Silicon Graphics International Corp - FORM 10-K

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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 24, 2016

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.)

900 North McCarthy Blvd.

Milpitas, California 95035

(Address of principal executive offices, including zip code)

(669) 900-8000

(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.

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(Check one):



Large accelerated filer o	Accelerated filer x	Non-accelerated filer o	Smaller reporting company o

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

As of December 25, 2015, 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 $170,705,362. For purposes of this calculation, shares of common stock held by each officer and director of the Registrant and by each person who is known to own 10% or more of the outstanding common stock of the Registrant have been excluded since such persons may be deemed to be affiliates of the Registrant. Such determination of affiliate status is not necessarily a conclusive determination of affiliate status for other purposes.

As of August 30, 2016, there were 36,518,406 shares of the registrant's common stock outstanding.

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SILICON GRAPHICS INTERNATIONAL CORP.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 24, 2016

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		Page
PART I
Item 1.	Business	2
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	28
Item 2.	Properties	28
Item 3.	Legal Proceedings	29
Item 4.	Mine Safety Disclosures	29

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30
Item 6.	Selected Financial Data	32
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 8.	Financial Statements and Supplementary Data	55
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	99
Item 9A.	Controls and Procedures	99
Item 9B.	Other Information	101

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	102
Item 11.	Executive Compensation	102
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	102
Item 13.	Certain Relationships and Related Transactions, and Director Independence	102
Item 14.	Principal Accounting Fees and Services	102

PART IV
Item 15.	Exhibits and Financial Statement Schedules	103

SIGNATURES		104

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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,” “Accelerate,” “Altix,” “CloudRack,” “CXFS,” “DMF,” "FileTek," “SGI ICE,” “ICE Cube,” "InfiniteData,” “InfiniteStorage,” “LiveARC," “NUMAflex,” “NUMAlink,” “Octane,” "OpenGL,” “Origin,” “Rackable,” “REACT,” “SHMEM,” “StorHouse,” “Supportfolio,” “Trusted Edge,” “SGI UV,” “VizServer,” “XFS,” and the “Silicon Graphics” logo are registered or other 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

SGI is a global leader in high performance solutions for compute, data analytics and data management, that enable customers to accelerate time to discovery, innovation, and profitability. We are focused on helping customers solve their most demanding business and technology challenges.

We develop, market and sell a broad line of low cost, mid-range and high-end scale-out and scale-up servers, enterprise-class storage, differentiating software and designed-to-order solutions for large-scale data center deployments, coupled with global support and highly experienced professional services. SGI solutions are designed to deliver high impact results with lower total cost of ownership and to achieve industry-leading speed, scale and efficiency.

SGI solutions are utilized by scientific, business and government communities to fulfill highly compute-intensive application needs in petascale and exascale environments. Delivering industry-leading computing power and fast and efficient data movement, both within the computing system and to and from large-scale data storage installations, SGI systems enable customers to access, analyze, transform, manage and visualize information in real and near real-time.

Our goal is to accelerate time to results in key High Performance Computing ("HPC") markets, including federal government, defense and strategic systems, weather and climate, physical and life sciences, energy (including oil and gas), aerospace, automotive manufacturing, internet, financial services, education and research institutions and media and entertainment. In the High Performance Data Analytics ("HPDA") market, SGI products allows enterprise customers to achieve greater insight and gain competitive advantage to run their business in real-time with SAP HANA and Oracle® Database In-Memory. These product options enables lines of business to access vital information with up-to-the-moment accuracy, get answers instantly, and operate in real time, at near limitless scale and mission-critical reliability. SGI helps make these SAP HANA and Oracle Database In-Memory insights possible.

SGI achieves competitive differentiation through compute and storage solutions built with innovative architectural advantages utilizing industry standard components and tight integration. By designing for performance, power, density and scalability; optimizing interconnections between layers; and engineering to reduce overhead and accelerate deployment, SGI solutions deliver industry leading speed, scale and efficiency.

SGI has approximately 1,100 employees worldwide, more than 550 granted and pending patents, and over 325 partners. SGI serves over 6,500 customers and sells products and services in about 50 countries through both a direct and indirect sales force, including original equipment manufacturers, system integrators and value added resellers. During fiscal 2016, 2015 and 2014, international revenue was approximately 47%, 40% and 52%, respectively, of our total revenue.

Fiscal Year

Included in this report are our consolidated balance sheets as of June 24, 2016 and June 26, 2015, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the fiscal years ended June 24, 2016 ("fiscal 2016"), June 26, 2015 ("fiscal 2015") and June 27, 2014 ("fiscal 2014").

The Company has a 52 or 53-week fiscal year ending on the last Friday in June. Fiscal years 2016, 2015, and 2014 were all comprised of 52 weeks. Fiscal year 2017 will be comprised of 53 weeks and will end on June 30, 2017.

Segment Information

The Company manages its business primarily as three operating segments, HPC, HPDA and Service. The Company has aggregated the HPC and HPDA operating segments into one reportable Product segment as the HPDA operating segment has not met the quanitative threshold to be reported as a separate reportable segment. As such, the Company reports two reportable segments, Product and Service. 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 our Chief Operating Officer, who functions as our Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the availability of separate financial information.

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A description of the Company's two reportable segments is as follows:

Product—The Product segment is comprised of our compute and storage solutions, which include products from both our HPC and HPDA operating segments. Compute solutions include our scale-out computing, scale-up computing, software and cloud/web solutions. Compute solutions also include integrated third-party hardware and software products that we sell to provide a single source solution for our customers. Our compute solutions are designed to minimize the number and complexity of interconnects for power and data transfer to improve reliability, speed of implementation and serviceability. Storage solutions include both hardware and software offerings to address virtually every type of data storage and management requirement. Our storage solutions are designed to provide extreme scale, broad flexibility, and to minimize the cost to store data.

Service—The Service segment is comprised of customer service support 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 value added services associated with technology consulting, project management and customer education, all of which help our customers realize the full value of their information technology investments.

In fiscal 2014, the Company previously managed its business primarily as three separate business units: Compute, Storage, and Service. In fiscal 2015, the Company combined the Compute and Storage business units into a single Product reportable segment. All periods presented conform to the current reportable segment structure.

The Company's CODM evaluates the performance of its operating segments based on revenue and operating profit (loss). Revenues are generally allocated based on the type of products and services provided to our customers. Operating profit (loss) for each segment includes related cost of sales and operating expenses directly attributable to the segment. A portion of the segments' expenses arise from shared services and infrastructure that the Company provides 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 and other corporate infrastructure expenses. The corporate charges that are directly attributable to the segments are allocated and are reassessed on a periodic 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 profitability of each of the segments is measured after excluding share-based compensation expenses, amortization and impairment of intangibles, restructuring and severance charges, manufacturing transition costs, general and administration charges, other unallocated corporate charges and other items as management does not include this information in its measurement of the performance of the operating segments.

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 23 "Segment Information" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

Customers

Direct sales to various agencies of the United States government, excluding system integrators, accounted for 25%, 21%, and 16% of our revenue in fiscal 2016, 2015 and 2014, respectively. For fiscal 2015, sales to a U.S. government system integrator accounted for 12% of our total revenue.

Information regarding revenue and gross profit by reportable segments and revenue from our customers and by business unit is presented in Note 23 "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

SGI provides a broad line of solutions designed to address the specialized demands of market verticals, enable our customers to run data-intensive applications rapidly, and store data safely and economically. Our core computing and storage components utilize Intel® processors, NVIDIA® graphics processing units ("GPUs") and the Linux® operating system along with SGI-designed innovative data center architectures. Our High Performance Computing ("HPC") solutions, SGI ICE™ XA, Rackable® and SGI UV™ systems, are optimized with HPC software including SGI Management Suite, large-scale provisioning and system health management tools, SGI Performance Suite and HPC performance optimization libraries and tools. Our storage product lines range from entry-level disk arrays to complex storage systems, with innovative technology and hardware, to include the SGI® Modular InfiniteStorage™ platform, SGI DMF™ storage tier virtualization solution and SGI CXFS® file system.

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We design our solutions for optimal performance, quick deployment, efficient operation, high system availability and broad serviceability. Our compute solutions incorporate premium quality components, selected for superior functionality and reliability, and are designed to minimize the number and complexity of interconnects for power and data transfer to improve reliability, speed of implementation and serviceability. Our storage solutions are designed to provide extreme scale, broad flexibility and to minimize management overhead. We also integrate third-party hardware and software products into the compute and storage solutions we sell and provide a single source solution for our customers.

Our products predominantly utilize a software environment based on the industry-standard Linux operating system with comprehensive management tools that include open source software and our own execution, development and administrative utilities. System management is required for supporting management of HPC solutions at large scale while improving system reliability with proactive resolution of system failures. HPC software application development utilizes performance optimized libraries and functionality that enables applications to achieve leading performance results. Investment in relationships with the best-of-breed third-party software vendors and open source solutions for workload management and software development provides a comprehensive, HPC solution for our customers. We have key differentiation in our storage software for managing very large data volumes efficiently and demonstrated ability to reliably store files for decades. We believe 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 group our solution offerings under these main categories: Scale-out Computing, Scale-up Computing, High Performance Data Analytics ("HPDA"), Clustered and High Performance Storage, Software, Networking and Global Services.

Scale-out Computing:

Clusters are the workhorses of many applications in high-performance computing, running technical computing 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 provides HPC cluster solutions for small design shops up to the largest corporations in the world.

SGI HPC cluster solutions for technical computing comprise:

•

SGI Rackable® standard depth server clusters provide 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 GPU Compute Accelerators and Intel® Xeon® Phi™ Coprocessors. The clusters include a broad range of GigE, Omni-Path and Infiniband interconnect options.

•

SGI ICE™ XA solution is a distributed memory supercomputer. The sixth generation of our award-winning SGI ICE architecture for technical HPC, SGI ICE XA solution can deliver over 190 teraflops per rack and affordably scale from 36 to tens of thousands of nodes to solve the world's most complex problems. SGI ICE XA solution delivers a variety of innovative technologies including Omni-Path, EDR and FDR Infiniband interconnect, an innovative double-density blade design, flexible power shelves, on-processor liquid cooling and “E-Cell” closed-loop cooling environment that allows warm water cooling. Its open x86 architecture makes it equally simple to deploy commercial, open source or custom applications on completely unmodified SUSE® Linux Enterprise Server or Red Hat® Enterprise Linux operating systems. SGI ICE XA solution supports the latest Intel® E5-2600 v4 processors, Intel Xeon® Phi™ Coprocessors and NVIDIA® Tesla GPUs. We have deployed numerous Petascale systems including NASA-Ames in Mountain View, California, Total S.A. in southwest France, the U.S. Air Force Research Lab in Ohio, Atomic Weapons Establishment ("AWE") in the United Kingdom, and have a roadmap to Exascale computing at both the hardware and software level.

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Scale-up Computing:

•

SGI UV™ 3 solution is the world's largest coherent, shared in-memory system. In addition to being a real time analytic solution, the SGI UV 3 solution is designed to address the most demanding data-intensive applications and accelerate the pace of innovation across a broad range of environments. Scaling up to 2,048 cores and 64 TBs of shared memory, SGI UV 3 solution is managed and operated as a single system. It can run many compute-intensive workloads simultaneously. Utilizing the SGI UV 3 large node in any cluster deployment also enables customers to address programming jobs and data sizes in computer-aided engineering, life sciences and other markets that exceed the capacity of standard two or even four socket servers. Programming tools utilized with scale-out cluster solutions such as SGI Performance Suite can be used with SGI UV 3 solution. For smaller environments without information technology ("IT") resources to manage a complex scale-out cluster deployment, SGI UV 3 solution can be utilized as the sole compute resource, with only a single server and operating system image. Customers interested in developing new applications will also be able to prototype new algorithms with the SGI UV 3 hardware and open software architecture.

Building upon 20 years of in-memory computing expertise and utilizing SGI NUMAlink® interconnect technology, these Linux-based servers deliver cache coherent in-memory computing to address the most compute- and data-intensive workloads. Equipped with an integrated MPI Offload Engine, SGI UV systems can also be leveraged for distributed applications and as a "super node" for clustered HPC systems.

High Performance Data Analytics Solutions:

•

SGI UV™ 300H for SAP ® HANA® server is a model of the SGI UV 300 server purpose-built for SAP HANA environments. SGI UV 300H enables running SAP Business Suite, SAP Bank Analyzer, SAP S/4HANA Finance, and other business-critical applications on SAP HANA. It combines online transaction processing and online analytical processing workloads and eliminates the time-consuming extract, transform, and load processes to generate real-time reports on demand. Featuring Intel® Xeon® E7-8800 v4 and v3 processors and 7th generation SGI NUMAlink technology, SGI UV 300H is SAP-certified under general availability from 4 to 20 sockets with up to 20TBs of in-memory computing capacity as a single node. Pending further certification, it's designed to scale up to 32 sockets and 32TB of shared memory. SGI deployed the first SGI UV 300H in the first half of fiscal 2015.

•

SGI UV™ 300RL is a model of the SGI UV 300 server purpose-built for Oracle Database In-Memory. SGI UV 300RL sever enables enterprises to run Oracle Database In-Memory on a single, Intel-based system with un-paralleled scale-up capacity to accelerate data analytics and achieve real-time operations. Featuring Intel® Xeon® E7-8800 v4 and v3 processors and 7th generation SGI NUMAlink® technology, UV 300RL is certified and factory-installed with Oracle Linux 7 with Unbreakable Enterprise Kernel. Utilizing the unique modular chassis architecture of the SGI UV 300, UV 300RL can scale from 4 to 32 sockets and with up to 24TBs of cache-coherent shared memory. SGI introduced the SGI UV 300RL under limited availability in the first half of fiscal 2016. It is now generally available.

•

SGI InfiniteData™ Cluster server is a highly flexible cluster computing platform combining server and storage density with extreme, scale-out performance. Designed for HPC spanning high performance data analytics and moderate technical computing environments, InfiniteData Cluster accelerates time to value in data and compute intensive environments with greater efficiency, less complexity, and at a lower cost.

•

SGI Fraud Analysis, Social Analytics and Genomics Solutions. Utilizing SGI UV™ 3 solution, the third generation of our Intel® Xeon® based scale-up servers, these solutions enable knowledge discovery, deliver real-time results and instant feedback versus batch jobs that might take hours or days to complete and allow customers to create new analyses quickly with ease of use. UV 3 solution leverages nearly twenty years of SGI technology to deliver the fastest and most scalable shared memory computer in the world, scaling from 32 to 8,192 processing threads, while supporting up to 64 terabytes of global, coherent shared memory in a single system image. SGI UV 3 solution can support SUSE® Linux Enterprise Server and Red Hat® Enterprise Linux®. Superior performance is built into every SGI UV 3 system, leveraging our high-speed proprietary interconnect NUMAlink® 6/7 and MPI Offload Engine acceleration. Based on open standards, the system's x86 architecture leverages the Intel® Xeon® E5-4600 or E7-8800 series processor families and allows for the use of completely unmodified SUSE® Linus Enterprise Server or Red Hat® Enterprise Linux operating systems.

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Clustered and High Performance Storage:

SGI Clustered and High Performance Storage solutions include a complete suite of hardware and software offerings to address virtually every type of data storage and management requirement. Offered under the SGI InfiniteStorage™ ecosystem, these solution components range from power-efficient Just a Bunch of Disks ("JBODs") to a wide range of Network Attached Storage ("NAS"), Redundant Array of Independent Disks ("RAID") and object storage platforms to accommodate all types of workflow requirements, as well as the industry's leading high-performance clustered file system and tiered storage virtualization software.

Our data storage solutions are designed to meet the performance, scale, and efficiency needs of high performance technical computing and data analytics, cloud computing and active archiving of persistent data and include:

•

HPC Storage Solutions comprise SGI RAID platforms with a variety of density, performance and price points in direct-attached and SAN configurations, and typically in combination with SGI file system and storage management software. Our InfiniteStorage 5000 series mid-range RAID products are focused on delivering a high price/performance ratio and flexible configurations. Our InfiniteStorage 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 thousands of disk drives in a single system, guaranteed latency and extremely high bandwidth, these offerings address the requirements of digital media, supercomputing, life sciences and remote sensor acquisition.

•

SGI Modular InfiniteStorage™ (MIS) platform is an integrated server and storage system designed to provide extreme flexibility with industry-leading density in an innovative, adaptable design. Offered in storage server and JBOD versions, MIS is a highly flexible platform that delivers a wide range of storage solutions with different disk size and types (including solid-state drives), to include cloud storage, NAS, active archive gateway, or object storage server. The unique, bi-directional design allows it to be serviced from the front or rear of the chassis.

•

SGI 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 software is deployed at customer sites worldwide, with individual customers managing more than 100 petabytes and nearly two billion files. DMF software operates in the background with no interruption or degradation of service to end-users and applications. DMF software is integrated with both traditional XFS® and CXFS® file system and the Lustre parallel file system that is often part of many HPC storage implementations.

•

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 software significantly boosts productivity where large files are shared by multiple processes in a workflow. Because it uses a SAN infrastructure, CXFS software delivers much greater I/O performance and bandwidth than any network data-sharing mechanism, such as network file system or common internet file system.

Software:

•

SGI Management Suite provides powerful tools to initiate management actions, monitor essential system metrics for all SGI systems, and improve overall power efficiency. It reduces the time and resources spent administering systems by improving software maintenance procedures and automating repetitive tasks - lowering total cost of ownership, increasing productivity and providing a better return on hardware investments.

•

SGI Foundation Software consists of support tools and utilities that enable our servers to run more reliably, with improved support and 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 improves performance and provides additional capabilities for developers of HPC applications on all of our systems. SGI Performance Suite software contains the following components: SGI Accelerate™ technology helps accelerate application performance, through tools that tune applications at runtime without recompiling and libraries that optimize performance with specialized algorithms. SGI Message Passing Interface ("MPI") contains complementary tools enabling application acceleration, with SGI Message Passing Toolkit ("MPT") as the core MPI performance engine. SGI REACT™ technology provides features that enable real-time, guaranteed response time applications to run on standard Linux distributions.

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Networking:

•

SGI Networking solutions include node-level integration (dual/quad NICs, GigE, 10GigE, InfiniBand QDR and FDR onboard interfaces), cluster-level integration for clustered-computing (pre-tested, pre-certified high-speed switches, in-cabinet aggregation and software managed GigE, 1GigE, FDR, EDR, Omni-Path) and Fibre Channel integration for clustered-storage (high-speed data access, interconnects and stacking). The SGI UV scale-up server line features SGI's own high-performance, low-latency SGI NUMAlink® interconnect.

SGI Global Services

The SGI Global Services organization is comprised of 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 value added services associated with technology consulting, project management and customer education, all of which help our customers realize the full value of their information technology investments. As of June 24, 2016, the organization staffed over 300 service professionals, providing services to customers in approximately 26 countries.

Both customer support services and professional services develop and implement services solutions for our customers, as well as provide a broad range of value added and support services offerings to address the requirements and business strategies of our customers, distributors and resellers. Service is provided to our customers several ways directly or through approved distributors, resellers and third-party provider partners.

Support Services: 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 a cost effective self-care option to a 7x24 option for mission critical environments.

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. All services plans come standard with SGI Remote Services.

Remote Service: SGI Remote Services provide proactive monitoring, alerting and reporting of system events with a secure connection to SGI Customer Support-on demand.

Installation Services: SGI services may include system installation, configuration and management services, spares management, site preparation, as well as software upgrades and updates.

Customer Education: SGI Global Services also offers customer technical training to fully enable their use of SGI technology.

Professional Services: Our professional services group provides fee-based technology and consulting services to our customers and system integrators. We architect, design, implement and manage complex and complete solutions for our customers' technical computing infrastructures and provide installation and deployment for custom consulting projects. 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 their specific information technology needs.

Sales and Distribution

We sell our systems and services primarily through our direct sales force, 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 and business development teams, which are then logged, qualified and assigned to a field account executive. After an initial lead qualification, our sales executives and sales engineers collect information regarding the customer’s mission and objectives, data center environment and application requirements. We then collaborate with the customer to agree upon a particular system configuration that will meet the customer's requirements. For larger customers, we allow evaluation of one or more hardware configurations to enable the customer to conduct their own benchmarking analyses.

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We currently have direct sales personnel in various countries, including Australia, Brazil, Canada, China, Czech Republic, France, Germany, Japan, the Netherlands, Singapore, the United States and the United Kingdom. We augment our sales staff with indirect coverage via 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 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 territories, and are supported by inside sales, channel sales, strategic partner sales and business development personnel.

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 and enterprise high performance data analytics markets. We have developed expertise in a number of vertical industry markets, including but not limited to in-memory data base, weather and climate; physical sciences; life sciences; energy, aerospace and automotive manufacturing; financial services; 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 recently increased our sales and marketing efforts in the commercial and enterprise high performance data analytics market in an effort to expand our penetration of this market and have announced that Dell and Cisco have agreed to resell our SAP HANA appliances for 8-sockets and above to their customer and prospect base. We continue to expand our targeted customer base to include all organizations with high performance technical computing requirements, through both our direct selling force and channel partners. Our channel program is designed to collaborate and enable those partners who provide additional geographic and vertical market coverage and expertise for SGI-based solutions. Additionally we entered into an OEM agreement with HPE that enables the sale and distribution of 8-socket configurations of the SGI UV300 under the HPE MC990 brand.

Marketing

Our global 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, field marketing, channel and corporate marketing. To showcase our solutions, expand our market presence, and enable our sales organization and channel partners to effectively pursue sales opportunities, we create and deliver a number of go-to-market vehicles including industry tradeshow and event activities, market research, customer forums, webinars, online advertisements and promotions, product demonstrations, web content, sales collateral, telemarketing, social media and customer case studies. Our marketing channels include a mix of product-based activities which leverage our hardware and software expertise and 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 high-performance computing community, we issue white papers on technology trends such as performance ratings, benchmark 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 solution platforms. Through our Solution Partners Network Program, we provide software, marketing support, and access to hardware to enable third-party software developers to leverage SGI differentiation and added value. Serving the key independent software vendors (“ISVs”) addressing our target market segments, the program provides ISVs with technical information 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 provide a robust channel program to an active and established base of worldwide channel partners utilizing a comprehensive channel portal and marketing program. We also develop concentrated co-marketing partnerships with our major customers and suppliers.

Research and Development

Our research and development organization includes, but is not limited to, hardware design engineers, software engineers, application engineers, benchmarking engineers and solution engineers. We focus our research and development efforts where we believe we can develop compelling and differentiated solutions to our customers’ most challenging problems, thus growing our share of the markets we participate in. Focus areas in research and development 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 differentiate the performance of our computing platforms; storage

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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, 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 extend our leadership in coherent shared-memory systems. The UV shared-memory system based on the latest generation of our NUMAlink® interconnect and NUMAflex® architecture increases substantially the performance and scalability of our single system image shared-memory products, incorporates hybrid processing elements, and provides optimized features to enhance in-memory application performance on a cluster computing system. We expect these design efforts to propel growth in adoption of the UV platform in technical computing, high performance data analytics, and as solutions to the needs of commercial customers employing in-memory databases for real time enterprise applications.

SGI ICE™ XA System Development. We continue to invest aggressively in the SGI ICE XA platform and its eventual successor, which offers market leading system configuration flexibility and is based on the InfiniBand and Omni-Path interconnect. The focus remains on maintaining the product’s leadership in speed, scalability, and power and thermal efficiencies, while enhancing its flexibility in terms of configurations, topologies and interconnect technologies. We are also enhancing the product’s reliability, availability, serviceability and interoperability in our designs.

Storage. We design, develop, and integrate hardware and software solutions for file serving, data management and data archival for petascale environments. The focus remains to maintain our leadership in speed, scalability and efficiency (both in power and asset utilization). We design or select “best-in-class” storage hardware such as 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 tightly integrate the storage software and hardware systems, and we optimize the software 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 extremely efficient management and operation of our systems, and enable software applications to run faster on our systems. We continue to enhance the SGI Management Center, our premier policy-based software tool for managing high performance, highly scalable technical computing environments, with a focus on accelerated system provisioning, proactive system health management, and system power management at the job level.

Application Engineering and Benchmarking. Our global benchmarking and solutions centers provide a full range of our server and storage hardware and software, integrated in a wide variety of configurations, for applications testing, benchmarking and performance tuning. At these centers, the highly skilled personnel in 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 we have developed and are developing for our strategic 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.

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 enhance our current product line and enable the development of new products that will provide differentiated and compelling solutions to the expanding range of challenges faced by our current and prospective customers. The execution of our business strategy relies on continued investment in engineering research and product development.

Manufacturing and Operations

Our sole manufacturing facility, located in Chippewa Falls, Wisconsin, is responsible for worldwide production, supply-chain management and order fulfilment. 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.

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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

High performance computing, data management and data analytics 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: solution features, performance, and scale, quality and reliability, application availability, ease of system management, customization, price/performance ratios, total cost of ownership and quality customer service and support. We believe we compete effectively in each of these areas by providing differentiated solutions that address the needs of our customers.

The market for our products is highly competitive, dynamic and subject to changing technology, customer needs and new product introductions. In the server market we compete primarily with large, build-to-order vendors of x86 servers based in the United States such as Dell Inc. (“Dell”), Hewlett Packard Enterprise Company (“HPE”), International Business Machines Corporation (“IBM”), Oracle Corporation (“Oracle”), Cray, Inc. (“Cray”), Bull/Atos, and Supermicro Computing, Inc. ("Supermicro"). In the data analytics or HPDA market, we compete primarily with IBM, Lenovo, HPE , Fujitsu, Hitachi and Oracle.

