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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 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 August 10, 2001, 41,469,772 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 June 30, 2001 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2000 and 2001 4
Condensed Consolidated Statement of Shareholders' Equity for the
Six Months Ended June 30, 2001 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 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 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
PART II OTHER INFORMATION
Item 2. Changes in Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
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CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, June 30,
2000 2001
----------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,626 $ 15,312
Restricted cash 761 562
Accounts receivable 25,159 30,384
Inventory, net 23,637 22,252
Prepaid expenses and other assets 2,835 3,361
--------- ---------
Total current assets 57,018 71,871
Property and equipment, net 25,535 25,763
Service spares, net 21,139 14,995
Goodwill and intangible assets, net 29,578 26,145
Other assets 2,923 2,796
--------- ---------
TOTAL $ 136,193 $ 141,570
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,247 $ 9,574
Accrued payroll and related expenses 12,028 12,156
Accrued loss on purchase commitment 6,006 4,755
Other accrued liabilities 6,574 3,540
Deferred revenue 17,666 16,312
Current portion of warranty reserves 17,996 9,948
Current portion of obligations under capital leases 349 237
Current portion of term loan 2,136
Current portion of notes payable 8,357 552
--------- ---------
Total current liabilities 85,223 59,210
Warranty reserves 14,285 11,635
Obligations under capital leases 284 125
Term loan payable 5,007
Notes payable 254 417
Shareholders' equity:
Series A Preferred stock, par $.01 - Authorized, 3,125 shares;
issued and outstanding, 3,125 shares 25,000
Common stock, par $.01 - Authorized, 100,000 shares;
issued and outstanding, 35,250 and 41,438 shares 158,799 170,741
Accumulated deficit (122,524) (129,621)
Accumulated other comprehensive income:
Cumulative currency translation adjustment (128) (944)
--------- ---------
36,147 65,176
--------- ---------
TOTAL $ 136,193 $ 141,570
========= =========
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 For the Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 2001 2000 2001
-------- -------- -------- --------
Revenue:
Product $ 26,693 $ 8,612 $ 26,693 $ 36,209
Service 24,280 20,811 24,324 41,961
-------- -------- -------- --------
Total revenue 50,973 29,423 51,017 78,170
-------- -------- -------- --------
Operating expenses:
Cost of product revenue 15,239 4,386 17,242 18,781
Cost of service revenue 12,264 10,604 12,290 18,664
Research and development 13,865 14,148 18,348 27,187
Marketing and sales 2,822 4,882 3,590 9,583
General and administrative 1,898 2,244 2,998 4,383
Amortization of goodwill and intangible assets 1,676 1,774 1,676 3,546
-------- -------- -------- --------
Total operating expenses 47,764 38,038 56,144 82,144
-------- -------- -------- --------
Income (loss) from operations 3,209 (8,615) (5,127) (3,974)
Other income (expense), net (44) (936) 27 (1,360)
Interest income (expense), net (504) (138) (244) (1,281)
-------- -------- -------- --------
Income (loss) before income taxes 2,661 (9,689) (5,344) (6,615)
Provision for income taxes 197 482
-------- -------- -------- --------
Net income (loss) for common share: $ 2,661 $ (9,886) $ (5,344) $ (7,097)
======== ======== ======== ========
Net income (loss) per common share:
Basic $ 0.08 $ (0.24) $ (0.17) $ (0.18)
======== ======== ======== ========
Diluted $ 0.08 $ (0.24) $ (0.17) $ (0.18)
======== ======== ======== ========
Weighted average shares outstanding:
Basic 33,367 41,385 31,492 39,416
======== ======== ======== ========
Diluted 33,448 41,385 31,492 39,416
======== ======== ======== ========
See accompanying notes
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CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
(in thousands)
