CRAY COMPUTER CORP, 10-Q, 1995-11-14

CRAY COMPUTER CORP
10-Q, 1995-11-14
ELECTRONIC COMPUTERS

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
or

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
----------- -----------

Commission File Number: 0-18072
- --------------------------------------------------------------------------------
----------------------

CRAY COMPUTER CORPORATION
(Exact name of registrant as specified in its charter)

Delaware 84-1120275
(State of Incorporation) (I.R.S Employer Identification Number)

1110 Bayfield Drive, Colorado Springs, Colorado 80906
(Address of principal executive offices) (Zip Code)

- --------------------------------------------------------------------------------
----------------------

Telephone Number: (719) 579-6464
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
----------------------

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 twelve 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
------------------------------- ------------------

As of November 10, 1995, 46,464,987 shares of the registrant's Common Stock,
$0.01 par value, were outstanding.
<PAGE>

CRAY COMPUTER CORPORATION
(Debtor in Possession)
INDEX

PART I. FINANCIAL INFORMATION PAGE NO.
-------
ITEM 1. FINANCIAL STATEMENTS

Statements of Operations (unaudited) cumulative from
October 1983 (inception) through September 30, 1995,
and for the three and nine months ended September 30,
1995 and 1994.......................................... 3

Statements of Deficiency in Net Assets of September 30,
1995 (unaudited), and December 31, 1994................ 4

Statement of Changes in Deficiency (unaudited) from
July 1, 1995 through September 30, 1995................ 5

Notes to Interim Financial Statements (unaudited)...... 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 20

PART II. OTHER INFORMATION

NOT APPLICABLE

SIGNATURE....................................................... 38

2
<PAGE>

CRAY COMPUTER CORPORATION
(Debtor in Possession)
STATEMENTS OF OPERATIONS
(Unaudited)

(In thousands, except per share data)
- ------------------------------------

Cumulative from Three months Nine months
October 1993 ended Sept. 30, ended Sept 30,
(inception) through ----------------------- ---------------------
Sept. 30, 1995 1995 1994 1995 1994
-------------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue
Sales $ 12,760 - - - -
Service fees 1,846 82 90 253 261
Development contract revenue 2,607 (20) 1,449 482 1,449
Other revenue 216 136 12 160 12
--------- -------- -------- ------- -------
17,231 198 1,551 895 1,722
--------- -------- -------- ------- -------

Operating costs and expenses
Cost of sales 7,686 - - - -
Cost of services 641 - - - 40

Research and development
Related parties 41,169 - 78 60 251
Other 316,552 - 7,644 7,571 27,929
--------- -------- -------- ------- -------
Total research and development 357,721 - 7,722 7,631 28,180

Marketing 3,859 - 342 362 803

General and administrative 22,190 1,729 588 4,376 1,944
--------- -------- -------- ------- -------
392,097 1,729 8,652 12,369 30,967
--------- -------- -------- ------- -------

Operating loss (374,668) (1,531) (7,101) (11,474) (29,245)

Other income (deductions), net (3,429) (3,806) (141) (4,337) (633)

Litigation settlement expense 1,000 - - - -

Net loss $(379,097) (5,337) (7,242) (15,811) (29,878)
========= ======== ======== ======= =======

Loss per share (.11) (.19) (.35) (.79)
======== ======== ======= =======

Weighted average number of shares
outstanding 46,465 38,042 45,792 37,983
======== ======== ======= =======

</TABLE>

See accompanying notes to interim financial statements

3
<PAGE>

CRAY COMPUTER CORPORATION
(Debtor in Possession)

Statements of Deficiency in Net Assets
Available in Liquidation

(Liquidation Basis and Unaudited)

(In thousands, except share data) Sept 30, December 31,
- -------------------------------- 1995 1994
-------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,104 2,372
Accounts receivable 1,826 711
Prepaid expenses 17 1,855
Other assets 38 15
Property, plant and equipment (net) 8,153 21,213
--------- ---------
Total assets 13,138 26,166
--------- ---------

Liabilities
Accounts payable 10,788 2,392
Accrued expenses 1,326 1,600
Lease obligations 3,002 -
Long-term liability - 360
Bank borrowings - 12,719
Bankruptcy administrative expense reserve 500 -
--------- ---------
Total liabilities 15,616 17,071
--------- ---------

Net deficiency in net assets available in liquidation $ (2,478) 9,095
========= =========

Stockholders' deficiency in net assets:
Preferred stock of $.01 par value
Authorized 20,000,000 shares - -
Common stock of $.01 par value
Authorized 120,000,000 shares,
issued and outstanding 46,464,987 and
41,905,800 shares 465 419
Additional paid-in capital 253,379 249,187
--------- ---------
253,844 249,606
--------- ---------

Deficit accumulated during the development stage (379,097) (363,286)
Less accumulated deficit transferred to additional
paid-in capital 122,775 122,775
--------- ---------
Accumulated deficit since November 15, 1989 (256,322) (240,511)
--------- ---------
Commitments and contingencies

Stockholders' deficiency in net assets $ (2,478) 9,095
========= =========

</TABLE>

See accompanying notes to interim financial statements

4
<PAGE>

CRAY COMPUTER CORPORATION
(Debtor in Possession)

Statement of Changes in Deficiency
in Net Assets Available in Liquidation

Quarter ended September 30, 1995 and
period from July 1, 1995 through September 30, 1995

(Unaudited)

(In thousands, except share data)
- ---------------------------------

<S> <C>
Net assets available in liquidation at July 1, 1995 $ 2,859

Changes in net assets available in liquidation attributed to:
Increase in cash 2,671
Increase in accounts receivable 1,662
Decrease in prepaid expenses and other assets (1,671)
Write-down of net property and equipment to net realizable value (11,169)
Increase in accounts payable (45)
Decrease in accrued expenses 104
Bankruptcy Administrative expense reserve (500)
Increase in lease obligations (3,002)
Decrease in bank borrowings 6,613
---------

(5,337)
---------

Deficiency in net assets available in liquidation at Sept. 30, 1995 $ (2,478)
=========

</TABLE>

See accompanying notes to interim financial statements

5
<PAGE>

CRAY COMPUTER CORPORATION

(Debtor in Possession)

Notes to Interim Financial Statements

(Unaudited)

(1) Bankruptcy Filing and Basis of Financial Statement Presentation
---------------------------------------------------------------

The accompanying financial statements are unaudited. Generally accepted
accounting principles require the adjustment of assets and liabilities to
estimated net realizable value under the liquidation basis. Accordingly, the
statements of deficiency in net assets available in liquidation at September
30, 1995 reflect assets and liabilities on this basis. The Company announced
that it would begin selling all or most of its assets for the benefit of the
Company's creditors and shareholders. However, management does not believe
that a liquidating distribution to shareholders is likely. (See Note 13 -
Other Subsequent Events.)

The Company is currently finalizing a Chapter 11 Liquidating Plan (the
"Plan") Once the Plan is finalized, it will be mailed to all known creditors,
shareholders, and other party in interest to make an informed decision to
accept or reject the Plan.

The Plan proposes that a Trustee will be appointed to manage and dispose of
the balance of the assets of the Estate on behalf of the Company. Allowed
priority claims shall be paid in full on the Effective Date. Allowed unsecured
claims shall be paid in full on the Effective Date, provided sufficient cash is
available. To the extent there is insufficient cash available on the Effective
Date to pay all allowed unsecured claims in full, the holders of allowed
unsecured claims shall be paid on a Pro Rata Basis. Subsequent distribution(s)
to the holders of allowed unsecured claims will be made to the extent
additional cash becomes available until such time as all allowed unsecured
claims are paid in full. Equity security holders shall receive pro rate
distribution of available cash remaining, if any, after full payment to the
classes of Allowed Claims as provided under the Plan. The Company's management
believes that any liquidating distribution to shareholders is unlikely. The
Effective Date of the Plan means the first business day which is 15 days after
the entry of a Bankruptcy Court order confirming the Plan which is no longer
subject to appeal, review, or certiorari proceedings.

