e424b1
Filed Pursuant to Rule
424(b)(1)
Registration No. 333-137694
PROSPECTUS
7,500,000 Shares
Common Stock
Cray Inc. is selling 7,500,000 shares of common stock. We
have granted the underwriters a
30-day option to
purchase up to an additional 1,125,000 shares to cover
over-allotments, if any.
Our common stock is traded on the Nasdaq Global Market under the
symbol CRAY. The last reported sales price on
December 13, 2006 was $10.45 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE RISK
FACTORS BEGINNING ON PAGE 7.
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Per Share | |
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Total | |
Public offering price
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$ |
10.00 |
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$ |
75,000,000 |
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Underwriting discount
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$ |
0.52 |
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$ |
3,900,000 |
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Proceeds, before expenses, to us
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$ |
9.48 |
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$ |
71,100,000 |
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Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Thomas Weisel Partners LLC, on behalf of the underwriters,
expects to deliver the shares on or about December 19, 2006.
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Thomas Weisel Partners LLC |
Needham & Company, LLC |
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Sole Book-Running Manager |
Co-Lead Manager |
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C.E. Unterberg, Towbin |
Miller Johnson Steichen Kinnard |
The date of this prospectus is December 13, 2006.
TABLE OF CONTENTS
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This prospectus is part of a registration statement that we
filed with the Securities and Exchange Commission. You should
rely only on the information contained or incorporated by
reference in this prospectus or to which we refer you in
connection with this offering of these securities. We have not
authorized anyone to provide you with different information. No
dealer, salesperson, or other person is authorized to provide
any information or to make any representation on behalf of us
that is not contained or incorporated by reference in this
prospectus. You must not rely on any unauthorized information or
representation. This prospectus is an offer to sell only the
securities offered by this prospectus under circumstances and in
jurisdictions where it is lawful to do so. You should not assume
that the information contained in this prospectus or the
documents incorporated by reference is accurate as of any date
other than the date of this prospectus or those documents,
regardless of the date of delivery of this prospectus or of any
sales of these securities. This prospectus may be used only in
jurisdictions where it is legal to sell these securities.
The image of the Cray Red Storm system on the inside front cover
was provided through the courtesy of Randy Montoya of Sandia
National Laboratories.
i
PROSPECTUS SUMMARY
You should read the following summary together with the more
detailed information appearing elsewhere in this prospectus and
the financial statements and related notes and other information
incorporated by reference in this prospectus. You should
carefully consider, among other things, the matters discussed in
Risk Factors before investing in our common stock.
All references to we, our,
us, and Cray refer to Cray Inc. and its
subsidiaries.
Our Company
We design, develop, manufacture, market and service high
performance computing (HPC) systems, commonly known
as supercomputers. Our supercomputer systems provide capability,
capacity and sustained performance far beyond typical
server-based computer systems and address challenging scientific
and engineering computing problems.
We believe we are well positioned to meet the HPC markets
demanding needs by providing superior supercomputer systems with
performance and cost advantages when sustained performance on
challenging applications and total cost of ownership are taken
into account. We differentiate ourselves from our competitors
primarily by concentrating our research and development efforts
on the processing, interconnect and software capabilities that
enable our systems to scale that is, to continue to
increase performance as our systems grow in size. Purpose-built
for the supercomputer market, our systems balance highly capable
processors, highly scalable software and very high speed
interconnect and communications capabilities.
We focus our sales and marketing activities on government
agencies, industrial companies and academic institutions that
purchase high end HPC systems. We sell our products primarily
through a direct sales force that operates throughout the United
States and in Canada, Europe, Japan and Asia-Pacific. Our
supercomputer systems are installed at more than 100 sites in
over 20 countries.
In early 2006 we announced our Adaptive Supercomputer vision to
expand the concept of hybrid computing to a fully integrated
view of both hardware and software supporting multiple
processing technologies within a single, highly scalable system.
We believe that our recent $250 million award from the
Defense Advanced Research Projects Agency under its High
Productivity Computing Systems program validates our Adaptive
Supercomputer vision. This award will co-fund our Cascade
development project to implement this vision.
Industry Background
Since Seymour Cray introduced the Cray-1 system in 1976,
supercomputers have contributed substantially to the advancement
of knowledge and the quality of human life. Scientists and
engineers typically require vast computing resources to address
problems of major economic, scientific and strategic importance.
Much of the development of new products and technologies, as
well as improvements of existing products and technologies, will
not be possible without the continued improvement of
supercomputer computational speeds, interconnect technologies,
scalable system software and overall sustained performance.
The HPC Market. The overall server market is estimated by
the International Data Corporation (IDC) to have
been $51.3 billion worldwide in 2005. According to IDC, the
HPC market, which is a sub-sector of the overall server market,
totaled $9.2 billion in 2005. We target the high end of the
HPC market, which includes the capability segment and a portion
of the enterprise segment, as these segments are defined by IDC.
We believe our total addressable market within these segments is
approximately $1.5 billion in annual product sales.
1
Increasing Demand for Supercomputing Power. Supercomputer
users are seeking answers to some of the worlds most
complex problems in science and engineering. We believe there
are three principal factors driving the demand for
supercomputing power: first, the increasing need for advanced
design and simulation capability in industry, government
agencies and weather and climate centers; second, continuing
concerns about national security issues, heightened by an
emphasis on terrorism prevention; and third, the recognized
national interests of many countries to advance scientific
research to enable innovations to better compete globally and
achieve breakthroughs in new energy technologies, biological
systems, nanotechnologies, particle physics and other natural
phenomena.
Limitations on Existing and Emerging Solutions. Despite
the demand for increased supercomputing power, systems capable
of exploiting high end capabilities have become less common.
Todays HPC market is replete with low bandwidth cluster
systems that are often limited in performance beyond certain
system size and capability. These systems loosely link together,
or cluster, multiple commodity servers using widely available
microprocessors by means of commercially available interconnect
products. Low bandwidth cluster systems are not balanced, do not
scale well and, as they grow in size, they may become unreliable
because they lack the necessary management software and built-in
hardware redundancies to minimize disruptions. Given these
limitations, low bandwidth cluster systems are better suited for
smaller problems and those lacking communications complexity
that make up the majority of the midrange and low end of the HPC
market. The effectiveness of low bandwidth cluster systems in
our target market, the high end of HPC, is limited today and, we
believe, will be increasingly limited in the future.
The Cray Solution
We have concentrated our product roadmap on building balanced
systems that are purpose-built for supercomputer users. These
systems address the critical computing resource challenges HPC
users face today: achieving massive scaling to tens of thousands
of processors, ease of use and very high levels of sustained
performance on real applications. We do this by designing
supercomputers that combine highly capable processors, whether
developed by us or by others, high speed interconnect technology
for maximum communication efficiency, innovative packaging to
address increased cooling, power and reliability requirements,
and scalable software that enables performance and usability at
scale.
To date in 2006, we have won several large customer contract
awards, including:
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Sandia National Laboratories a dual core upgrade and
expansion of its Red Storm supercomputer from 40 teraflops to
125 teraflops (40 to 125 trillion floating point operations per
second), making it the second most powerful supercomputer in the
world, as measured on the November 2006 Top 500 list
of the worldwide sites operating the 500 most powerful computer
systems; |
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CSC Finland contract to deliver a 70 teraflops Cray
XT4 system in stages from late 2006 through 2008; |
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Oak Ridge National Laboratory $200 million
contract for several deliveries, including an order for a
petaflops (1,000 trillion floating point operations per second)
performance system for delivery toward the end of 2008 or early
2009; |
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National Energy Research Scientific Computing Center
$52 million contract to deliver our Cray XT4 system in
2007, with options for future upgrades; and |
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AWE Plc £20 million contract to deliver a
dual-core Cray XT3 system in 2006. |
2
Our Strategy
Our goal is to become the leading provider of supercomputers in
the markets that we target. Key elements of our strategy include:
Gain Share in Our Core HPC Market. We intend to leverage
our strong product portfolio, product roadmap and brand
recognition in the high end of the HPC market to gain market
share.
Maintain Focus on Execution and Profitability. We are
committed to achieving sustained profitability on an annual
basis. We intend to continue to refine our product roadmap,
converge our technologies and development processes, improve our
ability to deliver high quality products on time and on budget
and continue our commitment to financial discipline.
Extend Technology Leadership. We are an innovation driven
company in a technology driven market. We plan to maintain a
technology leadership position by investing in research and
development and partnering with key customers with interests
aligned strongly with ours. We will rely in part on government
funding for our research and development efforts. We intend to
execute on our product roadmap and implement our Adaptive
Supercomputing vision to realize the concept of supporting
multiple processing technologies within a single, highly
scalable Linux-based system.
Expand Total Addressable Market. Over time, we intend to
leverage our technologies, customer base and Cray brand in new
segments and expand our addressable market. We believe we have
the opportunity to compete in a broader portion of the HPC
market as well as selective markets outside of HPC.
Corporate Information
We were incorporated under the laws of the State of Washington
in December 1987 under the name Tera Computer Company. We
changed our corporate name to Cray Inc. in connection with our
April 2000 acquisition of the Cray Research operating assets
from Silicon Graphics, Inc. Our corporate headquarter offices
are located at 411 First Avenue South, Suite 600,
Seattle, Washington,
98104-2860, our
telephone number is
(206) 701-2000 and
our website address is: www.cray.com. The contents of our
website are not incorporated by reference into this prospectus
or our other SEC reports and filings.
Cray and Cray-1 are
federally registered trademarks of Cray Inc., and Cray T3E,
Cray X1, Cray X1E, Cray XT3, Cray XT4, Cray XMT
and Cray XD1 are trademarks of Cray Inc. Other trademarks
used in this prospectus are the property of their respective
owners.
3
THE OFFERING
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Common stock offered |
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7,500,000 shares |
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Over-allotment option |
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We have granted the underwriters a
30-day option to
purchase up to 1,125,000 shares of common stock to cover
over-allotments, if any. |
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Common stock to be outstanding after the offering |
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30,755,597 shares |
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Use of proceeds |
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Working capital and other general corporate purposes, including
funding product development and capital expenditures. |
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Nasdaq Global Market symbol |
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CRAY |
The number of shares outstanding after the offering is based on
23,255,597 shares of common stock outstanding as of
September 30, 2006, and excludes:
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1,334,852 shares of common stock issuable upon exercise of
warrants, of which warrants covering 1,284,852 shares are
exercisable at $10.12 per share and warrants covering
50,000 shares are exercisable at $6.60 per share; |
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3,223,570 shares of common stock issuable upon the exercise
of options which have a weighted average exercise price of
approximately $15.48 per share; and |
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4,144,008 shares of common stock issuable upon conversion
of our 3.0% Convertible Senior Subordinated Notes due 2024
(the Notes) which have a conversion price of
approximately $19.31 per share, or a maximum of
5,698,006 shares of common stock issuable under certain
circumstances specified in the indenture governing the Notes, as
more fully described in Description of Capital Stock and
Convertible Notes. |
All numbers of shares of our common stock in this prospectus, as
well as per share and similar calculations involving our common
stock, reflect the one-for-four reverse stock split effected on
June 8, 2006. Such information in documents dated prior to
June 8, 2006 that are incorporated by reference into this
prospectus do not reflect the one-for-four reverse stock split.
All information in this prospectus, unless otherwise stated,
assumes the underwriters do not exercise their over-allotment
option.
4
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
We derived the consolidated operating data for the years ended
December 31, 2003, 2004 and 2005 and the consolidated
balance sheet data as of December 31, 2004 and 2005 from
our audited consolidated financial statements incorporated by
reference in this prospectus. We derived the consolidated
balance sheet data as of December 31, 2003 from our audited
consolidated financial statements not incorporated by reference
in this prospectus. We derived the consolidated balance sheet
data as of September 30, 2006, and the consolidated
operating data for the nine months ended September 30, 2005
and 2006, from our unaudited consolidated financial statements
incorporated by reference in this prospectus. We have prepared
the unaudited consolidated financial statements on a basis
substantially consistent with the audited consolidated financial
statements incorporated by reference in this prospectus and, in
the opinion of management, these statements include all
adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of such data. The share and per
share amounts reflect the one-for-four reverse stock split
effected on June 8, 2006.
The following data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus and the consolidated financial statements and
related notes thereto incorporated by reference in this
prospectus.
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Nine Months Ended | |
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Year Ended December 31, | |
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September 30, | |
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2003 | |
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2004 | |
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2005 | |
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2005 | |
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2006 | |
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(Unaudited) | |
Operating Data:
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Product revenue
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$ |
175,004 |
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$ |
95,901 |
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|
$ |
152,098 |
|
|
$ |
99,796 |
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$ |
77,990 |
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Service revenue
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|
|
61,958 |
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|
|
49,948 |
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|
|
48,953 |
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|
35,998 |
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|
|
41,603 |
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Total revenue
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|
|
236,962 |
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|
|
145,849 |
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|
|
201,051 |
|
|
|
135,794 |
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|
|
119,593 |
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Cost of product revenue
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|
|
97,354 |
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|
|
104,196 |
|
|
|
139,518 |
|
|
|
96,567 |
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|
|
58,703 |
|
Cost of service revenue
|
|
|
40,780 |
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|
|
30,338 |
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|
|
29,032 |
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|
|
22,652 |
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|
|
22,836 |
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|
|
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|
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Total cost of revenue
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|
|
138,134 |
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|
|
134,534 |
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|
|
168,550 |
|
|
|
119,219 |
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|
|
81,539 |
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Gross margin
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|
98,828 |
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|
|
11,315 |
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|
|
32,501 |
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|
|
16,575 |
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|
|
38,054 |
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Research and development, net
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|
|
37,762 |
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|
|
53,266 |
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|
|
41,711 |
|
|
|
32,932 |
|
|
|
23,278 |
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Sales and marketing
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|
|
27,038 |
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|
|
34,948 |
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|
|
25,808 |
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|
|
19,951 |
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|
|
15,591 |
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General and administrative
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|
|
10,908 |
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|
|
19,451 |
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|
|
16,145 |
|
|
|
12,491 |
|
|
|
14,328 |
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Restructuring, severance and impairment
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|
|
4,019 |
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|
|
8,182 |
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|
|
9,750 |
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|
|
2,933 |
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|
|
1,290 |
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In-process research and development charge
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|
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|
43,400 |
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Income (loss) from operations
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19,101 |
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|
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(147,932 |
) |
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|
(60,913 |
) |
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(51,732 |
) |
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|
(16,433 |
) |
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Other income (expense), net
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|
1,496 |
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|
|
(699 |
) |
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|
(1,421 |
) |
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|
(602 |
) |
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|
(1,964 |
) |
Interest income (expense), net
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|
444 |
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|
365 |
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(3,462 |
) |
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(2,319 |
) |
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(1,657 |
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Income (loss) before income taxes
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21,041 |
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(148,266 |
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(65,796 |
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(54,653 |
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(20,054 |
) |
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Provision (benefit) for income taxes
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(42,207 |
) |
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|
59,092 |
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(1,488 |
) |
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|
428 |
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|
748 |
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Net income (loss)
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$ |
63,248 |
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|
$ |
(207,358 |
) |
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$ |
(64,308 |
) |
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$ |
(55,081 |
) |
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$ |
(20,802 |
) |
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Net income (loss) per common share
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Basic
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$ |
3.77 |
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|
$ |
(9.95 |
) |
|
$ |
(2.91 |
) |
|
$ |
(2.49 |
) |
|
$ |
(0.93 |
) |
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|
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|
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Diluted
|
|
$ |
3.25 |
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|
$ |
(9.95 |
) |
|
$ |
(2.91 |
) |
|
$ |
(2.49 |
) |
|
$ |
(0.93 |
) |
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|
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|
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|
Weighted average outstanding shares
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|
|
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|
|
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Basic
|
|
|
16,775 |
|
|
|
20,847 |
|
|
|
22,125 |
|
|
|
22,094 |
|
|
|
22,475 |
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|
|
|
|
|
|
|
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|
|
|
|
|
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|
Diluted
|
|
|
19,465 |
|
|
|
20,847 |
|
|
|
22,125 |
|
|
|
22,094 |
|
|
|
22,475 |
|
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5
In 2003 we recorded an income tax benefit of $42.2 million,
principally as a result of the reversal of a $58.0 million
valuation allowance against deferred tax assets.
In 2004 the in-process research and development charge related
to our acquisition of OctigaBay Systems Corporation. We recorded
an income tax provision of $59.1 million, principally
related to the establishment of a $58.9 million valuation
allowance against deferred tax assets, primarily consisting of
accumulated net operating losses.
The As Adjusted consolidated balance sheet data set
forth below gives effect to the receipt of the net proceeds from
the sale by us of shares of common stock in this offering at the
public offering price of $10.00 per share, after deducting
the underwriting discounts and commissions and estimated
offering expenses payable by us. See Use of Proceeds
and Capitalization.
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|
|
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|
|
December 31, | |
|
September 30, 2006 | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
Actual | |
|
As Adjusted | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
(Unaudited) | |
Balance Sheet Data:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash and short-term
investments
|
|
$ |
74,343 |
|
|
$ |
87,422 |
|
|
$ |
46,026 |
|
|
$ |
44,164 |
|
|
$ |
114,764 |
|
Working capital
|
|
|
115,815 |
|
|
|
93,616 |
|
|
|
52,204 |
|
|
|
42,674 |
|
|
|
113,274 |
|
Total assets
|
|
|
291,589 |
|
|
|
310,504 |
|
|
|
273,005 |
|
|
|
278,778 |
|
|
|
349,378 |
|
Convertible notes payable
|
|
|
|
|
|
|
80,000 |
|
|
|
80,000 |
|
|
|
80,000 |
|
|
|
80,000 |
|
Shareholders equity
|
|
|
222,633 |
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121,965 |
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65,947 |
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52,580 |
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123,180 |
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6
RISK FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks and uncertainties
described below together with all of the other information
contained or incorporated by reference in this prospectus before
deciding whether to invest. Each of these risks could adversely
affect our business, financial condition and results of
operations. As a result, the trading price of our common stock
could decline and you might lose all or part of your
investment.
Risk Factors Pertaining to Our Business, Operations and
Industry
Our operating results may fluctuate significantly and we may
not achieve profitability in any given period.
Our operating results are subject to significant fluctuations
due to the factors listed below, which make estimating revenue
and operating results for any specific period very difficult. We
experienced net losses in each full year of our
development-stage operations prior to 2002. For 2002 we had net
income of $5.4 million and for 2003 we had net income of
$63.2 million, including an income tax benefit of
$42.2 million substantially all of which came from the
reversal of a valuation allowance against deferred tax assets.
For 2004 we had a net loss of $207.4 million, including an
expense for in-process research and development of
$43.4 million and an income tax expense of
$59.1 million, of which $58.9 million related to the
establishment of a valuation allowance against deferred tax
assets. For 2005 we had a net loss of $64.3 million, and
for the first nine months of 2006 we had a net loss of
$20.8 million.
Whether we will be able to increase our revenue and achieve and
sustain profitability on a quarterly and annual basis depends on
a number of factors, including:
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successfully selling the Cray XT4 system, including upgrades and
successor systems, new products based on our BlackWidow project
and Cray XMT platform and the timing and funding of government
purchases, especially in the United States; |
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the level of revenue recognized in any given period,
particularly with very high average sales prices and limited
number of system sales in any quarter, the timing of product
acceptances by customers and contractual provisions affecting
revenue recognition; |
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the level of product margin contribution in any given period due
to product mix, strategic transactions, product life cycle and
component costs; |
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maintaining our product development projects on schedule and
within budgetary limitations; |
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revenue delays or losses due to customers postponing purchases
to wait for future upgraded or new systems, delays in delivery
of upgraded or new systems and longer than expected customer
acceptance cycles; |
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our expense levels, including research and development net of
government funding, which may be affected by the level and
timing of such funding; |
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the terms and conditions of sale or lease for our products; |
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the impact of expensing our share-based compensation under
Financial Accounting Standards Board Statement No. 123(R),
Share-Based Payment (FAS 123R); and |
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whether we conclude that all or some part of our recorded
goodwill has been impaired, which may be due to changes in our
business plans and strategy and/or a decrease in our fair value,
primarily based on the market value of our outstanding shares of
common stock. |
7
The timing of orders and shipments impact our quarterly and
annual results and are affected by events outside our control,
such as:
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the timely availability of acceptable components in sufficient
quantities to meet customer delivery schedules; |
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timing and level of government funding for products and research
and development contracts; |
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general economic trends, including changes in levels of customer
capital spending; |
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the introduction or announcement of competitive products; |
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currency fluctuations, international conflicts or economic
crises; and |
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the receipt and timing of necessary export licenses. |
Because of the numerous factors affecting our revenue and
results of operations, we cannot assure our investors that we
will have net income on a quarterly or annual basis in the
future. We anticipate that our quarterly results will vary
significantly. Delays in product development, receipt of orders
or product acceptances could have a substantial adverse effect
on our results in 2006 and in future years.
Failure to sell Cray XT3 and Cray XT4 systems in planned
quantities and at expected gross margins could adversely affect
2006 and 2007 revenue and operating results.
We expect that a significant portion of our product revenue in
the fourth quarter of 2006 and in 2007 will come from a limited
number of sales of the Cray XT3 and Cray XT4 systems to
governmental purchasers in the United States and overseas. We
shipped the first Cray XT4 system in late November 2006, and
thus the planned completion of customer acceptance late in the
fourth quarter is at significant risk. We also face significant
margin pressure for our Cray XT4 system and other commodity
processor-based products from competitors. If we do not sell
these systems in planned quantities and at expected gross
margins, our 2006 and 2007 revenue and operating results would
be adversely affected.
The achievement of our business plan is highly dependent on
increased product revenue and margins.
In 2005, we had lower revenue and margins than anticipated for
our principal products. Product revenue was adversely affected
by delays in product shipments due to development delays,
including system software development for large systems, and at
times by the availability of key components from third-party
vendors. Potential system stability issues typical of new large
systems could affect the timing of system acceptances, which
would adversely affect our revenue, results of operations and
cash flows. In the past, product margins have been adversely
impacted by competitive pressures, lower volumes than planned
and higher than anticipated manufacturing variances, including
scrap, rework and excess and obsolete inventory. We sometimes do
not meet all of the contract requirements for customer
acceptance of our systems, which have resulted in contract
penalties. Most often these penalties adversely affect the gross
margin on a sale through the provision of additional equipment
and services to satisfy delivery delays and performance
shortfalls, although there is the risk of contract defaults and
product return. The risk of contract penalties is increased when
we bid for new business prior to completion of product
development.
To improve our financial performance, we need to receive higher
margin orders, particularly for the Cray XT3 and Cray XT4
systems; deliver shipments and gain customer acceptances of new
products on time, particularly the Cray XT4 system in the fourth
quarter of 2006; and limit negative manufacturing variances,
contract penalties and other charges that adversely affect
product margin.
8
Our reliance on third-party suppliers poses significant risks
to our business and prospects.
We subcontract the manufacture of substantially all of the
hardware components for all of our products, including
integrated circuits, printed circuit boards, connectors, cables,
power supplies and memory parts, on a sole or limited source
basis to third-party suppliers. We use contract manufacturers to
assemble our components for all of our systems. We also rely on
third parties to supply key capabilities, such as file systems
and storage subsystems. We are subject to substantial risks
because of our reliance on limited or sole source suppliers. For
example:
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if a supplier does not provide components that meet our
specifications in sufficient quantities on time, then production
and sales of our systems would be delayed, adversely affecting
revenue and cash flow these risks are accentuated
during steep production ramp periods as we introduce new or
successor products; |
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if an interruption of supply of our components occurs, because
of a significant problem with a supplier providing parts that
later prove to be defective or because a single-source supplier
imposes allocation on its customers, decides to no longer
provide those components to us or increases the price of those
parts significantly, 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. In some cases, we may not be able to
redesign such components. See also the Risk Factor captioned
We face last-time buy decisions affecting all of our
current products, which may adversely affect our revenue and
operating results, below; |
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if a supplier cannot provide a competitive key component, our
systems may be less competitive than systems using components
with greater capability; and |
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some of our key suppliers are small companies with limited
financial and other resources, and consequently may be more
likely to experience financial and operational difficulties than
are larger, well-established companies. |
Our products must meet demanding specifications. For example,
integrated circuits must perform reliably at high frequencies to
meet acceptance criteria. From time to time during 2004, 2005
and 2006, we incurred significant delays in the receipt of key
components for the Cray X1E, Red Storm, Cray XT3, Cray XT4 and
the Cray XD1 systems, which delayed product shipments and
acceptances. The delays in product shipments and acceptances
adversely affected 2004 and 2005 revenue and margins, and, to
the extent that we experience similar problems in the future,
such delays may adversely affect 2006 and future revenue and
gross margins. We have also received parts that later proved
defective, particularly for the Cray XD1 and Cray XT3 systems,
which adversely affected our product and service margins and
customer confidence.
We have used IBM as a key foundry supplier of our integrated
circuits for many years. In 2004 IBM informed us that it would
no longer act as our foundry supplier on a long-term basis,
although it will continue production of components for our
current products for a limited time. We have negotiated a
termination of the relationship with IBM and completed a general
contract with Texas Instruments Incorporated (TI) to
act as our foundry for certain key integrated circuits for our
BlackWidow project in 2006 and 2007.
Our Cray XT3, Cray XT4 and Cray XD1 systems utilize Advanced
Micro Devices, Inc. (AMD)
Opterontm
processors as will planned upgrade and successor products. If
Intel, IBM or other microprocessor suppliers develop processors
with greater capabilities, even for a short time, our Cray
systems, including upgrades and successor products, may be at a
competitive disadvantage to systems utilizing such other
processors. Our Cray XMT system is based on custom processors
manufactured for us by Taiwan Semiconductor Manufacturing
Company. If any of our integrated circuit suppliers suffers
delays or cancels the development of enhancements to its
processors, our
9
product revenue would be adversely affected. Changing our
product designs to utilize another suppliers integrated
circuits would be a costly and time-consuming process.
Phase III of the DARPA HPCS program will affect our
operations.
Our proposal for Phase III of the Defense Advanced Research
Projects Agency (DARPA) High Productivity Computer
Systems (HPCS) program was accepted by DARPA on
November 21, 2006, for the development of our Cascade
project. This award calls for the delivery of prototype systems
by late 2010, and provides for a contribution by DARPA to us of
up to $250 million payable over approximately four years,
assuming we meet ten milestones. DARPAs future financial
commitments are subject to subsequent Congressional action. We
will contribute at least $125 million towards the projects
total development cost. This award likely will result in
increased net research and development expenditures by us for
the cost-sharing portion of the program and may adversely affect
our cash flow, particularly in the later years of the program.
We face last-time buy decisions affecting all of our current
products, which may adversely affect our revenue and operating
results.
We have placed a last-time buy order for parts used to
manufacture our Cray X1/ X1E products; we expect to no
longer produce the Cray XD1 after 2006 and must plan our
inventory purchases accordingly, and we face a last-time buy
deadline in early 2007 for a key component for our Cray XT4
and Cray XMT systems and our BlackWidow project. Such last-time
buy orders and inventory purchases must be placed before we know
all possible sales prospects. In determining last-time buy
orders and inventory purchases, we may either estimate low, in
which case we limit the number of possible sales of products and
reduce potential revenue, perhaps substantially, or we may
estimate too high, and incur inventory obsolescence charges.
