0000949158-13-000004.txt : 20130207 0000949158-13-000004.hdr.sgml : 20130207 20130207170657 ACCESSION NUMBER: 0000949158-13-000004 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20121121 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20130207 DATE AS OF CHANGE: 20130207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRAY INC CENTRAL INDEX KEY: 0000949158 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 930962605 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-26820 FILM NUMBER: 13583236 BUSINESS ADDRESS: STREET 1: 901 FIFTH AVENUE STREET 2: SUITE 1000 CITY: SEATTLE STATE: WA ZIP: 98164 BUSINESS PHONE: 2067012000 MAIL ADDRESS: STREET 1: 901 FIFTH AVENUE STREET 2: SUITE 1000 CITY: SEATTLE STATE: WA ZIP: 98164 FORMER COMPANY: FORMER CONFORMED NAME: TERA COMPUTER CO \WA\ DATE OF NAME CHANGE: 19950809 8-K/A 1 appro8-k.htm 8-K/A Appro 8-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K/A
(Amendment No. 1)
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 21, 2012
 
 
CRAY INC.
(Exact name of registrant as specified in its charter)

 
 
 
 
 
 
 
Washington
 
0-26820
 
93-0962605
(State or other Jurisdiction
of Incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
 
 
 
 
901 Fifth Avenue, Suite 1000
Seattle, WA
 
98164
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's telephone number, including area code: (206) 701-2000
Registrant's facsimile number, including area code: (206) 701-2500
None
(Former name or former address if changed since last report.)  
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 




 

Explanatory Note
On November 21, 2012, Cray Inc. (“Cray”) filed with the Securities and Exchange Commission a Current Report on Form 8-K (the “Initial Form 8-K”) regarding the completion of its acquisition of Appro International, Inc. (“Appro”). This Amendment No. 1 amends and supplements the Initial Form 8-K to include the financial statements and pro forma financial information required by Item 9.01 of Form 8-K.
Item 9.01    Financial Statements and Exhibits
 
(a) Financial statements of business acquired.

The audited consolidated balance sheets of Appro as of December 31, 2010 and 2011, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2011, are being filed as Exhibit 99.1 to this Current Report on Form 8-K/A.

The unaudited condensed consolidated balance sheet of Appro as of September 30, 2012 and the related condensed consolidated statements of operations, stockholders' equity and cash flows for the nine months ended September 30, 2012 and 2011 are being filed as Exhibit 99.2 to this Current Report on Form 8-K/A.

(b) Pro forma financial information.

The unaudited pro forma condensed combined financial statements and explanatory notes relating to Cray's acquisition of Appro, as of September 30, 2012 and for the nine months ended September 30, 2012 and the year ended December 31, 2011, are being filed as Exhibit 99.3 to this Current Report on Form 8-K/A.

(d) Exhibits.
Exhibit No.
Description
23.1
Consent of KPMG LLP
99.1
Audited consolidated balance sheets of Appro International, Inc. and subsidiary as of December 31, 2010 and 2011, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2011 and accompanying notes thereto.

99.2
Unaudited condensed consolidated financial statements of Appro International, Inc. as of September 30, 2012 and for the nine months ended September 30, 2012 and 2011 and accompanying notes thereto.
99.3
Unaudited condensed combined pro forma financial statements of Cray Inc. and Appro International, Inc. as of September 30, 2012 and for the nine months ended September 30, 2012 and the year ended December 31, 2011, and accompanying notes thereto.






SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: February 7, 2013
 
                                
 
 
 
Cray Inc.
 
 
By:
 
/s/ MICHAEL C. PIRAINO
 
 
Michael C. Piraino
Vice President Administration, General Counsel and Corporate Secretary






EXHIBIT INDEX
Exhibit No.
Description
23.1
Consent of KPMG LLP
99.1
Audited consolidated balance sheets of Appro International, Inc. and subsidiary as of December 31, 2010 and 2011, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2011 and accompanying notes thereto.

99.2
Unaudited condensed consolidated financial statements of Appro International, Inc. as of September 30, 2012 and for the nine months ended September 30, 2012 and 2011 and accompanying notes thereto.
99.3
Unaudited condensed combined pro forma financial statements of Cray Inc. and Appro International, Inc. as of September 30, 2012 and for the nine months ended September 30, 2012 and the year ended December 31, 2011, and accompanying notes thereto.





 EX-23.1 2 a112112ex231.htm EX-23.1 112112ex23.1







Exhibit 23.1

Consent of Independent Auditors

The Board of Directors
Appro International, Inc.:

We consent to the incorporation by reference in the registration statements (Nos. 333-12747, 333-08990, 333-30304, 333-57970, 333-70238, 333-107835, 333-114243, 333-115596, 333-134808, and 333-159294) on Form S-8 of Cray Inc. of our report dated September 12, 2012, with respect to the consolidated balance sheets of Appro International, Inc. and subsidiary as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2011, which appears in this Form 8-K/A of Cray Inc. dated February 7, 2013.


/s/ KPMG LLP
Los Angeles, California
February 7, 2013



 EX-99.1 3 a112112ex991.htm EX-99.1 112112ex99.1



Exhibit 99.1

Independent Auditors' Report
The Board of Directors
Appro International, Inc.:
We have audited the accompanying consolidated balance sheets of Appro International, Inc. and subsidiary (the Company) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Appro International, Inc. and subsidiary as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Los Angeles, California
September 12, 2012





Appro International, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 2010 and 2011
 
 
2010
 
2011
ASSETS
 
 
 
 
Current Assets
 
 
 
 
Cash
$
1,528,762

$
657,559

Accounts receivable, net
 
4,686,998

 
11,839,015

Inventories
 
4,737,422

 
9,244,817

Deferred costs
 
—    

 
7,169,507

Deferred tax assets
 
1,327,000

 
1,036,000

Prepaid expenses and other current assets
 
623,938

 
760,126

Total current assets
 
12,904,120

 
30,707,024

 
 
 
 
 
Investments
 
 
 
 
Property & equipment, net
 
198,449

 
405,924

Deferred tax assets
 
721,000

 
2,252,000

Other assets, net
 
154,048

 
160,577

TOTAL ASSETS
$
13,977,617

$
33,525,525

 
 
 
 
 
LIABILITIES
 
 
 
 
Current Liabilities
 
 
 
 
Accounts payable
$
5,945,100

$
8,043,137

Advance from customer
 
—    

 
5,043,439

Accrued expenses and other current liabilities
 
713,598

 
851,710

Warranty liability
 
163,029

 
199,937

Deferred revenue
 
929,207

 
8,691,180

Bank line of credit
 
1,450,000

 
6,705,240

Total Current Liabilities
 
9,200,934

 
29,534,643

 
 
 
 
 
Warranty liability
 
58,121

 
100,667

Deferred revenue
 
1,311,070

 
1,624,942

Other liabilities
 
126,046

 
256,332

TOTAL LIABILITIES
 
10,696,171

 
31,516,584

 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
Preferred stock. Authorized 1,982,360 shares; Series A convertible preferred stock 732,360 shares designated; issued and outstanding 625,000 shares, liquidation preference of $2,500,000
 
2,400,000

 
2,400,000

Common stock. Authorized 11,500,000 shares; issued and outstanding 5,757,500 shares
 
2,437,088

 
2,651,552

Accumulated deficit
 
(1,555,642
)
 
(3,042,611
)
Total stockholders' equity
 
3,281,446

 
2,008,941

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
TOTAL LIAB. & STOCKHOLDERS' EQUITY
$
13,977,617

$
33,525,525

See accompanying notes to consolidated financial statements.




Appro International, Inc. and Subsidiary
Consolidated Statements of Operations
Years ended December 31, 2009, 2010 and 2011

 
 
2009
 
2010
 
2011
 Sales
$
39,839,055

$
46,249,646

$
55,362,652

 Cost of sales
 
32,331,434

 
37,273,367

 
45,771,960

    Gross Profit
 
7,507,621

 
8,976,279

 
9,590,692

 
 
 
 
 
 
 
 Operating expenses:
 
9,471,289

 
9,458,907

 
12,104,142

 
 
 
 
 
 
 
 Operating loss
 
(1,963,668
)
 
(482,628
)
 
(2,513,450
)
 
 
 
 
 
 
 
 Other income (expense):
 
 
 
 
 
 
 Interest expense, net
 
(80,071
)
 
(128,875
)
 
(283,655
)
 Other income (expense), net
 
(119,917
)
 
9,459

 
75,136

 Total other income (expense), net
 
(199,988
)
 
(119,416
)
 
(208,519
)
 
 
 
 
 
 
 
Loss before income taxes
 
(2,163,656
)
 
(602,044
)
 
(2,721,969
)
 
 
 
 
 
 
 
Income tax benefit
 
860,000

 
247,000

 
1,235,000

 
 
 
 
 
 
 
 Net loss
$
(1,303,656
)
$
(355,044
)
$
(1,486,969
)

See accompanying notes to consolidated financial statements.                            




