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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
June 30, 2000
OR
[x] 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 0-26820
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CRAY INC.
(Exact name of registrant as specified in its charter)
--------------------------------------------------------------------------------
WASHINGTON 93-0962605
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 FIRST AVENUE SOUTH, SUITE 600
SEATTLE, WA 98104-2860
(206) 701 - 2000
(Address of principal executive offices)
(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 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 [ ]
As of August 14, 2000, 33,429,074 shares of the Company's Common Stock,
par value $0.01 per share, were outstanding.
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CRAY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 2000 4
Consolidated Statement of Shareholders' Equity for the Six Months
Ended June 30, 2000 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
PART II OTHER INFORMATION
Item 2. Changes in Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
2
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CRAY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
(unaudited)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,069 $ 7,742
Restricted cash 1,132 951
Accounts receivable 641 32,523
Inventory, net 4,513 22,020
Prepaid expenses and other assets 544 2,072
--------- ---------
Total current assets 16,899 65,308
Property and equipment, net 5,829 26,024
Spares inventory, net 26,299
Intangible assets, net 186 34,528
Other assets 496 969
--------- ---------
TOTAL $ 23,410 $ 153,128
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,366 $ 10,039
Accrued payroll and related expenses 2,147 10,736
Other accrued liabilities 277 7,380
Line of credit 5,200
Current portion of warranty reserves 16,881
Current portion of obligations under capital leases 612 465
Current portion of notes payable 289 23,809
--------- ---------
Total current liabilities 7,691 74,510
Warranty reserves 26,597
Obligations under capital leases 390 261
Notes payable 1,022 884
Shareholders' equity:
Common Stock, par $.01 - Authorized, 100,000 shares;
issued and outstanding, 25,212 and 33,378 shares 111,443 152,709
Accumulated deficit (97,136) (101,833)
--------- ---------
14,307 50,876
--------- ---------
TOTAL $ 23,410 $ 153,128
========= =========
</TABLE>
See accompanying notes
3
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CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product $ $ 26,693 $ 557 $ 26,693
Service 22 24,280 44 24,324
-------- -------- -------- --------
Total revenue 22 50,973 601 51,017
-------- -------- -------- --------
Operating expenses:
Cost of product revenue 1,643 15,239 4,588 17,242
Cost of service revenue 21 12,264 51 12,290
Research and development 3,569 13,865 6,563 18,348
Marketing and sales 545 2,822 1,178 3,590
General and administrative 638 1,898 1,102 2,998
-------- -------- -------- --------
Total operating expenses 6,416 46,088 13,482 54,468
-------- -------- -------- --------
Income (loss) from operations (6,394) 4,885 (12,881) (3,451)
Other income (expense) (278) 171 (602) 502
Amortization of intangibles (1,748) (1,748)
-------- -------- -------- --------
Net income (loss) (6,672) 3,308 (13,483) (4,697)
Preferred stock dividend (45) (115)
-------- -------- -------- --------
Net income (loss) for common share $ (6,717) $ 3,308 $(13,598) $ (4,697)
======== ======== ======== ========
Net income (loss) per common share:
Basic $ (0.40) $ 0.10 $ (0.87) $ (0.15)
======== ======== ======== ========
Diluted $ (0.40) $ 0.10 $ (0.87) $ (0.15)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 16,677 33,367 15,696 31,492
======== ======== ======== ========
Diluted 16,677 33,448 15,696 31,492
======== ======== ======== ========
</TABLE>
See accompanying notes
4
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CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
------------------------
Number of Accumulated
Shares Amount Deficit Total
--------- --------- ----------- -------
<S> <C> <C> <C> <C>
BALANCE, January 1, 2000 25,212 $ 111,443 $ (97,136) $14,307
Common stock issued in private
placement, net of issuance costs
of $1,830,495 5,227 24,304 24,304
Exercise of warrants 1,872 9,015 9,015
Cash received on subscribed common stock 900 900
Warrants and options issued for services 194 194
Issuance of shares under Employee
Stock Purchase Plan 34 108 108
Exercise of stock options 30 93 93
Net loss (8,005) (8,005)
------- --------- --------- -------
BALANCE, March 31, 2000 32,375 $ 146,057 $(105,141) $40,916
Issuance of common stock to SGI 1,000 6,700 6,700
Exercise of stock options 3 4 4
Warrant commission and fees (147) (147)
Warrants issued for services 95 95
Net income 3,308 3,308
------- --------- --------- -------
BALANCE, June 30, 2000 33,378 $ 152,709 $(101,833) $50,876
======= ========= ========= =======
</TABLE>
See accompanying notes
5
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CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
-------- --------
<S> <C> <C>
Operating Activities:
Net loss $(13,483) $ (4,697)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 885 5,192
Amortization of acquisition intangibles 1,748
Beneficial conversion feature of notes payable 531 18
Non-cash warrant and option expense 289
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable 88 (27,966)
Inventory (8) 4,672
Other assets 113 (381)
Accounts payable (732) 5,866
Other accrued liabilities (10) 3,044
Accrued payroll and related expenses 187 4,146
Warranty reserve (3,856)
-------- --------
Net cash used by operating activities (12,429) (11,925)
Investing Activities:
Cash used for acquisition (27,775)
Purchases of property and equipment (710) (1,549)
-------- --------
Net cash used by investing activities (710) (29,324)
Financing Activities:
Related party receivable (18) (10)
Restricted cash 181
Issuance of notes payable 1,900
Sale of common stock 34,070 25,204
Proceeds from exercise of warrants 8,868
Proceeds from exercise of options 32 96
Proceeds from line of credit 5,000
Principal payments on notes payable (141)
Capital leases, net (130) (276)
-------- --------
Net cash provided by financing activities 35,854 38,922
Net Increase (Decrease) in Cash and Cash Equivalents 22,714 (2,327)
Cash and Cash Equivalents:
Beginning of period 3,162 10,069
-------- --------
End of period $ 25,876 $ 7,742
======== ========
Supplemental Disclosure of Non Cash Investing
and Financing Activities:
Inventory reclassed to fixed assets 1,032 1,559
Common stock issued for acquisition of assets 6,700
Notes payable converted to common stock 2,000
Common stock issued for employee stock purchase plan 108
Accounts payable converted to notes 594
Fixed asset additions through common stock 164
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 87 $ 136
</TABLE>
See accompanying notes
6
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CRAY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated balance sheets
and related interim consolidated statements of operations, shareholders' equity
and cash flows have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. All adjustments
considered necessary for fair presentation have been included. Interim results
are not necessarily indicative of results for a full year. The information
included in this Form 10-Q should be read in conjunction with Management's
Discussion and Analysis and the financial statements and notes thereto included
in the Company's financial statements for the year ended December 31, 1999,
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Cray Inc. and its wholly-owned subsidiaries (the Company). All material
intercompany accounts and transactions have been eliminated.
