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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, 2001
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)
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 11, 2001, 41,438,117 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
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2000
and March 31, 2001 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 2001 4
Condensed Consolidated Statement of Shareholders' Equity
for the Three Months Ended March 31, 2001 5
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2000 and 2001 6
Notes to Condensed 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 20
PART II OTHER INFORMATION
Item 2. Changes in Securities 20
Item 6. Exhibits and Reports on Form 8-K 20
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CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, March 31,
2000 2001
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,626 $ 2,402
Restricted cash 761 664
Accounts receivable 25,159 43,608
Inventory, net 23,637 15,694
Prepaid expenses and other assets 2,835 4,645
--------- ---------
Total current assets 57,018 67,013
Property and equipment, net 25,535 25,567
Spares inventory, net 21,139 19,805
Goodwill and intangible assets, net 29,578 27,806
Other assets 2,923 2,914
--------- ---------
TOTAL $ 136,193 $ 143,105
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,247 $ 19,963
Accrued payroll and related expenses 12,028 12,113
Accrued loss on purchase commitment 6,006 6,006
Other accrued liabilities 6,574 4,078
Deferred revenue 17,666 16,618
Current portion of warranty reserves 17,996 16,150
Current portion of obligations under capital leases 349 286
Current portion of term loan 2,136
Current portion of notes payable 8,357 908
--------- ---------
Total current liabilities 85,223 78,258
Warranty reserves 14,285 10,553
Obligations under capital leases 284 227
Term loan payable 5,364
Notes payable 254 107
Shareholders' equity:
Common Stock, par $.01 - Authorized, 100,000 shares;
issued and outstanding, 25,212 and 40,518 shares 158,799 169,292
Accumulated deficit (122,524) (119,735)
Accumulated other comprehensive income:
Cumulative currency translation adjustment (128) (961)
--------- ---------
36,147 48,596
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TOTAL $ 136,193 $ 143,105
========= =========
See accompanying notes
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CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
For the Three Months Ended
March 31,
------------------------
2000 2001
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Revenue:
Product $ $ 27,597
Service 43 21,150
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Total revenue 43 48,747
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Operating expenses:
Cost of product revenue 14,395
Cost of service revenue 26 8,060
Research and development 6,485 13,039
Marketing and sales 768 4,701
General and administrative 1,101 2,139
Amortization of goodwill and intangible assets 1,772
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Total operating expenses 8,380 44,106
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Income (loss) from operations (8,337) 4,641
Other income (expense), net 72 (424)
Interest income (expense), net 260 (1,143)
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Net income (loss) before income taxes (8,005) 3,074
Provision for income taxes 285
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Net income (loss) for common share: $ (8,005) $ 2,789
======== ========
Net income (loss) per common share:
Basic $ (0.27) $ 0.07
======== ========
Diluted $ (0.27) $ 0.07
======== ========
Weighted average shares outstanding:
Basic 29,596 37,435
======== ========
Diluted 29,596 37,471
======== ========
See accompanying notes
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CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
(in thousands)
Common Stock
------------------------ Currency
Number of Accumulated Translation
Shares Amount Deficit Adjustment Total
--------- -------- ----------- ------------ ---------
BALANCE, January 1, 2001 35,250 $ 158,799 $(122,524) $ (128) $ 36,147
Issuance of shares under Employee
Stock Purchase Plan 349 644 644
Options issued for debt 225 225
Common stock issued in exchange
for notes, net of issuance costs of $821 3,764 6,960 6,960
Common stock issued 1,147 2,500 2,500
Exercise of stock options 8 15 15
Warrants issued for services 26 26
Warrants issued for credit facility 123 123
Other comprehensive income:
Cumulative currency translation adjustment (833) (833)
Net income 2,789 2,789
--------- --------- --------- --------- ---------
BALANCE, March 31, 2001 40,518 $ 169,292 $(119,735) $ (961) $ 48,596
========= ========= ========= ========= =========
See accompanying notes
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CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Three Months Ended
March 31,
------------------------
