-----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, C6Sup3apuffe1ggxGCj+H3VbaAerap5xCJ2iOaAqqDpXfeBZnfTdB7QXsjJZ9B0e dIa5SZZRUSkOCE7nr9LOvQ== 0000891020-01-500337.txt : 20020412 0000891020-01-500337.hdr.sgml : 20020412 ACCESSION NUMBER: 0000891020-01-500337 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011106 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20011128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRAY INC CENTRAL INDEX KEY: 0000949158 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 930962605 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26820 FILM NUMBER: 1800968 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 8-K 1 v77507e8-k.txt FORM 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): November 6, 2001 ------------------------------------------------------ CRAY INC. (Exact name of registrant as specified in its charter) ------------------------------------------------------ Washington 0-26820 93-0962605 (State or other jurisdiction of (Commission (I.R.S. Employer incorporation or organization) File Number) Identification No.)
411 First Avenue South, Suite 600 Seattle, WA 98104-2860 (Address of principal executive offices) Registrant's telephone number, including area code: (206) 701-2000 Registrant's facsimile number, including area code: (206) 701-2500 None (Former name or former address, if changed since last report) Page 1 ITEM 5. OTHER EVENTS. NOVEMBER 2001 PRIVATE PLACEMENT In November, 2001, in a private placement under the Securities Act of 1933, we sold to six accredited investors (i) 5% convertible subordinated debentures in the aggregate original principal amount of $9,300,000, convertible into shares of our common stock as described below, and (ii) common stock purchase warrants for an aggregate of 367,590 shares of our common stock at an initial exercise price of $4.4275 per share, subject to adjustment, exercisable until November 6, 2004. The placement closed in two tranches, on November 6 and 15, 2001. The six investors were Riverview Group, LLC, Omicron Partners, LP, Laterman & Co., Forevergreen Partners, Clarion Capital Corporation and The Morton A. Cohen Revocable Living Trust. We received gross proceeds of $9,300,000 in exchange for the issuance of the debentures and the warrants. We have agreed to pay a finder's fee of $651,000 to Intellect Capital Ltd., which is affiliated with Terren S. Peizer, a member of our Board of Directors. After payment of the finder's fee and other expenses of the offering, we expect that the net proceeds of the offering will be approximately $8,550,000. No underwriters were involved in this private placement. The sale of the debentures and the warrants to the investors was exempt from the registration provisions of the Securities Act, under Sections 4(2) and 4(6) of the Securities Act, and the rules and regulations thereunder, because of the nature of the offerees and investors and the manner in which the offering was conducted. The investors have acknowledged that the securities cannot be resold unless registered or exempt from registration under the securities laws. We have agreed to register the resale of the shares of common stock issuable to the investors under the Securities Act. THE CONVERTIBLE SUBORDINATED DEBENTURES The debentures bear interest at the rate of 5% per year, payable semi-annually commencing May 6, 2002. We can elect to pay interest in cash or in shares of our common stock. The debentures mature on November 6, 2004. The holders of the debentures can choose to convert all or a portion of the principal amount outstanding into shares of our common stock at any time before the maturity date of November 6, 2004. The debentures are convertible into common stock at a fixed conversion price of $2.35 per share from the date of issuance until maturity. In addition, during each three-month period beginning on February 6, 2002, each holder may convert on a cumulative basis up to 25% of the original principal amount of each holder's debenture at a floating conversion price. The floating conversion price is equal Page 2 to 94% of the average of the 7 lowest daily volume weighted average prices during the 20 trading days immediately prior to the date upon which the debenture is converted. On the maturity date of November 6, 2004, the holders are obligated to convert any remaining principal into common stock at a conversion price equal to the average of the closing prices during the 15 trading days immediately prior to the maturity date. The debentures contain subordination provisions in favor of our senior secured lender, which limit our rights and obligations to make cash payments of principal, interest or other payments of funds under the debentures and related transaction documents. We are not required to issue to the debenture holders in excess of 8,422,204 shares below the market price of our common stock in accordance with Nasdaq rules, or such greater number of shares permitted under Nasdaq Rule 4350(i). In such event, the debenture holders may elect to require us to convert the debentures at the lowest possible conversion price that complies with Nasdaq rules or to redeem the portion of the debentures which were not able to be converted by payment of 105% of the outstanding principal, plus accrued interest, if the redemption were by May 6, 2002, or of 110% of the outstanding principal, plus accrued interest, if the redemption were after May 6, 2002, provided that we are not obligated to redeem more than 25% of the original principal amount of the debentures every three months on a cumulative basis beginning on February 6, 2002. A debenture holder may not convert its debenture or receive shares of our common stock as payment of interest to the extent that, at the time of the conversion or payment, the sum of (i) the number of shares of our common stock beneficially owned by the holder plus (ii) the number of shares to be issued upon conversion and payment would exceed 4.999% of the number of shares of our common stock then issued and outstanding, including other shares of our common stock issuable upon conversion of, or payment of interest on, the holder's debenture. The holder may terminate this restriction upon 61 days' prior notice to us. In the event that we sell any shares of our common stock (or certain securities convertible into or exercisable for shares of our common stock) at a price less than the fixed conversion price of the debentures, then the fixed conversion price of the debentures generally shall be reduced based on a weighted average adjustment (subject to certain exceptions). The debentures also contain customary antidilution provisions for stock dividends, stock splits or combinations and reclassifications. In the event that a debenture is converted and we issue the shares of common stock later than the time permitted in the debenture, we may be required to make late fee payments to the holder that increase based upon how late we issue the shares and Page 3 without a limit on the late fee that must be paid. The debentures provide that, if we deny, or if any of our shareholders obtain a judgment denying, the rights of the holders to convert the debentures, then the holders have the right to require us to pay 120% of the outstanding principal amount of the debentures plus accrued and unpaid interest. If an event of default occurs under the debentures, the holders have the right to require us to pay a mandatory redemption amount, subject to the subordination provisions of the debentures in favor of our senior secured lender. The mandatory redemption amount is the greater of (i) 120% of the outstanding principal on the debentures, plus accrued interest or (ii) the outstanding principal amount, plus accrued interest, divided by the applicable conversion price, and multiplied by the closing price of our common stock on the applicable date provided in the debentures. The events of default include: (i) failure to pay scheduled principal or interest payments, (ii) breach of any material representation or warranty in the debentures or the related transaction agreements, (iii) failure to timely issue shares upon conversion of the debentures, to timely transfer such issued shares or to timely remove restrictive legends if lawful and required by the debentures and the related agreements, which failure continues uncured for ten trading days, (vi) failure to perform our obligations in the debentures or related agreements for a period of 20 business days after notice, (vii) commencement of bankruptcy or insolvency proceedings or appointment of a receiver or similar assumption of control of a material portion of our properties and assets, (viii) any judgment or claim becoming a lien or encumbrance on any material portion of our assets, (ix) delisting or suspension of trading of our common stock for more than 5 consecutive trading days or 8 total trading days, (x) the failure of a registration statement that we are required to file being declared effective by the SEC by May 6, 2002, (xi) a lapse in the effectiveness of the registration statement for more than 20 trading days during any 12-month period (subject to exceptions for material transactions), or (xii) a change of control transaction. A change of control transaction includes the acquisition of more than 40% of our voting stock in a transaction not approved by our board of directors, the replacement of more than one-half of the current members of the board of directors without the approval of such directors, the consolidation or merger of us where the shareholders prior to such transaction do not own at least 51% of our voting stock after the transaction or the common stock is no longer listed on Nasdaq National Market System or a national exchange, the sale of all or substantially all of our assets, or the execution by us of an agreement providing for one of the foregoing events. These change of control provisions may have the effect of discouraging third parties from making a bid to acquire control of us in a transaction not approved by our board of directors. THE WARRANTS Page 4 The warrants are exercisable for a total of 367,590 shares of our common stock at an exercise price of $4.4275 payable in cash. The warrants are exercisable until November 6, 2004. The number of shares issuable upon exercise and the exercise price are subject to adjustment in the event of a stock dividend, a stock split or combination or a reclassification of our common stock, but otherwise do not have exercise price adjustments. THE REGISTRATION RIGHTS AGREEMENT In the registration rights agreement, we agreed to file a registration statement covering (i) the resale of up to 7,914,894 shares of common stock, which was calculated by multiplying 200% by the number of shares into which the debentures are convertible using the fixed conversion price of $2.35 per share, and (ii) the resale of 367,590 shares of common stock issuable upon exercise of the warrants. If we are required to issue additional shares under the debentures and the related agreements, we may be required to file additional registration statements. We must pay penalties if we breach certain of our obligations under the registration rights agreement. These penalties may be paid in cash or, at our option, in shares of our common stock. Page 5 THE PURCHASE AGREEMENT Under our purchase agreement with the investors, we generally are prohibited from entering into any financing transaction until after May 6, 2002 without the consent of a majority in interest of the investors, which cannot be unreasonably withheld. We may however grant equity incentive awards and issue our securities in connection with stock option, stock purchase and other compensatory plans, strategic business transactions or an underwritten registered public offering. The purchase agreement also contains representations, warranties, covenants and indemnification provisions customary for agreements of its type. SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE DEBENTURES AND EXERCISE OF THE WARRANTS The following table outlines the number of shares of common stock that would be issuable upon conversion in full of the debentures at several hypothetical conversion prices. The table also sets forth the total number of shares the investors would beneficially own at such hypothetical adjustment prices, and assuming exercise in full of the warrants, and the percentage that such shares would constitute of our resulting outstanding common stock, assuming the investors had not purchased or sold any of our securities. During calendar year 2000, the closing price of our common stock ranged from a low of $1.125 to a high of $11.50 per share. During calendar year 2001, through November 19, 2001, the closing price of our common stock has ranged from a low of $1.531 to a high of $3.45 per share.
Shares Issuable Under Total Shares Total Shares as a Hypothetical Convertible Shares Issuable Under Issuable to Percent of Conversion Price (1) Debentures (1) Warrants Investors Outstanding Stock (2) -------------------- -------------- -------- --------- --------------------- $1.00 9,300,000 367,590 9,667,590 18.7% $1.25 7,440,000 367,590 7,807,590 15.6% $1.50 6,200,000 367,590 6,567,590 13.5% $1.75 5,314,286 367,590 5,681,876 11.9% $2.00 4,650,000 367,590 5,017,590 10.7% $2.25 4,133,333 367,590 4,500,923 9.7% $2.35(3) 3,957,447 367,590 4,325,037 9.3%
Page 6 - -------------------- (1) Assumes conversion in full of all debentures at the hypothetical conversion price set forth above. Assumes interest is paid in cash and not in shares of common stock. (2) Based on 42,111,021 shares of common stock outstanding on November 19, 2001, plus the shares issuable to the investors under the debentures and the warrants shown above. (3) At floating conversion prices above $2.35 per share, the investors would convert at the fixed conversion price of $2.35 per share. ADDITIONAL FACTORS THAT COULD AFFECT FUTURE RESULTS In addition to the factors below relating to the debentures and the warrants, investors should carefully consider the "Factors That Could Affect Future Results" contained in our quarterly report on Form 10-Q for the quarter ending September 30, 2001, and in our future filings made with the Securities and Exchange Commission in determining whether to purchase shares of our common stock. THE CONVERSION OF THE DEBENTURES AND THE EXERCISE OF THE WARRANTS MAY SUBSTANTIALLY DILUTE OUR COMMON SHAREHOLDERS. We are obligated initially to register 8,282,484 shares of common stock issuable under the debentures, the warrants issued to the investors and the related transaction agreements, and we may become obligated to register additional shares to cover the conversion of the debentures and the exercise of the warrants. The conversion prices of the debentures and the exercise price of the warrants could be lower than the trading price of our common stock from time to time. The debentures are convertible into common stock at a fixed conversion price of $2.35 per share from the date of issuance until maturity. In addition, during each three-month period beginning on February 6, 2002, each investor may convert on a cumulative basis up to 25% of the original principal amount of the debentures at a floating conversion price. The floating conversion price is equal to 94% of the average of the 7 lowest daily volume weighted average prices during the 20 trading days immediately prior to the date upon which the debenture is converted. The floating conversion price generally ensures that the debentures can be converted at a discount from the market price of our common stock at the time of conversion. For that reason, we expect the investors ultimately to convert the entire principal amount of the debentures and to resell the common stock issued to them. The potential or actual issuance of shares under the debentures and upon exercise of the warrants could have a substantial dilutive impact on the holders of our common stock. THE SALES OF MATERIAL AMOUNTS OF OUR COMMON STOCK UPON CONVERSION OF THE DEBENTURES, OR THE PROSPECT OF SUCH SALES, COULD REDUCE THE MARKET PRICE OF OUR Page 7 COMMON STOCK AND ENCOURAGE SHORT SALES. Our common stock price may decrease if the holders of the debentures elect to convert and resell their shares of common stock. In particular, as the price of our common stock decreases, if the holders of the debentures elect to convert, we will be required to issue more shares of our common stock, based on the floating conversion price, for any given dollar amount invested by the holders of the debentures. See the table above under "Shares of Common Stock Issuable upon Conversion of the Debentures and Exercise of the Warrants." Any future issuance of a significant number of common shares, or any future sales by the investors of a significant number of common shares, or the prospect of such issuances or sales, could reduce the market price of our common stock. This may encourage short sales by third parties, which could place further downward pressure on the price of our common stock. OUR ABILITY TO OBTAIN FUTURE FINANCING MAY BE HINDERED BY THE UNCERTAIN AND POTENTIALLY SUBSTANTIAL NUMBER OF SHARES ISSUABLE UNDER THE DEBENTURES. The shares issuable upon conversion of the debentures are linked to a percentage discount to the market price of our common stock at the time of the conversion. We cannot predict the number of shares of common stock that may be issued upon conversion. The lower the price of our common stock at the time of conversion, the more shares of common stock that we will be required to issue upon conversion, which will further dilute holders of our other securities. See the table above under "Shares of Common Stock Issuable upon Conversion of the Debentures and Exercise of the Warrants." This uncertain and potentially substantial number of shares issuable upon conversion of the debentures may hinder our ability to obtain additional financing. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits 4.1 Convertible Subordinated Debentures and Warrants Purchase Agreement, dated as of November 6, 2001, between Cray Inc. and the investors 4.2 Form of 5% Convertible Subordinated Debenture, due November 6, 2004, issued to the investors 4.3 Form of Stock Purchase Warrant, dated November 6, 2001, issued to the investors 4.4 Registration Rights Agreement, dated as of November 6, 2001, between Cray Inc. and the investors Page 8 4.5 Amendment No. 1 to the Convertible Subordinated Debentures and Warrants Purchase Agreement and Other Transaction Documents, between Cray Inc. and the investors SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CRAY INC. /S/ By: __________________________ Kenneth W. Johnson Chief Financial Officer November 28, 2001 Page 9 EX-4.1 3 v77507ex4-1.txt EXHIBIT 4.1 Exhibit 4.1 CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS PURCHASE AGREEMENT BETWEEN CRAY INC. AND THE INVESTORS SIGNATORY HERETO CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS PURCHASE AGREEMENT dated as of November 6, 2001 (the "Agreement"), between the Investors signatory hereto (each an "Investor" and together the "Investors"), and Cray Inc., a corporation organized and existing under the laws of the State of Washington (the "Company"). WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investors, and the Investors shall purchase, in the aggregate, (i) $8,000,000 principal amount of the Convertible Subordinated Debentures, and (ii) the Warrants; and WHEREAS, such investments will be made in reliance upon the provisions of Section 4(2) ("Section 4(2)") and/or 4(6) ("Section 4(6)") of the United States Securities Act of 1933, as amended (the "Securities Act") and/or Regulation D ("Regulation D") and the other rules and regulations promulgated thereunder, and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments in securities to be made hereunder. NOW, THEREFORE, in consideration of the foregoing premises, and the promises and covenants herein contained, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties, intending to be legally bound, hereby agree as follows: ARTICLE I PURCHASE AND SALE OF CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS .1. Investment. (a) Upon the terms and subject to the conditions set forth herein, the Company agrees to sell, and the Investors agree to purchase, severally and not jointly, the Convertible Subordinated 1 Debentures together with the Warrants at the Purchase Price on the Closing Date as follows. Within three (3) Trading Days of the execution and delivery of this Agreement, the Investors shall purchase, severally and not jointly, in the aggregate, $8,000,000 principal amount of Convertible Subordinated Debentures together with the Warrants in exchange for the Purchase Price. Each Investor shall deliver to the Escrow Agent immediately available funds in their proportionate amount of the aggregate Purchase Price, as set forth on the signature pages hereto, and the Company shall deliver the Convertible Subordinated Debentures evidencing said principal sum and the Warrants to the Escrow Agent, in each case to be held by the Escrow Agent pursuant to the Escrow Agreement. Upon satisfaction of the conditions set forth in Section 1.1(b), the Closing shall occur at the offices of the Escrow Agent at which time the Escrow Agent (x) shall release the Convertible Subordinated Debentures and the Warrants to the Investors, and (y) shall release the Purchase Price (after all fees have been paid as set forth in the Escrow Agreement), pursuant to the terms of the Escrow Agreement. (b) The Closing is subject to the satisfaction or waiver by the party to be benefited thereby of the following conditions: (i) acceptance and execution by the Company and by the Investors, of this Agreement and all exhibits hereto; (ii) delivery into escrow by each Investor of immediately available funds in their proportionate amount of the Purchase Price as indicated and set forth on the signature pages hereto; (iii) all representations and warranties of the Investors contained herein shall remain true and correct in all material respects as of the Closing Date; (iv) all representations and warranties of the Company contained herein shall remain true and correct in all material respects as of the Closing Date; (v) the Company shall have obtained all permits and qualifications required by any state for the offer and sale of the Convertible Subordinated Debentures and the Warrants, or shall have the availability of exemptions therefrom; (vi) the sale and issuance of the Convertible Subordinated Debentures and the Warrants hereunder, and the proposed issuance by the Company to the Investors of Conversion Shares or Warrant Shares upon the conversion or exercise thereof shall be legally permitted by all laws and regulations to which the Investors and the Company are subject and there shall be no ruling, judgment or writ of any court prohibiting the transactions contemplated by this Agreement; (vii) delivery of the applicable original fully executed Convertible Subordinated Debentures and Warrants to the Escrow Agent; (viii) delivery to the Escrow Agent of an opinion of Kenneth W. Johnson, Esq., General Counsel to the Company, in the form of Exhibit D hereto; 2 (ix) delivery to the Escrow Agent of the Registration Rights Agreement; (x) there shall have been no Material Adverse Effect with respect to the Company since the date hereof; and (xi) there shall have been no act of war, major hostilities, act of God or other calamity since the date hereof that has led to the suspension of trading on the New York Stock Exchange, Inc. or the Nasdaq National Market System for at least one Trading Day. .2. Warrants. At the Closing, the Company shall issue to the Investors Warrants to purchase, in the aggregate, up to a number of shares of Common Stock equal to 10% of the aggregate Purchase Price divided by the average Closing Prices of the Common Stock during the 15 Trading Days immediately prior to the Closing Date (the "Base Price"). The Company shall issue the Warrants to the Investors pro rata among all Investors in proportion to their respective initial purchases of the Convertible Subordinated Debentures pursuant to this Agreement. The exercise price of the Warrants shall be equal to the 175% of the Base Price. The Warrants shall be exercisable for a period of 3 years beginning on the Closing Date. The shares of Common Stock underlying the Warrants shall be registered for resale on the Registration Statement for resale by the Investors pursuant to the Registration Rights Agreement. .3. Liquidated Damages. The parties hereto acknowledge that with respect to the delivery of the Conversion Shares, time is of the essence and the Company shall be liable for the liquidated damages set forth in the Convertible Subordinated Debentures. Additionally, the parties hereto acknowledge and agree that the sums payable pursuant to this Agreement, the Registration Rights Agreement and the Convertible Subordinated Debentures shall constitute liquidated damages and not penalties. The parties further acknowledge that a breach by either party of this Agreement or exhibits hereto, (a) the amount of loss or damages likely to be incurred is incapable or is difficult to precisely estimate, (b) the amounts specified in such agreements bear a reasonable proportion and are not plainly or grossly disproportionate to the probable loss likely to be incurred by the Investors in connection with the failure of the Company to timely cause the registration of the Registrable Securities or to deliver stock certificates upon any conversion, and (c) the parties are sophisticated businesses and have been represented by sophisticated and able legal and financial counsel and negotiated this Agreement at arm's length. ARTICLE II REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR Each Investor, severally and not jointly, represents and warrants to the Company that: .1. Organization. The Investor is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. 