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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
March 31, 2000
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 0-26820
- --------------------------------------------------------------------------------
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)
FORMER NAME: TERA COMPUTER COMPANY
(Former name, former address and former fiscal year, if changed
since last report)
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 May 8, 2000, 33,408,406 shares of the Company's Common Stock, par
value $0.01 per share, were outstanding.
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CRAY INC.
TABLE OF CONTENTS
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1999
and March 31, 2000 3
Statements of Operations for the Three Months
Ended March 31, 1999 and 2000 4
Statement of Shareholders' Equity for the Three Months
Ended March 31, 2000 5
Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 2000 6
Notes to 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 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
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CRAY INC.
BALANCE SHEETS
December 31, March 31,
1999 2000
(unaudited)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,069,355 $ 30,187,972
Restricted cash 1,131,583 1,042,078
Accounts receivable 300,682 312,614
Related party receivable 340,634 345,842
Inventory 4,513,013 4,482,710
Deposit to SGI 5,000,000
Advances to suppliers 111,558 196,789
Prepaid expenses and other assets 431,680 860,616
------------- -------------
Total current assets 16,898,505 42,428,621
Property and equipment, net 5,828,712 7,158,322
Lease deposits 496,788 498,467
Patents 186,471 260,321
------------- -------------
TOTAL $ 23,410,476 $ 50,345,731
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,365,646 $ 5,209,948
Accrued payroll and related expenses 2,147,195 1,830,482
Accrued interest 9,886 19,772
Deferred revenue 68,045 25,068
Contract adjustment reserve 200,455 200,455
Current portion of obligations under capital leases 611,585 561,351
Current portion of notes payable to bank 288,865 295,959
------------- -------------
Total current liabilities 7,691,677 8,143,035
Obligations under capital leases 390,250 332,447
Notes payable to bank 572,768 496,064
Convertible notes payable, net of discount 448,964 458,150
Shareholders' equity:
Common Stock, par $.01 - Authorized, 50,000,000 shares;
issued and outstanding, 25,211,872 and 32,375,480 shares 111,442,905 146,057,003
Accumulated deficit (97,136,088) (105,140,968)
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14,306,817 40,916,035
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TOTAL $ 23,410,476 $ 50,345,731
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See accompanying notes
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CRAY INC.
STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended
March 31,
---------------------------------
1999 2000
------------ ------------
REVENUE:
Product revenue $ 557,000 $
Service revenue 22,167 42,978
Contract revenue 81,426
------------ ------------
660,593 42,978
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OPERATING EXPENSES:
Cost of product revenue 550,232
Cost of service revenue 29,201 26,250
Cost of contract revenue 41,406
Manufacturing costs and
inventory adjustments 2,395,745 2,002,644
Research and development 3,033,333 4,482,844
Marketing and sales 632,479 767,733
General and administrative 465,058 1,100,621
------------ ------------
Loss from operations (6,486,861) (8,337,114)
OTHER INCOME / (EXPENSE) (324,406) 332,234
------------ ------------
NET LOSS $ (6,811,267) $ (8,004,880)
PREFERRED STOCK DIVIDEND (70,057)
------------ ------------
LOSS FOR COMMON STOCK $ (6,881,324) $ (8,004,880)
============ ============
LOSS PER COMMON SHARE,
BASIC AND DILUTED $ (0.47) $ (0.27)
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING, BASIC AND DILUTED 14,625,703 29,595,622
============ ============
See accompanying notes
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CRAY INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(unaudited)
Common Stock
-----------------------------------
Number of Accumulated
Shares Amount Deficit Total
------------- ------------- ------------- -------------
BALANCE, January 1, 2000 25,211,872 $ 111,442,905 $ (97,136,088) $ 14,306,817
Common stock issued in private
placement, net of issuance costs
of $1,830,495 5,226,875 24,303,880 24,303,880
Exercise of warrants 1,872,537 9,015,339 9,015,339
Cash received on subscribed common stock 900,000 900,000
Warrants and options issued for services 193,880 193,880
Issuance of shares under Employee
Stock Purchase Plan 33,895 108,040 108,040
Exercise of stock options 30,301 92,959 92,959
Net loss (8,004,880) (8,004,880)
------------- ------------- ------------- -------------
BALANCE, March 31, 2000 32,375,480 $ 146,057,003 $(105,140,968) $ 40,916,035
============= ============= ============= =============
See accompanying notes
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CRAY INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
---------------------------------
1999 2000
------------ ------------
OPERATING ACTIVITIES:
Net loss $ (6,811,267) $ (8,004,880)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 431,370 529,994
Beneficial conversion feature of notes payable 286,466 9,186
Non-cash warrant and option expense 193,880
