<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______ .
Commission file number 0-26820
- --------------------------------------------------------------------------------
CRAY INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
WASHINGTON 93-0962605
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 FIRST AVENUE SOUTH, SUITE 600
SEATTLE, WA 98104-2860
(206) 701 - 2000
(Address of principal executive offices)
(Registrant's telephone number, including area code)
FORMER NAME: TERA COMPUTER COMPANY
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of May 8, 2000, 33,408,406 shares of the Company's Common Stock, par
value $0.01 per share, were outstanding.
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CRAY INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1999
and March 31, 2000 3
Statements of Operations for the Three Months
Ended March 31, 1999 and 2000 4
Statement of Shareholders' Equity for the Three Months
Ended March 31, 2000 5
Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 2000 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
PART II OTHER INFORMATION
Item 2. Changes in Securities 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
2
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CRAY INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
(unaudited)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,069,355 $ 30,187,972
Restricted cash 1,131,583 1,042,078
Accounts receivable 300,682 312,614
Related party receivable 340,634 345,842
Inventory 4,513,013 4,482,710
Deposit to SGI 5,000,000
Advances to suppliers 111,558 196,789
Prepaid expenses and other assets 431,680 860,616
------------- -------------
Total current assets 16,898,505 42,428,621
Property and equipment, net 5,828,712 7,158,322
Lease deposits 496,788 498,467
Patents 186,471 260,321
------------- -------------
TOTAL $ 23,410,476 $ 50,345,731
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,365,646 $ 5,209,948
Accrued payroll and related expenses 2,147,195 1,830,482
Accrued interest 9,886 19,772
Deferred revenue 68,045 25,068
Contract adjustment reserve 200,455 200,455
Current portion of obligations under capital leases 611,585 561,351
Current portion of notes payable to bank 288,865 295,959
------------- -------------
Total current liabilities 7,691,677 8,143,035
Obligations under capital leases 390,250 332,447
Notes payable to bank 572,768 496,064
Convertible notes payable, net of discount 448,964 458,150
Shareholders' equity:
Common Stock, par $.01 - Authorized, 50,000,000 shares;
issued and outstanding, 25,211,872 and 32,375,480 shares 111,442,905 146,057,003
Accumulated deficit (97,136,088) (105,140,968)
------------- -------------
14,306,817 40,916,035
------------- -------------
TOTAL $ 23,410,476 $ 50,345,731
============= =============
</TABLE>
See accompanying notes
3
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CRAY INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
REVENUE:
Product revenue $ 557,000 $
Service revenue 22,167 42,978
Contract revenue 81,426
------------ ------------
660,593 42,978
------------ ------------
OPERATING EXPENSES:
Cost of product revenue 550,232
Cost of service revenue 29,201 26,250
Cost of contract revenue 41,406
Manufacturing costs and
inventory adjustments 2,395,745 2,002,644
Research and development 3,033,333 4,482,844
Marketing and sales 632,479 767,733
General and administrative 465,058 1,100,621
------------ ------------
Loss from operations (6,486,861) (8,337,114)
OTHER INCOME / (EXPENSE) (324,406) 332,234
------------ ------------
NET LOSS $ (6,811,267) $ (8,004,880)
PREFERRED STOCK DIVIDEND (70,057)
------------ ------------
LOSS FOR COMMON STOCK $ (6,881,324) $ (8,004,880)
============ ============
LOSS PER COMMON SHARE,
BASIC AND DILUTED $ (0.47) $ (0.27)
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING, BASIC AND DILUTED 14,625,703 29,595,622
============ ============
</TABLE>
See accompanying notes
4
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CRAY INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(unaudited)
<TABLE>
<CAPTION>
Common Stock
-----------------------------------
Number of Accumulated
Shares Amount Deficit Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 2000 25,211,872 $ 111,442,905 $ (97,136,088) $ 14,306,817
Common stock issued in private
placement, net of issuance costs
of $1,830,495 5,226,875 24,303,880 24,303,880
Exercise of warrants 1,872,537 9,015,339 9,015,339
Cash received on subscribed common stock 900,000 900,000
Warrants and options issued for services 193,880 193,880
Issuance of shares under Employee
Stock Purchase Plan 33,895 108,040 108,040
Exercise of stock options 30,301 92,959 92,959
Net loss (8,004,880) (8,004,880)
------------- ------------- ------------- -------------
BALANCE, March 31, 2000 32,375,480 $ 146,057,003 $(105,140,968) $ 40,916,035
============= ============= ============= =============
</TABLE>
See accompanying notes
5
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CRAY INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,811,267) $ (8,004,880)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 431,370 529,994
Beneficial conversion feature of notes payable 286,466 9,186
Non-cash warrant and option expense 193,880
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable 250,422 (11,932)
Inventory 75,527 (1,280,301)
Deposit to SGI (5,000,000)
Other assets 32,585 (504,465)
Accounts payable and other accrued liabilities 984,769 854,188
Accrued payroll and related expenses (34,003) (208,673)