Either way, our operating results would be adversely affected.
Our inability to overcome the technical challenges of
completing the development of our supercomputer systems would
adversely affect our revenue and operating results in 2006 and
beyond.
Our success in 2006 and in the following years depends in part
on completing development of hardware and software enhancements
to the Cray XT3 systems and successfully shipping and
recognizing revenue for the Cray XT4 system in the fourth
quarter of 2006. In 2007, we also must successfully and timely
complete several key projects on our product roadmap, including
the products based on our BlackWidow project and Cray XMT
system. These hardware and software development efforts are
lengthy and technically challenging processes, and require a
significant investment of capital, engineering and other
resources. Our engineering and technical personnel resources are
limited. Unanticipated performance and/or development issues may
require more engineers, time or testing resources than are
currently available. Engineering resources directed to solving
current issues may adversely affect the timely development of
successor or future products. Given the breadth of our
engineering challenges and our limited resources, we
periodically review the anticipated contributions and expense of
our product programs to determine their long-term viability. We
may not be successful in meeting our development schedules for
technical reasons and/or because of insufficient hardware and
software engineering resources. Delays in successfully
completing the design and production of the hardware components,
including several custom integrated circuits and network
components, delays in detecting and correcting, if possible,
design errors in such integrated circuits and components and/or
delays in developing requisite system software and needed
software features and integrating and stabilizing the full
systems would make it difficult for us to develop and market
these systems timely and successfully and could cause a lack of
confidence in our capabilities among our key customers. To the
extent we uncover stability issues, whether for software or
hardware, we may incur delays in passing acceptance tests, which
would adversely affect our revenue, results of operations and
cash flows, and may adversely affect the reputation of such
systems in the market. Future sales of our products may be
adversely affected. We have suffered
10
significantly from product delays in the past, especially in
2004 and 2005, that adversely affected our financial
performance, and we continue to incur some stability issues
typical of new large installations. We may incur similar delays
and stability issues in the future, which could adversely affect
our revenue and operating results.
If we are unable to compete successfully in the HPC market,
our revenue will decline.
The performance of our products may not be competitive with the
computer systems offered by our competitors. Many of our
competitors are established companies well known in the HPC
market, including IBM, NEC, Hewlett-Packard, Silicon
Graphics, Inc. (Silicon Graphics), Dell,
Bull S.A. and Sun Microsystems. Most of these
competitors have substantially greater research, engineering,
manufacturing, marketing and financial resources than we do.
We also compete with systems builders and resellers of systems
that are constructed from commodity components using
microprocessors manufactured by Intel, AMD, IBM and others.
These competitors include the previously named companies as well
as smaller firms that benefit from the low research and
development costs needed to assemble systems from commercially
available commodity products. These companies have capitalized
on developments in parallel processing and increased computer
performance in commodity-based networking and cluster systems.
While these companies products are more limited in
applicability and scalability, they have achieved growing market
acceptance. They offer significant peak/price performance on
larger problems lacking complexity. Such companies, because they
can offer high peak performance per dollar, can put pricing
pressure on us in certain competitive procurements. In addition,
to the extent that Intel, IBM and other microprocessor suppliers
develop processors with greater capabilities than the processors
we use from AMD, our Cray XT4 systems, including upgrades and
successor products, may be at a competitive disadvantage to
systems utilizing such other processors.
Internationally we compete primarily with IBM, Hewlett-Packard,
Sun Microsystems, Silicon Graphics and NEC. While the first
four companies offer large systems based on commodity
processors, NEC also offers vector-based systems with a large
suite of ported application programs. As in the United States,
commodity HPC suppliers can offer systems with significantly
better peak/price performance. Periodic announcements by our
competitors of new HPC systems or plans for future systems and
price adjustments may reduce customer demand for our products.
Many 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 engage in other aggressive pricing tactics, and
we have not always been able to match these sales incentives. We
have in the past and may again be required to provide
substantial discounts to make strategic sales, which may reduce
or eliminate any positive margin on such transactions, or to
provide lease financing for our products, which could result in
a deferral of our receipt of cash and revenue for these systems.
These developments limit our revenue and resources and reduce
our ability to be profitable.
Our market is characterized by rapidly changing technology,
accelerated product obsolescence and continuously evolving
industry standards. Our success depends upon our ability to sell
our current products, and to develop successor systems and
enhancements in a timely manner to meet evolving customer
requirements, which may be influenced by competitive offerings.
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. A
breakthrough in technology could make low bandwidth cluster
systems even more attractive to our existing and potential
customers. Such a breakthrough would impair our ability to sell
our products and reduce our revenue and operating results.
11
To be successful, we need to increase differentiation of our
Cray XT4 and successor systems.
We are a comparatively small company. We have concentrated our
product roadmap on building balanced systems combining highly
capable processors with very high speed interconnect and
communications capabilities throughout the entire computing
system. We achieve performance differentiation from our
competitors through our custom processors in our vector-based
and multithreading products, although the markets for those
products may be limited in size. We need to establish greater
performance differentiation from our competitors in our Cray XT3
and successor massively parallel products in order to command
higher margins. The market for such products is larger but is
replete with low bandwidth cluster systems offered by larger
competitors with significant resources and smaller companies
with minimal research and development expenditures. Potential
customers may be able to meet their computing needs through the
use of such systems, and are willing to accept lower capability
and less accurate modeling in return for lower acquisition
costs. Vendors of such systems, because they can offer high peak
performance per dollar, put pricing pressure on us in certain
competitive procurements. Our long-term success may be adversely
affected if we are not successful in establishing the value of
our balanced high bandwidth systems with the capability of
solving challenging problems quickly to a market beyond our core
of customers, largely certain agencies of the U.S. and other
governments, that require systems with the performance and
features we offer.
If the U.S. government purchases fewer supercomputers,
our revenue would be reduced and our operating results would be
adversely affected.
Historically, sales to the U.S. government and customers
primarily serving the U.S. government have represented a
significant market for supercomputers, including our products.
From January 1, 2001, through December 31, 2002,
approximately 79%, of our product revenue was derived from
sales to various agencies of the U.S. government; in 2003
and 2004, approximately 83% and 81%, respectively, of
our product revenue was derived from such sales. In 2005,
approximately 55% of our product revenue was derived from
U.S. government sales, and in the first nine months of
2006, approximately 72% of our product revenue was derived
from U.S. government sales. Our 2006 and future plans
contemplate significant sales to U.S. government agencies.
Sales to government agencies may be affected by factors outside
our control, such as changes in procurement policies, budgetary
considerations, domestic crises, and international political
developments. If agencies and departments of the
United States or other governments were to stop, reduce or
delay their use and purchases of supercomputers, our revenue and
operating results would be adversely affected.
If we lose government support for development of our
supercomputer systems, our net research and development
expenditures and capital requirements would increase and our
ability to conduct research and development would decrease.
A few government agencies and research laboratories fund a
significant portion of our development efforts, including our
BlackWidow, Cray XMT and Cascade projects, which significantly
reduces our reported level of net research and development
expenses. To date, our development contracts for our BlackWidow
and Eldorado projects are not funded fully. Agencies of the
U.S. government historically have facilitated the
development of, and have constituted a market for, new and
enhanced very high performance computer systems.
U.S. government agencies may delay or decrease funding of
our future product development efforts due to a change of
priorities, international political developments, overall
budgetary considerations or for any other reason. Any delay or
decrease in other governmental support would cause an increased
need for capital, increase significantly our research and
development expenditures and adversely impact our operating
results and our ability to implement our product roadmap.
12
We may infringe or be subject to claims that we infringe the
intellectual property rights of others.
Third parties in the past have asserted, and may in the future
assert intellectual property infringement claims against us, and
such future claims, if proved, could require us to pay
substantial damages or to redesign our existing products or pay
fees to obtain a cross-license agreement. Regardless of the
merits, any claim of infringement would require management
attention and could be expensive to defend.
Our indebtedness may adversely affect our financial
strength.
In December 2004 we sold $80.0 million in aggregate
principal amount of our 3.0% Convertible Senior
Subordinated Notes due 2024 (the Notes). Holders may
require us to purchase all or a part of their Notes for cash at
a purchase price of 100% of the principal amount of the Notes
plus accrued and unpaid interest on December 1, 2009, 2014,
and 2019, or upon the occurrence of certain events provided in
the indenture governing the Notes. As of September 30,
2006, we had no other outstanding indebtedness for money
borrowed and no material equipment lease obligations. We have a
$30.0 million secured credit facility which supports the
issuance of letters of credit and forward currency contracts. As
of September 30, 2006, we had approximately
$28.5 million available to borrow under this credit
facility. The senior secured credit facility constitutes senior
indebtedness with respect to the Notes. We may incur additional
indebtedness for money borrowed, which may include borrowing
under new credit facilities or the issuance of new debt
securities. The level of our indebtedness could, among other
things:
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make it difficult or impossible for us to make payments on the
Notes; |
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increase our vulnerability to general economic and industry
conditions, including recessions; |
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require us to use cash from operations to service our
indebtedness, thereby reducing our ability to fund working
capital, capital expenditures, research and development efforts
and other expenses; |
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limit our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate; |
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place us at a competitive disadvantage compared to competitors
that have less indebtedness; and |
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limit our ability to borrow additional funds that may be needed
to operate and expand our business. |
We will require a significant amount of cash to repay our
indebtedness and to fund planned capital expenditures, research
and development efforts and other corporate expenses.
Our ability to make payments on our indebtedness, including the
Notes, and to fund planned capital expenditures, research and
development efforts and other corporate expenses will depend on
our future operating performance and on economic, financial,
competitive, legislative, regulatory and other factors. Many of
these factors are beyond our control. Our business may not
generate sufficient cash from operations and future borrowings
may not be available to us in an amount sufficient to enable us
to pay our indebtedness, including the Notes, or to fund our
other needs.
If we are unable to generate sufficient cash to enable us to pay
our indebtedness, we may need to pursue one or more
alternatives, such as reducing our operating expenses; reducing
or delaying capital expenditures or research and development;
selling assets; raising additional equity capital and/or debt;
and seeking legal protection from our creditors.
13
Any reduction in operating expenses, reduction or delay in
capital expenditures, or sale of assets may materially and
adversely affect our future revenue prospects. In addition, we
may not be able to raise additional equity capital or debt on
commercially reasonable terms or at all. Any of the above
actions may not provide sufficient cash to repay our
indebtedness, including the Notes. In addition, our issuance of
additional equity or debt that is convertible into equity could
dilute our existing shareholders.
If we cannot retain, attract and motivate key personnel, we
may be unable to effectively implement our business plan.
Our success also depends in large part upon our ability to
retain, attract and motivate highly skilled management,
technical, marketing, sales and service personnel. The loss of
and failure to replace key engineering management and personnel
could adversely affect multiple development efforts. Recruitment
and retention of senior management and skilled technical, sales
and other personnel is very competitive, and we may not be
successful in either attracting or retaining such personnel. As
part of our strategy to attract and retain personnel, we offer
equity compensation through stock options and restricted stock
grants. However, potential employees may not perceive our equity
incentives as attractive, and current employees who have
significant options with exercise prices significantly above
current market values for our common stock may seek other
employment. In addition, due to the intense competition for
qualified employees, we may be required to increase the level of
compensation paid to existing and new employees, which could
materially increase our operating expenses.
Lower than anticipated sales of new supercomputers and the
termination of maintenance contracts on older and/or
decommissioned systems may reduce our service revenue and
margins from maintenance service contracts.
Our HPC systems are typically sold with maintenance service
contracts. These contracts generally are for annual periods,
although some are for multi-year periods, and provide a
predictable revenue base. Our revenue from maintenance service
contracts declined from approximately $95 million in 2000
to approximately $42 million in 2005. While we expect our
maintenance service revenue to stabilize over the next year, we
may have periodic revenue and margin declines as our older,
higher margin service contracts are ended and newer, lower
margin contracts are established, based on the timing of system
withdrawals from service. Adding service personnel to new
locations when we win contracts where we have previously had no
presence and servicing installed products if we discover
defective components in the field create additional pressure on
service margins.
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 HPC systems
such as our products. Occasionally we have experienced delays
for up to several months in receiving appropriate approvals
necessary for certain sales, which have 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.
We may not meet the covenants imposed by our current credit
agreement.
We are subject to various financial and other covenants related
to our line of credit with Wells Fargo Foothill, Inc.
(WFF). If we were to fail to satisfy any of the
covenants, we could be subject to fees and/or the possible
termination of the credit facility. We failed to meet a
financial covenant for 2005, which was waived by WFF.
Termination of our credit facility could have an adverse impact
on our liquidity.
14
The adoption of FAS 123R has and will continue to
adversely affect our operating results and may adversely affect
the market price of our common stock.
We have used share-based compensation, primarily stock options
and an employee stock purchase plan, as a key component in our
employee compensation. We previously granted stock options to
each new employee and to all employees on an annual basis. We
believe we have structured these programs to align the
incentives for employees with those of our long-term
shareholders. We are reviewing our share-based compensation
programs and their structure in light of the imposition of
FAS 123R that became effective for us on January 1,
2006. In the past three fiscal years, as we have reported in the
notes to our financial statements, our stock option program, as
currently structured, would have added approximately
$7 million to $26 million of additional non-cash
expense annually. These estimates are based on use of the
Black-Scholes valuation method. We recorded approximately
$1.5 million as non-cash compensation expense in the first
nine months of 2006 for stock options and unvested stock grants.
We recently have granted some stock options to certain new
employees with four-year vesting periods and have issued
restricted stock grants to certain employees and officers, which
will be recorded as an expense over the requisite service
period. We do not know how analysts and investors will react to
the additional expense recorded in our statement of operations
rather than in the footnotes, and thus such additional expense
may adversely affect the market price of our common stock.
We are required to evaluate our internal control over
financial reporting under Section 404 of the Sarbanes-Oxley
Act of 2002 at the end of each fiscal year, and any adverse
results from such future evaluations could result in a loss of
investor confidence in our financial reports and have an adverse
effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we are required to furnish a report by our management on our
internal control over financial reporting in our Annual Report
on Form 10-K. Such
report must contain, among other items, an assessment of the
effectiveness of our internal control over financial reporting
as of the end of the fiscal year, including a statement as to
whether or not our internal control over financial reporting is
effective. This assessment must include disclosure of any
material weaknesses in our internal control over financial
reporting identified by management. Such report must also
contain a statement that our independent registered public
accounting firm has issued an attestation report on
managements assessment of such internal control. In our
amended 2004 Annual Report on
Form 10-K/ A, we
identified and described a number of material weaknesses in our
internal control over financial reporting, which required our
assessment that our internal control over financial reporting
was not effective, and our independent registered public
accounting firm disclaimed an opinion with respect to our
managements assessment of our internal control over
financial reporting as of December 31, 2004.
Although we received favorable opinions from our independent
registered public accounting firm and we reported no material
weaknesses for 2005, we must continue to monitor and assess our
internal control over financial reporting and determine whether
we have any material weaknesses. Depending on their nature and
severity, any future material weaknesses could result in our
having to restate financial statements, could make it difficult
or impossible for us to obtain an audit of our annual financial
statements or could result in a qualification of any such audit.
In such events, we could experience a number of adverse
consequences, including our inability to comply with applicable
reporting and listing requirements, a loss of market confidence
in our publicly available information, delisting from the Nasdaq
Global Market, loss of financing sources such as our line of
credit, and litigation based on the events themselves or their
consequences.
15
We incorporate software licensed from third parties into the
operating systems for our products and any significant
interruption in the availability of these third-party software
products or defects in these products could reduce the demand
for our products.
The operating system software we develop for our HPC systems
contains components that are licensed to us under open
source software licenses. Our business could be disrupted
if this software, or functional equivalents of this software,
were either no longer available to us or no longer offered to us
on commercially reasonable terms. In either case we would be
required to redesign our operating system software to function
with alternate third-party software, or develop these components
ourselves, which would result in increased costs and could
result in delays in product shipments. Furthermore, we might be
forced to limit the features available in our current or future
operating system software offerings. Our Cray XT4 and successor
systems utilize software system variants that incorporate Linux
technology. The SCO Group, Inc. has filed and threatened to file
lawsuits against companies that operate Linux for commercial
purposes, alleging that such use of Linux infringes The SCO
Groups rights. It is possible that The SCO Group could
assert a claim of infringement against us with respect to our
use of Linux technology. The open source licenses under which we
have obtained certain components of our operating system
software may not be enforceable. Any ruling by a court that
these licenses are not enforceable, or that Linux-based
operating systems, or significant portions of them, may not be
copied, modified or distributed as provided in those licenses,
would adversely affect our ability to sell our systems. In
addition, as a result of concerns about The SCO Groups
lawsuit and open source generally, we may be forced to protect
our customers from potential claims of infringement by The SCO
Group or other parties. In any such event, our financial
condition and results of operations may be adversely affected.
We also incorporate proprietary software from third parties,
such as for file systems, job scheduling and storage subsystems.
We have experienced some functional issues in the past with
implementing such software with our supercomputer systems. These
issues, if repeated, may result in additional expense by us in
integrating this software more fully and/or loss of customer
confidence.
New environmental rules in Europe and other jurisdictions may
adversely affect our operations.
In 2006 members of the European Union (EU) and
certain other European countries have begun implementing the
Restrictions on Hazardous Substances (RoHS)
Directive, which prohibits or limits the use in electrical and
electronic equipment of the following substances: lead, mercury,
cadmium, hexavalent chromium, polybrominated biphenyls, and
polybrominated diphenyl ethers. After July 1, 2006, a
company shipping products that do not comply with RoHS to the EU
or such other European countries could have its products
detained and could be subject to penalties. We decided not to
ship any Cray X1E or Cray XD1 systems to Europe after
July 1, 2006, because of these restrictions, and we are
working with our suppliers to assure RoHS compliance with
respect to our other products. We believe we are RoHS-compliant
with our Cray XT4 system which began shipping in the fourth
quarter of 2006. If a regulatory authority determines that one
of our products is not RoHS-compliant, we will have to redesign
and re-qualify certain
components to meet RoHS requirements, which could result in
increased engineering expenses, shipment delays, penalties and
possible product detentions or seizures.
A separate EU Directive on Waste Electrical and Electronic
Equipment (WEEE) was scheduled to become effective
in August 2005, but many EU member states have delayed its
implementation. Under the WEEE Directive, companies that put
electrical and electronic equipment on the EU market must
register with individual member states, mark their products,
submit annual reports, provide recyclers with information about
product recycling, and either recycle their products or
participate in or fund mandatory recycling schemes. In addition,
some
16
EU member states require recycling fees to be paid in advance to
ensure funds are available for product recycling at the end of
the products useful life or de-installation. We have begun
to mark our products as required by the WEEE Directive and are
registering with those EU member states where our products are
sold. Each EU member state is responsible for implementing the
WEEE Directive and some member states have not yet established
WEEE registrars or established or endorsed the recycling schemes
required by the WEEE Directive. We are actively monitoring
implementation of the WEEE Directive by the member states.
Compliance with the WEEE Directive could increase our costs and
any failure to comply with the WEEE Directive could lead to
monetary penalties.
Other jurisdictions are considering adoption of rules similar to
the RoHS and WEEE regulations. To the extent that any such rules
differ from the RoHS and WEEE regulations, they may result in
additional expense for us to redesign and qualify our products,
and may delay us from shipping products into such jurisdictions.
In 2005 we formed a new senior management team that must work
together effectively for us to be successful.
In 2005 we revamped our senior management team, obtaining the
services of Margaret A. Williams as Senior Vice President
responsible for research and development, Brian C. Henry as
Executive Vice President and Chief Financial Officer, Jan C.
Silverman as Senior Vice President responsible for corporate
strategy and business development and Steven L. Scott as Senior
Vice President and Chief Technology Officer, and Peter J. Ungaro
was elevated to Chief Executive Officer. We also added a new
vice president/ corporate controller, a new vice president
responsible for human resources, a new vice president
responsible for hardware development and a new vice president
responsible for software development. If our new management
team, including any additional senior executives who join us in
the future, is unable to work together effectively to implement
our strategies, manage our operations and accomplish our
business objectives, our ability to grow our business and
successfully meet operational challenges could be significantly
impaired. The loss of any key senior management could have a
significant impact on our efforts to improve operating results.
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, nondisclosure 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. 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. Additionally, under
certain conditions, the U.S. government might obtain
non-exclusive rights to certain of our intellectual property.
Although we continue to implement protective measures and intend
to defend our proprietary rights vigorously, these efforts may
not be successful.
Risk Factors Pertaining to this Offering and Our Common
Stock
Our stock price may be volatile or may decline regardless of
our operating performance, and you may not be able to resell
your shares at or above the public offering price.
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 us. The
trading price of our common stock is subject to significant
fluctuations in response to many factors, including our
quarterly operating results (particularly if they are less than
our or analysts
17
previous estimates), changes in analysts estimates, our
capital raising activities, announcements of technological
innovations by us or our competitors and general conditions in
our industry.
A substantial number of our shares are eligible for future
sale and may depress the market price of our common stock and
may hinder our ability to obtain additional financing.
As of September 30, 2006, we had outstanding:
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|
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23,255,597 shares of common stock; |
|
|
|
1,334,852 shares of common stock issuable upon exercise of
warrants; |
|
|
|
3,223,570 shares of common stock issuable upon exercise of
options, of which options to purchase 3,190,358 shares
of common stock were then exercisable; and |
|
|
|
Notes convertible into an aggregate of 4,144,008 shares of
common stock or, under certain circumstances specified in the
indenture governing the Notes, a maximum of
5,698,006 shares of common stock. |
Almost all of our outstanding shares of common stock may be sold
without substantial restrictions, with certain exceptions
including 537,443 shares held by Board members, executive
officers and key managers that may be forfeited and are
restricted against transfer until vested. In addition, an
aggregate of 538,012 shares beneficially owned by our
executive officers and directors are subject to
lock-up agreements with
the underwriters for this offering and cannot be sold in the
public market until the 91st day following the commencement
of this offering, subject to a possible extension for up to 18
days in certain circumstances, as described below under
Underwriting.
Almost all of the shares of common stock that may be issued on
exercise of the warrants and options will be available for sale
in the public market when issued, subject in some cases to
volume and other limitations. The warrants outstanding at
September 30, 2006, consisted of warrants to purchase
50,000 shares of common stock, with an exercise price of
$6.60 per share, expiring on June 3, 2009, and
warrants to purchase 1,284,852 shares of common stock, with
an exercise price of $10.12 per share, expiring on
June 21, 2009. The Notes are not now convertible, and only
become convertible upon the occurrence of certain events. We
have registered the resale of the Notes and of the underlying
common stock under the Securities Act of 1933, as amended (the
Securities Act), which facilitates transferability
of those securities. Sales in the public market of substantial
amounts of our common stock, including sales of common stock
issuable upon the exercise of warrants, options and Notes, may
depress prevailing market prices for the common stock. Even the
perception that sales could occur may impact market prices
adversely. The existence of outstanding warrants, options and
Notes may prove to be a hindrance to our future financings.
Further, the holders of warrants, options and Notes may exercise
or convert them for shares of common stock 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. We also have authorized
5,000,000 shares of undesignated preferred stock, although
no shares of preferred stock currently are outstanding.
Our management will have broad discretion over the use of the
net proceeds from this offering, and may invest or spend the net
proceeds of this offering in ways with which you disagree.
Our management will have broad discretion in the application of
the net proceeds we receive from this offering and investors
will be relying on the judgment of our management regarding the
application of these proceeds. Managements failure to
apply these funds effectively could have an adverse effect on
our ability to execute our business plan. In addition, the
market price of our common stock may fall if the market does not
view our use of the proceeds from the shares we are selling in
this offering favorably.
18
Provisions of our Restated Articles of Incorporation and
Bylaws could make a proposed acquisition that is not approved by
our Board of Directors more difficult.
Provisions of our Restated Articles of Incorporation and 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 Restated Articles of Incorporation and Bylaws provide for:
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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; |
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the ability of our board of directors to issue preferred stock,
without shareholder approval, with rights senior to those of the
common stock; |
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no cumulative voting of shares; |
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the right of shareholders to call 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; |
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the affirmative vote of not less than two-thirds of the
outstanding shares entitled to vote on an 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; |
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special voting requirements for mergers and other business
combinations, unless the proposed transaction was approved by a
majority of continuing directors; |
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special procedures to bring matters before our shareholders at
our annual shareholders meeting; and |
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special procedures to nominate members for election to our board
of directors. |
These provisions could delay, defer or prevent a merger,
consolidation, takeover or other business transaction between us
and a third party that is not approved by our Board of Directors.
19
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including information incorporated by
reference, contains forward-looking statements
within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and is subject to the
safe harbor created by those sections and includes statements
concerning the future of our industry, product development,
business strategy, continued acceptance and growth of our
products, dependence on significant customers and our expected
future financial performance. These statements can be identified
by the use of forward-looking terminology such as
may, will, expect,
anticipate, estimate,
continue, or other similar words. When considering
forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this prospectus. The
risk factors described above and other factors noted throughout
this prospectus as well as factors that we do not now anticipate
could cause our actual results to differ materially and
adversely from those contained in any forward-looking statement.
The risks, uncertainties and assumptions referred to above
include the following: fluctuating operating results with
possibility of periodic losses and uneven and possibly negative
cash flows; the need for increased product revenue and margin,
particularly from our Cray XT3, Cray XT4 and successor systems;
the technical challenges of developing new supercomputer systems
on time and budget; the timing of product orders, shipments and
customer acceptances; the timing and level of government support
for supercomputer system development; our dependency on
third-party suppliers to build and deliver components timely
that meet our specifications; the challenge of maintaining
expense growth at modest levels while increasing revenue; our
ability to attract, retain and motivate key employees, including
executive officers and managers; and other risks that are
described under Risk Factors in this prospectus.
Factors that could cause results to differ materially from those
projected in the forward-looking statements are set forth in the
discussion under Risk Factors above.
In this prospectus, we rely on and refer to information and
statistics regarding the markets for various products. We
obtained this information from third party sources, discussions
with our customers and our own internal estimates. We believe
that these sources are reliable and estimates are reasonable,
but we have not independently verified them. Because this
information regardless of its source consists of estimates, it
is likely that actual results will differ, perhaps materially,
from such estimates.
20
USE OF PROCEEDS
Our net proceeds from the sale of the 7,500,000 shares of
our common stock offered by us at the public offering price of
$10.00 per share are estimated to be $70.6 million
after deducting the underwriting discounts and commissions and
our estimated offering expenses.
We expect to use the net proceeds of the offering for working
capital and other general corporate purposes, including funding
product development and capital expenditures. We may also use a
portion of the proceeds for the future acquisition of, or
investment in, companies, assets or technologies that complement
our business, although we are not pursuing any acquisitions or
investments as of the date of this prospectus. We have not
allocated specific amounts of net proceeds for any of these
purposes and future allocations will depend on our capital
requirements at the time such allocations are made.