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable 250,422 (11,932)
Inventory 75,527 (1,280,301)
Deposit to SGI (5,000,000)
Other assets 32,585 (504,465)
Accounts payable and other accrued liabilities 984,769 854,188
Accrued payroll and related expenses (34,003) (208,673)
Deferred revenue 20,833 (42,977)
Advances to suppliers 2,573 (85,231)
------------ ------------
Net cash used by operating activities (4,760,725) (13,551,211)
INVESTING ACTIVITIES:
Purchases of property and equipment (391,737) (491,771)
------------ ------------
Net cash used by investing activities (391,737) (491,771)
FINANCING ACTIVITIES:
Related party receivable (18,873) (5,208)
Restricted cash 89,505
Issuance of notes payable 1,650,000
Sale of common stock 4,914,023 25,203,880
Proceeds from exercise of warrants 9,015,339
Proceeds from exercise of options 92,959
Principal payments on bank note (69,610)
Capital leases, net (128,521) (165,266)
------------ ------------
Net cash provided by financing activities 6,416,629 34,161,599
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,264,167 20,118,617
CASH AND CASH EQUIVALENTS:
Beginning of period 3,161,867 10,069,355
------------ ------------
End of period $ 4,426,034 $ 30,187,972
============ ============
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING
AND FINANCING ACTIVITIES:
Inventory reclassed to fixed assets 1,032,107 1,310,604
Common stock issued for employee stock purchase plan 144,729 108,040
Accounts payable converted to notes 594,291
Fixed asset additions through capital leases 57,229
Stock dividends 90,295
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 48,969 $ 69,464
See accompanying notes
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CRAY INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and
related interim 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 years ended December 31, 1998 and 1999, contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
INVENTORY
Inventory consisted of the following:
December 31, March 31,
1999 2000
------------ -----------
Components and subassemblies $ 8,043,797 $ 7,854,535
Work in process 805,612
Finished goods 1,137,328 2,549,807
Inventory allowance (5,473,724) (5,921,632)
----------- -----------
$ 4,513,013 $ 4,482,710
=========== ===========
CHANGES IN CAPITAL
On February 2, 2000, the Company raised $26,134,375, prior to fees and
expenses of $1,830,495, in a private placement of 5,226,875 shares of Common
Stock to 20 institutional and 8 individual accredited investors.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average
number of shares of common stock outstanding. Because outstanding stock options,
warrants and other common stock equivalent shares are antidilutive, their effect
has not been included in the calculation of net loss per share.
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RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
ACQUISITION OF CRAY RESEARCH BUSINESS UNIT
The Company has acquired certain assets of the Cray Research business
unit operations from Silicon Graphics, Inc. ("SGI"). The tangible assets and
operations acquired consist primarily of three buildings and associated real
property, inventory, furniture, fixtures and equipment and collateral records
and materials. In addition the Company acquired certain intellectual property
rights, including patents, know-how, trademarks and trade names, licenses to
other patents and know-how and rights under specified contracts and causes of
action. The Company assumed certain liabilities related to the assets
acquired, including obligations under specified contracts, certain employment
and benefit obligations and specified product liability claims. SGI has retained
service contracts related to Cray products until the contracts terminate or are
assigned to the Company. The Company has agreed to perform the obligations under
these service contracts in return for monthly fees from SGI. The Company did
not acquire any cash or trade receivables and did not assume any trade payables
or indebtedness.
The Company intends to continue to offer and support the Cray business
unit's supercomputer products, to continue its current product development
programs and to integrate these operations with the Company's current
supercomputer operations.
The Company paid to SGI $15 million in cash, issued one million shares
of Common Stock and issued a nine-month non-interest bearing promissory note in
the amount of $35.8 million. The amount of the note is subject to post-closing
adjustment based upon an audit of the closing balance sheet. The cash paid at
closing was funded from the Company's available cash balances. The Company
expects to pay the promissory note from funds generated from business
operations. The amount of consideration paid in this acquisition was determined
in arms-length negotiations between the Company and SGI.
The closing documents were signed on April 2, 2000, with SGI responsible
for all operations of the Cray Research business unit through March 31, 2000 and
the Company responsible for all operations commencing April 1, 2000. The Company
will record the acquisition as of April 1, 2000.
On April 3, 2000, in connection with the Company's acquisition of the
Cray Research business unit from SGI, the Company filed an amendment to its
articles of incorporation changing its name from "Tera Computer Company" to
"Cray Inc." The Company's Nasdaq trading symbol has changed from "TERA" to
"CRAY."