Preferred Stock Common Stock
------------------- -------------------- Currency
Number of Number of Accumulated Translation
Shares Amount 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:0
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
Common stock issued 600 930 930
Series A preferred stock issued to NEC 3,125 25,000 25,000
Common stock issued in exchange for notes 320 519 519
Other comprehensive income:
Cumulative currency translation adjustment 17 17
Net loss (9,886) (9,886)
----- ------- ------ -------- --------- ----- --------
BALANCE, June 30, 2001 3,125 $25,000 41,438 $170,741 $(129,621) $(944) $ 65,176
===== ======= ====== ======== ========= ===== ========
See accompanying notes
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CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
For the Six Months Ended
June 30,
2000 2001
-------- --------
Operating activities
Net loss $ (5,344) $ (7,097)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 5,192 6,868
Imputed interest expense 719
Amortization of intangible assets 1,676 3,546
Beneficial conversion feature of notes payable 18 747
Non-cash warrant and option expense 289 374
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable (27,966) (5,358)
Inventory 4,672 4,403
Other assets (381) (512)
Accounts payable 5,866 (6,673)
Other accrued liabilities 3,044 (5,106)
Accrued payroll and related expenses 4,146 128
Warranty reserve (3,856) (8,797)
Deferred revenue (1,354)
-------- --------
Net cash used by operating activities (11,925) (18,831)
Investing activities
Purchases of spares (1,439)
Cash used for acquisition (27,775)
Purchases of property and equipment (1,549) (3,847)
-------- --------
Net cash used by investing activities (29,324) (5,286)
Financing activities
Restricted cash 181 199
Related party (receivable)/payments (10) 133
Proceeds from term loan 5,000 7,500
Sale of common stock 25,300 4,089
Proceeds from sale of preferred stock 25,000
Proceeds from exercise of warrants 8,868
Principal payments on notes (141) (1,031)
Capital leases, net (276) (271)
-------- --------
Net cash provided by financing activities 38,922 35,619
-------- --------
Effect of foreign exchange rate changes on
cash and cash equivalents (816)
Net increase (decrease) in cash and cash equivalents (2,327) 10,686
Cash and cash equivalents
Beginning of period 10,069 4,626
-------- --------
End of period $ 7,742 $ 15,312
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 87 $ 560
Non-cash investing and financing activities
Inventory reclassed to fixed assets 1,032
Inventory reclassed to service spares 4,919
Fixed asset additions through capital leases 164
Fixed asset additions through notes payable 585
Warranty reserve reclassed to service spares 1,901
Note payable converted to common stock 2,000 8,300
Accounts payable converted to notes 594
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.
CRAY RESEARCH 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. With this acquisition, the Company
changed from a development stage company with 125 employees (almost all located
in Seattle, Washington), limited revenue and one product under development, to a
company with nearly 900 employees located in over 20 countries, ongoing sales of
supercomputer systems with several products under development, major
manufacturing operations, an established service organization and substantial
inventory. For these reasons, period to period comparisons that include periods
prior to April 1, 2000, are not indicative of future results.
NEC TRANSACTION
On May 10, 2001, the Company closed a transaction with NEC Corporation
(NEC) pursuant to which the Company became the exclusive distributor of NEC for
its current and future vector supercomputers in North America and a
non-exclusive distributor in the rest of the world. As part of this transaction,
NEC purchased $25 million of the Company's Series A Convertible Preferred Stock.
Further information concerning the transaction is set forth in the Company's
current report on Form 8-K filed on May 14, 2001, and concerning the issuance of
the Series A Convertible Preferred Stock is set forth under Item 2 in Part II of
this report.