Our management will have broad discretion in the application of
the net proceeds we receive from this offering and investors
will be relying on the judgment of our management regarding the
application of these proceeds. Pending these uses, we plan to
invest these net proceeds in short-term, interest bearing
obligations, investment grade instruments, certificates of
deposit or direct or guaranteed obligations of the United
States. The goal with respect to the investment of these net
proceeds is capital preservation and liquidity so that such
funds are readily available to fund our operations.
DIVIDEND POLICY
We have not paid cash dividends on our common stock and we do
not anticipate paying any cash dividends on our common stock in
the foreseeable future. In addition, our credit facility
prohibits us from paying cash dividends without the consent of
our lender.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq Global Market under the
symbol CRAY.
The quarterly high and low sales prices of our common stock for
the periods indicated are as follows:
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High | |
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Low | |
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| |
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| |
Year Ended December 31, 2004:
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|
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|
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First Quarter
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$47.00 |
|
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|
$24.24 |
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|
Second Quarter
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|
$32.12 |
|
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|
$23.36 |
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|
Third Quarter
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|
$26.72 |
|
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|
$11.40 |
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Fourth Quarter
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$19.32 |
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|
$12.08 |
|
Year Ended December 31, 2005:
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|
|
|
|
|
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|
First Quarter
|
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|
$19.64 |
|
|
|
$ 8.32 |
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|
Second Quarter
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|
$11.00 |
|
|
|
$ 4.72 |
|
|
Third Quarter
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|
$ 5.64 |
|
|
|
$ 3.40 |
|
|
Fourth Quarter
|
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|
$ 6.92 |
|
|
|
$ 3.56 |
|
Year Ended December 31, 2006:
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|
|
|
|
|
|
|
First Quarter
|
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|
$10.16 |
|
|
|
$ 5.20 |
|
|
Second Quarter
|
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|
$10.16 |
|
|
|
$ 5.88 |
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|
Third Quarter
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$14.36 |
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$ 9.95 |
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|
Fourth Quarter (through December 13, 2006)
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$13.45 |
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$ 8.36 |
|
The last reported sale price of our common stock on the Nasdaq
Global Market on December 13, 2006, was $10.45 per share.
On December 11, 2006, we had 23,290,301 shares of common
stock outstanding that were held by approximately
742 holders of record.
21
CAPITALIZATION
The following table sets forth our actual cash and cash
equivalents and capitalization as of September 30, 2006,
and as adjusted to give effect to the issuance and sale by us of
7,500,000 shares of common stock in this offering at the
public offering price of $10.00 per share, after deducting
the underwriting discounts and commissions and estimated
offering expenses payable by us.
This capitalization table should be read in conjunction with our
unaudited consolidated financial statements and related notes
for September 30, 2006, which are incorporated by reference
in this prospectus.
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|
|
|
|
September 30, 2006 | |
|
|
| |
|
|
Actual | |
|
As Adjusted | |
|
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| |
|
| |
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(In thousands) | |
Cash and cash equivalents
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|
$ |
44,164 |
|
|
$ |
114,764 |
|
|
|
|
|
|
|
|
3.0% Convertible Senior Subordinated Notes due 2024
|
|
$ |
80,000 |
|
|
$ |
80,000 |
|
Shareholders equity:
|
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|
|
|
|
|
|
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|
Preferred stock, par value $0.01 Authorized and
undesignated, 5,000,000 shares; no shares issued and
outstanding
|
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|
|
|
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|
Common stock, par value $0.01 Authorized
75,000,000 shares; issued and outstanding
23,255,597 shares, actual; 30,755,597 shares, as
adjusted
|
|
|
425,196 |
|
|
|
495,796 |
|
|
Accumulated other comprehensive income
|
|
|
8,953 |
|
|
|
8,953 |
|
|
Accumulated deficit
|
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|
(381,569 |
) |
|
|
(381,569 |
) |
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
52,580 |
|
|
|
123,180 |
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
132,580 |
|
|
$ |
203,180 |
|
|
|
|
|
|
|
|
The number of shares outstanding after the offering is based on
23,255,597 shares of common stock outstanding as of
September 30, 2006, and excludes:
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1,334,852 shares of common stock issuable upon exercise of
warrants, of which warrants covering 1,284,852 shares are
exercisable at $10.12 per share and warrants covering 50,000
shares are exercisable at $6.60 per share; |
|
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3,223,570 shares of common stock issuable upon the exercise
of options which have a weighted average exercise price of
approximately $15.48 per share; and |
|
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|
4,144,008 shares of common stock issuable upon conversion
of the Notes which have a conversion price of approximately
$19.31 per share, or a maximum of 5,698,006 shares of
common stock issuable under certain circumstances specified in
the indenture governing the Notes, as more fully described in
Description of Capital Stock and Convertible Notes. |
22
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands except per share data)
We derived the consolidated operating data for the years ended
December 31, 2003, 2004 and 2005 and the consolidated
balance sheet data as of December 31, 2004 and 2005 from
our audited consolidated financial statements incorporated by
reference in this prospectus. We derived the consolidated
operating data for the fiscal years ended December 31, 2001
and 2002 and the consolidated balance sheet data as of
December 31, 2001, 2002 and 2003 from our audited
consolidated financial statements not incorporated by reference
in this prospectus. We derived the consolidated balance sheet
data as of September 30, 2006, and the consolidated
operating data for the nine months ended September 30, 2005
and 2006 from our unaudited consolidated financial statements
incorporated by reference in this prospectus. We have prepared
the unaudited consolidated financial statements on a basis
substantially consistent with the audited consolidated financial
statements incorporated by reference in this prospectus and, in
the opinion of management, these statements include all
adjustments, consisting only of normal recurring adjustments,
necessary for fair presentation of such data. The share and per
share amounts reflect the one-for-four reverse stock split
effected on June 8, 2006.
The following data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus and the consolidated financial statements and
related notes thereto incorporated by reference in this
prospectus.
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|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
Year Ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$ |
51,105 |
|
|
$ |
76,519 |
|
|
$ |
175,004 |
|
|
$ |
95,901 |
|
|
$ |
152,098 |
|
|
$ |
99,796 |
|
|
$ |
77,990 |
|
Service revenue
|
|
|
82,502 |
|
|
|
78,550 |
|
|
|
61,958 |
|
|
|
49,948 |
|
|
|
48,953 |
|
|
|
35,998 |
|
|
|
41,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
133,607 |
|
|
|
155,069 |
|
|
|
236,962 |
|
|
|
145,849 |
|
|
|
201,051 |
|
|
|
135,794 |
|
|
|
119,593 |
|
Cost of product revenue
|
|
|
30,657 |
|
|
|
41,187 |
|
|
|
97,354 |
|
|
|
104,196 |
|
|
|
139,518 |
|
|
|
96,567 |
|
|
|
58,703 |
|
Cost of service revenue
|
|
|
41,181 |
|
|
|
42,581 |
|
|
|
40,780 |
|
|
|
30,338 |
|
|
|
29,032 |
|
|
|
22,652 |
|
|
|
22,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
71,838 |
|
|
|
83,768 |
|
|
|
138,134 |
|
|
|
134,534 |
|
|
|
168,550 |
|
|
|
119,219 |
|
|
|
81,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
61,769 |
|
|
|
71,301 |
|
|
|
98,828 |
|
|
|
11,315 |
|
|
|
32,501 |
|
|
|
16,575 |
|
|
|
38,054 |
|
Research and development, net
|
|
|
53,926 |
|
|
|
32,861 |
|
|
|
37,762 |
|
|
|
53,266 |
|
|
|
41,711 |
|
|
|
32,932 |
|
|
|
23,278 |
|
Sales and marketing
|
|
|
19,961 |
|
|
|
20,332 |
|
|
|
27,038 |
|
|
|
34,948 |
|
|
|
25,808 |
|
|
|
19,951 |
|
|
|
15,591 |
|
General and administrative
|
|
|
9,226 |
|
|
|
8,923 |
|
|
|
10,908 |
|
|
|
19,451 |
|
|
|
16,145 |
|
|
|
12,491 |
|
|
|
14,328 |
|
Restructuring, severance and impairment
|
|
|
3,802 |
|
|
|
1,878 |
|
|
|
4,019 |
|
|
|
8,182 |
|
|
|
9,750 |
|
|
|
2,933 |
|
|
|
1,290 |
|
In-process research and development charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of goodwill
|
|
|
6,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(32,127 |
) |
|
|
7,307 |
|
|
|
19,101 |
|
|
|
(147,932 |
) |
|
|
(60,913 |
) |
|
|
(51,732 |
) |
|
|
(16,433 |
) |
Other income (expense), net
|
|
|
(336 |
) |
|
|
3,104 |
|
|
|
1,496 |
|
|
|
(699 |
) |
|
|
(1,421 |
) |
|
|
(602 |
) |
|
|
(1,964 |
) |
Interest income (expense), net
|
|
|
(1,771 |
) |
|
|
(2,832 |
) |
|
|
444 |
|
|
|
365 |
|
|
|
(3,462 |
) |
|
|
(2,319 |
) |
|
|
(1,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(34,234 |
) |
|
|
7,579 |
|
|
|
21,041 |
|
|
|
(148,266 |
) |
|
|
(65,796 |
) |
|
|
(54,653 |
) |
|
|
(20,054 |
) |
|
Provision (benefit) for income taxes
|
|
|
994 |
|
|
|
2,176 |
|
|
|
(42,207 |
) |
|
|
59,092 |
|
|
|
(1,488 |
) |
|
|
428 |
|
|
|
748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(35,228 |
) |
|
$ |
5,403 |
|
|
$ |
63,248 |
|
|
$ |
(207,358 |
) |
|
$ |
(64,308 |
) |
|
$ |
(55,081 |
) |
|
$ |
(20,802 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(3.47 |
) |
|
$ |
0.45 |
|
|
$ |
3.77 |
|
|
$ |
(9.95 |
) |
|
$ |
(2.91 |
) |
|
$ |
(2.49 |
) |
|
$ |
(0.93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(3.47 |
) |
|
$ |
0.40 |
|
|
$ |
3.25 |
|
|
$ |
(9.95 |
) |
|
$ |
(2.91 |
) |
|
$ |
(2.49 |
) |
|
$ |
(0.93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,158 |
|
|
|
11,993 |
|
|
|
16,775 |
|
|
|
20,847 |
|
|
|
22,125 |
|
|
|
22,094 |
|
|
|
22,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
10,158 |
|
|
|
13,605 |
|
|
|
19,465 |
|
|
|
20,847 |
|
|
|
22,125 |
|
|
|
22,094 |
|
|
|
22,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, restricted cash and short-term
investments
|
|
$ |
12,730 |
|
|
$ |
23,916 |
|
|
$ |
74,343 |
|
|
$ |
87,422 |
|
|
$ |
46,026 |
|
|
$ |
44,164 |
|
Working capital
|
|
|
(5,724 |
) |
|
|
27,351 |
|
|
|
115,815 |
|
|
|
93,616 |
|
|
|
52,204 |
|
|
|
42,674 |
|
Total assets
|
|
|
127,087 |
|
|
|
145,245 |
|
|
|
291,589 |
|
|
|
310,504 |
|
|
|
273,005 |
|
|
|
278,778 |
|
Redeemable preferred stock
|
|
|
24,946 |
|
|
|
24,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
14,944 |
|
|
|
4,144 |
|
|
|
|
|
|
|
80,000 |
|
|
|
80,000 |
|
|
|
80,000 |
|
Shareholders equity
|
|
|
14,804 |
|
|
|
58,615 |
|
|
|
222,633 |
|
|
|
121,965 |
|
|
|
65,947 |
|
|
|
52,580 |
|
In 2003 we recorded an income tax benefit of $42.2 million,
principally as a result of the reversal of a $58.0 million
valuation allowance against deferred tax assets.
In 2004 the in-process research and development charge related
to our acquisition of OctigaBay Systems Corporation. We recorded
an income tax provision of $59.1 million, principally
related to the establishment of a $58.9 million valuation
allowance against deferred tax assets, primarily consisting of
accumulated net operating losses.
24
QUARTERLY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table presents unaudited quarterly financial
information for each of the eleven quarters ended
September 30, 2006. In the opinion of management, this
information contains all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation
thereof. Certain 2004 and 2005 quarterly reclassifications have
been made to conform to the 2006 presentation. The operating
results are not necessarily indicative of results for any future
periods.
Quarter-to-quarter
comparisons should not be relied upon as indicators of future
performance. Our operating results are subject to quarterly
fluctuations as a result of a number of factors. See Risk
Factors Risk Factors Pertaining to Our Business,
Operations and Industry.
The following data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this prospectus and the consolidated financial statements and
related notes thereto incorporated by reference in this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended | |
|
|
| |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
|
3/31 | |
|
6/30 | |
|
9/30 | |
|
12/31 | |
|
3/31 | |
|
6/30 | |
|
9/30 | |
|
12/31 | |
|
3/31 | |
|
6/30 | |
|
9/30 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
Revenue
|
|
$ |
41,781 |
|
|
$ |
21,152 |
|
|
$ |
44,821 |
|
|
$ |
38,095 |
|
|
$ |
37,634 |
|
|
$ |
53,419 |
|
|
$ |
44,741 |
|
|
$ |
65,257 |
|
|
$ |
48,515 |
|
|
$ |
38,513 |
|
|
$ |
32,565 |
|
Cost of revenue
|
|
|
28,010 |
|
|
|
16,552 |
|
|
|
51,946 |
|
|
|
38,026 |
|
|
|
33,927 |
|
|
|
48,741 |
|
|
|
36,551 |
|
|
|
49,331 |
|
|
|
34,370 |
|
|
|
26,000 |
|
|
|
21,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
13,771 |
|
|
|
4,600 |
|
|
|
(7,125 |
) |
|
|
69 |
|
|
|
3,707 |
|
|
|
4,678 |
|
|
|
8,190 |
|
|
|
15,926 |
|
|
|
14,145 |
|
|
|
12,513 |
|
|
|
11,396 |
|
Research and development, net
|
|
|
9,368 |
|
|
|
12,907 |
|
|
|
14,359 |
|
|
|
16,632 |
|
|
|
13,032 |
|
|
|
13,427 |
|
|
|
6,472 |
|
|
|
8,780 |
|
|
|
7,215 |
|
|
|
6,371 |
|
|
|
9,692 |
|
Sales and marketing
|
|
|
7,646 |
|
|
|
8,584 |
|
|
|
8,720 |
|
|
|
9,998 |
|
|
|
6,599 |
|
|
|
7,574 |
|
|
|
5,778 |
|
|
|
5,857 |
|
|
|
4,985 |
|
|
|
5,682 |
|
|
|
4,924 |
|
General and administrative
|
|
|
2,873 |
|
|
|
4,507 |
|
|
|
4,974 |
|
|
|
7,097 |
|
|
|
4,267 |
|
|
|
4,607 |
|
|
|
3,617 |
|
|
|
3,654 |
|
|
|
5,594 |
|
|
|
4,600 |
|
|
|
4,134 |
|
Restructuring, severance and impairment
|
|
|
|
|
|
|
|
|
|
|
7,129 |
|
|
|
1,053 |
|
|
|
(215 |
) |
|
|
1,947 |
|
|
|
1,201 |
|
|
|
6,817 |
|
|
|
738 |
|
|
|
549 |
|
|
|
3 |
|
In-process research and development charge
|
|
|
|
|
|
|
43,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,097 |
) |
|
|
(54,862 |
) |
|
|
(112,402 |
) |
|
|
(35,997 |
) |
|
|
(21,035 |
) |
|
|
(23,796 |
) |
|
|
(10,250 |
) |
|
|
(9,227 |
) |
|
|
(5,305 |
) |
|
|
(7,173 |
) |
|
|
(8,324 |
) |
Net loss per common share, basic and diluted
|
|
$ |
(0.22) |
|
|
$ |
(2.56 |
) |
|
$ |
(5.15 |
) |
|
$ |
(1.65 |
) |
|
$ |
(0.95 |
) |
|
$ |
(1.08 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.42 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.32 |
) |
|
$ |
(0.37 |
) |
The in-process research and development charge in the second
quarter of 2004 related to our acquisition of OctigaBay Systems
Corporation. The large net loss in the third quarter of 2004
included the establishment of a valuation allowance against our
deferred tax asset of approximately $59 million.
Since the second half of 2004, we have reviewed our workforce
requirements in light of our operating results and have engaged
in workforce reductions, particularly in the third quarter of
2004 and the second and fourth quarters of 2005. The 2005 fourth
quarter also reflects a $4.9 million charge related to
impairment of a core technology intangible asset.
The decreases in research and development expenses beginning in
the third quarter of 2005 reflect increased funding for our
BlackWidow project and reduced expenses for the Cray XD1 system.
25
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and related notes thereto in
our Annual Report on
Form 10-K for the
year ended December 31, 2005 (2005
Form 10-K)
and the unaudited condensed consolidated financial statements
and related notes thereto in our Quarterly Report on
Form 10-Q for the
fiscal quarter ended September 30, 2006 (Third
Quarter 2006
Form 10-Q),
both of which are incorporated by reference into this prospectus.
Overview
We design, develop, manufacture, market and service high
performance computing (HPC) systems, commonly known
as supercomputers. Our supercomputer systems provide capability,
capacity and sustained performance far beyond typical
server-based computer systems and address challenging scientific
and engineering computing problems.
We believe we are well positioned to meet the HPC markets
demanding needs by providing superior supercomputer systems with
performance and cost advantages when sustained performance on
challenging applications and total cost of ownership are taken
into account. We differentiate ourselves from our competitors
primarily by concentrating our research and development efforts
on the processing, interconnect and software capabilities that
enable our systems to scale that is, to continue to
increase performance as our systems grow in size. Purpose-built
for the supercomputer market, our systems balance highly capable
processors, highly scalable software and very high speed
interconnect and communications capabilities.
In 2005, our management changed significantly with a new chief
executive officer and new leaders in technology, engineering,
finance, marketing, operations and customer support. Under our
new management team, we have expanded our worldwide customer
base, refined our product roadmap, established a lower operating
cost model and sharpened our focus on execution to meet customer
expectations and improve our financial operating results.
|
|
|
Key Performance Indicators |
Our management monitors and analyzes several key performance
indicators in order to manage our business and evaluate our
financial and operating performance, including:
Revenue. Product revenue generally constitutes the major
portion of our revenue in any reporting period, and for the
reasons discussed elsewhere in this prospectus is subject to
significant variability from period to period. In the short
term, we closely review the status of product shipments,
installations and acceptances in order to forecast revenue and
cash receipts; longer-term, we monitor the status of the
pipeline of product sales opportunities and pipeline and product
development cycles. Revenue growth is the best indicator of
whether we are achieving our objective of increased market share
in the markets we address. Our new products scheduled for 2007
and our longer-term Adaptive Supercomputing vision are efforts
to increase product revenue. Product revenue varies
significantly from quarter to quarter. Service revenue is more
constant in the short run and assists, in part, to offset the
impact that the variability in product revenue has on total
revenue.
Gross margins. Our overall product margins in 2004 and
2005 were not satisfactory, even adjusting for the effect of our
low-margin Red Storm and Cascade development projects, which
were included as product revenue. To be successful, we need to
increase product gross margins, which we believe is best
achieved through increased product differentiation. We also
monitor service margins and have been proactive in reducing
service costs where possible. Our mid-term objective is to
achieve overall margins, as a percentage of revenue, from 35% to
40% or better. Recent increases in gross margins have led to
improved operational results.
26
Operating expenses. Our operating expenses are driven
largely by headcount, contracted research and development
services and the level of co-funded research and development. We
had two major headcount reductions in 2005. As part of our
ongoing efforts to control operating expenses, we monitor
headcount levels in specific geographic and operational areas.
During 2006 we have been successful in receiving increased
levels of co-funding for our research and development projects.
Our recent Defense Advanced Research Projects Agency
(DARPA) Phase III award is in line with our
long-term development path. Our recent award likely will result
in some increase in gross and net research and development
expenditures by us in future periods due to the size of the
overall program and the cost-sharing requirement on our part.
Our overall operating expenses have significantly decreased in
the first nine months of 2006 compared to the comparable 2005
period, especially in research and development. Our mid-term
objective is to have total operating expenses, as a percentage
of revenue, be in the range of 25% to 30%. Meeting this
objective is dependent on our ability to grow revenue in the
future.
Liquidity and cash flows. Due to the variability in
product revenue, our cash position also varies from quarter to
quarter and within a quarter. We closely monitor our expected
cash levels, particularly in light of potential increased
inventory purchases for large system installations and the risk
of delays in product shipments and acceptances and, longer term,
in product development. This offering is consistent with our
goal to build our cash position to provide additional working
capital and to improve our operational and strategic flexibility
while at the same time lowering the business risk to
shareholders. Sustained profitability over annual periods is our
primary objective, which should improve our cash position and
shareholder value.
Critical Accounting Policies and Estimates
This discussion, as well as disclosures included elsewhere in
this prospectus, is based upon our consolidated financial
statements, which have been prepared in accordance with
generally accepted accounting principles (GAAP). The
preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related
disclosure of contingencies. In preparing our consolidated
financial statements in accordance with GAAP, there are certain
accounting policies that are particularly important. These
include revenue recognition, inventory valuation, goodwill and
other intangible assets, income taxes, the accounting for loss
contracts and share-based compensation. Our relevant accounting
policies are set forth in Note 3 to the consolidated
financial statements of our 2005
Form 10-K and
should be reviewed in conjunction with the condensed
consolidated financial statements and notes as of
September 30, 2006, in our Third Quarter 2006
Form 10-Q, as they
are integral to understanding our results of operations and
financial condition. In some cases, these policies represent
required accounting. In other cases, they may represent a choice
between acceptable accounting methods or may require substantial
judgment or estimation.
Additionally, we consider certain judgments and estimates to be
significant, including those relating to the fair value
allocation used in revenue recognition, percentage of completion
accounting on the Red Storm contract, estimates of proportional
performance on co-funded engineering contracts, determination of
inventory at the lower of cost or market, useful lives for
depreciation and amortization, determination of future cash
flows associated with impairment testing for goodwill and
long-lived assets, assumptions used to determine the fair value
of stock options and assessments of fair value, estimation of
restructuring costs, calculation of deferred income tax asset,
potential income tax assessments and other contingencies. We
base our estimates on historical experience, current conditions
and on other assumptions that we believe to be reasonable under
the circumstances. Actual results may differ from these
estimates and assumptions.
Our management has discussed the selection of significant
accounting policies and the effect of judgments and estimates
with the Audit Committee of our Board of Directors.
27
We recognize revenue when it is realized or realizable and
earned. In accordance with the Securities and Exchange
Commission Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition in Financial
Statements, we consider revenue realized or realizable and
earned when we have persuasive evidence of an arrangement, the
product has been shipped or the services have been provided to
our customer, the sales price is fixed or determinable, no
significant unfulfilled obligations exist and collectibility is
reasonably assured. In addition to the aforementioned general
policy, the following are the specific revenue recognition
policies for each major category of revenue and for
multiple-element arrangements.
Products. We recognize revenue from our product lines as
follows:
|
|
|
|
|
Cray X1/ X1E and Cray XT3 Product Lines. We recognize
revenue from product sales upon customer acceptance of the
system, when we have no significant unfulfilled obligations
stipulated by the contract that affect the customers final
acceptance, the price is fixed or determinable and collection is
reasonably assured. A customer-signed notice of acceptance or
similar document is required from the customer prior to revenue
recognition. |
|
|
|
Cray XD1 Product Line. We recognize revenue from product
sales of Cray XD1 systems upon shipment to, or delivery to, the
customer, depending upon contract terms, when we have no
significant unfulfilled obligations stipulated by the contract,
the price is fixed or determinable and collection is reasonably
assured. If there is a contractual requirement for customer
acceptance, revenue is recognized upon receipt of the notice of
acceptance and when we have no unfulfilled obligations. |
Revenue from contracts that require us to design, develop,
manufacture or modify complex information technology systems to
a customers specifications is recognized using the
percentage of completion method for long-term development
projects under American Institute of Certified Public
Accountants (AICPA) Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. Percentage of completion is
measured based on the ratio of costs incurred to date compared
to the total estimated costs. Total estimated costs are based on
several factors, including estimated labor hours to complete
certain tasks and the estimated cost of purchased components or
services. Estimates may need to be adjusted from quarter to
quarter, which would impact revenue and margins on a cumulative
basis. To the extent the estimate of total costs to complete the
contract indicates a loss, such amount is recognized in full in
the period that the determination is made.
Services. Maintenance services are provided under
separate maintenance contracts with our customers. These
contracts generally provide for maintenance services for one
year, although some are for multi-year periods, often with
prepayments for the term of the contract. We consider the
maintenance period to commence upon installation and acceptance
of the product, which may include a warranty period. We allocate
a portion of the sales price to maintenance service revenue
based on estimates of fair value. Revenue for the maintenance of
computers is recognized ratably over the term of the maintenance
contract. Maintenance contracts that are paid in advance are
recorded as deferred revenue. We consider fiscal funding clauses
as contingencies for the recognition of revenue until the
funding is virtually assured. HPC service revenue is recognized
as the services are rendered.
Multiple-Element Arrangements. We commonly enter into
transactions that include multiple-element arrangements, which
may include any combination of hardware, maintenance and other
services. In accordance with Emerging Issues Task Force Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, when
some elements are delivered prior to others in an arrangement
28
and all of the following criteria are met, revenue for the
delivered element is recognized upon delivery and acceptance of
such item:
|
|
|
|
|
The element could be sold separately; |
|
|
|
The fair value of the undelivered element is
established; and |
|
|
|
In cases with any general right of return, our performance with
respect to any undelivered element is within our control and
probable. |
If all of the criteria are not met, revenue is deferred until
delivery of the last element as the elements would not be
considered a separate unit of accounting and revenue would be
recognized as described above under our product line or service
revenue recognition policies. We consider the maintenance period
to commence upon installation and acceptance of the product,
which may include a warranty period and accordingly allocate a
portion of the sales price as a separate deliverable which is
recognized as service revenue over the entire service period.
We record our inventory at the lower of cost or market. We
regularly evaluate the technological usefulness and anticipated
future demand of our inventory components. Due to rapid changes
in technology and the increasing demands of our customers, we
are continually developing new products. Additionally, during
periods of product or inventory component upgrades or
transitions, we may acquire significant quantities of inventory
to support estimated current and future production and service
requirements. As a result, it is possible that older inventory
items we have purchased may become obsolete, be sold below cost
or be deemed in excess of quantities required for production or
service requirements. When we determine it is not likely we will
recover the cost of inventory items through future sales, we
write down the related inventory to our estimate of its market
value. We are nearing the end of the life cycle for the Cray XT3
product and have made certain estimates of the future demand for
this product. These estimates are subject to risk in the near
term and could require a write-down of inventory if the actual
demand is lower than currently estimated.
Because the products we sell have high average sales prices and
competitive product lives of generally one to two years, and
because a high number of our prospective customers receive
funding from U.S. or foreign governments, it is difficult
to estimate future sales of our products and the timing of such
sales. It also is difficult to determine whether the cost of our
inventories will ultimately be recovered through future sales.