3 .2. Intent. The Investor is entering into this Agreement for its own account and not with a view to or for sale in connection with any distribution of the Common Stock. The Investor has no present arrangement (whether or not legally binding) at any time to sell the Convertible Subordinated Debenture, the Warrants, the Conversion Shares or the Warrant Shares to or through any person or entity; provided, however, that by making the representations herein, the Investor does not agree to hold such securities for any minimum or other specific term and reserves the right to dispose of the Conversion Shares and Warrant Shares at any time in accordance with federal and state securities laws applicable to such disposition. .3. Sophisticated Investor. The Investor is a sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor (as defined in Rule 501 of Regulation D), and Investor has such experience in business and financial matters that it has the capacity to protect its own interests in connection with this transaction and is capable of evaluating the merits and risks of an investment in the Convertible Subordinated Debentures, the Warrants and the underlying Common Stock. The Investor has been represented by counsel of its choice. The Investor acknowledges that an investment in the Convertible Subordinated Debentures and the Warrants and the underlying Common Stock is speculative and involves a high degree of risk. .4. Authority. This Agreement and each agreement attached as an Exhibit hereto which is required to be executed by the Investor has been duly authorized and validly executed and delivered by the Investor and is a valid and binding agreement of the Investor enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. .5. Not an Affiliate. The Investor is not an officer, director or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of the Company. .6. Absence of Conflicts. The execution and delivery of this Agreement and each agreement which is attached as an Exhibit hereto and executed by the Investor in connection herewith, and the consummation of the transactions contemplated hereby and thereby, and compliance with the requirements hereof and thereof by the Investor, will not violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Investor or (a) violate any provision of any indenture, instrument or agreement to which the Investor is a party or is subject, or by which the Investor or any of its assets is bound; (b) conflict with or constitute a material default thereunder; (c) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by the Investor to any third party; or (d) require the approval of any third-party (which has not been obtained) pursuant to any material contract, agreement, instrument, relationship or legal obligation to which the Investor is subject or to which any of its assets, operations or management may be subject. .7. Disclosure; Access to Information. The Investor has received all documents, records, books and other publicly available information pertaining to Investor's investment in the Company that 4 have been requested by the Investor. The Company is subject to the periodic reporting requirements of the Exchange Act, and the Investor has reviewed copies of all SEC Documents deemed relevant by Investor. .8. Manner of Sale. At no time was Investor presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising. Section 2.9. Broker-Dealer. The Investor is not a broker-dealer registered with the SEC nor a member of the National Association of Securities Dealers. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth on the SEC Documents or on the disclosure schedule prepared by the Company and attached hereto, the Company represents and warrants to the Investors that: (a) Section 3.1 Organization and Authority. The Company is a corporation duly organized and validly existing under the laws of the State of Washington, and has all requisite corporate power and authority (i) to own, lease, and operate its properties and to carry on its business as now being conducted, and (ii) to execute, deliver, and perform its obligations under this Agreement, the Warrants, the Registration Rights Agreement and the Convertible Subordinated Debentures, and to consummate the transactions contemplated hereby and thereby. The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and where failure so to qualify could have a material adverse effect on the business, properties, operations, condition (financial or other), results of operations or prospects of the Company. The Company has no subsidiaries. The Company has the requisite corporate power and corporate authority to conduct its business as now conducted, to enter into and perform its obligations under this Agreement, the Registration Rights Agreement, the Escrow Agreement and the Warrants, and to issue the Convertible Subordinated Debentures, the Conversion Shares, the Warrants and the Warrant Shares pursuant to their respective terms. The execution, issuance and delivery of this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Convertible Subordinated Debentures and the Warrants by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors or stockholders is required. This Agreement, the Registration Rights Agreement, the Escrow Agreement, the Warrants and the Convertible Subordinated Debentures have been duly executed and delivered by the Company and at the Closing shall constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. The Company has duly and validly authorized and reserved for issuance 5 shares of Common Stock sufficient in number for the conversion of the Convertible Subordinated Debentures and the exercise of the Warrants. The Company understands and acknowledges the potentially dilutive effect to the Common Stock of the issuance of the Conversion Shares and Warrant Shares. The Company further acknowledges that its obligation to issue Conversion Shares and Warrant Shares upon conversion of the Convertible Subordinated Debentures and Warrant Shares upon exercise of the Warrants in accordance with this Agreement and the Convertible Subordinated Debentures is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other stockholders of the Company and notwithstanding the commencement of any case under 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"). The Company shall not seek judicial relief from its obligations hereunder except pursuant to the Bankruptcy Code. In the event the Company is a debtor under the Bankruptcy Code, the Company hereby waives to the fullest extent permitted any rights to relief it may have under 11 U.S.C. Section 362 in respect of the conversion of the Convertible Subordinated Debentures and the exercise of the Warrants. The Company agrees, without cost or expense to the Investors, to take or consent to any and all action necessary to effectuate relief under 11 U.S.C. Section 362. See the disclosure schedule. (b) Section 3.2 Capitalization. The authorized capital stock of the Company consists of (i) 100,000,000 shares of Common Stock, $.01 par value, and (ii) 5,000,000 shares of Preferred Stock, $.01 par value. The Company's issued and outstanding shares of Common Stock and Preferred Stock is as set forth on the disclosure schedule. None of the Company's securities has been issued in violation of the preemptive rights of any security holder of the Company. The issue and sale of the Convertible Subordinated Debentures and the Warrants will not obligate the Company to issue shares of Common Stock or other securities to any person or entity other than the Investors and will not result in a right of any holder of Company's securities to receive additional shares of Common Stock or require the adjustment of the exercise or conversion or reset price under securities of the Company owned by them. See the disclosure schedule. (c) Section 3.3 Concerning the Convertible Subordinated Debentures. The Convertible Subordinated Debentures have been duly authorized and, when issued and paid for in accordance with this Agreement, will constitute the valid and binding obligations of the Company enforceable in accordance with their terms, subject to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditor rights generally. (d) Section 3.4 Concerning the Conversion Shares and Warrant Shares. The Conversion Shares and the Warrant Shares have been duly authorized and, when issued and paid for in accordance with this Agreement, will be duly and validly issued, fully paid, non-assessable and free from liens, and rights of first refusal and will not subject the holder thereof to personal liability by reason of being such holder. There are no preemptive or similar rights of any security holder of the Company or any other person to acquire any securities of the Company. The Common Stock currently is listed for trading on the Nasdaq National Market System ("Nasdaq") and, the Company and the Common Stock meet the currently applicable criteria for continued listing and trading on Nasdaq; (ii) the Company has not been notified in the last two years by Nasdaq of any failure or potential failure to meet the criteria for continued listing and trading on Nasdaq; (iii) no suspension of trading in the Common Stock is in effect; (iv) the Company knows 6 of no reason that the Common Stock will not be eligible for listing on Nasdaq; and (v) the Company has delivered to Nasdaq all required notices. (e) Section 3.5 Purchase Agreement. This Agreement has been duly and validly authorized by the Company and, when delivered on behalf of the Company, will be, valid and binding obligation of the Company enforceable in accordance with their respective terms, subject to general principles of equity and to bankruptcy, insolvency, moratorium and other similar laws affecting the enforcement of creditors' rights generally. (f) Section 3.6 Non-Contravention. The execution, delivery and performance of this Agreement and the Convertible Subordinated Debentures by the Company (including the issuance by the Company of the Conversion Shares and Warrant Shares as contemplated by this Agreement), do not and will not (i) conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under, the Articles of Incorporation or Bylaws of the Company, (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument or other understanding to which the Company or any of its subsidiaries is a party or by which any material property or asset of the Company or any of its subsidiaries is bound or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or any of its subsidiaries is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company is bound or affected; except in the case of each of clauses (ii) and (iii), as would not, individually or in the aggregate, have or result in a material adverse effect on the results of operations, assets, prospects, or condition (financial or otherwise) of the Company, or adversely impair the Company's ability to perform fully on a timely basis its obligations under this Agreement or any Convertible Subordinated Debenture. See the disclosure schedule. (g) Section 3.7 Approvals. No authorization, approval or consent of any court, governmental body, regulatory agency or Nasdaq is required to be obtained by the Company or any of its subsidiaries for the issuance and sale of the Debentures, the Warrants or the Conversion Shares or Warrant Shares issuable upon exercise thereof, as contemplated by this Agreement. See the disclosure schedule. (h) Section 3.8 Information Provided. The Company has made available to the Investors copies of all periodic reports, statements and other documents that the Company has filed with the SEC under the Securities Exchange Act of 1934 (the "1934 Act") since January 1, 2000 (collectively, the "Disclosure Documents"), each in the form (including exhibits and any amendments thereto) required to be filed with the SEC. All information provided by or on behalf of the Company to the Investors in connection with the transactions contemplated by the Agreement, including, without limitation, the Disclosure Documents, is true and correct in all material respects and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading. The Company has publicly disclosed all material adverse information concerning the Company. 7 (i) Section 3.10 Absence of Certain Changes. Since the date of the financial statements contained in the Company's most recently filed Form 10-Q or 10-K, there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or other), results of operations or prospects of the Company, and the Company has no undisclosed material (individually or in the aggregate) liabilities, debts or obligations, whether accrued, absolute, contingent or otherwise, and whether due or to become due. (j) Section 3.11 Absence of Certain Proceeding. There is no action, suit or proceeding, before or by any court, public board or body or governmental agency pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries and, to the knowledge of the Company, there is no inquiry or investigation before or by any court, public board or body or governmental agency pending or threatened against the Company or any of its subsidiaries, in any such case wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect. (k) Section 3.12 SEC Filings. The Company has timely filed all required forms, reports and other documents with the SEC. All such forms, reports and other documents filed since January 1, 2000, complied, when filed, in all material respects, with all applicable requirements of the 1933 Act and the 1934 Act. See disclosure schedule. (l) Section 3.13 Financial Statements; Contracts. The consolidated financial statements of the Company included in the Disclosure Documents were prepared in accordance with U.S. generally accepted accounting principles, consistently applied, and the rules and regulations of the SEC during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, (ii) in the case of unaudited interim statements, to the extent they do not include footnotes or are condensed or summary statements, and present fairly the consolidated financial position of the Company and its subsidiaries as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal, immaterial year-end audit adjustments). The Disclosure Documents contain as exhibits all material contracts that were required to be filed as exhibits thereto by applicable SEC regulations (each a "Contract"). Neither the Company nor, to the best knowledge of the Company, any of the parties thereto, is in breach or violation of any Contract, which breach or violations relates to indebtedness for borrowed money or would have a Material Adverse Effect. To the Company's knowledge, no event, occurrence or condition exists which, with the lapse of time, the giving of notice, or both, or the happening of any further event or condition, would become a breach or default by the Company under any Contract which breach or default would have a Material Adverse Effect. See disclosure schedule. (m) Section 3.14 Intellectual Property. The Company owns or possesses adequate and enforceable rights to use all material patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, copyright applications, licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) and other similar rights and proprietary knowledge (collectively, "Intangibles") used or necessary for the conduct of its business as now being conducted and described in the Disclosure Documents. The Company, to the best of its 8 knowledge, does not infringe any right of any other person with respect to any Intangibles nor is there any claim of infringement made by a third party against or involving the Company which infringement or claim, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. (n) Section 3.15 Certain Practices. Neither the Company or any subsidiary, nor to the best knowledge of the Company, any director, officer and, agent, employee or other person acting on behalf of the Company or any of its subsidiaries has, in the course of his or her actions for, or on behalf of, the Company or any subsidiary, used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. Without limiting the generality of the foregoing, the Company and its subsidiaries have not directly or indirectly made or agreed to make (whether or not said payment is lawful) any payment to obtain, or with respect to, sales other than usual and regular compensation to its or their employees and sales representatives with respect to such sales. (o) Section 3.16 Certain Fees. No fees or commissions will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other person with respect to the transactions contemplated by this Agreement. The Investors shall have no obligation with respect to any fees incurred by the Company or any other person (other than an Investor, if an Investor has agreed in writing to pay such fees) or with respect to any claims made by or on behalf of other persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless each Investor, its employees, officers, directors, agents, and partners, and its affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect of any such claimed or existing fees incurred by the Company or any other person (other than such Investor, if such Investor has agreed in writing to pay such fees), as such fees and expenses are incurred. See disclosure schedule. (p) Section 3.17 Disclosure. The Company confirms that neither it nor any other person acting on its behalf has provided any Investor or its agents or counsel with any information that constitutes or might constitute material non-public information. (q) Section 3.18 Insurance. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company is engaged. The Company does not have any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost. (r) Section 3.19 Transactions With Affiliates and Employees. None of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the 9 Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. See disclosure schedule. (s) Section 3.20 Internal Accounting Controls. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorizations, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (t) Section 3.21 Solvency. Based on the financial condition of the Company as of the date hereof: (i) the Company's fair saleable value of its assets exceeds the amount that will be required to be paid on or in respect of the Company's existing debts and other liabilities (including known contingent liabilities) as they mature; (ii) the Company's assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements and capital availability thereof; and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its debt when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). .2. Section 3.22 Exemption from Registration; Valid Issuances. Subject to the accuracy of the Investors' representations in Article II, the sale to the Investors of the Convertible Subordinated Debentures and the Conversion Shares, and the Warrants and Warrant Shares will not require registration under the Securities Act and/or any applicable state securities law. When validly converted or exercised in accordance with the terms of the Convertible Subordinated Debentures and the Warrants, the Conversion Shares and Warrant Shares will be duly and validly issued, fully paid, and non-assessable. Neither the sales of the Convertible Subordinated Debentures, the Conversion Shares, the Warrants and Warrant Shares pursuant to, nor the Company's performance of its obligations under, this Agreement, the Registration Rights Agreement, the Escrow Agreement or the Convertible Debentures and the Warrants will (a) result in the creation or imposition by the Company of any liens, charges, claims or other encumbrances upon the Convertible Subordinated Debentures, the Warrants or the Conversion Shares and Warrant Shares or, except as contemplated herein, any of the assets of the Company, or (b) entitle the holders of Outstanding Capital Shares to preemptive or other rights to subscribe for or acquire the Capital Shares or other securities of the Company. The Convertible Subordinated Debentures, the Warrants and the Conversion Shares and Warrant Shares, shall not 10 subject the Investors to personal liability to the Company or its creditors by reason of the possession thereof. .3. Section 3.23 No General Solicitation or Advertising in Regard to this Transaction. Neither the Company nor any of its affiliates nor, to the knowledge of the Company, any person acting on its or their behalf (a) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to the sale of the Convertible Subordinated Debentures or the Warrants, or (b) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Convertible Subordinated Debentures or the Conversion Shares and the Warrants and Warrant Shares, under the Securities Act. .4. Section 3.24 No Integrated Offering. Other than pursuant to an effective registration statement under the Securities Act, or pursuant to the issuance or exercise of employee stock options or in connection with certain acquisitions, or pursuant to its discussion with the Investors in connection with the transactions contemplated hereby, the Company has not issued, offered or sold the Convertible Subordinated Debentures, the Warrants or any shares of Common Stock (including for this purpose any securities of the same or a similar class as the Convertible Subordinated Debentures, Warrants or Common Stock, or any securities convertible into or exchangeable or exercisable for the Convertible Subordinated Debentures or Common Stock or any such other securities) within the six-month period next preceding the date hereof, and the Company shall not permit any of its directors, officers or affiliates directly or indirectly to take, any action (including, without limitation, any offering or sale to any Person of the Convertible Subordinated Debentures or shares of Common Stock), so as to make unavailable the exemption from Securities Act registration being relied upon by the Company for the offer and sale to Investors of the Convertible Subordinated Debentures (and the Conversion Shares) and the Warrants (and the Warrant Shares) as contemplated by this Agreement. See disclosure schedule. .5. Section 3.25 Tax Matters. (a) The Company and each subsidiary has filed all Tax Returns, which it is required to file under applicable laws; all such Tax Returns are true and accurate and have been prepared in compliance with all applicable laws except as could not reasonably be expected to have a Material Adverse Effect; the Company has paid all Taxes due and owing by it or any subsidiary (whether or not such Taxes are required to be shown on a Tax Return) and have withheld and paid over to the appropriate taxing authorities all Taxes which it is required to withhold from amounts paid or owing to any employee, stockholder, creditor or other third parties; and since December 31, 2000, the charges, accruals and reserves for Taxes with respect to the Company (including any provisions for deferred income taxes) reflected on the books of the Company are adequate to cover any Tax liabilities of the Company if its current tax year were treated as ending on the date hereof. (b) No material claim has been made by a taxing authority in a jurisdiction where the Company does not file tax returns that the Company or any subsidiary is or may be 11 subject to taxation by that jurisdiction. There are, to the Company's knowledge, no material foreign, federal, state or local tax audits or administrative or judicial proceedings pending or being conducted with respect to the Company or any subsidiary; no information related to Tax matters has been requested by any foreign, federal, state or local taxing authority; and, except as disclosed above, no written notice indicating an intent to open an audit or other review has been received by the Company or any subsidiary from any foreign, federal, state or local taxing authority. There are no material unresolved questions or claims concerning the Company's Tax liability. The Company (i) has not executed or entered into a closing agreement pursuant to Section 7121 of the Internal Revenue Code or any predecessor provision thereof or any similar provision of state, local or foreign law; or (ii) has not agreed to or is required to make any adjustments pursuant to Section 481 (a) of the Internal Revenue Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by the Company or any of its subsidiaries or has any knowledge that the IRS has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of the Company. The Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Internal Revenue Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Internal Revenue Code. (c) The Company has not made an election under Section 341(f) of the Internal Revenue Code. The Company is not liable for the Taxes of another person that is not a subsidiary of the Company under (i) Treas. Reg. Section 1.1502-6 (or comparable provisions of state, local or foreign law), (ii) as a transferee or successor, (iii) by contract or indemnity or (iv) otherwise. The Company is not a party to any tax sharing agreement. The Company has not made any payments, is not obligated to make payments nor is it a party to an agreement that could obligate it to make any payments that would not be deductible under Section 280G of the Internal Revenue Code. (d) For purposes of this Section 3.25: "IRS" means the United States Internal Revenue Service. "Tax" or "Taxes" means federal, state, county, local, foreign, or other income, gross receipts, ad valorem, franchise, profits, sales or use, transfer, registration, excise, utility, environmental, communications, real or personal property, capital stock, license, payroll, wage or other withholding, employment, social security, severance, stamp, occupation, alternative or add-on minimum, estimated and other taxes of any kind whatsoever (including, without limitation, deficiencies, penalties, additions to tax, and interest attributable thereto) whether disputed or not. "Tax Return" means any return, information report or filing with respect to Taxes, including any schedules attached thereto and including any amendment thereof. 