Appro International, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2009, 2010 and 2011

 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
Series A preferred
 
Common stock
 
Accumulated
 
Stockholders'
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Deficit
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2009
 
625,000

$
2,400,000

 
5,757,500

$
2,146,999

$
103,058

$
4,650,057

Stock-based compensation
 
—    
 
—    
 
—    
 
142,749

 
—

 
142,749

Net loss
 
—    
 
—    
 
—    
 
 
 
(1,303,656
)
 
(1,303,656
)
Balance at December 31, 2009
 
625,000

$
2,400,000

 
5,757,500

$
2,289,748

$
(1,200,598
)
$
3,489,150

Stock-based compensation
 
—    
 
—    
 
—    
 
147,340

 
—

 
147,340

Net loss
 
—    
 
—    
 
—    
 
—

 
(355,044
)
 
(355,044
)
Balance at December 31, 2010
 
625,000

$
2,400,000

 
5,757,500

$
2,437,088

$
(1,555,642
)
$
3,281,446

Stock-based compensation
 
—    

 
—    

 
—    

 
214,464

 
—

 
214,464

Net loss
 
—    

 
—    

 
—    

 
—

 
(1,486,969
)
 
(1,486,969
)
Balance at December 31, 2011
 
625,000

$
2,400,000

 
5,757,500

$
2,651,552

$
(3,042,611
)
$
2,008,941


See accompanying notes to consolidated financial statements.




Appro International, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 2009, 2010 and 2011
 
 
2009
 
2010
 
2011
Cash flows from operating activities:
 
 
 
 
 
 
 Net loss
$
(1,303,656
)
$
(355,044
)
$
(1,486,969
)
Adjustments to reconcile net loss to net cash (used in) provided by
 
 
 
 
 
 
Depreciation and amortization
 
974,437

 
147,983

 
129,126

Provision for doubtful accounts
 
(63,695
)
 
156,935

 
78,777

Loss for inventory obsolescence
 
179,480

 
719,202

 
186,199

Provision for warranty reserve
 
245,356

 
194,173

 
283,629

Impairment loss on long-lived assets
 
503,741

 
—    

 
—    

Stock-based compensation
 
142,749

 
147,340

 
214,464

Deferred income tax benefit
 
(762,000
)
 
(263,000
)
 
(1,240,000
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
Accounts Receivable
 
(4,682,089
)
 
537,060

 
(7,250,960
)
Inventory
 
(1,306,957
)
 
(1,551,677
)
 
(4,696,921
)
Receivable from related party
 
428,247

 
—    

 
—    

Deferred costs
 
1,036,576

 
90,000

 
(7,169,507
)
Prepaid expenses and other current liabilities
 
(92,619
)
 
312,673

 
(136,997
)
Other assets
 
(13,788
)
 
(5,593
)
 
(9,332
)
Accounts payable
 
2,593,847

 
707,537

 
2,099,298

Advance from customer
 
—    

 
—    

 
5,043,439

Accrued expenses and other current liabilities
 
(34,485
)
 
147,051

 
140,101

Warranty liability
 
(416,534
)
 
(309,452
)
 
(204,175
)
Deferred revenue
 
(682,999
)
 
321,721

 
8,075,845

Other liabilities
 
3,499

 
25,839

 
132,493

     Net cash (used in) provided by operating activities
 
(3,250,890
)
 
1,022,748

 
(5,811,490
)
Cash flows from investing activities:
 
 
 
 
 
 
Purchases of PP&E
 
(147,485
)
 
(28,912
)
 
(336,601
)
     Net cash (used in) provided by investing activities
 
(147,485
)
 
(28,912
)
 
(336,601
)
Cash flows from financing activities:
 
 
 
 
 
 
Principal payments on notes payable
 
(167,519
)
 
(204,059
)
 
—    
Net increase (decrease) in bank lines of credit
 
1,100,000

 
350,000

 
5,255,240

     Net cash (used in) provided by financing activities
 
932,481

 
145,941

 
5,255,240

Effect of exchange rate changes on cash
 
—

 
25,218

 
21,648

     Net increase (decrease) in cash
 
(2,465,894
)
 
1,164,995

 
(871,203
)
Cash at beginning of year
 
2,829,661

 
363,767

 
1,528,762

Cash at end of year
$
363,767

$
1,528,762

$
657,559

 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
Cash paid for income taxes
 
91,468

 
67,285

 
10,000

Cash paid for interest
 
99,367

 
118,341

 
283,210

Supplemental disclosures of noncash activities:
 
 
 
 
 
 
Reclassification of equipment to inventories
 
(150,269
)
 
—

 
—

Reclassification of equipment to other current assets (Note 5)
 
(107,500
)
 
—

 
—


See accompanying notes to consolidated financial statements.




APPRO INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements

(1)
Organization and Line of Business
Appro International, Inc. (the Company or Appro) was incorporated in California in May 1991. The Company is in the business of designing and providing high‑performance cluster supercomputing solutions for commercial enterprises in the oil and gas, financial services, manufacturing, as well as government research fields and universities. In October 2008, the Company invested $1,000,000 to establish Appro Korea, Inc. (the Subsidiary or Appro Korea) in South Korea as a wholly owned subsidiary of the Company. The Subsidiary is mainly engaged in engineering, research, and development activities.
(2)
Summary of Significant Accounting Policies
(a)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and the Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
(b)
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. Significant items subject to such estimates and assumptions include the valuation of inventory, property and equipment, warranty reserve, share‑based compensation, and deferred tax assets, and other contingencies.
(c)
Accounts Receivable
Accounts receivable consist primarily of amounts due from customers for the sale of the Company's products and are reported at net realizable value. The allowance for doubtful accounts is based on the best estimate of the amount of probable credit losses in existing accounts receivable. The Company reviews the allowance for doubtful accounts quarterly. Past‑due balances of 90 days and over are reviewed individually for collection. Account balances are charged off against the allowance for doubtful accounts when management believes it is probable the receivable will not be recovered.
(d)
Inventories
Inventories are goods held for sale in the normal course of business. Inventories are stated at the lower of cost (determined under the first‑in, first‑out method) or market. The inventory balance is segregated among raw materials, work in process (WIP), and finished goods. Raw materials are low‑level components, which are purchased from vendors; WIP is partially assembled products. Consideration is given to inventory shipped and received near the end of a period, and the transaction is recorded when transfer of title occurs. Management regularly evaluates inventory for obsolescence and adjusts inventories to estimated net realizable value based on inventory that is obsolete or in excess of current demand. During 2011 and 2010, the Company wrote down its inventories for their obsolescence in the amount of $186,199 and $309,708, respectively.
(e)
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for additions and major improvements are capitalized; maintenance and repairs are expensed as incurred. Depreciation of property and equipment is computed using the straight‑line method over the estimated useful lives of the assets, generally four to seven years for equipment and furniture and fixtures, three years for computer hardware, and one year for engineering computer parts. Leasehold improvements are amortized over the shorter of the lease term or the remaining useful economic




life. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is credited or charged to income.
(f)
Intangible Assets
Intangible assets consist of purchased intellectual properties. The intangible assets are included in other assets and are being amortized on a straight‑line basis over five years. All changes in intangible assets during the years ended December 31, 2010 and 2009 resulted from amortization expense. Amortization expense was $24,358 and $106,433 for the years ended December 31, 2010 and 2009, respectively. As of December 31, 2010, all intangible assets were fully amortized.
(g)
Impairment of Long‑Lived Assets
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 360, Property, Plant, and Equipment, the Company evaluates the carrying value of long‑lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. This evaluation is performed based on the estimated undiscounted future cash flows from operating activities compared with the carrying value of the related asset. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, as measured by the difference between the carrying value and the estimated fair value of the assets determined using the best information available. Based on the impairment analysis in 2011 and 2010, no impairment loss was recognized. In 2009, the Company recognized an impairment loss of $503,741 on certain equipment due to the unforeseeable market demand in near future (note 5).
(h)
Warranty
The Company provides standard warranties with the sale of products, generally for up to two years from the date of shipment. The Company quantifies and records an estimate for warranty‑related costs based on the Company's actual history, projected returns and failure rates, and current repair costs. A summary of changes in the Company's accrued warranty liability is as follows:
 
 
2009
 
2010
 
2011
Warranty liability at beginning of the period
$
507,607

$
336,429

$
221,150

Accruals for warranty during the period
 
245,356

 
194,173

 
283,629

Warranty utilization
 
(416,534
)
 
(309,452
)
 
