UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-26820
| Washington (State or other jurisdiction of incorporation or organization) |
93-0962605 (I.R.S. Employer Identification No.) |
411 First Avenue South, Suite 600
Seattle, WA 98104-2860
(206) 701- 2000
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
As of May 12, 2003, 65,346,265 shares of the Company’s Common Stock, par value $0.01 per share, were outstanding.
CRAY INC. AND SUBSIDIARIES
TABLE OF CONTENTS
| Page No. | ||||||
| PART I | FINANCIAL INFORMATION | |||||
| Item 1. | Unaudited Condensed Consolidated Financial Statements: | |||||
| Balance Sheets as of December 31, 2002 and March 31, 2003 | 3 | |||||
| Statements of Operations for the Three Months Ended March 31, 2002 and 2003 | 4 | |||||
| Statement of Shareholders’ Equity for the Three Months Ended March 31, 2003 | 5 | |||||
| Statements of Cash Flows for the Three Months Ended March 31, 2002 and 2003 | 6 | |||||
| Notes to Financial Statements | 7 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | ||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 22 | ||||
| Item 4. | Controls and Procedures | 23 | ||||
| PART II | OTHER INFORMATION | |||||
| Item 1. | Legal Proceedings | 23 | ||||
| Item 5. | Other Information | 23 | ||||
| Item 6. | Exhibits and Reports on Form 8-K | 24 |
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge at our web site at www.cray.com as soon as reasonably practicable after we file electronically such reports with the SEC.
Cray is a federally registered trademark of Cray Inc., and Cray SV1ex, Cray X1, Cray SX-6, Cray T90, Cray MTA-2, Cray SV1 and Cray T3E are trademarks of Cray Inc.
2
CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, | March 31, | |||||||||
| 2002 | 2003 | |||||||||
| (unaudited) | ||||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 23,916 | $ | 38,369 | ||||||
Short-term investments, available for sale |
22,948 | |||||||||
Accounts receivable, net of allowance of $1,098 in 2002 and 2003 |
31,017 | 39,153 | ||||||||
Inventory, net |
24,033 | 37,989 | ||||||||
Prepaid expenses and other assets |
5,805 | 8,829 | ||||||||
Total current assets |
84,771 | 147,288 | ||||||||
Property and equipment, net |
24,799 | 23,929 | ||||||||
Service spares, net |
9,279 | 8,232 | ||||||||
Goodwill |
22,680 | 22,680 | ||||||||
Deferred tax asset |
263 | 263 | ||||||||
Other assets |
3,453 | 2,924 | ||||||||
TOTAL |
$ | 145,245 | $ | 205,316 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 13,173 | $ | 19,675 | ||||||
Accrued payroll and related expenses |
15,573 | 12,200 | ||||||||
Other accrued liabilities |
4,396 | 3,241 | ||||||||
Deferred revenue |
18,406 | 26,169 | ||||||||
Notes payable |
215 | 153 | ||||||||
Current portion of warranty reserves |
3,273 | 2,654 | ||||||||
Current portion of obligations under capital leases |
241 | 243 | ||||||||
Current portion of term loan |
2,143 | 2,143 | ||||||||
Total current liabilities |
57,420 | 66,478 | ||||||||
Warranty reserves |
2,326 | 927 | ||||||||
Obligations under capital leases |
152 | 101 | ||||||||
Term loan payable |
1,786 | 1,250 | ||||||||
Shareholders’ equity: |
||||||||||
Series A Convertible Preferred Stock, par $.01 - Authorized, issued and outstanding, 3,125,000 shares |
24,946 | 24,946 | ||||||||
Common Stock, par $.01 - Authorized, 100,000,000 shares; issued and outstanding, 56,039,016 and 65,168,653 shares, respectively |
211,255 | 263,092 | ||||||||
Accumulated other comprehensive loss |
(291 | ) | (326 | ) | ||||||
Accumulated deficit |
(152,349 | ) | (151,152 | ) | ||||||
| 83,561 | 136,560 | |||||||||
TOTAL |
$ | 145,245 | $ | 205,316 | ||||||
See accompanying notes
3
CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months Ended | |||||||||||