Our largest competitors have significant financial, technical, development and sales and marketing resources, broad name and brand recognition and large customer bases. Because a computing system is a substantial investment that can require extensive service and support commitments, company size can have a significant impact on purchase decisions. In addition, large competitors can leverage strategic business lines to broaden offerings and support deep discounting and reduced margins to gain market share.

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 have more than 550 granted patents and pending applications 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. We have been engaged in intellectual property disputes as a defendant and, in the past, as a plaintiff in efforts 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.

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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 cancelled 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 revenue in any given period. Factors impacting the amount of product and service revenue in any given period include 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 schedules. 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.

We do not believe backlog is a meaningful indicator of our future business prospects due to the uncertainty of converting orders into recognized revenue in any given period. Factors impacting the amount of backlog and our ability to recognize revenue from backlog in any given period include, but are not limited to: the possibility of significant changes to implementation schedules, including site readiness, changes in system specifications, timing of system acceptance, material procurement constraints and manufacturing build delays. As such, we believe that backlog information is not material to an understanding of our overall business.

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 content of our products and the recycling and treatment and disposal of our products. Certain aspects 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 may require further capital expenditures in future periods, including possible expenditures for the implementation of new processes in supply chain management and order fulfilment. 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 2016 and none are planned for the fiscal year ending June 30, 2017 ("fiscal 2017"). See Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K.

Employees

As of June 24, 2016, we had approximately 1,100 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. We have employment-related agreements with a number of key employees or where required by applicable law. In general, where permitted by applicable law, employment with the Company is considered "at will" and our employment related agreements are not for a defined term.

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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, 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 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., 900 North McCarthy Blvd, Milpitas, California, 95035. 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 2, 2016 are as follows:



Name	Age	Position
Jorge Titinger	55	Chief Executive Officer, President and Director
Mekonnen Asrat	48	Senior Vice President and Chief Financial Officer
Cassio Conceicao	53	Executive Vice President & Chief Operating Officer
Kirk Williams	47	Senior Vice President, General Counsel and Corporate Secretary
Pete Hilliard	49	Senior Vice President, Chief Administrative Officer

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 held several executive positions at Verigy Ltd. (a company in the semiconductor automated test equipment industry) culminating as President, Chief Executive Officer and member of the Board. Mr. Titinger worked for Verigy Ltd. from June 2008 to July 2011. Prior to Verigy, Mr. Titinger was Sr. Vice President and General Manager of Product Business Groups at Form Factor, Inc. (a company in the probe card technology business) from November 2007 to June 2008. Mr. Titinger previously held executive positions at KLA-Tencor Corporation (a company in the semiconductor equipment industry), Applied Materials, Inc. (a company involved in semiconductor manufacturing), MIPS/Silicon Graphics Inc. (a company in the graphics computing industry) and Hewlett-Packard Company. Mr. Titinger also serves on the Boards of Directors of XCERRA, a publicly traded company in the semiconductor test equipment market, and CalAmp Corp., a publicly traded wireless communications solutions provider. 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.

Mekonnen Asrat has served SGI as Senior Vice President and Chief Financial Officer since November 2015. Mr. Asrat joined SGI in June 2012 as our Vice President and Corporate Controller and since August 2012 has served SGI as our Principal Accounting Officer. Previously, Mr. Asrat served as Senior Director, Corporate Controller of Advantest America, Inc., a subsidiary of Advantest Corporation, (a company in the semiconductor automated test equipment business) from March 2011 to June 2012. Prior to that, Mr. Asrat served as Director and Controller at Verigy Ltd. for its Memory Test Solutions business unit, from January 2008 to June 2011 and as Director of SEC Reporting from June 2006 to December 2007. Verigy was acquired by Advantest Corporation in July 2011. Prior to Verigy, Mr. Asrat held a variety of accounting and financial planning and analysis roles at Agilent Technologies, Inc., Hewlett-Packard Company and Ernst & Young LLP. Mr. Asrat is a certified public accountant, actively licensed in California and holds a Master of Professional Accounting degree from the University of Texas at Arlington and a Bachelor of Arts in Economics from the College of William & Mary in Virginia.

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Cassio Conceicao joined SGI in January 2013 as our Executive Vice President and Chief Operating Officer. Mr. Conceicao has over 25 years of technology industry experience, leading change and continuous improvement across a broad range of business disciplines, such as operations, business development, product development, marketing, engineering and customer service. Prior to SGI, Mr. Conceicao served as Corporate Vice President and General Manager of the Services Business at Applied Materials, Inc. (a global provider of manufacturing equipment to the semiconductor, flat-panel display and solar energy industries) from October 1999 to January 2013. He also previously held the position of Vice President of Operations and Engineering at Kinetics Fluid Systems (a manufacturer of gas delivery systems and components for the semiconductor equipment industry) from April 1997 to October 1999. Mr. Conceicao earned a Bachelor of Science in Electrical Engineering and a Bachelor of Arts in English Literature, both from Stanford University.

Kirk O. Williams has served SGI as Senior Vice President, General Counsel and Corporate Secretary since June 2016. From March 2013 to June 2016, Mr. Williams served the Company as Associate General Counsel, responsible for corporate governance, securities and compliance. Before joining the Company, Mr. Williams was Vice President, General Counsel and Corporate Secretary at Roamware, Inc., a privately-held developer of roaming and quality of experience and service enhancing solutions for mobile network operators and communications service providers from March 2012 to November 2012. Prior to that, Mr. Williams served as Chief Legal and Compliance Officer and Corporate Secretary at Sunrise Telecom Incorporated, (a publicly-traded manufacturer of test and measurement solutions for telecom) cable and wireless networks from December 2002 to January 2012. Mr. Williams holds a J.D. from New York University School of Law and a dual B.A. in Economics and Political Science from Stanford University.

Peter E. Hilliard joined SGI in November 2015 as our Senior Vice President and Chief Administrative Officer. Mr. Hilliard brings over 20 years of experience providing leadership in the area of change management within hyper growth and evolving organizations. Prior to joining SGI, Mr. Hilliard served as Senior Vice Present of Human Resources at Harmonic, Inc. (a company in the video infrastructure delivery industry) from October 2008 to November 2015. Prior to Harmonic, Mr. Hilliard served as Senior Vice President of Human Resources & Corporate Services with Agile Software (an enterprise software company) from June 2002 until acquisition by Oracle in September of 2007. While at Agile, Mr. Hilliard had functional responsibility for HR, IT, Facilities and Administration. Prior to Agile, Mr. Hilliard served as Senior Vice President of Human Resources & Administration with Metromedia Fiber Network, Inc. and with SiteSmith, Inc. (both internet infrastructure companies) and was Partner & Vice President of Client Services with consulting firm 54th Street Partners, LLC, (a consulting firm) where he led strategic engagements with clients such as Webvan, Borland Software, and many others.

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Item 1A. Risk Factors

The pendency of our agreement to be acquired by Hewlett-Packard Enterprise ("HPE") or our failure to complete the merger with HPE could have an adverse effect on our business.

On August 11, 2016 we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Hewlett-Packard Enterprise Company (HPE) and Satellite Acquisition Sub, Inc., a wholly-owned subsidiary of HPE (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of HPE. Completion of the Merger is subject to the satisfaction of various conditions, including approval of the Merger by our stockholders, the absence of certain legal impediments, antitrust regulatory approval pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the antitrust laws of certain other jurisdictions, and the expiration or termination of the respective waiting periods required in connection with such required antitrust approvals. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected time frame, or at all. The Merger gives rise to inherent risks that include:


•	the inability to complete the Merger due to the failure to obtain stockholder approval or failure to satisfy the other conditions to the completion of the Merger, including receipt of the required regulatory approvals;


•	potential future stockholder litigation that could prevent or delay the Merger or otherwise negatively impact our business and operations;


•	a pending litigation suit that has been filed against us on August 29, 2016 that seeks injunctive relief and damages could prevent or delay the Merger or otherwise negatively impact our business and operations;


•	if the Merger is not completed, the price of our common stock will change to the extent that the current market price of our stock reflects an assumption that the Merger will be completed;


•	the pendency of the Merger, even if ultimately completed, may create uncertainty in the marketplace and could lead customer and prospective customers to purchase from other vendors or delay purchasing from the Company;

•

the amount of cash to be paid under the agreement governing the Merger is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, including any potential long-term value of the successful execution of our current strategy as an independent company or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;


•	legal or regulatory proceedings, including regulatory approvals from various domestic and foreign governmental entities (including any conditions, limitations or restrictions placed on these approvals) and the risk that one or more governmental entities may delay or deny approval, or other matters that affect the timing or ability to complete the transaction as contemplated;


•	the possibility of disruption to our business, including increased costs and diversion of management time and resources;


•	difficulties maintaining and renewing business and operational relationships, including relationships with significant customers, contract manufacturers and component suppliers, channel partners, and other business partners;


•	the possibility of slowing sales and renewals by clients;


•	the inability to attract and retain key personnel pending consummation of the Merger;


•	the inability to pursue alternative business opportunities, including strategic acquisitions and investments, or make changes to our business pending the completion of the Merger, and other restrictions on our ability to conduct our business;


•	the requirement to pay a termination fee of $12.2 million if the agreement governing the Merger is terminated under certain circumstances;


•	the fact that under the terms of the Merger Agreement, we are unable to solicit other acquisitions proposals during the pendency of the Merger;


•	the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger, and the possibility that our employees could lose productivity as a result of uncertainty regarding their employment post-Merger;


•	developments beyond our control including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the Merger; and

•

the risk that if the Merger is not completed, the market price of our common stock could decline, investor confidence could decline, stockholder litigation could be brought against us, relationships with customers, contract manufacturers and component suppliers, channel partners, and other business partners may be adversely impacted, we may be unable to retain key personnel, and profitability may be adversely impacted due to costs incurred in connection with the proposed Merger.

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U.S. Government Sales—We derive a significant portion of our revenue from customers who directly or indirectly receive funding from the U.S. government. 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 directly from U.S. government entities, from education and research institutions funded by the U.S. government, and from system integrators that sell to the U.S. government. For fiscal 2016, such sales represented approximately 45% 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 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.

Customer Concentration—A relatively small number of customers that purchase our products in large quantities have historically accounted for a significant portion of our revenue. 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 2016, our top five customers worldwide accounted for approximately 50% of our total revenue, of which various agencies of the U.S. government, excluding system integrators, accounts for 25%.

This customer concentration increases the risk of quarterly fluctuations in our revenue 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 revenue, financial condition and results of operations.

Strong Competition—We face competition from the leading enterprise computing companies in the world as well as from emerging companies. Some of our competitors have greater name recognition and capital resources than we do. 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 server market, such as Dell Inc., HPE, International Business Machines Corporation, Cray, Inc. and Oracle Corporation. In the storage market, we compete primarily with EMC Corporation, HPE, Hitachi Data Systems, Inc. and NetApp, Inc. Our largest competitors have several advantages over us, such as:


•	substantially greater market presence and greater name recognition;


•	substantially greater financial, technical, research and development, sales and marketing, manufacturing, distribution and other resources;


•	longer operating histories;


•	a broader offering of products and services;


•	more established relationships with customers, suppliers and other technology companies; and


•	the ability to acquire technologies or consolidate with other companies in the industry to compete more effectively.

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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.

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.

Unproven Go-to-Market Strategy—We lack experience in marketing solutions to large enterprise customers. If we are not successful in increasing sales of our solutions into enterprise customers, our growth opportunities will be limited.

Despite our historical success in growing our revenue from certain agencies of the U.S. government as well as higher education, we have had limited success in broadening our base of enterprise customers. We have modified our go-to-market strategy and have invested in sales and marketing personnel and programs to increase penetration of our HPC, and High Performance Data Analytics solutions among enterprise customers. We have recently increased our sales and marketing efforts in the commercial and enterprise high performance data analytics market in an effort to expand our penetration of this market and have announced that Dell and Cisco have agreed to resell our SAP HANA appliances for 8-sockets and above to their customer and prospect base. Additionally we entered into an OEM agreement with HPE that enables the sale and distribution of 8-socket configurations of the SGI UV300 under the HPE MC990 brand. If we are not successful in increasing sales of our solutions into enterprise customers, our growth opportunities may be limited.

Fluctuations in Operating Results—Among other things, the timing of our revenue is primarily dependent upon the funding and implementation schedules of our customers, particularly as it relates to large IT projects where we can have long sales cycles and long build-out and acceptance schedules. 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. 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, delays in obtaining necessary components from our suppliers, or delays resulting from contractual provisions or other reasons;


•	customer delays in the acceptance of our product once delivered;


•	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 sales pipeline and resulting customer contracts; our ability to align our product and service offerings and cost structure with customer needs;

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•	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 assets;


•	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 original equipment manufacturers ("OEMs") to address new market opportunities;


•	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,


•	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;


•	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.

Lengthy Sales Cycle—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 and cash collection.

The sales cycle of our products, beginning with our first customer contact to the closing of a sale, often ranges from six to nine months and it may be even longer before we are able to collect cash on our sales. 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 essential 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, operating expenses and cash position may 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 quarters. Recently, we have found success in our strategy of focusing on large deals to help drive our revenue growth and have been awarded by customers a greater number of large installation programs. Such transactions require significant up-front capital investment. To further support our needs and to offset these declines in our cash position, we secured $70.0 million in term loan financing in January 2015. Nonetheless, during fiscal 2016, we generated approximately $27.4 million in cash from our operating activities. If we are unable to collect cash and negotiate more favorable cash collection terms in the future, or if we are unable to secure additional financing on acceptable terms, our liquidity and ability to fund our operations could be adversely affected.

International Sales and Operations—The global nature of our operations exposes us to increased risks and compliance obligations, which may adversely affect our business.

During fiscal 2016, 2015 and 2014, we derived approximately 47%, 40% and 52% 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;


•	recruiting sales and technical support personnel internationally with the skills to design, manufacture, sell and support our products;


•	complying with governmental regulations, including obtaining required import or export approval for our products;


•	increased complexity and costs of managing international operations;


•	increased exposure to foreign currency exchange rate fluctuations;


•	commercial laws and business practices that favor local competition;


•	longer sales cycles and manufacturing lead times;


•	financial risks such as longer payment cycles and difficulties in collecting accounts receivable;


•	difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner;


•	ineffective legal protection of intellectual property rights;


•	more complicated logistics and distribution arrangements;


•	additional taxes and penalties;


•	inadequate local infrastructure that could result in business disruptions;


•	global political and economic instability; and


•	other factors beyond our control such as natural disasters, terrorism, civil unrest, war and infectious diseases.

If any of the foreign economies in which we do business deteriorate or if we fail to effectively manage our global operations, our business and results of operations would be harmed.

In addition, our global operations are subject to numerous U.S. and foreign laws and regulations, including those related to anti-corruption, tax, corporate governance, imports and exports, financial and other disclosures, privacy and labor relations. These laws and regulations are complex and may have differing or conflicting legal standards, making compliance difficult and costly. If we or our employees, contractors or agents violate these laws and regulations, we could be subject to fines, penalties or criminal sanctions and may be prohibited from conducting business in one or more countries. Any violation individually or in the aggregate could have a material adverse effect on our operations and financial condition.

Volatile Stock Price—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 2016, our stock price fluctuated from a high of $7.61 to a low of $3.93. 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;


•	rating 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.

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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.

Foreign Currency Fluctuations—We may experience foreign currency gains and losses.

We have significant exposure to revenues, expenses and certain asset and liability balances denominated in currencies other than the U.S. Dollar. Changes in the exchange rates of major foreign currencies, particularly the Euro, Japanese Yen, British Pound, and Australian Dollar, 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. Although we 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 2016, 2015 and 2014, our combined revenue from our Europe ("EMEA") and Asia Pacific and Japan ("APJ") regions was $237.4 million, $197.5 million and $252.4 million, respectively. As of June 24, 2016 and June 26, 2015, the balance in our foreign currency cash accounts was $49.9 million and $31.5 million, respectively. 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 balance sheet hedging strategy is intended to mitigate our currency exposures related to remeasuring monetary assets and liabilities by entering into foreign currency forward contracts that have maturities generally of six months or less. 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. Additionally, our cash flow hedging strategy uses forward contracts designated as cash flow hedges to hedge a portion of future forecasted non-USD cash flows to further mitigate the effect of exchange rate fluctuations for these currencies.

In addition, there may be future volatility in the British pound, other foreign currencies and global equities market associated with the recent referendum vote of the United Kingdom to exit the European Union, or what is also known as Brexit. Given the uncertainty surrounding future economic growth prospects for the United Kingdom and Europe more broadly, the Euro and the British pound has weakened resulting in exchange rate fluctuations for these currencies. Although we typically hedge these currencies as described above, significant fluctuations may negatively impact our balance sheet and statement of operations.

Information Security—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.

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Cost of Materials—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. 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 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.

In addition to the component parts, we currently integrate application-specific integrated circuits ("ASICs") in many of our products. The development of an ASIC is costly and may take up to many months to develop. These costs typically are expensed as incurred as research and development costs and will cause volatility in our operating results and may cause them to fluctuate significantly.

Supplier Relationships—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.

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Channel Sales—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, such as OEMs. 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.

Term Loan—We are subject to a Term Loan that may limit our ability to engage in favorable business activities or finance future operations or capital needs; and we may have difficulty repaying such loan in the event of a default which could result in the acceleration of the indebtedness.

On January 27, 2015, we entered into a three and a half year Term Loan in the aggregate principal amount of $70.0 million. Pursuant to the terms of the agreement, certain of our subsidiaries have guaranteed or will guaranty our obligations under the loan. In addition, our obligations under the agreement are secured by a lien on substantially all of our assets and those of our subsidiary guarantors.

The Term Loan contains various covenants that limit our ability and the ability of our subsidiaries to, among other things, do the following:


•	issue any preferred stock;


•	incur or guarantee indebtedness;


•	create, incur, assume, or permit liens to exist;


•	consummate asset sales, acquisitions or mergers;


•	dispose of property;


•	pay dividends or repurchase stock;


•	make investments;


•	enter into transactions with affiliates; or


•	enter into or permit certain types of other agreements to exist.

The Term Loan also requires compliance with a minimum adjusted current ratio and a $10.0 million minimum unrestricted cash balance, calculated as set forth in the agreement, and contains customary events of default, including the following:


•	failure to make required payments;


•	material breaches of representations and warranties;


•	failure to comply with certain agreements or covenants;


•	failure to pay, or default under, certain other indebtedness;


•	certain events of bankruptcy and insolvency;


•	failure to pay certain judgments; and


•	a change of control.

We may not prepay the loan during the first year and may only prepay the loan during the second year at a premium. After such time, we may prepay the loan without penalty. If we were unable to repay the loan, 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, working capital and operating results. If any of our indebtedness is accelerated, we may not have sufficient funds available to repay such indebtedness.

Dependence on Key Personnel—If we are unable to retain and attract adequate qualified personnel, we may not be able to execute on our business strategy.

During the past few fiscal years, we have experienced changes in our most senior managers. 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.

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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 one or more 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 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.

Contract Manufacturing—We are dependent 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 systems that meet our and/or our customers’ expectations, 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 we fail to properly manage our relationships with our contract manufacturers or partners, or if one or more of them are not able to meet our manufacturing or capacity requirements, maintain our high standards of quality or experience delays or disruptions in their service delivery, 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.

Intellectual Property Risks—If we are found to have violated the intellectual property rights of others, we could be required to indemnify our 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 (“AIA”). As a result of the AIA, the United States is now a “first-to-file” system. For any patent applications that are filed on or after March 16, 2013 and that do not otherwise properly claim the benefit of an application filed before that March 16, 2013 date, said applications will be subject to the new “first-to-file” requirements versus the “first-to-invent” standard of law that existed prior to that date. 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.

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Financial Reporting Risks—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 addition, changes in accounting standards could also adversely affect our reported operating results.

In connection with the preparation of our consolidated financial statements, we use certain estimates and assumptions based on 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. If 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.

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, the Financial Accounting Standards Board (FASB) and various other 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, revenue and expenses, and could cause unexpected financial reporting fluctuations.

Environmental Laws and Liabilities—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.

Geographic Business Concentrations—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 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.

Tax Exposure—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, interest and penalties.

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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.

Export Controls—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.

Weak Global Economy—Weak or unstable global market and economic conditions may have serious adverse consequences on our business.

The global economy has 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. 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, if one or more of our current service providers, manufacturers and other partners go out of business, it could directly affect our ability to attain our operating goals on schedule and on budget.

If the global economy experiences 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.

Intellectual Property Enforcement—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.

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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.

Open Source Software—Our use of open source and third-party software could limit our sales and growth opportunities and impose unanticipated conditions or restrictions on our ability to commercialize our products.

We incorporate open source software into our products. A majority of our server systems run 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 purchase and adopt open standard-based technologies could have a material adverse impact on our ability to maintain or generate additional revenue.

In addition, 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.

IT Infrastructure—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 manufacturing and sales systems. 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.

Litigation—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 legal matters is discussed under "Legal Proceedings" in Part I, Item 3 of this Annual Report on Form 10-K.

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Global Cost Reduction Efforts—We may not fully realize the anticipated positive impacts to future financial results from our restructuring and cost reductions efforts.

We have taken in the past and may continue to take cost reduction efforts to streamline operations and reduce operating expenses. Our ability to achieve the anticipated cost savings and other benefits from our cost reduction measures within expected time frames is subject to many estimates and assumptions, and may vary materially based on many factors. 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 cost reduction measures. If our estimates and assumptions are incorrect or if other unforeseen events occur, we may not achieve the cost savings expected from such actions, and our business and results of operations could be adversely affected.

Acquisition Strategy—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. In addition, our Term Loan contains various covenants that limit our ability to acquire assets or make certain investments. Acquisitions are difficult, time consuming and pose a number of risks, including:


•	the acquired products may fail to achieve projected sales or operating margin targets;


•	the acquired business, asset or technology may not further our business strategy or we may not realize expected synergies or cost savings;


•	we might overpay for the acquired business, asset or technology;


•	we might experience difficulties integrating the acquired assets, technologies, operations or personnel or retaining the key personnel of the acquired company;


•	disruption of ongoing business, including diversion of management's attention;


•	we might experience difficulties entering and competing in new product or geographic markets in which we are not experienced;


•	assumption of unknown liabilities, including tax and litigation or problems with product quality, and the related expenses and diversion of resources;


•	potential downward pressure on operating margins due to lower operating margins of acquired businesses, increased headcount costs and other expenses associated with adding and supporting new products;


•	potential negative impact on our relationships with customers, distributors and business partners; and


•	potential negative impact on our earnings per share/negative impact on our earnings resulting from the application of Accounting Standards Codification ("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 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.

Internal Controls—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.

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Corporate Governance—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 FASB. 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. Our efforts to comply with 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.

Anti-takeover Provisions—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.

Conflict Minerals Risks—We are subject to the SEC's rules regarding the use and disclosure of conflict minerals, which we expect will increase our operating and compliance costs and could potentially harm our reputation, causing a decline in our stock price.

The SEC adopted its final rule implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning conflict minerals in August 2012. The objective of the rule is to reduce funding for armed groups that are abusing human rights in the "conflict region" as defined in the final rule. This new rule requires us to: (1) determine whether conflict minerals (tin, tantalum, tungsten, gold or similar derivatives) are used in our products and, if so, determine if the minerals originated from the Democratic Republic of Congo (DRC) or its immediately adjoining countries; and (2), if so, conduct due diligence regarding the source and chain of custody of these conflict minerals to determine whether the conflict minerals financed or benefited armed groups. The rule requires us to submit forms and reports to the SEC annually that disclose our determinations and due diligence measures. We are currently conducting conflict minerals due diligence with our supply chain partners. Presently, we have not determined how many of our supply chain partners use conflict minerals or how much expense our due diligence exercise will add to our operational cost. If we do not properly assess supply chain partners and appropriately control costs and budget for conflict minerals compliance, our results of operations and profitability in the future could suffer, our reputation could be harmed and our stock price could suffer as a result.

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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 24, 2016, we owned and leased approximately 560,000 square feet of space in our domestic and international locations. We owned approximately 48% of this space and leased the remaining approximately 52%.

Approximately 86% of our owned and leased properties are located in the United States. These domestic locations are primarily located in Milpitas, California, which is our corporate headquarters, and in Chippewa Falls, Wisconsin, which is where our manufacturing warehouse facilities are located as well as a large portion of our research and development employees. Our international locations, which comprise approximately 14% of all our properties, are mainly located in Tokyo, Japan, Paris, France, and Winnersh, United Kingdom. Our international 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, domestic and international federal, state and local tax reviews and audits and other matters. We may also be subject to litigation and/or adverse rulings or judgments as a result of certain contractual indemnification obligations. We do not know whether we will prevail in these matters, nor can we assure that any remedy or resolution will be reached on commercially reasonable terms, if at all. We intend to defend ourselves vigorously in these actions. Based on currently available information, we believe that we have meritorious defenses and that the resolution of these cases, individually or in the aggregate, is not likely to have a material adverse effect on our business, financial condition 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.

From time to time, we may be involved in the future in litigation or other legal proceedings relating to claims arising out of our day-to-day operations or otherwise, including securities and stockholder matters. Litigation is inherently uncertain, and we could experience unfavorable judgments or rulings or choose to settle outstanding litigation. Should we experience an unfavorable judgment or ruling or make a settlement payment, there exists the possibility of a material adverse impact on our financial condition, results of operations, cash flows or on our business for the period in which the judgment, ruling of payment occurs and/or future periods.

