year ended January 3, 2009, we classified our RapidScale™ product line as a discontinued operation as a result of discontinuing this product line. Our decision was a result of a change in strategic direction, as well as an inability to license certain third-party software on reasonable commercial terms.
The revenue contribution from this product line was not significant for fiscal 2011 and $0.4 million for fiscal 2010.
Liquidity and Capital Resources
We had $104.9 million of cash and cash equivalents at June 29, 2012 and $139.9 million of cash and cash equivalents at June 24, 2011. As of June 29, 2012, we had $51.6 million of cash and cash equivalents that are held outside the United States. Historically, we have required capital principally to support business operations. It is our investment policy to invest in a manner that preserves capital, provides liquidity and maintains appropriate diversification and optimizes after-tax yield and return within our policy's framework and stipulated benchmarks. Adherence with our policy requires the assets to be liquid on and before their maturity dates. This liquidity requirement means that the holder of the assets must be able to pay us, upon our demand, the cash value of the assets invested.
At June 29, 2012, we had short-term and long-term restricted cash and cash equivalents of $4.1 million that are pledged as collateral for various guarantees issued to cover rent on leased facilities and equipment, to government authorities for value-added tax (“VAT”) and other taxes, and certain vendors to support payments in advance of delivery of goods and services.
As described further below under the section titled "Contractual Obligations and Other Commitments," in December 2011 we entered into a five-year senior secured credit facility in the aggregate principal amount of $35.0 million, which was increased to $40.0 million on May 1, 2012. The credit facility is intended to be used primarily to fund working capital requirements, capital expenditures and operations to the extent that cash provided by operating activities is not sufficient to fund our cash needs. As of June 29, 2012, we had an outstanding balance of $15.2 million from our credit facility plus $0.2

43


million in accrued interest. We also had $2.0 million of outstanding letters of credit under this credit facility.
At June 29, 2012, we believe our current cash and cash equivalents, in conjunction with the funds that may be drawn down under our credit facility, will be sufficient to fund working capital requirements, capital expenditures and operations for at least the next twelve months. We have implemented processes to more effectively monitor our working capital. We have intensified our cash processes related to monitoring, projections and control procedures to operate our business and are more broadly requiring advance and milestone payments for certain large projects that would otherwise involve a significant lag between our payments to vendors for equipment and materials and the installation, acceptance, billing, and collection from the customer. We intend to retain any future earnings to support operations and to finance the growth and development of our business, and we do not anticipate paying any dividends in the foreseeable future. At the present time, we have no material commitments for capital expenditures.
The adequacy of these resources to meet our liquidity needs beyond the next twelve months will depend on our growth, operating results and capital expenditures. If we fail to generate cash from operations on a timely basis, we may not have the cash resources required to run our business and we may need to seek additional sources of funds.
If we require additional capital resources to expand our business internally or to acquire complementary technologies and businesses at any time in the future, we may seek to sell additional equity or debt securities or obtain other debt financing. The sale of additional equity or debt securities could result in more dilution to our stockholders. Financing arrangements may not be available to us, or may not be available in amounts or on terms acceptable to us.
The following is a summary of cash activity (in thousands):
 
 
Fiscal Year Ended
 
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
 
Consolidated statements of cash flows data:
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
(46,828
)
 
$
11,533

 
$
8,197

 
Net cash (used in) provided by investing activities and acquisitions
 
(7,700
)
 
6,312

 
(8,500
)
 
Net cash provided by (used in) financing activities
 
19,059

 
(8,364
)
 
932

 
Effect of exchange rate changes on cash and cash equivalents
 
452

 
1,044

 

 
Net (decrease) increase in cash and cash equivalents
 
$
(35,017
)
 
$
10,525

 
$
629

 
Operating Activities
Cash used in operating activities was $46.8 million for fiscal 2012. Our net loss was $24.5 million for fiscal 2012. Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $14.6 million, share-based compensation expense of $10.1 million, gain on pension plan curtailment of $1.3 million, loss on settlement of pension plan of $1.0 million, impairment on investments and long-lived assets of $0.5 million, changes in deferred income taxes of $1.7 million, and changes in other non-cash items of $1.0 million. Net change in operating assets and liabilities was $50.0 million. The primary uses of cash in operating activity were an increase in inventory and a decrease in deferred revenue. The primary sources of of cash in operating activities were an increase in accounts receivable and decrease in deferred cost of revenue.
For fiscal 2012, deferred revenue decreased $36.5 million and deferred cost of revenue decreased $37.3 million, primarily due to the timing of revenue recognition on sales transactions which were required to be deferred in accordance with our revenue recognition policy. Inventory increased $44.6 million primarily related to finished goods inventory that has already been shipped to our customers for which we are awaiting customer acceptance. This was partially offset by a $7.2 million inventory write down to reflect reduced demand for manufacturing parts for earlier generation products. Additionally, accounts payable decreased $2.5 million, primarily due to our efforts to more closely align payments with customer receipts and as part of the efforts to manage our working capital more closely. Accrued compensation decreased $5.3 million primarily due to timing of payments.
Cash provided by operating activities was $11.5 million for fiscal 2011. Our net loss was $21.2 million for fiscal 2011. Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $17.8 million, share-based compensation expense of $5.9 million, impairment of investment in SGI Japan of $2.9 million, impairment on investments of $0.8 million, changes in deferred income taxes of $8.2 million, and recovery of doubtful accounts receivable of $0.1 million. Net change in operating assets and liabilities was $13.5 million. The primary operating activity source of cash was a decrease in inventory. The primary uses of cash in operating activities were an increase in accounts receivable and decrease in deferred revenue.