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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 general-purpose
parallel computer systems. With our acquisition of the Cray Research business
unit effective at the beginning of April 2000, 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 also are
developing new computer systems, the MTA1 and the MTA2, based on our
multithreaded architecture system, and the SV2, which will combine elements of
the SV1 and T3E computers, and have begun initial work on their respective
successors, the MTA3 and SV3.
Our product line now includes:
- The Cray SV1, a vector system introduced in 1998, is targeted at the
installed base of vector supercomputers, such as the earlier Cray J90,
T90, C90 and YMP computers. The sales price for SV1 systems ranges
from $1 million to $5 million.
- The Cray T3E, introduced in 1997, is a massively parallel system
targeted at governmental, environmental science, academic research and
national research laboratory applications. The sales price for T3E
systems ranges from $4 million to $20 million.
- The Cray MTA1, based on our multithreaded architecture, is targeted to
customers with computational problems that have proven difficult to
run in parallel on vector and massively parallel systems. MTA systems
are designed to address a wide range of scientific and engineering
applications and emerging commercial applications. We are currently
installing our first 16-processor MTA1 at the San Diego Supercomputer
Center and are in the process of moving the integrated circuit designs
from gallium arsenide to CMOS, or complementary metal-oxide silicon;
the full CMOS system is referred to as the Cray MTA2. The sales price
for MTA1 and MTA2 systems is expected to range from $4 million to $40
million.
- The SV2 is designed to combine vector and massively parallel features
with high-speed memory access. This project, which is targeted for
release in late 2002, is considered essential for national security
interests and is partially funded by the
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Department of Defense. The SV2 will be used for large scale science and
engineering applications.
Our service organization now supports over 600 Cray supercomputers
installed at approximately 200 customer sites in approximately 30 countries.
This installed base includes close to 200 large scale vector supercomputers,
such as the Cray YMP, C90 and T90 systems, and more than 50 T3E massively
parallel systems.
We have approximately 900 employees (an increase from approximately 125
employees before the acquisition) 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 and manufacturing), 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 in almost 30 countries, 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
$8.0 million in the first three months of 2000, compared to a net loss of
approximately $6.8 million in the first three months of 1999. Our funding from
inception through March 31, 2000 has been primarily from the sale of
approximately $142.8 million of securities, research funding from the Defense
Advanced Research Projects Agency ("DARPA") of approximately $19.4 million, and
revenue of approximately $4.2 million.
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.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
REVENUE. We had no revenue from any product sales in the first quarter
of 2000; in the first quarter of 1999, we recognized $557,000 of product revenue
from the sale of a four-processor MTA system to the San Diego Supercomputer
Center. We had $43,000 of service revenue in the first quarter of 2000 compared
to $22,000 for the comparable 1999 quarter. We had no contract revenue for the
three months ended March 31, 2000, compared to $81,000 for the three months
ended March 31, 1999. Contract revenue was pursuant to a subcontract with SDSC
to evaluate multithreaded architecture for certain defense applications. The
subcontract expired on June 30, 1999.
OPERATING EXPENSE. With no product revenue in the first quarter of 2000,
we had no associated costs in that quarter, compared to a cost of product
revenue of $550,000 for the 1999 first quarter. Our cost of service revenue was
$26,000 for the 2000 first quarter compared to $29,000 for the 1999 first
quarter. The cost of contract revenue decreased to zero for the three months
ended March 31, 2000 compared to $41,000 for the three months ended March 31,
1999, due to the completion of the SDSC subcontract on June 30,
1999.
Manufacturing costs and inventory adjustments were $2.0 million for the
three months ended March 31, 2000 compared to $2.4 million for the three months
ended March 31, 1999. These costs reflect the expense of our manufacturing
group, including personnel costs and allocated overhead, of approximately
$687,000 for the three months ended March 31, 2000, compared to $935,000 for the
three months ended March 31, 1999. The decrease of $248,000 is primarily due to
an increased allocation of manufacturing personnel to research and development
for the three months of 2000. We expect this trend to continue during the
remainder of 2000.
We also incurred production expenses not directly related to systems
delivered to SDSC of $439,000 for the three months ended March 31, 2000,
compared to $249,000 for the three months ended March 31, 1999, and net
inventory adjustments of $921,000 for the three months ended March 31, 2000,
compared to $1.3 million for the three months ended March 31, 1999.