Litigation Related to Our Proposed Acquisition by HPE

Subsequent to the Company's fiscal year end, on August 29, 2016, a stockholder class action complaint was filed in Santa Clara Superior Court on behalf of a putative class of SGI stockholders and naming as defendants SGI’s Board of Directors, SGI, HPE, and Acquisition Sub: Kierkla v. SGI, as the result of the Company's signing a definitive agreement to be acquired by Hewlett Packard Enterprise Company ("HPE"). Also, see note 27 "Subsequent Events". The complaint generally alleges that, in connection with the proposed acquisition of SGI by HPE, the individual director defendants breached their fiduciary duties to SGI’s stockholders by, among other things, purportedly failing to take steps to maximize the value of SGI to SGI’s stockholders and agreeing to allegedly preclusive deal protection devices in the Merger Agreement. The complaints further allege that HPE, Acquisition Sub, and/or SGI aided and abetted the individual defendants in the alleged breaches of their fiduciary duties. The complaints seek, among other things, an order enjoining the defendants from consummating the proposed transaction, in the event that the proposed transaction is consummated, an order rescinding it and setting it aside or awarding rescissory damages, an order directing defendants to account to the class for damages allegedly sustained, and attorneys’ fees and costs. The Company intends to take all necessary steps to vigorously defend itself and any directors and/or officers named in the lawsuit as defendants. SGI has not booked an accrual relating to any of these matters at this time, as amounts are not probable or estimable.

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 is listed on the NASDAQ National Market under the symbol “SGI". 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 24, 2016	High		Low
Fourth Quarter	$	7.29	$	4.48
Third Quarter	7.61		4.72
Second Quarter	6.59		3.93
First Quarter	6.47		4.08

Fiscal Year Ending June 26, 2015	High		Low
Fourth Quarter	$	9.71	$	6.42
Third Quarter	11.76		8.66
Second Quarter	11.31		8.00
First Quarter	10.15		8.72

Holders

As of August 30, 2016, there were 36,518,406 shares of our common stock outstanding. As of August 30, 2016, we had eleven registered holders of record of our outstanding common stock. 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 and our Term Loan 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. Also, the Term Loan agreement signed in January 2015 restricts the ability of the Company to pay dividends while borrowings under the agreement remain outstanding. See Note 16, Long-term Debt, for more information about the Term Loan agreement.

Recent Sale of Unregistered Securities

None

Issuer Purchases of Equity Securities

The Company's common stock may be repurchased in the open market or through negotiated transactions, including 10b5-1 trading plans that would enable the Company to repurchase its shares during periods outside of its normal trading windows. In January 2013, the Company's board of directors approved a plan for the Company to repurchase shares of its common stock with a market value of up to $15.0 million. In November 2013, the Company announced an increase in the authorized repurchase amount to $30.0 million and in November 2014, the Company announced that it had extended its repurchase program through December 31, 2015. This purchase program expired as of December 31, 2015. The Company was not obligated to acquire any particular amount of stock, and the program could have been suspended or terminated at any time at the Company's discretion. There were no shares repurchased during fiscal 2016. Since the inception of the repurchase plan in January 2013, the Company repurchased approximately 1,566,000 shares of its common stock for $18.0 million. These repurchases are reflected in our balance sheet as treasury stock and are available for future issuance.

See Note 16, Long-term debt, for more information about the Term Loan agreement.

Performance Graph (1)

The following graph shows the cumulative total stockholder return of an investment of $100 in cash at market close on June 24, 2011 through market close on June 24, 2016, 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.



	6/24/2011	6/29/2012	6/28/2013	6/27/2014	6/26/2015	6/24/2016
Silicon Graphics International Corp.	100.00	41.72	86.94	61.47	42.82	32.68
NASDAQ Composite	100.00	108.58	128.19	169.08	192.10	187.57
RDG Technology Composite	100.00	110.39	120.73	159.28	176.75	177.01


(1)	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 Consolidated 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.



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014			June 28, 2013			June 29, 2012
	(in thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenue	$	532,930		$	521,259		$	529,946		$	767,227		$	752,987
Gross profit (1)	144,545			134,638			138,407			189,052			193,817

Loss before income taxes (2)	(11,804		)	(38,705		)	(52,802		)	(15,443		)	(23,460		)
Income tax (benefit) provision	(626		)	440			12			(12,623		)	1,001
Net loss	$	(11,178	)	$	(39,145	)	$	(52,814	)	$	(2,820	)	$	(24,461	)

Basic and dilutive net loss per share:	$	(0.31	)	$	(1.13	)	$	(1.54	)	$	(0.09	)	$	(0.77	)

Shares used in computing basic and diluted net loss per share:	35,745			34,559			34,260			32,909			31,653



	Fiscal Year Ended
	June 24, 2016		June 26, 2015		June 27, 2014		June 28, 2013		June 29, 2012
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	92,946	$	67,191	$	109,297	$	175,181	$	104,851
Working capital	$	96,568	$	100,783	$	57,470	$	130,866	$	112,960
Total assets	$	356,129	$	387,584	$	364,938	$	407,853	$	496,880
Total debt, net of unamortized debt issuance costs	$	64,498	$	68,677	$	—	$	—	$	15,200
Total liabilities	$	300,939	$	334,206	$	282,786	$	277,599	$	385,988
Total stockholders’ equity	$	55,190	$	53,378	$	82,152	$	130,254	$	110,892


(1)	Gross profit includes the following items:



	Fiscal Year Ended
	June 24, 2016		June 26, 2015		June 27, 2014		June 28, 2013		June 29, 2012
	(in thousands)
Share-based compensation	$	1,622	$	1,962	$	1,676	$	1,598	$	1,358
Impairment of investments and long-lived assets	$	—	$	955	$	2,946	$	—	$	—


(2)	Loss before income taxes includes the following items:



	Fiscal Year Ended
	June 24, 2016			June 26, 2015		June 27, 2014		June 28, 2013		June 29, 2012
	(in thousands)
Share-based compensation	$	12,037		$	14,549	$	11,979	$	10,100	$	10,061
Restructuring charges	—			116		1,251		9,048		2,469
Gain from sale of assets	(4,425		)	—		—		—		—
Impairment of investments and long-lived assets	—			1,230		4,554		189		527
Total charges	$	7,612		$	15,895	$	17,784	$	19,337	$	13,057

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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

SGI is a global leader in high performance solutions for compute, data analytics and data management, that enable customers to accelerate time to discovery, innovation and profitability. We are focused on helping customers solve their most demanding business and technology challenges.

We develop, market and sell a broad line of low cost, mid-range and high-end scale-out and scale-up servers, enterprise-class storage hardware, differentiating software and designed-to-order solutions for large-scale deployments, coupled with global support and highly experienced professional services. SGI solutions are designed to deliver high impact results with lower total costs of ownership and to achieve industry-leading speed, scale and efficiency.

SGI solutions are utilized by scientific, business and government communities to fulfill highly compute intensive application needs in petascale and exascale environments. Delivering industry-leading computing power and fast and efficient data movement, both within the computing system and to and from large-scale data storage installations, SGI systems enable customers to access, analyze, transform, manage and visualize information in real and near real-time.

Our goal is to accelerate time to results in key High Performance Computing ("HPC") markets including federal government, defense and strategic systems, weather and climate, physical and life sciences, energy (including oil and gas), aerospace, automotive manufacturing, internet, financial services, education and research institutions, and media and entertainment. In the High Performance Data Analytics ("HPDA") market, SGI products allows enterprise customers to achieve greater insight and gain competitive advantage to run their business in real-time with SAP HANA and Oracle® Database In-Memory. These product options enables lines of business to access vital information with up-to-the-moment accuracy, get answers instantly, and operate in real time, at near limitless scale and mission-critical reliability. SGI helps make these SAP HANA and Oracle Database In-Memory insights possible.

We are focused on building upon the success in our existing high performance solution for compute business as well as increasing our service business with an emphasis on professional services. With our enhanced go-to-market capability, which includes large partners and resellers, we believe we will penetrate the higher margin in-memory market that will largely target commercial enterprise businesses. We have already begun to see positive traction in the market. In addition, we entered into a non-exclusive Outsourced Manufacturing Agreement with Hewlett Packard Enterprise Company ("HPE") effective as of February 4, 2016, pursuant to which HPE will incorporate our UV technology into a new 8-socket system manufactured by HPE. Our SGI UV 300H for SAP HANA is designed to streamline database management for single large node environments, which require extremely high capacity and scale to meet the needs of in-memory databases. Our management continues to focus on opportunities to enhance operational efficiency to reduce costs that will enable profitability while maintaining appropriate levels of investment as well as cash generation. We believe that this strategic plan will help create a strong foundation for our long-term business results.

Basis of Presentation

Included in this report are our consolidated balance sheets as of June 24, 2016 and June 26, 2015, and the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for the fiscal years ended June 24, 2016 ("fiscal 2016"), June 26, 2015 ("fiscal 2015") and June 27, 2014 ("fiscal 2014").

The Company has a 52 or 53-week fiscal year ending on the last Friday in June. Fiscal years 2016, 2015 and 2014 were all comprised of 52 weeks. Fiscal year 2017 will be comprised of 53 weeks and will end on June 30, 2017.

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Significant events

Our financial results during fiscal 2016, 2015 and 2014 were affected by certain significant events that should be considered in comparing the periods presented.

Definitive Agreement to be acquired by Hewlett Packard Enterprise Company

On August 11, 2016, we announced that we signed a definitive agreement to be acquired by HPE for $7.75 per share in cash, a transaction valued at approximately $275 million, net of cash and debt. HPE and SGI believe that by combining complementary product portfolios and go-to-market approaches they will be able to strengthen the leading position and financial performance of the combined business. The transaction is expected to close in the second or third quarter of the Company's fiscal year 2017 (November 1, 2016 - January 31, 2017), subject to regulatory and stockholders approvals and other customary closing conditions.

Divestiture of MineSet, Inc.

On February 5, 2016, the "Closing Date," we consummated a stock purchase agreement to sell 100% of the issued and outstanding shares of MineSet, Inc. ("MineSet"), a wholly-owned subsidiary, to ESI Group for approximately $4.7 million in cash. In connection with this transaction, we transferred all assets and liabilities related to the MineSet business to ESI Group as of the closing date. The Company recognized a gain of $4.4 million for the sale of this asset, net of all related costs.

Term Loan

On January 27, 2015, we entered into a credit agreement (the "Term Loan") among the Company, certain lenders and Morgan Stanley Senior Funding, Inc., as administrative and collateral agent and lead arranger. The Term Loan provided an aggregate principal amount of $70.0 million with a term of three and a half years, bearing interest at the LIBO Rate (as defined in the Credit Agreement), subject to a 1.0% minimum, plus 9.0% per annum. The Term Loan provided $66.2 million of cash, net of borrowing and origination costs of approximately $3.8 million, which was used to pay off the prior credit facility and provide cash and cash equivalents sufficient to fund working capital requirements, capital expenditures and operations. As of June 24, 2016, we had $57.2 million, net of unamortized debt issuance costs of $2.2 million, outstanding principal balance owed on the Term Loan. Approximately $56.7 million, net of unamortized issuance costs of $1.2 million, was recorded as long-term debt and approximately $0.5 million, net of unamortized issuance costs of $1.1 million, was recorded as short-term debt. We were in compliance with all covenants under the Term Loan as of June 24, 2016.

Japan Loans

During 2015, we entered into unsecured unguaranteed loans with various Japanese banks ("Japan Loans") amounting to 300 million yen or $2.5 million at TIBOR (Tokyo Interbank Offered Rate) plus 1.0% per annum. During fiscal 2016, we entered into two new loans at rates ranging from TIBOR plus 1.0% to 1.75% per annum, for an aggregate total of 250 million yen or approximately $2.1 million and repaid a total of 275 million yen amounting to approximately $2.4 million toward the loans. As of June 24, 2016, approximately $2.1 million and $0.5 million were classified as short-term debt and long-term debt, respectively.

During fiscal 2016, we also secured a four year Private Placement Bond from Mizuho Bank ("Japan Private Placement Bond") for 500 million yen or $4.4 million at 0.8% per annum, of which approximately $1.2 million and $3.5 million, net of unamortized debt issuance costs of $0.1 million, were classified as short-term debt and long-term debt, respectively, as of June 24, 2016.

Impairment of Long-lived Assets

We review 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.

As a result of a decision made to stop investment in certain next generation FileTek products, we determined that intangible assets related to the product development of these next generation products were impaired. We recorded an impairment charge of $2.9 million in the fourth quarter of fiscal 2014, which was recorded as cost of revenue. In the second quarter of fiscal 2015, we recorded an impairment charge of $1.1 million, impacting cost of revenue by $0.8 million and sales expense by $0.3 million. In addition, during the fourth quarter of fiscal 2015, we recorded a $0.1 million impairment charge impacting cost of revenue for other assets with an indefinite life as we no longer plan to utilize the asset for future product development.

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Acquisition of FileTek, Inc.

On September 30, 2013, we acquired certain assets of FileTek, Inc. ("FileTek"), a global provider of High Performance Data Analytics storage virtualization, large-scale data management and active archive solutions. The total purchase price was approximately $9.2 million in cash. This acquisition expanded our storage solutions by enabling customers to manage data assets efficiently and lower the cost and administration of high-volume storage. Under the terms of the agreement, we acquired FileTek® StorHouse® and Trusted Edge® software, worldwide customers, an engineering team and services and support resources.

As indicated above, as a result of a decision made in the fourth quarter of fiscal 2014 to stop further investment in development of the next generation FileTek products, we determined that the intangible assets related to the product development of the next generation products were impaired. As mentioned above, we recorded an impairment charge of $2.9 million in the fourth quarter of fiscal 2014, impacting cost of revenue. During the second quarter of fiscal 2015, we decided to cease selling and supporting the products acquired as part of the FileTek acquisition and determined that the remaining intangible assets related to this acquisition were impaired. We recorded an impairment charge of $1.1 million in the second quarter of fiscal 2015, impacting cost of revenue by $0.8 million and sales expense by $0.3 million.

Contract Manufacturing Transition

In July 2013, we selected Jabil Circuit, Inc. ("Jabil") to be our primary global manufacturing services and supply chain management provider. The transition to Jabil was expected to be implemented as a “manage in place” model, which would utilize existing SGI facilities and personnel. On November 18, 2013, the Company signed an asset purchase agreement with Jabil, whereby Jabil would purchase SGI’s primary manufacturing facility, located in Chippewa Falls, Wisconsin and certain other manufacturing assets for $6.3 million in cash.

The total carrying of the assets held for sale were written down to their fair value of $6.3 million resulting in an impairment charge of $0.9 million recorded in general and administrative expenses in the second quarter of fiscal 2014.

We also expected that approximately 120 of our manufacturing personnel in Chippewa Falls would transfer to Jabil. During the second quarter of fiscal 2014, we accrued approximately $0.7 million of compensation costs associated with the transfer of these employees as part of the agreement with Jabil, which was recorded within cost of revenue.

During the fourth quarter of fiscal 2014, we reevaluated our outsourcing model given lower than anticipated volumes of Company product sales. On August 4, 2014, we terminated the planned manage-in-place outsourcing structure and the asset purchase agreement referenced above. We paid approximately $0.6 million to Jabil for certain assets that were purchased for the manage-in-place model as well as for costs associated with streamlining the manufacturing process. In addition, we reversed the $0.7 million accrual previously booked for compensation costs associated with the proposed employee transfer discussed above.

Results of Operations

Summarized below are the results of our operations for fiscal 2016, 2015 and 2014.

Financial Highlights

Comparison of Fiscal 2016 and Fiscal 2015

•

Our total revenue increased $11.7 million or 2.2% to $532.9 million in fiscal 2016 from $521.3 million in fiscal 2015. The increase of revenue in fiscal 2016 compared fiscal 2015, was due primarily to higher products revenue, particularly in our international operations, offset by a reduction in service revenue. The increase in product revenue is consistent with our strategic decision to focus our investments in strategic areas of High Performance Computing ("HPC") and High Performance Data Analytics ("HPDA"). We have seen good traction in our HPDA business and have been successful in winning large strategic projects in HPC. Although we experienced a significant increase in revenue from the U.S. government as a result of these large programs; we have seen a overall decline in revenue from our U.S. government contracts compared to the same period a year ago. The decrease in our service revenue was due to the lower volume of products sold over the last few years requiring service needs and the timing of professional services provided. In addition, we experienced a decline in our support revenue associated with initial product sales as our customers refresh their technology to newer generation products. The warranty period for our products is generally one to three years, as such the amount of support and maintenance revenue is expected to be lower given that products are still under warranty.

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•

Our overall gross margin increased by 1.3 percentage points from 25.8% in fiscal 2015 to 27.1% in fiscal 2016. The favorable change in gross margin was primarily due to higher product margin resulting from a higher UV mix compared to last year, however, this was offset by a lower mix of service revenue. Our UV products and service typically generate a much higher margin than our other products. We also benefited from lower severance, impairment charges and share based compensation costs during fiscal 2016 compared to fiscal 2015.

•

Our research and development, sales and marketing and general and administrative expenses decreased $18.5 million or 11.0% from $168.6 million in fiscal 2015 to $150.1 million in fiscal 2016. We benefited from lower compensation and related expenses due to reductions in headcount, lower share-based compensation, severance and impairment charges along with lower spending due to tight expense controls. As indicated above, we took an impairment charge in the second quarter of 2015 related to an acquisition made in 2014.


•	We recognized a gain of $4.4 million from the sale of MineSet during the third quarter of fiscal 2016, as discussed above.


•	Total headcount as of June 24, 2016 was 1,091, which reflects a reduction of 19 employees from 1,110 as of June 26, 2015 due to our cost reduction and restructuring actions occurring over the last fiscal year.


•	During fiscal 2016, we incurred approximately $2.6 million of severance charges, primarily associated with planned cost reductions in Germany. During fiscal 2015, we incurred approximately $6.2 million of severance charges, primarily associated with planned cost reductions in the U.S.

•

Interest expense, net was approximately $7.9 million and $3.7 million for fiscal 2016 and fiscal 2015, respectively. As indicated above, on January 27, 2015, we entered into a credit agreement providing an aggregate principal amount of $70.0 million with a term of three and a half years, bearing interest at the LIBO Rate (as defined in the Credit Agreement), subject to a 1.0% minimum, plus 9.0% per annum.


•	Other expense, net was approximately $2.8 million and $0.9 million for fiscal 2016 and 2015, respectively. During fiscal 2016, we experienced an unfavorable foreign exchange impact related to balance sheet hedge contracts as a result of the Japanese yen strengthening against the U.S. dollar.

•

We recognized a net loss for fiscal 2016 of $11.2 million compared to a net loss of $39.1 million in fiscal 2015. The $28.0 million decrease in net loss for fiscal 2016 compared to the last fiscal year was primarily driven by higher revenue and lower operating expenses as well as the $4.4 million gain for the sale of the MineSet assets. This was offset by higher interest expense due to the Term Loan obtained in January 2015 and unfavorable foreign exchange impact relating to balance sheet hedge contracts as a result of the Japanese yen strengthening against the U.S. dollar.


•	We have continued to streamline our operations and size the business for profitability while continuing to invest in our more differentiated growth initiatives.

Comparison of Fiscal 2015 and Fiscal 2014

•

Our total revenue decreased $8.7 million or 1.6% to $521.3 million in fiscal 2015 from $529.9 million in fiscal 2014. The decrease was due primarily to lower sales for our legacy cloud products as well as lower service revenue. The decrease in legacy cloud products is consistent with our strategic decision to withdraw from low margin commodity service infrastructure and to focus our investments in strategic areas of HPC, HPDA and services. The decrease in our service revenue is due to the lower volume of products sold over the last few years requiring service needs, the timing of professional services provided. In addition, we experienced a decline in our support revenue associated with initial product sales as our customers refresh their technology to newer generation products. The warranty period for our products is generally one to three years, as such the amount of support and maintenance revenue is expected to be lower given that products are still under warranty. This decrease was partially offset by higher U.S. government and system integrators sales compared to the low levels that we experienced after the government shutdown in the fall of 2013. Since the beginning of fiscal 2015, we experienced an overall upward trend in revenue generated from the U.S. government and system integrators.

•

Our overall gross margin decreased by 0.3 percentage points from 26.1% in fiscal 2014 to 25.8% in fiscal 2015. The unfavorable change in gross margin was primarily driven by an unfavorable mix of product revenue to service revenue. This was offset by lower compensation expense resulting from reductions in headcount, lower impairment charges associated with our intangible assets, lower costs related to our previous plans to transition contract manufacturing to Jabil, as well as lower excess and obsolete inventory charges incurred during fiscal 2015. During fiscal 2014, we took excess and obsolete inventory charges of $5.4 million related to our withdrawal from the legacy cloud business and another product line. We also paid approximately $0.6 million to Jabil for certain assets that were purchased for the manage-in-place model as well as for costs associated with streamlining the manufacturing processes discussed above.

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•

Our research and development and selling, general and administrative expenses decreased $23.4 million or 12.2% from $192.0 million in fiscal 2014 to $168.6 million in fiscal 2015. The decrease was attributed to the decline in compensation and related expenses due to reductions in headcount, lower severance as well as lower spending due to tight controls. These decreases were partially offset by higher share-based compensation expenses. In addition, during fiscal 2014, we took an impairment charge of $0.9 million associated with the proposed plan for Jabil to purchase SGI’s primary manufacturing facility, located in Chippewa Falls, Wisconsin and certain other manufacturing assets as discussed above.

•

On September 30, 2013 we acquired certain assets of FileTek for approximately $9.2 million in cash, expanding the Company's storage solutions by enabling customers to manage data assets efficiently and lower the cost and administration of high-volume storage. Under the terms of the agreement, we acquired FileTek's StorHouse® and Trusted Edge® software, worldwide customers, engineering team and services and support resources. As described above, during fiscal 2015, we made a decision to discontinue selling and supporting these products and determined that the remaining intangible assets related to this acquisition were impaired. We recorded an impairment charge of $1.1 million during 2015, impacting cost of revenue by $0.8 million and sales expense by $0.3 million.


•	Total headcount as of June 26, 2015 was 1,110, which reflects a reduction of 56 employees from 1,166 as of June 27, 2014 due to our cost reduction and restructuring actions occurring over the last fiscal year.


•	During fiscal 2015, we incurred approximately $6.2 million of severance charges, primarily associated with planned cost reductions in Germany. During fiscal 2014, we incurred approximately $11.1 million of severance charges, primarily associated with planned cost reductions in the U.S.


•	We incurred restructuring expense of $0.1 million for fiscal 2015, as compared to $1.3 million for fiscal 2014 related to the fiscal 2012 restructuring action primarily focused on cost reductions in Europe.


•	We recognized approximately $1.7 million in other income associated with the sale of an investment in fiscal 2014.

•

We recognized a net loss for fiscal 2015 of $39.1 million compared to a net loss of $52.8 million in fiscal 2014. The $13.7 million decrease in net loss for fiscal 2015 compared to last fiscal year was primarily driven by reductions in operating expenses associated with the lower headcount as part of our cost reduction programs, as well as lower severance, excess and obsolete charges, impairment charges and contract manufacturing transition expenses. This was partially offset by higher interest expense primarily due to the Term Loan, as well as a reduction in other income of $1.7 million associated with the sale of an investment that occurred during fiscal 2014 discussed above.

Net Revenue



	Fiscal Year Ended									2016 over 2015				2015 over 2014
	June 24, 2016			June 26, 2015			June 27, 2014			Change				Change
	June 24, 2016			June 26, 2015			June 27, 2014			$			%	$			%

Net revenue from products:	$	394,844		$	376,294		$	374,565		$	18,550		4.9%	$	1,729		0.5%
As a percent of total net revenue	74.1		%	72.2		%	70.7		%				1.9 ppts				1.5 ppts
Net revenue from services:	138,086			144,965			155,381			(6,879		)	(4.7)%	(10,416		)	(6.7)%
As a percent of total net revenue	25.9		%	27.8		%	29.3		%				(1.9) ppts				(1.5) ppts
Total net revenue	$	532,930		$	521,259		$	529,946		$	11,671		2.2%	$	(8,687	)	(1.6)%

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

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We continuously make revisions to our product offerings and improvements of our product's performance and data storage capacity. Accordingly, we are unable to directly compare our products from period to period and are therefore unable to quantify the changes in pricing of our products from period to period. We believe that our on-going revisions to product offerings and product feature improvements help mitigate competitive pricing pressures by shifting the competitive landscape to differentiated value rather than price. Among other things, the timing of our revenue is primarily dependent upon the funding and implementation schedule of our customers. A significant portion of our revenue relates to large IT projects, which can have long sales cycles and long build-out and acceptance schedules. In addition, we derive a significant portion of our revenue from the U.S. government and from system integrators and educational institutions that receive funding from the U.S. government. Protracted federal budget deliberations, government shutdowns and other disruptions in the timely funding or acceptance of government-related programs can impact the timing of our revenue.

The following table presents revenue by geographic region for fiscal 2016, 2015 and 2014 (in thousands except percentages):



	Fiscal Year Ended									2016 over 2015				2015 over 2014
	June 24, 2016			June 26, 2015			June 27, 2014			Change				Change
	June 24, 2016			June 26, 2015			June 27, 2014			$			%	$			%
Americas	$	295,518		$	323,785		$	277,536		$	(28,267	)	(8.7)%	$	46,249		16.7%
As a percent of total net revenue	55.4		%	62.1		%	52.4		%				(6.7) ppts				9.7 ppts
EMEA	107,439			73,311			116,071			$	34,128		46.6%	(42,760		)	(36.8)%
As a percent of total net revenue	20.2		%	14.1		%	21.9		%				6.1 ppts				(7.8) ppts
APJ	129,973			124,163			136,339			$	5,810		4.7%	(12,176		)	(8.9)%
As a percent of total net revenue	24.4		%	23.8		%	25.7		%				0.6 ppts				(1.9) ppts
Total revenue	$	532,930		$	521,259		$	529,946		$	11,671		2.2%	$	(8,687	)	(1.6)%

The Americas geographic region includes both North and South America. The Europe geographic region ("EMEA") includes European countries. The Asia-Pacific geographic region ("APJ") includes Australia, Japan and all other Asian countries.