2000 2001
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Operating activities
Net income (loss) $ (8,005) $ 2,789
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 530 3,524
Amortization of intangible assets 1,772
Beneficial conversion feature of notes payable 9 747
Non-cash warrant and option expense 194 374
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable (12) (18,587)
Inventory (1,280) 9,307
Deposit to SGI (5,000)
Other assets (504) (1,801)
Accounts payable 854 3,716
Other accrued liabilities (85) (3,316)
Accrued payroll and related expenses (209) 85
Warranty reserve (5,578)
Deferred revenue (43) (1,048)
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Net cash used by operating activities (13,551) (8,016)
Investing activities
Purchases of spares (1,439)
Purchases of property and equipment (492) (2,147)
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Net cash used by investing activities (492) (3,586)
Financing activities
Restricted cash 89 97
Related party (receivable)/payments (5) 138
Proceeds from term loan 7,500
Sale of common stock 25,297 3,159
Proceeds from exercise of warrants 9,015
Principal payments on bank note (70) (562)
Capital leases, net (165) (121)
-------- --------
Net cash provided by financing activities 34,161 10,211
-------- --------
Effect of foreign exchange rate changes on
cash and cash equivalents (833)
Net increase (decrease) in cash and cash equivalents 20,118 (2,224)
Cash and cash eqivalents
Beginning of period 10,069 4,626
-------- --------
End of period $ 30,187 $ 2,402
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 69 $ 171
Non-cash investing and financing activities
Inventory reclassed to fixed assets 1,311
Inventory reclassed to spares 1,364
Fixed asset additions through capital leases 57
Note payable converted to common stock 7,781
See accompanying notes
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CRAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
In the opinion of management, the accompanying condensed consolidated
balance sheets and related interim consolidated statements of operations,
shareholders' equity and cash flows have been prepared in accordance with
accounting principles generally accepted in the United States of America 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 accounting principles generally accepted
in the United States of America 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 of Financial Condition and Results of
Operations" and the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2000.
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
On April 1, 2000, the Company acquired certain assets of the Cray Research
business unit operations from Silicon Graphics, Inc. and changed its name from
Tera Computer Company to Cray Inc. For this reason, period to period comparisons
that include periods prior to April 1, 2000, are not indicative of future
results.
INVENTORY
Inventory consisted of the following (in thousands):
December 31, March 31,
2000 2001
------------ ---------
Components and subassemblies $ 14,884 $ 9,893
Work in process 10,148 6,037
Finished goods 936 732
LCM adjustment (2,331) (968)
--------
$ 23,637 $ 15,694
======== ========
LINE OF CREDIT
In March 2001, the Company entered into a credit agreement with Foothill
Capital Corporation. This line of credit replaced the Company's existing credit
agreement in place at December 31, 2000. The credit agreement makes available
$15 million through March 2004. The credit agreement provides $7.5 million of
borrowings in the form of a revolving line of credit based on eligible domestic
and foreign product accounts receivable, and $7.5 million of borrowings in the
form of a term loan. Borrowings under the credit agreement are secured by
property, plant and equipment and bear interest at the prime rate plus 2% for
the revolving line of credit and at the prime rate plus 3.25% for the term loan.
The credit agreement contains financial covenants relating to tangible net worth
EBITDA and domestic service revenue.
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COMPREHENSIVE INCOME
The components of comprehensive income (loss) are as follows:
Three months ended March 31,
2000 2001
------- -------
Net income (loss) $(8,005) $ 2,789
Foreign currency translation
adjustment (833)
------- -------
Comprehensive income (loss) $(8,005) $ 1,956
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SEGMENT INFORMATION
Revenue from U.S. government agencies or commercial customers primarily
serving the U.S. government totaled approximately $26.1 million in the first
quarter of 2001.
The Company's significant operations outside the United States include sales
and service offices in Europe, the Middle East and Africa (EMEA), Japan, and
Asia Pacific (Australia, Korea, China and Taiwan). Intercompany transfers
between operating segments and geographic areas are primarily accounted for at
prices that approximate arm's length transactions.