ACQUISITION
The Company acquired certain assets of the Cray Research business unit
operations from Silicon Graphics, Inc. ("SGI") on April 1, 2000. The acquisition
was recorded under the purchase method of accounting and therefore the results
of operations of the Cray Research business unit and the fair values of the
acquired assets and liabilities were included in the Company's financial
statements beginning as of April 1, 2000.
The purchase price was allocated to the assets acquired and liabilities
assumed based on their respective fair values on the date of the acquisition as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net assets acquired $ 21,943
Fair value adjustments 1,094
Note payable (35,259)
Acquisition costs (1,022)
Cash paid (15,000)
Common stock (6,700)
---------
Goodwill $ 34,944
=========
</TABLE>
7
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The pro forma results of operations set forth below have been prepared to
reflect the acquisitions of the Cray Research business unit, assuming the
acquisition had occurred on January 1, 1999 (in thousands, except for per share
data).
<TABLE>
<CAPTION>
Pro Forma
Six months ended June 30,
(unaudited)
1999 2000
---------- ---------
<S> <C> <C>
Total revenue $ 105,285 $ 91,965
========= ========
Net income $ 10,228 $ 9,257
========= ========
Net income per share $ 0.61 $ 0.29
========= ========
</TABLE>
The unaudited pro forma results of operations do not purport to present
what the Company's financial position or results of operations would have been
had the events leading to the pro forma adjustments in fact occurred at the
beginning of the periods indicated or to project the Company's financial
position or results of operations for any future date or period.
INVENTORY
Inventory consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ --------
<S> <C> <C>
Components and subassemblies $ 8,044 $ 26,840
Work in process 806 17,369
Finished goods 1,137 4,780
Inventory allowance (5,474) (26,969)
-------- --------
$ 4,513 $ 22,020
======== ========
</TABLE>
CHANGES IN CAPITAL
On April 1, 2000, the Company issued one million shares of common stock
valued at $6.7 million to SGI, in connection with the acquisition of the Cray
Research business unit.
EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income or net loss
by the weighted average number of common shares outstanding. Diluted earnings
per share are calculated using the
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weighted average number of common shares outstanding plus the dilutive effect of
outstanding stock options and warrants using the "treasury stock" method.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in this Item 2 includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act, as amended, and is
subject to the safe harbor created by those sections. Factors that realistically
could cause results to differ materially from those projected in the
forward-looking statements are set forth under "Risk Factors" beginning on page
14. The following discussion should also be read in conjunction with the
Financial Statements and Notes thereto.
OVERVIEW
We design, develop, market and service high-performance vector processor
and general-purpose parallel computer systems. We presently market two computer
models, the Cray SV1 and T3E, and provide maintenance services to the Cray
installed base of these and earlier models of Cray computers. We are developing
upgrades to the Cray SV1 and T3E, and we are developing two new computer
systems, the MTA2, based on our multithreaded architecture system, and the SV2,
which will combine elements of the SV1 and T3E computers. We have begun initial
work on their respective successors, the MTA3 and SV3.
Our service organization supports over 600 Cray supercomputers installed
at about 200 customer sites in approximately 30 countries. This installed base
includes close to 200 large scale vector supercomputers and more than 50
massively parallel systems.
We have approximately 900 employees and world-wide operations. Our
principal facilities are located in Seattle, Washington (corporate headquarters
and MTA hardware and software engineering) with 125 employees; Eagan, Minnesota
(software engineering, sales and marketing), with approximately 200 employees;
and Chippewa Falls, Wisconsin (hardware engineering, manufacturing and service
support), with approximately 300 employees. Approximately 125 employees are
located in field offices in the United States, with principal sales and service
offices located in Maryland, Georgia and New Mexico. Overseas, we have
approximately 150 employees
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with principal offices in the United Kingdom, Germany, France, Japan, Canada and
Australia.