Revenue generated in the Americas represented 55.4% of total revenue during fiscal 2016, or a decrease of 6.7 percentage points, from 62.1% during fiscal 2015. The decrease in revenue was primarily driven by a reduction in U.S. government contracts compared to the comparable fiscal 2015. However, starting the second half of fiscal 2016, we have been seeing a significant increase in revenue from our commercial and international customers with an increasing number of large programs, particularly in EMEA and Japan, reflecting our efforts to win large strategic projects.

Revenue generated in the Americas represented 62.1% of total revenue during fiscal 2015, or an increase of 9.7 percentage points, from 52.4% during fiscal 2014. The increase in revenue was due primarily to higher revenue from U.S. government and system integrator sales reflecting an upward trend from the significant reduction in federal spending after the government shutdown in the fall of 2013. This was offset by lower sales for our legacy cloud products.

Our revenue mix by geography illustrates that we continue to have strong international presence representing 46.7%, 40.3% and 52.3%, of our total revenue during fiscal 2016, 2015 and 2014, respectively. For both fiscal 2016 and fiscal 2014 various agencies of the United States government, excluding system integrators (collectively "U.S. government"), contributed more than 10% of total revenue. For fiscal 2015, the U.S. government and one U.S. government system integrators contributed more than 10% of total revenue.

Cost of revenue and gross profit

Cost of revenue and gross profit for fiscal 2016, 2015 and 2014 were as follows (in thousands except percentages):



	Fiscal Year Ended			2016 over 2015		2015 over 2014
	June 24, 2016	June 26, 2015	June 27, 2014	Change		Change
	June 24, 2016	June 26, 2015	June 27, 2014	$	%	$	%
Total cost of revenue	$388,385	$386,621	$391,539	$1,764	0.5%	$(4,918)	(1.3)%

Total gross profit	$144,545	$134,638	$138,407	$9,907	7.4%	$(3,769)	(2.7)%

Total gross margin	27.1%	25.8%	26.1%		1.3 ppts		(0.3) ppts

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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. In addition, 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.

Overall gross profit increased by $9.9 million to $144.5 million in fiscal 2016 from $134.6 million in fiscal 2015 due to an increase in revenue primarily related to our HPDA business and our large strategic program wins. We also benefited from lower severance, share-based compensation and impairment charges. As indicated above, we took an impairment charge of $1.1 million, during fiscal 2015, related to an acquisition made in 2014, of which $0.8 million impacted cost of revenue. This was partially offset by lower revenue from our services business. In addition, we were negatively impacted as a result of one large program where we recognized revenue at a much lower margin than our typical run rate business. Our overall gross margin increased to 27.1% in fiscal 2016 from 25.8% in fiscal 2015. The increase in gross margins in fiscal 2016 compared to fiscal 2015 was primarily driven by a favorable mix of UV, which typically generates higher margins, partially offset by a lower mix of service revenue.

Overall gross profit decreased by $3.8 million to $134.6 million in fiscal 2015 from $138.4 million in fiscal 2014 due to a decrease in revenue volume primarily related to lower sales for our legacy cloud products. This was partially offset by lower compensation and related expense due to the reduction in headcount. Our overall gross margin decreased to 25.8% in fiscal 2015 from 26.1% in fiscal 2014. The decrease in gross margins in fiscal 2015 compared to fiscal 2014 was primarily driven by an unfavorable mix of product revenue to service revenue. However, this was partially offset by higher overall gross margins as we withdrew from low margin commodity server infrastructure and focused on strategic areas of HPC, HPDA and service. We also benefited from lower compensation expense resulting from reductions in headcount, lower impairment charges associated with our intangible assets, lower costs related to our previous plans to transition contract manufacturing to Jabil, as well as lower excess and obsolete inventory charges incurred during fiscal 2015. During fiscal 2014, we took excess and obsolete inventory charges of $5.4 million related to our withdrawal from the legacy cloud business and another product line. We also paid approximately $0.6 million to Jabil for certain assets that were purchased for the manage-in-place model as well as for costs associated with streamlining the manufacturing processes discussed above.

Operating expenses

Operating expenses for fiscal 2016, 2015 and 2014 were as follows:



	Fiscal Year Ended							2016 over 2015					2015 over 2014
	June 24, 2016			June 26, 2015		June 27, 2014		Change					Change
	June 24, 2016			June 26, 2015		June 27, 2014		$			%		$			%
	(in thousands, except percentages)
Research and development	$	50,697		$	53,206	$	63,526	$	(2,509	)	(4.7	)%	$	(10,320	)	(16.2	)%
Sales and marketing	51,525			61,544		72,681		(10,019		)	(16.3	)%	(11,137		)	(15.3	)%
General and administrative	47,860			53,861		55,796		(6,001		)	(11.1	)%	(1,935		)	(3.5	)%
Gain on sale of assets	(4,425		)	—		—		(4,425		)	NM		—			NM
Restructuring	—			116		1,251		(116		)	(100.0	)%	(1,135		)	(90.7	)%
Total operating expense	$	145,657		$	168,727	$	193,254	$	(23,070	)	(13.7	)%	$	(24,527	)	(12.7	)%

NM - Not meaningful

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, facilities and information technology costs. During fiscal 2016, 2015 and 2014, we received $1.1 million, $0.2 million and $1.0 million, respectively, in third-party funding which offset a portion of our research and development expenses.

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Research and development expense decreased $2.5 million or 4.7% to $50.7 million in fiscal 2016 from $53.2 million in fiscal 2015. We incurred lower third party costs of $1.2 million, received higher research and development fundings of $0.9 million, incurred lower severance costs of $0.8 million as well as reduced facility and share-based compensation charges. This was partially offset by an increase in equipment and material as well as an increase in compensation and related costs incurred to support new product introductions and development activities.

Research and development expense decreased $10.3 million or 16.2% to $53.2 million in fiscal 2015 from $63.5 million in fiscal 2014. We experienced lower compensation and related expenses of $6.7 million as a result of reduction in headcount, lower facilities and depreciation costs as well as lower severance costs of $3.2 million in fiscal 2015 compared fiscal 2014. This was partially offset by an increase in equipment, material and third party costs of $1.9 million incurred to support new product introductions and development activities.

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, facilities and information technology costs. We also incur marketing expenses for activities such as trade shows, direct mail and advertising.

Sales and marketing expense decreased $10.0 million or 16.3% to $51.5 million in fiscal 2016 from $61.5 million in fiscal 2015. This decrease was primarily due to a decrease in our compensation and related expenses of $2.8 million as a result of decreased headcount, as well as lower commission expense reflecting a change in the sales commission targets compared to last year. We also benefited from lower severance expenses of $1.4 million, lower share-based compensation of $0.5 million, as well as lower amortization and impairment of intangibles compared to fiscal 2015. As previously indicated, as a result of a decision made to discontinue selling and supporting certain storage products, we recorded an impairment charge impacting sales expense by $0.3 million in fiscal 2015.

Sales and marketing expense decreased $11.1 million or 15.3% to $61.5 million in fiscal 2015 from $72.7 million in fiscal 2014. This decrease was primarily due to a decrease in our compensation and related expenses of $7.0 million as a result of decreased headcount, as well as lower commission expense reflecting a change in the sales commission targets compared to the previous year. We also benefited from lower spending for travel and conferences and lower amortization of intangibles as assets become fully amortized. This was only slightly offset by an increase in severance expense related to our cost reduction program primarily impacting Germany. In addition, during fiscal 2015, as a result of a decision made to discontinue selling and supporting certain storage products, we recorded an impairment charge impacting sales expense by $0.3 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 manufacturing, media and entertainment, semiconductor design, manufacturing, financial services, data centers and business intelligence and data analytics. In addition, we are also investing in our marketing functions in order to ensure that we are in markets and technologies that will provide us with growth in our target segments.

General and administrative. General and administrative expense consists primarily of personnel costs, legal and professional service costs, depreciation, share-based compensation, facilities and information technology costs.

General and administrative expense decreased $6.0 million or 11.1% to $47.9 million in fiscal 2016 from $53.9 million in fiscal 2015. This decrease was primarily due a decrease in third party expenses of $2.6 million, a decrease in facility costs of $2.2 million as a result of tight spending and facility closures compared to the same period a year ago, lower compensation and related expenses of $2.3 million as a result of decreased headcount as well as decrease in share-based compensation. This decrease was slightly offset by higher severance and bad debt expense.

General and administrative expense decreased $1.9 million or 3.5% to $53.9 million in fiscal 2015 from $55.8 million in fiscal 2014. This decrease was primarily due to a decrease in our compensation and related expenses of $2.5 million as a result of decreased headcount, decreased severance of $1.7 million as well as lower facility costs. This was partially offset by higher share-based compensation expense due to new grant awards and an increase in property taxes, as we received a $0.6 million property tax refund during fiscal 2014. We also incurred lower costs and charges associated with our previous plans to transition contract manufacturing transition to Jabil.

Gain from sale of assets. On February 5, 2016, the "Closing Date," we consummated a stock purchase agreement to sell 100% of the issued and outstanding shares of MineSet, a wholly-owned subsidiary, to ESI Group for approximately $4.7 million in cash,. The Company recognized a gain of $4.4 million for the sale of this asset, net of all related costs.

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Restructuring. Total restructuring expense related to our fiscal 2012 restructuring actions was approximately $0.1 million and $1.3 million for fiscal 2015 and 2014, respectively. There was no restructuring expense recorded during fiscal 2016. This restructuring action was complete as of December 26, 2014 and we incurred approximately $12.6 million of cumulative expense related to our fiscal 2012 restructuring action.

Total other income (expense), net

Total other income (expense), net for fiscal 2016, 2015 and 2014 was as follows:



	Fiscal Year Ended									2016 over 2015					2015 over 2014
	June 24, 2016			June 26, 2015			June 27, 2014			Change					Change
	June 24, 2016			June 26, 2015			June 27, 2014			$			%		$			%
	(in thousands, except percentages)
Interest expense, net	$	(7,932	)	$	(3,744	)	$	(117	)	$	(4,188	)	(111.9	)%	$	(3,627	)	(3,100.0	)%
Other income (expense), net	(2,760		)	(872		)	2,162			(1,888		)	(216.5	)%	(3,034		)	(140.3	)%
Total other income (expense), net	$	(10,692	)	$	(4,616	)	$	2,045		$	(6,076	)	(131.6	)%	$	(6,661	)	(325.7	)%

Interest expense, net. Interest expense, net primarily consists of interest expense relating to our Term Loan as well as interest earned on our interest-bearing investment accounts. During the fiscal 2016, we recorded $8.0 million of interest expense primarily related to our Term Loan which we entered into in January 2015.

Other income (expense), net. Other income (expense), net consists primarily of foreign exchange losses as a result of the strengthening of the U.S. Dollar against the Euro, British Pound, Czech Koruna, Japanese Yen, and Canadian dollar against the U.S. Dollar as well as gains or losses associated with other non-operating business activities. We have a hedging strategy that is intended to mitigate the effect of exchange rate fluctuations on certain foreign currency balance sheet accounts and cash flows. During fiscal 2014, we recorded $1.7 million of other income associated with a sale of an investment.

Income tax provision (benefit)

Income tax provision for fiscal 2016, 2015 and 2014 was as follows:



	Fiscal Year Ended							2016 over 2015					2015 over 2014
	June 24, 2016			June 26, 2015		June 27, 2014		Change					Change
	June 24, 2016			June 26, 2015		June 27, 2014		$			%		$		%
	(in thousands, except percentages)
Income tax (benefit) provision	$	(626	)	$	440	$	12	$	(1,066	)	(242.3	)%	$	428	3,566.7	%

We recorded a tax benefit of $0.6 million for fiscal 2016. Our tax benefit for fiscal 2016 includes current tax expense and net deferred tax benefit primarily related to our foreign operations, current tax expense attributable to U.S. state income taxes, deferred tax expense related to amortization of acquired intangibles, and tax benefit for unrecognized tax benefits and related interest due to settlements and expiration of statutes of limitation. The effective tax rate differed from the combined U.S. federal and state statutory income tax rates for fiscal 2016 primarily due to unbenefited losses related to our U.S. valuation allowance and the foreign rate differential. We early adopted ASU 2015-17 effective June 24, 2016 on a prospective basis. Adoption of this ASU resulted in an immaterial reclassification of our net current deferred tax asset to the net non-current deferred tax asset in our Consolidated Balance Sheet as of June 24, 2016. No prior periods were retrospectively adjusted.

We recorded a tax provision of $0.4 million for fiscal 2015. Our tax expense for fiscal 2015 includes current and deferred tax expense primarily related to our foreign operations, current tax expense attributable to U.S. state income taxes, deferred tax expense related to amortization of acquired intangibles, and tax benefit for unrecognized tax benefits and related interest due to settlements and expiration of statutes of limitation. The effective tax rate differed from the combined U.S. federal and state statutory income tax rates for fiscal 2015 primarily due to unbenefited losses related to our U.S. valuation allowance and the foreign rate differential.

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We recorded an immaterial amount of tax expense of for fiscal 2014. Our tax expense for fiscal 2014 includes current and deferred tax benefit primarily related to our foreign operations, current tax expense attributable to U.S. state income taxes, and tax expense for unrecognized tax benefits and related interest. We believe that it is more likely than not that a portion of the deferred tax assets of our foreign subsidiaries will not be realized. As such, we recorded deferred tax benefit related to the release of valuation allowance for certain of our foreign subsidiaries. The effective tax rate differed from the combined U.S. federal and state statutory income tax rates for fiscal 2014 primarily due to current and deferred tax expense incurred by our foreign subsidiaries, a refund of foreign taxes paid, change in valuation allowance and a tax expense associated with unrecognized tax benefits and related interest.

As of June 24, 2016, 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.

Segment Operating Performance

The Company manages its business primarily as three operating segments, HPC, HPDA and Service. The Company has aggregated the HPC and HPDA operating segments into one reportable Product segment as the HPDA operating segment has not met the quantitative threshold to be reported as a separate reportable segment. As such, the Company reports two reportable segments, Product and Service. 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 Operating Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the Company's availability of separate financial information.

The Company's CODM evaluates the performance of its operating segments based on revenue and operating profit (loss). Revenues are generally allocated based on the type of products and services provided to our customers. Operating profit (loss) for each segment includes related cost of sales and operating expenses directly attributable to the segment. A portion of the segments' expenses arise from shared services and infrastructure that the Company provides 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 and other corporate infrastructure expenses. These corporate charges are allocated to the segments and are reassessed on a periodic 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 profitability of each of the segments is measured after excluding share-based compensation expenses, amortization and impairment of intangibles, restructuring charges, general and administration charges, other unallocated corporate charges and other items as management does not include this information in its measurement of the performance of the operating segments.

In fiscal 2014, the Company previously managed its business primarily as three separate business units: Compute, Storage, and Service. In fiscal 2015, the Company combined the Compute and Storage business units into a single Product business unit. All periods presented conform to the current reportable segment structure.

Product:

Our Product reportable segment is comprised of our compute and storage solutions, which include products from both our HPC and HPDA operating segments. Our product segment includes our scale-out computing, scale-up computing, software and cloud/web solutions. Compute solutions include integrated third-party hardware and software products that we sell to provide a single source solution for our customers. Our compute solutions are designed to minimize the number and complexity of interconnects for power and data transfer to improve reliability, speed of implementation and serviceability. Our storage solutions include both hardware and software offerings to address virtually every type of data storage and management requirement. Our storage solutions are designed to provide extreme scale, broad flexibility, and to minimize the cost to store data.

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Operating results for our product reportable segment for fiscal 2016, 2015 and 2014 were as follow (in thousands except percentage):



	Fiscal Year Ended			2016 over 2015			2015 over 2014
	June 24, 2016	June 26, 2015	June 27, 2014	Change			Change
	June 24, 2016	June 26, 2015	June 27, 2014	$	%		$	%
Net revenue	$394,844	$376,294	$374,565	$18,550	4.9%		$1,729	0.5%

Operating profit (loss)	29,885	10,578	(146)	19,307	182.5	%	10,724	(7,345.2)%

Operating margin	7.6%	2.8%	—%		4.8 ppts			2.8 ppts

Revenue for our product segment increased $18.6 million or 4.9% to $394.8 million in fiscal 2016 from $376.3 million during fiscal 2015. The increase in revenue in fiscal 2016 compared to fiscal 2015 was due primarily to an increase in the number of large programs, particularly in Japan and EMEA, as a result of our focus to win more strategic large projects. We also experienced an increase in revenue for our HPDA solutions with our new UV products, as discussed above.

Revenue for our product segment increased $1.7 million or 0.5% in fiscal 2015 compared to $374.6 million in fiscal 2014. The slight increase in revenue in fiscal 2015 compared to fiscal 2014 was due primarily to an increase in revenue generated from the U.S. government and system integrators compared to the low levels that we experienced after the government shutdown in the fall of 2013. We have experienced an upward trend in revenue generated from the U.S. government and system integrators compared to the low levels that we experienced after the government shutdown. This increase was offset by the lower volume of our legacy cloud products and is consistent with our strategic decision to withdraw from low margin commodity service infrastructure and to focus our investments in strategic areas of HPC, High Performance Data Analytics and services.

Overall operating profit for our product segment increased by $19.3 million to an operating profit of $29.9 million in fiscal 2016 from $10.6 million operating profit in fiscal 2015. The increase in operating profit in fiscal 2016 compared to the last fiscal year was mainly driven by higher revenue along with a more favorable mix of higher margin product sales. We also benefited from lower operating expenses due to reductions in headcount resulting in lower compensation and related expenses, lower commissions and bonuses, as well as tight spending controls. However, this was partially offset by the impact of one large deal that occurred during fiscal 2016 where we recognized revenue at a much lower margin than our typical run rate business.

Overall operating profit for our product segment increased by $10.7 million to an operating profit of $10.6 million in fiscal 2015 from $0.1 million operating loss in fiscal 2014. The increase in operating profit in fiscal 2015 compared to the last fiscal year was mainly driven by more favorable product mix as we withdrew from low margin commodity server infrastructure and focused on strategic areas of HPC, HPDA, and service. In addition, we benefited from lower operating expenses due to reductions in headcount resulting in lower compensation and related expenses as discussed above, lower commissions as well as tight spending controls.

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Service:

The Service segment is comprised of customer service support and professional services. Our customer service 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 value added services associated with technology consulting, project management and customer education, all of which help our customers realize the full value of their information technology investments.

Operating results for our Service segment for fiscal 2016, 2015 and 2014 were as follows (in thousands except percentage):



	Fiscal Year Ended			2016 over 2015		2015 over 2014
	June 24, 2016	June 26, 2015	June 27, 2014	Change		Change
	June 24, 2016	June 26, 2015	June 27, 2014	$	%	$	%
Net revenue	$138,086	$144,965	$155,381	$(6,879)	(4.7)%	$(10,416)	(6.7)%

Operating profit	53,585	57,513	60,412	(3,928)	(6.8)%	(2,899)	(4.8)%

Operating margin	38.8%	39.7%	38.9%		(0.9) ppts		0.8 ppts

Our service revenue will typically fluctuate due to timing of when services were performed on consulting and product integration services. Our service revenue is typically recognized ratably over the respective service periods. Revenue for our Service segment decreased $6.9 million or 4.7% to $138.1 million in fiscal 2016 from $145.0 million in fiscal 2015. The decrease compared to a year ago was primarily due to the lower volume of products sold requiring service needs and the timing of professional services provided. In addition, we experienced a decline in our support revenue associated with initial product sales as our customers refresh their technology to newer generation products. The warranty period for our products is generally one to three years, as such the amount of support and maintenance revenue is expected to be lower given that products are still under warranty.

Revenue for our Service segment decreased $10.4 million or 6.7% to $145.0 million in fiscal 2015 from $155.4 million in fiscal 2014. The decrease compared to a year ago was primarily due to the lower volume of products sold requiring service needs and the timing of professional services provided. In addition, we experienced a decline in our support revenue associated with initial product sales as our customers refresh their technology to newer generation products. The warranty period for our products is generally one to three years, as such the amount of support and maintenance revenue is expected to be lower given that products are still under warranty.

Overall operating profit for our Service segment decreased by $3.9 million to $53.6 million operating income in fiscal 2016 from $57.5 million operating income in fiscal 2015. The decreases in operating profit in fiscal 2016 compared to last fiscal year primarily driven by the lower revenue volumes, however this was partially offset by lower expenses driven by reductions in headcount.

Overall operating profit for our Service segment decreased by $2.9 million to $57.5 million operating income in fiscal 2015 from $60.4 million operating income in fiscal 2014. Despite the decrease in revenue, overall operating margin increased for our Service segment during fiscal 2015 compared to fiscal 2014 as we benefited from the reductions in headcount discussed above resulting in lower compensation and related expenses, lower spending associated with using third parties as well as tight expense controls.

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Liquidity and Capital Resources

We had $92.9 million of cash and cash equivalents at June 24, 2016 compared with $67.2 million of cash and cash equivalents at June 26, 2015. As of June 24, 2016, we had $46.7 million of cash and cash equivalents that are held outside the United States. Historically, we have required capital principally to fund our working capital needs. If we invest any of our cash outside of non-interest-bearing operating accounts, it is our investment policy to invest in a manner that preserves capital, provides liquidity, maintains appropriate diversification and optimizes after-tax yield and return within our policy's framework and stipulated benchmarks. Adherence to 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 24, 2016, we had short-term and long-term restricted cash and cash equivalents of $3.5 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.

On January 27, 2015, the Company entered into a credit agreement (the "Term Loan") among the Company, certain lenders and Morgan Stanley Senior Funding, Inc., as administrative and collateral agent and lead arranger. The Term Loan provided an aggregate principal amount of $70.0 million for a term of three and a half years bearing interest at the LIBO Rate (as defined in the Credit Agreement), subject to a 1.0% minimum, plus 9.0% per annum. The Term Loan provided $66.2 million of cash, net of borrowing and debt issuance costs of approximately $3.8 million, which was used to pay off the prior credit facility, as mentioned above, and provide cash and cash equivalents sufficient to fund working capital requirements, capital expenditures and operations. All commitments under the December 2011 credit facility were terminated. We may not prepay the loan during the first year and may only prepay the loan during the second year at a premium. After the second year, we may prepay the loan without penalty. We have been assessing various financing alternatives including a prepayment of all or portion the Term Loan. During fiscal 2016, we made $10.1 million of principal payments to Morgan Stanley Senior funding, Inc. and Tennenbaum Capital Partners, LLC, of which $8.4 million represented prepayments. As of June 24, 2016, we had an outstanding principal balance of $59.4 million on the Term Loan of which approximately $1.5 million and $57.9 million were recorded as short-term debt and long-term debt, respectively. We were in compliance with all covenants under the Term Loan, as of June 24, 2016 and expects to be in compliance for the next 12 months.

During fiscal 2015, we entered into unsecured unguaranteed loans with various Japanese banks amounting to 300 million yen or $2.5 million at TIBOR plus 1.0% per annum. During fiscal 2016, we entered into two new loans at rates ranging from TIBOR plus 1.0% to 1.75% per annum, for an aggregate total of 250 million yen or approximately $2.1 million and repaid a total of 275 million yen amounting to approximately $2.4 million toward the loans during fiscal 2016. As of June 24, 2016, we had an outstanding principal balance of $2.6 million on the Japanese loans of which approximately $2.1 million and $0.5 million were classified as short-term debt and long-term debt, respectively.

The Company also entered into a four year Private Placement Bond from Mizuho Bank ("Japan Private Placement Bond") for 500 million yen or $4.4 million at 0.8% per annum. As of June 24, 2016, we had an outstanding principal balance of $4.7 million of which approximately $1.2 million and $3.5 million were recored as short-term debt and long-term debt, respectively.

We have intensified our cash management processes related to monitoring, projecting and controlling 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 believe our current cash and cash equivalents will be sufficient to fund working capital requirements, anticipated capital expenditures and other operations for the next twelve months. We do not anticipate paying dividends or repurchasing stock while the Term Loan is outstanding. See Note 15 and 16, Short-term Debt and Long-term Debt, for more information on the Term Loan agreement.

The adequacy of these resources to meet our liquidity needs beyond the next twelve months will depend on our success in receiving advance and milestone payments, our ability to continue winning larger program awards, our operating results and capital expenditures required to meet our business needs. We have experienced an increase in the number of large programs that have been awarded to us and are continuing to focus on winning large programs to help drive our revenue growth. With many of these large programs, we may experience a one to two quarter lag between our payments to vendors for equipment and materials and the accompanying installation, acceptance, billing and collection from the customer. If we fail to generate cash from our operations on a timely basis or do not generate cash from our operations sufficient to service our outstanding debt obligations, we may not have the cash resources required to run our business and we may need to seek additional sources of funds.

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If we require additional capital resources to expand our business internally or to acquire complementary products, 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.