On March 24, 1995 Cray Computer Corporation (the "Company") filed a
voluntary petition under Chapter 11 of the United States Bankruptcy

6
<PAGE>

Code in the United States Bankruptcy Court for the District of Colorado (the
"Court") after the Company determined it would be unable to complete a planned
private placement of up to $25 million of Common Stock with foreign and United
States institutional investors, and the Company ceased to have liquid assets
which would allow it to continue in operations. The Company is managed under the
director of its Board of Directors, who have served both prior to and during the
Chapter 11 case. The executive officers who have remained with the Company since
the filing of the Chapter 11 case, in addition to Seymour R. Cray as the Chief
Executive Officer, are Terry A. Willkom, President and Chief Operating Officer
and William G. Skolout, Vice President of Finance, Chief Financial Officer,
Secretary and Treasurer. Messrs,. Willkom and Skolout are responsible for the
day-to-day management of the Company and have undertaken primary responsibility
for the investigations and negotiations pertaining to the marketing and sale of
the Company's business and its assets.

The terms of the Company's secured debt financing provided for certain
events of default. The Filing of Bankruptcy is stated in the loan agreement to
be an event of default. No additional debt financing is currently available
under the secured line of credit and under the terms of the debt agreement
repayment of such debt is required. The lender is subject under the U.S.
Bankruptcy Code to an automatic stay against any action against the Company or
its assets to collect its debt without prior approval of the Bankruptcy Court.
The Company does not believe that the Filing of Bankruptcy is an event of
default.

The Bankruptcy Code requires the Company to obtain Bankruptcy Court approval
or the consent of the secured creditor to use cash and other liquid assets on
which the creditor holds a lien ("Cash Collateral"). On May 5, 1995, the
Company filed a Motion for Authorization to Use Cash Collateral in which
Congress claimed a security interest. As a result of discussions between the
Company, Congress, and the Creditors Committee, a stipulation was reached in
which Congress allowed the Company, on an interim basis, to utilize the cash
which the Company held (or would receive as a result of collection of
outstanding receivables) to fund the Company's reorganization efforts.

7
<PAGE>

compensation under this Agreement since March 24, 1995. This Agreement provides
for the early termination in the event that the Company discontinues development
funding for the CRAY-4 or for future systems or limits or terminates agreed upon
production of the CRAY-4 or for future systems. In such event, Mr. Cray retains
the option to continue development and production of the project, subject,
however, to the prior consent by the Company's asset based secured lender, as
long as its loan agreement with the Company remains in effect. The Company
believes that it has paid substantially all of the monies owed to the secured
lender.

In August 1994, the Company and the National Security Agency (NSA) entered
into a cost sharing development contract for the Company to produce a
CRAY-3/SSS. The contract provided that the Company may be paid up to $4.2
million for development costs. The Company has cumulatively invoiced NSA for
approximately $2.6 million under the contract and no receivables are currently
outstanding. No additional amounts will be billed under the contract.

The Company is reviewing the terms and conditions of the above contracts,
and all other executory contracts and unexpired leases, with their respective
non-debtor parties regarding assumption or rejection decisions. In addition,
the Company has received proposals for the purchase of its patent and other
intellectual property assets.

As of the petition date, payment of liabilities to unsecured creditors,
including trade unsecured creditors and secured note holders, are stayed while
the Company is a Debtor in Possession.

Depending on the ultimate outcome of the Company's bankruptcy proceeding,
the Company's ability to utilize its Federal income tax net operating loss and
research and development credit carryforwards may be further restricted or
eliminated.

See Notes 3, 5, 6, 7, 8, 9, 10 and 11 for matters that are or may be
significantly impacted by the bankruptcy filing.

Cray Research, Inc., (CRI) distributed 90 percent of the then outstanding
shares of Cray Computer Corporation (the "Company") to its shareholders on
November 19, 1989. By December 31, 1992, CRI had sold the remaining common
shares of the Company which it had owned. The accompanying financial statements
include the historical basis accounts of the Company while operating as a
division of CRI and as a separate company. These accounts do not include
general unallocated corporate expenses of CRI while the Company operated as a
division of CRI. Advances made by CRI to the Company through November 15, 1989
were transferred to additional paid-in capital and the Company's

8
<PAGE>

accumulated deficit from October 1983 (inception) through November 15, 1989 was
offset against additional paid-in capital.

The Company was a development stage enterprise, having devoted substantially
all of its efforts from inception through March 24, 1995 to activities related
to the design and development of the CRAY-3, CRAY3/Super Scalable System (SSS),
and CRAY-4 supercomputer systems. Such activities included research and
development; raising capital; acquiring and constructing property, plant and
equipment; recruiting and training personnel; establishing sources of supply;
and developing potential markets. The Company had no orders for or revenues
from the sale of its products.

These condensed financial statements should be read in conjunction with the
financial statements and related notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1994. There were no
business combinations or dispositions in the first nine months of 1995.

(2) Property and Equipment
- --------------------------

Property and equipment are stated at estimated net realizable value at
September 30, 1995.

(3) Common Stock and Warrants
- -----------------------------

On January 25, 1995, the Company completed a sale of 1,100,000 shares of its
unregistered Common Stock to foreign institutional investors and 1,165,501
shares of its unregistered Common Stock to Seymour R. Cray, Chairman of the
Board and Chief Executive Officer (net proceeds of approximately $2,295,000).
The sale of shares to the foreign institutional investors was exempt from the
registration requirements of the Securities Act (the "Securities Act") of 1933,
as amended pursuant to Regulation S. The sale of shares to Mr. Cray was exempt
from registration requirements of the Securities Act pursuant to Regulation D.

On February 27, 1995, the stockholders of the Company approved an amendment
to the Company's Restated Certificate of Incorporation increasing the number of
authorized shares of Common Stock, $0.01 par value, from 60,000,000 to
120,000,000 shares in order to have sufficient authorized unissued shares to
permit substantial additional equity financing. The Company had approximately
72 million authorized shares of Common Stock remaining available for future
issuance at March 31, 1995.

9
<PAGE>

On February 27, 1995, the Company completed a sale of 2,100,000 shares of
its unregistered Common Stock to a foreign institutional investor (net proceeds
of approximately $1,764,000). This sale of shares was exempt from the
registration requirements of the Securities Act pursuant to Regulation S.

See Note 13 - "Other Subsequent Events" for information concerning the
current status of the bankruptcy filing.

(4) Related Party Transactions
- ------------------------------

Below is a table which sets forth the related party transactions included in
research and development expenses for the periods indicated.

(In thousands) Nine months ended Three months ended
September 30, September 30,
------------------------- ---------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Performance Semiconductor
Corporation (a) $ - 45 - 8
Seymour R. Cray (b) 60 206 - 70
----- --- ---- ---
$ 60 251 - 78
===== === ==== ===

</TABLE>
Performance Semiconductor Corporation (PSC) supplied the Company with 4
Kilobit and 256 Kilobit Static Random Access Memory (SRAM) circuits until
August 1993. The $45,000 reported above for 1994 represents the cost of SRAM
circuits that were used in the research and development process and expensed in
1994. The circuits were previously classified as prepaid expenses.

In November 1991, the Company entered into an agreement with PSC to design
and develop a specialized one-megabit memory circuit. Under the terms of the
agreement, the Company would pay development fees of approximately $1,025,000
to PSC beginning in November 1991. The Company paid $925,000 to PSC under this
agreement during 1992. No payments were made under the agreement in 1994, 1993
and 1991. The Company had the right, in its sole discretion, to cancel the
remaining payment(s) under the agreement if it was determined that adequate
progress was not or could not be made. The Company notified PSC that the
agreement was cancelled because adequate progress was not made on the part of
PSC, and no additional payments will be made.

PSC declared Chapter 11 Bankruptcy in January 1994. The Company received
Chapter 11 Notice of Final Hearing on Debtor's Motion for Approval of
Stipulation for Use of Cash Collateral dated January 5, 1994 from the United
States Bankruptcy Court, Northern District of

10
<PAGE>

California. All outstanding purchase orders between the Company and PSC had been
fulfilled or cancelled prior to January 1994.

