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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):

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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.


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SILICON GRAPHICS INTERNATIONAL CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 29, 2012
TABLE OF CONTENTS
 
 
 
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Mine Safety Disclosures
 
 
 
 
 
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Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
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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 31 st 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.

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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.

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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:

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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.

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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:
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substantially greater market presence and greater name recognition;
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substantially greater financial, technical, research and development, sales and marketing, manufacturing, distribution and other resources;
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longer operating histories;
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a broader offering of products and services;
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more established relationships with customers, suppliers and other technology companies; and
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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:
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the acquired products may fail to achieve projected sales or operating margin targets;
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the acquired business, asset or technology may not further our business strategy or we may not realize expected synergies or cost savings;
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we might overpay for the acquired business, asset or technology;
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we might experience difficulties integrating the acquired assets, technologies, operations or personnel or retaining the key personnel of the acquired company;
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disruption of ongoing business, including diversion of management's attention;
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we might experience difficulties entering and competing in new product or geographic markets in which we are not experienced;
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assumption of unknown liabilities, including tax and litigation or problems with product quality, and the related expenses and diversion of resources;
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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;
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potential negative impact on our relationships with customers, distributors and business partners; and
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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:
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supporting multiple languages;
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recruiting sales and technical support personnel internationally with the skills to design, manufacture, sell and support our products;
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complying with governmental regulations, including obtaining required import or export approval for our products;
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increased complexity and costs of managing international operations;
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increased exposure to foreign currency exchange rate fluctuations;
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commercial laws and business practices that favor local competition;
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longer sales cycles and manufacturing lead times;
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financial risks such as longer payment cycles and difficulties in collecting accounts receivable;
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difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;
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ineffective legal protection of intellectual property rights;
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more complicated logistics and distribution arrangements;

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•
additional taxes and penalties;
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inadequate local infrastructure that could result in business disruptions;
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political and economic instability, including the current credit crisis in Europe; and
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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:
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require us to maintain a fixed charge coverage ratio (applicable during certain periods);
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limit our ability to incur indebtedness, grant liens, or consign inventory; and
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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.

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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.

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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.

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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:

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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.

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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").

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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.



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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

 
$
15,741

 
$
189

 
$
—

Operating Leases —We lease certain real and personal property under non-cancelable operating leases. Certain leases require us to pay property taxes, insurance and routine maintenance and include renewal options and escalation clauses.
As of June 29, 2012 , we had total outstanding commitments on non-cancelable operating leases of our real property of $19.0 million, of which $6.1 million relate to our domestic leases. Our domestic leases are generally for terms of five to seven years and generally provide renewal options for terms of three to five additional years. These leases include our headquarters in Fremont, California and our warehouse facility in Chippewa Falls, Wisconsin. A significant portion of our domestic leases will expire in fiscal 2013. We have total outstanding commitments of $12.9 million in non-cancelable international operating leases. The total outstanding commitments included $7.0 million relating to our leased facility in Japan. Our major facility leases in our international locations are generally for terms of two to nine years, and generally do not provide renewal options.
As of June 29, 2012 , personal property under operating lease is comprised primarily of automobiles and office equipments. Total outstanding commitments under these leases is approximately $1.1 million at June 29, 2012 .
Purchase Obligations —From time to time, we issue blanket purchase orders to our contract manufacturers for the procurement of materials to be used for upcoming orders, particularly for those components that have long lead times. Blanket purchase orders vary in size depending on our projected requirements. If we do not consume these materials on a timely basis or if our relationship with one of our contract manufacturers was to terminate, we could experience an abnormal increase to our inventory carrying amount and related accounts payable.
In connection with supplier agreements, we agreed to purchase certain units of inventory and non-inventory through our fiscal year ending June 26, 2015. As of June 29, 2012 , there was a remaining commitment of approximately $30.3 million, due within the next 12 months.
Other than the contractual obligations and commitments described above, we have no significant unconditional purchase obligations or similar instruments. We are not a guarantor of any other entities’ debt or other financial obligations.
Uncertain Tax Positions —As of June 29, 2012 the liability for uncertain tax positions, net of offsetting tax benefits associated with the correlative effects of state income taxes and interest deductions, was $7.5 million. As of June 29, 2012 , the Company has accrued $13.7 million of interest and penalty associated with its uncertain tax positions. The Company cannot conclude on the range of cash payments that will be made within the next twelve months associated with its uncertain tax positions.
Credit facility —In December 2011, we entered into a five-year credit facility in the aggregate principal amount of $35.0 million. The credit facility included a feature that allowed us to increase the revolver amount in the first 18 months of the credit facility. We exercised this feature, and on May 1, 2012, the revolver amount of our credit facility was increased by $5.0 million to an aggregate principal amount of $40.0 million. We intend to use the credit facility to primarily fund our 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, our total outstanding balance was $15.2 million plus $0.2 million in accrued interest. Further, the credit facility includes a $10.0 million letter of credit subfacility and we had $2.0 million outstanding letters of credit as of June 29, 2012. See Note 14 "Credit Facility" in our audited financial statements in this Form 10-K for further information on the credit facility.
Off Balance Sheet Arrangements —We have issued financial guarantees to cover rent on leased facilities and equipment, to government authorities for VAT and other taxes, and to various other parties to support payments in advance of future delivery on goods and services. The majority of our financial guarantees have terms of one year or more. The maximum potential obligation under financial guarantees at June 29, 2012 was $4.3 million for which we have $4.1 million of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash and cash equivalents in the consolidated balance sheets.
Additionally, we enter into standard indemnification agreements with our customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third-party to the extent any such claim alleges that our product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third-party. The agreements generally limit the scope of the available remedies in a

46



variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. We have not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of June 29, 2012 . As a result, we believe the estimated fair value of these indemnification agreements, if any, to be immaterial; accordingly, no liability has been recorded with respect to such indemnifications as of June 29, 2012 .
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements. We periodically evaluate our material estimates and judgments based on the terms of underlying agreements, the expected course of development, historical experience and other factors that we believe are reasonable under the circumstances. However, actual future results may vary from our estimates.
We believe that the following accounting policies are significantly affected by critical accounting estimates and that they are both highly important to the portrayal of our financial condition and results and require difficult management judgments and assumptions about matters that are inherently uncertain. Note 2 of the consolidated financial statements in Part II Item 8 of this Annual Report on Form 10-K describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies.
Our critical accounting policies and estimates are as follows:
•
Revenue recognition;
•
Share-based compensation;
•
Restructuring reserve;
•
Inventory valuation;
•
Impairment of intangibles and long-lived assets;
•
Warranty reserve;
•
Retirement benefit obligations; and
•
Accounting for income taxes.
Revenue Recognition . We enter into sales contracts to deliver multiple products and/or services. A typical multiple-element arrangement includes product, third-party product, customer support services and professional services. We also sell software products as part of certain multiple-element arrangements. In addition to selling multiple-element arrangements, we also sell certain products and services on a stand-alone basis.
Product revenue. We recognize revenue from sales of products, primarily hardware, when persuasive evidence of an arrangement exists, shipment has occurred and title has transferred, the sales price is fixed or determinable, and collection of the resulting receivable is reasonably assured. In arrangements where a formal acceptance of products or services is required by the customer, revenue is recognized upon meeting such acceptance criteria.
Service revenue . Service revenue includes customer support services, primarily hardware maintenance services, and professional services, which include consulting services and product integration services. Revenue from service contracts, that are not subject to deferral under our revenue recognition policy applicable to sales contracts entered into prior to fiscal 2011 (discussed below) and are expressly priced separately from the hardware, is recognized ratably over the contract term, generally one to three years. Professional services are offered under time and material or fixed fee-based contracts or as part of multiple-element arrangements. Professional services revenue is recognized as services are performed.
Multiple-element arrangements. Our multiple-element arrangements include products, customer support services and/or professional services. Certain multiple-element arrangements include software products integrated with the hardware (“Hardware Appliance”) and we provide unspecified software updates and enhancements to the software through our service contracts.
In October 2009, the Financial Accounting Standards Board ("FASB") amended the Accounting Standards Codification (“ASC”) as summarized in 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 . ASU 2009-14 amends industry specific revenue accounting guidance for software and software related

47



transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product's essential functionality. ASU 2009-13 amends the accounting for multiple-element arrangements to provide guidance on how the deliverables in an arrangement should be separated and eliminates the use of the residual method. ASU 2009-13 also requires an entity to allocate revenue using the relative selling price method. The standard establishes a hierarchy of evidence to determine the stand-alone selling price of a deliverable based on vendor-specific objective evidence ("VSOE"), third-party evidence ("TPE"), and the best estimate of selling price ("BESP"). If VSOE is available, it would be used to determine the selling price of a deliverable. If VSOE is not available, the entity would determine whether TPE is available. If so, TPE must be used to determine the selling price. If TPE is not available, then the BESP would be used.
Effective the beginning of fiscal 2011, we adopted the provisions of ASU 2009-13 and ASU 2009-14 on a prospective basis for new and materially modified arrangements originating after June 25, 2010. The adoption of ASU 2009-13 and ASU 2009-14 was material to the Company's financial results, increasing revenues by $166.2 million and gross profit by $62.0 million for fiscal 2011. The impact was due to the recognition of revenue that would have previously been deferred for multiple-element arrangements which include Hardware Appliances or arrangements where the undelivered element is post contract customer support ("PCS") for which we were unable to establish VSOE of fair value of the element. The new standard 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 with other elements in the arrangement.
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 allocate revenue to each element based on the aforementioned selling price hierarchy. In multiple element arrangements where software is essential to the functionality of the products, 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.
We evaluate each deliverable in an arrangement to determine whether they represent separate units of accounting. The delivered item constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered elements. The Company's Hardware Appliances are sold on a stand-alone basis and customers are able to sell the Hardware Appliances to other buyers; accordingly, the Company has concluded that its Hardware Appliances have stand-alone value. Allocation of the consideration is determined at arrangement inception on the basis of each unit's relative selling price. We limit the amount of revenue recognition for delivered product elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.
We have not consistently established VSOE of fair value of any of our products or services. In addition, we have not established TPE as there are no similar or interchangeable competitor products or services in standalone sales to similarly situated customers. Therefore, revenue from our multiple-element arrangements is allocated based on the BESP. The objective of BESP is to determine the price at which we would transact a sale if a product or service were sold on a stand-alone basis. We determine BESP for product or service by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific market factors, profit objectives and pricing practices. The determination of BESP is a formal process that includes review and approval by our management. In addition, we regularly review BESP for our products and services.
For fiscal 2010 and sales contracts entered into prior to fiscal 2011, we recognize revenue pursuant to the previous guidance for multiple-element arrangements. For arrangements which do not include Hardware Appliances and where services are included, we recognize revenue from the sale of products prior to the completion of services as the services are not essential to the functionality of the products. For certain multiple-element arrangements, we deliver software products integrated with the Hardware Appliance and provide unspecified software updates and enhancements to the software through PCS. For arrangements which include Hardware Appliances or arrangements where the undelivered element is PCS, we have not established VSOE of fair value of the element. Therefore, revenue and related cost of revenue from these arrangements are deferred and recognized ratably over the PCS period as combined product and service revenue in the consolidated statements of operations.
Share-Based Compensation. We use the fair value method of accounting for share-based compensation arrangements, including grants of employee stock awards and purchases under an employee stock purchase plan. The fair values of our unvested stock awards are calculated based on the fair value of our common stock at the dates of grant, using the Black-Scholes option-pricing model, which requires the input of subjective assumptions. These assumptions include estimating the length of

48



time employees will retain their vested stock awards before exercising them, the estimated volatility of our common stock over the expected term and the number of awards that will ultimately not vest (i.e. forfeitures). Our assumptions on the estimated length of time employees will retain their vested stock awards before exercising them is based on examining our historical pattern of option exercises to determine if there were any discernible activity patterns based on certain employee populations. From this analysis, we identified two employee populations to which to apply the Black-Scholes model. We determined that implied volatility calculated based on the average of historical volatility and volatility calculated based on actively traded options on SGI common stock is a good indicator of the overall stock volatility. We analyzed SGI's historical forfeiture rate and calculated forfeiture rate using a weighted average of the actual forfeitures as a percentage of average unvested options. The estimated fair value of stock awards is expensed on a straight-line basis over the expected term of the grant. Compensation expense for purchases under the employee stock purchase plan is recognized based on the estimated fair value of the common stock during each offering period and the percentage of the purchase discount.
The assumptions used in calculating the fair value of share-based payment awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Changes to any of these assumptions could have a material impact on our reported share-based compensation expense.
Restructuring Reserve. In recent years, we have recorded accruals in connection with our restructuring programs. These accruals include estimates of employee separation costs, fixed asset write-offs and the settlements of contractual obligations, including lease terminations resulting from our actions. Accruals associated with employee termination costs are accrued when it is determined that a liability has been incurred, which is generally when individuals have been notified of their termination dates and expected severance payments. Fixed asset write-offs primarily consist of equipment, leasehold improvements, and furnitures and fixtures associated with lease terminations, and are based on an estimate of the amounts and timing of future cash flows related to the expected future remaining use and ultimate sale or disposal of the equipment and furniture. Accruals associated with vacated facilities are accrued when we have vacated the premises. Our estimates may need to be adjusted upon the occurrence of future events, which include, but are not limited to, changes in the estimated time to enter into a sublease, the sublease terms and the sublease rates. Due to the extended contractual obligations of certain of these leases and the inherent volatility of the commercial real estate markets, future adjustments to these vacated facilities accruals could have a material impact on our results of operations and financial position.
Inventory Valuation. We value our inventories at the lower of cost or market with cost determined on a first-in, first-out basis. We write down obsolete inventory or inventory in excess of our estimated usage to its estimated market value less cost to sell, if less than its cost. Inherent in our estimates of market value in determining inventory valuation are estimates related to future demand and technological obsolescence of our products. Any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventories and our results of operations and financial position could be materially affected. For example, in the fourth quarter of fiscal 2012, we recorded a charge of $7.2 million to reflect reduced demand for manufacturing parts for earlier generation products.
Impairment of Intangibles and Long-Lived Assets. We assess the carrying values of long-lived assets, including our intangible assets with finite lives, for possible impairment when we identify events or when we believe that circumstances may have changed to indicate that the carrying amount of a long-lived asset may not be recoverable. Such events or changes in circumstances may include the significant under-performance relative to historical or projected future operating results, significant changes in the strategy for our overall business, discontinuation of a product or product line, a sudden or consistent decline in the forecast for a product, changes in technology or in the way an asset is being used, or an adverse change in legal factors or in the business climate. An impairment loss would be recognized when the sum of the estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Such impairment loss would be measured as the difference between the carrying amount of the asset and its fair value. Cash flow assumptions used in calculating the fair value are based on historical and forecasted revenue, operating costs, and other relevant factors. This analysis requires judgment with respect to many factors, including future cash flows, changes in technology, the continued success of product lines and future volume and revenue and expense growth rates. If our estimate of future operating results changes, or if there are changes to other assumptions, the estimate of the fair value of our long-lived assets could change significantly. Such change could result in impairment charges in future periods, which could have a material impact on our results of operations and financial position.
Warranty Reserve. We provide for estimated cost to warrant our products against defects in materials and workmanship at the time revenue is recognized. We net any cost recoveries from warranties offered to us by our suppliers against the warranty expense. Warranty costs include labor to repair faulty systems and replacement parts for defective items, as well as other costs incidental to warranty repairs. We estimate our warranty obligation based on historical experience, and our estimate is affected by data such as product failure rates, material usage and service delivery costs incurred in correcting a product failure. Our standard warranty ranges from one to three years. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required which could have a

49



material impact on our results of operations and financial position.
Retirement Benefit Obligations. Our defined benefit obligations and plan assets are dependent on various assumptions. Our major assumptions relate primarily to discount rates, rates of compensation growth, and expected long-term rates of return on plan assets. Our discount rate assumption is based on current investment yields of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Expected long-term rate of return on assets is determined using the projected long-term rate of return estimated by the insurance company for its general fund for the defined benefit plan in Germany and based on historical portfolio results and target asset allocations, as well as the projected long-term rate of return based on the Japanese market for the defined benefit plan in Japan. The weighted-average rates used are set forth in Note 18 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. For fiscal 2012, the effect of rate changes in these assumptions does not result in a material change in the net periodic benefit cost.
Accounting for Income Taxes. The determination of our tax provision is subject to judgments and estimates. The carrying value of our net deferred tax assets, which is comprised primarily of future tax deductions, net operating loss carryovers and tax credit carryovers, is subject to significant judgment as to whether it is more likely than not our deferred tax assets will be realized. In determining whether the realization of these deferred tax assets may be impaired, we evaluate both positive and negative evidence. As of June 29, 2012, we have recorded a valuation allowance against the majority of our net deferred tax assets. Based on all available evidence, on a jurisdictional basis, including our historical operating results, and the uncertainty of predicting our future income, the valuation allowance reduces 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 recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining solely on its technical merits of the law whether the more likely than not threshold is met. If the first step is satisfied, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement with the taxing authorities. We evaluate these uncertain tax positions on a quarterly basis, based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, new audit activity and lapses in the statutes of limitations on assessment. A change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period that such event occurs and could have a material impact on our results of operations and financial position.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements, including our expected adoption dates and estimated effects on our results of operations, financial condition, and cash flows.

50



ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, our financial position is routinely subject to a variety of risks, including market risk for investments associated with interest rate movements, liquidity risks, credit risks, and foreign exchange market risk associated with currency rate movements on non-U.S. dollar denominated assets and liabilities. We regularly assess these risks and have established policies and business practices to protect against the adverse effects of these and other potential exposures.
Investment Risk
The primary objective of our investment activities is to preserve principal while maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash, cash equivalents, and investments in high credit quality, readily liquid securities, primarily U.S. treasuries and money market funds. Our portfolio of investments have original maturities of less than three months from date of purchase.
There has been significant deterioration and instability in the financial markets since 2008. The extraordinary disruption and readjustment in the financial markets exposes us to additional investment risk. The value and liquidity of the securities in which we invest could deteriorate rapidly and the issuers of such securities could be subject to credit rating downgrades. In light of the current market conditions and these additional risks, we actively monitor market conditions and developments specific to the securities and security classes in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated securities with relatively short maturities and do not invest in securities we believe involve a higher degree of risk. While we believe we take prudent measures to mitigate investment related risks, such risks cannot be fully eliminated as there are circumstances outside of our control. We currently believe that the current credit market difficulties do not have a material impact on our investment portfolio. However, future degradation in credit market conditions could have a material adverse affect on our financial position.
Interest Rate Risk
Our exposure to market risks for changes in interest rates relates primarily to our investment portfolio. As of June 29, 2012 , our cash and cash equivalents of $104.9 million consisted primarily of cash, money market funds, and U.S. Treasury notes. We believe that the exposure of our principal to interest rate risk is minimal, although our future interest income is subject to reinvestment risk.
Given the short term nature of our cash and cash equivalents, the risk of loss in fair value resulting from interest rate changes is minimal.
Foreign Exchange Risk
As of June 29, 2012 and June 24, 2011, foreign currency cash accounts totaled $38.6 million and $70.2 million, respectively, primarily in Japanese Yen and the Euro.
Foreign currency risks are associated with our cash and cash equivalents, investments, receivables, and payables denominated in foreign currencies. Fluctuations in exchange rates will result in foreign exchange gains and losses on these foreign currency assets and liabilities, which are included in other income, net in our consolidated statements of operations. Our exposure to foreign currency exchange rate risk relates to sales commitments, anticipated sales, purchases and other expenses, and assets and liabilities denominated in foreign currencies. For most currencies, we are a net receiver of the foreign currency and are adversely affected by a stronger U.S. dollar relative to the foreign currency. At June 29, 2012 , we had no foreign currency forward contracts or option contracts. We have subsequently implemented a hedging strategy that is intended to mitigate our currency exposures by entering into foreign currency forward contracts that have maturities generally of one month or more. These contracts are used to reduce our risk associated with exchange rate movements, as gains and losses on these contracts are intended to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated balance sheet accounts or cash flows.
We assessed the risk of loss in fair values from the impact of hypothetical changes in foreign currency exchange rates. For foreign currency exchange rate risk, a 10% increase or decrease of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $3.9 million change in the value of our foreign currency cash accounts.

51
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
 
 
 
 
 
Page
Financial Statements:
 
 
 
 
 
 
 
 
 
 
Financial Statement Schedule:
 
 
 

52
Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Silicon Graphics International Corp.
Fremont, California

We have audited the accompanying consolidated balance sheets of Silicon Graphics International Corp. and subsidiaries (the “Company”) as of June 29, 2012, and June 24, 2011, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years ended June 29, 2012, June 24, 2011, and June 25, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Silicon Graphics International Corp. and subsidiaries at June 29, 2012, and June 24, 2011, and the results of their operations and their cash flows for the years ended June 29, 2012, June 24, 2011, and June 25, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, in the year ended June 24, 2011, the Company changed its method of recognizing revenue for multiple element arrangements in accordance with the Financial Accounting Standards Board's Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements and ASU 2009-14, Certain Revenue Arrangements that include Software Elements .
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 29, 2012, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 10, 2012 expressed an unqualified opinion on the Company's internal control over financial reporting.


/s/ DELOITTE & TOUCHE LLP
San Jose, California
September 10, 2012



53



SILICON GRAPHICS INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
 
 
Fiscal Year Ended
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Revenue
 
 
 
 
 
Product
$
479,530

 
$
392,661

 
$
—

Service
191,274

 
147,951

 
—

Combined product and service
82,183

 
88,956

 
403,717

Total revenue (Note 2)
752,987

 
629,568

 
403,717

Cost of revenue
 
 
 
 
 
Product
398,272

 
307,264

 
—

Service
108,065

 
91,103

 
—

Combined product and service
52,833

 
61,389

 
314,128

Total cost of revenue
559,170

 
459,756

 
314,128

Gross profit
193,817

 
169,812

 
89,589

Operating expenses:
 
 
 
 
 
Research and development
62,356

 
54,067

 
56,865

Sales and marketing
88,414

 
75,813

 
64,831

General and administrative
62,021

 
52,578

 
52,594

Restructuring
2,469

 
5,072

 
5,213

Acquisition-related
—

 
1,271

 
(3,264
)
Total operating expenses
215,260

 
188,801

 
176,239

Loss from operations
(21,443
)
 
(18,989
)
 
(86,650
)
 
 
 
 
 
 
Interest (expense) income, net
(297
)
 
95

 
436

Other expense, net
(1,720
)
 
(1,097
)
 
(7,088
)
Total other expense, net
(2,017
)
 
(1,002
)
 
(6,652
)
Loss from continuing operations before income taxes
(23,460
)
 
(19,991
)
 
(93,302
)
Income tax provision (benefit) from continuing operations
1,001

 
1,242

 
(4,441
)
Net loss from continuing operations
(24,461
)
 
(21,233
)
 
(88,861
)
Income (loss) from discontinued operations, net of tax (Note 20)
—

 
—

 
409

Net loss
$
(24,461
)
 
$
(21,233
)
 
$
(88,452
)
Net loss per share, basic and diluted:
 
 
 
 
 
Continuing operations
$
(0.77
)
 
$
(0.69
)
 
$
(2.95
)
Discontinued operations
—

 
—

 
0.01

Basic and diluted net loss per share
$
(0.77
)
 
$
(0.69
)
 
$
(2.94
)
Shares used in computing basic and diluted net loss per share
31,653

 
30,608

 
30,130

See accompanying notes.

54
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SILICON GRAPHICS INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
 
 
June 29,
2012
 
June 24,
2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
104,851

 
$
139,868

Current portion of restricted cash
980

 
948

Accounts receivable, net of allowance for doubtful accounts of $1,597 and $1,335 as of June 29, 2012 and June 24, 2011, respectively
98,293

 
108,675

Inventories
123,391

 
80,965

Deferred cost of revenue
49,407

 
59,306

Prepaid expenses and other current assets
18,443

 
17,937

Total current assets
395,365

 
407,699

Non-current portion of restricted cash
3,088

 
2,390

Property and equipment, net
27,404

 
29,573

Intangible assets, net
8,675

 
13,289

Non-current portion of deferred cost of revenue
17,466

 
45,219

Other assets
44,882

 
39,839

Total assets
$
496,880

 
$
538,009

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
69,448

 
$
71,299

Credit facility
15,200

 
—

Accrued compensation
24,246

 
29,477

Other current liabilities
48,587

 
39,967

Current portion of deferred revenue
124,924

 
132,986

Total current liabilities
282,405

 
273,729

Non-current portion of deferred revenue
64,717

 
93,146

Long-term income taxes payable
20,568

 
24,104

Retirement benefit obligations
11,484

 
15,569

Other non-current liabilities
6,814

 
8,175

Total liabilities
385,988

 
414,723

Commitments and contingencies (Note 24)
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock, par value $0.001 per share; 12,000 shares authorized; none outstanding
—

 
—

Common stock, par value $0.001 per share; 120,000 shares authorized; 32,723 shares and 31,850 shares issued at June 29, 2012 and June 24, 2011, respectively
33

 
31

Additional paid-in capital
484,461

 
470,343

Treasury stock, at cost (749 shares at June 29, 2012 and June 24, 2011)
(4,912
)
 
(4,912
)
Accumulated other comprehensive (loss) income
(1,480
)
 
573

Accumulated deficit
(367,210
)
 
(342,749
)
Total stockholders’ equity
110,892

 
123,286

Total liabilities and stockholders’ equity
$
496,880

 
$
538,009

See accompanying notes.

SILICON GRAPHICS INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)

 
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at June 26, 2009
 
30,170,557

 
$
30

 
(243,695
)
 
$
(1,022
)
 
$
453,730

 
$
(1,575
)
 
$
(233,064
)
 
$
218,099

Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(88,452
)
 
(88,452
)
Unrealized gain on short-term investments
 
—

 
—

 
—

 
—

 
—

 
230

 
—

 
230

Unrecognized loss on defined benefit plans
 
—

 
—

 
—

 
—

 
—

 
(558
)
 
—

 
(558
)
Total comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(88,780
)
Issuance of common stock under employee stock options and employee stock purchase plan, net of taxes
 
391,676

 
1

 
—

 
—

 
931

 
—

 
—

 
932

Restricted common stock
 
146,835

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation in connection with employee stock plans
 
—

 
—

 
—

 
—

 
4,678

 
—

 
—

 
4,678

Balance at June 25, 2010
 
30,709,068

 
$
31

 
(243,695
)
 
$
(1,022
)
 
$
459,339

 
$
(1,903
)
 
$
(321,516
)
 
$
134,929

Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(21,233
)
 
(21,233
)
Unrealized gain on short-term investments
 
—

 
—

 
—

 
—

 
—

 
1,355

 
—

 
1,355

Unrecognized gain on defined benefit plans
 
—

 
—

 
—

 
—

 
—

 
380

 
—

 
380

Cumulative translation adjustment
 
 
 
 
 
 
 
 
 
 
 
741

 
 
 
741

Total comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(18,757
)
Issuance of common stock under employee stock options and employee stock purchase plan, net of taxes
 
501,567

 
—

 
—

 
—

 
5,118

 
—

 
—

 
5,118

Repurchase of treasury stock
 
—

 
—

 
(505,100
)
 
(3,890
)
 
—

 
—

 
—

 
(3,890
)
Restricted common stock
 
165,906

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation in connection with employee stock plans
 
473,698

 
—

 
—

 
—

 
5,886

 
—

 
—

 
5,886

Balance at June 24, 2011
 
31,850,239

 
$
31

 
(748,795
)
 
$
(4,912
)
 
$
470,343

 
$
573

 
$
(342,749
)
 
$
123,286

Net loss
 
—

 
—

 
—

 
—

 
—

 
—

 
(24,461
)
 
(24,461
)
Unrecognized loss on defined benefit plans
 
—

 
—

 
—

 
—

 
—

 
(2,150
)
 
—

 
(2,150
)
Cumulative translation adjustment
 
 
 
 
 
 
 
 
 
 
 
97

 
 
 
97

Total comprehensive loss
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(26,514
)
Issuance of common stock under employee stock options and employee stock purchase plan, net of taxes
 
704,792

 
2

 
—

 
—

 
4,057

 
—

 
—

 
4,059

Restricted common stock
 
167,975

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Share-based compensation in connection with employee stock plans
 
—

 
—

 
—

 
—

 
10,061

 
—

 
—

 
10,061

Balance at June 29, 2012
 
32,723,006

 
$
33

 
(748,795
)
 
$
(4,912
)
 
$
484,461

 
$
(1,480
)
 
$
(367,210
)
 
$
110,892



See accompanying notes.

55
Table of Contents



SILICON GRAPHICS INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Fiscal Year Ended
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net loss
$
(24,461
)
 
$
(21,233
)
 
$
(88,452
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
 
Depreciation and amortization
14,574

 
17,799

 
18,358

Share-based compensation
10,061

 
5,898

 
4,721

Gain on pension plan curtailment
(1,265
)
 
—

 
—

Loss on settlement of pension plan
993

 
—

 
—

Impairment on investments and long-lived assets
527

 
790

 
—

Deferred income taxes
1,655

 
(8,177
)
 
(1,039
)
Impairment of investment in SGI Japan, Ltd.
—

 
2,904

 
—

Other
1,030

 
9

 
1,767

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
10,102

 
(6,379
)
 
(15,506
)
Inventories
(44,587
)
 
17,219

 
28,268

Deferred cost of revenue
37,342

 
(1,925
)
 
(88,520
)
Prepaid expenses and other assets
(2,191
)
 
1,248

 
7,742

Other assets
2,986

 
3,016

 
1,176

Accounts payable
(2,519
)
 
7,558

 
(4,202
)
Accrued compensation
(5,280
)
 
1,783

 
1,030

Other current liabilities
(688
)
 
(7,458
)
 
(3,575
)
Deferred revenue
(36,486
)
 
(12,424
)
 
145,295

Income taxes payable
(3,111
)
 
6,703

 
(1,039
)
Other liabilities
(5,510
)
 
4,202

 
2,173

Net cash (used in) provided by operating activities
(46,828
)
 
11,533

 
8,197

CASH FLOWS FROM INVESTING ACTIVITIES AND ACQUISITIONS:
 
 
 
 
 
Purchases of property and equipment
(5,461
)
 
(8,245
)
 
(6,273
)
Proceeds from sales and maturities of investments
—

 
7,917

 
275

Cash acquired (used) in acquisition, net
—

 
6,046

 
(1,983
)
Other
(2,239
)
 
594

 
(519
)
Net cash (used in) provided by investing activities and acquisitions
(7,700
)
 
6,312

 
(8,500
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
 
Proceeds from draw-down on credit facility
15,000

 
—

 
—

Funding of restricted stock units withheld for taxes
(1,126
)
 
(1,433
)
 
(857
)
Purchase of treasury stock
—

 
(3,890
)
 
—

Repayment of notes payable
—

 
(9,592
)
 
—

Proceeds from issuance of common stock upon exercise of stock options
1,920

 
4,428

 
887

Proceeds from issuance of common stock under employee stock purchase plan
3,265

 
2,123

 
902

Net cash (used in) provided by 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

Cash and cash equivalents—beginning of period
139,868

 
129,343

 
128,714

Cash and cash equivalents—end of period
$
104,851

 
$
139,868

 
$
129,343

SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION
 
 
 
 
 
Income taxes (paid) refunded
$
(310
)
 
$
(1,511
)
 
$
4,206

NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
 
 
Property and equipment purchases in accounts payable
$
685

 
$
250

 
$
788

Unrealized gain on investments
$
—

 
$
1,355

 
$
230

See accompanying notes.

56
Table of Contents



SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS
The principal business of Silicon Graphics International Corp. ("SGI" or the "Company") is the design, manufacture and implementation of highly scalable compute servers, high-capacity storage systems and high-end computing and data management systems. The Company has significant global presence providing products and services either directly or through its distributors and channel partners. In addition to the broad line of mid-range to high-end computing servers, data storage and data center technologies, the Company provides global customer support and professional services related to these products. The Company's products are used by the scientific, technical and business communities to solve challenging data-intensive computing, data management and visualization problems. The vertical markets the Company serves include the federal government, defense and strategic systems, weather and climate, physical sciences, life sciences, energy (including oil and gas), aerospace and automotive, internet, financial services, media and entertainment, and business intelligence and data analytics. The Company's headquarters is located in Fremont, California and its primary manufacturing facility is located in Chippewa Falls, Wisconsin.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements reflect all adjustments, consisting only of normal, recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods presented.
Fiscal Year-End. The Company has a 52 or 53 -week fiscal year ending on the last Friday in June. The current fiscal 2012 was comprised of 53 weeks and ended on June 29, 2012. Fiscal year 2011 and fiscal year 2010 were comprised of 52 weeks and ended on June 24, 2011 and June 25, 2010, respectively. Included in this report are the Company’s consolidated balance sheets as of June 29, 2012 and June 24, 2011 , the consolidated statements of operations, statements of stockholders’ equity, and cash flows for the 53 -week fiscal year ended June 29, 2012 ("fiscal 2012") and 52 -week fiscal years ended June 24, 2011 ("fiscal 2011") and June 25, 2010 ("fiscal 2010").
Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.
Estimates and Assumptions. The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses as presented in the consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. The Company’s critical accounting policies are those that affect the Company’s financial statements materially and involve difficult, subjective or complex judgments by management and include revenue recognition, share-based compensation, restructuring reserve, inventory valuation, fair value measurements, impairment of intangibles and long-lived assets, warranty reserve, retirement benefit obligations, and accounting for income taxes.
Discontinued Operations. In fiscal 2009, the Company abandoned the Rapidscale product line (“Rapidscale”) and has accounted for Rapidscale as a discontinued operation. The results of operations of Rapidscale have been reclassified and presented as discontinued operations, net of tax, for fiscal 2010. The cash flows of Rapidscale have not been reported separately within the accompanying consolidated statement of cash flows (see Note 20).
Revenue Recognition . The Company enters into sales contracts to deliver multiple products and/or services. A typical multiple-element arrangement includes product, customer support services and professional services. The Company also sells software products as part of certain multiple-element arrangements. In addition to selling multiple-element arrangements, the Company also sells certain products and services on a stand-alone basis.
Product revenue. The Company recognizes revenue from sales of products, primarily hardware, when persuasive evidence of an arrangement exists, shipment has occurred and title has transferred, the sales price is fixed or determinable, and collection of the resulting receivable is reasonably assured. In arrangements where a formal acceptance of products or services is required by the customer, revenue is recognized upon meeting such acceptance criteria.

57

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Service revenue. Service revenue includes customer support services, primarily hardware maintenance services, and professional services, which include consulting services and product integration services. Revenue from service contracts, that are not subject to deferral under the Company's revenue recognition policy applicable to sales contracts entered into prior to fiscal 2011 (discussed below) and are expressly priced separately from the hardware, is recognized ratably over the contract term, generally one to three years. Professional services are offered under time and material or fixed fee-based contracts or as part of multiple-element arrangements. Professional services revenue is recognized as services are performed.
Multiple-element arrangements. The Company's multiple-element arrangements include products, customer support services and/or professional services. Certain multiple-element arrangements include software products integrated with the hardware (“Hardware Appliance”) and the Company provides unspecified software updates and enhancements to the software through its service contracts. For arrangements which do not include Hardware Appliances, the Company recognizes revenue from the sale of products prior to the completion of services as product sales are not dependent on services to be functional.
In October 2009, the Financial Accounting Standards Board ("FASB") amended the Accounting Standards Codification (“ASC”) as summarized in 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 . ASU 2009-14 amends industry specific revenue accounting guidance for software and software related transactions to exclude from its scope tangible products containing software components and non-software components that function together to deliver the product's essential functionality. ASU 2009-13 amends the accounting for multiple-element arrangements to provide guidance on how the deliverables in an arrangement should be separated and eliminates the use of the residual method. ASU 2009-13 also requires an entity to allocate revenue using the relative selling price method. The standard establishes a hierarchy of evidence to determine the stand-alone selling price of a deliverable based on vendor-specific objective evidence ("VSOE"), third-party evidence ("TPE"), and the best estimate of selling price ("BESP"). If VSOE is available, it would be used to determine the selling price of a deliverable. If VSOE is not available, the entity would determine whether TPE is available. If so, TPE must be used to determine the selling price. If TPE is not available, then the BESP would be used.
Effective the beginning of fiscal 2011, the Company adopted the provisions of ASU 2009-13 and ASU 2009-14 on a prospective basis for new and materially modified arrangements originating after June 25, 2010. The adoption of ASU 2009-13 and ASU 2009-14 was material to the Company's financial results, increasing revenues by $166.2 million and gross profit by $62.0 million for fiscal 2011. The impact was due to the recognition of revenue that would have previously been deferred for multiple-element arrangements which include Hardware Appliances or arrangements where the undelivered element is post contract customer support ("PCS") for which the Company was unable to establish VSOE of fair value of the element. The new standard 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 with other elements in the arrangement.
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, the Company allocates revenue to each element based on the aforementioned selling price hierarchy. In multiple element arrangements where software is essential to the functionality of the products, 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.
The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting. The delivered item constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered elements. The Company's Hardware Appliances are sold on a stand-alone basis and customers are able to sell the Hardware Appliances to other buyers; accordingly, the Company has concluded that its Hardware Appliances have stand-alone value. Allocation of the consideration is determined at arrangement inception on the basis of each unit's relative selling price. The Company limits the amount of revenue recognition for delivered product elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges.
The Company has not consistently established VSOE of fair value of any of its products or services. In addition, the Company has not established TPE as there are no similar or interchangeable competitor products or services in standalone sales to similarly situated customers. Therefore, revenue from these multiple-element arrangements is allocated based on the BESP. The objective of BESP is to determine the price at which the Company would transact a sale if a product or service were sold

58

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

on a stand-alone basis. The Company determines BESP for product or service by considering multiple factors including, but not limited to, overall market conditions, including geographic or regional specific market factors, profit objectives and pricing practices. The determination of BESP is a formal process within the Company that includes review and approval by the Company's management.
For fiscal 2010 and sales contracts entered into prior to fiscal 2011, the Company recognizes revenue pursuant to the previous guidance for multiple-element arrangements. For arrangements which do not include Hardware Appliances and where services are included, the Company recognizes revenue from the sale of products prior to the completion of services as the services are not essential to the functionality of the products. For certain multiple-element arrangements, the Company delivers software products integrated with the Hardware Appliance and provides unspecified software updates and enhancements to the software through PCS. For arrangements which include Hardware Appliances or arrangements where the undelivered element is PCS, the Company had not established VSOE of fair value of the element. Therefore, revenue and related cost of revenue from these arrangements are deferred and recognized ratably over the PCS period as combined product and service revenue in the accompanying consolidated statements of operations. Revenue from those arrangements is reported as "Combined product and service" in the Consolidated Statement of Operations.
Shipping and Handling Costs. Shipping and handling costs are classified as a component of cost of revenue. Customer payments of shipping and handling costs are recorded as revenue.
Research and Development. Costs related to research, design and development of Company products are charged to research and development expense as incurred. Software development costs are required to be capitalized when a product’s technological feasibility has been established through the date the product is available for general release to customers. The Company has not capitalized any software development costs, as technological feasibility is generally not established until a working model is completed, at which time substantially all development is complete.
Share-Based Compensation. The Company uses the fair value method of accounting for share-based compensation arrangements. Share-based compensation arrangements currently include stock options granted, restricted shares issued (“RSAs”), restricted stock unit awards granted (“RSUs”) and purchases of common stock by the Company’s employees under the employee stock purchase plan ("ESPP"). The fair values of stock options and ESPP awards are estimated using the Black-Scholes option-pricing model. The fair value of RSAs and RSUs are determined based on the fair value of the stock on the date of grant. The estimated fair value of stock options, RSAs and RSUs is expensed on a straight-line basis over the expected term of the grant. Compensation expense for purchases under the ESPP is recognized based on the estimated fair value of the common stock during each offering period and the percentage of the purchase discount.
Share-based compensation expense for stock options, RSAs, RSUs and ESPP awards has been reduced for estimated forfeitures so that compensation expense is based on options, RSAs, RSUs and ESPP awards that are ultimately expected to vest. The Company’s estimated annual forfeiture rates are based on its historical forfeiture experience.
Restructuring Expense. The Company recognizes restructuring expense resulting from significant reductions in headcount, excess manufacturing or administrative facilities that the Company chooses to close, or consolidate, and from other exit activities. In connection with exit activities, the Company records restructuring charges for employee termination costs, long-lived asset impairments, costs related to leased facilities abandoned or subleased, and other exit-related costs. These charges are incurred pursuant to formal plans developed and approved by management. The recognition of restructuring expense requires management to make judgments and estimates regarding the nature, timing, and amount of costs associated with the planned exit activity, including estimating sublease income and the fair value, less selling costs of property and equipment to be disposed of. Estimates of future liabilities may change, requiring the Company to record additional restructuring expense or to reduce the amount of liabilities previously recorded. At the end of each reporting period, the Company evaluates the remaining accrued balances to ensure their adequacy, that no excess accruals are retained and that the utilization of the provisions is for the intended purpose in accordance with developed exit plans. In the event circumstances change and the provision is no longer required, the provision is reversed.
Foreign Currency Transactions. The functional currency of the Company's foreign subsidiaries is the U.S. dollar, except for its Japanese subsidiary. Accordingly, all monetary assets and liabilities of the foreign subsidiaries, except for the Japanese subsidiary, are re-measured into U.S. dollars at the exchange rates in effect at the reporting date, nonmonetary assets and liabilities are translated at historical rates, and revenue and expenses are translated at average exchange rates in effect during each reporting period. The transaction gains and losses are included as a component of other income (expense), net in the accompanying consolidated statements of operations.

59

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company uses the Japanese yen as the functional currency for its Japanese subsidiary. Assets and liabilities of the Japanese subsidiary with Japanese yen are translated to U.S. dollars using exchange rates in effect at the balance sheet dates. Revenues and expenses are translated at average exchange rates in effect during the period. Translation adjustments are included in stockholders' equity in the accompanying consolidated balance sheet as a component of accumulated other comprehensive (loss) income.
Comprehensive (Loss) Income. Comprehensive (loss) income consists of two components, net loss and other comprehensive (loss) income. Other comprehensive (loss) income refers to revenue, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders’ equity but are excluded from net loss. The Company’s other comprehensive (loss) income consists of unrealized gains and losses on investments categorized as available-for-sale, unrecognized gain (loss) related to defined benefit pension plans, and foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as the functional currency.  
Fair Value of Financial Instruments. The Company measures its consolidated financial instruments in its financial statements at fair value or amounts that approximate fair value. The Company maximizes the use of observable inputs and minimizes the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value (Level 1). If market prices are not available, fair value measurement is based upon models that use primarily market-based or independently-sourced market parameters (Level 2). If market observable inputs for model-based valuation techniques are not available, the Company makes judgments about assumptions market participants would use in estimating the fair value of the financial instrument (Level 3). Carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and credit facility due within one year approximate their fair values due to the short-term nature and liquidity of these financial instruments.
Cash and Cash Equivalents . The Company classifies highly liquid investments with remaining contractual maturity at date of purchase of three months or less as cash equivalents. Cash equivalents consist primarily of money market funds and U.S. treasuries. Due to the short-term nature and liquidity of these financial instruments, the carrying values of these assets approximate fair value.
Restricted Cash. S hort-term and long-term restricted cash consist primarily of cash deposits with banks. The cash deposits 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. The deposits are classified as short-term or long-term depending on the nature of the period of guarantee.
Accounts Receivable. Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable have been reduced by an estimated allowance for doubtful accounts, which is management’s best estimate of the amount of probable credit losses in existing accounts receivable. Among other factors, management determines the allowance based on customer specific experience and the aging of the receivables.
Concentration of Credit Risk. Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, and accounts receivable. The Company maintains cash and cash equivalents with high credit quality financial institutions. The Company derives a significant portion of its revenue from a limited number of individual customers spread globally. The Company also derives revenue from several large customers in different industries and geographies. If the financial condition or results of operations of any one of the large customers deteriorates substantially, the Company’s operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company generally does not require collateral and maintains reserves for probable credit losses on customer accounts when considered necessary.
Inventories. Inventories are stated at the lower of cost or market, which approximates actual cost on a first-in, first-out basis. The Company assesses the value of inventory on a quarterly basis based upon estimates about future demand and actual usage. To the extent that the Company determines that it is holding excess or obsolete inventory, it writes down the value of its inventory to its net realizable value. Such write downs are reflected in cost of revenue. If the inventory value is written down to its net realizable value and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is sold either as a component of a system or as separate inventory.
In addition, the Company records a liability for firm, noncancelable, and unconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of future demand forecasts consistent with the Company's valuation of excess and obsolete inventory.

