-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVdCKnOTcIsZrdniIrezuNyUjfO8rMnGPsueGw8i3yA2HL6icOoypnGHpYGYHDAs jUz4fPymke+KFkgQ1IWBwg== /in/edgar/work/20000814/0000891020-00-001500/0000891020-00-001500.txt : 20000921 0000891020-00-001500.hdr.sgml : 20000921 ACCESSION NUMBER: 0000891020-00-001500 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRAY INC CENTRAL INDEX KEY: 0000949158 STANDARD INDUSTRIAL CLASSIFICATION: [3571 ] IRS NUMBER: 930962605 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26820 FILM NUMBER: 698502 BUSINESS ADDRESS: STREET 1: 411 FIRST AVE SOUTH STREET 2: SUITE 600 CITY: SEATTLE STATE: WA ZIP: 98104-2860 BUSINESS PHONE: 2067012000 MAIL ADDRESS: STREET 1: 411 FIRST AVE SOUTH STREET 2: SUITE 600 CITY: SEATTLE STATE: WA ZIP: 98104-2860 FORMER COMPANY: FORMER CONFORMED NAME: TERA COMPUTER CO \WA\ DATE OF NAME CHANGE: 19950809 10-Q 1 e10-q.txt FORM 10-Q FOR PERIOD ENDED JUNE 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [x] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________. Commission file number 0-26820 - -------------------------------------------------------------------------------- CRAY INC. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- WASHINGTON 93-0962605 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 411 FIRST AVENUE SOUTH, SUITE 600 SEATTLE, WA 98104-2860 (206) 701 - 2000 (Address of principal executive offices) (Registrant's telephone number, including area code) ------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 14, 2000, 33,429,074 shares of the Company's Common Stock, par value $0.01 per share, were outstanding. 2 CRAY INC. AND SUBSIDIARIES TABLE OF CONTENTS
Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of December 31, 1999 and June 30, 2000 3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999 and 2000 4 Consolidated Statement of Shareholders' Equity for the Six Months Ended June 30, 2000 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 22 PART II OTHER INFORMATION Item 2. Changes in Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 24
2 3 CRAY INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
December 31, June 30, 1999 2000 (unaudited) ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 10,069 $ 7,742 Restricted cash 1,132 951 Accounts receivable 641 32,523 Inventory, net 4,513 22,020 Prepaid expenses and other assets 544 2,072 --------- --------- Total current assets 16,899 65,308 Property and equipment, net 5,829 26,024 Spares inventory, net 26,299 Intangible assets, net 186 34,528 Other assets 496 969 --------- --------- TOTAL $ 23,410 $ 153,128 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,366 $ 10,039 Accrued payroll and related expenses 2,147 10,736 Other accrued liabilities 277 7,380 Line of credit 5,200 Current portion of warranty reserves 16,881 Current portion of obligations under capital leases 612 465 Current portion of notes payable 289 23,809 --------- --------- Total current liabilities 7,691 74,510 Warranty reserves 26,597 Obligations under capital leases 390 261 Notes payable 1,022 884 Shareholders' equity: Common Stock, par $.01 - Authorized, 100,000 shares; issued and outstanding, 25,212 and 33,378 shares 111,443 152,709 Accumulated deficit (97,136) (101,833) --------- --------- 14,307 50,876 --------- --------- TOTAL $ 23,410 $ 153,128 ========= =========
See accompanying notes 3 4 CRAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
Three Months Ended Six Months Ended June 30, June 30, 1999 2000 1999 2000 -------- -------- -------- -------- Revenue: Product $ $ 26,693 $ 557 $ 26,693 Service 22 24,280 44 24,324 -------- -------- -------- -------- Total revenue 22 50,973 601 51,017 -------- -------- -------- -------- Operating expenses: Cost of product revenue 1,643 15,239 4,588 17,242 Cost of service revenue 21 12,264 51 12,290 Research and development 3,569 13,865 6,563 18,348 Marketing and sales 545 2,822 1,178 3,590 General and administrative 638 1,898 1,102 2,998 -------- -------- -------- -------- Total operating expenses 6,416 46,088 13,482 54,468 -------- -------- -------- -------- Income (loss) from operations (6,394) 4,885 (12,881) (3,451) Other income (expense) (278) 171 (602) 502 Amortization of intangibles (1,748) (1,748) -------- -------- -------- -------- Net income (loss) (6,672) 3,308 (13,483) (4,697) Preferred stock dividend (45) (115) -------- -------- -------- -------- Net income (loss) for common share $ (6,717) $ 3,308 $(13,598) $ (4,697) ======== ======== ======== ======== Net income (loss) per common share: Basic $ (0.40) $ 0.10 $ (0.87) $ (0.15) ======== ======== ======== ======== Diluted $ (0.40) $ 0.10 $ (0.87) $ (0.15) ======== ======== ======== ======== Weighted average shares outstanding: Basic 16,677 33,367 15,696 31,492 ======== ======== ======== ======== Diluted 16,677 33,448 15,696 31,492 ======== ======== ======== ========
See accompanying notes 4 5 CRAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) (IN THOUSANDS)
Common Stock ------------------------ Number of Accumulated Shares Amount Deficit Total --------- --------- ----------- ------- BALANCE, January 1, 2000 25,212 $ 111,443 $ (97,136) $14,307 Common stock issued in private placement, net of issuance costs of $1,830,495 5,227 24,304 24,304 Exercise of warrants 1,872 9,015 9,015 Cash received on subscribed common stock 900 900 Warrants and options issued for services 194 194 Issuance of shares under Employee Stock Purchase Plan 34 108 108 Exercise of stock options 30 93 93 Net loss (8,005) (8,005) ------- --------- --------- ------- BALANCE, March 31, 2000 32,375 $ 146,057 $(105,141) $40,916 Issuance of common stock to SGI 1,000 6,700 6,700 Exercise of stock options 3 4 4 Warrant commission and fees (147) (147) Warrants issued for services 95 95 Net income 3,308 3,308 ------- --------- --------- ------- BALANCE, June 30, 2000 33,378 $ 152,709 $(101,833) $50,876 ======= ========= ========= =======
See accompanying notes 5 6 CRAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Six Months Ended June 30, 1999 2000 -------- -------- Operating Activities: Net loss $(13,483) $ (4,697) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 885 5,192 Amortization of acquisition intangibles 1,748 Beneficial conversion feature of notes payable 531 18 Non-cash warrant and option expense 289 Cash provided (used) by changes in operating assets and liabilities: Accounts receivable 88 (27,966) Inventory (8) 4,672 Other assets 113 (381) Accounts payable (732) 5,866 Other accrued liabilities (10) 3,044 Accrued payroll and related expenses 187 4,146 Warranty reserve (3,856) -------- -------- Net cash used by operating activities (12,429) (11,925) Investing Activities: Cash used for acquisition (27,775) Purchases of property and equipment (710) (1,549) -------- -------- Net cash used by investing activities (710) (29,324) Financing Activities: Related party receivable (18) (10) Restricted cash 181 Issuance of notes payable 1,900 Sale of common stock 34,070 25,204 Proceeds from exercise of warrants 8,868 Proceeds from exercise of options 32 96 Proceeds from line of credit 5,000 Principal payments on notes payable (141) Capital leases, net (130) (276) -------- -------- Net cash provided by financing activities 35,854 38,922 Net Increase (Decrease) in Cash and Cash Equivalents 22,714 (2,327) Cash and Cash Equivalents: Beginning of period 3,162 10,069 -------- -------- End of period $ 25,876 $ 7,742 ======== ======== Supplemental Disclosure of Non Cash Investing and Financing Activities: Inventory reclassed to fixed assets 1,032 1,559 Common stock issued for acquisition of assets 6,700 Notes payable converted to common stock 2,000 Common stock issued for employee stock purchase plan 108 Accounts payable converted to notes 594 Fixed asset additions through common stock 164 Supplemental Disclosure of Cash Flow Information: Cash paid for interest $ 87 $ 136
See accompanying notes 6 7 CRAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) BASIS OF PRESENTATION In the opinion of management, the accompanying consolidated balance sheets and related interim consolidated statements of operations, shareholders' equity and cash flows have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles 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 and the financial statements and notes thereto included in the Company's financial statements for the year ended December 31, 1999, contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Cray Inc. and its wholly-owned subsidiaries (the Company). All material intercompany accounts and transactions have been eliminated. ACQUISITION The Company acquired certain assets of the Cray Research business unit operations from Silicon Graphics, Inc. ("SGI") on April 1, 2000. The acquisition was recorded under the purchase method of accounting and therefore the results of operations of the Cray Research business unit and the fair values of the acquired assets and liabilities were included in the Company's financial statements beginning as of April 1, 2000. The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values on the date of the acquisition as follows (in thousands):
Net assets acquired $ 21,943 Fair value adjustments 1,094 Note payable (35,259) Acquisition costs (1,022) Cash paid (15,000) Common stock (6,700) --------- Goodwill $ 34,944 =========
7 8 The pro forma results of operations set forth below have been prepared to reflect the acquisitions of the Cray Research business unit, assuming the acquisition had occurred on January 1, 1999 (in thousands, except for per share data).
Pro Forma Six months ended June 30, (unaudited) 1999 2000 ---------- --------- Total revenue $ 105,285 $ 91,965 ========= ======== Net income $ 10,228 $ 9,257 ========= ======== Net income per share $ 0.61 $ 0.29 ========= ========
The unaudited pro forma results of operations do not purport to present what the Company's financial position or results of operations would have been had the events leading to the pro forma adjustments in fact occurred at the beginning of the periods indicated or to project the Company's financial position or results of operations for any future date or period. INVENTORY Inventory consisted of the following (in thousands):
December 31, June 30, 1999 2000 ------------ -------- Components and subassemblies $ 8,044 $ 26,840 Work in process 806 17,369 Finished goods 1,137 4,780 Inventory allowance (5,474) (26,969) -------- -------- $ 4,513 $ 22,020 ======== ========
CHANGES IN CAPITAL On April 1, 2000, the Company issued one million shares of common stock valued at $6.7 million to SGI, in connection with the acquisition of the Cray Research business unit. EARNINGS PER SHARE Basic earnings per share are calculated by dividing net income or net loss by the weighted average number of common shares outstanding. Diluted earnings per share are calculated using the 8 9 weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options and warrants using the "treasury stock" method. RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform with the current-year presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The information set forth in this Item 2 includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act, as amended, and is subject to the safe harbor created by those sections. Factors that realistically could cause results to differ materially from those projected in the forward-looking statements are set forth under "Risk Factors" beginning on page 14. The following discussion should also be read in conjunction with the Financial Statements and Notes thereto. OVERVIEW We design, develop, market and service high-performance vector processor and general-purpose parallel computer systems. We presently market two computer models, the Cray SV1 and T3E, and provide maintenance services to the Cray installed base of these and earlier models of Cray computers. We are developing upgrades to the Cray SV1 and T3E, and we are developing two new computer systems, the MTA2, based on our multithreaded architecture system, and the SV2, which will combine elements of the SV1 and T3E computers. We have begun initial work on their respective successors, the MTA3 and SV3. Our service organization supports over 600 Cray supercomputers installed at about 200 customer sites in approximately 30 countries. This installed base includes close to 200 large scale vector supercomputers and more than 50 massively parallel systems. We have approximately 900 employees and world-wide operations. Our principal facilities are located in Seattle, Washington (corporate headquarters and MTA hardware and software engineering) with 125 employees; Eagan, Minnesota (software engineering, sales and marketing), with approximately 200 employees; and Chippewa Falls, Wisconsin (hardware engineering, manufacturing and service support), with approximately 300 employees. Approximately 125 employees are located in field offices in the United States, with principal sales and service offices located in Maryland, Georgia and New Mexico. Overseas, we have approximately 150 employees 9 10 with principal offices in the United Kingdom, Germany, France, Japan, Canada and Australia. We are in the process of separating the Cray Research operations from those of Silicon Graphics and integrating them with our own. This process includes establishing separate network, communications and other infrastructure services, reconstituting the marketing and sales operations, setting up subsidiary operations for international sales and services, implementing new operational policies and procedures, and identifying and filling openings in management, administration and other areas. We have experienced net losses in each year of operations. We incurred net losses of approximately $19.8 million in 1998, $34.5 million in 1999 and $4.7 million in the first six months of 2000, compared to a net loss of approximately $13.5 million in the first six months of 1999. With net profits of $3.1 million, the quarter ended June 30, 2000 was our first profitable quarter. We recognize revenue from sales of our computer systems upon acceptance by the customer, although depending on sales contract terms, revenue may be recognized upon shipment or delayed until clarification of funding. We recognize service revenue from the maintenance of our computer systems ratably over the term of each maintenance agreement. Factors that should be considered in evaluating our business, operations and prospects and that may affect our future results and financial condition are set forth below, beginning on page 14. RESULTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000 With the acquisition of the Cray Research business unit on April 1, 2000, period-to-period comparisons of our operating results that include periods prior to the acquisition are not indicative of results for any future period. REVENUE. We had revenue from product sales of $26.7 million for the three and six months ended June 30, 2000 compared to zero and $557,000 for the respective 1999 periods. Product revenue for the three and six months ended June 30, 2000 consist of $20.6 million for our T3E product line and $6.1 million for our SV1 product line. The respective 1999 periods consisted of the sale of a four-processor MTA1 system. The overall increase in product revenue is due to the acquisition of the Cray product line. We expect our product revenue to vary quarterly. In particular we expect that product revenue will decline markedly in the third quarter and then improve substantially in the fourth quarter of 2000. See "Risk Factors - Our Quarterly Performance May Vary Significantly and Could Cause Our Stock Price To Be Volatile." Product revenue represented 52% of total revenues for the three and six months ended June 30, 2000. 10 11 Service revenue were $24.3 million for the three and six months ended June 30, 2000 compared to $22,000 and $44,000 for the respective 1999 periods. Services are provided under separate maintenance contracts between the Company and its customers. These contracts generally provide for maintenance services for one year, although some are for multi-year periods, and are renewable upon expiration at the customer's election. The overall increase in service revenue is due to the acquisition of the Cray product line and related service business. We expect service revenue to decline slowly over the next year or so as older systems are withdrawn from service and then stabilize as our new systems are placed in service. Service revenue represented 48% of total revenues for the three and six months ended June 30, 2000. OPERATING EXPENSES. Cost of product revenue was $15.2 million and $17.2 million for the three and six months ended June 30, 2000 compared to $1.6 million and $4.6 million for the respective 1999 periods. Cost of product revenue for 1999 consisted of manufacturing costs and inventory adjustments relating to the MTA product line. Cost of product revenue represented 57% of product revenue for the three and six months ended June 30, 2000. Cost of service revenue was $12.3 million for the three and six months ended June 30, 2000, after offset in part by $4.3 million of warranty reserves, compared to $21,000 and $51,000 for the respective 1999 periods. Cost of service revenue represented 51% of product revenue for the three and six months ended June 30, 2000. Research and development expenses reflect our costs associated with the enhancements to the SV1 AND T3E systems and the development of the MTA and SV2 systems, including related software development, and cover personnel expenses, allocated overhead and operating expenses, software, materials, and engineering expenses, including payments to third parties, offset in part by governmental development funding. Research and development expenses were $13.9 million and $18.3 million for the three and six months ended June 30, 2000 compared to $3.6 million and $6.6 million for respective 1999 periods. Increases in research and development expenses primarily will depend on increases in engineering personnel, principally software engineers. Over time, with receipt of increased revenue from products currently under development, we would expect research and development expenses to decrease as a percentage of overall revenue. Research and development expenses represented 27% and 36% of total revenues for the three and six months ended June 30, 2000. Marketing and sales expenses were $2.8 million and $3.6 million for the three and six months ended June 30, 2000 compared to $545,000 and $1.2 million for respective 1999 periods. We expect marketing and sales expenses to increase over the rest of the year as we augment our sales force. Marketing and sales expenses represented 5% and 7% of total revenues for the three and six months ended June 30, 2000. General and administrative expenses were $1.9 million and $3.0 million for the three and six months ended June 30, 2000 compared to $638,000 and $1.1 million for the respective 1999 period. General and administrative expenses represented 4% and 6% of total revenues for the three and six months ended June 30, 2000. General and administrative expenses are expected to increase as we complete our management team. OTHER EXPENSE. Interest income was $281,000 and $601,000 for the three and six months ended June 30, 2000 compared to $50,000 and $77,000 for the respective 1999 periods, due to 11 12 higher average cash balances from the financings completed in 2000. Interest expense was $66,000 and $126,000 for the three and six months ended June 30, 2000 compared to $29,000 and $87,000 for the respective 1999 periods. The results for the three and six months ended June 30, 2000 include amortization of acquisition related expenses of $1.7 million. TAXES. We made no provision for federal income taxes as we have continued to incur net operating losses. PREFERRED STOCK. The dividends for the first half of 1999 were accrued on our Series A Convertible Preferred Stock, all of which was converted to common stock in the second quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $7.7 million at June 30, 2000 and $10.1 million at December 31, 1999. Restricted cash balances, which serve as collateral for capital equipment loans and leases, totaled $1 million at June 30, 2000 and December 31, 1999. Accounts receivable were $32.5 million at June 30, 2000 and $641,000 at year end. Net cash used in operating activities was $11.9 million for the six months ended June 30, 2000 compared to $12.4 million used in the six months ended June 30, 1999. For the six months ended June 30, 2000, net operating cash flows were primarily attributed to an increase in accounts receivable from product sales and operating expenses. For the six months ended June 30, 1999, net operating cash flows were primarily attributable to net losses, personnel costs and costs of inventory. Net cash spent on investing activities was $29.3 million for the six months ended June 30, 2000, compared to $710,000 for the six months ended June 30, 1999, and for the 2000 period consisted primarily of $26.7 million of cash spent on the Cray acquisition, $1.1 million of cash spent on acquisition related charges, and $1.5 million spent on additional property, plant and equipment used primarily for computers and electronic test equipment, computer software and furniture and fixtures for both periods. Net cash provided by financing activities was $38.9 million for the six months ended June 30, 2000 compared to $35.8 million for the six months ended June 30, 1999. For the six months ended June 30, 2000, we raised $25.2 million through the sale of common stock and received $8.9 million in proceeds from warrant exercises. We also obtained a line of credit for up to $10 million. For the six months ended June 30, 1999 financing activities consisted primarily of the sale of common stock through private placements. As part of the acquisition of the Cray Research business unit, we paid SGI $15 million and issued a nine-month non-interest bearing promissory note of $35.2 million of which we paid $11.7 million on June 30, 2000. We believe our present cash resources and our anticipated 12 13 revenue from product sales and maintenance services will be sufficient to finance our planned operations for the remainder of the year, including payment of the SGI note and other acquisition costs. Our operational expenses will consist primarily of personnel costs, cost of inventory and third-party engineering expenses. Nevertheless, we may raise additional equity and/or debt capital in the next twelve months to enhance our financial position for future operations. In addition, if anticipated sales of Cray products were delayed or if we were not successful in maintaining the level of maintenance revenue, we may need additional capital earlier than planned. Financings may not be available to us when needed or, if available, may not be available on satisfactory terms or may be dilutive to our shareholders. See "Risk Factors--We May Engage in Additional Financings Which May Be Dilutive to Existing Shareholders." 