12 .6. Section 3.26 Property. Neither the Company nor any of its subsidiaries owns any real property. Each of the Company and its subsidiaries has good and marketable title to all personal property owned by it, free and clear of all liens, encumbrances and defects except such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company; and to the Company's knowledge any real property and buildings held under lease by the Company as tenant are held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and intended to be made of such property and buildings by the Company. The Company's present facilities are adequate for the Company's reasonably foreseeable needs. See disclosure schedule. ARTICLE IV COVENANTS OF THE INVESTORS Each Investor, severally and not jointly, covenants with the Company that: .1. Compliance with Law. The Investor's trading activities with respect to the Conversion Shares and Warrant Shares will be in compliance with all applicable state and federal securities laws, rules and regulations and rules and regulations of the Principal Market on which the Company's Common Stock is listed. Without limiting the generality of the foregoing, the Investor agrees that it will comply with the description of the plan of distribution in the Registration Statement. Section 4.2. No Short Position. So long as the Investor holds any Convertible Subordinated Debentures, such Investor and its affiliates shall not engage in net short sales of the Company's securities. To the extent that the foregoing sentence permits short sales, then such transactions may only be effected in accordance with Rule 10a-1 under the 1934 Act (assuming that the exclusions in subparagraph (e) of Rule 10a-1 are inapplicable), and in any case such transactions would not create any daily low sales prices for the Common Stock. Section 4.3. Regulation M. To the extent applicable to the Investors, each Investor agrees to comply with provisions of Regulation M adopted by the SEC. Section 4.4. Transfers of the Convertible Subordinated Debentures and Warrants. The Investors will not sell, assign or otherwise transfer any of the Convertible Subordinated Debentures or Warrants to any person who is not an "accredited investor" (as defined in Rule 501 of Regulation D) nor to any person who is a broker-dealer registered with the SEC or a member of the National Association of Securities Dealers, Inc. 13 ARTICLE V COVENANTS OF THE COMPANY .1. Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof. .2. Reservation of Common Stock. On any date hereafter, in the event the number of Shares reserved, as to any Investor, is less than 200% of the Conversion Shares necessary to convert all of such Investor's Convertible Subordinated Debenture, based on the then applicable conversion price, and Warrant Shares to exercise all of such Investor's Warrant (the "Trigger Amount"), then the Company shall have seven (7) calendar days from such date to increase the number of shares reserved as to such Investor above the Trigger Amount, unless to do so the Company must authorize additional shares, in which case the Company shall have one hundred twenty (120) calendar days from such date to increase the number of shares authorized and reserved as to such Investor above the Trigger Amount. .3. Listing of Common Stock. The Company hereby agrees to maintain the listing of the Common Stock on a Principal Market, and as soon as reasonably practicable following the Closing to list the Conversion Shares and the Warrant Shares on the Principal Market. The Company further agrees, if the Company applies to have the Common Stock traded on any other Principal Market, it will include in such application the Conversion Shares and the Warrant Shares, and will take such other action as is necessary or desirable to cause the Conversion Shares and Warrant Shares to be listed on such other Principal Market as promptly as possible. The Company will use its best efforts to continue the listing and trading of its Common Stock on a Principal Market and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Principal Market and shall provide Investors with copies of any correspondence to or from such Principal Market which questions or threatens delisting of the Common Stock, within five (5) Trading Days of the Company's receipt thereof, until the Investors have disposed of all of their Registrable Securities. .4. Exchange Act Registration. The Company will cause its Common Stock to continue to be registered under Section 12(b) or (g) of the Exchange Act, will use its best efforts to comply in all respects with its reporting and filing obligations under the Exchange Act, and will not take any action or file any document (whether or not permitted by the Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Act until the Investors have disposed of all of their Registrable Securities. .5. Legends. The certificates evidencing the Securities shall be free of legends, except as set forth in Article VIII. .6. Corporate Existence; Conflicting Agreements. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. The Company shall not enter into 14 any agreement, the terms of which agreement would restrict or impair the right or ability of the Company to perform any of its obligations under this Agreement or any of the other agreements attached as exhibits hereto. .7. Issuance of Convertible Subordinated Debentures and Warrants. The sale of the Convertible Subordinated Debentures, the Warrants and the issuance of the Conversion Shares upon conversion and Warrant Shares upon the exercise of the Warrants of the Convertible Subordinated Debentures shall be made in accordance with the provisions and requirements of Section 4(2), 4(6) or Regulation D and any applicable state securities law. The Company shall make any necessary SEC and "blue sky" filings as may be required to be made by the Company in connection with the sale of the Securities to the Investors, and shall provide a copy thereof to the Investors promptly after such filing. .8. Pro-Rata Redemption. Upon any redemption of any of the Convertible Subordinated Debentures, the Company shall offer such redemption pro-rata among all Investors in proportion to their respective current holdings of such securities pursuant to this Agreement. Section 5.9 Future Financing. The Company agrees that it will not enter into any financing transactions until six months following the Closing Date. The foregoing shall not prevent or limit the Company from granting equity incentive awards pursuant to equity incentive and stock option plans approved by the Company's Board of Directors or selling securities purchased pursuant to the Company's Employee Stock Purchase Plan or engaging in any sale of securities (i) pursuant to the exercise of options granted or to be granted under an employee benefit plan which plan has been approved by the Company's Board of Directors, (ii) pursuant to any compensatory plan for an employee or consultant, (iii) in connection with a strategic partnership or other business transaction, the principal purpose of which is not simply to raise money, (iv) in a registered public offering by the Company which is underwritten by one or more established investment banks (not including an equity line type financing), or (v) with the prior written approval of a majority in interest of the Investors, which will not be unreasonably withheld. ARTICLE VI SURVIVAL; INDEMNIFICATION .1. Survival. The representations, warranties and covenants made by each of the Company and each Investor in this Agreement, the annexes, schedules and exhibits hereto and in each instrument, agreement and certificate entered into and delivered by them pursuant to this Agreement, shall survive the Closing and the consummation of the transactions contemplated hereby. In the event of a breach or violation of any of such representations, warranties or covenants, the party to whom such representations, warranties or covenants have been made shall have all rights and remedies for such breach or violation available to it under the provisions of this Agreement, irrespective of any investigation made by or on behalf of such party on or prior 15 to the Closing Date, unless such party had actual knowledge of such breach or violation prior to such Closing Date. .2. Indemnity. (a) The Company hereby agrees to indemnify and hold harmless the Investors, their respective Affiliates and their respective officers, directors, partners and members (collectively, the "Investor Indemnitees"), from and against any and all Damages, and agrees to reimburse the Investor Indemnitees for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Investor Indemnitees and to the extent arising out of or in connection with: (i) any material misrepresentation, omission of fact or breach of any of the Company's representations or warranties contained in this Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement; or (ii) any failure by the Company to perform in any material respect any of its material covenants, agreements, undertakings or obligations set forth in this Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Company pursuant to this Agreement; or (iii) any action instituted against the Investors, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of an Investor, with respect to any of the transactions contemplated by this Agreement. (b) Each Investor, severally and not jointly, hereby agrees to indemnify and hold harmless the Company, its Affiliates and their respective officers, directors, partners and members (collectively, the "Company Indemnitees"), from and against any and all Damages, and agrees to reimburse the Company Indemnitees for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of legal counsel), in each case promptly as incurred by the Company Indemnitees and to the extent arising out of or in connection with any misrepresentation, omission of fact, or breach of any of the Investor's representations or warranties contained in this Agreement, the annexes, schedules or exhibits hereto or any instrument, agreement or certificate entered into or delivered by the Investor pursuant to this Agreement. Notwithstanding anything to the contrary herein, an Investor shall be liable under this Section 6.2(b) for only that amount as does not exceed the net profits to such Investor as a result of the sale of Registrable Securities pursuant to the Registration Statement. 16 .3. Notice. Promptly after receipt by any party hereto seeking indemnification pursuant to Section 6.2 (an "Indemnified Party") of written notice of any investigation, claim, proceeding or other action in respect of which indemnification is being sought (each, a "Claim"), the Indemnified Party promptly shall notify the party from whom indemnification pursuant to Section 6.2 is being sought (the "Indemnifying Party") of the commencement thereof; but the omission to so notify the Indemnifying Party shall not relieve it from any liability that it otherwise may have to the Indemnified Party, except to the extent that the Indemnifying Party is actually prejudiced by such omission or delay. In connection with any Claim as to which both the Indemnifying Party and the Indemnified Party are parties, the Indemnifying Party shall be entitled to assume the defense thereof. Notwithstanding the assumption of the defense of any Claim by the Indemnifying Party, the Indemnified Party shall have the right to employ separate legal counsel and to participate in the defense of such Claim, and the Indemnifying Party shall bear the reasonable fees, out-of-pocket costs and expenses of such separate legal counsel to the Indemnified Party if (and only if): (a) the Indemnifying Party shall have agreed in writing after the date hereof to pay such fees, out-of-pocket costs and expenses, (b) the Indemnified Party reasonably shall have concluded that representation of the Indemnified Party and the Indemnifying Party by the same legal counsel would not be appropriate due to actual or, as reasonably determined by legal counsel to the Indemnified Party, potentially differing interests between such parties in the conduct of the defense of such Claim, or if there may be legal defenses available to the Indemnified Party that are in addition to or disparate from those available to the Indemnifying Party, or (c) the Indemnifying Party shall have failed to employ legal counsel reasonably satisfactory to the Indemnified Party within a reasonable period of time after notice of the commencement of such Claim. If the Indemnified Party employs separate legal counsel in circumstances other than as described in clauses (a), (b) or (c) above, the fees, costs and expenses of such legal counsel shall be borne exclusively by the Indemnified Party. Except as provided above, the Indemnifying Party shall not, in connection with any Claim in the same jurisdiction, be liable for the fees and expenses of more than one firm of legal counsel for the Indemnified Party (together with appropriate local counsel). The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not unreasonably be withheld), settle or compromise any Claim or consent to the entry of any judgment that does not include an unconditional release of the Indemnified Party from all liabilities with respect to such Claim or judgment. All fees and expenses of the Indemnified Party (including reasonable costs of defense and investigation in a manner not inconsistent with this Section and all reasonable attorneys' fees and expenses) shall be paid to the Indemnified Party, as incurred, within ten (10) Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an indemnified party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). .4. Direct Claims. In the event one party hereunder should have a claim for indemnification that does not involve a claim or demand being asserted by a third party, the Indemnified Party promptly shall deliver notice of such claim to the Indemnifying Party. If the Indemnifying Party 17 disputes the claim, such dispute shall be resolved by mutual agreement of the Indemnified Party and the Indemnifying Party or in accordance with Article IX. Judgment upon any award rendered by any arbitrators may be entered in any court having competent jurisdiction thereof. ARTICLE VII DUE DILIGENCE REVIEW .1. Due Diligence Review. Subject to Section 7.2, the Company shall make available for inspection and review by the Investors, advisors to and representatives of the Investors (who may or may not be affiliated with the Investors and who are reasonably acceptable to the Company), any underwriter participating in any disposition of the Registrable Securities on behalf of the Investors pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, Nasdaq or other filing, all SEC Documents and other proposed filings with the SEC, and all other publicly available corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such publicly available information reasonably requested by the Investors or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investors and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. .2. Non-Disclosure of Non-Public Information. (a) From and after the filing of the Registration Statement, the Company shall not disclose material non-public information to the Investors, advisors to or representatives of the Investors unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investors, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. Other than disclosure of any comment letters received from the SEC staff with respect to the Registration Statement, the Company may, as a condition to disclosing any non-public information hereunder, require the Investors' advisors and representatives to enter into a confidentiality agreement in form and content reasonably satisfactory to the Company and the Investors. (b) The Company will promptly notify the advisors and representatives of the Investors and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting material non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons 18 or entities), which, if not disclosed in the prospectus included in the Registration Statement, would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 7.2 shall be construed to mean that such persons or entities other than the Investors (without the written consent of the Investors prior to disclosure of such information as set forth in Section 7.2(a)) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE VIII LEGENDS; TRANSFER AGENT INSTRUCTIONS .1. Legends. Unless otherwise provided below, each certificate representing Registrable Securities will bear the following legend or equivalent (the "Legend"): THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH REGISTRATION. .2. Removal of Legends. During any periods following the Effective Date that the Registration Statement is effective, or otherwise in accordance with the Registration Rights Agreement, the shares of Common Stock registered for resale shall not bear any restrictive legend. At any time following the Effective Date, the transfer agent instructions described in Section 8.3 below shall require the transfer agent to deliver to the appropriate Investor certificates representing Common Stock not bearing any restrictive legend without requiring further advice or instruction or additional documentation from the Company or its counsel or the Investor or its counsel or any 19 other party. In the event the Company fails to deliver or cause its transfer agent to deliver such shares free of any legends, the Investor shall be entitled to, in addition to any other rights hereunder or in the Convertible Subordinated Debentures, the liquidated damages described in Section 4(c)(iii) of the Convertible Subordinated Debentures. .3. Transfer Agent Instructions. After the Effective Date, in lieu of delivering physical certificates representing the Common Stock issuable upon the conversion of, or in lieu of interest payments on, the Convertible Subordinated Debentures, the Company shall cause its transfer agent to electronically transmit the Conversion Shares by crediting the account of the Investor's prime broker with the Depository Trust Company ("DTC") Fast Automated Securities Transfer program through its Deposit Withdrawal Agent Commission ("DWAC") system no later than the applicable date of delivery, provided that the Investors have provided to the Company the appropriate information for DWAC issuances. .4. No Other Legend or Stock Transfer Restrictions. No legend other than the one specified in Section 8.1 has been or shall be placed on the share certificates representing the Registrable Securities regarding resale restrictions and no instructions or "stop transfer orders," "stock transfer restrictions," or other restrictions have been or shall be given to the Company's transfer agent with respect thereto other than as expressly set forth in this Article VIII. .5. Investors' Compliance. Nothing in this Article shall affect in any way each Investor's obligations to comply with all applicable securities laws upon resale of the Common Stock. .6. Rule 144. Subject to the applicable securities laws, the Company acknowledges and agrees that, for the purpose of calculating the holding period of the Shares under Rule 144, the Conversion Shares shall be deemed to have been acquired on the Closing Date. ARTICLE IX CHOICE OF LAW .1. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made in New York by persons domiciled in New York City and without regard to its principles of conflicts of laws. The Company and each of the Investors agree to submit themselves to the in personam jurisdiction of the state and federal courts situated within the Southern District of the State of New York with regard to any controversy arising out of or relating to this Agreement. Any party shall be entitled to obtain injunctive relief from a court in any case where such relief is available, and the prevailing party in such injunctive action shall be entitled to its reasonable attorneys' fees in connection therewith. The non-prevailing party to any dispute hereunder shall pay the expenses of the prevailing party, including reasonable attorneys' fees, in connection with any such dispute. 20 .2. Specific Enforcement. The Company acknowledges and agrees that irreparable damage would occur in the event that any of the provisions of this Agreement or any of the exhibits hereto were not performed in accordance with their specific terms or were otherwise breached, notwithstanding any reasons the Company may have to the contrary in the future, including claims of solvency or that the Investor is not put at risk absent performance by the Company. It is accordingly agreed that the Investors shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof or thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. The prevailing party in such injunctive action shall be entitled to its reasonable attorneys' fees in connection with any such specific performance. ARTICLE X ASSIGNMENT .1. Assignment. Neither this Agreement nor any rights of the Company hereunder may be assigned by the Company to any other person. The provisions of this Agreement shall inure to the benefit of, and be enforceable by, any permitted transferee of any of the Convertible Subordinated Debentures and Warrants purchased or acquired by any Investor hereunder with respect to the Convertible Subordinated Debentures and Warrants held by such person. ARTICLE XI NOTICES .1. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (a) hand delivered, (b) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (c) delivered by reputable air courier service with charges prepaid, or (d) transmitted by facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the first business day following the date of sending by reputable courier service, fully prepaid, addressed to such address, or (c) upon actual receipt of such mailing, if mailed. The addresses for such communications shall be: If to the Company: Cray Inc. 411 First Avenue South, Suite 600 21 Seattle, WA 98104 Tel.: (206) 701-2000 Fax: (206) 701-2218 Attn.: Chief Financial Officer With copies to: L. John Stevenson, Esq. (which shall not constitute notice) Stoel Rives LLP One Union Square, 36th Floor 601 University Seattle, WA 98101 Tel: (206) 386-7603 Fax: (206) 386-7500 if to the Investors: As set forth on the signature pages hereto with a copy to: Robert Charron, Esq. (which shall not constitute notice) Feldman & Associates Counselors at Law, P.C. 36 West 44th Street New York, New York 10036 Tel.: (212) 869-7000 Fax: (212) 997-4242 Either party hereto may from time to time change its address or facsimile number for notices under this Section 11.1 by giving written notice of such changed address or facsimile number to the other party hereto as provided in this Section 11.1. ARTICLE XII MISCELLANEOUS .1. Counterparts/ Facsimile/ Amendments. This Agreement may be executed in multiple counterparts, each of which may be executed by less than all of the parties and shall be deemed to be an original instrument which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one and the same instrument. Except for the Convertible Subordinated Debentures or Warrants or as otherwise stated herein, in lieu of the original documents, a facsimile transmission or copy of the original documents shall be as effective and enforceable as the original. This Agreement may be amended only by a writing executed by all parties. .2. Entire Agreement. Except for the instructions to Transfer Agent executed by the Company prior to the date hereof, this Agreement, the agreements attached as Exhibits hereto, which include, but are not limited to the Convertible Subordinated Debentures, and Warrants the Escrow Agreement, and the Registration Rights Agreement, set forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and 22 contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. The terms and conditions of all Exhibits to this Agreement are incorporated herein by this reference and shall constitute part of this Agreement as is fully set forth herein. .3. Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party. .4. Headings. The headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. .5. Number and Gender. There may be one or more Investors parties to this Agreement, which Investors may be natural persons or entities. All references to plural Investors shall apply equally to a single Investor if there is only one Investor, and all references to an Investor as "it" shall apply equally to a natural person. .6. Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg Financial, L.P. or any successor thereto. The written mutual consent of the Investors and the Company shall be required to employ any other reporting entity. .7. Replacement of Certificates. Upon (a) receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of a certificate representing the Convertible Subordinated Debentures or any Conversion Shares or Warrants or any Warrant Shares and (b) in the case of any such loss, theft or destruction of such certificate, upon delivery of an indemnity agreement or security reasonably satisfactory in form to the Company or as may be required by the Company's Transfer Agent or (c) in the case of any such mutilation, on surrender and cancellation of such certificate, the Company at its expense will execute and deliver, in lieu thereof, a new certificate of like tenor. .8. Fees and Expenses. Each of the Company and the Investors agrees to pay its own expenses incident to the performance of its obligations hereunder, except that the Company shall pay the fees, expenses and disbursements of the Investors as set forth in the Escrow Agreement. .9. Finder's and Broker's Fees. Each of the parties hereto represents that it has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party except as set forth in the Escrow Agreement. The Company on the one hand, and the Investors, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any person claiming brokerage commissions or finder's fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby. 23 .10. Publicity. The Company agrees that it will not issue any press release or other public announcement, except as required by law, of the transactions contemplated by this Agreement without the prior consent of the Investors, which shall not be unreasonably withheld nor delayed by more than two (2) Trading Days from their receipt of such proposed release. No release shall name the Investors or any of their respective affiliates, representatives, members, agents, associates, employees, consultants, companies, subsidiaries, businesses and/or entities or agents without their express consent. ARTICLE XIII CERTAIN DEFINITIONS .1. "Capital Shares" shall mean the Common Stock and any shares of any other class of common stock whether now or hereafter authorized, having the right to participate in the distribution of earnings and assets of the Company. .2. "Capital Shares Equivalents" shall mean any securities, rights, or obligations that are convertible into or exchangeable for or give any right to subscribe for any Capital Shares of the Company or any warrants, options or other rights to subscribe for or purchase Capital Shares or any such convertible or exchangeable securities. .3. "Closing" shall mean the closing of the purchase and sale of the Convertible Subordinated Debentures and Warrants pursuant to Section 1.1. .4. "Closing Date" shall mean the date on which all conditions to the Closing has been satisfied (as defined in Section 1.1(b) hereto) and the Closing shall have occurred. .5. "Closing Price" shall mean on any particular date (a) the closing sales price per share of Common Stock on such date on the Principal Market on which the shares of Common Stock are then listed or quoted, or if there is no such price on such date, then the closing sales price on the Principal Market on the date nearest preceding such date, or (b) if the shares of Common Stock are not then listed or quoted on the Principal Market, the closing sales price for a share of Common Stock in the OTC Bulletin Board, as reported by the National Quotation Bureau Incorporated or similar organization or agency succeeding to its functions of reporting prices) at the close of business on such date, or (c) if the shares of Common Stock are not then reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the board of directors of the Company and the holders of a majority in interest of the principal amount of Debentures then outstanding, or (d) if the shares of Common Stock are not then publicly traded the fair market value of a share of Common Stock as determined by an appraiser selected in good faith by the board of directors of 24 the Company and the holders of a majority in interest of the principal amount of Debentures then outstanding. .6. "Common Stock" shall mean the Company's common stock, par value $.01 per share. .7. "Conversion Shares" shall mean the shares of Common Stock issuable upon conversion of the Convertible Subordinated Debentures and any shares issuable as interest upon the Convertible Subordinated Debentures. .8. "Convertible Subordinated Debenture(s)" shall mean the 5% Convertible Subordinated Debenture(s) issued hereunder and due 36 months from their date of issuance, in the form of Exhibit A hereto. .9. "Damages" shall mean any loss, claim, damage, judgment, penalty, deficiency, liability, costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements and reasonable costs and expenses of expert witnesses and investigation). .10. "Effective Date" shall mean the date on which the SEC first declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in the Registration Rights Agreement. .11. "Escrow Agent" shall have the meaning set forth in the Escrow Agreement. .12. "Escrow Agreement" shall mean the Escrow Agreement in substantially the form of Exhibit C hereto executed and delivered contemporaneously with this Agreement. .13. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. .14. "Legend" shall mean the legend set forth in Section 8.1. .15. "Material Adverse Effect" shall mean any effect on the business, operations, properties, stock price or financial condition of the Company that is material and adverse to the Company and its subsidiaries taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement, the Registration Rights Agreement, the Convertible Subordinated Debentures, the Warrants or the Escrow Agreement in any material respect. .16. "Maturity Date" shall mean the date on which the outstanding principal amount and any accrued but unpaid interest of the Convertible Subordinated Debentures are due and payable as set forth in the Convertible Subordinated Debenture. 25 .17. "Outstanding" when used with reference to shares of Common Stock or Capital Shares (collectively the "Shares"), shall mean, at any date as of which the number of such Shares is to be determined, all issued and outstanding Shares, and shall include all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that "Outstanding" shall not mean any such Shares then directly or indirectly owned or held by or for the account of the Company. .18. "Person" shall mean an individual, a corporation, a partnership, a limited liability company, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. .19. "Principal Market" shall initially mean the Nasdaq National Market and shall also include the American Stock Exchange, the New York Stock Exchange or the NASDAQ Small-Cap Market, whichever is at the time the principal trading exchange or market for the Common Stock, based upon share volume. .20. "Purchase Price" shall mean the face principal amount of the Convertible Subordinated Debentures. .21. "Registrable Securities" shall mean the Warrant Shares and 200% of the Conversion Shares until the earlier of the date that (i) the Registration Statement has been declared effective by the SEC, and all Conversion Shares and Warrant Shares have been disposed of pursuant to the Registration Statement, (ii) all Conversion Shares and Warrant Shares have been sold under circumstances under which all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") are met, (iii) all Conversion Shares and Warrant Shares have been otherwise transferred to holders who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iv) such time as, in the opinion of counsel to the Company, all Conversion Shares and Warrant Shares may be sold without any time, volume or manner limitations pursuant to Rule 144(k) (or any similar provision then in effect) under the Securities Act. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be deemed to be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Agreement or the Registration Rights Agreement. .22. "Registration Rights Agreement" shall mean the agreement regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investors, on the date hereof in the form annexed hereto as Exhibit B. .23. "Registration Statement" shall mean a registration statement on Form S-3 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale by the 26 Investors of the Registrable Securities to be registered thereunder in accordance with the provisions of this Agreement, the Registration Rights Agreement and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investors of the Registrable Securities under the Securities Act. .24. "Regulation D" shall have the meaning set forth in the recitals of this Agreement. .25. "SEC" shall mean the Securities and Exchange Commission. .26. "SEC Documents" shall mean the Company's latest Form 10-K or 10-K/A as of the time in question, all Forms 10-Q or 10-Q/A and 8-K filed thereafter, all registration statements filed as of the time in question, and the Proxy Statement for its latest fiscal year as of the time in question until such time as the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. .27. "Section 4(2)" and "Section 4(6)" shall have the meanings set forth in the recitals of this Agreement. .28. "Securities Act" shall have the meaning as set forth in the recitals of this Agreement. .29. "Shares" shall have the meaning set forth in the definition of "Outstanding" herein. .30. "Trading Day" shall mean any day during which the Principal Market shall be open for business. .31. "Warrants" shall mean the Warrants set forth in Section 1.2, substantially in the form of Exhibit E hereto, to be issued to the Investors pro-rata hereunder. .32. "Warrant Shares" shall mean all shares of Common Stock or other securities issued or issuable pursuant to exercise of the Warrants. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK.] 27 [SIGNATURE PAGE OF CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS PURCHASE AGREEMENT] IN WITNESS WHEREOF, the parties hereto have caused this Purchase Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first written above. CRAY INC. /s/ By: __________________________________ James E. Rottsolk, Chairman INVESTORS: Address for Notice: RIVERVIEW GROUP, LLC 666 5th Avenue 8th Floor /s/ New York, New York 10103 By:_____________________________________ Attn: Daniel Cardella Name: Terry Feeney Fax: (212) 841-6302 Title: Chief Administrative Officer $5,000,000 principal amount and 197,628 Warrant Shares. Address for Notice: OMICRON PARTNERS, LP c/o Omicron Capital L.P. By: Omicron Capital L.P., as subadvisor 153 E. 53rd Street By: Omicron Capital Inc., it general partner 48th Floor New York, New York 10022 /s/ Attn: Brian Daly By: ____________________________________ Fax: (212) 508-7028 Olivier Morali, President $2,000,000 principal amount and 79,052 Warrant Shares. Address for Notice: LATERMAN & CO. 5 East 59th Street New York, New York 10022 /s/ Attn: Bernard Laterman By: ____________________________________ Fax: (212) 593-4976 Bernard Laterman, Managing Partner $500,000 principal amount and 19,763 Warrant Shares. Address for Notice: FOREVERGREEN PARTNERS c/o Laterman & Co. 5 East 59th Street /s/ New York, New York 10022 By: ____________________________________ Attn: Bernard Laterman Bernard Laterman, Managing Partner Fax: (212) 593-4976 $500,000 principal amount and 19,763 Warrant Shares.
28 EX-4.2 4 v77507ex4-2.txt EXHIBIT 4.2 Exhibit 4.2 THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM SUCH REGISTRATION. No. ___ $_______________ CRAY INC. 5% CONVERTIBLE SUBORDINATED DEBENTURE DUE NOVEMBER 6, 2004 THIS DEBENTURE is one of a series of duly authorized and issued debentures of Cray Inc., a Washington corporation, having a principal place of business at 411 First Avenue South, Suite 600, Seattle, WA 98104 (the "Company"), designated as its 5% Convertible Subordinated Debentures, due November 6, 2004, in the aggregate principal amount of Eight Million Dollars ($8,000,000) (the "Debentures" and this debenture, this "Debenture") pursuant to the Convertible Subordinated Debentures and Warrants Purchase Agreement, as amended from time to time, originally dated November 6, 2001 among the Company, Riverview Group, LLC, Omicron Partners, LP, Laterman & Co. and Forevergreen Partners (the "Purchase Agreement"). CAPITALIZED TERMS NOT DEFINED IN SECTION 17 HEREIN SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN THE PURCHASE AGREEMENT. FOR VALUE RECEIVED, the Company promises to pay to [ ], or its registered assigns (the "Holder"), the principal sum of _____________ Dollars ($_________________), or such lesser amount reflecting the principal balance then-outstanding, on November 6, 2004 or such earlier date as the Debentures are required or permitted to be repaid as provided hereunder (the "Maturity Date") and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Debenture at the rate of 5% per annum, payable semi- annually, in cash or shares of Common Stock. On each conversion of this Debenture, the Company and the Holder shall agree in writing as to the unconverted principal amount then-outstanding following each such conversion. Subject to the terms and conditions herein, the decision whether to pay interest hereunder in registered shares of Common Stock or cash shall be at the discretion of the Company. Semi-annual interest payments shall be due and payable on April 30 and September 30 of each year, commencing with April 30, 2002. Not less than 10 Trading Days prior to each interest payment date, the Company shall provide the Holder with written notice of its election to pay interest hereunder either in cash or registered shares of Common Stock (the Company may indicate in such notice that the election contained in such notice shall continue for later periods until revised). Failure to timely provide such written notice shall be deemed an election by the Company to pay interest in cash. Payment in shares shall be based on the Alternate Conversion Price on the interest payment date. Interest shall be calculated on the basis of a 360-day year and shall accrue daily commencing on the Original Issue Date until payment in full of the principal sum, together with all accrued and unpaid interest and other amounts which may become due hereunder, has been made. Interest hereunder will be paid to the Person in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the "Debenture Register"). All overdue accrued and unpaid interest to be paid in cash hereunder shall entail a late fee at the rate of 18% per annum (or such lower maximum amount of interest permitted to be charged under applicable law) (the "Late Fee") (to accrue daily, from the date such interest is due hereunder through and including the date of payment), payable in cash. This Debenture is subject to the following additional provisions: Section 1. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange. Section 2. This Debenture has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and the legend set forth on the face of this Debenture. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary. Section 3. Events of Default. (a) "Event of Default", wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body): 2 (i) any default in the payment of the principal of, or semi-annual interest on, any Debentures, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise); or (ii) any of the material representations or warranties made by the Company herein, in the Purchase Agreement, the Registration Rights Agreement, or in any agreement or certificate heretofore or hereafter furnished by the Company in connection with the execution and delivery of this Debenture or the Purchase Agreement shall be false or misleading, in light of the circumstances when made, in any material respect at the time made; or (iii) the Company (a) fails to issue Conversion Shares to the Holder or to cause its Transfer Agent to issue Conversion Shares, or, if applicable, cash, upon proper exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Debenture, (b) fails to transfer or to cause its Transfer Agent to transfer any certificate for Conversion Shares issued to the Holder as and when required by this Debenture or the Registration Rights Agreement, and such transfer is otherwise lawful, or (c) fails to remove any restrictive legend or to cause its Transfer Agent to transfer any certificate or any Conversion Shares issued to the Holder as and when required by this Debenture, the Purchase Agreement or the Registration Rights Agreement and such legend removal is otherwise lawful, and any such failure described in sub-clauses (a), (b) or (c) shall continue uncured for 10 Trading Days; or (iv) the Company shall fail to perform or observe, in any material respect, any other covenant, term, provision, condition, agreement or obligation of the Company under the Purchase Agreement, the Registration Rights Agreement or this Debenture including the payments of interest (other than semi-annual interest payments), liquidated damages and Late Fees, provided the Holder has provided the Company notice and an opportunity to cure within 20 business days of any such event of default under this Section 3(a)(iv); or (v) any governmental agencies or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and such action shall not be dismissed within sixty (60) days thereafter; or (vi) if any judgment or other claim becomes a lien or encumbrance upon any material portion of the Company's assets; or (vii) the Registration Statement is not declared effective by the SEC 3 within 180 days from the Closing; or (viii) the Company or its subsidiary (solely for purposes of this sub-section, Cray Federal, Inc. shall be deemed the only subsidiary of the Company) shall commence, or there shall be commenced against any of them a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company or any of its respective subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any of its respective subsidiaries or there is commenced against the Company or any of its respective subsidiaries any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company or any of its respective subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any of its respective subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company or any of its subsidiaries makes a general assignment for the benefit of creditors; or the Company or any of its subsidiaries shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any of its subsidiaries shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any of its subsidiaries shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any of its subsidiaries for the purpose of effecting any of the foregoing; or (ix) the Common Stock shall be delisted from the Principal Market or suspended from trading on the Principal Market (other than a general suspension of trading of substantially all of the securities on the Principal Market) without resuming trading and/or being relisted or thereon or listed on another Principal Market or having such suspension lifted, in either case, for more than 5 consecutive Trading Days, or an aggregate of 8 Trading Days (which need not be consecutive Trading Days); or (x) the Company shall be a party to any Change of Control Transaction; or (xi) if the effectiveness of the Registration Statement lapses for any reason or the Holder shall not be permitted to resell Registrable Securities (as defined in the Registration Rights Agreement) under the Registration Statement, in either case, for more than 20 Trading Days, in the aggregate, during any 12 4 month period (excluding any Blackout Period under Section 2(h) of the Registration Rights Agreement). (b) During the time that any portion of this Debenture remains outstanding, if any Event of Default occurs and is continuing, unless such Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the Holder's sole discretion, the Holder may consider this Debenture immediately due and payable in cash, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and the Holder may immediately enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. The aggregate amount payable upon an Event of Default shall be equal to the Mandatory Redemption Amount Interest shall accrue on the redemption amount hereunder from the 7th calendar day after such amount is due (being the date of an Event of Default) through the date of redemption in full thereof at the rate of 18% per annum (or such lesser maximum amount that is permitted to be paid by applicable law), to accrue daily from the date such payment is due hereunder through and including the date of payment. All Debentures and Conversion Shares for which the full redemption price hereunder shall have been paid in accordance herewith shall promptly be surrendered to or as directed by the Company. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. Section 4. Conversion. (a) Conversion at Option of Holder. (i) At the option of the Holder, this Debenture shall be convertible into Conversion Shares, in whole or in part, at any time and from time to time, after the Original Issue Date (subject to the limitations on conversion set forth in Section 4(a)(ii) hereof). The number of Conversion Shares issuable hereunder shall be determined by dividing (1) the outstanding principal amount of this Debenture to be converted plus all accrued and unpaid interest on such Debenture by (2) $2.35 (the "Set Price"), provided that if the Company has not elected to pay the accrued and unpaid interest on such Debenture in shares of Common Stock, then the number of shares shall be determined by dividing the outstanding principal amount of this Debenture to be converted by the Set Price. 5 (ii) Notwithstanding anything to the contrary contained in Section 4(a)(i) above, at any time commencing 3 months after the Original Issue Date, every 3 months, the Holder shall have the cumulative right to elect to convert up to an outstanding principal amount of this Debenture equal to 25% of the original principal amount of this Debenture and any accrued but unpaid interest hereon (unless the Company elects to pay such accrued and unpaid interest in cash) at such time at a conversion price equal to 94% OF THE AVERAGE OF THE 7 LOWEST VWAPS DURING THE 20 TRADING DAYS IMMEDIATELY PRIOR TO THE CONVERSION DATE (the "Alternate Conversion Price") rather than at the Set Price. Accordingly, beginning on the 4th month after the Original Issue Date, the Holder shall have the right to convert up to 25% of the original principal amount of this debenture at the lower of the Set Price or the Alternate Conversion Price, beginning on the 7th month after the Original Issue Date, the Holder shall have the right to convert up to 50% of the original principal amount of this debenture at the lower of the Set Price or the Alternate Conversion Price, beginning on the 10th month after the Original Issue Date, the Holder shall have the right to convert up to 75% of the original principal amount of this debenture at the lower of the Set Price or the Alternate Conversion Price and beginning on the 13th month after the Original Issue Date, the Holder shall have the right to convert up to 100% of the original principal amount of this debenture at the lower of the Set Price or the Alternate Conversion Price until the Holder no longer holds any part of this Debenture. (iii) Notwithstanding anything to the contrary contained herein, if on any Conversion Date: (A) the Common Stock is not listed or quoted on a Principal Market; (B) the Company has failed to timely satisfy its conversion obligations hereunder with respect to Debentures submitted for conversion on such conversion date; or (C) the issuance of such shares of Common Stock would result in a violation of Sections 4(d)(ii). then, at the option of the Holder, the Company, in lieu of delivering Conversion Shares, shall deliver, within 3 Trading Days of each applicable Conversion Date, an amount in cash equal to the product of the number of Conversion Shares otherwise deliverable to the Holder in connection with such Conversion Date and the highest VWAP during the period commencing on the Conversion Date and ending on the Trading Day prior to the date such payment is made, provided that if the Holder elects the remedy provided in this sub-section and in lieu of another remedy with respect to such conversion (subject to timely 6 payment hereunder), it shall not be entitled to declare an Event of Default for the items set forth in Section 4(a)(iii)A-C. (b) Mandatory Conversion. If on the Maturity Date, there remains any principal amount due and payable under this Debenture then the Holder of this Debenture shall convert the then outstanding principal balance due hereunder for Conversion Shares at a conversion price equal to the average of the Closing Prices during the 15 Trading Days immediately prior to the Maturity Date (the "Mandatory Conversion"). Notwithstanding the foregoing, the Holders shall not convert that portion of this Debenture to the extent that such conversion would violate Section 4(d)(ii). To the extent that the Debenture is not converted pursuant to the Mandatory Conversion, the Company shall pay to the Holder the remaining principal amount plus any accrued and unpaid interest in cash on the Maturity Date. At least 5 Trading Days (but not more than 10 Trading Days) prior to the Mandatory Conversion Date, the Company shall provide written notice to the Holder of the Mandatory Conversion. Nothing herein shall preclude the Holder from converting this Debenture to the extent this Debenture remains unpaid and unconverted after the Mandatory Conversion Date. (c) Conversion Procedure. (i) CONVERSION NOTICES. The Holder shall effect conversions by surrendering, if applicable, this Debenture (but only if the Holder is converting the entire outstanding principal amount of this Debenture), together with the form of conversion notice attached hereto (a "Conversion Notice") to the Company. Each Conversion Notice shall specify the principal amount of this Debenture to be converted, the applicable conversion price and, if applicable, the basis for determining the Alternate Conversion Price, and the date on which such conversion is to be effected, which date may not be prior to the date such Conversion Notice is deemed to have been delivered hereunder (a "Conversion Date"). If the Holder is converting less than all of the principal amount represented by this Debenture, the Holder shall convert at least $100,000 in principal amount of this Debenture. If no Conversion Date is specified in a Conversion Notice, the Conversion Date shall be the date that such Conversion Notice is deemed delivered hereunder. Unless otherwise provided for by the terms hereunder, each Conversion Notice, once given, shall be irrevocable. If the Holder is converting less than all of the principal amount represented by this Debenture, it shall not be required to surrender this Debenture but may exercise its right to convert solely by the delivery of a Conversion Notice. If a conversion hereunder cannot be effected in full for any reason, the Company shall honor such conversion to the extent permissible hereunder. At anytime the Holder may elect, upon delivery of this Debenture to the Company, to receive a new Debenture for such principal amount as has not been converted. 