Seymour R. Cray, the Chairman of the Board and Chief Executive Officer of
the Company, is the designed of the CRAY-3 and CRAY-4 supercomputer systems.
Mr. Cray devoted his full working time to the Company since its inception until
after the petition was filed and has continued to render services since that
date. Mr. Cray serves as an independent contractor to the Company under a
Design and Development Agreement, which is similar to his prior agreement with
CRI from 1981 to 1989, and with the Company from 1989 to 1992, and has a term
expiring in June 1997. Mr. Cray has waived all compensation under this
Agreement since March 24, 1995. This Agreement provides for the early
termination in the event that the Company discontinues development funding for
the CRAY-4 or for future systems or limits or terminates agreed upon production
of the CRAY-4 or for future systems. In such event, Mr. Cray retains the
option to continue development and production of the project, subject, however,
to the prior consent by the Company's asset based secured lender, as long as
its loan agreement with the Company remains in effect.

The Company is reviewing the terms and conditions of the Agreement with Mr.
Cray regarding the rejection of the Agreement.

(5) Loss Per Common Share
---------------------

Loss per common share has been computed based upon the weighted average
number of common shares outstanding. Common stock equivalents are not included
in the computation because their effect would be anti-dilutive.

See Note 13 - "Other Subsequent Events" for information concerning the
current status of the bankruptcy filing.

11
<PAGE>

(6) Stock Plans
-----------

1989 Employee Benefit Stock Plan: The purpose of this plan is to provide a
means for the Company, by granting Company stock or options to purchase stock
to eligible employees and directors of the Company and its subsidiaries, to
attract and retain persons of ability and motivate them to advance the
interests of the Company and benefit its stockholders. Stock options and grants
are awarded by the Compensation Committee of the Board of Directors. Under the
plan, 3,700,000 shares of the Company's Common Stock may be issued, of which
200,000 shares may be issued to the Company's directors. Under the terms of the
plan, the option price (in the case of stock options) is equal to the fair
market value on the date of grant or, if repriced, on the date of option
repricing. Options may be exercised at a rate of 25 percent annually, beginning
one year from the date of grant, and terminate seven years from the date of
grant.

In the case of stock grants, the vesting terms vary. However, in most cases
the employee or director becomes vested 25 percent one year after the date of
grant and then 6.25 percent every three months thereafter. The value of grants
on the date awarded, net of the value related to grants subsequently cancelled,
is amortized on a progressive method to the statement of operations over the
four years during which the grants become vested. There was no unamortized
deferred compensation expense related to stock grants or outstanding stock
grants at December 31, 1994. No stock options were awarded in the first quarter
of 1995.

1989 Qualified Stock Purchase Investment Plan: The purpose of this plan is
to facilitate capital accumulation by eligible employees in the form of the
Company's Common Stock and thereby to provide employee identification with the
commitment to the goals of the Company. Under the original plan, up to 500,000
shares of Common Stock could be issued. At the Annual Meeting of Shareholders
held on May 10, 1994, shareholders approved an amendment to the original plan
adding 1,000,000 shares for issuance under the plan bringing the total to
1,500,000 shares. The Company has registered the 1,500,000 shares with the
Securities and Exchange Commission. Eligible employees may designate from 2 to
15 percent of their earnings to be withheld through payroll deductions for the
purchase of Common Stock at 85 percent of the lower of the market price on the
first or the last day of the offering period. Directors are not eligible to
participate. Participant elections resulted in the issuance of 193,686 shares
at a per share price of $0.93 for the offering period ended February 28, 1995.

See Note 13 - "Other Subsequent Events" for information concerning the
current status of the bankruptcy filing.

12
<PAGE>

(7) Statement of Stockholders' Equity
---------------------------------

(In thousands)
Additional
Common Paid-in Accumulated
Stock Capital Deficit
-------- --------- ------------
<S> <C> <C> <C>
Balance at December 31, 1994 $ 419 249,187 (240,511)
Issuance of common stock @ $0.93 (avg), net 44 4,014
Shares issued for purchases under the
1989 Qualified Stock Purchase
Investment Plan 2 178
Net loss - - (15,811)
------- ------- ---------

Balance at September 30, 1995 $ 465 253,379 (256,322)
======= ======= =========

</TABLE>

See Note 13 - "Other Subsequent Events" for information concerning the
current status of the bankruptcy filing.

(8) Income Taxes
------------

The Financial Accounting Standards Board has issued the Statement of
Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes.
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to the
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date.

Effective January 1, 1993, the Company adopted SFAS 109. There was no effect
on the financial statements as a result of this change in accounting for income
taxes.

At December 31, 1994, the Company had a net operating loss carryforward for
Federal income tax purposes of approximately $226,985,000 which it believes may
be available to offset future taxable income, if any, through 2009. The Company
also has a research and development tax credit carryforward for Federal income
tax purposes of approximately $13,773,000 which it believes will be available
to offset future Federal income taxes, if any, through 2009. The use of these
carryforwards would be severely limited by the terms of

13
<PAGE>

Section 382 of the Internal Revenue Code if there is an "ownership change" as
defined by Section 382.

See Note 13 - "Other Subsequent Events" for information concerning the
current status of the bankruptcy filing.

(9) Accounts Receivable
-------------------

In August 1994, the Company and the National Security Agency (NSA) entered
into a cost sharing development contract for the Company to produce a
CRAY-3/SSS. Under the terms of the contract, the Company may be paid up to
$4,200,000 for development costs, and the Government will provide approximately
$400,000 in software consulting services. As of September 30, 1995, the Company
had cumulatively invoiced the NSA approximately $2,607,000 pursuant to the
terms of the joint development contract. No additional amounts will be billed
under the joint development contract. The Company is reviewing the terms and
conditions of the joint development contract with NSA regarding termination of
the contract.

The Company's asset based lender asserts a security interest in the
outstanding accounts receivable. The Company requested and the United States
Bankruptcy Court for the District of Colorado provided an order, subject to
terms and conditions stated in the order, authorizing the Company the use of
cash collateral. Development costs incurred by the Company are charged to
research and development expense.

Accounts receivable also reflect an estimated amount of net proceeds of
$1,750,000 from the Company's equipment auction held on October 26, 1995.

See Note 13 - "Other Subsequent Events" for information concerning the
current status of the bankruptcy filing.

(10) Licensing Agreement
-------------------

In June 1993, the Company entered into a systems distributorship and license
agreement with Advanced Visual Systems, Inc. (AVS). The agreement grants the
Company a license to use AVS software and AVS documentation internally to make
distributor versions of AVS software. The agreement also grants the Company a
license to sublicense distributor versions of AVS software. The agreement
expires after three years and can be automatically renewed on a year-to-year
basis. The Company has the right to cancel the

14
<PAGE>

agreement upon 90 days written notice to AVS. Under the terms of the license
agreement a one-time, nonrefundable licensing fee of $300,000 was incurred by
the Company. The Company paid $50,000 of this fee upon the execution of the
agreement with the remaining amount of $250,000 due in 1996. The total license
fee of $300,000 was charged to research and development expense in 1993.

The Company is reviewing the terms and conditions of the license agreement
with AVS to assess the ramifications of the bankruptcy filing and forthcoming
Chapter 11 Plan.

See Note 13 - "Other Subsequent Events" for information concerning the
current status of the bankruptcy filing.

(11) Bank Borrowings
---------------

In June 1994, the Company obtained a $17.5 million secured line of credit
commitment from an asset-based lender, comprised of a $6.5 million term loan
and a revolving line of credit of up to $11.0 million. The amount advanced is
secured by a senior security interest in all the assets of the Company,
including the Company's plant, equipment, technology, and intellectual property
rights. Additional collateral was provided by Seymour R. Cray, Chairman of the
Board and Chief Executive Officer, in the form of a $5.0 million standby letter
of credit in June 1994 and a $1.0 million standby letter of credit in December
1994. As of September 30, 1995, approximately $6.6 million was outstanding
under the line of credit. The terms of the Company's secured debt financing
provided for certain events of default. The Filing of Bankruptcy is stated in
the loan agreement to be an event of default. No additional debt financing is
currently available under the secured line of credit and under the terms of the
debt agreement repayment of such debt is required. The lender is subject under
the U.S. Bankruptcy Code to an automatic stay against any action against the
Company or its assets to collect its debt without prior approval of the
Bankruptcy Court. The Company does not believe that the Filing of Bankruptcy
is an event of default.