While we believe our inventory is stated at the lower of cost or
market and that our estimates and assumptions to determine any
adjustments to the cost of our inventories are reasonable, our
estimates may prove to be inaccurate. We have sold inventory
previously reduced in part or in whole to zero, and we may have
future sales of previously written down inventory. We also may
have additional expense to write down inventory to its estimated
market value. Adjustments to these estimates in the future may
materially impact our operating results.
|
|
|
Goodwill and Other Intangible Assets |
Approximately 21% of our total assets as of September 30,
2006 consisted of goodwill resulting from our acquisition of the
Cray Research business unit assets from Silicon Graphics in 2000
and our acquisition of OctigaBay Systems Corporation
(OctigaBay Systems) in April 2004. We no longer
amortize goodwill associated with the acquisitions, but we are
required to conduct periodic analyses of the recorded amount of
goodwill in comparison to its estimated fair value. We currently
have one operating segment and reporting unit. As such, we
evaluate any potential goodwill impairment by comparing our net
assets against the market value of our outstanding shares of
common stock. We performed an annual impairment test effective
January 1, 2006, and determined that our recorded goodwill
was not impaired.
29
The analysis of whether the fair value of recorded goodwill is
impaired and the number and nature of our reporting units
involves a substantial amount of judgment. Future charges
related to the amounts recorded for goodwill could be material
depending on future developments and changes in technology and
our business.
In connection with our 2004 acquisition of OctigaBay Systems, we
assigned $6.7 million of value to core technology. In
December 2005 we announced plans to further integrate our
technology platforms, and combine the Cray XD1 and the Cray XT3
products into a unified product offering. The expected
undiscounted cash flows from the product using the core
technology were not sufficient to recover the carrying value of
the asset. We performed a fair value assessment similar to the
original valuation and determined the asset had no continuing
value. We wrote off the unamortized balance of our core
technology intangible asset of $4.9 million. Accordingly,
we recorded a $4.9 million charge in 2005 to
Restructuring, Severance and Impairment in the
Consolidated Statements of Operations appearing in our 2005
Form 10-K. In
connection with this charge, we reversed the remaining deferred
tax liability of $1.5 million that was established in the
purchase accounting as amortization of this intangible asset was
not deductible for income tax purposes.
|
|
|
Accounting for Income Taxes |
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets
and liabilities and operating loss and tax credit carryforwards
and are measured using the enacted tax rates and laws that will
be in effect when the differences and carryforwards are expected
to be recovered or settled. In accordance with Statement of
Financial Accounting Standards (FAS) No. 109,
Accounting for Income Taxes, a valuation allowance for
deferred tax assets is provided when we estimate that it is more
likely than not that all or a portion of the deferred tax assets
may not be realized through future operations. This assessment
is based upon consideration of available positive and negative
evidence, which includes, among other things, our most recent
results of operations and expected future profitability. We
consider our actual historical results to have stronger weight
than other more subjective indicators when considering whether
to establish or reduce a valuation allowance on deferred tax
assets.
The provision for or benefit from income taxes represents taxes
payable or receivable for the current period plus the net change
in deferred tax assets and liabilities and valuation allowance
amounts during the period. In 2003, we reversed
$58.0 million of the valuation allowance against deferred
tax assets, principally U.S. loss carryforwards, based
primarily upon our consideration of our most recent profitable
operating performance as well as our reasonably expected future
performance. Based upon our judgment of the positive and
negative evidence, we concluded that we would more likely than
not be able to utilize most of our net deferred tax asset. In
late 2004, we established a valuation allowance and recorded an
income tax expense of $58.9 million based on our losses
from operations in 2004 and based on our revised projections
indicating continued challenging financial results. Based upon
our most recent negative operating results, which we consider as
a strong indicator of our future ability to utilize our deferred
tax assets, we established a valuation allowance on certain
deferred tax assets, principally U.S. loss carryforwards,
created during 2005 in accordance with FAS No. 109.
As of September 30, 2006, we had approximately
$140.8 million of deferred tax assets, of which
$140.1 million was fully reserved. The net deferred tax
assets were generated in foreign jurisdictions where we believe
it is more likely than not that we will realize these assets
through future operations. For the nine month periods ended
September 30, 2006, and 2005 we recognized income tax
expense of $748,000 and $428,000, respectively. Income tax
expense in all periods was related to taxes due in foreign and
certain state jurisdictions.
30
|
|
|
Accounting for Loss Contracts |
In accordance with our revenue recognition policy, certain
production contracts are accounted for using the percentage of
completion accounting method. We recognize revenue based on a
measurement of completion comparing the ratio of costs incurred
to date with total estimated costs multiplied by the contract
value. Inherent in these estimates are uncertainties about the
total cost to complete the project. If the estimate to complete
results in a loss on the contract, we will record the amount of
the estimated loss in the period the determination is made. On a
regular basis, we update our estimates of total costs. Changes
to the estimate may result in a charge or benefit to operations.
As of September 30, 2006, our estimate of loss on the Red
Storm contract was consistent with our estimate of such loss as
of December 31, 2005, which was a cumulative loss of
$15.3 million, all of which was recorded in prior periods.
As of September 30, 2006 and December 31, 2005, the
balance in the Red Storm loss contract accrual account was
$3.0 million and $5.7 million, respectively, and is
included in Other accrued liabilities in our
consolidated balance sheets.
On January 1, 2006, we adopted the fair value recognition
provisions of Financial Accounting Standards Board
(FASB) Statement No. 123(R), Share-Based
Payment (FAS 123R). Prior to
January 1, 2006, we accounted for share-based payments
under the recognition and measurement provisions of APB Opinion
No. 25, Accounting for Stock Issued to Employees
(APB 25), and related Interpretations, as
permitted by FASB Statement No. 123, Accounting for
Stock-Based Compensation (FAS 123). In
accordance with APB 25, no compensation cost was required
to be recognized for options granted that had an exercise price
equal to the market value of the underlying common stock on the
date of grant. Certain of the stock options granted in
connection with the OctigaBay Systems acquisition in 2004 had
exercise prices below the fair market value of our common stock
at the grant date and accordingly we have recorded compensation
expense over the vesting period based on the intrinsic value
method.
We adopted FAS 123R using the modified-prospective
transition method. Under that transition method, compensation
cost recognized for the nine months ended September 30,
2006, includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested, as of
January 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of
FAS 123, and (b) compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on
the grant-date fair value estimated in accordance with the
provisions of FAS 123R. The financial results for the prior
periods have not been restated.
Estimates of fair value of stock options are based upon the
Black-Scholes option pricing model. We utilize assumptions
related to stock price volatility, stock option term and
forfeiture rates that are based upon both historical factors as
well as managements judgment.
|
|
|
Recent Accounting Pronouncements |
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes and prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 is effective for financial statements as of
January 1, 2007. We have not yet determined the impact of
applying FIN 48.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(FAS 157). FAS 157 defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements but does not require
any new fair value measurements. FAS 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. We have not yet determined the impact of applying
FAS 157.
31
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans
(FAS 158). FAS 158 requires an employer to
recognize the overfunded or underfunded status of a defined
benefit postretirement plan (other than a multiemployer plan) as
an asset or liability in its statement of financial position and
to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. FAS 158 is
effective for financial statements as of December 31, 2006.
We have not yet determined the impact of applying FAS 158.
Results of Operations
|
|
|
Revenue and Gross Margins |
Our revenue, cost of revenue and gross margin for the years
ended December 31, 2003, 2004 and 2005, and the nine months
ended September 30, 2005, and 2006, were (in thousands,
except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
Year Ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Product revenue
|
|
$ |
175,004 |
|
|
$ |
95,901 |
|
|
$ |
152,098 |
|
|
$ |
99,796 |
|
|
$ |
77,990 |
|
Less: Cost of product revenue
|
|
|
97,354 |
|
|
|
104,196 |
|
|
|
139,518 |
|
|
|
96,567 |
|
|
|
58,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin
|
|
$ |
77,650 |
|
|
$ |
(8,295 |
) |
|
$ |
12,580 |
|
|
$ |
3,229 |
|
|
$ |
19,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross margin percentage
|
|
|
44% |
|
|
|
(9)% |
|
|
|
8% |
|
|
|
3% |
|
|
|
25% |
|
|
Service revenue
|
|
$ |
61,958 |
|
|
$ |
49,948 |
|
|
$ |
48,953 |
|
|
$ |
35,998 |
|
|
$ |
41,603 |
|
Less: Cost of service revenue
|
|
|
40,780 |
|
|
|
30,338 |
|
|
|
29,032 |
|
|
|
22,652 |
|
|
|
22,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross margin
|
|
$ |
21,178 |
|
|
$ |
19,610 |
|
|
$ |
19,921 |
|
|
$ |
13,346 |
|
|
$ |
18,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross margin percentage
|
|
|
34% |
|
|
|
39% |
|
|
|
41% |
|
|
|
37% |
|
|
|
45% |
|
|
Total revenue
|
|
$ |
236,962 |
|
|
$ |
145,849 |
|
|
$ |
201,051 |
|
|
$ |
135,794 |
|
|
$ |
119,593 |
|
Less: Total cost of revenue
|
|
|
138,134 |
|
|
|
134,534 |
|
|
|
168,550 |
|
|
|
119,219 |
|
|
|
81,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
$ |
98,828 |
|
|
$ |
11,315 |
|
|
$ |
32,501 |
|
|
$ |
16,575 |
|
|
$ |
38,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross margin percentage
|
|
|
42% |
|
|
|
8% |
|
|
|
16% |
|
|
|
12% |
|
|
|
32% |
|
Product Revenue
Product revenue for the nine months ended September 30,
2006, and 2005 consisted of $58.9 million and
$84.5 million, respectively, primarily from
Cray X1/X1E systems, Cray XT3 systems, Cray XD1
systems and other products, as well as $19.1 million and
$15.3 million, respectively, from our Red Storm and Cascade
development projects.
The increase in 2005 product revenue over 2004 levels was due to
increased sales of all three of our principal products, the
Cray X1E, the Cray XT3 and the Cray XD1 systems, which
became available after a production
ramp-up during the
first half of the year. In 2005, we recorded approximately
$22.1 million in product revenue from the Cascade and Red
Storm development projects which was a reduction of
$27.4 million compared to 2004 due to reduced expenditures
and associated revenue, in particular on the Red Storm
development project. Product revenue declined in 2004 from 2003
due to significantly reduced Cray X1 system sales and the
inability to recognize revenue on certain Cray X1E and
Cray XT3 systems delivered in the fourth quarter of 2004,
offset in part by an increase in Red Storm and Cascade
development project revenue of $29.9 million to
$49.5 million for 2004.
32
We expect that product revenue for the fourth quarter of 2006
will improve significantly from the third quarter of 2006. There
is a reasonable possibility that some or all of approximately
$40 million of product revenue we expect to recognize in the
fourth quarter of 2006 could be recognized in the first quarter
of 2007 due to the timing of customer acceptances. If this were
to occur, 2006 product revenue would be lower and 2007 product
revenue would be positively impacted. We also will recognize
approximately $39 million of revenue from one customer, Korea
Meteorological Administration, in the fourth quarter of 2006.
For the full year 2007, we expect strong product sales growth,
offset in part by a nearly $20 million reduction in low
margin development-related project revenue. The 2007 revenue
level is dependent on the successful introduction of three new
products over the next twelve months (our Cray XT4, our Cray XMT
and code-named BlackWidow systems). Due in part to the timing of
these product introductions, the first quarter of 2007 is
expected to be the weakest quarter of 2007 and the second half
of 2007 should be stronger than the first half of 2007.
Service Revenue
Service revenue for the nine months ended September 30,
2006 increased $5.6 million, or 16%, over the same period
in 2005, due to a growth in maintenance revenue from new
contracts.
Service revenue in 2005 decreased slightly from 2004 due to
lower revenue on maintenance contracts as older systems were
withdrawn from service. Revenue from professional services in
2005 increased by $2.8 million from $3.7 million in
2004 due principally to a professional services contract to
refurbish certain components for a customer. Service revenue
decreased in 2004 from 2003 due to expiring maintenance
contracts as older systems were withdrawn from service.
While we expect our maintenance service revenue to stabilize and
potentially increase over the next year, we may have periodic
revenue and margin declines as our older, higher margin service
contracts end. Our newer products will likely require less
hardware maintenance and therefore generate less maintenance
revenue than our historic vector systems. Overall service
revenue may decline in 2007 due to the refurbishment
professional services contract ending in 2006.
Product Gross Margin
Product gross margin improved 22 percentage points for the
nine month period ended September 30, 2006, compared to the
same period in 2005. This improvement in product gross margin
was due to increased gross margins across all product lines,
including lower charges for excess and obsolete inventory and no
amortization of core technology intangible asset that was
written off during the fourth quarter of 2005. Additionally,
gross margins for the nine-month period ended September 30, 2005
were negatively impacted by a $7.7 million loss on the Red Storm
project.
Product gross margin in 2005, although improved compared to
2004, was impacted by several factors, including higher sales of
the lower margin Cray XD1 product, a $7.7 million
charge for a change in the estimate to complete the Red Storm
project due principally to the addition of hardware deliverables
to settle contract and performance issues, and $5.8 million
of charges for inventory write-downs, which included scrap and
obsolete inventory. Product gross margin in 2004 was negatively
impacted by inventory write-downs of $8.5 million, a
$7.6 million charge to record the initial estimated loss on
the Red Storm project, a $1.6 million adjustment for
unabsorbed manufacturing overhead relating to lower than planned
production of Cray X1 systems and significant revenue
recognized on the low margin Cascade and zero margin Red Storm
projects. The Red Storm and Cascade research and development
costs totaling $28.6 million, $57.3 million and
$18.7 million in 2005, 2004 and 2003, respectively, are
reflected on our financial statements as cost of product revenue
and the related reimbursements are recorded in our financial
statements as product revenue. Revenue for 2005, 2004 and 2003
included $2.1 million, $498,000 and $316,000, respectively,
from the sale of obsolete inventory recorded at
33
a zero cost basis. In 2005, this amount consisted mainly of the
sale of a refurbished Cray T3E supercomputer, one of our
legacy systems.
Product gross margin will be adversely affected in the fourth
quarter of 2006 by the relatively low margin on a large contract
expected to be recognized as revenue. With minimal low-margin
development-related product revenue expected in 2007 and the
expected benefit of three new product introductions, overall
product gross margins should increase in 2007 as compared to
2006.
Service Gross Margin
Service gross margin improved 8 percentage points for the
nine months ended September 30, 2006, compared to the
respective 2005 period due to an increase in maintenance revenue
while essentially maintaining costs at 2005 levels.
In both 2005 and 2004, our service gross margin was favorably
impacted by high margin professional service contracts, service
cost reductions implemented in the fourth quarter of 2003 and
the second half of both 2004 and 2005, and the completed
amortization of legacy spare parts inventory by March 31,
2004, offset in 2005 in part by increased costs incurred to
achieve customer acceptances of large Cray XT3 systems.
We expect service gross margin for the fourth quarter of 2006 to
be between 38% to 45%. Service gross margin percentage for 2007
is expected to be down somewhat as revenue from high margin
professional services is expected to decrease.
|
|
|
Research and Development Expenses |
Our research and development expenses for the years ended
December 31, 2003, 2004 and 2005, and the nine months ended
September 30, 2005, and 2006, were (in thousands, except
for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
Year Ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Gross research and development expenses
|
|
$ |
68,801 |
|
|
$ |
98,843 |
|
|
$ |
96,257 |
|
|
$ |
70,691 |
|
|
$ |
76,303 |
|
Less: Amounts included in cost of product revenue
|
|
|
(18,714 |
) |
|
|
(22,970 |
) |
|
|
(19,724 |
) |
|
|
(14,441 |
) |
|
|
(16,658 |
) |
Less: Reimbursed research and development (excludes amounts in
revenue)
|
|
|
(12,325 |
) |
|
|
(22,607 |
) |
|
|
(34,822 |
) |
|
|
(23,318 |
) |
|
|
(36,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net research and development expenses
|
|
$ |
37,762 |
|
|
$ |
53,266 |
|
|
$ |
41,711 |
|
|
$ |
32,932 |
|
|
$ |
23,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue
|
|
|
16% |
|
|
|
37% |
|
|
|
21% |
|
|
|
24% |
|
|
|
19% |
|
Gross research and development expenses in the table above
reflect all research and development expenditures, including
expenses related to our research and development activities on
the Red Storm and Cascade projects. Research and development
expenses on our Red Storm and Cascade projects are reflected on
our financial statements as cost of product revenue, and
government co-funding
on our other projects are recorded on our financial statements
as reimbursed research and development. Research and development
expenses include personnel expenses, depreciation, allocations
for certain overhead expenses, software, prototype materials and
outside contracted engineering expenses.
Net research and development expenses in the first nine months
of 2006 and in 2005 primarily reflect our net costs associated
with the hardware and software associated with the
Cray X1E, Cray XT3 and Cray XD1 systems, and the
BlackWidow and Cray XMT projects, and their upgrade
34
and successor products. Net research and development expenses in
2004 reflect our costs associated with the development of the
Cray X1E, Cray XT3, Cray XD1 systems and upgrade
and successor projects, including related software development.
We have received increased government funding each period. For
the nine months ended September 30, 2006, net research and
development expenses decreased as compared to the same periods
in 2005 due principally to increased funding for our BlackWidow
project and reduced research and development expenses for the
Cray XD1 product line.
In 2005, net research and development expenses as a percentage
of total revenue decreased as compared to 2004 due to higher
revenue, increased government funding for our BlackWidow
project, and the effect of a pay reduction program in the second
half of 2005, partially offset by option expense as we
accelerated vesting on options issued in connection with the
OctigaBay Systems acquisition at the beginning of the second
quarter in 2004. The higher 2004 percentage of total
revenue compared to 2003 was due to lower revenue earned in 2004
and to increases in research and development expenses for most
of our products and projects, including an increase of
approximately $2.0 million to $2.5 million per quarter
due to the OctigaBay Systems acquisition.
With our recent DARPA Phase III award, net research and
development expenses for the fourth quarter of 2006 will be
lower than the third quarter of 2006. We anticipate 2007 net
research and development expenses to be up slightly from 2006
due to the cost-sharing portion of the DARPA award. Net research
and development expenses may also be higher in 2007,
particularly in the second half, if the U.S. government ceases
co-funding earlier than anticipated on our BlackWidow or Cray
XMT projects. We expect that research and development
co-funding, including amounts earned under the DARPA Phase III,
BlackWidow and Cray XMT funding agreements, will be recorded
primarily as a reduction to research and development expense in
the fourth quarter of 2006 and in 2007.
Our sales and marketing, general and administrative, and
restructuring, severance and impairment charges for the years
ended December 31, 2003, 2004 and 2005, and the nine months
ended September 30, 2005, and 2006, were (in thousands,
except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
Year Ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Sales and marketing
|
|
$ |
27,038 |
|
|
$ |
34,948 |
|
|
$ |
25,808 |
|
|
$ |
19,951 |
|
|
$ |
15,591 |
|
|
Percentage of total revenue
|
|
|
11% |
|
|
|
24% |
|
|
|
13% |
|
|
|
15% |
|
|
|
13% |
|
|
General and administrative
|
|
$ |
10,908 |
|
|
$ |
19,451 |
|
|
$ |
16,145 |
|
|
$ |
12,491 |
|
|
$ |
14,328 |
|
|
Percentage of total revenue
|
|
|
5% |
|
|
|
13% |
|
|
|
8% |
|
|
|
9% |
|
|
|
12% |
|
|
Restructuring, severance and impairment
|
|
$ |
4,019 |
|
|
$ |
8,182 |
|
|
$ |
9,750 |
|
|
$ |
2,933 |
|
|
$ |
1,290 |
|
|
Percentage of total revenue
|
|
|
2% |
|
|
|
6% |
|
|
|
5% |
|
|
|
2% |
|
|
|
1% |
|
Sales and Marketing. The decrease in sales and marketing
expenses for the nine month period ended September 30,
2006, compared to the same period in 2005, was primarily due to
a decrease in headcount as a result of a reduction-in-force that
took place in the second quarter of 2005.
The decrease in 2005 sales and marketing expenses compared to
2004 was due to lower headcount, the pay reduction program in
the second half of 2005 and lower discretionary spending, offset
in part by higher commissions on increased product revenue. The
increase in 2004 compared to 2003 was primarily due to an
acceleration of expenses related to certain prepaid computer
access services no longer utilized and additional benchmarking,
application and sales
35
personnel related to the introduction of our three new products.
We also experienced an unfavorable currency exchange rate in our
overseas personnel expenses in 2004 compared to 2003.
We expect sales and marketing expenses to increase in the fourth
quarter of 2006 due to increased sales commissions as a result
of higher anticipated revenue and expenses related to a major
supercomputing trade show, but decline for 2006 compared to
annual 2005 levels due to reduced headcount, offset in part by
re-establishment of full salaries for all of 2006. We expect
that 2007 sales and marketing expenses will be slightly higher
than 2006 levels primarily due to increased sales commissions on
higher product sales.
General and Administrative. The increase in general and
administrative costs for the nine months ended
September 30, 2006 over the corresponding 2005 period was
primarily due to an increase in non-cash stock-based
compensation incurred in connection with restricted stock and
stock option grants as well as an increase in expense for
variable pay and retention compensation expenses, which were
partially offset by a general headcount decrease and the effects
of the
reduction-in-force that
occurred in the second quarter of 2005.
The decrease in general and administrative expense in 2005
compared to 2004 was primarily due to the effects of our
reduction-in-force, as well as the pay reduction program in the
second half of 2005, savings from which were offset in part by
increased fees for external audit, Sarbanes-Oxley compliance and
legal fees. The increase in 2004 compared to 2003 was due
primarily to consulting costs related to Sarbanes-Oxley
compliance and additional expenses as a result of our
acquisition of OctigaBay Systems, including additional
depreciation, insurance and utilities.
We expect general and administrative expenses to remain modestly
higher for the fourth quarter of 2006 compared to 2005 levels
due to re-establishment of full salaries and our variable pay
program as well as the executive retention and restricted stock
grant programs instituted in December 2005. We expect 2007
general and administrative expenses to be similar to 2006
expense levels.
Restructuring, Severance and Impairment. Restructuring,
severance and impairment charges include costs related to our
efforts to reduce our overall cost structure by reducing
headcount. During the second quarter of 2005, we implemented a
worldwide reduction in workforce of approximately 90 employees,
or 10% of our worldwide workforce, primarily in manufacturing,
sales, service and marketing. We incurred additional severance
charges primarily for the retirement of our former Chief
Executive Officer, James Rottsolk, in the third quarter of 2005.
In the fourth quarter of 2005, we implemented an additional
reduction of approximately 65 employees from our
international sales, service and engineering operations, largely
based in our Burnaby, British Columbia, Canada facility with the
remainder in Europe. In the second quarter of 2006, we incurred
additional severance costs related to both our second and fourth
quarter 2005 actions; these costs decreased to $3,000 in the
third quarter of 2006.
In connection with the 2004 acquisition of OctigaBay Systems, we
allocated $6.7 million of the purchase price to a core
technology intangible asset, which was associated with the
Cray XD1 system. In connection with the fourth quarter 2005
decision to incorporate the Cray XD1 system technology into
the Cray XT3 line, as well as limited expected future
benefits of the core technology obtained in the acquisition, we
evaluated the carrying value of the unamortized balance of the
intangible asset of $4.9 million and determined that the
carrying value of the asset was impaired and accordingly
recorded a charge for the $4.9 million in the fourth
quarter of 2005.
In-Process Research and Development Charge
As part of the acquisition of OctigaBay Systems, we incurred an
expense associated with acquired in-process research and
development of $43.4 million in the second quarter of 2004.
36
Other Income (Expense), Net
For the nine months ended September 30, 2006 and 2005, we
recognized net other expense of $2.0 million and $602,000,
respectively. Other expense for the nine months ended
September 30, 2006, was principally the result of a
$1.6 million loss in fair value on our foreign currency
forward contract derivative through September 30, 2006,
while net other expense for the nine months ended
September 30, 2005 was principally the result of net
foreign currency transaction losses. We expect the impact of the
foreign currency loss recorded in 2006 related to the foreign
currency derivative will be recovered when the revenue on the
related product sale is recognized.
During 2005, we recorded $1.4 million of net other expense,
compared to net other expense of $699,000 in 2004 and net other
income of $1.5 million in 2003. Other expense in 2005 and
2004 primarily consisted of foreign currency losses on the
remeasurement of foreign currency balances, principally
intercompany balances. Other income in 2003 primarily consisted
of gains resulting from the remeasurement of foreign currency
balances, principally intercompany balances.
|
|
|
Interest Income (Expense), Net |
Our interest income and interest expense for the years ended
December 31, 2003, 2004 and 2005, and the nine months ended
September 30, 2005, and 2006, were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended | |
|
|
Year Ended December 31, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Interest income
|
|
$ |
657 |
|
|
$ |
666 |
|
|
$ |
741 |
|
|
$ |
491 |
|
|
$ |
1,574 |
|
Interest expense
|
|
|
(213 |
) |
|
|
(301 |
) |
|
|
(4,203 |
) |
|
|
(2,810 |
) |
|
|
(3,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense)
|
|
$ |
444 |
|
|
$ |
365 |
|
|
$ |
(3,462 |
) |
|
$ |
(2,319 |
) |
|
$ |
(1,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income increased in the nine months ended
September 30, 2006 compared to the same period in 2005 as a
result of higher average invested cash balances and higher
short-term interest rates.
Interest income in 2005 and 2004 was related primarily to our
cash and short-term investments balances, which, on average,
were consistent with the balances during 2003. The 2003 interest
income reflects our increased average cash position in 2003
following our public offering in February 2003 in which we
raised $49.1 million.
Interest expense for both nine month periods ended
September 30, 2006, and 2005 principally consisted of
$1.8 million of interest on our Notes in each period and
$1.0 million and $672,000, respectively, of
non-cash amortization
of capitalized issuance costs. The amount of
non-cash amortization
of capitalized issuance costs was higher in 2006 than in 2005
because the line of credit agreement was entered into in May
2005.
Interest expense in 2005 represents $2.4 million of
interest on our Notes, $1.0 million of
non-cash amortization
of fees capitalized in connection with both our line of credit
with WFF and our long-term debt offering costs, and $765,000 of
interest and related fees on our line of credit with WFF. The
interest expense for 2004 reflects approximately one month of
interest on our Notes, one month of amortization of the related
capitalized issuance costs and interest on our capital leases.
The interest expense for 2003 reflects interest on our term loan
for the first four months of the year and interest on our
capital leases.
We recorded tax expense of $748,000 for the nine months ended
September 30, 2006, and $428,000 for the nine months ended
September 30, 2005. The tax expense recognized in the first
37
nine months of both 2006 and 2005 reflected estimated current
and deferred foreign and state income tax expense.
Benefit from income taxes in 2005 was $1.5 million, which
consisted of a $2.3 million benefit for foreign deferred
taxes, partially offset by current tax expense for local, state
and foreign tax jurisdictions. We recorded an income tax
provision of $59.1 million in 2004, principally related to
the establishment of a $58.9 million valuation allowance
against deferred tax assets, primarily consisting of accumulated
net operating losses. Under the criteria set forth in
FAS No. 109, Accounting for Income Taxes,
management concluded that it was unlikely that the future
benefits of these deferred tax assets would be realized. In
2003, we recorded an income tax benefit of $42.2 million,
principally as a result of the reversal of $58.0 million
valuation allowance on deferred tax assets.