7 (ii) DELIVERY OF CONVERSION SHARES. Not later than 3 Trading Days after any Conversion Date, the Company will deliver to the Holder, at an address in the United States supplied by the Holder, (A) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those required by the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of this Debenture (subject to the limitations set forth in Section 4(d) hereof), (B) if applicable, a new Debenture in a principal amount equal to the principal amount of Debentures not converted (if the Holder elects to surrender this Debenture and a principal amount remains outstanding after conversion), and (C) a bank wire or a bank or certified check in the amount of accrued and unpaid interest (if the Company has timely elected or is required to pay accrued interest in cash). The Company shall, upon request of the Holder, if available, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Conversion Notice such certificate or certificates are not delivered to or as directed by the applicable Holder by the 3rd Trading Day after a Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the principal amount of Debentures tendered for conversion. (iii) FAILURE TO DELIVER CONVERSION SHARES IN A TIMELY MANNER. If the Company fails for any reason to deliver to the Holder such certificate or certificates by the 3rd Trading Day after the Conversion Date in accordance with Section 4(c)(ii), including, (in the event that shares are to be delivered in certificated form) but not limited to, the obligation of the Company to deliver such shares without any restrictive legend, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, for each $5,000 of principal amount being converted, $50 per Trading Day (increasing to $100 per Trading Day after 3 Trading Days and increasing to $200 per Trading Day 6 Trading Days after such damages begin to accrue) after such third Trading Day until such certificates are delivered; provided, however, in the event the Holder elects to rescind a conversion notice, liquidated damages shall accrue only up to the date of such rescission notice but not thereafter with respect to such rescinded conversion. Nothing herein shall limit a Holder's right to pursue actual damages or declare an Event of Default pursuant to Section 3 herein for the Company's failure to deliver certificates representing shares of Common Stock upon conversion within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other 8 Section hereof or under applicable law. Further, if the Company shall not have delivered any cash due as payment of interest hereon by the third Trading Day after the Conversion Date, the Holder may, by notice to the Company, require the Company to issue shares of Common Stock pursuant to Section 4(a), except that for such purpose the conversion price applicable thereto shall be the lesser of (A) the lesser of the Set Price and the Alternate Conversion Price on the Conversion Date and, (B) the lesser of the Set Price and the Alternate Conversion Price on the date of the Holder's demand. Any such shares will be subject to the provision of this Section. (iv) BUY-IN. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder such certificate or certificates by the 3rd Trading Day after the Conversion Date in accordance with Section 4(c)(ii), and if after such 3rd Trading Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Conversion Shares which the Holder anticipated receiving upon such conversion (a "Buy-In"), then the Company shall pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder anticipated receiving from the conversion at issue multiplied by (2) the market price of the Common Stock at the time of the sale giving rise to such purchase obligation. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of this Debentures with respect to which the market price of the Conversion Shares on the date of conversion was a total of $10,000, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and the basis for determining such amount. Notwithstanding anything contained herein to the contrary, if a Holder requires the Company to make payment in respect of a Buy-In for the failure to timely deliver certificates hereunder and the Company timely pays in full such payment, the Company shall not be required to pay such Holder liquidated damages under Section 4(c)(iii) in respect of the certificates resulting in such Buy-In. (v) OBLIGATION TO HONOR CONVERSIONS. If at any time (A) the Company challenges, disputes or denies the right of the Holder to effect the conversion of this Debenture permitted under this Section 4 into Conversion Shares or, if applicable, cash, or otherwise dishonors or rejects any Notice of Conversion permitted under this Section 4 and properly delivered pursuant to Section 7 or (B) any Company stockholder who is not and has never been an Affiliate (as defined in Rule 405 under the Securities Act) of the Holder obtains a 9 judgment or any injunctive relief from any court or public or governmental authority which denies, enjoins, limits, modifies, delays or disputes the right of the Holder hereof to effect the conversion of this Debenture into Conversion Shares, then the Holder shall have the right, by written notice, to require the Company to promptly redeem this Debenture for cash at a redemption price equal to 120% of the outstanding principal amount hereof and all accrued and unpaid interest hereon. Under any of the circumstances set forth above, the Company shall indemnify and hold harmless the Holder and be responsible for the payment of all costs and expenses of the Holder, including its reasonable legal fees and expenses, as and when incurred in disputing any such action or pursuing its rights hereunder (in addition to any other rights of the Holder). In the event a Holder of this Debenture shall elect to convert any or all of the outstanding principal amount hereof, to the extent and in the manner permitted by this Debenture, the Company may not refuse conversion based on any claim that the Holder or any one associated or affiliated with the Holder has been engaged in any violation of law, or any agreement or for any other reason, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or part of this Debenture shall have been sought and obtained and the Company posts a surety bond for the benefit of the Holder in the amount of 120% of the principal amount of this Debenture outstanding which is subject to the injunction, which bond shall remain in effect until the completion of litigation of the dispute and the proceeds of which shall be payable to such Holder to the extent it obtains judgment. In the absence of an injunction precluding the same, the Company shall issue Conversion Shares or, if applicable, cash, upon a properly noticed conversion permitted hereunder. (d) Conversion Restrictions. (i) BENEFICIAL OWNERSHIP LIMITATION. Notwithstanding anything herein to the contrary, the Holder may not convert this Debenture or receive shares of Common Stock as payment of interest hereunder to the extent such conversion or receipt of such interest payments would result in the Holder, together with any affiliate thereof, beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act (as defined in Section 6) and the rules promulgated thereunder) in excess of 4.999% of the then issued and outstanding shares of Common Stock, including shares issuable upon conversion of, and payment of interest on, this Debenture or any other debenture of the Company held by such Holder after application of this Section. Since the Holder will not be obligated to report to the Company the number of shares of Common Stock it may hold at the time of a conversion hereunder, unless the conversion at issue would result in the issuance of shares of Common Stock in excess of 4.999% of the then outstanding shares of Common Stock without regard to any other shares which may be beneficially owned by the Holder or an affiliate thereof, the Holder shall have the authority and obligation to determine whether 10 the restriction contained in this Section will limit any particular conversion hereunder and to the extent that the Holder determines that the limitation contained in this Section applies, the determination of which portion of the principal amount of this Debenture is convertible shall be the responsibility and obligation of the Holder. If the Holder has delivered a Conversion Notice for a principal amount of this Debenture that, without regard to any other shares that the Holder or its affiliates may beneficially own, would result in the issuance in excess of the permitted amount hereunder, the Company shall notify the Holder of this fact and shall honor the conversion for the maximum principal amount permitted to be converted on such Conversion Date in accordance with this Section. If this Debenture was not surrendered on the Conversion Date, the Company shall provide the Holder written notice of the amount actually converted. If the Holder surrendered this Debenture on the Conversion Date, the Company shall, at the option of the Holder, either retain any principal amount tendered for conversion in excess of the permitted amount hereunder for future conversions or return such excess principal amount to the Holder. The provisions of this Section may be waived by a Holder (but only as to itself and not to any other Holder) upon not less than 61 days prior notice to the Company. Other Holders shall be unaffected by any such waiver. (ii) LIMITATION ON NUMBER OF SHARES ISSUABLE. Notwithstanding anything herein to the contrary, the Company shall not be required to issue to the Holder and any other holders of the Debentures in excess of 8,422,204 shares of Common Stock, in the aggregate, at a price below the market price of the Common Stock on the Closing Date, or such greater number of shares of Common Stock permitted pursuant to Nasdaq Rule 4350(i), as confirmed in writing by counsel to the Company, upon conversion of the Debentures (the "Maximum Aggregate Share Amount"), unless the Company first obtains shareholder approval permitting such issuances in accordance with Nasdaq rules. If the number of shares of Common Stock which would, notwithstanding the limitation set forth herein, be issuable and sold to the Holder equals or exceeds the Maximum Aggregate Share Amount, then, at the sole election of the Holder, in whole or in part, the Company shall either: (i) honor the conversion of this Debenture by the Holder at the lowest possible conversion price which would permit such conversion without violating Nasdaq Rule 4350(i), and/or (ii) redeem the portion of this Debenture submitted to the Company, the conversion of which would exceed the Maximum Aggregate Share Amount, in accordance with Section 5, except that the Company's obligation to make such redemption payments in clause (ii) shall be pro-rata in accordance with Alternate Conversion Price schedule in Section 4(a)(ii) such that, the Company shall be obligated hereunder to redeem up to 25% of the original principal amount of this Debenture, every 3 months, beginning on the 4th month after the Closing Date. By way of example, after the 13th month after the Closing Date, any such redemption 11 payments shall be for the full outstanding principal amount. The Holder shall be entitled to convert this Debenture up to its pro-rata portion of the Maximum Aggregate Share Amount based upon the initial Purchase Price paid for this Debenture. In the event the other holders of the Debentures have elected the second option pursuant to the penultimate preceding sentence, the Holder's pro-rata portion of such maximum amount shall be proportionally increased. (e) Anti-Dilution Provisions. (i) DIVIDENDS, STOCK SPLITS, ETC. If the Company, at any time while this Debenture is outstanding, (A) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock, (B) subdivide outstanding shares of Common Stock into a larger number of shares, (C) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D) issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Set Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (ii) RIGHTS, OPTIONS, WARRANTS, ETC. If the Company, at any time while this Debenture is outstanding, shall issue rights, options or warrants to all holders of Common Stock (and not to holders of the Debentures) entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Set Price (the "Lower Price"), then the Set Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at the Set Price. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights, options or warrants. However, upon the expiration of any such right, option or warrant to purchase shares of the Common Stock the issuance of which resulted in 12 an adjustment in the Set Price pursuant to this Section, if any such right, option or warrant shall expire and shall not have been exercised, the Set Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Set Price made pursuant to the provisions of this Section after the issuance of such rights or warrants) had the adjustment of the Set Price made upon the issuance of such rights, options or warrants been made on the basis of offering for subscription or purchase only that number of shares of the Common Stock actually purchased upon the exercise of such rights, options or warrants actually exercised. (iii) FUTURE ISSUANCES. If the Company or any subsidiary thereof, as applicable with respect to Capital Share Equivalents, at any time while this Debenture is outstanding, shall issue Capital Share Equivalents entitling any Person to acquire shares of Common Stock at a price per share less than the Set Price (if the holder of the Common Stock or Capital Share Equivalent so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights issued in connection with such issuance, be entitled to receive shares of Common Stock at a price less than the Set Price, such issuance shall be deemed to have occurred for less than the Set Price)(the "Lower Price"), then, the Set Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such Capital Share Equivalent plus the number of Capital Share Equivalents offered for subscription or purchase, and of which the numerator shall be the number of shares of the Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such Capital Share Equivalent plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at the Set Price, provided, that for purposes hereof, all shares of Common Stock that are issuable upon conversion, exercise or exchange of Capital Share Equivalents shall be deemed outstanding immediately after the issuance of such Capital Share Equivalents. Such adjustment shall be made whenever such shares of Common Stock or Capital Share Equivalents are issued. However, upon the expiration of any Capital Share Equivalents the issuance of which resulted in an adjustment in the Conversion Price pursuant to this Section, if any such Capital Share Equivalents shall expire and shall not have been exercised, the Set Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Set Price made pursuant to the provisions of this Section after the issuance of such Capital Share Equivalents) had the adjustment of the Set Price made upon the issuance of such Capital Share Equivalents been made on the basis of offering for subscription or purchase only that number of 13 shares of Common Stock actually purchased upon the exercise of such Capital Share Equivalents actually exercised. (iv) NO ADJUSTMENT. No adjustment to the Set Price pursuant to this Section will be made: (A) upon the exercise of any warrants, options, convertible securities or other rights issued and outstanding as of the original issuance date of this Debenture in accordance with the terms of such securities as of such date; (B) upon issuance, grant or exercise of shares, warrants, options or convertible securities to employees, officers, consultants or directors of the Company in accordance with plans approved by the Board of Directors; (C) upon the issuance of shares or other securities of the Company pursuant to an agreement or other written obligation entered into prior to the initial issuance of this Debenture; (D) upon the issuance of shares of Common Stock upon conversion of this or similar Debentures and exercise of Warrants being issued in connection with the issuance of this and similar Debentures; and (E) any securities issued in any firmly underwritten public offering. (v) RIGHTS OF SHAREHOLDERS, ETC. If the Company, at any time while this Debenture is outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security, then in each such case the Set Price at which this Debenture shall thereafter be convertible shall be determined by multiplying the Set Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Closing Price determined as of the record date mentioned above, and of which the numerator shall be such Closing Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. (f) Miscellaneous. (i) All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. No adjustments in the Set Price shall be required if such adjustment is less than $0.01, provided, however, that any adjustments which by reason of this Section are not required to be made shall be carried forward and taken into account in any subsequent adjustment. 14 (ii) Whenever the Set Price is adjusted pursuant to Section 4(e), the Company shall promptly mail to each Holder a notice setting forth the Set Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (iii) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of this Debenture and payment of interest on this Debenture, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder, not less than such number of shares of the Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 4) upon the conversion of the outstanding principal amount of this Debenture and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued, fully paid and nonassessable. (iv) Upon a conversion hereunder, the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Closing Price at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (v) The issuance of certificates for shares of the Common Stock on conversion of this Debenture shall be made without charge to the Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. Section 5. Redemption. (a) Optional Redemption by the Company. The Company shall have the right, 15 at any time after the Effective Date, upon 10 Trading Days' notice to the Holder (an "Optional Redemption Notice" and the date such notice is received by the Holder, the "Notice Date"), to redeem no less than the entire principal amount of this Debenture then held by the Holder, at a cash price equal to, (i) if the Notice Date occurs within the 6 month period immediately following the Closing Date, 105% of the principal amount outstanding of this Debenture plus any accrued but unpaid interest hereon, and (ii) if the Notice Date occurs after the 6 month period immediately following the Closing Date, 110% of the principal amount outstanding of this Debenture plus any accrued but unpaid interest hereon (the "Optional Redemption Price". The Company may only deliver an Optional Redemption Notice to the Holder if, on the Notice Date: (i) either there is an effective Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the Conversion Shares issued to the Holder and all of the Conversion Shares as are issuable to the Holder upon conversion in full of the Debentures subject to the Optional Redemption Notice or all of such issued or issuable Conversion Shares may be sold without volume restrictions pursuant to Rule 144 promulgated under the Securities Act, as determined by counsel to the Company pursuant to a written opinion letter, addressed and delivered prior to the Notice Date to the Company's transfer agent in the form and substance acceptable to the Holders and such transfer agent, and (ii) the Common Stock is listed for trading on a Principal Market. If any of the foregoing conditions shall cease to be in effect during the period between the Notice Date and the date the Optional Redemption Price is paid in full, then the Holders subject to such redemption may elect, by written notice to the Company given at any time after any of the foregoing conditions shall cease to be in effect, to invalidate ab initio such redemption, notwithstanding anything herein contained to the contrary. The Holders may convert any portion of the outstanding principal amount of the Debentures subject to an Optional Redemption Notice prior to the date that the Optional Redemption Price is due and paid in full. (b) Redemption Procedure. The Optional Redemption Price is due on the 10th Trading Day following the Notice Date. If any portion of the Optional Redemption Price shall not be paid by the Company by expiration of such 10th Trading Day, interest shall accrue thereon at the rate of 18% per annum (or the maximum rate permitted by applicable law, whichever is less) until the Optional Redemption Price plus all such interest is paid in full. In addition, if any portion of the Optional Redemption Price remains unpaid after such date, the Holders subject to such Redemption may elect, by written notice to the Company given at any time thereafter, to invalidate ab initio such redemption, notwithstanding anything herein contained to the contrary. If a Holder elects to invalidate such redemption the Company shall promptly, and, in any event, not later than 3 Trading Days from receipt of such Holder's notice of such election, return to such Holder all of the Debentures for which the Optional Redemption Price shall not have been paid in full. Section 6. Dividends, Mergers, Consolidations, Reclassifications, Etc. 16 (a) Notice of Certain Events. If (i) the Company shall declare a dividend (or any other distribution) on the Common Stock; (ii) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (iii) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (iv) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; or (v) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of the Debentures, and shall cause to be mailed to the Holder at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (i) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined, or (ii) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder is entitled to convert this Debenture during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. (b) Change of Control. In case of any Change of Control, the Holder shall have the right to either (i) declare an Event of Default, (ii) convert its aggregate principal amount of Debentures then outstanding into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger, consolidation or sale, and such Holder shall be entitled upon such event or series of related events to receive such amount of securities, cash and property as the shares of Common Stock into which such aggregate principal amount of Debentures could have been converted immediately prior to such merger, consolidation or sale would have been entitled, or (iii) in the case of Change of Control involving a merger in which the Company is not the surviving corporation or a consolidation, (A) require the surviving entity to issue convertible subordinated debentures in such face amount equal to the aggregate principal amount of Debentures then held by the Holder, plus all accrued and unpaid interest and other amounts owing thereon, which newly issued debentures shall 17 have terms identical (including with respect to conversion) to the terms of this Debenture and shall be entitled to all of the rights and privileges of a Holder of this Debenture and the agreements pursuant to which this Debenture was issued (including, without limitation, as such rights relate to the acquisition, transferability, registration and listing of such shares of stock or other securities issuable upon conversion thereof), and (B) simultaneously with the issuance of such convertible subordinated debentures, shall have the right to convert such instrument only into shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such merger or consolidation. In the case of clause (iii), the conversion price applicable for the newly issued convertible subordinated debentures shall be based upon the amount of securities, cash and property that each share of Common Stock would receive in such transaction and the Set Price in effect immediately prior to the effectiveness or closing date for such transaction. The terms of any such merger, sale or consolidation shall include such terms so as to continue to give the Holders the right to receive the securities, cash and property set forth in this Section upon any conversion or redemption following such event. This provision shall similarly apply to successive such events. The terms of any agreement to be executed in connection with any Change of Control transaction shall include terms requiring any successor or surviving entity to comply with the provisions of this Section. (c) Reclassification. In case of any reclassification of the Common Stock (other than a change in par value or a change from par value to no par value) or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the Holder shall have the right thereafter to, at its option, (i) to convert, at any time, in whole or in part, the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of the Common Stock following such reclassification or share exchange, and the Holder of this Debenture shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which the then outstanding principal amount, together with all accrued but unpaid interest and any other amounts then owing hereunder in respect of this Debenture could have been converted immediately prior to such reclassification or share exchange would have been entitled, or (ii) to cause the Company to exercise its right to redeem the aggregate outstanding principal amount of this Debenture, plus all interest and other amounts due and payable thereon, pursuant to Section 5. The entire redemption price due hereunder shall be paid in cash. This provision shall similarly apply to successive reclassifications or share exchanges. Section 7. Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the Company, 18 at 411 First Avenue South, Suite 600, Seattle, WA 98104, fax: (206) 701-2218, attention Chief Financial Officer, or such other address or facsimile number as the Company may specify for such purposes by notice to the Holders delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (New York City time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 4:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. Section 8. Subordination (a) Agreement of Subordination. The Company covenants and agrees, and the Holder, by its acceptance hereof, likewise covenants and agrees, that the payment of the principal of and interest on and other payments due pursuant to this Debenture are each hereby expressly subordinated, to the extent and in the manner hereinafter set forth, to the prior payment and/or cancellation (as shall be appropriate) in full of all Senior Indebtedness. The provisions of this Section 8 shall automatically terminate upon the indefeasible payment in full in cash or cash equivalents of all Senior Indebtedness due and owing by the Company to the Senior Lender. The provisions of this Section 8 are made for the benefit of Senior Lender, and Senior Lender shall, at any time, be entitled to enforce such provisions against the Company or the Holder of this Debenture. Senior Lender shall not be deemed to owe any fiduciary duty or any other obligation to the Holder of this Debenture now or at any time hereafter. (b) Terms of Subordination. (i) In the event of (x) any insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment, composition or other similar proceeding relative to the Company or its creditors or its property, (y) any proceeding for voluntary liquidation, dissolution or other winding up of the Company whether or not involving insolvency or bankruptcy proceedings, or (z) any assignment for the benefit of creditors or any marshalling of the assets of the Company, then and in any such event: (A) all Senior Indebtedness (including all interest that but for the provisions of 19 the Bankruptcy Code would have accrued on such Senior Indebtedness after the date of filing a petition or other action commencing any such proceeding) shall first be paid in full in cash or cash equivalents, or have provision made for payment and/or cancellation (as shall be appropriate) in full to the reasonable satisfaction of Senior Lender, before the Holder is entitled to receive any payment (other than securities upon conversion or issuance under this Debenture) on account of the principal of or premium, if any, or interest on the indebtedness evidenced by this Debenture, and (B) any payment or distribution of assets of the Company of any kind or character, whether in cash or cash equivalents, property or securities (other than securities upon conversion or issuance under this Debenture and other than securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, provided the rights of Senior Lender are not altered by such reorganization or readjustment, the payment of which is subordinate, at least to the extent provided in this Section 8 with respect to this Debenture, to the payment of all Senior Indebtedness at the time outstanding and to the payment of all securities issued in exchange therefor to Senior Lender at the time outstanding), to which Holder would be entitled except for the provisions of this Section 8, shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or other trustee or agent, directly to Senior Lender or its representative, to the extent necessary to make payment of and/or to cancel (as may be appropriate) in full all Senior Indebtedness remaining unpaid and/or outstanding (as the case may be), after giving effect to any concurrent payment or distribution, or provision therefor, to Senior Lender. (ii) In the event and during the continuation of any Senior Default, or if there is no Designated Senior Excess Availability after giving effect to any payment made in respect of the indebtedness evidenced by this Debenture, provided, however, that the Holder has been given written notice thereof and the basis therefor, then, unless and until such Senior Default shall have been cured or waived or shall have ceased to exist or there is Designated Senior Excess Availability after giving effect to any such payment, no payment shall be made by the Company and no application of funds shall be made with respect to the principal of or interest on this Debenture, the redemption of this Debenture pursuant to Section 4(c)(v), or any other payment of funds under this Debenture or under any of the agreements relating to the issuance of the Debenture, provided, however, that the Holder may demand and the Company may pay at any time and from time to time liquidated damages and Late Fees pursuant to Sections 4(a)(iii), 4(c)(iii) and 4(c)(iv) of this Debenture and Section 2(f) of the Registration Rights Agreement of even date by and among the Company and the holders of this Debenture and the other Debentures even if a Senior Default exists and/or there is no Designated Senior Excess Availability at the time of such payment(s), but only so long as, of the date of such payment by the Company, the Holder (or the holder of any other Debenture) has not declared that an Event of Default exists under Section 3 of this Debenture or such other Debenture, and provided, further, that the Senior Lender has not accelerated the Senior Indebtedness. If, however, no Senior Default then exists and there is Designated Senior Excess Availability after giving effect to any 20 such payment, nothing herein shall prohibit the Company from making and the Holder from receiving a payment in respect of a regularly scheduled principal or interest payment, redemption payments under Section 4(c)(v) or liquidated damages or Late Fees that are due that but for the occurrence of a Senior Default or the lack of the Designated Senior Excess Availability would have been made on its originally scheduled payment date or due date of such payment hereunder, as the case may be. (iii) In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities upon conversion or issuance under this Debenture and other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment, provided that the rights of Senior Lender are not altered by such reorganization or readjustment, the payment of which is subordinate, at least to the extent provided in this Section 8 with respect to this Debenture, to the payment of all Senior Indebtedness at the time outstanding and to the payment of all securities issued in exchange therefor to Senior Lender at the time outstanding), shall be received by Holder during the continuance of any event specified in Sections 8(b)(i) or 8(b)(ii) prohibiting such payment and before all Senior Indebtedness is paid in full in cash and/or canceled (as may be appropriate), or provision made for its payment to the reasonable satisfaction of Senior Lender of the Senior Indebtedness, such payment or distribution (subject to Section 8(e)) shall be immediately paid by Holder over to Senior Lender for application to the payment of such Senior Indebtedness until all such Senior Indebtedness shall have been paid in full in cash, after giving effect to any concurrent payment or distribution, or provision therefor, to Senior Lender. (iv) Subject to the payment in full in cash and/or cancellation (as may be appropriate) of all Senior Indebtedness and the irrevocable and complete termination of all commitments and obligations to issue or fund any Senior Indebtedness (and not before such time), Holder shall be subrogated to all rights of Senior Lender to receive payments or distributions of cash, property or securities (other than securities upon conversion or issuance under this Debenture) of the Company applicable to the Senior Indebtedness until this Debenture and all other obligations owed to Holder by the Company shall be paid in full; and, for purposes of such subrogation, no payments or distributions to Senior Lender of cash, property or securities distributable or paid over to Senior Lender under the provisions hereof to which Holder would be entitled except for the provisions of this Section 8 shall, as between the Company, its creditors other than Senior Lender, and Holder, be deemed to be a payment by the Company to or account of the Senior Indebtedness, it being understood that the provisions of this Section 8 are and are intended solely for the purpose of defining the relative rights of Holder and Senior Lender. (v) Nothing contained in this Section 8 or elsewhere in this Debenture is intended to or shall impair, as between the Company, its creditors other than Senior Lender (and the persons and entities committed or obligated to issue or fund any Senior Indebtedness), and Holder, the obligation of the Company, which is absolute and unconditional, to pay to Holder the principal and interest hereon and other payments required hereby (and to honor all conversions and 21 issuances of securities under this Debenture), as and when the same shall become due and payable in accordance with the terms hereof, or is intended to or shall affect the relative rights of Holder and other creditors of the Company other than Senior Lender (and the persons and entities committed or obligated to issue or fund any Senior Indebtedness), nor shall anything in this Debenture, except to the extent provided below, prevent Holder from exercising all remedies otherwise permitted by applicable law upon the happening of any Event of Default under this Debenture, subject to the rights, if any, under this Section 8 of Senior Lender (and the persons and entities committed or obligated to issue or fund any Senior Indebtedness) in respect of cash, property or securities of the Company received upon the exercise of any such remedy. (vi) Except as otherwise provided below, unless and until the Senior Indebtedness has been paid and discharged in full in cash, the Holder shall not, without the prior written consent of Senior Lender, which Senior Lender may give or withhold in its sole discretion, directly or indirectly take any of the following actions (each an "Enforcement Action"): (A) Commence any lawsuit or legal proceeding against the Company to collect the Junior Indebtedness; (B) Seek to attach any asset of the Company, or seek the appointment of a liquidator, trustee, conservator, receiver, keeper or custodian for the Company or any of its assets; (C) Commence or join in the commencement of involuntary bankruptcy or insolvency proceedings against the Company unless failure to join could materially prejudice Holder's rights in such proceeding; or (D) Take any other enforcement action against the Company with respect to the Junior Indebtedness; provided, however, that, if an Event of Default under this Debenture shall have occurred and be continuing (or Holder is otherwise entitled to enforce any rights hereunder, including its right to receive liquidated damages or Late Fees) and so long as Holder has not received written notice from the Senior Lender that a Senior Default has occurred or is continuing or there is no Designated Senior Excess Availability, which notice shall include the basis therefor (any such written notice a "Standstill Notice"), then the Holder may, to the extent the Holder is legally entitled to do so, undertake any Enforcement Action; provided, further, however, that if Holder has received a Standstill Notice, then for a period commencing on the date of the receipt by Holder of the Standstill Notice and ending on the earliest of (a) the waiver of the Senior Default, (b) the receipt by Holder of the written consent of Senior Lender, or (c) the date that is 180 days immediately following Holder's receipt of the Standstill Notice, Holder shall not take any Enforcement Action except and to the extent the Holder is permitted, pursuant to Section 8(b)(ii) above, to demand and receive liquidated damages and Late Fees under Section 8(b)(ii) above. 22 Notwithstanding anything in this Section 8 to the contrary, nothing herein shall limit or restrict the Holder's right to continue any action commenced or taken prior to receipt of a Standstill Notice to collect liquidated damages and Late Fees and the proceeds representing liquidated damages and Late Fees received by the Holder for any such action commenced or taken prior to receipt of such Standstill Notice shall not be subrogated under this Section 8, provided that the Holder's rights as described above in this sentence shall not be effective if the Senior Lender has accelerated the Senior Indebtedness, nor shall limit or restrict the Holder's rights to file proofs of claim against the Company in any proceeding described in sub-clause (B) or (C) above, with copies thereof being sent to the Senior Lender promptly after such filing. (vii) The Company shall give prompt written notice to Holder of any Senior Default or any insolvency, bankruptcy, liquidation, reorganization, readjustment, composition, dissolution, assignment, marshalling of assets or similar proceedings of the Company within the meaning of this Section 8. Upon any payment or distribution of assets of the Company referred to in this Section 8, Holder shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding up, liquidation or reorganization proceedings are pending or a certificate of the liquidating trustee or agent or other person making any distribution to Holder for the purpose of ascertaining the persons entitled to participate in such distribution, Senior Lender and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 8. (viii) Except as expressly provided herein, the Senior Lender may, at any time and from time to time, without impairing or releasing the subordination herein made, change the manner, place or terms of payment, or change or extend the time of payment of or renew, increase the amount of or alter the Senior Indebtedness or the commitment or obligation to issue or fund any Senior Indebtedness, or amend or supplement in any manner any instrument evidencing the Senior Indebtedness or the commitment or obligation to issue or fund any Senior Indebtedness, any agreement pursuant to which the Senior Indebtedness was issued or incurred or any instrument securing or relating to the Senior Indebtedness or the commitment or obligation to issue or fund any Senior Indebtedness; release any person liable in any manner for the payment or collection of the Senior Indebtedness; exercise or refrain from exercising any rights in respect of the Senior Indebtedness against the Company or any other person; apply any money or other property paid by any person or released in any manner to the Senior Indebtedness; accept or release any security for the Senior Indebtedness; sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; or exercise or refrain from exercising any rights against the Company or any other person, provided, however, that the Senior Lender and the Company shall not, without the prior written consent of the Holder, increase the principal amount of the Senior Indebtedness above $14,000,000; all without thereby impairing in any respect the rights of the Senior Lender as provided in this Section 8. 23 (ix) Notwithstanding anything to the contrary in any other agreement to which Holder is a party or of which Holder is a beneficiary, Holder agrees and acknowledges that, subject to the terms of this Debenture: (A) Holder shall not take any security interest in, mortgage, pledge, assignment or transfer of any properties of the Company, or any other person to secure or satisfy any of the Junior Indebtedness; (B) Holder shall not take any action to challenge the validity, enforceability, amount or priority of the Senior Liens, or induce any other entity to take such an action or cooperate with any other entity in taking such an action; (C) Holder has no right to direct Senior Lender to exercise any right, remedy or power with respect to the collateral securing the Senior Debt and Senior Lender shall be free to take all actions whatsoever in respect of such collateral without consent of Holder; and (D) Holder will not institute any Enforcement Action against Senior Lender seeking damages from it, or other relief, by way of specific performance, injunction or otherwise, with respect to any action with respect to the collateral securing the Senior Indebtedness taken or omitted by Senior Lender in accordance with the provisions of this Section 8 (xi) Without limiting the foregoing, Holder hereby expressly and unconditionally waives any right to affect the order or manner in which Senior Lender exercises its remedies (whether at law, in equity or pursuant to any agreement with the Company or any other party) or the selection of property against which Senior Lender exercises its remedies, and knowingly waives and disclaims the benefit of any provision of law or equity affording to Holder (directly or as third party beneficiary) any such right. In particular, Holder knowingly waives and disclaims the benefits of any principle of "election of remedies" or marshalling and acknowledges that Senior Lender's remedies are cumulative. (c) Notices to Other Lender; Right to Cure Senior Payment Default. (i) Senior Lender shall notify Holder of: (i) any Senior Payment Default concurrently with Senior Lender's notification to the Company; (ii) Senior Lender's commencement of its exercise of remedies following any Senior Default; (iii) any increase in the Maximum Revolver Amount (as defined in the Senior Loan Documents); or (iv) the creation of any other credit facility for the Company not contemplated by the Senior Loan Documents. (ii) Holder shall notify Senior Lender in writing of any default or Event of Default under this Debenture concurrently with Holder's notification to the Company. 24 (iii) Senior Lender will allow Holder, at Holder's option, within 5 days following notice to Holder of a Senior Payment Default, to cure said Senior Payment Default by paying to Senior Lender, in cash, the Senior Indebtedness in full, including without limitation the Applicable Prepayment Premium (as such term is defined in the Senior Loan Documents); provided, however, that Holder's cure shall consist only of payment of all sums due under the Senior Loan Documents prior to acceleration of the Senior Indebtedness by Senior Lender if and only if Senior Lender has not, prior to receipt of such cure payment from Holder, accelerated the Senior Indebtedness. (d) No Waiver of Subordination Provision. No right of Senior Lender to enforce subordination, as herein provided, shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, by Senior Lender, or by any noncompliance by the Company with the terms, provisions and covenants of this Debenture, regardless of any knowledge thereof that Senior Lender may have or be otherwise charged with. (e) Payments to Holder. Nothing contained in this Section 8 or elsewhere in this Debenture, shall, however, affect the obligation of the Company to make, or prevent the Company from making, at any time, except as provided in Section 8(b), payments of principal of or premium, if any, or interest on, and other payments due under this Debenture. (f) Authorization of Holder to the Company. Holder by its acceptance hereof irrevocably authorizes and directs the Company on its behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Section 8 and appoints the Company its attorney-in-fact for such purpose. This authorization and appointment shall be effective only after the Senior Lender has requested in writing, copy to the Company, the Holder to take such necessary or appropriate action and Holder has failed to take such action for a period of not less than five business days, and Senior Lender has so notified the Company in writing, copy to the Holder, of such request and failure. (g) Securities Issuable to Holder. Notwithstanding anything herein to the contrary, nothing herein shall restrict, delay or otherwise affect the Holder's right to receive securities upon any conversion or issuance under this Debenture. (h) All Provisions of Debenture Qualified by Section 8. Notwithstanding anything herein contained to the contrary, all the provisions of this Debenture shall, except as otherwise provided herein, be subject to the provisions of this Section 8, so far as the same may be applicable thereto. (i) Definitions. For purposes of this Section 8 only, the following terms have the indicated meanings: "Availability" shall be used as defined in the Senior Loan Agreement. 25 "Bankruptcy Code" shall mean the United States Bankruptcy Code, 11 United States Code 101 et seq., or any successor statute thereto. "Designated Senior Excess Availability" shall mean "Excess Availability" of not less than $1,000,000. "Excess Availability" means the amount, as of the date of any determination thereof is to be made, equal to Availability minus the aggregate amount, if any, of all trade payables of Borrower aged in excess of historical levels with respect thereto and all book overdrafts in excess of historical practices with respect thereto, in each case as determined by Senior Lender in its Permitted Discretion (as defined in the Senior Loan Documents). "Junior Indebtedness" shall mean the principal and interest heretofore or hereafter evidenced pursuant to this Debenture. "Senior Default" shall mean an "Event of Default" as that term is defined in the Senior Loan Documents. "Senior Payment Default" means any Senior Default consisting of a failure to pay Senior Lender any portion of the Senior Indebtedness when due following any applicable grace periods. "Senior Indebtedness" shall mean all "Obligations," as that term is defined in the Senior Loan Documents, of Borrower now or hereafter due Senior Lender together with any increases, refundings, refinancings, renewals, rearrangements or extensions of and amendments, modifications and supplements thereto. "Senior Lender" shall mean Foothill Capital Corporation, a California corporation, and its successors and assigns, or Wells Fargo Bank N.A. "Senior Liens" shall mean, collectively, the liens and security interests granted to Senior Lender pursuant to the terms of the Senior Loan Documents. "Senior Loan Documents" means that certain Loan and Security Agreement, between Borrower and Senior Lender, dated as of March 28, 2001, and the other "Loan Documents" referred to and defined therein, as now in effect or hereafter amended, restated, modified or supplemented from time to time, in accordance with the provisions hereof, or any similar agreement between the Company and Wells Fargo Bank N.A.. Section 9. Company's Obligations. Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, interest and liquidated damages (if any) on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This 26 Debenture is a direct obligation of the Company. This Debenture ranks pari passu with all other Debentures now or hereafter issued under the terms set forth herein. As long as this Debenture is outstanding, the Company shall not and shall cause it subsidiaries not to, without the consent of the Holder, (i) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the Holder; (ii) repay, repurchase or offer to repay, repurchase or otherwise acquire shares of its Common Stock or other equity securities other than as to the Conversion Shares to the extent permitted or required under the Purchase Agreement or this Debenture; or (iii) enter into any agreement with respect to any of the foregoing. THE COMPANY MAY ONLY VOLUNTARILY PREPAY THE OUTSTANDING PRINCIPAL AMOUNT ON THE DEBENTURES IN ACCORDANCE WITH SECTION 5 HEREOF. Section 10. Rights as Holder. This Debenture shall not entitle the Holder to any of the rights of a stockholder of the Company, including without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of stockholders or any other proceedings of the Company, unless and to the extent converted into shares of Common Stock in accordance with the terms hereof. Section 11. Replacement Debentures. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company. Section 12. Governing Law. This Debenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to conflicts of laws thereof. The Company and the Holder hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or that such suit, action or proceeding is improper. Each of the Company and the Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by receiving a copy thereof sent to the Company at the address in effect for notices to it under this instrument and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Section 13. Waivers. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on 27 one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing. Section 14. Severability. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder shall violate applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Debentures as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted. Section 15. Non Trading Days. Whenever any payment or other obligation hereunder shall be due on a day other than a Trading Day, such payment shall be made on the next succeeding Trading Day. Section 16. Headings. The headings used in this Debenture are used for convenience only and are not to be considered in construing or interpreting this Debenture. Section 17. Definitions. For the purposes hereof, the following terms shall have the following meanings: (a) "Alternate Conversion Price" shall have the meaning ascribed to such term in Section 4(a)(ii). (b) "Buy In" shall have the meaning assigned to such term in Section 4(c)(iv). (c) "Change of Control Transaction" means the occurrence of any of (i) an acquisition after the date hereof by an individual or legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 40% of the voting securities of the Company in a transaction or series of transactions not approved by the board of directors of the Company, (ii) a replacement at one time or over time of more than one-half of the members of the 28 Company's board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), (iii) the consolidation or merger of the Company with or into another entity (other than a merger or consolidation of a subsidiary of the Company into the Company or the Company into a wholly-owned subsidiary of the Company) where (A) the shareholders of the Company immediately prior to such transaction do not collectively own at least 51% of the outstanding voting securities of the surviving corporation of such consolidation or merger immediately following such transaction or (B) the common stock of such surviving corporation is not listed for trading on the Nasdaq National Market System, the New York Stock Exchange or the American Stock Exchange immediately after the completion of such transaction, (iv) the sale of all or substantially all of the assets of the Company in one or a series of related transactions, or (v) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i), (ii), (iii) or (iv). (d) "Conversion Date" shall have the meaning ascribed to such term in Section 4(c). (e) "Conversion Notice" shall have the meaning ascribed to such term in Section 4(c). (f) "Conversion Shares" means the shares of Common Stock issuable upon conversion of Debentures or as payment of interest in accordance with the terms hereof. (g) "Debenture(s)" shall have the meanings ascribed to such terms in the opening paragraph of this Debenture. (h) "Debenture Register" shall have the meaning ascribed to such term in the second opening paragraph of this Debenture. (i) "Event of Default" shall have the meaning ascribed to such term in Section 3(a) (j) "Holder" shall have the meaning ascribed to such term in second opening paragraph of this Debenture. (k) "Mandatory Conversion" shall have the meaning ascribed to such term in Section 4(b). (l) "Mandatory Conversion Date" shall have the meaning ascribed to such 29 term in Section 4(b). (m) "Mandatory Redemption Amount" for any Debentures shall equal the sum of (i) the greater of (A) 120% of the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, and (B) the principal amount of Debentures to be prepaid, plus all accrued and unpaid interest thereon, divided by the then applicable conversion price on the date of acceleration multiplied by the Closing Price on (x) the date the Mandatory Redemption Amount is demanded or otherwise due or (y) the date immediately prior to the date the Mandatory Redemption Amount is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such Debentures. (n) "Maturity Date" shall have the meaning ascribed to such term in the second opening paragraph of this Debenture. (o) "Maximum Aggregate Share Amount" shall have the meaning ascribed to such term in Section 4(d)(ii). (p) "Notice Date" shall have the meaning ascribed to such term in Section 5(a). (q) "Optional Redemption Notice" shall have the meaning ascribed to such term in Section 5(a). (r) "Optional Redemption Price" shall have the meaning ascribed to such term in Section 5(a). (s) "Original Issue Date" shall mean the date of the first issuance of the Debentures regardless of the number of transfers of any Debenture and regardless of the number of instruments which may be issued to evidence such Debenture. (t) "Person" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. (u) "Purchase Agreement" Shall have the meaning ascribed to such term in the first paragraph of this Debenture. (v) "Set Price" shall have the meaning ascribed to such term in Section 4(a)(i). (w) "VWAP" shall mean the daily volume weighted average price of the Common Stock on the Principal Market as reported by Bloomberg Financial L.P. using the VAP function on the date in question. 30 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOLLOWS] 31 IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed by a duly authorized officer as of the date first above indicated. CRAY INC. By: ----------------------------------------- Name: Title: Convertible Debenture EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby elects to convert the attached Debenture into shares of common stock, $.01 par value per share (the "Common Stock"), of Cray Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: Date to Effect Conversion Principal Amount of Debentures to be Converted Number of shares of Common Stock to be Issued Conversion Price Signature Name Address -33- Convertible Debenture EX-4.3 5 v77507ex4-3.txt EXHIBIT 4.3 Exhibit 4.3 NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY OTHER APPLICABLE STATE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PURSUANT TO REGULATION D AND SUCH OTHER SECURITIES LAWS. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND ANY APPLICABLE STATE LAWS. STOCK PURCHASE WARRANT To Purchase _______________ Shares of Common Stock of CRAY INC. THIS CERTIFIES that, for value received, _____________ (the "Holder"), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after November 6, 2001 (the "Initial Exercise Date") and on or prior to the close of business on the third anniversary of the Initial Exercise Date (the "Termination Date") but not thereafter, to subscribe for and purchase from Cray Inc., a corporation incorporated in the State of Washington (the "Company"), up to ____________ shares (the "Warrant Shares") of Common Stock, par value $.01 per share, of the Company (the "Common Stock"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be $4.4275. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Convertible Debentures and Warrants Purchase Agreement (the "Purchase Agreement"), dated November 6, 2001, between the Company and the investors signatory thereto. 1 1. Title to Warrant. Prior to the Termination Date and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. 2. Authorization of Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. (a) Except as provided in Section 4 herein, exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased by wire transfer or cashier's check drawn on a United States bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for shares purchased hereunder shall be delivered to the Holder within three (3) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by delivery of the Warrant and the duly executed Notice of Exercise and payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) Notwithstanding anything herein to the contrary, in no event shall the Holder be permitted to exercise this Warrant for Warrant Shares to the extent that (i) the number of shares of Common Stock owned by such Holder (other than Warrant Shares issuable upon exercise of this Warrant) plus (ii) the number of Warrant Shares issuable upon exercise of this Warrant, would be equal to or exceed 4.999% of the number of shares of Common Stock then issued and outstanding, including shares issuable upon exercise of this Warrant held by such Holder after application of 2 this Section 3(c). As used herein, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this Section 3(c) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder) and of which a portion of this Warrant is exercisable shall be in the sole discretion of such Holder, and the submission of a Notice of Exercise shall be deemed to be such Holder's determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. Nothing contained herein shall be deemed to restrict the right of a Holder to exercise this Warrant into Warrant Shares at such time as such exercise will not violate the provisions of this Section 3(c). The provisions of this Section 3(c) may be waived by the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). No exercise of this Warrant in violation of this Section 3(c) but otherwise in accordance with this Warrant shall affect the status of the Warrant Shares as validly issued, fully-paid and nonassessable. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant. 7. Transfer, Division and Combination. (a) Subject to compliance with any applicable securities laws, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. In the event that the Holder wishes to transfer a portion of this Warrant, the 3 Holder shall transfer at least 100,000 shares underlying this Warrant to any such transferee. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. Notwithstanding the above, the Holder shall not transfer this Warrant or any rights hereunder to any person or entity which is then engaged in a business that is in the reasonable judgement of the Company is in direct competition with the Company, or to any person who is not an "accredited investor" (as defined in Rule 501 of Regulation D) or to a broker-dealer registered with the SEC or a member of the National Association of Securities Dealers. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. 8. No Rights as Shareholder until Exercise. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof pursuant to Section 3(a). 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday. 11. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to 4 adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 12. Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. In case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("Other Property"), are to be received by or distributed to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "common stock of the successor or acquiring corporation" shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and 5 which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets. 13. Voluntary Adjustment by the Company. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the Holder notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. Such notice, in the absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Notice of Corporate Action. If at any time: (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger (where the Company is not the surviving corporation) of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 20 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled 6 to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). 16. Authorized Shares. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Principal Market upon which the Common Stock may be listed. The Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 17. Miscellaneous. (a) Jurisdiction. This Warrant shall constitute a contract under the laws of New York, without regard to its conflict of law, principles or rules. (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal 7 securities laws. (c) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (d) Notices. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement. (e) Limitation of Liability. No provision hereof, in the absence of affirmative action by Holder to purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (f) Remedies. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (g) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (h) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder. (i) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (j) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 8 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: November 6, 2001 CRAY INC. By: -------------------------------------- James E. Rottsolk, Chairman 9 Exhibit 4.3 NOTICE OF EXERCISE To: Cray Inc. (1) The undersigned hereby elects to purchase ________ Warrant Shares (the "Common Stock"), of Cray Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below: ---------------------------------------- The Warrant Shares shall be delivered to the following: ---------------------------------------- ---------------------------------------- ---------------------------------------- [PURCHASER] By: ------------------------------------------ Name: Title: Dated: --------------------------------------- ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to whose address is - ------------------------------------------------ - ------------------------------------------------------------------. - ------------------------------------------------------------------- Dated: , -------------- ------- Holder's Signature: --------------------------- Holder's Address: ----------------------------- ----------------------------- Signature Guaranteed: ------------------------------------------- NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. EX-4.4 6 v77507ex4-4.txt EXHIBIT 4.4 Exhibit 4.4 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of November 6, 2001, between the investor or investors signatory hereto (each an "Investor" and together the "Investors"), and Cray Inc., a Washington corporation (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement, the Investors are purchasing from the Company, pursuant to the Convertible Subordinated Debentures and Warrants Purchase Agreement dated the date hereof (the "Purchase Agreement") (capitalized terms not defined herein shall have the meanings ascribed to them in the Purchase Agreement), $8,000,000, in the aggregate, principal amount of the Company's 5% Convertible Subordinated Debentures and Warrants; and WHEREAS, the Company desires to grant to the Investors the registration rights set forth herein with respect to the Conversion Shares of Common Stock issuable upon conversion of, or as interest upon, the Convertible Subordinated Debentures, shares of Common Stock issuable upon exercise of the Warrants purchased pursuant to the Purchase Agreement and shares issuable in the event of a registration default pursuant to Section 2(f) (the "Securities"). NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Restrictions on Transfer. Each Investor acknowledges and understands that prior to the registration of the Securities as provided herein, the Securities are "restricted securities" as defined in Rule 144 promulgated under the Securities Act. Each Investor understands that no disposition or transfer of the Securities may be made by Investor in the absence of (i) an opinion of counsel to the Investor, in form and substance reasonably satisfactory to the Company, that such transfer may be made without registration under the Securities Act, or (ii) such registration. With a view to making available to the Investors the benefits of Rule 144 under the Securities Act or any other similar rule or regulation of the Commission that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144"), the Company agrees to: (a) comply with the provisions of paragraph (c)(1) of Rule 144; (b) file with the Commission in a timely manner all reports and other documents required to be filed with the Commission pursuant to Section 13 or 15(d) under the Exchange Act by companies subject to either of such sections, irrespective of whether the Company is then subject to such reporting requirements; and (c) upon request by the Transfer Agent, the Company shall promptly provide the Transfer Agent an opinion of counsel, which opinion shall be reasonably acceptable to the Transfer Agent, that the Investor has complied with the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act. .1. Section 2. Registration Rights With Respect to the Securities. (a) The Company agrees that it will prepare and file with the Commission, within 30 calendar days after the Closing Date, a registration statement on Form S-3, or another registration statement (on Form S-1, or other appropriate registration statement form) under the Securities Act (as applicable, the "Registration Statement"), at the sole expense of the Company (except as provided in Section 2(c) hereof), in respect of the Investors, so as to permit the resale of the Securities under the Act by the Investors as selling stockholders and not as underwriters. (b) The Company shall cause such Registration Statement to become effective within 90 calendar days (120 calendar days in the event of a "full review" by the SEC) after the Closing Date, or, if earlier, within 5 Trading Days of SEC clearance to request acceleration of effectiveness. The number of shares designated in the Registration Statement to be registered shall include all the Warrant Shares, 100% of the already converted Conversion Shares held by any Investor on the filing date and at least 200% of the greater of the number of shares which would be issuable upon the conversion of the principal amount of the Convertible Subordinated Debentures issued and to be issued at the Conversion Price in effect (i) on the Closing Date, or (ii) on the date of the filing of the Registration Statement, and such number of shares as the Company deems prudent for the purpose of issuing shares of Common Stock as interest on the Convertible Subordinated Debentures, and shall include appropriate language regarding reliance upon Rule 416 to the extent permitted by the Commission. The Company will notify the Investors and its transfer agent of the effectiveness of the Registration Statement within 1 Trading Day of such event. After the Effective Date, within 20 days after the day on which the number of Securities registered for resale by the Investors, notwithstanding the limitation on conversion herein and in the Purchase Agreement, is less than 125% of the number of Securities (calculated at the Conversion Price on such date) held by the Investors on such date (the "Further Registration Date"), the Company shall file a further registration statement registering a number of shares of Common Stock to the extent that at least 200% of the shares which would be required to be issued upon the conversion of the remaining Convertible Subordinated Debentures at the Conversion Price on the date of the filing of such further registration statement are registered and shall prosecute such additional registration statement to effectiveness within 90 calendar days of the date of the Further Registration Date (120 calendar days in the event of a "full review" of such additional registration statement by the SEC). Each Investor shall have the right to convert all or any of its Convertible Subordinated Debenture into up to a number of registered shares of Common Stock equal to such Investor's fraction of the aggregate Purchase Price multiplied by the initially registered and, if applicable, subsequently registered Securities; provided, however, in no event shall this provision limit each Investor's right to convert its Convertible Subordinated Debenture into unregistered Common Stock. 