Geographic revenue and long-lived assets related to operations as of and for
the quarter ended March 31, 2001, were as follows:
United Asia
States EMEA Japan Pacific Total
------ ---- ----- ------- -----
Product revenue $25,973 $ 1,624 $ -- $ -- $27,597
======= ======= ======= ======= =======
Service revenue $14,188 $ 4,872 $ 1,484 $ 606 $21,150
======= ======= ======= ======= =======
Long lived assets $68,339 $ 4,260 $ 2,942 $ 1,207 $76,748
======= ======= ======= ======= =======
No prior year comparative information has been presented as the Company did
not have significant operations outside the United States prior to the Cray
Research acquisition on April 1, 2000.
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 weighted average number of common shares
outstanding plus the dilutive effect of outstanding stock options and warrants
using the "treasury stock" method.
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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 "Factors That Could Affect Future Results"
beginning on page 13. 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 computer systems,
commonly known as supercomputers. We presently market two computer systems, the
Cray SV1ex(TM) and Cray T3E(TM), and provide maintenance services to the
world-wide installed base of these and earlier models of Cray computers. We are
developing enhancements to the Cray SV1ex, and we are developing three new
computer systems, the Cray MTA-2(TM), based on our multithreaded architecture
system, the SuperCluster(R), a highly parallel system using leading commercial
off-the-shelf components, and the Cray SV2(TM), which will combine elements of
the Cray SV1(TM) and T3E computers.
We have experienced net losses in each year of our operations. We incurred
net losses of approximately $25.4 million in 2000, $34.5 million in 1999 and
$19.8 million in 1998. For the three months ended March 31, 2001 we had net
income of $2.8 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 when title passes upon shipment or may be delayed until funding is
certain. 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 could affect our future results and financial condition are
set forth below, beginning on page 13.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 2001
With the acquisition of the Cray Research business unit from Silicon
Graphics, Inc. ("SGI"), 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.
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REVENUE. We had revenue from product sales of $27.6 million for the three
months ended March 31, 2001, compared to zero for the respective 2000 period.
Product revenue for the three months ended March 31, 2001 consisted of $21.3
million for our T3E product line, $3.8 million for our SV1 product line, and
$2.5 for our T90(TM) product line. The overall increase in product revenue is
due to the acquisition of the Cray product line. We expect our product revenue
to vary quarterly. See "Factors That Could Affect Our Future Results -- Our
Quarterly Performance May Vary Significantly and Could Cause Our Stock Price To
Be Volatile." Product revenue represented 57% of total revenues for the three
months ended March 31, 2001.
Service revenue was $21.2 million for the three months ended March 31, 2001,
compared to $43,000 for the respective 2000 period. 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 to stabilize as our new systems are placed in service. Service
revenue represented 43% of total revenue for the three months ended March 31,
2001.
OPERATING EXPENSES. Cost of product revenue was $14.4 million for the three
months ended March 31, 2001, compared to zero for the respective 2000 period.
Cost of product revenue represented 52% of product revenue for the three months
ended March 31, 2001.
Cost of service revenue was $8.1 million for the three months ended March
31, 2001, after utilization of $5.3 million of warranty reserves for the three
months ended March 31, 2001, compared to cost of service revenue of $26,000 for
the respective 2000 period. Cost of service revenue represented 38% of service
revenue for the three months ended March 31, 2001. In addition to higher than
expected utilization of warranty reserves, the cost of services was decreased by
one-time favorable adjustments of $795,000 arising from operations in Europe. We
expect cost of service revenue to approximate 50% of service revenue for the
rest of the year.
Research and development expenses reflect our costs associated with the
enhancements to the SV1 and T3E systems and the development of the MTA(TM) and
SV2 systems, including related software development. These costs also include
personnel expenses, allocated overhead and operating expenses, software,
materials and engineering expenses, including payments to third parties. These
costs are offset in part by governmental development funding. Net research and
development expenses were $13.0 million for the three months ended March 31,
2001, compared to $6.5 million for the respective 2000 period, and represented
27% of total revenues for the three months ended March 31, 2001. 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 expect
research and development expenses to decrease as a percentage of overall
revenue.