In June 1994, the Company obtained a $17.5 million secured line of credit
commitment from a lender. The commitment is comprised of a $6.5 million term
loan and an $11.0 million revolving line of credit. The commitment is secured
by a senior security interest in all the assets of the Company. Additional
collateral was provided by Seymour R. Cray, Chairman of the Board and Chief
Executive Officer, in the form of a $5.0 million standby letter of credit in
June 1994 and a $1.0 million standby letter of credit in December 1994. The
Company received the funds from the $6.5 million term loan upon closing of the
transaction in June 1994. As of December 31, 1994, the Company

15
<PAGE>

had borrowed $6.2 million of the revolving line of credit, for a total amount of
$12.7 million borrowed against the available line of credit of $17.5 million.
The Company could have borrowed the remaining amount of the available revolving
line of credit ($4.8 million) only by providing additional collateral in the
form of standby letter(s) of credit (up to $4.0 million) and/or 70 percent of
eligible accounts receivable (up to $.8 million). The revolving line of credit
is for a term of three years from June 10, 1994 and from year to year
thereafter, unless sooner terminated pursuant to the terms of the Loan and
Security Agreement.

All loans under the revolving line of credit were subject to the lender's
continuing right to establish lending reserves. These reserves, if imposed,
could have reduced the amount of revolving line of credit loans which otherwise
would have been available to the Company under the lending formulas.

The $6.5 million term loan has a five-year term under which the Company made
interest only payments from June 1994 through December 1994. Principal plus
interest payments commence in January 1995. Annual maturities on the term loan
are as follows: 1995 through 1998 - $1,444,440, 1999 - $722,240.

The terms of the Company's secured debt financing provided for certain
events of default, which include, among other things, (i) failure to perform or
meet certain covenants, such as maintaining a minimum working capital and net
worth, as defined by the agreement, (ii) any change in the controlling
ownership of the Company, (iii) the failure of Seymour R. Cray to provide
services to the Company substantially similar to those he currently provides,
other than such failure by reason of death, disability, sickness, or injury,
(iv) any material adverse change in the Company's business, assets, or
prospects and (v) the Filing of Bankruptcy. If the Company were to default
under the financing, the lender may take possession of the Company's assets,
charge higher interest rates on the outstanding debt, demand immediate
repayment of all obligations and/or take other actions as specified in the loan
agreement.

On April 24, 1995 the secured lender, as a result of the bankruptcy filing,
called on the standby letters of credit (totalling $6 million) issued in their
favor by Mr. Cray which reduces the amount owed by the Company on its line of
credit to the secured lender. The Company now has an unsecured liability to Mr.
Cray for an approximate amount of $6 million.

See Note 1 - Bankruptcy Filing and Basis of Financial Statement Presentation.

The term loan and the revolving line of credit bear interest at prime (as
publicly announced by Philadelphia National Bank from time to time) plus 2 1/2
percent and prime plus 1 1/2 percent, respectively. The Company must

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also pay a service fee of $50,000 for each year the loan agreement is effective
and certain other fees.

Per the terms of the Loan and Security Agreement between the Company and
Congress Financial Corporation, the Company must pay a success fee of $175,000
on June 10, 1997 or, if sooner, upon termination of the loan. The success fee
owed is recorded as a current liability at March 31, 1995.

(12) Commitments and Contingencies
-----------------------------

The Securities and Exchange Commission (the "Commission") has issued a formal
order for a non-public investigation relating to trading in the Common Stock of
the Company during the period from September 1, 1990 through January 31, 1992,
which is the approximate period during which the Company was negotiating or had
in effect a purchase order for a 16-processor CRAY-3 supercomputer system from
the National Energy Research Supercomputer Center (NERSC) at Lawrence Livermore
National Laboratory. The announced loss of this purchase order in December 1991
caused a major drop in the market price of the Company's Common Stock. The
formal order states that the Commission staff has information tending to show
that during the period under investigation certain individuals and entities may
have traded stock of the Company while in possession of material non-public
information and that the Company and others may have made false and misleading
statements in filings with the Commission or in other public documents
concerning this purchase order or the progress of development of the CRAY-3,
which allegations, if true, would result in possible violation of Section 17 (a)
of the Securities Act of 1933 and Sections 10 (b) and 13 (a) of the Securities
Exchange Act of 1934. The staff of the Central Regional Office of the Commission
has notified the Company of its intention to recommend that the Commission seek
permanent injunctions and civil penalties against the Company, Seymour R. Cray
and a former officer of the Company for alleged violations of these Sections and
to seek similar relief against Terry Willkom, the President of the Company,
under two of them. The staff of the Central Regional Office has informed the
Company and the corporate officers that they may file setting forth their
positions and arguments concerning the proposed recommendation, and such a
statement was filed with the Central Regional Office on February 15, 1995. The
staff has also indicated its willingness to consider a proposed compromise
resolution of the issues. Management of the Company is actively seeking to
resolve these matters and does not believe that the investigation has uncovered
violations by the Company or any of its officers and directors of any of the
cited provisions of law or that the investigation will result in a material
adverse effect on the business, operating results, or financial position of the
Company. However, the Company cannot predict whether a prompt resolution will be
reached or what the ultimate outcome of the investigation will be.

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<PAGE>

(13) Other Subsequent Events
-----------------------

On July 14, 1995 the Company's Board of Directors passed a resolution
whereby the Company requested voluntary delisting from the NASDQ Market. The
delisting request is directly related to the Company's forthcoming Chapter 11
plan whereby the Company will liquidate its assets with approval of the
Bankruptcy Court. The NASDAQ Stock Market, Inc. was notified of this request
on July 14, 1995.

The Company's Board of Directors authorized and directed Officers of the
Company to take all steps they deem necessary or appropriate to prepare and
implement a Chapter 11 Plan pursuant to which all or most of the assets of the
Company will be sold for the benefit of the Company's creditors and, to the
extent feasible, the benefit of the shareholders of the Company. Management of
the Company believes that a liquidating distribution to its shareholders is
unlikely.

Since filing under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Colorado on March 24, 1995,
the Officers of the Company have pursued the possibility that the Company could
emerge from Chapter 11 bankruptcy as a going concern. These Officers have
concluded, and the Board of Directors has agreed, that the Company will not be
able to continue its business. The Company will pursue the liquidation of its
assets pursuant to a Chapter 11 Plan to be prepared and presented to the
Bankruptcy Court. The Company requested extensions of its exclusive right to
file a Chapter 11 Plan through November 15, 1995. The motion is pending as of
the date of this report.

On July 24, 1995 the Company notified creditors, shareholders and parties in
interest of:

(1) Proposed sale and lease of assets, free and clear of liens, of the hearing
on approval thereof, and of procedures for the submission of competitive bids.
The Company proposed to enter a sale and lease (the "Sale and Lease")
transaction with M/A-COM, Inc. (M/A-COM) and Quantum Corporation ("Quantum"),
under which the Company would: (a) sell equipment and other personal property
constituting the "FAB Facility," including a "clean room" for the manufacture
and assembly of computer components, to M/A-COM for $5,860,000 payable as set
forth in the Motion. The Company would also lease to M/A-COM the FAB Facility
(approximately 40,000 square feet) for two years at $320,000 per annum, triple
net, with an option for up to three more years. (b) lease to Quantum 128,000
square feet of its building, triple net, for two years at a rent of $2,248,000
payable as set forth in the Motion, with an option for up to three more years.

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<PAGE>

The proposed Sale and Lease is subject to competitive bids. The competitive
bidding may result in a sale or lease of most or all of the Company's assets.
Any assets not sold pursuant to competitive bidding will be held for subsequent
sale by the Company at auction or private sale. The proposed Sale and Lease,
by itself, will not result in proceeds sufficient to allow a distribution to
shareholders. The Company's management believes that neither the competitive
bidding nor the proposed sale and lease, together with any other sale of any
remaining assets, will generate enough proceeds to allow a distribution to
shareholders.