60

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company maintains a long-term service inventory of parts to support maintenance arrangements. The long-term service inventory is valued based on assumptions about product life cycles, historical usage, current production status and installed base, and is periodically tested for impairment. The long-term service inventory is included in other assets in the accompanying consolidated balance sheets.
Sales and Value Added Taxes. The Company collects various types of taxes from its customers that are assessed by governmental authorities, which are imposed on and concurrent with revenue-producing transactions. Such taxes are recorded on a net basis and are not included in revenue on the accompanying consolidated statements of operations.
Property and Equipment. Property and equipment is stated at cost, net of accumulated depreciation and amortization. Equipment and capitalized software are depreciated on a straight-line basis over their estimated useful lives, generally two to seven years. Buildings are depreciated on a straight-line basis over their estimated useful life, generally 30 to 32 years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the respective assets, or the original lease term.
Repairs and maintenance are charged to expense as incurred and significant improvements and betterments that substantially enhance the life of an asset are capitalized.
Impairment of Long-lived Assets. The Company reviews the carrying values of long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the assets to the estimated undiscounted future cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value, which is typically calculated using discounted expected future cash flows utilizing a discount rate.
Intangible Assets. Intangible assets with finite lives consist of customer relationships, customer backlog, purchased technology, trademarks and trade names acquired in business combinations. Intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives of the respective assets, generally two to five years, except for the customer backlog intangible asset, which is amortized as acceptance is received for a particular customer order, reflecting the use of the asset. Amortization expense is primarily recognized within cost of revenue and sales and marketing on the consolidated statement of operations.
Warranty Reserve . The warranty period for the Company’s products is generally one to three years. Estimated future warranty costs are expensed as a cost of revenue when revenue is recognized. The warranty accrual is based upon historical experience and is affected by actual product failure rates, material usage, and service delivery costs incurred in correcting the product failure. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as considered necessary. The short-term portion of the warranty reserve is included in other current liabilities and the long-term portion of the warranty reserve is recorded in non-current liabilities on the accompanying consolidated balance sheets.
Deferred Revenue and Deferred Cost of Revenue. Deferred revenue is recorded when products or services provided are invoiced prior to completion of the related performance obligations and is recognized as revenue ratably over the PCS period. Deferred revenue also includes revenue deferred for arrangements which include hardware appliances or arrangements where the undelivered element is PCS for arrangements that were entered into prior to the fiscal 2011 adoption of ASU 2009-13 and ASU 2009-14. Deferred cost of revenue primarily consists of product costs related to revenue deferred in accordance with the Company’s revenue recognition policy. Deferred revenue and associated deferred cost of revenue, expected to be realized within one year are classified as current liabilities and current assets, respectively, on the accompanying consolidated balance sheets.
Retirement Benefit Obligations. The Company recognizes the overfunded or underfunded status of a defined benefit pension or postretirement plan as an asset or liability in the accompanying consolidated balance sheets. Changes in the funded status are recognized through accumulated other comprehensive (loss) income, a component of stockholder’s equity, in the year in which the changes occur.
Income Taxes. The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for temporary differences between financial reporting basis and tax basis of assets and liabilities and operating loss and tax credit carry forwards. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities are measured using enacted statutory tax rates expected to be realized in the years in which those temporary differences and operating loss and tax credit carryforwards are estimated to

61

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

be recovered or settled.
The Company is subject to audits and examinations of tax returns by tax authorities in various jurisdictions, including the Internal Revenue Service. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the provision for income taxes.
Recently Issued Accounting Standards .
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income ("ASU 2011-05"), which requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. This requirement under ASU 2011-05 should be applied retrospectively and is effective for the Company beginning in fiscal 2013. The adoption of this guidance will only impact the presentation of the consolidated financial statements.
3. ACQUISITION
Acquisition of SGI Japan, Ltd.
On March 9, 2011 (the “Closing Date”), pursuant to a Stock Purchase Agreement (the "Agreement") dated March 8, 2011, the Company's 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, the Company 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.
Pursuant to the terms of the Agreement, the total purchase price was approximately $17.9 million in cash, $1.8 million of which was placed in escrow to secure the Company's indemnification rights under the Agreement. The escrow funds were released in full in March 2012. The acquisition was expected to serve as a strategic entry into the large technical computing market of Japan and to enable the Company to extend its global reach, accelerate growth opportunities, and strengthen the relationships with its partners and customers in Japan. Furthermore, the acquisition was expected to enable the Company to more fully participate in the Japanese HPC market and benefit from SGI Japan's extensive service business.
The Company retained independent appraisers to assist management in the determination of the fair value of the various assets acquired and liabilities assumed. The fair value of the acquired assets, net of assumed liabilities and the fair value of the Company's previous investment, equals the $17.9 million cash consideration paid by the Company. The acquisition-date fair value of the equity interest in SGI Japan held by the Company immediately before the Closing Date was $2.1 million and was equal to its carrying value of $2.1 million . No gain or loss was recorded as the fair value approximated the carrying value of the investment.
The following were the estimated fair value of assets acquired and liabilities assumed as of the Closing Date (in thousands):
Cash and cash equivalents
 
$
23,950

Prepaid maintenance contracts
 
8,211

Other tangible assets
 
41,190

Deferred revenue
 
(8,801
)
Notes payable
 
(9,408
)
Other liabilities assumed
 
(41,834
)
Net tangible assets
 
13,308

Customer backlog
 
5,222

Goodwill
 
1,470

Total net assets acquired
 
20,000

Less: acquisition-date fair value of investment in SGI Japan previously held
 
2,096

Cash paid
 
$
17,904


62

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair value of the major components of the intangibles assets acquired and their estimated useful lives were as follows (in thousands):
Intangible Asset Class
 
Fair Value
 
Weighted Average
Useful Life
(in Years)
Customer Backlog
 
$
5,222

 
(a)
Goodwill
 
1,470

 
(b)
(a) The customer backlog intangible asset is amortized as all revenue recognition criteria is accomplished for a particular customer order, reflecting the use of the asset.
(b) Goodwill is not amortized but is tested for impairment at least annually. The goodwill resulted from expected synergies from combining the operations of the Company and SGI Japan and from the value of SGI Japan's workforce. None of this goodwill is deductible for tax purposes. The goodwill is not material to the Company and is recorded as other assets in the accompanying consolidated balance sheet.
The revenue and net loss of SGI Japan from the Closing Date to June 24, 2011 included in the accompanying consolidated statement of operations were $51.6 million and $0.2 million , respectively.
The Company incurred acquisition-related costs (i.e., advisory, legal, accounting, valuation, and other costs) of $ 1.3 million during fiscal 2011. The acquisition-related costs were expensed in the periods in which the costs were incurred and are recorded in the accompanying consolidated statements of operations.
The following unaudited pro forma condensed financial information presents the combined results of operations of the Company and SGI Japan as if the acquisition had occurred at the beginning of fiscal 2010 (in thousands except per share amounts):
 
 
Fiscal Year Ended
 
 
June 24,
2011
 
June 25,
2010
Revenue
 
$
671,163

 
$
510,854

Net loss from continuing operations
 
$
(27,472
)
 
$
(93,854
)
Income from discontinued operations, net of tax
 
—

 
409

Net loss
 
$
(27,472
)
 
$
(93,445
)
Net loss per share, basic and diluted:
 
 
 
 
Continuing operations
 
$
(0.90
)
 
$
(3.11
)
Discontinued operations
 
—

 
0.01

Basic and diluted net loss per share
 
$
(0.90
)
 
$
(3.10
)
 
 
 
 
 
Shares used in computing basic and diluted net loss per share
 
30,608

 
30,130

The unaudited pro forma condensed financial information is not intended to represent or be indicative of the condensed results of operations of the Company that would have been reported had the acquisition been completed as of the beginning of the period presented, and should not be taken as representative of the future consolidated results of operations of the Company. The acquisition-related costs of $1.3 million during fiscal 2011 are not presented in the pro forma condensed financial information because they will not have a continuing impact on the combined results.
In connection with the acquisition of SGI Japan, the Company assumed the outstanding borrowings under SGI Japan's notes payable to various Japanese financial institutions. In June 2011, the Company repaid all of the notes payable for a sum of $9.6 million ; included in this amount is the foreign currency exchange rate impact of approximately $0.2 million .
Acquisition of Copan Systems, Inc.
On February 23, 2010, the Company completed the acquisition of substantially all the assets of Copan Systems, Inc. (“Copan”) and assumed certain liabilities. The purchase price of $2.0 million was allocated to Copan’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair market values as of the acquisition date. The purchase

63

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

price allocation resulted in purchased net tangible assets of $1.0 million , consisting primarily of inventories and fixed assets, and purchased identifiable intangible assets of $1.0 million .
The Company retained independent appraisers to assist management in the determination of the fair value of the various assets acquired and liabilities assumed.  
The fair value of the intangible assets acquired and their estimated useful lives are as follows (dollars in thousands):
 
 
Fair
Value
 
Useful Life
(in Years)
Purchased technology
 
$
300

 
2
Patents and core technology
 
200

 
2
Trademark / trade name portfolio
 
100

 
2
In-process research and development costs
 
400

 
(a)
Total
 
$
1,000

 
 
(a)
In-process research and development is accounted for as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. The Company completed these efforts in fiscal 2011 and this amount was reclassified to purchased technology.
The financial results of this acquisition are not considered significant for purposes of pro forma financial disclosures.
Acquisition of Silicon Graphics, Inc.
On May 8, 2009 , the Company 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. (an entity in Chapter 11 of the U.S. Bankruptcy code) ("Legacy SGI") for a purchase price of approximately $42.5 million in cash.
During fiscal 2010, the Company 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, the Company settled a lawsuit filed by Legacy SGI with its customer and received a $2.3 million settlement payment during fiscal 2010. At the Legacy SGI acquisition date, the Company assessed whether it was more likely than not that contingent assets existed and, based on all available information, concluded that no assets existed. Accordingly, the Company recorded the total $3.3 million payment as an acquisition-related gain in the accompanying consolidated statement of operations for fiscal 2010.
4. FINANCIAL INSTRUMENTS AND FAIR VALUE
The Company measures its assets and liabilities at fair value based upon the expected exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value reflects the assumptions market participants would use in pricing an asset or liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.
The Company uses a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
•
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
•
Level 2 - Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
•
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The Company’s assessment of the hierarchy level of the assets or liabilities measured at fair value is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company considers an active market to be one in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing

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SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

information on an ongoing basis, and views an inactive market as one in which there are a few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers. Where appropriate, the Company or the counterparty’s non-performance risk is considered in determining the fair values of liabilities and assets, respectively.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company's assets that are measured at fair value on a recurring basis (in thousands):
 
 
June 29, 2012
 
 
Carrying
 
Fair Value Measured Using
Total
 
 
Value
 
Level 1
Level 2
Level 3
Balance
Cash equivalents
 
 
 
 
 
 
 
U.S. treasuries
 
$
5,530

 
$
5,530

$
—

$
—

$
5,530

Total cash equivalents
 
$
5,530

 
$
5,530

$
—

$
—

$
5,530

 
 
 
 
 
 
 
 
 
 
June 24, 2011
 
 
Carrying
 
Fair Value Measured Using
Total
 
 
Value
 
Level 1
Level 2
Level 3
Balance
Cash equivalents
 
 
 
 
 
 
 
Money market funds
 
$
1,495

 
$
1,495

$
—

$
—

$
1,495

U.S. treasuries
 
15,534

 
15,534

—

—

15,534

Total cash equivalents
 
$
17,029

 
$
17,029

$
—

$
—

$
17,029

 
 
 
 
 
 
 
 
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during fiscal 2012. The Company’s cash equivalents, consisting of money market funds and U.S. treasuries, are classified within Level 1 of the fair value hierarchy as they are valued using quoted market prices of the identical underlying securities in active markets.
The fair values of accounts receivable, accounts payable, accrued liabilities, and credit facility due within one year approximates their carrying values because of their short-term nature.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
The Company may also be required to measure certain assets or liabilities at fair value on a nonrecurring basis. The fair value of the Company's retirement benefit plans are disclosed in Note 18 of the consolidated financial statements. Prior to its acquisition, the Company's investment in SGI Japan was accounted for under the cost method and fair value of the investment was measured using comparisons to companies in Japan, analysis of the financial condition of SGI Japan, and conditions reflected in the capital markets. During the second quarter of fiscal 2011, the Company determined that there had been an other-than-temporary impairment of its investment in SGI Japan. As a result, the Company wrote down the investment by $2.9 million , which represented the difference between the investment's carrying value and the estimated fair value of the investment of $2.1 million (using Level 3 inputs). The Company classified the impairment loss as other expense in the accompanying consolidated statement of operations for fiscal 2011. There are no other assets or liabilities measured at fair value on a non-recurring basis as of June 29, 2012 and June 24, 2011.
The Company previously held adjustable rate debt securities (ARS), the majority of which were ultimately guaranteed by the U.S. Department of Education. At the end of fiscal 2010, this portfolio had a carrying basis of $8.8 million , versus an estimated fair value of $7.5 million ; the difference was recorded in other comprehensive income as an unrealized loss. During fiscal 2011, the Company determined the declines in value were other than temporary and recognized a realized loss; the securities were subsequently sold during the year. The total losses realized in connection with the ARS securities in fiscal 2011 was $0.8 million .


65

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. INVENTORIES
Inventories consist of the following (in thousands):
 
 
June 29,
2012
 
June 24,
2011
Finished goods
 
$
47,728

 
$
15,788

Work in process
 
22,666

 
16,891

Raw materials
 
52,997

 
48,286

Total inventories
 
$
123,391

 
$
80,965


Finish goods include inventory at customer sites undergoing installation testing prior to customer acceptance; such amounts were $27.9 million at June 29, 2012 and $3.0 million at June 24, 2011.
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in thousands):
 
 
June 29,
2012
 
June 24,
2011
Value-added tax receivable
 
$
9,831

 
$
7,433

Deferred tax assets
 
—

 
1,815

Prepaid taxes
 
1,555

 
1,542

Other prepaid and current assets
 
7,057

 
7,147

Total prepaid expenses and other current assets
 
$
18,443

 
$
17,937

7. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
 
 
Estimated
Useful Life
 
June 29,
2012
 
June 24,
2011
Land
 
N/A
 
$
799

 
$
799

Building
 
30-32
 
13,230

 
11,562

Computer equipment and software
 
2-6
 
27,708

 
25,076

Manufacturing equipment
 
2-7
 
7,315

 
6,280

Leasehold improvements
 
2-7
 
8,098

 
8,214

Furniture and fixtures
 
2-7
 
3,616

 
3,307

Vehicles
 
5
 
32

 
30

Construction in progress
 
N/A
 
1,396

 
518

 
 
 
 
62,194

 
55,786

Less accumulated depreciation and amortization
 
 
 
(34,790
)
 
(26,213
)
Total property and equipment, net
 
 
 
$
27,404

 
$
29,573

Depreciation and amortization expense for fiscal 2012, 2011 and 2010 was $9.5 million , $9.5 million and $12.1 million , respectively.


66

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. INTANGIBLE ASSETS, NET
Intangible assets by major asset class consist of the following (in thousands):
Intangible Asset Class
 
Weighted
Average
Useful Life
(in Years)
 
June 29, 2012
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
 
5
 
$
7,245

 
$
(4,407
)
 
$
2,838

Purchased technology
 
5
 
7,800

 
(4,980
)
 
2,820

Customer backlog
 
(a)
 
10,695

 
(9,115
)
 
1,580

Trademark/trade name portfolio
 
5
 
3,738

 
(2,365
)
 
1,373

Patents and other
 
2
 
340

 
(276
)
 
64

Total
 
 
 
$
29,818

 
$
(21,143
)
 
$
8,675

Intangible Asset Class
 
Weighted
Average
Useful Life
(in Years)
 
June 24, 2011
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Customer relationships
 
5
 
$
6,900

 
$
(2,990
)
 
$
3,910

Purchased technology
 
5
 
7,800

 
(3,271
)
 
4,529

Customer backlog
 
(a)
 
10,497

 
(7,768
)
 
2,729

Trademark/ trade name portfolio
 
5
 
3,667

 
(1,612
)
 
2,055

Patents and other
 
2
 
200

 
(134
)
 
66

Total
 
 
 
$
29,064

 
$
(15,775
)
 
$
13,289

(a)
The customer backlog intangible asset is amortized as all revenue recognition criteria is accomplished for a particular customer order, reflecting the use of the asset.
Intangible assets amortization expense was $5.2 million , $8.3 million and $6.3 million in fiscal 2012, 2011 and 2010, respectively.
No impairment of intangible assets was recorded in fiscal 2012, 2011 and 2010.
As of June 29, 2012 , expected amortization expense for all intangible assets is as follows (in thousands):
Fiscal Year
 
Amortization
Expense
2013
 
$
3,834

2014
 
3,368

2015
 
539

2016
 
446

2017
 
402

2018 and thereafter
 
86

Total amortization
 
$
8,675


9. OTHER ASSETS
Other assets consist of the following (in thousands):
 
 
June 29,
2012
 
June 24,
2011
Long-term service inventory
 
$
13,494

 
$
15,520

Restricted pension plan assets
 
7,318

 
8,211

Deferred tax assets
 
15,438

 
8,673

Long-term refundable deposits
 
3,943

 
4,117

Other assets
 
4,689

 
3,318

Total other assets
 
$
44,882

 
$
39,839

10. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
 
 
June 29,
2012
 
June 24,
2011
Accrued sales and use tax payable
 
$
10,795

 
$
12,342

Deferred tax liabilities
 
15,158

 
6,602

Accrued professional services fees
 
5,657

 
3,959

Accrued warranty, current portion
 
4,054

 
4,805

Income taxes payable
 
1,740

 
1,315

Accrued restructuring
 
1,849

 
1,286

Other
 
9,334

 
9,658

Total other current liabilities
 
$
48,587

 
$
39,967

11. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following (in thousands):
 
 
June 29,
2012
 
June 24,
2011
Accrued warranty, non-current portion
 
$
3,248

 
$
2,773

Deferred tax liabilities
 
—

 
1,814

Other
 
3,566

 
3,588

Total other non-current liabilities
 
$
6,814

 
$
8,175


12. WARRANTY RESERVE
Activity in the warranty reserve, which is included in other current and non-current liabilities, is as follows (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
Balance at beginning of period
 
$
7,578

 
$
4,386

Warranty accrual assumed in acquisition of SGI Japan
 
—

 
1,690

Current period accrual
 
5,690

 
4,595

Warranty expenditures charged to accrual
 
(4,777
)
 
(4,359
)
Changes in accrual for pre-existing warranties
 
(1,189
)
 
1,266

Balance at end of period
 
$
7,302

 
$
7,578


67

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. RESTRUCTURING ACTIVITY
The Company has implemented a number of restructuring actions to streamline operations and reduce operating expenses. Total expense for all restructuring actions was $ 2.5 million , $ 5.1 million , and $ 5.2 million for fiscal 2012, 2011 and 2010, respectively. The restructuring expense is included in operating expenses in the accompanying consolidated statement of operations. The total restructuring liability for all restructuring actions was $1.8 million as of June 29, 2012 , all of which are classified as current liabilities in the accompanying consolidated balance sheet.
Fiscal 2012 Restructuring Action
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 connection with the restructuring action, the Company expects to incur pre-tax cash charges (including charges recorded in fiscal 2012) 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. The Company expects to recognize the majority of the expense associated with the employee termination benefits prior to the third quarter of fiscal 2013. Total expense incurred in connection with this restructuring plan, for actions taken through June 29, 2012 was $2.3 million .
Activity in accrued restructuring for the fiscal 2012 restructuring action was as follows (in thousands):
 
 
Employee
Terminations
Balance at June 24, 2011
 
$
—

Costs incurred
 
2,340

Cash payments
 
(719
)
Balance at June 29, 2012
 
$
1,621


Fiscal 2011 Restructuring Action
On February 18, 2011, the Company's Board of Directors approved restructuring actions to reduce the Company's worldwide workforce. Total expense for the fiscal 2011 restructuring actions was $0.1 million and $4.3 million for fiscal 2012 and 2011, respectively. The Company expects the remaining employee severance of $0.2 million to be paid by the end of fiscal 2013.
Activity in accrued restructuring for the fiscal 2011 restructuring action was as follows (in thousands):
 
 
Employee
Terminations
Balance at June 24, 2011
 
$
1,130

Costs incurred
 
129

Cash payments
 
(1,049
)
Balance at June 29, 2012
 
$
210


Fiscal 2010 Restructuring Action
On July 27, 2009, management approved restructuring actions to reduce the Company's European workforce and vacate certain facilities in Europe. Total expense for the fiscal 2010 restructuring actions was $0.8 million and $5.2 million for fiscal 2011 and 2010, respectively. The Company has paid all contractual obligations and employee severance in connection with this restructuring action as of the end of fiscal 2011.

68

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. CREDIT FACILITY
On December 5, 2011 , the Company entered into a five -year senior secured credit facility in the aggregate principal amount of $35.0 million . The availability under the credit facility is limited to a borrowing base, subject to meeting certain conditions set forth in the credit facility. The credit facility included a feature that allowed the Company to increase the revolver amount in the first 18 months . The Company exercised this feature, and on May 1, 2012 , the revolver amount was increased by $5.0 million to an aggregate principal amount of $40.0 million . The credit facility includes a $10.0 million letter of credit subfacility. See Note 24 "Commitments and Contingencies" for more information regarding the letter of credit.
The availability of the aggregate principal amount under the credit facility will fluctuate, generally monthly, based on eligible domestic accounts receivable and inventory due to a variety of factors including the Company's overall mix of sales and resulting accounts receivable with international and domestic customers, United States governmental agencies and a few individual customer accounts which may result in high concentrations of accounts receivable as compared to the overall level of the Company's accounts receivable. The credit facility contains financial covenants including, under certain conditions, maintaining a minimum fixed charge coverage ratio, as well as other non-financial covenants, including restrictions on declaring and paying dividends, and is secured by substantially all of the Company's assets. The credit facility terminates on December 5, 2016 . Borrowings under the credit facility bear interest based on a rate of the Company's choice equal to either: 1) the LIBOR plus a margin of 2.50 % per annum or 2) the base rate plus a margin of 1.75 % per annum. The base rate is the greater of (a) the Federal Funds rate plus 0 .50 %, (b) the LIBOR rate plus 1.00 % or (c) the prime rate of the financial institution. The LIBOR rate and the base rate are determined at the specified date preceding or at the time of the borrowing in accordance with the terms of the credit facility. In addition, unused line fees are payable on the credit facility at rates of 0.40% per annum.
As of June 29, 2012 , the Company had $15.2 million outstanding borrowings under this credit facility plus $0.2 million in accrued interest. The amount borrowed bears interest at 2.70% based on LIBOR as of June 29, 2012 . As of June 29, 2012 , the remaining amount available to be borrowed under the credit facility was approximately $24.8 million , and the Company was in compliance with all covenants.
15. SHARE-BASED COMPENSATION
Share-Based Compensation Plans
In 2005, the Company’s Board of Directors adopted and its stockholders approved the Company’s 2005 Equity Incentive Plan (“2005 Plan”), 2005 Non-Employee Directors’ Stock Option Plan ("2005 Director Plan") and 2005 Employee Stock Purchase Plan (“2005 ESPP Plan”). As of June 29, 2012 , the aggregate number of shares of common stock available for grant under each plan is 2,332,427 , 70,333 and 1,201,589 shares, respectively. Each plan contains a provision that automatically increases the number of shares of common stock reserved for issuance on January 1 of each year. During fiscal 2010, the number of stock options authorized for issuance under the 2005 Plan, 2005 Director Plan and the 2005 ESPP Plan was increased by 1,583,135 shares, 68,703 shares and 364,923 shares, respectively. During fiscal 2011, the number of stock options authorized for issuance under each Plan was increased by 153,515 shares, 0 shares and 310,561 shares, respectively. During fiscal 2012, the number of stock options authorized for issuance under each Plan was increased by 1,295,453 shares, 0 shares, and 1,123,863 shares, respectively.
The Company’s Board of Directors adopted the 2006 New Recruit Equity Incentive Plan (“New Recruit Plan”) in January 2006 which allows the Company to grant non-statutory stock awards to newly hired employees as an inducement to join the Company. No grants may be made under the New Recruit Plan to persons who are continuing employees or directors. The New Recruit Plan provides for the grant of the following stock awards: (i) non-statutory stock options, (ii) stock purchase awards, (iii) stock bonus awards, (iv) stock appreciation rights, (v) stock unit awards and (vi) other stock awards. As of June 29, 2012 , the number of shares of common stock available for grant under the 2006 Plan is 106,705 shares. There have been no increases in the total shares of common stock reserved for the New Recruit Plan during fiscal 2010, 2011 and 2012. The exercise price of each non-statutory stock option shall be not less than 100%  of the fair market value of the common stock subject to the option on the date the option is granted.
Stock awards expire ten years from the date of grant, or such shorter period specified in the award agreement. The awards generally vest at a rate of 25%  per year over four years from the date the award is granted. The Company issues new shares of its common stock upon exercise of stock options, issuance of restricted stock awards (“RSA”), restricted stock units (“RSU”) and issuance of shares purchased under its 2005 ESPP Plan. RSAs differ from RSUs in that RSAs result in issuance of common stock with all rights, including rights to vote and to receive dividends, upon grant, with the exception of the ability to sell the common stock. Common stock to be issued for grants of RSUs are not issued until the RSU vests and do not have rights to vote

69

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

or receive dividends.
Determining Fair Value
The fair value of certain share-based awards are estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the following periods:
 
 
Fiscal Year Ended
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Option Plans Shares
 
 
 
 
 
 
Risk-free interest rate
 
1.0
%
 
1.4
%
 
2.6
%
Volatility
 
69.7
%
 
61.5
%
 
61.6
%
Weighted average expected life (in years)
 
4.73

 
4.29

 
4.98

Expected dividend yield
 
—
%
 
—
%
 
—
%
Weighted average grant date fair value
 
$6.67
 
$6.04
 
$3.09
 
 
 
 
 
 
 
ESPP Plan shares
 
 
 
 
 
 
Risk-free interest rate
 
0.2
%
 
0.4
%
 
0.6
%
Volatility
 
78.0
%
 
56.0
%
 
58.0
%
Weighted average expected life (in years)
 
1.25

 
1.25

 
1.25

Expected dividend yield
 
—
%
 
—
%
 
—
%
Weighted average grant date fair value
 
$5.39
 
$3.91
 
$2.55
The computation of expected life is based on an analysis of the Company's historical exercise and post-vesting forfeiture experience. The expected volatility is based on the implied and historical volatility for the Company from fiscal 2010 through the second quarter of fiscal 2012, and historical volatility from the third quarter of fiscal 2012 through the fourth quarter of fiscal 2012; this change had no significant impact on the volatility rate used during the year. The interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. As share-based compensation expense recognized in the accompanying consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimated.
Share-Based Compensation Expense
Total share-based compensation expense is as follows (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Cost of revenue
 
$
1,358

 
$
685

 
$
691

Research and development
 
1,938

 
641

 
767

Sales and marketing
 
1,570

 
990

 
445

General and administrative
 
5,195

 
3,582

 
2,924

Continuing operations
 
10,061

 
5,898

 
4,827

Discontinued operations
 
—

 
—

 
(106
)
Total share-based compensation expense
 
$
10,061

 
$
5,898

 
$
4,721

Total share-based compensation expense for the fiscal 2012 includes $1.4 million of share-based expense recognized by the Company due to the modification of certain terms of the vested options held by the Company's former Chief Executive Officer and former Chief Financial Officer.

70

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Option Activity
The following table summarizes the Company’s stock option activity for fiscal 2012 and 2011.
 
 
Options Outstanding
 
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual term
in years
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
(in thousands)
Balance at June 25, 2010
 
3,752,920

 
$
9.85

 
 
 
 
Options granted
 
228,000

 
12.18

 
 
 
 
Options exercised
 
(501,567
)
 
8.83

 
 
 
 
Options cancelled
 
(358,271
)
 
7.99

 
 
 
 
Balance at June 24, 2011
 
3,121,082

 
10.40

 
 
 
 
Options granted
 
1,220,500

 
11.86

 
 
 
 
Options exercised
 
(196,660
)
 
9.55

 
 
 
 
Options cancelled
 
(441,262
)
 
11.49

 
 
 
 
Balance at June 29, 2012
 
3,703,660

 
$
10.79

 
5.67

 
$
1,033

Vested and expected to vest at June 29, 2012
 
3,444,147

 
$
10.83

 
5.41

 
$
970

Exercisable at June 29, 2012
 
2,321,762

 
$
11.26

 
3.74

 
$
624

The total intrinsic value of options exercised in fiscal 2012, 2011 and 2010 was $1.0 million , $3.7 million and $0.5 million , respectively. The total fair value of shares vested during fiscal 2012, 2011 and 2010 was $3.1 million , $4.4 million and $5.8 million , respectively.
As of June 29, 2012 , there was $3.8 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a weighted average period of 1.32 years.
The following table summarizes information about stock options outstanding under all option plans as of June 29, 2012 :
 
 
Options Outstanding
 
Options Exercisable
Exercise Price Range
 
Number of
Outstanding
Options
 
Weighted Average
Remaining
Contractual Life
(In Years)
 
Weighted
Average
Exercise
Price
 
Number of
Options
Exercisable
 
Weighted
Average
Exercise
Price
$ 3.65 - $ 5.07
 
51,825

 
6.01

 
$
4.38

 
24,316

 
$
4.06

   5.34 - 5.34
 
729,515

 
6.15

 
5.34

 
506,721

 
5.34

   5.60 - 7.99
 
410,374

 
7.53

 
6.68

 
191,642

 
7.22

   8.35 - 9.78
 
537,980

 
8.48

 
9.57

 
171,933

 
9.31

   9.80 - 11.69
 
389,033

 
5.59

 
11.18

 
235,657

 
11.09

 11.83 - 13.15
 
137,247

 
2.98

 
12.44

 
136,622

 
12.44

 13.23 - 13.23
 
700,000

 
1.00

 
13.23

 
700,000

 
13.23

 13.44 - 14.69
 
500,936

 
8.08

 
14.40

 
166,309

 
14.30

 16.50 - 35.94
 
234,918

 
5.01

 
21.10

 
176,730

 
22.26

 37.91 - 37.91
 
11,832

 
3.92

 
37.91

 
11,832

 
37.91

   3.65 - 37.91
 
3,703,660

 
5.67

 
10.79

 
2,321,762

 
11.26

Performance-based option grants
On August 11, 2009, the Company's former CEO was granted a non-qualified stock option, with performance-based metrics, to purchase 40,000 shares of the Company's common stock. The stock option, which had a grant date fair value of approximately $0.1 million , was valued using the Black-Scholes option-pricing model. The stock option had an exercise price of $5.34 per share, a contractual term of ten years and a maximum of 10,000 shares vesting per annum depending on the attainment of performance-based metrics. Stock-based compensation expense for this award was recognized when it was determined that it was probable that the performance-based metrics were going to be achieved. Some of the 40,000 options

71

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

vested in fiscal 2010. As the former CEO resigned in January 2012, the performance vesting conditions were not achieved and, accordingly, the performance grant's remaining options expired unvested. Therefore, the Company reversed the stock-based compensation expense previously recorded in fiscal 2012. Stock-based compensation expense related to this award was not material in the fiscal 2011 and 2010.
Restricted Stock Activity
The following table summarizes the Company’s RSA activity for fiscal 2012 and 2011.
 
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
Balance at June 25, 2010
 
41,252

 
$
13.91

Released
 
(41,252
)
 
13.91

Balance at June 24, 2011
 
—

 
—

Awarded
 
—

 
—

Balance at June 29, 2012
 
—

 
$
—

As of June 29, 2012 , the total unrecognized compensation cost related to RSA was zero .
The following table summarizes the Company’s RSU activity for fiscal 2012 and 2011.
 
 
Number of
Shares
 
Weighted
Average
Grant Date
Fair Value
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
 
 
(in thousands)
Balance at June 25, 2010
 
314,348

 
$
9.37

 
 
 
 
Awarded
 
558,043

 
6.96

 
 
 
 
Released
 
(279,369
)
 
8.65

 
 
 
 
Forfeited
 
(48,404
)
 
7.51

 
 
 
 
Balance at June 24, 2011
 
544,618

 
7.43

 
 
 
 
Awarded
 
791,650

 
11.38

 
 
 
 
Released
 
(263,721
)
 
11.89

 
 
 
 
Forfeited
 
(153,783
)
 
8.72

 
 
 
 
Balance at June 29, 2012
 
918,764

 
$
10.12

 
1.59

 
$
5,898

Vested and expected to vest at June 29, 2012
 
705,048

 
$
9.98

 
1.58

 
$
4,549

As of June 29, 2012 , there was $5.7 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 3.11 years.
RSUs are converted into common stock upon vesting. Upon the vesting of restricted stock, the Company primarily uses the net share settlement approach, which withholds a portion of the shares to cover the applicable taxes and decreases the shares issued to the employee by a corresponding value. The withholding tax obligations were based upon the fair market value of the Company’s common stock on the vesting date. The number and the value of the shares netted for employee taxes are summarized in the table below (in thousands except share amounts):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
RSUs and RSAs shares withheld for taxes
 
95,746

 
113,463

 
118,486

RSUs and RSAs amounts withheld for taxes
 
$
1,126

 
$
1,433

 
$
857


72

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Employee Stock Purchase Plan
At June 29, 2012 , the total compensation cost related to options to purchase the Company’s common stock under the 2005 ESPP Plan not yet recognized was approximately $1.4 million . This cost will be amortized on a straight-line basis over approximately 1.60 years. The following table shows the shares issued and their respective weighted-average purchase price per share during fiscal 2012, 2011, and 2010.
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Shares issued
 
508,132

 
473,698

 
238,889

Weighted-average purchase price per share
 
$
6.42

 
$
4.51

 
$
3.78


16. STOCKHOLDERS’ EQUITY
Stock Repurchase
In February 2009, the Company's Board of Directors authorized a share repurchase program of up to $40.0 million of its common stock. Under the program, the Company was able to purchase shares of common stock through open market transactions and privately negotiated purchases at prices deemed appropriate by management. The timing and amount of repurchase transactions under this program will depend on market conditions, corporate and regulatory considerations, and other relevant considerations. The shares the Company repurchases will be held in treasury for general corporate purposes, including issuance under employee equity incentive plans. The program was suspended in April 2009. On August 31, 2010, the Company's Board of Directors authorized the Company to resume its stock repurchase program. The program expired in March 2012.
During fiscal 2011, the Company repurchased and held in treasury 505,100 shares of common stock for a total of $3.9 million . Such repurchases were accounted for at cost and reflected as treasury stock in the accompanying consolidated balance sheets. No shares of common stock were repurchased during fiscal 2012 and 2010.
As of June 29, 2012 , the Company held in treasury 748,795 shares for a total of $4.9 million .
Accumulated Other Comprehensive (Loss) Income
The following table summarizes the components of accumulated other comprehensive (loss) income as of June 29, 2012 , June 24, 2011 and  June 25, 2010 (in thousands):
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Net unrealized losses on investments
 
$
—

 
$
—

 
$
(1,355
)
Cumulative translation adjustment
 
838

 
741

 
—

Loss on pension assets
 
(2,318
)
 
(168
)
 
(548
)
Accumulated other comprehensive (loss) income
 
$
(1,480
)
 
$
573

 
$
(1,903
)
The related tax effects of these components of accumulated other comprehensive (loss) income is not material to the Company.
17. EARNINGS PER SHARE
Basic and diluted net loss per common share is computed by dividing consolidated net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing consolidated net loss by the weighted average number of common shares outstanding and dilutive common stock equivalent shares outstanding during the period. For fiscal 2012, 2011 and 2010, potentially dilutive shares, which include outstanding common stock options and restricted stock units, were not included in the computation of diluted net loss per common share as the result would be anti-dilutive. Such potentially dilutive shares are excluded when the effect would be to reduce a net loss per share. As the Company had a net loss in each of the periods presented, basic and diluted net loss per share are the same for each period presented.

73

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth the computation of basic and diluted net loss per share for fiscal 2012, 2011 and 2010 (in thousands, except per share amount):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Numerators:
 
 
 
 
 
 
Loss from continuing operations, net of tax
 
$
(24,461
)
 
$
(21,233
)
 
$
(88,861
)
Income from discontinued operations, net of tax
 
—

 
—

 
409

Net loss
 
$
(24,461
)
 
$
(21,233
)
 
$
(88,452
)
Denominator:
 
 
 
 
 
 
Weighted-average common shares used in computing basic and diluted net loss per share
 
31,653

 
30,608

 
30,130

Net loss per share, basic and diluted:
 
 
 
 
 
 
Continuing operations
 
$
(0.77
)
 
$
(0.69
)
 
$
(2.95
)
Discontinued operations
 
—

 
—

 
0.01

Basic and diluted net loss per share
 
$
(0.77
)
 
$
(0.69
)
 
$
(2.94
)
The following table sets forth potential shares of common stock, which are excluded from the calculation of diluted net loss per share, as the result would be anti-dilutive (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Potentially dilutive securities
 
4,623

 
3,666

 
4,067

18. RETIREMENT BENEFIT PLAN
Defined Benefit Plans
The Company sponsors defined benefit plans covering certain of its international employees in Germany and Japan.
Pension benefits associated with these plans generally are based on each participant's years of service, compensation, and age at retirement or termination. The Company funds these pension plans in amounts sufficient to meet the minimum requirements of the local laws and regulations. Additional funding may be provided as deemed appropriate.
German Plan
The German defined benefit plan was acquired as part of the acquisition of Legacy SGI in May 2009. Employees joining the Company after May 2009 are not eligible for this plan. The German plan is managed by an insurance company and the insurance company makes investment decisions with the guidelines set by the German regulation. The plan assets are invested as part of the insurance company’s general fund and the Company does not have control over the target allocation or visibility of the investment strategies of these investments.

74

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Following is a reconciliation of the beginning and ending balances of the projected benefit obligation and the fair value of plan assets as of June 29, 2012 and June 24, 2011 (in thousands):
 
 
 
Fiscal Year Ended

 
June 29,
2012
 
June 24,
2011
Projected Benefit Obligation
 
 
 
 
Benefit obligation, beginning of year
 
$
11,334

 
$
9,548

Service cost
 
118

 
119

Interest cost
 
563

 
558

Actuarial (gains) and losses
 
1,809

 
(191
)
Benefits paid
 
(388)

 
(349
)
Foreign exchange rate changes
 
(1,573)

 
1,650

Benefit obligation, ending of year
 
$
11,863

 
$
11,334

 
 
 
Fiscal Year Ended

 
June 29,
2012
 
June 24,
2011
Fair Value of Plan Assets
 
 
 
 
Fair value of plan assets, beginning of year
 
$
2,721

 
$
2,587

Expected return on plan assets
 
97

 
102

Participant contributions
 
28

 
30

Actuarial gains and (losses)
 
(14
)
 
9

Benefit payments
 
(63
)
 
(53
)
Foreign exchange rate changes
 
(340
)
 
46

Fair value of plan assets, ending of year
 
$
2,429

 
$
2,721


 
June 29,
2012
 
June 24,
2011
Underfunded Status
 
 
 
 
Projected benefit obligation
 
$
11,863

 
$
11,334

Fair value of plan assets
 
2,429

 
2,721

Underfunded status of plan
 
$
9,434

 
$
8,613

The Company has life insurance policies with cash surrender values that have been earmarked by the Company to partly cover the underfunded status of the plan. As of June 29, 2012 , the cash surrender values of the life insurance plans of $0.3 million and $7.3 million are included in other current assets and other assets, respectively, in the accompanying consolidated balance sheets. As of June 24, 2011 , the cash surrender values of the life insurance plans of $0.3 million and $8.3 million are included in other current assets and other assets, respectively, in the accompanying consolidated balance sheets.
The following table summarizes the amounts recognized on the consolidated balance sheets as of June 29, 2012 and June 24, 2011 (in thousands):
 
 
June 29,
2012
 
June 24,
2011
Amounts recognized in the consolidated balance sheets
 
 
 
 
Accrued benefit cost
 

 

Current liabilities
 
$
305

 
$
339

Non-current liabilities
 
9,129

 
8,274

Amounts recognized in accumulated other comprehensive (loss) income
 
 
 
 
Net actuarial (loss) gain
 
$
(2,161
)
 
$
(366
)

75

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the amounts recorded to other comprehensive (loss) income before taxes during fiscal 2012 and 2011 (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
Amounts recognized in other comprehensive (loss) income
 
 
 
 
Net actuarial (loss) gain
 
$
(1,795
)
 
$
182

Total recognized in other comprehensive (loss) income
 
$
(1,795
)
 
$
182

The Company expects to recognize $0.2 million of amortization from accumulated other comprehensive (loss) income into net periodic benefit cost during fiscal 2013.
The following table summarizes the amounts related to the pension plan with accumulated benefit obligation in excess of plan assets at June 29, 2012 and June 24, 2011 (in thousands):
 
 
June 29,
2012
 
June 24,
2011
Projected benefit obligation
 
$
11,863

 
$
11,334

Accumulated benefit obligation
 
11,499

 
10,973

Fair value of plan assets
 
2,429

 
2,721

The Company carries the interest and service cost of the plan. Actuarial gains and losses are amortized over the expected life of the plan.
Weighted average assumptions used to determine benefit obligations for the German plan were as follows:
 
 
June 29,
2012
 
June 24,
2011
Discount rate
 
4.1
%
 
5.4
%
Rate of compensation increase
 
2.0
%
 
2.0
%
Weighted average assumptions used to determine net periodic benefit cost for the German plan were as follows:
 
 
June 29,
2012
 
June 24,
2011
Discount rate
 
5.4
%
 
5.4
%
Expected long-term rate of return on plan assets
 
3.8
%
 
4.1
%
Rate of compensation increase
 
2.0
%
 
2.0
%
The discount rate reflects the current rate at which the Company believes associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Using this methodology, the Company determined a discount rate of 4.1% for the German plan as of June 29, 2012 , which is a 1.3% decrease from the rate used as of June 24, 2011 .
Expected long-term rate of return on assets assumptions for the German plan is determined using the projected long-term rate of return estimated by the insurance company for its general fund.