- ---------------
Cray and SuperCluster are federally registered trademarks of Cray Inc., and Cray
T90, Cray T3E, Cray SV1, Cray SV1ex, Cray SV2, Cray MTA, and Cray MTA-2 are
trademarks of Cray Inc.
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Marketing and sales expenses were $4.7 million for the three months ended
March 31, 2001, compared to $768,000 for the respective 2000 period. We expect
quarterly marketing and sales expenses to remain relatively constant. Marketing
and sales expenses represented 10% of total revenues for the three months ended
March 31, 2001.
General and administrative expenses were $2.1 million for the three months
ended March 31, 2001, compared to $1.1 million for the respective 2000 period.
General and administrative expenses represented 4% of total revenues for the
three months ended March 31, 2001. We expect quarterly general and
administrative expenses to increase slightly as we complete our administrative
team but to remain relatively constant as a percentage of revenue.
We incurred amortization expense of $1.8 million for the three months ended
March 31, 2001 primarily relating to the goodwill and intangible assets from the
acquisition of the Cray Research business unit.
OTHER INCOME (EXPENSE). Other expense was $424,000 for the three months
ended March 31, 2001, compared to other income of $72,000 for the respective
2000 period, and consisted primarily of realized losses from the effects of
foreign currency exchange rates.
INTEREST INCOME (EXPENSE). Interest income was $7,000 for the three months
ended March 31, 2001, compared to $320,000 for the respective 2000 period, due
to lower average cash balances in 2001. Interest expense was $1.1 million for
the three months ended March 31, 2001, compared to $60,000 for the respective
2000 period. The increase in 2001 was largely due to a non-cash charge of
$747,000 associated with the value of the conversion feature of certain investor
promissory notes, and a $225,000 non-cash charge for the value of options issued
in conjuction with certain investor promissory notes.
TAXES. We made a provision of $285,000 for income taxes in foreign countries
for the three months ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $2.4 million at March 31, 2001, compared
to $4.6 million at December 31, 2000. Restricted cash balances, which serve as
collateral for capital equipment loans and leases, totaled $664,000 at March 31,
2001 and $761,000 at December 31, 2000.
Net cash used by operating activities was $8.0 million for the three months
ended March 31, 2001, compared to $13.6 million used in the three months ended
March 31, 2000. For the three months ended March 31, 2001, net operating cash
flows were primarily attributed to an increase in accounts receivable from
product sales, offset in part by decreases in inventory.
Net cash used by investing activities was $3.6 million for the three months
ended March 31, 2001, compared to $492,000 for the three months ended March 31,
2000. Net cash used by investing activities for the 2001 period consisted
primarily of $2.1 million spent on additional property, plant and
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equipment used primarily for computers and electronic test equipment, computer
software and furniture and fixtures for both periods, and $1.4 million for spare
parts inventory.
Net cash provided by financing activities was $10.2 million for the three
months ended March 31, 2001, compared to $34.2 million for the three months
ended March 31, 2000. For the three months ended March 31, 2001, we raised $2.5
million through the sale of common stock to two institutional investors. We also
secured a $15 million credit facility of which we used $7.5 million as of March
31, 2001.
Over the next twelve months our significant cash requirements will relate to
operational expenses, consisting primarily of personnel costs, costs of
inventory and third-party engineering expenses, and acquisition of property and
equipment. These expenses include our commitments to acquire components and
manufacturing and engineering services. We expect that anticipated product sales
and maintenance services over the next twelve months will generate positive cash
flow from operations.
We secured a three-year $15 million credit facility in March 2001, of which
$7.5 million was outstanding as of March 31, 2001, and completed the NEC
distribution agreement on May 10, 2001, at which time NEC invested $25 million
in us.