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INVENTORY
Inventory consisted of the following (in thousands):
December 31, June 30,
2000 2001
-------- --------
Components and subassemblies $ 14,884 $ 12,980
Work in process 10,148 11,035
Finished goods 936 660
LCM adjustment (2,331) (2,423)
-------- --------
$ 23,637 $ 22,252
======== ========
COMPREHENSIVE INCOME
The components of comprehensive income (loss) are as follows (in
thousands):
Three months Six months
ended June 30, ended June 30,
2000 2001 2000 2001
------ ------- ------- -------
Net income (loss) $2,661 $(9,886) $(5,344) $(7,097)
Foreign currency translation
adjustment 17 (816)
------ ------- ------- -------
Comprehensive income (loss) $2,661 $(9,869) $(5,344) $(7,913)
====== ======= ======= =======
SEGMENT INFORMATION
Revenue from U.S. government agencies or commercial customers primarily
serving the U.S. government totaled approximately $10.8 million and $36.9
million for the three and six months ended June 30, 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 were as
follows (in thousands):
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United Asia
Three months ended June 30, 2001: States EMEA Japan Pacific Total
------- ------- ------- ------- -------
Product revenue $ 6,784 $ 1,828 $ -- $ -- $ 8,612
======= ======= ======= ======= =======
Service revenue $13,285 $ 5,739 $ 1,271 $ 516 $20,811
======= ======= ======= ======= =======
Six months ended June 30, 2001:
Product revenue $32,757 $ 3,452 $ -- $ -- $36,209
======= ======= ======= ======= =======
Service revenue $27,375 $10,611 $ 2,755 $ 1,220 $41,961
======= ======= ======= ======= =======
As of June 30, 2001:
Long lived assets $62,656 $ 2,936 $ 2,884 $ 1,223 $69,699
======= ======= ======= ======= =======
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 effect of outstanding stock options and warrants
using the "treasury stock" method, if dilutive.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized, but are reviewed annually for impairment or more frequently if
impairment indicators arise. Separable intangible assets that have finite lives
will continue to be amortized over their useful lives. The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, the Company is required to adopt SFAS No. 142 effective
July 1, 2002, but may adopt the new statement beginning July 1, 2001. The
Company is currently evaluating the effects that adoption of the provisions of
SFAS No. 142 will have on its results of operations and financial position. As
of June 30, 2001, the Company had goodwill and intangible assets, net of
accumulated amortization, of approximately $26.1 million, which would be subject
to the transitional provisions of SFAS No. 142. Amortization expense was $1.8
million and $3.5 million for the three and six months ended June 30, 2001.
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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 "Factors That Could Affect Future
Results" beginning on page 15. 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 six months ended June 30, 2001 we had a
net loss of $7.1 million, with net income in the 2001 first quarter of $2.8
million offset by a net loss in the 2001 second quarter of $9.9 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 15.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 2001
With our 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 April 1, 2000, are not
indicative of results for any future period.
--------
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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PRODUCT REVENUE. For the second quarter of fiscal 2001, product revenue
decreased from $26.7 million to $8.6 million over the second quarter of fiscal
2000, primarily due to a $17.6 million sale of a T3E system in June 2000 and the
absence of a correspondingly large sale in the 2001 second quarter. 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."
For the first six months of fiscal 2001, product revenue increased from
$26.7 million to $36.2 million over the corresponding period of fiscal 2000,
primarily due to the acquisition of the Cray Research business unit on April 1,
2000.
Product revenue represented 29% and 46% of total revenue for the three
months and six months ended June 30, 2001, respectively.
SERVICE REVENUE. Service revenue was $20.8 million and $42.0 million for
the three and six months ended June 30, 2001, compared to $24.3 million for each
of the respective periods in 2000. 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 for the six months ended June
30, 2001, over 2000 is due to the acquisition of the Cray Research operations,
including the 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.
OPERATING EXPENSES. Our cost of product revenue was 51% and 52% of
product revenue for the three months and six months ended June 30, 2001,
compared to 57% and 65% for the corresponding 2000 periods. This decrease
reflects more favorable pricing obtained for the 2001 sales. Our cost of product
revenue is expected to increase as a percentage of product revenue in the rest
of 2001 as we enter into end-of-production transactions for our T3E systems.
Cost of service revenue was $10.6 million and $18.7 million for the
three and six months ended June 30, 2001, after utilization of $3.5 million and
$8.8 million of warranty reserves for the three and six months ended June 30,
2001, compared to cost of service revenue of $12.3 million for each of the
respective 2000 periods. We expect our cost of service revenue, after
application of warranty reserves, to range from 50% to 55% of service revenue
for the rest of the year, due to anticipated reduced application of the warranty
reserves.
Research and development expenses reflect our costs associated with the
enhancements to the SV1 and T3E systems and the development of the SuperCluster,
MTA-2(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 $14.1 million and $27.2 million for the
three and six months ended June 30, 2001, compared to $13.9 million and $18.3
million for each of the respective 2000 periods, or 48% and 35% of total revenue
for the three months and six months ended June 30, 2001, respectively.
Governmental developmental funding was $3.2 million and $6.5 million for the
three and six months ended June 30, 2001, compared to $3.2 million for each of
the respective 2000 periods. Increases in research and development expenses
primarily will depend on increases in engineering personnel, principally
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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.
Marketing and sales expenses were $4.9 million and $9.6 million for the
three and six months ended June 30, 2001, compared to $2.8 million and $3.6
million for the respective 2000 periods. The increase over the 2000 periods was
primarily due to increased staffing and infrastructure following the April 1,
2000, acquisition of the Cray Research business unit. We expect quarterly
marketing and sales expenses to remain relatively constant for the remaining
2001 quarters.