Research and development expenses reflect our costs associated with the
development of the MTA system, including next generation systems and related
software development, and cover personnel expenses, allocated overhead and
operating expenses, software, materials, and engineering expenses, including
payments to third parties. Research and development expenses increased from $3.0
million for the three months ended March 31, 1999 to $4.5 million for the three
months ended March 31, 2000. Personnel expenses increased by $647,000 over 1999,
due to an increased allocation of personnel, additions in our personnel and
higher wages. Also, a decrease in materials expense of $200,000 was offset by an
increase of $1.0 million in engineering expenses.
Marketing and sales expenses for the three months ended March 31, 2000
increased $136,000 to $768,000 from $632,000 for the three months ended March
31, 1999. The increase was due to increased personnel costs.
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General and administrative expenses for the three months ended March 31,
2000 increased $635,000 to $1.1 million from $465,000 for the three months ended
March 31, 1999. The increase was due in part to increased investment relations
and shareholder costs of approximately $250,000, non-cash expenses associated
with the provisions of warrants and options for consulting services of
approximately $193,000, and increased personnel costs of $65,000. General and
administrative expenses are expected to increase commensurate with growth in our
operations.
OTHER INCOME (EXPENSE). Interest income for the three months ended March
31, 2000 increased $293,000 to $320,000 from $27,000 for the three months ended
March 31, 1999, due to higher average cash balances from the financing completed
in February 2000. Interest expense for the three months ended March 31, 2000
increased $11,000 to $60,000 from $49,000 for the three months ended March 31,
1999, due to a bank loan for the purchase of capital assets issued in the third
quarter 1999.
The results for the first three months of 2000 include a gain of $81,000
associated with the sale of inventory to a third-party.
The results for the first three months of 1999 include a non-cash
interest expense of approximately $278,000 associated with the value of the
conversion feature of certain convertible promissory notes issued in the first
quarter of 1999, all of which was recorded in the first quarter; the results
also include a non-cash expense for the value of detachable warrants issued in
conjunction with the convertible promissory notes, of which $8,000 was
recognized in the first quarter of 1999.
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 quarter 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
Since our inception in 1987 through March 31, 2000, our principal
sources of liquidity have been net proceeds from the sale of equity totaling
$142.8 million, DARPA research funding and subcontracts totaling $19.4 million
and sales receipts of approximately $4.2 million. At March 31, 2000, we had
$30.2 million in cash.
Net cash used in operating activities was $13.6 million for the three
months ended March 31, 2000, an increase of $8.8 million from the $4.8 million
used in the three months ended March 31, 1999. Net operating cash flows were
primarily attributable to quarterly net losses, personnel costs, costs of
inventory and a $5.0 million escrow deposit in connection with the purchase of
the Cray Research business unit from SGI. Cash used for personnel expenditures
increased from
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approximately $2.8 million in the first three months of 1999 to $3.4 million for
the three months of 2000; inventory purchases increased from $1.8 million to
$1.9 million.
Net cash spent on investing activities was $492,000 for the three months
ended March 31, 2000, compared to $392,000 for the three months ended March 31,
1999, and consisted of additional property, plant and equipment, primarily for
computers and electronic test equipment, computer software and furniture and
fixtures for both periods.
Net cash provided by financing activities was $34.2 million for the
three months ended March 31, 2000, compared to $6.4 million for the three months
ended March 31, 1999. The increase in 2000 over 1999 was due primarily to net
proceeds from the issuance of common stock of $25.2 million in the first quarter
of 2000, compared to $4.9 million in the first quarter of 1999. In the first
quarter of 2000, we also received $9.0 million from the exercise of common stock
warrants.
As part of the acquisition of the Cray Research business unit, we paid
SGI $15 million ($10 million from our unrestricted cash and $5 million from the
SGI deposit account) and issued a nine-month non-interest bearing promissory
note of $35.8 million (the amount of the note is subject to post-closing audit).
We believe our present cash resources and our anticipated 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, for
significant product revenues in 2000. 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 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.
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,
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and will have on our balance sheet 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, 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.
OUR UNCERTAIN PROSPECTS FOR EARNINGS COULD ADVERSELY AFFECT AN INVESTMENT IN US.
We cannot be certain that we will achieve a profitable level of operations in
the future. We have experienced net losses in each year of our operations. We
incurred net losses of approximately $15.8 million in 1997, $19.8 million in
1998, $34.5 million in 1999 and $8.0 million in the first quarter of 2000. While
we will have a substantial increase in revenues with the acquisition of the Cray
business operations, whether we will 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 based;
- 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
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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 MTA and SV2 systems.