13 14 RISK FACTORS The following factors should be considered in evaluating our business, operations and prospects and may affect our future results and financial condition. A FAILURE TO INTEGRATE THE CRAY RESEARCH BUSINESS UNIT COULD COMPROMISE OUR GROWTH STRATEGY AND ADVERSELY AFFECT OUR BUSINESS. With the acquisition of the Cray Research business unit from Silicon Graphics, Inc. ("SGI"), the size and geographic dispersion of our workforce and operations increased significantly. These increases place a significant strain on our management, financial and other resources. We need to attract additional management talent, implement new financial, budgeting and management information systems, retain, motivate and effectively manage our employees, enhance internal control systems, increase our sales force, renovate existing and find new facilities and successfully separate the Cray operations from those of SGI and combine them with our existing operations. We may experience difficulties in integrating Cray's personnel, operations and technologies; and managing this sudden growth and these issues could divert our management's time and resources. Our success will depend on our management's ability to make these changes and to manage our operations effectively over the long term. LACK OF CUSTOMER ORDERS FOR OUR EXISTING SV1 AND T3E PRODUCTS AND OUR INABILITY TO SELL OUR PRODUCTS AT EXPECTED PRICES WOULD ADVERSELY AFFECT OUR PROSPECTS. We will depend on sales of our current products, the Cray SV1 and T3E, including enhancements to these products, for significant product revenues in 2000 and 2001. To obtain these sales, we need to reconstitute our marketing and service organization and assure our customers of product performance and our ability to service these products. Most of our potential customers already own or lease very high-performance computer systems. Some of our competitors may offer trade-in allowances or substantial discounts to potential customers, and we may not be able to match these sales incentives. We may be required to provide discounts to make sales or to finance the leasing of our products, which would result in a deferral of our receipt of cash for such systems. These developments would limit our revenues and resources and would adversely affect our profitability and operations. FAILURE TO OBTAIN RENEWAL OF SERVICE CONTRACTS WOULD ADVERSELY AFFECT OUR REVENUES AND EARNINGS. High-performance computer systems are typically sold with maintenance service contracts. These contracts generally are for annual periods, although some are for multi-year periods. We currently are performing most of the services under the existing SGI maintenance contracts as a sub-contractor to SGI. As these contracts expire, we need to convince customers to execute new maintenance service contracts with us. We anticipate that the service revenues will constitute a significant amount of our total revenues. If customers decommissioned our installed computers and did not renew their maintenance service contracts with us, our revenue and earnings would be adversely affected. OUR QUARTERLY PERFORMANCE MAY VARY SIGNIFICANTLY AND COULD CAUSE OUR STOCK PRICE TO BE VOLATILE. One or a few system sales may account for a substantial percentage of our quarterly and annual revenue. This is due to the high average sales price of our products, particularly the T3E system and the expected high average sales 14 15 prices for our MTA2 and SV2 systems, and the timing of purchase orders and product acceptances. Because a number of our prospective customers receive funding from the U.S. or foreign governments, the timing of orders from such customers may be subject to the appropriation and funding schedules of the relevant government agencies. The timing of orders and shipments also could be affected by other events outside our control, such as: - changes in levels of customer capital spending; - the introduction or announcement of competitive products; - the availability of components; - timing of the receipt of necessary export licenses; or - currency fluctuations and international conflicts or economic crises. Because of these factors, revenue, net income or loss and cash flow are likely to fluctuate significantly from quarter to quarter. In particular we expect that product revenue will decline markedly in the third quarter and then improve substantially in the fourth quarter of 2000. THE COST OF SERVICE OF THE T90 INSTALLED BASE WILL ADVERSELY AFFECT OUR EARNINGS. Certain components in the T90 vector computers sold by Cray prior to our acquisition have an unusually high failure rate. The cost of servicing the T90 computers exceeds the related service revenues. We are continuing to take action that commenced prior to the acquisition to address this problem, and have on our balance sheets a reserve to account for anticipated losses on the T90 maintenance service contracts. LACK OF GOVERNMENT SUPPORT FOR SUPERCOMPUTER SYSTEMS WOULD ADVERSELY AFFECT OUR BUSINESS AND INCREASE OUR CAPITAL REQUIREMENTS. We have targeted U.S. and foreign government agencies and research laboratories as important sales prospects for all of our products. In addition, a few of these agencies fund a portion of our development efforts. The U.S. government historically has facilitated the development of, and has constituted a market for, new and enhanced very high- performance computer systems. The failure of U.S. and foreign government agencies to purchase additional very high-performance computer systems or to continue to fund these development efforts, due to lack of funding, change of priorities or for any other reason, would materially and adversely affect our results of operations and increase our need for capital. PROPOSALS AND PURCHASES BASED ON THEORETICAL PEAK PERFORMANCE WILL ADVERSELY AFFECT OUR PROSPECTS. Our high-performance systems are designed to provide high actual sustained performance on difficult computational problems. Many of our competitors offer systems with higher theoretical peak performance numbers, although their actual sustained performance frequently is a small fraction of their theoretical peak performance. Nevertheless, many requests for proposals, primarily from governmental agencies in the U.S. and elsewhere, have criteria based on theoretical peak performance. Until these criteria are changed, we may be foreclosed from bidding or proposing our systems, which would adversely affect our revenue potential. 15 16 OUR UNCERTAIN PROSPECTS FOR EARNINGS COULD ADVERSELY AFFECT AN INVESTMENT IN US. While we have had a substantial increase in revenues with the acquisition of the Cray business operations, whether we will continue to achieve earnings will depend upon a number of factors, including: - our ability to integrate the operations of the former Cray business unit; - our ability to market and sell our existing products, the SV1 and T3E, and complete the development of the MTA2 and SV2 systems; - the level of revenue in any given period; - the cost of servicing the T90 installed base; - the terms and conditions of sale or lease for our products; and - our expense levels and manufacturing costs. OUR INABILITY TO OVERCOME THE TECHNICAL CHALLENGES OF COMPLETING THE DEVELOPMENT OF OUR SYSTEMS COULD CAUSE OUR BUSINESS TO FAIL. We are involved in significant development efforts, including system upgrades to our existing SV1 and T3E products in order to add capabilities and features to extend their product lives. Our success over the next few years depends upon completing the development of the MTA2 and the SV2 systems. And we have commenced initial work on development of the MTA3 and SV3 systems. These development efforts are lengthy and technically challenging processes, and require a significant investment of capital, engineering and other resources. Delays in completing the design of the hardware components or software of these systems or in integrating the full systems could materially and adversely affect our business and results of operations. We are dependent on our vendors to manufacture components for our systems, and few companies can meet our design requirements. Their inability to manufacture our components to our designs will adversely affect the completion of these products. From time to time during the development process we have had, and in the future we may have, to redesign certain components because of previously unforeseen design flaws. We also may find certain flaws, or "bugs", in our system software which require correction. Redesign work may be costly and cause delays in the development of these systems, and could affect adversely their success as commercial products. THE ABSENCE OF THIRD-PARTY APPLICATION SOFTWARE COULD ADVERSELY AFFECT OUR ABILITY TO MAKE COMMERCIAL SALES OF OUR NEW SYSTEMS. In order to make sales in the automotive, aerospace, chemistry and other engineering and commercial markets, we must be able to attract independent software vendors to port their software application programs so that they will run on our systems. The relatively low volume of supercomputer sales may make it difficult for us to attract these 16 17 vendors. We also plan to modify and rewrite third-party software applications to run on these systems ourselves to facilitate the expansion of our potential markets. There can be no assurance that we will be able to induce independent software vendors to rewrite their applications, or that we will successfully rewrite third-party applications for use on our systems. U.S. EXPORT CONTROLS COULD HINDER OUR ABILITY TO MAKE SALES TO FOREIGN CUSTOMERS AND OUR FUTURE PROSPECTS. The U.S. government regulates the export of high-performance computer systems such as our products. We currently are awaiting approval for the export of one system. Delay or denial in the granting of any required licenses could adversely affect our ability to make sales to certain foreign customers, thereby eliminating an important source of potential revenue. OUR RELIANCE ON THIRD-PARTY SUPPLIERS POSES SIGNIFICANT RISKS TO OUR BUSINESS AND PROSPECTS. We subcontract the manufacture of substantially all of our hardware components for all of our products, including integrated circuits, printed circuit boards, flex circuits and power supplies, on a sole or limited source basis to third-party suppliers. We are exposed to substantial risks because of our reliance on these and other limited or sole source suppliers. For example: - if a reduction or interruption of supply of our components occurred, it could take us a considerable period of time to identify and qualify alternative suppliers to redesign our products as necessary and to recommence manufacture of the redesigned components; - if we were ever unable to locate a supplier for a component, we would be unable to assemble and deliver our products; - one or more suppliers may make strategic changes in their product lines, which may result in the delay or suspension of manufacture of our components or systems; and - some of our key suppliers are small companies with limited financial and other resources, and consequently may be more likely to experience financial difficulties than larger, well- established companies. FAILURE TO OBTAIN CREDIT FACILITIES MAY RESTRICT OUR OPERATIONS. We are negotiating for credit facilities, such as bank lines of credit, vendor credit and capitalized equipment lease lines. The absence of a consistent record of revenues and earnings makes obtaining such facilities more difficult; if we obtain such facilities, they may have high interest rates, contain restrictions on our operations and require security. Failure to obtain such credit facilities may limit our planned operations and our ability to acquire needed infrastructure and other capital items and would adversely affect our cash reserves and increase our need for capital. A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE AND COULD DEPRESS MARKET PRICES OF OUR STOCK AND COULD HINDER OUR ABILITY TO OBTAIN ADDITIONAL FINANCING. Sale of a substantial number of our shares of common stock in the public market or the prospect of such sales could materially 17 18 and adversely affect the market price of our common stock. As of June 30, 2000, we had outstanding: - 33,409,206 shares of common stock; - warrants to purchase 14,836,167 shares of common stock; - 8% Convertible Promissory Notes in the principal amount of $494,291, convertible at $5.00 per share into 98,858 shares of common stock; and - stock options to purchase an aggregate of 7,461,102 shares of common stock, of which 2,093,479 options were then exercisable. Almost all of our outstanding shares of common stock may be sold without substantial restrictions. All of the shares purchased under the option plans are available for sale in the public market, subject in some cases to volume and other limitations. Sales in the public market of substantial amounts of our common stock, including sales of common stock issuable upon the exercise of the warrants, could depress prevailing market prices for the common stock. Even the perception that such sales could occur may impact market prices. In addition, the existence of outstanding warrants and options may prove to be a hindrance to our future equity financings. Further, the holders of the warrants and options may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us. Such factors could materially and adversely affect our ability to meet our capital needs. WE MAY ENGAGE IN ADDITIONAL FINANCINGS WHICH MAY BE DILUTIVE TO EXISTING SHAREHOLDERS. We believe our present cash resources and revenue from anticipated sales of products and service revenues are sufficient to finance our planned operations for the next twelve months. Nevertheless, we may raise additional equity and/or debt capital in the next twelve months to enhance our financial position for future operations. In addition, if we were not able to complete the enhancements to the SV1 and T3E systems and the development of the MTA2 and SV2 systems, we may need additional capital earlier than planned. Financings may not be available to us when needed or, if available, may not be available on satisfactory terms or may be dilutive to our shareholders. WE MAY BE UNABLE TO ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL, AND AS A RESULT WE MAY NOT BE ABLE TO GROW AS WE EXPECT OR EFFECTIVELY IMPLEMENT OUR BUSINESS PLAN. Our success also depends in large part upon our ability to attract, retain and motivate highly skilled management, technical and marketing and sales personnel, particularly in light of the acquisition of the Cray business unit. Competition for highly skilled management, technical, marketing and sales personnel is intense, and we may not be successful in attracting and retaining such personnel. We have no employment contracts with any of our employees. 18 19 OUR STOCK PRICE MAY BE VOLATILE. The trading price of our common stock is subject to significant fluctuations in response to, among other factors: - changes in analysts' estimates; - our future capital raising activities; - announcements of technological innovations by us or our competitors; and - general conditions in the high-performance computer industry. In addition, the stock market is subject to price and volume fluctuations that particularly affect the market prices for small capitalization, high technology companies like us. WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE. Our market is characterized by rapidly changing technology, accelerated product obsolescence and continuously evolving industry standards. Our success will depend upon our ability to enhance our current products, the SV1 and T3E, to complete development of the MTA2 and the SV2 systems and to develop MTA3 and SV3 systems in the future. We will need to introduce new products and features in a timely manner to meet evolving customer requirements. We may not succeed in these efforts. Our business and results of operations will be materially and adversely affected if we incur delays in developing our products or if such products do not gain broad market acceptance. In addition, products or technologies developed by others may render our products or technologies noncompetitive or obsolete. WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGH- PERFORMANCE COMPUTER MARKET. The performance of our products may not be competitive with the computer systems offered by our competitors, and we may not compete successfully over time against new entrants or innovative competitors at the lower end of the market. Furthermore, periodic announcements by our competitors of new high-performance computer systems and price adjustments may materially and adversely affect customer demand for our products. Our competitors are established companies that are well known in the high-performance computer market, including IBM, Sun Microsystems, Compaq Computer, Hewlett-Packard and Silicon Graphics in the U.S. and Japanese companies such as NEC Corporation, Fujitsu and Hitachi. Each of these competitors has broader product lines and substantially greater research, engineering, manufacturing, marketing and financial resources than we do. 19 20 In addition we compete with new entrants capitalizing on developments in parallel processing and increased computer performance through networking and clustering systems. To date, these products have been limited in applicability and scalability and can be difficult to program. A breakthrough in architecture or software technology could make parallel systems more attractive to potential customers. Such a breakthrough would materially and adversely affect our ability to sell our products and the receipt of revenue. MODIFICATION OR ELIMINATION OF CURRENT TARIFFS UNDER THE ANTIDUMPING LAWS WOULD ADVERSELY AFFECT OUR COMPETITIVE POSITION IN THE UNITED STATES. Significant duties are imposed on the importation in the U.S. of vector high-performance computer systems of NEC, Fujitsu and Hitachi under the U.S. antidumping laws. These duties are subject to review in the second half of 2002. If these duties were modified or eliminated, we may face significantly increased competition in the U.S. high-performance computer market from these companies. WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY INFORMATION AND RIGHTS ADEQUATELY. We rely on a combination of patent, copyright and trade secret protection, non-disclosure agreements and licensing arrangements to establish, protect and enforce our proprietary information and rights. We have a number of patent applications pending and plan to file additional patent applications. There can be no assurance, however, that patents will be issued from the pending applications or that any issued patents will protect adequately those aspects of our technology to which such patents will relate. Despite our efforts to safeguard and maintain our proprietary rights, we cannot be certain that we will succeed in doing so or that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technologies. Although we are not a party to any present litigation regarding proprietary rights, third parties may assert intellectual property claims against us in the future. Such claims, if proved, could materially and adversely affect our business and results of operations. In addition, even meritless claims would require management attention and would cause us to incur significant expense to defend. The laws of certain countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the United States. Although we continue to implement protective measures and intend to defend our proprietary rights vigorously, these efforts may not be successful. OUR ABILITY TO BUILD CERTAIN PRODUCTS IS LIMITED BY OUR AGREEMENT WITH SGI, WHICH MAY LIMIT OUR ABILITY TO COMPETE WITH SGI AND OTHER COMPANIES. The Technology Agreement pursuant to which we acquired and licensed patent, know-how and other intellectual property rights from SGI contains restrictions on our ability to develop certain products, including specified successors to the T3E system, and restrictions on the use of other technology, such as SGI's IRIX operating system in the SV2. 20 21 IT MAY BECOME MORE DIFFICULT TO SELL OUR STOCK IN THE PUBLIC MARKET. Our common stock is quoted on the Nasdaq National Market. In order to remain listed on this market, the Company must meet Nasdaq's listing maintenance standards. If the bid price of our common stock falls below $5.00 for an extended period, or we are unable to continue to meet Nasdaq's standards for any other reason, our common stock could be delisted from the Nasdaq National Market. If the common stock were delisted, we likely would seek to list the common stock on the Nasdaq SmallCap Market or for quotation on the American Stock Exchange or a regional stock exchange. However, listing or quotation on these markets or exchanges could reduce the liquidity for our common stock. If the common stock were not listed or quoted on another market or exchange, trading of the common stock would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities or in what are commonly referred to as the "pink sheets." As a result, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, the common stock. In addition, a delisting from the Nasdaq National Market and failure to obtain listing or quotation on such other market or exchange would subject our securities to so-called "penny stock" rules that impose additional sales practice and market-making requirements on broker-dealers who sell and/or make a market in such securities. Consequently, removal from the Nasdaq National Market and failure to obtain listing or quotation on another market or exchange could affect the ability or willingness of broker-dealers to sell and/or make a market in the common stock and the ability of purchasers of the common stock to sell their securities in the secondary market. In addition, if the market price of the common stock falls to below $5.00 per share, we may become subject to certain penny stock rules even if our common stock is still quoted on the Nasdaq National Market. While such penny stock rules should not affect the quotation of our common stock on the Nasdaq National Market, such rules may further limit the market liquidity of the common stock and the ability of investors to sell the common stock in the secondary market. PROVISIONS IN OUR AGREEMENT WITH SILICON GRAPHICS MAKE IT MORE DIFFICULT FOR SPECIFIED COMPANIES TO ACQUIRE US. The Asset Purchase Agreement with SGI pursuant to which we purchased the Cray Research business assets contains provisions restricting our ability to transfer the Cray Research business assets. Sales of these assets to Hewlett-Packard, Sun Microsystems, IBM, Compaq Computer, NEC or Gores Technology Group, or their affiliates, are prohibited until the earlier of March 31, 2003 or if SGI were sold. In addition, we must give SGI a right of first refusal for any sale of these assets to other purchasers for such period or earlier, if over a period of four fiscal quarters the revenue from product sales of Cray products is less than 50% of our total revenue. PROVISIONS OF OUR ARTICLES AND BYLAWS COULD MAKE A PROPOSED ACQUISITION THAT IS NOT APPROVED BY OUR MANAGEMENT MORE DIFFICULT. Provisions of our Restated Articles of Incorporation and Restated Bylaws could make it more difficult for a third party to acquire us. These provisions could limit the price that investors might be willing to pay in the future for our common stock. For example, our Articles and Bylaws provide for: - a staggered Board of Directors, so that only three of nine directors are elected each year; 21 22 - removal of a director only for cause and only upon the affirmative vote of not less than two-thirds of the shares entitled to vote to elect directors; - the issuance of preferred stock, without shareholder approval, with rights senior to those of the common stock; - no cumulative voting of shares; - calling a special meeting of the shareholders only upon demand by the holders of not less than 30% of the shares entitled to vote at such a meeting; - amendments to the Restated Articles of Incorporation require the affirmative vote of not less than two-thirds of the outstanding shares entitled to vote on the amendment, unless the amendment was approved by a majority of "continuing directors" (as that term is defined in our Articles); - special voting requirements for mergers and other business combinations, unless the proposed transaction was approved by a majority of continuing directors; - special procedures must be followed in order to bring matters before our shareholders at our annual shareholders' meeting; and - special procedures must be followed in order for nominating members for election to the Board of Directors. WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS. We have never paid any dividends on our common stock and we intend to continue our policy of retaining any earnings to finance the development and expansion of our business. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For the quarter ended June 30, 2000, substantially all of our cash equivalents and marketable securities are held in money market funds or commercial paper of less than 90 days that is held to maturity. Accordingly, we believe that the market risk arising from our holdings of these financial instruments is minimal. All of our current product contract payments are payable in U.S. dollars, and consequently we do not have any foreign currency exchange risks for product sales. Our foreign maintenance contracts are paid in local currencies and provide a natural hedge against local expenses. To the extent that we wish to repatriate any of these funds to the United States, however, we are subject to foreign exchange losses. We do not hold any derivative instruments and have not engaged in hedging transactions. 22 23 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES On April 1, 2000, we issued one million shares of our common stock to SGI in partial consideration for SGI's Cray Research business unit operations. This transaction did not involve a public offering and was exempt from registration under the Securities Act pursuant to Sections 4(2) and 4(6) thereof. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held on May 31, 2000. At the meeting the following actions occurred: 1. The following were elected as directors for three year terms expiring in 2002:
Name Votes for % for Withheld % withheld - ---------------- --------- ----- -------- ---------- Stephen C. Kiely 26,150,975 99.53 126,678 0.47 Burton J. Smith 25,644,525 97.60 633,128 2.40 John W. Titcomb 26,150,005 99.52 127,648 0.48
David N. Cutler, Daniel J. Evans, Dean D. Thornton, Kenneth W. Kennedy, Terren S. Peizer, and James E. Rottsolk continue to serve as directors. 2. An amendment to our restated Articles of Incorporation increasing the number of authorized shares of common stock to 100,000,000 was approved by the shareholders, with 25,719,866 shares voting in favor (76.6%), 477,606 shares voting against (1.4%), 80,181 shares abstaining, and 7,292,183 shares not voting (21.7%) 3. An amendment to our 1999 Stock Option Plan increasing the number of shares reserved for issuance to 6,000,000 shares was approved by the shareholders, with 10,446,914 shares voting in favor (90.6%), 1,081,967 shares voting against (9.4%), 71,080 shares abstaining, and 21,969,875 shares not voting. ITEM 5. OTHER INFORMATION The Company acquired certain assets of the Cray Research business unit operations from Silicon Graphics, Inc. ("SGI") on April 1, 2000. See "Acquisition" under Notes to Financial Statements. 23 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Restated Articles of Incorporation, as amended on April 3, 2000, and June 14, 2000 10.1 Agreement between the CIT Group/Business Credit, Inc. and the Company, dated June 29, 2000 11.1 Computation of Earnings (Loss) Per Share 27.1 Financial Data Schedule Reports on Form 8-K A report on Form 8-K for an event of April 2, 2000, was filed on April 17, 2000, reporting our acquisition of the Cray research business unit under "Acquisition or disposition of assets." A report on Form 8-K/A for an event of April 2, 2000, was filed on June 16, 2000, reporting our acquisition of the Cray research business unit under "Acquisition or disposition of assets." A report on Form 8-K for an event of April 3, 2000, was filed on April 5, 2000, reporting our name change from "Tera Computer Company" to "Cray Inc." under "Other Events." ITEMS 1 AND 3 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 24 25 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CRAY INC. August 14, 2000 By: /s/ JAMES E. ROTTSOLK --------------------------------- James E. Rottsolk Chief Executive Officer /s/ KENNETH W. JOHNSON --------------------------------- Kenneth W. Johnson Chief Financial Officer 25 EX-3.1 2 ex3-1.txt RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF CRAY INC. ARTICLE I Name The name of this Corporation is Cray Inc. ARTICLE II Capital Stock A. Authorized Capital. The Corporation is authorized to issue a total of one hundred five million (105,000,000) shares, consisting of one hundred million (100,000,000) shares of $.01 par value to be designated "Common Stock" and five million (5,000,000) shares of $.01 par value to be designated "Preferred Stock." Subject to any rights expressly granted to Preferred Stock issued pursuant to Paragraph B of this Article, the Common Stock shall have all the rights ordinarily associated with common shares, including but not limited to general voting rights, general rights to dividends, and liquidation rights. The Preferred Stock shall have the rights and preferences described in Paragraph B of this article or in a resolution of the Board of Directors adopted pursuant to Paragraph B. B. Issuance of Preferred Stock in Series. The Preferred Stock may be issued from time to time in one or more series in any manner permitted by law and these Restated Articles of Incorporation, as determined from time to time by the Board of Directors and stated in the resolution or resolutions providing for its issuance, prior to the issuance of any shares thereof. The Board of Directors shall have the authority to fix and determine, subject to the provisions hereof, the rights and preferences of the shares of any series so established. Unless otherwise provided in the resolution establishing a series of shares of Preferred Stock, prior to the issuance of any shares of a series so established or to be established, the Board of Directors may by resolution amend the relative rights and preferences of the shares of such series, and, after the issuance of shares of a series whose number has been designated by the Board of Directors, the 1 2 resolution establishing the series may be amended by the Board of Directors to decrease (but not below the number of shares of such series then outstanding) the number of shares of that series. ARTICLE III No Preemptive Rights Except as may otherwise be provided by the Board of Directors, no holder of any shares of this Corporation shall have any preemptive right to purchase, subscribe for or otherwise acquire any securities of this Corporation of any class or kind now or hereafter authorized. ARTICLE IV Cumulative Voting There shall be no cumulative voting of shares in this Corporation. ARTICLE V Directors A. Number. The Corporation shall have at least six directors, the actual number to be prescribed in the Bylaws. Subject to the minimum requirement of six directors, the number of directors may be increased or decreased from time to time by amendment of the Bylaws, but no decrease shall have the effect of shortening the term of any incumbent director. B. Staggered Terms. The Board of Directors shall be divided into three classes of directors, with said classes to be as equal in number as may be possible. Initially, two directors shall be assigned to Class 1, two directors shall be assigned to Class 2, and two directors shall be assigned to Class 3. Any director or directors in excess of the number divisible by three shall be first assigned to Class 1 and any additional director shall be assigned to Class 2, as the case may be. (For example, if there are eight directors, the seventh director shall be in Class 1 and the eighth director in Class 2.) At the first election of directors to such classified Board of Directors, each Class 1 Director shall be elected to serve until the next ensuing annual meeting of shareholders, each Class 2 Director shall be elected to serve until the second ensuing annual meeting of shareholders and each Class 3 Director shall be elected to serve until 2 3 the third ensuing annual meeting of shareholders. At each annual meeting of shareholders following the meeting at which the Board of Directors is initially classified, the number of directors equal to the number of directors in the class whose term expires at the time of such meeting shall be elected to serve until the third ensuing annual meeting of shareholders. Notwithstanding any of the foregoing provisions of this Article V, directors shall serve until their successors are elected and qualified or until their earlier death, resignation or removal from office, or until there is a decrease in the number of directors; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. C. Removal. The directors of this Corporation may be removed only for cause, in the manner provided by the Bylaws, by the affirmative vote of the holders of not less than two-thirds of the shares entitled to elect the director or directors whose removal is being sought. ARTICLE VI Limitation on Director Liability To the fullest extent permitted by Washington law and subject to the Bylaws of this Corporation, a director of this Corporation shall not be liable to the Corporation or its shareholders for monetary damages for his or her conduct as a director. Any amendment to or repeal of this Article VI shall not adversely affect any right of a director of this Corporation hereunder with respect to any acts or omissions of the director occurring prior to amendment or repeal. ARTICLE VII Indemnification of Directors To the fullest extent permitted by its Bylaws and Washington law, this Corporation is authorized to indemnify any of its directors. The Board of Directors shall be entitled to determine the terms of indemnification, including advance of expenses, and to give effect thereto through the adoption of Bylaws, approval of agreements, or by any other manner approved by the Board of Directors. Any amendment to or repeal of this Article VII shall not adversely affect any right of an individual with respect to any right to indemnification arising prior to such amendment or repeal. ARTICLE VIII 3 4 Registered Office and Registered Agent The name of the registered agent of this Corporation and the street address of its registered office are as follows: JGB Service Corporation 3600 One Union Square 600 University Street Seattle, WA 98101 ARTICLE IX Bylaws The Board of Directors shall have the power to adopt, amend or repeal the Bylaws of this Corporation subject to approval by a majority of the Continuing Directors (as defined in Section A of Article XII hereof); provided, however, that the Board of Directors may not repeal or amend any bylaw that the shareholders expressly have provided may not be amended or repealed by the Board of Directors. The shareholders shall also have the power to adopt, amend or repeal the Bylaws of this Corporation by the affirmative vote of the holders of not less than two-thirds of the outstanding shares entitled to vote thereon and, to the extent, if any, provided by resolution adopted by the Board of Directors authorizing the issuance of a class or series of Preferred Stock, by the affirmative vote of the holders of not less than two-thirds of the outstanding shares of Common Stock and/or of such class or series of Preferred Stock, voting as separate voting groups. ARTICLE X Special Meetings of Shareholders The Chairman of the Board of Directors, the President or a majority of the Board of Directors may call special meetings of the shareholders for any purpose. Further, for so long as the Corporation is a "public company" under Title 23B RCW, a special meeting of the shareholders shall be held if the holders of not less than 30% of all the votes entitled to be cast on any issue proposed to be considered at such special meeting have dated, signed and delivered to the Secretary of this Corporation one or more written demands for such meeting, describing the purpose or purposes for which it is to be held; provided, however, that if the Corporation is not a "public company" under Title 23B RCW, the percentage of such votes required to call a special meeting shall be 4 5 25%. ARTICLE XI Amendments to Restated Articles of Incorporation This Corporation reserves, and the rights of the shareholders of this Corporation are granted subject to, the right to amend or repeal any of the provisions contained in these Restated Articles of Incorporation as follows: A. Two-Thirds Requirement. Except as provided in Section B of this Article XI, the Restated Articles of Incorporation may be amended or repealed only upon the affirmative vote of the holders of at least two-thirds of the outstanding shares entitled to vote thereon and, to the extent, if any, provided by resolution adopted by the Board of Directors authorizing the issuance of a class or series of Preferred Stock, by the affirmative vote of the holders of at least two-thirds of the outstanding shares of Common Stock and/or of such class or series of Preferred Stock, voting as separate voting groups. B. Majority Voting. Notwithstanding the provisions of Section A of this Article XI, if an amendment or repeal of a Section or Article of the Restated Articles of Incorporation is approved by a majority of the Continuing Directors (as defined in Section A of Article XII hereof), voting separately and as a subclass of directors, such amendment or repeal shall require the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote thereon and, to the extent, if any, provided by resolution adopted by the Board of Directors authorizing the issuance of a class or series of Preferred Stock, by the affirmative vote of the holders of at least a majority of the outstanding shares of Common Stock and/or of such class or series of Preferred Stock, voting as separate voting groups. ARTICLE XII Special Voting Requirements In addition to any affirmative vote required by law, by these Restated Articles of Incorporation or otherwise, any "Business Combination" (as hereinafter defined) involving this Corporation shall be subject to approval in the manner set forth in this Article XII. A. Definitions. For the purpose of this Article XII: 5 6 a. "Business Combination" means (i) a merger, share exchange or consolidation of this Corporation or any of its Subsidiaries with any other corporation; (ii) the sale, lease, exchange, mortgage, pledge, transfer or other disposition or encumbrance, whether in one transaction or a series of transactions, by this Corporation or any of its Subsidiaries of all or a substantial part of this Corporation's assets otherwise than in the usual and regular course of business; or (iii) any agreement, contract or other arrangement providing for any of the foregoing transactions. b. "Continuing Director" means any member of the Board of Directors (i) who was a member of the Board of Directors on August 31, 1995, or (ii) who is elected to the Board of Directors after August 31, 1995, after being nominated by a majority of the Continuing Directors voting separately and as a subclass of directors on such nomination. c. "Subsidiary" means a domestic or foreign corporation, a majority of the outstanding voting shares of which are owned, directly or indirectly, by this Corporation. B. Vote Required for Business Combinations. 1. Except as provided in subsection 2 of this Section B, the affirmative vote of the holders of not less than two-thirds of the outstanding shares entitled to vote thereon and, to the extent, if any, provided by resolution adopted by the Board of Directors authorizing the issuance of a class or series of Preferred Stock, the affirmative vote of the holders of not less than two-thirds of the outstanding shares of Common Stock and/or of such class or series of Preferred Stock, voting as separate voting groups, shall be required for the adoption or authorization of a Business Combination. 2. Notwithstanding subsection (1) of this Section 2, if a Business Combination shall have been approved by a majority of the Continuing Directors, voting separately and as a subclass of directors, such Business Combination, if required to be approved by this Corporation's shareholders by the Washington Business Corporation Act or these Restated Articles of Incorporation, shall be approved only with the affirmative vote of the holders of not less than a majority of the outstanding shares entitled to vote thereon and, to the extent, if any, provided by resolution adopted by the Board of Directors authorizing the issuance of a class or series of Preferred Stock, the affirmative vote of the holders of not less than a majority of the outstanding shares of Common Stock and/or such class or series of Preferred Stock, voting as separate voting groups. 6 EX-10.1 3 ex10-1.txt AGREEMENT WITH CIT GROUP/BUSINESS CREDIT, INC. 1 EXHIBIT 10.1 FINANCING AGREEMENT THE CIT GROUP/BUSINESS CREDIT, INC. (AS LENDER) AND CRAY INC. (AS BORROWER) DATED: JUNE 29, 2000 2 TABLE OF CONTENTS
Page ---- SECTION 1. DEFINITIONS ......................................................... 1 SECTION 2. CONDITIONS PRECEDENT ................................................ 13 SECTION 3. REVOLVING LOANS ..................................................... 18 SECTION 4. TERM LOAN............................................................ 21 SECTION 5. INTENTIONALLY OMITTED ............................................... 21 SECTION 6. COLLATERAL........................................................... 23 SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS ........................... 26 SECTION 8. INTEREST, FEES AND EXPENSES ......................................... 37 SECTION 9. POWERS .............................................................. 43 SECTION 10. EVENTS OF DEFAULT AND REMEDIES ..................................... 44 SECTION 11. TERMINATION ........................................................ 47 SECTION 12. MISCELLANEOUS ...................................................... 47
EXHIBIT Exhibit A - Form of Term Loan A Promissory Note SCHEDULES Schedule 1 - Collateral Information -1- 3 THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation, with offices located at 300 South Grand Ave., Third Floor, Los Angeles, CA 90071 (hereinafter "CIT"), is pleased to confirm the terms and conditions under which CIT shall make revolving loans, the term loan and other financial accommodations to CRAY INC., a Washington corporation with a principal place of business at 411 First Avenue South, Suite 600, Seattle, Washington 98104 (herein the "Company"). SECTION 1. DEFINITIONS ACCOUNTS shall mean all of the Company's now existing and future: (a) accounts (as now or hereafter defined in the UCC), and any and all other receivables (whether or not specifically listed on schedules furnished to CIT), including, without limitation, all accounts created by, or arising from, all of the Company's sales, leases, rentals of goods or renditions of services to its customers, including but not limited to, those accounts arising under any of the Company's trade names or styles, or through any of the Company's divisions; (b) any and all instruments, documents, chattel paper (including electronic chattel paper) (all as now or hereafter defined in the UCC); (c) unpaid seller's or lessor's rights (including rescission, replevin, reclamation, repossession and stoppage in transit) relating to the foregoing or arising therefrom; (d) rights to any goods represented by any of the foregoing, including rights to returned, reclaimed or repossessed goods; (e) reserves and credit balances arising in connection with or pursuant hereto; (f) guarantees, supporting obligations, payment intangibles and letter of credit rights (all as now or hereafter defined in the UCC); (g) insurance policies or rights relating to any of the foregoing; (h) general intangibles pertaining to any and all of the foregoing (including all rights to payment, including those arising in connection with bank and non-bank credit cards), and including books and records and any electronic media and software thereto; (i) notes, deposits or property of account debtors securing the obligations of any such account debtors to the Company; and (j) cash and non-cash proceeds (as now or hereafter defined in the UCC) of any and all of the foregoing. ANNIVERSARY DATE shall mean the date occurring three (3) years from the Closing Date and the same date in every year thereafter. AVAILABILITY shall mean at any time the amount by which: (a) the sum of (i) the Borrowing Base and (ii) Cash Collateral, if any, exceeds (b) the sum of (i) the outstanding aggregate amount of all Obligations, including without limitation, all Obligations with respect to Revolving Loans and (ii) the Availability Reserve. AVAILABILITY RESERVE shall mean the sum of: (a) one (1) months rental payments or similar charges for any of the Company's leased premises or other Collateral locations for which the Company has not delivered to CIT a landlord's waiver in form and substance reasonably satisfactory to CIT, provided that any of the foregoing amounts shall be adjusted from time to time hereafter upon: (x) delivery to CIT of any such acceptable waiver; (y) the opening or closing of a Collateral location; and/or (z) any change in the amount of rental, storage or processor payments or similar charges; and (b) such other reserves as CIT deems necessary in its reasonable judgment as a result of (x) negative forecasts and/or trends in the Company's business, industry, prospects, profits, operations or financial condition or (y) other issues, 4 circumstances or facts that could otherwise negatively impact the Company, its business, prospects, profits, operations, industry, financial condition or assets. BORROWING BASE shall mean an amount equal to eighty-five percent (85%) of the Company's aggregate outstanding Eligible Accounts Receivable, provided that the Dilution Percentage does not exceed five percent (5%). The Dilution Percentage is the sum of the Company's credits, allowances, discounts, write-offs, contra-accounts and offsets and deductions which reduce the value of accounts receivable divided by gross invoices. The Dilution Percentage shall be calculated on a rolling 90 day average. If the Dilution Percentage exceeds five percent (5%) then the "eighty-five percent (85%)" referenced above shall be reduced by such excess Dilution Percentage. BUSINESS DAY shall mean any day on which CIT and The Chase Manhattan Bank are open for business. CAPITAL EXPENDITURES shall mean, for any period, the aggregate expenditures of the Company during such period on account of, property, plant, equipment or similar fixed assets that, in conformity with GAAP, are required to be reflected in the balance sheet of the Company. CAPITAL IMPROVEMENTS shall mean operating Equipment, facilities (other than land) acquired or installed for use in the Company's business operations. CAPITAL LEASE shall mean any lease of property (whether real, personal or mixed) which, in conformity with GAAP, is accounted for as a capital lease or a Capital Expenditure in the balance sheet of the Company. CASH COLLATERAL shall mean the amount of cash collateral in the form of cash deposited in an account in the name of CIT. CHASE BANK RATE shall mean the rate of interest per annum announced by The Chase Manhattan Bank from time to time as its prime rate in effect at its principal office in New York City. (The prime rate is not intended to be the lowest rate of interest charged by The Chase Manhattan Bank to its borrowers). If The Chase Manhattan Bank ceases to announce a prime rate of interest, CIT may by notice to the Company substitute a prime rate of interest issued by another commercial bank of its reasonable choice. CLOSING DATE shall mean the date that this Financing Agreement has been duly executed by the parties hereto and delivered to CIT. COLLATERAL shall mean all present and future