General and administrative expenses were $2.2 million and $4.4 million
for the three and six months ended June 30, 2001, compared to $1.9 million and
$3.0 million for the respective 2000 periods. The increase over the 2000 periods
was primarily due to increased staffing and infrastructure following the April
1, 2000, acquisition of the Cray Research business unit. We expect quarterly
general and administrative expenses to remain relatively constant for the
remaining 2001 quarters.
We incurred amortization expense of $1.8 million and $3.5 million for
the three and six months ended June 30, 2001, compared to $1.7 million for each
of the respective 2000 periods. Amortization expense relates to the goodwill and
intangible assets from the acquisition of the Cray Research business unit on
April 1, 2000.
OTHER INCOME (EXPENSE). Other expense was $936,000 and $1.4 million for
the three and six months ended June 30, 2001, compared to other expense of
$44,000 and other income of $27,000 for the respective 2000 periods. The
increase in other expense consisted primarily of realized losses from the
effects of foreign currency exchange rates.
INTEREST INCOME (EXPENSE). Interest income was $61,000 and $68,000 for
the three and six months ended June 30, 2001, compared to $281,000 and $601,000
for the respective 2000 periods. The decrease in both periods was due to lower
average cash balances in 2001. Interest expense was $199,000 and $1.3 million
for the three and six months ended June 30, 2001, compared to $785,000 and
$845,000 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 conjunction with certain investor promissory
notes.
TAXES. We made a provision of $197,000 and $482,000 for income taxes in
foreign countries for the three and six months ended June 30, 2001,
respectively.
NET LOSS. We had a net loss of $9.9 million for the second quarter of
2001 compared to net income of $2.7 million for the 2000 second quarter,
primarily due to the significant decrease in product revenue in the 2001 second
quarter. Our net loss of $7.1 million for the six months ended June 30, 2001,
was greater than our net loss of $5.3 million for the corresponding 2000 period
largely due to the absence of revenue and an $8.0 million loss in the first
quarter of 2000 before the acquisition of the Cray Research business unit. To
become profitable we need to increase our product revenue from the enhancements
to our current products and our products under development in order to support
our current high level of research and development expenditures.
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LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and accounts receivable totaled $46.3 million at
June 30, 2001, compared to $30.5 million at December 31, 2000. Over that period,
cash increased from $4.6 million to $15.3 million, while restricted cash
balances, which serve as collateral for capital equipment loans and leases,
decreased from $761,000 to $562,000.
Net cash used by operating activities was $18.8 million for the six
months ended June 30, 2001, compared to $11.9 million used in the six months
ended June 30, 2000. For the six months ended June 30, 2001, net operating cash
was used primarily by the year to date net loss, increases in accounts
receivable, decreases in accrued liabilities and application of the warranty
reserve, offset in part by depreciation, amortization and reductions in
inventory.
Net cash used by investing activities was $5.3 million for the six
months ended June 30, 2001, compared to $29.3 million for the six months ended
June 30, 2000. Net cash used by investing activities for the 2001 period
consisted primarily of $3.8 million spent on additional property, plant and
equipment used primarily for computers and electronic test equipment, computer
software and furniture and fixtures for both periods, and $1.4 million for
service spares.
Net cash provided by financing activities was $35.6 million for the six
months ended June 30, 2001, compared to $38.9 million for the six months ended
June 30, 2000. In the six months ended June 30, 2001, we raised $3.5 million
through the sale of common stock to two institutional investors, and raised
$25 million through the sale of preferred stock to NEC. We also secured a $15
million credit facility in March 2001, of which $7.1 million was outstanding as
of June 30, 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, service revenue and government funding of research and development
expenses over the next twelve months will generate overall positive cash flow.