76

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The net periodic benefit cost of the German plan was comprised of the following components (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Net periodic benefit cost
 
 
 
 
 
 
Service cost
 
$
118

 
$
119

 
$
126

Interest expense
 
563

 
558

 
589

Expected return on plan assets
 
(97
)
 
(102
)
 
(105
)
Net periodic benefit cost
 
$
584

 
$
575

 
$
610

The Company does not expect to make any contributions to the German plan during the next fiscal year as contributions are not required by funding regulations or laws and the cash surrender value of the life insurance plan earmarked by the Company substantially covers the under-funded status of the German plan.
Fair Value of Plan Assets

The plan assets measured at fair value consisted of the following as of June 29, 2012 (in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments held by an insurance company
 
$
—

 
$
2,429

 
$
—

 
$
2,429

Total assets measured at fair value
 
$
—

 
$
2,429

 
$
—

 
$
2,429

The plan assets measured at fair value consisted of the following as of June 24, 2011 (in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments held by an insurance company
 
$
—

 
$
2,721

 
$
—

 
$
2,721

Total assets measured at fair value
 
$
—

 
$
2,721

 
$
—

 
$
2,721

Level 2 assets include investments that are pooled with other investments held by the insurance company within its general fund. The investments held by the insurance company are valued by taking the percentage owned by the plan in the underlying net asset value of the insurance company’s general fund.
Future Employee Benefit Payments
The following table provides the estimated pension payments that are payable from the German plan to participants (in thousands):
Fiscal Year
 
Future
Payments
2013
 
$
540

2014
 
412

2015
 
452

2016
 
464

2017
 
494

Following five years
 
3,786

Total
 
$
6,148

Japan Plan
In connection with the acquisition of SGI Japan (See Note 3), the Company acquired a defined benefit plan ("Japan plan") covering substantially all of its employees in Japan. All employees of SGI Japan are eligible to participate in the Japan plan. Pension benefits associated with the Japan plan are based on a point-based plan under which a point is added every year reflecting the individual employee's years of service and their job classification. The amount of pension benefit payment is determined based on the sum of cumulative points from past services. The pension benefits are payable, depending on the employee's eligibility, in either in a lump-sum amount or monthly pension payments. The Company funds the SGI Japan

77

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

pension plan in amounts sufficient to meet the minimum requirements of the local laws and regulations. Additional funding may be provided as deemed appropriate.
In October 2011, SGI Japan, Ltd ("SGI Japan"), its employees, and the Japanese Ministry of Health, Labor and Welfare approved an action to change SGI Japan's retirement benefit plan effective October 1, 2011 in accordance with the Defined Benefit Corporate Pension Law and Defined Contribution Corporate Pension Law of 2001 (the "Acts"). SGI Japan shifted a portion of its defined benefit plan to a defined contribution plan and modified the terms of its defined benefit plan in accordance with the Acts. The change in the retirement benefit plan reduced SGI Japan's retirement benefit obligation and resulted in a gain from curtailment of $1.3 million and a loss from settlement of $1.0 million . In addition, SGI Japan agreed to increase its employer contribution to the defined benefit plan and defined contribution plan to fund the underfunded portion of the retirement benefit obligation as required under the Acts.
Following is a reconciliation of the beginning and ending balances of the projected benefit obligation and the fair value of plan assets as of June 29, 2012 and June 24, 2011 (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
Projected Benefit Obligation
 
 
 
 
Benefit obligation, beginning of year
 
$
10,474

 
$
—

Business combinations
 
—

 
9,861

Service cost
 
749

 
350

Interest cost
 
128

 
50

Actuarial (gains) and losses
 
563

 
(186
)
Benefits paid
 
(787
)
 
(37
)
Effect of curtailments
 
(1,693
)
 
—

Effect of settlements
 
(3,514
)
 
—

Foreign exchange rate changes
 
133

 
436

Benefit obligation, ending of year
 
$
6,053

 
$
10,474

 
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
Fair Value of Plan Assets
 
 
 
 
Fair value of plan assets, beginning of year
 
$
3,236

 
$
—

Business combinations
 
—

 
2,585

Expected return on plan assets
 
97

 
23

Company contributions
 
1,243

 
529

Actuarial gains and (losses)
 
(208
)
 
11

Benefit payments
 
(690
)
 
(36
)
Foreign exchange rate changes
 
20

 
124

Fair value of plan assets, ending of year
 
$
3,698

 
$
3,236


 
 
June 29,
2012
 
June 24,
2011
Underfunded Status
 
 
 
 
Projected benefit obligation
 
$
6,053

 
$
10,474

Fair value of plan assets
 
(3,698
)
 
(3,236
)
Underfunded status of plan
 
$
2,355

 
$
7,238


78

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the amounts recognized on the consolidated balance sheets as of June 29, 2012 and June 24, 2011 (in thousands):

 
June 29,
2012
 
June 24,
2011
Amounts recognized in the consolidated balance sheets
 
 
 
 
Accrued benefit cost
 

 
 
Non-current liabilities
 
$
2,355

 
$
7,238

Amounts recognized in accumulated other comprehensive (loss) income
 
 
 
 
Net actuarial (loss) gain
 
$
(157
)
 
$
198

The following table summarizes the amounts recorded to other comprehensive (loss) income before taxes during fiscal 2012 and 2011 (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
Amounts recognized in other comprehensive (loss) income
 
 
 
 
Net actuarial (loss) gain
 
$
(355
)
 
$
198

Total recognized in other comprehensive (loss) income
 
$
(355
)
 
$
198

The Company does not expect any amortization from accumulated other comprehensive (loss) income into net periodic benefit cost during fiscal 2013.
The following table summarizes the amounts related to the pension plan with accumulated benefit obligation in excess of plan assets at June 29, 2012 and June 24, 2011 (in thousands):
 
 
June 29,
2012
 
June 24,
2011
Projected benefit obligation
 
$
6,053

 
$
10,474

Accumulated benefit obligation
 
5,312

 
9,206

Fair value of plan assets
 
3,698

 
3,236

The Company carries the interest and service cost of the plan. Actuarial gains and losses are amortized over the expected life of the plan.
Weighted average assumptions used to determine benefit obligations for the Japan plan were as follows:
 
 
June 29,
2012
 
June 24,
2011
Discount rate
 
1.7
%
 
1.8
%
Rate of compensation increase
 
5.7
%
 
6.2
%

Weighted average assumptions used to determine net periodic benefit cost for the Japan plan were as follows:
 
 
June 29,
2012
 
June 24,
2011
Discount rate
 
1.7
%
 
1.8
%
Expected long-term rate of return on plan assets
 
3.0
%
 
3.0
%
Rate of compensation increase
 
5.7
%
 
6.2
%
The discount rate reflects the current rate at which the Company believes associated liabilities could be effectively settled at the end of the year. The Company sets its rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits. Using this methodology, the Company determined a discount rate of 1.7% for the Japan plan as of June 29, 2012 , which is a 0.1% decrease from the rate used as of June 24, 2011 .
Expected long-term rate of return on assets assumptions for the Japan plan is determined by SGI Japan in consideration

79

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

of the portfolio of SGI Japan's pension plan and projected long-term rate of return based on the Japanese market.
The net periodic benefit cost of the Japan plan was comprised of the following components (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
Net periodic benefit cost
 
 
 
 
Service cost
 
$
749

 
$
350

Interest expense
 
128

 
50

Expected return on plan assets
 
(97
)
 
(23
)
Loss on settlement
 
993

 
—

Gain from curtailment
 
(1,265
)
 
—

Net periodic benefit cost
 
$
508

 
$
377

The Company expects to make contributions to the Japan plan of approximately $0.9 million during fiscal 2013.
Fair Value of Plan Assets
The Japan plan is managed by an insurance company and the insurance company makes investment decisions with the guidelines set by the Japanese regulation. The plan assets are invested as part of the insurance company’s general fund and the Company does not have control over the target allocation or visibility of the investment strategies of these investments.
The plan assets measured at fair value consisted of the following as of June 29, 2012 (in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Investments held by an insurance company
 
$
—

 
$
3,698

 
$
—

 
$
3,698

Total assets measures at fair value
 
$
—

 
$
3,698

 
$
—

 
$
3,698

Level 2 assets include investments that are pooled with other investments held by the insurance company within its general fund. The investments held by the insurance company are valued by taking the percentage owned by the plan in the underlying net asset value of the insurance company’s general fund.
Prior to transferring the management of the Japan plan to the insurance company, the plan assets were diversified primarily into domestic and foreign equity and debt securities. Approximately 44% of plan assets were invested in equity securities, approximately 50% were invested in domestic and foreign government bonds and corporate bonds and the remaining 6% of plan assets were invested in other assets, such as money in trust, and other funds. The plan assets measured at fair value consisted of the following as of June 24, 2011 (in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Equity securities
 
 
 
 
 
 
 
 
Japanese
 
$
696

 
$
17

 
$
—

 
$
713

Non-Japanese
 
677

 
15

 
—

 
692

Debt securities
 
 
 
 
 
 
 
 
Japanese
 
939

 
413

 
—

 
1,352

Non-Japanese
 
164

 
111

 
—

 
275

Cash and cash equivalents
 
204

 
—

 
—

 
204

Total assets measured at fair value
 
$
2,680

 
$
556

 
$
—

 
$
3,236

Future Employee Benefit Payments
The following table provides the estimated pension payments that are payable from the Japan plan to participants (in thousands):

80

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fiscal Year
 
Future
Payments
2013
 
$
491

2014
 
232

2015
 
336

2016
 
414

2017
 
332

Following five years
 
2,716

Total
 
$
4,521

Defined Contribution Plan
The Company's U.S. employees are eligible to participate in the Company's qualified defined contribution plan under section 401(k) of the Internal Revenue Code. The plan provides for voluntary salary reduction contributions up to the maximum allowed under Internal Revenue Service rules. Under the terms of the plan, the Company may provide a discretionary matching contribution at the discretion of its management or the Company can make annual contributions to the plan at the discretion of the Board of Directors. The Company contributed $ 1.4 million during fiscal 2012. There were no contributions to the plan for during fiscal 2011 and 2010.
19. INCOME TAXES
The provision (benefit) for income taxes for fiscal years 2012, 2011 and 2010 was as follows (in thousands):
 
 
Fiscal Year Ended
 
 
June 29, 2012
 
June 24,
2011
 
June 25,
2010
Federal:
 
 
 
 
 
 
Current
 
$
7

 
$
(417
)
 
$
(4,923
)
Deferred
 
—

 
—

 
(482
)
 
 
7

 
(417
)
 
(5,405
)
State:
 
 
 
 
 
 
Current
 
(136
)
 
(47
)
 
(395
)
Deferred
 
—

 
—

 
(59
)
 
 
(136
)
 
(47
)
 
(454
)
Foreign:
 
 
 
 
 
 
Current
 
(524
)
 
3,280

 
1,915

Deferred
 
1,654

 
(1,574
)
 
(497
)
 
 
1,130

 
1,706

 
1,418

Provision (benefit) for income taxes
 
$
1,001

 
$
1,242

 
$
(4,441
)
The components of loss before income taxes consisted of the following (in thousands):
 
 
Fiscal Year Ended
 
 
June 29, 2012
 
June 24,
2011
 
June 25,
2010
Domestic sources
 
$
(17,817
)
 
$
(14,874
)
 
$
(50,733
)
Foreign sources
 
(5,643
)
 
(5,117
)
 
(42,569
)
Total
 
$
(23,460
)
 
$
(19,991
)
 
$
(93,302
)
Deferred tax assets and liabilities reflect the effects of tax losses, credits, and the future income tax effects of temporary differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted statutory tax rates that are realized the years in which those temporary differences are estimated to be recovered or settled.


81

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 29, 2012 and June 24, 2011 , the significant components of the Company’s deferred tax assets and liabilities were (in thousands):
 
 
Fiscal Year Ended
 
 
June 29, 2012
 
June 24,
2011
Deferred tax assets:
 
 
 
 
Net operating losses and tax credit carry forwards
 
$
176,709

 
$
128,494

Deferred revenue
 
—

 
14,708

Stock based compensation
 
13,324

 
13,109

Intangible and fixed assets
 
17,367

 
9,248

Accruals & Reserves
 
19,537

 
10,505

Other
 
322

 
3,978

Total deferred tax assets
 
227,259

 
180,042

Deferred tax liabilities:
 
 
 
 
        Deferred revenue
 
(55,516
)
 
—

       Total deferred tax liabilities
 
(55,516
)
 
—

 
 
 
 
 
Net Deferred tax assets
 
171,743

 
180,042

Less valuation allowance
 
(171,463
)
 
(177,970
)
Net deferred tax assets
 
$
280

 
$
2,072

The valuation allowance against the Company's deferred tax assets decreased from $178.0 million as of June 24, 2011 to $171.5 million as of June 29, 2012 . There was an increase in net operating losses carryforwards and a corresponding increase in deferred tax liabilities associated with deferred revenue from fiscal 2011 to fiscal 2012 due to the Company changing its income tax accounting method for the treatment of deferred revenue. The net deferred tax asset as of June 29, 2012 is attributable to deferred tax assets of certain foreign subsidiaries which the Company believes are more likely than not of being realized. The majority of deferred tax assets are subject to a full valuation allowance as they are more likely than not to be unrealized based on all available positive and negative evidence including our historical operating results and the uncertainty of predicting our future income.
As of June 29, 2012, the Company has federal, state, other foreign and Japan net operating loss carryforwards of $286.6 million , $250.7 million , $91.0 million and $89.4 million , respectively. If not utilized, the net operating loss carryforwards will begin to expire in fiscal 2013 for state and foreign, fiscal 2017 for Japan, and fiscal 2028 for federal. The Japan net operating losses of $89.4 million will expire by fiscal 2020. The amounts expiring in fiscal 2013 are immaterial to our financial statements.
As a result of a cumulative ownership change of greater than 50% occurring in January, 2010, the Company's ability to utilize federal and state net operating loss and credit carryforwards is subject to an annual limitation as defined by sections 382 and 383 of the Internal Revenue Code.  The Company anticipates that all net operating loss carryforwards will become available prior to expiration, and that the carryforwards will become available by 2022 or prior if there are no subsequent events that produce a greater restriction on the net operating losses.
Tax attributes related to stock option windfalls deductions are not recorded until the deductions result in a reduction of cash taxes payable. The amount of the Company's unrealized federal and state net operating losses relating to stock options deductions as of June 29, 2012 was $10.7 million . The benefit of these net operating losses will be recorded to additional paid-in capital if and when the Company realizes a reduction of cash taxes payable.
    
As of June 29, 2012 , the Company has federal and state Research and Development tax credits of $3.5 million and $2.2 million , respectively, and $5.3 million of foreign investment tax credits. If not utilized, the federal and foreign tax credits will begin to expire in fiscal 2027 and 2019, respectively. The state tax credits do not expire.

The Company's policy with respect to its undistributed foreign earnings is to consider those earnings to be indefinitely reinvested or repatriated tax-free and, accordingly, no related provision for income or withholding taxes have been provided. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both income taxes

82

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and withholding taxes in the U.S. and various foreign countries. At June 29, 2012 , the Company did not record deferred tax liabilities of $14.2 million on approximately $40.6 million of earnings that are deemed to be permanently reinvested overseas or repatriated tax free.
A reconciliation of the statutory federal income tax rate for fiscal 2012, 2011 and 2010 is as follows:
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Federal statutory rate provision
 
35.0
 %
 
35.0
 %
 
35.0
 %
State taxes, net of federal tax benefit
 
(0.9
)
 
(0.4
)
 
0.8

Foreign rate differential
 
(5.4
)
 
(15.7
)
 
(2.3
)
Stock based compensation
 
(2.3
)
 
0.1

 
0.1

Valuation allowance - US *
 
(20.9
)
 
(23.2
)
 
(30.6
)
Valuation allowance - Foreign *
 
(7.4
)
 
7.9

 
0.5

Losses carried back
 
—

 
—

 
5.3

Unrecognized tax benefits
 
4.9

 
(6.0
)
 
(1.2
)
Foreign withholding tax
 
(2.9
)
 
—

 
(0.2
)
Foreign dividend and other
 
(4.6
)
 
(3.9
)
 
(2.6
)
Effective tax rate
 
(4.5
)%
 
(6.2
)%
 
4.8
 %
* Valuation allowance related to foreign activity for fiscal 2011 and 2010 have been reclassified from foreign taxes to conform to the fiscal 2012 presentation.
A reconciliation of the unrecognized tax benefits (excluding interest and penalties) from June 25, 2010 through June 29, 2012 are as follows (in thousands):
Balance at June 25, 2010
$
9,335

Increase (decrease) to current year positions
12,777

Increase (decrease) to prior year positions
1,570

Decrease due to lapse of statute of limitations
(819
)
Balance at June 24, 2011
$
22,863

Increase (decrease) to current year positions
1,142

Increase (decrease) to prior year positions
(12,556
)
Decrease due to lapse of statute of limitations
(2,182
)
Balance at June 29, 2012
$
9,267


At June 29, 2012 , the Company had approximately $9.3 million of gross unrecognized tax benefit of which $7.5 million , if recognized, will impact the effective tax rate. The Company does not expect that the total unrecognized tax benefits will significantly increase or decrease in the next 12 months.
The decrease in the unrecognized tax benefits related to prior year positions of $12.6 million is primarily the result of the Company's change in accounting method for deferred revenue for federal and state income taxes.
The Company classifies interest expense and penalties related to unrecognized tax benefits as components of income tax expense. As of June 29, 2012 , the Company has accrued interest and penalties of approximately $13.4 million and $0.3 million , respectively, on the Company’s consolidated balance sheet.
During the year the Company recognized benefit of approximately $1.3 million and $0.4 million related to gross unrecognized tax benefit and the resulting interest and penalties were recorded in the consolidated statement of operations.
The Company’s U.S. federal tax returns for 2003 and prior years are no longer subject to examination. The Company’s state tax returns for years prior to 2005 are not subject to examination.

83

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company’s foreign subsidiaries file income tax returns in the countries in which they have operations. Generally, these countries have statute of limitations ranging from 4 to 6 years. Tax years still open to examination by foreign tax authorities range from 2005 through 2011. The Company is under examination by the taxing authorities in Canada and Germany. The financial statement impact of these examinations cannot be estimated as of June 29, 2012.
With respect to the Company's audit in Canada, the Company is expecting that the audit will be concluded in the next twelve months. It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. However, it is not possible to estimate either the estimated amount or the range of any increase or decrease at this time.
20. DISCONTINUED OPERATIONS
In October 2008, the Company committed to a formal plan to abandon the Rapidscale product line, which was reviewed and approved by management with appropriate authority, and was communicated to the affected employees. The Company continues to honor service contracts with existing Rapidscale customers, but had no other significant continuing involvement in the operations of the Rapidscale product line subsequent to the abandonment.
The results of operations of the Rapidscale product line were reclassified and included in “discontinued operations, net of tax”, within the accompanying consolidated statements of operations for fiscal 2010. Results of operations of the RapidScale product line did not impact fiscal 2012 and were not material to the Company's operations for fiscal 2011 and, therefore, were not reclassified.
The following summarizes the results of discontinued operations (in thousands):
 
 
Fiscal Year Ended
 
 
June 25,
2010
Revenue
 
$
366

Cost of revenue
 
72

Gross profit
 
294

Operating expenses:
 
 
Research and development
 
(106
)
Sales and marketing
 
(14
)
General and administrative
 
10

Total operating expenses
 
(110
)
Income from discontinued operations
 
404

Total other income
 
5

Income from discontinued operations before income tax benefit
 
409

Income tax
 
—

Income from discontinued operations
 
$
409


21. SEGMENT INFORMATION
Commencing in the first quarter of fiscal 2012, the Company started managing its business primarily on a geographical basis. Accordingly, the Company determined its operating and reporting segments, which are generally based on the location of its sales and service employees generating revenue, to be 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 all other Asian countries. The segment information for fiscal 2011 and 2010 have been presented to reflect the new reporting segments. The Company's operating segments are determined based upon several criteria including: the Company's internal organizational structure; the manner in which the Company's operations are managed; the criteria used by the Company's Chief Executive Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the availability of separate financial information. The accounting policies of the various segments are the same as those described in "Note 2. Summary of Significant Accounting Policies". The Company's CODM evaluates the performance of its operating segments based on revenue and operating profit

84

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(loss). Revenues are generally based on the location of its sales and service employees generating revenues. Operating profit (loss) for each segment includes related cost of sales and operating expenses directly attributable to the segment. A significant portion of the segments’ expenses arise from shared services and infrastructure that the Company has historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development, legal, accounting, information technology services, treasury and other corporate infrastructure expenses. These corporate charges are allocated to the segments and are reassessed on an annual basis. The allocations have been determined on a basis that the Company considers to be a reasonable reflection of the utilization of services provided to or benefits received by the segments. The Company does not include intercompany transfers between segments for management reporting purposes.
Segment Results
The following table presents revenues and gross margin for the Company’s segments for fiscal 2012, 2011 and 2010 (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Total Revenue
 
 
 
 
 
 
Americas
 
$
473,746

 
$
412,102

 
$
313,699

APJ
 
170,392

 
102,327

 
37,531

EMEA
 
108,849

 
115,139

 
52,487

Total revenue
 
$
752,987

 
$
629,568

 
$
403,717

 
 
 
 
 
 
 
Product Revenue
 
 
 
 
 
 
Americas
 
$
387,165

 
$
311,973

 
$
208,745

APJ
 
94,494

 
68,641

 
26,515

EMEA
 
75,074

 
84,563

 
20,747

Total product revenue
 
$
556,733

 
$
465,177

 
$
256,007

 
 


 
 
 
 
Service Revenue
 
 
 
 
 
 
Americas
 
$
86,581

 
$
100,129

 
$
104,954

APJ
 
75,898

 
33,686

 
11,016

EMEA
 
33,775

 
30,576

 
31,740

Total service revenue
 
$
196,254

 
$
164,391

 
$
147,710


 
 
 
 
 
 
Operating Profit (Loss)
 
 
 
 
 
 
Americas
 
$
(10,694
)
 
$
4,873

 
$
(53,498
)
APJ
 
3,378

 
(4,877
)
 
(6,055
)
EMEA
 
(14,127
)
 
(18,985
)
 
(27,097
)
Total operating profit (loss)
 
$
(21,443
)
 
$
(18,989
)
 
$
(86,650
)
The Company derives the results of the business segments directly from its internal management reporting system. The presentation of revenue for segment information purposes differs from the accompanying consolidated statement of operations. The segment information is presented on the basis which the Company's CODM evaluates the performance of its operating segments. The combined product and service revenue is allocated to product and service revenue on a contractual basis for segment information purposes.
The Company's assets are located primarily in the United States and are not allocated to any specific region. The Company does not measure the performance of its geographic regions on any asset-based metrics. Therefore, geographic information is presented only for revenue and operating profit (loss).
Customer information
During fiscal 2012, 2011 and 2010, Amazon accounted for approximately 16% , 12% and 20% of the Company's total revenues.

85

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At June 29, 2012 , two customers from the Americas segment accounted for more than 10% of the Company's accounts receivable. Amazon accounted for 25% and the other customer accounted for 16% of the Company's accounts receivable. At June 24, 2011 , three customers accounted for more than 10% of the Company's accounts receivable. All of these customers were from the Americas segment and accounted for 13% , 12% and 11% of the Company's accounts receivable.
Geographic Information
Summarized revenues by geographic region, based on the Company's internal management system and as utilized by the Company's CODM, is as follows (in thousands):
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
 
June 25,
2010
Domestic revenue
 
$
447,041

 
$
389,328

 
$
301,837

International revenue
 
305,946

 
240,240

 
101,880

Total revenue
 
$
752,987

 
$
629,568

 
$
403,717

International sales to Japan, the only single foreign country which accounted for ten percent or more of revenues, were $130.9 million for fiscal 2012 or 17% and $67.5 million for 2011 or 11% of revenues. These revenues originated from our APJ segment. No individual foreign country’s revenue accounted for ten percent or more of revenues in fiscal 2010.
Approximately 90% and 81% of the Company’s property and equipment was located in the United States as of June 29, 2012 and June 24, 2011 , respectively. No individual foreign country’s property and equipment was material for disclosure purposes.
22. RELATED PARTY TRANSACTIONS
Investment in SGI Japan
The Company acquired approximately 90% of the outstanding stock of SGI Japan for $17.9 million on March 9, 2011. Prior to that date, the Company owned approximately 10% of the outstanding stock of SGI Japan, which was acquired in connection with the acquisition of Legacy SGI. As a result, effective March 10, 2011, SGI Japan became a wholly-owned subsidiary of the Company (see Note 3).
Prior to March 10, 2011, the Company's investment in SGI Japan of $2.1 million was accounted for under the cost method. During the quarter ended December 24, 2010, the Company determined that there had been an other-than-temporary impairment of its investment in SGI Japan. As a result, the Company wrote down the investment from $5.0 million to $2.1 million , which represented the estimated fair value of the investment at December 24, 2010. On March 9, 2011, the carrying value of $ 2.1 million was equal to the acquisition-date fair value of the equity interest in SGI Japan held by the Company immediately before the acquisition, no gain or loss was recorded.
The Company's consolidated statements of operations and consolidated statement of cash flows for fiscal 2012 include SGI Japan's statement of operations and statement of cash flows. The Company's consolidated statements of operations and consolidated statement of cash flows for fiscal 2011 include SGI Japan's statement of operations and statement of cash flows for the period from March 10, 2011 to June 24, 2011 . All significant intercompany transactions between the Company and SGI Japan for fiscal 2012 and for the period from March 10, 2011 to June 24, 2011 have been eliminated in consolidation. The Company's consolidated balance sheet at June 29, 2012 and June 24, 2011 include the accounts of SGI Japan. All significant intercompany balances between the Company and SGI Japan at June 29, 2012 and June 24, 2011 have also been eliminated in consolidation.
  Sales to SGI Japan
Prior to March 10, 2011, the Company recognized product revenue and cost of product revenue from sales to SGI Japan. The Company ceased recognizing product revenue and cost of product revenue from sales to SGI Japan effective March 10, 2011. Product revenue and cost of product revenue from sales to SGI Japan prior to March 10, 2011 were as follows (in thousands):

86

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
 
Period from
June 26, 2010
to
March 9, 2011
 
Year Ended
June 25,
2010
Product revenue
 
$
15,718

 
$
18,890

Cost of product revenue
 
$
10,027

 
$
13,829


23. FINANCIAL GUARANTEES
The Company has issued financial guarantees to cover rent on leased facilities and equipment, to government authorities for VAT and other taxes, and to various other parties to support payments in advance of future delivery on goods and services. The majority of the Company’s financial guarantees have terms of one year or more. The maximum potential obligation under financial guarantees at June 29, 2012 was $4.3 million for which the Company has $4.1 million of assets held as collateral. The full amount of the assets held as collateral are included in short-term and long-term restricted cash in the consolidated balance sheets.
24. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain real and personal property under non-cancelable operating leases. The Company leases its facilities and office buildings under operating leases that expire at various dates through March 2017. Certain leases also contain escalation and renewal option clauses calling for increased rents. Where a lease contains an escalation clause or a concession such as a rent holiday, rent expense is recognized using the straight line method over the term of the lease.
Future minimum lease payments under operating leases are as follows (in thousands):
Fiscal Year
 
 
2013
 
$
9,880

2014
 
6,275

2015
 
2,710

2016
 
1,054

2017
 
189

Total
 
$
20,108

Rent expense for fiscal 2012, 2011 and 2010 was approximately $8.3 million , $6.4 million and $6.8 million , respectively.
Purchase Commitments
In connection with supplier agreements, the Company has purchase obligations that include agreements to purchase certain units of inventory and non-inventory items through 2015. These purchase obligations that are enforceable and legally binding on the Company specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction.
As of June 29, 2012 , these non-cancelable purchase commitments were approximately $36.0 million , of which $30.3 million are due in the next 12 months.
Indemnification Agreements
The Company enters into standard indemnification agreements with its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third party to the extent any such claim alleges that the Company’s product infringes a patent, copyright or trademark, or misappropriates a trade secret, of that third-party. The agreements generally limit the scope of the available remedies in a variety of industry-standard methods, including, but not limited to, product usage and geography-based limitations, a right to control the defense or settlement of any claim, and a right to replace or modify the infringing products to make them non-infringing. The Company has not incurred significant expenses related to these indemnification agreements and no material claims for such indemnifications were outstanding as of June 29, 2012 . As a result, the Company believes the estimated fair value of these indemnification agreements, if any, to be immaterial; accordingly, no liability has been recorded with respect to

87

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

such indemnifications as of June 29, 2012 .
Credit facility
The Company's credit facility includes a $10.0 million letter of credit subfacility. As of June 29, 2012, the Company has $2.0 million of outstanding letter of credit to back the Company's obligation to pay or perform when required to do so pursuant to the requirements of an underlying agreement or the provision of goods or services to a supplier. See Note 14 "Credit facility" for more information regarding the credit facility.
Contingencies
The Company may, from time to time, be involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. The Company records a provision for a liability when management believes that it is both probable that a liability has been incurred and it can reasonably estimate the amount of the loss. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact 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. The Company assumed this claim in connection with its acquisition of Legacy SGI assets, and is 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 ₨78,478,200 ( $1.4 million based on the conversion rate on June 29, 2012 ) plus interest and costs. On February 29, 2008, the Company filed its reply as well as a counter claim for a sum of ₨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 scheduled hearing date (to be determined by the arbitrator).  The Company cannot currently predict the outcome of this dispute nor determine the amount or a reasonable range of potential loss, if any.
Third parties in the past have asserted, and may in the future assert, intellectual property infringement claims against the Company, and such future claims, if proved, could require the Company to pay substantial damages or to redesign its existing products or pay fees to obtain cross-license agreements. Litigation may be necessary in the future to enforce or defend the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of its proprietary rights or the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm the Company's business, operating results and financial condition. Further, many of the Company's current and potential competitors have the ability to dedicate substantially greater resources to enforcing and defending their intellectual property rights than the Company.
Additionally, from time to time, the Company receives inquiries from regulatory agencies informally requesting information or documentation. There can be no assurance in any given case that such informal review will not lead to further proceedings involving the Company in the future.
The Company is not aware of any pending disputes, including those disputes and settlements described above, that would be likely to have a material adverse effect on its consolidated financial condition, results of operations or liquidity. However, litigation is subject to inherent uncertainties and costs and unfavorable outcomes could occur. An unfavorable outcome could include the payment of monetary damages, cash or other settlement, or an injunction prohibiting it from selling one or more products. If an unfavorable resolution were to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial condition, results of operations or cash flows of the period in which the resolution occurs or on future periods.

88

SILICON GRAPHICS INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

25. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly results of operations for fiscal 2012 and 2011 (in thousands, except per share amounts).
 
 
Fiscal Quarter Ended
June 29,
2012
 
March 30,
2012
 
December 30,
2011
 
September 30,
2011
Revenue
 
$
179,488

 
$
199,390

 
$
195,214

 
$
178,895

Gross profit
(2
)
37,486

 
51,510

 
52,183

 
52,638

Net loss
 
$
(18,386
)
 
$
(1,162
)
 
$
(2,256
)
 
$
(2,657
)
Basic and diluted net loss per share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.58
)
 
$
(0.04
)
 
$
(0.07
)
 
$
(0.08
)
Diluted
 
$
(0.58
)
 
$
(0.04
)
 
$
(0.07
)
 
$
(0.08
)
Shares used in the calculation of net loss per share:
 
 
 
 
 
 
 
 
Basic
 
31,947

 
31,783

 
31,604

 
31,303

Diluted
 
31,947

 
31,783

 
31,604

 
31,303

 
 
Fiscal Quarter Ended
June 24,
2011 (1)
 
March 25,
2011 (1)
 
December 24,
2010
 
September 24,
2010
Revenue
 
$
195,486

 
$
143,664

 
$
177,524

 
$
112,894

Gross profit
 
45,984

 
40,502

 
52,329

 
30,997

Net (loss) income
 
$
(12,098
)
 
$
(1,672
)
 
$
3,724

 
$
(11,187
)
Basic and diluted net (loss) income per share:
 
 
 
 
 
 
 
 
Basic
 
$
(0.39
)
 
$
(0.05
)
 
$
0.12

 
$
(0.37
)
Diluted
 
$
(0.39
)
 
$
(0.05
)
 
$
0.12

 
$
(0.37
)
Shares used in the calculation of net (loss) income per share:
 
 
 
 
 
 
 
 
Basic
 
31,029

 
30,577

 
30,321

 
30,536

Diluted
 
31,029

 
30,577

 
30,836

 
30,536

(1)
On March 9, 2011 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, the Company owned approximately 10% of the outstanding shares of SGI Japan and accounted for such investment as a cost method investment.
(2)
In the fourth quarter of fiscal 2012, we recorded a charge of $10.1 million to reflect reduced demand for manufacturing parts for earlier generation products and a revaluation of spare parts to better reflect expected usage.

89




SCHEDULE II.

SILICON GRAPHICS INTERNATIONAL CORP.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
 
 
 
Fiscal Year Ended
 
 
June 29,
2012
 
June 24,
2011
Allowance for doubtful accounts:
 
 
 
 
Beginning balance
 
$
1,335

 
$
1,646

(Recovery) charges
 
62

 
(77
)
Reduction and write-offs
 
200

 
(234
)
Ending balance
 
$
1,597

 
$
1,335


90
Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). The evaluation considered the procedures designed to ensure that the information included in reports we file under the Exchange Act, is recorded, processed, summarized and reported within the appropriate time periods and that information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures. Based on that evaluation, our management, including our chief executive officer and chief financial officer, has concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 29, 2012 .
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over financial reporting based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that the Company’s internal control over financial reporting was effective as of June 29, 2012 .
The effectiveness of our internal control over financial reporting as of June 29, 2012 has been audited by Deloitte & Touche LLP, independent registered public accounting firm, as stated in its report which appears below.
Changes in Internal Control over Financial Reporting
The Company also evaluated changes to its internal control over financial reporting. There were no changes in the Company's internal control over financial reporting during the quarter ended June 29, 2012 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

91
Table of Contents




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Silicon Graphics International Corp.
Fremont, California

We have audited the internal control over financial reporting of Silicon Graphics International Corp. and subsidiaries (the "Company") as of June 29, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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 company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 29, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended June 29, 2012 of the Company and our report dated September 10, 2012 expressed an unqualified opinion on those financial statements and financial statement schedule and includes an explanatory paragraph relating to the Company's method for recognizing revenue for multiple element arrangements.


/s/ DELOITTE & TOUCHE LLP
San Jose, California
September 10, 2012


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Item 9B. Other Information
None

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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item with respect to our executive officers is contained in Item 1 of Part I of this Annual Report on Form 10-K under the heading “Executive Officers.”
All other information required by this Item is incorporated by reference herein from our definitive Proxy Statement for the 2012 Annual Meeting of Stockholders (the “ Proxy Statement ”) scheduled to be held on December 7, 2012.

Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference from the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference from the Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference from the Proxy Statement.

Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference from the Proxy Statement.


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PART IV

Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
See Index to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
2. Financial Statement Schedules
All other financial statement schedules have been omitted because they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits
See the Exhibit Index which follows the signature page of this Annual Report on Form 10-K, which is incorporated herein by reference.

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
SILICON GRAPHICS INTERNATIONAL CORP.
 
 
 
 
 
 
By:
/s/    ROBERT J. NIKL    
 
 
 
Robert J. Nikl
Chief Financial Officer
Dated: September 10, 2012

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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jorge L. Titinger and Robert J. Nikl, and each of them, acting individually, as his or her attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated .

Signature
 
Title
 
Date
 
 
 
 
/s/ Jorge L. Titinger
President, Chief Executive Officer and Director
 
September 10, 2012
Jorge L. Titinger
 
(Principal Executive Officer)
 
 
 
 
 
 
/s/ Robert J. Nikl
Executive Vice President and Chief Financial Officer
 
September 10, 2012
Robert J. Nikl
 
(Principal Financial Officer)
 
 
 
 
 
 
 
 
 
 
 
/s/ Mekonnen P. Asrat
Vice President of Finance and Corporate Controller
 
September 10, 2012
Mekonnen P. Asrat
 
(Principal Accounting Officer)
 
 
 
 
 
 
 
/s/ Charles M. Boesenberg
Director
 
September 10, 2012
Charles M. Boesenberg
 
 
 
 
 
 
 
 
/s/ Gary A. Griffiths
  
Director
 
September 10, 2012
Gary A. Griffiths
 
 
 
 
 
 
 
 
/s/ Michael W. Hagee
  
Director
 
September 10, 2012
Michael W. Hagee
 
 
 
 
 
 
 
 
/s/ Douglas R. King
  
Director
 
September 10, 2012
Douglas R. King
 
 
 
 
 
 
 
 
/s/ Hagi Schwartz
  
Director
 
September 10, 2012
Hagi Schwartz
 
 
 
 
 
 
 
 
/s/ Ronald D. Verdoorn
  
Chairman of the Board of Directors
 
September 10, 2012
Ronald D. Verdoorn
 
 
 
 


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EXHIBIT INDEX
 
Exhibit
Number
 
Exhibit Description
 
Incorporated by Reference
 
Filing Date
 
Filed
Herewith
Form
 
Ex. No.
 
File No.
 
2.1

 
Asset Purchase Agreement dated as of March 31, 2009, by and among Silicon Graphics, Inc., the subsidiaries of Silicon Graphics, Inc. listed on Schedule I thereto, and Rackable Systems, Inc.
 
8-K
 
2.1
 
000-51333
 
4/1/2009
 
 
2.2

 
Amendment to Asset Purchase Agreement dated as of March 31, 2009, by and among Silicon Graphics, Inc., the subsidiaries of Silicon Graphics, Inc. listed on Schedule I thereto, and Rackable Systems, Inc., dated as of April 30, 2009.
 
8-K
 
2.1
 
000-51333
 
5/5/2009
 
 
2.3

 
Stock Purchase Agreement dated as of March 8, 2011, by and among Silicon Graphics World Trade B.V., SGI Japan, Ltd., certain subsidiaries of SGI Japan and NEC CORPORATION as the Stockholders' Representative.
 
8-K
 
2.1
 
000-51333
 
3/9/2011
 
 
3.1

 
Amended and Restated Certificate of Incorporation.
 
10-Q
 
3.1
 
000-51333
 
8/12/2005
 
 
3.2

 
Amended and Restated Bylaws.
 
8-K
 
3.2
 
000-51333
 
3/7/2008
 
 
3.3

 
Certificate of Ownership and Merger.
 
8-K
 
3.3
 
000-51333
 
5/21/2009
 
 
4.1

 
Reference is made to Exhibits 3.1, 3.2 and 3.3.
 
 
 
 
 
 
 
 
 
 
4.2

 
Form of Specimen Common Stock Certificate.
 
8-K
 
4.2
 
000-51333
 
5/21/2009
 
 
10.1

 
Form of Indemnification Agreement for directors and executive officers.
 
8-K
 
99.1
 
000-51333
 
5/14/2012
 
 
10.2

 
2002 Stock Option Plan and form of related agreements.
 
S-1
 
10.8
 
333-122576
 
3/30/2005
 
 
10.3

* 
2005 Equity Incentive Plan, as amended.
 
 
 
 
 
 
 
 
 
X
10.4

* 
2005 Non-Employee Directors’ Stock Option Plan.
 
S-1
 
10.10
 
333-122576
 
2/4/2005
 
 
10.5

* 
2005 Employee Stock Purchase Plan, as amended.
 
 
 
 
 
 
 
 
 
X
10.6

* 
Form of Stock Option Agreement under the 2006 New Recruit Equity Incentive Plan.
 
8-K
 
10.2
 
000-51333
 
1/30/2006
 
 
10.7

  
Net Lease Agreement dated June 26, 2006 between the Registrant and Fremont Landing Investors, LLC.
 
8-K
 
10.62
 
000-51333
 
8/25/2006
 
 
10.8

 
Industrial Space Lease dated November 1, 2006 between the Registrant and Renco Bayside Investors.
 
 
 
 
 
 
 
 
 
X
10.9

 
First Amendment to Lease dated March 1, 2007 between the Registrant and Renco Bayside Investors.
 
 
 
 
 
 
 
 
 
X
10.10

* 
2006 New Recruit Equity Inventive Plan, as amended and restated.
 
10-K
 
10.48
 
000-51333
 
2/28/2007
 
 
10.11

* 
Form of Option Agreement and Grant Notices under the 2005 Equity Incentive Plan.
 
8-K
 
10.2
 
000-51333
 
9/5/2006
 
 
10.12

* 
Form of Stock Bonus Award Agreement and Grant Notice under the 2005 Equity Incentive Plan.
 
8-K
 
10.3
 
000-51333
 
9/5/2006
 
 
10.13

* 
Form of Stock Option Agreement and Grant Notice with Outside Directors under the 2002 Stock Option Plan.
 
10-Q
 
10.10
 
000-51333
 
11/14/2006
 
 
10.14

* 
Form of Non-statutory Stock Option Agreement under the 2005 Non-Employee Directors’ Stock Option Plan.
 
10-Q
 
10.11
 
000-51333
 
11/14/2006
 
 


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Exhibit
Number
 
Exhibit Description
 
Incorporated by Reference
 
Filing Date
 
Filed
Herewith
Form
 
Ex. No.
 
File No.
 
10.15

*
Employment Agreement, dated May 24, 2007, by and between the Registrant and Mark J. Barrenechea.
 
8-K
 
10.1

 
000-51333
 
5/30/2007
 
 
10.16

* 
Form of 2005 Equity Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement.
 
 
 
 
 
 
 
 
 
X
10.17

* 
Amendment to Employment Agreement, dated December 31, 2008, between the Registrant and Mark J. Barrenechea.
 
8-K
 
10.3

 
000-51333
 
1/6/2009
 
 
10.18

* 
Employment Agreement, dated March 31, 2008, between the Registrant and James Wheat.
 
10-K
 
10.69

 
000-51333
 
3/19/2009
 
 
10.19

* 
Amendment #1 to Employment Agreement, dated December 31, 2008, between the Registrant and James Wheat.
 
10-K
 
10.70

 
000-51333
 
3/19/2009
 
 
10.20

* 
First Amendment to Employment Agreement, dated December 31, 2008, between the Registrant and James Wheat.
 
8-K
 
10.2

 
000-51333
 
1/6/2009
 
 
10.21

* 
Offer Letter made by the Registrant to Anthony Carrozza, dated January 24, 2008
 
10-K
 
10.73

 
000-51333
 
3/19/2009
 
 
10.22

* 
First Amendment to Employment Agreement, dated December 23, 2008, between the Registrant and Anthony Carrozza.
 
10-K
 
10.74

 
000-51333
 
3/19/2009
 
 
10.23

* 
Offer Letter made by the Registrant to Tim Pebworth, dated May 1, 2009.
 
8-K
 
10.2

 
000-51333
 
5/14/2009
 
 
10.24

* 
Fiscal 2011 Short Term Incentive Plan.
 
10-K
 
10.63

 
000-51333
 
9/8/2010
 
 
10.25

* 
Fiscal 2012 Short Term Incentive Plan.
 
8-K
 
—

 
000-51333
 
8/18/2011
 
 
10.26

* 
First Amendment to Employment Agreement, dated June 13, 2011 between the Registrant and Tim Pebworth.
 
10-K
 
10.42

 
000-51333
 
8/29/2011
 
 
10.27

* 
Separation Agreement dated June 22, 2011, between the Registrant and Maurice Leibenstern.
 
10-K
 
10.43

 
000-51333
 
8/29/2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 








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Exhibit
Number
 
Exhibit Description
 
Incorporated by Reference
 
Filing
Date
 
Filed
Herewith
Form
 
Ex. No.
 
File No.
 
10.28
*
Employment Agreement Restatement and Amendment #1, dated January 23, 2008 between the Registrant and Jennifer Pratt.
 
10-K
 
10.46
 
000-51333
 
8/29/2011
 
 
10.29
*
Second Amendment to Employment Agreement, dated December 23, 2008 between the Registrant and Jennifer Pratt.
 
10-K
 
10.47
 
000-51333
 
8/29/2011
 
 
10.30
*
Third Amendment to Employment Agreement, dated May 14, 2009 between the Registrant and Jennifer Pratt.
 
10-K
 
10.48
 
000-51333
 
8/29/2011
 
 
10.31
*
Fourth Amendment to Employment Agreement, dated January 10, 2011 between the Registrant and Jennifer Pratt.
 
10-K
 
10.49
 
000-51333
 
8/29/2011
 
 
10.32
*
Offer Letter made by the Registrant to Rick Rinehart, dated April 1, 2010.
 
10-K
 
10.50
 
000-51333
 
8/29/2011
 
 
10.33
*
Offer Letter, dated September 9, 2011, between the Registrant and Jennifer Pileggi.
 
10-Q
 
10.1
 
000-51333
 
11/9/2011
 
 
10.34
 
Credit Agreement, dated December 5, 2011, by and among the Registrant, Silicon Graphics Federal, Inc. and Wells Fargo Capital Finance, LLC.
 
8-K
 
10.1
 
000-51333
 
12/9/2011
 
 
10.35
 
Amendment Number One to Credit Agreement, dated February 7, 2012, among the Registrant, Silicon Graphics Federal, Inc. and Wells Fargo Capital Finance, LLC.
 
 
 
 
 
 
 
 
 
X
10.36
 
Amendment Number Two to Credit Agreement, dated March 30, 2012, among the Registrant, Silicon Graphics Federal, Inc. and Wells Fargo Capital Finance, LLC.
 
 
 
 
 
 
 
 
 
X
10.37
 
Amendment Number Three to Credit Agreement, dated March 30, 2012, among the Registrant, Silicon Graphics Federal, Inc. and Wells Fargo Capital Finance, LLC.
 
 
 
 
 
 
 
 
 
X
10.38
*
Employment Agreement Letter, dated February 21, 2012, between the Registrant and Jorge Titinger.
 
8-K
 
10.1
 
000-51333
 
2/23/2012
 
 
10.39
*
Employment Agreement Letter, dated April 30, 2012, between the Registrant and Robert Nikl.
 
8-K
 
10.1
 
000-51333
 
4/30/2012
 
 
10.40
*
Separation Agreement, dated July 10, 2012, between the Registrant and James Wheat.
 
8-K
 
10.1
 
000-51333
 
7/12/2012
 
 
10.41
*
Summary of Non-Employee Director Compensation
 
 
 
 
 
 
 
 
 
X
10.42
*
Fiscal 2013 Performance Results Bonus
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
21.1
  
Subsidiaries of the Company.
 
 
 
 
 
 
 
 
 
X
23.1
  
Consent of Independent Registered Public Accounting Firm.
 
 
 
 
 
 
 
 
 
X
24.1
  
Power of Attorney (Included on the signature page hereto).
 
 
 
 
 
 
 
 
 
 
31.1
  
Certification required by Rule 13a-14(a) or Rule 15d-14(a).
 
 
 
 
 
 
 
 
 
X
31.2
  
Certification required by Rule 13a-14(a) or Rule 15d-14(a).
 
 
 
 
 
 
 
 
 
X
32.1
** 
Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
 
 
 
 
 
 
 
 
 
X
 
*
Indicates a management contract or compensatory plan or arrangement.

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**
The certification attached as Exhibit 32.1 accompanies the Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by Silicon Graphics International Corp. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.


