Supercomputer manufacturers settle lawsuit

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It’s easy to take for granted all the things we surround ourselves with: cushy cars, cellular phones, fast computers. We don’t always look at the work that took place behind the scenes: long hours, daily headaches, depleted personal checking accounts, and business deals that take years to close.

One man who contributed greatly to the world of computing was Seymour Cray. His legendary presence in the supercomputer world continues almost five years after his death.

Cray Inc. (Nasdaq: CRAY), a company he co-founded nearly 30 years ago before spinning off Cray Computer Corp. and SRC computers in Colorado Springs, recently signed a 10-year agreement with NEC Corp., allowing NEC to sell its vector supercomputers along with Cray’s vector systems. Outside of the potential revenue increase for both companies, Cray has agreed to drop a four-year-old lawsuit against NEC. The peace treaty involves a $25 million cash investment from NEC to Cray, and Cray has exclusive rights to sell NEC’s SX-5 series line of supercomputers in the U.S. market under the Cray brand. NEC cannot directly sell its supercomputers within U.S. boundaries. It also agreed to give NEC 3.125 million non-voting preferred shares of Cray stock that can be converted to common stock only at a fixed price of $8.

The disagreement between the two companies began in 1997 when Tokyo-based NEC (Nasdaq: NIPNY) secured a contract with the University Corporation for Atmospheric Research in Boulder. Cray accused the company of “dumping” – a term used to describe a foreign manufacturer selling a product to a U.S. company at production cost, plus a fair profit margin. This forced Cray out of the competition.

The lawsuit forced the U.S. Commerce Department to investigate. Its findings resulted in a 454 percent duty to NEC that would bring the sales price of its computers in the United States up to fair market value. This applied to all business transactions NEC had in America, effectively forcing NEC to stay off of U.S. soil.

The agreement was made on Feb. 28 and should close by the end of May, said Steve Conway, a spokesman for Cray. The reason Cray agreed to allow NEC’s products into the U.S. market is due to the unfulfilled orders Cray has for high-end vector systems. Cray can offer non-vector and a mid-range vector line of supercomputers, but not high-end.

“One piece of the attraction is the cash part, but an even much larger financial attraction is what we would make by selling these systems worldwide by the length of the agreement, assuming we are as successful as we hope to be,” said Conway.

This agreement will boost Cray’s revenues substantially, said Conway. Cray’s revenues in 2000 were $118 million. It expects revenues to increase to $175 million by the end of this year – not counting the NEC addition — and by $100 million by 2002. Cray expects the union to be in full gear within one year.

The agreement also includes safety provisions, said Conway. One point of protection for Cray prohibits NEC from acquiring more than 5 percent of Cray’s stock. Also, NEC can convert its shares into voting stock, but only if it is sold to a third party.

Seymour Cray began his company, Cray Research Inc. in Minneapolis, Minn., in 1972. The company designed and manufactured the first line of supercomputers — a mainframe computer that is among the largest, fastest, or most powerful of those available at a given time. His Cray-1 and Cray-2 supercomputers helped the defense industry create sophisticated weapons systems.

Cray Computer Corp., an offshoot of Cray Research, was formed in 1989 in Colorado Springs and headed by Seymour Cray.

Although Cray Research merged with Mountain View, Calif.-based Silicon Graphics Inc. in 1996, Cray had already left the business and formed a new company – SRC Computers, also based in Colorado Springs. Later that year, he died in an automobile accident at the age of 71. SGI discontinued its development and research of high-end computers.

In August 1999, SGI created a separate Cray Research business unit to focus exclusively on the requirements of high-end supercomputing. It never developed this vector system, thus relying on NEC to bring it into the U.S. market. Assets of this business unit were sold to Seattle, Wash.-based Tera Computer Co. in March 2000, who shortened the name to Cray Inc.