At any particular time, given the high average selling price of our
products, our cash position is affected by the timing of payment of product
sales, receipt of prepaid maintenance revenue and receipt of government funding
of research and development activities. In addition, delays in the development
of the SV1ex, MTA-2 and SuperCluster systems, all planned to be completed in the
next six to nine months, and the SV2 system may require additional capital
earlier than planned. While we believe our cash resources will be adequate for
the next twelve months, we may need to raise additional equity and/or debt
capital if we experience lower than anticipated product sales due to general
economic conditions and/or delays in product development. In addition we may
raise additional capital to enhance our cash position and working capital
position. Additional capital 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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RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. Under SFAS
No. 142, goodwill and intangible assets with indefinite lives are no longer
amortized, but are reviewed annually for impairment or more frequently if
impairment indicators arise. Separable intangible assets that have finite lives
will continue to be amortized over their useful lives. The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets acquired
prior to July 1, 2001, the Company is required to adopt SFAS No. 142 effective
July 1, 2002, but may adopt the new statement beginning July 1, 2001. The
Company is currently evaluating the effects that adoption of the provisions of
SFAS No. 142 will have on its results of operations and financial position. As
of June 30, 2001, the Company had goodwill and intangible assets, net of
accumulated amortization, of approximately $26.1 million, which would be subject
to the transitional provisions of SFAS No. 142. Amortization expense was $1.8
million and $3.5 million for the three and six months ended June 30, 2001.
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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 LIMIT OUR REVENUE AND OUR ABILITY
TO BE PROFITABLE. We will depend on sales of our current products, the Cray
SV1ex and T3E systems, for significant product revenue in 2001. To obtain these
sales, we need to complete the development of the SV1ex system and 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 these systems. These developments would limit our revenue
and resources and would reduce our ability to be profitable.
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 SV1ex,
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 would make it difficult for us to develop and market these
systems. In addition, Compaq Computer has announced that it will transition from
its Alpha processor to the Intel processor family; we are evaluating the impact
of that transaction on the development schedule of our SuperCluster system. If
we were to change from Alpha to another off-the-shelf processor, completion of
the SuperCluster system would likely be delayed until 2002. We are dependent on
our vendors to manufacture components for our systems, and few companies can
meet our design requirements. If our vendors are unable to manufacture our
components to our design specifications, the completion of our products will be
delayed. During the development process we have had, and in the future we may
have, to redesign components because of previously unforeseen design flaws. We
also may find flaws in our system software which require correction. Redesign
work may be costly and cause delays in the development of these systems, and
could make it more difficult for these systems to be successful as commercial
products.
GENERAL ECONOMIC AND MARKET CONDITIONS COULD DECREASE OUR REVENUE, INCREASE OUR
NEED FOR CASH AND DELAY PROFITABILITY. While most of our business is related to
the government sector, which is relatively immune to short-term economic cycles,
a slow-down in the overall U.S. and global economy and resultant decreases in
capital expenditures likely would affect sales to our industrial customers.
Cancellations or delays in purchases would decrease our revenue, increase our
need for working capital and delay profitability.
LACK OF GOVERNMENT SUPPORT FOR SUPERCOMPUTER SYSTEMS WOULD INCREASE OUR CAPITAL
REQUIREMENTS AND DECREASE OUR ABILITY TO CONDUCT RESEARCH AND DEVELOPMENT. Some
U.S. government agencies fund a portion of our development efforts. The U.S.
government historically has facilitated the development of, and
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has constituted a market for, new and enhanced very high-performance computer
systems. The failure of U.S. government agencies to continue to fund these
development efforts, due to lack of funding, change of priorities or for any
other reason, would increase our need for capital and reduce our research and
development expenditures.
IF GOVERNMENT AGENCIES PURCHASE FEWER SUPERCOMPUTERS, OUR REVENUE WOULD BE
REDUCED. We have targeted U.S. and foreign government agencies and research
laboratories as important sales prospects for all of our products. Historically,
sales to the U.S. government have been a significant market for our
supercomputers. In the six months ended June 30, 2001, approximately 47% of our
revenue was derived from sales to various agencies and departments of the U.S.
government. Sales to the U.S. and other government agencies may be affected by
factors out of our control, such as changes in procurement policies and budget
considerations. If these agencies were to stop or reduce their use and purchases
of supercomputers, our revenue would be reduced.
PROPOSALS AND PURCHASES BASED ON THEORETICAL PEAK PERFORMANCE REDUCE OUR ABILITY
TO MARKET OUR SYSTEMS. 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. Unless and until these criteria are
changed, we are foreclosed from bidding on or proposing our systems for such
proposals, which will limit our revenue potential.
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. We
also 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 begin 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.