(204,175
)
Warranty liability at end of the period
$
336,429

$
221,150

$
300,604

(i)
Revenue Recognition
The Company recognizes revenue when persuasive evidence of sales arrangement exists, delivery has occurred or services have been rendered, the buyer's price is fixed or determinable, and collectibility is reasonably assured.
Occasionally, the Company enters into agreements to provide multiple deliverables, generally for large‑scale hardware solutions including hardware, installation services, and support and maintenance. The Company allocates fees attributable to each element into units of accounting in accordance with FASB ASC Subtopic 605‑25, Revenue Recognition - Multiple‑Element Arrangements, to the extent that separability criteria are met, there is stand‑alone value for the delivered elements and reliable and objective evidence of the fair value (third‑party selling price) of undelivered elements exists. Using these criteria, hardware and installation services are treated as one unit of accounting and recognized upon customer acceptance of the related deliverable. Support and maintenance are considered a separate unit of accounting and deferred based upon their fair value and recognized ratably over the support period. There was $10,316,122 and $2,240,277 of revenue deferred as of December 31, 2011 and 2010, respectively, for such projects that had not been completed and accepted. Of the deferred revenue, $2,398,353 and $2,240,277 was attributable




to maintenance and support as of December 31, 2011 and 2010, respectively. The costs of hardware and installation services are recognized upon revenue recognition. The cost of support and maintenance is recognized ratably over the supporting period.
(j)
Stock‑Based Compensation
The Company has stock option plans under which incentive and nonqualified stock options are granted primarily to employees. The Company has applied FASB ASC Topic 718, Compensation - Stock Compensation, which requires measurement of the cost of employee services received in exchange for all equity awards granted based on the fair market value of the award on the grant date. Under this standard, the fair value of each employee stock option is estimated using an option pricing model. The Company utilizes the Black‑Scholes option pricing model to estimate the fair value of its stock‑based compensation expense. The model requires management to make a number of assumptions including fair value of the Company's shares, expected volatility, expected life, risk‑free interest rate, and expected dividends.
Stock‑based compensation expense recognized in the Company's consolidated financial statements is based on awards that are expected to vest. These expense amounts have been reduced by using an estimated forfeiture rate. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company evaluates the assumptions used to value stock awards when such awards are granted and evaluates forfeiture rate estimates on an annual basis.
(k)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interest and penalty relating to income tax positions, if any, are recorded in interest expense and operating expenses, respectively.
(l)
Research and Product Development
Research and product development costs are expensed as incurred.
(m)
Advertising Expense
The Company expenses advertising costs as incurred. Advertising expense for the years ended December 31, 2011, 2010 and 2009 was $203,880, $253,890 and $219,652, respectively.
(n)
Concentrations
Financial instruments subjecting the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains its cash with major financial institutions. At times, such balances with any one financial institution may exceed Federal Deposit Insurance Corporation insurance limits. However, the Company does not anticipate any loss on excess deposits. The Company's accounts receivable are derived from revenue earned from customers located primarily in the United States. The Company extends differing levels of credit to customers and generally does not require collateral. The Company currently relies on a limited number of suppliers to manufacture its products and does not have long‑term contracts with any of these suppliers.




(3)
Accounts Receivable, Net
Accounts receivable consist of the following as of December 31:
 
 
2010
 
2011
Accounts receivable
$
4,835,881

$
11,864,435

Allowance for doubtful accounts
 
(148,883
)
 
(25,420
)
     Accounts receivable, net
$
4,686,998

$
11,839,015

(4)
Inventories
Inventories consist of the following as of December 31:
 
 
2010
 
2011
Finished goods
$
1,489,850

$
2,133,461

Work in process
 
378,016

 
4,232,926

Raw materials
 
2,869,556

 
2,878,430

   Inventories
$
4,737,422

$
9,244,817

(5)
Property and Equipment, Net
Property and equipment consist of the following as of December 31:
 
 
2010
 
2011
Equipment
$
261,654

$
563,924

Furniture and fixtures
 
83,597

 
83,597

Computers and computer parts
 
282,304

 
316,635

Leasehold improvements
 
2,988

 
2,988

Less accumulated depreciation and amortization
 
(432,094
)
 
(561,220
)
     Property and equipment, net
$
198,449

$
405,924

Depreciation expense from the Company's property and equipment was $129,126, $123,625 and $868,004 for the years ended December 31, 2011, 2010 and 2009, respectively.
Based on the annual impairment analysis performed in 2009, the Company recognized an impairment loss of $503,741 on certain equipment. The loss was based on the fair value of the equipment, which was offer price from a prospective buyer. The Company reclassified the equipment into current asset in the amount of $107,500, net of accumulated depreciation of approximately $2,253,000 as it was available for sale as of December 31, 2009. The equipment was sold to an unrelated party at the offered price in May 2010. There was no impairment of property and equipment during 2010 and 2011.




(6)
Income Taxes
Income tax benefit (expense) for the years ended December 31, 2009, 2010, and 2011 consisted of the following:
 
 
2009
 
 
Current
 
Deferred
 
Total
Federal
$
68,000

$
635,000

$
703,000

State
 
30,000

 
127,000

 
157,000

     Total
$
98,000

$
762,000

$
860,000

 
 
 
 
 
2010
 
 
Current
 
Deferred
 
Total
Federal
$
(6,000
)
$
169,000

$
163,000

State
 
(10,000
)
 
94,000

 
84,000

     Total
$
(16,000
)
$
263,000

$
247,000

 
 
 
 
 
 
 
 
 
2011
 
 
Current
 
Deferred
 
Total
Federal
$
(1,000
)
$
871,000

$
870,000

State
 
(4,000
)
 
369,000

 
365,000

     Total
$
(5,000
)
$
1,240,000

$
1,235,000

The net effective income tax rate differed from the federal statutory income tax rate as follows:
 
 
2009
 
2010
 
2011
Statutory federal income tax rate
$
34.0
 %
$
34.0
 %
$
34.0
 %
State income tax rate, net of federal benefit
 
4.8
 %
 
9.2
 %
 
8.9
 %
R&D credit
 
2.4
 %
 
7.9
 %
 
4.6
 %
Stock-based compensation
 
(1.3
)%
 
(4.9
)%
 
(1.9
)%
Meals and entertainment
 
(0.5
)%
 
(2.5
)%
 
(0.6
)%
Others
 
0.4
 %
 
(2.7
)%
 
0.5
 %
     Total
$
39.8
 %
$
41.0
 %
$
45.5
 %




The primary components of temporary differences that gave rise to deferred taxes were as follows:
 
 
2010
 
2011
Deferred tax assets:
 
 
 
 
    Net operating loss carryforwards
$
150,000

$
850,000

    Inventory obsolescence
 
487,000

 
561,000

    Inventory capitalization
 
112,000

 
252,000

    Allowance for doubtful accounts
 
57,000

 
29,000

    R&D tax credits
 
495,000

 
713,000

    Accrued expenses and other liabilities
 
173,000

 
192,000

    Sale of extended warranties
 
467,000

 
508,000

    Depreciation and amortization
 
39,000

 
92,000

    Other deferred tax assets
 
68,000

 
91,000

        Net deferred tax assets
$
2,048,000

$
3,288,000

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers historical operating results, the projected future taxable income, and tax planning strategies in making this assessment. Based upon such consideration, a valuation allowance against deferred tax assets at December 31, 2011 and 2010 was not considered necessary because it is more likely than not the deferred tax asset will be fully realized.
At December 31, 2011, the Company had net operating loss carryforwards of approximately $1,900,000 for federal income tax purposes to offset future federal taxable income, if any, through 2032. At December 31, 2011, the Company had net operating loss carryforwards of approximately $3,500,000 for state income tax purposes to offset future state taxable income, if any, through 2032.
For years before 2007, the Company is no longer subject to U.S. federal or state income tax examinations.
The Company has unrecognized tax benefits totaling approximately $192,000 as of December 31, 2011, which was accounted for in the balance of the income tax payable and deferred tax accounts. There was no change in balances from the prior year.




(7)
Bank Lines of Credit
Bank lines of credit at December 31 are summarized as follows:
 
 
2010
 
2011
Line of credit with a maximum amount of $4,000,000, bearing interest at Wall Street Journal Prime Rate plus 1.25% with floor rate of 5.75% (5.75% at December 31, 2011), maturing in January 2013, collateralized by the Company’s accounts receivable and inventories, guaranteed by the Company’s Chief Executive Officer (CEO). Borrowings may be withdrawn against 80% eligible accounts receivable plus 35% of eligible inventories aged within 365 days, capped at $2,000,000
 
1,450,000

$
3,210,240

Line of credit with a maximum amount of $4,500,000, bearing interest at Wall Street Journal Prime Rate plus 2.00% with floor rate of 6.50% (6.50% at December 31, 2011), maturing in January 2013, guaranteed by the Company’s CEO. Borrowings may be withdrawn against various percentages of purchase orders from certain customers
 
—

 
3,495,000

 
 
1,450,000

$
6,705,240

As of and during the year ended December 31, 2011, the Company violated certain financial covenants. However, the Company subsequently obtained waivers from the lender for the covenant violations. Effective as of March 5, 2012, the line of credit agreements were renewed with no significant change in the key terms of the loans. The line of credit agreements mature in January 2013.
(8)
Commitments and Contingencies
(a)
Operating Leases
The Company leases its Milpitas facilities and Houston office under noncancelable operating lease agreements that expire through March 2013. Rent expense for the years ended December 31, 2011, 2010 and 2009 was approximately $234,000, $381,000 and $409,000, respectively.
The following is a schedule of the future minimum payments for operating leases with remaining terms in excess of one year as of December 31, 2011:
 