| March 31, | |||||||||||
| 2002 | 2003 | ||||||||||
REVENUE: |
|||||||||||
Product |
$ | 15,071 | $ | 27,284 | |||||||
Service |
20,129 | 16,845 | |||||||||
Total revenue |
35,200 | 44,129 | |||||||||
OPERATING EXPENSES: |
|||||||||||
Cost of product revenue |
4,628 | 17,675 | |||||||||
Cost of service revenue |
10,925 | 10,281 | |||||||||
Research and development |
10,551 | 7,475 | |||||||||
Marketing and sales |
4,857 | 5,521 | |||||||||
General and administrative |
2,040 | 1,874 | |||||||||
Restructuring charge |
1,878 | ||||||||||
Total operating expenses |
34,879 | 42,826 | |||||||||
Income from operations |
321 | 1,303 | |||||||||
OTHER INCOME (EXPENSE), NET |
1,384 | (53 | ) | ||||||||
INTEREST INCOME (EXPENSE), NET |
(571 | ) | 6 | ||||||||
Income before income taxes |
1,134 | 1,256 | |||||||||
PROVISION FOR INCOME TAXES |
385 | 59 | |||||||||
Net income |
$ | 749 | $ | 1,197 | |||||||
Net income per common share: |
|||||||||||
Basic |
$ | 0.02 | $ | 0.02 | |||||||
Diluted |
$ | 0.02 | $ | 0.02 | |||||||
Weighted average shares outstanding: |
|||||||||||
Basic |
43,615 | 59,780 | |||||||||
Diluted |
47,812 | 72,764 | |||||||||
See accompanying notes
4
CRAY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)
| Series A | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Accumulated | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||
| Number of | Number of | Accumulated | Comprehensive | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Deficit | Loss | Total | ||||||||||||||||||||||||
BALANCE, January 1, 2003 |
3,125 | $ | 24,946 | 56,039 | $ | 211,255 | $ | (152,349 | ) | $ | (291 | ) | $ | 83,561 | ||||||||||||||||
Public sale of common
stock, less
issuance costs
of $3,517,000 |
8,480 | 49,059 | 49,059 | |||||||||||||||||||||||||||
Issuance of shares
under Employee
Stock Purchase Plan |
70 | 437 | 437 | |||||||||||||||||||||||||||
Exercise of stock
options |
352 | 1,362 | 1,362 | |||||||||||||||||||||||||||
Exercise of warrants |
228 | 979 | 979 | |||||||||||||||||||||||||||
Other comprehensive
income: |
||||||||||||||||||||||||||||||
Unrealized gain on
available for
sale investments |
8 | 8 | ||||||||||||||||||||||||||||
Cumulative currency
translation
adjustment |
(43 | ) | (43 | ) | ||||||||||||||||||||||||||
Net income |
1,197 | 1,197 | ||||||||||||||||||||||||||||
BALANCE, March 31, 2003 |
3,125 | $ | 24,946 | 65,169 | $ | 263,092 | $ | (151,152 | ) | $ | (326 | ) | $ | 136,560 | ||||||||||||||||
See accompanying notes
5
CRAY INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| For the Three Months Ended | |||||||||
| March 31, | |||||||||
| 2002 | 2003 | ||||||||
Operating activities |
|||||||||
Net income |
$ | 749 | $ | 1,197 | |||||
Adjustments to reconcile net income to net cash used by operating activities: |
|||||||||
Depreciation and amortization |
3,751 | 4,042 | |||||||
Gain on sale of assets |
(38 | ) | |||||||
Beneficial conversion feature of notes payable |
99 | ||||||||
Cash provided (used) by changes in operating assets and liabilities: |
|||||||||
Accounts receivable |
(8,248 | ) | (5,136 | ) | |||||
Inventory |
(3,093 | ) | (14,498 | ) | |||||
Other assets |
(187 | ) | (2,495 | ) | |||||
Spares |
(33 | ) | |||||||
Accounts payable |
(856 | ) | 6,502 | ||||||
Other accrued liabilities |
(4,375 | ) | (1,155 | ) | |||||
Accrued payroll and related expenses |
3,667 | (3,373 | ) | ||||||
Warranty reserve |
(2,687 | ) | (2,018 | ) | |||||
Deferred revenue |
12 | 4,763 | |||||||
Net cash used by operating activities |
(11,206 | ) | (12,204 | ) | |||||
Investing activities |
|||||||||
Purchases of short-term investments |
(22,940 | ) | |||||||
Purchases of spares |
(700 | ) | |||||||
Proceeds from sale of assets |