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We are evaluating the impact on our SuperCluster development of Compaq
Computer's planned transition from its Alpha processor to the Intel processor
family. We have experienced delays in obtaining circuit boards, integrated
circuits and flex circuits on a timely basis from its suppliers, which have
resulted in delays in the development of our products.
ADDITIONAL FINANCINGS MAY BE DILUTIVE TO EXISTING SHAREHOLDERS. At any
particular time, our capital position is impacted by the timing of particular
product sales, the receipt of prepaid maintenance, and receipt of governmental
funding of research and development activities. Delays in the completion of the
SV1ex system and the development of the MTA-2 and SuperCluster systems, all
planned to be completed in the next six to nine months, or delays in the SV2
development program may require additional capital earlier than planned. While
we believe our cash resources will be adequate for the next twelve months, we
may need to raise additional equity and/or debt capital if we experience lower
than anticipated product sales due to general economic conditions and/or delays
in product development. In addition we may raise additional capital to enhance
our cash position and working capital position. Additional capital 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.
FAILURE TO OBTAIN CREDIT FACILITIES MAY RESTRICT OUR OPERATIONS. While we have
obtained a $15 million secured credit facility based on domestic accounts
receivables and maintenance revenue, we are seeking additional credit facilities
of up to approximately $4 million, 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 reduce or eliminate our cash
reserves and increase our need for capital.
FAILURE TO OBTAIN RENEWAL OF SERVICE CONTRACTS WILL REDUCE OUR REVENUE 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. Over the past year, we have been performing
maintenance services under existing Silicon Graphics maintenance contracts as a
sub-contractor to Silicon Graphics; we have been successful in having most of
these contracts assigned to us. As these contracts expire, however, we need to
sell new maintenance service contracts to these customers. Revenue from service
contracts has declined from approximately $125 million in 1999 to approximately
$95 million in 2000 and is expected to further decline until our new products
are designed and sold. If customers do not renew their maintenance service
contracts with us, our revenue and earnings will be reduced.
THE ABSENCE OF THIRD-PARTY APPLICATION SOFTWARE COULD MAKE IT MORE DIFFICULT FOR
US TO SELL OUR SYSTEMS TO COMMERCIAL CUSTOMERS. 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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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 REDUCE OUR EARNINGS. Some of
the components in the T90 vector computers sold by Silicon Graphics before our
acquisition of the Cray Research business unit 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 before the acquisition
to address this problem, and have recorded a warranty reserve, with a balance of
$21.0 million as of June 30, 2001, to provide for anticipated future losses on
the T90 maintenance service contracts.
OUR UNCERTAIN PROSPECTS FOR EARNINGS COULD CAUSE OUR STOCK PRICE TO DECLINE.
While we have had a substantial increase in revenue with the acquisition of the
Cray Research business unit and have had two profitable quarters since that
acquisition, whether we will achieve earnings on a consistent basis will depend
on a number of factors, including:
- our ability to market and sell our existing products, and
complete the development of the SV1ex, SuperCluster, MTA-2, and
SV2 systems;
- the level of revenue in any given period;
- the cost of servicing the T90 installed base;
- the terms and conditions of sale or lease for our products; and
- our expense levels, particularly for research and development,
manufacturing and service.
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IF WE CANNOT ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL, WE MAY BE UNABLE TO
IMPLEMENT EFFECTIVELY 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.
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 sales could cause the market price of our
common stock to decline. As of June 30, 2001, we had outstanding:
- 41,469,772 shares of common stock;
- warrants to purchase 14,901,096 shares of common stock;
- stock options to purchase an aggregate of 9,583,112 shares of
common stock, of which 3,969,108 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 sales could occur may impact market prices.
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 impair our ability to meet our capital needs.
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. Occasionally we have
experienced delays in receiving appropriate approvals necessary for sales, which
has delayed the shipment of our products. Delay or denial in the granting of any
required licenses could make it more difficult to make sales to foreign
customers, eliminating an important source of potential revenue.
OUR STOCK PRICE MAY BE VOLATILE. The trading price of our common stock is
subject to significant fluctuations in response to:
- changes in analysts' estimates;
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- our future capital raising activities;
- announcements of technological innovations by us or our
competitors; and general conditions in our industry.
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.
IF WE ARE NOT ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE, OUR PRODUCTS WILL
NOT BE COMPETITIVE. Our market is characterized by rapidly changing technology,
accelerated product obsolescence and continuously evolving industry standards.