 
Operating leases
Year ending December 31:
 
 
2012
$
290,626

2013
 
14,859

     Total minimum lease payments
$
305,485

(b)
Other Contingencies
From time to time, the Company may become involved in legal proceedings and claims, which arise in the normal course of business. Management does not believe that the outcome of outstanding matters will have a material effect on the Company's consolidated financial statements.
(9)
Stockholders' Equity
(a)
Convertible Series A Preferred Stock
The Company has authorized 1,982,360 shares of preferred stock, of which 732,360 shares were designated as Series A preferred stock (the Series A Preferred).
Significant terms of the Series A Preferred are as follows:
•
Each share of Series A Preferred is convertible, at the option of the holder, at any time after the date of issuance, into shares of common stock on a one‑for‑one basis, subject to adjustment




in certain instances, at the option of the stockholder. The Series A Preferred are convertible at $4.00 per share, subject to adjustment. Such shares will be converted automatically upon the sale of the Company's common stock pursuant to a Registration Statement under the Securities Act of 1933 meeting certain criteria or the affirmative vote of the stockholders of a majority of shares of preferred stock outstanding at the time of such vote.
•
Each share of convertible preferred stock has voting rights equivalent to the number of shares of common stock into which it is convertible.
•
Stockholders are entitled to noncumulative dividends as declared by the board of directors out of any assets legally available prior to, and in preference to, any declaration or payment of any dividend on the common stock. The dividend rate for the Series A Preferred per share per annum is $0.20. No dividends have been declared as of December 31, 2011 and 2010.
•
In the event of any voluntary or involuntary liquidation, dissolution, or winding‑up of the affairs of the Company, each stockholder of a share of Series A Preferred shall be entitled to receive, prior to, and in preference to, any distribution of any of the assets or property of the Company to the stockholders of the common stock, by reason of their ownership thereof, an amount per share equal to $4.00 for each outstanding share of Series A Preferred plus all declared and unpaid dividends with respect to such shares. If the assets or property to be distributed are insufficient to permit the payment to holders of the Series A Preferred of their full preferential amount, the entire assets and property legally available for distribution shall be distributed ratably among the holders of Series A Preferred. After setting apart for payment to the holders of the Series A Preferred of the Series A liquidation preference and any other distribution that may be required with respect to the Series A Preferred, the remaining assets and funds of the Company legally available for distribution, if any, shall be distributed ratably to the then holders of outstanding shares of common stock.
(b)
Warrants
In November 2001, in connection with the renegotiation of its lease, the Company issued a warrant to its landlord to purchase a variable number of Series B Preferred shares at a purchase price to be determined by certain elections under the lease restructuring agreement. In August of 2003, upon further restructuring of the Company's lease, the terms of the warrant were amended such that the purchase price and the number of shares subject to warrant were fixed at $3.92 and 107,360, respectively. The warrants, as amended, expired in November 2011.
(c)
Stock Options
The Company adopted a Stock Option Plan (the Plan) in 2000 for the grant of options to purchase shares of common stock to employees, consultants, and directors of the Company. Under the Plan, the Company can issue up to 2,000,000 shares of common stock. The options are based upon a vesting schedule structured by the board of directors, except that fifty percent (50%) of any exercisable or unvested portion of outstanding options will become exercisable and vested in the event of a change of control of the Company. Under the Plan, the exercise price for an incentive stock option and nonstatutory stock option will not be less than 100% and 85%, respectively, of the fair market value of the Company's common stock on the grant date as determined by the board of directors. Likewise, no option granted to a 10% owner optionee will have an exercise price per share less than 110%. Options expire as determined by the board of directors, but not more than 10 years after the grant date. No incentive stock option granted to a 10% owner optionee will be exercisable after the expiration of five years after the effective date of the grant. In addition, no option will become exercisable at a rate less than 20% per year over a period of five years from the effective date of grant, subject to the optionee's continued service.
As of December 31, 2011, there were 2,000,000 shares authorized under the Company's stock option plan, of which 289,006 shares were available under the current option plan for future grants.




Option activity under the Plan is summarized as follows:
 
 
Number of shares
 
Exercise price per share
 
Weighted average exercise price
 
Average remaining contractual life (in years)
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2010
 
1,165,205

$
—
 
1.00
 
6.06
 
 
 
 
 
 
 
 
 
Granted
 
494,119

 
1.06
 
1.06
 
 
Forfeited
 
(32,330
)
 
0.40
 
0.40
 
 
Forfeited
 
(13,000
)
 
1.79
 
1.79
 
 
 
 
 
 
 
 
 
 
 
Outstanding at December 31, 2010
 
1,613,994

 
—
 
1.02
 
6.53
 
 
 
 
 
 
 
 
 
Granted
 
134,000

 
1.06
 
1.06
 
 
Forfeited
 
(15,000
)
 
0.40
 
0.40
 
 
Forfeited
 
(22,000
)
 
1.06
 
1.06
 
 
 
 
 
 
 
 
 
 
 
Outstanding at December 31, 2011
 
1,710,994

 
—
 
1.03
 
5.81
 
 
 
 
 
 
 
 
 

The following table summarizes information with respect to stock options outstanding at December 31:
2010
Number outstanding
 
Weighted average remaining contractual life (in years)
 
Number exercisable
 
Exercise price
556,875

 
3.53
 
556,875

$
0.40
118,000

 
5.02
 
118,000

 
0.90
445,000

 
7.02
 
338,098

 
1.79
494,119

 
9.84
 
6,319

 
1.06
1,613,994

 
6.53
 
1,019,292

 
1.02
 
 
 
 
 
 
 
2011
Number outstanding
 
Weighted average remaining contractual life (in years)
 
Number exercisable
 
Exercise price
541,875

 
2.53
 
541,875

$
0.40
118,000

 
4.02
 
118,000

 
0.90
445,000

 
6.05
 
443,147

 
1.79
606,119

 
8.93
 
145,504

 
1.06
1,710,994

 
5.81
 
1,248,526

 
1.03

(d)
Stock-Based Compensation
During the years ended December 31, 2011 and 2010, the Company granted stock options to employees to purchase 134,000 and 494,119 shares of common stock, respectively, with a grant‑date fair value per option of $0.68 per share. Company did not grant any stock options in 2009. As of December 31, 2011 and 2010, there were total unrecognized compensation costs of $383,760 and $507,527, respectively, related to these stock options. These costs are expected to be recognized over a period of approximately four years.




The fair value of employee stock options was estimated using the following assumptions for the years ended December 31:
 
 
2010
 
2011
Expected term (in years)
 
6.25

 
6.25

Expected volatility
 
71.0
%
 
71.0
%
Risk-free rate
 
1.4
%
 
1.1
%
Dividend yield
 
—    

 
—    

Forfeitures
 
10.0
%
 
12.0
%

The expected term of the options is based on the average period the stock options are expected to remain outstanding calculated as the midpoint of the options vesting term, and contractual expiration period, in accordance with the “Simplified Method” described in ASC Topic 718, as the Company did not have sufficient historical information to develop reasonable expectations about future exercise patterns and post‑vesting employment termination behavior. The expected stock price volatility assumptions for the Company's stock options for the years ended December 31, 2011 and 2010 were determined by examining the historical volatilities for industry peers, as the Company did not have any trading history for the Company's common stock. The risk‑free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company's stock options. The expected dividend assumption is based on the Company's history and expectation of dividend payouts. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
(10)
401(k) Plan
The Company has a 401(k) tax deferred savings plan under which eligible employees may elect to have a portion of their salary deferred and contributed to the plan. Employer matching contributions are determined by the board of directors and are discretionary. There were no employer matching contributions in 2011, 2010 and 2009.
(11)
Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through September 12, 2012, the date at which the consolidated financial statements were available to be issued, and determined there are no other items to disclose.






 EX-99.2 4 a112112ex992.htm EX-99.2 112112ex99.2


Exhibit 99.2
Appro International, Inc. and Subsidiary
Unaudited Condensed Consolidated Balance Sheet
 
 
September 30,
 
 
2012
ASSETS
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash
$
533,907

Accounts receivable, net
 
12,482,509

Inventories
 
5,071,392

Deferred costs
 
3,088,847

Deferred tax assets
 
888,000

Prepaid expenses and other current assets
 
805,619

Total current assets
 
22,870,274

 
 
 
Investments
 
100,000

Property & equipment, net
 
335,839

Deferred tax assets
 
1,478,000

Other assets, net
 
160,577

TOTAL ASSETS
$
24,944,690

 
 
 
LIABILITIES
 
 
 
 
 
Current Liabilities
 
 
Accounts payable
$
4,257,431

Advance from customer
 
301,950

Accrued expenses and other current liabilities
 
1,920,475

Warranty liability
 
361,396

Deferred revenue
 
5,093,031

Bank notes payable
 
4,643

Bank line of credit
 
5,310,000

Total Current Liabilities
 
17,248,926

 
 
 
Warranty liability
 
49,733

Deferred revenue
 
3,632,596

Bank notes payable
 
17,470

Other liabilities
 
219,077

TOTAL LIABILITIES
 
21,167,802

 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
Preferred stock
 
2,400,000

Common stock
 
2,719,931

Accumulated deficit
 
(1,343,043
)
Total stockholders' equity
 
3,776,888

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
$
24,944,690

See accompanying notes to consolidated financial statements.