At any particular time, given the high average selling price of our
products, our cash position is affected by the timing of product sales and the
receipt of prepaid maintenance revenue. In addition, delays in the development
of the SV1ex, MTA-2 and SuperCluster systems, all planned to be completed in the
next twelve months, and the SV2 system may require additional capital earlier
than planned. We believe our cash resources will be adequate for the next 12
months. Nevertheless, we may raise additional equity and/or debt capital to
enhance our cash position and working capital position. Financings may not be
available to us when needed or, if available, may not be available on
satisfactory terms and may be dilutive to our shareholders.
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FACTORS THAT COULD AFFECT FUTURE RESULTS
The following factors should be considered in evaluating our business,
operations and prospects and may affect our future results and financial
condition.
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 series and T3E
systems, for significant product revenue in 2001. To obtain these sales, we need
to 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 provide lease financing for our products, which would result in
a deferral of our receipt of cash for such systems. In addition, general
economic conditions may affect adversely the ability of our customers to invest
significant funds in capital investments. These developments would limit our
revenue and resources and would adversely affect our profitability and
operations.
OUR INABILITY TO OVERCOME THE TECHNICAL CHALLENGES OF COMPLETING THE DEVELOPMENT
OF OUR SYSTEMS COULD CAUSE OUR BUSINESS TO FAIL. We expect that our success in
2002 and following years depends upon completing the development of the
SuperCluster, the MTA-2 and the SV2 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.
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 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
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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 are
foreclosed from bidding or proposing our systems on such proposals, which
adversely affects our revenue potential.
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 have been performing most of the
services under the existing SGI maintenance contracts as a sub-contractor to SGI
and are in the process of novating these contracts to us. As these contracts
expire, we need to sell new maintenance service contracts to these customers. A
significant portion of these contracts includes prepaid service amounts. If
customers do not renew their maintenance service contracts with us, our
revenues, earnings and cash resource would be adversely affected.
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. The SuperCluster system will be built
entirely from commercial off-the-shelf components on a sole-source basis. In
addition, we use a contract manufacturer to assemble our SV1 and T3E components,
and plan to do so for our MTA-2 and SV-2 systems also. 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.
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 makes it difficult for us to
attract these vendors. We also modify and rewrite third-party software
applications to run on our systems and so 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.
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FAILURE TO OBTAIN CREDIT FACILITIES MAY RESTRICT OUR OPERATIONS. While we have
obtained a secured credit facility based on accounts receivables and maintenance
revenue, we are seeking additional credit facilities, such as bank lines of
credit, vendor credit and capitalized equipment lease lines. The absence of a
consistent record of revenue 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.
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 Cray T3E system, and the expected
high average sales prices for our MTA-2 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.
THE COST OF SERVICE OF THE T90 INSTALLED BASE WILL ADVERSELY AFFECT OUR
EARNINGS. Certain components in the T90 vector computers sold by SGI prior to
our acquisition of the Cray Research operations have an unusually high failure
rate. The cost of servicing the T90 computers exceeds the related service
revenue. We are continuing to take action that commenced prior to the
acquisition to address this problem, and have recorded a warranty reserve to
provide for anticipated future losses on the T90 maintenance service contracts.
OUR UNCERTAIN PROSPECTS FOR EARNINGS COULD ADVERSELY AFFECT AN INVESTMENT IN US.
While we have had a substantial increase in revenue 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 market and sell our existing products, the SV1 and T3E,
and complete the development of the SV1ex, SuperCluster, MTA-2, and SV2
systems;
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- 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, particularly for research and development and
manufacturing and service costs.
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 adversely affect our ability to make
sales to certain foreign customers, thereby eliminating an important source of
potential revenue.
A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE AND COULD
DEPRESS MARKET PRICES OF OUR STOCK AND 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, 2001, we had
outstanding:
- 40,518,259 shares of common stock;
- warrants to purchase 14,901,096 shares of common stock;
- stock options to purchase an aggregate of 9,671,605 shares of common
stock, of which 2,942,910 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 options 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
warrants and options, 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.