Accounts, Equipment, Inventory, Documents of Title, General Intangibles, Real Estate, and Other Collateral. CONSOLIDATED BALANCE SHEET shall mean a consolidated or compiled, as applicable, balance sheet for the Company and its consolidated subsidiaries, if any, eliminating all inter-company transactions and prepared in accordance with GAAP. CONSOLIDATING BALANCE SHEET shall mean a Consolidated Balance Sheet plus individual balance sheets for the Company and its consolidated subsidiaries, if any, showing all eliminations of -2- 5 inter-company transactions, including a balance sheet for the Company exclusively, all prepared in accordance with GAAP. COPYRIGHTS shall mean all present and hereafter acquired copyrights, copyright registrations, recordings, applications, designs, styles, licenses, marks, prints and labels bearing any of the foregoing, goodwill, any and all general intangibles, intellectual property and rights pertaining thereto, and all cash and non-cash proceeds thereof. CURRENT ASSETS shall mean those assets of the Company which, in accordance with GAAP, are classified as current. CURRENT LIABILITIES shall mean those liabilities of the Company which, in accordance with GAAP, are classified as "current," provided however, that, notwithstanding GAAP, the Revolving Loans and the current portion of Permitted Indebtedness shall be considered "current liabilities." DEFAULT shall mean any event specified in Section 10 hereof, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, event or act, has been satisfied. DEFAULT RATE OF INTEREST shall mean a rate of interest per annum on any Obligations hereunder, equal to the sum of: (a) two percent (2%) and (b) the applicable increment over the Chase Bank Rate (as set forth in Paragraph 8.1 hereof) plus the Chase Bank Rate, which CIT shall be entitled to charge the Company on all Obligations due CIT by the Company, as further set forth in Paragraph 10.2 of Section 10 of this Financing Agreement. DEPOSITORY ACCOUNTS shall mean the collection accounts, which are subject to CIT's instructions, as specified in Paragraph 3.4 of Section 3 of this Financing Agreement. DOCUMENTS OF TITLE shall mean all present and future documents (as now or hereafter defined in the UCC), and any and all warehouse receipts, bills of lading, shipping documents, chattel paper, instruments and similar documents, all whether negotiable or not and all goods and Inventory relating thereto and all cash and non-cash proceeds of the foregoing. EARLY TERMINATION DATE shall mean the date on which the Company or CIT terminates this Financing Agreement or the Revolving Line of Credit which date is prior to an Anniversary Date. EARLY TERMINATION FEE shall: (a) mean the fee CIT is entitled to charge the Company in the event the Company terminates the Revolving Line of Credit or this Financing Agreement on a date prior to an Anniversary Date; and (b) be determined by multiplying the Revolving Line of Credit by (x) three percent (3%) if the Early Termination Date occurs on or before one (1) year from the Closing Date, (y) two percent (2%) if the Early Termination Date occurs after one (1) year from the Closing Date but on or before two (2) years from the Closing Date; and (z) one percent (1%) if the Early Termination Date occurs after two (2) years from the Closing Date. Notwithstanding the foregoing, the Early Termination Fee shall be waived if the Company refinances its Obligations under this Financing Agreement with U.S. Bank at any time after twelve (12) months from the Closing Date. -3- 6 EBIT shall mean, in any period, all earnings of the Company for said period before all interest and tax obligations of the Company for said period, determined in accordance with GAAP on a consistent basis with the latest audited financial statements of the Company, but excluding the effect of extraordinary or non-reoccurring gains or losses for such period. EBITDA shall mean, in any period, all earnings of the Company before all (i) interest and tax obligations, (ii) depreciation and (iii) amortization for said period, all determined in accordance with GAAP on a consistent basis with the latest audited financial statements of the Company, but excluding the effect of extraordinary and/or non-reoccurring gains or losses for such period. ELIGIBLE ACCOUNTS RECEIVABLE shall mean the gross amount of the Company's Trade Accounts Receivable that are subject to a valid, exclusive, first priority and fully perfected security interest in favor of CIT, which conform to the warranties contained herein and which, at all times, continue to be acceptable to CIT in the exercise of its reasonable business judgment, less, without duplication, the sum of: (a) any returns, discounts, claims, credits and allowances of any nature (whether issued, owing, granted, claimed or outstanding), and (b) reserves for any such Trade Accounts Receivable that arise from or are subject to or include: (i) to the extent CIT requests compliance with the Assignment of Claims Act of 1940 or any other similar applicable statute, rules or regulation in its reasonable business judgment, sales to the United States of America, any state or other governmental entity or to any agency, department or division thereof as to which the Company has not complied with the Assignment of Claims Act of 1940 or any other similar applicable statute, rules or regulation, to CIT's satisfaction in the exercise of its reasonable business judgment; (ii) foreign sales, other than sales which otherwise comply with all of the other criteria for eligibility hereunder and are (x) secured by letters of credit (in form and substance satisfactory to CIT) issued or confirmed by, and payable at, banks having a place of business in the United States of America, or (y) to customers residing in Canada provided such Accounts do not exceed $5,000,000.00 in the aggregate at any one time; (iii) Accounts that remain unpaid more than ninety (90) days from invoice date; (iv) contra accounts; (v) sales to any subsidiary, if any, or to any company affiliated with the Company in any way; (vi) bill and hold (deferred shipment) or consignment sales; (vii) sales to any customer which is: (A) insolvent, (B) the debtor in any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law, (C) negotiating, or has called a meeting of its creditors for purposes of negotiating, a compromise of its debts, or (D) financially unacceptable to CIT or has a credit rating unacceptable to CIT; (viii) all sales to any customer if fifty percent (50%) or more of the aggregate dollar amount of all outstanding invoices to such customer are unpaid more than ninety (90) days from invoice date; (ix) pre-billed receivables and receivables arising from progress billing; (x) an amount representing, historically, returns, discounts, claims, credits, allowances and applicable terms; (xi) sales not payable in United States currency; and (xii) any other reasons deemed necessary by CIT in its reasonable business judgment, and which are customary either in the commercial finance industry or in the lending practices of CIT. EQUIPMENT shall mean all present and hereafter acquired equipment (as now or hereafter defined in the UCC) including, without limitation, all machinery, equipment, furnishings and fixtures, and all additions, substitutions and replacements thereof, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto and all proceeds thereof of whatever sort. -4- 7 ERISA shall mean the Employee Retirement Income Security Act or 1974, as amended from time to time and the rules and regulations promulgated thereunder from time to time. EVENT(S) OF DEFAULT shall have the meaning provided for in Section 10 of this Financing Agreement. FISCAL QUARTER shall mean, with respect to the Company, each three (3) month period ending March 31, June 30, September 30, and December 31 of each Fiscal Year. FISCAL YEAR shall mean each twelve (12) month period commencing on January 1 of each year and ending on the following December 31. GAAP shall mean generally accepted accounting principles in the United States of America as in effect from time to time and for the period as to which such accounting principles are to apply, provided that in the event the Company modifies its accounting principles and procedures as applied as of the Closing Date, the Company shall provide such statements of reconciliation as shall be in form and substance acceptable to CIT. GENERAL INTANGIBLES shall mean all present and hereafter acquired general intangibles (as now or hereafter defined in the UCC), and shall include, without limitation, all present and future right, title and interest in and to: (a) all Trademarks, tradenames, corporate names, business names, logos and any other designs or sources of business identities, (b) Patents, together with any improvements on said Patents, utility models, industrial models, and designs, (c) Copyrights, (d) trade secrets, (e) licenses, permits and franchises, (f) all applications with respect to the foregoing, (g) all right, title and interest in and to any and all extensions and renewals, (h) goodwill with respect to any of the foregoing, (i) any other forms of similar intellectual property, (j) all customer lists, distribution agreements, supply agreements, blue prints, indemnification rights and tax refunds, together with all monies and claims for monies now or hereafter due and payable in connection with any of the foregoing or otherwise, and all cash and non-cash proceeds thereof, including, without limitation, the proceeds or royalties of any licensing agreements between the Company and any licensee of any of the Company's General Intangibles. INDEBTEDNESS shall mean, without duplication, all liabilities, contingent or otherwise, which are any of the following: (a) obligations in respect of borrowed money or for the deferred purchase price of property, services or assets, other than Inventory, or (b) lease obligations which, in accordance with GAAP, have been, or which should be capitalized. INSURANCE PROCEEDS shall mean proceeds or payments from an insurance carrier with respect to any loss, casualty or damage to Collateral. Interest Expense shall mean the total interest obligations (paid or accrued) of the Company, determined in accordance with GAAP, on a consistent basis with the latest audited statements of the Company. INVENTORY shall mean all of the Company's present and hereafter acquired inventory (as now or hereafter defined in the UCC) and including, without limitation, all merchandise, inventory and goods, and all additions, substitutions and replacements thereof, wherever located, together with all goods and materials used or usable in manufacturing, processing, packaging or shipping same -5- 8 in all stages of production from raw materials through work-in-process to finished goods, and all proceeds thereof of whatever sort. LOAN DOCUMENTS shall mean this Financing Agreement, the Promissory Notes, if any, the mortgages, the other closing documents and any other ancillary loan and security agreements executed from time to time in connection with this Financing Agreement, all as may be renewed, amended, extended, increased or supplemented from time to time. LOAN FACILITY FEE shall mean the fee payable to CIT in accordance with, and pursuant to, the provisions of Paragraph 8.3 of Section 8 of this Financing Agreement. OBLIGATIONS shall mean all loans, advances and extensions of credit made or to be made by CIT to the Company or to others for the Company's account (including, without limitation, all Revolving Loans and the Term Loan); any and all indebtedness and obligations which may at any time be owing by the Company to CIT howsoever arising, whether now in existence or incurred by the Company from time to time hereafter; whether principal, interest, fees, costs, expenses or otherwise; whether secured by pledge, lien upon or security interest in any of the Company's Collateral, assets or property or the assets or property of any other person, firm, entity or corporation; whether such indebtedness is absolute or contingent, joint or several, matured or unmatured, direct or indirect and whether the Company is liable to CIT for such indebtedness as principal, surety, endorser, guarantor or otherwise. Obligations shall also include indebtedness owing to CIT by the Company under any Loan Document or under any other agreement or arrangement now or hereafter entered into between the Company and CIT; indebtedness or obligations incurred by, or imposed on, CIT as a result of environmental claims arising out of the Company's operations, premises or waste disposal practices or sites in accordance with Paragraph 7.7 hereof; the Company's liability to CIT as maker or endorser of any promissory note or other instrument for the payment of money; the Company's liability to CIT under any instrument of guaranty or indemnity, or arising under any guaranty, endorsement or undertaking which CIT may make or issue to others for the Company's account, including any other accommodation extended by CIT, CIT's acceptance of drafts or CIT's endorsement of notes or other instruments for the Company's account and benefit. OTHER COLLATERAL shall mean the Depositary Account, the Blocked Account and all now owned and hereafter acquired lockbox, blocked account and any other deposit accounts maintained with any bank or financial institutions into which the proceeds of Collateral are or may be deposited; all cash and other monies and property in the possession or control of CIT; all books, records, ledger cards, disks and related data processing software at any time evidencing or containing information relating to any of the Collateral described herein or otherwise necessary or helpful in the collection thereof or realization thereon; and all cash and non-cash proceeds of the foregoing. OUT-OF-POCKET EXPENSES shall mean all of CIT's present and future expenses incurred relative to this Financing Agreement or any other Loan Documents, whether incurred heretofore or hereafter, which expenses shall include, without being limited to: the cost of record searches, all costs and expenses incurred by CIT in opening bank accounts, depositing checks, receiving and transferring funds, and wire transfer charges, any charges imposed on CIT due to returned items and "insufficient funds" of deposited checks and CIT's standard fees relating thereto, travel, lodging and similar expenses of CIT's personnel in connection with inspecting and monitoring -6- 9 the Collateral from time to time hereunder, any reasonable applicable counsel fees and disbursements, fees and taxes relative to the filing of financing statements, all expenses, costs and fees set forth in Paragraph 10.3 of Section 10 of this Financing Agreement, and title insurance premiums, real estate survey costs, costs of preparing and recording mortgages/deeds of trust against the Real Estate. OVERADVANCES shall mean the amount by which (a) the sum of all outstanding Revolving Loans, and the outstanding portion of the Term Loan and advances made hereunder exceed (b) the Borrowing Base. PATENTS shall mean all of the Company's present and hereafter acquired patents, patent applications, registrations, any reissues or renewals thereof, licenses, any inventions and improvements claimed thereunder, and all general intangible, intellectual property and patent rights with respect thereto of the Company, and all income, royalties, cash and non-cash proceeds thereof. PERMITTED ENCUMBRANCES shall mean: (a) liens existing on the date hereof on specific items of Equipment and other liens expressly permitted, or consented to in writing by CIT; (b) subject to Paragraph 7.11 of Section 7, Purchase Money Liens; (c) liens of local or state authorities for franchise or other like Taxes, provided that the aggregate amounts of such liens shall not exceed $100,000.00 in the aggregate at any one time; (d) statutory liens of landlords and liens of carriers, warehousemen, bailees, mechanics, materialmen and other like liens imposed by law, created in the ordinary course of business and for amounts not yet due (or which are being contested in good faith, by appropriate proceedings or other appropriate actions which are sufficient to prevent imminent foreclosure of such liens) and with respect to which adequate reserves or other appropriate provisions are being maintained by the Company in accordance with GAAP; (e) deposits made (and the liens thereon) in the ordinary course of business of the Company (including, without limitation, security deposits for leases, indemnity bonds, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, contracts (other than for the repayment or guarantee of borrowed money or purchase money obligations), statutory obligations and other similar obligations arising as a result of progress payments under government contracts; (f) easements (including, without limitation, reciprocal easement agreements and utility agreements), encroachments, minor defects or irregularities in title, variation and other restrictions, charges or encumbrances (whether or not recorded) affecting the Real Estate, if applicable, and which in the aggregate (A) do not materially interfere with the occupation, use or enjoyment by the Company of its business or property so encumbered and (B) in the reasonable business judgment of CIT do not materially and adversely affect the value of such Real Estate; and (g) liens granted CIT by the Company; (h) liens of judgment creditors provided such liens do not exceed, in the aggregate, at any time, $50,000.00 (other than liens bonded or insured to the reasonable satisfaction of CIT); and (i) tax liens which are not yet due and payable or which are being diligently contested in good faith by the Company by appropriate proceedings, and which liens are not (x) filed on any public records, (y) other than with respect to Real Estate, senior to the liens of CIT or (z) for Taxes due the United States of America or any state thereof having similar priority statutes, as further set forth in Paragraph 7.6 hereof. -7- 10 PERMITTED INDEBTEDNESS shall mean: (a) current Indebtedness maturing in less than one year and incurred in the ordinary course of business for raw materials, supplies, equipment, services, Taxes or labor; (b) subject to Paragraph 7.11 of Section 7, the Indebtedness secured by Purchase Money Liens; (c) Indebtedness arising under this Financing Agreement; (d) deferred Taxes and other expenses incurred in the ordinary course of business; and (e) other Indebtedness existing on the date of execution of this Financing Agreement and listed in the most recent financial statement delivered to CIT or otherwise disclosed to CIT in writing prior to the Closing Date. PREPAYMENT PREMIUM shall: (a) mean the amount due CIT by the Company upon any voluntary prepayment, in whole or in part, of the Term Loan, and (b) be computed by multiplying the amount so prepaid by: (i) three percent (3%) if such prepayment occurs on or before the expiration of one (1) year from the Closing Date; (ii) two percent (2%) if such prepayment occurs after one (1) from the Closing Date but on or before the expiration of two (2) years from the Closing Date; and (iii) one percent (1%) if such prepayment occurs after two (2) years from the Closing Date. Notwithstanding the foregoing, the Prepayment Premium shall be waived if the Company refinances its Obligations under this Financing Agreement with U.S. Bank at any time after twelve (12) months from the Closing Date. PROMISSORY NOTE shall mean the note, in the form of Exhibit A attached hereto, delivered by the Company to CIT to evidence the Term Loan pursuant to, and repayable in accordance with, the provisions of Section 4 of this Financing Agreement. PURCHASE MONEY LIENS shall mean liens on any item of Equipment acquired after the date of this Financing Agreement provided that (a) each such lien shall attach only to the property to be acquired, (b) a description of the Equipment so acquired is furnished to CIT, and (c) the debt incurred in connection with such acquisitions shall not exceed the limitations set forth in Paragraph 7.11 of Section 7 in any Fiscal Year. REAL ESTATE shall mean the Company's fee interest in real property, including any such real property which has been, or will be, encumbered, mortgaged, pledged or assigned to CIT or its designee. REVOLVING LINE OF CREDIT shall mean the aggregate commitment of CIT to make loans and advances pursuant to Section 3 (and Term Loan A advances under Section 4 as a subline of the Revolving Line of Credit) of this Financing Agreement in the aggregate amount not to exceed $10,000,000. REVOLVING LOAN ACCOUNT shall mean the account on CIT's books, in the Company's name, in which the Company will be charged with all Obligations under this Financing Agreement. -8- 11 REVOLVING LOANS shall mean the loans and advances made, from time to time, to or for the account of the Company by CIT pursuant to Section 3 of this Financing Agreement. TANGIBLE NET WORTH shall mean, at any date of determination, an amount equal to (a) Total Assets minus (b) (i) Total Liabilities, and (ii) all goodwill, Patents, Trademarks, Copyrights, franchises, formulas, leasehold interests, leasehold improvements, non-compete agreements, engineering plans, deferred tax benefits, organization costs, prepaid items and any other assets of the Company that would be treated as intangible assets on the Company's balance sheet, and shall be determined in accordance with GAAP, on a consistent basis with the latest audited financial statements of the Company. TAXES shall mean all federal, state, municipal and other governmental taxes, levies, charges, claims and assessments which are or may be due by the Company with respect to its business, operations, Collateral or otherwise. TERM LOAN PROMISSORY NOTE A shall mean the promissory note in the form of Exhibit A hereto executed by the Company to evidence Term Loan A made by CIT under Section 4 hereof. TERM LOAN shall mean, collectively, the capital expenditure term loans not to exceed $5,000,000.00 in the aggregate outstanding at any one time (herein "Term Loan A") made by CIT pursuant to, and repayable in accordance with, the provisions of Section 4 of this Financing Agreement. TOTAL ASSETS shall mean total assets determined in accordance with GAAP, on a basis consistent with the latest audited financial statements of the Company. TOTAL LIABILITIES shall mean total liabilities determined in accordance with GAAP, on a basis consistent with the latest audited financial statements of the Company. TRADE ACCOUNTS RECEIVABLE shall mean (i) that portion of the Company's Accounts which arises from the sale of Inventory or the rendition of services in the ordinary course of the Company's business and (ii) the payments made to the Company by Silicon Graphics, Inc. which are the subject of the Non-Offset Agreement among CIT, the Company and Silicon Graphics, Inc. TRADEMARKS shall mean all present and hereafter acquired trademarks, trademark registrations, recordings, applications, tradenames, trade styles, service marks, prints and labels (on which any of the foregoing may appear), licenses, reissues, renewals, and any other intellectual property and trademark rights pertaining to any of the foregoing, together with the goodwill associated therewith, and all cash and non-cash proceeds thereof. UCC shall mean the Uniform Commercial Code as the same may be amended and in effect from time to time in the state of California. WORKING CAPITAL shall mean Current Assets in excess of Current Liabilities. -9- 12 SECTION 2. CONDITIONS PRECEDENT 2.1 The obligation of CIT to make the initial loans hereunder is subject to the satisfaction of, extension of or waiver (in writing), of on or prior to, the Closing Date, the following conditions precedent: (a) LIEN SEARCHES - CIT