Appro International, Inc. and Subsidiary
Unaudited Condensed Consolidated Statements of Operations

 
Nine Months Ended September 30,
 
 
2011
 
2012
 Sales
$
24,686,117

$
66,930,222

 Cost of sales
 
19,969,197

 
53,299,106

    Gross Profit
 
4,716,920

 
13,631,116

 
 
 
 
 
 Operating expenses:
 
 
 
 
 Research and development
 
3,710,773

 
4,548,297

 Sales and marketing
 
2,098,896

 
2,896,847

 General and administration
 
2,980,880

 
3,672,299

 Total operating expenses
 
8,790,549

 
11,117,443

 
 
 
 
 
 Net income (loss) from operations
 
(4,073,629
)
 
2,513,673

 
 
 
 
 
 Other income (expense):
 
 
 
 
 Interest expense, net
 
(188,315
)
 
(109,386
)
 Other income (expense), net
 
(55,180
)
 
438,281

 Total other income (expense)
 
(243,495
)
 
328,895

 
 
 
 
 
 Income (loss) before income taxes
 
(4,317,124
)
 
2,842,568

 
 
 
 
 
Income tax benefit (expense)
 
1,698,000

 
(1,143,000
)
 
 
 
 
 
 Net income (loss)
$
(2,619,124
)
$
1,699,568

See accompanying notes to consolidated financial statements.





Appro International, Inc. and Subsidiary
Unaudited Condensed Consolidated Statements of Stockholders' Equity

 
 
 
 
 
 
 
 
 
 
 
 
Total
 
 
Series A preferred
 
Common stock
 
Accumulated
 
Stockholders'
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Deficit
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
 
625,000

$
2,400,000

 
5,757,500

$
2,437,088

$
(1,555,642
)
$
3,281,446

Stock-based compensation
 
—    

 
—    

 
—    

 
161,000

 
 
 
161,000

Net loss
 
—    

 
—    

 
—    

 
 
 
(2,619,124
)
 
(2,619,124
)
Balance at September 30, 2011
 
625,000

$
2,400,000

 
5,757,500

$
2,598,088

$
(4,174,766
)
$
823,322

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
625,000

$
2,400,000

 
5,757,500

$
2,651,552

$
(3,042,611
)
$
2,008,941

Stock-based compensation
 
—    

 
—    

 
—    

 
68,379

 
 
 
68,379

Net income
 
—    

 
—    

 
—    

 
 
 
1,699,568

 
1,699,568

Balance at September 30, 2012
 
625,000

$
2,400,000

 
5,757,500

$
2,719,931

$
(1,343,043
)
$
3,776,888


See accompanying notes to consolidated financial statements.






Appro International, Inc. and Subsidiary
Unaudited Condensed Consolidated Statements of Cash Flows
 
Nine Months Ended
 
September 30,
 
 
2011
 
2012
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 Net income (loss)
$
(2,619,124
)
$
1,699,568

 
 
 
 
 
Adjustments to reconcile net loss to net cash (used in) provided by
 
 
 
 
Depreciation and amortization
 
46,848

 
104,518

Provision for doubtful accounts
 
67,852

 
280

Loss for inventory obsolescence
 
17,404

 
—

Provision for warranty reserve
 
186,234

 
356,663

Stock-based compensation
 
161,000

 
68,379

Deferred income tax (benefit) expense
 
(1,703,000
)
 
922,000

Changes in operating assets and liabilities:
 
 
 
 
Accounts Receivable
 
815,150

 
(643,775
)
Inventory
 
(2,634,856
)
 
4,173,426

Deferred costs
 
—

 
4,080,660

Prepaid expenses and other current liabilities
 
(57,577
)
 
(45,494
)
Other assets
 
(2,803
)
 
—

Accounts payable
 
(4,348,672
)
 
(3,785,706
)
Advance from customer
 
5,181,597

 
(4,741,489
)
Accrued expenses and other current liabilities
 
341,588

 
1,068,764

Warranty reserve
 
(172,435
)
 
(246,138
)
Deferred revenue
 
(483,831
)
 
(1,590,495
)
Other liabilities
 
123,770

 
(37,256
)
     Net cash (used in) provided by operating activities
 
(5,080,855
)
 
1,383,905

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of PP&E
 
(269,141
)
 
(34,430
)
Purchases of investments
 
—

 
(100,000
)
     Net cash (used in) provided by investing activities
 
(269,141
)
 
(134,430
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Increase in capital lease
 
—

 
22,113

Net increase (decrease) in bank lines of credit
 
4,839,000

 
(1,395,240
)
     Net cash (used in) provided by financing activities
 
4,839,000

 
(1,373,127
)
 
 
 
 
 
     Net increase (decrease) in cash
 
(510,996
)
 
(123,652
)
Cash at beginning of period
 
1,528,762

 
657,559

 
 
 
 
 
Cash at end of period
$
1,017,766

$
533,907

 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
Cash paid for income taxes
 
21,603

 
7,800

Cash paid for interest
 
188,615

 
111,280


See accompanying notes to consolidated financial statements.







APPRO INTERNATIONAL, INC.
AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
September 30, 2012 and 2011
(unaudited)

(1)
Organization and Line of Business
Appro International, Inc. (the Company or Appro) was incorporated in California in May 1991. The Company is in the business of designing and providing high-performance cluster supercomputing solutions for commercial enterprises in the oil and gas, financial services, manufacturing, as well as government research fields and universities. In October 2008, the Company invested $1,000,000 to establish Appro Korea, Inc. (the Subsidiary or Appro Korea) in South Korea as a wholly owned subsidiary of the Company. The Subsidiary is mainly engaged in engineering, research, and development activities.
(2)
Summary of Significant Accounting Policies
(a)
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and the Subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation.
(b)
Interim Financial Statements
The financial information included in the accompanying condensed consolidated financial statements is unaudited and includes all adjustments, consisting of normal recurring adjustments and accruals, considered necessary for a fair presentation in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures have been condensed or omitted. Operating results and cash flows for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012 or any other interim period.

(c)
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements. Significant items subject to such estimates and assumptions include the valuation of inventory, property and equipment, warranty reserve, share-based compensation, and deferred tax assets, and other contingencies.
(d)
Accounts Receivable
Accounts receivable consist primarily of amounts due from customers for the sale of the Company's products and are reported at net realizable value. The allowance for doubtful accounts is based on the best estimate of the amount of probable credit losses in existing accounts receivable. The Company reviews the allowance for doubtful accounts quarterly. Past-due balances of 90 days and over are reviewed individually for collection. Account balances are charged off against the allowance for doubtful accounts when management believes it is probable the receivable will not be recovered.





(e)
Inventories
Inventories are goods held for sale in the normal course of business. Inventories are stated at the lower of cost (determined under the first-in, first-out method) or market. The inventory balance is segregated among raw materials, work in process (WIP), and finished goods. Raw materials are low‑level components, which are purchased from vendors; WIP is partially assembled products. Consideration is given to inventory shipped and received near the end of a period, and the transaction is recorded when transfer of title occurs. Management regularly evaluates inventory for obsolescence and adjusts inventories to estimated net realizable value based on inventory that is obsolete or in excess of current demand. During the nine months ended September 30, 2012 and 2011, the Company wrote down its inventories for their obsolescence in the amount of $1.4 million and $17,404.
(f)
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Expenditures for additions and major improvements are capitalized; maintenance and repairs are expensed as incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets, generally four to seven years for equipment and furniture and fixtures, three years for computer hardware, and one year for engineering computer parts. Leasehold improvements are amortized over the shorter of the lease term or the remaining useful economic life. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is credited or charged to income.
(g)
Impairment of Long‑Lived Assets
In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 360, Property, Plant, and Equipment, the Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. This evaluation is performed based on the estimated undiscounted future cash flows from operating activities compared with the carrying value of the related asset. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, as measured by the difference between the carrying value and the estimated fair value of the assets determined using the best information available. Based on the impairment analysis in 2012, no impairment loss was recognized.
(h)
Warranty
The Company provides standard warranties with the sale of products, generally for up to two years from the date of shipment. The Company quantifies and records an estimate for warranty-related costs based on the Company's actual history, projected returns and failure rates, and current repair costs. A summary of changes in the Company's accrued warranty liability at September 30, 2012 is as follows:
Warranty liability at beginning of the period
$
300,604