Deferred revenue 20,833 (42,977)
Advances to suppliers 2,573 (85,231)
------------ ------------
Net cash used by operating activities (4,760,725) (13,551,211)
INVESTING ACTIVITIES:
Purchases of property and equipment (391,737) (491,771)
------------ ------------
Net cash used by investing activities (391,737) (491,771)
FINANCING ACTIVITIES:
Related party receivable (18,873) (5,208)
Restricted cash 89,505
Issuance of notes payable 1,650,000
Sale of common stock 4,914,023 25,203,880
Proceeds from exercise of warrants 9,015,339
Proceeds from exercise of options 92,959
Principal payments on bank note (69,610)
Capital leases, net (128,521) (165,266)
------------ ------------
Net cash provided by financing activities 6,416,629 34,161,599
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,264,167 20,118,617
CASH AND CASH EQUIVALENTS:
Beginning of period 3,161,867 10,069,355
------------ ------------
End of period $ 4,426,034 $ 30,187,972
============ ============
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING
AND FINANCING ACTIVITIES:
Inventory reclassed to fixed assets 1,032,107 1,310,604
Common stock issued for employee stock purchase plan 144,729 108,040
Accounts payable converted to notes 594,291
Fixed asset additions through capital leases 57,229
Stock dividends 90,295
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 48,969 $ 69,464
</TABLE>
See accompanying notes
6
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CRAY INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and
related interim statements of operations, shareholders' equity and cash flows
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. All adjustments considered necessary for fair
presentation have been included. Interim results are not necessarily indicative
of results for a full year. The information included in this Form 10-Q should be
read in conjunction with Management's Discussion and Analysis and the financial
statements and notes thereto included in the Company's financial statements for
the years ended December 31, 1998 and 1999, contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
<S> <C> <C>
Components and subassemblies $ 8,043,797 $ 7,854,535
Work in process 805,612
Finished goods 1,137,328 2,549,807
Inventory allowance (5,473,724) (5,921,632)
----------- -----------
$ 4,513,013 $ 4,482,710
=========== ===========
</TABLE>
CHANGES IN CAPITAL
On February 2, 2000, the Company raised $26,134,375, prior to fees and
expenses of $1,830,495, in a private placement of 5,226,875 shares of Common
Stock to 20 institutional and 8 individual accredited investors.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average
number of shares of common stock outstanding. Because outstanding stock options,
warrants and other common stock equivalent shares are antidilutive, their effect
has not been included in the calculation of net loss per share.
7
<PAGE> 8
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
ACQUISITION OF CRAY RESEARCH BUSINESS UNIT
The Company has acquired certain assets of the Cray Research business
unit operations from Silicon Graphics, Inc. ("SGI"). The tangible assets and
operations acquired consist primarily of three buildings and associated real
property, inventory, furniture, fixtures and equipment and collateral records
and materials. In addition the Company acquired certain intellectual property
rights, including patents, know-how, trademarks and trade names, licenses to
other patents and know-how and rights under specified contracts and causes of
action. The Company assumed certain liabilities related to the assets
acquired, including obligations under specified contracts, certain employment
and benefit obligations and specified product liability claims. SGI has retained
service contracts related to Cray products until the contracts terminate or are
assigned to the Company. The Company has agreed to perform the obligations under
these service contracts in return for monthly fees from SGI. The Company did
not acquire any cash or trade receivables and did not assume any trade payables
or indebtedness.
The Company intends to continue to offer and support the Cray business
unit's supercomputer products, to continue its current product development
programs and to integrate these operations with the Company's current
supercomputer operations.
The Company paid to SGI $15 million in cash, issued one million shares
of Common Stock and issued a nine-month non-interest bearing promissory note in
the amount of $35.8 million. The amount of the note is subject to post-closing
adjustment based upon an audit of the closing balance sheet. The cash paid at
closing was funded from the Company's available cash balances. The Company
expects to pay the promissory note from funds generated from business
operations. The amount of consideration paid in this acquisition was determined
in arms-length negotiations between the Company and SGI.
The closing documents were signed on April 2, 2000, with SGI responsible
for all operations of the Cray Research business unit through March 31, 2000 and
the Company responsible for all operations commencing April 1, 2000. The Company
will record the acquisition as of April 1, 2000.
On April 3, 2000, in connection with the Company's acquisition of the
Cray Research business unit from SGI, the Company filed an amendment to its
articles of incorporation changing its name from "Tera Computer Company" to
"Cray Inc." The Company's Nasdaq trading symbol has changed from "TERA" to
"CRAY."