shall have received tax, judgment and Uniform Commercial Code searches satisfactory to CIT for all locations presently occupied or used by the Company. (b) CASUALTY INSURANCE - The Company shall have delivered to CIT evidence satisfactory to CIT that casualty insurance policies listing CIT as additional insured, loss payee or mortgagee, as the case may be, are in full force and effect, all as set forth in Paragraph 7.5 of Section 7 of this Financing Agreement. (c) UCC FILINGS - Any financing statements required to be filed in order to create, in favor of CIT, a first perfected security interest in the Collateral, subject only to the Permitted Encumbrances, shall have been properly filed in each office in each jurisdiction required in order to create in favor of CIT a perfected lien on the Collateral. CIT shall have received acknowledgment copies of all such filings (or, in lieu thereof, CIT shall have received other evidence satisfactory to CIT that all such filings have been made) and CIT shall have received evidence that all necessary filing fees and all taxes or other expenses related to such filings have been paid in full. (d) BOARD RESOLUTION - CIT shall have received a copy of the resolutions of the Board of Directors of each of the Company authorizing the execution, delivery and performance of (i) this Financing Agreement, and (ii) any related agreements, in each case certified by the Secretary or Assistant Secretary of the Company as of the date hereof, together with a certificate of the Secretary or Assistant Secretary of the Company as to the incumbency and signature of the officers of the Company executing such Loan Documents and any certificate or other documents to be delivered by them pursuant hereto, together with evidence of the incumbency of such Secretary or Assistant Secretary. (e) CORPORATE ORGANIZATION - CIT shall have received (i) a copy of the Certificate of Incorporation of the Company certified by the Secretary of State of the state of its incorporation, and (ii) a copy of the By-Laws of the Company certified by the Secretary or Assistant Secretary thereof, all as amended through the date hereof. (f) OFFICER'S CERTIFICATE - CIT shall have received an executed Officer's Certificate of the Company, satisfactory in form and substance to CIT, certifying that (i) the representations and warranties contained herein are true and correct in all material respects on and as of the Closing Date; (ii) the Company is in compliance with all of the terms and provisions set forth herein; and (iii) no Default or Event of Default has occurred. (g) OPINIONS - Counsel for the Company shall have delivered to CIT opinions satisfactory to CIT opining, inter alia, that, subject to the (i) filing, priority and remedies provisions of the Uniform Commercial Code, (ii) the provisions of the Bankruptcy Code, insolvency statutes or other like laws, (iii) the equity powers of a court of law and (iv) such other -10- 13 matters as may be agreed upon with CIT: this Financing Agreement and all other Loan Documents of the Company are (A) valid, binding and enforceable according to their terms, (B) are duly authorized, executed and delivered, and (C) do not violate any terms, provisions, representations or covenants in the charter or bylaws of the Company or, to the best knowledge of such counsel, of any loan agreement, mortgage, deed of trust, note, security or pledge agreement, indenture or other contract to which the Company is a signatory or by which the Company or its assets are bound. (h) ABSENCE OF DEFAULT - No Default or Event of Default shall have occurred and no material adverse change shall have occurred in the financial condition, business, prospects, profits, operations or assets of the Company or the Company's subsidiaries, if any. (i) LEGAL RESTRAINTS/LITIGATION - As of the Closing Date, there shall be no: (x) litigation, investigation or proceeding (judicial or administrative) pending or threatened against the Company or its assets, by any agency, division or department of any county, city, state or federal government arising out of this Financing Agreement; (y) injunction, writ or restraining order restraining or prohibiting the consummation of the financing arrangements contemplated under this Financing Agreement or; (z) suit, action, investigation or proceeding (judicial or administrative) pending against the Company or its assets, which, in the opinion of CIT, if adversely determined, could have a material adverse effect on the business, operation, assets, financial condition or Collateral of the Company. (j) CASH BUDGET PROJECTIONS - CIT shall have received, reviewed and been satisfied with a twelve (12) month cash budget projection prepared by the Company on the form provided by CIT. (k) ADDITIONAL DOCUMENTS - The Company shall have executed and delivered to CIT all Loan Documents necessary to consummate the lending arrangement contemplated between the Company and CIT, including but not limited to, a Security Agreement (Intellectual Property) in form and substance satisfactory to CIT covering the Company's Patents, Trademarks, Copyrights and maskworks or applications or licenses with respect thereto. In connection with this Financing Agreement and the Security Agreement (Intellectual Property), the Company shall cause all unregistered copyrightable material, to be registered with the appropriate governmental office as required by CIT in its discretion. (1) SUBSIDIARIES - The Company shall have executed and delivered (and cause any intervening subsidiaries to have executed and delivered) to CIT pledge agreements and related documents in form and substance satisfactory to CIT pledging no less than 65% (or such greater amount so long as there are no negative tax implications) of the stock or other ownership interests of any of the Company's now existing direct or indirect subsidiaries. (m) DISBURSEMENT AUTHORIZATION - The Company shall have delivered to CIT all information necessary for CIT to issue wire transfer instructions on behalf of the Company for the initial and subsequent loans and/or advances to be made under this Financing Agreement including, but not limited to, disbursement authorizations in form acceptable to CIT. -11- 14 (n) EXAMINATION & VERIFICATION - CIT shall have completed, to its satisfaction, an examination and verification of the Accounts, Inventory, financial statements, books and records of the Company which examination shall indicate that, after giving effect to all Revolving Loans, advances and extensions of credit to be made at closing, the Company shall have an opening additional Availability of at least $1,000,000, as evidenced by a Borrowing Base certificate delivered by the Company to CIT as of the Closing Date. It is understood that such requirement is measured after (i) the application of the initial loan proceeds (including closing costs), and (ii) bringing all debts and obligations current, such that there are no payables over 60 days past due. (o) DEPOSITORY ACCOUNTS - The Company shall have established a system of lockbox and/or bank accounts with respect to the collection of Accounts and the deposit of proceeds of Collateral as shall be acceptable to CIT in all respects. Such accounts shall be subject to three party agreements (between the Company, CIT and the depository bank) or other agreements, which shall be in form and substance satisfactory to CIT. (p) MORTGAGES/DEEDS OF TRUST - The Company shall have executed and delivered to CIT, an agent of CIT or to a title insurance company acceptable to CIT, such mortgages and/or deeds of trust as CIT may reasonably require to obtain first liens on the Company's Real Estate located in Wisconsin. (q) TITLE INSURANCE POLICIES - CIT shall have received, in respect of each mortgage or deed of trust, a mortgagee's title policy or marked-up unconditional binder for such insurance. Each such policy shall (i) be in an amount satisfactory to CIT; (ii) insure that the mortgage or deed of trust insured thereby creates a valid first lien on the property covered by such mortgage or deed of trust, free and clear of all defects and encumbrances except those acceptable to CIT; (iii) name CIT as the insured thereunder; and (iv) contain such endorsements and effective coverage as CIT may reasonably request, including, without limitation, the revolving line of credit endorsement. CIT shall also have received evidence that all premiums in respect of such policies have been paid and that all charges for mortgage recording taxes, if any, shall have been paid. (r) SURVEYS - CIT and the title insurance company issuing each policy referred to in the immediately preceding paragraph (each, a "Title Insurance Company") shall have received maps or plats of a perimeter or boundary of the site of each of the properties covered by the mortgages or deeds of trust, dated a date satisfactory to CIT and the relevant Title Insurance Company prepared by an independent professional licensed land surveyor satisfactory to CIT and the relevant Title Insurance Company, which maps or plats and the surveys on which they are based shall be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American Congress on Surveying and Mapping; and, without limiting the generality of the foregoing, there shall be surveyed and shown on the maps or plats or surveys the following: (i) the locations on such sites of all the buildings, structures and other improvements and the established building setback lines insofar as the foregoing affect the perimeter or boundary of such property; (ii) the lines of streets abutting the sites and width thereof; (iii) all access and other easements appurtenant to the sites or necessary or desirable to use the sites; (iv) all roadways, paths, driveways, easements, encroachments and overhanging projections and similar -12- 15 encumbrances affecting the sites, whether recorded, apparent from a physical inspection of the sites or otherwise known to the surveyor; (v) any encroachments on any adjoining property by the building, structures and improvements on the sites; and (vi) if the site is designated as being on a filed map, a legend relating the survey to said map. Further, the survey shall (x) be certified to CIT and the Title Insurance Company and (y) contain a legend reciting as to whether or not the site is located in a flood zone. (s) APPRAISALS - CIT shall have received satisfactory a appraisal on the Company's Real Estate, which appraisal: (i) shall be by an appraiser acceptable to CIT, and (ii) shall indicate a fair market value of not less than $7,000,000. (t) ENVIRONMENTAL REPORT - CIT shall have received environmental audit reports on (i) all of the Company's leasehold and fee interests, and (ii) the Company's waste disposal practices. The reports must (x) be satisfactory to CIT and (y) not disclose or indicate any material liability (real or potential) stemming from the Company's premises, its operations, its waste disposal practices or waste disposal sites used by Company. (u) SCHEDULES - The Company or its counsel shall provide CIT with schedules of: (a) any of the Company's and its subsidiaries, if any, (i) Trademarks, (ii) Patents, and (iii) Copyrights, as applicable and all in such detail as to provide appropriate recording information with respect thereto, (b) any tradenames, (c) monthly rental payments for any leased premises or any other premises where any Collateral may be stored or processed, and (d) Permitted Liens, all of the foregoing in form and substance satisfactory to CIT. (v) SILICON GRAPHICS NON-OFFSET AGREEMENT - The Company and Silicon Graphics, Inc. shall have delivered to CIT a Non-Offset Agreement in form and substance satisfactory to CIT and its counsel with respect to certain payments which Silicon Graphics, Inc. has agreed to make to the Company. Except as provided in the next paragraph, upon the execution of this Financing Agreement and the initial disbursement of loans hereunder, all of the above Conditions Precedent shall have been deemed satisfied except as otherwise set forth hereinabove or as the Company and CIT shall otherwise agree in writing. Except as the Company and CIT shall otherwise agree in writing, to the extent any condition precedent in this Paragraph 2.1 of Section 2 has not been satisfied as of the execution of this Financing Agreement and the initial disbursement of loans hereunder, the Company agrees to do all things to cause such condition precedent(s) to be satisfied (as determined by CIT in its discretion) within 45 days of the date hereof. The Company's failure to cause any such condition precedent(s) to be satisfied shall be an immediate Event of Default and shall not be subject to any cure or grace periods hereunder. 2.2 CONDITIONS TO EACH EXTENSION OF CREDIT Except to the extent expressly set forth in this Financing Agreement, the agreement of CIT to make any extension of credit requested to be made by it to the Company on any date (including without limitation, the initial extension of credit) is subject to the satisfaction of the following conditions precedent: -13- 16 (a) REPRESENTATIONS AND WARRANTIES - Each of the representations and warranties made by the Company in or pursuant to this Financing Agreement shall be true and correct in all material respects on and as of such date as if made on and as of such date. (b) NO DEFAULT - No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extension of credit requested to be made on such date. (c) BORROWING BASE - Except as may be otherwise agreed to from time to time by CIT and the Company in writing, after giving effect to the extension of credit requested to be made by the Company on such date, the aggregate outstanding balance of the Revolving Loans owing by the Company will not exceed the lesser of (i) the Revolving Line of Credit or (ii) the Borrowing Base. Each borrowing by the Company hereunder shall constitute a representation and warranty by the Company as of the date of such loan or advance that each of the representations, warranties and covenants contained in the Financing Agreement have been satisfied and are true and correct, except as the Company and CIT shall otherwise agree herein or in a separate writing. SECTION 3. REVOLVING LOANS 3.1 CIT agrees, subject to the terms and conditions of this Financing Agreement, from time to time (but subject to CIT's right to make "Overadvances"), to make loans and advances to the Company on a revolving basis (i.e. subject to the limitations set forth herein, the Company may borrow, repay and re-borrow Revolving Loans). Such requests for loans and advances shall be in amounts not to exceed the lesser of (a) the Availability or (b) the Revolving Line of Credit. All requests for loans and advances must be received by an officer of CIT no later than 10:00 a.m., Los Angeles time, of the Business Day on which any such Revolving Loans and advances are required. Should CIT for any reason honor requests for Overadvances, any such Overadvances shall be made in CIT's sole discretion and subject to any additional terms CIT deems necessary. 3.2 In furtherance of the continuing assignment and security interest in the Company's Accounts and Inventory, the Company will, upon the creation of Accounts and purchase or acquisition of Inventory, execute and deliver to CIT in such form and manner as CIT may reasonably require, solely for CIT's convenience in maintaining records of Collateral, such confirmatory schedules of Accounts and Inventory as CIT may reasonably request, including, without limitation, weekly schedules of Accounts and monthly schedules of Inventory, all in form and substance satisfactory to CIT, and such other appropriate reports designating, identifying and describing the Accounts and Inventory as CIT may reasonably request, and provided further that CIT may request any such information more frequently, from time to time, upon its reasonable prior request. In addition, upon CIT's request, the Company shall provide CIT with copies of agreements with, or purchase orders from, the Company's customers, and copies of invoices to customers, proof of shipment or delivery, access to its computers, electronic media and software programs associated therewith (including any electronic records, contracts and signatures) and such other documentation and information relating to said Accounts and other Collateral as CIT may reasonably require. Failure to provide CIT with any of the -14- 17 foregoing shall in no way affect, diminish, modify or otherwise limit the security interests granted herein. The Company hereby authorizes CIT to regard the Company's printed name or rubber stamp signature on assignment schedules or invoices as the equivalent of a manual signature by one of the Company's authorized officers or agents. 3.3 The Company hereby represents and warrants that: each Trade Account Receivable is based on an actual and bona fide sale and delivery of Inventory or rendition of services to customers, made by the Company in the ordinary course of its business; the Inventory being sold, and the Trade Accounts Receivable created, are the exclusive property of the Company and are not and shall not be subject to any lien, consignment arrangement, encumbrance, security interest or financing statement whatsoever, other than the Permitted Encumbrances; the invoices evidencing such Trade Accounts Receivable are in the name of the Company; and the customers of the Company have accepted the Inventory or services, owe and are obligated to pay the full amounts stated in the invoices according to their terms, without dispute, offset, defense, counterclaim or contra, except for disputes and other matters arising in the ordinary course of business with respect to which the Company has complied with the notification requirements of Paragraph 3.5 of this Section 3. The Company confirms to CIT that any and all Taxes or fees relating to its business, its sales, the Accounts or Inventory relating thereto, are its sole responsibility and that same will be paid by the Company when due, subject to Paragraph 7.6 of Section 7 of this Financing Agreement, and that none of said Taxes or fees represent a lien on or claim against the Accounts. The Company hereby further represents and warrants that it shall not acquire any Inventory on a consignment basis, nor co-mingle its Inventory with any of its customers or any other person, including pursuant to any bill and hold sale or otherwise, and that its Inventory is marketable to its customers in the ordinary course of business of the Company, except as it may otherwise report in writing to CIT pursuant to Paragraph 3.5 hereof from time to time. The Company also warrants and represents that it is a duly and validly existing corporation and is qualified in all states where the failure to so qualify would have an adverse effect on the business of the Company or the ability of the Company to enforce collection of Accounts due from customers residing in that state. The Company agrees to maintain such books and records regarding Accounts and Inventory as CIT may reasonably require and agrees that the books and records of the Company will reflect CIT's interest in the Accounts and Inventory. All of the books and records of the Company will be available to CIT at normal business hours, including any records handled or maintained for the Company by any other company or entity. 3.4 (a) Until CIT has advised the Company to the contrary after the occurrence of an Event of Default, the Company, at its expense, will enforce, collect and receive all amounts owing on the Accounts in the ordinary course of its business and any proceeds it so receives shall be subject to the terms hereof, and held on behalf of and in trust for CIT. Such privilege shall terminate at the election of CIT, upon the occurrence of an Event of Default. Any checks, cash, credit card sales and receipts, notes or other instruments or property received by the Company with respect to any Collateral, including Accounts, shall be held by the Company in trust for CIT, separate from the Company's own property and funds, and promptly turned over to CIT with proper assignments or endorsements by deposit to the Depository Accounts. The Company shall: (i) indicate on all of its invoices that funds should be delivered to and deposited in a Depository Account; (ii) direct all of its account debtors to deposit any and all proceeds of Collateral into the Depository Accounts; (iii) irrevocably authorize and direct any banks which -15- 18 maintain the Company's initial receipt of cash, checks and other items to promptly wire transfer all available funds to a Depository Account; and (iv) advise all such banks of CIT's security interest in such funds. The Company shall provide CIT with prior written notice of any and all deposit accounts opened or to be opened subsequent to the Closing Date. All amounts received by CIT in payment of Accounts will be credited to the Revolving Loan Account when CIT is advised by its bank of its receipt of "collected funds" at CIT's bank account in New York, New York on the Business Day of such advise if advised no later than 10:00 a.m. Los Angeles time or on the next succeeding Business Day if so advised after 10:00 a.m. Los Angeles time. However, the Company's Revolving Loan Account will be charged monthly with the cost of one (1) additional Business Days on all such Collections at the interest rate (based upon the Chase Bank Rate) applicable to Revolving Loans. No checks, drafts or other instrument received by CIT shall constitute final payment to CIT unless and until such instruments have actually been collected. (b) The Company shall establish and maintain, in the Company's name or CIT's name as CIT may instruct and at the Company's expense, a collateral proceeds account or other deposit accounts, as instructed by CIT, with such banks as are acceptable to CIT (the "Blocked Accounts") into which the Company shall promptly cause to be deposited: (i) all proceeds of Collateral received by the Company, including all amounts payable to the Company from credit card issuers and credit card processors, and (ii) all amounts on deposit in deposit accounts used by the Company at each of its locations, all as further provided in Paragraph 3.4(a) above. The banks at which the Blocked Accounts are established shall enter into an agreement, in form and substance satisfactory to CIT (the "Blocked Account Agreements"), providing that all cash, checks and items received or deposited in the Blocked Accounts are the property of CIT, that the depository bank has no lien upon, or right of set off against, the Blocked Accounts and any cash, checks, items, wires or other funds from time to time on deposit therein, except as otherwise provided in the Blocked Account Agreements, and that automatically, on a daily basis the depository bank will wire, or otherwise transfer, in immediately available funds, all funds received or deposited into the Blocked Accounts to such bank account as CIT may from time to time designate for such purpose. The Company hereby confirms and agrees that all amounts deposited in such Blocked Accounts and any other funds received and collected by CIT, whether as proceeds of Inventory or other Collateral or otherwise, shall be the property of CIT. 3.5 The Company agrees to notify CIT: (a) of any matters affecting the value, enforceability or collectibility of any Account and of all customer disputes, offsets, defenses, counterclaims, returns, rejections and all reclaimed or repossessed merchandise or goods, and of any adverse effect in the value of its Inventory, in its weekly and monthly collateral reports (as applicable) provided to CIT hereunder, in such detail and format as CIT may reasonably require from time to time and (b) promptly of any such matters which are material, as a whole, to the Accounts and/or the Inventory. The Company agrees to issue credit memoranda promptly (with duplicates to CIT upon request after the occurrence of an Event of Default) upon accepting returns or granting allowances. Upon the occurrence of an Event of Default (which is not waived in writing by CIT) and on notice from CIT, the Company agrees that all returned, reclaimed or repossessed merchandise or goods shall be set aside by the Company, marked with CIT's name (as secured party) and held by the Company for CIT's account. -16- 19 3.6 CIT shall maintain a Revolving Loan Account on its books in which the Company will be charged with all loans and advances made by CIT to it or for its account, and with any other Obligations, including any and all costs, expenses and reasonable attorney's fees which CIT may incur in connection with the exercise by or for CIT of any of the rights or powers herein conferred upon CIT, or in the prosecution or defense of any action or proceeding to enforce or protect any rights of CIT in connection with this Financing Agreement, the other Loan Documents or the Collateral assigned hereunder, or any Obligations owing by the Company. The Company will be credited with all amounts received by CIT from the Company or from others for the Company's account, including, as above set forth, all amounts received by CIT in payment of Accounts, and such amounts will be applied to payment of the Obligations as set forth herein. In no event shall prior recourse to any Accounts or other security granted to or by the Company be a prerequisite to CIT's right to demand payment of any Obligation. Further, it is understood that CIT shall have no obligation whatsoever to perform in any respect any of the Company's contracts or obligations relating to the Accounts. 