There has been no current provision for U.S. federal income
taxes for any period. We have income taxes currently payable due
to our operations in certain foreign countries, particularly in
Canada and certain European and Asian countries and in certain
states.
As of December 31, 2005, we had tax net operating loss
carryforwards of approximately $288 million that will begin
to expire in 2010 if not utilized.
Liquidity and Capital Resources
Cash, cash equivalents and accounts receivable totaled
$90.0 million as of September 30, 2006, compared to
$101.1 million as of December 31, 2005; cash and cash
equivalents decreased by $1.9 million while accounts
receivable decreased by $9.2 million. As of
September 30, 2006, we had working capital of
$42.7 million compared to $52.2 million as of
December 31, 2005.
Net cash used by operating activities for the nine months ended
September 30, 2006 was $2.2 million compared to a use
of $60.1 million for the same period in 2005. For the nine
months ended September 30, 2006, cash used by operating
activities was principally the result of our net loss for the
period and an increase in inventory, partially offset by a
decrease in accounts receivable and increases in deferred
revenue and accounts payable. For the nine months ended
September 30, 2005, cash used by operating activities was
principally the result of our net loss for the period and
increases in inventory and accounts receivable, partially offset
by an increase in deferred revenue.
Net cash used by operating activities was $36.7 million in
2005, $52.7 million in 2004 and $8.7 million in 2003.
For 2005, net operating cash was used primarily by our net
operating loss, decreases in accounts payable and payroll
liabilities, and increases in accounts receivable and inventory,
partially offset by an increase in deferred revenue. For 2004,
net operating cash was used primarily by our net operating loss
and an increase in inventory, offset in part by increases in
deferred revenue and accounts payable and a decrease in accounts
receivable. In 2003, net operating cash was used primarily by
increases in accounts receivable, inventory and prepaid expenses
and other assets, which was offset in part by an increase in
deferred revenue.
Net cash used by investing activities was $2.1 million for
the nine months ended September 30, 2006, compared to net
cash provided by investing activities of $41.9 million for
the respective 2005 period. Net cash used by investing
activities for the nine months ended September 30, 2006
consisted primarily of purchases of property and equipment. Net
cash provided by investing activities for the same period in
2005 consisted of net sales and maturities of short-term
investments of $34.3 million and a decrease in restricted
cash of $11.4 million, partially offset by
$3.8 million of purchases of property and equipment.
Net cash provided by investing activities was $41.7 million
in 2005, while net cash used in investing activities was
$29.9 million in 2004 and $41.2 million in 2003. For
the year ended December 31, 2005, net cash provided by
investing activities consisted of the sale of short-term
investments, partially offset by the purchases of short-term
investments and equipment as well as
38
a decrease in restricted cash. In 2004, net cash used in
investing activities consisted primarily of $12.5 million
of capital expenditures, an $11.4 million increase in
restricted cash and $6.3 million used for the acquisition
of OctigaBay Systems (which consisted of $15.9 million in
cash used in connection with the acquisition netted against
$9.6 million in cash we acquired from OctigaBay Systems),
offset by net sales of $317,000 of short-term investments. In
2003 net cash used in investing activities was primarily
for net purchases of short-term investments and equipment.
Net cash provided by financing activities was $2.3 million
for the nine months ended September 30, 2006, compared to
net cash used by financing activities of $273,000 for the
respective 2005 period. Cash provided by financing activities
for both periods was primarily cash received from the exercise
of stock options and the issuance of common stock through our
employee stock purchase plan. In both periods, these proceeds
were offset by line of credit issuance costs and principal
payments on capital leases.
Net cash used in financing activities was $137,000 in 2005,
while net cash provided by financing activities was
$84.2 million in 2004 and $65.1 million in 2003. For
the year ended December 31, 2005, net cash used in
financing activities consisted primarily of $755,000 paid for
line of credit issuance costs and $731,000 for payments on
capital leases, offset by $1.3 million in proceeds from the
issuance of common stock through the employee stock purchase
plan and exercise of stock options. The 2004 net cash
provided by financing activities was primarily related to our
Note offering in which we received net proceeds of
$76.6 million. In 2004 we also received approximately
$8.3 million through stock option and warrant exercises as
well as through the issuance of common stock in connection with
our employee stock purchase plan. The 2003 net cash
provided by financing activities was primarily from our public
offering, in which we received net proceeds of
$42.5 million, and $27.0 million from stock option and
warrant exercises and the issuance of common stock through the
employee stock purchase plan, while we used $4.1 million to
pay down a portion of our debt.
Over the next twelve months, our significant cash requirements
will relate to operational expenses, consisting primarily of
personnel costs, costs of inventory and spare parts, outside
engineering expenses, particularly as we continue development of
our Cray XT4 and successor systems and internally fund a
portion of the expenses on our Cascade project pursuant to the
DARPA Phase III award, interest expense and acquisition of
property and equipment. As of September 30, 2006, our
remaining fiscal year 2006 capital budget for property and
equipment was approximately $4.0 million. In addition, we
lease certain equipment and facilities used in our operations
under operating or capital leases in the normal course of
business. The following table summarizes our contractual cash
obligations as of September 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Committed by Year |
|
|
|
|
|
|
|
Less than | |
|
|
Contractual Obligations |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
Thereafter |
|
|
| |
|
| |
|
| |
|
| |
|
|
Development agreements
|
|
$ |
12,892 |
|
|
$ |
11,997 |
|
|
$ |
895 |
|
|
$ |
|
|
|
$ |
|
|
Capital lease obligations
|
|
|
63 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
7,034 |
|
|
|
3,164 |
|
|
|
3,734 |
|
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
19,989 |
|
|
$ |
15,224 |
|
|
$ |
4,629 |
|
|
$ |
136 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have $80.0 million in aggregate principal amount of
outstanding Notes due in 2024. The Notes bear interest at an
annual rate of 3.0%, or $2.4 million per year, and holders
of the Notes may require us to purchase the Notes on
December 1, 2009, December 1, 2014 and
December 1, 2019 or upon the occurrence of certain events
provided in the indenture governing the Notes. Additionally, we
have a two-year
revolving line of credit for up to $30.0 million, which
expires in May 2007. No amounts were outstanding under this line
as of September 30, 2006. As of the
39
same date, we were eligible to borrow $28.5 million against
this line of credit; the borrowing limitation relates to
restrictions from our cash flow hedge, open letters of credit
and minimum required receivables balance.
In our normal course of operations, we have development
arrangements under which we engage outside engineering resources
to work on our research and development projects. For the nine
months ended September 30, 2006, we incurred
$18.3 million for such arrangements.
At any particular time, our cash position is affected by the
timing of cash receipts for product sales, maintenance
contracts, government
co-funding for research
and development activities and our payments for inventory,
resulting in significant fluctuations in our cash balance from
quarter-to-quarter and within a quarter. Our principal sources
of liquidity are our cash and cash equivalents, operations and
credit facility. Even assuming acceptances and payment for large
new systems to be sold and the benefit from our 2004 and 2005
restructurings and other recent cost reduction efforts, our cash
flow from operations may be negative for 2006 as a whole,
including the fourth quarter of 2006, largely to support working
capital requirements, although a wide range of results is
possible. With this offering, and the near term expected cash
flow from our DARPA Phase III award, we do not anticipate
borrowing from our credit line and we expect our cash resources
to be adequate for at least the next twelve months.
We have been focusing on expense controls, negotiating sales
contracts with advance partial payments where possible,
implementing tighter purchasing and manufacturing processes and
improving working capital management in order to maintain
adequate levels of cash. Additionally, the adequacy of our cash
resources is dependent on the amount and timing of government
funding as well as our ability to sell our products,
particularly the Cray XT4, BlackWidow and Cray XMT
systems, with adequate margins. Beyond the next twelve months,
the adequacy of our cash resources will largely depend on our
success in
re-establishing
profitable operations and positive operating cash flows on a
sustained basis. See Risk Factors above.
40
BUSINESS
Overview
We design, develop, manufacture, market and service high
performance computing (HPC) systems, commonly known
as supercomputers. Our supercomputer systems provide capability,
capacity and sustained performance far beyond typical
server-based computer systems and address challenging scientific
and engineering computing problems.
We believe we are well positioned to meet the HPC markets
demanding needs by providing superior supercomputer systems with
performance and cost advantages when sustained performance on
challenging applications and total cost of ownership are taken
into account. We differentiate ourselves from our competitors
primarily by concentrating our research and development efforts
on the processing, interconnect and software capabilities that
enable our systems to scale that is, to continue to
increase performance as our systems grow in size. Purpose-built
for the supercomputer market, our systems balance highly capable
processors, highly scalable software and very high speed
interconnect and communications capabilities.
We focus our sales and marketing activities on government
agencies, industrial companies and academic institutions that
purchase high end HPC systems. We sell our products primarily
through a direct sales force that operates throughout the United
States and in Canada, Europe, Japan and Asia-Pacific. Our
supercomputer systems are installed at more than 100 sites in
over 20 countries.
In 2005, our management changed significantly with a new chief
executive officer and new leaders in technology, engineering,
finance, marketing, operations and customer support. Under our
new management team, we have expanded our worldwide customer
base, refined our product roadmap, established a lower operating
cost model and sharpened our focus on execution to meet customer
expectations and improve our financial operating results.
In early 2006 we announced our Adaptive Supercomputer vision to
expand the concept of hybrid computing to a fully integrated
view of both hardware and software supporting multiple
processing technologies within a single, highly scalable system.
We believe our recent $250 million award from DARPA under
its HPCS program validates our Adaptive Supercomputer vision.
This award will co-fund our Cascade development project to
implement this vision.
Industry Background
Since Seymour Cray introduced the
Cray-1 system in 1976,
supercomputers have contributed substantially to the advancement
of knowledge and the quality of human life. Scientists and
engineers typically require vast computing resources to address
problems of major economic, scientific and strategic importance.
Much of the development of new products and technologies, as
well as improvements of existing products and technologies, will
not be possible without the continued improvement of
supercomputer computational speeds, interconnect technologies,
scalable system software and overall performance.
The overall server market is estimated by the International Data
Corporation (IDC), in its reports entitled Worldwide
and U.S. Server 2006-2010 Forecast and Worldwide Technical
Computing Systems 2006-2010 Forecast, issued in April and May
2006, respectively, to have been $51.3 billion worldwide in
2005. According to these reports, the HPC market, which is a
sub-sector of the overall server market, totaled
$9.2 billion in 2005. We target the high end of the HPC
market, which includes the capability segment, and a portion of
the enterprise segment, as these segments are defined by IDC. We
believe our total addressable market within these segments is
approximately $1.5 billion in annual product sales.
41
The capability segment is characterized by intensive research
and development requirements and high barriers to entry
necessary to deliver systems configured to solve the
worlds largest and most demanding problems. Systems
purchased in the enterprise segment primarily support high
capacity requirements of many small and medium-sized technical
applications running concurrently. Systems in these two market
segments range in price from $1 million to $50 million
or more.
Vendors that compete in the highest end of the HPC market must
commit significant resources to develop proprietary technologies
and computing elements to meet the exacting needs of their
customers. We believe that the technical requirements and high
costs required to compete in this market are significant
barriers to entry. Many of our potential competitors focus on
the lower segments of the HPC market. These segments comprise a
larger market that is increasingly competitive and in which it
is difficult for vendors to add significant value due to the
commoditization of these solutions.
|
|
|
Increasing Demand for Supercomputing Power |
Supercomputer users are seeking answers to some of the
worlds most complex problems in science and engineering.
Addressing these challenges can require up to 1,000 times or
more than the computing capability currently available with
existing computer systems. Users require systems that provide
powerful computing resources that are massively scalable,
flexible and manageable at this scale, and that can deliver high
levels of sustained performance.
We believe there are three principal factors driving the demand
for supercomputing power: first, the increasing need for
advanced design and simulation capability in industry,
government agencies and weather and climate centers; second,
continuing concerns about national security issues, heightened
by an emphasis on terrorism prevention; and, third, the
recognized national interests of many countries to advance
scientific research to enable innovations to better compete
globally and achieve breakthroughs in new energy technologies,
biological systems, nanotechnologies, particle physics and other
natural phenomena.
Design and simulation of new products before they are built are
invaluable tools to improve time-to-market, product quality and
differentiation for government, industrial and academic users.
The need for supercomputers within government laboratories and
agencies and industrial firms is driven by the increasingly
complex application requirements of computer-aided engineering,
full-systems analysis, material behavior in composite materials
and real-time stress-strain behavior. Supercomputers are
critical for increasingly refined simulations of both automotive
and aeronautical performance dynamics. Weather forecasting and
climate centers require supercomputers to process large volumes
of data to produce more accurate short-term and medium-range
forecasts and to further our understanding of the long-term
impact of various pollutants on the environment and the effects
of global warming.
Governments have a wide range of ongoing and yet unmet security
needs, ranging from burgeoning cryptanalysis and data mining
requirements to rapid and accurate analysis of data from a
diverse and growing number of disparate sources. In addition,
governments constantly seek better simulation and modeling of
missiles and other weapons systems and the maintenance and
reliability of nuclear stockpiles. They also use supercomputers
to simulate real world battlefield conditions rapidly and in
increasing levels of detail.
Competition between countries to acquire the best supercomputing
technology to enhance their worldwide competitiveness has
increased. The U.S. government and its various agencies
have determined that it is in the best economic and security
interest of the country to establish and maintain a leadership
position in the development of supercomputing technologies. One
such initiative is the DARPA High Productivity Computing Systems
initiative, under which we have received funding since 2002 for
our Cascade project. The DARPA program, announced in 2002, is
designed to provide government support to develop breakthroughs
in high productivity
42
supercomputing systems for the national security and industrial
user communities. This initiative has become increasingly
important due to the trend towards commoditization in the HPC
market, which is not expected to provide the advanced
supercomputing capabilities necessary for the United States to
achieve important goals and missions. Other countries such as
Japan, China and members of the European Union, also have
programs in place to increase their worldwide competitiveness
through the aggressive use of supercomputers.
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Limitations of Existing and Emerging Solutions |
Despite the demand for increased supercomputing power, systems
capable of exploiting high end opportunities have become less
common. Todays HPC market is replete with low bandwidth
cluster systems that are often limited in performance beyond
certain system size and capability. These systems loosely link
together, or cluster, multiple commodity servers using widely
available microprocessors by means of commercially available
interconnect products.
With standard interconnect components, low bandwidth cluster
systems are not well balanced they may have fast
processors, but performance is severely limited by the rate at
which data can be moved throughout the system, such as to and
from memory, and between processors over the interconnection
network. Because of the lack of specialized communication and
software capabilities, these systems do not scale
well as these systems grow in size their full system
and per processor efficiencies degrade significantly.
Additionally, as these systems grow in size, they may become
unreliable because they lack the necessary management software
and built-in hardware redundancies to minimize disruptions.
Low bandwidth cluster systems may offer higher theoretical peak
performance, for equivalent cost, than do our systems, but often
lack in sustained performance when running real applications at
scale. Theoretical peak performance is the highest theoretical
possible speed at which a computer system could, but never does,
operate; this measure is obtained simply by multiplying the
number of processors by their peak rated speed and the number of
floating point operations per cycle it can compute, assuming
zero communications bottlenecks or system inefficiencies.
Sustained performance, always lower than peak, is the actual
speed at which a supercomputer system runs an application
program. The sustained performance of low bandwidth cluster
systems on complex applications frequently is a small fraction,
often less than 5% to 10%, of their theoretical peak
performance as these systems become larger, their
efficiency declines even further, sometimes below 1% for the
most challenging applications at scale.
The recent introduction of dual-core processors, and planned
quad-core and multi-core processors, which incorporate more than
one processing core on the same integrated circuit, will further
stress the capabilities of low bandwidth cluster systems,
resulting in decreased per processor utilization due to the
absence of balanced network and communication capabilities in
such systems. Multi-core processors will also increase the power
and cooling requirements for these systems, making packaging an
increasingly critical element.
Given these limitations, low bandwidth cluster systems are
better suited for applications that can be partitioned easily
into discrete tasks that do not need to communicate often with
each other, such as small problems and larger problems lacking
communications complexity that make up the majority of the
midrange and low end of the HPC market. The effectiveness of low
bandwidth cluster systems in our target market, the high end of
HPC, is limited today and, we believe, will be increasingly
limited in the future.
The Cray Solution
We have concentrated our product roadmap on building balanced
systems that are purpose-built for supercomputer users. These
systems address the critical computing resource challenges HPC
users face today: achieving massive scaling to tens of thousands
of processors, ease of use, and very high levels of sustained
performance on real applications. We do this by designing
supercomputers that combine highly capable processors, whether
developed by us or by others,
43
high speed interconnect technology for maximum communication
efficiency, innovative packaging to address increased cooling,
power and reliability requirements, and scalable software that
enables performance and usability at scale.
Our supercomputers utilize components and technologies designed
to support the demanding requirements of high end HPC users. In
contrast, low bandwidth cluster system vendors use processors,
interconnects and software designed to meet the requirements of
the significantly larger general purpose server market and then
attempt to leverage these commercially-oriented products into
the HPC market. An important benefit of our purpose-built
approach is significantly higher sustained performance on real
applications, with actual application performance improvements
on the order of 1.5 to 10 times that of our competitors. With
our supercomputers, HPC users are able to focus on their primary
objectives: advancing science, industry and discovery and
improving national security.
Our supercomputer systems offer several additional benefits:
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upgrade options that allow customers to leverage their
investments over longer periods of time and provide enhanced
total costs of ownership; |
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custom hardware design of proprietary processors and
interconnect systems; |
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flexibility of processor type, memory and network configuration
and software tools developed towards our Adaptive Supercomputing
vision; and |
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the Cray brand name, synonymous with supercomputing, that brings
with it a proven research and development team and a global
sales and service organization dedicated to the needs of HPC
users. |
We expect the emergence of multi-core processors to be
advantageous to us, complementing our technical strengths in
networking, scaling software, and cooling and power management
technologies. Additional cores will amplify the scaling issues
that customers face today by putting increased stress on all
aspects of the system. Our balanced approach to system design
will likely become increasingly critical in enabling customers
to take advantage of the benefits of multi-core processing.
Our Strategy
Our goal is to become the leading provider of supercomputers in
the markets that we target. Key elements of our strategy include:
Gain Share in Our Core HPC Market. We intend to leverage
our strong product portfolio, product roadmap and brand
recognition in the high end of the HPC market to gain market
share. We believe that most of our competitors are primarily
focused on the lower end of the HPC market where low-bandwidth
cluster systems dominate. We plan to remain focused on the
capability and enterprise segments of the HPC market.
Maintain Focus on Execution and Profitability. We are
committed to achieving sustained profitability on an annual
basis. We intend to continue to refine our product roadmap,
converge our technologies and development processes, improve our
ability to deliver high quality products on time and on budget
and continue our commitment to financial discipline.
Extend Technology Leadership. We are an innovation driven
company in a technology driven market. We plan to maintain a
technology leadership position by investing in research and
development and partnering with key customers with interests
aligned strongly with ours. We will rely in part on government
funding for our research and development efforts. We intend to
execute on our product roadmap and implement our Adaptive
Supercomputing vision to realize the concept of supporting
multiple processing technologies within a single, highly
scalable Linux-based system.
44
Expand Total Addressable Market. Over time, we intend to
leverage our technologies, customer base and Cray brand in new
segments and expand our addressable market. We believe we have
the opportunity to compete in a broader portion of the HPC
market as well as selective markets outside of HPC.
Our Target Market and Customers
Our supercomputer systems are installed at more than
100 sites in over 20 countries. Our target markets for
2006 and beyond principally include the national security,
scientific research, earth sciences, and computer-aided
engineering, consisting primarily of automotive, aerospace and
manufacturing companies, markets. In certain of our targeted
markets, such as the national security and scientific research
markets, customers have their own application programs and are
accustomed to using new, less proven systems. Other target
customers, such as automotive and aerospace firms and some
governmental agencies, require third-party application programs
developed by independent software vendors.
National Security. Classified work in government agencies
has represented an important customer market for us over many
years. Certain governmental departments continue to provide
funding support for our research and development efforts to meet
their objectives. We expect long-term spending on national
security and defense to increase. Current and target customers
for our products include a number of Department of
Defense-related classified customers, the National Nuclear
Security Administration of the Department of Energy, and certain
foreign counterparts.
Scientific Research. Scientific research includes both
unclassified governmental and academic research laboratories and
centers. The Department of Defense, through its High Performance
Computing Modernization Program, funds a number of research
organizations that are target customers. The Office of Science
in the Department of Energy and its laboratories are key target
customers, as are the National Science Foundation and the
National Aeronautics and Space Administration, and related
agencies around the world.
Earth Sciences. Weather forecasting and climate modeling
applications require increasing speed and larger volumes of
data. Forecasting models and climate applications have grown
increasingly complex with an ever-increasing number of
interactive variables, making improved supercomputing
capabilities increasingly critical. We have a number of
customers doing weather and climate applications and believe
that the Cray X1E system installed at the Korea Meteorological
Administration is currently the most powerful operational
weather forecasting system in the world.
Computer-Aided Engineering. Supercomputers are used to
design lighter, safer and more durable vehicles, as well as to
study wind noise and airflow around the vehicle, to improve
airplane flight characteristics and in many other computer-aided
engineering applications in order to improve
time-to-market and
product quality. We currently have customers in each of the
automotive, aerospace and manufacturing areas.
Agencies of the U.S. government, directly and indirectly
through system integrators and other resellers, accounted for
approximately 55% of our 2005 revenue, 74% of our 2004 revenue
and 74% of our 2003 revenue. Our largest customer in 2005 was
Oak Ridge National Laboratory with 18% of our revenue, in 2004
was Sandia National Laboratories through the Red Storm project
with 27% of our revenue and in 2003 Oak Ridge National
Laboratory had 11% of our total revenue. International customers
accounted for 32% of our total revenue in 2005, up from 17% in
2004 and 18% in 2003, showing our strong growth in international
markets.
45
Recent Customer Contract Wins
We have had significant recent customer contract wins which we
believe are indicative of the value that we bring to our
customers. The following represent announced 2006 contract wins:
Sandia National Laboratories, part of the U.S. Department
of Energys National Nuclear Security Administration,
upgraded its Red Storm supercomputer from 40 teraflops to 125
teraflops (40 to 125 trillion floating point operations per
second), making it the second most powerful supercomputer in the
world, as announced in November 2006 on the Top 500
list. The Red Storm system, co-designed by Sandia and ourselves
and built by us, is the basis for the Cray XT3 system and is a
key component of Sandias ongoing mission of putting
advanced technology to work in the pursuit of global safety,
peace and freedom. This achievement was announced in November
2006.
CSC Finland (CSC), the information technology
center for science in Finland, will acquire a Cray XT4 system
delivering over 70 teraflops of compute power. The system will
be installed in stages, beginning in late 2006 and continuing
through 2008. CSC provides information technology
infrastructure, skills and specialist services for universities,
polytechnic colleges, research institutions and companies across
Finland, and collaborates with various research institutions
worldwide. The Cray XT4 system will be used for research in
areas such as physics, chemistry, nanotechnology, linguistics,
bioscience, applied mathematics and engineering. We were told
that CSC selected the Cray XT4 system after an extensive
acquisition process that involved surveying 35 different
research groups, closely analyzing the available technologies
and benchmarking competing systems. The contract was announced
in October 2006.
National Energy Research Scientific Computing Center
(NERSC), a laboratory of the
U.S. Department of Energys Office of Science, awarded
us a $52 million contract for products and services to
deliver our Cray XT4 system in 2007, with options to provide
future upgrades that could quadruple the performance of the
system and boost performance to one petaflops and beyond. NERSC
is one of the largest scientific computing facilities in the
world devoted to providing computational resources and expertise
for a broad base of unclassified research. We were informed that
our proposal was selected because of its price/performance and
overall effectiveness, as determined by NERSCs
comprehensive evaluation criteria of more than 40 measures. This
contract win was announced in August 2006.
Oak Ridge National Laboratory (ORNL), the
largest laboratory of the Department of Energys Office of
Science and its current Leadership Computing center,
awarded us a $200 million contract for products and
services to be provided in progressive upgrades to ORNLs
existing Cray XT3 supercomputer and future systems being
developed under our Cray XT4 and Baker programs. The Baker
system, planned for delivery toward the end of 2008 or early
2009, is expected to provide peak performance of one petaflops
(1,000 trillion floating point operations per second). ORNL is
an international leader in research areas that include neutron
science, new energy sources, biological systems, nanoscale
materials science and national security. This contract win was
announced in June 2006.
Swiss National Supercomputing Center (CSCS)
awarded us a contract for products and services to expand
Europes first Cray XT3 supercomputer from 5.7 teraflops to
more than 8.6 teraflops. Large scientific research projects
targeted for the Cray XT3 system at CSCS include analysis of
human bone structure, the environmental effects of aerosols and
pollutants, anticancer drugs, nanoelectronics, molecular
switches and global climate model. This contract win was
announced in May 2006.
The University of Western Australia awarded us a contract
to purchase a Cray XT3 system and related services as part of
the Western Australia Supercomputing program. The Cray XT3
system is being used for major large-scale computational studies
and simulations in the areas of
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geophysics, chemistry, astrophysics, biology, rock mechanics,
genetic epidemiology, physics and quantum mechanics, and water
research. This contract win was announced in March 2006.
The Institute for Plasma Research (IPR),
headquartered in Gujarat, India, awarded us a contract for a
Cray X1E system and services. IPR will use the Cray X1E system
to conduct studies in plasma physics with an emphasis on the
physics of magnetically confined hot plasmas and nonlinear
plasma phenomena. The Cray X1E system provides IPR with the
processing power and scalability that it needs to design
effective research devices and conduct fruitful experiments.
This contract win was announced in March 2006.
AWE Plc awarded us a £20 million contract for
product and services to deliver a dual-core Cray XT3 system with
peak performance of over 40 teraflops in 2006. The new system
will expand AWEs current computing power by almost 30
times, as measured on AWEs rigorous benchmark tests, and
will enable AWE to explore even more complex mathematical models
in three dimensions and to make advances on a range of
scientific fronts, including weapon physics, materials science
and engineering. AWE, a United Kingdom governmental agency, is
one of the largest high technology research, design development
and production facilities in that country. This contract win was
announced in January 2006.
Current Products and Products in Development
Our supercomputers provide capability, capacity and sustained
performance far beyond typical server-based computer systems,
allowing users to address challenging scientific and engineering
computing problems. Purpose-built for the supercomputing market,
our systems balance highly capable processors, highly scalable
software and very high speed interconnect and communications
capabilities. We plan to utilize increasingly common
infrastructure, components and system software pursuant to our
Adaptive Supercomputing vision. Our goal is to bring new
products and/or major enhancements to market every 12 to
24 months.