We are in the process of separating the Cray Research operations from
those of Silicon Graphics and integrating them with our own. This process
includes establishing separate network, communications and other infrastructure
services, reconstituting the marketing and sales operations, setting up
subsidiary operations for international sales and services, implementing new
operational policies and procedures, and identifying and filling openings in
management, administration and other areas.
We have experienced net losses in each year of operations. We incurred net
losses of approximately $19.8 million in 1998, $34.5 million in 1999 and $4.7
million in the first six months of 2000, compared to a net loss of approximately
$13.5 million in the first six months of 1999. With net profits of $3.1 million,
the quarter ended June 30, 2000 was our first profitable quarter.
We recognize revenue from sales of our computer systems upon acceptance by
the customer, although depending on sales contract terms, revenue may be
recognized upon shipment or delayed until clarification of funding. We recognize
service revenue from the maintenance of our computer systems ratably over the
term of each maintenance agreement.
Factors that should be considered in evaluating our business, operations
and prospects and that may affect our future results and financial condition are
set forth below, beginning on page 14.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000
With the acquisition of the Cray Research business unit on April 1, 2000,
period-to-period comparisons of our operating results that include periods prior
to the acquisition are not indicative of results for any future period.
REVENUE. We had revenue from product sales of $26.7 million for the three and
six months ended June 30, 2000 compared to zero and $557,000 for the respective
1999 periods. Product revenue for the three and six months ended June 30, 2000
consist of $20.6 million for our T3E product line and $6.1 million for our SV1
product line. The respective 1999 periods consisted of the sale of a
four-processor MTA1 system. The overall increase in product revenue is due to
the acquisition of the Cray product line. We expect our product revenue to vary
quarterly. In particular we expect that product revenue will decline markedly in
the third quarter and then improve substantially in the fourth quarter of 2000.
See "Risk Factors - Our Quarterly Performance May Vary Significantly and Could
Cause Our Stock Price To Be Volatile." Product revenue represented 52% of total
revenues for the three and six months ended June 30, 2000.
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Service revenue were $24.3 million for the three and six months ended June
30, 2000 compared to $22,000 and $44,000 for the respective 1999 periods.
Services are provided under separate maintenance contracts between the Company
and its customers. These contracts generally provide for maintenance services
for one year, although some are for multi-year periods, and are renewable upon
expiration at the customer's election. The overall increase in service revenue
is due to the acquisition of the Cray product line and related service business.
We expect service revenue to decline slowly over the next year or so as older
systems are withdrawn from service and then stabilize as our new systems are
placed in service. Service revenue represented 48% of total revenues for the
three and six months ended June 30, 2000.
OPERATING EXPENSES. Cost of product revenue was $15.2 million and $17.2
million for the three and six months ended June 30, 2000 compared to $1.6
million and $4.6 million for the respective 1999 periods. Cost of product
revenue for 1999 consisted of manufacturing costs and inventory adjustments
relating to the MTA product line. Cost of product revenue represented 57% of
product revenue for the three and six months ended June 30, 2000.
Cost of service revenue was $12.3 million for the three and six months
ended June 30, 2000, after offset in part by $4.3 million of warranty reserves,
compared to $21,000 and $51,000 for the respective 1999 periods. Cost of service
revenue represented 51% of product revenue for the three and six months ended
June 30, 2000.
Research and development expenses reflect our costs associated with the
enhancements to the SV1 AND T3E systems and the development of the MTA and SV2
systems, including related software development, and cover personnel expenses,
allocated overhead and operating expenses, software, materials, and engineering
expenses, including payments to third parties, offset in part by governmental
development funding. Research and development expenses were $13.9 million and
$18.3 million for the three and six months ended June 30, 2000 compared to $3.6
million and $6.6 million for respective 1999 periods. Increases in research and
development expenses primarily will depend on increases in engineering
personnel, principally software engineers. Over time, with receipt of increased
revenue from products currently under development, we would expect research and
development expenses to decrease as a percentage of overall revenue. Research
and development expenses represented 27% and 36% of total revenues for the three
and six months ended June 30, 2000.
Marketing and sales expenses were $2.8 million and $3.6 million for the
three and six months ended June 30, 2000 compared to $545,000 and $1.2 million
for respective 1999 periods. We expect marketing and sales expenses to increase
over the rest of the year as we augment our sales force. Marketing and sales
expenses represented 5% and 7% of total revenues for the three and six months
ended June 30, 2000.
General and administrative expenses were $1.9 million and $3.0 million for
the three and six months ended June 30, 2000 compared to $638,000 and $1.1
million for the respective 1999 period. General and administrative expenses
represented 4% and 6% of total revenues for the three and six months ended June
30, 2000. General and administrative expenses are expected to increase as we
complete our management team.
OTHER EXPENSE. Interest income was $281,000 and $601,000 for the three and
six months ended June 30, 2000 compared to $50,000 and $77,000 for the
respective 1999 periods, due to
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higher average cash balances from the financings completed in 2000. Interest
expense was $66,000 and $126,000 for the three and six months ended June 30,
2000 compared to $29,000 and $87,000 for the respective 1999 periods.
The results for the three and six months ended June 30, 2000 include
amortization of acquisition related expenses of $1.7 million.
TAXES. We made no provision for federal income taxes as we have continued
to incur net operating losses.
PREFERRED STOCK. The dividends for the first half of 1999 were accrued on
our Series A Convertible Preferred Stock, all of which was converted to common
stock in the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $7.7 million at June 30, 2000 and $10.1
million at December 31, 1999. Restricted cash balances, which serve as
collateral for capital equipment loans and leases, totaled $1 million at June
30, 2000 and December 31, 1999. Accounts receivable were $32.5 million at June
30, 2000 and $641,000 at year end.