101
SILICON GRAPHICS INTERNATIONAL CORP .
2005 EQUITY INCENTIVE PLAN
ADOPTED: JANUARY 12, 2005
APPROVED BY STOCKHOLDERS: APRIL 27, 2005
AS AMENDED BY THE BOARD OF DIRECTORS: OCTOBER 19, 2011
AMENDMENT APPROVED BY STOCKHOLDERS: DECEMBER 2, 2011

1.
GENERAL .
Eligible Stock Award Recipients. The persons eligible to receive Stock Awards are Employees, Directors and Consultants.
Available Stock Awards. The Plan provides for the grant of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Stock Purchase Awards, (iv) Stock Bonus Awards, (v) Stock Appreciation Rights, (vi) Stock Unit Awards, and (vii) Other Stock Awards.
General Purpose. The Company, by means of the Plan, seeks to secure and retain the services of the group of persons eligible to receive Stock Awards as set forth in Section 1(a), to provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate and to provide a means by which such eligible recipients may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Stock Awards.
2.
DEFINITIONS .
As used in the Plan, the following definitions shall apply to the capitalized terms indicated below:
“ Affiliate ” means (i) any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided each corporation in the unbroken chain (other than the Company) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain, and (ii) any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. The Board shall have the authority to determine (i) the time or times at which the ownership tests are applied, and (ii) whether “ Affiliate ” includes entities other than corporations within the foregoing definition.
“ Board ” means the Board of Directors of the Company.
“ Capitalization Adjustment ” has the meaning ascribed to that term in Section 11(a).
“ Cause ” means, with respect to a Participant, the occurrence of any of the following: (i) such Participant’s commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof; (ii) such Participant’s attempted commission of, or participation in, a fraud or act of dishonesty against the Company; (iii) such

     1     

Participant’s intentional, material violation of any material contract or agreement between the Participant and the Company or any statutory duty owed to the Company; (iv) such Participant’s unauthorized use or disclosure of the Company’s confidential information or trade secrets; or (v) such Participant’s gross misconduct. The determination that a termination is for Cause shall be made by the Company in its sole discretion. Any determination by the Company that the Continuous Service of a Participant was terminated by reason of dismissal without Cause for the purposes of outstanding Stock Awards held by such Participant shall have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose.
“ Change in Control ” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i)      any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person from the Company in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities or (B) solely because the level of Ownership held by any Exchange Act Person (the “ Subject Person ”) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur;
(ii)      there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction;
(iii)      the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the Company, or a complete dissolution or liquidation of the Company shall otherwise occur;
(iv)      there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale,

     2     

lease, license or other disposition; or
(v)      individuals who, on the date this Plan is adopted by the Board, are members of the Board (the “ Incumbent Board ”) cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board.
The term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company.
Notwithstanding the foregoing or any other provision of this Plan, the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Stock Awards subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply.
In addition, if a Change in Control constitutes a payment event with respect to any Stock Award which provides for the deferral of compensation and is subject to Section 409A of the Code, the transaction or event described in (i)-(v) with respect to such Stock Award must also constitute a “change in control event,” as defined in Treasury Regulations Sec. 1.409A-2(i)(5) to the extent required by Section 409A.
The Board shall have full and final authority, which shall be exercised in its discretion, to determine conclusively whether a Change in Control of the Company has occurred pursuant to the above definition, and the date of the occurrence of such Change in Control and any incidental matters relating thereto.
“ Code ” means the Internal Revenue Code of 1986, as amended.
“ Committee ” means a committee of one (1) or more members of the Board to whom authority has been delegated by the Board in accordance with Section 3 (c).
“ Committee ” means a committee of one (1) or more members of the Board to whom authority has been delegated by the Board in accordance with Section 3 (c).
“ Common Stock ” means the common stock of the Company.
“ Company ” means Silicon Graphics International Corp., a Delaware corporation.
“Consultant” means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the Board of Directors of an Affiliate and is compensated for such services. However, service solely as a Director, or payment of a fee for such service, shall not cause a Director to be considered a “Consultant” for purposes of the Plan.
“ Continuous Service ” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an

     3     

Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s service with the Company or an Affiliate, shall not terminate a Participant’s Continuous Service. For example, a change in status from an employee of the Company to a consultant to an Affiliate or to a Director shall not constitute an interruption of Continuous Service. To the extent permitted by law, the Board or the chief executive officer of the Company, in that party’s sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Company’s leave of absence policy or in the written terms of the Participant’s leave of absence.
“ Corporate Transaction ” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i)      a sale or other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii)      a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;
(iii)      the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
(iv)      the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
“ Covered Employee ” means any Employee who is, or could be, a “covered employee” within the meaning of Section 162(m) of the Code.
“ Director ” means a member of the Board.
“ Disability ” means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code.
“ Employee ” means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such services, shall not cause a Director to be considered an “Employee” for purposes of the Plan.
“ Entity ” means a corporation, partnership or other entity.
“ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
“ Exchange Act Person ” means any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that “ Exchange Act Person ” shall not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities

     4     

under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the effective date of the Plan as set forth in Section 14, is the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities.
“ Fair Market Value ” means, as of any date, the value of the Common Stock determined as follows:
(i)      If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date in question, as reported in The Wall Street Journal or such other source as the Board deems reliable. Unless otherwise provided by the Board, if there is no closing sales price (or closing bid if no sales were reported) for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price (or closing bid if no sales were reported) on the last preceding date for which such quotation exists.
(ii)      In the absence of such markets for the Common Stock, the Fair Market Value shall be determined by the Board in good faith.
“ Incentive Stock Option ” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
“ IPO Date ” means the date of the underwriting agreement between the Company and the underwriter(s) managing the initial public offering of the Common Stock, pursuant to which the Common Stock is priced for the initial public offering.
“ Non-Employee Director ” means a Director who either (i) is not a current employee or officer of the Company or an Affiliate, does not receive compensation, either directly or indirectly, from the Company or an Affiliate for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act (“ Regulation S-K ”)), does not possess an interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.
“ Nonstatutory Stock Option ” means an Option not intended to qualify as an Incentive Stock Option.
“ Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
“ Option ” means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.

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“ Option Agreement ” means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.
“ Optionholder ” means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.
“ Other Stock Award ” means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 7(e).
“ Other Stock Award Agreement ” means a written agreement between the Company and a holder of an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant. Each Other Stock Award Agreement shall be subject to the terms and conditions of the Plan.
“ Outside Director ” means a Director who either (i) is not a current employee of the Company or an “affiliated corporation” (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an “affiliated corporation” who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, has not been an officer of the Company or an “affiliated corporation,” and does not receive remuneration from the Company or an “affiliated corporation,” either directly or indirectly, in any capacity other than as a Director, or (ii) is otherwise considered an “outside director” for purposes of Section 162(m) of the Code.
“ Own ,” “ Owned ,” “ Owner ,” “ Ownership ”. A person or Entity shall be deemed to “ Own ,” to have “ Owned ,” to be the “ Owner ” of, or to have acquired “ Ownership ” of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.
“ Participant ” means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.
“ Performance Criteria ” means the one or more criteria that the Board shall select for purposes of establishing the Performance Goals for a Performance Period. The Performance Criteria that shall be used to establish such Performance Goals may be based on any one of, or combination of, the following: (i) earnings per share; (ii) earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and amortization (EBITDA); (iv) net earnings; (v) total shareholder return; (vi) return on equity; (vii) return on assets, investment, or capital employed; (viii) operating margin; (ix) gross margin; (x) operating income; (xi) net income (before or after taxes); (xii) net operating income; (xiii) net operating income after tax; (xiv) pre- and after-tax income; (xv) pre-tax profit; (xvi) operating cash flow; (xvii) sales or revenue targets; (xviii) increases in revenue or product revenue; (xix) expenses and cost reduction goals; (xx) improvement in or attainment of expense levels; (xxi) improvement in or attainment of working capital levels; (xxii) economic value added (or an equivalent metric); (xxiii) market share; (xxiv) cash flow; (xxv) cash flow per share; (xxvi) share price performance; (xxvii) debt reduction; (xxviii) implementation or completion of projects or processes; (xxix) customer satisfaction; (xxx) total stockholder return; (xxxi) stockholders’ equity; and (xxxii) other measures of performance selected by the Board. Partial achievement of the specified criteria may result in the payment or vesting corresponding to the degree of achievement as specified in the Stock Award Agreement . The Board

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shall, in its sole discretion, define the manner of calculating the Performance Criteria it selects to use for such Performance Period.
“ Performance Goals ” means, for a Performance Period, the one or more goals established by the Board for the Performance Period based upon the Performance Criteria. The Board is authorized at any time in its sole discretion, to adjust or modify the calculation of a Performance Goal for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants, (a) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event or development; (b) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions; or (c) in view of the Board’s assessment of the business strategy of the Company, performance of comparable organizations, economic and business conditions, and any other circumstances deemed relevant. Specifically, the Board is authorized to make adjustment in the method of calculating attainment of Performance Goals and objectives for a Performance Period as follows: (i) to exclude the dilutive effects of acquisitions or joint ventures; (ii) to assume that any business divested by the Company achieved performance objectives at targeted levels during the balance of a Performance Period following such divestiture; and (iii) to exclude the effect of any change in the outstanding shares of common stock of the Company by reason of any stock dividend or split, stock repurchase, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other similar corporate change, or any distributions to common shareholders other than regular cash dividends; provided that such adjustments are consistent with the regulations promulgated under Section 162(m) of the Code with respect to Covered Employees. In addition, with respect to Performance Goals established for Participants who are not Covered Employees, and who will not be Covered Employees at the time the compensation will be paid, the Board is authorized to make adjustment in the method of calculating attainment of Performance Goals and objectives for a Performance Period as follows: (i) to exclude restructuring and/or other nonrecurring charges; (ii) to exclude exchange rate effects, as applicable, for non-U.S. dollar denominated net sales and operating earnings; (iii) to exclude the effects of changes to generally accepted accounting standards required by the Financial Accounting Standards Board; (iv) to exclude the effects to any statutory adjustments to corporate tax rates; (v) to exclude the impact of any “extraordinary items” as determined under generally accepted accounting principles; and (vi) to exclude any other unusual, non-recurring gain or loss or other extraordinary item; provided that such adjustments are consistent with the regulations promulgated under Section 162(m) of the Code with respect to Covered Employees.
“ Performance Period ” means the one or more periods of time, which may be of varying and overlapping durations, as the Board may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to and the payment of a Stock Award.
“ Plan ” means this Silicon Graphics International Corp. 2005 Equity Incentive Plan.
“ Rule 16b-3 ” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time.
“ Securities Act ” means the Securities Act of 1933, as amended.

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“ Stock Appreciation Right ” means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 7(d).
“ Stock Appreciation Right Agreement ” means a written agreement between the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant. Each Stock Appreciation Right Agreement shall be subject to the terms and conditions of the Plan.
“ Stock Award ” means any right granted under the Plan, including an Option, a Stock Purchase Award, Stock Bonus Award, a Stock Appreciation Right, a Stock Unit Award, or any Other Stock Award.
“ Stock Award Agreement ” means a written agreement between the Company and a Participant evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.
“ Stock Bonus Award ” means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(b).
“ Stock Bonus Award Agreement ” means a written agreement between the Company and a holder of a Stock Bonus Award evidencing the terms and conditions of a Stock Bonus Award grant. Each Stock Bonus Award Agreement shall be subject to the terms and conditions of the Plan.
“ Stock Purchase Award ” means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(a).
“ Stock Purchase Award Agreement ” means a written agreement between the Company and a holder of a Stock Purchase Award evidencing the terms and conditions of a Stock Purchase Award grant. Each Stock Purchase Award Agreement shall be subject to the terms and conditions of the Plan.
“ Stock Unit Award ” means a right to receive shares of Common Stock which is granted pursuant to the terms and conditions of Section 7(c).
“ Stock Unit Award Agreement ” means a written agreement between the Company and a holder of a Stock Unit Award evidencing the terms and conditions of a Stock Unit Award grant. Each Stock Unit Award Agreement shall be subject to the terms and conditions of the Plan.
“ Subsidiary ” means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%).
“ Ten Percent Stockholder ” means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Affiliate.

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3.
ADMINISTRATION .
Administration by Board. The Board shall administer the Plan unless and until the Board delegates administration of the Plan to a Committee, as provided in Section 3(c).
Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i)      To determine from time to time (1) which of the persons eligible under the Plan shall be granted Stock Awards; (2) when and how each Stock Award shall be granted; (3) what type or combination of types of Stock Award shall be granted; (4) the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and (5) the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person.
(ii)      To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
(iii)      To effect, at any time and from time to time, with the consent of any adversely affected Optionholder and with prior stockholder approval, (1) the reduction of the exercise price of any outstanding Option or Stock Appreciation Right under the Plan; provided, however that the exercise price may not be reduced below the Fair Market Value of the date the action is taken to reduce the exercise price; (2) the cancellation of any outstanding Option under the Plan and the grant in substitution therefor of (a) a new Option under the Plan or another equity plan of the Company covering the same or a different number of shares of Common Stock, (b) a Stock Purchase Award, (c) a Stock Bonus Award, (d) a Stock Appreciation Right, (e) a Stock Unit Award, (f) an Other Stock Award, (g) cash, and/or (h) other valuable consideration (as determined by the Board, in its sole discretion); or (3) any other action that is treated as a repricing under generally accepted accounting principles.
(iv)      To amend the Plan or a Stock Award as provided in Section 12.
(v)      To terminate or suspend the Plan as provided in Section 13.
(vi)      Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to administer the Plan and promote the best interests of the Company and that are not in conflict with the provisions of the Plan.
(vii)      To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside the United States; provided, however, that no such subplans and/or modifications shall increase the shares limitations contained in Section 4(a).
(viii)      To the extent necessary to comply with the requirements of Section 162(m)(4)(C) of the Code, with respect to any Stock Award granted to a Covered Employee and which is intended to qualify as performance-based compensation, no later than 90 days following the commencement of any Performance Period or any designated fiscal period or period of service (or such earlier time as may be required under Section 162(m) of the Code), the Board shall, in writing, (a) designate one or more

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Covered Employees, (b) select the Performance Criteria applicable to the Performance Period, (c) establish the Performance Goals, and amounts of such Stock Awards, as applicable, which may be earned for such Performance Period based on the Performance Criteria, and (d) specify the relationship between Performance Criteria and the Performance Goals and the amounts of such Stock Awards, as applicable, to be earned by each Covered Employee for such Performance Period. Following the completion of each Performance Period, the Board shall certify in writing whether and the extent to which the applicable Performance Goals have been achieved for such Performance Period. In determining the amount earned under such Stock Awards, the Board shall have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the Board may deem relevant to the assessment of individual or corporate performance for the Performance Period.
Delegation to Committee.
(i)      General . The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated.
(ii)      Section 162(m) and Rule 16b-3 Compliance . The Committee shall consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code who also qualify as Non-Employee Directors, in accordance with Rule 16b-3. In addition, the Board or the Committee, in its sole discretion, may (1) delegate to a committee of one or more members of the Board who need not be Outside Directors the authority to grant Stock Awards to eligible persons who are either (a) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (b) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code, and/or (2) delegate to a committee of one or more members of the Board who need not be Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act.
Delegation to an Officer. The Board may delegate to one or more Officers of the Company the authority to do one or both of the following (i) designate Officers and Employees of the Company or any of its Subsidiaries to be recipients of Stock Awards and the terms thereof, and (ii) determine the number of shares of Common Stock to be subject to such Stock Awards granted to such Officers and Employees of the Company; provided, however, that the Board resolutions regarding such delegation shall specify the total number of shares of Common Stock that may be subject to the Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to (x) himself or herself, (y) a Covered Employee or (z) an individual covered by Section 16 of the Exchange Act. Notwithstanding anything to the contrary in this Section 3(d), the Board may not delegate to an Officer authority to determine the Fair Market Value of the Common Stock pursuant to Section 2(t)(ii) above.
Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.

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4.
SHARES SUBJECT TO THE PLAN .
Share Reserve. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, the number of shares of Common Stock that may be issued pursuant to Stock Awards shall not exceed, in the aggregate, 5,863,461* shares of Common Stock (*as of June 24, 2011, with all stock splits and evergreen increases through such date); provided, that such share reserve shall be increased from time to time by the number of shares of Common Stock that (i) are issuable pursuant to stock awards outstanding under the Company’s 2002 Stock Option Plan (the “ 2002 Plan ”) as of the effective date of the Plan (as set forth in Section 14), and (ii) but for the termination of the 2002 Plan as of the effective date of the Plan, would otherwise have reverted to the share reserve of the 2002 Plan. In addition, the number of shares of Common Stock available for issuance under the Plan shall automatically increase on the first anniversary of the IPO Date and on each January 1st of each year commencing thereafter and ending on (and including) January 1, 2015, in an amount equal to the lesser of (i) four percent (4%) of the total number of shares of Common Stock outstanding on the day prior to the first anniversary of the IPO Date in the case of the first such increase, and on December 31st of the preceding calendar year in the case of each January 1 thereafter, or (ii) the greatest number of shares of Common Stock that could be added to the Plan as of such date without causing the number of shares available for grant (i.e., not already subject to outstanding Stock Awards) under the Plan as of that date to exceed seven percent (7%) of the Fully Diluted Number of Shares of Common Stock on the day prior to the first anniversary of the IPO Date in the case of the first such increase, and on December 31st of the preceding calendar year in the case of each January 1 thereafter. For purposes of clause (ii) of the preceding sentence, the “Fully Diluted Number of Shares of Common Stock” on any date shall consist of the sum of (i) the number of shares of Common Stock outstanding on such date, (ii) the number of shares of Common Stock issuable pursuant to stock options or other types of stock awards outstanding on such date under all of the Company’s equity compensation plans, whether or not vested, and (iii) all shares reserved for issuance but not subject to grants of stock options or other types of stock awards under all of the Company’s equity compensation plans. Notwithstanding the foregoing, the Board may act, prior to the first day of any calendar year, to provide that the increase in the share reserve for such calendar year shall be a lesser number of shares of Common Stock that would otherwise occur pursuant to the preceding sentence, specifying such lesser number, or that there shall be no increase for that calendar year.
Reversion of Shares to the Share Reserve. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, if any shares of Common Stock issued to a Participant pursuant to a Stock Award are forfeited to or repurchased by the Company, including, but not limited to, any repurchase or forfeiture caused by the failure to meet a contingency or condition required for the vesting of such shares, or if any shares of Common Stock are cancelled in accordance with the cancellation and regrant provisions of Section 3(b)(iii), then the shares of Common Stock not issued under such Stock Award, or forfeited to or repurchased by the Company, shall revert to and again become available for issuance under the Plan in accordance with the limitations contained herein. If any shares subject to a Stock Award are not delivered to a Participant because such shares are withheld for the payment of taxes or the Stock Award is exercised through a reduction of shares subject to the Stock Award (i.e., “net exercised”), (i) the full number of shares exercised (including in the case of Options or Stock Appreciation Rights, such number of shares used to pay the exercise price or, in the case of any Award, withholding taxes) shall reduce the number of shares that remain available for issuance under the Plan and (ii) such number of shares used to net exercise or pay withholding taxes shall not be added to the shares authorized for grant under the Plan. Notwithstanding anything to the

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contrary in this Section 4(b), subject to the provisions of Section 11(a) relating to Capitalization Adjustments the aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options shall be thirteen million (13,000,000) shares of Common Stock.
Source of Shares. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market.
5.
ELIGIBILITY .
Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants.
Ten Percent Stockholders. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.
Section 162(m) Limitation. Subject to the provisions of Section 11(a) relating to Capitalization Adjustments, at such time as the Company may be subject to the applicable provisions of Section 162(m) of the Code, no Employee shall be eligible to be granted Stock Awards covering more than one million (1,000,000) shares of Common Stock during any calendar year (two million (2,000,000) shares for new hires) for Options and Stock Appreciation Rights and five hundred thousand (500,000) shares for all other Stock Awards.
Consultants. A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act (“ Form S-8 ”) is not available to register either the offer or the sale of the Company’s securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, because the Consultant is not a natural person, or because of any other rule governing the use of Form S-8.
6.
OPTION PROVISIONS .
Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate and consistent with the Plan. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates shall be issued for shares of Common Stock purchased on exercise of each type of Option. The provisions of separate Options need not be identical; provided, however, that each Option Agreement shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:
Term. The Board shall determine the term of an Option; provided, however, that subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date of grant.
Exercise Price of an Incentive Stock Option. Subject to the provisions of Section 5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject

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to the Option on the date the Option is granted. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner consistent with the provisions of Section 424(a) of the Code.
Exercise Price of a Nonstatutory Stock Option. The exercise price of each Nonstatutory Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner consistent with the provisions of Section 424(a) of the Code.
Consideration. The purchase price of Common Stock acquired pursuant to the exercise of an Option shall be paid, to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of payment set forth below. The Board shall have the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to utilize a particular method of payment. The methods of payment permitted by this Section 6(d) are:
(i)      by cash or check;
(ii)      pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;
(iii)      by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;
(iv)      by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock issued upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, the Company shall accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such holding back of whole shares; provided, however, shares of Common Stock will no longer be outstanding under an Option and will not be exercisable thereafter to the extent that (i) shares are used to pay the exercise price pursuant to the “net exercise,” (ii) shares are delivered to the Participant as a result of such exercise, and (iii) shares are withheld to satisfy tax withholding obligations; or
(v)      in any other form of legal consideration that may be acceptable to the Board.
Transferability of Options. The Board may, in its sole discretion, impose such limitations on the transferability of Options as the Board shall determine. In the absence of such a determination by the Board to the contrary, the following restrictions on the transferability of Options shall apply:
(i)      Restrictions on Transfer . An Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder

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only by the Optionholder.
(ii)      Domestic Relations Orders . Notwithstanding the foregoing, an Option may be transferred pursuant to a domestic relations order.
(iii)      Beneficiary Designation . Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.
Vesting Generally of Options. The total number of shares of Common Stock subject to an Option may vest and therefore become exercisable in periodic installments that may or may not be equal. The Option may be subject to such other terms and conditions on the time or times when it may or may not be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this Section 6(f) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised.
Termination of Continuous Service. In the event that an Optionholder’s Continuous Service terminates (other than upon the Optionholder’s death or Disability or upon a Change in Control), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination of Continuous Service) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder’s Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.
Extension of Termination Date. An Optionholder’s Option Agreement may provide that if the exercise of the Option following the termination of the Optionholder’s Continuous Service (other than upon the Optionholder’s death or Disability or upon a Change in Control) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of a period of three (3) months after the termination of the Optionholder’s Continuous Service during which the exercise of the Option would not be in violation of such registration requirements, or (ii) the expiration of the term of the Option as set forth in the Option Agreement.
Disability of Optionholder. In the event that an Optionholder’s Continuous Service terminates as a result of the Optionholder’s Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination of Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.
Death of Optionholder. In the event that (i) an Optionholder’s Continuous Service

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terminates as a result of the Optionholder’s death, or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder’s Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder’s death, but only within the period ending on the earlier of (i) the date twelve (12) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, after the Optionholder’s death, the Option is not exercised within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.
Termination on or after a Change in Control. In the event that an Optionholder’s Continuous Service terminates as of, or within twelve (12) months following a Change in Control, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination of Continuous Service) within such period of time ending on the earlier of (i) the date twelve (12) months following the effective date of the Change in Control (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.
Early Exercise. The Option may include a provision whereby the Optionholder may elect at any time before the Optionholder’s Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. The Company shall not be required to exercise its repurchase option until at least six (6) months (or such longer or shorter period of time necessary to avoid a charge to earnings for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option.
7.
PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS .
Stock Purchase Awards. Each Stock Purchase Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate and consistent with the Plan. At the Board’s election, shares of Common Stock may be (i) held in book entry form subject to the Company’s instructions until any restrictions relating to the Stock Purchase Award lapse; or (ii) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board. The terms and conditions of Stock Purchase Award Agreements may change from time to time, and the terms and conditions of separate Stock Purchase Award Agreements need not be identical, provided, however, that each Stock Purchase Award Agreement shall include (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(i)      Purchase Price . At the time of the grant of a Stock Purchase Award, the Board will determine the price to be paid by the Participant for each share subject to the Stock Purchase Award. To the extent required by applicable law, the price to be paid by the Participant for each share of the Stock Purchase Award will not be less than the par value of a share of Common Stock.

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(ii)      Consideration . At the time of the grant of a Stock Purchase Award, the Board will determine the consideration permissible for the payment of the purchase price of the Stock Purchase Award. The purchase price of Common Stock acquired pursuant to the Stock Purchase Award shall be paid either: (i) in cash or by check at the time of purchase, (ii) by past services rendered to the Company, or (iii) in any other form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.
(iii)      Vesting . Shares of Common Stock acquired under a Stock Purchase Award may be subject to a share repurchase right or option in favor of the Company in accordance with a vesting schedule to be determined by the Board.
(iv)      Termination of Participant’s Continuous Service . In the event that a Participant’s Continuous Service terminates, the Company shall have the right, but not the obligation, to repurchase or otherwise reacquire, any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination under the terms of the Stock Purchase Award Agreement. At the Board’s election, the price paid for all shares of Common Stock so repurchased or reacquired by the Company may be at the lesser of (i) the Fair Market Value on the relevant date, or (ii) the Participant’s original cost for such shares. The Company shall not be required to exercise its repurchase or reacquisition option until at least six (6) months (or such longer or shorter period of time necessary to avoid a charge to earnings for financial accounting purposes) have elapsed following the Participant’s purchase of the shares of stock acquired pursuant to the Stock Purchase Award unless otherwise determined by the Board or provided in the Stock Purchase Award Agreement.
(v)      Transferability . Rights to purchase or receive shares of Common Stock granted under a Stock Purchase Award shall be transferable by the Participant only upon such terms and conditions as are set forth in the Stock Purchase Award Agreement, as the Board shall determine in its sole discretion, and so long as Common Stock awarded under the Stock Purchase Award remains subject to the terms of the Stock Purchase Award Agreement.
Stock Bonus Awards. Each Stock Bonus Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate and consistent with the Plan. At the Board’s election, shares of Common Stock may be (i) held in book entry form subject to the Company’s instructions until any restrictions relating to the Stock Bonus Award lapse; or (ii) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board. The terms and conditions of Stock Bonus Award Agreements may change from time to time, and the terms and conditions of separate Stock Bonus Award Agreements need not be identical, provided, however, that each Stock Bonus Award Agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(i)      Consideration . A Stock Bonus Award may be awarded in consideration for (i) past services actually rendered to the Company or an Affiliate, or (ii) any other form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.
(ii)      Vesting . Shares of Common Stock awarded under the Stock Bonus Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.
(iii)      Termination of Participant’s Continuous Service . In the event a Participant’s

     16     

Continuous Service terminates, the Company may receive via a forfeiture condition, any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination of Continuous Service under the terms of the Stock Bonus Award Agreement.
(iv)      Transferability . Rights to acquire shares of Common Stock under the Stock Bonus Award Agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the Stock Bonus Award Agreement, as the Board shall determine in its sole discretion, so long as Common Stock awarded under the Stock Bonus Award Agreement remains subject to the terms of the Stock Bonus Award Agreement.
Stock Unit Awards. Each Stock Unit Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of Stock Unit Award Agreements may change from time to time, and the terms and conditions of separate Stock Unit Award Agreements need not be identical, provided, however, that each Stock Unit Award Agreement shall include (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(vi)      Consideration . At the time of grant of a Stock Unit Award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Stock Unit Award may be paid in any form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.
(vii)      Vesting . At the time of the grant of a Stock Unit Award, the Board may impose such restrictions or conditions to the vesting of the Stock Unit Award as it, in its sole discretion, deems appropriate.
(viii)      Payment . A Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Stock Unit Award Agreement.
(ix)      Additional Restrictions . At the time of the grant of a Stock Unit Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Stock Unit Award after the vesting of such Stock Unit Award.
(x)      Dividend Equivalents . Dividend equivalents may be credited in respect of shares of Common Stock covered by a Stock Unit Award, as determined by the Board and contained in the Stock Unit Award Agreement. At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Stock Unit Award in such manner as determined by the Board. Any additional shares covered by the Stock Unit Award credited by reason of such dividend equivalents will be subject to all the terms and conditions of the underlying Stock Unit Award Agreement to which they relate.
(xi)      Termination of Participant’s Continuous Service . Except as otherwise provided in the applicable Stock Unit Award Agreement, such portion of the Stock Unit Award that has not vested will be forfeited upon the Participant’s termination of Continuous Service.
Stock Appreciation Rights. Each Stock Appreciation Right Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The

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terms and conditions of Stock Appreciation Right Agreements may change from time to time, and the terms and conditions of separate Stock Appreciation Right Agreements need not be identical; provided, however, that each Stock Appreciation Right Agreement shall include (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:
(iv)      Strike Price and Calculation of Appreciation . Each Stock Appreciation Right will be denominated in shares of Common Stock equivalents. The appreciation distribution payable on the exercise of a Stock Appreciation Right will be not greater than an amount equal to the excess of (i) the aggregate Fair Market Value (on the date of the exercise of the Stock Appreciation Right) of a number of shares of Common Stock equal to the number of share of Common Stock equivalents in which the Participant is vested under such Stock Appreciation Right, and with respect to which the Participant is exercising the Stock Appreciation Right on such date, over (ii) an amount (the strike price) that will be determined by the Board at the time of grant of the Stock Appreciation Right, which shall be no less than the Fair Market Value of the Common Stock on the date of grant.
(v)      Vesting . At the time of the grant of a Stock Appreciation Right, the Board may impose such restrictions or conditions to the vesting of such Stock Appreciation Right as it, in its sole discretion, deems appropriate.
(vi)      Exercise . To exercise any outstanding Stock Appreciation Right, the Participant must provide written notice of exercise to the Company in compliance with the provisions of the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.
(vii)      Payment . The appreciation distribution in respect to a Stock Appreciation Right may be paid in Common Stock, in cash, in any combination of the two or in any other form of consideration, as determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.
(viii)      Termination of Continuous Service . In the event that a Participant’s Continuous Service terminates, the Participant may exercise his or her Stock Appreciation Right (to the extent that the Participant was entitled to exercise such Stock Appreciation Right as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Participant’s Continuous Service (or such longer or shorter period specified in the Stock Appreciation Right Agreement), or (ii) the expiration of the term of the Stock Appreciation Right as set forth in the Stock Appreciation Right Agreement. If, after termination, the Participant does not exercise his or her Stock Appreciation Right within the time specified herein or in the Stock Appreciation Right Agreement (as applicable), the Stock Appreciation Right shall terminate.
Other Stock Awards. Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common Stock may be granted either alone or in addition to Stock Awards provided for under Section 6 and the preceding provisions of this Section 7. Subject to the provisions of the Plan, the Board shall have sole and complete authority to determine the persons to whom and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards.
8.
COVENANTS OF THE COMPANY .
Availability of Shares. During the terms of the Stock Awards, the Company shall

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keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards.
Securities Law Compliance. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained.
9.
USE OF PROCEEDS FROM SALES OF COMMON STOCK .
Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company.
10.
MISCELLANEOUS .
Acceleration of Exercisability and Vesting. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest.
Stockholder Rights. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms.
No Employment or Other Service Rights. Nothing in the Plan, any Stock Award Agreement or other instrument executed thereunder or any Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.
Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and any Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).

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Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant’s knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant’s own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.
Withholding Obligations. To the extent provided by the terms of a Stock Award Agreement, the Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to a Stock Award by any of the following means (in addition to the Company’s right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Stock Award; or (iii) by such other method as may be set forth in the Stock Award Agreement.
Electronic Delivery. Any reference herein to a “written” agreement or document shall include any agreement or document delivered electronically or posted on the Company’s intranet.
Performance Stock Awards. A Stock Award may be granted, may vest, or may be exercised based upon service conditions, upon the attainment during a Performance Period of certain Performance Goals, or both. The length of any Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what degree such Performance Goals have been attained shall be conclusively determined by the Board in its sole discretion.
11.
ADJUSTMENTS UPON CHANGES IN COMMON STOCK; CORPORATE TRANSACTIONS .
Capitalization Adjustments. If any change is made in, or other events occur with respect to, the Common Stock subject to the Plan or subject to any Stock Award after the effective date of the Plan set forth in Section 14 without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company (each a “ Capitalization Adjustment ”)), the Plan shall be

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appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to Sections 4(a) and 4(b), the maximum number of securities that may be awarded to any person pursuant to Section 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a transaction “without receipt of consideration” by the Company.) Any adjustment affecting a Stock Award intended as performance-based compensation shall be made consistent with the requirements of Section 162(m) of the Code.
Dissolution or Liquidation. In the event of a dissolution or liquidation of the Company, all outstanding Stock Awards (other than Stock Awards consisting of vested and outstanding shares of Common Stock not subject to the Company’s right of repurchase) shall terminate immediately prior to the completion of such dissolution or liquidation, and the shares of Common Stock subject to the Company’s repurchase option may be repurchased by the Company notwithstanding the fact that the holder of such Stock Award is providing Continuous Service, provided, however, that the Board may, in its sole discretion, cause some or all Stock Awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Stock Awards have not previously expired or terminated) before the dissolution or liquidation is completed but contingent on its completion.
Corporate Transaction. The following provisions shall apply to Stock Awards in the event of a Corporate Transaction unless otherwise provided in a written agreement between the Company or any Affiliate and the holder of a Stock Award:
(i)      Stock Awards May Be Assumed . In the event of a Corporate Transaction, any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or continue any or all Stock Awards outstanding under the Plan or may substitute similar stock awards for Stock Awards outstanding under the Plan (including but not limited to, awards to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction), and any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to Stock Awards may be assigned by the Company to the successor of the Company (or the successor’s parent company, if any), in connection with such Corporate Transaction. A surviving corporation or acquiring corporation may choose to assume or continue only a portion of a Stock Award or substitute a similar stock award for only a portion of a Stock Award. The terms of any assumption, continuation or substitution shall be set by the Board in accordance with the provisions of Section 3.
(ii)      Stock Awards Not Assumed or Continued . In the event of a Corporate Transaction in which the surviving corporation or acquiring corporation (or its parent company) does not assume or continue such outstanding Stock Awards or substitute similar stock awards for such outstanding Stock Awards, then with respect to Stock Awards that have not been assumed, continued or substituted, the vesting of such Stock Awards (and, if applicable, the time at which such Stock Award may be exercised) shall not be accelerated and such Stock Awards (other than a Stock Award consisting of vested and outstanding shares of Common Stock not subject to the Company’s right of repurchase) shall terminate if not exercised (if applicable) prior to the effective time of the Corporate Transaction; provided, however, that any reacquisition or repurchase rights held by the Company with respect to such Stock Awards shall not terminate and may continue to be exercised notwithstanding the Corporate Transaction.

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(iii)      Payment for Stock Awards in Lieu of Exercise . Notwithstanding the foregoing, in the event a Stock Award will terminate if not exercised prior to the effective time of a Corporate Transaction, the Board may provide, in its sole discretion, that the holder of such Stock Award may not exercise such Stock Award but will receive a payment, in such form as may be determined by the Board, equal in value to the excess, if any, of (i) the value of the property the holder of the Stock Award would have received upon the exercise of the Stock Award, over (ii) any exercise price payable by such holder in connection with such exercise.
Change in Control. A Stock Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration shall occur.
12.
AMENDMENT OF THE PLAN AND STOCK AWARDS .
Amendment of Plan. Subject to the limitations, if any, of applicable law, the Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 11(a) relating to Capitalization Adjustments, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy applicable law.
Stockholder Approval. The Board, in its sole discretion, may submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to Covered Employees.
Contemplated Amendments. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith.
No Impairment of Rights. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the affected Participant, and (ii) such Participant consents in writing.
Amendment of Stock Awards. The Board, at any time and from time to time, may amend the terms of any one or more Stock Awards, including, but not limited to, amendments to provide terms more favorable than previously provided in the Stock Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the affected Participant, and (ii) such Participant consents in writing.
13.
TERMINATION OR SUSPENSION OF THE PLAN .
Plan Term. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the

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date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.
No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the affected Participant.
14.
EFFECTIVE DATE OF PLAN .
The Plan shall become effective on the IPO Date, but no Stock Award shall be exercised (or, in the case of a Stock Purchase Award, Stock Bonus Award, Stock Unit Award, or Other Stock Award shall be granted) unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. In the event that the terms of the Stock Award Agreement shall conflict with the terms of the Plan, the terms of the Plan will control.
15.
CHOICE OF LAW .
The law of the State of Delaware shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state’s conflict of laws rules.
16.
SECTION 409A .
To the extent that the Board determines that any Stock Award granted under the Plan is subject to Section 409A of the Code, the Stock Award Agreement evidencing such Stock Award shall incorporate the terms and conditions required by Section 409A of the Code. To the extent applicable, the Plan and Stock Award Agreements shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued after the Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that following the Effective Date the Board determines that any Stock Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Board may adopt such amendments to the Plan and the applicable Stock Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Board determines are necessary or appropriate to (a) exempt the Stock Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Stock Award, or (b) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance and thereby avoid the application of any penalty taxes under such Section.

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SILICON GRAPHICS INTERNATIONAL CORP .
2005 EMPLOYEE STOCK PURCHASE PLAN

ADOPTED: JANUARY 12, 2005
APPROVED BY STOCKHOLDERS: APRIL 27, 2005
AS AMENDED BY THE BOARD OF DIRECTORS: OCTOBER 19, 2011
AMENDMENT APPROVED BY STOCKHOLDERS: DECEMBER 2, 2011

1.
GENERAL .
(a)      The purpose of the Plan is to provide a means by which Employees of the Company and certain designated Related Corporations may be given an opportunity to purchase shares of the Common Stock of the Company.
(b)      The Company, by means of the Plan, seeks to retain the services of such Employees, to secure and retain the services of new Employees and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Related Corporations.
(c)      The Company intends that the Purchase Rights be considered options issued under an Employee Stock Purchase Plan.
2.
DEFINITIONS .
As used in the Plan, the following definitions shall apply to the capitalized terms indicated below:
(a)      “ Board ” means the Board of Directors of the Company.
(b)      “ Capitalization Adjustment ” has the meaning ascribed to that term in Section 14(a).
(c)      “ Code ” means the Internal Revenue Code of 1986, as amended.
(d)      “ Committee ” means a committee of one (1) or more members of the Board to whom authority has been delegated by the Board in accordance with Section 3(c).
(e)      “ Common Stock ” means the common stock of the Company.
(f)      “ Company ” means Silicon Graphics International Corp., a Delaware corporation.
(g)      “ Contributions ” means the payroll deductions and other additional payments specifically provided for in the Offering, that a Participant contributes to fund the exercise of a Purchase Right. A Participant may make additional payments into his or her account, if specifically provided for in the Offering, and then only if the Participant has not already had the maximum permitted amount withheld during the Offering through payroll deductions.
(h)      “ Corporate Transaction ” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:
(i)      a sale or other disposition of all or substantially all, as determined by the Board

     1     


in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;
(ii)      a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;
(iii)      the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or
(iv)      the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.
(i)      “ Director ” means a member of the Board.
(j)      “ Eligible Employee ” means an Employee who meets the requirements set forth in the Offering for eligibility to participate in the Offering, provided that such Employee also meets the requirements for eligibility to participate set forth in the Plan.
(k)      “ Employee ” means any person, including Officers and Directors, who is employed for purposes of Section 423(b)(4) of the Code by the Company or a Related Corporation. However, service solely as a Director, or payment of a fee for such services, shall not cause a Director to be considered an “Employee” for purposes of the Plan.
(l)      “ Employee Stock Purchase Plan ” means a plan that grants Purchase Rights intended to be options issued under an “employee stock purchase plan,” as that term is defined in Section 423(b) of the Code.
(m)      “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.
(n)      “ Fair Market Value ” means, as of any date, the value of the Common Stock determined as follows:
(i)      If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date in question, as reported in The Wall Street Journal or such other source as the Board deems reliable.
(ii)      In the absence of such markets for the Common Stock, the Fair Market Value shall be determined by the Board in good faith.
(o)      “ IPO Date ” means the date of the underwriting agreement between the Company and the underwriter(s) managing the initial public offering of the Common Stock, pursuant to which the Common Stock is priced for the initial public offering.
(p)      “ Offering ” means the grant of Purchase Rights to purchase shares of Common Stock under the Plan to Eligible Employees.

     2     


(q)      “ Offering Date ” means a date selected by the Board for an Offering to commence.
(r)      “ Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
(s)      “ Participant ” means an Eligible Employee who holds an outstanding Purchase Right granted pursuant to the Plan.
(t)      “ Plan ” means this Silicon Graphics International Corp. 2005 Employee Stock Purchase Plan, as amended.
(u)      “ Purchase Date ” means one or more dates during an Offering established by the Board on which Purchase Rights shall be exercised and as of which purchases of shares of Common Stock shall be carried out in accordance with such Offering.
(v)      “ Purchase Period ” means a period of time specified within an Offering beginning on the Offering Date or on the next day following a Purchase Date within an Offering and ending on a Purchase Date. An Offering may consist of one or more Purchase Periods.
(w)      “ Purchase Right ” means an option to purchase shares of Common Stock granted pursuant to the Plan.
(x)      “ Related Corporation ” means any “parent corporation” or “subsidiary corporation” of the Company whether now or subsequently established, as those terms are defined in Sections 424(e) and (f), respectively, of the Code.
(y)      “ Securities Act ” means the Securities Act of 1933, as amended.
(z)      “ Trading Day ” means any day on which the exchange(s) or market(s) on which shares of Common Stock are listed, whether it be an established stock exchange, the Nasdaq National Market, the Nasdaq SmallCap Market or otherwise, is open for trading.
3.
ADMINISTRATION .
(a)      The Board shall administer the Plan unless and until the Board delegates administration of the Plan to a Committee, as provided in Section 3(c).
(b)      The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:
(i)      To determine when and how Purchase Rights to purchase shares of Common Stock shall be granted and the provisions of each Offering of such Purchase Rights (which need not be identical).
(ii)      To designate from time to time which Related Corporations of the Company shall be eligible to participate in the Plan.
(iii)      To construe and interpret the Plan and Purchase Rights, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan, in a manner and to the extent it shall deem

     3     


necessary or expedient to make the Plan fully effective.
(iv)      To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees who are foreign nationals or employed outside the United States.
(v)      To amend the Plan as provided in Section 15.
(vi)      Generally, to exercise such powers and to perform such acts as it deems necessary or expedient to promote the best interests of the Company and its Related Corporations and to carry out the intent that the Plan be treated as an Employee Stock Purchase Plan.
(c)      The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated.
(d)      All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.
4.
SHARES OF COMMON STOCK SUBJECT TO THE PLAN .
(a)      Subject to the provisions of Section 14 relating to Capitalization Adjustments, a total of two million one hundred thirty thousand three hundred thirty-eight (2,130,338) shares* of the Company’s Common Stock that may be sold pursuant to Purchase Rights is reserved for issuance under this Plan as of June 24, 2011 (*with all stock splits and evergreen increases through such date). In addition, the number of shares of Common Stock available for issuance under the Plan shall automatically increase on January 1st of each year, commencing in 2006 and ending on (and including) January 1, 2015, in an amount equal to the lesser of (i) one percent (1%) of the total number of shares of Common Stock outstanding on December 31st of the preceding calendar year, (ii) four hundred thousand (400,000) shares of Common Stock, or (iii) the greatest number of shares of Common Stock that could be added to the Plan as of such date without causing the number of shares that may be sold pursuant to Purchase Rights under the Plan as of that date to exceed three percent (3%) of the number of shares of Common Stock outstanding on December 31st of the preceding calendar year. Notwithstanding the foregoing, the Board may act, prior to the first day of any calendar year, to provide that the increase in the share reserve for such calendar year shall be a lesser number of shares of Common Stock that would otherwise occur pursuant to the preceding sentence, specifying such lesser number, or that there shall be no increase for that calendar year.
(b)      If any Purchase Right granted under the Plan shall for any reason terminate without having been exercised, the shares of Common Stock not purchased under such Purchase Right shall again become available for issuance under the Plan.
(c)      The stock purchasable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market.