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The following table lists our current products and products in
development by internal code names:
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Technology | |
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Applications |
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Current Products |
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Cray XT3
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Q4:2004 |
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AMD Opteron Single and Dual- Core |
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Capability and Enterprise |
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Scientific research; nuclear stockpile stewardship; defense;
structural engineering |
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Cray X1E
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Q4:2004 |
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Proprietary Vector |
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Capability |
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National security; earth science; aerospace design |
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Cray XD1
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Q3:2004 |
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AMD Opteron Single and Dual- Core |
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Enterprise and lower |
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Crash testing; computational fluid dynamics; image processing |
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Cray XT4
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Q4:2006 |
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AMD Opteron Dual and Quad-Core |
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Capability and Enterprise |
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Scientific research; nuclear stockpile stewardship; defense;
structural engineering |
In Development |
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BlackWidow
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Expected 2007 |
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Proprietary Vector |
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Capability |
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National security; earth science; computational fluid dynamics |
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Cray XMT
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Expected 2007 |
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Proprietary Multithreaded |
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Capability and Data Analysis |
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National security; large, unstructured data sets; graph
algorithms |
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Baker
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Expected late 2008 |
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AMD Opteron Quad-Core |
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Capability and Enterprise |
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Scientific research; nuclear stockpile stewardship; defense;
structural engineering |
Cray XT3 System. The Cray XT3 system uses AMD
single-core and dual-core Opteron processors connected via our
proprietary high bandwidth interconnect network. It incorporates
a massively parallel tailored operating system and a
standards-based programming environment designed to deliver very
high sustained application performance in configurations from
100 to over 30,000 processors. The Cray XT3 system, based
on the Red Storm architecture we co-developed with Sandia
National Laboratories, features a tightly integrated management
system to provide high reliability and enable full-system
applications to run to completion. We began shipments of early
versions of the Cray XT3 system in the fourth quarter of
2004, with full production ramp in the first half of 2005. Our
selling focus for the Cray XT3 system covers a range of
peak performance from one to over 100 teraflops.
Cray XT4 System. Our Cray XT4 system combines the
capabilities of our Cray XT3 system and many software
features of our Cray XD1 system to provide a next
generation massively parallel processor supercomputer system.
Our Cray XT4 system uses dual-core AMD Opteron processors, which
are field-upgradeable to quad-core, running a lightweight Linux
operating system and connected to our proprietary second
generation high speed network. The Cray XT4 system is highly
scalable and is designed to provide significant improvements in
peak and sustained performance.
Cray X1E System. In late 2002 we completed hardware
development of the Cray X1 system, which incorporates in
its design both vector and massively parallel processing
capabilities. We commenced delivering production systems late in
the fourth quarter of 2002 and had full production ramp in 2003.
The Cray X1E system, first shipped in December 2004, nearly
triples the peak performance of the Cray X1 system per
cabinet and features one of the worlds most
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powerful processors, at 18 gigaflops. Our selling focus for
the Cray X1E system covers a range of performance from
500 gigaflops to 20 teraflops. We expect the last
Cray X1E system to ship in late 2006 or early 2007, and to
be followed by a successor system currently in development,
code-named BlackWidow.
Cray XD1 System. The Cray XD1 system, designed for
the midrange HPC market, uses a Linux-based operating system in
concert with our automated management infrastructure and
provides the opportunity to accelerate application performance
through the use of field programmable gate arrays. We plan to
combine the capabilities of the Cray XD1 and Cray XT3
systems into our Baker system in development.
Products in Development
BlackWidow. Our BlackWidow program is directed at
developing our next generation vector-based supercomputer as a
successor to our Cray X1E system. The BlackWidow system is
designed to provide major improvements in single thread scalar
performance and overall price performance as measured on both
peak and sustained bases. The BlackWidow system will be tightly
coupled with our Cray XT3 and Cray XT4 systems so that
the user sees a unified environment and file system across both
products, representing an important step in our program towards
providing a heterogeneous computing environment. The BlackWidow
program is co-funded by the U.S. government.
Cray XMT. Our Cray XMT program is directed at
developing a third generation multithreaded supercomputer, which
offers global shared memory and high latency tolerance, with 128
threads per processor. The Cray XMT system will utilize our
Cray XT3 infrastructure and is a significant step towards
implementing our Adaptive Supercomputing vision. The
Cray XMT program is co-funded by the U.S. government.
Baker. Our Baker program is directed at creating the
successor to our Cray XT4 system and to extend our
leadership position in massively parallel computing. The Baker
system will utilize a new highly configurable interconnect
system that combines the interconnect technologies of the
Cray XT3 and Cray XD1 systems and next generation
quad-core and multi-core AMD Opteron processors in a more
densely packaged air and/or liquid-cooled cabinet. The Baker
system is expected to provide beyond one petaflops peak
performance. Our recent contract with Oak Ridge National
Laboratory was the first announced contract for a petaflops
performance system and is based on our Baker system.
Our Adaptive Supercomputing Vision and Cascade Program
Our Adaptive Supercomputing vision supports the anticipated
future needs of HPC customers. With Adaptive Supercomputing, we
expect to expand the concept of heterogeneous computing to a
fully integrated view of both hardware and software supporting
multiple processing technologies within a single, highly
scalable system. Our plan is to increasingly integrate these
processing technologies into a single Linux-based platform. We
expect to include powerful compilers and related software that
will analyze and match application codes to the most appropriate
processing elements we expect this capability will
enable programmers to write code in a more natural way. We
believe the recent DARPA $250 million award to us validates
this vision, which was the center of our DARPA HPCS Phase III
proposal.
Our Adaptive Supercomputing vision incorporates many of our
technical strengths system scalability, multiple
processing technologies, including proprietary processors, and
high bandwidth networks into a single system that we
believe will make supercomputing capabilities accessible to a
larger set of end-users.
Our Cascade development program implements our Adaptive
Supercomputing vision by easing the development of parallel
software codes, supporting global address space models which
exploit shared memory and providing for new high productivity
languages. We plan to develop
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an adaptive, configurable system that can match the attributes
of a wide variety of applications, whether scalar, vector,
multithreaded or other coprocessors, including using field
programmable gate arrays, in order to maximize performance.
Systems developed under the Cascade program will utilize single
and multi-cabinet designs that can leverage a variety of network
cards and processor blades, thus providing system flexibility.
Our Cascade efforts are co-funded by the U.S. government through
the recent award to us under the DARPA HPCS program.
Technology
Our leadership in supercomputing is dependent upon the
successful development and timely introduction of new products.
We focus our research and development activities on designing
system architecture, hardware and software necessary to
implement our product roadmap.
We believe we are the only company in the world with significant
demonstrated expertise in four primary processor technologies:
vector processing, massively parallel processing, multithreading
and co-processing with field programmable gate arrays.
Cray Research pioneered the use of vector systems. These systems
traditionally have a moderate number of very fast custom
processors utilizing shared memory. Vector processing is the
computation of a vector or string of numbers with a single
operation. This technology has proven to be highly effective for
many scientific and engineering applications in areas such as
weather forecasting, cryptanalysis and computational fluid
dynamics. Vector processing is the basis for our existing Cray
X1E system and our successor BlackWidow product.
Massively parallel processing architectures typically link
hundreds or thousands of commodity processors together in a
single system. These systems are best suited for large computing
problems that can be segmented into many parts and distributed
across a large number of processors. We focus on building
systems with highly scalable architectures using high bandwidth
interconnect networks. The Cray XT3, Cray XT4 and the Cray XD1
systems, and the Baker successor system, are based on this
architecture.
Multithreading is designed to provide latency tolerance by
supporting a large number of executable threads per processor,
and quickly switching to another thread when a thread stalls
waiting for data to be computed or to return from memory. These
systems are particularly effective for irregular access to large
data sets and graph-based algorithms. We are currently
developing a third generation multithreading system as part of
our Cray XMT project.
Field programmable gate arrays can be reconfigured or
reprogrammed to implement specific functionality more suitably
and more efficiently than on a general-purpose processor. The
Cray XD1 system introduced the concept of reconfigurable
computing with field programmable gate arrays to our product
portfolio, and we have a roadmap which will bring reconfigurable
computing to our Cray XT3 and Cray XT4 systems.
We have extensive experience in designing hardware components of
HPC systems processors, memory controllers,
interconnect systems, I/ O subsystems and cooling, power, and
packaging infrastructures and integrating them into
a single system. Our hardware research and development
experience includes:
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Integrated circuit design. We have experience in designing
custom and standard cell integrated circuits, including vector
and multithreaded processors. Our processors and other
integrated circuits have special features that let them use high
available memory bandwidth efficiently. |
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High speed interconnect systems. We design high speed and high
bandwidth interconnect systems using a combination of custom I/O
circuits, high density connectors, carefully chosen transmission
media and highly optimized logic. |
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Packaging and cooling. We use very dense packaging in order to
produce systems with high processing capabilities and
complementary bandwidth. This packaging generates more heat per
unit volume. We use specialized cooling techniques to address
this issue, including liquid cooling and high volume air cooling. |
Our hardware engineers are located primarily in our Chippewa
Falls, Wisconsin, and Seattle, Washington, offices.
We have extensive experience in designing and developing
software for HPC systems. This includes the operating system,
the hardware supervisory system and the programming environment.
Over time we plan to transition to a common system software and
a common programming environment across all of our platforms, an
important aspect of our Adaptive Software vision. Our software
research and development experience includes:
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Operating Systems. For our Cray XT3, Cray XT4 and Cray XD1
systems, we make use of and enhance commercially available
versions of the Linux operating system. Additionally, on our
Cray XT3 and Cray XT4 systems, we develop and support a
micro-kernel for the compute resources. On the Cray X1E,
BlackWidow and Cray XMT systems, we utilize and support separate
UNIX-based operating systems. In the future, we anticipate that
all of our systems will exploit the Linux operating system for
all node architectures. |
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Hardware Supervisory Systems (HSS). For all of our
systems, we provide a scalable hardware control infrastructure
for managing hardware, including power control, monitoring of
environmental data and hardware diagnostics. In the future, we
anticipate providing a common HSS infrastructure for all of our
systems. |
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Programming Environment. For our Cray XT3, Cray XT4 and Cray XD1
systems, we use commercially available compilers, libraries and
tools. We also provide Cray developed libraries and tools that
make our systems easier to optimize and more robust. For our
Cray X1E, BlackWidow and Cray XMT systems, we develop our own
compilers, libraries and tools. |
We purchase or license software technologies from third parties
when necessary to provide appropriate support to our customers,
while focusing our own resources where we believe we add the
highest value.
Our software personnel are located principally in our Mendota
Heights, Minnesota, and Seattle, Washington, offices.
Services
Our worldwide service organization provides us with a
competitive advantage and a predictable flow of revenue and
cash. Support services are important to our customers, and we
generally locate our support personnel at customer locations. In
recent years, annual service revenue has ranged from
approximately one-quarter to one-third of total revenue. Our
support services include facility analysis, system installation,
application porting, tuning and support, hardware maintenance
and operating system support.
Support services are provided under separate maintenance
contracts with our customers. These contracts generally provide
for support services on an annual basis, although some cover
multiple years. While most customers pay for support monthly,
others pay on a quarterly or annual basis. Customers may select
levels of support and response times, ranging from parts only to
24 x 7 coverage with
two-hour response.
Our professional services, which include product integration,
advanced computer training, project management services, site
engineering, application analyst support and customer hardware
and software engineering, are provided on a project-by-project
basis.
51
We have approximately 120 employees in our service organization
located at or near customer sites globally and approximately 50
employees in our central service organization located in
Chippewa Falls, Wisconsin, and Mendota Heights, Minnesota.
Sales and Marketing
We focus our sales and marketing activities on government
agencies, industrial companies and academic institutions that
purchase HPC systems. We sell our products primarily through a
seasoned supercomputing direct sales force that operates
throughout the United States and in Canada, Europe, Japan and
Asia-Pacific. We serve smaller foreign markets through sales
representatives and resellers. About half of our sales force is
located in the United States and Canada, with the rest overseas.
A majority of our sales are driven by a formal request for
proposal process for HPC systems. We utilize pre-sales technical
experts to develop technical proposals that meet the customer
requirements and benchmarking teams to demonstrate the
advantages of our particular supercomputing products being
proposed. For a majority of sales opportunities, the terms of
our proposals, including system size, options, pricing and other
commitments, are individually reviewed and approved by our
senior executives. While we often tailor our supercomputer
solutions for each customer, there is substantial commonality in
the underlying components and systems, allowing us to mitigate
potential impacts on manufacturing and procurement operations.
As government agencies and government funded scientific research
institutions comprise a large portion of our customer base, our
government programs office is an integral part of our overall
sales and marketing strategy. Our government programs staff
actively manages our relationship with U.S. government
agencies and Congress.
Our marketing staff is responsible for product marketing,
marketing communications and business development. Product
marketing bridges our research and development organization and
our sales staff to help ensure that our products meet the
demands and requirements of our key customers and a broader set
of prospects. Marketing communications focus on our overall
brand messaging, press releases, conferences, trade shows and
marketing campaigns. Business development focus on providing
products and services to specific customer sets, such as earth
sciences and computer-aided engineering.
Intellectual Property
We attempt to protect our trade secrets and other proprietary
rights through formal agreements with our employees, customers,
suppliers and consultants, and through patent protection.
Although we intend to protect our rights vigorously, there can
be no assurance that our contractual and other security
arrangements will be successful. There can be no assurance that
such arrangements will not be terminated or that we will be able
to enter into similar arrangements on favorable terms if
required in the future. In addition, if such agreements were
breached, there can be no assurance that we would have adequate
remedies for any breach.
Our general policy is to seek patent protection for those
inventions and improvements likely to be incorporated into our
products and services or to give us a competitive advantage. We
have a number of patents and pending patent applications
relating to our hardware and software technologies. While we
believe our patents and applications have value, no single
patent or group of patents is in itself essential to us as a
whole or to any of our key products. Any of our proprietary
rights could be challenged, invalidated or circumvented and may
not provide significant competitive advantage.
We license certain patents and other intellectual property from
Silicon Graphics as part of our acquisition of the Cray Research
operations. These licenses contain restrictions on our use of
the underlying technology, generally limiting the use to
historic Cray products, vector processor computers and the Cray
X1/ X1E system.
52
There can be no assurance that the steps we take will be
adequate to protect or prevent the misappropriation of our
intellectual property. We may infringe or be subject to claims
that we infringe the intellectual property rights of others.
Litigation may be necessary in the future to enforce patents we
obtain, and to protect copyrights, trademarks, trade secrets and
know-how we own, or to defend infringement claims from others.
Such litigation could result in substantial expense to us and a
diversion of our efforts.
Manufacturing and Procurement
We subcontract the manufacture of substantially all of the
hardware components for all of our products, including
integrated circuits, printed circuit boards, connectors, cables,
power supplies and memory parts, on a sole or limited source
basis to third-party suppliers. We use contract manufacturers to
assemble our components for all of our systems. Our
manufacturing strategy is on
build-to-order systems,
focusing on obtaining competitive assembly and component costs
and concentrating on the final assembly, test and quality
assurance stages. This strategy allows us to avoid the large
capital commitment and overhead associated with establishing
full-scale manufacturing facilities and to maintain the
flexibility to adopt new technologies as they become available
without the risk of equipment obsolescence, provide near
real-time configuration changes to exploit faster and/or less
expensive technologies, and provide a higher level of large
scale system quality. We perform final system integration,
testing and check out of our hardware systems. Our manufacturing
personnel are located primarily in Chippewa Falls, Wisconsin.
Our systems incorporate some components that are available from
single or limited sources, often containing our proprietary
designs. Such components include integrated circuits,
interconnect systems and certain memory devices. Prior to
development of a particular product, proprietary components are
competitively bid to a shortlist of technology partners. The
technology partner that provides the best solution for the
component is generally awarded the contract for the life of the
component. Once we have engaged a technology partner, changing
our product designs to utilize another suppliers
integrated circuits can be a costly and time-consuming process.
We also have sole or limited sources for less critical
components, such as peripherals, power supplies, cooling and
chassis hardware. We obtain key integrated circuits from IBM for
our Cray X1E, Cray XT3 and Cray XT4 systems, from Texas
Instruments for our BlackWidow project and from Taiwan
Semiconductor Manufacturing Company for our Cray XMT project and
microprocessors from AMD for our Cray XT3, Cray XT4, Cray XD1
and successor systems. Our procurements from these vendors are
primarily through purchase orders. We have chosen to deal with
sole sources in specific cases due to the availability of
specific technologies, economic advantages and other factors.
Reliance on single or limited source vendors involves several
risks, including the possibility of shortages of key components,
long lead times, reduced control over delivery schedules and
changes in direction by vendors. See Risk
Factors Our reliance on third-party suppliers poses
significant risks to our business and prospects above.
Competition
The HPC market is very competitive. Many of our competitors are
established companies well known in the HPC market, including
IBM, NEC, Hewlett-Packard, Silicon Graphics, Dell, Hitachi, Bull
and Sun Microsystems. Most of these competitors have
substantially greater research, engineering, manufacturing,
marketing and financial resources than we do.
We also compete with systems builders and resellers of systems
that are constructed from commodity components using
microprocessors manufactured by Intel, AMD, IBM and others.
These competitors include the previously named companies as well
as smaller firms that benefit from the low research and
development costs needed to assemble systems from commercially
available commodity products. These companies have capitalized
on developments in parallel processing and increased computer
performance in commodity-based networking and cluster systems.
While these companies products are more limited in
applicability and scalability, they have achieved growing market
acceptance as they offer significant peak/price performance on
53
larger problems lacking complexity. Such companies, because they
can offer high peak performance per dollar, can put pricing
pressure on us in certain procurements.
Internationally, we compete primarily with IBM, Hewlett-Packard,
Sun Microsystems, Silicon Graphics and NEC. While the first four
companies offer large systems based on commodity processors, NEC
also offers vector-based systems with a large suite of ported
application programs. As in the United States, commodity HPC
suppliers can offer systems with significantly better peak/price
performance on certain applications. In addition, to the extent
that Intel, IBM and other microprocessor suppliers develop
processors with greater capabilities than the processors we use
from AMD, our Cray XT3 systems, including upgrades and successor
products, may be at a competitive disadvantage to systems
utilizing such other processors.
We compete primarily on the basis of product performance,
breadth of features, price/performance, scalability, quality,
reliability, upgradability, service and support, corporate
reputation, brand image and account relationships. Our market
approach is more focused than our competitors, as we concentrate
on supercomputing with products designed for the needs of this
specific market. We offer systems that provide greater
performance on the largest, most difficult computational
problems and superior price/performance on many important
applications in the capability market. Our systems often offer
superior total cost of ownership advantages as they typically
use less electric power and cooling and occupy less space than
low bandwidth cluster systems.
Employees
As of December 1, 2006, we had 769 employees. We have no
collective bargaining agreement with our employees. We have not
experienced a work stoppage and believe that our employee
relations are very good.
Properties
Our principal properties as of December 1, 2006, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Approximate Square | |
Location of Property |
|
Uses of Facility |
|
Footage | |
|
|
|
|
| |
Chippewa Falls, WI
|
|
Manufacturing, hardware development, central service and
warehouse |
|
|
227,800 |
|
Seattle, WA
|
|
Executive offices, hardware and software development, sales and
marketing |
|
|
59,600 |
|
Mendota Heights, MN
|
|
Software development, sales and marketing |
|
|
55,300 |
|
We own 179,000 square feet of manufacturing, development,
service and warehouse space in Chippewa Falls, Wisconsin, and
lease the remaining space described above. The real property we
own in Chippewa Falls, Wisconsin, is pledged as collateral for
our secured line of credit with WFF. We lease 19,000 square
feet of office space in Burnaby, British Columbia, Canada; we
are reducing our operations in that office. The lease expires at
the end of 2006.
We also lease a total of approximately 7,200 square feet,
primarily for sales and service offices, in various domestic
locations. In addition, various foreign sales and service
subsidiaries have leased an aggregate of approximately
15,000 square feet of office space. We believe our
facilities are adequate to meet our needs for at least the next
twelve months.
54
MANAGEMENT
Our executive officers and directors, and their ages, as of
December 1, 2006, were as follows:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Peter J. Ungaro
|
|
|
38 |
|
|
Chief Executive Officer, President and Director |
Brian C. Henry
|
|
|
49 |
|
|
Executive Vice President and Chief Financial Officer |
Christopher Jehn
|
|
|
63 |
|
|
Vice President |
Kenneth W. Johnson
|
|
|
64 |
|
|
Senior Vice President, General Counsel and Corporate Secretary |
Steven L. Scott
|
|
|
40 |
|
|
Senior Vice President and Chief Technology Officer |
Jan C. Silverman
|
|
|
56 |
|
|
Senior Vice President |
Margaret A. Williams
|
|
|
48 |
|
|
Senior Vice President |
William C. Blake
|
|
|
57 |
|
|
Director |
John B. Jones, Jr.
|
|
|
62 |
|
|
Director |
Kenneth W. Kennedy, Jr.
|
|
|
61 |
|
|
Director |
Stephen C. Kiely
|
|
|
60 |
|
|
Chairman of the Board |
Frank L. Lederman
|
|
|
57 |
|
|
Director |
Sally G. Narodick
|
|
|
61 |
|
|
Director |
Daniel C. Regis
|
|
|
67 |
|
|
Director |
Stephen C. Richards
|
|
|
52 |
|
|
Director |
Executive Officers
Peter J. Ungaro has served as Chief Executive Officer and
as a member of our Board of Directors since August 2005 and as
President since March 2005; he previously served as Senior Vice
President responsible for sales, marketing and services since
September 2004 and before then served as Vice President
responsible for sales and marketing from when he joined us in
August 2003. Prior to joining us, he served as Vice President,
Worldwide Deep Computing Sales for IBM since April 2003. Prior
to that assignment, he was IBMs vice president, worldwide
HPC sales, a position he held since February 1999. He also held
a variety of other sales leadership positions since joining IBM
in 1991. Mr. Ungaro received a B.A. from Washington State
University.
Brian C. Henry joined us in May 2005 as Executive Vice
President and Chief Financial Officer. He has 20 years of
experience as a technology company chief financial officer.
Mr. Henry joined us after having served as Executive Vice
President and Chief Financial Officer of Onyx Software
Corporation, a full suite customer relationship management
company, which he joined in 2001. He previously served from 1999
to 2001 as Executive Vice President and Chief Financial Officer
of Lante Corporation, a public internet consulting company
focused on e-markets
and collaborative business models. From 1998 to 1999 he was
Chief Operating Officer, Information Management Group, of
Convergys Corporation, which he helped spin-off from Cincinnati
Bell Inc., a diversified service company where he served as
Executive Vice President and Chief Financial Officer from 1993
to 1998. From 1983 to 1993 he was with Mentor Graphics
Corporation in key financial management roles, serving as Chief
Financial Officer from 1986 to 1993. Mr. Henry received his
B.S. from Portland State University and an M.B.A. from Harvard
University where he was a Baker Scholar.
55
Christopher Jehn serves as Vice President responsible for
government programs, a position he has held since joining us in
July 2001. He served as the Assistant Director for National
Security in the Congressional Budget Office from 1998 to 2001.
From 1997 to 1998, he was a member of the Commission on Service
members and Veterans Transition Assistance, and also served in
1997 as the Executive Director of the National Defense Panel.
Mr. Jehn was a Senior Vice President at ICF Kaiser
International, Inc., from 1995 to 1997. Prior to 1995, he held
executive positions at the Institute for Defense Analyses and
the Center for Naval Analyses and served as Assistant Secretary
of Defense for Force Management and Personnel from 1989 to 1993.
He received a B.A. from Beloit College and a Masters from
the University of Chicago.
Kenneth W. Johnson serves as Senior Vice President,
General Counsel and Corporate Secretary. He has held the
position of General Counsel and Corporate Secretary since
joining us in September 1997. From September 1997 to December
2001 he also served as Vice President Finance and Chief
Financial Officer and he again served as Chief Financial Officer
from November 2004 to May 2005. Prior to joining us,
Mr. Johnson practiced law in Seattle for 20 years with
Stoel Rives LLP and predecessor firms, where his practice
emphasized corporate finance. Mr. Johnson received an A.B.
from Stanford University and a J.D. from Columbia University Law
School.
Steven L. Scott has served as Senior Vice President since
October 2005. He originally served as an employee, having joined
Cray Research in 1992, through mid-July 2005, and rejoined us in
October 2005. He was named as Chief Technology Officer in
October 2004 and then again in October 2005. He is responsible
for designing the integrated infrastructure that will drive our
next generation of supercomputers. Prior to his appointment as
Chief Technology Officer, Dr. Scott held a variety of
technology leadership positions. He was formerly the chief
architect of the Cray X1 system and was instrumental in the
design of the Red Storm supercomputer system. Dr. Scott
holds 17 U.S. patents in the areas of interconnection
networks, cache coherence, synchronization mechanisms, and
scalable parallel architectures. Dr. Scott has served on
numerous program committees and as an associate editor for the
IEEE Transactions on Parallel and Distributed Systems, and is a
noted expert in HPC architecture and interconnection networks.
In 2005 he was the recipient of both the Seymour Cray Computing
Award from the IEEE Computer Society and the Maurice Wilkes
Award from the Association of Computing Machinery. He received
his B.S. in electrical and computing engineering, M.S. in
computer science and Ph.D. in computer architecture all from the
University of Wisconsin where he was a Wisconsin Alumni Research
Foundation and Hertz Foundation Fellow.
Jan C. Silverman joined us in November 2005 as Senior
Vice President responsible for corporate strategy and business
development. In this capacity, he is responsible for our
business and marketing strategies and leads our product
management and marketing organizations. Mr. Silverman has
20 years of computer systems experience. From 1999 to 2005
he held senior marketing positions at Silicon Graphics,
including Senior Vice President Strategic Initiatives from 2004
to 2005, Senior Vice President and General Manager, Industry
Solutions and Service Group in 2003, Senior Vice President
Worldwide Marketing from 2000 to 2003 and Vice President Product
Marketing responsible for servers, storage and graphics from
1999 to 2000. Before joining Silicon Graphics,
Mr. Silverman was with Hewlett-Packard from 1989 to 1999,
holding senior product marketing positions in
Hewlett-Packards server and workstation groups and also
led its early Internet program and microprocessor strategy.
Hewlett-Packard, he was with Apollo Computer and Lockheed Martin
in management and research and development positions.
Mr. Silverman holds a B.S. from Rensselaer Polytechnic
Institute and an M.S. in computer science from Lehigh University.
Margaret A. Peg Williams is Senior Vice
President responsible for our software and hardware research and
development efforts, including our current and future products
and projects. Dr. Williams, who has more than 20 years
of experience in the HPC industry, joined us in May 2005. From
1997 through 2005, she held various positions with IBM,
including Vice President of
56
Database Technology and Director and then Vice President of HPC
Software and AIX Development. She also led the user support team
at the Maui High Performance Computing Center from 1993 through
1996. From 1987 through 1993, Dr. Williams held various
positions in high performance computing software development at
IBM. Dr. Williams holds a B.S. in mathematics and physics
from Ursinus College and an M.S. in mathematics and a Ph.D. in
applied mathematics from Lehigh University.
Outside Directors
William C. Blake joined our Board in June 2006.