3.7 After the end of each month, CIT shall promptly send the Company a statement showing the accounting for the charges, loans, advances and other transactions occurring between CIT and the Company during that month. The monthly statements shall be deemed correct and binding upon the Company and shall constitute an account stated between the Company and CIT unless CIT receives a written statement of the exceptions within thirty (30) days of the date of the monthly statement. 3.8 In the event that any requested advance exceeds Availability or that (a) the outstanding balance of Revolving Loans and the Term Loan exceed (b) either of (x) the Borrowing Base or (y) the Revolving Line of Credit, any such nonconsensual Overadvance shall be due and payable to CIT immediately upon CIT's demand therefor. 3.9 The Company shall execute and deliver (and cause any intervening subsidiaries to execute and deliver) to CIT pledge agreements and related documents in form and substance satisfactory to CIT pledging no less than 65% (or such greater amount so long as there are no negative tax implications) of the stock or other ownership interests of any of the Company's hereafter created or acquired direct or indirect subsidiaries. SECTION 4. TERM LOAN 4.1 The Company hereby agrees to execute and deliver to CIT the Term Loan Promissory Note A, to evidence Term Loan A to be extended by CIT on the terms and subject to the conditions set forth below. 4.2 The aggregate amount of Term Loan A advances shall not exceed the lesser of (i) the Company's Availability and (ii) $5,000,000. Any Overadvance caused by a shortfall in Availability for any reason shall be subject to the terms and conditions of this Financing Agreement, including, but not limited to, Paragraph 3.8 of Section 3. 4.3 Term Loan A advances shall be up to one hundred percent (100%) of the cost of the machinery or equipment (excluding transportation, installation, taxes, and other start up costs) with minimum advances of $500,000 and additional increments of $100,000. -17- 20 4.4 Beginning August 1, 2000 on the first Business Day of each month thereafter, the principal amount of Term Loan A shall be repaid monthly to CIT by the Company as follows: (i) the initial advances of Term Loan A made on the Closing Date shall be amortized over thirty six (36) months, (ii) each subsequent advance shall be shall be amortized on a schedule equal to the number of months remaining from the month following such advance through the first Anniversary Date, and (iii) with a final payment of all principal and accrued but unpaid interest owing on Term Loan A due and payable on the first Anniversary Date of this Financing Agreement. 4.5 In the event this Financing Agreement or the Revolving Line of Credit is terminated by either CIT or the Company for any reason whatsoever, the Term Loan shall become due and payable on the effective date of such termination notwithstanding any provision to the contrary in the Promissory Notes or this Financing Agreement. 4.6 The Company may prepay at any time, at its option, in whole or in part, the Term Loan, provided that on each such prepayment, the Company shall pay: (a) accrued interest on the principal so prepaid to the date of such prepayment and (b) the Prepayment Premium, if any. 4.7 Each prepayment (whether voluntary or mandatory) shall be applied to the then last maturing installments of principal of the Term Loan. 4.8 CIT shall create an Availability Reserve against Eligible Accounts Receivable for all outstanding amounts due under this Section 4 to the extent CIT has not received Cash Collateral in an amount not less than the amount of the Availability Reserve that would otherwise have been created under this Paragraph 4.8. 4.9 The Company hereby authorizes CIT to charge its Revolving Loan Account with the amount of all amounts due under this Section 4 as such amounts become due. The Company confirms that any charges which CIT may so make to its Revolving Loan Account as herein provided will be made as an accommodation to the Company and solely at CIT's discretion. SECTION 5. INTENTIONALLY OMITTED SECTION 6. COLLATERAL 6.1 As security for the prompt payment in full of all Obligations, the Company hereby pledges and grants to CIT a continuing general lien upon, and security interest in, all of its: (a) Accounts; (b) Inventory; (c) General Intangibles; (d) Documents of Title; (e) Other Collateral; -18- 21 (f) Equipment; and (g) Real Estate. 6.2 The security interests granted hereunder shall extend and attach to: (a) All Collateral which is owned by the Company or in which the Company has any interest, whether held by the Company or others for its account, and, if any Collateral is Equipment, whether the Company's interest in such Equipment is as owner, finance lessee or conditional vendee; (b) All Equipment, whether the same constitutes personal property or fixtures, including, but without limiting the generality of the foregoing, all dies, jigs, tools, benches, molds, tables, accretions, component parts thereof and additions thereto, as well as all accessories, motors, engines and auxiliary parts used in connection with, or attached to, the Equipment; and (c) All Inventory and any portion thereof which may be returned, rejected, reclaimed or repossessed by either CIT or the Company from the Company's customers, as well as to all supplies, goods, incidentals, packaging materials, labels and any other items which contribute to the finished goods or products manufactured or processed by the Company, or to the sale, promotion or shipment thereof. 6.3 The Company agrees to safeguard, protect and hold all Inventory for CIT's account and make no disposition thereof except in the ordinary course of its business of the Company, as herein provided. The Company represents and warrants that Inventory will be sold and shipped by the Company to its customers only in the ordinary course of the Company's business, and then only on open account and on terms currently being extended by the Company to its customers, provided that, absent the prior written consent of CIT, the Company shall not sell Inventory on a consignment basis nor retain any lien or security interest in any sold Inventory. Upon the sale, exchange, or other disposition of Inventory, as herein provided, the security interest in the Inventory provided for herein shall, without break in continuity and without further formality or act, continue in, and attach to, all proceeds, including any instruments for the payment of money, Trade Accounts Receivable, documents of title, shipping documents, chattel paper and all other cash and non-cash proceeds of such sale, exchange or disposition. As to any such sale, exchange or other disposition, CIT shall have all of the rights of an unpaid seller, including stoppage in transit, replevin, rescission and reclamation. The Company hereby agrees to immediately forward any and all proceeds of Collateral to the Depository Account, and to hold any such proceeds (including any notes and instruments), in trust for CIT pending delivery to CIT. Irrespective of CIT's perfection status in any and all of the General Intangibles, including, without limitations, any Patents, Trademarks, Copyrights or licenses with respect thereto, the Company hereby irrevocably grants CIT a royalty free license to sell, or otherwise dispose or transfer, in accordance with Paragraph 10.3 of Section 10 of this Financing Agreement, and the applicable terms hereof, of any of the Inventory upon the occurrence of an Event of Default which has not been waived in writing by CIT. -19- 22 6.4 The Company agrees at its own cost and expense to keep the Equipment in as good and substantial repair and condition as the same is now or at the time the lien and security interest granted herein shall attach thereto, reasonable wear and tear excepted, making any and all repairs and replacements when and where necessary. The Company also agrees to safeguard, protect and hold all Equipment in accordance with the terms hereof and subject to CIT's security interest. Absent CIT's prior written consent, any sale, exchange or other disposition of any Equipment shall be made by the Company in the ordinary course of business and as set forth herein. The Company may, in the ordinary course of its business, sell, exchange or otherwise dispose of obsolete or surplus Equipment provided, however, that: (a) the then value of the Equipment so disposed of in any Fiscal Year does not exceed $1,000,000 in the aggregate; and (b) the proceeds of any such sales or dispositions shall be held in trust by the Company for CIT and shall be immediately delivered to CIT by deposit to the Depository Account, except that the Company may retain and use such proceeds to purchase forthwith replacement Equipment which the Company determines in its reasonable business judgment to have a collateral value at least equal to the Equipment so disposed of or sold; provided, however, that the aforesaid right shall automatically cease upon the occurrence of a Default or an Event of Default which is not waived in writing by CIT. Upon the sale, exchange, or other disposition of the Equipment, as herein provided, the security interest provided for herein shall, without break in continuity and without further formality or act, continue in, and attach to, all proceeds, including any instruments for the payment of money, Accounts, documents of title, shipping documents, chattel paper and all other cash and non-cash proceeds of such sales, exchange or disposition. As to any such sale, exchange or other disposition, CIT shall have all of the rights of an unpaid seller, including stoppage in transit, repletion, rescission and reclamation. 6.5 The rights and security interests granted to CIT hereunder are to continue in full force and effect, notwithstanding the termination of this Financing Agreement or the fact that the Revolving Loan Account may from time to time be temporarily in a credit position, until the final payment in full to CIT of all Obligations and the termination of this Financing Agreement. Any delay, or omission by CIT to exercise any right hereunder shall not be deemed a waiver thereof, or be deemed a waiver of any other right, unless such waiver shall be in writing and signed by CIT. A waiver on any one occasion shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion. 6.6 Notwithstanding CIT's security interest in the Collateral and to the extent that the Obligations are now or hereafter secured by any assets or property other than the Collateral or by the guarantee, endorsement, assets or property of any other person, CIT shall have the right in its sole discretion to determine which rights, liens, security interests or remedies CIT shall at any time pursue, foreclose upon, relinquish, subordinate, modify or take any other action with respect to, without in any way modifying or affecting any of them, or any of CIT's rights hereunder. 6.7 Any balances to the credit of the Company and any other property or assets of the Company in the possession or control of CIT may be held by CIT as security for any Obligations and applied in whole or partial satisfaction of such Obligations when due. The liens and security interests granted herein, and any other lien or security interest CIT may have in any other assets of the Company, shall secure payment and performance of all now existing and future Obligations. CIT may in its discretion charge any or all of the Obligations to the Revolving Loan Account when due. -20- 23 6.8 The Company represents and warrants that it possess all General Intangibles and rights thereto necessary to conduct its business as conducted as of the Closing Date and the Company shall maintain its rights in, and the value of, the foregoing in the ordinary course of its business, including, without limitation, by making timely payment with respect to any applicable licensed rights. The Company shall deliver to CIT, and/or shall cause the appropriate party to deliver to CIT, from time to time such pledge or security agreements with respect to General Intangibles (now or hereafter acquired) of the Company and its subsidiaries, if any, as CIT shall require to obtain valid first liens thereon. In furtherance of the foregoing, the Company shall provide written notice to CIT no later than 30 days after the acquisition of or application for any additional Patents, Trademarks, tradenames, service marks, Copyrights, brand names, trade names, logos and other trade designations subsequent to the Closing Date and the Company shall execute such documentation as CIT may reasonably require to obtain and perfect its lien thereon. The Company hereby irrevocably grants to CIT a royalty-free, non-exclusive license in the General Intangibles, including tradenames, Trademarks, Copyrights, Patents, licenses, and any other proprietary and intellectual property rights and any and all right, title and interest in any of the foregoing, for the sole purpose, upon the occurrence of an Event of Default, of the right to: (i) advertise for sale and sell or transfer any Inventory bearing any of the General Intangibles, and (ii) make, assemble, prepare for sale or complete, or cause others to do so, any applicable raw materials or Inventory bearing any of the General Intangibles, including use of the Equipment and Real Estate for the purpose of completing the manufacture of unfinished goods, raw materials or work-in-process comprising Inventory, and apply the proceeds thereof to the Obligations hereunder, all as further set forth in this Financing Agreement and irrespective of CIT's lien and perfection in any General Intangibles. 6.9 This Financing Agreement and the obligation of the Company to perform all of its covenants and obligations hereunder are further secured by mortgage(s), deed(s) of trust or assignment(s) on the Company's Real Estate located in Wisconsin. 6.10 The Company shall give to CIT from time to time such mortgage(s), deed(s) of trust or assignment(s) on the Real Estate located in Wisconsin or real estate acquired after the date hereof as CIT shall require to obtain a valid first lien thereon subject only to those exceptions of title as set forth in future title insurance policies that are satisfactory to CIT. SECTION 7. REPRESENTATIONS, WARRANTIES AND COVENANTS 7.1 The Company hereby warrants, represents and covenants that: (a) the fair value of the Total Assets exceeds the book value of the Total Liabilities; (b) taking into account the transactions contemplated by this Financing Agreement, the Company is generally able to pay its debts as they become due and payable; and (c) the Company does not have unreasonably small capital to carry on its business as it is currently conducted absent extraordinary and unforeseen circumstances. The Company further warrants and represents that: (i) Schedule 1 hereto correctly and completely sets forth the Company's (A) chief executive office, (B) Collateral locations, (C) tradenames, and (D) all the other information listed on said Schedule; (ii) except for the Permitted Encumbrances, after filing of financing statements in the applicable filing clerks office at the locations set forth in Schedule 1, this Financing Agreement creates a valid, perfected and first priority security interest in the Collateral and the security interests granted herein constitute and shall at all times constitute the first and only liens on the Collateral; (iii) -21- 24 except for the Permitted Encumbrances, the Company is, or will be, at the time additional Collateral is acquired by it, the absolute owner of the Collateral with full right to pledge, sell, consign, transfer and create a security interest therein, free and clear of any and all claims or liens in favor of others; (iv) the Company will, at its expense, forever warrant and, at CIT's request, defend the same from any and all claims and demands of any other person other than a holder of a Permitted Encumbrance; (v) the Company will not grant, create or permit to exist, any lien upon, or security interest in, the Collateral, or any proceeds thereof, in favor of any other person other than the holders of the Permitted Encumbrances; and that the Equipment does not comprise a part of the Inventory of the Company; and (vi) the Equipment is and will only be used by the Company in its business and will not be held for sale or lease, or removed from its premises, or otherwise disposed of by the Company except as otherwise permitted in this Financing Agreement. 7.2 The Company agrees to maintain books and records pertaining to the Collateral in accordance with GAAP and in such additional detail, form and scope as CIT shall reasonably require. The Company agrees that CIT or its agents may enter upon the Company's premises at any time during normal business hours, and from time to time in its reasonable business judgement, for the purpose of inspecting the Collateral and any and all records pertaining thereto. The Company agrees to afford CIT thirty (30) days prior written notice of any change in the location of any Collateral, other than to locations, that as of the Closing Date, are known to CIT and at which CIT has filed financing statements and otherwise fully perfected its liens thereon. The Company is also to advise CIT promptly, in sufficient detail, of any material adverse change relating to the type, quantity or quality of the Collateral or on the security interests granted to CIT therein. 7.3 The Company agrees to: execute and deliver to CIT, from time to time, solely for CIT's convenience in maintaining a record of the Collateral, such written statements, and schedules as CIT may reasonably require, designating, identifying or describing the Collateral. The Company's failure, however, to promptly give CIT such statements, or schedules shall not affect, diminish, modify or otherwise limit CIT's security interests in the Collateral. 7.4 The Company agrees to comply with the requirements of all state and federal laws in order to grant to CIT valid and perfected first security interests in the Collateral, subject only to the Permitted Encumbrances. CIT is hereby authorized by the Company to file (including pursuant to the applicable terms of the UCC) from time to time any financing statements, continuations or amendments covering the Collateral whether or not the Company's signature appears thereon. The Company hereby consents to and ratifies any and all execution and/or filing of financing statements on or prior to the Closing Date by CIT. The Company agrees to do whatever CIT may reasonably request, from time to time, by way of: (a) filing notices of liens, financing statements, amendments, renewals and continuations thereof; (b) cooperating with CIT's agents and employees; (c) keeping Collateral records; (d) transferring proceeds of Collateral to CIT's possession; and (e) performing such further acts as CIT may reasonably require in order to effect the purposes of this Financing Agreement. Without limiting the generality of the foregoing, such documents and actions may include, without limitation, Company's cooperation with CIT (i) in obtaining a control agreement in form and substance satisfactory to CIT in its discretion with respect to Collateral consisting of deposit accounts, investment property, letter of credit rights and electronic chattel paper and (ii) in notifying a third -22- 25 party in possession of Collateral of CIT's security interest and obtaining an acknowledgement from the third party that it is holding the Collateral for the benefit of CIT. 7.5 (a) The Company agrees to maintain insurance on the Real Estate, Equipment and Inventory under such policies of insurance, with such insurance companies, in such reasonable amounts and covering such insurable risks as are at all times reasonably satisfactory to CIT. All policies covering the Real Estate, Equipment and Inventory are, subject to the rights of any holders of Permitted Encumbrances holding claims senior to CIT, to be made payable to CIT, in case of loss, under a standard non-contributory "mortgagee", "lender" or "secured party" clause and are to contain such other provisions as CIT may require to fully protect CIT's interest in the Real Estate, Inventory and Equipment and to any payments to be made under such policies. All original policies or true copies thereof are to be delivered to CIT, premium prepaid, with the loss payable endorsement in CIT's favor, and shall provide for not less than thirty (30) days prior written notice to CIT of the exercise of any right of cancellation. At the Company's request, or if the Company fails to maintain such insurance, CIT may arrange for such insurance, but at the Company's expense and without any responsibility on CIT's part for: (i) obtaining the insurance; (ii) the solvency of the insurance companies; (iii) the adequacy of the coverage; or (iv) the collection of claims. Upon the occurrence of an Event of Default which is not waived in writing by CIT, CIT shall, subject to the rights of any holders of Permitted Encumbrances holding claims senior to CIT, have the sole right, in the name of CIT or the Company, to file claims under any insurance policies, to receive, receipt and give acquittance for any payments that may be payable thereunder, and to execute any and all endorsements, receipts, releases, assignments, reassignments or other documents that may be necessary to effect the collection, compromise or settlement of any claims under any such insurance policies. (b) (i) In the event of any loss or damage by fire or other casualty, insurance proceeds relating to Inventory shall first reduce the Company's Revolving Loan, the Term Loan, and then any other Obligations. Upon the occurrence of a Default or Event of Default, such Insurance Proceeds may be applied to the Obligations in such order as CIT may elect; (ii) In the event any part of the Company's Real Estate or Equipment is damaged by fire or other casualty and the Insurance Proceeds for such damage or other casualty is less than or equal to $100,000.00, CIT shall promptly apply such