     4     


5.
GRANT OF PURCHASE RIGHTS; OFFERING .
(a)      The Board may from time to time grant or provide for the grant of Purchase Rights to purchase shares of Common Stock under the Plan to Eligible Employees in an Offering (consisting of one or more Purchase Periods) on an Offering Date or Offering Dates selected by the Board. Each Offering shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate and consistent with this Plan, which shall comply with the requirement of Section 423(b)(5) of the Code that all Employees granted Purchase Rights shall have the same rights and privileges. The terms and conditions of an Offering shall be incorporated by reference into the Plan and treated as part of the Plan. The provisions of separate Offerings need not be identical, but each Offering shall include (through incorporation of the provisions of this Plan by reference in the document comprising the Offering or otherwise) the period during which the Offering shall be effective, which period shall not exceed twenty-seven (27) months beginning with the Offering Date, and the substance of the provisions contained in Sections 6 through 9, inclusive.
(b)      If a Participant has more than one Purchase Right outstanding under the Plan, unless he or she otherwise indicates in agreements or notices delivered hereunder: (i) each agreement or notice delivered by that Participant shall be deemed to apply to all of his or her Purchase Rights under the Plan, and (ii) a Purchase Right with a lower exercise price (or an earlier-granted Purchase Right, if different Purchase Rights have identical exercise prices) shall be exercised to the fullest possible extent before a Purchase Right with a higher exercise price (or a later-granted Purchase Right if different Purchase Rights have identical exercise prices) shall be exercised.
(c)      The Board shall have the discretion to structure an Offering so that if the Fair Market Value of the shares of Common Stock on the first day of a new Purchase Period within that Offering is less than or equal to the Fair Market Value of the shares of Common Stock on the Offering Date, then (i) that Offering shall terminate immediately, and (ii) the Participants in such terminated Offering shall be automatically enrolled in a new Offering beginning on the first day of such new Purchase Period.
6.
ELIGIBILITY .
(a)      Purchase Rights may be granted only to Employees of the Company or, as the Board may designate as provided in Section 3(b), to Employees of a Related Corporation. Except as provided in Section 6(b), an Employee shall not be eligible to be granted Purchase Rights under the Plan unless, on the Offering Date, such Employee has been in the employ of the Company or the Related Corporation, as the case may be, for such continuous period preceding such Offering Date as the Board may require, but in no event shall the required period of continuous employment be greater than two (2) years. In addition, the Board may provide that no Employee shall be eligible to be granted Purchase Rights under the Plan unless, on the Offering Date, such Employee’s customary employment with the Company or the Related Corporation is more than twenty (20) hours per week and more than five (5) months per calendar year or such other criteria as the Board may determine consistent with Section 423 of the Code.
(b)      The Board may provide that each person who, during the course of an Offering, first becomes an Eligible Employee shall, on a date or dates specified in the Offering which coincides with the day on which such person becomes an Eligible Employee or which occurs thereafter, receive a Purchase Right under that Offering, which Purchase Right shall thereafter be deemed to be a part of that Offering. Such Purchase Right shall have the same characteristics as any Purchase Rights originally granted under that Offering, as described herein, except that:
(i)      the date on which such Purchase Right is granted shall be the “ Offering Date ” of

     5     


such Purchase Right for all purposes, including determination of the exercise price of such Purchase Right;
(ii)      the period of the Offering with respect to such Purchase Right shall begin on its Offering Date and end coincident with the end of such Offering; and
(iii)      the Board may provide that if such person first becomes an Eligible Employee within a specified period of time before the end of the Offering, he or she shall not receive any Purchase Right under that Offering.
(c)      No Employee shall be eligible for the grant of any Purchase Rights under the Plan if, immediately after any such Purchase Rights are granted, such Employee owns stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Related Corporation. For purposes of this Section 6(c), the rules of Section 424(d) of the Code shall apply in determining the stock ownership of any Employee, and stock which such Employee may purchase under all outstanding Purchase Rights and options shall be treated as stock owned by such Employee.
(d)      As specified by Section 423(b)(8) of the Code, an Eligible Employee may be granted Purchase Rights under the Plan only if such Purchase Rights, together with any other rights granted under all Employee Stock Purchase Plans of the Company and any Related Corporations, do not permit such Eligible Employee’s rights to purchase stock of the Company or any Related Corporation to accrue at a rate which exceeds twenty five thousand dollars ($25,000) of Fair Market Value of such stock (determined at the time such rights are granted, and which, with respect to the Plan, shall be determined as of their respective Offering Dates) for each calendar year in which such rights are outstanding at any time.
(e)      Officers of the Company and any designated Related Corporation, if they are otherwise Eligible Employees, shall be eligible to participate in Offerings under the Plan. Notwithstanding the foregoing, the Board may provide in an Offering that Employees who are highly compensated Employees within the meaning of Section 423(b)(4)(D) of the Code shall not be eligible to participate.
7.
PURCHASE RIGHTS; PURCHASE PRICE .
(a)      On each Offering Date, each Eligible Employee, pursuant to an Offering made under the Plan, shall be granted a Purchase Right to purchase up to that number of shares of Common Stock purchasable either with a percentage or with a maximum dollar amount, as designated by the Board, but in either case not exceeding fifteen percent (15%) of such Employee’s earnings (as defined by the Board in each Offering) during the period that begins on the Offering Date (or such later date as the Board determines for a particular Offering) and ends on the date stated in the Offering, which date shall be no later than the end of the Offering.
(b)      The Board shall establish one (1) or more Purchase Dates during an Offering as of which Purchase Rights granted pursuant to that Offering shall be exercised and purchases of shares of Common Stock shall be carried out in accordance with such Offering.
(c)      In connection with each Offering made under the Plan, the Board may specify a maximum number of shares of Common Stock that may be purchased by any Participant on any Purchase Date during such Offering. In connection with each Offering made under the Plan, the Board may specify a maximum aggregate number of shares of Common Stock that may be purchased by all Participants

     6     


pursuant to such Offering. In addition, in connection with each Offering that contains more than one Purchase Date, the Board may specify a maximum aggregate number of shares of Common Stock that may be purchased by all Participants on any Purchase Date under the Offering. If the aggregate purchase of shares of Common Stock issuable upon exercise of Purchase Rights granted under the Offering would exceed any such maximum aggregate number, then, in the absence of any Board action otherwise, a pro rata allocation of the shares of Common Stock available shall be made in as nearly a uniform manner as shall be practicable and equitable.
(d)      The purchase price of shares of Common Stock acquired pursuant to Purchase Rights shall be not less than the lesser of:
(i)      an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of Common Stock on the Offering Date; or
(ii)      an amount equal to eighty-five percent (85%) of the Fair Market Value of the shares of Common Stock on the applicable Purchase Date.
8.
PARTICIPATION; WITHDRAWAL; TERMINATION .
(a)      A Participant may elect to authorize payroll deductions pursuant to an Offering under the Plan by completing and delivering to the Company, within the time specified in the Offering, an enrollment form (in such form as the Company may provide). Each such enrollment form shall authorize an amount of Contributions expressed as a percentage of the submitting Participant’s earnings (as defined in each Offering) during the Offering (not to exceed the maximum percentage specified by the Board). Each Participant’s Contributions shall be credited to a bookkeeping account for such Participant under the Plan and shall be deposited with the general funds of the Company except where applicable law requires that Contributions be deposited with a third party. To the extent provided in the Offering, a Participant may begin such Contributions after the beginning of the Offering. To the extent provided in the Offering, a Participant may thereafter reduce (including to zero) or increase his or her Contributions. To the extent specifically provided in the Offering, in addition to making Contributions by payroll deductions, a Participant may make Contributions through the payment by cash or check prior to each Purchase Date of the Offering.
(b)      During an Offering, a Participant may cease making Contributions and withdraw from the Offering by delivering to the Company a notice of withdrawal in such form as the Company may provide. Such withdrawal may be elected at any time prior to the end of the Offering, except as provided otherwise in the Offering. Upon such withdrawal from the Offering by a Participant, the Company shall distribute to such Participant all of his or her accumulated Contributions (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock for the Participant) under the Offering, and such Participant’s Purchase Right in that Offering shall thereupon terminate. A Participant’s withdrawal from an Offering shall have no effect upon such Participant’s eligibility to participate in any other Offerings under the Plan, but such Participant shall be required to deliver a new enrollment form in order to participate in subsequent Offerings.
(c)      Purchase Rights granted pursuant to any Offering under the Plan shall terminate immediately upon a Participant ceasing to be an Employee for any reason or for no reason (subject to any post-employment participation period required by law) or other lack of eligibility. The Company shall distribute to such terminated or otherwise ineligible Employee all of his or her accumulated Contributions (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock for the terminated or otherwise ineligible Employee) under the Offering.

     7     


(d)      Purchase Rights shall not be transferable by a Participant except by will, the laws of descent and distribution, or by a beneficiary designation as provided in Section 13. During a Participant’s lifetime, Purchase Rights shall be exercisable only by such Participant.
(e)      Unless otherwise specified in an Offering, the Company shall have no obligation to pay interest on Contributions.
9.
EXERCISE .
(a)      On each Purchase Date during an Offering, each Participant’s accumulated Contributions shall be applied to the purchase of shares of Common Stock up to the maximum number of shares of Common Stock permitted pursuant to the terms of the Plan and the applicable Offering, at the purchase price specified in the Offering. No fractional shares shall be issued upon the exercise of Purchase Rights unless specifically provided for in the Offering.
(b)      If any amount of accumulated Contributions remains in a Participant’s account after the purchase of shares of Common Stock and such remaining amount is less than the amount required to purchase one share of Common Stock on the final Purchase Date of an Offering, then such remaining amount shall be held in such Participant’s account for the purchase of shares of Common Stock under the next Offering under the Plan, unless such Participant withdraws from such next Offering, as provided in Section 8(b), or is not eligible to participate in such Offering, as provided in Section 6, in which case such amount shall be distributed to such Participant after the final Purchase Date, without interest. If the amount of Contributions remaining in a Participant’s account after the purchase of shares of Common Stock is at least equal to the amount required to purchase one (1) whole share of Common Stock on the final Purchase Date of the Offering, then such remaining amount shall be distributed in full to such Participant at the end of the Offering without interest.
(c)      No Purchase Rights may be exercised to any extent unless the shares of Common Stock to be issued upon such exercise under the Plan are covered by an effective registration statement pursuant to the Securities Act and the Plan is in material compliance with all applicable federal, state, foreign and other securities and other laws applicable to the Plan. If on a Purchase Date during any Offering hereunder the shares of Common Stock are not so registered or the Plan is not in such compliance, no Purchase Rights or any Offering shall be exercised on such Purchase Date, and the Purchase Date shall be delayed until the shares of Common Stock are subject to such an effective registration statement and the Plan is in such compliance, except that the Purchase Date shall not be delayed more than twelve (12) months and the Purchase Date shall in no event be more than twenty-seven (27) months from the Offering Date. If, on the Purchase Date under any Offering hereunder, as delayed to the maximum extent permissible, the shares of Common Stock are not registered and the Plan is not in such compliance, no Purchase Rights or any Offering shall be exercised and all Contributions accumulated during the Offering (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock) shall be distributed to the Participants without interest.
10.
COVENANTS OF THE COMPANY .
The Company shall seek to obtain from each federal, state, foreign or other regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of Common Stock upon exercise of the Purchase Rights. If, after commercially reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock

     8     


upon exercise of such Purchase Rights unless and until such authority is obtained.
11.
USE OF PROCEEDS FROM SALES OF COMMON STOCK .
Proceeds from the sale of shares of Common Stock pursuant to Purchase Rights shall constitute general funds of the Company.
12.
RIGHTS AS A STOCKHOLDER .
A Participant shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, shares of Common Stock subject to Purchase Rights unless and until the Participant’s shares of Common Stock acquired upon exercise of Purchase Rights are recorded in the books of the Company (or its transfer agent).
13.
DESIGNATION OF BENEFICIARY .
(a)      A Participant may file a written designation of a beneficiary who is to receive any shares of Common Stock and/or cash, if any, from the Participant’s account under the Plan in the event of such Participant’s death subsequent to the end of an Offering but prior to delivery to the Participant of such shares of Common Stock or cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant’s account under the Plan in the event of such Participant’s death during an Offering. Any such designation shall be on a form provided by or otherwise acceptable to the Company.
(b)      The Participant may change such designation of beneficiary at any time by written notice to the Company. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant’s death, the Company shall deliver such shares of Common Stock and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its sole discretion, may deliver such shares of Common Stock and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate.
14.
ADJUSTMENTS UPON CHANGES IN COMMON STOCK; CORPORATE TRANSACTIONS .
(a)      If any change is made in, or other events occur with respect to, the Common Stock subject to the Plan or subject to any Purchase Right after the effective date of the Plan set forth in Section 17 without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company (each a “Capitalization Adjustment”)), the Plan shall be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to Section 4(a), and the outstanding Purchase Rights shall be appropriately adjusted in the class(es), number of shares and purchase limits of such outstanding Purchase Rights. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a transaction “without receipt of consideration” by the Company.)
(b)      In the event of a Corporate Transaction, then: (i) any surviving corporation or acquiring

     9     


corporation (or the surviving or acquiring corporation’s parent company) may assume or continue Purchase Rights outstanding under the Plan or may substitute similar rights (including a right to acquire the same consideration paid to the stockholders in the Corporate Transaction) for those outstanding under the Plan, or (ii) if any surviving or acquiring corporation (or its parent company) does not assume or continue such Purchase Rights or does not substitute similar rights for Purchase Rights outstanding under the Plan, then the Participants’ accumulated Contributions shall be used to purchase shares of Common Stock within ten (10) business days prior to the Corporate Transaction under the ongoing Offering, and the Participants’ Purchase Rights under the ongoing Offering shall terminate immediately after such purchase.
15.
AMENDMENT OF THE PLAN .
(a)      The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 14(a) relating to Capitalization Adjustments and except as to amendments solely to benefit the administration of the Plan, to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for Participants or the Company or any Related Corporation, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary for the Plan to satisfy the requirements of Section 423 of the Code or other applicable laws or regulations.
(b)      It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans and/or to bring the Plan and/or Purchase Rights into compliance therewith.
(c)      The rights and obligations under any Purchase Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan except: (i) with the consent of the person to whom such Purchase Rights were granted, or (ii) as necessary to comply with any laws or governmental regulations (including, without limitation, the provisions of the Code and the regulations promulgated thereunder relating to Employee Stock Purchase Plans).
16.
TERMINATION OR SUSPENSION OF THE PLAN .
(a)      The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate at the time that all of the shares of Common Stock reserved for issuance under the Plan, as increased and/or adjusted from time to time, have been issued under the terms of the Plan. No Purchase Rights may be granted under the Plan while the Plan is suspended or after it is terminated.
(b)      Any benefits, privileges, entitlements and obligations under any Purchase Rights while the Plan is in effect shall not be impaired by suspension or termination of the Plan except (i) as expressly provided in the Plan or with the consent of the person to whom such Purchase Rights were granted, (ii) as necessary to comply with any laws, regulations or listing requirements, or (iii) as necessary to ensure that the Plan and/or Purchase Rights comply with the requirements of Section 423 of the Code. Notwithstanding the foregoing, if the Company’s accountants advise the Company that the accounting treatment of purchases under the Plan will change or has changed in a manner that the Company determines is detrimental to its best interests, then the Company may, in its discretion, take any or all of the following actions: (i) terminate each Offering hereunder that is then ongoing as of the next Purchase Date (after the purchase of Common Stock on such Purchase Date) under such Offering; (ii) set a new Purchase Date for each ongoing Offering and terminate such Offerings after the purchase of Common

     10     


Stock on such Purchase Date; (iii) amend the Plan and the ongoing Offering so that such Offering will no longer have an accounting treatment that is detrimental to the Company’s best interests and (iv) terminate each ongoing Offering and refund any Contributions (reduced to the extent, if any, such Contributions have been used to acquire shares of Common Stock) without interest to the participants.
17.
EFFECTIVE DATE OF PLAN .
The Plan shall become effective on the IPO Date, but no Purchase Rights shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board.
18.
MISCELLANEOUS PROVISIONS .
(a)      The Plan and Offering do not constitute an employment contract. Nothing in the Plan or in the Offering shall in any way alter the at will nature of a Participant’s employment or be deemed to create in any way whatsoever any obligation on the part of any Participant to continue in the employ of the Company or a Related Corporation, or on the part of the Company or a Related Corporation to continue the employment of a Participant.
(b)      The provisions of the Plan shall be governed by the laws of the State of Delaware without resort to that state’s conflicts of laws rules.

     11     
File No. ______________________
INDUSTRIAL SPACE LEASE
(MULTI-TENANT NET)
THIS LEASE , dated October __, 2006 for reference purposes only, is made by and between RENCO BAYSIDE INVESTORS , a California Limited Partnership (“Landlord”), and RACKABLE SYSTEMS, INC. , a Delaware corporation (“Tenant”), to be effective and binding upon the parties as of the date the last of the designated signatories to this Lease shall have executed this Lease (the “Effective Date of this Lease”).
ARTICLE 1
REFERENCES
1.1      References. All references in this Lease (subject to any further clarifications contained in this Lease) to the following terms shall have the following meaning or refer to the respective address, person, date, time period, amount, percentage, calendar year or fiscal year as below set forth:
A.
Tenant's Address for Notices:
 
46600 Landing Parkway
Fremont, CA 94538
 
 
 
 
B.
Tenant's Representative:
 
Jennifer Pratt
 
Phone Number:
 
(408) 240-8300
 
 
 
 
C.
Landlord's Address for Notices:
 
Renco Bayside Investors
615 National Avenue
Mountain View, CA 94043
 
 
 
 
D.
Landlord's Representative:
 
William N. Neidig
 
Phone Number:
 
(408) 730-5500
 
 
 
 
E.
Lease Commencement Date:
 
The Lease shall commence on the later of (i) substantial completion of the tenant improvements, or (ii) March 1, 2007
 
 
 
 
F.
Intended Term:
 
Six (6) years and ten (10) months or a total of 82 months
 
 
 
 
G.
Lease Expiration Date:
 
The last day of the eighty-second (82nd) full calendar month following the Commencement Date
 
 
 
 
H.
Tenant's Punchlist Period:
 
Ten (10) Business Days
 
 
 
 
I.
First Month's Prepaid Rent:
 
$13,304.00
 
 
 
 
J.
Last Month's Prepaid Rent:
 
N/A
 
 
 
 
K.
Tenant's Security Deposit:
 
$40,316.00
 
 
 
 
L.
Late Charge Amount:
 
Five (5%) percent of any delinquent amount due
 
 
 
 
M.
Tenant's Required Liability
 
$3,000,000 Single Limit
 
Coverage:
 
 
 
 
 
 
N.
Tenant's number of Parking Spaces
 
150 unreserved parking spaces
 
 
 
 
O.
Brokers:
 
Terry Haught - Cornish & Carey Commercial representing Tenant and Chris Shaffer & Kurt Heinrich - Cornish & Carey Commercial representing Landlord

1003283 v5/SF
1 .


P.      Project or Property. That certain real property situated in the City of Fremont, County of Alameda, State of California, as presently improved with one (1) building, which real property is shown on the Site Plan attached hereto as Exhibit “A” and is commonly known as or otherwise described as follows:
RENCO 40
46600 – 46610 Landing Parkway
Fremont, CA 94538
Q.      Building. That certain Building within the Project in which the Leased Premises are located, which Building is shown outlined in red on Exhibit “A” hereto.
R.      Common Areas. The “Common Areas” shall mean those areas within the Project which are located outside the buildings and which are provided and designated by Landlord from time to time for general use by tenants of the Project including driveways, pedestrian walkways, parking spaces, landscaped areas and enclosed trash disposal areas.
S.      Leased Premises. That certain space which is a portion of the Building, which space is shown outlined in red on the Floor Plan attached hereto as Exhibit “B” consisting of approximately 40,316 square feet of gross leasable area and, for purposes of this Lease, agreed to contain said number of square feet. The Leased Premises are commonly known as or otherwise described as follows:
46600 Landing Parkway
Fremont, CA 94538
T.      Base Monthly Rent. The term “Base Monthly Rent” pursuant to paragraph 3.1 shall mean the following:
Months
 
 
 
From
To
# Mos
 
Base Monthly Rent
1
5
5
(a)
$
—

6
12
7
 
$
13,304

13
24
12
 
$
30,237

25
36
12
 
$
32,253

37
48
12
 
$
34,269

49
60
12
 
$
36,284

61
72
12
 
$
38,300

73
82
10
 
$
40,316

Total
82
 
 

(a)
Tenant shall not pay Landlord the Base Monthly Rent for the initial five months of the Lease Term; however, Tenant shall pay Landlord the monthly Additional Rent Charges during the initial five months of the Lease Term.
U.      Permitted Use. The term “Permitted Use” shall mean the following:
General office, sales, engineering, marketing, manufacturing, warehouse and other legally related uses.
V.      Exhibits. The term “Exhibits” shall mean the Exhibits to this Lease which are described as follows:
Exhibit “A” –
Site Plan showing the Project and delineating the Building in which the Leased Premises are located.
Exhibit “B” –
Floor Plan outlining the Leased Premises.
Exhibit “C” –
Subordination Agreement

1003283 v5/SF
2 .

Exhibit “D” –
Tenant Estoppel Certificate
Exhibit “E” –
Acceptance Agreement
Exhibit “F” –
Tenant Improvement Agreement
W.      Addenda. The term “Addenda” shall mean the Addendum (or Addenda) to this Lease which is (or are) described as follows: N/A
ARTICLE 2
LEASED PREMISES, TERM AND POSSESSION
2.1      Demise of Leased Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord for Tenant’s own use in the conduct of Tenant’s business and not for purposes of speculating in real estate, for the Lease Term and upon the terms and subject to the conditions of this Lease, that certain interior space described in Article 1(s) as the Leased Premises, reserving and excepting to Landlord the exclusive right to 50% of all profits to be derived from any assignments or sublettings by Tenant during the Lease Term by reason of the appreciation in the fair market rental value of the Leased Premises. Landlord further reserves the right to install, maintain, use and replace ducts, wires, conduits and pipes leading through the Leased Premises in locations which will not materially interfere with Tenant’s use of the Leased Premises. Tenant’s lease of the Leased Premises, together with the appurtenant right to use the Common Areas as described in Article 2.2 below, shall be subject to the continuing compliance by Tenant with (i) all the terms and conditions of the Lease, (ii) all Laws governing the use of the Leased Premises and the Project, (iii) all Private Restrictions, easements and other matters now of public record respecting the use of the Leased Premises and the Project, and (iv) all reasonable rules and regulations from time to time established by Landlord.
2.2      Right To Use Common Areas. As an appurtenant right to Tenant’s right to the use of the Leased Premises, Tenant shall have the non-exclusive right to use the Common Areas in conjunction with other tenants of the Project and their invitees, subject to the limitations on such use as set forth in Article 4, and solely for the purposes for which they were designed and intended. Tenant’s right to use the Common Areas shall terminate concurrently with any termination of this Lease.
2.3      Lease Commencement Date and Lease Term. The term of this Lease shall begin, and the Lease Commencement Date shall be determined pursuant to Article 2.4 below but in no event prior to March 1, 2007 unless Tenant occupies the Leased Premises for the purpose of conducting business therein prior to such date, in which case the Lease Commencement Date shall be as determined pursuant to Article 2.7 below. The term of this Lease shall end on the Lease Expiration Date (as set forth in Article 1). The Lease Term shall be that period of time commencing on the Lease Commencement Date and ending on the Lease Expiration Date (the “Lease Term”).
2.4      Delivery of Possession. Landlord shall deliver to Tenant possession of the Leased Premises on or before the Intended Commencement Date (as set forth in Article 1) in their presently existing condition, broom clean, unless Landlord shall have agreed, as a condition to Tenant’s obligation to accept possession of the Leased Premises, pursuant to an Exhibit or Addenda attached to and made a part of this Lease to modify existing interior improvements or to make, construct and/or install additional specified improvements within the Leased Premises, in which case Landlord shall deliver to Tenant possession of the Leased Premises on the Intended Commencement Date as so modified and/or improved. If Landlord is unable to so deliver possession of the Leased Premises to Tenant on or before the Intended Commencement Date, for whatever reason, Landlord shall not be in default under this Lease, nor shall this Lease be void, voidable or cancelable by Tenant until the lapse of ninety (90) days after the Intended Commencement Date (the “delivery grace period”). The Lease Commencement Date shall not be deemed to have occurred until such date as Landlord notifies Tenant that the Leased Premises are Ready for Occupancy and delivers possession of the Leased Premises to Tenant. Additionally, the delivery grace period above set forth shall be extended for such number of days as Landlord may be delayed in delivering possession of the Leased Premises to Tenant by reason of the actions of Tenant. If Landlord is unable to deliver possession of the Leased Premises to Tenant within the described delivery grace period (including any extensions thereof by reason of Force Majeure or the actions of Tenant), then Tenant’s sole remedy shall be to cancel and terminate this Lease, and in no event shall Landlord be liable to Tenant for such delay. Tenant may not cancel this Lease at any time after the date Landlord notifies Tenant the Leased Premises are Ready for Occupancy.
2.5      Acceptance of Possession. Tenant acknowledges that it has inspected the Leased Premises and is willing to accept them in their existing condition, broom clean, unless Landlord shall have agreed, as a condition to Tenant’s obligation to accept possession of the Leased Premises, pursuant to an Exhibit or Addenda attached to and made a part of this Lease to modify existing interior

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improvements or to make, construct and/or install additional specified improvements within the Leased Premises, in which case Tenant agrees to accept possession of the Leased Premises when Landlord has substantially completed such modifications or improvements and the Leased Premises are Ready for Occupancy. If Landlord shall have so modified existing improvements or constructed additional improvements within the Leased Premises for Tenant, Tenant shall, within Tenant’s Punchlist Period (as set forth in Article 1) which shall commence on the date that Landlord notifies Tenant that the Leased Premises are Ready for Occupancy and delivers possession of the Leased Premises to Tenant, submit to Landlord a signed copy of the Acceptance Agreement attached hereto as Exhibit “E” together with a punchlist of all incomplete and/or improper work performed by Landlord. Upon the expiration of Tenant’s Punchlist Period, Tenant shall be conclusively deemed to have accepted the Leased Premises in their then-existing condition as so delivered by Landlord to Tenant, except as to those items reasonably set forth in the punchlist submitted to Landlord prior to the expiration of said period. Landlord agrees to correct promptly all items reasonably set forth in Tenant’s punchlist, provided that such punchlist was submitted to Landlord within Tenant’s Punchlist Period. Additionally, Landlord agrees to place in good working order all existing plumbing, lighting, electrical, life safety, access control, heating, ventilating and air conditioning systems within the Leased Premises and all man doors and roll-up truck doors serving the Leased Premises to the extent that such systems and/or items are not in good operating condition as of the date Tenant accepts possession of the Leased Premises; provided that , and only if, Tenant notifies Landlord in writing of such failures or deficiencies within the Punchlist Period.
2.6      Surrender of Possession. Immediately prior to the expiration or upon the sooner termination of this Lease, Tenant shall remove all of Tenant’s signs from the exterior of the Building and shall remove all of Tenant’s equipment, trade fixtures, furniture, supplies, wall decorations and other personal property from the Leased Premises, and shall vacate and surrender the Leased Premises to Landlord in the same condition, broom clean, as existed at the Lease Commencement Date. Tenant shall repair all damage to the Leased Premises caused by Tenant or by Tenant’s removal of Tenant’s property and all damage to the exterior of the Building caused by Tenant’s removal of Tenant’s signs. Tenant shall patch and refinish, to Landlord’s reasonable satisfaction, all penetrations made by Tenant or its employees to the floor, walls or ceiling of the Leased Premises, whether such penetrations were made with Landlord’s approval or not. Tenant shall clean, repair or replace all stained or damaged ceiling tiles, wall coverings and clean or replace as may be required floor coverings to the reasonable satisfaction of Landlord. Tenant shall replace all burned out light bulbs and damaged light lenses, and clean and repaint all painted walls. Tenant shall repair all damage caused by Tenant to the exterior surface of the Building and the paved surfaces of the outside areas adjoining the Leased Premises and, where necessary, replace or resurface same. Additionally, Tenant shall, prior to the expiration or sooner termination of this Lease, remove any improvements installed by Tenant (other than the initial tenant improvements install pursuant to Exhibit F) and repair all damage caused by such removal, unless Landlord, at the time it consented to such improvements waived the right to require such removal. If the Leased Premises are not surrendered to Landlord in the condition required by this Article at the expiration or sooner termination of this Lease, Landlord may, at Tenant’s expense, so remove Tenant’s signs, property and/or improvements not so removed and make such repairs and replacements not so made or hire, at Tenant’s expense, independent contractors to perform such work. Tenant shall be liable to Landlord for all costs incurred by Landlord in returning the Leased Premises to the required condition, plus interest on all costs incurred from the date paid by Landlord at the then maximum rate of interest not prohibited by Law until paid, payable by Tenant to Landlord within ten days after receipt of a statement therefore from Landlord, and Tenant shall be deemed to have impermissibly held over until such time as such required work is completed, and Tenant shall pay Base Monthly Rent and Additional Rent in accordance with the terms of Section 13.2 (Holding Over) until such work is completed. Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Leased Premises, including, without limitation, any claims made by any succeeding tenant or any losses to Landlord due to lost opportunities to lease to succeeding tenants.
2.7      Early Occupancy. Provided that Tenant and its agents do not interfere with Landlord performance of the Tenant Improvement Work, Landlord shall allow Tenant access to the Leased Premises not less than thirty (30) days prior to the Substantial Completion of the Tenant Improvements for the purpose of Tenant installing furniture, equipment or fixtures (including Tenant’s data and telephone equipment) in the Leased Premises and otherwise prepare the Leased Premises for occupancy. Tenant’s entry shall be subject to the terms of this Lease, except that Base Monthly Rent shall not commence until the Lease Commencement Date. If Tenant occupies the Leased Premises for the purpose of conducting its business therein prior to the Lease Commencement Date, unless otherwise agreed in writing by Landlord, the Lease Commencement Date shall be deemed to have occurred on such sooner date, and Tenant shall be obligated to perform all its obligations under this Lease, including the obligation to pay rent, from that sooner date.
ARTICLE 3
RENT, LATE CHARGES AND SECURITY DEPOSITS
3.1      Base Monthly Rent. Commencing on the Lease Commencement Dated (as determined pursuant Article 2.3 above) and

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continuing throughout the Lease Term, Tenant shall pay to Landlord, without prior demand therefore, in advance on the first day of each calendar month, as base monthly rent, the amount set forth as “Base Monthly Rent” in Article 1 (the Base Monthly Rent”).
3.2      Additional Rent. Commencing on the Lease Commencement Date (as determined pursuant to Article 2.3 above) and continuing throughout the Lease Term, in addition to the Base Monthly Rent, Tenant shall pay to Landlord as additional rent (the “Additional Rent”) the following amounts:
A.      Tenant’s Proportionate Share of all Building Operating Expenses (as defined in Article 13). Payment shall be made by whichever of the following methods (or combination of methods) is (are) from time to time designated by Landlord:
(1)     Landlord may bill to Tenant, on a periodic basis not more frequently than monthly, Tenant’s Proportionate Share of such expenses (or group of expenses) as paid or incurred by Landlord, and Tenant shall pay such share of such expenses within ten days after receipt of a written bill therefore from Landlord; and/or
(2)     Landlord may deliver to Tenant Landlord’s reasonable estimate of any given expense (or group of expenses, such as Landlord’s Insurance Costs or Real Property Taxes) which it anticipates will be paid or incurred for the ensuing calendar or fiscal year, as Landlord may determine, and Tenant shall pay its Proportionate Share of such expenses for such year in equal monthly installments during such year with the installments of Base Monthly Rent. Landlord reserves the right to change from time to time the method of billing Tenant its Proportionate Share of such expenses or the periodic basis on which such expenses are billed.
B.     Landlord’s share of the consideration received by Tenant upon certain assignments and sublettings as required by Article 7;
C.     Any legal fees and costs that Tenant is obligated to pay or reimburse to Landlord pursuant to Article 13; and
D.     Any other charges or reimbursements due Landlord from Tenant pursuant to the terms of this Lease.
3.3      Year-End Adjustments. If Landlord shall have elected to charge Tenant its Proportionate Share of the Building Operating Expenses (or any group of such expenses) on an estimated basis in accordance with the provisions of Article 3.2A(2) above, Landlord shall furnish to Tenant within three months following the end of the applicable calendar or fiscal year, as the case may be, a statement setting forth (i) the amount of such expenses paid or incurred during the just ended calendar or fiscal year, as appropriate, and (ii) Tenant’s Proportionate Share of such expenses for such period. If Tenant shall have paid more than its Proportionate Share of such expenses for the stated period, Landlord shall, at its election, either (i) credit the amount of such overpayment toward the next ensuing payment or payments of Additional Rent that would otherwise be due or (ii) refund in cash to Tenant the amount of such overpayment. If such year-end statement shall show that Tenant did not pay its Proportionate Share of any such expenses in full, then Tenant shall pay to Landlord the amount of such underpayment within thirty (30) days from Landlord’s billing of same to Tenant. The provisions of this Article shall survive the expiration or sooner termination of this Lease.
3.4      Late Charge and Interest on Rent in Default. Tenant acknowledges that the late payment by Tenant of any monthly installment of Base Monthly Rent or any Additional Rent will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amounts of which are extremely difficult or impractical to fix. Such costs and expenses will include, without limitation, administration and collection costs and processing and accounting expenses. Therefore, if any installment of Base Monthly Rent is not received by Landlord from Tenant within six calendar days after the same becomes due, Tenant shall immediately pay to Landlord a late charge in an amount equal to the amount set forth in Article 1 as the “Late Charge Amount”, and if any Additional Rent is not received by Landlord within six calendar days after same becomes due, Tenant shall immediately pay to Landlord a late charge in an amount equal to ten percent of the Additional Rent not so paid. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for its loss suffered by reason of Tenant’s failure to make timely payment. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any rental installment or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant’s failure to pay each rental installment due under this Lease when due, including the right to terminate this Lease. If any rent remains delinquent for a period in excess of six calendar days, then, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not so paid from said sixth day at the then maximum rate of interest not prohibited by Law until paid. Notwithstanding the above, once but only once in any twelve (12) month period during the Lease Term, Tenant shall be entitled to written notice of non-receipt of Base Monthly Rent or Additional Rent from Landlord, and Tenant shall not be liable for any Late Charge Amount, interest or other late charge hereunder if such installment of Base Monthly Rent or Additional Rent is received by Landlord within five (5) days after Tenant’s receipt of such notice from Landlord.

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3.5      Payment of Rent. All rent shall be paid in lawful money of the United States, without any abatement, deduction or offset for any reason whatsoever, to Landlord at such address as Landlord may designate from time to time. Tenant’s obligation to pay Base Monthly Rent and all Additional Rent shall be prorated at the commencement and expiration of the Lease Term. The failure by Tenant to pay any Additional Rent as required pursuant to this Lease when due shall be treated the same as a failure by Tenant to pay Base Monthly Rent when due, and Landlord shall have the same rights and remedies against Tenant as Landlord would have if Tenant failed to pay the Base Monthly Rent when due.
3.6      Prepaid Rent. Upon signing this Lease, Tenant shall immediately pay to Landlord the amount set forth in Article 1 as “First Month’s Prepaid Rent” as prepayment of rent for credit against the first installment(s) of Base Monthly Rent due hereunder.
3.7      Security Deposit. Upon signing this Lease, Tenant shall immediately deposit with Landlord the amount set forth in Article 1 as the “Security Deposit” as security for the performance by Tenant of the terms of this Lease to be performed by Tenant, and not as prepayment of rent. Landlord may apply such portion or portions of the Security Deposit as are reasonably necessary for the following purposes: (i) to remedy any default by Tenant in the payment of Base Monthly Rent or Additional Rent or a late charge or interest on defaulted rent; (ii) to repair damage to the Leased Premises caused by Tenant; (iii) to clean and repair the Leased Premises following their surrender to Landlord if not surrendered in the condition required pursuant to the provisions of Article 2; and (iv) to remedy any other default of Tenant to the extent permitted by Law including, without limitation, paying in full on Tenant’s behalf any sums claimed by materialmen or contractors of Tenant to be owing to them by Tenant for work done or improvements made at Tenant’s request to the Leased Premises. In this regard, Tenant hereby waives any restriction on the uses to which the Security Deposit may be applied as contained in Section 1950.7(c) of the California Civil Code and/or any successor statute. In the event the Security Deposit or any portion thereof is so used, Tenant shall pay to Landlord, promptly upon demand, an amount in cash sufficient to restore the Security Deposit to the full original sum. Landlord shall not be deemed a trustee of the Security Deposit. Landlord may use the Security Deposit in Landlord’s ordinary business and shall not be required to segregate it from its general accounts. Tenant shall not be entitled to any interest on the Security Deposit. If Landlord transfers the Building during the Lease Term, Landlord shall pay the Security Deposit to any subsequent owner in conformity with the provisions of Section 1950.7 of the California Civil Code and/or any successor statute, in which event the transferring landlord shall be released from all liability for the return of the Security Deposit. Tenant specifically grants to Landlord (and hereby waives the provisions of California Civil Code Section 1950.7 to the contrary) a period of sixty days following a surrender of the Leased Premises by Tenant to Landlord within which to return the Security Deposit (less permitted deductions) to Tenant, it being agreed between Landlord and Tenant that sixty days is a reasonable period of time within which to inspect the Leased Premises, make required repairs, receive and verify workmen’s billings therefore, and prepare a final accounting with respect to such deposit. In no event shall the Security Deposit, or any portion thereof, be considered prepaid rent.
ARTICLE 4
USE OF LEASED PREMISES AND COMMON AREAS
4.1      Permitted Use. Tenant shall be entitled to use the Leased Premises solely for the “Permitted Use” as set forth in Article 1 and for no other purpose whatsoever. Subject to the limitations contained in this Article 4, Tenant shall have the right to use the Common Areas, in conjunction with other tenants and during normal business hours, solely for the purposes for which they were intended and for no other purposes whatsoever. Tenant shall not have the right to use the exterior surfaces of exterior walls, the area beneath the floor or the area above the ceiling of the Leased Premises.
4.2      General Limitations on Use. Tenant shall not do or permit any person for whom Tenant is responsible to do anything in or about the Leased Premises, the Building, the Common Areas or the Project which does or could (i) interfere with the rights of other tenants or occupants of the Building or the Project, (ii) jeopardize the structural integrity of the Building or (iii) cause damage to any part of the Building or the Project. Tenant shall not operate any equipment within the Leased Premises which does or could (i) injure, vibrate or shake the Leased Premises or the Building, (ii) damage, overload, corrode, or impair the efficient operation of any electrical, plumbing, sewer, heating, ventilating or air conditioning systems within or servicing the Leased Premises or the Building or (iii) damage or impair the efficient operation of the sprinkler system (if any) within or servicing the Leased Premises or the Building. Tenant shall not install any equipment or antennas on or make any penetrations of the exterior walls or roof of the Building. Tenant shall not affix any equipment to or make any penetrations or cuts in the floor, ceiling or walls of the Leased Premises. Tenant shall not place any loads upon the floors, walls, ceiling or roof systems which could endanger the structural integrity of the Building or damage its floors, foundations or supporting structural components. Tenant shall not place any explosive, flammable or harmful fluids, including Hazardous Materials, or other waste materials in the drainage systems of the Building or the Project. Tenant shall not drain or discharge any fluids in the landscaped areas or across the paved areas of the Project. Tenant shall not use any area located outside the Leased Premises for the storage of its materials, supplies, inventory or

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equipment, and all such materials, supplies, inventory and equipment shall at all times be stored within the Leased Premises. Tenant shall not commit nor permit to be committed any waste in or about the Leased Premises, the Common Areas or the Project.
4.3      Noise and Emissions. All noise generated by Tenant in its use of the Leased Premises shall be confined or muffled so that it does not interfere with the businesses of or annoy other tenants of the Building or the Project. All dust, fumes, odors and other emissions generated by Tenant’s use of the Leased Premises shall be sufficiently dissipated in accordance with sound environmental practices and exhausted from the Leased Premises in such a manner so as not to interfere with the businesses of or annoy other tenants of the Building or the Project, or cause any damage to the Leased Premises or the Building or any component part thereof or the property of other tenants of the Building or the Project.
4.4      Trash Disposal. Tenant shall provide trash and garbage disposal facilities inside the Leased Premises for all of its trash, garbage and waste requirements and shall cause such trash, garbage and waste to be regularly removed from the Leased Premises at Tenant’s sole cost. Tenant shall keep all areas outside the Leased Premises and all fire corridors and mechanical equipment rooms in or about the Leased Premises free and clear of all trash, garbage, waste and boxes containing same at all times.
4.5      Parking. Tenant is allocated, and Tenant and its employees and invitees shall have the non-exclusive right to use, not more than the number of parking spaces set forth in Article 1 as “Tenant’s Number of Parking Spaces”. Tenant shall not, at any time, use or permit its employees or invitees to use more parking spaces than the number so allocated to Tenant. Tenant shall not have the exclusive right to use any specific parking space, and Landlord reserves the right to designate from time to time the location of the parking spaces allocated for Tenant’s use. In the event Landlord elects or is required by any Law to limit or control parking within the Project, whether by validation of parking tickets or any other method, Tenant agrees to participate in such validation or other program as reasonably established by Landlord. Tenant shall not, at any time, park or permit to be parked any trucks or vehicles adjacent to entryways or loading areas within the Project so as to interfere in any way with the use of such areas, nor shall Tenant, at any time, park or permit the parking of Tenant’s trucks or other vehicles, or the trucks and vehicles of Tenant’s suppliers or others, in any portion of the Common Areas not designated by Landlord for such use by Tenant. Tenant shall not, at any time, park or permit to be parked any recreational vehicles, inoperative vehicles or equipment on any portion of the common parking area or other Common Areas of the Project. Tenant agrees to assume responsibility for compliance by its employees and invitees with the parking provisions contained herein. If Tenant or its employees park any vehicle within the Project in violation of these provisions, then Landlord may charge Tenant, as Additional Rent, and Tenant agrees to pay, as Additional Rent, Fifty Dollars per day for each day or partial day that each such vehicle is illegally parked, or parked in any area other than that designated. Tenant hereby authorizes Landlord, at Tenant’s sole expense, to tow away from the Project and store until redeemed by its owner any vehicle belonging to Tenant or Tenant’s employees parked in violation of these provisions.
4.6      Signs. Tenant shall not place or install on or within any portion of the Leased Premises, the Building, the Common Areas or the Project any sign (other than a business identification sign first approved by Landlord in accordance with this Article), advertisements, banners, placards or pictures which are visible from the exterior of the Leased Premises. Tenant shall not place or install on or within any portion of the Leased Premises, the Building, the Common Areas or the Project any business identification sign which is visible from the exterior of the Leased Premises until Landlord shall have first approved in writing the location, size, content, design, method of attachment and material to be used in the making of such sign. Any signs, once approved by Landlord, shall be installed only in strict compliance with Landlord’s approval, at Tenant’s expense, using a person first approved by Landlord to install same. Landlord may remove any signs (not first approved in writing by Landlord), advertisements, banners, placards or pictures so placed by Tenant on or within the Leased Premises, the Building, the Common Areas or the Project and charge to Tenant the cost of such removal, together with any costs incurred by Landlord to repair any damage caused thereby, including any cost incurred to restore the surface upon which such sign was so affixed to its original condition. Tenant shall remove any such signs, repair any damage caused thereby, and restore the surface upon which the sign was affixed to its original condition, all to Landlord’s reasonable satisfaction, upon the termination of this Lease.
4.7      Compliance With Laws and Private Restrictions. Tenant shall not use or permit any person for whom Tenant is responsible to use the Leased Premises in any manner which violates any Laws or Private Restrictions. Tenant shall abide by and shall promptly observe and comply with, at its sole cost and expense, all Laws and Private Restrictions respecting the use and occupancy of the Leased Premises, the Building, the Common Areas or the Project and shall defend with competent counsel, indemnify and hold Landlord harmless from any claims, damages or liability resulting from Tenant’s failure to do so.
4.8      Compliance With Insurance Requirements. With respect to any insurance policies carried by Landlord in accordance with the provisions of this Lease, Tenant shall not conduct (nor permit any other person to conduct) any activities within the Leased Premises, or store, keep or use anything within the Leased Premises which (i) is prohibited under the terms of any of such policies, (ii) could result in the termination of the coverage afforded under any of such policies, (iii) could give to the insurance carrier the

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right to cancel any of such policies, or (iv) could cause an increase in the rates (over standard rates) charged for the coverage afforded under any of such policies. Tenant shall comply with all requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters which are necessary to maintain, at standard rates, the insurance coverages carried by either Landlord or Tenant pursuant to this Lease.
4.9      Landlord’s Right to Enter. Landlord and its agents shall have the right to enter the Leased Premises during normal business hours and subject to Tenant’s reasonable security measures for the purpose of (i) inspecting the same; (ii) supplying any services to be provided by Landlord to Tenant; (iii) showing the Leased Premises to prospective purchasers or mortgagees (or prospective tenants for the Leased Premises during the last six (6) months of the Lease Term); (iv) making necessary alterations, additions or repairs; (v) performing any of Tenant’s obligations when Tenant has failed to do so after giving Tenant reasonable written notice of its intent to do so; and (vi) posting notices of non-responsibility or “For Lease” or “For Sale” signs. Additionally, Landlord shall have the right to enter the Leased Premises at times of emergency. Any entry into the Leased Premises or portions thereof obtained by Landlord in accordance with this Article shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Leased Premises, or an eviction, actual or constructive, of Tenant from the Leased Premises or any portion thereof. In exercising its right to enter the Leased Premises for any reason, Landlord shall use commercially reasonable efforts not to interfere with Tenant’s use of and operations within the Leased Premises and its access thereto, including parking.
4.10      Control of Common Areas. Landlord shall at all times have exclusive control of the Common Areas. Landlord shall have the right, without the same constituting an actual or constructive eviction and without entitling Tenant to any reduction in or abatement of rent, to: (i) temporarily close any part of the Common Areas to whatever extent required in the opinion of Landlord’s counsel to prevent a dedication thereof or the accrual of any prescriptive rights therein; (ii) temporarily close all or any part of the Common Areas to perform maintenance or for any other reason deemed sufficient by Landlord; (iii) change the shape, size, location, number and extent of improvements within the Common Areas including, without limitation, changing the location of driveways, entrances, exits, parking spaces, parking areas, sidewalks, directional or locator signs, or the direction of the flow of traffic; and (iv) to make additions to the Common Areas including, without limitation, the construction of parking structures. Landlord shall have the right to change the name or address of the Building. Tenant, in its use of the Common Areas, shall keep the Common Areas free and clear of all obstructions created or permitted by Tenant. If, in the opinion of Landlord, unauthorized persons are using any of the Common Areas by reason of, or under claim of, the express or implied authority or consent of Tenant, then Tenant, upon demand of Landlord, shall restrain, to the fullest extent then allowed by Law, such unauthorized use, and shall initiate such appropriate proceedings as may be required to so restrain such use. Nothing contained herein shall affect the right of Landlord at any time to remove any unauthorized person from the Common Areas or to prohibit the use of the Common Areas by unauthorized persons, including, without limitation, the right to prohibit mobile food and beverage vendors. In exercising any such right regarding the Common Areas, Landlord shall make a reasonable effort to minimize any disruption to Tenant’s business.
4.11      Rules and Regulations. Landlord shall have the right from time to time to establish reasonable rules and regulations and/or amendments or additions thereto respecting the use of space within the Project and the use of the Common Areas for the care and orderly management of the Project and the safety of its tenants, occupants and invitees. Upon delivery to Tenant of a copy of such rules and regulations or any amendments or additions thereto, Tenant shall comply with such rules and regulations. A violation by Tenant of any of such rules and regulations shall constitute a default by Tenant under this Lease. If there is a conflict between the rules and regulations and any of the provisions of this Lease, the provisions of this Lease shall prevail. Landlord shall not be responsible or liable to Tenant for the violation of such rules and regulations by any other tenant of the Project.
4.12      Environmental Protection. Landlord may voluntarily cooperate in a reasonable manner with the efforts of all governmental agencies in reducing actual or potential environmental damage. Tenant shall not be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with Landlord and to abide by all rules and regulations and requirements which Landlord may reasonably prescribe in order to comply with the requirements and recommendations of governmental agencies regulating, or otherwise involved in, the protection of the environment.
4.13      Outside Areas. No materials, pallets, supplies, tanks or containers whether above or below ground level, equipment, finished products or semi-finished products, raw materials, inoperable vehicles or articles of any nature shall be stored upon or permitted to remain outside of the Leased Premises except in fully fenced and screened areas outside the Building which have been designed for such purpose and have been approved in writing by Landlord for such use by Tenant.
4.14      Hazardous Materials. Landlord and Tenant agree as follows with respect to the existence or use of Hazardous Materials on the Property:

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A.     Any handling, transportation, storage, treatment, disposal or use of Hazardous Materials by Tenant, Tenant’s Agents, or any other party after the Effective Date of this Lease in or about the Property shall strictly comply with all applicable Hazardous Materials Laws. Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord from and against any and all liabilities, losses, claims, damages, lost profits, consequential damages, interest, penalties, fines, court costs, remediation costs, investigation costs, and other expenses which result from or arise in any manner whatsoever out of the use, storage, treatment, transportation, release, or disposal of Hazardous Materials on or about the Property by Tenant, or Tenant’s Agents or Permitees after the Effective Date.
B.     If the presence of Hazardous Materials on the Property caused or permitted by Tenant or Tenant’s Agents or Permitees after the Effective Date of this Lease results in contamination or deterioration of water or soil or any other part of the Property, then Tenant shall promptly take any and all action necessary to investigate and remediate such contamination. Tenant shall further be solely responsible for, and shall defend, indemnify and hold Landlord and its agents harmless from and against all claims, costs and liabilities, including attorney’s fees and costs, arising out of or in connection with any investigation and remediation (including investigative analysis, removal, cleanup, and/or restoration work) required hereunder to return the Leased Premises, Building, Common Areas, Outside Areas, and/or Property and any other property of whatever nature to their condition existing prior to the appearance of such Hazardous Materials.
C.     Landlord and Tenant shall each give written notice to the other as soon as reasonably practicable of (i) any communication received from any governmental authority concerning Hazardous Materials which relates to the Property, and (ii) any contamination of the Property by Hazardous Materials which constitutes a violation of any Hazardous Materials Law. Tenant acknowledges that Landlord, as the owner of the Property, at Landlord’s election, shall have the sole right at Tenant’s expense to negotiate, defend, approve, and/or appeal any action taken or order issued with regard to Hazardous Materials by any applicable governmental authority. Tenant may use small quantities of household chemicals such as adhesive, lubricants, and cleaning fluids in order to conduct its business at the Premises and such other Hazardous Materials as are necessary to the operation of Tenant’s business of which Landlord receives notice prior to such Hazardous Materials being brought onto the Property (or any portion thereof) and which Landlord consents in writing may be brought onto the Property. In granting Landlord’s consent, Landlord may specify the location and manner or use, storage, or handling of any Hazardous Material. Landlord’s consent shall in no way relieve Tenant from any of its obligations as contained herein. Tenant shall notify Landlord in writing at least ten (10) days prior to the first introduction by Tenant of any Hazardous Material on the Leased Premises, Building, Common Areas, Outside Areas, and/or Property. Tenant shall provide Landlord with a list of all Hazardous Materials and the quantities of each Hazardous Material to be stored, or used, on any portion of the Property, and upon Landlord’s request Tenant shall provide Landlord with copies of any and all Hazardous Materials Management Plans, Material Safety Data Sheets, Hazardous Waste Manifests, and other documentation maintained or received by Tenant pertaining to the Hazardous Materials used, stored, or transported or to be used, stored, or transported on any portion of the Property. At any time during the Lease Term, Tenant shall, within five days after written request therefor received from Landlord, disclose in writing all Hazardous Materials that are being used by Tenant on the Property (or have been used on the Property), the nature of such use, and the manner of storage and disposal.
D.     Landlord may cause testing wells to be installed on the Property and may cause the ground water to be tested to detect the presence of Hazardous Material by the use of such tests as are then customarily used for such purposes. If Tenant so requests, Landlord shall supply Tenant with copies of such test results. The cost of such tests and of the installation, maintenance, repair and replacement of such wells shall be paid by Landlord unless such tests disclose the existence of facts which give rise to liability of Tenant pursuant to its indemnity given in A and/or B above. If reasonably required due to Tenant’s use of the Leased Premises, Landlord may retain consultants to inspect the Property, conduct periodic environmental audits, and review any information provided by Tenant. Tenant shall pay the reasonable cost of fees charged by Landlord’s consultants.
E.     Upon the expiration or earlier termination of the Lease, Tenant, at its sole cost, shall remove from the Property all Hazardous Materials introduced by Tenant and shall provide a certificate to Landlord from a registered consultant satisfactory to Landlord, certifying that Tenant has caused no contamination of building(s), soil or groundwater in or about the Leased Premises, Building, Common Areas, Outside Areas, or Property. If Tenant fails to so surrender the Property, Tenant shall indemnify and hold Landlord harmless from all damages resulting from Tenant’s failure to surrender the Property as required by this Subsection, including, without limitation, any claims or damages in connection with the condition of the Property including, without limitation, damages occasioned by the inability to Lease the Property (or any portion thereof) or a reduction in the fair market and/or rental value of the Property, Building, Common Areas, Outside Areas, and/or Property by reason of the existence of any Hazardous Materials in or around the Leased Premises, Building, Common Areas, Outside Areas, and/or Property. If any action is required to be taken by a governmental authority to test, monitor, and/or clean up Hazardous Materials from the Leased Premises, Building, Common Areas, Outside Areas, and/or Property and such action is not completed prior to the expiration or earlier termination of the Lease, Tenant shall be deemed to have impermissibly held over until such time as such required action is completed, and Tenant shall pay Base Monthly Rent and Additional Rent in accordance with the terms of Section 13.2 (Holding Over). In addition,

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Landlord shall be entitled to all damages directly or indirectly incurred in connection with such holding over, including without limitation, damages occasioned by the inability to Lease the Property or a reduction of the fair market and/or rental value of the Leased Premises, Building, Common Areas, Outside Areas, and/or Property.
F.     As used herein, the term “Hazardous Materials(s)” means any hazardous or toxic substance, material or waste, which is or becomes regulated by any federal, state, regional or local governmental authority because it is in any way hazardous, toxic, carcinogenic, mutagenic or otherwise adversely affects any part of the environment or creates risks of any such hazards or effects, including, but not limited to, petroleum; asbestos, and polychlorinated bipheyls and any material, substance, or waste (a) defined as a “hazardous waste,” “extremely hazardous waste” or “restricted hazardous waste” under Sections 25115, 25117 or 25122.7, or listed pursuant to Section 25140 of the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law); (b) defined as a “hazardous substance” under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley Tanner Hazardous Substance Account Act); (c) defined as a “hazardous material,” “hazardous substance” or “hazardous waste” under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and Inventory); (d) defined as a “hazardous substance” under Section 25281 of the California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances); (e) defined as a “hazardous substance” pursuant to Section 311 of the Clean Water Act, 33 United States Code Sections 1251 et seq. (33 U.S.C. 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. 1317); (f) defined as a “hazardous waste” pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 United States Code Sections 6901 et seq. (42 U.S.C. 6903); or (g) defined as a “hazardous substance” pursuant to Section 101 of the Comprehensive Environmental Response, Compensation, and Liability Act, 42 United States Code Section 9601 et seq. (42 U.S.C. 9601) or (h) defined as a “hazardous substance” pursuant to Section 311 of the Federal Water Pollution Control Act, 33 U.S.C. 1251 et seq. or (i) listed pursuant to Section 307 of the Federal Water Pollution Control Act (33 U.S.C. 1317 ) or (j) regulated under the Toxic Substances Control Act (15 U.S.C. 2601 et seq. ) or (k) defined as a “hazardous material “under Section 66680 or 66084 of Title 22 of the California Code of Regulations (Administrative Code) (l) listed in the United States Department of Transportation Hazardous Materials Table (49 C.F.R. 172.101) or (m) listed by the Environmental Protection Agency as “hazardous substances” ( 4 0 C.F.R. Part 302 ) and amendments thereto. The term “Hazardous Material Laws” shall mean (i) all of the foregoing laws as amended from time to time and (ii) any other federal, state, or local law, ordinance, regulation, or order regulating Hazardous Materials.
G.     Tenant’s failure to comply with any of the requirements of this Section regarding the storage, use, disposal, or transportation of Hazardous Materials, or the appearance of any Hazardous Materials on the Leased Premises, Building, Common Area, Outside Area, and/or the Property without Landlord’s consent shall be an Event of Default as defined in this Lease. The obligations of Landlord and Tenant under this Section shall survive the expiration or earlier termination of the Lease Term as to occurrences during Tenant’s occupancy. The rights and obligations of Landlord and Tenant within respect to issues relating to Hazardous Materials are exclusively established by this section. In the event of any inconsistency between any other part of this Lease and this Section, the terms of this Section shall control.
ARTICLE 5
REPAIRS, MAINTENANCE, SERVICES AND UTILITIES
5.1      Repair and Maintenance. Except in the case of damage to or destruction of the Leased Premises, the Building or the Project caused by an Act of God or other peril, in which case the provisions of Article 10 shall control, the parties shall have the following obligations and responsibilities with respect to the repair and maintenance of the Leased Premises, the Building and the Common Areas.
A.      Tenants Obligation. Tenant shall, at all times during the Lease Term and at its sole cost and expense, regularly clean and continuously keep and maintain in good order, condition and repair the Leased Premises and every part thereof and all appurtenances thereto, including, without limiting the generality of the foregoing, (i) all interior walls, floors and ceilings, (ii) all windows, doors and skylights, (iii) all interior electrical wiring, conduits, connectors and fixtures, (iv) all interior plumbing, pipes, sinks, toilets, faucets and drains, (v) all interior lighting fixtures, bulbs and lamps, (vi) all heating, ventilating and air conditioning equipment located within the Leased Premises or located outside the Leased Premises ( e.g. , rooftop compressors) and serving the Leased Premises only (other than Common HVAC as defined in Subarticle B below), and (vii) all entranceways to the Leased Premises. Tenant, if requested to do so by Landlord, shall hire, at Tenant’s sole cost and expense, a licensed heating, ventilating and air conditioning contractor to regularly, and periodically inspect (not less frequently than every three months) and perform required maintenance on the heating, ventilating and air conditioning equipment and systems serving the Leased Premises, or alternatively, Landlord may, at its election, contract in its own name for such regular and periodic inspections of and maintenance on such heating, ventilating and air conditioning equipment and systems and charge to Tenant, as Additional Rent, the cost thereof. Tenant shall, at its sole cost and expense, repair all damage to the Building, the Common Areas or the Project caused by the

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activities of Tenant, its employees, invitees or contractors promptly following written notice from Landlord to so repair such damage. If Tenant shall fail to perform the required maintenance or fail to make repairs required of it pursuant to this Article within a reasonable period of time following notice from Landlord to do so, then Landlord may, at its election and without waiving any other remedy it may otherwise have under this Lease or at Law, perform such maintenance or make such repairs and charge to Tenant, as Additional Rent, the costs so incurred by Landlord for same. All glass within or a part of the Leased Premises, both interior and exterior, is at the sole risk of Tenant and any broken glass shall promptly be replaced by Tenant at Tenant’s expense with glass of the same kind, size and quality.
B.      Landlord’s Obligation. Landlord shall, at all times during the Lease Term, maintain in good condition and repair: (i) the exterior and structural parts of the Building (including the foundation, subflooring, load-bearing and exterior walls, and roof); (ii) the Common Areas; and (iii) the electrical and plumbing systems located outside the Leased Premises which service the Building. Additionally, to the extent that the Building contains central heating, ventilating and/or air conditioning systems located outside the Leased Premises which are designed to service, and are then servicing, more than a single tenant within the Building (“Common HVAC”), Landlord shall maintain in good operating condition and repair such Common HVAC equipment and systems. The provisions of this Subarticle B shall in no way limit the right of Landlord to charge to tenants of the Project, as Additional Rent pursuant to Article 3, the costs incurred by Landlord in making such repairs and/or performing such maintenance.
5.2      Services and Utilities. The parties shall have the following responsibilities and obligations with respect to obtaining and paying the cost of providing the following utilities and other services to the Leased Premises.
A.      Gas and Electricity. Tenant shall arrange, at its sole cost and expense and in its own name, for the supply of gas and electricity to the Leased Premises. In the event that such services are not separately metered, Tenant shall, at its sole expense, cause such meters to be installed. Tenant shall be responsible for determining if the local supplier of gas and/or electricity can supply the needs of Tenant and whether or not the existing gas and/or electrical distribution systems within the Building and the Leased Premises are adequate for Tenant’s needs. Tenant shall pay all charges for gas and electricity as so supplied to the Leased Premises.
B.      Water. Landlord shall provide the Leased Premises with water for lavatory and drinking purposes only. Tenant shall pay, as Additional Rent, the cost to Landlord of providing water to the Leased Premises. In the event Landlord believes that Tenant is using more water than what normally would be required for lavatory and drinking purposes, Landlord at its election may (i) periodically charge Tenant, as Additional Rent, a sum equal to Landlord’s estimate of the cost of Tenant’s excess water usage or (ii) install (or require Tenant to install at Tenant’s sole cost) a separate meter for purposes of measuring Tenant’s water usage and, based upon such meter readings, periodically charge Tenant, as Additional Rent, a sum equal to Landlord’s estimate of the cost of Tenant’s excess water usage. In the event that Landlord shall so install such a separate meter, Tenant shall pay to Landlord, upon demand, the costs incurred by Landlord in purchasing and installing such meter and thereafter all costs incurred by Landlord in maintaining said meter. The cost of Tenant’s water usage shall include any costs to Landlord in keeping account of such usage and all governmental fees, public charges or the like attributable to or based upon (such as sewer usage fees) the use of water to the extent of such usage.
C.      Security Service. Tenant acknowledges that Landlord is not responsible for the security of the Leased Premises or the protection of Tenant’s property or Tenant’s employees, invitees or contractors, and that to the extent Tenant determines that such security or protection services are advisable or necessary, Tenant shall arrange for and pay the costs of providing same.
D.      Trash Disposal. Tenant acknowledges that Landlord is not responsible for the disposal of Tenant’s waste, garbage or trash and that Tenant shall arrange, in its own name and at its sole cost, for the regular and periodic removal of such waste, garbage or trash from the Leased Premises. In no event shall Landlord be required to provide trash bins for the disposal of Tenant’s waste, garbage or trash.
5.3      Energy and Resource Consumption. Landlord may voluntarily cooperate in a reasonable manner with the efforts of governmental agencies and/or utility suppliers in reducing energy or other resource consumption within the Project. Tenant shall not be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with Landlord and to abide by all reasonable rules established by Landlord (i) in order to maximize the efficient operation of the electrical, heating, ventilating and air conditioning systems and all other energy or other resource consumption systems within the Project and/or (ii) in order to comply with the requirements and recommendations of utility suppliers and governmental agencies regulating the consumption of energy and/or other resources.
5.4      Limitation of Landlord’s Liability. Landlord shall not be liable to Tenant for injury to Tenant, its employees, agents, invitees or contractors, damage to Tenant’s property or loss of Tenant’s business or profits, nor shall Tenant be entitled to terminate

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this Lease or to any reduction in or abatement of rent by reason of (i) Landlord’s failure to perform any maintenance or repairs to the Project until Tenant shall have first notified Landlord, in writing, of the need for such maintenance or repairs, and then only after Landlord shall have had a reasonable period of time following its receipt of such notice within which to perform such maintenance or repairs, or (ii) any failure, interruption, rationing or other curtailment in the supply of water, electric current, gas or other utility service to the Leased Premises, the Building or the Project from whatever cause (other than Landlord’s active negligence or willful misconduct), or (iii) the unauthorized intrusion or entry into the Leased Premises by third parties (other than Landlord).
ARTICLE 6
ALTERATIONS AND IMPROVEMENTS
6.1      By Tenant. Tenant shall not make any alterations to or modifications of the Leased Premises or construct any improvements to or within the Leased Premises without Landlord’s prior written approval, and then not until Landlord shall have first approved, in writing, the plans and specifications therefore, which approval shall not be unreasonably withheld. Notwithstanding the foregoing, Tenant shall be permitted to make alterations following not less than ten (10) business days notice to Landlord, but without Landlord’s prior approval, to the extent any such alteration is merely cosmetic in nature ( i.e. , re-painting and re-carpeting) and together with all other such alterations in any calendar year costs less than $20,000, and provided that such alteration does not (a) affect the exterior of the Building, (b) affect the structure of the Building or the systems and equipment of the Building, and/or (c) interfere with Building services or the use of the Property or the Building by other tenants or occupants. All such modifications, alterations or improvements, once so approved, shall be made, constructed or installed by Tenant at Tenant’s expense, using a licensed contractor first approved by Landlord, in substantial compliance with the Landlord-approved plans and specifications therefore. All work undertaken by Tenant shall be done in accordance with all Laws and in a good and workmanlike manner using new materials of good quality that match or complement the original improvements existing as of the Lease Commencement Date. Tenant shall not commence the making of any such modifications or alterations or the construction of any such improvements until (i) all required governmental approvals and permits shall have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, (iii) Tenant shall have given Landlord at least five business days prior written notice of its intention to commence such work so that Landlord may post and file notices of non-responsibility, and (iv) if requested by Landlord, Tenant shall have obtained contingent liability and broad form builder’s risk insurance in an amount satisfactory to Landlord to cover any perils relating to the proposed work not covered by insurance carried by Tenant pursuant to Article 9. In no event shall Tenant make any modifications, alterations or improvements to the Common Areas or any areas outside of the Leased Premises. As used in this Article, the term “modifications, alterations and/or improvements” shall include, without limitation, the installation of additional electrical outlets, overhead lighting fixtures, drains, sinks, partitions, doorways, or the like. If Landlord reserves the right to require Tenant to remove any alterations or modifications at the end of the Lease Term, and the cost of such removal and restoration together with the cost of removal and restoration of all other alterations and modifications which Landlord may require Tenant to remove exceeds $25,000.00, then as a condition to granting its consent, Landlord may require Tenant to increase the amount of its Security Deposit hereunder to cover such costs to the extent they exceed $25,000.00. Tenant shall pay Landlord’s reasonable costs to inspect the construction of Tenant’s alterations or modifications and to have Landlord’s architect revise Landlord’s drawings to show the work performed by Tenant.
6.2      Ownership Of Improvements. All modifications, alterations or improvements made or added to the Leased Premises by Tenant (other than Tenant’s inventory, equipment, movable furniture, wall decorations and trade fixtures) shall be deemed real property and a part of the Leased Premises, but shall remain the property of Tenant during the Lease Term. Any such modifications, alterations or improvements, once completed, shall not be altered or removed from the Leased Premises during the Lease Term without Landlord’s written approval first obtained in accordance with the provisions of Article 6.1 above. At the expiration or sooner termination of the Lease, all such modifications, alterations and improvements (other than Tenant’s inventory, equipment, movable furniture, wall decorations and trade fixtures) shall automatically become the property of Landlord and shall be surrendered to Landlord as a part of the Leased Premise as required pursuant to Article 2, unless Landlord shall require Tenant to remove any of such modifications, alterations or improvements in accordance with the provisions of Article 2, in which case Tenant shall so remove same. Landlord shall have no obligation to reimburse to Tenant all or any portion of the cost or value of any such modifications, alterations or improvements so surrendered to Landlord. All modifications, alterations or improvements which are installed or constructed on or attached to the Leased Premises by Landlord at Landlord’s expense shall be deemed real property and a part of the Leased Premises and shall be the property of Landlord. All lighting, plumbing, electrical, heating, ventilating and air conditioning fixtures, partitioning, window coverings, wall coverings and floor coverings installed by Tenant shall be deemed improvements to the Leased Premises and not trade fixtures of Tenant.
6.3      Alterations. Landlord, at its sole cost and expense and not as a Project Maintenance Cost, shall be responsible for correcting any violations of applicable laws (including, without limitation, Title III of the Americans with Disabilities Act) with

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respect to the Leased Premises, Building and the Project existing as of the Lease Commencement Date. At its sole cost, Tenant shall make all modifications, alterations and improvements to the Leased Premises that are required by any Law because of (i) Tenant’s use or occupancy of the Leased Premises, the Building, the Outside Areas, or the Property, (ii) Tenant’s application for any permit or governmental approval, or (iii) Tenant’s making of any modifications, alterations or improvements to or within the Leased Premises. If Landlord shall, at any time during the Lease Term, (i) be required by any governmental authority to make any modifications, alterations or improvements to the Building or the Project, (ii) modify the existing (or construct additional) capital improvements or provide building service equipment for the purpose of reducing the consumption of utility services or project maintenance costs for the property, the cost incurred by Landlord in making such modifications, alterations or improvements shall be considered a Project Maintenance Cost.
6.4      Liens. Tenant shall keep the Leased Premises, the Building and the Property free from any liens and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant, its agents, employees or contractors relating to the Leased Premises. If any such claim of lien is recorded against Tenant’s interest in this Lease, the Leased Premises, the Building or the Project, Tenant shall bond against, discharge or otherwise cause such lien to be entirely released within ten days after the same has been so recorded.
6.5      Tenant Improvements By Landlord. Pursuant to Exhibit “F” Tenant Improvement Work Letter; Landlord agrees to construct the tenant improvements as outlined in the mutually agreed upon and approved Tenant Improvement Plan and Specifications to be prepared by Habitect and to be attached to this Lease as Exhibit “F-1”. Said tenant improvements shall include the construction of new private offices, conference rooms, upgraded lobby, install glass windows in the roll-up door, remodel existing kitchen with appliances, install new carpet and VCT where necessary. Any additional cost related to changes Tenant may make to the tenant improvement plan after said plan has been approved by Landlord shall be Tenant’s responsibility.
ARTICLE 7
ASSIGNMENT AND SUBLETTING BY TENANT
7.1      By Tenant. Tenant shall not sublet the Leased Premises (or any portion thereof) or assign or encumber its interest in this Lease, whether voluntarily or by operation of Law, without Landlord’s prior written consent first obtained in accordance with the provisions of this Article 7. Any attempted subletting, assignment or encumbrance without Landlord’s prior written consent, at Landlord’s election, shall constitute a default by Tenant under the terms of this Lease. The acceptance of rent by Landlord from any person or entity other than Tenant, or the acceptance of rent by Landlord from Tenant with knowledge of a violation of the provisions of this Article, shall not be deemed to be a waiver by Landlord of any provision of this Article or this Lease or to be a consent to any subletting by Tenant or any assignment or encumbrance of Tenant’s interest in this Lease.
7.2      Merger or Reorganization. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or other transfer in the aggregate over the Lease Term of a controlling percentage of the capital stock of Tenant, shall be deemed a voluntary assignment of Tenant’s interest in this Lease. The phrase “controlling percentage” means the ownership of and the right to vote stock possessing more than fifty percent of the total combined voting power of all classes of Tenant’s capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, a withdrawal or change, whether voluntary, involuntary or by operation of Law, of any general partner, or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant’s interest in this Lease.
7.3      Landlord’s Election. If Tenant or Tenant’s successors shall desire to assign its interest under this Lease or to sublet the Leased Premises, Tenant and Tenant’s successors must first notify Landlord, in writing, of its intent to so assign or sublet, at least thirty days in advance of the date it intends to so assign its interest in this Lease or sublet the Leased Premises but not sooner than sixty days in advance of such date, specifying in detail the terms of such proposed assignment or subletting, including the name of the proposed assignee or sublessee, the proposed assignee’s or Sublessee’s intended use of the Leased Premises, a current financial statement of such proposed assignee or sublessee and the form of documents to be used in effectuating such assignment or subletting. Landlord shall have a period of fifteen days following receipt of such notice and receipt of all information requested by Landlord regarding the proposed assignee or sublessee within which to do one of the following: (a) in the case of an assignment or of a sublease of all or substantially all the Leased Premises for all or substantially all the then remaining Lease Term, terminate this Lease, or (b) if Landlord shall not have elected to cancel and terminate this Lease, to either (i) consent to such requested assignment or subletting subject to Tenant’s and Tenant’s successors’ compliance with the conditions set forth in Article 7.4 below or (ii) refuse to so consent to such requested assignment or subletting, provided that such consent shall not be unreasonably refused. If Landlord elects to terminate this Lease, the Lease shall so terminate in its entirety fifteen (15) days after Landlord has notified Tenant and Tenant’s successors in writing of such election. Landlord and Tenant or Tenant’s successors shall execute a cancellation

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agreement with respect to the Lease to effect such termination. It shall not be unreasonable for Landlord to withhold its consent to any proposed assignment or subletting if (i) the proposed assignee’s or subtenant’s anticipated use of the Leased Premises is more intensive than Tenant’s and/or involves the storage, use or disposal of a Hazardous Material; (ii) if the proposed assignee or subtenant has been required by any prior landlord, lender or governmental authority to clean up Hazardous Materials unlawfully discharged by the proposed assignee or subtenant; or (iii) if the proposed assignee or subtenant is subject to investigation or enforcement order or proceeding by any governmental authority in connection with the use, disposal or storage of a Hazardous Material. Tenant and Tenant’s successors covenant and agree to supply to Landlord, upon request, with all necessary or relevant information which Landlord may reasonably request respecting such proposed assignment or subletting and/or the proposed assignee or sublessee. Landlord’s review period shall not commence until Landlord has received all information requested by Landlord.
7.4      Conditions to Landlord’s Consent. If Landlord elects to consent, or shall have been ordered to so consent by a court of competent jurisdiction, to such requested assignment, subletting or encumbrance, such consent shall be expressly conditioned upon the occurrence of each of the conditions below set forth, and any purported assignment, subletting or encumbrance made or ordered prior to the full and complete satisfaction of each of the following conditions shall be void and, at the election of Landlord, which election may be exercised at any time following such a purported assignment, subletting or encumbrance shall constitute a material default by Tenant under this Lease giving Landlord the absolute right to terminate this Lease. The conditions are as follows:
A.     Landlord having approved in form and substance the assignment or sublease agreement (or the encumbrance agreement), which approval shall not be unreasonably withheld by Landlord if the requirements of this Article 7 are otherwise complied with.
B.     Each such assignee having agreed, in writing satisfactory to Landlord and its counsel and for the benefit of Landlord, to assume, to be bound by, and to perform the obligations of this Lease to be performed by Tenant (or, in the case of an encumbrance, each such encumbrancer having similarly agreed to assume, be bound by and to perform Tenant’s obligations upon a foreclosure or transfer in lieu thereof).
C.     Tenant having fully and completely performed all of its obligations under the terms of this Lease through and including the date of the requested consent, as well as through and including the date such assignment or subletting is to become effective.
D.     Tenant having reimbursed to Landlord all reasonable costs and attorneys fees incurred by Landlord in conjunction with the processing and documentation of any such requested subletting, assignment or encumbrance.
E.     Tenant having delivered to Landlord a complete and fully-executed duplicate original of such sublease agreement, assignment agreement or encumbrance (as applicable) and all related agreements.
F.     Tenant having paid, or having agreed in writing to pay as to future payments, to Landlord fifty percent of all assignment consideration or excess rentals to be paid to Tenant or to any other on Tenant’s behalf or for Tenant’s benefit for such assignment or subletting after deduction of broker’s commissions.
7.5      Intentionally Deleted.
7.6      Payments. All payments required by this Article to be made to Landlord shall be made in cash in full as and when they become due. At the time Tenant, Tenant’s assignee or sublessee makes each such payment to Landlord, Tenant or Tenant’s assignee or sublessee, as the case may be, shall deliver to Landlord an itemized statement in reasonable detail showing the method by which the amount due Landlord was calculated and certified by the party making such payment as true and correct. Landlord may require that fifty (50%) percent of the Excess Rentals and/or Assignment Consideration, less reasonable subleasing brokerage fee, to be made hereunder be made directly to Landlord by such Transferee.
7.7      Good Faith. The rights granted to Tenant by this Article are granted in consideration of Tenant’s express covenant that all pertinent allocations which are made by Tenant between the rental value of the Leased Premises and the value of any of Tenant’s personal property which may be conveyed or leased concurrently with and which may reasonably be considered a part of the same transaction as the permitted assignment or subletting shall be made fairly, honestly and in good faith. If Tenant shall breach this Covenant of Good Faith, Landlord may immediately declare Tenant to be in default under the terms of this Lease and terminate this Lease and/or exercise any other rights and remedies Landlord would have under the terms of this Lease in the case of a material

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default by Tenant under this Lease.
7.8      Effect of Landlord’s Consent. No subletting, assignment or encumbrance, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay rent and to perform all of the obligations to be performed by Tenant hereunder. Consent by Landlord to one or more assignments or encumbrances of Tenant’s interest in this Lease or to one or more sublettings of the Leased Premises shall not be deemed to be a consent to any subsequent assignment, encumbrance or subletting. If Landlord shall have been ordered by a court of competent jurisdiction to consent to a requested assignment or subletting, or such an assignment or subletting shall have been ordered over the objection of Landlord, such assignment or subletting shall not be binding between the assignee (or sublessee) and Landlord until such time as all conditions set forth in Article 7.4 above have been fully satisfied (to the extent not then satisfied) by the assignee or sublessee, including, without limitation, the payment to Landlord of all agreed assignment considerations and/or excess rentals then due Landlord.
7.9      Permitted Transfers. Notwithstanding the above Tenant shall have the right, without Landlord’s consent and without triggering Landlord’s recapture or rent sharing rights, (A) to enter into an occupancy agreement, license, assignment or sublease with: (i) a parent corporation or entity; (ii) any subsidiary corporation or entity of Tenant or Tenant’s parent corporation or entity; (iii) an affiliated entity in which Tenant, or its subsidiaries or parent corporation or entity holds a controlling share of the outstanding shares or ownership interest; (iii) any person or entity that acquires all or substantially all of Tenant’s assets or all the capital stock or other ownership interest in Tenant; (iv) any entity with which Tenant merges, regardless of whether Tenant is the surviving entity, or (v) any person or entity that acquires all or substantially all of the business or assets operated or located on the Premises; or (B) to cause a sale or transfer of a controlling interest or all the capital stock or other ownership interests in Tenant (each such transaction in (A) or (B) above being referred to herein as a “Permitted Transfer and each such occupant, licensee, assignee or sublessee being referred to herein as a “Permitted Transferee”); provided that in all cases the transaction is not a subterfuge intended to avoid Tenant’s obligations hereunder. If Tenant enters into to a Permitted Transfer, Tenant shall promptly following the effective date thereof deliver written notice of such transfer to Landlord with a copy of the operative documents.
ARTICLE 8LIMITATION ON LANDLORD’S LIABILITY AND INDEMNITY
8.1      Limitation on Landlord’s Liability and Release. Landlord shall not be liable to Tenant for, and Tenant hereby releases Landlord and its partners and officers from, any and all liability, whether in contract, tort or on any other basis, for any injury to or any damage sustained by Tenant, its agents, employees, contractors or invitees; any damage to Tenant’s property; or any loss to Tenant’s business, loss of Tenant’s profits or other financial loss of Tenant resulting from or attributable to the condition of, the management of, the maintenance of, or the protection of the Leased Premises, the Building, the Project or the Common Areas, including, without limitation, any such injury, damage or loss resulting from (i) the failure, interruption, rationing or other curtailment or cessation in the supply of electricity, water, gas or other utility service to the Project, the Building or the Leased Premises; (ii) the vandalism or forcible entry into the Building or the Leased Premises; (iii) the penetration of water into or onto any portion of the Leased Premises through roof leaks or otherwise; (iv) the failure to provide security and/or adequate lighting in or about the Project, the Building or the Leased Premises; (v) the existence of any design or construction defects within the Project, the Building or the Leased Premises; (vi) the failure of any mechanical systems to function properly (such as the HVAC systems); or (vii) the blockage of access to any portion of the Project, the Building or the Leased Premises, except in any matter covered by subsections 8.1(i) through (vii) above to the extent such damage was proximately caused by Landlord’s active negligence or willful misconduct, or Landlord’s failure to perform an obligation expressly undertaken pursuant to this Lease but only if Tenant shall have given Landlord prior written notice to perform such obligation and Landlord shall have failed to perform such obligation within a reasonable period of time following receipt of written notice from Tenant to so perform such obligation. In this regard, Tenant acknowledges that it is fully apprised of the provisions of Law relating to releases, and particularly to those provisions contained in Section 1542 of the California Civil Code which read as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Notwithstanding such statutory provision, and for the purpose of implementing a full and complete release and discharge, Tenant hereby (i) waives the benefit of such statutory provision and (ii) acknowledges that, subject to the exceptions specifically set forth herein, the release and discharge set forth in this Article is a full and complete settlement and release and discharge of all claims and is intended to include in its effect, without limitation, all claims which Tenant, as of the date hereof, does not know of or suspect to exist in its favor.
8.2      Tenant’s Indemnification of Landlord. Tenant shall defend, with competent counsel satisfactory to Landlord, any claims made or legal actions filed or threatened by third parties against Landlord which result in the death, bodily injury, personal injury, damage to property or interference with contractual or other rights suffered by any third party (including other tenants within the Project) which (i) occurred within the Leased Premises or (ii) resulted from Tenant’s use or occupancy of the Leased Premises or the Common Areas or (iii) resulted from Tenant’s activities in or about the Leased Premises, the Building or the

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Project, and Tenant shall indemnify and hold Landlord, Landlord’s principals, employees and agents harmless from any loss (including loss of rents by reason of vacant space which otherwise would have been leased but for such activities), liabilities, penalties, or expense whatsoever (including all legal fees incurred by Landlord with respect to defending such claims) resulting therefrom, except in any event to the extent proximately caused by the active negligence or willful misconduct of Landlord or Landlord’s failure to perform an obligation expressly undertaken pursuant to this Lease but only if Tenant shall have given Landlord prior written notice to perform such obligation and Landlord shall have failed to perform such obligation within a reasonable period of time following receipt of written notice from Tenant to so perform such obligation. This indemnity agreement shall survive the expiration or sooner termination of this Lease, provided that Tenant shall not be required to indemnify Landlord under this section 8.2 with respect to events that first occur after the later of (a) the date of the expiration, or sooner termination, of this Lease, or (b) the date Tenant actually vacates the Premises, provided that Landlord has actual notice of such vacation.
ARTICLE 9
INSURANCE
9.1      Tenant’s Insurance. Tenant shall maintain insurance complying with all of the following:
A.     Tenant shall procure, pay for and keep in full force and effect, at all times during the Lease Term, the following:
(1)     Commercial General Liability insurance insuring Tenant against liability for bodily injury, death, property damage and personal injury occurring at the Leased Premises, or resulting from Tenant’s use or occupancy of the Leased Premises or the Building, Outside Areas, Property, or Common Areas or resulting from Tenant’s activities in or about the Leased Premises. Such insurance shall be on an occurrence basis with a combined single limit of liability of not less than the amount of Tenant’s Required Liability Coverage (as set forth in Article 1). The policy or policies shall be endorsed to name Landlord and such others as are designated by Landlord as additional insureds in the form equivalent to CG20111185 or successor and shall contain the following additional endorsement: “The insurance afforded to the additional insureds is primary insurance. If the additional insureds have other insurance which is applicable to the loss on a contributing, excess or contingent basis, the amount of this insurance company’s liability under this policy shall not be reduced by the existence of such other insurance. Any insurance carried by the additional insureds shall be excess and non contributing with the insurance provided by the Tenant.” The policy shall not be canceled or reduced without at least 10 days written notice to additional insureds. If the policy insures more than one location, it shall be endorsed to show that the limits and aggregate apply per location using endorsement CG25041185 or successor. Tenant’s policy shall also contain the severability of interest and cross-liability endorsement or clauses.
(2)     Fire and property damage insurance in so-called Special Form (except earthquake and flood) insuring Tenant against loss from physical damage to Tenant’s personal property, inventory, stock, trade fixtures and improvements within the Leased Premises with coverage for the full actual replacement cost thereof;
(3)     Plate-glass insurance, at actual replacement cost;
(4)     Boiler and Machinery insurance, if applicable;
(5)     Product Liability insurance (including without limitation Liquor Liability insurance for liability arising out of the distribution, sale, or consumption of food and/or beverages including alcoholic beverages at the Leased Premises for not less than the Tenant’s Required Liability Coverage as set forth in Article 1;
(6)     Workers’ compensation insurance and any other employee benefit insurance sufficient to comply with all Laws which policy shall be endorsed to provide thirty (30) days written notice of cancellation to Landlord;
(7)     With respect to making of alterations or the construction of improvements or the like undertaken by Tenant, contingent liability and builder’s risk insurance, in an amount and with coverage satisfactory to Landlord;
(8)     Business Income Insurance at a minimum of 50% co-insurance including coverage for loss of business income due to damage to equipment from perils covered under the so-called Special Form excepting perils of earth quake and flood; and
(9)     Comprehensive Auto Liability insurance with a combined single limit coverage of not less than the amount of Tenant’s Required Liability Coverage (as set forth in Article l) for bodily injury and/or property damage liability for: (a) Owned autos, (b) Hired or borrowed autos, and (c) Non-owned autos. The policy shall be endorsed to provide 10 days written

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notice of cancellation to Landlord.
B.     Each policy of liability insurance required to be carried by Tenant pursuant to this Article or actually carried by Tenant with respect to the Leased Premises or the Property (i) shall be in a form satisfactory to Landlord, (ii) Shall be provided by carriers admitted to do business in the state of California, with a Best rating of “A/VI” or better and/or acceptable to Landlord. Property insurance shall contain a waiver and/or a permission to waive by the insurer any right of subrogation against Landlord, its principals, employees, agents and contractors which might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its principals, employees, agents or contractors.
C.     Prior to the time Tenant or any of its contractors enters the Leased Premises, Tenant shall deliver to the Landlord with respect to each policy of insurance required to be carried by Tenant pursuant to this Article, a certificate of the insurer certifying, in a form satisfactory to the Landlord, that the policy has been issued and premium paid providing the coverage required by this Article and containing the provisions herein. Attached to such a certificate shall be endorsements naming Landlord as additional insured, and including the wording under primary insurance above. With respect to each renewal or replacement of any such insurance, the requirements of this Article must be complied with not less than 10 days prior to the expiration or cancellation of the policy being renewed or replaced. Landlord may at any time and from time-to-time inspect and/or copy any and all insurance policies required to be carried by Tenant pursuant to this article. If Landlord’s lender, insurance broker or advisor or counsel reasonably determines at any time that the form or amount of coverage set forth in Article 9.1.(A) for any policy of insurance Tenant is required to carry pursuant to this Article is not adequate, then Tenant shall increase the amount of coverage for such insurance to such greater amount or change the form as Landlord’s lender, insurance broker or advisor or counsel reasonably deems adequate ( provided, however, such increase level of coverage may not exceed the level of coverage for such insurance commonly carried by comparable businesses similarly situated and operating under similar circumstances).
D.     The Commercial General Liability insurance carried by Tenant shall specifically insure the performance by Tenant of the Indemnification provisions set forth in Article 8.2 of this lease; provided, however, nothing contained in this Article 9 shall be construed to limit the liability of Tenant under the Indemnification provisions set forth in said Article 8.2.
9.2      Landlord’s Insurance. With respect to insurance maintained by Landlord:
G.     Landlord shall maintain, as the minimum coverage required of it by this Lease, property insurance in so-called “Special” form insuring Landlord (and such others as Landlord may designate) against loss from physical damage to the Building with coverage of not less than one hundred percent of the full actual replacement cost thereof and against loss of rents for a period of not less than twelve months. Such property damage insurance, at Landlord’s election but without any requirement on Landlord’s behalf to do so, (i) may be written in so-called Special Form, excluding only those perils commonly excluded from such coverage by Landlord’s then property damage insurer; (ii) may provide coverage for physical damage to the improvements so insured for up to the entire full actual replacement cost thereof; (iii) may be endorsed to include (or separate policies which may be carried to cover) loss or damage caused by any additional perils against which Landlord may elect to insure, including earthquake and/or flood; (iv) may provide coverage for loss of rents for a period of up to twelve months; and/or (v) may contain “deductibles” per occurrence in an amount reasonably acceptable to Landlord. Landlord shall not be required to cause such insurance to cover any of Tenant’s personal property, inventory and trade fixtures, or any modifications, alterations or improvements made or constructed by Tenant to or within the Leased Premises.
H.     Landlord shall maintain Commercial General Liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death, and damage to property occurring in, on or about, or resulting from the use or occupancy of the Project, or any portion thereof, with combined single limit coverage of at least Two Million Dollars. Landlord may carry such greater coverage as Landlord or Landlord’s Lender, insurance broker or advisor or counsel may from time to time determine is reasonably necessary for the adequate protection of Landlord and the Project.
I.     Landlord may maintain any other insurance which in the opinion of its lender, insurance broker or advisor, or legal counsel is prudent to carry under the given circumstances.
9.3      Mutual Waiver of Subrogation. Notwithstanding anything to the contrary set forth in this Lease, Landlord hereby releases Tenant, and Tenant hereby releases Landlord and its respective partners and officers, agents, employees and servants, from any and all liability for loss, damage or injury to the property of the other in or about the Leased Premises which is caused by or results from a peril or event or happening which would be covered by insurance required to be carried under the terms of this Lease, or is covered by insurance actually carried and in force at the time of the loss, by the party sustaining such loss; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss and to the extent such insurance is not prejudiced thereby.

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ARTICLE 10
DAMAGE TO LEASED PREMISES
10.1      Landlord’s Duty to Restore. If the Leased Premises are damaged by any peril after the Effective Date of this Lease, Landlord shall restore the Leased Premises, as and when required by this Article, unless this Lease is terminated by Landlord pursuant to Article 10.2 or by Tenant pursuant to Article 10.3. All insurance proceeds available from the fire and property damage insurance carried by Landlord shall be paid to and become the property of Landlord. If this Lease is terminated pursuant to either Article 10.2 or 10.3, all insurance proceeds available from insurance carried by Tenant which cover loss to property that is Landlord’s property or would become Landlord’s property on termination of this Lease shall be paid to and become the property of Landlord, and the remainder of such proceeds shall be paid to and become the property of Tenant. If this Lease is not terminated pursuant to either Article 10.2 or 10.3, all insurance proceeds available from insurance carried by Tenant which cover loss to property that is Landlord’s property shall be paid to and become the property of Landlord, and all proceeds available which cover loss to property which would become the property of Landlord upon the termination of this Lease shall be paid to and remain the property of Tenant. If this Lease is not so terminated, then upon receipt of the insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Leased Premises, to the extent then allowed by Law, to substantially the same condition in which the Leased Premises existed as of the Lease Commencement Date. Landlord’s obligation to restore shall be limited to the Leased Premises and interior improvements constructed by Landlord. Landlord shall have no obligation to restore any other improvements to the Leased Premises or any of Tenant’s personal property, inventory or trade fixtures. Upon completion of the restoration by Landlord, Tenant shall forthwith replace or fully repair all of Tenant’s trade fixtures and other improvements constructed by Tenant to like or similar condition as existed at the time of such damage or destruction.
10.2      Landlord’s Right to Terminate. Landlord shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Tenant of a written notice of election to terminate within thirty days after the date of such damage or destruction:
A.     The Building is damaged by any peril covered by valid and collectible insurance actually carried by Landlord and in force at the time of such damage or destruction (an “insured peril”) to such an extent that the estimated cost to restore the Building exceeds the lesser of (i) the insurance proceeds available from insurance actually carried by Landlord, or (ii) seventy-five percent of the then actual replacement cost thereof;
B.     The Building is damaged by an uninsured peril, which peril Landlord was required to insure against pursuant to the provisions of Article 9 of this Lease, to such an extent that the estimated cost to restore the Building exceeds the lesser of (i) the insurance proceeds which would have been available had Landlord carried such required insurance, or (ii) seventy-five percent of the then actual replacement cost thereof;
C.     The Building is damaged by an uninsured peril, which peril Landlord was not required to insure against pursuant to the provisions of Article 9 of this Lease, to any extent.
D.     The Building is damaged by any peril and, because of the Laws then in force, the Building (i) can not be restored at reasonable cost or (ii) if restored, can not be used for the same use being made thereof before such damage.
10.3      Tenant’s Right to Terminate. If the Leased Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to this Article, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord’s architect or construction consultant as to when the restoration work required of Landlord may be complete. Tenant shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised in the case of A or B below only by delivery to Landlord of a written notice of election to terminate within fifteen days after Tenant receives from Landlord the estimate of the time needed to complete such restoration:
A.     The Leased Premises are damaged by any peril and, in the reasonable opinion of Landlord’s architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within ninety (90) days after the date of such notice from Landlord; or

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B.     The Leased Premises are damaged by any peril within nine months of the last day of the Lease Term and, in the reasonable opinion of Landlord’s architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within sixty days after the date such restoration is commenced.
10.4      Tenant’s Waiver. Landlord and Tenant agree that the provisions of Article 10.3 above, captioned “Tenant’s Right to Terminate”, are intended to supersede and replace the provisions contained in California Civil Code, Section 1932, Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant hereby waives the provisions of said Civil Code Sections and the provisions of any successor Code Sections or similar Laws hereinafter enacted.
10.5      Abatement of Rent. In the event of damage to the Leased Premises which does not result in the termination of this Lease, the Base Monthly Rent (and any Additional Rent) shall be temporarily abated during the period of restoration in proportion to the degree to which Tenant’s use of the Leased Premises is impaired by such damage and repair.