2 (c) The Company will maintain the Registration Statement or post-effective amendment filed under this Section 2 effective under the Securities Act until the earliest of (i) the date that none of the Securities covered by such Registration Statement are or may become issued and outstanding, (ii) the date that all of the Securities have been sold pursuant to such Registration Statement, (iii) the date the Investors receive an opinion of counsel to the Company, which counsel shall be reasonably acceptable to the Investors, that the Securities may be sold under the provisions of Rule 144 without limitation as to volume, (iv) all Securities have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (v) three (3) years from the Effective Date. (d) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement hereunder and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees of the Company) shall be borne by the Company. The Investors shall bear the cost of underwriting and/or brokerage discounts, fees and commissions, if any, applicable to the Securities being registered and the fees and expenses of their counsel. The Investors and their counsel shall have a reasonable period, not to exceed 5 Trading Days, to review the proposed Registration Statement or any amendment thereto, prior to filing with the Commission, and the Company shall provide each Investor with copies of any comment letters received from the Commission with respect thereto within 2 Trading Days of receipt thereof. The Company shall qualify any of the securities for sale in such states as any Investor reasonably designates and shall furnish indemnification in the manner provided in Section 5 hereof. However, the Company shall not be required to qualify in any state which will require an escrow or other restriction relating to the Company and/or the sellers, or which will require the Company to qualify to do business in such state or require the Company to file therein any general consent to service of process. The Company at its expense will supply the Investors with copies of the applicable Registration Statement and the prospectus included therein and other related documents in such quantities as may be reasonably requested by the Investors. (e) The Company shall not be required by this Section 2 to include an Investor's Registrable Securities in any Registration Statement which is to be filed if, in the opinion of counsel for both the Investor and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Investor and the Company) the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not "restricted securities", as defined in Rule 144 under the Securities Act. (f) In the event that (i) the Registration Statement is not filed by the Company in a timely manner as set forth in Section 2(a), (ii) the Registration Statement is not 3 declared effective by the Commission within the period of time set forth in Section 2(b) herein, or within five (5) Trading Days of clearance by the Commission to request effectiveness, (iii) such Registration Statement is not maintained as effective by the Company for the period set forth in Section 2(c) above, or (iv) the additional registration statement referred to in Section 2(b) is not filed within 20 calendar days or declared effective within 90 or, if applicable, 120 calendar days as set forth therein (each a "Registration Default") then the Company will pay each Investor (pro-rata on a monthly basis), for each Registration Default then in effect, as liquidated damages and not as a penalty, during any period in which a Registration Default is occurring, two percent (2%) per month of (i) the then outstanding principal amount of the Convertible Subordinated Debentures, and (ii) the value of any outstanding Warrants (valued at the difference between the average closing bid price during the applicable month and the Exercise Price multiplied by the number of Warrant Shares the Warrants are exercisable into), held by such Investor until such corresponding Registration Default no longer exists ("Liquidated Damages"). Such payment of the Liquidated Damages shall be made to the Investors in cash, or, at the option of the Company, in registered shares of Common Stock (based on the Conversion Price (as defined in the Convertible Subordinated Debenture)) on the Trading Day prior to the date of payment) on the last day of each month during which a Registration Default occurred or was continuing, without demand therefor by the Investor; provided, however, that the payment of the Liquidated Damages shall not relieve the Company from its obligations to register the Securities pursuant to this Section. If the Company does not remit the payment to the Investors as set forth above, the Company will pay the Investors reasonable costs of collection, including attorneys' fees, in addition to the Liquidated Damages and interest of 15% per annum on any liquidated damage payments not made in a timely manner as set forth above. The registration of the Securities pursuant to this provision shall not affect or limit the Investors' other rights or remedies as set forth in this Agreement. (g) The Company shall be precluded from including in any registration statement which it is required to file pursuant to this Section 2 any other securities apart from the Registrable Securities, without the prior written consent of a majority in interest of the Investors. (h) If at any time or from time to time after the effective date of any Registration Statement, the Company notifies the Investors in writing of the existence of a Potential Material Event (as defined in Section 2(i) below), the Investors shall not offer or sell any Securities or engage in any other transaction involving or relating to Securities, from the time of the giving of notice with respect to a Potential Material Event until the Investors receive written notice from the Company that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event; provided, however, that the Company may not so suspend the right to such holders of Securities for more than twenty-five (25) calendar days in the aggregate during any twelve month period (the "Blackout Period"), during the period the Registration 4 Statement is required to be in effect (such 25 day calendar period including any preclusion pursuant to Section 3(f)), and if such period is exceeded, such event shall be a Registration Default and subject to liquidated damages as set forth in Section 2(f) hereof. THE COMPANY MUST GIVE THE INVESTORS NOTICE IN WRITING PRIOR TO THE FIRST DAY OF THE BLACKOUT PERIOD AS PROMPTLY AS PRACTICABLE AFTER BECOMING AWARE THAT SUCH A BLACKOUT PERIOD (WITHOUT INDICATING THE NATURE OF SUCH BLACKOUT PERIOD) WILL OCCUR AND SUCH NOTICE MUST BE ACKNOWLEDGED IN WRITING BY THE INVESTORS. FAILURE TO PROVIDE THE INVESTORS WITH SUCH NOTICE SHALL CONSTITUTE A REGISTRATION DEFAULT DURING THE ENTIRE APPLICABLE PERIOD THAT THE REGISTRATION STATEMENT IS SUSPENDED. Compliance by the Company with this Section 2(h) will not result in or be deemed a breach of any of the Company's obligations set forth in the Purchase Agreement not to disclose non-public information to the Investors. (i) "Potential Material Event" means any of the following: (a) the possession by the Company of material information not ripe for disclosure in a registration statement, as determined in good faith by the Chief Executive Officer or the Board of Directors of the Company that disclosure of such information in a Registration Statement would be detrimental to the business and affairs of the Company; or (b) any material engagement or activity by the Company which would, in the good faith determination of the Chief Executive Officer or the Board of Directors of the Company, be adversely affected by disclosure in a registration statement at such time, which determination shall be accompanied by a good faith determination by the Chief Executive Officer or the Board of Directors of the Company that the applicable Registration Statement would be materially misleading absent the inclusion of such information. Section 3. Cooperation with Company. The Investors will cooperate with the Company in all respects in connection with this Agreement, including timely supplying all information reasonably requested by the Company (which shall include all information regarding the Investors and proposed manner of sale of the Registrable Securities required to be disclosed in any Registration Statement) and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities and entering into and performing their obligations under any underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering. Nothing in this Agreement shall obligate any Investor to consent to be named as an underwriter in any Registration Statement. The obligation of the Company to register the Registrable Securities shall be absolute and unconditional as to those Securities which the Commission will permit to be registered without naming the Investors as underwriters. Any delay or delays caused by the Investors by failure to cooperate as required hereunder shall not constitute a Registration Default. Section 4. Registration Procedures. If and whenever the Company is required by any of the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible, subject to the Investors' assistance and cooperation as reasonably required with respect to each Registration Statement: 5 (a) (i) prepare and file with the Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Act with respect to the sale or other disposition of all Registrable Securities covered by such Registration Statement whenever the Investors shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of Registrable Securities from time to time in connection with a registration statement pursuant to Rule 415 promulgated under the Act) and (ii) take all lawful action such that each of (A) the Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (B) the prospectus forming part of the Registration Statement, and any amendment or supplement thereto, does not at any time during the Registration Period include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (b) (i) prior to the filing with the Commission of any Registration Statement (including any amendments thereto) and the distribution or delivery of any prospectus (including any supplements thereto), provide draft copies thereof to the Investors as required by Section 2(d) and reflect in such documents all such comments as the Investors (and their counsel) reasonably may propose respecting the Selling Shareholders and Plan of Distribution sections (or equivalents); (ii) furnish to each Investor such numbers of copies of a prospectus including a preliminary prospectus or any amendment or supplement to any prospectus, as applicable, in conformity with the requirements of the Act, and such other documents, as such Investor may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities owned by such Investor; and (iii) provide to each Investor copies of any comments and communications from the Commission relating to the Registration Statement, if lawful to do so; (c) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or blue sky laws of such jurisdictions as the Investors shall reasonably request (subject to the limitations set forth in Section 2(d) above), and do any and all other acts and things which may be necessary or advisable to enable each Investor to consummate the public sale or other disposition in such jurisdiction of the Registrable Securities owned by such Investor; (d) list such Registrable Securities on the Principal Market, if the listing of such Registrable Securities is then permitted under the rules of such Principal Market; (e) notify each Investor at any time when a prospectus relating thereto covered by the Registration Statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in the 6 Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, subject to Section 2(h), other than a Potential Material Event, and the Company shall prepare and file a curative amendment under Section 4(a) as quickly as commercially possible and during such period, the Investors shall not make any sales of Registrable Securities pursuant to the Registration Statement and during such period; provided, however, any period during which the Investors are precluded from making sales of the Registrable Securities shall be included in the 25 calendar day period in Section 2(h) and any such days herein which exceed, or cause the Company to exceed, such 25 calendar day period shall be deemed a Registration Default and the Company shall be subject to Liquidated Damages as set forth in Section 2(f). (f) as promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the Commission of any stop order or other suspension of the effectiveness of the Registration Statement at the earliest possible time and take all lawful action to effect the withdrawal, recession or removal of such stop order or other suspension; (g) cooperate with the Investors to facilitate the timely preparation and delivery of certificates for the Registrable Securities to be offered pursuant to the Registration Statement and enable such certificates for the Registrable Securities to be in such denominations or amounts, as the case may be, as the Investors reasonably may request and registered in such names as the Investors may request; and, within 3 Trading Days after a Registration Statement which includes Registrable Securities is declared effective by the Commission, deliver and cause legal counsel selected by the Company to deliver to the transfer agent for the Registrable Securities (with copies to the Investors) an appropriate instruction and, to the extent necessary, an opinion of such counsel; (h) take all such other lawful actions reasonably necessary to expedite and facilitate the disposition by the Investors of their Registrable Securities in accordance with the intended methods therefor provided in the prospectus which are customary for issuers to perform under the circumstances; (i) in the event of an underwritten offering, promptly include or incorporate in a prospectus supplement or post-effective amendment to the Registration Statement such information as the managers reasonably agree should be included therein and to which the Company does not reasonably object and make all required filings of such prospectus supplement or post-effective amendment as soon as practicable after it is notified of the matters to be included or incorporated in such Prospectus supplement or post-effective amendment; and (j) maintain a transfer agent and registrar for its Common Stock. 7 Section 5. Indemnification. (a) To the maximum extent permitted by law, the Company agrees to indemnify and hold harmless the Investors and each person, if any, who controls an Investor within the meaning of the Securities Act (each a "Distributing Investor") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all reasonable attorneys' fees and expenses), to which the Distributing Investor may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, or any related final prospectus or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent, and only to the extent, that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, final prospectus or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Investor, its counsel, affiliates or any underwriter, specifically for use in the preparation thereof or (ii) by such Investor's failure to deliver to the purchaser a copy of the most recent prospectus (including any amendments or supplements thereto. This indemnity agreement will be in addition to any liability, which the Company may otherwise have. (b) To the maximum extent permitted by law, each Distributing Investor agrees that it will indemnify and hold harmless the Company, and each officer and director of the Company or person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all reasonable attorneys' fees and expenses) to which the Company or any such officer, director or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, or any related final prospectus or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, final prospectus or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Investor, its counsel, affiliates or any underwriter, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability, which the Distributing Investor may otherwise have. Notwithstanding anything to the contrary herein, the Distributing 8 Investor shall be liable under this Section 5(b) for only that amount as does not exceed the net proceeds to such Distributing Investor as a result of the sale of Registrable Securities pursuant to the Registration Statement. (c) Promptly after receipt by an indemnified party under this Section 5 of notice of the commencement of any action against such indemnified party, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 5, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party except to the extent the failure of the indemnified party to provide such written notification actually prejudices the ability of the indemnifying party to defend such action. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 5 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified parties as a group shall have the right to employ one separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party unless (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party and the indemnified party shall have been advised by its counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the indemnified party or any other indemnified party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the indemnified party, which firm shall be designated in writing by the indemnified party). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld so long as such settlement includes a full release of claims against the indemnified party. All fees and expenses of the indemnified party (including reasonable costs of defense and investigation in a manner not inconsistent with this Section and all 9 reasonable attorneys' fees and expenses) shall be paid to the indemnified party, as incurred, within ten (10) Trading Days of written notice thereof to the indemnifying party; provided, that the indemnifying party may require such indemnified party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such indemnified party is not entitled to indemnification hereunder. Section 6. Contribution. In order to provide for just and equitable contribution under the Securities Act in any case in which (i) the indemnified party makes a claim for indemnification pursuant to Section 5 hereof but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 5 hereof provide for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any indemnified party, then the Company and the applicable Distributing Investor shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all reasonable attorneys' fees and expenses), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Investor on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Investor agree that it would not be just and equitable if contribution pursuant to this Section 6 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 6. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 6 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding any other provision of this Section 6, in no event shall any (i) Investor be required to undertake liability to any person under this Section 6 for any amounts in excess of the dollar amount of the proceeds received by such Investor from the sale of such Investor's Registrable Securities (after deducting any fees, discounts and commissions applicable thereto) pursuant to any Registration Statement under which such Registrable Securities are registered under the Securities Act and (ii) underwriter be required to undertake liability to any person hereunder for any amounts in excess of the aggregate discount, commission or other compensation payable to such underwriter with respect to the Registrable Securities underwritten by it and distributed pursuant to such Registration Statement. 10 Section 7. Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) hand delivered, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by facsimile, addressed as set forth in the Purchase Agreement or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the first business day following the date of sending by reputable courier service, fully prepaid, addressed to such address, or (c) upon actual receipt of such mailing, if mailed. Either party hereto may from time to time change its address or facsimile number for notices under this Section 7 by giving at least ten (10) days' prior written notice of such changed address or facsimile number to the other party hereto. Section 8. Assignment. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. The rights granted the Investors under this Agreement may be assigned to any purchaser of substantially all of the Registrable Securities (or the rights thereto) from an Investor, as otherwise permitted by the Purchase Agreement. Section 9. Additional Covenants of the Company. The Company agrees that, for so long as it shall be required to maintain the effectiveness of the Registration Statement, it shall file all reports and information required to be filed by it with the Commission in a timely manner and take all such other action so as to maintain such eligibility for the use of such form. Section 10. Counterparts/Facsimile. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when together shall constitute but one and the same instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. In lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. Section 11. Remedies. The remedies provided in this Agreement are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. 11 Section 12. Conflicting Agreements. The Company shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise prevents the Company from complying with all of its obligations hereunder. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made in New York by persons domiciled in New York City and without regard to its principles of conflicts of laws. The Company and each of the Investors agree to submit themselves to the in personam jurisdiction of the state and federal courts situated within the Southern District of the State of New York with regard to any controversy arising out of or relating to this Agreement. The non-prevailing party to any dispute hereunder shall pay the expenses of the prevailing party, including reasonable attorneys' fees, in connection with any such dispute. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.] 12 [SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT] IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed as of the date first written above. CRAY INC. By: /s/ ----------------------------------------- James E. Rottsolk, Chairman INVESTORS: RIVERVIEW GROUP, LLC By: /s/ ----------------------------------------- Name: Terry Feeney Title: Chief Administrative Officer OMICRON PARTNERS, LP By: Omicron Capital L.P., as subadvisor By: Omicron Capital Inc., it general partner By: /s/ ----------------------------------------- Olivier Morali, President LATERMAN & CO. By: /s/ ----------------------------------------- Bernard Laterman, Managing Partner FOREVERGREEN PARTNERS By: /s/ ----------------------------------------- Bernard Laterman, Managing Partner 13 EX-4.5 7 v77507ex4-5.txt EXHIBIT 4.5 Exhibit 4.5 AMENDMENT NO. 1 TO CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANT PURCHASE AGREEMENT AND OTHER TRANSACTION DOCUMENTS THIS AMENDMENT NO. 1 TO THE CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANT PURCHASE AGREEMENT AND OTHER TRANSACTION DOCUMENTS, dated as of November 15, 2001, is by and between the Investors (as such term is defined below) and Cray Inc., a corporation organized and existing under the laws of the State of Washington (the "Company"). WHEREAS, the Company and Riverview Group, LLC, Omicron Partners, LP, Laterman & Co. and Forevergreen Partners (together, the "Original Investors") are parties to a Convertible Subordinated Debentures and Warrant Purchase Agreement, dated as of November 6, 2001 (the "Purchase Agreement") pursuant to which the Original Investors invested $8,000,000 in the Company in return for an aggregate of $8,000,000 principal amount of Convertible Subordinated Debentures (the "Debentures") and Warrants (the "Warrants") to purchase an aggregate of 316,206 shares of the Company's Common Stock, $.01 par value per share (the "Common Stock"), and WHEREAS, Clarion Capital Corporation and Morton A. Cohen TTEE FBO The Morton A. Cohen Revocable Living Trust (together, the "New Investors") wish to invest an aggregate of $1,300,000 in the Company on the same terms as the Original Investors (the "Investment"), and the Original Investors desire that the New Investors so invest in the Company, WHEREAS, the Company and the Original Investors executed and delivered the Purchase Agreement and a Registration Rights Agreement (together, the "Transaction Documents") NOW THEREFOR, in consideration of the foregoing premises, and the promises and covenants herein contained, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties, intending to be legally bound, hereby agree as follows: 1. Amendment to Transaction Documents. The parties hereto hereby amend each of the Transaction Documents as follows: 1 a) the total principal amount of the Debentures will be $9,300,000, with an aggregate of $1,300,000 principal amount of the Debentures being issued to the New Investors; b) the total Warrants to be issued will cover an aggregate of 367,590 shares of Common Stock, with an aggregate of Warrants for 51,384 shares of Common Stock being issued to the New Investors; and c) to add the New Investors as parties thereto to the full extent and as if they were original parties to each of the Transaction Documents, with the Company and the New Investors making the same representations and warranties to each other and agreeing to bound by the same covenants as contained in each of the Transaction Documents. d) the Company agrees that to forever surrender its right to redeem the Debentures held by the Original Investors and the New Investors pursuant to an Optional Redemption Notice (as defined therein) in Section 5 of the Debentures or otherwise exercise any rights it may have to force the Original Investors or the New Investors to convert their Debentures other than pursuant to Section 4(b) of the Debentures, provided, however, that this provision will not alter or restrict any rights the Original Investors or the New Investors have under the Purchase Agreement or Debentures to cause the Company to redeem the Debentures pursuant to the terms therein. 2. Debentures and Warrants. The principal amount of the Debentures and the number of Warrant Shares being received by each of the New Investors are set forth on the signature page hereof. 3. Consent and Waivers. The Original Investors hereby consent to the investment by the New Investors and waive the provisions of Section 5.9 of the Purchase Agreement with respect to the Investment only, and also agree that the issuance of the Debentures and the Warrants to the New Investors and the issuance of the shares of Common Stock under the Debentures and upon exercise of the Warrants will be exempt from the anti-dilution provisions of Section 4(e) of the Debentures. 4. Closing. The Company acknowledges the receipt of $1,300,000 from the New Investors and the New Investors hereby acknowledge receipt of the Debentures and Warrants. 5. Definitions. The term "Investors" is defined to include both the Original Investors and the New Investors. All capitalized terms not 2 otherwise defined herein are used as defined in the Transaction Documents [THE REMAINDER OF THIS PAGE IS INTENTIONALLY BLANK] 3 [Signature Page to Amendment No. 1] IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be executed by the undersigned, thereunto duly authorized, as of the date first written above. CRAY INC. /S/ By James E. Rottsolk, Chairman NEW INVESTORS CLARION CAPITAL CORPORATION /S/ By Morton A. Cohen, President Address for Notice: 1801 East Ninth Street, Suite 1120 Cleveland, Ohio 44144 Fax: 216-694-3545 $1,000,000 principal amount of Debentures and 39,526 Warrant Shares MORTON A. COHEN TTEE FBO THE MORTON A COHEN REVOCABLE LIVING TRUST /S/ By Morton A. Cohen, Trustee Address for Notice: 1801 East Ninth Street, Suite 1120 Cleveland, Ohio 44144 Fax: 216-694-3545 $300,000 principal amount of Debentures and 11,858 Warrant Shares
4 OLD INVESTORS RIVERVIEW GROUP, LLC /S/ By Name: Terry Feeney Title: Chief Administrative Officer OMICRON PARTNERS, LP By: Omicron Capital L.P., as subadvisor By: Omicron Capital Inc., general partner /S/ By: Olivier Morali, President LATERMAN &. CO. /S/ By Bernard Laterman, Managing Partner FOREVERGREEN PARTNERS /S/ By Bernard Laterman, Managing Partner 5 -----END PRIVACY-ENHANCED MESSAGE-----