ADDITIONAL FINANCINGS MAY BE DILUTIVE TO EXISTING SHAREHOLDERS. Over the next
twelve months our significant cash requirements relate to operational expenses,
consisting primarily of personnel costs, costs of inventory and third-party
engineering expenses, and acquisition of capital goods. We expect that
anticipated product sales and maintenance services over the next twelve months
will generate positive cash flow. We secured a $15 million credit facility in
March 2001, and completed the NEC distribution agreement in May 2001, at which
time NEC invested $25 million in us. At any particular time, given the
high average selling price of our products, our capital position is impacted by
the timing of particular product sales, and the receipt of prepaid
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maintenance. In addition, delays in the completion of the SV1ex system and the
development of the MTA-2 and SuperCluster systems, all planned to be completed
in 2001, or delays in the SV2 development program may require additional capital
earlier than planned. In order to provide sufficient working capital and enhance
our capital position, we may raise additional equity and/or debt capital.
Financings may not be available to us when needed or, if available, may not be
available on satisfactory terms and 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. Competition for highly skilled management, technical, marketing and
sales personnel is intense, and we may not be successful in attracting and
retaining such personnel. In particular, we have an ongoing project to add
software developers to assist our development efforts. We have no employment
contracts with any of our employees.
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 has been and is subject to price and
volume fluctuations that particularly affect the market prices for
small capitalization, high technology companies like ourselves.
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, to complete development of the
SuperCluster, the MTA-2 and the SV2 systems and to develop successor 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
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Microsystems, Compaq Computer, Hewlett-Packard, Silicon Graphics, 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. 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.
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 patents and
have additional applications pending. 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.
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 our 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 our common stock were not
listed or quoted on another market or exchange, trading of our common stock
would be conducted in our 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"
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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 our common stock and the
ability of purchasers of our common stock to sell their securities in the
secondary market. In addition, if the market price of our 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 our
common stock and the ability of investors to sell our 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 the sale of SGI.
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;
- 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
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- 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, 2001, 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. We sell our products primarily in North America, Asia
and Europe. As a result, our financial results could be affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Our products are generally priced in U.S. dollars, and a
strengthening of the dollar could make our products less competitive in foreign
markets. While we commonly sell products with payments in U.S. dollars, our
product sales contracts occasionally call for payment in foreign currencies and
to the extent we do so, we are subject to foreign currency exchange risks.
We plan on using forward currency contracts to minimize these risks. 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 risks.
We do not hold any derivative instruments and have not engaged in hedging
transactions.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 28, 2001, we issued warrants to purchase 100,000 shares of
common stock to Foothill Capital Corporation in connection with obtaining the
line of credit. The warrants are exercisable at an exercise price of $1.76 per
share, and expire on March 28, 2005. The transaction was exempt from
registration under the Securities Act pursuant to Sections 4(2) and 4(6)
thereto, given the nature of the transaction and the investor.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.12 Agreement between Foothill Capital Corporation and the Company,
dated March 28, 2001
11.1 Computation of Earnings (Loss) Per Share
Reports on Form 8-K
A report on Form 8-K for an event of December 15, 2000, was filed on
January 4, 2001, reporting our promissory notes with two institutional
investors under Item 5, "Other Events."
A report on Form 8-K for an event of February 7, 2001, was filed on
February 15, 2001, reporting a change in our Board of Directors under Item
5, "Other Events."
ITEMS 1, 3, 4 AND 5 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, 2001 By: /s/ JAMES E. ROTTSOLK
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James E. Rottsolk
Chief Executive Officer
/s/ KENNETH W. JOHNSON
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Kenneth W. Johnson
Chief Financial Officer
/s/ DOUGLAS C. RALPHS
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Douglas C. Ralphs
Chief Accounting Officer
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EXHIBIT INDEX
Exhibit No. Description
10.12 Agreement between Foothill Capital Corporation and the Company,
dated March 28, 2001
11.1 Computation of Earnings (Loss) Per Share