Net cash used in operating activities was $11.9 million for the six months
ended June 30, 2000 compared to $12.4 million used in the six months ended June
30, 1999. For the six months ended June 30, 2000, net operating cash flows were
primarily attributed to an increase in accounts receivable from product sales
and operating expenses. For the six months ended June 30, 1999, net operating
cash flows were primarily attributable to net losses, personnel costs and costs
of inventory.
Net cash spent on investing activities was $29.3 million for the six
months ended June 30, 2000, compared to $710,000 for the six months ended June
30, 1999, and for the 2000 period consisted primarily of $26.7 million of cash
spent on the Cray acquisition, $1.1 million of cash spent on acquisition related
charges, and $1.5 million spent on additional property, plant and equipment used
primarily for computers and electronic test equipment, computer software and
furniture and fixtures for both periods.
Net cash provided by financing activities was $38.9 million for the six
months ended June 30, 2000 compared to $35.8 million for the six months ended
June 30, 1999. For the six months ended June 30, 2000, we raised $25.2 million
through the sale of common stock and received $8.9 million in proceeds from
warrant exercises. We also obtained a line of credit for up to $10 million. For
the six months ended June 30, 1999 financing activities consisted primarily of
the sale of common stock through private placements.
As part of the acquisition of the Cray Research business unit, we paid SGI
$15 million and issued a nine-month non-interest bearing promissory note of
$35.2 million of which we paid $11.7 million on June 30, 2000. We believe our
present cash resources and our anticipated
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revenue from product sales and maintenance services will be sufficient to
finance our planned operations for the remainder of the year, including payment
of the SGI note and other acquisition costs. Our operational expenses will
consist primarily of personnel costs, cost of inventory and third-party
engineering expenses. Nevertheless, we may raise additional equity and/or debt
capital in the next twelve months to enhance our financial position for future
operations. In addition, if anticipated sales of Cray products were delayed or
if we were not successful in maintaining the level of maintenance revenue, we
may need additional capital earlier than planned. Financings may not be
available to us when needed or, if available, may not be available on
satisfactory terms or may be dilutive to our shareholders. See "Risk Factors--We
May Engage in Additional Financings Which May Be Dilutive to Existing
Shareholders."
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RISK FACTORS
The following factors should be considered in evaluating our business,
operations and prospects and may affect our future results and financial
condition.
A FAILURE TO INTEGRATE THE CRAY RESEARCH BUSINESS UNIT COULD COMPROMISE OUR
GROWTH STRATEGY AND ADVERSELY AFFECT OUR BUSINESS. With the acquisition of the
Cray Research business unit from Silicon Graphics, Inc. ("SGI"), the size and
geographic dispersion of our workforce and operations increased significantly.
These increases place a significant strain on our management, financial and
other resources. We need to attract additional management talent, implement new
financial, budgeting and management information systems, retain, motivate and
effectively manage our employees, enhance internal control systems, increase our
sales force, renovate existing and find new facilities and successfully separate
the Cray operations from those of SGI and combine them with our existing
operations. We may experience difficulties in integrating Cray's personnel,
operations and technologies; and managing this sudden growth and these issues
could divert our management's time and resources. Our success will depend on our
management's ability to make these changes and to manage our operations
effectively over the long term.
LACK OF CUSTOMER ORDERS FOR OUR EXISTING SV1 AND T3E PRODUCTS AND OUR INABILITY
TO SELL OUR PRODUCTS AT EXPECTED PRICES WOULD ADVERSELY AFFECT OUR PROSPECTS. We
will depend on sales of our current products, the Cray SV1 and T3E, including
enhancements to these products, for significant product revenues in 2000 and
2001. To obtain these sales, we need to reconstitute our marketing and service
organization and assure our customers of product performance and our ability to
service these products. Most of our potential customers already own or lease
very high-performance computer systems. Some of our competitors may offer
trade-in allowances or substantial discounts to potential customers, and we may
not be able to match these sales incentives. We may be required to provide
discounts to make sales or to finance the leasing of our products, which would
result in a deferral of our receipt of cash for such systems. These developments
would limit our revenues and resources and would adversely affect our
profitability and operations.
FAILURE TO OBTAIN RENEWAL OF SERVICE CONTRACTS WOULD ADVERSELY AFFECT OUR
REVENUES AND EARNINGS. High-performance computer systems are typically sold with
maintenance service contracts. These contracts generally are for annual periods,
although some are for multi-year periods. We currently are performing most of
the services under the existing SGI maintenance contracts as a sub-contractor to
SGI. As these contracts expire, we need to convince customers to execute new
maintenance service contracts with us. We anticipate that the service revenues
will constitute a significant amount of our total revenues. If customers
decommissioned our installed computers and did not renew their maintenance
service contracts with us, our revenue and earnings would be adversely affected.