44


For fiscal 2011, deferred revenue decreased $12.4 million and deferred cost of revenue increased $1.9 million, respectively, primarily due to the timing of revenue recognition on sales transactions which were required to be deferred in accordance with our revenue recognition policy. Inventory decreased $17.2 million due to timing of inventory purchases and shipments to customers. Additionally, accounts payable increased $7.6 million, primarily due to the increase in inventory purchases and the timing of payments. Accrued compensation increased $1.8 million primarily due to timing of payments.
Cash provided by operating activities of $8.2 million for fiscal 2010 reflected cash provided by changes in operating assets and liabilities of $72.8 million, non-cash adjustments of $23.8 million, which consisted primarily of depreciation and amortization of $18.4 million and share-based compensation of $4.7 million offset by our net loss of $88.5 million. The primary working capital sources of cash were an increase in deferred revenue and decreases in inventories and prepaid and other current assets. The primary working capital uses of cash were increases in deferred cost of revenue and accounts receivable and a decrease in accounts payable and other liabilities.
Investing Activities and Acquisition
Cash used in investing activities and acquisition was $7.7 million in fiscal 2012, primarily due to purchases of property and equipment of $5.5 million and other investing activities of $2.2 million.
Cash provided by investing activities and acquisition was $6.3 million in fiscal 2011, primarily due to proceeds from sales and maturities of investments of $7.9 million. In addition, we purchased the remaining outstanding shares of SGI Japan that we did not already own for $17.9 million in cash. In connection with the acquisition, we acquired $23.9 million of cash, resulting in net cash acquired of $6.0 million. Our restricted cash and cash equivalents also increased our cash by $0.6 million during fiscal 2011. Cash provided by investing activities was partially offset by purchases of property and equipment of $8.2 million.
Cash used in investing activities and acquisition was $8.5 million in fiscal 2010, primarily due to the purchases of property and equipment of $6.3 million and the acquisition of Copan Systems, Inc. for $2.0 million.
Financing Activities
Cash provided by financing activities was $19.1 million in fiscal 2012, primarily due to proceeds from draw-downs on our credit facility of $15.0 million, the issuance of stock under our employee stock purchase plan and stock option exercises of $5.2 million, which was partially offset by the funding of RSUs withheld for taxes of $1.1 million. We did not any purchase any treasury stock during fiscal 2012.
Cash used in financing activities was $8.4 million in fiscal 2011, primarily for repayment of notes payable assumed in the acquisition of SGI Japan of $9.6 million, funding of RSUs withheld for taxes of $1.4 million, and purchase of treasury stock of $3.9 million. This decrease in cash was partially offset by proceeds of $6.6 million from the issuance of stock and stock options under the employee stock purchase plan and stock options.
Cash provided by financing activities was $0.9 million in fiscal 2010, primarily due to proceeds from the issuance of stock under the employee stock purchase plan and stock options of $1.8 million, partially offset by the funding of RSUs withheld for taxes of $0.9 million.
In February 2009, the Board of Directors authorized a share repurchase program of up to $40.0 million of our common stock. Under the program, we are able to purchase shares of common stock through open market transactions and privately negotiated purchases at prices deemed appropriate by management. During fiscal 2011, we repurchased 505,100 shares of outstanding common stock for a total of $3.9 million which was paid in cash. Our share repurchased program expired in March 2012.
We expect to continue to invest in the business including working capital, capital expenditures and operating expenses. We intend to fund these activities with our cash reserves and cash generated from operations, if any. Increases in operating expenses may not result in an increase in our revenue and our anticipated revenue may not be sufficient to support these increased expenditures. We anticipate that operating expenses and working capital will constitute a material use of our cash resources.
Contractual Obligations and Commitments
The following are contractual obligations and commitments at June 29, 2012, associated with lease obligations and contractual commitments (in thousands):

45


 
 
Payments due by period
 
 
Total
 
Less than
1 year
 
1 - 3
years
 
3 - 5
years
 
More than
5 years
Operating leases
 
$
20,108

 
$
9,880

 
$
10,039

 
$
189

 
$

Purchase obligations
 
35,970

 
30,268

 
5,702

 

 

Total
 
$
56,078

 
$
40,148
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