(2) Request for extension of debtor's exclusive right to file a Chapter 11
Plan. The Company has requested extensions for its exclusive right to file a
Chapter 11 plan through November 15, 1995.

(3) Order fixing last date for filing proofs of claim as September 30, 1995.
The Bankruptcy Court has entered its order fixing September 30, 1995, as the
last day for filing proofs of claim.

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<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following is a discussion of the historical results of operations and
financial condition of Cray Computer Corporation. This discussion should be
read in conjunction with the discussions and historical financial statements
and notes thereto included in the Annual Report on Form 10-K for the year ended
December 31, 1994 and the historical financial statements and notes thereto
included elsewhere in this Form 10-Q. Generally accepted accounting principles
require the adjustment of assets and liabilities to estimated net realizable
value under the liquidation basis. Accordingly, the statements of deficiency
in net assets available in liquidation at September 30, 1995 reflect assets and
liabilities on this basis.

Overview

On March 24, 1995 Cray Computer Corporation (the "Company") filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Colorado (the "Court") after
the Company determined it would be unable to complete a planned private
placement of up to $25 million of Common Stock with foreign and United States
institutional investors, and the Company ceased to have liquid assets which
would allow it to continue in operations. The Company is managed under the
director of its Board of Directors, who have served both prior to and during
the Chapter 11 case. The executive officers who have remained with the Company
since the filing of the Chapter 11 case, in addition to Seymour R. Cray as the
Chief Executive Officer, are Terry A. Willkom, President and Chief Operating
Officer and William G. Skolout, Vice President of Finance, Chief Financial
Officer, Secretary and Treasurer. Messrs,. Willkom and Skolout are responsible
for the day-to-day management of the Company and have undertaken primary
responsibility for the investigations and negotiations pertaining to the
marketing and sale of the Company's business and its assets.

The Company is currently finalizing a Liquidating Plan (the "Plan") Once
the Plan is finalized, it will be mailed to all known creditors, shareholders,
and other party in interest to make an informed decision to accept or reject
the Plan.

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<PAGE>

insufficient cash available on the Effective Date to pay all allowed unsecured
claims in full, the holders of allowed unsecured claims shall be paid on a Pro
Rata Basis. Subsequent distribution(s) to the holders of allowed unsecured
claims will be made to the extent additional cash becomes available until such
time as all allowed unsecured claims are paid in full. Equity security holders
shall receive pro rate distribution of available cash remaining, if any, after
full payment to the classes of Allowed Claims as provided under the Plan. The
Company's management believes that any liquidating distribution to shareholders
is unlikely. The Effective Date of the Plan means the first business day which
is 15 days after the entry of a Bankruptcy Court order confirming the Plan which
is no longer subject to appeal, review, or certiorari proceedings.

The Company believes it is complying with the reporting requirements and
operating guidelines for debtors-in-possession under Chapter 11 proceedings.

Under Chapter 11 the Company may attempt to reorganize, enabling it to
resume operations, or it may dispose of assets followed by distribution of the
amount realized to creditors and, if any excess remains, to shareholders of the
Company. If the assets of the Company are disposed of, that disposition may be
accomplished by the management of the Company as Debtor-in-Possession or by an
appointed trustee following conversion of the Chapter 11 proceeding to a
liquidation under Chapter 7 of the United States Bankruptcy Code.

Also, under Chapter 11, the Company as Debtor-in-Possession, has the
exclusive right to file a plan during the 120 days from the initial bankruptcy
filing date. This plan may be to either reorganize or to liquidate the
Company's assets. The 120 day exclusive period ended July 21, 1995. The
Company requested extensions for its exclusive right to file a Chapter 11 plan
through November 15, 1995. The motion is pending as of the date of this report.

The development of a new generation of scientific supercomputers is a
lengthy and technically challenging process. The CRAY-3, CRAY-3/SSS, and
CRAY-4 were technically complex super computers. The performance
specifications of these supercomputers require a unique computer design, and
unique manufacturing techniques and testing processes.

Because the Company pioneered the technological development in all of these
areas, it experienced various developmental delays in each area and in
combining all of the advanced components into a complete supercomputer system.
Some of these delays were lengthy. In total, they resulted in an approximately
two-year delay in the market introduction of the CRAY-3 from management's
estimate at the time the Company was spun off from CRI in 1989.

21
<PAGE>

The Company believes that this delay was one of the principal causes of its
inability to secure orders for the purchase of the CRAY-3 when it became
available for sale in 1993. Also, as a result of this delay in market
introduction and associated sales, the Company was repeatedly required to raise
additional capital to continue the funding of design, development and marketing
activities for the CRAY-4, development of the CRAY-3/SSS, and the manufacture
and marketing of the CRAY-3 systems.

Through the development of the CRAY-3, CRAY-3/SSS and CRAY-4 computers, the
Company sought to address the high performance, large scale scientific
computing segment of the supercomputer market. The number of potential
customers in this market is and always has been limited. In addition, the
market for supercomputers has always been characterized by continuing
advancement of technology and the development of increasingly sophisticated and
powerful systems which render existing systems obsolete within a few years.

The Company, Debtor in Possession, had a net loss for the nine months ended
September 30, 1995 of $15.8 million. The Company had accumulated losses of
approximately $379 million from its inception through September 30, 1995.
Approximately $123 million of its cumulative deficit was incurred while the
Company was a division or wholly owned subsidiary of Cray Research, Inc. (CRI).
Substantially all of the Company's funding since its incorporation in 1989 has
come from CRI ($98,640,000) between October 1989 and October 1991, the sale of
a CRAY-2 supercomputer ($12,760,000) in December 1990, a public stock offering
(net proceeds of approximately $61,088,000) in July 1991, ongoing maintenance
revenues ($1,846,000) on the CRAY-2 supercomputer, a sale of shares of Common
Stock to institutional and private investors (net proceeds of approximately
$27,805,000) in June 1993, loan proceeds ($6,613,000), letter of credit
provided by Seymour R. Cray, Chairman of the Board and Chief Executive Officer
($6,000,000), contract revenue ($2,607,000) on the cost sharing development
contract with the National Security Agency (NSA) entered into in August 1994,
sales of shares of Common Stock to private and foreign institutional investors
(net proceeds of approximately $3,822,000) in the fourth quarter of 1994, and
sales of shares of Common Stock to Seymour R. Cray (1,165,501 shares and to
foreign institutional investors (3,200,000 shares) in the first quarter of 1995
(aggregate net proceeds of approximately $3,909,000).

In early 1995, the Company determined it would be unable to complete a
planned private placement financing of up to $25 million of Common Stock with
foreign and United States institutional investors. In March 1995, the Company
ceased to have sufficient liquid assets which would allow it to continue
operations. The Company terminated most of its 350 employees and stopped work
on its supercomputer systems. The Board of Directors

22
<PAGE>

authorized the Company to file a petition for protection under Chapter 11. The
Company filed its Chapter 11 petition on March 24, 1995 in order to preserve its
assets and to equitably provide for all creditors and parties in interest.

The commencement of a case under Chapter 11 subjected the Company and all of
its property wherever located to the jurisdiction of the Bankruptcy Court for
administration in accordance with the provisions of the Bankruptcy Code. Since
filing its petition, the Company has continued to operate as a debtor in
possession. It has filed all statements, schedules and lists required by the
Bankruptcy Code and Rules, and all interim monthly financial reports required
by the Office of the United States Trustee.

Bankruptcy Status

The commencement of a case under Chapter 11 subjected the Company and all of
its property wherever located to the jurisdiction of the Bankruptcy Court for
administration in accordance with the provisions of the Bankruptcy Code. Since
filing its petition, the Company has continued to operate as a debtor in
possession. It has filed all statements, schedules and listed required by the
Bankruptcy Code and Rules, and all interim monthly financial reports required
by the Office of the United States Trustee.