OUR QUARTERLY PERFORMANCE MAY VARY SIGNIFICANTLY AND COULD CAUSE OUR STOCK PRICE
TO BE VOLATILE. One or a few system sales may account for a substantial
percentage of our quarterly and annual revenue. This is due to the high average
sales price of our products, particularly the T3E system and the expected high
average sales
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prices for our MTA2 and SV2 systems, and the timing of purchase orders and
product acceptances. Because a number of our prospective customers receive
funding from the U.S. or foreign governments, the timing of orders from such
customers may be subject to the appropriation and funding schedules of the
relevant government agencies. The timing of orders and shipments also could be
affected by other events outside our control, such as:
- changes in levels of customer capital spending;
- the introduction or announcement of competitive products;
- the availability of components;
- timing of the receipt of necessary export licenses; or
- currency fluctuations and international conflicts or economic
crises.
Because of these factors, revenue, net income or loss and cash flow are
likely to fluctuate significantly from quarter to quarter. In particular we
expect that product revenue will decline markedly in the third quarter and then
improve substantially in the fourth quarter of 2000.
THE COST OF SERVICE OF THE T90 INSTALLED BASE WILL ADVERSELY AFFECT OUR
EARNINGS. Certain components in the T90 vector computers sold by Cray prior to
our acquisition have an unusually high failure rate. The cost of servicing the
T90 computers exceeds the related service revenues. We are continuing to take
action that commenced prior to the acquisition to address this problem, and have
on our balance sheets a reserve to account for anticipated losses on the T90
maintenance service contracts.
LACK OF GOVERNMENT SUPPORT FOR SUPERCOMPUTER SYSTEMS WOULD ADVERSELY AFFECT OUR
BUSINESS AND INCREASE OUR CAPITAL REQUIREMENTS. We have targeted U.S. and
foreign government agencies and research laboratories as important sales
prospects for all of our products. In addition, a few of these agencies fund a
portion of our development efforts. The U.S. government historically has
facilitated the development of, and has constituted a market for, new and
enhanced very high- performance computer systems. The failure of U.S. and
foreign government agencies to purchase additional very high-performance
computer systems or to continue to fund these development efforts, due to lack
of funding, change of priorities or for any other reason, would materially and
adversely affect our results of operations and increase our need for capital.
PROPOSALS AND PURCHASES BASED ON THEORETICAL PEAK PERFORMANCE WILL ADVERSELY
AFFECT OUR PROSPECTS. Our high-performance systems are designed to provide high
actual sustained performance on difficult computational problems. Many of our
competitors offer systems with higher theoretical peak performance numbers,
although their actual sustained performance frequently is a small fraction of
their theoretical peak performance. Nevertheless, many requests for proposals,
primarily from governmental agencies in the U.S. and elsewhere, have criteria
based on theoretical peak performance. Until these criteria are changed, we may
be foreclosed from bidding or proposing our systems, which would adversely
affect our revenue potential.
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<PAGE> 16
OUR UNCERTAIN PROSPECTS FOR EARNINGS COULD ADVERSELY AFFECT AN INVESTMENT IN
US. While we have had a substantial increase in revenues with the acquisition of
the Cray business operations, whether we will continue to achieve earnings will
depend upon a number of factors, including:
- our ability to integrate the operations of the former Cray business
unit;
- our ability to market and sell our existing products, the SV1 and
T3E, and complete the development of the MTA2 and SV2 systems;
- the level of revenue in any given period;
- the cost of servicing the T90 installed base;
- the terms and conditions of sale or lease for our products; and
- our expense levels and manufacturing costs.
OUR INABILITY TO OVERCOME THE TECHNICAL CHALLENGES OF COMPLETING THE DEVELOPMENT
OF OUR SYSTEMS COULD CAUSE OUR BUSINESS TO FAIL. We are involved in significant
development efforts, including system upgrades to our existing SV1 and T3E
products in order to add capabilities and features to extend their product
lives. Our success over the next few years depends upon completing the
development of the MTA2 and the SV2 systems. And we have commenced initial work
on development of the MTA3 and SV3 systems. These development efforts are
lengthy and technically challenging processes, and require a significant
investment of capital, engineering and other resources. Delays in completing the
design of the hardware components or software of these systems or in integrating
the full systems could materially and adversely affect our business and results
of operations. We are dependent on our vendors to manufacture components for our
systems, and few companies can meet our design requirements. Their inability to
manufacture our components to our designs will adversely affect the completion
of these products. From time to time during the development process we have had,
and in the future we may have, to redesign certain components because of
previously unforeseen design flaws. We also may find certain flaws, or "bugs",
in our system software which require correction. Redesign work may be costly and
cause delays in the development of these systems, and could affect adversely
their success as commercial products.
THE ABSENCE OF THIRD-PARTY APPLICATION SOFTWARE COULD ADVERSELY AFFECT OUR
ABILITY TO MAKE COMMERCIAL SALES OF OUR NEW SYSTEMS. In order to make sales in
the automotive, aerospace, chemistry and other engineering and commercial
markets, we must be able to attract independent software vendors to port their
software application programs so that they will run on our systems. The
relatively low volume of supercomputer sales may make it difficult for us to
attract these
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<PAGE> 17
vendors. We also plan to modify and rewrite third-party software applications to
run on these systems ourselves to facilitate the expansion of our potential
markets. There can be no assurance that we will be able to induce independent
software vendors to rewrite their applications, or that we will successfully
rewrite third-party applications for use on our systems.
U.S. EXPORT CONTROLS COULD HINDER OUR ABILITY TO MAKE SALES TO FOREIGN CUSTOMERS
AND OUR FUTURE PROSPECTS. The U.S. government regulates the export of
high-performance computer systems such as our products. We currently are
awaiting approval for the export of one system. Delay or denial in the
granting of any required licenses could adversely affect our ability to make
sales to certain foreign customers, thereby eliminating an important source of
potential revenue.