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in this Item 2 includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act, as amended, and is
subject to the safe harbor created by those sections. Factors that realistically
could cause results to differ materially from those projected in the
forward-looking statements are set forth under "Risk Factors" beginning on page
14. The following discussion should also be read in conjunction with the
Financial Statements and Notes thereto.
OVERVIEW
We design, develop, market and service high performance general-purpose
parallel computer systems. With our acquisition of the Cray Research business
unit effective at the beginning of April 2000, we presently market two computer
models, the Cray SV1 and T3E, and provide maintenance services to the Cray
installed base of these and earlier models of Cray computers. We also are
developing new computer systems, the MTA1 and the MTA2, based on our
multithreaded architecture system, and the SV2, which will combine elements of
the SV1 and T3E computers, and have begun initial work on their respective
successors, the MTA3 and SV3.
Our product line now includes:
- The Cray SV1, a vector system introduced in 1998, is targeted at the
installed base of vector supercomputers, such as the earlier Cray J90,
T90, C90 and YMP computers. The sales price for SV1 systems ranges
from $1 million to $5 million.
- The Cray T3E, introduced in 1997, is a massively parallel system
targeted at governmental, environmental science, academic research and
national research laboratory applications. The sales price for T3E
systems ranges from $4 million to $20 million.
- The Cray MTA1, based on our multithreaded architecture, is targeted to
customers with computational problems that have proven difficult to
run in parallel on vector and massively parallel systems. MTA systems
are designed to address a wide range of scientific and engineering
applications and emerging commercial applications. We are currently
installing our first 16-processor MTA1 at the San Diego Supercomputer
Center and are in the process of moving the integrated circuit designs
from gallium arsenide to CMOS, or complementary metal-oxide silicon;
the full CMOS system is referred to as the Cray MTA2. The sales price
for MTA1 and MTA2 systems is expected to range from $4 million to $40
million.
- The SV2 is designed to combine vector and massively parallel features
with high-speed memory access. This project, which is targeted for
release in late 2002, is considered essential for national security
interests and is partially funded by the
9
<PAGE> 10
Department of Defense. The SV2 will be used for large scale science and
engineering applications.
Our service organization now supports over 600 Cray supercomputers
installed at approximately 200 customer sites in approximately 30 countries.
This installed base includes close to 200 large scale vector supercomputers,
such as the Cray YMP, C90 and T90 systems, and more than 50 T3E massively
parallel systems.
We have approximately 900 employees (an increase from approximately 125
employees before the acquisition) and world-wide operations. Our principal
facilities are located in Seattle, Washington (corporate headquarters and MTA
hardware and software engineering) with 125 employees; Eagan, Minnesota
(software engineering, sales and marketing), with approximately 200 employees;
and Chippewa Falls, Wisconsin (hardware engineering and manufacturing), with
approximately 300 employees. Approximately 125 employees are located in field
offices in the United States, with principal sales and service offices located
in Maryland, Georgia and New Mexico. Overseas, we have approximately 150
employees in almost 30 countries, with principal offices in the United Kingdom,
Germany, France, Japan, Canada and Australia.
We are in the process of separating the Cray Research operations from
those of Silicon Graphics and integrating them with our own. This process
includes establishing separate network, communications and other infrastructure
services, reconstituting the marketing and sales operations, setting up
subsidiary operations for international sales and services, implementing new
operational policies and procedures, and identifying and filling openings in
management, administration and other areas.
We have experienced net losses in each year of operations. We incurred
net losses of approximately $19.8 million in 1998, $34.5 million in 1999 and
$8.0 million in the first three months of 2000, compared to a net loss of
approximately $6.8 million in the first three months of 1999. Our funding from
inception through March 31, 2000 has been primarily from the sale of
approximately $142.8 million of securities, research funding from the Defense
Advanced Research Projects Agency ("DARPA") of approximately $19.4 million, and
revenue of approximately $4.2 million.
We recognize revenue from sales of our computer systems upon acceptance
by the customer, although depending on sales contract terms, revenue may be
recognized upon shipment or delayed until clarification of funding. We recognize
service revenue from the maintenance of our computer systems ratably over the
term of each maintenance agreement.
Factors that should be considered in evaluating our business, operations
and prospects and that may affect our future results and financial condition are
set forth below, beginning on page 14.
10
<PAGE> 11
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
REVENUE. We had no revenue from any product sales in the first quarter
of 2000; in the first quarter of 1999, we recognized $557,000 of product revenue
from the sale of a four-processor MTA system to the San Diego Supercomputer
Center. We had $43,000 of service revenue in the first quarter of 2000 compared
to $22,000 for the comparable 1999 quarter. We had no contract revenue for the
three months ended March 31, 2000, compared to $81,000 for the three months
ended March 31, 1999. Contract revenue was pursuant to a subcontract with SDSC
to evaluate multithreaded architecture for certain defense applications. The
subcontract expired on June 30, 1999.