As indicated above, we have been assessing various financing alternatives and may prepay all or a portion of the Term Loan. On January 27, 2016, we filed with the SEC a universal shelf Registration Statement on Form S-3 to issue and sell on a current, delayed or continuous basis up to $75.0 million of Company securities in one or more offerings within or outside the United States, whether for cash or through the exchange of other forms of consideration (the “Shelf Registration Statement”). Upon being declared effective by the SEC and pursuant to the Shelf Registration Statement, the Company may issue an indeterminate number of shares of common stock, preferred stock, debt securities and/or warrants at various times and at indeterminate prices. The sale of any additional equity or debt securities could result in dilution to our stockholders.

The following is a summary of cash activity (in thousands):



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014
Consolidated statements of cash flows data:
Net cash provided by (used in) operating activities	$	27,369		$	(97,186	)	$	(33,080	)
Net cash used in investing activities	(470		)	(6,798		)	(26,311		)
Net cash (used in) provided by financing activities	(4,111		)	65,512			(5,530		)
Effect of exchange rate changes on cash and cash equivalents	2,967			(3,634		)	(963		)
Net increase (decrease) in cash and cash equivalents	$	25,755		$	(42,106	)	$	(65,884	)

Operating Activities

Cash provided by operating activities was $27.4 million for fiscal 2016. Our net loss was $11.2 million for fiscal 2016. Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $11.1 million, share-based compensation expense of $12.0 million, gain on sale of MineSet of $4.4 million, and changes in other items of $0.2 million. Net change in operating assets and liabilities was $20.0 million. The primary sources of cash in operating activities were decreases in accounts receivables, inventory, and prepaid expenses and other assets, as well as an increase in accounts payables. The decrease in inventory reflects the timing of shipments of large sales contracts. The primary uses of cash in operating activities were decreases in deferred revenue and other operating liabilities, as well as increases in deferred costs of revenue.

For fiscal 2016, accounts receivable decreased $35.3 million reflecting the timing of revenue recognition and collections of the trade receivables. In addition, inventory decreased $19.5 million reflecting the timing of customer shipments and acceptance of sales contracts. At June 24, 2016, there was $1.4 million of inventory at customer sites undergoing installation testing prior to customer acceptance, compared with $30.2 million at June 26, 2015. Prepaid expenses and other assets decreased by $5.8 million also contributing to the increase in cash from operating activities. Additionally, accounts payable increased by $6.6 million primarily due to the timing of payments to our suppliers.

For fiscal 2016, other liabilities and income taxes payable decreased $7.5 million. These decreases are primarily due to timing of purchases of inventory and payments to our suppliers and tax authorities. Accrued compensation decreased $2.2 million primarily due to lower bonuses and commissions and timing of payments. Deferred revenue decreased by $33.3 million, primarily due to the timing of revenue recognition on sales transactions that were required to be recognized in accordance with our revenue recognition policy. Additionally, other assets increased by $0.9 million also contributing to the decrease in cash from operating activities. We continue our efforts to more closely align payments with customer receipts and as part of the efforts to manage our working capital more closely.

Cash used in operating activities was $97.2 million for fiscal 2015. Our net loss was $39.1 million for fiscal 2015. Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $11.2 million, share-based compensation expense of $14.5 million, impairment on acquired intangibles and long-lived assets of $1.2 million, and changes in deferred income taxes of $0.4 million. Net change in operating assets and liabilities was $85.4 million. The primary sources of cash in operating activity were driven by increases in deferred revenue and decreases in prepaid and other assets. The primary uses of cash in operating activities were increases in accounts receivables, inventory, and deferred costs of revenue, as well as decreases in accounts payables, accrued compensations, and other current and non-current liabilities for payments to our suppliers and vendors. The increase in inventory reflects the timing of purchases to meet demands of large sales contracts that have not yet shipped or have not been accepted by the customers.

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For fiscal 2015, inventory increased $44.0 million reflecting timing of customer shipments and acceptance for a number of our large sales contracts for which we had built up inventory during fiscal 2015 in order to meet customer demand. At June 26, 2015, there was $30.2 million of inventory at customer sites undergoing installation testing prior to customers acceptance, compared with $7.9 million at June 27, 2014. Accounts receivables increased $50.9 million reflecting the timing of revenue recognition and timing of collection of the trade receivables. Deferred cost of revenues also increased by $3.6 million primarily due to the timing and recognition of revenue for these large deals. We continued to receive milestone payments from our customers, improving our cash position. Accounts payables decreased $3.5 million and other liabilities and income taxes payable decreased $7.7 million. These decreases are primarily due to timing of purchases of inventory and payments to our suppliers. Additionally, accrued compensation decreased $1.8 million primarily due to lower bonuses and commissions and timing of payments. This was partially offset by an increase in deferred revenue of $21.4 million, primarily due to the timing of revenue recognition on sales transactions that were required to be recognized in accordance with our revenue recognition policy and a decrease in prepaid and other assets of $4.7 million.

Cash used in operating activities was $33.1 million for fiscal 2014. Our net loss was $52.8 million for fiscal 2014. Non-cash items included in net loss consisted primarily of depreciation and amortization expense of $14.5 million, share-based compensation expense of $12.0 million, a gain on sale of an investment of $1.7 million, impairment on investments and long-lived assets of $4.6 million, changes in deferred income taxes of $0.2 million and changes in other non-cash items of $0.6 million. Net change in operating assets and liabilities was $10.1 million. The primary sources of cash in operating activity were driven by decreases in inventory, deferred cost of revenue, as well as an increase in accounts payable and other liabilities. The primary uses of cash in operating activities were decreases in deferred revenue, accrued compensation, and increase in accounts receivable as well as prepaid and other assets for payments to our suppliers and vendors.

For fiscal 2014, inventory decreased $10.1 million reflecting timing of customer shipments and acceptance for a number of our large sales contracts for which we had built up inventory in order to meet customer demand. Deferred cost of revenues also decreased by $8.4 million primarily due to the timing and recognition of revenue for these large deals. We continued to receive milestone payments from our customers, improving our cash position. Additionally, accounts payables increased $2.2 million and other liabilities increased $12.2 million. These increases are primarily due to timing of purchases of inventory and payments to our suppliers. This was partially offset by a decrease in deferred revenue of $14.6 million and an increase in accounts receivable of $13.0 million reflecting the timing of revenue recognition and timing of collection of the trade receivables. Additionally, accrued compensation decreased $8.4 million primarily due to lower bonuses and commissions and timing of payments.

Investing Activities and Acquisition

Cash used in investing activities was $0.5 million in fiscal 2016, primarily due to purchases of property and equipment of $5.8 million offset by the net proceed from the sale of MineSet of $4.5 million and a decrease in restricted cash and other investment activities of $0.9 million.

Cash used in investing activities was $6.8 million in fiscal 2015, primarily due to purchases of property and equipment of $6.5 million and an increase in restricted cash and other investment activities of $0.3 million.

Cash used in investing activities and acquisition was $26.3 million in fiscal 2014, primarily due to purchases of property and equipment of $16.8 million largely for our new headquarters facility, cash used to acquire FileTek of $9.2 million and an increase in restricted cash and other investment activities of $2.1 million. This was offset by cash proceeds of $1.7 million for the sale of an investment.

Financing Activities

Cash used in financing activities was $4.1 million in fiscal 2016, primarily due to the payments of loan principal of $10.1 million for our Term Loan, of which $8.4 million represented prepayments, payments of Japan loans of $2.4 million, and funding of restricted stock units withheld for taxes of $1.7 million. These were offset by the proceeds from the Japan loans of $6.5 million, issuance of stock under our employee stock purchase plan and stock option exercises of $3.6 million.

Cash provided by financing activities was $65.5 million in fiscal 2015, primarily due to the proceeds from our Term Loan of $70.0 million, proceeds from our line credit facility of $15.0 million, proceeds from the Japan line of credit of $2.5 million, issuance of stock under our employee stock purchase plan and stock option exercises of $3.9 million. This was offset by the repurchase of shares of our common stock of $4.2 million and the funding of restricted stock units withheld for taxes of $2.5 million. During fiscal 2015, we terminated and paid off the $15.0 million outstanding balance on our credit facility with the proceeds from our Term Loan and also paid debt issuance costs of $3.8 million and loan principal of $0.4 million.

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Cash used in financing activities was $5.5 million in fiscal 2014, primarily due to the repurchase of our common stock of $11.0 million, the funding of restricted stock units withheld for taxes of $2.7 million, which was partially offset by the issuance of stock under our employee stock purchase plan and stock option exercises of $8.1 million.

There were no shares repurchased during fiscal 2016. During fiscal 2015, we repurchased approximately 471,000 shares of outstanding common stock for a total of approximately $4.2 million. During fiscal 2014, we repurchased 897,400 shares of outstanding common stock for a total of approximately $11.0 million.

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 24, 2016, associated with lease obligations and contractual commitments (in thousands):



	Payments due by period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Operating leases	$	28,638	$	6,220	$	9,539	$	6,479	$	6,400
Purchase obligations	17,818		12,547		5,271		—		—
Principal and interest on loans	80,625		12,787		66,634		1,204		—
Total	$	127,081	$	31,554	$	81,444	$	7,683	$	6,400

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 24, 2016, we had total outstanding commitments on non-cancelable operating leases of our real property of $28.1 million, of which $19.4 million related to our domestic leases. These domestic leases include our headquarters in Milpitas, California and our warehouse facility in Chippewa Falls, Wisconsin. A significant portion of our domestic leases will expire in fiscal 2024. The remainder of our domestic leases will expire in fiscal 2017 through 2024. The total outstanding commitment for non-cancelable international real property operating leases is $8.7 million. The total outstanding commitments included $4.5 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, except for our leases in Japan, that generally provide for a two-year renewal option.

As of June 24, 2016, personal property under operating lease was comprised primarily of automobiles and office equipments. Total outstanding commitments under these leases were approximately $0.5 million at June 24, 2016.

Purchase Obligations—From time to time, we issue 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. These 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 fiscal 2018. As of June 24, 2016, there was a remaining commitment of approximately $17.8 million, of which $12.5 million is expected to be paid in 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.

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Term Loan—On January 27, 2015, we entered into a new three and a half year credit agreement with an aggregate principal amount of $70.0 million. As of June 24, 2016, the Company had a $59.4 million outstanding principal balance owed on the Term Loan of which approximately $1.5 million and $57.9 million were recorded as short-term debt and long-term debt, respectively. See Note 15 and 16, Short-term Debt and Long-term Debt, for more information regarding the secured Term Loan.

Credit Facility—On December 5, 2011, the Company entered into a five-year senior secured credit facility in the aggregate principal amount of $25.0 million, as amended. The credit facility also included a $10.0 million letter of credit subfacility. See Note 17, Credit Facility, for more information about the credit facility.

During the second quarter of fiscal 2015, the Company drew down $15.0 million from the December 2011 credit facility bearing interest at 5.0% based on a base rate of 3.25% as of December 26, 2014 plus a margin of 1.75%. The Company paid off the $15.0 million outstanding balance on the December 2011 credit facility with the net proceeds received from the Term Loan and terminated the December 2011 agreement in January 2015. See Note 16, Long-term Debt, for more information about the Term Loan.

Japan Loans—During fiscal 2015, the Company entered into unsecured unguaranteed loans with various Japanese banks ("Japan Loans") amounting to 300 million yen or $2.5 million at TIBOR (Tokyo Interbank Offered Rate) plus 1.0% per annum. During fiscal 2016, the Company entered into two new loans at rates ranging from TIBOR plu 1.0% to 1.75% per annum, for an aggregate total of 250 million yen or approximately $2.1 million and repaid a total of 275 million yen amounting to approximately $2.4 million toward the loans. As of June 24, 2016, approximately $2.1 million and $0.5 million were classified as short-term debt and long term debt, respectively.

The Company also entered into a four year Private Placement Bond from Mizuho Bank (“Japan Private Placement Bond”) for 500 million yen or $4.4 million at 0.8% per annum. As of June 24, 2016, approximately $1.2 million and $3.5 million, net of unamortized debt issuance costs of $0.1 million, were recorded as short-term debt and long-term debt, respectively.

Uncertain Tax Positions—As of June 24, 2016, the liability for uncertain tax positions was $1.3 million. As of June 24, 2016, the Company has accrued $6.9 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.

Guarantees and Indemnifications—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 24, 2016 was $3.6 million, for which we have $3.5 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 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 24, 2016. As a result, we believe the estimated fair value of these indemnification agreements, if any, to be immaterial and, accordingly, no liability has been recorded with respect to such indemnifications as of June 24, 2016.

Letter of Credit Arrangements— As of June 24, 2016 we have a $2.0 million outstanding letter of credit from Wells Fargo bank to back our 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. This outstanding letter of credit is secured by restricted cash that is reflected on our balance sheet.

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Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on 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 revenue 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;


•	Inventory valuation;


•	Impairment of goodwill;


•	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 (which consist of hardware and software essential to the functionality of the hardware), customer support services and professional services. We also sell software products that are not essential to the functionality of the hardware 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. Professional services, which include consulting services and product integration 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 provided.

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.

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 selling price hierarchy. 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. 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.

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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.

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 and Monte Carlo models, which requires the input of subjective assumptions. These assumptions include estimating the fair value of awards which include a targeted shareholder return performance metric, length of time employees will retain their vested stock awards before exercising them and the estimated volatility of our common stock over the expected term.

We estimate the fair value of awards which include a targeted shareholder return performance metric using a Monte Carlo simulation method. 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. We determined the implied volatility based on historical volatility of SGI's common stock. 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.

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.

Goodwill Impairment. We review goodwill for impairment annually during the fourth quarter of our fiscal year and whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350 Intangibles-Goodwill and Other. The more likely than not threshold is defined as having a likelihood of more than 50%. If, after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary and goodwill is considered to be unimpaired. However, if, based on the qualitative assessment, we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will proceed with performing the two-step process.

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In step one, we determine the fair value of each reporting unit and compares it to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. However, if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform step two of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, we record an impairment loss equal to the difference.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. Recoverability of goodwill is measured at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit, which is measured based upon, among other factors, a discounted cash flow analysis. We estimate the expected future cash flows by reporting unit and then compare the carrying value including goodwill to the discounted future cash flows. 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 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.

As discussed above, we complete our annual assessment at the end of the first month of the fourth quarter. As part of our analysis, we reconcile the computed fair values of our reporting units to our overall market capitalization and we concluded that there was significant headroom between the computed fair value of each of our reporting units and our net book value, and accordingly no impairment existed as of June 24, 2016. To the extent that we conclude that there are any indicators of impairment prior to the date of our next annual goodwill impairment test, we will perform an impairment analysis and could record an impairment charge to write down goodwill in one or more of our reporting units to its fair value. If the results of that impairment testing confirm that a write down of goodwill is necessary, then we will record an associated charge. Any such charge could be significant and accordingly, would have a material impact on our financial position and results of operations, but would not be expected to have a material adverse effect on our financial covenants or cash flows from operations.

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. The Company sponsors defined benefit plans in Germany and Japan, each plan has investments held by an insurance company. The 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 21 to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K. For fiscal 2016, 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 that our deferred tax assets will be realized. In determining whether these deferred tax assets are realizable, we evaluate both positive and negative evidence. As of June 24, 2016, 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 relating to net operating loss carryovers, tax credit carryovers, accrued expenses and other temporary differences.

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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 consolidated financial statements.

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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

We invest our excess cash in various fixed-income securities and money market funds. The primary objectives of our investment activities are to preserve principal and maintain short-term liquidity while maximizing the income we receive from our investments. The market value of these securities can vary depending upon prevailing interest rates, and if we were forced to liquidate our position in a security before its maturity date we could suffer loss of principal. We also are exposed to credit and liquidity risk related to these securities. If the issuer of a security were to default on its obligations, we would suffer loss of principal. If there were disruptions in the pricing and trading of securities in the financial markets, it is possible that there would not be a liquid market for our securities, which could limit our ability to meet cash requirements. To preserve principal and maintain short-term liquidity, our investment policy dictates that we maintain our portfolio of cash, cash equivalents, and investments in high credit quality, readily liquid securities of relatively short duration. Our portfolio of investments has a range of original maturities, which typically have average remaining maturities of less than one year.

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. 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 that could have a material adverse effect 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 24, 2016, our cash and cash equivalents of $92.9 million consisted primarily of cash and money market funds. 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. At June 24, 2016, we had no interest rate forward contracts or options contracts.

The interest expense on outstanding cash borrowings under our credit facility is based on variable interest rates and is therefore affected by changes in market interest rates. If interest rates rise significantly, our results from operations and cash flows may be materially affected. As of June 24, 2016, we had $66.8 million outstanding principal balance from our loans. A 1% increase or decrease in the interest rate, with all other variables held constant, would have impacted our interest expense by approximately $0.7 million per year.

Foreign Exchange Risk

As of June 24, 2016 and June 26, 2015, foreign currency cash accounts totaled $49.9 million and $31.5 million, respectively, primarily in Euros, British Pounds, Australian Dollars, and Japanese Yen.

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. Our balance sheet hedging strategy is intended to mitigate our currency exposures related to remeasuring monetary assets and liabilities by entering into foreign currency forward contracts that have maturities generally of three months or less. 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. Additionally, our cash flow hedging strategy uses forward contracts designated as cash flow hedges to hedge a portion of future forecasted non-USD cash flows to further mitigate the effect of exchange rate fluctuations for these currencies.

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 $5.0 million change in the value of our foreign currency cash accounts as of June 24, 2016.

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements




		Page
Financial Statements:
Report of Independent Registered Public Accounting Firm		56
Consolidated Statements of Operations		57
Consolidated Statements of Comprehensive Loss		58
Consolidated Balance Sheets		59
Consolidated Statements of Stockholders’ Equity		60
Consolidated Statements of Cash Flows		61
Notes to Consolidated Financial Statements		62

Financial Statement Schedule:
Schedule II—Valuation and Qualifying Accounts		98

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Silicon Graphics International Corp.

Milpitas, California

We have audited the accompanying consolidated balance sheets of Silicon Graphics International Corp. and subsidiaries (the "Company") as of June 24, 2016 and June 26, 2015, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three fiscal years in the period ended June 24, 2016. 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 as of June 24, 2016 and June 26, 2015, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 24, 2016, 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, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 27 to the consolidated financial statements, on August 11, 2016, the Company signed a definitive agreement to be acquired by Hewlett Packard Enterprise Company.

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 24, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 2, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

September 2, 2016

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SILICON GRAPHICS INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014
Revenue
Product	$	394,844		$	376,294		$	374,565
Service	138,086			144,965			155,381
Total revenue	532,930			521,259			529,946
Cost of revenue
Product	309,267			303,772			305,785
Service	79,118			82,849			85,754
Total cost of revenue	388,385			386,621			391,539
Gross profit	144,545			134,638			138,407
Operating expenses:
Research and development	50,697			53,206			63,526
Sales and marketing	51,525			61,544			72,681
General and administrative	47,860			53,861			55,796
Gain from sale of assets	(4,425		)	—			—
Restructuring	—			116			1,251
Total operating expenses	145,657			168,727			193,254
Loss from operations	(1,112		)	(34,089		)	(54,847		)
Interest expense, net	(7,932		)	(3,744		)	(117		)
Other (expense) income, net	(2,760		)	(872		)	2,162
Total other (expense) income, net	(10,692		)	(4,616		)	2,045
Loss before income taxes	(11,804		)	(38,705		)	(52,802		)
Income tax (benefit) provision	(626		)	440			12
Net loss	$	(11,178	)	$	(39,145	)	$	(52,814	)

Basic and diluted net loss per share:	$	(0.31	)	$	(1.13	)	$	(1.54	)

Shares used in computing basic and diluted net loss per share:	35,745			34,559			34,260

See accompanying notes.

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SILICON GRAPHICS INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014

Net loss	$	(11,178	)	$	(39,145	)	$	(52,814	)
Other components of comprehensive loss:
Unrecognized (loss) gain on defined benefit plans, net of zero tax	(1,497		)	1,412			(940		)
Change in unrealized (loss) gain on derivative instruments, net of zero tax	(2,724		)	462			(1,738		)
Amounts reclassified into earnings related to derivative instruments, net of zero tax	675			(783		)	1,651
Foreign currency translation adjustment, net of zero tax	2,578			(2,472		)	(710		)
Other comprehensive loss	(968		)	(1,381		)	(1,737		)
Total comprehensive loss	$	(12,146	)	$	(40,526	)	$	(54,551	)

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SILICON GRAPHICS INTERNATIONAL CORP.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)



	June 24, 2016			June 26, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	92,946		$	67,191
Current portion of restricted cash	2,109			2,109
Accounts receivable, net of allowance for doubtful accounts of $475 and $190 as of June 24, 2016 and June 26, 2015, respectively	85,834			118,219
Inventories	55,911			82,832
Deferred cost of revenue	15,453			12,108
Prepaid expenses and other current assets	11,698			17,547
Total current assets	263,951			300,006
Non-current portion of restricted cash	1,360			2,251
Property and equipment, net	40,526			38,480
Goodwill and intangible assets, net	10,610			11,303
Non-current portion of deferred cost of revenue	11,459			9,648
Other non-current assets	28,223			25,896
Total assets	$	356,129		$	387,584
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	55,761		$	48,677
Accrued compensation	15,849			17,797
Short-term debt, net of unamortized debt issuance costs of $1,106 as of June 24, 2016 and $1,074 as of June 26, 2015.	3,776			3,096
Current portion of deferred revenue	64,392			96,473
Other current liabilities	27,605			33,180
Total current liabilities	167,383			199,223
Long-term debt, net of unamortized debt issuance costs of $1,250 as of June 24, 2016 and $2,232 as of June 26, 2015	60,722			65,581
Non-current portion of deferred revenue	46,619			43,781
Long-term income taxes payable	7,529			8,420
Retirement benefit obligations	10,868			9,330
Other non-current liabilities	7,818			7,871
Total liabilities	300,939			334,206
Commitments and contingencies (Note 25)
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; 38,704 shares and 37,225 shares issued and outstanding at June 24, 2016 and June 26, 2015, respectively	39			37
Additional paid-in capital	557,454			543,498
Treasury stock, at cost (2,315 shares at June 24, 2016 and June 26, 2015)	(22,899		)	(22,899		)
Accumulated other comprehensive loss	(6,237		)	(5,269		)
Accumulated deficit	(473,167		)	(461,989		)
Total stockholders’ equity	55,190			53,378
Total liabilities and stockholders’ equity	$	356,129		$	387,584

See accompanying notes.

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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			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
Balance at June 28, 2013	34,795,340	$	35	(946,417	)	$	(7,692	)	$	510,092	$	(2,151	)	$	(370,030	)	$	130,254
Net loss	—	—		—		—			—		—			(52,814		)	(52,814		)
Other comprehensive loss	—	—		—		—			—		(1,737		)	—			(1,737		)
Issuance of common stock under employee stock options, equity incentive, and employee stock purchase plan, net of taxes	1,377,450	1		—		—			5,454		—			—			5,455
Repurchase of treasury stock	—	—		(897,400	)	(10,985		)	—		—			—			(10,985		)
Share-based compensation in connection with employee stock option plans and other	—	—		—		—			11,979		—			—			11,979
Balance at June 27, 2014	36,172,790	36		(1,843,817	)	(18,677		)	527,525		(3,888		)	(422,844		)	82,152
Net loss	—	—		—		—			—		—			(39,145		)	(39,145		)
Other comprehensive loss	—	—		—		—			—		(1,381		)	—			(1,381		)
Issuance of common stock under employee stock options, equity incentive, and employee stock purchase plan, net of taxes	1,052,283	1		—		—			1,424		—			—			1,425
Repurchase of treasury stock	—	—		(471,219	)	(4,222		)	—		—			—			(4,222		)
Share-based compensation in connection with employee stock option plans and other	—	—		—		—			14,549		—			—			14,549
Balance at June 26, 2015	37,225,073	37		(2,315,036	)	(22,899		)	543,498		(5,269		)	(461,989		)	53,378
Net loss	—	—		—		—			—		—			(11,178		)	(11,178		)
Other comprehensive loss	—	—		—		—			—		(968		)	—			(968		)
Issuance of common stock under employee stock options, equity incentive, and employee stock purchase plan, net of taxes	1,479,254	2		—		—			1,919		—			—			1,921
Share-based compensation in connection with employee stock option plans and other	—	—		—		—			12,037		—			—			12,037
Balance at June 24, 2016	38,704,327	$	39	(2,315,036	)	$	(22,899	)	$	557,454	$	(6,237	)	$	(473,167	)	$	55,190

See accompanying notes.