OUR RELIANCE ON THIRD-PARTY SUPPLIERS POSES SIGNIFICANT RISKS TO OUR BUSINESS
AND PROSPECTS. We subcontract the manufacture of substantially all of our
hardware components for all of our products, including integrated circuits,
printed circuit boards, flex circuits and power supplies, on a sole or limited
source basis to third-party suppliers.
We are exposed to substantial risks because of our reliance on these and
other limited or sole source suppliers. For example:
- if a reduction or interruption of supply of our components occurred,
it could take us a considerable period of time to identify and
qualify alternative suppliers to redesign our products as necessary
and to recommence manufacture of the redesigned components;
- if we were ever unable to locate a supplier for a component, we
would be unable to assemble and deliver our products;
- one or more suppliers may make strategic changes in their product
lines, which may result in the delay or suspension of manufacture of
our components or systems; and
- some of our key suppliers are small companies with limited financial
and other resources, and consequently may be more likely to
experience financial difficulties than larger, well- established
companies.
FAILURE TO OBTAIN CREDIT FACILITIES MAY RESTRICT OUR OPERATIONS. We are
negotiating for credit facilities, such as bank lines of credit, vendor credit
and capitalized equipment lease lines. The absence of a consistent record of
revenues and earnings makes obtaining such facilities more difficult; if we
obtain such facilities, they may have high interest rates, contain restrictions
on our operations and require security. Failure to obtain such credit facilities
may limit our planned operations and our ability to acquire needed
infrastructure and other capital items and would adversely affect our cash
reserves and increase our need for capital.
A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE AND COULD
DEPRESS MARKET PRICES OF OUR STOCK AND COULD HINDER OUR ABILITY TO OBTAIN
ADDITIONAL FINANCING. Sale of a substantial number of our shares of common stock
in the public market or the prospect of such sales could materially
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<PAGE> 18
and adversely affect the market price of our common stock. As of June 30, 2000,
we had outstanding:
- 33,409,206 shares of common stock;
- warrants to purchase 14,836,167 shares of common stock;
- 8% Convertible Promissory Notes in the principal amount of $494,291,
convertible at $5.00 per share into 98,858 shares of common stock;
and
- stock options to purchase an aggregate of 7,461,102 shares of common
stock, of which 2,093,479 options were then exercisable.
Almost all of our outstanding shares of common stock may be sold without
substantial restrictions. All of the shares purchased under the option plans are
available for sale in the public market, subject in some cases to volume and
other limitations.
Sales in the public market of substantial amounts of our common stock,
including sales of common stock issuable upon the exercise of the warrants,
could depress prevailing market prices for the common stock. Even the perception
that such sales could occur may impact market prices.
In addition, the existence of outstanding warrants and options may prove
to be a hindrance to our future equity financings. Further, the holders of the
warrants and options may exercise them at a time when we would otherwise be able
to obtain additional equity capital on terms more favorable to us. Such factors
could materially and adversely affect our ability to meet our capital needs.
WE MAY ENGAGE IN ADDITIONAL FINANCINGS WHICH MAY BE DILUTIVE TO EXISTING
SHAREHOLDERS. We believe our present cash resources and revenue from anticipated
sales of products and service revenues are sufficient to finance our planned
operations for the next twelve months. Nevertheless, we may raise additional
equity and/or debt capital in the next twelve months to enhance our financial
position for future operations. In addition, if we were not able to complete the
enhancements to the SV1 and T3E systems and the development of the MTA2 and SV2
systems, we may need additional capital earlier than planned. Financings may not
be available to us when needed or, if available, may not be available on
satisfactory terms or may be dilutive to our shareholders.
WE MAY BE UNABLE TO ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL, AND AS A RESULT
WE MAY NOT BE ABLE TO GROW AS WE EXPECT OR EFFECTIVELY IMPLEMENT OUR BUSINESS
PLAN. Our success also depends in large part upon our ability to attract, retain
and motivate highly skilled management, technical and marketing and sales
personnel, particularly in light of the acquisition of the Cray business unit.
Competition for highly skilled management, technical, marketing and sales
personnel is intense, and we may not be successful in attracting and retaining
such personnel. We have no employment contracts with any of our employees.
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<PAGE> 19
OUR STOCK PRICE MAY BE VOLATILE. The trading price of our common stock is
subject to significant fluctuations in response to, among other factors:
- changes in analysts' estimates;
- our future capital raising activities;
- announcements of technological innovations by us or our competitors;
and
- general conditions in the high-performance computer industry.
In addition, the stock market is subject to price and volume fluctuations
that particularly affect the market prices for small capitalization, high
technology companies like us.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE. Our market is
characterized by rapidly changing technology, accelerated product obsolescence
and continuously evolving industry standards. Our success will depend upon our
ability to enhance our current products, the SV1 and T3E, to complete
development of the MTA2 and the SV2 systems and to develop MTA3 and SV3 systems
in the future. We will need to introduce new products and features in a timely
manner to meet evolving customer requirements. We may not succeed in these
efforts. Our business and results of operations will be materially and adversely
affected if we incur delays in developing our products or if such products do
not gain broad market acceptance. In addition, products or technologies
developed by others may render our products or technologies noncompetitive or
obsolete.