Retention of Bankruptcy Counsel and Accountants by Company

On March 24, 1995, the Company filed a Motion pursuant to Bankruptcy Code
Section 327 and Rule 2014, seeking to retain Holland & Hart ("H&H"), 555
Seventeenth Street, Suite 3200, Denver, Colorado 80202 as bankruptcy counsel to
represent the Company in the bankruptcy proceedings and to continue its
representation on other general matters. Prior to the filing, the Company paid
H&H a retainer of $100,800 for costs and professional services rendered or to be
rendered in connection with this bankruptcy case. After deducting payment for
pre-petition services rendered in preparation for the bankruptcy filing in the
amount of $16,099.96 and payment of the $800 Chapter 11 filing fee, H&H
deposited the amount of $83,900.04 in its trust account pending application to
court approved fees and costs. On March 28, 1995, the Court entered its Order
authorizing the Company to retain H&H.

On April 7, 1995, the Company filed an Application seeking to employ KPMG
Peat Marwick LLP ("KPMG") as the Company's independent certified public
accountants and consultants. On April 12, 1995, the Court entered its Order
authorizing the employment of KPMG.

23
<PAGE>

Suspension of Operations

As of the Petition Date, the Company suspended its business operations and
laid off approximately 350 employees. These employees were paid their accrued
salary to the Petition Date, but were not paid for accrued vacation time. In
the Plan, the Company anticipates paying these unpaid employee claims for
amounts representing: (1) accrued vacation time; (2) certain 401(k) plan
administration and asset management fees which have been charged to
participating employees on an individual account basis; and (3) amounts owed to
certain employees for reimbursement of expenses. Once Court approval is
obtained, payments will be made as priority claims up to the amount of $4,000
for each employee, with any excess or non-priority portion being treated as an
unsecured claim.

Appointment of Creditors' Committee and Its Counsel

On April 13, 1995, the United States Trustee's Office appointed the
following creditors to serve on the Official Creditors' Unsecured Committee
(the "Committee") in this Chapter 11 case:

Toshiba America Electronic Components, Inc.
Omnetics Connector Corporation
Colorado Springs Utilities
Air Liquide
Visual Numerics, Inc.

On or about April 21, 1995, the Creditors' committee filed a Motion seeking
to retain the law firm of Faegre & Benson, P.L.L.P., 370 Seventeenth Street,
Suite 2500, Denver, Colorado 80202 as general bankruptcy counsel to represent
the Committee in the bankruptcy proceedings. On May 17, 1995, the Court
entered its Order authorizing the Committee to retain Faegre & Benson.

Cash Collateral Agreement

As a result of the shutdown of active operations, the Company's operating
expenses were greatly reduced, involving the maintenance and preservation of
assets and the search for investment partners or purchasers. Nevertheless, the
Company required the use of funds to pay the ongoing costs of its limited
operations and reorganization efforts. The Bankruptcy Code requires the
Company to obtain Bankruptcy Court approval or the consent of the secured
creditor to use cash and other liquid assets on which the creditor holds a lien
("Cash Collateral").

On June 10, 1994, the Company entered into a secured loan transaction with
Congress Financial Corporation ("Congress"). In that transaction, the Company
obtained a term loan from Congress in the amount of $6,500,000, a

24
<PAGE>

revolving line of credit, and certain letter of credit accommodations. The terms
of the loan are set forth in a Loan and Security Agreement dated June 10, 1994.
The Company's loan from Congress is secured by collateral including the
Company's real estate, equipment, intellectual property and accounts receivable.
Standby letters of credit in the amount of $6 million were also posted by
Seymour R. Cray in favor of Congress to provide additional security for the
loan. As of the Petition Date, the Company owed Congress approximately $12.4
million. Since that time, Congress has drawn on the standby letter of credit,
reducing the amount of Congress' secured loan by $6 million and creating instead
an unsecured debt to Seymour Cray in that amount. During the pendency of this
case, the Company has paid Congress an additional $6.7 million. It is the
Company's position that Congress has been paid substantially, if not all, of its
secured claim in this case.

On May 5, 1995, the Company filed a Motion for Authorization to Use Cash
Collateral in which Congress claimed a security interest. As a result of
discussions between the Company, Congress, and the Creditors Committee, a
stipulation was reached in which Congress allowed the Company, on an interim
basis, to utilize the cash which the Company held (or would receive as a result
of collection of outstanding receivables) to fund the Company's reorganization
efforts.

Delisting of Company's Stock

The Company's common stock is quoted on the NASDAQ National Market under the
symbol "CRAY". Because of the Company's bankruptcy filing, the National
Association of Securities Dealers ("NASD"), suspended the listing of the
Company's common stock on the NASDAQ Stock Market. Effective April 11, 1995,
the Company's NASDAQ symbol was change to "CRAYQ".

Sale and Lease of Assets

Prior to and since the commencement of this Chapter 11 case, the Company
engaged in extensive efforts to lay the groundwork for a confirmable plan of
reorganization. These efforts sought to (1) find investment capital or an
investment partner, which would permit the Company to satisfy its creditors and
resume operations; or, (2) find potential purchasers or lessees of all or a
substantial portion of its assets on terms which would permit the Company to
satisfy its secured debt, and make the maximum possible distributions to
unsecured creditors, if possible thereafter to equity holders.

The Company contacted numerous companies that manufacture computers and
related products as part of an extensive search for purchasers or investment
partners. To assist in the marketing process, and with Bankruptcy Court
authorization, the Company hired certain appraisers, consultants, and
auctioneers to provide valuations of the Company's real and

25
<PAGE>

personal property assets. The Committee also employed its own consultant for the
valuation and marketing of the Company's business and assets.

As of the Petition Date, the Company's assets include: (1) its headquarters
and operations building located at 1110 Bayfield Drive in Colorado Springs,
Colorado; (2) the equipment located at the headquarters facility consisting of
a "clean room" and associated equipment used in the manufacture and assembly of
computer components, commonly referred to as the "FAB Facility"; (3) other
technical, manufacturing, and assembly equipment not related to the FAB
Facility; (4) general office furniture and equipment; (5) a leased facility at
a different location in Colorado Springs which is equipped to operate as a
printed circuit board manufacturing facility; and (6) certain intellectual
property associated with its operations and the products it was developing.

Despite its efforts, the Company has been unable to find the investment
capital or an investment partner that would permit the Company to resume its
business operations. The Company contacted and had discussions with numerous
prospective purchasers of its assets and after conferring with Congress and the
Committee, the Company entered into a transaction for the sale and lease of
certain of its assets as offering the best prospect to commence the process of
maximizing the sale value of its assets for the benefit of the Estate and all
parties in interest.

On July 6, 1995, the Company executed a Letter of Interest, providing for
the sale of certain personal property and for the lease of the Company's real
property, with M/A-COM, Inc. ("M/A-COM") and Quantum Corporation ("Quantum").
The key terms of this proposed transaction with M/A-COM and Quantum (the "Sale
and Lease") provided for the Company's sale to M/A-COM of all the equipment and
fixtures, including the "clean room" and its support equipment, located in the
FAB Facility as well as any other equipment or intellectual property necessary
for such operation. In addition, the Company proposed to lease to M/A-COM the
portion of its building occupied by the FAB Facility, which consists of
approximately 40,000 square feet. Finally, the Company proposed to lease to
Quantum the portion of its building known as the "Western Manufacturing Wing",
which contains approximately 128,000 square feet. These leases permit M/A-COM
and/or Quantum to occupy the Company's office building for an initial two year
lease term on a triple net basis with an option for up to an additional three
years.

On July 13, 1995, the Company filed a Motion, which primarily sought court
authority to approve the Sale and Lease and to establish procedures for a
competitive bidding process for the sale and/or lease of all or a portion of
the Company's remaining assets outside the ordinary course of business, free
and

26
<PAGE>

clear of liens. A Court-approved notice of these proposed actions was mailed to
all creditors, equity holders and other parties in interest.