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SILICON GRAPHICS INTERNATIONAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(11,178	)	$	(39,145	)	$	(52,814	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	11,062			11,191			14,549
Share-based compensation	12,037			14,549			11,979
Gain on sale of MineSet, Inc.	(4,425		)	—			—
Gain on sale of investment	—			(22		)	(1,717		)
Impairment of investments and long-lived assets	—			1,230			4,554
Deferred income taxes	(484		)	411			(191		)
Other non-cash items, net	330			(15		)	644
Changes in operating assets and liabilities:
Accounts receivable	35,258			(50,894		)	(13,042		)
Inventories	19,475			(43,971		)	10,088
Deferred cost of revenue	(3,212		)	(3,570		)	8,396
Prepaid expenses and other assets	5,811			2,592			(5,794		)
Other assets	(863		)	2,138			(1,066		)
Accounts payable	6,616			(3,526		)	2,215
Accrued compensation	(2,221		)	(1,846		)	(8,384		)
Other current liabilities	32			(3,097		)	1,893
Deferred revenue	(33,316		)	21,359			(14,582		)
Income taxes payable	(1,119		)	(1,849		)	(147		)
Other operating liabilities	(6,434		)	(2,721		)	10,339
Net cash provided by (used in) operating activities	27,369			(97,186		)	(33,080		)
CASH FLOWS FROM INVESTING ACTIVITIES AND ACQUISITIONS:
Purchases of property and equipment	(5,820		)	(6,511		)	(16,762		)
Proceeds from sale of investment	—			22			1,717
Proceeds from sale of MineSet, Inc., net	4,459			—			—
Cash used in acquisition, net	—			—			(9,200		)
Other investing activities	891			(309		)	(2,066		)
Net cash used in investing activities and acquisitions	(470		)	(6,798		)	(26,311		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Term Loan	—			70,000			—
Payments of Term Loan	(10,122		)	(438		)	—
Payments for loan origination costs	—			(3,760		)	—
Proceeds from draw-down of credit facility	—			15,000			—
Payment of credit facility	—			(15,000		)	—
Funding of restricted stock units withheld for taxes	(1,673		)	(2,482		)	(2,685		)
Purchase of treasury stock	—			(4,222		)	(10,985		)
Proceeds from issuance of common stock upon exercise of stock options	143			445			3,858
Proceeds from issuance of common stock under employee stock purchase plan	3,451			3,461			4,282
Proceeds from Japan loans	6,504			2,508			—
Payments of Japan loans	(2,414		)	—			—
Net cash (used in) provided by financing activities	(4,111		)	65,512			(5,530		)
Effect of exchange rate changes on cash and cash equivalents	2,967			(3,634		)	(963		)
Net increase (decrease) in cash and cash equivalents	25,755			(42,106		)	(65,884		)
Cash and cash equivalents—beginning of period	67,191			109,297			175,181
Cash and cash equivalents—end of period	$	92,946		$	67,191		$	109,297
SUPPLEMENTAL DISCLOSURE OF OTHER CASH FLOW INFORMATION
Income taxes refunded (paid)	$	(676	)	$	81		$	114
Cash paid for interest	$	7,272		$	1,324		$	136
NON-CASH INVESTING AND FINANCING ACTIVITIES
Property and equipment purchases in accounts payable	$	1,058		$	771		$	368
Inventory transfers to property and equipment	$	6,267		$	6,368		$	2,372

See accompanying notes.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Silicon Graphics International Corp. ("SGI" or the "Company," "we," "us" or "our") is a global leader in high-performance solutions for compute, data analytics and data management. The Company is focused on helping customers solve their most demanding business and technology challenges by delivering high performance computing, data management and data analytics solutions that accelerate time to discovery, innovation and profitability.

The Company develops, markets and sells a broad line of low cost, mid-range and high-end scale-out and scale-up servers, differentiating software and designed-to-order solutions for large-scale deployments, coupled with global support and highly experienced professional services. SGI solutions are designed to deliver high impact results with lower total cost of ownership and to achieve industry-leading speed, scale and efficiency.

The Company's solutions are utilized by scientific, business and government communities to fulfill highly compute intensive application needs in petascale and exascale environments. Delivering industry-leading computing power and fast and efficient data movement, both within the computing system and to and from large-scale data storage and data management installations, SGI systems enable customers to access, analyze, transform, manage and visualize information in real and near real-time. The vertical markets the Company serves include the federal government, defense and strategic systems, weather and climate, physical and life sciences, energy (including oil and gas), aerospace, automotive manufacturing, internet, financial services, education and research institutions and media and entertainment. The Company's headquarters is located in Milpitas, California and its sole 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. Fiscal years 2016, 2015, and 2014 were all comprised of 52 weeks and ended on June 24, 2016 ("fiscal 2016"), June 26, 2015 ("fiscal 2015"), and June 27, 2014 ("fiscal 2014'), respectively. Fiscal year 2017 will be comprised of 53 weeks and will be ended on June 30, 2017.

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.

Revenue Recognition. The Company enters into sales contracts to deliver multiple products and/or services. A typical multiple-element arrangement includes product (which consist of hardware and software essential to the functionality of the hardware), customer support services and professional services. The Company also sells software products that are not essential to the functionality of the hardware 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.

Service revenue. Service revenue includes customer support services, primarily hardware maintenance services and professional services. Hardware maintenance services is deferred and recognized over the contractual period or as services are rendered to the customer. Professional services, which include consulting services and product integration 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 completed.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 without regard to the completion of services as product sales are not dependent on services to be functional.

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 selling price hierarchy. 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. 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 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.

Shipping and Handling Costs. Shipping and handling costs are classified as a component of cost of revenue. Invoices to customers for 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.

Advertising. Advertising costs are expensed as incurred and included in sales and marketing expenses in the Consolidated Statements of Operations. Advertising expenses were immaterial in fiscal 2016, 2015 and 2014.

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”), time-based RSUs and performance-based RSUs (“executive PSUs”) 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 RSU awards is determined based on the fair value of the stock on the date of grant, other than the executive PSU awards, which include a targeted shareholder return as a performance metric, whose value is determined using a Monte Carlo simulation model. The estimated fair value of stock options, RSUs and PSUs is expensed on a straight-line basis over the vesting 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.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Share-based compensation expense for stock options, RSUs, PSUs and ESPP awards has been reduced for estimated forfeitures so that compensation expense is based on options, RSUs, PSUs 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 plans 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. There were no significant reversals or long-lived asset impairments related to our restructuring actions in any periods presented.

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 and revenue and expenses of the foreign subsidiaries, except for the Japanese subsidiary, are remeasured into U.S. dollars at the exchange rates in effect at the reporting date. Nonmonetary assets and liabilities are remeasured at historical rates. The foreign currency gains and losses are included as a component of other income (expense), net in the accompanying consolidated statements of operations.

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. Revenue 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.

Fair Value of Financial Instruments. The Company measures its financial instruments in its consolidated financial statements at 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).

Derivative Instruments. Derivatives that are not designated as hedges are adjusted to fair value through earnings. If the derivative is designated as a cash flow hedge, the effective portion of the contracts’ gains and losses resulting from changes in fair value is recognized in accumulated other comprehensive income. Amounts associated with cash flow hedges are reclassified and recognized in income when the forecasted transaction occurs or it becomes probable the forecasted transaction will not occur. The ineffective portion of the hedge is recognized in earnings immediately.

As a result of the Company's significant international operations, the Company is subject to risks associated with fluctuating exchange rates. The Company uses derivative financial instruments, principally foreign currency exchange forward contracts, to attempt to minimize the impact of exchange rate movements on our subsidiaries’ and consolidated balance sheets and operating results. Factors that could have an impact on the effectiveness of our hedging program include the accuracy of forecasts and the volatility of foreign currency markets. These programs reduce, but do not entirely eliminate, the impact of currency exchange movements. The maturities of these instruments are generally less than one year.

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. Due to the short-term nature and liquidity of these financial instruments, the carrying values of these assets approximate fair value.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Cash. Short-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.

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. The Company generally does not require collateral and maintains reserves for probable credit losses on customer accounts.

Inventories. Inventories are stated at the lower of standard cost or market: standard cost, approximates cost determined 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.

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 in the accompanying consolidated statements of operations.

Property and Equipment. Property and equipment is stated at cost, net of accumulated depreciation and amortization. Equipment includes Company-built inventory used as demonstration equipment. 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 24 to 40 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 other than goodwill 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.

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.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Goodwill Impairment. The Company reviews goodwill for impairment annually during the fourth quarter of our fiscal year and whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50%. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary and goodwill is considered to be unimpaired. However, if, based on the qualitative assessment, the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company will proceed with performing the two-step process.

In step one, the Company determines the fair value of each reporting unit and compares it to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. However, if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform step two of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. The Company estimates the expected future cash flows by reporting unit and then compare the carrying value including goodwill to the discounted future cash flows. 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 the estimate of future operating results changes, or if there are changes to other assumptions, the estimate of the fair value could change significantly. Such change could result in impairment charges in future periods, which could have a material impact on the Company's results of operations and financial position.

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. 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. The Company more broadly requires advance and milestone payments for certain larger projects that would otherwise involve a significant lag between payments to our vendors and final acceptance of our products. These advance and milestone payments are recorded as deferred revenue and are recognized when all revenue recognition criteria have been met. 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, 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 that apply to taxable income in effect for the years in which those tax assets are expected to be realized 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.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Recently Issued Accounting Standards.

Improvement to Employee Share-Based Payment Accounting. In March 2016, the Financial Accounting Standards Board ("FASB") issued guidance to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016 including interim periods within those annual periods. Early adoption of this guidance is permitted in any interim or annual period. If any entity adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period and must elect to early adopt all the amendments in the same period. The new guidance is effective for the Company beginning in fiscal 2018. The Company is evaluating the timing and the impact of adopting this guidance on its consolidated financial statements and disclosures.

Accounting Standard Update, Leases, (Topic 842). In February 2016, the FASB issued guidance which amends the existing accounting standards for leases. Consistent with existing guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize right-of-use assets and lease liabilities on the balance sheet. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2018 including interim periods within those fiscal years. Early adoption of this guidance is permitted. The new guidance is effective for the Company beginning in fiscal 2020. The Company is evaluating the timing and the impact of adopting this guidance on its consolidated financial statements and disclosures.

Simplifying the Presentation of Deferred Income Taxes. In November 2015, the FASB issued guidance to simplify the presentation of the deferred income taxes. The amendments in this update apply to all entities that present a classified statement of financial position and require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, for public entities. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The guidance will be effective for the Company in fiscal 2018. The Company adopted this guidance effective June 24, 2016 on a prospective basis. Adoption of this guidance resulted in an immaterial reclassification of our net current deferred tax asset to the net non-current deferred tax asset in our consolidated balance sheet as of June 24, 2016. No prior periods were retrospectively adjusted.

Simplifying the Measurement of Inventory. In July 2015, the FASB issued guidance to simplify the accounting for inventory and to more closely align their guidance with international accounting standards. The amendments in this update apply to companies which use inventory valuation methods other than last in, first-out and the retail inventory method to change the way that they subsequently measure the value of inventory on their balance sheet. Under the new guidance, inventory should be valued at the lower of cost and net realizable value rather than the lower of cost and market. The amendments in this update are effective for fiscal years beginning after December 15, 2016, and for interim periods beginning after December 15, 2017. This guidance will be effective for the Company in fiscal 2018. The Company does not expect this guidance to have an impact on its consolidated financial statements upon adoption, as the new guidance aligns with the Company's current practice.

Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets. In April 2015, the FASB issued guidance which permits the entity with a fiscal year-end that does not coincide with a month-end, to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year for all plans. The amendments in ASU 2015-04 are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. This guidance will be effective for the Company in fiscal 2017. The Company is currently evaluating the effects, if any, which the adoption of this guidance will have on the Company’s consolidated financial statements.

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early application not permitted. This guidance will be effective for the Company in fiscal 2019. The Company is evaluating the timing and the impact of adopting this guidance on its consolidated financial statements and disclosures.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. 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 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 24, 2016
	Carrying		Fair Value Measured Using						Total
	Value		Level 1		Level 2		Level 3		Balance
Assets
Money market funds	$	130	$	130	$	—	$	—	$	130
Pension investments held by insurance companies - German Plan	2,281		—		2,281		—		2,281
Pension investments held by insurance companies - Japan Plan	3,231		—		3,231		—		3,231
Derivative assets	398		—		398		—		398
Total assets measured at fair value	$	6,040	$	130	$	5,910	$	—	$	6,040
Derivative liabilities	$	4,476	$	—	$	4,476	$	—	$	4,476
Total liabilities measured at fair value	$	4,476	$	—	$	4,476	$	—	$	4,476

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	June 26, 2015
	Carrying		Fair Value Measured Using						Total
	Value		Level 1		Level 2		Level 3		Balance
Assets
Money market funds	$	130	$	130	$	—	$	—	$	130
Pension investments held by insurance companies - German Plan	2,222		—		2,222		—		2,222
Pension investments held by insurance companies - Japan Plan	2,539		—		2,539		—		2,539
Derivative assets	6,467		—		6,467		—		6,467
Total assets measured at fair value	$	11,358	$	130	$	11,228	$	—	$	11,358
Derivative liabilities	$	5,443	—		5,443		—		$	5,443
Total liabilities measured at fair value	$	5,443	$	—	$	5,443	$	—	$	5,443

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during both fiscal 2016 and fiscal 2015. The Company's cash equivalents, consisting primarily of money market funds, are classified within Level 1 of the fair value hierarchy as they were valued using quoted market prices of the identical underlying securities in active markets.

Level 2 assets include investments that are pooled with other investments held by insurance companies within their general funds for our pension plans. The investments held by the insurance companies are valued by taking the percentage owned by the plan in the underlying net asset value of the insurance company's general fund. The valuation of the underlying net assets of the insurance company's general fund is based on quoted market prices of the investments in active markets or for quoted market prices in active markets of similar assets. The market inputs used to value these instruments generally consist of market yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. Pricing sources include industry standard data providers, security master files from large financial institutions and other third party sources. Our derivative financial instruments are classified within Level 2, as there is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.

The fair values of accounts receivable, accounts payable, accrued liabilities and borrowings under short-term credit lines due within one year approximates their carrying values because of their short-term nature. The fair value of our Term Loan was approximately $60.2 million and $70.6 million as June 24, 2016 and June 26, 2015, respectively and are classified within Level 2 of the fair value hierarchy. Other non-current assets include life insurance contracts related to our pension plans: these life insurance contracts are carried at cash surrender values, which due to their ability to be converted to cash at that amount, approximate their fair values.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

The Company does not have any assets or liabilities measured at fair value on a non-recurring basis as of June 24, 2016. The Company measured its intangible assets at fair value on a non-recurring basis as of June 26, 2015.

4. DIVESTITURE OF MINESET, INC.

On February 5, 2016, the "Closing Date," the Company consummated a stock purchase agreement to sell 100% of the issued and outstanding shares of MineSet, Inc. ("MineSet"), a wholly-owned subsidiary, to ESI Group for approximately $4.7 million in cash. In connection with this transaction, the Company transferred all assets and liabilities related to the MineSet business to ESI Group as of the closing date. The Company recognized a gain of $4.4 million for the sale of this asset, net of all related costs.

5. DERIVATIVES

The Company is exposed to foreign currency exchange rate fluctuations in the normal course of our business. As part of the Company's risk management strategy, the Company uses derivative instruments, primarily forward contracts to hedge economic exposures resulting from changes in foreign currency exchange rates.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash Flow Hedges

The Company implemented a cash flow hedging strategy to protect anticipated non-functional currency revenue and expenses. The Company uses forward contracts designated as cash flow hedges to hedge a portion of future forecasted non-U.S. Dollar ("USD") cash flows. In general, these foreign exchange contracts, carried at fair value, have maturities between one and twelve months. As of June 24, 2016, the Company has 13 open hedges in an aggregate notional amount in USD equivalent to approximately $69.8 million. The Company hedges the Euro, British pound, Japanese yen, and the Australian dollar. These derivative instruments are designated and qualify as cash flow hedges under the criteria prescribed in the authoritative guidance. All amounts related to gains / losses on designated hedges, currently in accumulated other comprehensive income ("AOCI") are expected to be reclassified into earnings over the next 12 months.

For derivative instruments that are designated and qualify as cash flow hedges under Accounting Standards Codification ("ASC") No. 815-Derivatives and Hedging, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss and reclassified into earnings into the same financial statement line as the item being hedged. SGI assesses the prospective and retrospective effectiveness of its hedge programs using statistical analysis. The Company uses the spot-to-spot method to measure ineffectiveness in the hedge relationship. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net. For derivative instruments that are not designated as hedging instruments under ASC No. 815 or that have been de-designated following recognition of the hedge item, gains and losses are recognized in other income (expense), net.

Balance Sheet Hedges

Additionally, the Company enters into foreign exchange contracts to hedge monetary assets and liabilities that are denominated in currencies other than the functional currency of our subsidiaries. These foreign exchange contracts are carried at fair value and do not qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in fair value of these derivatives are recognized in other income (expense), net in the consolidated statement of operations, in the current period, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities. As of June 24, 2016, the Company has 7 open non-designated hedges in an aggregate USD-equivalent notional amount totaling approximately $11.2 million.

The before tax effect of derivative instruments for foreign exchange contracts designated as hedging instruments and non-designated hedging instruments in our consolidated statement of operations was as follows (in thousands):



		Fiscal Year Ended
	Location	June 24, 2016			June 26, 2015			June 27, 2014
Designated Derivatives
Cash Flow Hedges:
Foreign exchange contracts (Effective portion)	Amount recognized in AOCI	$	(2,724	)	$	462		$	(1,738	)
Foreign exchange contracts (Effective portion)	Net revenues	(103		)	1,590			(2,539		)
Foreign exchange contracts (Effective portion)	Cost of goods sold	(572		)	—			—
Foreign exchange contracts (Effective portion)	Operating expenses	—			(807		)	888
Foreign exchange contracts (Effective portion)	Other income (expense), net	(387		)	(138		)	115
Total		$	(3,786	)	$	1,107		$	(3,274	)
Non-designated Derivatives
Foreign exchange contracts	Other income (expense), net	$	(2,082	)	$	1,778		$	(1,431	)
Total		$	(2,082	)	$	1,778		$	(1,431	)

The Company's use of derivative instruments exposes it to non-performance risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company does, however, seek to mitigate such risks by limiting its counterparties to major financial institutions, which are selected based on their credit ratings and other factors. The Company has established policies and procedures for mitigating non-performance risk that include establishing counterparty credit limits, monitoring credit exposures and continually assessing the creditworthiness of counterparties. Therefore the Company does not consider counterparty non-performance risk a material risk at this time.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A number of the Company's derivative agreements contain threshold limits to the net liability position with counterparties and are dependent on the Company's corporate credit rating determined by the major credit rating agencies. The counterparties to the derivative instruments may request collateralization, in accordance with derivative agreements, on derivative instruments in net liability positions.

The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a net liabilities position as of June 24, 2016, was $4.1 million. The credit-risk-related contingent features underlying these agreements had not been triggered as of June 24, 2016.

Derivative instruments are subject to master netting arrangements and are disclosed gross in the statement of financial position. The gross fair values and location of derivative instruments included in the consolidated statement of financial position as of June 24, 2016 and June 26, 2015 were as follows (in thousands):



Offsetting of Derivative Assets
	Gross Amount Offset In the Statement of Financial Position						Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amount of Recognized Assets		Gross Amount Offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received		Net Amount
As of June 24, 2016
Derivatives
Foreign currency forward contracts	$	398	$	—	$	—	$	(398	)	$	—	$	—
Total	$	398	$	—	$	—	$	(398	)	$	—	$	—
As of June 26, 2015
Derivatives	$	6,467	$	—	$	—	$	(5,443	)	$	—	$	1,024
Foreign currency forward contracts	$	6,467	$	—	$	—	$	(5,443	)	$	—	$	1,024



Offsetting of Derivative Liabilities
	Gross Amount Offset In the Statement of Financial Position							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amount of Recognized Liabilities			Gross Amount Offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Pledged		Net Amount
As of June 24, 2016
Derivatives
Foreign currency forward contracts	$	(4,476	)	$	—	$	—	$	398	$	—	$	(4,078	)
Total	$	(4,476	)	$	—	$	—	$	398	$	—	$	(4,078	)
As of June 26, 2015
Derivatives	$	(5,443	)	$	—	$	—	$	5,443	$	—	$	—
Foreign currency forward contracts	$	(5,443	)	$	—	$	—	$	5,443	$	—	$	—

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The gross fair value and location of derivative instruments held in the consolidated statement of financial position as of June 24, 2016 and June 26, 2015 were as follows (in thousands):



Fair Values of Derivative Instruments
Asset Derivatives					Liability Derivatives
Location	June 24, 2016		June 26, 2015		Location	June 24, 2016		June 26, 2015

Designated Derivatives:
Foreign exchange contracts					Foreign exchange contracts
Other current assets	$	1	$	167	Other current liabilities	$	2,516	$	628
Non- designated Derivatives:
Foreign exchange contracts					Foreign exchange contracts
Other current assets	397		6,300		Other current liabilities	1,960		4,815

Total derivatives	$	398	$	6,467		$	4,476	$	5,443

See Statement of Comprehensive Loss and Note 3 for more information regarding derivatives.

6. INVENTORIES

Inventories consist of the following (in thousands):



	June 24, 2016		June 26, 2015
Finished goods	$	3,901	$	36,772
Work in process	29,753		25,562
Raw materials	22,257		20,498
Total inventories	$	55,911	$	82,832

Finished goods include inventory at customer sites undergoing installation testing prior to customer acceptance; such amounts were $1.4 million at June 24, 2016 and $30.2 million at June 26, 2015.

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):



	June 24, 2016		June 26, 2015
Value-added tax receivable	$	5,603	$	5,179
Derivatives (see Note 5)	398		6,467
Prepaid taxes	179		178
Prepaid expenses	3,036		4,221
Other assets	2,482		1,502
Total prepaid expenses and other current assets	$	11,698	$	17,547

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consist of the following (in thousands):



	Estimated Useful Life	June 24, 2016			June 26, 2015
Land	N/A	$	768		$	768
Building	24-40	16,186			14,004
Computer equipment and software	2-6	50,152			44,497
Manufacturing equipment	2-7	5,899			7,002
Leasehold improvements	2-10	12,661			12,601
Furniture and fixtures	2-7	1,653			1,578
Vehicles	5	20			40
Construction in progress	N/A	1,486			4,620
		88,825			85,110
Less accumulated depreciation and amortization		(48,299		)	(46,630		)
Total property and equipment, net		$	40,526		$	38,480

Depreciation and amortization expense of property and equipment for fiscal 2016, 2015 and 2014 was $10.4 million, $10.6 million and $10.7 million, respectively.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. GOODWILL AND INTANGIBLE ASSETS, NET

The goodwill balances and the movements in fiscal 2016 and 2015 for each of our reportable segments are shown in the table below (in thousands):



	Product		Service		Total
Goodwill as of June 27, 2014	$	7,508	$	1,076	$	8,584
Goodwill arising from acquisitions	—		—		—
Goodwill as of June 26, 2015	$	7,508	$	1,076	$	8,584
Goodwill arising from acquisitions	—		—		—
Goodwill as of June 24, 2016	$	7,508	$	1,076	$	8,584

Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using the income approach that uses discounted cash flows. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss.

The Company reviews goodwill for impairment annually in the fourth quarter of its fiscal year, or more frequently if impairment indicators arise. At the end of the first quarter of fiscal 2016 there was a substantial decline in the market capitalization of the Company from the end of fiscal 2015. Based on this impairment indicator, the Company performed a formal impairment analysis of the carrying value of goodwill as of September 25, 2015. As part of the its analysis, the Company reconciled the computed fair values of our reporting units to its overall market capitalization and concluded that the computed fair value of each of its reporting units was well in excess of the net book value, and accordingly no impairment existed as of September 25, 2015. The Company also performed its annual impairment in the fourth quarter of fiscal 2016. Based on the Company's annual assessment, no impairment was recorded as of June 24, 2016. The Company will continue to evaluate goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Based on the Company's annual assessment no impairment was recorded for fiscal 2016, 2015 and 2014.

Intangible assets by major asset class consist of the following (in thousands):



Intangible Asset Class	Weighted Average Useful Life (in Years)	June 24, 2016
Intangible Asset Class	Weighted Average Useful Life (in Years)	Gross Carrying Amount		Accumulated Amortization and Impairment			Net
Customer relationships	5	$	7,300	$	(7,300	)	$	—
Purchased technology	5	12,200		(12,200		)	—
Customer backlog	(a)	10,540		(10,481		)	59
Trademark/trade name portfolio	5	3,767		(3,767		)	—
Patents and other	(b)	1,967		—			1,967
Total		$	35,774	$	(33,748	)	$	2,026



Intangible Asset Class	Weighted Average Useful Life (in Years)	June 26, 2015
Intangible Asset Class	Weighted Average Useful Life (in Years)	Gross Carrying Amount		Accumulated Amortization and Impairment			Net
Customer relationships	5	$	7,300	$	(7,300	)	$	—
Purchased technology	5	12,200		(11,600		)	600
Customer backlog	(a)	10,540		(10,388		)	152
Trademark/ trade name portfolio	5	3,767		(3,767		)	—
Patents and other	(b)	2,097		(130		)	1,967
Total		$	35,904	$	(33,185	)	$	2,719


(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.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


(b)	Includes in-process Research and Development for which amortization has not commenced.

Intangible assets amortization expense was $0.7 million, $0.6 million and $3.8 million in fiscal 2016, 2015 and 2014, respectively.

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.

As a result of a decision made in the fourth quarter of fiscal 2014 to stop investment in certain next generation FileTek products, the Company determined that intangible assets related to the product development of these next generation products were impaired. The Company recorded an impairment charge of $2.9 million in fiscal 2014, which was recorded as a cost of revenue. During the second quarter of fiscal 2015, the Company decided to cease selling and supporting these products acquired as part of the FileTek acquisition and determined that the remaining intangible assets related to this acquisition were impaired. The Company recorded an impairment charge of $1.1 million in fiscal 2015, impacting cost of revenue by $0.8 million and sales expense by $0.3 million.

In addition, during the fourth quarter of fiscal 2015, the Company recorded a $0.1 million impairment charge impacting cost of revenue for in-process Research and Development as the Company no longer plans to utilize the asset for future product development.

No impairment of intangible assets was recorded in fiscal 2016.