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGH- PERFORMANCE COMPUTER
MARKET. The performance of our products may not be competitive with the computer
systems offered by our competitors, and we may not compete successfully over
time against new entrants or innovative competitors at the lower end of the
market. Furthermore, periodic announcements by our competitors of new
high-performance computer systems and price adjustments may materially and
adversely affect customer demand for our products.
Our competitors are established companies that are well known in the
high-performance computer market, including IBM, Sun Microsystems, Compaq
Computer, Hewlett-Packard and Silicon Graphics in the U.S. and Japanese
companies such as NEC Corporation, Fujitsu and Hitachi. Each of these
competitors has broader product lines and substantially greater research,
engineering, manufacturing, marketing and financial resources than we do.
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<PAGE> 20
In addition we compete with new entrants capitalizing on developments in
parallel processing and increased computer performance through networking and
clustering systems. To date, these products have been limited in applicability
and scalability and can be difficult to program. A breakthrough in architecture
or software technology could make parallel systems more attractive to potential
customers. Such a breakthrough would materially and adversely affect our ability
to sell our products and the receipt of revenue.
MODIFICATION OR ELIMINATION OF CURRENT TARIFFS UNDER THE ANTIDUMPING LAWS WOULD
ADVERSELY AFFECT OUR COMPETITIVE POSITION IN THE UNITED STATES. Significant
duties are imposed on the importation in the U.S. of vector high-performance
computer systems of NEC, Fujitsu and Hitachi under the U.S. antidumping laws.
These duties are subject to review in the second half of 2002. If these duties
were modified or eliminated, we may face significantly increased competition
in the U.S. high-performance computer market from these companies.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY INFORMATION AND RIGHTS ADEQUATELY.
We rely on a combination of patent, copyright and trade secret protection,
non-disclosure agreements and licensing arrangements to establish, protect and
enforce our proprietary information and rights. We have a number of patent
applications pending and plan to file additional patent applications. There can
be no assurance, however, that patents will be issued from the pending
applications or that any issued patents will protect adequately those aspects of
our technology to which such patents will relate. Despite our efforts to
safeguard and maintain our proprietary rights, we cannot be certain that we will
succeed in doing so or that our competitors will not independently develop or
patent technologies that are substantially equivalent or superior to our
technologies.
Although we are not a party to any present litigation regarding
proprietary rights, third parties may assert intellectual property claims
against us in the future. Such claims, if proved, could materially and adversely
affect our business and results of operations. In addition, even meritless
claims would require management attention and would cause us to incur
significant expense to defend.
The laws of certain countries do not protect intellectual property rights
to the same extent or in the same manner as do the laws of the United States.
Although we continue to implement protective measures and intend to defend our
proprietary rights vigorously, these efforts may not be successful.
OUR ABILITY TO BUILD CERTAIN PRODUCTS IS LIMITED BY OUR AGREEMENT WITH SGI,
WHICH MAY LIMIT OUR ABILITY TO COMPETE WITH SGI AND OTHER COMPANIES. The
Technology Agreement pursuant to which we acquired and licensed patent, know-how
and other intellectual property rights from SGI contains restrictions on our
ability to develop certain products, including specified successors to the T3E
system, and restrictions on the use of other technology, such as SGI's IRIX
operating system in the SV2.
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IT MAY BECOME MORE DIFFICULT TO SELL OUR STOCK IN THE PUBLIC MARKET. Our common
stock is quoted on the Nasdaq National Market. In order to remain listed on this
market, the Company must meet Nasdaq's listing maintenance standards. If the bid
price of our common stock falls below $5.00 for an extended period, or we are
unable to continue to meet Nasdaq's standards for any other reason, our common
stock could be delisted from the Nasdaq National Market. If the common stock
were delisted, we likely would seek to list the common stock on the Nasdaq
SmallCap Market or for quotation on the American Stock Exchange or a regional
stock exchange. However, listing or quotation on these markets or exchanges
could reduce the liquidity for our common stock. If the common stock were not
listed or quoted on another market or exchange, trading of the common stock
would be conducted in the over-the-counter market on an electronic bulletin
board established for unlisted securities or in what are commonly referred to as
the "pink sheets." As a result, an investor would find it more difficult to
dispose of, or to obtain accurate quotations for the price of, the common stock.
In addition, a delisting from the Nasdaq National Market and failure to obtain
listing or quotation on such other market or exchange would subject our
securities to so-called "penny stock" rules that impose additional sales
practice and market-making requirements on broker-dealers who sell and/or make a
market in such securities. Consequently, removal from the Nasdaq National Market
and failure to obtain listing or quotation on another market or exchange could
affect the ability or willingness of broker-dealers to sell and/or make a market
in the common stock and the ability of purchasers of the common stock to sell
their securities in the secondary market. In addition, if the market price of
the common stock falls to below $5.00 per share, we may become subject to
certain penny stock rules even if our common stock is still quoted on the Nasdaq
National Market. While such penny stock rules should not affect the quotation of
our common stock on the Nasdaq National Market, such rules may further limit the
market liquidity of the common stock and the ability of investors to sell the
common stock in the secondary market.
PROVISIONS IN OUR AGREEMENT WITH SILICON GRAPHICS MAKE IT MORE DIFFICULT FOR
SPECIFIED COMPANIES TO ACQUIRE US. The Asset Purchase Agreement with SGI
pursuant to which we purchased the Cray Research business assets contains
provisions restricting our ability to transfer the Cray Research business
assets. Sales of these assets to Hewlett-Packard, Sun Microsystems, IBM, Compaq
Computer, NEC or Gores Technology Group, or their affiliates, are prohibited
until the earlier of March 31, 2003 or if SGI were sold. In addition, we must
give SGI a right of first refusal for any sale of these assets to other
purchasers for such period or earlier, if over a period of four fiscal
quarters the revenue from product sales of Cray products is less than 50% of our
total revenue.