Mr. Blake is a
25-year veteran of the
High Performance Computing industry. He currently serves as the
Senior Vice President, Product Development of Netezza
Corporation, which develops, markets and sells data warehouse
appliances. Prior to joining Netezza in 2002, he was with Compaq
Computer Corporation for nine years, managing both Compaqs
worldwide High Performance Technical Computing business and its
software development group from 1996 to 2002, which included
being responsible for compiler development for the Alpha
processor; from 1993 to 1996 he was Compaqs director of
software products development and long-range operating system
strategy. Mr. Blake previously held various key engineering
management positions with Digital Equipment Corporation from
1981 to 1993. Mr. Blake is a member of the Board of
Directors of Etnus, Inc., a provider of debugging and analysis
solutions for complex computer codes, and is a member of the
Institute of Electrical and Electronics Engineers and the
Association for Computing Machinery. He received his B.S. in
Electrical Engineering from Lowell Technological Institute.
John B. Jones, Jr. joined our Board in December
2004. He was a leading high technology equity research analyst
for nearly twenty years. Until his retirement in the fall of
2004, Mr. Jones was a Senior Managing Director at Schwab
SoundView Capital Markets. He joined SoundView in 2002 as a
Senior Equity Research Analyst. From 1992 to 2002,
Mr. Jones was a Managing Director and Senior Analyst at
Salomon Brothers, Salomon Smith Barney and Citibank, where he
covered the Server and Enterprise Hardware, Printer and
Test & Measurement industries. From 1985 to 1992, he
was a partner and senior analyst at Montgomery Securities. Prior
to his career as an equity research analyst, Mr. Jones held
various positions in the computer industry at Stratus Computer,
Wang Laboratories and IBM. He is a director of Stratus
Technologies Inc., a provider of fault tolerant computer
servers, technologies and services. He received his B.S. from
the University of Oregon.
Kenneth W. Kennedy, Jr., joined our Board in 1989.
He is the John and Ann Doerr University Professor of
Computational Engineering at Rice University and also is
currently Director of the Center for High Performance Software
at Rice University. He directed the National Science Foundation
Center for Research on Parallel Computation from 1989 to January
2000. From 1997 to 1999, Professor Kennedy served as Co-Chair of
the Presidents Information Technology Advisory Committee
and remained a member of that committee until 2001. He is a
Fellow of the Institute of Electrical and Electronics Engineers,
the Association for Computing Machinery, and the American
Association for the Advancement of Science and has been a member
of the National Academy of Engineering since 1990. In 1999, he
was named recipient of the ACM SIGPLAN Programming Languages
Achievement Award, the third time this award was given. He
received his M.S. and Ph.D. from New York University.
Stephen C. Kiely joined our Board in 1999, was appointed
Lead Director in January 2005 and Chairman of the Board in
August 2005. He is Chairman of Stratus Technologies Inc., a
provider of fault tolerant computer servers, technologies and
services. Mr. Kiely has served in his present position at
Stratus Technologies since 1999 when Stratus was purchased from
Ascend Communications and he served as Chief Executive Officer
of Stratus Technologies from 1999 through June 2003.
Mr. Kiely joined Stratus in 1994 and held various executive
positions with Stratus, becoming President of the Stratus
Enterprise Computer division in 1998. Prior to joining Stratus,
Mr. Kiely held a number of executive positions with several
information technology
57
companies, including EON Corporation, Bull Information Systems,
Prisma, Inc., Prime Computer and IBM. Mr. Kiely is a past
member of the Advisory Council for the School of Engineering at
Rice University, has served as a board member of the
Massachusetts Technology Park Corporation and was a member of an
advisory board to the President of the State University of New
York at New Paltz. Mr. Kiely received his B.A. in
Mathematics at Fairfield University and his M.S. in Management
at the Stanford University Graduate School of Business.
Frank L. Lederman joined our Board in May 2004. He served
as a Vice President and Chief Technical Officer of Alcoa, Inc.,
from 1995 to his retirement in 2002. From 1988 to 1995,
Dr. Lederman was with Toronto-based Noranda Inc., where he
served as Senior Vice President, Technology. His
responsibilities included directing the Noranda Technology
Center in Montreal. Before joining Noranda, he was with General
Electric Company from 1976 to 1988 serving in a number of
positions in management and as a physicist, including as manager
of electronics research programs and resources in the Corporate
Research and Development Center in Schenectady, N.Y.
Dr. Lederman received an M.S. and Ph.D. in Physics at the
University of Illinois and a B.S. and M.S. at Carnegie-Mellon
University, and was a Post-Doctoral Fellow in Electrical
Engineering at the University of Pennsylvania.
Sally G. Narodick joined our Board in October 2004. She
is a retired educational technology and
e-learning consultant.
From 2000 to 2004 she was President of Narodick Consulting, an
e-learning consulting
firm. From 1998 to 2000, she served as Chief Executive Officer
of Apex Online Learning, an Internet educational software
company. Previously, Ms. Narodick served as an education
technology consultant, both independently and for the Consumer
Division of IBM from 1996 to 1998. From 1989 to 1996,
Ms. Narodick served as Chairman and Chief Executive Officer
of Edmark Corporation, an educational software company sold to
IBM in 1996. From 1973 to 1987, she served in a variety of
financial management capacities at Seafirst Corporation and
Seafirst Bank, and was a securities analyst at Paine Webber from
1970 to 1973. She also serves as a Board member of Penford
Corporation, Puget Energy, Inc., Solutia Inc. and SumTotal
Systems. A graduate of Boston University, Ms. Narodick
earned an M.A. in Teaching from Columbia University and an
M.B.A. from New York University.
Daniel C. Regis joined our Board in 2003. He currently is
Managing Director of Digital Partners, a venture capital fund
specializing in Northwest emerging technology companies, which
he co-founded in 2000. From 1996 to 1999, he was President of
Kirlan Venture Capital, Inc., where he managed similarly focused
technology funds. Prior to that, Mr. Regis spent over
30 years with Price Waterhouse LLP, including serving as
managing partner of the Seattle office and previously of the
Northwest and Portland, Oregon offices. He is a director of
Columbia Banking System, Inc., and Art Technology Group, Inc. He
received his B.S. from Seattle University.
Stephen C. Richards joined our Board in October 2004 and
is currently a private investor. Previously he served as Chief
Operating Officer and Chief Financial Officer of McAfee, Inc.,
the leading provider of intrusion prevention and risk management
solutions, a position he held for four years until his
retirement in December 2004. He served as Chief Online Trading
Officer of E*TRADE Group, Inc., a position he held from March
1999 to June 2000. From 1998 to February 1999, he served as
Senior Vice President, Corporate Development and New Ventures at
E*TRADE, following two years as E*TRADEs Senior Vice
President of Finance, Chief Financial Officer and Treasurer.
Prior to joining E*TRADE in April 1996, he was Managing Director
and Chief Financial Officer of Correspondent Clearing at Bear
Stearns & Companies, Inc., Vice President/ Deputy
Controller of Becker Paribas and First Vice President/
Controller of Jefferies and Company, Inc. Mr. Richards is a
member of the Board of Directors of Tradestation Group Inc., and
Zantaz, Inc., and is a trustee for the UC Davis Foundation.
Mr. Richards is a Certified Public Accountant. He received
a B.A. from the University of California at Davis and an M.B.A.
in Finance from the University of California at Los Angeles.
58
Executive Compensation and Agreements
Compensation
The following table summarizes the salaries, bonuses and other
compensation paid during the last three years for the two
individuals who served as our President and Chief Executive
Officer in 2005, our next four most highly compensated executive
officers who were serving as executive officers at the end of
2005 and one individual who would have been one of our four most
highly compensated executive officers but for the fact he was
not serving as an executive officer at the end of 2005.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Compensation | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Annual Compensation | |
|
|
|
Securities | |
|
|
|
|
Fiscal | |
|
| |
|
Restricted Stock | |
|
Underlying | |
|
All Other | |
Name and Principal Position |
|
Year | |
|
Salary | |
|
Bonus(1) | |
|
Awards(2) | |
|
Options | |
|
Compensation(3) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Peter J. Ungaro(4)
|
|
|
2005 |
|
|
$ |
264,262 |
|
|
$ |
413,754 |
|
|
$ |
846,000 |
|
|
|
175,000 |
|
|
$ |
2,543 |
|
|
Chief Executive Officer & |
|
|
2004 |
|
|
$ |
283,333 |
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
$ |
3,759 |
|
|
President |
|
|
2003 |
|
|
$ |
100,480 |
|
|
$ |
319,680 |
|
|
$ |
180,000 |
|
|
|
125,000 |
|
|
$ |
315 |
|
|
James E. Rottsolk(5)
|
|
|
2005 |
|
|
$ |
339,333 |
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
|
$ |
662,530 |
|
|
Former Chief Executive |
|
|
2004 |
|
|
$ |
350,000 |
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
|
$ |
7,658 |
|
|
Officer & President |
|
|
2003 |
|
|
$ |
337,500 |
|
|
$ |
263,813 |
|
|
$ |
131,245 |
|
|
|
|
|
|
$ |
8,106 |
|
|
Brian C. Henry(6)
|
|
|
2005 |
|
|
$ |
168,641 |
|
|
$ |
281,250 |
|
|
$ |
493,500 |
|
|
|
125,000 |
|
|
$ |
2,292 |
|
|
Executive Vice President & Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margaret A. Williams(7)
|
|
|
2005 |
|
|
$ |
182,231 |
|
|
$ |
125,000 |
|
|
$ |
493,500 |
|
|
|
75,000 |
|
|
$ |
1,465 |
|
|
Senior Vice President |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven L. Scott(8)
|
|
|
2005 |
|
|
$ |
258,215 |
|
|
$ |
125,000 |
|
|
|
|
|
|
|
100,000 |
|
|
$ |
2,662 |
|
|
Senior Vice President & |
|
|
2004 |
|
|
$ |
214,400 |
|
|
|
|
|
|
|
|
|
|
|
18,750 |
|
|
$ |
3,756 |
|
|
Chief Technology Officer |
|
|
2003 |
|
|
$ |
211,667 |
|
|
$ |
64,200 |
|
|
|
|
|
|
|
|
|
|
$ |
3,625 |
|
|
Kenneth W. Johnson(9)
|
|
|
2005 |
|
|
$ |
219,076 |
|
|
$ |
25,000 |
|
|
$ |
141,000 |
|
|
|
79,175 |
|
|
$ |
5,907 |
|
|
Senior Vice President & |
|
|
2004 |
|
|
$ |
220,000 |
|
|
$ |
30,000 |
|
|
|
|
|
|
|
12,500 |
|
|
$ |
7,713 |
|
|
General Counsel |
|
|
2003 |
|
|
$ |
217,500 |
|
|
$ |
88,440 |
|
|
$ |
43,995 |
|
|
|
|
|
|
$ |
8,327 |
|
|
Burton J. Smith(10)
|
|
|
2005 |
|
|
$ |
256,115 |
|
|
$ |
750 |
|
|
|
|
|
|
|
25,000 |
|
|
$ |
5,527 |
|
|
Former Chief Scientist |
|
|
2004 |
|
|
$ |
250,000 |
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
$ |
6,338 |
|
|
|
|
|
2003 |
|
|
$ |
246,500 |
|
|
$ |
100,500 |
|
|
$ |
49,996 |
|
|
|
|
|
|
$ |
8,169 |
|
|
|
(1) |
Bonuses are shown for the year earned. If the bonuses were not
paid during the year, they were paid in the following calendar
year. |
|
(2) |
In 2005 we granted shares of restricted stock to the named
executive officers as follows: Mr. Ungaro
150,000 shares; Mr. Henry
87,500 shares; Ms. Williams
87,500 shares; and Mr. Johnson
25,000 shares. All such shares vest on June 30, 2007,
and are forfeitable if before such date the officer is
discharged with cause or resigns without good reason, as such
terms are defined in the restrictive stock agreements. If we
were to pay dividends on our common stock, the holders of the
restricted shares would be eligible to receive such dividends.
The values shown in the above table are based on the closing
price of $5.64 per share for our common stock on the date
of grant, December 20, 2005, as reported by Nasdaq. The
restricted shares granted in 2005 are the only restricted shares
currently owned by the named executive officers. As of
December 31, 2005, these shares had the following |
59
|
|
|
values, based on the closing price of our common stock of
$5.32 per share on December 30, 2005, the last trading
day of the year, as reported by Nasdaq:
Mr. Ungaro $798,000; Mr. Henry
$465,500; Ms. Williams $465,000, and
Mr. Johnson $133,000. |
|
|
|
Mr. Ungaro received an award of 5,000 restricted shares
when he joined us in 2003; these restricted shares fully vested
in 2004. As part of a bonus plan for 2003, the following
individuals received the indicated shares of restricted stock in
May 2004, all of which vested in May 2005:
Mr. Rottsolk 4,707 shares;
Mr. Johnson 1,578 shares and
Mr. Smith 1,793 shares. The value shown on the
above table for these restricted shares are based upon the
closing price of our common stock on the respective dates of
grant. |
|
|
(3) |
All Other Compensation for 2005 includes premiums
for group term life insurance policies:
Mr. Ungaro $486, Mr. Rottsolk
$3,564, Mr. Henry $542,
Ms. Williams $540, Mr. Scott
$477, Mr. Johnson $3,434, and
Mr. Smith $3,416, and our matching
contributions under our 401(k) Plan: Mr. Ungaro
$2,057, Mr. Rottsolk $2,716,
Mr. Henry $1,750, Ms. Williams
$925, Mr. Scott $2,185,
Mr. Johnson $2,473, and
Mr. Smith $2,111. |
|
(4) |
Mr. Ungaro joined us in August 2003. The amount shown as
Bonus for 2003 includes a one-time hiring bonus of
$250,000. On March 7, 2005, Mr. Ungaro was appointed
President. In connection with his appointment as President, he
received a one-time appointment bonus of $300,000 that in part
was in lieu of a payment under a 2004 special incentive plan
based on product revenue and gross margin and his annual base
salary was increased to $350,000 effective March 1, 2005.
We had accrued $88,647 for payment of such 2004 bonus. On
August 8, 2005, Mr. Ungaro was named Chief Executive
Officer. The amount shown under Bonus for 2005
includes an override bonus based on gross margin pursuant to our
March 2005 agreement with Mr. Ungaro. |
|
(5) |
Mr. Rottsolk was President until March 7, 2005, and
Chief Executive Officer until August 8, 2005. He remained
an employee until January 1, 2006. The amount shown under
All Other Compensation includes the amount of
$656,250 which is payable to Mr. Rottsolk under our
Executive Severance Policy. This amount is being paid in
bi-weekly payments from January 2006 through December 31,
2007. |
|
(6) |
Mr. Henry joined us as Chief Financial Officer in May 2005.
Mr. Henry earned a bonus for 2005 for the accomplishment of
certain goals specified in his offer letter. The amount shown as
Bonus for 2005 also includes a one-time hiring bonus
of $200,000, which vested in full in May 2006. |
|
(7) |
Ms. Williams joined us as a Senior Vice President in April
2005. The amount shown as Bonus for 2005 was a
one-time hiring bonus which vested in April 2006. |
|
(8) |
Mr. Scott was appointed as Senior Vice President in October
2005. He previously served as an employee from 1992 through
mid-July 2005, including serving as Chief Technology Officer
since October 2004, and rejoined us in September 2005. The
amount shown as Bonus for 2005 was a one-time hiring
bonus, of which $63,000 was paid in September 2005 and $62,000
was paid in March 2006, which Mr. Scott has agreed to repay
to us if he leaves before September 2007. |
|
(9) |
From November 2004 to May 2005, Mr. Johnson also served as
our Chief Financial Officer, and the amounts shown under
Bonus for 2004 and 2005 were for his contributions
for accepting this position on an interim basis in addition to
his other responsibilities. Of the options shown as granted to
Mr. Johnson in 2005, 54,175 were outstanding options that
were repriced to $5.96 per share, the fair market value of
our common stock on December 20, 2005, the date of
repricing, from exercise prices ranging from to $15.80 to
$35.36 per share. No other changes were made to the terms
of his options. |
60
|
|
(10) |
Mr. Smith resigned as an officer and employee effective
December 7, 2005. The amount shown under Bonus
includes payments to Mr. Smith for issued patents under a
policy available to all employees. |
Management Agreements, Policies and Plans
Management Continuation Agreements. We have entered into
Management Continuation Agreements with certain of our employees
and officers, including our current executive officers named in
the Summary Compensation Table above. Pursuant to these
agreements, each such officer or employee is eligible to
receive, in the event that his or her employment is terminated
within three years following a change of control, other than for
just cause, death, disability, retirement or resignation other
than for good reason, as the agreement defines such terms, an
amount equal to two times his or her annual compensation,
continuation of health benefits and group term life insurance
for twenty-four months thereafter and the acceleration of
vesting for all options held. If these severance payments were
to constitute excess parachute payments for federal
income tax purposes, we have agreed to pay any excise taxes due
with respect to those excess parachute payments, and
any further excise taxes and federal and state income taxes due
with respect to these additional payments, so that the employee
receives the same after-tax compensation the employee would have
received if no excise tax were imposed.
Under the Management Continuation Agreements, annual
compensation means one year of base salary, at the highest
base salary rate that was paid to the employee in the
12-month period prior
to the date of his or her termination of employment, plus 100%
of the annual bonus which the employee was eligible to receive
in that 12-month
period. A change of control includes a 50% or
greater change in voting power immediately following a merger or
an acquisition and certain changes in the composition of our
Board of Directors during a
36-month period not
initiated by our Board of Directors.
Executive Severance Policy. In October 2002 the Board
adopted an Executive Severance Policy that covers our officers,
including the executive officers named in the Summary
Compensation Table. This policy primarily applies to
terminations of employment without cause or resignations for
good reason (as such terms are defined in the policy); this
policy does not apply if the Management Continuation Agreements
described above are applicable and does not apply to
terminations due to death, disability or retirement. This policy
provides for continuation of base salary, exclusive of bonus,
for varying periods except as discussed below. For senior vice
presidents, the period is nine months plus one month for each
year of service as an officer up to a maximum of 12 months;
and for other vice presidents, the period is six months plus one
month for each year of service as an officer up to a maximum of
nine months. The Chief Executive Officer receives a payment
based on his total annual base salary and the executive bonus
based on the target established by the Board for each year; he
receives 200% of such compensation if his employment is
terminated before the end of March 2008 and 100% of such
compensation thereafter. This policy also provides for continued
payment of our portion of medical, dental, vision and life
insurance benefits, extension of a period to exercise stock
options if permitted by the applicable option agreement and
executive outplacement services. To receive these benefits the
officer must provide us with a general release and continue to
comply with his or her confidentiality and other agreements with
us. Our obligations under this policy are unfunded and the Board
has the express right to modify or terminate this policy at any
time.
Retention Agreements. On December 20, 2005, our
Board of Directors approved retention agreements with each of
Peter J. Ungaro, President and Chief Executive Officer; Brian C.
Henry, Executive Vice President and Chief Financial Officer; and
Margaret A. Williams, Senior Vice President. The agreements
provide that if the officer remains employed by us through
December 31, 2006, and December 31, 2007, he or she
will receive a retention bonus. The amount of the bonus is equal
to, for 2006, 100% of the sum of the officers base pay in
2006 plus target bonus assuming 100% of target is reached, and,
for 2007, 50% of the sum of the officers
61
base pay in 2007 plus target bonus assuming 100% of target is
reached. In the event the officer is terminated without cause or
terminates with good reason, as such terms are defined in the
agreement, Mr. Henry and Ms. Williams would receive
payment under the retention agreement and, if applicable, a
payment under our Executive Severance Policy, as then in effect;
in such event Mr. Ungaro would receive the higher of the
payment under the retention agreement or the Executive Severance
Policy, but not payments under both. An officer would not
receive a payment under the retention agreement if he or she
were terminated for cause, died, retired, terminated employment
for other than for good reason or because of disability, as such
terms are defined in the retention agreement. If there were a
change of control, the Board then would decide whether the
retention agreements would be applicable in addition to the
Management Continuation Agreements described above.
2006 Executive Salaries and Bonus Plan. The Board did not
grant any salary increases to executive officers for 2006. On
April 29, 2006, the Board of Directors approved the 2006
Bonus Plan, which is based on adjusted results from operations
(75%) and on achievement of personal goals (25%). In determining
results from operation (pre-tax, pre-interest and pre-foreign
currency effects), any charge due to FAS 123(R) stock
compensation, restructuring, 401(k), variable pay, bonus and
retention incentives, are excluded. To the extent there are
other unplanned significant transactions or charges, then the
Compensation Committee would determine what adjustments, if any,
are appropriate in determining the results from operations for
purposes of determining the bonuses. No bonus will be paid
unless results from operations, as so adjusted, reach a
pre-determined minimum level. In addition, no bonus will be paid
unless 2006 bookings exceed a defined threshold level.
Each participant in the Cray 2006 Bonus Plan is assigned a
percentage of the participants base salary as his/her
target bonus. Bonus would be payable at 25% of target bonus once
results from operations reach the minimum level and increase up
to 150% of the target bonus as specified levels of results from
operations established by the Board are reached. Bonuses cannot
exceed more than 100% of target bonus unless 2006 bookings are
at least at a pre-determined level, which is higher than the
threshold level. Any bonus higher than 150% of target bonus is
at the Boards discretion. The Chief Executive Officer,
subject to the approval of the Compensation Committee, retains
the right to adjust the formula bonus from 0% to 125% for each
officer. The Board approves the final bonus for the Chief
Executive Officer.
Additional Information
Additional information regarding our 2005 executive
compensation, including option grants in 2005, aggregated option
values as of year-end 2005, ten-year option repricing, equity
compensation plan information and other information regarding
our 2005 executive compensation, can be found in our Definitive
Proxy Statement for the 2006 Annual Meeting of Shareholders, as
filed with the SEC on April 28, 2006, which is incorporated
by reference in this prospectus.
62
PRINCIPAL SHAREHOLDERS
The following table shows, as of December 11, 2006, the
number of shares of our common stock beneficially owned by the
following persons: (a) all persons we know to be beneficial
owners of at least 5% of our common stock, (b) our current
directors, (c) the executive officers named in the Summary
Compensation Table and (d) all current directors and
executive officers as a group. As of December 11, 2006,
there were 23,290,301 shares of our common stock
outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options or | |
|
|
|
|
|
|
|
|
Warrants | |
|
|
|
|
|
|
Common | |
|
Exercisable | |
|
|
|
|
|
|
Shares | |
|
Within | |
|
Total Beneficial | |
|
|
Name and Address*(1) |
|
Owned | |
|
60 Days | |
|
Ownership | |
|
Percentage | |
|
|
| |
|
| |
|
| |
|
| |
5% Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terren S. Peizer(2)
|
|
|
0 |
|
|
|
1,289,352 |
|
|
|
1,289,352 |
|
|
|
5.25 |
% |
11150 Santa Monica Blvd., #1500
Los Angeles, CA 90025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bear Stearns Asset Management Inc.(3)
|
|
|
1,464,358 |
|
|
|
0 |
|
|
|
1,464,358 |
|
|
|
6.29 |
% |
383 Madison Avenue
New York, NY 10179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wells Fargo & Company(4)
|
|
|
2,579,793 |
|
|
|
50,000 |
|
|
|
2,629,793 |
|
|
|
11.27 |
% |
420 Montgomery Street
San Francisco, CA 94104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William C. Blake
|
|
|
250 |
|
|
|
5,000 |
|
|
|
5,250 |
|
|
|
** |
|
John B. Jones, Jr.(5)
|
|
|
7,452 |
|
|
|
12,083 |
|
|
|
19,535 |
|
|
|
** |
|
Kenneth W. Kennedy, Jr.(5)
|
|
|
5,553 |
|
|
|
28,250 |
|
|
|
33,803 |
|
|
|
** |
|
Stephen C. Kiely(5)
|
|
|
21,182 |
|
|
|
32,250 |
|
|
|
53,432 |
|
|
|
** |
|
Frank L. Lederman(5)
|
|
|
9,728 |
|
|
|
15,000 |
|
|
|
24,728 |
|
|
|
** |
|
Sally G. Narodick(5)
|
|
|
8,451 |
|
|
|
12,500 |
|
|
|
20,951 |
|
|
|
** |
|
Daniel C. Regis(5)
|
|
|
11,399 |
|
|
|
12,500 |
|
|
|
23,899 |
|
|
|
** |
|
Stephen C. Richards(5)
|
|
|
13,451 |
|
|
|
12,500 |
|
|
|
25,951 |
|
|
|
** |
|
Named Executives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peter J. Ungaro(6)
|
|
|
160,727 |
|
|
|
400,000 |
|
|
|
560,727 |
|
|
|
2.37 |
% |
James E. Rottsolk(7)
|
|
|
40,209 |
|
|
|
215,000 |
|
|
|
255,209 |
|
|
|
1.09 |
% |
Brian C. Henry(6)
|
|
|
87,603 |
|
|
|
125,000 |
|
|
|
212,603 |
|
|
|
** |
|
Margaret A. Williams(6)
|
|
|
90,256 |
|
|
|
75,000 |
|
|
|
165,256 |
|
|
|
** |
|
Steven L. Scott
|
|
|
672 |
|
|
|
129,943 |
|
|
|
130,615 |
|
|
|
** |
|
Kenneth W. Johnson(6)(8)
|
|
|
48,638 |
|
|
|
132,550 |
|
|
|
181,188 |
|
|
|
** |
|
Burton J. Smith
|
|
|
200 |
|
|
|
0 |
|
|
|
200 |
|
|
|
** |
|
All current directors and executive officers as a group (15
persons)(6)(9)
|
|
|
511,785 |
|
|
|
1,052,181 |
|
|
|
1,564,056 |
|
|
|
6.43 |
% |
|
|
* |
Unless otherwise indicated, all addresses are c/o Cray
Inc., 411 First Avenue South, Suite 600, Seattle, WA
98104-2860. |
|
|
(1) |
This table is based upon information supplied by the named
executive officers, directors and 5% shareholders, including
filings with the Securities and Exchange Commission (the
SEC). Unless otherwise indicated in these notes and
subject to community property laws where applicable, each of the
listed shareholders has sole voting and investment power with
respect to the shares shown as beneficially owned by such
shareholder. The number of |
63
|
|
|
shares and percentage of beneficial ownership includes shares of
common stock issuable pursuant to stock options and warrants
held by the person or group in question, which may be exercised
on December 11, 2006, or within 60 days thereafter. |
|
|
(2) |
Mr. Peizer has sole voting and dispositive powers regarding
the shares of common stock underlying certain warrants, which
are held of record by Laphroig LLC (warrants for
1,220,610 shares) and Chinaco LLC (warrants for
64,242 shares). |
|
(3) |
The information under the column Common Shares Owned
is based on a Schedule 13G/A filed with the SEC on
December 12, 2006, regarding ownership as of
November 30, 2006. The filer, as an investment adviser,
reports sole voting power over 276,433 shares and shared
voting power over 939,900 shares, and sole dispositive
power over 391,330 shares and shared dispositive power over
939,900 shares. |
|
(4) |
The information under the column Common Shares Owned
is based on a Schedule 13G filed with the SEC on
February 15, 2006, regarding ownership as of
December 31, 2005. In that Schedule 13G, as adjusted
for our June 8, 2006, one-for-four reverse stock split,
Wells Fargo & Company, as parent company, reported sole
voting power over 2,519,535 shares and sole dispositive
power over 2,579,793 shares, with one subsidiary, Wells
Capital Management Incorporated, reporting sole voting power
over 662,500 shares and sole dispositive power over
2,474,119 shares and another subsidiary, Wells Fargo Funds
Management, LLC, reporting sole voting power over
1,857,035 shares and sole dispositive power over
105,674 shares. We have issued a common stock purchase
warrant to Wells Fargo Foothill, Inc., which we believe is
affiliated with the foregoing entities, covering
50,000 shares, which was not reflected on the
Schedule 13G. |
|
(5) |
The number of common shares shown for the indicated independent
directors includes restricted shares, 50% of which vest on
June 7, 2007, and 50% of which vest on June 7, 2008,
and are forfeitable in certain circumstances, as follows:
Mr. Jones 5,502 shares;
Mr. Kennedy 5,230 shares;
Mr. Kiely 6,182 shares;
Mr. Lederman 5,978 shares;
Ms. Narodick 7,201 shares;
Mr. Regis 8,899 shares; and
Mr. Richards 7,201 shares. |
|
(6) |
The number of common shares shown for the indicated executive
officers includes restricted shares which vest on June 30,
2007, and are forfeitable in certain circumstances, as follows:
Mr. Ungaro 150,000 shares,
Mr. Henry 87,500 shares,
Ms. Williams 87,500 shares,
Mr. Johnson 25,000 shares, and other
executive officers 37,500 shares. |
|
(7) |
Mr. Rottsolk disclaims beneficial ownership of
1,467 shares for which he has voting and dispositive powers
as custodian for his son under the Washington Uniform Gifts to
Minors Act. |
|
(8) |
Mr. Johnson disclaims beneficial ownership of
650 shares for which he has voting and dispositive powers
as a trustee of trusts for the benefit of his children,
25 shares owned by his wife and 125 shares owned by
one of his children. |
|
(9) |
Our current directors and executive officers exclude our former
Chief Executive Officer and President, Mr. Rottsolk, and our
former Chief Scientist, Mr. Smith, and include two executive
officers who are not named executive officers. |
TRANSACTIONS WITH PRINCIPAL SHAREHOLDER
On May 31, 2005, we entered into a secured credit agreement
with WFF providing us with a two-year revolving line of credit
for up to $30 million and agreed to issue the lender a
four-year warrant to purchase 50,000 shares of our
common stock. On February 15, 2006, Wells Fargo &
Company, on behalf of two of its registered investment advisor
subsidiaries, filed with the SEC a Schedule 13G reporting
the beneficial ownership of 2,579,793 shares of our common
stock, which constitutes approximately 11.1% of our
outstanding common stock as of December 11, 2006. We
believe that WFF is an affiliate of Wells Fargo &
Company. From time to time after February 15, 2006, we have
amended our credit agreement with WFF and obtained waivers from
WFF of a financial covenant and of its registration rights to
include shares issuable upon exercise of its warrant in this
offering. In the first nine months of 2006, we paid WFF an
aggregate of
64
approximately $816,000 in closing, letter of credit, unused line
and other fees. As of September 30, 2006, we held a forward
contract of £3.7 million (British pound sterling) to
hedge anticipated cash receipts on a sales contract through
Wells Fargo Bank N.A. In the first nine months of 2006, we paid
Wells Fargo Bank N.A. the sum of $1.5 million in connection
with this forward currency contract and $44,000 in bank fees. We
believe that Wells Fargo Bank N.A. is an affiliate of Wells
Fargo & Company. Because of the beneficial stock
ownership of Wells Fargo & Company and its relationship
to WFF and Wells Fargo Bank N.A., such transactions may be
deemed to be related party transactions.