OPERATING EXPENSE. With no product revenue in the first quarter of 2000,
we had no associated costs in that quarter, compared to a cost of product
revenue of $550,000 for the 1999 first quarter. Our cost of service revenue was
$26,000 for the 2000 first quarter compared to $29,000 for the 1999 first
quarter. The cost of contract revenue decreased to zero for the three months
ended March 31, 2000 compared to $41,000 for the three months ended March 31,
1999, due to the completion of the SDSC subcontract on June 30,
1999.
Manufacturing costs and inventory adjustments were $2.0 million for the
three months ended March 31, 2000 compared to $2.4 million for the three months
ended March 31, 1999. These costs reflect the expense of our manufacturing
group, including personnel costs and allocated overhead, of approximately
$687,000 for the three months ended March 31, 2000, compared to $935,000 for the
three months ended March 31, 1999. The decrease of $248,000 is primarily due to
an increased allocation of manufacturing personnel to research and development
for the three months of 2000. We expect this trend to continue during the
remainder of 2000.
We also incurred production expenses not directly related to systems
delivered to SDSC of $439,000 for the three months ended March 31, 2000,
compared to $249,000 for the three months ended March 31, 1999, and net
inventory adjustments of $921,000 for the three months ended March 31, 2000,
compared to $1.3 million for the three months ended March 31, 1999.
Research and development expenses reflect our costs associated with the
development of the MTA system, including next generation systems and related
software development, and cover personnel expenses, allocated overhead and
operating expenses, software, materials, and engineering expenses, including
payments to third parties. Research and development expenses increased from $3.0
million for the three months ended March 31, 1999 to $4.5 million for the three
months ended March 31, 2000. Personnel expenses increased by $647,000 over 1999,
due to an increased allocation of personnel, additions in our personnel and
higher wages. Also, a decrease in materials expense of $200,000 was offset by an
increase of $1.0 million in engineering expenses.
Marketing and sales expenses for the three months ended March 31, 2000
increased $136,000 to $768,000 from $632,000 for the three months ended March
31, 1999. The increase was due to increased personnel costs.
11
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General and administrative expenses for the three months ended March 31,
2000 increased $635,000 to $1.1 million from $465,000 for the three months ended
March 31, 1999. The increase was due in part to increased investment relations
and shareholder costs of approximately $250,000, non-cash expenses associated
with the provisions of warrants and options for consulting services of
approximately $193,000, and increased personnel costs of $65,000. General and
administrative expenses are expected to increase commensurate with growth in our
operations.
OTHER INCOME (EXPENSE). Interest income for the three months ended March
31, 2000 increased $293,000 to $320,000 from $27,000 for the three months ended
March 31, 1999, due to higher average cash balances from the financing completed
in February 2000. Interest expense for the three months ended March 31, 2000
increased $11,000 to $60,000 from $49,000 for the three months ended March 31,
1999, due to a bank loan for the purchase of capital assets issued in the third
quarter 1999.
The results for the first three months of 2000 include a gain of $81,000
associated with the sale of inventory to a third-party.
The results for the first three months of 1999 include a non-cash
interest expense of approximately $278,000 associated with the value of the
conversion feature of certain convertible promissory notes issued in the first
quarter of 1999, all of which was recorded in the first quarter; the results
also include a non-cash expense for the value of detachable warrants issued in
conjunction with the convertible promissory notes, of which $8,000 was
recognized in the first quarter of 1999.
TAXES. We made no provision for federal income taxes as we have
continued to incur net operating losses.
PREFERRED STOCK. The dividends for the first quarter of 1999 were
accrued on our Series A Convertible Preferred Stock, all of which was converted
to common stock in the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in 1987 through March 31, 2000, our principal
sources of liquidity have been net proceeds from the sale of equity totaling
$142.8 million, DARPA research funding and subcontracts totaling $19.4 million
and sales receipts of approximately $4.2 million. At March 31, 2000, we had
$30.2 million in cash.
Net cash used in operating activities was $13.6 million for the three
months ended March 31, 2000, an increase of $8.8 million from the $4.8 million
used in the three months ended March 31, 1999. Net operating cash flows were
primarily attributable to quarterly net losses, personnel costs, costs of
inventory and a $5.0 million escrow deposit in connection with the purchase of
the Cray Research business unit from SGI. Cash used for personnel expenditures
increased from
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approximately $2.8 million in the first three months of 1999 to $3.4 million for
the three months of 2000; inventory purchases increased from $1.8 million to
$1.9 million.