The relatively low volume of supercomputer sales may make it difficult for us to
attract these 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 the MTA or SV2 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. Delay or denial in the
granting of any required licenses could materially and adversely affect our
ability to make sales to 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;
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- 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 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 and
adversely affect the market price of our common stock. As of March 31, 2000,
without giving effect to the Cray acquisition, we had outstanding:
- 32,406,135 shares of common stock,
- warrants to purchase 9,696,759 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 4,470,921 shares of common
stock, of which 1,932,400 options were then exercisable.
As part of the financing completed on June 21, 1999, we issued a warrant
to Terren S. Peizer, who paid us $200,000 for the warrant, for a minimum of
1,591,723 shares of common stock at $4.95 per share. This warrant becomes
exercisable for half of the shares covered thereby on June 21, 2000, and ratably
over the following twelve months for the remaining half. If the average market
price for our common stock is less than $4.72 for the five trading days prior to
June 21, 2000, the exercise price would be reset to 105% of such average. On
June 21, 2000, and in certain circumstances prior to that date, such as if we
were involved in a merger or similar transaction or if we terminated our
relationship with Mr. Peizer, the number of shares subject to this warrant
increases to 10% of our issued and outstanding shares, on a fully diluted basis,
with certain limited exceptions. If this warrant had been so exercisable as of
March 31, 2000, it would have been exercisable for a total of 4,439,930 shares.
This warrant is not included in the number of shares of common stock issuable
upon exercise of warrants above.
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.
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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
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 are dependent on Burton J. Smith, our Chief Scientist, and James E.
Rottsolk, our Chief Executive Officer and President. The loss of either
officer's services could have a material impact on our ability to achieve our
business objectives. We are the beneficiary of key man life insurance policies
on the lives of Messrs. Smith and Rottsolk in the amount of $2 million and $1
million, respectively. We have no employment contracts with either Mr. Smith or
Mr. Rottsolk, or with any other employee.
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 prices for our MTA1, 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;
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- the availability of components; 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.
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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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 would 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 to the SV2.
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
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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 if earlier, when over a period of four fiscal
quarters the revenue from 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;
- 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;
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- 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 March 31, 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 contract payments are payable in U.S.
dollars, and consequently we do not have any foreign currency exchange risks. We
do not hold any derivative instruments and have not engaged in hedging
transactions. Beginning in the second quarter, with the acquisition of the
world-wide Cray business operations, we will have transactions in foreign
currencies and anticipate that we will engage in hedging transactions.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On February 2, 2000, we raised $26,134,375, prior to fees and expenses
of $1,830,495, in a private placement of 5,226,875 shares of our Common Stock to
20 institutional and 8 individual accredited investors. We sold the shares at a
price of $5.00 per share. These offers and sales were exempt from the
registration provisions of the Securities Act of 1933, as amended, under
Sections 4(2) and 4(6) of the Securities Act, and the rules and regulations
under those provisions, because of the nature of the offerees and investors and
the manner in which we conducted the offering. There were no underwriters or
finders involved.
ITEM 5. OTHER INFORMATION
The Company has acquired certain assets of the Cray Research business
unit operations from Silicon Graphics, Inc. ("SGI"). See "Acquisition of Cray
Research Business Unit" under Notes to Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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10.1 Asset Purchase Agreement between SGI and the Company,
dated as of March 1, 2000*
10.2 Amendment No. 1 to the Asset Purchase Agreement, dated as
of March 31, 2000*
10.3 Technology Agreement between SGI and the Company,
effective as of March 31, 2000
10.4 Services Contract Agreement between SGI and the Company,
dated as of March 31, 2000
10.5 Transition Services Agreement between SGI and the Company,
dated as of March 31, 2000
10.6 Registration Rights Agreement between SGI and the Company,
dated as of March 31, 2000
27.1 Financial Data Schedule
*Incorporated by reference to the Company's report on Form 8-K, as filed with
the Commission on April 17, 2000
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(b) Reports on Form 8-K
A report on Form 8-K for an event of February 2, 2000, was filed
on February 15, 2000, reporting our private placement of common stock
under "Other Events."
A report on Form 8-K for an event of March 1, 2000, was filed on
March 3, 2000, reporting our Asset Purchase Agreement for the Cray
Research business unit under "Other Events."
ITEMS 1, 3, AND 4 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.
May 15, 2000 By: /s/ JAMES E. ROTTSOLK
James E. Rottsolk
Chief Executive Officer
/s/ KENNETH W. JOHNSON
Kenneth W. Johnson
Chief Financial Officer
/s/ PHILISSA SARGIN
Philissa Sargin
Chief Accounting Officer
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