On August 29, 1995, the Bankruptcy Court approved the Sale and Lease as
subsequently modified by negotiations during the competitive bidding process.
Thereafter the Company, M/A-COM and Quantum closed the Sale and Lease as more
definitively described in the transactional agreements between the parties
filed with the Court. At closing, the Company received a total of $7,275,000
from M/A-COM and $2,573,000 from Quantum for a total consideration of
$9,848,000. Congress was paid the amount of $6,734,343.83 on account of its
secured claim and liens covering the Company's assets. Also, a tax reserve for
payment of the Company's pre-petition real and personal property taxes in the
amount of $1 million was established, pending final resolution of these claims.
Finally, after payment of closing expenses and personal property taxes arising
from the Sale and Lease, the Company received the net amount of $2,724,096.37
for eventual payment to creditors under the Plan.

Assets Remaining To Be Sold

As a result of the Sale and Lease, the Company was required to vacate its
corporate office complex at 1110 Bayfield Drive, Colorado Springs, Colorado.
The Company has moved to smaller offices located at 202 East Cheyenne Mountain
Boulevard, Suite C, Colorado Springs, Colorado 80906 (P.O. Box 61003, 80960).
The Company has continued to seek purchasers for its remaining personal
property and equipment assets and the Bayfield complex (approximately 60
acres), subject to the M/A-COM and Quantum leases.

The Company removed all of its equipment and other personal property not
covered in the Sale and Lease from the Bayfield Complex. To commence an
orderly Chapter 11 liquidation of assets, the Company solicited numerous
proposals from auctioneers and equipment purchasers.

After the Company's discussions with third party plan investors and
purchasers of all remaining assets did not result in offers for adequate value,
the Company determined that the value of its remaining equipment would be
maximized by an auction process. Thereafter, the Company sought and received
Bankruptcy Court approval to hire Koll-Dove Global Disposition Services, LLC
("Koll-Dove") to conduct the auction. Koll-Dove is a full service auctioneer
located in Foster City, California, specializing in the sale of high technology
capital assets and having over 50 years of experience with the auction,
appraisal and liquidation of equipment and other capital assets. The Company
leased a warehouse to conduct the auction, consisting of approximately 40,000
square feet of space for up to 90 days. The auction was held on October 26,
1995. The property sold included printed circuit boards, data processing
equipment, furniture, industrial machinery and other

27
<PAGE>

miscellaneous capital assets. The assets were sold piece by piece or by lot as
determined by Koll-Dove so as to best maximize the return to the Estate. The
total gross amount realized by the auction is estimated to have been
approximately $1.8 million.

In addition, the Company continues to seek purchasers for the Bayfield
Office Complex subject to the M/A-Com and Quantum leases. The Complex totals
approximately 60 acres of real estate, consisting of the office building and
other improvements.

Also, at December 31, 1994, the Company had a net operating loss
carryforward for Federal Income Tax purposes of approximately $227 million
which it believes may be available to offset future taxable income, if any,
through 2009. The Company also has a research and development tax credit
carryforward for Federal Income Tax purposes of approximately $14 million which
it believes will be available to offset future Federal Income taxes, if any,
through 2009. The use of these carryforwards would be severely limited by the
terms of Section 382 of the Internal Revenue Code if there is an "ownership
change" as defined by Section 382. Such an ownership change may occur should a
prospective investor seek to acquire the Company to continue its supercomputer
business. Accordingly, depending on the outcome of the Company's bankruptcy
case, the Company's ability to utilize its Federal Income tax net operating
loss and research and development credit carryforwards may be severely
restricted or eliminated. To date, the Company has been unable to finalize a
satisfactory arrangement which would allow utilization of its net operating
losses for the benefit of the Estate, and such an arrangement appears to be
unlikely.

Bar Date for Filing Claims

The Bankruptcy Court set September 30, 1995 as the last date to file proofs
of claim and proofs of interest against the Estate. Notice of the claims bar
date was given to all creditors, shareholders, and other parties in interest.
This requirement for filing claims applies to all pre-petition claims or claims
which arose prior to March 24, 1995 which were not scheduled, or were scheduled
as disputed, contingent or unliquidated in the schedules of liabilities filed
with the Bankruptcy Court by the Company, or were scheduled and such creditor
disagreed with the amount of the scheduled claim. Claims arising on account of
the rejection of an executory contract must be filed within 30 days of the
order allowing rejection. Since September 30, 1995 was a Saturday, any
creditor required to file a proof of claims and who failed to do so by 4:30
p.m. Denver time, October 2, 1995, will not be treated as a creditor for the
purposes of voting on or distribution under the Plan, and any claim by such
creditor shall be forever barred.

Extension of the Exclusive Period To File a Plan

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<PAGE>

The Bankruptcy Code provides that only the Company may file a Plan within
the first 120 days after the entry of the Order For Relief. This is known as
the exclusive period. If the Company files a plan within this time frame, then
the exclusive period is extended an additional 60 days to permit the Company to
gain acceptance of the Plan. The exclusive period may be extended by the Court
for cause.

On July 20, 1995, the Company filed a Motion seeking an order of the Court
extending the exclusive period for the Company to file the Plan from July 24,
1995 to September 30, 1995. On September 13, 1995 the Court entered its Order
granting the requested extension. Since the Company and the Committee were
continuing to negotiate with third parties on a potential plan of
reorganization and additional asset sales, on September 29, 1995 the Company
filed its Second Motion to extend the exclusive period for an additional month
from September 30 to October 31, 1995. On October 31, 1995 the Company filed
its Third Motion seeking an extension until November 15, 1995.

Actions on Executory Contracts

The Company is a party to several executory contracts, unexpired leases, and
licenses. To date, the Company has entered into an agreement with CRI
regarding the rejection of an executory contract for the maintenance of a
CRAY-2 computer utilized at Lawrence Livermore Laboratories in Los Angeles,
California. The Company continues to have discussions with various interested
purchasers of its unexpired leases, executory contracts, licenses, intellectual
property and other patent assets. The Company intends to make its final
decision regarding the assumption or rejection of these unexpired leases,
executory contracts and licenses as part of the confirmation of its plan.

The Bankruptcy Code provides that the Company must assume or reject
unexpired leases of nonresidential real property wherein the Company is the
lessee ("Lease") within sixty days after the entry of the Order for Relief. If
a Lease is not assumed or rejected within the sixty day period, the Lease is
deemed automatically rejected. The Bankruptcy Code provides that the sixty day
period may be extended by the Court. The Company has received from the Court
two previous extensions of time to assume or reject the real property lease
covering the printed circuit board plant located in Colorado Springs, Colorado
until October 31, 1995. On October 20, 1995, the Company filed its third
motion for an extension, requesting an additional month or until December 15,
1995 within which to make its decision on this lease. The reason for these
requested delays was that the Company hoped it could realize more value for its
creditors if it can locate a successor to this lease, rather than terminating
the lease and selling the contents of the premises separately. On

29
<PAGE>

October 26, 1995, the Court entered its Third Order, pursuant to the Company's
motion, extending the time to assume or reject this lease until December 15,
1995 .

Status of Pending Litigation

As of the date of this report, the Company was involved in two litigation
matters in this bankruptcy case. To the Company's knowledge, no other legal
actions are outstanding except the bankruptcy case.

On September 28, 1995, Congress filed a Complaint asking the Bankruptcy
Court to declare its loan agreement with the Company terminated, to determine
the extent and validity of its claims, and for other relief. By this action,
Congress seeks payment of a Loan Termination Fee in the amount of $875,000 plus
additional interest and fees. The Company disputes Congress'

30
<PAGE>

claim for a termination fee and anticipates that the Committee will seek to
intervene to support the Company's position in this adversary. To date, this
matter has not been set for trial and no pretrial scheduling order is in place.

The second matter involves an appeal to the United States District Court for
the district of Colorado by William Kuntz, III, an equity security holder of
the Company. The appeal concerns the Company requested orders be entered by
the Bankruptcy Court (1) granting the Company an extension until October 31,
1995 in which to assume or reject the printed circuit board facility lease; and
(2) granting the Company an extension of its exclusive period to file a plan
until September 30, 1995. When the Bankruptcy Court denied Mr. Kuntz'
objections and granted these extension requests, Mr. Kuntz filed the appeal.
The parties have filed their respective designations of record and upon
transmittal of the record by the Bankruptcy Court to the District Court, the
appellate briefing schedule will begin. The Company believes that this appeal
is interlocutory in nature and should be mooted by subsequent events and
decisions in the Chapter 11 case.