46 | ||||||||
Purchases of property and equipment |
(2,459 | ) | (1,550 | ) | |||||
Net cash used by investing activities |
(3,113 | ) | (24,490 | ) | |||||
Financing activities |
|||||||||
Restricted cash |
108 | ||||||||
Principal payments on term loan |
(536 | ) | (536 | ) | |||||
Proceeds from line of credit |
3,486 | ||||||||
Sale of common stock |
3,627 | 49,059 | |||||||
Proceeds from exercise of options and warrants |
1,823 | 2,341 | |||||||
Proceeds from issuance of common stock through employee purchase plan |
437 | ||||||||
Principal payments on bank note |
(139 | ) | (62 | ) | |||||
Principal payments on capital leases |
(61 | ) | (49 | ) | |||||
Net cash provided by financing activities |
8,308 | 51,190 | |||||||
Effect of foreign exchange rate changes on
cash and cash equivalents |
(502 | ) | (43 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
(6,513 | ) | 14,453 | ||||||
Cash and cash equivalents |
|||||||||
Beginning of period |
12,377 | 23,916 | |||||||
End of period |
$ | 5,864 | $ | 38,369 | |||||
Supplemental disclosure of cash flow information: |
|||||||||
Cash paid for interest |
$ | 192 | $ | 119 | |||||
Non-cash investing and financing activities |
|||||||||
Inventory reclassed to spares |
347 | 507 | |||||||
Inventory reclassed to fixed assets |
68 | ||||||||
Unrealized gain on short term investments |
8 | ||||||||
See accompanying notes
6
CRAY INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Basis of Presentation
In the opinion of management, the accompanying condensed consolidated balance sheets and related condensed consolidated statements of operations, shareholders’ equity and cash flows have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. All adjustments considered necessary for fair presentation have been included. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Cray Inc. and its wholly-owned subsidiaries (the Company). All material intercompany accounts and transactions have been eliminated.
Short-term investments
The Company considers all liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. Short-term investments generally mature between three months and two years from the purchase date. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All cash and short-term investments are classified as available for sale and are recorded at market value using the specific identification method; unrealized gains and losses are reflected in other comprehensive income.
Inventory, net
Inventory consisted of the following (in thousands):
| December 31, | March 31, | |||||||
| 2002 | 2003 | |||||||
Components and subassemblies |
$ | 15,653 | $ | 17,510 | ||||
Work in process |
8,324 | 19,587 | ||||||
Finished goods |
2,414 | 2,839 | ||||||
| 26,391 | 39,936 | |||||||
Allowance for excess and obsolete |
(2,358 | ) | (1,947 | ) | ||||
Inventory, net |
$ | 24,033 | $ | 37,989 | ||||
Revenue in the first quarter of 2002 includes $5.9 million from the sale of obsolete inventory recorded at a zero cost basis.
Goodwill
In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets.” As of January 1, 2002, the Company adopted SFAS 142 and no longer amortizes goodwill. Upon adoption of SFAS 142, the Company determined that there was no impairment of Goodwill as of January 1, 2002. Additionally, SFAS 142 requires an annual impairment test or more frequently if impairment indicators arise. In the first quarter of fiscal 2003, the Company completed its annual impairment test in accordance with SFAS 142. Results of the impairment tests did not indicate any impairment loss.
7
Comprehensive Income
The components of comprehensive income are as follows (in thousands):
| Three months | ||||||||
| ended March 31, | ||||||||
| 2002 | 2003 | |||||||