Proceeds to reduce the Company's outstanding balance in the Revolving Loan Account. Upon the occurrence of a Default or Event of Default, such Insurance Proceeds may be applied to the Obligations in such order as CIT may elect; (iii) Absent the occurrence of an Event of Default, and provided that (x) the Company has sufficient business interruption insurance to replace the lost profits of any of the Company's facilities, and (y) the Insurance Proceeds are in excess of $100,000.00, the Company may elect (by delivering written notice to CIT) to replace, repair or restore such Real Estate or Equipment to substantially the equivalent condition prior to such fire or other casualty as set forth herein. If the Company does not, or cannot, elect to use the Insurance Proceeds as set forth above, CIT may, subject to the rights of any holders of Permitted Encumbrances holding claims senior to CIT, apply the Insurance Proceeds to the payment of the Obligations in such manner and in such order as CIT may reasonably elect. -23- 26 (iv) If the Company elects to use the Insurance Proceeds for the repair, replacement or restoration of any Real Estate and/or Equipment, and there is then no Event of Default, (x) Insurance Proceeds in excess of $100,000.00 on Equipment and/or Real Estate will be applied to the reduction of the Revolving Loans and (y) CIT may set up an Availability Reserve for an amount equal to said Insurance Proceeds. The Availability Reserve will be reduced dollar-for-dollar upon receipt of non-cancelable executed purchase orders, delivery receipts or contracts for the replacement, repair or restoration of Equipment and/or the Real Estate and disbursements in connection therewith. Prior to the commencement of any material restoration, repair or replacement of Real Estate, the Company shall provide CIT with a restoration plan and a total budget certified by an independent third party experienced in construction costing. If there are insufficient Insurance Proceeds to cover the cost of restoration as so determined, the Company shall be responsible for the amount of any such insufficiency, prior to the commencement of restoration and shall demonstrate evidence of such before the reserve will be reduced. Completion of restoration shall be evidenced by a final, unqualified certification of the design architect employed, if any; an unconditional Certificate of Occupancy, if applicable; such other certification as may be required by law; or if none of the above is applicable, a written good faith determination of completion by the Company (herein collectively the "Completion"). Upon Completion, any remaining reserve as established hereunder will be automatically released. (c) In the event the Company fails to provide CIT with timely evidence, acceptable to CIT, of its maintenance of insurance coverage required pursuant to Paragraph 7.5(a) above, CIT may purchase, at the Company's expense, insurance to protect CIT's interests in the Collateral. The insurance acquired by CIT may, but need not, protect the Company's interest in the Collateral, and therefore such insurance may not pay claims which the Company may have with respect to the Collateral or pay any claim which may be made against the Company in connection with the Collateral. In the event CIT purchases, obtains or acquires insurance covering all or any portion of the Collateral, the Company shall be responsible for all of the applicable costs of such insurance, including premiums, interest (at the applicable Chase Bank Rate for Revolving Loans set forth in Paragraph 8.1 of Section 8 hereof), fees and any other charges with respect thereto, until the effective date of the cancellation or the expiration of such insurance. CIT may charge all of such premiums, fees, costs, interest and other charges to the Company's Revolving Loan Account. The Company hereby acknowledges that the costs of the premiums of any insurance acquired by CIT may exceed the costs of insurance which the Company may be able to purchase on its own. In the event that CIT purchases such insurance, CIT will notify the Company of said purchase within thirty (30) days of the date of such purchase. If, within thirty (30) days of the date of such notice, the Company provides CIT with proof that the Company had the insurance coverage required pursuant to 7.5(a) above (in form and substance satisfactory to CIT) as of the date on which CIT purchased insurance and the Company continued at all times to have such insurance, then CIT agrees to cancel the insurance purchased by CIT and credit the Company's Revolving Loan Account with the amount of all costs, interest and other charges associated with any insurance purchased by CIT, including with any amounts previously charged to the Revolving Loan Account. 7.6 The Company agrees to pay, when due, all Taxes, including sales taxes, assessments, claims and other charges lawfully levied or assessed upon the Company or the Collateral unless such Taxes are being diligently contested in good faith by the Company by -24- 27 appropriate proceedings and adequate reserves are established in accordance with GAAP. Notwithstanding the foregoing, if any lien shall be filed or claimed thereunder (a) for Taxes due the United States of America, or (b) which in CIT's opinion might create a valid obligation having priority over the rights granted to CIT herein (exclusive of Real Estate), such lien shall not be deemed to be a Permitted Encumbrance hereunder and the Company shall immediately pay such tax and remove the lien of record. If the Company fails to do so promptly, then at CIT's election, CIT may (i) create an Availability Reserve in such amount as it may deem appropriate in its business judgement, or (ii) upon the occurrence of a Default or Event of Default, imminent risk of seizure, filing of any priority lien, forfeiture, or sale of the Collateral, pay Taxes on the Company's behalf, and the amount thereof shall be an Obligation secured hereby and due on demand. 7.7 The Company: (a) agrees to comply with all acts, rules, regulations and orders of any legislative, administrative or judicial body or official, which the failure to comply with would have a material and adverse impact on the Collateral, or any material part thereof, or on the business or operations of the Company, provided that the Company may contest any acts, rules, regulations, orders and directions of such bodies or officials in any reasonable manner which will not, in CIT's reasonable opinion, materially and adversely effect CIT's rights or priority in the Collateral; (b) agrees to comply with all environmental statutes, acts, rules, regulations or orders as presently existing or as adopted or amended in the future, applicable to the Collateral, the ownership and/or use of its real property and operation of its business, which the failure to comply with would have a material and adverse impact on the Collateral, or any material part thereof, or on the operation of the business of the Company; and (c) shall not be deemed to have breached any provision of this Paragraph 7.7 if (i) the failure to comply with the requirements of this Paragraph 7.7 resulted from good faith error or innocent omission, (ii) the Company promptly commences and diligently pursues a cure of such breach, and (iii) such failure is cured within (30) days following the Company's receipt of notice of such failure, or if such cannot in good faith be cured within thirty (30) days, then such breach is cured within a reasonable time frame based upon the extent and nature of the breach and the necessary remediation, and in conformity with any applicable consent order, consensual agreement and applicable law. 7.8 Until termination of this Financing Agreement and payment and satisfaction of all Obligations due hereunder, the Company agrees that, unless CIT shall have otherwise consented in writing, the Company will furnish to CIT: (a) within ninety (90) days after the end of each Fiscal Year of the Company, an audited Consolidated Balance Sheet, with a Consolidating Balance Sheet attached thereto, as at the close of such year, and statements of profit and loss, cash flow and reconciliation of surplus of the Company and its consolidated subsidiaries, if any, for such year, audited by independent public accountants selected by the Company and satisfactory to CIT; (b) within sixty (60) days after the end of each Fiscal Quarter a Consolidated Balance Sheet and Consolidating Balance Sheet as at the end of such period and statements of profit and loss, cash flow and surplus of the Company and its consolidated subsidiaries, if any, certified by an authorized financial or accounting officer of the Company; (c) within thirty (30) days after the end of each month a Consolidated Balance Sheet as at the end of such period and statements of profit and loss, cash flow and surplus of the Company and all subsidiaries, if any, for such period, certified by an authorized financial or accounting officer of the Company; and (d) from time to time, such further information regarding the business affairs and financial -25- 28 condition of the Company and its consolidated subsidiaries, if any, as CIT may reasonably request, including, without limitation (i) the accountant's management practice letter and (ii) annual cash flow projections in form satisfactory to CIT. Each financial statement which the Company is required to submit hereunder must be accompanied by an officer's certificate, signed by the President, Vice President, Controller, or Treasurer, pursuant to which any one such officer must certify that: (x) the financial statement(s) fairly and accurately represent(s) the Company's financial condition at the end of the particular accounting period, as well as the Company's operating results during such accounting period, subject to year-end audit adjustments; and (y) during the particular accounting period: (A) there has been no Default or Event of Default under this Financing Agreement, provided, however, that if any such officer has knowledge that any such Default or Event of Default, has occurred during such period, the existence of and a detailed description of same shall be set forth in such officer's certificate; (B) the Company has not received any notice of cancellation with respect to its property insurance policies; (C) the Company has not received any notice that could result in a material adverse effect on the value of the Collateral taken as a whole; and (D) the exhibits attached to such financial statement(s) constitute detailed calculations showing compliance with all financial covenants contained in this Financing Agreement. 7.9 Until termination of the Financing Agreement and payment and satisfaction of all Obligations hereunder, the Company agrees that, without the prior written consent of CIT, except as otherwise herein provided, the Company will not: (a) Mortgage, assign, pledge, transfer or otherwise permit any lien, charge, security interest, encumbrance or judgment, (whether as a result of a purchase money or title retention transaction, or other security interest, or otherwise) to exist on any of the Company's Collateral or any other assets, whether now owned or hereafter acquired, except for the Permitted Encumbrances; (b) Incur or create any Indebtedness other than the Permitted Indebtedness; (c) Sell, lease, assign, transfer or otherwise dispose of (i) Collateral, except as otherwise specifically permitted by this Financing Agreement, or (ii) either all or substantially all of the Company's assets, which do not constitute Collateral; (d) Merge, consolidate or otherwise alter or modify its corporate name, principal place of business, structure, or existence, re-incorporate or re-organize or otherwise change its state of incorporation, or enter into or engage in any operation or activity materially different from that presently being conducted by the Company, except that the Company may change its corporate name or address; provided that: (i) the Company shall give CIT thirty (30) days prior written notice thereof; and (ii) the Company shall execute and deliver, prior to or simultaneously with any such action, any and all documents and agreements requested by CIT to confirm the continuation and preservation of all security interests and liens granted to CIT hereunder; (e) Assume, guarantee, endorse, or otherwise become liable upon the obligations of any person, firm, entity or corporation, except by the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; -26- 29 (f) Declare or pay any dividend or distributions of any kind on, or purchase, acquire, redeem or retire, any of the capital stock or equity interest, of any class whatsoever, whether now or hereafter outstanding; (g) Make any advance or loan to, or any investment in, any firm, entity, person or corporation, or purchase or acquire all or substantially all of the stock or assets of any entity, person or corporation; or (h) Pay any management, consulting or other similar fees to any person, corporation or other entity affiliated with the Company; 7.10 Until termination of the Financing Agreement and payment and satisfaction in full of all Obligations hereunder, the Company shall maintain at all times during each Fiscal Year ending below a Tangible Net Worth of not less than $15,000,000 as of the Closing Date, increasing quarterly by 50% of the Company's reported positive net income. 7.11 Without the prior written consent of CIT, the Company will not contract for, purchase, make expenditures for or otherwise incur obligations with respect to Capital Expenditures where the assets acquired are subject to Purchase Money Liens or Capital Leases in an aggregate amount in excess of $6,000,000 per Fiscal Year. 7.12 The Company agrees to advise CIT in writing of: (a) all expenditures (actual or anticipated) in excess of $150,000.00 from the budgeted amount therefor in any Fiscal Year for (x) environmental clean-up, (y) environmental compliance or (z) environmental testing and the impact of said expenses on the Company's Working Capital; and (b) any notices the Company receives from any local, state or federal authority advising the Company of any environmental liability (real or potential) stemming from the Company's operations, its premises, its waste disposal practices, or waste disposal sites used by the Company and to provide CIT with copies of all such notices if so required. 7.13 The Company hereby agrees to indemnify and hold harmless CIT and its officers, directors, employees, attorneys and agents (each an "Indemnified Party") from, and holds each of them harmless against, any and all losses, liabilities, obligations, claims, actions, damages, costs and expenses (including attorney's fees) and any payments made by CIT pursuant to any indemnity provided by CIT with respect to or to which any Indemnified Party could be subject insofar as such losses, liabilities, obligations, claims, actions, damages, costs, fees or expenses with respect to the Loan Documents, including without limitation those which may arise from or relate to: (a) the Depository Account, the Blocked Accounts, the lockbox and/or any other depository account and/or the agreements executed in connection therewith; and (b) any and all claims or expenses asserted against CIT as a result of any environmental pollution, hazardous material or environmental clean-up relating to the Real Estate; or any claim or expense which results from the Company's operations (including, but not limited to, the Company's off-site disposal practices) and use of the Real Estate, which CIT may sustain or incur (other than solely as a result of the physical actions of CIT on the Company's premises which are determined to constitute gross negligence or willful misconduct by a court of competent jurisdiction), all whether through the alleged or actual negligence of such person or otherwise, except and to the extent that the same results solely and directly from the gross negligence or willful misconduct -27- 30 of such Indemnified Party as finally determined by a court of competent jurisdiction. The Company hereby agrees that this indemnity shall survive termination of this Financing Agreement, as well as payments of Obligations which may be due hereunder. CIT may, in its sole business judgement, establish such Availability Reserves with respect thereto as it may deem advisable under the circumstances and, upon any termination hereof, hold such reserves as cash reserves for any such contingent liabilities. 7.14 Without the prior written consent of CIT, the Company agrees that it will not enter into any transaction, including, without limitation, any purchase, sale, lease, loan or exchange of property with any subsidiary, if any, or affiliate of the Company, provided that, except as otherwise set forth in this Financing Agreement, the Company may enter into sale and service transactions in the ordinary course of its business and pursuant to the reasonable requirements of the Company, and upon standard terms and conditions and fair and reasonable terms, no less favorable to the Company than the Company could obtain in a comparable arms length transaction with an unrelated third party, provided further that no Default or Event of Default exists or will occur hereunder prior to and after giving effect to any such transaction. 7.15 The Company and CIT acknowledge that due to the nature of the Company's business and its customers certain items comprising the Collateral and/or books, records or other documents related to the Collateral contain "classified" information or data ("Classified Material") which may not be legally disclosed without proper authorization and/or security clearance (a "Security Clearance"). CIT agrees that to the extent any representation, warranty or covenant of the Company or right or remedy of CIT contained in this Financing Agreement would otherwise require the Company to disclose Classified Material without a proper Security Clearance, such representation, warranty, covenant, right or remedy shall not apply with respect to obligations which would lead to such illegal disclosure; provided that any time the Company refuses, declines or otherwise fails to fulfill an obligation under this Financing Agreement due to an invocation of this Paragraph 7.15 or the substance hereof, the Company shall promptly provide written notice to CIT of that fact certifying that it has complied with its obligations hereunder to the fullest extent possible without illegally disclosing Classified Material and, upon the reasonable request of CIT, the Company shall provide evidence reasonably satisfactory to CIT that the requested items of Collateral or information are in fact "classified." The Company represents and warrants that the Classified Material is not necessary nor would it otherwise prohibit or impede (i) CIT's enforcement rights related to Collateral consisting of the Company's Accounts, or (ii) the sale by CIT of the Collateral consisting of the Company's Accounts, Inventory and Equipment (except for non-material amounts of Equipment which may contain Classified Material). SECTION 8. INTEREST, FEES AND EXPENSES 8.1 (a) Interest on the Revolving Loans and Term Loan A shall be payable monthly as of the end of each month on the unpaid balance or on payment in full prior to maturity. The Revolving Loans and Term Loan A shall bear interest at a rate equal to the Chase Bank Rate plus one and one half percent (1.50%) per annum on the average of the net balances owing by the Company to CIT in the Revolving Loan Account at the close of each day during such month. In the event of any change in said Chase Bank Rate, the rate hereunder shall change, as of the date -28- 31 of such change, so as to remain one and one half percent (1.50%) above the Chase Bank Rate. The rate hereunder shall be calculated based on a 360-day year. CIT shall be entitled to charge the Company's Revolving Loan Account at the rate provided for herein when due until all Obligations have been paid in full. If the Company's audited financial statement for the Fiscal Year ending December 31, 2000 reflects EBITDA of not less than $15,000,000, and no Event of Default has occurred and is continuing, the interest rate under this Paragraph 8.1 shall be reduced by one half of one percent (0.50%). (b) Upon and after the occurrence of an Event of Default and the giving of any required notice by CIT in accordance with the provisions of Section 10, Paragraph 10.2 hereof, all Obligations shall bear interest at the Default Rate of Interest. 8.2 The Company shall reimburse or pay CIT, as the case may be, for: (a) all Out-of-Pocket Expenses and (b) any other applicable fees. 8.3 To induce CIT to enter into this Financing Agreement and to extend to the Company the Revolving Loans and the Term Loan, the Company shall pay to CIT a Loan Facility Fee in the amount of $200,000.00 payable upon execution of this Financing Agreement. The Commitment Fee, less Out-of-Pocket Expenses, shall be credited toward the Loan Facility Fee upon consummation of this financing transaction on the Closing Date. 8.4 The Company shall pay CIT's standard charges and fees (currently $750 per person per day subject to change) for CIT's personnel used by CIT for reviewing the books and records of the Company and for verifying, testing, protecting, safeguarding, preserving or disposing of all or any part of the Collateral (which fees shall be in addition to any Out-of-Pocket Expenses). 8.5 The Company hereby authorizes CIT to charge the Revolving Loan Account with the amount of all payments due hereunder as such payments become due. The Company confirms that any charges which CIT may so make to the Revolving Loan Account as herein provided will be made as an accommodation to the Company and solely at CIT's discretion. 8.6 In the event that CIT or any participant hereunder (or any financial institution which may from time to time become a participant or lender hereunder) shall have determined in the exercise of its reasonable business judgement that, subsequent to the Closing Date, any change in applicable law, rule, regulation or guideline regarding capital adequacy, or any change in the interpretation or administration thereof, or compliance by CIT or such participant with any new request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on CIT's or such participant's capital as a consequence of its obligations hereunder to a level below that which CIT or such participant could have achieved but for such adoption, change or compliance (taking into consideration CIT or such participant's policies with respect to capital adequacy) by an amount reasonably deemed by CIT or such participant to be material, then, from time to time, the Company shall pay no later than five (5) days following demand to CIT or such participant such additional amount or amounts as will compensate CIT's or such participant's for such reduction. In determining such amount or amounts, CIT or such participant may use any reason-able averaging or attribution methods. The protection of this -29- 32 Paragraph 8.6 shall be available to CIT or such participant regardless of any possible contention of invalidity or inapplicability with respect to the applicable law, regulation or condition. A certificate of CIT or such participant setting forth such amount or amounts as shall be necessary to compensate CIT or such participant with respect to this Section 8 and the calculation thereof when delivered to the Company shall be conclusive on the Company absent manifest error. Notwithstanding anything in this paragraph to the contrary, in the event CIT or such participant has exercised its rights pursuant to this paragraph, and subsequent thereto determines that the additional amounts paid by the Company in whole or in part exceed the amount which CIT or such participant actually required to be made whole, the excess, if any, shall be returned to the Company by CIT or such participant. 