As of June 24, 2016, expected amortization expense for all intangible assets, excluding amounts related to in-process research and development for which amortization has not commenced, is as follows (in thousands):



Fiscal Year	Amortization Expense
2017	$	59
Total amortization	$	59

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. OTHER NON-CURRENT ASSETS

Other assets consist of the following (in thousands):



	June 24, 2016		June 26, 2015
Long-term service inventory	$	15,489	$	16,015
Restricted pension plan assets (see Note 21)	6,841		6,726
Deferred tax assets	1,488		758
Long-term refundable deposits	1,990		1,763
Other assets	2,415		634
Total other assets	$	28,223	$	25,896

11. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following (in thousands):



	June 24, 2016		June 26, 2015
Accrued sales and use tax payable	$	8,919	$	8,670
Accrued professional services fees	2,736		3,597
Accrued warranty, current portion (see Note 13)	3,377		3,402
Accrued interest payables	1,403		1,159
Accrued restructuring and severance	435		2,239
Derivatives (see Note 5)	4,476		5,443
Other	6,259		8,670
Total other current liabilities	$	27,605	$	33,180

12. OTHER NON-CURRENT LIABILITIES

Other non-current liabilities consist of the following (in thousands):



	June 24, 2016		June 26, 2015
Accrued warranty, non-current portion (see Note 13)	$	1,684	$	1,374
Deferred rent	4,940		5,526
Other	1,194		971
Total other non-current liabilities	$	7,818	$	7,871

13. WARRANTY RESERVE

Activity in the warranty reserve, which is included in other current and non-current liabilities, is as follows (in thousands):



	June 24, 2016			June 26, 2015
Balance at beginning of period	$	4,776		$	6,044
Current period accrual	3,688			3,033
Warranty expenditures charged to accrual	(3,727		)	(4,363		)
Changes in accrual for pre-existing warranties	324			62
Balance at end of period	$	5,061		$	4,776

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. RESTRUCTURING AND SEVERANCE ACTIVITY

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. The Company implemented restructuring actions to streamline operations and reduce operating expenses. This restructuring action was complete as of December 26, 2014.

Total expense for all restructuring actions was $0.1 million and $1.3 million for fiscal 2015 and 2014, respectively. There was no restructuring expense during fiscal 2016. The restructuring expense is included in operating expenses in the accompanying consolidated statement of operations. As of June 24, 2016, there was no restructuring liability balance remaining for this restructuring action.

Total cumulative expense incurred in connection with this restructuring plan was $12.7 million.

Severance Activity

During fiscal 2016 and 2015, the Company incurred approximately $2.6 million and $6.2 million of severance charges, respectively, associated with planned cost reductions primarily in Germany, Japan, and the U.S. During fiscal 2014, the Company incurred approximately $11.1 million of severance charges, associated with planned cost reductions primarily in the U.S. and Japan. As of June 24, 2016, the remaining liability for these cost reduction programs was approximately $0.4 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. SHORT-TERM DEBT

Term Loan

As of June 24, 2016, the Company's short-term debt includes the current portion of the outstanding net balance of $57.2 million Term Loan with Morgan Stanley Senior Funding, Inc. and Tennenbaum Capital Partners, LLC of $0.5 million net of unamortized debt issuance costs of $1.1 million.

Japan Loans

During fiscal 2015, the Company entered into unsecured unguaranteed loans with various Japanese banks ("Japan Loans") amounting to 300 million yen or $2.5 million at TIBOR (Tokyo Interbank Offered Rate) plus 1.0% per annum. During fiscal 2016, the Company entered into two new loans at rates ranging from TIBOR plus 1.0% to 1.75% per annum, for an aggregate total of 250 million yen or approximately $2.1 million and repaid a total of 275 million yen amounting to approximately $2.4 million toward the loans. As of June 24, 2016, approximately $2.1 million was classified as short-term debt.

See Note 16, Long-term Debt, for more information about the Term Loan and Japan Loans.

16. LONG-TERM DEBT

Term Loan

Pursuant to the Term Loan, certain wholly-owned domestic subsidiaries of the Company (the “Guarantors”) have guaranteed the obligations of the Company under the Term Loan. The Term Loan and related loan documents replaced the Company’s prior Credit Agreement dated December 5, 2011, by and among the Company, certain lenders party thereto, and Wells Fargo Capital Finance, LLC, as administrative agent (as amended from time to time, the “Prior Credit Facility”). All commitments under the Prior Credit Facility were terminated and all borrowings thereunder were repaid, effective January 27, 2015. The remaining obligations of Company and guarantor party to the Prior Credit Facility and related loan documents are limited to certain remaining contingent indemnification obligations under such facility. See Note 17, Credit Facility, for more information about the Prior Credit Facility.

The Term Loan and related loan documents contain covenants that limit the ability of the Company and certain of its subsidiaries, among other things, to:


•	issue any preferred stock;


•	incur or guarantee indebtedness;


•	create, incur, assume, or permit liens to exist;


•	consummate asset sales, acquisitions or mergers;


•	dispose of property;


•	pay dividends or repurchase stock;


•	make investments;


•	enter into transactions with affiliates; or


•	enter into or permit certain type of agreements to exist.

The Term Loan also requires compliance with a minimum adjusted current ratio and a $10.0 million minimum unrestricted cash balance, calculated as set forth in the Term Loan.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Term Loan contains customary events of default, including:


•	failure to make required payments;


•	material breaches of representations and warranties;


•	failure to comply with certain agreements or covenants;


•	failure to pay, or default under, certain other indebtedness;


•	certain events of bankruptcy and insolvency;


•	failure to pay certain judgments; and


•	a change of control.

The Company may not prepay the loan during the first year and may only prepay the loan during the second year at a premium. After such time, the Company may prepay the loan without penalty.

During fiscal 2016, we made $10.1 million total cash payments to Morgan Stanley Senior Funding, Inc. and Tennenbaum Capital Partners, LLC, reducing the Term Loan's outstanding balance to $59.4 million.

As of June 24, 2016, the Company had an outstanding principal balance of which was classified as follows:



	Term Loan
	Long-Term			Short-Term			Total
	(in thousands)

Principal amount	$	57,907		$	1,533		$	59,440
Less unamortized debt issuance costs	(1,158		)	(1,075		)	(2,233		)
	$	56,749		$	458		$	57,207

Japan Loans

During fiscal 2015, the Company entered into unsecured unguaranteed loans with various Japanese banks amounting to 300 million yen or $2.5 million at TIBOR plus 1.0% per annum. During fiscal 2016, the Company entered into two new loans at the rate ranging from TIBOR plus 1.0% to 1.75% per annum, for an aggregate total of 250 million yen or approximately $2.1 million and repaid a total of 275 million yen amounting to approximately $2.4 million toward the loans. As of June 24, 2016, approximately $0.5 million was classified as long-term debt.

The Company also entered into a four year Private Placement Bond from Mizuho Bank (“Japan Private Placement Bond”) for 500 million yen or $4.4 million at 0.8% per annum. As of June 24, 2016, approximately $3.5 million, net of unamortized debt issuance costs of $0.1 million was classified as long-term debt as of June 24, 2016.

17. CREDIT FACILITY

On December 5, 2011, the Company entered into a five-year senior secured credit facility in the aggregate principal amount of $25.0 million, as amended. The credit facility included a $10.0 million letter of credit subfacility.

18. SHARE-BASED COMPENSATION

The Company’s Board of Directors adopted the Company's 2014 Omnibus Incentive Plan ("2014 Plan") in October 2014. The 2014 Plan supersedes all prior plans and any remaining shares outstanding from the previous equity plans were transferred to the 2014 Plan. The 2014 plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock unit awards, and other forms of equity compensation, or collectively, stock awards, all of which may be granted to employees, including officers, non-employee directors and consultants. Incentive stock options may be granted only to employees. All other awards may be granted to employees, including officers and to non-employee directors and consultants. In 2014, the Company has initially reserved 2,500,000 shares of the Company’s common stock for the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

issuance of awards under the 2014 Plan, plus the number of any shares that may be subject to options granted under the Company’s existing plans that expire or otherwise terminate after the date of such Board approval without being exercised. In February 2016, the number of shares authorized for issuance under the 2014 Plan was increased by 1,200,000. As of June 24, 2016, the aggregate number of shares of common stock available for grant under the 2014 Plan was 2,476,931 shares.

In 2005, the Company’s Board of Directors adopted and its stockholders approved the Company’s 2005 Employee Stock Purchase Plan (“2005 ESPP Plan”). As of June 24, 2016, the aggregate number of shares of common stock available for grant under this plan is 1,340,017 shares. During fiscal 2014 and 2015 the number of shares authorized for issuance under this Plan was increased by 365,263 shares and 2,000,000 shares, respectively. During fiscal 2016, there was no increase in shares for this Plan. Subsequent to the year end, the 2005 ESPP Plan was terminated.

Stock awards expire ten years from the date of grant, or such shorter period specified in the award agreement. The awards vest over a period of time as determine by the board of directors, generally 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 units (“RSU”) and issuance of shares purchased under its 2005 ESPP Plan. Common stock to be issued for grants of RSUs are not issued until the RSU vests and do not have rights to vote or receive dividends.

The Company granted restricted stock units to employees under its equity incentive plans and issued shares of the Company's common stock to participating employees under its employee stock purchase plan during fiscal 2016, 2015 and 2014. Stock options were not granted during these respective periods.

Determining Fair Value

The fair value of certain share-based awards is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions for the following periods:



	Fiscal Year Ended
	June 24, 2016		June 26, 2015		June 27, 2014

ESPP Plan shares
Risk-free interest rate	0.5	%	0.2	%	0.2	%
Volatility	63.8	%	49.1	%	56.7	%
Weighted average expected life (in years)	1.25		1.25		1.25
Expected dividend yield	—	%	—	%	—	%
Weighted average grant date fair value	$2.09		$3.23		$5.59

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 historical volatility for the Company. 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 24, 2016		June 26, 2015		June 27, 2014
Cost of revenue	$	1,622	$	1,962	$	1,676
Research and development	2,132		2,318		2,072
Sales and marketing	1,675		2,771		2,598
General and administrative	6,608		7,498		5,633
Total share-based compensation expense	$	12,037	$	14,549	$	11,979

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Stock Option Activity

The following table summarizes the Company’s stock option activity for fiscal 2016, 2015 and 2014.



	Options Outstanding
	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual term in years	Aggregate Intrinsic Value
						(in thousands)
Balance at June 28, 2013	2,281,401		$	10.56
Options granted	—		—
Options exercised	(492,825	)	7.83
Options cancelled	(180,140	)	18.32
Balance at June 27, 2014	1,608,436		10.53
Options granted	—		—
Options exercised	(69,471	)	5.80
Options cancelled	(152,395	)	13.75
Balance at June 26, 2015	1,386,570		10.41
Options granted	—		—
Options exercised	(26,877	)	5.34
Options cancelled	(230,790	)	13.87
Balance at June 24, 2016	1,128,903		$	9.82	3.88	$	—
Vested and expected to vest at June 24, 2016	1,128,902		$	9.82	3.88	$	—
Exercisable at June 24, 2016	1,128,402		$	9.82	3.88	$	—

The total intrinsic value of options exercised in fiscal 2016 was immaterial. The total intrinsic value of options exercised in fiscal 2015 and 2014 was $0.2 million and $3.9 million, respectively. The total fair value of shares vested during fiscal 2016, 2015 and 2014 was $1.5 million, $1.5 million and $2.5 million, respectively.

As of June 24, 2016, the total compensation costs related to stock options has been fully recognized.

The following table summarizes information about stock options outstanding under all option plans as of June 24, 2016:



	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
$ 5.07 - $ 5.07	13,235	2.93	$	5.07	13,235	$	5.07
5.34 - 5.34	138,217	3.13	5.34		138,217	5.34
5.60 - 6.58	131,972	2.33	5.83		131,555	5.83
6.69 - 7.99	159,720	2.90	7.78		159,636	7.79
8.98 - 9.68	97,500	3.29	9.06		97,500	9.06
9.78 - 9.78	212,396	5.68	9.78		212,396	9.78
9.82 - 11.69	153,950	5.99	11.06		153,950	11.06
11.83 - 14.68	49,913	1.77	13.47		49,913	13.47
14.69 - 14.69	130,000	4.18	14.69		130,000	14.69
17.34 - 33.07	42,000	1.35	24.42		42,000	24.42
5.07 - 33.07	1,128,903	3.88	$	9.82	1,128,402	$	9.82

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Stock Activity

The following table summarizes the Company’s RSU activity for fiscal 2016, 2015 and 2014.



	Number of Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value
						(in thousands)
Balance at June 28, 2013	1,337,767		$	10.27
Awarded	1,237,967		14.41
Released	(558,481	)	12.17
Forfeited	(320,430	)	11.98
Balance at June 27, 2014	1,696,823		12.67
Awarded	1,273,510		9.44
Released	(804,420	)	8.90
Forfeited	(459,840	)	12.82
Balance at June 26, 2015	1,706,073		10.81
Awarded	1,495,901		5.16
Released	(997,453	)	9.77
Forfeited	(279,437	)	8.25
Balance at June 24, 2016	1,925,084		$	7.30	1.21	$	9,626
Vested and expected to vest at June 24, 2016	1,514,695		$	7.37	1.05	$	7,577

In August 2014, the Company granted time-based RSUs ("2014 executive RSUs") and performance-based RSUs (“2014 executive PSUs”) to members of the Company's executive management team. The 2014 executive RSUs vest quarterly over four years, subject to the recipient's continuous service through each vesting date. The 2014 executive PSUs initially vest as to one-fourth of their amount so long as (a) the Company’s total stockholder return meets the median total stockholder return ("TSR") of its peer group (50% weighting), and (b) the Company’s financial results meet targets established by the Board for certain product sales and bookings for fiscal 2015 (two goals with 25% weighting each). The 2014 executive PSUs may be increased or decreased depending on the level of attainment by the Company of the performance metrics established by the Board. Achievement of the aforementioned performance criteria will result in an initial vesting of one-fourth of the awards determined in accordance with a vesting matrix. At attainment of 75% or below, total vesting will be at 50%. At 100% attainment, total vesting will be at 125%. At 125% attainment or above, vesting will be at 150%. If the conditions for initial vesting of the 2014 executive PSUs are met, the remaining portion of the 2014 executive PSUs will vest in twelve equal, successive quarterly installments over an additional three years, subject to continued service through each vesting date.

The Company estimated the fair value of its 2014 executive PSUs using a Monte Carlo simulation model with the assumptions discussed above. The 2014 executive PSUs are recognized as compensation costs over the requisite service period, if rendered, even if the TSR threshold is never satisfied. The performance targets were achieved at 75% or below, resulting in 50% of the original PSU grant vesting over four years.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In August 2015, the Company granted time-based RSUs ("2015 executive RSUs") and performance-based RSUs (“2015 executive PSUs”) to members of the Company's executive management team. Generally, the 2015 executive RSUs begin immediate, quarterly vesting over a period of four years. The 2015 executive PSUs initially vest as to one-fourth of their amount on the day following Compensation Committee review of Company goal attainment for the fiscal year ending June 24, 2016. The 2015 executive PSU grants may be increased or decreased depending on the level of attainment by the Company of the performance metrics established by the Compensation Committee. The shares of common stock subject to these awards will be earned based on the performance as measured against the following metrics related to (i) total stockholder return (50% weighting) and (ii) two strategic objectives related to revenue and gross margin (50% weighting). Achievement of the aforementioned performance criteria results in a vesting percentage determined in accordance with a payout matrix. At attainment of below 75%, PSU vesting would be 0%. At 75% attainment, vesting would be 50%. At 100% attainment, vesting would be 100%. Attainment at 125% and above would result in 150% vesting. If the conditions for initial vesting of the PSUs are met, the remaining portion of the PSU grant would vest in twelve equal, successive quarterly installments over an additional three years, subject to continued service through each vesting date. The Company estimated the fair value of its 2015 executive PSUs using a Monte Carlo simulation model with the assumptions discussed above. The performance targets were achieved at 89%, resulting in 78% of the original PSU grant vesting over four years.

As of June 24, 2016, there was $3.7 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted average period of 1.22 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 24, 2016		June 26, 2015		June 27, 2014
RSUs shares withheld for taxes	340,284		278,733		214,304
RSUs amounts withheld for taxes	$	1,673	$	2,482	$	2,671

Employee Stock Purchase Plan

At June 24, 2016, the total compensation cost related to options to purchase the Company’s common stock under the 2005 ESPP Plan not yet recognized was approximately $1.2 million. This cost will be amortized on a straight-line basis over approximately 1.6 years. The following table shows the shares issued and their respective weighted-average purchase price per share during fiscal 2016, 2015 and 2014.



	Fiscal Year Ended
	June 24, 2016		June 26, 2015		June 27, 2014
Shares issued	795,208		457,125		540,448
Weighted-average purchase price per share	$	4.34	$	7.58	$	7.92

19. STOCKHOLDERS’ EQUITY

Stock Repurchase

The Company's common stock may be repurchased in the open market or through negotiated transactions, including 10b5-1 trading plans that would enable the Company to repurchase its shares during periods outside of its normal trading windows. In January 2013, the Company's board of directors approved a plan for the Company to repurchase shares of its common stock with a market value of up to $15.0 million. In November 2013, the Company announced an increase in the authorized repurchased amount to $30.0 million and in November 2014, the Company announced that it had extended its repurchase program through December 31, 2015. This purchase program expired as of December 31, 2015. The Company was not obligated to acquire any particular amount of stock, and the program could have been suspended or terminated at any time at the Company's discretion. Since the inception of the repurchase plan in January 2013, the Company repurchased approximately 1,566,000 shares of its common stock for approximately $18.0 million.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

These repurchases are reflected in our balance sheet as treasury stock and are available for future issuance. There were no shares repurchased during fiscal 2016. The following table shows the total number of shares repurchased during fiscal 2015 (in thousands, except per share amount):



	Treasury Stock
	Number of Shares	Amount		Average Purchase Price per Share
Cumulative balance at June 27, 2014	1,844	$	18,677	$	10.13
Repurchase of Treasury Stock:
Twelve months ended June 26, 2015	471	4,222		$	8.96
Cumulative balance at June 26, 2015	2,315	$	22,899	$	9.89

Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive loss as of June 24, 2016, June 26, 2015 and June 27, 2014 (in thousands):



	June 24, 2016			June 26, 2015			June 27, 2014
Cumulative translation adjustment	$	(502	)	$	(3,080	)	$	(608	)
Unrealized loss on cash flow hedges	(2,457		)	(408		)	(87		)
Loss on pension assets	(3,278		)	(1,781		)	(3,193		)
Accumulated other comprehensive loss	$	(6,237	)	$	(5,269	)	$	(3,888	)

There are no related tax effects of these components of accumulated other comprehensive loss.

20. EARNINGS PER SHARE

Basic and diluted net income (loss) per common share is computed by dividing consolidated net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted average number of common shares outstanding and dilutive common shares equivalent shares outstanding during the period. For fiscal 2016, 2015 and 2014, the effect of outstanding options and RSUs were anti-dilutive to loss per share and were therefore excluded from the calculation of diluted loss per share.

The dilutive effect of outstanding options and RSUs is reflected in diluted net income per share, but not diluted loss per share, by application of the treasury stock method. As the Company had a net loss in fiscal 2016, 2015 and 2014, basic and diluted net loss per share are the same for these fiscal years.

The following table sets forth the computation of basic and diluted net loss per share for fiscal 2016, 2015 and 2014 (in thousands, except per share amount):



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014
Numerator:
Net loss	$	(11,178	)	$	(39,145	)	$	(52,814	)
Denominator:
Weighted-average common shares used in computing basic and diluted net loss per share	35,745			34,559			34,260

Basic and diluted net loss per share	$	(0.31	)	$	(1.13	)	$	(1.54	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 24, 2016	June 26, 2015	June 27, 2014
Options, RSUs and ESPP	3,127	3,785	3,442

21. RETIREMENT BENEFIT PLANS

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

Employees who joined the Company prior to May 2009 were eligible for the German defined benefit 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.

Japan Plan

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Following is a reconciliation of the projected benefit obligation and the fair value of plan assets as of June 24, 2016 and June 26, 2015 for both the German and Japan plans (in thousands):



	Germany Plan						Japan Plan						Total
	Fiscal Year Ended						Fiscal Year Ended						Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 24, 2016			June 26, 2015			June 24, 2016			June 26, 2015
Projected Benefit Obligation
Benefit obligation, beginning of year	$	10,672		$	14,417		$	3,705		$	4,485		$	14,377		$	18,902
Service cost	10			48			310			330			320			378
Interest cost	252			376			43			48			295			424
Actuarial (losses) gain	1,088			(1,224		)	357			(65		)	1,445			(1,289		)
Benefits paid	(358		)	(375		)	(237		)	(293		)	(595		)	(668		)
Foreign exchange rate changes	83			(2,570		)	742			(800		)	825			(3,370		)
Benefit obligation, ending of year	$	11,747		$	10,672		$	4,920		$	3,705		$	16,667		$	14,377

Fair Value of Plan Assets
Fair value of plan assets, beginning of year	$	2,222		$	2,706		$	2,539		$	2,918		$	4,761		$	5,624
Expected return on plan assets	68			75			81			78			149			153
Participant contributions	1			2			381			408			382			410
Actuarial losses	(33		)	(33		)	(62		)	(56		)	(95		)	(89		)
Benefit payments	(68		)	(70		)	(202		)	(280		)	(270		)	(350		)
Foreign exchange rate changes	91			(458		)	494			(529		)	585			(987		)
Fair value of plan assets, ending of year	$	2,281		$	2,222		$	3,231		$	2,539		$	5,512		$	4,761

Underfunded Status
Projected benefit obligation	$	11,747		$	10,672		$	4,920		$	3,705		$	16,667		$	14,377
Fair value of plan assets	2,281			2,222			3,231			2,539			5,512			4,761
Underfunded status of plan	$	9,466		$	8,450		$	1,689		$	1,166		$	11,155		$	9,616

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 German plan. As of June 24, 2016, the cash surrender values of the life insurance plans amounted to $7.1 million ($0.3 million is included in prepaid expenses and other current assets and $6.8 million is included in other non-current assets in the accompanying consolidated balance sheets). As of June 26, 2015, the cash surrender values of the life insurance plans amounted to $7.0 million ($0.3 million is included in prepaid expenses and other current assets and $6.7 million is included in other non-current assets in the accompanying consolidated balance sheets). See Note 3, Financial Instruments and Fair Value, for additional information regarding the determination of fair value of the pension plan assets.

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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 24, 2016 and June 26, 2015 for both the German and Japan plans (in thousands):



	German Plan						Japan Plan						Total
	June 24, 2016			June 26, 2015			June 24, 2016			June 26, 2015			June 24, 2016			June 26, 2015
Amounts recognized in the consolidated balance sheets
Accrued benefit cost
Current liabilities	$	287		$	286		$	—		$	—		$	287		$	286
Non-current liabilities	$	9,179		$	8,164		$	1,689		$	1,166		$	10,868		$	9,330
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss	$	(2,522	)	$	(1,494	)	$	(756	)	$	(287	)	$	(3,278	)	$	(1,781	)

The following table summarizes the amounts recorded to other comprehensive (loss) income, net of zero tax during fiscal 2016 and 2015 (in thousands):



	Fiscal Year Ended
	June 24, 2016			June 26, 2015
Amounts recognized in other comprehensive (loss) income
Net actuarial gain (loss) - German Plan	$	(1,028	)	$	1,454
Net actuarial loss - Japan Plan	(469		)	(42		)
Total recognized in other comprehensive (loss) income	$	(1,497	)	$	1,412

The Company expects to recognize less than $0.1 million of amortization from accumulated other comprehensive (loss) income into net periodic benefit cost during fiscal 2017.

The following table summarizes the amounts related to the pension plan with accumulated benefit obligation in excess of plan assets at June 24, 2016 and June 26, 2015 (in thousands):



	German Plan				Japan Plan				Total
	June 24, 2016		June 26, 2015		June 24, 2016		June 26, 2015		June 24, 2016		June 26, 2015
Projected benefit obligation	$	11,747	$	10,672	$	4,920	$	3,705	$	16,667	$	14,377
Accumulated benefit obligation	$	11,747	$	10,672	$	4,337	$	3,231	$	16,084	$	13,903
Fair value of plan assets	$	2,281	$	2,222	$	3,231	$	2,539	$	5,512	$	4,761

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 and Japan plans were as follows:



	German Plan		Japan Plan
	June 24, 2016	June 26, 2015	June 24, 2016	June 26, 2015
Assumptions used to determine benefits obligations:
Discount rate	1.5% - 2.0%	1.6% - 2.5%	0.3%	1.1	%
Rate of compensation increase	0.0%	0.0%	3.5%	3.2	%
Assumptions used to determine net periodic benefit cost:
Discount rate	1.6% - 2.5%	3.0% - 3.2%	1.1%	1.2	%
Expected long-term rate of return on plan assets	3.0% - 4.1%	3.0% - 4.1%	3.0%	3.0	%
Rate of compensation increase	0.0%	0.0% - 1.0%	3.2%	5.7	%

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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. Expected long-term rate of return on assets assumptions for the Japan plan is determined by SGI Japan in consideration 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 German and Japan plans was comprised of the following components (in thousands):



	German Plan									Japan Plan										Total
	Fiscal Year Ended									Fiscal Year Ended										Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014				June 24, 2016			June 26, 2015			June 27, 2014			June 24, 2016			June 26, 2015			June 27, 2014
Net periodic benefit cost
Service cost	$	10		$	48		$	47			$	310		$	330		$	384		$	320		$	378		$	431
Interest expense	252			376			470				43			48			78			295			424			548
Expected return on plan assets	(68		)	(75		)	(91		)		(81		)	(78		)	(85		)	(149		)	(153		)	(176		)
Amortization on actuarial losses	18			257			128				—			—			—			18			257			128
Net periodic benefit cost	$	212		$	606		$	554			$	272		$	300		$	377		$	484		$	906		$	931

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.