Our success will depend upon our ability to complete development of the SV1ex,
SuperCluster, MTA-2 and 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.
Even if we succeed, products or technologies developed by others may render our
products or technologies noncompetitive or obsolete. If we incur delays in
developing our products or if such products do not gain broad market acceptance
or become obsolete, our ability to develop and market our products will be
reduced.
IF WE ARE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGH-PERFORMANCE COMPUTER
MARKET, OUR REVENUE WILL DECLINE. 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. Periodic announcements by our competitors of new
high-performance computer systems and price adjustments may reduce 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, 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.
We also compete with new entrants capitalizing on developments in
parallel processing and increased computer performance through networking and
clustering systems. Currently, these products are 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 impair our ability to sell our products and
reduce our 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.
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Although we are not a party to any present litigation disputing
proprietary rights, third parties may assert intellectual property claims
against us in the future. Such claims, if proved, could require us to pay
substantial damages or redesign our existing products. Even meritless claims
would require management attention and would cause us to incur significant
expense to defend.
The laws of some 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 SOME PRODUCTS IS LIMITED BY OUR AGREEMENT WITH SILICON
GRAPHICS, WHICH MAY LIMIT OUR ABILITY TO COMPETE WITH SILICON GRAPHICS AND OTHER
COMPANIES. The technology agreement through which we acquired and licensed
patent, know-how and other intellectual property rights from Silicon Graphics
contains restrictions on our ability to develop some 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. To keep our listing on this
market, Cray must meet Nasdaq's listing maintenance standards. If the bid price
of our common stock falls below $1.00 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. If our common stock was trading in the over-the-counter market, an
investor would find it more difficult to dispose of, or to obtain accurate
quotations for the price of, the common stock. 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 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 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. If the market price of our common stock falls to below $5.00 per share,
we may become subject to penny stock rules even if our common stock is still
quoted on the Nasdaq National Market. While the penny stock rules should not
affect the quotation of our common stock on the Nasdaq National Market, these
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 terms of our purchase of the Cray
Research business unit contain provisions restricting our ability to transfer
the assets of Cray Research. 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 Silicon
Graphics were sold.
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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 of incorporation 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 in limited circumstances 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 our 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 our continuing directors, who are
defined as directors who have either served as a director since
August 31, 1995 or were nominated to be a director by the
continuing directors;
- 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 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 our board of directors.
WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS. We have never paid any dividends
on our common stock and we intend to continue our policy of retaining any
earnings to finance the development and expansion of our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the quarter ended June 30, 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
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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 May 10, 2001, we sold 3,125,000 shares of our Series A Convertible
Preferred Stock ("Series A Stock") to NEC for $8.00 per share, or a total price
of $25 million in cash prior to fees and expenses of approximately $65,000. The
Series A Stock is initially convertible into 3,125,000 shares of common stock,
subject to standard anti-dilution adjustments, and provided that the Series A
Stock may be converted only (i) in the event of a sale by us of substantially
all of our assets or an acquisition of us in which holders of voting stock prior
to the acquisition own less than 50% of the voting power of the surviving entity
after the acquisition, or (ii) if the Series A Stock is sold by NEC. NEC has
agreed not to sell the Series A Stock until two years after the closing date,
unless the distribution agreement, dated February 28, 2001, between NEC and us
is sooner terminated. Any shares of Series A Stock that are sold by NEC or its
affiliates automatically convert into common stock. The sale of the Series A
Stock to NEC was exempt from the registration provisions of the Securities Act
of 1933 pursuant to Sections 4(2) and 4(6) thereof and and the rules and
regulations thereunder, because of the nature of the investor and the manner in
which the offering was conducted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A report on Form 8-K for an event of April 3, 2001, was filed on
April 14, 2001, reporting our promissory notes with two institutional
investors under Item 5, "Other Events."
A report on Form 8-K for an event of May 10, 2001, was filed on
May 14, 2001, reporting an agreement with NEC corporation 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.
August 14, 2001 By: /s/ JAMES E. ROTTSOLK
James E. Rottsolk
Chief Executive Officer
/s/ KENNETH W. JOHNSON
Kenneth W. Johnson
Chief Financial Officer
/s/ DOUGLAS C. RALPHS
Douglas C. Ralphs
Chief Accounting Officer
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