Net cash spent on investing activities was $492,000 for the three months
ended March 31, 2000, compared to $392,000 for the three months ended March 31,
1999, and consisted of additional property, plant and equipment, primarily for
computers and electronic test equipment, computer software and furniture and
fixtures for both periods.
Net cash provided by financing activities was $34.2 million for the
three months ended March 31, 2000, compared to $6.4 million for the three months
ended March 31, 1999. The increase in 2000 over 1999 was due primarily to net
proceeds from the issuance of common stock of $25.2 million in the first quarter
of 2000, compared to $4.9 million in the first quarter of 1999. In the first
quarter of 2000, we also received $9.0 million from the exercise of common stock
warrants.
As part of the acquisition of the Cray Research business unit, we paid
SGI $15 million ($10 million from our unrestricted cash and $5 million from the
SGI deposit account) and issued a nine-month non-interest bearing promissory
note of $35.8 million (the amount of the note is subject to post-closing audit).
We believe our present cash resources and our anticipated revenue from product
sales and maintenance services will be sufficient to finance our planned
operations for the remainder of the year, including payment of the SGI note and
other acquisition costs. Our operational expenses will consist primarily of
personnel costs, cost of inventory and third party engineering expenses.
Nevertheless, we may raise additional equity and/or debt capital in the
next twelve months to enhance our financial position for future operations. In
addition, if anticipated sales of Cray products were delayed or if we were not
successful in maintaining the level of maintenance revenue, we may need
additional capital earlier than planned. Financings may not be available to us
when needed or, if available, may not be available on satisfactory terms or may
be dilutive to our shareholders. See "Risk Factors--We May Engage in
Additional Financings Which May Be Dilutive to Existing Shareholders."
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Risk Factors
The following factors should be considered in evaluating our business,
operations and prospects and may affect our future results and financial
condition.
A FAILURE TO INTEGRATE THE CRAY RESEARCH BUSINESS UNIT COULD COMPROMISE OUR
GROWTH STRATEGY AND ADVERSELY AFFECT OUR BUSINESS. With the acquisition of the
Cray Research business unit from Silicon Graphics, Inc. ("SGI"), the size and
geographic dispersion of our workforce and operations increased significantly.
These increases place a significant strain on our management, financial and
other resources. We need to attract additional management talent, implement new
financial, budgeting and management information systems, retain, motivate and
effectively manage our employees, enhance internal control systems, increase our
sales force, renovate existing and find new facilities and successfully separate
the Cray operations from those of SGI and combine them with our existing
operations. We may experience difficulties in integrating Cray's personnel,
operations and technologies, and managing this sudden growth, and these issues
could divert our management's time and resources. Our success will depend on our
management's ability to make these changes and to manage our operations
effectively over the long term.
LACK OF CUSTOMER ORDERS FOR OUR EXISTING SV1 AND T3E PRODUCTS AND OUR INABILITY
TO SELL OUR PRODUCTS AT EXPECTED PRICES WOULD ADVERSELY AFFECT OUR PROSPECTS. We
will depend on sales of our current products, the Cray SV1 and T3E, for
significant product revenues in 2000. To obtain these sales, we need to
reconstitute our marketing and service organization and assure our customers of
product performance and our ability to service these products. Most of our
potential customers already own or lease very high performance computer systems.
Some of our competitors may offer trade-in allowances or substantial discounts
to potential customers, and we may not be able to match these sales incentives.
We may be required to provide discounts to make sales or to finance the leasing
of our products, which would result in a deferral of our receipt of cash for
such systems. These developments would limit our revenues and resources and
would adversely affect our profitability and operations.
FAILURE TO OBTAIN RENEWAL OF SERVICE CONTRACTS WOULD ADVERSELY AFFECT OUR
REVENUES AND EARNINGS. High performance computer systems are typically sold with
maintenance service contracts. These contracts generally are for annual periods
although some are for multi-year periods. We currently are performing the
services under the existing SGI maintenance contracts as a sub-contractor to
SGI. As these contracts expire, we need to convince customers to execute new
maintenance service contracts with us. We anticipate that the service revenues
will constitute a significant amount of our total revenues. If customers
decommissioned our installed computers and did not renew their maintenance
service contracts with us, our revenue and earnings would be adversely affected.
THE COST OF SERVICE OF THE T90 INSTALLED BASE WILL ADVERSELY AFFECT OUR
EARNINGS. Certain components in the T90 vector computers sold by Cray prior to
our acquisition have an unusually high failure rate. The cost of servicing the
T90 computers exceeds the related service revenues. We are continuing to take
action that commenced prior to the acquisition to address this problem,
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and will have on our balance sheet a reserve to account for anticipated losses
on the T90 maintenance service contracts.