ARTICLE 11
CONDEMNATION
11.1      Landlord’s Right To Terminate. Subject to Article 11.3, Landlord shall have the option to terminate this Lease if, as a result of a taking by means of the exercise of the power of eminent domain (including inverse condemnation and/or a voluntary sale or transfer by Landlord under threat of condemnation to an entity having the power of eminent domain), (i) all or any part of the Leased Premises is so taken, (ii) more than thirty-three and one-third percent of the Buildings leasable area is so taken, (iii) more than thirty-three and one-third percent of the Common Area is so taken, or (iv) because of the Laws then in force, the Leased Premises may not be used for the same use being made thereof before such taking, whether or not restored as required by Article 11.4 below. Any such option to terminate by Landlord must be exercisable within a reasonable period of time, to be effective as of the date possession is taken by the condemnor.
11.2      Tenant’s Right to Terminate. Subject to Article 11.3, Tenant shall have the option to terminate this Lease if, as a result of any taking by means of the exercise of the power of eminent domain (including inverse condemnation and/or a voluntary sale or transfer by Landlord to an entity having the power of eminent domain under threat of condemnation), (i) all of the Leased Premises is so taken, (ii) thirty-three and one-third percent or more of the Leased Premises is so taken and the part of the Leased Premises that remains cannot, within a reasonable period of time, be made reasonably suitable for the continued operation of the Tenant’s business, or (iii) there is a taking of a portion of the Common Area and, as a result of such taking, Landlord cannot provide parking spaces within the Project (or within a reasonable distance therefrom) equal in number to at least sixty-six and two-thirds percent of Tenant’s Number of Parking Spaces (as set forth in Article 1), whether by rearrangement of the remaining parking areas in the Common Area (including, if Landlord elects, construction of multi-dock parking structures or restriping for compact cars where permitted by Law), or by providing alternative parking facilities on other land within reasonable walking distance of the Leased Premises. Tenant must exercise such option within a reasonable period of time, to be effective on the later to occur of (i) the date that possession of that portion of the Common Area or the Leased Premises that is condemned is taken by the condemnor or (ii) the date Tenant vacates the Leased Premises.
11.3      Temporary Taking. If any portion of the Leased Premises is temporarily taken for one year or less, this Lease shall remain in effect. If any portion of the Leased Premises is temporarily taken for a period which either exceeds one year or which extends beyond the natural expiration of the Lease Term, then Landlord and Tenant shall each independently have the option to terminate this Lease, effective on the date possession is taken by the condemnor.
11.4      Restoration and Abatement of Rent. If any part of the Leased Premises is taken by condemnation and this Lease is not terminated, then Landlord shall repair any damage occasioned thereby to the remainder of the Leased Premises to a condition reasonably suitable for Tenant’s continued operations and otherwise, to the extent practicable, in the manner and to the extent provided in Article 10.1. As of the date possession is taken by the condemning authority, (i) the Base Monthly Rent shall be reduced in the same proportion that the area of that part of the Leased Premises so taken (less any addition to the area of the Leased Premises by reason of any reconstruction) bears to the area of the Leased Premises immediately prior to such taking, and (ii) Tenant’s Proportionate Share shall be appropriately adjusted.

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11.5      Division of Condemnation Award. Any award made for any condemnation of the Project, the Building, the Common Areas or the Leased Premises, or any portion thereof, shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award; provided, however, that Tenant shall be entitled to receive any condemnation award that is made directly to Tenant (i) for the taking of personal property, inventory or trade fixtures belonging to Tenant, (ii) for the interruption of Tenant’s business or its moving costs, (iii) for loss of Tenant’s goodwill, or (iv) for any temporary taking where this Lease is not terminated as a result of such taking. The rights of Landlord and Tenant regarding any condemnation shall be determined as provided in this Article, and each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure, and the provisions of any similar law hereinafter enacted, allowing either party to petition the Superior Court to terminate this Lease and/or allocating condemnation awards between Landlord and Tenant in the event of a taking of the Leased Premises.
ARTICLE 12
DEFAULT AND REMEDIES
12.1      Events of Tenant’s Default. Tenant shall be in default of its obligations under this Lease if any of the following events occur:
C.     Tenant shall have failed to pay Base Monthly Rent or any Additional Rent when due and such failure continues for more than five (5) days after written notice of delinquency from Landlord; or
D.     Tenant shall have failed to perform any term, covenant or condition of this Lease, except those requiring the payment of Base Monthly Rent or Additional Rent, within 30 days after written notice from Landlord to Tenant specifying the nature of such failure and requesting Tenant to perform same; provided, however, that in the event such act, use, thing or failure and the consequences thereof are curable but completing such cure is not reasonable within said thirty (30) day period, then Tenant shall have a reasonable time to cure such default provided Tenant commences such cure within such thirty (30) days and diligently prosecutes such cure to completion; or
E.     Tenant shall have sublet the Leased Premises or assigned or encumbered its interest in this Lease in violation of the provisions contained in Article 7, whether voluntarily or by operation of Law; or
F.     Tenant or any Guarantor of this Lease shall have permitted or suffered the sequestration or attachment of, or execution on, or the appointment of a custodian or receiver with respect to, all or any substantial part of the property or assets of Tenant (or such Guarantor) or any property or asset essential to the conduct of Tenant’s (or such Guarantor’s) business, and Tenant (or such Guarantor) shall have failed to obtain a return or release of the same within thirty days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or
G.     Tenant or any Guarantor of this Lease shall have made a general assignment of all or a substantial part of its assets for the benefit of its creditors; or
H.     Tenant or any Guarantor of this Lease shall have allowed (or sought) to have entered against it a decree or order which: (i) grants or constitutes an order for relief, appointment of a trustee, or confirmation of a reorganization plan under the bankruptcy laws of the United States; (ii) approves as properly filed a petition seeking liquidation or reorganization under said bankruptcy laws or any other debtor’s relief law or similar statute of the United States or any state thereof; or (iii) otherwise directs the winding up or liquidation of Tenant; provided, however, if any decree or order was entered without Tenant’s consent or over Tenant’s objection, Landlord may not terminate this Lease pursuant to this Subarticle if such decree or order is rescinded or reversed within sixty days after its original entry.
I.     Tenant or any Guarantor of this Lease shall have availed itself of the protection of any debtor’s relief law, moratorium law or other similar Law which does not require the prior entry of a decree of order.
12.2      Landlord’s Remedies. In the event of any default by Tenant, and without limiting Landlord’s right to indemnification as provided in Article 8.2, Landlord shall have the following remedies, in addition to all other rights and remedies provided by Law or otherwise provided in this Lease, to which Landlord may resort cumulatively, or in the alternative:
A.     Landlord may, at Landlord’s election, keep this Lease in effect and enforce, by an action at law or in equity all of its rights and remedies under this Lease including, without limitation, (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required of Tenant, or perform Tenant’s obligations and

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be reimbursed by Tenant for the cost thereof with interest at the then maximum rate of interest not prohibited by Law from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive relief and specific performance to prevent Tenant from violating the terms of this Lease and/or to compel Tenant to perform its obligations under this Lease, as the case may be.
B.     Landlord may, at Landlord’s election, terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice. Any termination under this Subarticle shall not relieve Tenant from its obligation to pay to Landlord all Base Monthly Rent and Additional Rent then or thereafter due, or any other sums due or thereafter accruing to Landlord, or from any claim against Tenant for damages previously accrued or then or thereafter accruing. In no event shall any one or more of the following actions by Landlord, in the absence of a written election by Landlord to terminate this Lease, constitute a termination of this Lease:
(1)     Appointment of a receiver or keeper in order to protect Landlord’s interest hereunder;
(2)     Consent to any subletting of the Leased Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or
(3)     Any other action by Landlord or Landlord’s agents intended to mitigate the adverse effects of any breach of this Lease by Tenant, including, without limitation, any action taken to maintain and preserve the Leased Premises or any action taken to relet the Leased Premises, or any portion thereof, for the account of Tenant and in the name of Tenant.
C.     In the event Tenant breaches this Lease and abandons the Leased Premises, Landlord may terminate this Lease, but this Lease shall not terminate unless Landlord gives Tenant written notice of termination. No act by or on behalf of Landlord intended to mitigate the adverse effect of such breach, including those described by Subarticles B(l), (2) and (3) immediately preceding, shall constitute a termination of Tenant’s right to possession unless Landlord gives Tenant written notice of termination. If Landlord does not terminate this Lease by giving written notice of termination, Landlord may enforce all its rights and remedies under this Lease, including the right to recover rent as it becomes due under this Lease as provided in California Civil Code Section 1951.4, as in effect on the Effective Date of this Lease.
D.     In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord’s election, to damages in an amount as set forth in California Civil Code Section 1951.2, as in effect on the Effective Date of this Lease. For purposes of computing damages pursuant to said Section 1951.2, an interest rate equal to the maximum rate of interest then not prohibited by Law shall be used where permitted. Such damages shall include, without limitation:
(1)     The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent; and
(2)     Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform Tenant’s obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom, including, without limitation, the following: (i) expenses for cleaning, repairing or restoring the Leased Premises; (ii) expenses for altering, remodeling or otherwise improving the Leased Premises for the purpose of reletting, including removal of existing leasehold improvements and/or installation of additional leasehold improvements (regardless of how the same is funded, including reduction of rent, a direct payment or allowance to a new tenant, or otherwise); (iii) broker’s fees, advertising costs and other expenses of reletting the Leased Premises; (iv) costs of carrying the Leased Premises, which costs would have been billed to Tenant as Additional Rent had Tenant not defaulted and which include, but are not limited to; taxes, insurance premiums, landscape maintenance, HVAC maintenance, utility charges and security precautions; (v) expenses incurred in removing, disposing of and/or storing any of Tenant’s personal property, inventory or trade fixtures remaining therein; (vi) attorneys’ fees, expert witness fees, court costs and other reasonable expenses incurred by Landlord (but not limited to taxable costs) in retaking possession of the Leased Premises, establishing damages hereunder, and re-leasing the Leased Premises; and (vii) any other expenses, costs or damages otherwise incurred or suffered as a result of Tenant’s default.
12.3      Landlord’s Default and Tenant’s Remedies. In the event Landlord fails to perform any of its obligations under this Lease, Landlord shall nevertheless not be in default under the terms of this Lease until such time as Tenant shall have first given Landlord written notice specifying the nature of such failure to perform its obligations, and then only after Landlord shall have had a reasonable period of time following its receipt of such notice within which to perform such obligations. In the event of Landlord’s default as above set forth, then, and only then, Tenant shall have the following remedies only:

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A.     Tenant may then proceed in equity or at law to compel Landlord to perform its obligations and/or to recover damages proximately caused by such failure to perform (except as and to the extent Tenant has waived its right to damages as provided in this Lease).
B.     Tenant, at its option, may then cure any default of Landlord at Landlord’s cost. If, pursuant to this Subarticle, Tenant reasonably pays any sum to any third party or does any act that requires the payment of any sum to any third party at any time by reason of Landlord’s default, the sum paid by Tenant shall be immediately due from Landlord to Tenant at the time Tenant supplies Landlord with an invoice therefore (provided such invoice sets forth and is accompanied by a written statement of Tenant setting forth in reasonable detail the amount paid, the party to whom it was paid, the date it was paid, and the reasons giving rise to such payment), together with interest at twelve percent per annum from the date of such invoice until Tenant is reimbursed by Landlord. Tenant may not offset such sums against any installment of rent due Landlord under the terms of this Lease.
12.4      Limitation on Tenant’s Recourse. If Landlord is a corporation, trust, partnership, joint venture, unincorporated association, or other form of business entity, Tenant agrees that (i) the obligations of Landlord under this Lease shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals of such business entity and (ii) Tenant shall have recourse only to Landlord’s then equity interest, if any, in the Property, rental income, sales and financing proceeds, and insurance proceeds for the satisfaction of such obligations and not against the assets of such officers, directors, trustees, partners, joint venturers, members, owners, stockholders or principals (other than to the extent of their interest in the Property). Tenant shall look exclusively to such interests of Landlord, if any, in the Property for payment and discharge of any obligations imposed upon Landlord hereunder, and Landlord is hereby released and relieved of any other obligations hereunder. Additionally, if Landlord is a partnership, then Tenant covenants and agrees:
A.     No partner of Landlord shall be sued or named as a party in any suit or action brought by Tenant with respect to any alleged breach of this Lease (except to the extent necessary to secure jurisdiction over the partnership and then only for that sole purpose);
B.     No service of process shall be made against any partner of Landlord except for the sole purpose of securing jurisdiction over the partnership; and
C.     No writ of execution shall be levied against the assets of any partner of Landlord other than to the extent of his interest in Property.
Tenant further agrees that each of the foregoing covenants and agreements shall be enforceable by Landlord and by any partner of Landlord and shall be applicable to any actual or alleged misrepresentation or non-disclosure made respecting this Lease or the Leased Premises or any actual or alleged failure, default or breach of any covenant or agreement either expressly or implicitly contained in this Lease or imposed by statute or at common law.
12.5      Tenant’s Waiver. Landlord and Tenant agree that the provisions of Article 12.3 above are intended to supersede and replace the provisions of California Civil Code 1932(l), 1941 and 1942, and accordingly, Tenant hereby waives the provisions of Section 1932(l), 1941 and 1942 of the California Civil Code and/or any similar or successor Law regarding Tenant’s right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under this Lease. Tenant hereby waives any right of redemption or relief from forfeiture under the Laws of the State of California, or under any other present or future Law, in the event Tenant is evicted or Landlord takes possession of the Leased Premises by reason of any default by Tenant.
ARTICLE 13
GENERAL PROVISIONS
13.1      Taxes on Tenant’s Property. Tenant shall pay before delinquency any and all taxes, assessments, license fees, use fees, permit fees and public charges of whatever nature or description levied, assessed or imposed against Tenant or Landlord by a governmental agency arising out of, caused by reason of or based upon Tenant’s estate in this Lease, Tenant’s ownership of property, improvements made by Tenant to the Leased Premises, improvements made by Landlord for Tenant’s use within the Leased Premises, Tenant’s use (or estimated use) of public facilities or services or Tenant’s consumption (or estimated consumption) of public utilities, energy, water or other resources. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. If any such taxes, assessments, fees or public charges are levied against Landlord, Landlord’s property, the Building or the Project, or if the assessed value of the Building or the Project is increased by the inclusion therein of a value placed upon same, then Landlord, after giving written notice to Tenant, shall have the right, regardless of the validity thereof, to pay such taxes, assessment, fee or public charge and bill Tenant, as Additional Rent, the amount of such taxes, assessment, fee or public

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charge so paid on Tenant’s behalf. Tenant shall, within ten days from the date it receives an invoice from Landlord setting forth the amount of such taxes, assessment, fee or public charge so levied, pay to Landlord, as Additional Rent, the amount set forth in said invoice. Failure by Tenant to pay the amount so invoiced within said ten day period shall be conclusively deemed a default by Tenant under this Lease. Tenant shall have the right, and with Landlord’s full cooperation if Tenant is not then in default under the terms of this Lease, to bring suit in any court of competent jurisdiction to recover from the taxing authority the amount of any such taxes, assessment, fee or public charge so paid.
13.2      Holding Over. This Lease shall terminate without further notice on the Lease Expiration Date (as set forth in Article 1). Any holding over by Tenant after expiration of the Lease Term shall neither constitute a renewal nor extension of this Lease nor give Tenant any rights in or to the Leased Premises except as expressly provided in this Article. Any such holding over shall be deemed an unlawful detainer of the Leased Premises unless Landlord has consented to same. Any such holding over to which Landlord has consented shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable, except that the Base Monthly Rent shall be increased to an amount equal to one hundred fifty percent of the Base Monthly Rent payable during the last full month immediately preceding such holding over.
13.3      Subordination to Mortgages. This Lease is subject and subordinate to all underlying ground leases and to all mortgages and deeds of trust which affect the Building and are of public record as of the Effective Date of this Lease, and to all renewals, modifications, consolidations, replacements and extensions thereof. However, if the lessor under any such ground lease or any Lender holding any such mortgage or deed of trust shall advise Landlord that it desires or requires this Lease to be made prior and superior thereto, then, upon written request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and deliver any and all documents or instruments which Landlord and such lessor or Lender deem necessary or desirable to make this Lease prior thereto. Tenant hereby consents to Landlord’s ground leasing the land underlying the Building and/or encumbering the Building as security for future loans on such terms as Landlord shall desire, all of which future ground leases, mortgages or deeds of trust shall be subject and subordinate to this Lease. However, if any lessor under any such future ground lease or any Lender holding such future mortgage or deed of trust shall desire or require that this Lease be made subject and subordinate to such future ground lease, mortgage or deed of trust, then Tenant agrees, within ten days after Landlord’s written request therefore, to execute, acknowledge and deliver to Landlord any and all documents or instruments requested by Landlord or such lessor or Lender as may be necessary or proper to assure the subordination of this Lease to such future ground lease, mortgage or deed of trust; but only if such lessor or Lender agrees to recognize Tenant’s rights under this Lease and not to disturb Tenant’s quiet possession of the Leased Premises so long as Tenant is not in default under this Lease.
13.4      Tenant’s Attornment Upon Foreclosure. Tenant shall, upon request, attorn (i) to any purchaser of the Building at any foreclosure sale or private sale conducted pursuant to any security instrument encumbering the Building, (ii) to any grantee or transferee designated in any deed given in lieu of foreclosure of any security interest encumbering the Building, or (iii) to the lessor under any underlying ground lease of the land underlying the Building, should such ground lease be terminated; provided that such purchaser, grantee or lessor recognizes Tenant’s rights under this Lease.
13.5      Mortgagee Protection. In the event of any default on the part of Landlord, Tenant will give notice by registered mail to any Lender or lessor under any underlying ground lease who shall have requested, in writing, to Tenant that it be provided with such notice, and Tenant shall offer such Lender or lessor a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale or judicial foreclosure or other appropriate legal proceedings if reasonably necessary to effect a cure.
13.6      Estoppel Certificates. Tenant will, following any request by Landlord, promptly execute and deliver to Landlord an estoppel certificate (i) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if any, (iii) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iv) certifying such other information about this Lease as may be reasonably requested by Landlord. Tenant’s failure to execute and deliver such estoppel certificate within ten days after Landlord’s request therefore shall be a material default by Tenant under this Lease, and Landlord shall have all of the rights and remedies available to Landlord as Landlord would otherwise have in the case of any other material default by Tenant, including the right to terminate this Lease and sue for damages proximately caused thereby, it being agreed and understood by Tenant that Tenant’s failure to so deliver such estoppel certificate in a timely manner could result in Landlord being unable to perform committed obligations to other third parties which were made by Landlord in reliance upon this covenant of Tenant. Landlord and Tenant intend that any statement delivered pursuant to this Article may be relied upon by any Lender or purchaser or prospective Lender or purchaser of the Building, the Project, or any interest therein.

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13.7      Tenant’s Financial Information. Tenant shall, within ten business days after Landlord’s request therefore, deliver to Landlord a copy of a current financial statement, including an income statement and balance sheet, and any such other information reasonably requested by Landlord regarding Tenant’s financial condition. Tenant acknowledges that Landlord has and will rely on the truth and accuracy of the information provided by Tenant to Landlord both prior to and during the term of the Lease. Landlord shall be entitled to disclose such financial statements or other information to its Lender, to any present or prospective principal of or investor in Landlord, or to any prospective Lender or purchaser of the Building, the Project or any portion thereof or interest therein. Any such financial statement or other information which is marked “confidential” or “company secrets” (or is otherwise similarly marked by Tenant) shall be confidential and shall not be disclosed by Landlord to any third party except as specifically provided in this Article, unless the same becomes a part of the public domain without the fault of Landlord.
13.8      Transfer By Landlord. Landlord and its successors in interest shall have the right to transfer their interest in the Building, the Project, or any portion thereof at any time and to any person or entity. In the event of any such transfer, the Landlord originally named herein (and in the case of any subsequent transfer, the transferor), from the date of such transfer, (i) shall be automatically relieved, without any further act by any person or entity, of all liability for the performance of the obligations of the Landlord hereunder which may accrue after the date of such transfer and (ii) shall be relieved of all liability for the performance of the obligations of the Landlord hereunder which have accrued before the date of transfer if its transferee agrees to assume and perform all such prior obligations of the Landlord hereunder. Tenant shall attorn to any such transferee. After the date of any such transfer, the term “Landlord” as used herein shall mean the transferee of such interest in the Building or the Project.
13.9      Force Majeure. The obligations of each of the parties under this Lease (other than the obligation to pay money) shall be temporarily excused if such party is prevented or delayed in performing such obligation by reason of any strikes, lockouts or labor disputes; inability to obtain labor, materials, fuels or reasonable substitutes therefore; governmental restrictions, regulations, controls, action or inaction; civil commotion; inclement weather, fire or other acts of God; or other causes (except financial inability) beyond the reasonable control of the party obligated to perform (including acts or omissions of the other party for a period equal to the period of any such prevention, delay or stoppage.
13.10      Notices. Any notice required or desired to be given by a party regarding this Lease shall be in writing and shall be personally served, or in lieu of personal service may be given by: (i) delivery by Federal Express, United Parcel Service or similar commercial service, (ii) electronic facsimile transmission, or (iii) by depositing such notice in the United States mail, postage prepaid, addressed to the other party as follows:
A.     If addressed to Landlord, to Landlord at its Address for Notices (as set forth in Article 1).
B.     If addressed to Tenant, to Tenant at its Address for Notices (as set forth in Article 1).
Any notice given by registered mail shall be deemed to have been given on the third business day after its deposit in the United States mail. Any notice given by certified mail shall be deemed given on the date receipt was acknowledged to the postal authorities. Any notice given by mail other than registered or certified mail shall be deemed given only if received by the other party, and then on the date of receipt. In the event of notice by electronic facsimile transmission or commercial carrier, notice shall be deemed received on the business day following the date of confirmation documented by the transmission or carrier. Each party may, by written notice to the other in the manner aforesaid, change the address to which notices addressed to it shall thereafter be mailed.
13.11      Attorneys’ Fees. In the event any party shall bring any action, arbitration proceeding or legal proceeding alleging a breach of any provision of this Lease to recover rent, to terminate this Lease, or to enforce, protect, determine or establish any term or covenant of this Lease or rights or duties hereunder of either party, the prevailing party shall be entitled to recover from the non-prevailing party as a part of such action or proceeding, or in a separate action for that purpose brought within one year from the determination of such proceeding, reasonable attorneys’ fees, expert witness fees, court costs and other reasonable expenses incurred by the prevailing party. Landlord may enforce this provision by either (i) requiring Tenant to pay such fees and costs as a condition to curing its default or (ii) bringing a separate action to enforce such payment, it being agreed by and between Landlord and Tenant that Tenant’s failure to pay such fees and costs upon demand shall constitute a breach of this Lease in the same manner as a failure by Tenant to pay the Base Monthly Rent, giving Landlord the same rights and remedies as if Tenant failed to pay the Base Monthly Rent.
13.12      Definitions. Any term that is given a special meaning by any provision in this Lease shall, unless otherwise specifically stated, have such meaning whenever used in this Lease or in any Addenda or amendment hereto. In addition to the terms defined in Article 1, the following terms shall have the following meanings:

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A.      Real Property Taxes. The term “Real Property Tax” or “Real Property Taxes” shall each mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership or new construction), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed for whatever reason against the Project or any portion thereof, or Landlord’s interest therein, or the fixtures, equipment and other property of Landlord that is an integral part of the Project and located thereon, or Landlord’s business of owning, leasing or managing the Project or the gross receipts, income or rentals from the Project; (ii) all charges, levies or fees imposed by any governmental authority against Landlord by reason of or based upon the use of or number of parking spaces within the Project, the amount of public services or public utilities used or consumed ( e.g. , water, gas, electricity, sewage or surface water disposal) at the Project, the number of persons employed by tenants of the Project, the size (whether measured in area, volume, number of tenants or whatever) or the value of the Project, or the type of use or uses conducted within the Project; and (iii) all costs and fees (including attorneys’ fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If, at any time during the Lease Term, the taxation or assessment of the Project prevailing as of the Effective Date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate, substitute, or additional tax or charge (i) on the value, size, use or occupancy of the Project or Landlord’s interest therein or (ii) on or measured by the gross receipts, income or rentals from the Project, or on Landlord’s business of owning, leasing or managing the Project or (iii) computed in any manner with respect to the operation of the Project, then any such tax or charge, however designated, shall be included within the meaning of the terms “Real Property Tax” or “Real Property Taxes” for purposes of this Lease. If any Real Property Tax is partly based upon property or rents unrelated to the Project, then only that part of such Real Property Tax that is fairly allocable to the Project shall be included within the meaning of the terms “Real Property Tax” or “Real Property Taxes”. Notwithstanding the foregoing, the terms “Real Property Tax” or “Real Property Taxes” shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state income tax imposed on Landlord’s income from all sources or any documentary transfer taxes.
B.      Landlord’s Insurance Costs. The term “Landlord’s Insurance Costs” shall mean the costs to Landlord to carry and maintain the policies of fire and property damage insurance, including quake and flood, for the Project and general liability insurance required, or permitted, to be carried by Landlord pursuant to Article 9, together with any deductible amounts paid by Landlord upon the occurrence of any insured casualty or loss; provided that with respect to any deductible applied to any cost which is capitalized in accordance with generally accepted accounting principles, such deductible shall be amortized as provided in Paragraph 13.12C below.
C.      Project Maintenance Costs. The term “Project Maintenance Costs” shall mean all costs and expenses (except Landlord’s Insurance Costs and Real Property Taxes) paid or incurred by Landlord in owning, protecting, operating, maintaining, repairing and preserving the Project and all parts thereof, including without limitation, (i) professional management fees (equal to three percent of the annualized Base Monthly Rent), (ii) the costs incurred by Landlord in the making of any modifications, alterations or improvements as set forth in Article 6 including costs of complying with any governmental regulation or court order coming into effect after the Lease Commencement Date such as costs associated with complying with the Americans with Disabilities Act (ADA) or any similar laws or court cases, (iii) costs of complying with governmental regulations governing Tenant’s use of Hazardous Materials, and Landlord’s costs of monitoring Tenant’s use of Hazardous Materials including fees charged by Landlord’s consultants to periodically inspect the Premises and the Property, (iv) all costs, fees, expenses, assessments, and the like charged by any public or private maintenance association or district whether such costs are incurred on or off the Project, for the benefit of the Project, also including any costs required to be paid by Landlord pursuant to any covenants, conditions, and/or restrictions effecting the Project for the benefit of any common property owners association, and (v) such other costs as may be paid or incurred with respect to owning, operating, maintaining and preserving the Project, such as repairing, replacing and resurfacing the exterior surfaces of the buildings (including roofs), repairing, replacing, and resurfacing paved areas, repairing structural parts of the buildings, cleaning, maintaining, repairing, or replacing the interior of the Leased Premises both during the Lease Term and upon termination of the Lease, and maintaining, repairing or replacing, when necessary electrical, plumbing, sewer, drainage, heating, ventilating and air conditioning systems serving the buildings, providing utilities to the common areas, maintenance, repair, replacement or installation of lighting fixtures, directional or other signs and signals, irrigation or drainage systems, trees, shrubs, materials, maintenance of all landscaped areas, and depreciation and financing costs on maintenance and operating machinery and equipment (if owned) and rental paid for such machinery and equipment (if leased). As to the costs of capital improvements, replacements, repairs, equipment and other capital costs (“Capital Items”), such costs shall be included in Project Maintenance Costs as follows: (i) as to Capital Items with a reasonable useful life of less than five (5) years, all such costs shall be included in the calendar year during which such costs were paid, and (ii) as to Capital Items with a reasonable useful life of five (5) years or more, the first $20,000 of such costs shall be included in Project Maintenance Costs for the calendar year during which such costs were paid and the remaining amount shall be amortized over the reasonable useful life of the Capital

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Item, as determined by Landlord in accordance with generally accepted accounting principles, at an interest rate announced from time to time by Wells Fargo Bank as its “prime rate” plus 2%, provided further that such amortized costs included in Project Maintenance Costs shall not exceed $40,000 in any calendar year.
Exclusions from Project Maintenance Costs. Notwithstanding the above, Project Maintenance Costs shall not include the following:
(i)     Interest, principal, depreciation, and other lender costs and closing costs on any mortgage or mortgages, ground lease payments, or other debt instrument encumbering the Building or Project;
(ii)     Any bad debt loss, rent loss, or reserves for bad debt or rent loss;
(iii)     Costs associated with operation of the business of the ownership of the Building or Project or entity that constitutes Landlord or Landlord’s property manager, as distinguished from the cost of Building operations, including the costs of partnership or corporate accounting and legal matters; defending or prosecuting any lawsuit with any mortgagee, lender, ground lessor, broker, tenant, occupant, or prospective tenant or occupant; selling or syndicating any of Landlord’s interest in the Building or Project; and disputes between Landlord and Landlord’s property manager;
(iv)     Landlord’s general corporate or partnership overhead and general administrative expenses, including the salaries of management personnel who are not directly related to the Building or Project and primarily engaged in the operation, maintenance, and repair of the Building or Project, except to the extent that those costs and expenses are included in the management fees;
(v)     Advertising, promotional expenditures and leasing expenses primarily directed toward leasing tenant space in the Project;
(vi)     Leasing commissions, space-planning costs, attorney fees and costs, disbursements, and other expenses incurred in connection with leasing, other negotiations, or disputes with tenants, occupants, prospective tenants, or other prospective occupants of the Project, or associated with the enforcement of any leases;
(vii)     Charitable or political contributions;
(viii)     Costs for which Landlord is reimbursed; and
(ix)     Fees paid to any affiliate or party related to Landlord to the extent such fees exceed the charges for comparable services rendered by unaffiliated third parties of comparable skill, stature and reputation in the same market.
D.      Ready For Occupancy. The term “Ready for Occupancy” shall mean the date upon which (i) the Leased Premises are available for Tenant’s occupancy in a broom clean condition and (ii) the improvements, if any, to be made to the Leased Premises by Landlord as a condition to Tenant’s obligation to accept possession of the Leased Premises have been substantially completed as evidenced by a Certificate of Completion by Tenant’s architect and the appropriate governmental building department ( i.e. , the City building department, if the Project is located within a City, or otherwise the County building department) shall have approved the construction of the improvements as substantially complete or is willing to so approve the construction of such improvements as substantially complete subject only to compliance with specified conditions which are the responsibility of Tenant to satisfy or is willing to allow Tenant to occupy subject to its receiving assurances that specified work will be completed within 30 days.
E.      Tenant’s Proportionate Share. The term “Tenant’s Proportionate Share” or “Tenant’s Share”, as used with respect to an item pertaining to the Building, shall each mean that percentage obtained by dividing the leasable square footage contained within the Leased Premises (as set forth in Article 1) by the total leasable square footage contained within the Building as the same from time to time exists or, as used with respect to an item pertaining to the Project, shall each mean that percentage obtained by dividing the leasable square footage contained within the Leased Premises (as set forth in Article 1) by the total leasable square footage contained within the Project as the same from time to time exists, unless, as to any given item, such a percentage allocation unfairly burdens or benefits a given tenant(s), in which case Landlord shall have the exclusive right to equitably allocate such item so as to not unfairly burden or benefit any given tenant(s). Landlord’s determination of any such special allocation shall be final and binding upon Tenant unless made in bad faith.
F.      Building’s Proportionate Share. The term “Building’s Proportionate Share” or “Building’s Share” shall each

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mean that percentage which is obtained by dividing the leasable square footage contained within the Building by the leasable square footage contained within all buildings located within the Project, unless, as to any given item, such a percentage allocation unfairly burdens or benefits a given building(s), in which case Landlord shall have the exclusive right to equitably allocate such item so as to not unfairly burden or benefit any given building(s). Landlord’s determination of any such special allocation shall be final and binding upon Tenant unless made in bad faith.
G.      Building Operating Expenses. The term “Building Operating Expenses” shall mean and include the Building’s Share of all Real Property Taxes, plus the Building’s Share of all Landlord’s Insurance Costs, plus the Building’s Share of all Project Maintenance Costs plus an accounting fee equal to three percent (3%) of Building Operating Expenses (other than said fee).
H.      Law. The term “Law” shall mean any judicial decision and any statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any municipal, county , state, federal, or other governmental agency or authority having jurisdiction over the parties to this Lease, the Leased Premises, the Building or the Project, or any of them in effect either at the Effective Date of this Lease or at any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body ( e.g. , a board of fire examiners or a public utility or special district).
I.      Lender. The term “Lender” shall mean the holder of any Note or other evidence of indebtedness secured by the Project or any portion thereof.
J.      Private Restrictions. The term “Private Restrictions” shall mean all recorded covenants, conditions and restrictions, private agreements, easements, and any other recorded instruments affecting the use of the Project, as they may exist from time to time.
K.      Rent. The term “rent” shall mean collectively Base Monthly Rent and all Additional Rent.
13.13      General Waivers. One party’s consent to or approval of any act by the other party, requiring the first party’s consent or approval shall not be deemed to waive or render unnecessary the first party’s consent to or approval of any subsequent similar act by the other party. No waiver of any provision hereof or any breach of any provision hereof shall be effective unless in writing and signed by the waiving party. The receipt by Landlord of any rent or payment with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach. No waiver of any provision of this Lease shall be deemed a continuing waiver unless such waiver specifically states so in writing and is signed by both Landlord and Tenant. No delay or omission in the exercise of any right or remedy accruing to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or any other provisions herein contained.
13.14      Miscellaneous. Should any provision of this Lease prove to be invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. Any copy of this Lease which is executed by the parties shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. The term “party” shall mean Landlord or Tenant as the context implies. If Tenant consists of more than one person or entity, then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the Laws of the State in which the Leased Premises are located. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against either Landlord or Tenant. The captions used in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. The terms “must”, “shall”, “will” and “agree” are mandatory. The term “may” is permissive. When a party is required to do something by this Lease, it shall do so at its sole cost and expense without right of reimbursement from the other party unless specific provision is made therefore. Where Tenant is obligated not to perform any act or is not permitted to perform any act, Tenant is also obligated to restrain any others reasonably within its control, including agents, invitees, contractors, subcontractors and employees, from performing said act. Landlord shall not become or be deemed a partner or a joint venturer with Tenant by reason of any of the provisions of this Lease.
13.15      Tenant’s Audit Right. Tenant shall have the right, to be exercised not more than once during any calendar year, within ninety (90) days after Landlord’s final statement, to audit Building Operating Expenses for the prior year, and to examine Landlord’s records relating to the same. The costs of any such audit shall be borne by Tenant, provided, however, that in the event such audit

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reveals that the amounts charged to Tenant were more than five percent (5%) greater than the amounts permitted by this Lease to be charged to Tenant, then Landlord shall pay the reasonable costs of that audit. In addition, Landlord shall pay to Tenant, within ten (10) days of notice thereof, any amounts determined to be owed to Tenant as a result of such audit.
ARTICLE 14
CORPORATE AUTHORITY

BROKERS AND ENTIRE AGREEMENT
14.1      Corporate Authority. If Tenant is a corporation, the Tenant represents and warrants that each individual executing this Lease on behalf of said corporation is duly authorized to execute and deliver this Lease on behalf of Tenant in accordance with the bylaws and/or a board of directors’ resolution of Tenant, that Tenant is validly formed and duly authorized and existing, that Tenant is qualified to do business in the State in which the Leased Premises are located, that Tenant has the full right and legal authority to enter into this Lease, and that this Lease is binding upon Tenant in accordance with its terms. Tenant shall, within thirty days after Landlord’s written request, deliver to Landlord a certified copy of the resolution of its board of directors authorizing or ratifying the execution of this Lease.
14.2      Brokerage Commissions. Tenant warrants that it has not had any dealings with any real estate broker(s), leasing agent(s), finder(s) or salesmen, other than those persons or entities named in Article I as the “Brokers” with respect to the lease by it of the Leased Premises pursuant to this Lease, and that it will indemnify, defend with competent counsel, and hold Landlord harmless from any liabilities for the payment of any real estate brokerage commissions, leasing commissions or finder’s fees claimed by any other real estate broker(s), leasing agent(s), finder(s) or salesmen to be earned or due and payable by reason of Tenant’s agreement or promise (implied or otherwise) to pay (or have Landlord pay) such a commission or finder’s fee by reason of its leasing the Leased Premises pursuant to this Lease. Landlord shall pay all commissions due to the Brokers on account of this Lease.
14.3      Entire Agreement. This Lease, the Exhibits (as described in Article 1) and the Addenda (as described in Article 1), which Exhibits and Addenda are by this reference incorporated herein, constitute the entire agreement between the parties, and there are no other agreements, understandings or representations between the parties relating to the lease by Landlord of the Leased Premises to Tenant, except as expressed herein. No subsequent changes, modifications or additions to this Lease shall be binding upon the parties unless in writing and signed by both Landlord and Tenant.
14.4      Landlord’s Representations. Tenant acknowledges that neither Landlord nor any of its agents made any representations or warranties respecting the Project, the Building or the Leased Premises, upon which Tenant relied in entering into this Lease, which are not expressly set forth in this Lease. Tenant further acknowledges that neither Landlord nor any of its agents made any representations as to (i) whether the Leased Premises may be used for Tenant’s intended use under existing Law or (ii) the suitability of the Leased Premises for the conduct of Tenant’s business or (iii) the exact square footage of the Leased Premises, and that Tenant relied solely upon its own investigations respecting said matters. Tenant expressly waives any and all claims for damage by reason of any statement, representation, warranty, promise or other agreement of Landlord or Landlord’s agent(s), if any, not contained in this Lease or in any Addenda hereto.
ARTICLE 15
OPTION TO RENEW
15.1      Option to Renew. Landlord hereby grants to Tenant one (1) option to renew the Lease, for a period of an additional three (3) years (the “Renewal Term”). The Renewal Term shall commence upon the expiration of the preceding lease term (the “Renewal Commencement Date”) such that there shall not be a gap in the time between the Lease Term and the Renewal Term.
1.     The lease of the Leased Premises for the Renewal Term shall be on the same terms and conditions as set forth in the Lease, except:
D.     That the rental for the Leased Premises during the Renewal Term shall be as set forth below in Paragraph 3, and
E.     That the Security Deposit shall be increased to the rental amount for the final month of the Renewal Term as determined in Paragraph 3 (the “Increased Security Deposit Amount”).

1003283 v5/SF
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2.     Tenant shall notify Landlord of Tenant’s exercise of its right to renew the Lease for the Renewal Term only by giving to Landlord written notice one hundred eighty (180) days prior to the Renewal Commencement Date (time is expressly of the essence to Landlord). Any attempted exercise of this Option made other than within the time period stated or in the manner stated shall be void and of no force or effect. In the event that Tenant does not or is not entitled to exercise its option Tenant shall have no further rights hereunder.
3.     If Tenant shall have properly and timely exercised its right to extend the term of the Lease, the term of the Lease shall be so extended for the Renewal Term on the same terms and conditions contained in the Lease; provided, however, the Base Monthly Rent for each month of the Renewal Term shall be the Then Market Rental Rate for the Leased Premises.
4.     The term “Then Monthly Market Rental Rate” shall be determined by mutual agreement between Landlord and Tenant or, in the event such agreement cannot be made within thirty (30) days from the date Tenant shall have exercised this option, Landlord and Tenant shall each appoint a real estate appraiser with at least five (5) years full-time commercial/industrial appraisal experience in Alameda County to appraise and determine the fair market monthly rental rate the Leased Premises, in their then existing condition for the use specified in the Lease could be leased for, on the same terms and conditions set forth in the Lease, to a qualified tenant ready, willing and able to lease the Leased Premises for a term equal to the Renewal Term. If either party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the other party can then apply to the President of the Alameda County Real Estate Board or the presiding Judge of the Superior Court of that County for the selection of a second appraiser who meets the qualifications stated above. The failing party shall bear the cost of appointing the second appraiser and of paying the second appraiser’s fee. The two appraisers shall attempt to establish the Then Fair Market Rental Rate for the Leased Premises. If the two appraisers are unable to agree on the Then Fair Market Rental Rate for the Leased Premises within ten (10) days after the second appraiser has been selected or appointed, then the two appraisers shall attempt to select a third appraiser meeting the qualifications stated above. If they fail to agree on a third appraiser, either party can follow the above procedure for having an appraiser appointed by the Real Estate Board or a judiciary. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser’s fee. Unless the three appraisers are able to agree on the Then Fair Market Rental Rate for the Leased Premises within ten (10) days after the selection or appointment of the third appraiser, the two appraisal amounts being calculated most closely together, after having discarded the appraisal amount which most greatly varies from the other two appraisal amounts, shall be added together then divided by two (2). The resulting rental amount shall be defined as the Then Fair Market Rental Rate for the Leased Premises.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the respective dates below set forth with the intent to be legally bound thereby as of the Effective Date of this Lease.
AS LANDLORD:
 
AS TENANT:
RENCO BAYSIDE INVESTORS,
a California limited partnership
 
RACKABLE SYSTEMS, INC.,
a Delaware corporation
 
 
 
By:     RENCO PROPERTIES I
 
By: _____________________________

 
Title: ____________________________
By:     RENCO PROPERTIES, INC.
 
 
a California corporation
 
By: _____________________________
Its: General Partner
 
Title: ____________________________
 
 
 
By: ____________________________
 
 
Title: ___________________________
 
 
 
 
 
By: ____________________________
 
 
Title: ___________________________
 
 
 
 
 
Date: __________________________________
 
Date: ________________________________
If Tenant is a CORPORATION, the authorized officers must sign on behalf of the corporation and indicate the capacity in which they are signing. This Lease must be executed by the chairman of the board, president or vice president, and the secretary, assistant secretary, the chief financial officer or assistant treasurer, unless the bylaws or a resolution of the board of directors shall

1003283 v5/SF
29 .

otherwise provide, in which event a certified copy of the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease.


1003283 v5/SF
30 .


FIRST AMENDMENT TO LEASE
Rackable Systems, Inc.


THIS FIRST AMENDMENT TO LEASE (“Amendment”) dated for reference purposes as of March 1, 2007, is made to that Industrial Space Lease signed by Landlord and Tenant as of November 1, 2006, (the “Lease”) by and between Rackable Systems, Inc., Delaware corporation as (“Tenant”), and Renco Bayside Investors, a California limited partnership (“Landlord”), for the lease of space located at 46600 Landing Parkway, Fremont, California (the “Leased Premises’).

The parties hereto agree that the Lease amended, changed and modified by the following provisions, which are hereby added to the Lease:

Unless otherwise expressly provided herein, all terms which are given a special definition by the Lease that are used herein are intended to be used with the definition given to them by the Lease. The provisions of the Lease shall remain in full force and effect except as specifically amended hereby. In the even of any inconsistency between the Lease and this Amendment, the terms of this amendment shall prevail.

Exhibit F of the Lease, Tenant Improvement Work Letter Agreement provides that Tenant may require Landlord to contribute an amount up to eighty five thousand dollars ($85,000.00) for interior improvements requested by Tenant. Tenant shall pay the contractor installing the interior improvements the cost of any items requested by Tenant in excess of this amount. Tenant has requested that Landlord provide the required funds. In consideration of which the Base Monthly Rent is increased by $1,448.54 per month to the following amounts:

1.1 P. Base Monthly Rent

Starting Month
Ending Month
Base Monthly Rent
 
 
 
March 1, 2007
July 31, 2007
$1,448.54
August 1, 2007
February 29, 2008
$14,752.54
March 1, 2008
February 28, 2009
$31,685.54
March 1, 2009
February 28, 2010
$33,701.54
March 1, 2010
February 28, 2011
$35,717.54
March 1, 2011
February 29, 2012
$37,732.54
March 1, 2012
February 28, 2013
39,748,54
March 1, 2013
December 31, 2013
$41,764.54
 
 
 


IN WITNESS WHEREOFF, Landlord and Tenant have executed this First Amendment To Lease with the intent to be legally bound thereby, to be effective as of the date the second party signs this First Amendment to Lease.