8.7 In the event that any applicable law, treaty or governmental regulation, or any change therein or in the interpretation or application thereof, or compliance by CIT or such participant with any request or directive (whether or not having the force of law) from any central bank or other financial, monetary or other authority, shall: (a) subject CIT or such participant to any tax of any kind whatsoever with respect to this Financing Agreement or change the basis of taxation of payments to CIT or such participant of principal, fees, interest or any other amount payable hereunder or under any other documents (except for changes in the rate of tax on the overall net income of CIT or such participant by the federal government or the jurisdiction in which it maintains its principal office); (b) impose, modify or hold applicable any reserve, special deposit, assessment or similar requirement against assets held by, or deposits in or for the account of, advances or loans by, or other credit extended by CIT or such participant by reason of or in respect to this Financing Agreement and the Loan Documents, including (without limitation) pursuant to Regulation D of the Board of Governors of the Federal Reserve System; or (c) impose on CIT or such participant any other condition with respect to this Financing Agreement or any other document, and the result of any of the foregoing is to increase the cost to CIT or such participant of making, renewing or maintaining its loans hereunder by an amount that CIT or such participant deems to be material in the exercise of its reasonable business judgement or to reduce the amount of any payment (whether of principal, interest or otherwise) in respect of any of the loans by an amount that CIT or such participant deems to be material in the exercise of its reasonable business judgement, then, in any case the Company shall pay CIT or such participant, within five (5) days following its demand, such additional cost or such reduction, as the case may be. CIT or such participant shall certify the amount of such additional cost or reduced amount to the Company and the calculation thereof and such certification shall be conclusive upon the Company absent manifest error. Notwithstanding anything in this paragraph to the contrary, in the event CIT or such participant has exercised its rights pursuant to this paragraph, and subsequent thereto determine that the additional amounts paid by the Company in whole or in part exceed the amount which CIT or such participant actually required pursuant hereto, the excess, if any, shall be returned to the Company by CIT or such participant. -30- 33 8.8 For purposes of this Financing Agreement and Section 8 thereof, any reference to CIT shall include any financial institution which may become a participant or co-lender subsequent to the Closing Date. SECTION 9. POWERS The Company hereby constitutes CIT, or any person or agent CIT may designate, as its attorney-in-fact, at the Company's cost and expense, to exercise all of the following powers, which being coupled with an interest, shall be irrevocable until all Obligations to CIT have been paid in full: (a) To receive, take, endorse, sign, assign and deliver, all in the name of CIT or the Company, any and all checks, notes, drafts, and other documents or instruments relating to the Collateral; (b) To receive, open and dispose of all mail addressed to the Company and to notify postal authorities to change the address for delivery thereof to such address as CIT may designate; (c) To request from customers indebted on Accounts at any time, in the name of CIT information concerning the amounts owing on the Accounts; (d) To request from customers indebted on Accounts at any time, in the name of the Company, in the name of certified public accountant designated by CIT or in the name of CIT's designee, information concerning the amounts owing on the Accounts; (e) To transmit to customers indebted on Accounts notice of CIT's interest therein and to notify customers indebted on Accounts to make payment directly to CIT for the Company's account; and (f) To take or bring, in the name of CIT or the Company, all steps, actions, suits or proceedings deemed by CIT necessary or desirable to enforce or effect collection of the Accounts. Notwithstanding anything hereinabove contained to the contrary, the powers set forth in (b), (c), (e) and (f) above may only be exercised after the occurrence of an Event of Default and until such time as such Event of Default is waived in writing by CIT. SECTION 10. EVENTS OF DEFAULT AND REMEDIES 10.1 Notwithstanding anything hereinabove to the contrary, CIT may terminate this Financing Agreement immediately upon the occurrence of any of the following Events of Default: (a) cessation of the business of the Company or the calling of a meeting of the creditors of the Company for purposes of compromising the debts and obligations of the Company; -31- 34 (b) the failure of the Company to generally meet its debts as they mature; (c) (i) the commencement by the Company of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law; (ii) the commencement against the Company, of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under any federal or state law by creditors of the Company, provided that such Default shall not be deemed an Event of Default if such proceeding is controverted within ten (10) days and dismissed and vacated within thirty (30) days of commencement, except in the event that any of the actions sought in any such proceeding shall occur or the Company shall take action to authorize or effect any of the actions in any such proceeding; or (iii) the commencement (x) by the Company's subsidiaries, if any, or any one of them, of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under any applicable state law, or (y) against the Company's subsidiaries, if any, or any one of them, of any involuntary bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceeding under applicable law, provided that such Default shall not be deemed an Event of Default if such proceeding is controverted within ten (10) days and dismissed or vacated within thirty (30) days of commencement, except in the event that any of the actions sought in any such proceeding shall occur or the Company's subsidiaries, if any, or any one of them, shall take action to authorize or effect any of the actions in any such proceeding; (d) breach by the Company of any warranty, representation or covenant contained herein (other than those referred to in subparagraph (e) below) or in any other written agreement between the Company or CIT, provided that such Default by the Company of any of the warranties, representations or covenants referred in this clause (d) shall not be deemed to be an Event of Default unless and until such Default shall remain unremedied to CIT's satisfaction for a period of ten (10) days from the date of such breach; (e) breach by the Company of any warranty, representation or covenant of Paragraphs 3.3 (other than the fourth sentence of Paragraph 3.3) and 3.4 of Section 3 hereof; Paragraphs 6.3 and 6.4 (other than the first sentence of Paragraph 6.4) of Section 6 hereof; Paragraphs 7.1, 7.5, 7.6, and 7.8 through 7.14 hereof; (f) failure of the Company to pay any of the Obligations within five (5) Business Days of the due date thereof, provided that nothing contained herein shall prohibit CIT from charging such amounts to the Revolving Loan Account on the due date thereof; (g) the Company shall (i) engage in any "prohibited transaction" as defined in ERISA, (ii) have any "accumulated funding deficiency" as defined in ERISA, (iii) have any "reportable event" as defined in ERISA, (iv) terminate any "plan", as defined in ERISA in violation of ERISA or (v) be engaged in any proceeding in which the Pension Benefit Guaranty Corporation shall seek appointment, or is appointed, as trustee or administrator of any "plan", as defined in ERISA, and with respect to this subparagraph (h) such event or condition (x) remains uncured for a period of thirty (30) days from date of occurrence and (y) could, in the reasonable opinion of CIT, subject the Company to any tax, penalty or other liability material to the business, operations or financial condition of the Company; -32- 35 (h) the occurrence of any default or event of default (after giving effect to any applicable grace or cure periods) under any instrument or agreement evidencing any other Indebtedness of the Company having a principal amount in excess of $250,000; or (i) (i) Mr. Burton J. Smith ceases for any reason whatsoever (other than as a result of death) to be the Chief Scientist of the Company or other key role in the Company and actively engaged in the management of the Company or (ii) Mr. James E. Rottsolk ceases for any reason whatsoever (other than as a result of death) to be the President of the Company or other key role in the Company and actively engaged in the management of the Company. 10.2 Upon the occurrence of a Default and/or an Event of Default, at the option of CIT, all loans, advances and extensions of credit provided for in Sections 3 and 4 of this Financing Agreement shall be thereafter in CIT's sole discretion and the obligation of CIT to make Revolving Loans or Term Loans shall cease or such Event of Default is waived in writing by CIT, and at the option of CIT upon the occurrence of an Event of Default: (a) all Obligations shall become immediately due and payable; (b) CIT may charge the Company the Default Rate of Interest on all then outstanding or thereafter incurred Obligations in lieu of the interest provided for in Section 8 of this Financing Agreement, provided that, with respect to this clause "(b)" CIT has given the Company written notice of the Event of Default, provided, however, that no notice is required if the Event of Default is the Event listed in Paragraph 10.1(c) of this Section 10; and (c) CIT may immediately terminate this Financing Agreement upon notice to the Company, provided, however, that upon the occurrence of an Event of Default listed in Paragraph 10.1(c) of this Section 10, this Financing Agreement shall automatically terminate and all Obligations shall become due and payable, without any action, declaration, notice or demand by CIT. The exercise of any option is not exclusive of any other option, which may be exercised at any time by CIT. 10.3 Immediately upon the occurrence of any Event of Default, CIT may, to the extent permitted by law: (a) remove from any premises where same may be located any and all books and records, computers, electronic media and software programs associated with any Collateral (including any electronic records, contracts and signatures pertaining thereto), documents, instruments, files and records, and any receptacles or cabinets containing same, relating to the Accounts, or CIT may use, at the Company's expense, such of the Company's personnel, supplies or space at the Company's places of business or otherwise, as may be necessary to properly administer and control the Accounts or the handling of collections and realizations thereon; (b) bring suit, in the name of the Company or CIT, and generally shall have all other rights respecting said Accounts, including without limitation the right to: accelerate or extend the time of payment, settle, compromise, release in whole or in part any amounts owing on any Accounts and issue credits in the name of the Company or CIT; (c) sell, assign and deliver the Collateral and any returned, reclaimed or repossessed Inventory, with or without advertisement, at public or private sale, for cash, on credit or otherwise, at CIT's sole option and discretion, and CIT may bid or become a purchaser at any such sale, free from any right of redemption, which right is hereby expressly waived by the Company; (d) foreclose the security interests in the Collateral created herein or by the Loan Documents by any available judicial procedure, or to take possession of any or all of the Collateral, including any Inventory, Equipment and/or Other Collateral without judicial process, and to enter any premises where any Inventory and Equipment and/or Other Collateral may be located for the purpose of taking possession of or -33- 36 removing the same; and (e) exercise any other rights and remedies provided in law, in equity, by contract or otherwise. CIT shall have the right, without notice or advertisement, to sell, lease, or otherwise dispose of all or any part of the Collateral, whether in its then condition or after further preparation or processing, in the name of the Company or CIT, or in the name of such other party as CIT may designate, either at public or private sale or at any broker's board, in lots or in bulk, for cash or for credit, with or without warranties or representations, and upon such other terms and conditions as CIT in its sole discretion may deem advisable, and CIT shall have the right to purchase at any such sale. If any Inventory and Equipment shall require rebuilding, repairing, maintenance or preparation, CIT shall have the right, at its option, to do such of the aforesaid as is necessary, for the purpose of putting the Inventory and Equipment in such saleable form as CIT shall deem appropriate and any such costs shall be deemed an Obligation hereunder. The Company agrees, at the request of CIT, to assemble the Inventory and Equipment and to make it available to CIT at premises of the Company or elsewhere and to make available to CIT the premises and facilities of the Company for the purpose of CIT's taking possession of, removing or putting the Inventory and Equipment in saleable form. If notice of intended disposition of any Collateral is required by law, it is agreed that five (5) days notice shall constitute reasonable notification and full compliance with the law. The net cash proceeds resulting from CIT's exercise of any of the foregoing rights, (after deducting all charges, costs and expenses, including reasonable attorneys' fees) shall be applied by CIT to the payment of the Obligations, whether due or to become due, in such order as CIT may elect, and the Company shall remain liable to CIT for any deficiencies, and CIT in turn agrees to remit to the Company or its successors or assigns, any surplus resulting therefrom. The enumeration of the foregoing rights is not intended to be exhaustive and the exercise of any right shall not preclude the exercise of any other rights, all of which shall be cumulative. The Company hereby indemnifies CIT and holds CIT harmless from any and all costs, expenses, claims, liabilities, Out-of-Pocket Expenses or otherwise, incurred or imposed on CIT by reason of the exercise of any of its rights, remedies and interests hereunder, including, without limitation, from any sale or transfer of Collateral, preserving, maintaining or securing the Collateral, defending its interests in Collateral (including pursuant to any claims brought by the Company, the Company as debtor-in-possession, any secured or unsecured creditors of the Company, any trustee or receiver in bankruptcy, or otherwise), and the Company hereby agrees to so indemnify and hold CIT harmless, absent CIT's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. The foregoing indemnification shall survive termination of this Financing Agreement until such time as all Obligations (including the foregoing) have been finally and indefeasibly paid in full. In furtherance thereof CIT, may establish such reserves for Obligations hereunder (including any contingent Obligations) as it may deem advisable in its reasonable business judgement. Any applicable mortgage(s), deed(s) of trust or assignment(s) issued to CIT on the Real Estate shall govern the rights and remedies of CIT thereto. SECTION 11. TERMINATION Except as otherwise permitted herein, CIT may terminate this Financing Agreement only as of the initial or any subsequent Anniversary Date and then only by giving the Company at least sixty (60) days prior written notice of termination. Notwithstanding the foregoing CIT may terminate the Financing Agreement immediately upon the occurrence of an Event of Default, provided, however, that if the Event of Default is an event listed in Paragraph 10.1(c) of Section 10 of this Financing Agreement, this Financing Agreement shall terminate in accordance with -34- 37 Paragraph 10.2 of Section 10. This Financing Agreement, unless terminated as herein provided, shall automatically continue from Anniversary Date to Anniversary Date. The Company may terminate this Financing Agreement at any time upon sixty (60) days' prior written notice to CIT, provided that the Company pays to CIT immediately on demand an Early Termination Fee and/or the Prepayment Premium, if applicable. All Obligations shall become due and payable as of any termination hereunder or under Section 10 hereof and, pending a final accounting, CIT may withhold any balances in the Company's account (unless supplied with an indemnity satisfactory to CIT) to cover all of the Obligations, whether absolute or contingent, including, but not limited to, cash reserves for any contingent Obligations. All of CIT's rights, liens and security interests shall continue after any termination until all Obligations have been paid and satisfied in full. SECTION 12. MISCELLANEOUS 12.1 The Company hereby waives diligence, notice of intent to accelerate, notice of acceleration, demand, presentment and protest and any notices thereof as well as notice of nonpayment. No delay or omission of CIT or the Company to exercise any right or remedy hereunder, whether before or after the happening of any Event of Default, shall impair any such right or shall operate as a waiver thereof or as a waiver of any such Event of Default. No single or partial exercise by CIT of any right or remedy precludes any other or further exercise thereof, or precludes any other right or remedy. 12.2 This Financing Agreement and the Loan Documents executed and delivered in connection therewith constitute the entire agreement between the Company and CIT; supersede any prior agreements; can be changed only by a writing signed by both the Company and CIT; and shall bind and benefit the Company and CIT and their respective successors and assigns. 12.3 In no event shall the Company, upon demand by CIT for payment of any Indebtedness relating hereto, by acceleration of the maturity thereof, or otherwise, be obligated to pay interest and fees in excess of the amount permitted by law. Regardless of any provision herein or in any agreement made in connection herewith, CIT shall never be entitled to receive, charge or apply, as interest on any indebtedness relating hereto, any amount in excess of the maximum amount of interest permissible under applicable law. If CIT ever receives, collects or applies any such excess, it shall be deemed a partial repayment of principal and treated as such; and if principal is paid in full, any remaining excess shall be refunded to the Company. This paragraph shall control every other provision hereof, the Loan Documents and of any other agreement made in connection herewith. 12.4 If any provision hereof or of any other agreement made in connection herewith is held to be illegal or unenforceable, such provision shall be fully severable, and the remaining provisions of the applicable agreement shall remain in full force and effect and shall not be affected by such provision's severance. Furthermore, in lieu of any such provision, there shall be added automatically as a part of the applicable agreement a legal and enforceable provision as similar in terms to the severed provision as may be possible. 12.5 THE COMPANY AND CIT EACH HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THE LOAN -35- 38 DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREUNDER. THE COMPANY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE OF PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED. IN NO EVENT WILL CIT BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. 12.6 Except as otherwise herein provided, any notice or other communication required hereunder shall be in writing (provided that, any electronic communications from the Company with respect to any request, transmission, document, electronic signature, electronic mail or facsimile transmission shall be deemed binding on the Company for purposes of this Financing Agreement, provided further that any such transmission shall not relieve the Company from any other obligation hereunder to communicate further in writing), and shall be deemed to have been validly served, given or delivered when hand delivered or sent by facsimile, or three days after deposit in the United State mails, with proper first class postage prepaid and addressed to the party to be notified or to such other address as any party hereto may designate for itself by like notice, as follows: (A) if to CIT, at: The CIT Group/Business Credit, Inc. 300 S. Grand Ave, Third Floor Los Angeles, California 90071 Attn: Regional Credit Manager Fax No.: (213) 613-2501 (B) if to the Company at: Cray Inc. 411 First Avenue South Seattle, Washington 98104 Attn: Kenneth W. Johnson Fax No.: (206) 701-2218 With a courtesy copy of any material notice to the Company's counsel at: Stoel Rives LLP 600 University Street, Suite 3600 Seattle, Washington 98101 Attn: Richard L. Goldfarb, Esq. Fax No.: (206) 386-7500 provided, however, that the failure of CIT to provide the Company's counsel with a copy of such notice shall not invalidate any notice given to the Company and shall not give the Company any rights, claims or defenses due to the failure of CIT to provide such additional notice. 12.7 THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA, EXCEPT TO THE -36- 39 EXTENT THAT ANY OTHER LOAN DOCUMENT INCLUDES AN EXPRESS ELECTION TO BE GOVERNED BY THE LAWS OF ANOTHER JURISDICTION. [This space intentionally left blank] -37- 40 IN WITNESS WHEREOF, the parties hereto have caused this Financing Agreement to be effective, executed, accepted and delivered at Los Angeles, California, by their proper and duly authorized officers as of the date set forth above. CRAY INC. THE CIT GROUP/ BUSINESS CREDIT, INC. By: /s/ By: /s/ --------------------------- --------------------------------- Title Title: Senior Vice President -38- EX-11.1 4 ex11-1.txt CONPUTATION OF EARNINGS (LOSS) PER SHARE 1 EXHIBIT 11.1 CRAY INC. COMPUTATION OF EARNINGS (LOSS) PER SHARE (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Three months ended Six months ended June 30, June 30, 1999 2000 1999 2000 ---------- -------- ---------- -------- Net income (loss) for common share $ (6,717) $ 3,308 $ (13,598) $ (4,697) ========= ======== ========== ======== Weighted average common shares, basic 16,677 33,367 15,696 31,492 Net effect of dilutive stock options 87 87 Net effect of dilutive warrants 18 18 --------- -------- ---------- -------- Weighted average common shares, diluted 16,677 33,472 15,696 31,597 ========= ======== ========== ======== Earnings (loss) per share, basic $ (0.40) $ 0.10 $ (0.87) $ (0.15) ========= ======== ========== ======== Earnings (loss) per share, diluted $ (0.40) $ 0.10 $ (0.87) $ (0.15) ========= ======== ========== ======== Potentially dilutive securities excluded from computation because they are anti-dilutive 17,735 19,464 17,735 19,464 ========= ======== ========== ========
EX-27.1 5 ex27-1.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED FINANCIAL STATEMENTS OF CRAY INC. FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JUN-30-2000 8,693 0 32,523 0 22,020 65,308 61,212 35,188 153,128 74,510 0 0 0 152,709 0 153,128 26,693 50,973 15,239 27,503 20,333 0 66 3,308 0 3,308 0 0 0 3,308 0.10 0.10
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