LACK OF GOVERNMENT SUPPORT FOR SUPERCOMPUTER SYSTEMS WOULD ADVERSELY AFFECT OUR
BUSINESS AND INCREASE OUR CAPITAL REQUIREMENTS. We have targeted U.S. and
foreign government agencies and research laboratories as important sales
prospects for all of our products. In addition, these agencies fund a portion of
our development efforts. The U.S. government historically has facilitated the
development of, and has constituted a market for, new and enhanced very high
performance computer systems. The failure of U.S. and foreign government
agencies to purchase additional very high performance computer systems or to
continue to fund these development efforts, due to lack of funding, change of
priorities or for any other reason, would materially and adversely affect our
results of operations and increase our need for capital.
PROPOSALS AND PURCHASES BASED ON THEORETICAL PEAK PERFORMANCE WILL ADVERSELY
AFFECT OUR PROSPECTS. Our high performance systems are designed to provide high
actual sustained performance on difficult computational problems. Many of our
competitors offer systems with higher theoretical peak performance numbers,
although their actual sustained performance frequently is a small fraction of
their theoretical peak performance. Nevertheless, many requests for proposals,
primarily from governmental agencies in the U.S. and elsewhere, have criteria
based on theoretical peak performance. Until these criteria are changed, we may
be foreclosed from bidding or proposing our systems, which would adversely
affect our revenue potential.
OUR UNCERTAIN PROSPECTS FOR EARNINGS COULD ADVERSELY AFFECT AN INVESTMENT IN US.
We cannot be certain that we will achieve a profitable level of operations in
the future. We have experienced net losses in each year of our operations. We
incurred net losses of approximately $15.8 million in 1997, $19.8 million in
1998, $34.5 million in 1999 and $8.0 million in the first quarter of 2000. While
we will have a substantial increase in revenues with the acquisition of the Cray
business operations, whether we will achieve earnings will depend upon a number
of factors, including:
- our ability to integrate the operations of the former Cray business
unit;
- our ability to market and sell our existing products, the SV1 and T3E,
and complete the development of the MTA2 and SV2 systems;
- the level of revenue in any given period;
- the cost of servicing the T90 installed based;
- the terms and conditions of sale or lease for our products; and
- our expense levels and manufacturing costs.
OUR INABILITY TO OVERCOME THE TECHNICAL CHALLENGES OF COMPLETING THE DEVELOPMENT
OF OUR SYSTEMS COULD CAUSE OUR BUSINESS TO FAIL. We are involved in significant
development
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<PAGE> 16
efforts, including system upgrades to our existing SV1 and T3E products in order
to add capabilities and features to extend their product lives. Our success over
the next few years depends upon completing the development of the MTA2 and the
SV2 systems. And we have commenced initial work on development of the MTA3 and
SV3 systems. These development efforts are lengthy and technically challenging
processes, and require a significant investment of capital, engineering and
other resources. Delays in completing the design of the hardware components or
software of these systems or in integrating the full systems could materially
and adversely affect our business and results of operations. We are dependent on
our vendors to manufacture components for our systems, and few companies can
meet our design requirements. Their inability to manufacture our components to
our designs will adversely affect the completion of these products. From time to
time during the development process we have had, and in the future we may have,
to redesign certain components because of previously unforeseen design flaws. We
also may find certain flaws, or "bugs", in our system software which require
correction. Redesign work may be costly and cause delays in the development of
these systems, and could affect adversely their success as commercial products.
THE ABSENCE OF THIRD-PARTY APPLICATION SOFTWARE COULD ADVERSELY AFFECT OUR
ABILITY TO MAKE COMMERCIAL SALES OF OUR NEW SYSTEMS. In order to make sales in
the automotive, aerospace, chemistry and other engineering and commercial
markets, we must be able to attract independent software vendors to port their
software application programs so that they will run on our MTA and SV2 systems.
The relatively low volume of supercomputer sales may make it difficult for us to
attract these vendors. We also plan to modify and rewrite third-party software
applications to run on these systems ourselves to facilitate the expansion of
our potential markets. There can be no assurance that we will be able to induce
independent software vendors to rewrite their applications, or that we will
successfully rewrite third-party applications for use on the MTA or SV2 systems.
U.S. EXPORT CONTROLS COULD HINDER OUR ABILITY TO MAKE SALES TO FOREIGN CUSTOMERS
AND OUR FUTURE PROSPECTS. The U.S. Government regulates the export of high
performance computer systems such as our products. Delay or denial in the
granting of any required licenses could materially and adversely affect our
ability to make sales to foreign customers thereby eliminating an important
source of potential revenue.