The Company believes it is complying with the reporting requirements and
operating guidelines for Debtors-in-Possession under Chapter 11 proceedings.

31
<PAGE>

Results of Operations

Revenue and cost of revenue: Service fees revenue and cost of services
relate to the maintenance of the CRAY-2 supercomputer installed at the National
Energy Research Supercomputer Center (NERSC) in April 1990. Service fees
revenue for the quarter ended September 30, 1995 totaled $82,000 compared with
$90,000 for the third quarter of 1994. The $8,000 decrease in service fees
revenue results from the terms of a new NERSC maintenance agreement which was
signed in March 1994 and renewed through March 31, 1995. The maintenance
agreement was extended through August 28, 1995.

The Company has entered into an agreement with CRI regarding the rejection
of an executory contract for the maintenance of a CRAY-2 computer utilized at
Lawrence Livermore Laboratories in Los Angeles, California. Services under the
maintenance agreement were performed by CRI as a subcontractor and were not
interrupted by the bankruptcy filing. The service fee revenues described
herein are net of payments to the subcontractor. Service fees revenue for the
nine months ended September 30, 1995 totaled $253,000 compared with $261,000
for the first nine months of 1994.

Development contract revenue relates to the joint development contract
entered into between the Company and the NSA in August 1994. The contract
provided that the Company would be paid up to $4,200,000 for development costs,
and the Government would provide approximately $400,000 in software consulting
services. Development contract revenue for the quarter ended September 30, 1995
totaled ($20,000), which reflects a correction to an invoice accrued in second
quarter of 1995. As of September 30, 1995, the Company had cumulatively
invoiced the NSA approximately $2,607,000 pursuant to the terms of the joint
development contract and had no related outstanding accounts receivable. No
additional amounts will be billed under the joint development contract.

The Company is reviewing the terms and conditions of the joint development
contract with NSA regarding termination of the contract. The Company's asset
based lender asserts a security interest in the outstanding accounts
receivable. The Company requested and the

32
<PAGE>

United States Bankruptcy Court for the District of Colorado provided an order,
subject to terms and conditions stated in the order, authorizing the Company the
use of cash collateral. Development contract revenue for the nine months ended
September 30, 1995 totaled $482,000 .

Other revenue reported for the third quarter of 1995 relates primarily to
recognition of deferred lease obligations.

Research and development expenses: Research and development expenses
related primarily to the design and development of the CRAY3/SSS and CRAY-4
high-performance computer systems, including costs associated with the
manufacture of prototype systems, and depreciation expenses on facilities and
equipment used in research and development activities.

No research and development expenses were incurred by the Company in the
third quarter of 1995 because research and development activities were
discontinued on March 24, 1995 when the Company filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code. The Company terminated
most of its employees and stopped work on its supercomputer systems. Research
and development expenses for the nine months ended September 30, 1995 totaled
$7,631,000 compared with $28,180,000 for the first nine months of 1994.

Research and development expenses include certain related party
transactions. Related party research and development expenses for the nine
months ended September 30, 1995 totaled $60,000 compared with $251,000 for the
first nine months of 1994.

Marketing: No marketing expenses were incurred by the Company in the
third quarter of 1995 because marketing activities were discontinued on March
24, 1995 when the Company filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code. The Company terminated most of its employees
and stopped work on its supercomputer systems. Marketing expenses for the nine
months ended September 30, 1995 totaled $362,000 compared with $803,000 for the
first nine months of 1994.

General and administrative expenses: General and administrative expenses
for the quarter ended September 30, 1995 totaled $1,729,000 compared with
$588,000 for the third quarter of 1994. The $1,141,000 increase in general and
administrative expenses was due primarily to depreciation and maintenance for
the Company's assets and utilities. Prior to the bankruptcy filing, these
expenses were allocated principally to research and development expenses.
General and administrative

33
<PAGE>

expenses for the nine months ended September 30, 1995 totaled $4,376,000
compared with $1,944,000 for the first nine months of 1994.

Other income (deductions), net: Other income (deductions), net for the
quarter ended September 30, 1995 totaled ($3,806,000) compared with ($141,000)
for the third quarter of 1994. The $3,665,000 increase in other (deductions),
net is a result of the write down of assets and prepaid production supplies to
estimated net realizable value ($8,342,000). The write down was partially
offset by a gain on the sale of assets to M/ACom and Quantum ($4,536,000).
Other income (deductions), net for the nine months ended September 30, 1995
totaled ($4,337,000) compared with ($633,000) for the first nine months of 1994.

Litigation settlement: On June 17, 1993, the Company reached a final
settlement with the consolidated plaintiffs in a lawsuit against the Company.
The Company paid $1,000,000 in April 1993 towards the settlement and the
Company's directors' and officers' liability insurer paid an additional
$4,000,000. The Company accrued its share of the tentative settlement,
$1,000,000, in its financial statements as of and for the year ended December
31, 1992.

Liquidity and Capital Resources

The Company's Independent Auditors in their report for the year ended
December 31, 1994, stated that because of the Company's recurring losses,
continued utilization of cash flows, working capital deficit at December 31,
1994, and the bankruptcy filing on March 24, 1995 by the Company, substantial
doubt is raised about the Company's ability to continue as a going concern and
that the Company's historical Financial Statements do not include any
adjustments that might result from the outcome of this uncertainty. The
Auditors' Report for the year ended December 31, 1993, and 1992 also stated
there was substantial doubt about the Company's ability to continue as a going
concern.

34
<PAGE>

Operating Officer and William G. Skolout, Vice President of Finance, Chief
Financial Officer, Secretary and Treasurer. Messrs,. Willkom and Skolout are
responsible for the day-to-day management of the Company and have undertaken
primary responsibility for the investigations and negotiations pertaining to the
marketing and sale of the Company's business and its assets.

The Company had a deficit deficiency in net assets available in liquidation
at September 30, 1995 of $2,478,000. Generally accepted accounting principles
require the adjustment of assets and liabilities to estimated net realizable
value under the liquidation basis. Accordingly, the statements of deficiency
in net assets available in liquidation at September 30, 1995 reflect assets and
liabilities on this basis. The Company announced that it would begin selling
all or most of its assets for the benefit of the Company's creditors and
shareholders. However, management does not believe that a liquidating
distribution to shareholders is likely.

On April 27, 1995 the secured lender drew down the standby letters of credit
totaling $6 million issued in its favor by Mr. Cray. This drawing reduced the
amount owed by the Company on its line of credit to the secured lender and
creates an unsecured liability to Mr. Cray for an approximately amount of $6
million.

The Company terminated most of its employees concurrent with the Filing on
March 24, 1995. The Company currently has two full time and three part

35
<PAGE>

time employees. In the event the Company were to resume operations, the extent
of operations and related costs have not been determined. There can be no
assurance that the Company will resume operations, even on a limited basis, and
that it will not be required to liquidate its assets to satisfy its liabilities.
In the event of liquidation, management has not determined if sufficient amounts
will be realized to satisfy the Company's liabilities. Furthermore, it is not
possible for management to determine whether there will be any distributions to
shareholders of any residual values available in the event of liquidation.

36
<PAGE>

PART II. OTHER INFORMATION
- ---------------------------

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
--------

The following Exhibits are filed as part of this Quarterly Report:

None

(b) Reports on Form 8-K
-------------------

Reports on Form 8-K filed during the quarter ended September 30, 1995.

None

37
<PAGE>

SIGNATURES

PursuantRegistrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CRAY COMPUTER CORPORATION
(Debtor in Possession)

Date November 14, 1995 by /s/ William G. Skolout
------------------------------------------- -------------------------
William G. Skolout
Vice President
Chief Financial Officer

Signing on behalf of
the registrant
and as principal
financial officer.

<PAGE>
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