The Company expects to make contributions to the Japan plan of approximately $0.4 million during fiscal 2017.

Future Employee Benefit Payments

The following table provides the estimated pension payments that are payable from the plans to participants (in thousands):



	Future Payments
Fiscal Year	Germany		Japan		Total
2017	$	383	$	161	$	544
2018	539		168		707
2019	712		183		895
2020	562		180		742
2021	561		221		782
Following five years	3,163		1,561		4,724
Total	$	5,920	$	2,474	$	8,394

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 $2.1 million, $2.6 million and $2.8 million during fiscal 2016, 2015 and 2014, respectively.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

22. INCOME TAXES

The provision (benefit) for income taxes for fiscal years 2016, 2015 and 2014 was as follows (in thousands):



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014
Federal:
Current	$	—		$	—		$	—
Deferred	165			288			—
	165			288			—
State:
Current	44			227			205
Deferred	7			12			—
	51			239			205
Foreign:
Current	(185		)	(198		)	(3		)
Deferred	(657		)	111			(190		)
	(842		)	(87		)	(193		)
Income tax provision (benefit)	$	(626	)	$	440		$	12

The components of loss before income taxes consisted of the following (in thousands):



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014
Domestic sources	$	(17,616	)	$	(32,473	)	$	(58,790	)
Foreign sources	5,812			(6,232		)	5,988
Total	$	(11,804	)	$	(38,705	)	$	(52,802	)

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.

As of June 24, 2016 and June 26, 2015, the significant components of the Company’s deferred tax assets and liabilities were (in thousands):



	Fiscal Year Ended
	June 24, 2016			June 26, 2015
Deferred tax assets:
Net operating losses and tax credit carry forwards	$	133,072		$	120,604
Deferred revenue	11,102			24,272
Stock based compensation	9,180			9,711
Intangible and fixed assets	2,081			8,909
Accruals and reserves	8,977			5,971
Other	936			2,674
Total deferred tax assets	165,348			172,141
Less valuation allowance	(164,331		)	(171,609		)
Net deferred tax assets	$	1,017		$	532

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The valuation allowance against the Company's deferred tax assets decreased from $171.6 million as of June 26, 2015 to $164.3 million as of June 24, 2016. The decrease was primarily due to current year utilization of foreign deferred tax assets. The net deferred tax asset as of June 24, 2016 is attributable to deferred tax assets of certain foreign subsidiaries which the Company believes are more likely than not to be realized offset by deferred tax liabilities related to amortization of acquired intangibles. The majority of deferred tax assets are subject to a full valuation allowance as they are more likely than not unrealizable based on all available positive and negative evidence including our history of operating results and uncertainty of predicting future income.

As of June 24, 2016, the Company has federal, state, Japan and other foreign net operating loss carryforwards of $232.9 million, $152.7 million, $58.4 million, and $52.3 million, respectively. If not utilized, the net operating loss carryforwards will begin to expire in fiscal 2017 for state, foreign, and Japan and fiscal 2028 for federal. Substantially all of the Japan net operating losses of $58.4 million will expire by fiscal 2018.

As a result of a cumulative ownership change of greater than 50% that occurred 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 if there are no subsequent events that produce a greater restriction on the net operating losses.

Tax attributes related to stock option windfall 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 24, 2016 was $10.3 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 24, 2016, the Company has federal and state Research and Development tax credits of $8.6 million and $8.6 million, respectively and $4.8 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 and withholding taxes in the U.S. and various foreign countries. At June 24, 2016, the Company did not record deferred tax liabilities of $11.9 million on approximately $34.1 million of earnings that are deemed to be permanently reinvested overseas or to be repatriated tax free.

A reconciliation of the statutory federal income tax rate for fiscal 2016, 2015 and 2014 is as follows:



	Fiscal Year Ended
	June 24, 2016		June 26, 2015		June 27, 2014
Federal statutory rate provision	35.0	%	35.0	%	35.0	%
State taxes, net of federal tax benefit	(1.1	)	(0.6	)	(0.2	)
Foreign rate differential	15.2		(6.4	)	2.3
Stock based compensation	(6.8	)	(2.5	)	0.1
Valuation allowance - US	(39.5	)	(27.4	)	(38.3	)
Valuation allowance - Foreign	5.6		(0.3	)	0.4
Unrecognized tax benefits	4.7		1.1		(0.1	)
Foreign tax refunds	—		0.5		2.6
Federal research credits	6.7		1.2		0.7
Foreign dividend	(9.3	)	(0.2	)	(0.2	)
Other	(5.2	)%	(1.6	)%	(2.3	)%
Effective tax rate	5.3	%	(1.2	)%	—	%

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A reconciliation of the unrecognized tax benefits (excluding interest and penalties) from June 28, 2013 through June 24, 2016 are as follows (in thousands):



Balance at June 28, 2013	$	4,987
Increase to current year positions	344
Increase to prior year positions	910
Decrease due to lapse of statute of limitations	(270		)
Balance at June 27, 2014	5,971
Increase to current year positions	329
Increase to prior year positions	480
Decrease due to lapse of statute of limitations	(388		)
Decrease of unrecognized tax benefits related to settlements	(97		)
Balance at June 26, 2015	6,295
Increase to current year positions	286
Decrease to prior year positions	(530		)
Decrease due to lapse of statute of limitations	(795		)
Balance at June 24, 2016	$	5,256

At June 24, 2016, the Company had approximately $5.3 million of gross unrecognized tax benefits of which $1.3 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 Company classifies interest expense and penalties related to unrecognized tax benefits as components of income tax expense. As of June 24, 2016, the Company has accrued interest and penalties of approximately $6.7 million and $0.2 million, respectively, on the Company’s consolidated balance sheet.

During fiscal 2016, the Company recognized an insignificant amount for interest and a benefit of $0.3 million related to penalties, resulting from reversals of unrecognized tax benefits and current year additions as recorded in the consolidated statement of operations.

The Company’s U.S. federal tax returns for 2009 and prior years are no longer subject to examination. The Company’s state tax returns for years prior to 2009 are not subject to examination.

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 3 to 7 years. Tax years still open to examination by foreign tax authorities range from 2009 through 2015.

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.

The Company early adopted ASU 2015-17 effective June 24, 2016 on a prospective basis. Adoption of this ASU resulted in an immaterial reclassification of our net current deferred tax asset to the net non-current deferred tax asset in its consolidated balance sheet as of June 24, 2016. No prior periods were retrospectively adjusted.

23. SEGMENT INFORMATION

The Company manages its business primarily as three operating segments, HPC, HPDA and Service. The Company has aggregated the HPC and HPDA operating segments into one reportable Product segment as the HPDA operating segment has not met the quantitative threshold to be reported as a separate reportable segment. As such, the Company reports two reportable segments, Product and Service. 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 Operating Officer, the Chief Operating Decision Maker (“CODM”), to evaluate segment performance; and the Company's availability of separate financial information.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A description of the Company's two reportable segments is as follows:

Product—The Product segment is comprised of SGI's compute and storage solutions, which include products from both our HPC and HPDA operating segments. Compute solutions include scale-out computing, scale-up computing, software and cloud/web solutions. Compute solutions also include integrated third-party hardware and software products that SGI sells to provide a single source solution for its customers. SGI's compute solutions are designed to minimize the number and complexity of interconnects for power and data transfer to improve reliability, speed of implementation and serviceability. Storage solutions include both hardware and software offerings to address virtually every type of data storage and management requirement. Products range from entry-level disk arrays to complex storage systems, with innovative technology and hardware. SGI's storage solutions are designed to provide extreme scale, broad flexibility to minimize the cost to store data.

Service—The Service segment is comprised of customer service support and professional services. SGI's customer support organization provides ongoing maintenance and technical support for its 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. SGI's professional services organization provides value added services associated with technology consulting, project management and customer education, all of which help its customers realize the full value of their information technology investments.

In fiscal 2014, the Company previously managed its business primarily as three separate business units: Compute, Storage, and Service. In fiscal 2015, the Company combined the Compute and Storage business units into a single Product business unit. All periods presented conform to the current reportable segment structure.

The Company's CODM evaluates the performance of its operating segments based on revenue and operating profit (loss). Revenues are generally allocated based on the type of products and service provided to its customers. Operating profit (loss) for each segment includes related cost of sales and operating expenses directly attributable to the segment. A portion of the segments' expenses arise from shared services and infrastructure that the Company provides 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 and other corporate infrastructure expenses. The corporate charges that are directly attributable to the segments are allocated and are reassessed on a periodic 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 profitability of each of the segments is measured after excluding share-based compensation expenses, amortization and impairment of intangibles, restructuring charges, manufacturing transition costs, general and administration charges, other unallocated corporate charges and other items as noted in the reconciliation below as management does not include this information in its measurement of the performance of the operating segments.

Segment Results

The following table presents revenue and operating profit (loss) for the Company’s segments for fiscal 2016, 2015 and 2014 (in thousands):



	Fiscal Year Ended
	June 24, 2016		June 26, 2015		June 27, 2014
Total net revenue
Product	$	394,844	$	376,294	$	374,565
Service	138,086		144,965		155,381
Total net revenue	$	532,930	$	521,259	$	529,946

Operating profit from reportable segments
Product	$	29,885	$	10,578	$	(146	)
Service	53,585		57,513		60,412
Total operating profit from reportable segments (1)	$	83,470	$	68,091	$	60,266

(1) The profitability of each of the segments is measured after excluding unallocated corporate charges, restructuring and severance, amortization and impairment of intangibles, share-based compensation expenses, manufacturing transition and termination costs and other items as noted in the reconciliation below.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table reconciles segment results to our total company results from operations before taxes:



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014
	(in thousands)
Total reportable segments' operating profit	$	83,470		$	68,091		$	60,266
All other corporate charges:
Unallocated operating expenses	73,943			75,815			73,357
Gain on sale of assets	(4,425		)	—			—
Restructuring and severance	2,560			6,314			12,222
Amortization and impairment of intangibles	662			1,854			6,748
Share-based compensation	12,037			14,549			11,979
Manufacturing transition / termination costs	—			—			2,199
Excess and obsolescence inventory charges	—			—			5,424
Other	(195		)	3,648			3,184
Total all other corporate charges	84,582			102,180			115,113
Loss from operations, as reported	$	(1,112	)	$	(34,089	)	$	(54,847	)

The Company derives the results of the business segments directly from its internal management reporting system. 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 business segment. The Company does not measure the performance of its business segments on any asset-based metrics. Therefore, reportable segment information is presented only for revenue and operating profit (loss).

Customer Information

A significant portion of the Company's revenue was generated from a limited number of customers. For the year ended June 24, 2016, one customer represented 10 percent or more of the Company's total net revenue. Various agencies of the United States government, excluding system integrators (collectively, U.S. government), accounted for approximately 25% of the Company's revenue. For the year ended June 26, 2015, two customers represented 10 percent or more of the Company's total net revenue. Various agencies of the United States government, excluding system integrators (collectively, U.S. government), accounted for approximately 21% of the Company's revenue and another customer accounted for approximately 12% of the Company's revenue.

At June 24, 2016, two customers accounted for 32% of the Company's accounts receivable. At June 26, 2015, four customer accounted for 56% of the Company's accounts receivable.

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Geographic Information

The following table presents revenue by geographic region for fiscal 2016, 2015 and 2014 (in thousands except percentages):



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014

Americas	$	295,518		$	323,785		$	277,536
As a percent of total net revenue	55.5		%	62.1		%	52.4		%
EMEA	107,439			73,311			116,071
As a percent of total net revenue	20.1		%	14.1		%	21.9		%
APJ	129,973			124,163			136,339
As a percent of total net revenue	24.4		%	23.8		%	25.7		%
Total revenue	$	532,930		$	521,259		$	529,946

Americas includes both North and South America. EMEA includes European countries. APJ includes Australia, Japan and all other Asian countries.

International sales to Japan, the only foreign country which accounted for ten percent or more of revenue, was $112.4 million for fiscal 2016 or 21% of revenue, $92.2 million for fiscal 2015 or 18% of revenue and $108.3 million or 20% of revenue for fiscal 2014.

Approximately 98% and 97% of the Company’s property and equipment was located in the United States as of June 24, 2016 and June 26, 2015, respectively. The Company's property was not material in any individual foreign country.

24. 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 24, 2016 was $3.6 million for which the Company has $3.5 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.

25. 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 December 2023. 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	Amount
2017	$	6,220
2018	5,306
2019	4,233
2020	3,167
2021	3,312
Thereafter	6,400
Total	$	28,638

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Rent expense for fiscal 2016, 2015 and 2014 was approximately $4.4 million, $5.7 million and $7.4 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 2018. 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 24, 2016, these non-cancelable purchase commitments were approximately $17.8 million, of which $12.5 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 24, 2016. 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 such indemnifications as of June 24, 2016.

Letter of Credit Arrangements

As of June 24, 2016, the Company has a $2.0 million outstanding letter of credit with Wells Fargo Bank 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. This outstanding letter of credit is secured by restricted cash that is reflected on our balance sheet.

Contingencies

The Company may, from time to time, be involved in legal proceedings and disputes that arise in the normal course of business. These matters include product liability actions, securities and stockholder matters, patent infringement actions, contract disputes, domestic and international federal, state and local tax reviews and audits and other matters. The Company also may be subject to litigation and/or adverse rulings or judgments as a result of certain contractual indemnification obligations. 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.

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 proven, 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 outlined above, that would be likely to have a material adverse effect, either individually or in the aggregate, 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

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Litigation Related to Our Proposed Acquisition by HPE

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26. CONTRACT MANUFACTURING TRANSITION

In July 2013, the Company selected Jabil Circuit, Inc. ("Jabil") as its primary global manufacturing services and supply chain management provider. The transition to Jabil was expected to be implemented as a “manage in place” model, which would utilize existing SGI facilities and personnel. On November 18, 2013, the Company signed an asset purchase agreement with Jabil, whereby Jabil would purchase SGI’s primary manufacturing facility, located in Chippewa Falls, Wisconsin and certain other manufacturing assets for $6.3 million in cash.

The total carrying of these assets held for sale were written down to their fair value of $6.3 million, resulting in an impairment charge of $0.9 million recorded in general and administrative expenses in the second quarter of fiscal 2014.

SGI also expected that approximately 120 of its manufacturing personnel in Chippewa Falls would transfer to Jabil. During the second quarter of fiscal 2014, the Company accrued approximately $0.7 million of compensation costs associated with the transfer of these employees as part of the agreement with Jabil, which was recorded within cost of revenue.

During the fourth quarter of fiscal 2014, the Company reevaluated its outsourcing model given lower than anticipated volumes of Company product sales. On August 4, 2014, the Company terminated the planned manage-in-place outsourcing structure and the asset purchase agreement referenced above. The Company paid approximately $0.6 million to Jabil for certain assets that were purchased for the manage-in-place model as well as for costs associated with streamlining the manufacturing process. In addition, SGI reversed the $0.7 million accrual previously booked for compensation costs associated with the proposed employee transfer discussed above.

27. SUBSEQUENT EVENTS

Definitive Agreement to be acquired by Hewlett Packard Enterprise Company

On August 11, 2016 the Company announced that it has signed a definitive agreement to be acquired by Hewlett Packard Enterprise Company ("HPE") for $7.75 per share in cash, a transaction valued at approximately $275 million, net of cash and debt. HPE and SGI believe that by combining complementary product portfolios and go-to-market approaches they will be able to strengthen the leading position and financial performance of the combined business. The transaction is expected to close in the second or third quarter of the Company's fiscal year 2017 (November 1, 2016 - January 31, 2017), subject to regulatory and stockholders approvals and other customary closing conditions. Also see Note 25, "Commitments and Contingencies".

28. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following is a summary of quarterly results of operations for fiscal 2016 and 2015 (in thousands, except per share amounts).



	Fiscal Quarter Ended
	June 24, 2016		March 25, 2016		December 25, 2015			September 25, 2015
Revenue	$	122,714	$	132,083	$	151,826		$	126,307
Gross profit	$	37,488	$	37,768	$	40,825		$	28,464
Net income (loss)	$	134	$	739	$	(479	)	$	(11,572	)

Basic net income (loss) per share:	$	0.00	$	0.02	$	(0.01	)	$	(0.33	)
Diluted net income (loss) per share:	$	0.00	$	0.02	$	(0.01	)	$	(0.33	)
Shares used in the calculation of net income (loss) per share:
Shares used in the calculation of basic net income (loss) per share:	36,319		35,954		35,531			35,174
Shares used in the calculation of diluted net income (loss) per share:	37,379		37,028		35,531			35,174

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SILICON GRAPHICS INTERNATIONAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Fiscal Quarter Ended
	June 26, 2015			March 27, 2015			December 26, 2014			September 26, 2014
Revenue	$	152,904		$	118,504		$	138,150		$	111,701
Gross profit	$	31,798		$	33,659		$	36,809		$	32,372
Net loss	$	(9,612	)	$	(8,762	)	$	(10,438	)	$	(10,333	)

Basic and diluted net loss per share:	$	(0.28	)	$	(0.25	)	$	(0.30	)	$	(0.30	)
Shares used in the calculation of basic and diluted net loss per share:	34,839			34,586			34,375			34,420

SCHEDULE II.

SILICON GRAPHICS INTERNATIONAL CORP.

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)



	Fiscal Year Ended
	June 24, 2016			June 26, 2015			June 27, 2014
Allowance for doubtful accounts:
Beginning balance	$	190		$	287		$	1,074
Charges, net of recoveries	520			44			70
Write-offs and adjustments	(235		)	(141		)	(857		)
Ending balance	$	475		$	190		$	287

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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 24, 2016.

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 (2013) 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 24, 2016.

The effectiveness of our internal control over financial reporting as of June 24, 2016 has been audited by Deloitte & Touche LLP, independent registered public accounting firm, as stated in its report.

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 that occurred during the last fiscal quarter ended June 24, 2016 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Silicon Graphics International Corp.

Milpitas, California

We have audited the internal control over financial reporting of Silicon Graphics International Corp. and subsidiaries (the "Company") as of June 24, 2016, based on criteria established in Internal Control - Integrated Framework (2013) 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 24, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) 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 24, 2016 of the Company and our report dated September 2, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph relating to the signing of a definitive agreement to be acquired by Hewlett Packard Enterprise Company.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

September 2, 2016

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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 of the Registrant.”

All other information required by this Item will be filed with the Commission in a Proxy Statement or Form 10-K/A within 120 days of the completion of the Company’s fiscal year ended June 24, 2016.

Item 11. Executive Compensation

The information required by this Item will be filed with the Commission in a Proxy Statement or Form 10-K/A within 120 days of the completion of the Company’s fiscal year ended June 24, 2016.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item will be filed with the Commission in a Proxy Statement or Form 10-K/A within 120 days of the completion of the Company’s fiscal year ended June 24, 2016.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this Item will be filed with the Commission in a Proxy Statement or Form 10-K/A within 120 days of the completion of the Company’s fiscal year ended June 24, 2016.

Item 14. Principal Accounting Fees and Services

The information required by this Item will be filed with the Commission within in a Proxy Statement or Form 10-K/A 120 days of the completion of the Registrant’s fiscal year ended June 24, 2016.

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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 Part II 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 following 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/ MEKONNEN P. ASRAT
			Mekonnen P. Asrat Chief Financial Officer

Dated: September 2, 2016

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Exhibit 24.1

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jorge L. Titinger and Mekonnen P. Asrat, 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 2, 2016
Jorge L. Titinger	(Principal Executive Officer)

/s/ Mekonnen P. Asrat	Senior Vice President and Chief Financial Officer	September 2, 2016
Mekonnen P. Asrat	(Principal Financial and Accounting Officer)

/s/ Rowena A. Numoto	Vice President and Corporate Controller	September 2, 2016
Rowena A. Numoto

/s/ Charles M. Boesenberg	Director	September 2, 2016
Charles M. Boesenberg

/s/ Gary A. Griffiths	Director	September 2, 2016
Gary A. Griffiths

/s/ Michael W. Hagee	Director	September 2, 2016
Michael W. Hagee

/s/ Douglas R. King	Director	September 2, 2016
Douglas R. King

/s/ Nina Richardson	Director	September 2, 2016
Nin Richardson

/s/ Ronald D. Verdoorn	Chairman of the Board of Director	September 2, 2016
Ronald D. Verdoorn

/s/ Kirsten Wolberg	Director	September 2, 2016
Kirsten Wolberg

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EXHIBIT INDEX



Exhibit Number		Exhibit Description	Incorporated by Reference			Filing Date	Filed Herewith
Exhibit Number		Exhibit Description	Form	Ex. No.	File No.	Filing Date	Filed Herewith
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
2.4	†	Agreement and Plan of Merger, dated as of August 11, 2016, among Hewlett Packard Enterprise Company, Satellite Acquisition Sub, In. and Silicon Graphics International Corp.	8-K	2.1	000-51333	8/11/2016
3.1		Amended and Restated Certificate of Incorporation.	10-Q	3.1	000-51333	8/12/2005
3.2		Amended and Restated Bylaws.	10-K	3.2	000-51333	9/8/2014
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	*	2005 Equity Incentive Plan, as amended.	10-K	10.3	000-51333	9/10/2012
10.3	*	2005 Non-Employee Directors’ Stock Option Plan.	S-1	10.1	333-122576	2/4/2005
10.4	*	2005 Employee Stock Purchase Plan, as amended.	S-8	99.1	000-51333	12/10/2014
10.5	*	Form of Stock Option Agreement under the 2006 New Recruit Equity Incentive Plan.	8-K	10.2	000-51333	1/30/2006
10.6	*	2006 New Recruit Equity Inventive Plan, as amended and restated.	10-K	10.48	000-51333	2/28/2007
10.7	*	Form of Option Agreement and Grant Notices under the 2005 Equity Incentive Plan.	8-K	10.2	000-51333	9/5/2006
10.8	*	Form of Stock Bonus Award Agreement and Grant Notice under the 2005 Equity Incentive Plan.	8-K	10.3	000-51333	9/5/2006
10.9	*	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
10.10	*	Form of 2005 Equity Incentive Plan Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement	10-K	10.16	000-51333	9/10/2012
10.11	*	2014 Omnibus Incentive Plan	S-8	99.1	000-51333	12/10/2014
10.12	*	2014 Omnibus Incentive Plan, as amended	10-Q	10.1	000-51333	1/29/2016
10.13	*	Form of Restricted Stock Unit Award Agreement under 2014 Omnibus Incentive Plan	10-Q	10.1	000-51333	5/1/2015

Exhibit

Number

Exhibit Description

Incorporated by Reference

Filing Date

Filed

Herewith

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Form

Ex. No.

File No.

10.14

Employment Agreement Letter, dated February 21, 2012, between the Registrant and Jorge L. Titinger.

8-K

10.1

000-51333

2/23/2012

10.15

First Amendment to Employment Letter, dated April 8, 2013 between the Registrant and Jorge L. Titinger

101-Q

10.1

000-51333

11/4/2013

10.16

Employment Agreement Letter, dated April 30, 2012, between the Registrant and Robert J. Nikl.

8-K

10.1

000-51333

4/30/2012

10.17

First Amendment to Employment Letter, dated December 20, 2012 between the Registrant and Robert J. Nikl

10-Q

10.2

000-51333

11/4/2013

10.18

Employment Agreement Letter dated January 18, 2013 between the registrant and Cassio Conceicao.

8-K

10.1

000-51333

1/22/2013

10.19

Offer letter dated June 4, 2012 between the Registrant and Mekonnen Asrat

10-Q

10.1

000-51333

5/1/2015

10.20

First Amendment to Employment Letter Agreement dated December 17, 2012 between the Registrant and Mekonnen Asrat

10-Q

10.2

000-51333

5/1/2015

10.21

Second Amendment to Employment Letter Agreement dated October 30, 2015 between the Registrant and Mekonnen Asrat

10-Q

10.2

000-51333

1/29/2016

10.22

Offer letter dated May 24, 2013 between the Registrant and Kirk O. Williams

10.23

First Amendment to Employment Letter Agreement dated December 18, 2015 between the Registrant and Kirk O. Williams

10.24

Second Amendment to Employment Letter Agreement dated June 25, 2016 between the Registrant and Kirk O. Williams

10.25

Offer letter dated October 26, 2015 between the Registrant and Pete Hilliard

10.26

Credit Agreement, dated as of January 27, 2015, among Silicon Graphics International Corp., as Borrower, certain lenders, and Morgan Stanley Senior Funding, Inc., as Administrative Agent and Collateral Agent.

8-K

10.10

000-51333

1/28/2015

10.27

Lease dated June 27, 2013 between the Registrant and The Irvine Company LLC.

8-K

10.10

000-51333

6/27/2013

21.1

Significant Subsidiaries of the Company

23.1

Consent of Independent Registered Public Accounting Firm

24.1

Power of Attorney (Included within document after SIGNATURES)

31.1

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2

Certification required by Rule 13a-14(a) or Rule 15d-14(a).

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).

101.INS

***

XBRL Instance Document

101.SCH

***

XBRL Taxonomy Extension Schema Document

101.CAL

***

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

***

XBRL Taxonomy Extension Definition Linkbase Document

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101.LAB

***

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

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XBRL Taxonomy Extension Presentation Linkbase Document



*	Indicates a management contract or compensatory plan or arrangement.



**	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.
***	XBRL (eXtensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed
†	Schedules have been omitted pursuant to ITem 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplementally copies of any of the omitted schedules upon request by the SEC.

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