Accruals for warranty during the period
 
356,663

Warranty utilization
 
(246,138
)
Warranty liability at end of the period
$
411,129


(i)
Revenue Recognition
The Company recognizes revenue when persuasive evidence of sales arrangement exists, delivery has occurred or services have been rendered, the buyer's price is fixed or determinable, and collectibility is reasonably assured.
Occasionally, the Company enters into agreements to provide multiple deliverables, generally for large-scale hardware solutions including hardware, installation services, and support and maintenance. The Company allocates fees attributable to each element into units of accounting in accordance with FASB ASC Subtopic 605-25, Revenue Recognition - Multiple-Element Arrangements. To the extent that separability criteria are met, there is stand‑alone value for the delivered elements and reliable and objective evidence




of the fair value (third-party selling price) of undelivered elements exists. Using these criteria, hardware and installation services are treated as one unit of accounting and recognized upon customer acceptance of the related deliverable. Support and maintenance are considered a separate unit of accounting and deferred based upon their fair value and recognized ratably over the support period. The costs of hardware and installation services are recognized upon revenue recognition. The cost of support and maintenance is recognized ratably over the supporting period.
(j)
Stock-Based Compensation
The Company has stock option plans under which incentive and nonqualified stock options are granted primarily to employees. The Company has applied FASB ASC Topic 718, Compensation - Stock Compensation, which requires measurement of the cost of employee services received in exchange for all equity awards granted based on the fair market value of the award on the grant date. Under this standard, the fair value of each employee stock option is estimated using an option pricing model. The Company utilizes the Black-Scholes option pricing model to estimate the fair value of its stock-based compensation expense. The model requires management to make a number of assumptions including expected volatility, expected life, risk-free interest rate, and expected dividends.
Stock-based compensation expense recognized in the Company's consolidated financial statements is based on awards that are expected to vest. These expense amounts have been reduced by using an estimated forfeiture rate. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company evaluates the assumptions used to value stock awards when such awards are granted and evaluates forfeiture rate estimates on an annual basis.
(k)
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interest and penalty relating to income tax positions, if any, are recorded in interest expense and operating expenses, respectively.
(l)
Research and Product Development
Research and product development costs are expensed as incurred.
(m)
Advertising Expense
The Company expenses advertising costs as incurred. Advertising expense for the nine month periods ended September 30, 2012 and 2011 was $146,670 and $152,560, respectively.
(n)
Concentrations of Credit Risk
Financial instruments subjecting the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains its cash with major financial institutions. At times, such balances with any one financial institution may exceed Federal Deposit Insurance Corporation insurance limits. However, the Company does not anticipate any loss on excess deposits. The Company's accounts receivable are derived from revenue earned from customers located primarily in the United States. The Company extends differing levels of credit to customers and generally does not require collateral. The Company currently relies on a limited number of suppliers to manufacture its products and does not have long‑term contracts with any of these suppliers.




(3)
Accounts Receivable, Net
Accounts receivable consist of the following as of September 30, 2012:
Accounts receivable
$
12,496,013

Allowance for doubtful accounts
 
(13,504
)
     Accounts receivable, net
$
12,482,509



(4)
Inventories
Inventories consist of the following as September 30, 2012:
Finished goods
$
684,992

Work in process
 
30,889

Raw materials
 
4,355,511

     Inventories
$
5,071,392


(5)
Property and Equipment, Net
Property and equipment consist of the following as of September 30, 2012:
Equipment
$
563,295

Furniture and fixtures
 
85,397

Computers and computer parts
 
341,398

Leasehold improvements
 
2,987

Less accumulated depreciation and amortization
 
(657,238
)
     Property and equipment, net
$
335,839

Depreciation expense from the Company's property and equipment was $104,518 and $46,848 for the nine month periods ended September 30, 2012 and 2011, respectively.




(6)
Income Taxes
Income tax (benefit) expense for the periods ended September 30, 2011 and 2012 consisted of the following:
 
 
2011
 
 
Current
 
Deferred
 
Total
Federal
$
1,000

$
(1,250,000
)
$
(1,249,000
)
State
 
4,000

 
(453,000
)
 
(449,000
)
     Total
$
5,000

$
(1,703,000
)
$
(1,698,000
)
 
 
2012
 
 
Current
 
Deferred
 
Total
Federal
$
186,000

$
786,000

$
972,000

State
 
35,000

 
136,000

 
171,000

     Total
$
221,000

$
922,000

$
1,143,000

The net effective income tax rate differed from the federal statutory income tax rate as follows:
 
 
2011
 
2012
Statutory federal income tax rate
$
34.0
 %
$
34.0
 %
State income tax rate, net of federal benefit
 
5.5
 %
 
4.0
 %
R&D credit
 
3.0
 %
 
—
 %
Stock-based compensation
 
(1.0
)%
 
1.9
 %
Meals and entertainment
 
(0.4
)%
 
0.7
 %
Others
 
(1.8
)%
 
(0.4
)%
     Total
$
39.3
 %
$
40.2
 %
The primary components of temporary differences that gave rise to deferred taxes were as follows:
 
 
2012
Deferred tax assets:
 
 
    Net operating loss carryforwards
$
64,000

    Inventory obsolescence
 
392,000

    Inventory capitalization
 
123,000

    Allowance for doubtful accounts
 
5,000

    R&D tax credits
 
503,000

    Accrued expenses and other liabilities
 
355,000

    Sale of extended warranties
 
683,000

    Depreciation and amortization
 
116,000

    Other deferred tax assets
 
125,000

        Net deferred tax assets
$
2,366,000


In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers historical operating results, the projected future taxable income, and tax planning strategies in making this assessment. Based upon such consideration, a valuation allowance against




deferred tax assets at September 30, 2012 was not considered necessary because it is more likely than not the deferred tax asset will be fully realized.
At September 30, 2012, the Company had net operating loss carryforwards of approximately $1 million for state income tax purposes to offset future state taxable income, if any, through 2032.
For years before 2008, the Company is no longer subject to U.S. federal or state income tax examinations.
The Company has unrecognized tax benefits totaling approximately $192,000 as of September 30, 2012, which was accounted for in the balance of the income tax payable and deferred tax accounts. There was no change in balances from the prior period.
(7)
Bank Lines of Credit
Bank lines of credit at September 30 are summarized as follows:
 
 
2012
Line of credit with a maximum amount of $4,000,000, bearing interest at Wall Street Journal Prime Rate plus 1.25% with floor rate of 5%, maturing in January 2013, guaranteed by the Company's Chief Executive Officer (CEO)
$
3,850,000

Line of credit with a maximum amount of $5,000,000, bearing interest at Wall Street Journal Prime Rate plus 1.5% with floor rate of 6%, maturing in January 2013, guaranteed by the Company's Chief Executive Officer (CEO)
 
1,460,000


$
5,310,000


As of and during the nine month period ended September 30, 2011, the Company violated certain financial covenants. However, the Company subsequently obtained waivers from the lender for the covenant violations.

(8)
Commitments and Contingencies
(a)
Operating Leases
The Company leases its Milpitas facilities and Houston office under A noncancelable operating lease agreement that expire through October 31, 2013. Rent expense for the nine month periods ended September 30, 2012 and 2011 was approximately $174,000.
The following is a schedule of the future minimum payments for operating leases with remaining terms in excess of one year as of September 30, 2012:
 
 
Operating leases
Period ending September 30:
 
 
2013
$
292,282

 
$
292,282


(b)
Other Contingencies
From time to time, the Company may become involved in legal proceedings and claims, which arise in the normal course of business. Management does not believe that the outcome of outstanding matters will have a material effect on the Company's consolidated financial statements.




(9)
Stockholders' Equity
(a)
Convertible Series A Preferred Stock
The Company has authorized 1,982,360 shares of preferred stock, of which 732,360 shares were designated as Series A preferred stock (the Series A Preferred).
Significant terms of the Series A Preferred are as follows:
•
Each share of Series A Preferred is convertible, at the option of the holder, at any time after the date of issuance, into shares of common stock on a one-for-one basis, subject to adjustment in certain instances, at the option of the stockholder. The Series A Preferred are convertible at $4.00 per share, subject to adjustment. Such shares will be converted automatically upon the sale of the Company's common stock pursuant to a Registration Statement under the Securities Act of 1933 meeting certain criteria or the affirmative vote of the stockholders of a majority of shares of preferred stock outstanding at the time of such vote.
•
Each share of convertible preferred stock has voting rights equivalent to the number of shares of common stock into which it is convertible.
•
Stockholders are entitled to noncumulative dividends as declared by the board of directors out of any assets legally available prior to, and in preference to, any declaration or payment of any dividend on the common stock. The dividend rate for the Series A Preferred per share per annum is $0.20. No dividends have been declared as of September 30, 2012.
•
In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the affairs of the Company, each stockholder of a share of Series A Preferred shall be entitled to receive, prior to, and in preference to, any distribution of any of the assets or property of the Company to the stockholders of the common stock, by reason of their ownership thereof, an amount per share equal to $4.00 for each outstanding share of Series A Preferred plus all declared and unpaid dividends with respect to such shares. If the assets or property to be distributed are insufficient to permit the payment to holders of the Series A Preferred of their full preferential amount, the entire assets and property legally available for distribution shall be distributed ratably among the holders of Series A Preferred. After setting apart for payment to the holders of the Series A Preferred of the Series A liquidation preference and any other distribution that may be required with respect to the Series A Preferred, the remaining assets and funds of the Company legally available for distribution, if any, shall be distributed ratably to the then holders of outstanding shares of common stock.
(b)
Warrants
In November 2001, in connection with the renegotiation of its lease, the Company issued a warrant to its landlord to purchase a variable number of Series B Preferred shares at a purchase price to be determined by certain elections under the lease restructuring agreement. In August of 2003, upon further restructuring of the Company's lease, the terms of the warrant were amended such that the purchase price and the number of shares subject to warrant were fixed at $3.92 and 107,360, respectively. The warrants, as amended, expired in November 2011.
(c)
Stock Options
The Company adopted a Stock Option Plan (the Plan) in 2000 for the grant of options to purchase shares of common stock to employees, consultants, and directors of the Company. Under the Plan, the Company could issue up to 2,000,000 shares of common stock. The options are based upon a vesting schedule structured by the board of directors, except that fifty percent (50%) of any exercisable or unvested portion of outstanding options will become exercisable and vested in the event of a change of control of the Company. Under the Plan, the exercise price for an incentive stock option and nonstatutory stock option will not be less than 100% and 85%, respectively, of the fair market value of the Company's common stock on the grant date as determined by the board of directors. Likewise, no option granted to a 10% owner optionee will have an exercise price per share less than 110%. Options expire as determined by the board of directors, but not more than 10 years after the grant date. No incentive stock option granted to a 10% owner optionee will be exercisable after the expiration of five years after the effective date of the grant. In addition, no option will become exercisable at a rate less than 20% per year over a period of five years from the effective date of grant, subject to the optionee's continued service.