PROVISIONS OF OUR ARTICLES AND BYLAWS COULD MAKE A PROPOSED ACQUISITION THAT IS
NOT APPROVED BY OUR MANAGEMENT MORE DIFFICULT. Provisions of our Restated
Articles of Incorporation and Restated Bylaws could make it more difficult for a
third party to acquire us. These provisions could limit the price that investors
might be willing to pay in the future for our common stock. For example, our
Articles and Bylaws provide for:
- a staggered Board of Directors, so that only three of nine directors
are elected each year;
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- removal of a director only for cause and only upon the affirmative
vote of not less than two-thirds of the shares entitled to vote to
elect directors;
- the issuance of preferred stock, without shareholder approval, with
rights senior to those of the common stock;
- no cumulative voting of shares;
- calling a special meeting of the shareholders only upon demand by
the holders of not less than 30% of the shares entitled to vote at
such a meeting;
- amendments to the Restated Articles of Incorporation require the
affirmative vote of not less than two-thirds of the outstanding
shares entitled to vote on the amendment, unless the amendment was
approved by a majority of "continuing directors" (as that term is
defined in our Articles);
- special voting requirements for mergers and other business
combinations, unless the proposed transaction was approved by a
majority of continuing directors;
- special procedures must be followed in order to bring matters before
our shareholders at our annual shareholders' meeting; and
- special procedures must be followed in order for nominating members
for election to the Board of Directors.
WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS. We have never paid any dividends
on our common stock and we intend to continue our policy of retaining any
earnings to finance the development and expansion of our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the quarter ended June 30, 2000, substantially all of our cash
equivalents and marketable securities are held in money market funds or
commercial paper of less than 90 days that is held to maturity. Accordingly, we
believe that the market risk arising from our holdings of these financial
instruments is minimal. All of our current product contract payments are payable
in U.S. dollars, and consequently we do not have any foreign currency exchange
risks for product sales. Our foreign maintenance contracts are paid in local
currencies and provide a natural hedge against local expenses. To the extent
that we wish to repatriate any of these funds to the United States, however, we
are subject to foreign exchange losses. We do not hold any derivative
instruments and have not engaged in hedging transactions.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On April 1, 2000, we issued one million shares of our common stock to SGI
in partial consideration for SGI's Cray Research business unit operations. This
transaction did not involve a public offering and was exempt from registration
under the Securities Act pursuant to Sections 4(2) and 4(6) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders was held on May 31, 2000. At the
meeting the following actions occurred:
1. The following were elected as directors for three year terms
expiring in 2002:
<TABLE>
<CAPTION>
Name Votes for % for Withheld % withheld
---------------- --------- ----- -------- ----------
<S> <C> <C> <C> <C>
Stephen C. Kiely 26,150,975 99.53 126,678 0.47
Burton J. Smith 25,644,525 97.60 633,128 2.40
John W. Titcomb 26,150,005 99.52 127,648 0.48
</TABLE>
David N. Cutler, Daniel J. Evans, Dean D. Thornton, Kenneth W.
Kennedy, Terren S. Peizer, and James E. Rottsolk continue to serve
as directors.
2. An amendment to our restated Articles of Incorporation increasing
the number of authorized shares of common stock to 100,000,000 was
approved by the shareholders, with 25,719,866 shares voting in favor
(76.6%), 477,606 shares voting against (1.4%), 80,181 shares
abstaining, and 7,292,183 shares not voting (21.7%)
3. An amendment to our 1999 Stock Option Plan increasing the number of
shares reserved for issuance to 6,000,000 shares was approved by the
shareholders, with 10,446,914 shares voting in favor (90.6%),
1,081,967 shares voting against (9.4%), 71,080 shares abstaining,
and 21,969,875 shares not voting.
ITEM 5. OTHER INFORMATION
The Company acquired certain assets of the Cray Research business unit
operations from Silicon Graphics, Inc. ("SGI") on April 1, 2000. See
"Acquisition" under Notes to Financial Statements.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation, as amended on April 3,
2000, and June 14, 2000
10.1 Agreement between the CIT Group/Business Credit, Inc. and the
Company, dated June 29, 2000
11.1 Computation of Earnings (Loss) Per Share
27.1 Financial Data Schedule
Reports on Form 8-K
A report on Form 8-K for an event of April 2, 2000, was filed on
April 17, 2000, reporting our acquisition of the Cray research business
unit under "Acquisition or disposition of assets."
A report on Form 8-K/A for an event of April 2, 2000, was filed on
June 16, 2000, reporting our acquisition of the Cray research business
unit under "Acquisition or disposition of assets."
A report on Form 8-K for an event of April 3, 2000, was filed on
April 5, 2000, reporting our name change from "Tera Computer Company" to
"Cray Inc." under "Other Events."
ITEMS 1 AND 3 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAY INC.
August 14, 2000 By: /s/ JAMES E. ROTTSOLK
---------------------------------
James E. Rottsolk
Chief Executive Officer
/s/ KENNETH W. JOHNSON
---------------------------------
Kenneth W. Johnson
Chief Financial Officer
25