65
DESCRIPTION OF CAPITAL STOCK AND CONVERTIBLE NOTES
At December 11, 2006, our authorized capital stock
consisted of 75,000,000 shares of common stock,
$.01 par value per share, and 5,000,000 shares of
preferred stock, $.01 par value per share. At
December 11, 2006, no shares of preferred stock and
23,290,301 shares of our common stock were issued and
outstanding. In addition, as of that date, an aggregate of
4,517,498 shares of common stock were issuable on exercise
of certain options and warrants, and an aggregate of
4,144,008 shares of common stock were issuable on
conversion of our Notes, or, under certain circumstances
specified in the indenture governing the Notes, a maximum of
5,698,006 shares.
The following description of our capital stock and the Notes
does not purport to be complete and is subject to and qualified
in its entirety by our articles of incorporation and bylaws and
the indenture governing the Notes, which are included as
exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Washington law.
Common Stock
Holders of common stock are entitled to one vote per share in
all matters to be voted on by the shareholders. Shareholders may
not cumulate their votes in the election of directors. Subject
to preferences that may be applicable to any preferred stock
outstanding at the time, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared from
time to time by the Board of Directors out of funds legally
available therefor. See Dividend Policy, above. In
the event of our liquidation, dissolution or winding up, holders
of common stock are entitled to share ratably in all assets
remaining after payment of or making provision for our
liabilities and the liquidation preference, if any, of any then
outstanding shares of preferred stock. Holders of common stock
have no preemptive rights and no rights to convert their common
stock into any other securities, and there are no redemption or
sinking fund provision with respect to any such shares. The
rights, preferences and privileges of shares of common stock are
subject to, and may be materially and adversely affected by, the
rights of shares of any series of preferred stock which we may
designate and issue in the future.
Preferred Stock
Our Board of Directors has the authority to issue the preferred
stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any
wholly unissued shares of preferred stock, as well as to fix the
number of shares constituting any series and the designation of
such series, without any vote or action by the shareholders. The
Board of Directors, without shareholder approval, may issue
preferred stock having voting and conversion rights which could
materially and adversely affect the voting power of the holders
of common stock, and having liquidation preferences and rights
to dividends that could decrease or eliminate the amount of
earnings and assets available for distribution to holders of
common stock as dividends or on liquidation. In addition, the
issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control.
Convertible Senior Subordinated Notes
In December 2004 we issued $80 million aggregate principal
amount of 3.0% Convertible Senior Subordinated Notes due
2024 (the Notes) in a private placement pursuant to
Rule 144A under the Securities Act. These unsecured Notes
bear interest at an annual rate of 3.0%, payable semiannually on
June 1 and December 1 of each year through the
maturity date of December 1, 2024.
The Notes are convertible, under certain circumstances, into our
common stock at an initial conversion rate of
51.8001 shares of common stock per $1,000 principal amount
of Notes, which is equivalent to an initial conversion price of
approximately $19.31 per share of common stock, subject to
adjustment in certain events. Accordingly, in the absence of any
adjustment, the Notes would be convertible into an aggregate of
4,144,008 shares of common stock. In the event of
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certain fundamental changes relating to a merger, change of
control or sale of substantially all our assets, the conversion
rate would be increased as provided in the indenture governing
the Notes, subject to a maximum of 5,698,006 shares of common
stock. Upon conversion of the Notes, in lieu of delivering
common stock, we may, at our discretion, deliver cash or a
combination of cash and common stock.
The Notes are general unsecured senior subordinated obligations,
ranking junior in right of payment to our existing and future
senior indebtedness, equally in right of payment with our
existing and future indebtedness or other obligations that are
not, by their terms, either senior or subordinated to the Notes
and senior in right of payment to our future indebtedness that,
by its terms, is subordinated to the Notes. In addition, the
Notes are effectively subordinated to any of our existing and
future secured indebtedness to the extent of the assets securing
such indebtedness and structurally subordinated to the claims of
all creditors of our subsidiaries.
Holders may convert the Notes during a conversion period
beginning with the mid-point date in a fiscal quarter to, but
not including, the mid-point date (or, if that day is not a
trading day, then the next trading day) in the immediately
following fiscal quarter, if on each of at least 20 trading
days in the period of 30 consecutive trading days ending on the
first trading day of the conversion period, the closing sale
price of our common stock exceeds 120% of the conversion price
in effect on that 30th trading day of such period. The
mid-point dates for the fiscal quarters are
February 15, May 15, August 15 and November 15.
Holders may also convert the Notes if we have called the Notes
for redemption or, during prescribed periods, upon the
occurrence of specified corporate transactions or a fundamental
change, in each case as described in the indenture governing the
Notes.
We may, at our option, redeem all or a portion of the Notes for
cash at any time on or after December 1, 2007, and prior to
December 1, 2009, at a redemption price of 100% of the
principal amount of the Notes plus accrued and unpaid interest
plus a make whole premium of $150.00 per $1,000 principal
amount of Notes, less the amount of any interest actually paid
or accrued and unpaid on the Notes prior to the redemption date,
if the closing sale price of our common stock exceeds 150% of
the conversion price for at least 20 trading days in the
30-trading day period ending on the trading day prior to the
date of mailing of the redemption notice. On or after
December 1, 2009, we may redeem for cash all or a portion
of the Notes at a redemption price of 100% of the principal
amount of the Notes plus accrued and unpaid interest. Holders
may require us to purchase all or a part of their Notes for cash
at a purchase price of 100% of the principal amount of the Notes
plus accrued and unpaid interest on December 1, 2009, 2014,
and 2019, or upon the occurrence of certain events provided in
the indenture governing the Notes.
Washington Business Corporation Act and the Restated Articles
of Incorporation and Bylaws
General
In general, our restated articles of incorporation and bylaws
provide that:
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our Board of Directors shall have no less than six members, the
actual number to be set in the bylaws (the bylaws set the actual
number at nine directors; we currently have nine directors); |
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directors may only be removed for cause by the affirmative vote
of the holders of not less than two-thirds of the shares
entitled to elect directors at a special meeting called for that
purpose; |
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the existing directors or the shareholders may fill any vacancy
or newly created directorship with a new director, except that a
vacancy created by the removal of a director for cause may be
filled only by a vote of the holders of two-thirds of the shares
entitled to elect directors; and |
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only the chairman of the Board, the president, vice-president,
secretary or treasurer, or any two or more directors may call a
meeting of the Board of Directors. |
We are a Washington corporation and we are subject to the
Washington Business Corporation Act. Under the laws of
Washington, the articles of incorporation generally can be
amended only with the approval of our board of directors and our
shareholders, except that the Board of Directors can amend the
articles of incorporation without shareholder approval to
authorize one or more series of preferred stock. Our articles of
incorporation provide that the articles of incorporation cannot
be amended without the approval of our board of directors and
the holders of at least two-thirds of the outstanding shares of
common stock and preferred stock, if any, voting as separate
groups, except that if a majority of Continuing Directors
approve the amendment only the approval of the holders of at
least a majority of the outstanding shares of common stock and
preferred stock, if any, voting as separate groups, is required.
Our articles of incorporation define Continuing Directors as
directors who were members of the Board on August 31, 1995
or were elected to the Board after August 31, 1995, after
being nominated by a majority of the Continuing Directors voting
separately and as a subclass of directors.
Provisions of the Washington Business Corporation Act and our
articles of incorporation and bylaws may discourage or make more
difficult the acquisition of control of us through a tender
offer, open market purchase, proxy contest or otherwise. These
provisions are intended to discourage and may have the effect of
discouraging certain types of coercive takeover practices and
inadequate takeover bids and of encouraging persons seeking to
acquire control of us first to negotiate with us. Our management
believes that the foregoing measures, many of which are
substantially similar to the takeover-related measures in effect
for many other publicly-held companies, provide benefits by
enhancing our ability to negotiate with a person making an
unfriendly or unsolicited proposal to take over or restructure
us. We believe that these benefits outweigh the disadvantages of
discouraging these proposals because, among other things,
negotiation of these proposals could result in an improvement of
their terms.
Provisions of the Washington Business Corporation Act, in
addition to provisions of our articles of incorporation and
bylaws, address corporate governance issues, including the
rights of shareholders. Some of these provisions could hinder
management changes while others could have anti-takeover effect.
We have summarized the key provisions below.
Articles of Incorporation
The Washington Business Corporation Act requires approval by the
holders of at least two-thirds of the outstanding shares
entitled to vote for the merger of a Washington corporation with
another corporation, with certain exceptions, unless the
articles of incorporation provide for a lesser vote, which
cannot be less than a majority of the outstanding shares. Our
articles of incorporation provide that the affirmative vote of
the holders of at least two-thirds of the outstanding shares
entitled to vote, including two-thirds of the holders of
preferred stock, if any, voting as a separate group, is required
for certain business combinations described in our articles of
incorporation. However, if a business combination is approved by
a majority of the Continuing Directors, voting separately and as
a subclass of directors, such business combination, if required
to be approved by the shareholders pursuant to the Washington
Business Corporation Act or our articles of incorporation, shall
be approved by the affirmative vote of the holders of at least a
majority of the outstanding shares entitled to vote, including
the holders of preferred stock, if any, voting as a separate
group. Under our articles of incorporation, a business
combination requiring approval includes:
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a merger, share exchange or consolidation of us or any of our
subsidiaries with any other corporation; |
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the sale, lease, exchange, mortgage, pledge, transfer or other
disposition or encumbrance, whether in one transaction or a
series of transactions, by us or any of our subsidiaries of all |
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or a substantial part of our assets otherwise than in the usual
and regular course of business; or |
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any agreement, contract or other arrangement providing for any
of the foregoing transactions. |
Bylaws
Our bylaws provide that, so long as we are a public company, our
shareholders may call a special meeting of the shareholders only
if the holders of not less than 30% of all the votes entitled to
be cast on the issue proposed to be considered at the meeting
deliver a written demand to the secretary. Our bylaws also
provide that any amendment to the bylaws must be approved by a
majority of the Continuing Directors or the affirmative vote of
the holders of at least two-thirds of the outstanding shares,
including the holders of preferred stock, if any, voting as a
separate group.
Significant Business Transactions in Washington
Chapter 23B.19 of the Washington Business Corporation Act
prohibits public companies in Washington from engaging in
significant business transactions (with certain
exceptions) with any person or group of persons who beneficially
own 10% or more of the voting shares of the public company for a
period of five years after such share acquisition, unless the
transaction or acquisition of shares is approved by a majority
of the members of the board of directors of the public company
prior to the time of the initial acquisition of shares by the
acquiring person. These significant business transactions
include the following transactions involving an acquiring person
(including its affiliates and associates):
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a merger, share exchange or consolidation with, dispositions of
assets with an aggregate market value equal to 5% or more of the
total market value of all of the public companys assets or
all of the public companys outstanding shares to, or
issuance or redemption of shares to or from, the acquiring
person; |
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termination of 5% or more of the Washington-based employees of
the public company over the course of the five-year period
following the acquiring persons acquisition of 10% or more
of the shares of the public company, if such termination is the
result of the acquiring persons acquisition; |
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the liquidation or dissolution of the public company pursuant to
an arrangement with an acquiring person; |
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a reclassification of securities of the public company pursuant
to an arrangement with an acquiring person that has the effect
of increasing the proportionate share of voting securities of
the public company owned by the acquiring person; |
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an issuance to the acquiring person, or a transfer or redemption
in favor of the acquiring person, by the public company of
shares, options, warrants or other rights to acquire shares of
the public company if the issuance, transfer or redemption is
not made to all shareholders of the public company on the same
proportionate basis; or |
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receipt by the acquiring person from the public company of the
benefit of any loan, advance, guarantee, pledge, other financial
assistance, tax credit or other tax advantage that is not made
to all shareholders of the public company. |
After the five-year period, certain significant business
transactions may still not occur unless they comply with certain
fair price provisions of the statute or are approved by
disinterested shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Mellon
Investor Services LLC.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement, each of the underwriters named below has severally
agreed to purchase from us the aggregate number of shares of
common stock set forth opposite their respective names below:
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Number of | |
Underwriters |
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Shares | |
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Thomas Weisel Partners LLC
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3,937,500 |
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Needham & Company, LLC
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1,687,500 |
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C.E. Unterberg, Towbin, LLC
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1,125,000 |
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Miller Johnson Steichen Kinnard, Inc.
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750,000 |
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Total
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7,500,000 |
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The underwriting agreement provides that the obligations of the
several underwriters are subject to various conditions set forth
in the agreement. The underwriters are required to purchase and
pay for all of the shares of common stock listed above if any
are purchased. The underwriters are offering the shares, subject
to prior sale, when, as and if issued to and accepted by them,
subject to the conditions contained in the underwriting
agreement, such as the receipt by the underwriters of
officers certificates and legal opinions. The underwriters
reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.
Thomas Weisel Partners LLC expects to deliver the shares of
common stock on behalf of the underwriters to purchasers on or
about December 19, 2006.
Over-Allotment Option
We have granted a
30-day option to the
underwriters to purchase up to 1,125,000 additional shares
of our common stock at the public offering price, less the
underwriting discount, as set forth on the cover page of this
prospectus. If the underwriters exercise this option in whole or
in part, then each of the underwriters will be separately
committed, subject to the conditions described in the
underwriting agreement, to purchase the additional shares of our
common stock in proportion to their respective commitments set
forth in the table above.
Commissions and Discounts
The underwriters propose to offer the shares of common stock
directly to the public at the public offering price set forth on
the cover page of this prospectus, and at this price less a
concession not in excess of $0.52 per share of common stock
to other dealers specified in a master agreement among
underwriters who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and the
other dealers specified may reallow, concessions not in excess
of $0.10 per share of common stock to these other dealers.
After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. Our common
stock is offered subject to receipt and acceptance by the
underwriters and to the other conditions, including the right to
reject orders in whole or in part. We and the representatives of
the underwriters determined the offering price of our common
stock through negotiation. This price does not necessarily
reflect the price at which investors in the market will be
willing to buy and sell our shares following this offering.
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The following table summarizes the compensation to be paid to
the underwriters by us and the proceeds, before expenses,
payable to us:
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Total | |
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Without | |
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Over-Allotment | |
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Over-Allotment | |
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Public offering price
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10.00 |
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75,000,000 |
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$ |
86,250,000 |
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Underwriting discount
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0.52 |
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3,900,000 |
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4,485,000 |
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Proceeds, before expenses, to us
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9.48 |
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71,100,000 |
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81,765,000 |
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Indemnification of Underwriters
We will indemnify the underwriters against some civil
liabilities, including liabilities under the Securities Act. If
we are unable to provide this indemnification, we will
contribute to payments the underwriters may be required to make
in respect of those liabilities.
No Sales of Similar Securities
The underwriters will require all of our directors and executive
officers to agree not to offer, sell, agree to sell, directly or
indirectly, or otherwise dispose of any shares of common stock
or any securities convertible into or exchangeable for shares of
common stock except for the shares of common stock offered in
this offering without the prior written consent of Thomas Weisel
Partners LLC for a period of 90 days after the date of this
prospectus. Notwithstanding the foregoing, if (a) during
the last 17 days of this
90-day period, we
release earnings results or announce material news or a material
event or (b) prior to the expiration of this
90-day period, we
announce that we will release earnings results during the
15-day period following
the last day of the
90-day period, then in
either case the above restrictions will continue to apply until
18-days after the date
of release of the earnings results or the announcement of the
material news or material event, as applicable, unless Thomas
Weisel Partners LLC waives, in writing, such extension.
The restrictions described in the immediately preceding
paragraph do not apply to:
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the transfer of shares of common stock by gift; |
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the transfer of shares to any trust for the stockholders
direct or indirect benefit or a member of the immediate family
of the stockholder; and |
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the distribution of shares of common stock by an entity to one
of its wholly-owned subsidiaries; |
provided that each donee or transferee agrees to be subject to
the restrictions described in the immediately preceding
paragraph.
We have agreed that for a period of 90 days after the date
of this prospectus, we will not, without the prior written
consent of Thomas Weisel Partners LLC, offer, sell or otherwise
dispose of any shares of common stock, except for:
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the shares of common stock offered in this offering; |
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the shares of common stock issuable upon exercise of outstanding
options or warrants on the date of this prospectus or upon
conversion of the Notes; and |
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the shares of our common stock that are issued under our equity
incentive plans, our employee stock purchase plan or our 401(k)
savings plan. |
These restrictions will remain in effect beyond the
90-day period under the
same circumstances described above.
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Nasdaq Global Market Listing
Our common stock is quoted on The Nasdaq Global Market under the
symbol CRAY.
Short Sales, Stabilizing Transactions and Penalty Bids
In order to facilitate this offering, persons participating in
this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of our common stock
during and after this offering. Specifically, the underwriters
may engage in the following activities in accordance with the
rules of the Securities and Exchange Commission.
Short sales. Short sales involve the sales by the
underwriters of a greater number of shares than they are
required to purchase in the offering. Covered short sales are
short sales made in an amount not greater than the
underwriters over-allotment option to purchase additional
shares from us and the selling stockholders in this offering.
The underwriters may close out any covered short position by
either exercising their over-allotment option to purchase shares
or purchasing shares in the open market. In determining the
source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to
the price at which they may purchase shares through the
over-allotment option. Naked short sales are any short sales in
excess of such over-allotment option. The underwriters must
close out any naked short position by purchasing shares in the
open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
after pricing that could adversely affect investors who purchase
in this offering.
Stabilizing transactions. The underwriters may make bids
for or purchases of the shares for the purpose of pegging,
fixing or maintaining the price of the shares, so long as
stabilizing bids do not exceed a specified maximum.
Penalty bids. If the underwriters purchase shares in the
open market in a stabilizing transaction or syndicate covering
transaction, they may reclaim a selling concession from the
underwriters and selling group members who sold those shares as
part of this offering. Stabilization and syndicate covering
transactions may cause the price of the shares to be higher than
it would be in the absence of these transactions. The imposition
of a penalty bid might also have an effect on the price of the
shares if it discourages presales of the shares.
The transactions above may occur on The Nasdaq Global Market or
otherwise. Neither we nor the underwriters make any
representation or prediction as to the effect that the
transactions described above may have on the price of the
shares. If these transactions are commenced, they may be
discontinued without notice at any time.
Discretionary Sales
The underwriters have informed us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of shares offered by them.
Stamp Taxes
If you purchase shares of common stock offered in this
prospectus, you may be required to pay stamp taxes and other
charges under the laws and practices of the country of purchase,
in addition to the public offering price listed on the cover
page of this prospectus.
Relationships
The underwriters may in the future perform investment banking
and advisory services for us from time to time for which they
may in the future receive customary fees and expenses. The
underwriters may, from time to time, engage in transactions with
or perform services for us in the ordinary course of their
business.
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LEGAL MATTERS
The validity of the shares of common stock offered hereby will
be passed upon for us by Stoel Rives LLP, Seattle, Washington.
Certain legal matters in connection with this offering will be
passed upon for the underwriters by Fenwick & West LLP,
Mountain View, California and Boise, Idaho.
EXPERTS
The consolidated financial statements and managements
report on the effectiveness of internal control over financial
reporting incorporated in this prospectus by reference from the
Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, have been audited by Peterson
Sullivan PLLC, an independent registered public accounting firm,
as stated in its reports, which are incorporated herein by
reference (which reports express (1) an unqualified opinion
on the consolidated financial statements, (2) an
unqualified opinion on managements assessment regarding
the effectiveness of internal control over financial reporting,
and (3) an unqualified opinion on the effectiveness of
internal control over financial reporting), and have been so
incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
The financial statements and related financial statement
schedule as of December 31, 2004, and for the years ended
December 31, 2004, and 2003, incorporated in this
prospectus by reference from the Companys Annual Report on
Form 10-K for the
year ended December 31, 2005, have been audited by
Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report (which report
expresses an unqualified opinion and includes an explanatory
paragraph related to the restatement described in Note 2
included in such
Form 10-K), which
is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on
Form S-1 that we
filed with the Securities and Exchange Commission. Certain
information in the registration statement has been omitted from
this prospectus as permitted by the SECs rules.
We file annual, quarterly and current reports and other
information with the SEC. You may read and copy the registration
statement of which this prospectus constitutes a part and any
other materials that we file with the SEC at the SECs
public reference room located at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC. Our SEC filings are
available to you free of charge on that SEC web site at
http://www.sec.gov.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to incorporate by reference into
this prospectus the publicly filed reports described below,
which means that information included in those reports is
considered part of this prospectus. We specifically incorporate
by reference into this prospectus the following documents we
have filed with the SEC pursuant to the Exchange Act (other than
any portions of the respective filings that were furnished
pursuant to Item 2.02 or 7.01 of Current Reports on
Form 8-K or other
applicable SEC rules):
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Our Annual Report on
Form 10-K for the
year ended December 31, 2005; |
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Our Quarterly Reports on
Form 10-Q for the
quarters ended March 31, 2006, June 30, 2006 and
September 30, 2006; |
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Our Definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders, as filed with the SEC on April 28, 2006; |
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Our Current Reports on
Form 8-K filed on
January 4, 2006; on
Form 8-K filed on
January 11, 2006; on
Form 8-K/ A, filed
on February 13, 2006; on
Form 8-K, filed on
February 21, 2006; on
Form 8-K, filed on
March 17, 2006; on
Form 8-K, filed on
March 31, 2006; on
Form 8-K, filed on
April 10, 2006; on
Form 8-K, filed on
April 18, 2006; on
Form 8-K, filed on
April 24, 2006; on
Form 8-K, filed on
May 2, 2006; on
Form 8-K, filed on
May 4, 2006; on
Form 8-K, filed on
June 8, 2006; and on
Form 8-K filed on
November 22, 2006; and |
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The description of our common stock set forth in our
Registration Statement on
Form SB-2
(Registration
No. 33-95460-LA),
including any amendment or report filed for the purpose of
updating such description, as incorporated by reference in our
Registration Statement on
Form 8-A
(Registration No. 0-26820), including the amendment thereto
on Form 8-A/ A. |
These filings are available at the SECs website,
www.sec.gov, as well as our website, www.cray.com. We will
provide to each person, including any beneficial owner, to whom
a prospectus is delivered, without charge, on written or oral
request, a copy of any or all of the reports and other documents
incorporated by reference in this prospectus, but not delivered
with this prospectus. Requests for documents should be directed
to Investor Relations, Cray Inc., 411 First Avenue South,
Suite 600, Seattle, Washington 98104-2860, telephone
(206) 701-2000.
The information relating to us contained in this prospectus is
not comprehensive and should be read together with the
information contained in the incorporated documents. Statements
contained in this prospectus as to the contents of any contract
or other document referred to are not necessarily complete. You
should refer to the copy of such contract or other document
filed as an exhibit to the registration statement.
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You should rely only on information contained or incorporated by
reference in this prospectus. We have not authorized any other
person to provide you with information different from that
contained in this prospectus.
You should not assume that the information contained in this
prospectus or the documents incorporated by reference is
accurate as of any date other the date on the front of this
prospectus or those documents.
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PROSPECTUS December 13, 2006
7,500,000 Shares
Common Stock
Thomas Weisel Partners LLC
Sole Book-Running Manager
Needham & Company, LLC
Co-Lead Manager
C.E. Unterberg, Towbin
Miller Johnson Steichen Kinnard
Neither we nor any of the underwriters have authorized anyone to
provide information different from that contained in this
prospectus. When you make a decision about whether to invest in
our common stock, you should not rely upon any information other
than the information in this prospectus. Neither the delivery of
this prospectus nor the sale of our common stock means that
information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell
or solicitation of an offer to buy these shares of common stock
in any circumstances under which the offer or solicitation is
unlawful.