OUR RELIANCE ON THIRD PARTY SUPPLIERS POSES SIGNIFICANT RISKS TO OUR BUSINESS
AND Prospects. We subcontract the manufacture of substantially all of our
hardware components for all of our products, including integrated circuits,
printed circuit boards, flex circuits and power supplies, on a sole or limited
source basis to third party suppliers.
We are exposed to substantial risks because of our reliance on these and
other limited or sole source suppliers. For example:
- if a reduction or interruption of supply of our components occurred,
it could take us a considerable period of time to identify and qualify
alternative suppliers to redesign our products as necessary and to
recommence manufacture of the redesigned components;
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<PAGE> 17
- if we were ever unable to locate a supplier for a component, we would
be unable to assemble and deliver our products;
- one or more suppliers may make strategic changes in their product
lines, which may result in the delay or suspension of manufacture of
our components or systems; and
- some of our key suppliers are small companies with limited financial
and other resources, and consequently may be more likely to experience
financial difficulties than larger, well established companies.
FAILURE TO OBTAIN CREDIT FACILITIES MAY RESTRICT OUR OPERATIONS. We are
negotiating for credit facilities, such as bank lines of credit, vendor credit
and capitalized equipment lease lines. The absence of a record of revenues and
earnings makes obtaining such facilities more difficult; if we obtain such
facilities they may have high interest rates, contain restrictions on our
operations and require security. Failure to obtain such credit facilities may
limit our planned operations and our ability to acquire needed infrastructure
and other capital items and would adversely affect our cash reserves and
increase our need for capital.
A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE AND COULD
DEPRESS MARKET PRICES OF OUR STOCK AND COULD HINDER OUR ABILITY TO OBTAIN
ADDITIONAL FINANCING. Sale of a substantial number of our shares of common stock
in the public market or the prospect of such sales could materially and
adversely affect the market price of our common stock. As of March 31, 2000,
without giving effect to the Cray acquisition, we had outstanding:
- 32,406,135 shares of common stock,
- warrants to purchase 9,696,759 shares of common stock,
- 8% Convertible Promissory Notes in the principal amount of $494,291,
convertible at $5.00 per share into 98,858 shares of common stock, and
- stock options to purchase an aggregate of 4,470,921 shares of common
stock, of which 1,932,400 options were then exercisable.
As part of the financing completed on June 21, 1999, we issued a warrant
to Terren S. Peizer, who paid us $200,000 for the warrant, for a minimum of
1,591,723 shares of common stock at $4.95 per share. This warrant becomes
exercisable for half of the shares covered thereby on June 21, 2000, and ratably
over the following twelve months for the remaining half. If the average market
price for our common stock is less than $4.72 for the five trading days prior to
June 21, 2000, the exercise price would be reset to 105% of such average. On
June 21, 2000, and in certain circumstances prior to that date, such as if we
were involved in a merger or similar transaction or if we terminated our
relationship with Mr. Peizer, the number of shares subject to this warrant
increases to 10% of our issued and outstanding shares, on a fully diluted basis,
with certain limited exceptions. If this warrant had been so exercisable as of
March 31, 2000, it would have been exercisable for a total of 4,439,930 shares.
This warrant is not included in the number of shares of common stock issuable
upon exercise of warrants above.
Almost all of our outstanding shares of common stock may be sold without
substantial restrictions. All of the shares purchased under the option plans are
available for sale in the public market, subject in some cases to volume and
other limitations.
Sales in the public market of substantial amounts of our common stock,
including sales of common stock issuable upon the exercise of the warrants,
could depress prevailing market prices for the common stock. Even the perception
that such sales could occur may impact market prices.
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<PAGE> 18
In addition, the existence of outstanding warrants and options may
prove to be a hindrance to our future equity financings. Further, the holders of
the warrants and options may exercise them at a time when we would otherwise be
able to obtain additional equity capital on terms more favorable to us. Such
factors could materially and adversely affect our ability to meet our capital
needs.
WE MAY ENGAGE IN ADDITIONAL FINANCINGS WHICH MAY BE DILUTIVE TO EXISTING
SHAREHOLDERS. We believe our present cash resources and revenue from anticipated
sales of products and service revenues are sufficient to finance our planned
operations for the next twelve months. Nevertheless, we may raise additional
equity and/or debt capital in the next twelve months to enhance our financial
position for future operations. In addition, if we were not able to complete the
development of the MTA2 and SV2 systems, we may need additional capital earlier
than planned. Financings may not be available to us when needed or, if
available, may not be available on satisfactory terms or may be dilutive to our
shareholders.
WE MAY BE UNABLE TO ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL, AND AS A RESULT
WE MAY NOT BE ABLE TO GROW AS WE EXPECT OR EFFECTIVELY IMPLEMENT OUR BUSINESS
PLAN. Our success also depends in large part upon our ability to attract, retain
and motivate highly skilled management, technical and marketing and sales
personnel, particularly in light of the acquisition of the Cray business unit.