AS LANDLORD:
AS TENANT:
 
 
RENCO BAYSIDE INVESTORS,
a California limited partnership

By: RENCO PROPERTIES IX
   a California general partnership

   By: RENCO PROPERTIES, INC.
      A California corporation
   Its: General Partner


   By:                

   Title:                
RACKABLE SYSTEMS, INC.,
a Delaware corporation

By:                   

Title:                   


By:                   

Title                   





Date:                   
 
 
Date:                


31687563_1


Silicon Graphics International Corp.
Stock Unit Grant Notice
(2005 Equity Incentive Plan)
Silicon Graphics International Corp. (the “ Company ”), pursuant to Section 7(c) of the Company's 2005 Equity Incentive Plan (the “ Plan ”), hereby awards to Participant a Stock Unit Award covering the number of stock units (the “ Stock Units ”) set forth below (the “ Award ”). This Award shall be evidenced by a Stock Unit Award Agreement (the “ Award Agreement ”). This Award is subject to all of the terms and conditions as set forth herein and in the applicable Award Agreement and the Plan, each of which are attached hereto and incorporated herein in their entirety.
Participant:      %%FIRST_NAME%-%
Date of Grant:      %%OPTION_DATE%-%
Vesting Commencement Date:      %%VEST_BASE_DATE%%
Number of Stock Units:      %%TOTAL_SHARES_GRANTED%-%
Payment for Common Stock:      Participant's services to the Company

Vesting Schedule :          [Time-based or performance-based.]
Special Tax Withholding Right:
 
In its discretion, the Board may permit or require you to direct the Company (x) (i) to withhold, from shares otherwise issuable upon vesting of the Award, a portion of those shares with an aggregate fair market value equal to the amount of the applicable withholding taxes or (ii) to withhold from proceeds of the sale of shares of Common Stock acquired upon settlement of the Award either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf pursuant to this authorization without further consent), and (y) to make a cash payment equal to such fair market value directly to the appropriate taxing authorities, as provided in Section 10 of the Award Agreement.
Delivery Schedule : Delivery of one share of Common Stock for each Stock Unit which vests shall occur on the applicable vesting date, provided that delivery may be delayed as provided in Section 3 of the Award Agreement.
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Grant Notice, the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Grant Notice, the Award Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the award of the Stock Units and the underlying Common Stock and supersede all prior oral and written agreements on that subject with the exception of Stock Awards previously granted and delivered to Participant under the Plan.
When you accept this restricted stock unit grant, you and the Company agree that these units are granted under and governed by the terms and conditions of Silicon Graphics International Corps' 2005 Equity Incentive Plan and the Stock Unit Award Agreement which are available for viewing online and are made a part of this document. Hard copies of the Plan and Agreement are available upon request.




SILICON GRAPHICS INTERNATIONAL CORP.
2005 EQUITY INCENTIVE PLAN
STOCK UNIT AWARD AGREEMENT

Pursuant to the Stock Unit Grant Notice (“ Grant Notice ”) and this Stock Unit Award Agreement (“ Agreement ”), Silicon Graphics International Corp. (the “ Company ”) has awarded you a Stock Unit Award pursuant to Section 7(c) of the Company’s 2005 Equity Incentive Plan (the “ Plan ”) for the number of Stock Units as indicated in the Grant Notice (collectively, the “ Award ”). Defined terms not explicitly defined in this Agreement but defined in the Plan shall have the same definitions as in the Plan. Subject to adjustment and the terms and conditions as provided herein and in the Plan, each Stock Unit shall represent the right to receive one (1) share of Common Stock.
The details of your Award, in addition to those set forth in the Grant Notice, are as follows.
1. NUMBER OF STOCK UNITS AND SHARES OF COMMON STOCK. The number of Stock Units in your Award is set forth in the Grant Notice.
(a)      The number of Stock Units subject to your Award and the number of shares of Common Stock deliverable with respect to such Stock Units may be adjusted from time to time for Capitalization Adjustments as described in Section 11(a) of the Plan. You shall receive no benefit or adjustment to your Award with respect to any cash dividend or other distribution that does not result in a Capitalization Adjustment pursuant to Section 11(a) of the Plan; provided, however, that this sentence shall not apply with respect to any shares of Common Stock that are delivered to you in connection with your Award after such shares have been delivered to you.
(b)      Any additional Stock Units, shares of Common Stock, cash or other property that becomes subject to the Award pursuant to this Section 1 shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on transferability, and time and manner of delivery as applicable to the other Stock Units and Common Stock covered by your Award.
(c)      Notwithstanding the provisions of this Section 1, no fractional Stock Units or rights for fractional shares of Common Stock shall be created pursuant to this Section 1. The Board shall, in its discretion, determine an equivalent benefit for any fractional Stock Units or fractional shares that might be created by the adjustments referred to in this Section 1.
2.      VESTING . The Stock Units shall vest, if at all, as provided in the Vesting Schedule set forth in your Grant Notice and the Plan, provided that vesting shall cease upon the termination of your Continuous Service.
3.      DELIVERY OF SHARES OF COMMON STOCK . Subject to the provisions of this Agreement and the Plan, in the event one or more Stock Units vests, the Company shall deliver to you one (1) share of Common Stock for each Stock Unit that vests on the applicable vesting date. However, if a scheduled delivery date falls on a date that is not a business day, such delivery date shall instead fall on the next following business day. Notwithstanding the foregoing, in the event that you are subject to the Company’s Policy Regarding Stock Trading by Officers, Directors and Employees (or any successor policy) and any shares covered by your Award are scheduled to be




delivered on a day (the “ Original Delivery Date ”) that does not occur during a “window period” applicable to you as determined by the Company in accordance with such policy, then such shares shall not be delivered on such Original Delivery Date and shall instead be delivered on the earlier to occur of the following: (i) the first day of the next “window period” applicable to you pursuant to such policy; or (ii) the day that is sixty (60) days after the Original Delivery Date. The form of such delivery ( e.g. , a stock certificate or electronic entry evidencing such shares) shall be determined by the Company.
4.      PAYMENT BY YOU . This Award was granted in consideration of your services for the Company. Subject to Section 10 below, except as otherwise provided in the Grant Notice, you will not be required to make any payment to the Company (other than your past and future services for the Company) with respect to your receipt of the Award, vesting of the Stock Units, or the delivery of the shares of Common Stock underlying the Stock Units.
5.      SECURITIES LAW COMPLIANCE . You may not be issued any Common Stock under your Award unless the shares of Common Stock are either (i) then registered under the Securities Act, or (ii) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other applicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such receipt would not be in material compliance with such laws and regulations.
6.      RESTRICTIVE LEGENDS. The Common Stock issued under your Award shall be endorsed with appropriate legends, if any, determined by the Company.
7.      TRANSFER RESTRICTIONS. Prior to the time that shares of Common Stock have been delivered to you, you may not transfer, pledge, sell or otherwise dispose of the shares in respect of your Award. For example, you may not use shares that may be issued in respect of your Stock Units as security for a loan, nor may you transfer, pledge, sell or otherwise dispose of such shares. This restriction on transfer will lapse upon delivery to you of shares in respect of your vested Stock Units. Your Award is not transferable, except by will or by the laws of descent and distribution. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to receive any distribution of Common Stock pursuant to this Agreement.
8.      AWARD NOT A SERVICE CONTRACT . Your Award is not an employment or service contract, and nothing in your Award shall be deemed to create in any way whatsoever any obligation on your part to continue in the service of the Company or any Affiliate, or on the part of the Company or any Affiliate to continue such service. In addition, nothing in your Award shall obligate the Company or any Affiliate, their respective stockholders, boards of directors or employees to continue any relationship that you might have as an Employee or Consultant of the Company or any Affiliate.
9.      UNSECURED OBLIGATION . Your Award is unfunded, and even as to any Stock Units which vest, you shall be considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue Common Stock pursuant to this Agreement. You shall




not have voting or any other rights as a stockholder of the Company with respect to the Common Stock acquired pursuant to this Agreement until such Common Stock is issued to you pursuant to Section 3 of this Agreement. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company with respect to the Common Stock so issued. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other person.
10.      WITHHOLDING OBLIGATIONS.
(a)      On or before the time you receive a distribution of Common Stock pursuant to your Award, or at any time thereafter as requested by the Company, you hereby authorize any required withholding from the Common Stock issuable to you and otherwise agree to make adequate provision in cash for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any Affiliate which arise in connection with your Award (the “ Withholding Taxes ”). In this regard, you authorize the Company or any Affiliate, at the direction and discretion of the Board and pursuant to such procedures as it may specify from time to time and to limitations of local law, to satisfy the Withholding Taxes in whole or in part (without limitation) by any one or a combination of the following: (i) your payment of a cash amount; (ii) by withholding from your wages or other cash compensation paid to you by the Company or any Affiliate; or (iii) by withholding shares of Common Stock with a Fair Market Value equal to the amount of such Withholding Taxes or (iv) withholding from proceeds of the sale of shares of Common Stock acquired upon settlement of the Award either through a voluntary sale or through a mandatory sale arranged by the Company (on your behalf pursuant to this authorization without further consent); or (v) by any other arrangement approved by the Board, and under such rules as may be established by the Board in compliance with the Company’s Policy Regarding Stock Trading by Officers, Directors and Employees (or any successor policy), if applicable; provided, however , that for subsections (iii) - (v) above, if applicable, the number of such shares of Common Stock so withheld shall not exceed the amount necessary to satisfy the Company’s required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax purposes, including payroll taxes, that are applicable to supplemental taxable income.
(b)      Unless the tax withholding obligations of the Company and/or any Affiliate are satisfied, the Company shall have no obligation to deliver to you any Common Stock.
(c)      In the event the Company’s obligation to withhold arises prior to the delivery to you of Common Stock or it is determined after the delivery of Common Stock to you that the amount of the Company’s withholding obligation was greater than the amount withheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold the proper amount.
11.      NOTICES . Any notices provided for in your Award or the Plan shall be given in writing to each of the other parties hereto and shall be deemed effectively given on the earlier of (i) the date of personal delivery, including delivery by express courier, or (ii) the date that is five (5) days after deposit in the United States Post Office (whether or not actually received by the addressee), by registered or certified mail with postage and fees prepaid, addressed at the following addresses, or at such other address(es) as a party may designate by ten (10) days’ advance written




notice to each of the other parties hereto:
COMPANY:
 
Silicon Graphics International Corp.  
Attn: General Counsel
46600 Landing Parkway
Fremont, California 94538
 
 
 
PARTICIPANT:
 
Your address as on file with the Company at the time notice is given
12.      HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to constitute a part of this Agreement or to affect the meaning of this Agreement.
13.      AMENDMENT. This Agreement may be amended only by a writing executed by the Company and you which specifically states that it is amending this Agreement. Notwithstanding the foregoing, this Agreement may be amended solely by the Company by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to you, and provided that no such amendment adversely affecting your rights hereunder may be made without your written consent. Without limiting the foregoing, the Company reserves the right to change, by written notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such change shall be applicable only to rights relating to that portion of the Award which is then subject to restrictions as provided herein.
14.      MISCELLANEOUS .
(a)      The rights and obligations of the Company under your Award shall be transferable by the Company to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the Company’s successors and assigns.
(b)      You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.
(c)      You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
(d)      This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
(e)      All obligations of the Company under the Plan and this Agreement shall be




binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.
15.      GOVERNING PLAN DOCUMENT . Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan shall control; provided, however , that Section 3 of this Agreement shall govern the timing of any distribution of Common Stock under your Award. The Company shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Board shall be final and binding upon you, the Company, and all other interested persons. No member of the Board shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.
16.      EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Award subject to this Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any Affiliate except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any or all of the employee benefit plans of the Company or any Affiliate.
17.      CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of the state of California without regard to such state’s conflicts of laws rules.
18.      SEVERABILITY . If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.
19.      OTHER DOCUMENTS . You hereby acknowledge receipt or the right to receive a document providing the information required by Rule 428(b)(1) promulgated under the Securities Act. In addition, you acknowledge receipt of the Company’s Policy Regarding Stock Trading by Officers, Directors and Employees .
* * * * *
This Stock Unit Award Agreement shall be deemed to be signed by the Company and the Participant upon the signing by the Participant of the Stock Unit Grant Notice to which it is attached.
SILICON GRAPHICS INTERNATIONAL CORP.




2005 EQUITY INCENTIVE PLAN





AMENDMENT NUMBER ONE TO CREDIT AGREEMENT
This Amendment Number One to Credit Agreement (“ Amendment ”) is entered into as of February 7, 2012, by and among the lenders identified on the signature pages hereof (such lenders, together with their respective successors and permitted assigns, are referred to hereinafter each individually as a “Lender” and collectively as the “ Lenders ”), and WELLS FARGO CAPITAL FINANCE, LLC, a Delaware limited liability company, as administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, “ Agent ”), on the one hand, and SILICON GRAPHICS INTERNATIONAL CORP., a Delaware corporation (“ Parent ”), SILICON GRAPHICS FEDERAL, INC., a Delaware corporation (“ Silicon Federal ”; and together with Parent each individually a “ Borrower ”, and individually and collectively, jointly and severally, the “ Borrowers ”), on the other hand, with reference to the following facts:
A. Borrowers, Agent, and Lenders have previously entered into that certain Credit Agreement, dated as of December 5, 2011 (the “ Agreement ”).
B. Borrowers have requested that Agent and Lenders make certain amendments to the Agreement as provided for and on the conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend and supplement the Agreement as follows:
1. DEFINITIONS . All initially capitalized terms used in this Amendment shall have the meanings given to them in the Agreement unless specifically defined herein.
2. AMENDMENTS .
(a)    Schedule 1.1 of the Agreement is hereby amended by deleting clause (i) of the definitions of “Eligible Accounts” set forth therein in its entirety and replacing it with the following:
(i)    Accounts with respect to an Account Debtor whose total obligations owing to Borrowers exceed 10%, or 40% with respect to a single Account Debtor (which such percentages, as applied to a particular Account Debtor, are subject to reduction by Agent in its Permitted Discretion if the creditworthiness of such Account Debtor deteriorates) of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided, however, that, in each case, the amount of Eligible Accounts that are excluded because they exceed the foregoing percentage shall be determined by Agent based on all of the otherwise Eligible Accounts prior to giving effect to any eliminations based upon the foregoing concentration limit,
(b)    Schedule 1.1 of the Agreement is hereby amended by deleting the definition of “Financial Covenant Period” set forth therein in its entirety and replacing it with the following:
“Financial Covenant Period” means a period that shall commence on any date (the “Commencement Date”) on which (i) Availability plus Qualified Cash is less than (w) $20,000,000 with respect to any date of determination on or before January 31, 2012, (x) $30,000,000 with respect to any date of determination after January 31, 2012 through and including February 29, 2012, (y) $40,000,000 with respect to any date of determination after February 29, 2012 through and including March 31, 2012, or (z) $50,000,000 with respect to any date of determination after March 31, 2012, or (ii) Availability is less than (x) $5,000,000 with respect to any date of determination on or before January 15, 2012, (y) $7,500,000 with respect to any date of determination after January 15, 2012 through and including March 31, 2012, or (z) $15,000,000 with respect to any date of determination after March 31, 2012, or (iii) an Event of Default has occurred, and shall continue until:
(a)    the last day of the second full fiscal quarter after the Commencement Date,
and
(b)    the last day of the fiscal quarter in which (i) Availability plus Qualified Cash is at least $50,000,000, and (ii) Availability is at least $15,000,000, and no Default or Event of Default exists at such time.
3. REPRESENTATIONS AND WARRANTIES . Each Borrower hereby affirms to Agent and Lenders that all of such Borrower’s representations and warranties set forth in the Agreement are true, complete and accurate in all




respects as of the date hereof.
4. NO DEFAULTS . Each Borrower hereby affirms to Agent and Lenders that no Event of Default has occurred and is continuing as of the date hereof.
5. CONDITIONS PRECEDENT . The effectiveness of this Amendment is hereby conditioned upon receipt by Agent of a fully executed copy of (a) this Amendment from each party hereto, and (b) that certain Side Letter of even date herewith, each in form and substance satisfactory to Agent.
6. REAFFIRMATION . Each Borrower hereby acknowledges and reaffirms (i) all of its obligations and duties under the,Loan Documents, and (ii) that the Agent, for the ratable benefit of the Lender Group, has and shall continue to have valid, perfected Liens in the Collateral as provided in the Security Agreement.
7. COSTS AND EXPENSES. Borrowers shall pay to Agent and Lenders all of Agent’s and Lenders’ out-of-pocket costs and expenses (including, without limitation, the fees and expenses of its counsel, which counsel may include any local counsel deemed necessary, search fees, filing and recording fees, documentation fees, appraisal fees, travel expenses, and other fees) arising in connection with the preparation, execution, and delivery of this Amendment and all related documents.
8. LIMITED EFFECT. In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Agreement, the terms and provisions of this Amendment shall govern. In all other respects, the Agreement, as amended and supplemented hereby, shall remain in full force and effect.
9. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute but one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. This Amendment is a Loan Document and is subject to all the terms and conditions, and entitled to all the protections, applicable to Loan Documents generally.

[ remainder of page left blank intentionally; signatures to follow ]
2





IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above.



SILICON GRAPHICS INTERNATIONAL CORP.,
a Delaware corporation



By:     /s/ James Wheat
Title:    Chief Financial Officer    


SILICON GRAPHICS FEDERAL, INC.,
a Delaware corporation


By:     /s/ James H. Brinker
Title:    President


WELLS FARGO CAPITAL FINANCE, LLC
a Delaware limited liability company, as Agent and as a
Lender


By:     /s/ Amelie Yehros    
Title:    Senior Vice President


























S-1


Amendment Number One




AMENDMENT NUMBER TWO TO CREDIT AGREEMENT
This Amendment Number Two to Credit Agreement (“ Amendment ”) is entered into as of March 30, 2012, by and among the lenders identified on the signature pages hereof (such lenders, together with their respective successors and permitted assigns, are referred to hereinafter each individually as a “ Lender ” and collectively as the “ Lenders ”), and WELLS FARGO CAPITAL FINANCE, LLC, a Delaware limited liability company, as administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, “ Agent ”), on the one hand, and SILICON GRAPHICS INTERNATIONAL CORP., a Delaware corporation (“ Parent ”), SILICON GRAPHICS FEDERAL, INC., a Delaware corporation (“ Silicon Federal ”; and together with Parent each individually a “ Borrower ”, and individually and collectively, jointly and severally, the “ Borrowers ”), and the undersigned Guarantor, on the other hand, with reference to the following facts:
A.    Borrowers, Agent, and Lenders have previously entered into that certain Credit Agreement, dated as of December 5, 2011 (as amended from time to time, the “ Agreement ”).
B.    Borrowers have requested that Agent and Lenders make certain amendments to the

Agreement as provided for and on the conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend and supplement the Agreement as follows:
1.      DEFINITIONS . All initially capitalized terms used in this Amendment shall have the meanings given to them in the Agreement unless specifically defined herein.
2.      AMENDMENTS .
(a)     Schedule 1.1 of the Agreement is amended by deleting the definition of “Borrowing Base” set forth therein in its entirety and replacing it with the following:
“ Borrowing Base ” means, as of any date of determination, the result of:
(a)    the sum of (i) 85% of the amount of Eligible Domestic Accounts, plus (ii) the lesser of (1) $5,000,000 and (2) 85% of the amount of Eligible Foreign Accounts, less (iii) the amount, if any, of the Dilution Reserve, plus
(b)    the lowest of
(i)    the greater of (1) $15,000,000, or (2) the lesser of (x) $20,000,000 and (y) 100% of the amount of availability created by clause (a) above,
(ii)    50% of the value (calculated at the lower of cost or market
 


1


on a basis consistent with Borrowers’ historical accounting practices) of Eligible Inventory, and
(iii)    85% times the most recently determined Net Liquidation Percentage times the value (calculated at the lower of cost or market on a basis consistent with Borrowers’ historical accounting practices) of Borrowers’ Eligible Inventory, minus
(c)    the aggregate amount of reserves, if any, established by Agent under Section 2.1(c) of the Agreement.
(b)     Schedule 1.1 of the Agreement is amended by deleting the definition of “Eligible Accounts” set forth therein in its entirety and replacing it with the following:
“ Eligible Accounts ” means, collectively, Eligible Domestic Accounts and Eligible Foreign Accounts.
(c)     Schedule 1.1 of the Agreement is amended by adding the following definition of “Eligible Domestic Accounts” as set forth below in proper alphabetical:
“ Eligible Domestic Accounts ” means those Accounts created by any Borrower in the ordinary course of its business, that arise out of such Borrower’s sale of goods or rendition of services, that comply with each of the representations and warranties respecting Eligible Accounts made in the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the excluding criteria set forth below; provided , however , that such criteria may be revised from time to time by Agent in Agent’s Permitted Discretion to address the results of any audit performed by Agent from time to time after the Closing Date. In determining the amount to be included, Eligible Domestic Accounts shall be calculated net of customer deposits, finance charges and unapplied cash. Eligible Domestic Accounts shall not include the following:
(a)    Accounts that the Account Debtor has failed to pay within the earlier of (i) 90 days of original invoice date or (ii) 60 days of due date, and Accounts with selling terms of more than 60 days,
(b)    Accounts owed by an Account Debtor (or its Affiliates) where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above,
(c)    Accounts with respect to which the Account Debtor is an Affiliate of a Borrower or an employee or agent of a Borrower or any Affiliate of a Borrower,
(d)    Accounts arising in a transaction wherein goods are samples, placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, COD, try and buy, or any other terms by reason of which the payment by the Account Debtor may be conditional ( provided , that Accounts arising out of the sale of Shipped Goods shall not be rendered ineligible solely as a result of this paragraph (d)),


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(e)    Accounts that are not payable in Dollars or Canadian Dollars,
(f)        Accounts with respect to which the Account Debtor either (i) does not maintain its chief executive office in the United States or Canada, or (ii) is not organized under the laws of the United States, Canada, or any state or province thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit reasonably satisfactory to Agent (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Agent and is directly drawable by Agent, or (z) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, reasonably satisfactory to Agent; provided , however , that clause (iii) above shall not apply to Canada or any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof so long as (y)

Agent’s Lien in such Accounts is perfected under applicable Canadian law satisfactory to Agent and its counsel, and (z) there is no Canadian law equivalent (including any equivalent law under any state, province, municipality, or other political subdivision thereof) to the Assignment of Claims Act, 31 USC §3727).
(g)    Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which Borrowers have complied, to the reasonable satisfaction of Agent, with the Assignment of Claims Act, 31 USC §3727), or (ii) any state of the United States,
(h)    Accounts with respect to which the Account Debtor is a creditor of a Borrower, is owed services from Parent or its Subsidiaries in respect of prepaid

maintenance contracts or accrued warranty claims, or has asserted a right of setoff (including coop advertising and credit memos), or has disputed its obligation to pay all or any portion of the Account, to the extent of such prepayment, warranty accrual, claim, right of setoff, or dispute,
(i)        Accounts with respect to an Account Debtor whose total obligations owing to Borrowers exceed 10%, or 20% with respect to each of the Account Debtors identified by Borrowers and approved in writing by Agent in its Permitted Discretion, or 40% with respect to a single Account Debtor identified by Borrowers and approved in writing by Agent in its Permitted Discretion (which such percentages, as applied to a particular Account Debtor, are subject to reduction by Agent in its Permitted Discretion if the creditworthiness of such Account Debtor deteriorates) of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided , however , that, in each case, the amount of Eligible Accounts that are excluded because they exceed the foregoing percentage shall be determined by Agent based on all of the otherwise Eligible Accounts prior to giving


3


effect to any eliminations based upon the foregoing concentration limit,
(j)        Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone out of business, or as to which a Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor,
(k)    Accounts, the collection of which, Agent, in its Permitted Discretion, believes to be doubtful by reason of the Account Debtor’s financial condition,
(1)    Accounts that are not subject to a valid and perfected first priority Agent’s Lien,
(m)    Accounts with respect to which (i) the goods giving rise to such Account have not been shipped and billed to (and accepted by) the Account Debtor, or (ii) the services giving rise to such Account have not been performed and billed to the Account Debtor,
(n)    Accounts with respect to which the Account Debtor is a Sanctioned Person or Sanctioned Entity,
(o)    Accounts acquired in connection with a Permitted Acquisition, until the completion of a field examination of such Accounts, in each case, reasonably satisfactory to Agent (which field examination may be conducted prior to the closing of such Permitted Acquisition), or
(p)    Accounts that represent the right to receive progress payments or other advance billings that are due prior to the completion of performance by Borrowers of the subject contract for goods or services.
(d)     Schedule 1.1 of the Agreement is amended by adding the following definition of “Eligible Foreign Accounts” as set forth below in proper alphabetical:
“ Eligible Foreign Accounts ” means any Account (a) meeting all of the criteria set forth in the definition of Eligible Domestic Accounts (except for the fact that they meet the conditions set forth in either clause (i) or clause (ii) of paragraph (f) thereof), (b) billed and collected by a Borrower in the United States, (c) in respect of an Account Debtor (x) whose has a corporate long term credit rating of at least BBB- by S&P and Baa3 by Moody’s, or (y) identified by Borrowers and approved in writing by Agent in its Permitted Discretion, and (d) that the Agent determines in its Permitted Discretion shall be treated as an “Eligible Foreign Account” for purposes hereof.
3.      REPRESENTATIONS AND WARRANTIES . Each Borrower hereby affirms to Agent and Lenders that all of such Borrower’s representations and warranties set forth in the Agreement are true, complete and accurate in all material respects (except that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof) as of the


4


date hereof (except to the extent that such representations and warranties relate solely to an earlier date).
4.      NO DEFAULTS . Each Borrower hereby affirms to Agent and Lenders that no Event of Default has occurred and is continuing as of the date hereof.
5.      CONDITIONS PRECEDENT . The effectiveness of this Amendment is hereby conditioned upon receipt by Agent of a fully executed copy of (a) this Amendment from each party hereto, and (b) that certain Side Letter of even date herewith, each in form and substance satisfactory to Agent.
6.      REAFFIRMATION . Each Borrower hereby acknowledges and reaffirms (i) all of its obligations and duties under the Loan Documents, and (ii) that the Agent, for the ratable benefit of the Lender Group, has and shall continue to have valid, perfected Liens in the Collateral as provided in the Security Agreement.
7.      COSTS AND EXPENSES . Borrowers shall pay to Agent and Lenders all of Agent’s and Lenders’ out-of-pocket costs and expenses (including, without limitation, the fees and expenses of its counsel, which counsel may include any local counsel deemed necessary, search fees, filing and recording fees, documentation fees, appraisal fees, travel expenses, and other fees) arising in connection with the preparation, execution, and delivery of this Amendment and all related documents.
8.      LIMITED EFFECT . In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Agreement, the terms and provisions of this Amendment shall govern. In all other respects, the Agreement, as amended and supplemented hereby, shall remain in full force and effect.
9.      COUNTERPARTS; EFFECTIVENESS . This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute but one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. This Amendment is a Loan Document and is subject to all the terms and conditions, and entitled to all the protections, applicable to Loan Documents generally.
10.      COUNTERPARTS; EFFECTIVENESS . This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute but one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. This Amendment is a Loan Document and is subject to all the terms and conditions, and entitled to all the protections, applicable to Loan Documents generally.
11.      REAFFIRMATION OF GUARANTY . The undersigned Guarantor hereby reaffirms and agrees that: (a) the Guaranty and the Loan Documents to which it is a party shall remain in full force and effect (including, without limitation, any security interests granted therein) after this Amendment is consummated as if consummated contemporaneously therewith; (b) nothing in the Loan Documents to which it is a party obligates Agent or the Lenders to notify the undersigned of any changes in the financial accommodations made available to the Loan Parties or to seek reaffirmations of the Loan Documents; and (c) no requirement to so notify either the undersigned or to seek the undersigned’s reaffirmations in the future shall be implied by this Section 10 .


5


[ remainder of page left blank intentionally; signatures to follow ]


6

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set

forth above.
SILICON GRAPHICS INTERNATIONAL CORP.,
a Delaware Corporation
By:     /s/ James Wheat
Title: Chief Financial Officer    

SILICON GRAPHICS FEDERAL, INC .,
a Delaware corporation
By:     /s/ James H. Brinker
Title: President    

SGI INTERNATIONAL, INC .,
a Delaware corporation
By:     /s/ James Wheat
Title: Chief Financial Officer    

WELLS FARGO CAPITAL FINANCE, LLC,
a Delaware limited liability company, as Agent and as a Lender
By:     /s/ Amelie Yehros
Title: Senior Vice President    


S-1 Amendment No. 2


AMENDMENT NUMBER THREE TO CREDIT AGREEMENT
This Amendment Number Three to Credit Agreement (“ Amendment ”) is entered into as of March 30, 2012, by and among the lenders identified on the signature pages hereof (such lenders, together with their respective successors and permitted assigns, are referred to hereinafter each individually as a “ Lender ” and collectively as the “ Lenders ”), and WELLS FARGO CAPITAL FINANCE, LLC, a Delaware limited liability company, as administrative agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, “ Agent ’’), on the one hand, and SILICON GRAPHICS INTERNATIONAL CORP., a Delaware corporation (“ Parent ”), SILICON GRAPHICS FEDERAL, INC., a Delaware corporation (“ Silicon Federal ”); and together with Parent each individually a “ Borrower ”, and individually and collectively, jointly and severally, the ‘‘ Borrowers ’’), and the undersigned Guarantor, on the other hand, with reference to the following facts:
A.     Borrowers, Agent, and Lenders have previously entered into that certain Credit Agreement, dated as of December 5, 2011 (as amended from time to time, the “ Agreement ”).
B.     Borrowers have requested that Agent and Lenders make certain amendments to the Agreement as provided for and on the conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend and supplement the Agreement as follows:
1.     DEFINITIONS . All initially capitalized terms used in this Amendment shall have the meanings given to them in the Agreement unless specifically defined herein.
2.     AMENDMENTS,
(a)    Schedule 1.1 or the Agreement is amended by deleting the definition of the “Fixed Charge Coverage Ratio” set forth therein in its entirety and replacing it with the following:
‘‘ Fixed Charge Coverage Ratio ” means, with respect to Parent and its Subsidiaries for any 12 month period ending on the measurement date (other than the measurement date ending March 30, 2012, for which such determination shall be for the 9 month period ending on such measurement date) the ratio of (a) EBITDA for such period minus Capital Expenditures made (to the extent not already incurred in a prior period) or incurred during such period, to (b) Fixed Charges for such period.
(b)    Schedule 1.1 of the Agreement is amended by deleting the definition of “EBITDA” set forth therein in its entirety and replacing it with the following:
“ EBIDTA ” means, with respect to any fiscal period, Parent’s consolidated net earnings (or loss), minus extraordinary gains, interest income, plus non-cash extraordinary losses, non-cash stock compensation expenses, interest expense, income taxes, fees and expenses incurred in connection with the entry into this Agreement, expenses incurred in connection with Permitted Acquisitions, cash expenses related to merger and acquisition transactions and restructuring not to exceed $1,000,000 in the aggregate per fiscal year, non-cash realized losses and impairment of investments, depreciation and amortization for such period, and actual restructuring expenses, not to exceed a maximum of $17,000.000, incurred during the period of April 1, 2012 through June 28, 2013 in connection with the European Restructure, in each case, determined on a consolidated basis in accordance with GAAP. For the purposes of calculating EBITDA for any period of 4 consecutive fiscal quarters (each, a “ Reference Period ”), (a) if at any time during such

1



Reference Period (and after the Closing Date), Parent or any of its their Subsidiaries shall have made a Permitted Acquisition, EBITDA for such Reference Period shall be calculated after giving pro forma effect thereto (including pro forma adjustments arising out of events which are directly attributable to such Permitted Acquisition, are factually supportable, and are expected to have a continuing impact, in each case to be mutually and reasonably agreed upon by Parent and Agent) or in such other manner acceptable to Agent as if any such Permitted Acquisition or adjustment occurred on the first day of such Reference Period, and (b) EBITDA for the fiscal quarter ended March 25, 2011, shall be deemed to be $982,000; (c) EBITDA for the fiscal quarter ended June 24, 2011, shall be deemed to be negative $5,397,000, and (d) EBITDA for the fiscal quarter ending September 30, 2011 and each fiscal quarter thereafter, shall be based on actual EBITDA.
(c)    Schedule 1.1 of the Agreement is amended by adding the following definition of “European Restructure” as set forth below in proper alphabetical:
“European Restructure ” means Parent’s restructure or its European operations, as publically announced March 21, 2012, to reduce its and its Subsidiaries’ operating expenses in Europe.
(d)    The table set forth in Section 7 or the Agreement is amended by deleting such table in its entirety and replacing it with the following:
Applicable Ratio
Applicable Period
1.10:1.00
For the 12 month period ending December 31, 2011
1.10:1.00
For the 9 month period ending March 30, 2012
1.10:1.00
For the 12 month period ending June 30, 2012 and for each 12 month period ending as of the last day of
each quarter thereafter

(e)    Clause (a) set forth in Schedule 5.1 of the Agreement is amended by deleting such clause in its entirety and replacing it with the following:
“(a) an unaudited consolidated balance sheet and income statement covering Parent’s and its Subsidiaries’ operations during such period.”
3.     REPRESENTATIONS AND WARRANTIES . Each Borrower hereby affirms to Agent and Lenders that all of such Borrower’s representations and warranties set forth in the Agreement are true, complete and accurate in all material respects (except that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof) as of the date hereof (except to the extent that such representations and warranties relate solely to an earlier date).
4.     NO DEFAULTS . Each Borrower hereby affirms to Agent and Lenders that no Event of Default has occurred and is continuing as of the date hereof.
5.     CONDITIONS PRECEDENT . The effectiveness of this Amendment is hereby conditioned upon receipt by Agent of a fully executed copy of this Amendment from each party hereto.

2



6.     REAFFIRMATION . Each Borrower hereby acknowledges and reaffirms (i) all of its obligations and duties under the Loan Documents, and (ii) that the Agent, for the ratable benefit of the Lender Group, has and shall continue to have valid, perfected Liens in the Collateral as provided in the Security Agreement.
7.     COSTS AND EXPENSES . Borrowers shall pay to Agent and Lenders all of Agent’s and Lenders’ out-of-pocket costs and expenses (including, without limitation, the fees and expenses of its counsel, which counsel may include any local counsel deemed necessary, search fees, filing and recording fees, documentation fees, appraisal fees, travel expenses, and other fees) arising in connection with the preparation, execution, and delivery of this Amendment and all related documents.
8.     LIMITED EFFECT . In the event of a conflict between the terms and provisions of this Amendment and the terms and provisions of the Agreement, the terms and provisions of this Amendment shall govern. In all other respects, the Agreement, as amended and supplemented hereby, shall remain in full force and effect.
9.     COUNTERPARTS; EFFECTIVENESS . This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed and delivered shall be deemed to be an original. All such counterparts, taken together, shall constitute but one and the same Amendment. This Amendment shall become effective upon the execution of a counterpart of this Amendment by each of the parties hereto. This Amendment is a Loan Document and is subject to all the terms and conditions, and entitled to all the protections, applicable to Loan Documents generally.
10.     REAFFIRMATION OF GUARANTY . The undersigned Guarantor hereby reaffirms and agrees that: (a) the Guaranty and the Loan Documents to which it is a party shall remain in full force and effect (including, without limitation, any security interests granted therein) after this Amendment is consummated as if consummated contemporaneously therewith; (b) nothing in the Loan Documents to which it is a party obligates Agent or the Lenders to notify the undersigned of any changes in the financial accommodations made available to the Loan Parties or to seek reaffirmations of the Loan Documents; and (c) no requirement to so notify either the undersigned or to seek the undersigned’s reaffirmations in the future shall be implied by this Section 10 .
[ remainder of page left blank intentionally; signatures to follow ]


3


IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first set forth above.
SILICON GRAPHICS INTERNATIONAL CORP.,
a Delaware corporation


By:     /s/ James Wheat
Title:    Chief Financial Officer


SILICON GRAPHICS FEDERAL, INC.,
a Delaware corporation


By:     /s/ James H. Brinker
Title:    President – SGI Federal


SGI INTERNATIONAL, INC.,
a Delaware corporation

By:     /s/ James Wheat
Title:    Chief Financial Officer

WELLS FARGO CAPITAL FINANCE, LLC,
a Delaware limited liability company, as Agent and as a Lender


By:     /s/ Amelie Yehros
Title:    Senior Vice President



Exhibit 10.41

Silicon Graphics International Corp.
SUMMARY OF NON-EMPLOYEE DIRECTOR COMPENSATION

The non-employee directors of Silicon Graphics International Corp. (“ SGI ”) are compensated for serving on SGI’s Board of Directors (the “ Board ”). SGI does not pay employees who serve on the Board any additional compensation for Board membership. The compensation payable to SGI’s non-employee directors consists of cash compensation and equity awards. SGI also reimburses non-employee directors for out-of-pocket expenses for travel to Board meetings and committee meetings.
Cash. SGI pays non-employee directors the following annual retainers for service on the Board and committees of the Board:

Annual Retainer for Board Members:
45,000

 
Annual Retainer for Committee Positions:
 
Audit Committee Chairperson:
24,000

 
Other Audit Committee members:
10,000

 
Compensation Committee Chairperson:
15,000

 
Other Compensation Committee members:
8,000

 
Nominating Committee Chairperson:
10,000

 
Other Nominating Committee members:
5,000

 
Annual Retainer for Non-Employee Chairman of the Board:
25,000

 

The retainers and meeting fees are paid in arrears in four equal payments at our regularly scheduled quarterly Board meetings.

Equity. Non-employee directors are eligible to receive equity awards upon appointment to the Board under the 2005 Equity Incentive Plan (the “ Plan ”) and annual equity awards at the Board’s discretion.

Initial Grants to Non-Employee Directors —new non-employee directors receive an initial stock option for 20,000 shares, vesting in 48 equal monthly installments over the four-year period measured from the grant date, subject to Continuous Service (as defined in the Plan) through each vesting date.

Annual Grants to Non-Employee Directors —each re-elected non-employee director receives an annual stock option for 15,000 shares, vesting on the earlier of (a) the next annual meeting of stockholders and (b) one year from the date of grant.



These cash compensation amounts and equity grants are reviewed by the Board periodically and adjustments are made as deemed appropriate.

31691151_3
Exhibit 10.42

Fiscal 2013 Performance Results Bonus

On August 8, 2012, the Compensation Committee of the Board of Directors of the Company approved design changes to the Performance Results Bonus for fiscal 2013 (the “2013 PRB”), previously known as the short term incentive plan, as the Company’s performance-based incentive plan.
The 2013 PRB is an integral part of compensation for our employees that are at the level of director or above, which includes our executive officers. The 2013 PRB provides that quarterly bonuses are payable, subject to the Compensation Committee’s discretion, based upon (1) achievement of certain revenue and non-GAAP gross margin performance targets established by the Compensation Committee, and (2) target bonus amounts for each eligible individual established by the Compensation Committee. The Compensation Committee established annual target bonus amounts, to be determined and paid on a quarterly basis, for the 2013 PRB, which include bonus amounts payable to the Company’s named executive officers (as defined in Item 402(a)(3) of Regulation S-K promulgated by the Securities and Exchange Commission).
Quarterly bonus amounts under the 2013 PRB will be subject to the Compensation Committee’s discretion, and will depend on the specific levels of actual revenue and non-GAAP gross margin attained. Such quarterly bonuses would be “earned” and payable if the Company’s non-GAAP gross margin is within a range of respective percentages that includes a threshold requirement of 75% and a maximum target of 125%, and revenue is within a range of respective percentages that includes a threshold requirement of 90% and a maximum target of 110%. The minimum threshold payout starts at 50%, with a maximum payout cap of 150%. Failure to meet the threshold requirement would result in no quarterly bonus amount being paid.
Further, at the end of FY2013, the Compensation Committee will compare the aggregate percentage of all quarterly bonus amounts paid during the fiscal year, with the actual revenue and non-GAAP gross margin attained for the entire 2013 fiscal year, and determine whether a “true-up” payment is necessary to prevent the actual quarterly payouts from negatively impacting the annual payout had the plan been measured for the full year.





Exhibit 21.1
SUBSIDIARIES OF SILICON GRAPHICS INTERNATIONAL CORP.

Silicon Graphics (Canada) Inc.
Silicon Graphics Limited (Canada)
Silicon Graphics International, LTD (Cayman Islands)
Silicon Graphics International Corp. (Delaware)
Silicon Graphics Federal, Inc. (Delaware)
SGI International, Inc. (Delaware)
Rackable Systems Limited (Ireland)
Rackable Asia Pacific Ltd. (Hong Kong)
Rackable Systems Holding Corp. (Delaware)
Rackable Systems Canada Acquisition ULC (Alberta)
Terrascale Technologies ULC (Alberta)
Rackable Systems Technology (Shanghai) Co., Ltd (PRC)
Rackable Systems Holding Corp. (Delaware)
Silicon Graphics Pty Ltd. (Australia)
SGI Japan, Ltd. (Japan)
Silicon Graphics Computer Engineering & Technology (China) Co., Ltd (Beijing)
Silicon Graphics Limited (Hong Kong)
Silicon Graphics Systems (India) Limited
Silicon Graphics Sdn Bhd (Malaysia)
Silicon Graphics Limited (New Zealand)
Silicon Graphics Pte Ltd. (Singapore)
Korea Silicon Graphics Ltd (South Korea)
Silicon Graphics Limited (Taiwan)
Silicon Graphics SA/NV (Belgium)
Alias/Wavefront NV (Belgium)
Silicon Graphics s.r.o (Czech Republic)
Silicon Graphics A/S (Denmark)
Silicon Graphics SA (France)
Silicon Graphics GmbH (Germany)
Silicon Graphics AE (Greece)
Silicon Graphics Computer Systems Limited (Israel)
Silicon Graphics Biomedical (1995) Ltd. (Israel)
SGI Research (Israel) Ltd (Israel)
Silicon Graphics SpA (Italy)
Silicon Graphics BV (Netherlands)
Silicon Graphics World Trade BV (Netherlands)
Silicon Graphics Europe Trade BV (Netherlands)
Silicon Graphics A/S (Norway)
Silicon Graphics (Pty) Ltd. (South Africa)
Silicon Graphics SA (Spain)
Silicon Graphics AB (Sweden)
Silicon Graphics S.A. (Switzerland)
Silicon Graphics Finance S.A. (Switzerland) - formerly Silicon Graphics Manufacturing S.A.
Silicon Graphics Trading Sarl (Switzerland)
Silicon Graphics Limited (UK)
Rackable Systems UK Limited (UK)
Silicon Graphics SA (Argentina)
Silicon Graphics Comercio E Servicos Limitada (Brazil)
Silicon Graphics SA (Chile)
Silicon Graphics S.A. de C.V. (Mexico)
Silicon Graphics SA (Venezuela)





Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-180205, 333-173210, 333-165847, 333-160464, 333-150102, 333-125760, 333-131976, 333-132564, 333-135677, 333-137250 and 333-140994 on Form S-8 of our reports dated September 10, 2012, relating to the consolidated financial statements and financial statement schedule of Silicon Graphics International Corp. and its subsidiaries (collectively the “Company”) which report expresses an unqualified opinion and includes an explanatory paragraph relating to the change in the Company's method for recognizing revenue for multiple element arrangements, and the effectiveness of the Company's internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended June 29, 2012.

/s/ DELOITTE & TOUCHE LLP
San Jose, California
September 10, 2012





Exhibit 31.1
CERTIFICATION

I, Jorge L. Titinger, certify that:
1. I have reviewed this annual report on Form 10-K of Silicon Graphics International Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
 
 
/s/ JORGE L. TITINGER
 
 
 
Jorge L. Titinger
CEO and President



Date: September 10, 2012






Exhibit 31.2
CERTIFICATION

I, Robert J. Nikl, certify that:
1. I have reviewed this annual report on Form 10-K of Silicon Graphics International Corp.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
 
 
/s/ ROBERT J. NIKL     
 
 
 
Robert J. Nikl
Chief Financial Officer



Date: September 10, 2012





Exhibit 32.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. ¤1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Silicon Graphics International Corp. (the “Company”) for the year ended June 29, 2012 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Jorge L. Titinger, Chief Executive Officer of the Company, and Robert J. Nikl, Chief Financial Officer of the Company, each hereby certifies, to the best of his or her knowledge, pursuant to 18 U.S.C. ¤1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report, to which this Certification is attached as Exhibit 32.1, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 10, 2012

/s/ Jorge L. Titinger
 
/s/ Robert J. Nikl
Jorge L. Titinger
CEO and President
 
Robert J. Nikl
Chief Financial Officer


This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Silicon Graphics International Corp. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934 as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.