As of September 30, 2012, there were 2,000,000 shares authorized under the Company's stock option plan, of which 524,831 shares were available under the current option plan for future grants.
Option activity under the Plan is summarized as follows:
 
 
Number of shares
 
Exercise price per share
 
Weighted average exercise price
 
Average remaining contractual life (in years)
 
 
 
 
 
 
 
 
 
Outstanding at January 1, 2011
 
1,613,994

$
—
 
1.02
 
6.53
 
 
 
 
 
 
 
 
 
Granted
 
134,000

 
1.06
 
1.06
 
 
Forfeited
 
(15,000
)
 
0.40
 
0.40
 
 
Forfeited
 
(22,000
)
 
1.06
 
1.06
 
 
 
 
 
 
 
 
 
 
 
Outstanding at September 30, 2011
 
1,710,994

 
—
 
1.03
 
5.81
 
 
 
 
 
 
 
 
 
Outstanding at December 31, 2011
 
1,710,994

 
—
 
1.03
 
5.81
 
 
 
 
 
 
 
 
 
Granted
 
—

 
 
 
 
 
 
Forfeited
 
(78,825
)
 
0.4
 
0.40
 
 
Forfeited
 
(22,000
)
 
1.79
 
1.79
 
 
Forfeited
 
(82,784
)
 
1.06
 
1.06
 
 
 
 
 
 
 
 
 
 
 
Outstanding at September 30, 2012
 
1,527,385

 
—
 
1.05
 
5.03
 
 
 
 
 
 
 
 
 

The following table summarizes information with respect to stock options outstanding at September 30, 2012:
Number outstanding
 
Weighted average remaining contractual life (in years)
 
Number exercisable
 
Exercise price
463,050

 
1.76
 
463,050

$
0.40
118,000

 
3.27
 
118,000

 
0.90
423,000

 
5.27
 
423,000

 
1.79
523,335

 
8.12
 
293,043

 
1.06
1,527,385

 
5.03
 
1,297,093

 
1.05

(d)
Stock‑Based Compensation
During the nine months ended September 30, 2011, the Company granted stock options to employees to purchase 134,000 shares of common stock, respectively, with a grant-date fair value per option of $0.68 per share. No stock options were granted during the nine months ended September 30, 2012. As of September 30, 2012, there were total unrecognized compensation costs of $260,032 related to these stock options. These costs are expected to be recognized over a period of approximately four years.




The fair value of employee stock options was estimated using the following assumptions for the nine month period ended September 30, 2011:
Expected term (in years)
 
6.25

Expected volatility
 
71.0
%
Risk-free rate
 
1.1
%
Dividend yield
 
—    

Forfeitures
 
11.0
%

The expected term of the options is based on the average period the stock options are expected to remain outstanding calculated as the midpoint of the options vesting term, and contractual expiration period, in accordance with the “Simplified Method” described in ASC Topic 718, as the Company did not have sufficient historical information to develop reasonable expectations about future exercise patterns and post‑vesting employment termination behavior. The expected stock price volatility assumptions for the Company's stock options for the nine month period ended September 30, 2011 were determined by examining the historical volatilities for industry peers, as the Company did not have any trading history for the Company's common stock. The risk‑free interest rate assumption is based on the U.S. Treasury instruments whose term was consistent with the expected term of the Company's stock options. The expected dividend assumption is based on the Company's history and expectation of dividend payouts. ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
(10)
401(k) Plan
The Company had a 401(k) tax deferred savings plan under which eligible employees could elect to have a portion of their salary deferred and contributed to the plan. Employer matching contributions are determined by the board of directors and are discretionary. There were no employer matching contributions in the nine months ended September 30, 2011 or 2012.









 EX-99.3 5 a112112ex993.htm EX-99.3 112112ex99.3



Exhibit 99.3

Unaudited Pro Forma Financial Information
On November 21, 2012 (the “Closing Date”), Cray Inc. (“Cray”) acquired all the outstanding shares of Appro International, Inc. (“Appro”) for cash consideration of $24.9 million ($21.8 million of the cash consideration was paid to Appro shareholders and $3.1 million was paid to other parties related to Appro's transaction costs). The acquisition of Appro will allow the Company to expand its product offerings in the high performance computing market.
The acquisition is accounted for using the acquisition method of accounting whereby the assets acquired and liabilities assumed as of the Closing Date, including identifiable intangible assets such as developed technologies, are recorded at their estimated fair value. The excess of the consideration transferred over the estimated fair value of the identifiable assets acquired and liabilities assumed is recognized as goodwill, which will not be amortized but will be subject to an annual impairment test.
The following unaudited pro forma combined financial statements are based on the latest available historical consolidated financial statements of Cray.
The unaudited pro forma combined balance sheet as of September 30, 2012, gives effect to the acquisition as if it had been completed on September 30, 2012, and therefore will differ from actual amounts reported by Cray. The pro forma combined statements of operations for the nine months ended September 30, 2012 and for the year ended December 31, 2011, give effect to the acquisition as if it had been completed on January 1, 2011, and therefore will differ from actual results reported by Cray.
The historical financial information has been adjusted to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable and (3) expected to have a continuing impact on the combined results of Cray and Appro. The unaudited pro forma combined financial statements do not reflect any operating efficiencies, cost savings or revenue enhancements that may be achieved by the combined companies.  In addition, certain nonrecurring expenses expected to be incurred within the first twelve months after the acquisition are also not reflected in the pro forma statements.
Cray is reviewing Appro's accounting policies to determine whether to harmonize any differences in policies. These unaudited pro forma combined financial statements assume no material differences in accounting policies.
These unaudited pro forma combined financial statements are based on the preliminary allocation of purchase price and are provided for informational purposes only and are not indicative of what the actual results of operations and financial position would have been had the acquisition taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of the combined companies. The pro forma adjustments are based on information available as of the date of this Current Report on Form 8-K/A. Assumptions and estimates underlying the pro forma adjustments are described in the accompanying notes. These preliminary assumptions and estimates are subject to change as Cray finalizes the valuations of the assets acquired and liabilities assumed in connection with its acquisition of Appro. Therefore, final adjustments may differ from the pro forma adjustments presented herein.
The unaudited pro forma combined financial statements, including the notes thereto, should be read in conjunction with the historical financial statements of Cray, which are included in its Annual Report on Form 10-K for the year ended December 31, 2011 and its Quarterly Report on Form 10-Q as of September 30, 2012; and Appro, whose audited consolidated financial statements as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2011and unaudited condensed consolidated financial statements as of September 30, 2012 and 2011 and for the nine months then ended are included in this Current Report on Form 8-K/A.




Cray Inc. and Subsidiaries
Unaudited Condensed Combined Pro Forma Balance Sheet
(in thousands)
 
September 30, 2012
 
 
Cray
 
Appro
 
Adjustments
 
Pro Forma
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
   Cash and cash equivalents
$
228,251

$
534

$
(24,881
)
(a)
$
203,904

   Restricted cash
 
3,500

 
—

 
—

 
 
3,500

   Short-term investments
 
30,697

 
—

 
—

 
 
30,697

   Accounts and other receivables, net
 
22,120

 
12,483

 
—

 
 
34,603

   Inventory
 
169,246

 
8,160

 
—

 
 
177,406

   Prepaid expenses and other current assets
 
13,041

 
1,693

 
(472
)
(f)
 
14,262

          Total current assets
 
466,855

 
22,870

 
(25,353
)
 
 
464,372

 
 
 
 
 
 
 
 
 
 
Long-term investments
 
20,087

 
—

 
—

 
 
20,087

Property and equipment, net
 
20,602

 
336

 
—

 
 
20,938

Service inventory, net
 
1,411

 
—

 
—

 
 
1,411

Deferred tax assets
 
13,083

 
1,478

 
(2,667
)
(f)
 
11,894

Trade name & trademarks
 
—

 
—

 
300

(b)
 
300

Developed technology
 
—

 
—

 
5,400

(b)
 
5,400

Customer relationships
 
—

 
—

 
1,800

(b)
 
1,800

Non-compete agreements
 
—

 
—

 
400

(b)
 
400

Goodwill
 
—

 
—

 
14,300

(e)
 
14,300

Other non-current assets
 
12,694

 
261

 
—

 
 
12,955

          TOTAL ASSETS
$
534,732

$
24,945

$
(5,820
)
 
$
553,857

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
   Accounts payable
$
61,131

$
4,257

$
—

 
$
65,388

   Accrued payroll and related expenses
 
13,497

 
—

 
—

 
 
13,497

   Other accrued liabilities
 
4,170

 
7,597

 
—

 
 
11,767

   Deferred revenue
 
99,655

 
5,395

 
(486
)
(c)
 
104,564

          Total current liabilities
 
178,453

 
17,249

 
(486
)
 
 
195,216

 
 
 
 
 
 
 
 
 
 
Long-term deferred revenue
 
29,431

 
3,633

 
(1,557
)
(c)
 
31,507

Other non-current liabilities
 
2,607

 
286

 
—

 
 
2,893

          TOTAL LIABILITIES
 
210,491

 
21,168

 
(2,043
)
 
 
229,616

 
 
 
 
 
 
 
 
 
 
Shareholders' equity:
 
 
 
 
 
 
 
 
 
   Preferred stock
 
—

 
2,400

 
(2,400
)
(d)
 
—

   Common stock and additional paid-in capital
 
575,216

 
2,720

 
(2,720
)
(d)
 
575,216

   Accumulated other comprehensive income
 
5,604

 
 
 
 
 
 
5,604

   Accumulated deficit
 
(256,579
)
 
(1,343
)
 
1,343

(d)
 
(256,579
)
          TOTAL SHAREHOLDERS' EQUITY
 
324,241

 
3,777

 
(3,777
)
 
 
324,241

          TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
534,732

$
24,945

$
(5,820
)
 
$
553,857






Cray Inc. and Subsidiaries
Unaudited Condensed Combined Pro Forma Statements of Operations
(in thousands, except per-share amounts)
 
 
Nine Months Ended September 30, 2012
 
 
Cray
 
Appro
 
Adjustments
 
Pro Forma
REVENUE:
 
 
 
 
 
 
 
 
 
  Product
$
182,806

$
65,514

$
 
 
$
248,320

  Service
 
49,423

 
1,416

 
 
 
 
50,839

 
 
 
 
 
 
 
 
 
 
     Total revenue
 
232,229

 
66,930

 
—

 
 
299,159

 
 
 
 
 
 
 
 
 
 
COST OF REVENUE:
 
 
 
 
 
 
 
 
 
  Cost of product revenue
 
107,545

 
52,380

 
1,350

(a)
 
161,275

  Cost of service revenue
 
27,701

 
919

 
 
 
 
28,620

 
 
 
 
 
 
 
 
 
 
     Total cost of revenue
 
135,246

 
53,299

 
1,350

 
 
189,895

 
 
 
 
 
 
 
 
 
 
     Gross profit
 
96,983

 
13,631

 
(1,350
)
 
 
109,264

 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
  Research and development, net
 
46,126

 
4,548

 
 
 
 
50,674

  Sales and marketing
 
24,601

 
2,897

 
135

(a)
 
27,633

  General and administrative
 
13,425

 
3,672

 
195

(a)
 
17,292

 
 
 
 
 
 
 
 
 
 
    Total operating expenses
 
84,152

 
11,117

 
330

 
 
95,599

 
 
 
 
 
 
 
 
 
 
Net gain on sale of hardware development program
 
139,068

 
—

 
 
 
 
139,068

 
 
 
 
 
 
 
 
 
 
    Income from operations
 
151,899

 
2,514

 
(1,680
)
 
 
152,733

 
 
 
 
 
 
 
 
 
 
Other income, net
 
573

 
438

 
 
 
 
1,011

 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
 
144

 
(109
)
 
 
 
 
35

 
 
 
 
 
 
 
 
 
 
    Income before income taxes
 
152,616

 
2,843

 
(1,680
)
 
 
153,779

 
 
 
 
 
 
 
 
 
 
Income tax expense
 
(5,381
)
 
(1,143
)
 
638

(b)
 
(5,886
)
 
 
 
 
 
 
 
 
 
 
    Net Income
$
147,235

$
1,700

$
(1,042
)
 
$
147,893

 
 
 
 
 
 
 
 
 
 
   Basic net income per common share
$
4.06

 
 
 
 
 
$
4.08

   Diluted net income per common share
$
3.92

 
 
 
 
 
$
3.95

 
 
 
 
 
 
 
 
 
 
   Basic weighted average shares
 
36,300

 
 
 
 
 
 
36,300

   Diluted weighted average shares
 
37,516

 
 
 
 
 
 
37,516








Cray Inc. and Subsidiaries
Unaudited Condensed Combined Pro Forma Statements of Operations
(in thousands, except per-share amounts)
 
 
Year Ended December 31, 2011
 
 
Cray
 
Appro
 
Adjustments
 
Pro Forma
REVENUE:
 
 
 
 
 
 
 
 
 
  Product
$
155,561

$
53,973

$
 
 
$
209,534

  Service
 
80,485

 
1,390

 
 
 
 
81,875

 
 
 
 
 
 
 
 
 
 
     Total revenue
 
236,046

 
55,363

 
—

 
 
291,409

 
 
 
 
 
 
 
 
 
 
COST OF REVENUE:
 
 
 
 
 
 
 
 
 
  Cost of product revenue
 
101,000

 
45,218

 
1,800

(a)
 
148,018

  Cost of service revenue
 
40,680

 
554

 
 
 
 
41,234

 
 
 
 
 
 
 
 
 
 
     Total cost of revenue
 
141,680

 
45,772

 
1,800

 
 
189,252

 
 
 
 
 
 
 
 
 
 
     Gross profit
 
94,366

 
9,591

 
(1,800
)
 
 
102,157

 
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
 
 
 
 
 
  Research and development, net
 
49,452

 
5,081

 
 
 
 
54,533

  Sales and marketing
 
26,134

 
3,017

 
180

(a)
 
29,331

  General and administrative
 
15,840

 
4,006

 
260

(a)
 
20,106

  Restructuring
 
1,783

 
—

 
 
 
 
1,783

 
 
 
 
 
 
 
 
 
 
    Total operating expenses
 
93,209

 
12,104

 
440

 
 
105,753

 
 
 
 
 
 
 
 
 
 
    Income (loss) from operations
 
1,157

 
(2,513
)
 
(2,240
)
 
 
(3,596
)
 
 
 
 
 
 
 
 
 
 
Other expense, net
 
(989
)
 
(284
)
 
 
 
 
(1,273
)
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
 
(33
)
 
75

 
 
 
 
42

 
 
 
 
 
 
 
 
 
 
    Income (loss) before income taxes
 
135

 
(2,722
)
 
(2,240
)
 
 
(4,827
)
 
 
 
 
 
 
 
 
 
 
Income tax benefit
 
14,194

 
1,235

 
851

(b)
 
16,280

 
 
 
 
 
 
 
 
 
 
    Net income (loss)
$
14,329

$
(1,487
)
$
(1,389
)
 
$
11,453

 
 
 
 
 
 
 
 
 
 
   Basic net income per common share
$
0.41

 
 
 
 
 
$
0.33

   Diluted net income per common share
$
0.40

 
 
 
 
 
$
0.32

 
 
 
 
 
 
 
 
 
 
   Basic weighted average shares
 
35,122

 
 
 
 
 
 
35,122

   Diluted weighted average shares
 
36,072

 
 
 
 
 
 
36,072









Cray Inc. and Subsidiaries
Notes to Unaudited Pro Forma Statements

Pro Forma Balance Sheet
(a)
Represents the cash purchase price paid for Appro.
(b)
Represents the estimated fair value of intangible assets acquired.
(c)
Reflects adjustment to state balances of acquired assets and liabilities at estimated fair value.
(d)
Adjustments reflect elimination of Appro equity balances.
(e)
Goodwill represents the difference between the purchase price and the estimated fair value of the tangible and intangible assets and liabilities acquired.
(f)
Deferred tax effect of acquisition adjustments primarily related to intangible assets acquired.

Pro Forma Statements of Operations
(a)
Reflects the preliminary estimate of amortization of acquired intangibles on a straight-line basis over estimated useful lives. Annual amortization is estimated at about $2.2 million for each of the first two years.
(b)
Tax effects of the pro forma adjustments are based on Cray's consolidated federal, state, and international statutory rates.