Competition for highly skilled management, technical, marketing and sales
personnel is intense, and we may not be successful in attracting and retaining
such personnel.
We are dependent on Burton J. Smith, our Chief Scientist, and James E.
Rottsolk, our Chief Executive Officer and President. The loss of either
officer's services could have a material impact on our ability to achieve our
business objectives. We are the beneficiary of key man life insurance policies
on the lives of Messrs. Smith and Rottsolk in the amount of $2 million and $1
million, respectively. We have no employment contracts with either Mr. Smith or
Mr. Rottsolk, or with any other employee.
OUR QUARTERLY PERFORMANCE MAY VARY SIGNIFICANTLY AND COULD CAUSE OUR STOCK PRICE
TO BE VOLATILE. One or a few system sales may account for a substantial
percentage of our quarterly and annual revenue. This is due to the high average
sales price of our products, particularly the T3E system and the expected high
average sales prices for our MTA1, MTA2 and SV2 systems, and the timing of
purchase orders and product acceptances. Because a number of our prospective
customers receive funding from the U.S. or foreign governments, the timing of
orders from such customers may be subject to the appropriation and funding
schedules of the relevant government agencies. The timing of orders and
shipments also could be affected by other events outside our control, such as:
- changes in levels of customer capital spending;
- the introduction or announcement of competitive products;
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<PAGE> 19
- the availability of components; or
- currency fluctuations and international conflicts or economic crises.
Because of these factors, revenue, net income or loss and cash flow are
likely to fluctuate significantly from quarter to quarter.
OUR STOCK PRICE MAY BE VOLATILE. The trading price of our common stock is
subject to significant fluctuations in response to, among other factors:
- changes in analysts' estimates;
- our future capital raising activities;
- announcements of technological innovations by us or our competitors;
and
- general conditions in the high performance computer industry.
In addition, the stock market is subject to price and volume
fluctuations that particularly affect the market prices for small
capitalization, high technology companies like us.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE. Our market is
characterized by rapidly changing technology, accelerated product obsolescence,
and continuously evolving industry standards. Our success will depend upon our
ability to enhance our current products, the SV1 and T3E, to complete
development of the MTA2 and the SV2 systems and to develop MTA3 and SV3 systems
in the future. We will need to introduce new products and features in a timely
manner to meet evolving customer requirements. We may not succeed in these
efforts. Our business and results of operations will be materially and adversely
affected if we incur delays in developing our products or if such products do
not gain broad market acceptance. In addition, products or technologies
developed by others may render our products or technologies noncompetitive or
obsolete.
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGH PERFORMANCE COMPUTER
MARKET. The performance of our products may not be competitive with the computer
systems offered by our competitors, and we may not compete successfully over
time against new entrants or innovative competitors at the lower end of the
market. Furthermore, periodic announcements by our competitors of new high
performance computer systems and price adjustments may materially and adversely
affect customer demand for our products.
Our competitors are established companies that are well known in the
high performance computer market, including IBM, Sun Microsystems, Compaq
Computer, Hewlett-Packard and Silicon Graphics in the U.S. and Japanese
companies such as NEC Corporation, Fujitsu and Hitachi. Each of these
competitors has broader product lines and substantially greater research,
engineering, manufacturing, marketing and financial resources than we do.
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<PAGE> 20
In addition we compete with new entrants capitalizing on developments in
parallel processing and increased computer performance through networking and
clustering systems. To date, these products have been limited in applicability
and scalability and can be difficult to program. A breakthrough in architecture
or software technology could make parallel systems more attractive to potential
customers. Such a breakthrough would materially and adversely affect our ability
to sell our products and the receipt of revenue.
MODIFICATION OR ELIMINATION OF CURRENT TARIFFS UNDER THE ANTIDUMPING LAWS WOULD
ADVERSELY AFFECT OUR COMPETITIVE POSITION IN THE UNITED STATES. Significant
duties are imposed on the importation in the U.S. of vector high performance
computer systems of NEC, Fujitsu and Hitachi under the U.S. antidumping laws.
These duties are subject to review in the second half of 2002. If these duties
were modified or eliminated, we would face significantly increased competition
in the U.S. high performance computer market from these companies.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY INFORMATION AND RIGHTS ADEQUATELY.
We rely on a combination of patent, copyright and trade secret protection,
non-disclosure agreements and licensing arrangements to establish, protect and
enforce our proprietary information and rights. We have a number of patent
applications pending and plan to file additional patent applications. There can
be no assurance, however, that patents will be issued from the pending
applications or that any issued patents will protect adequately those aspects of
our technology to which such patents will relate. Despite our efforts to
safeguard and maintain our proprietary rights, we cannot be certain that we will
succeed in doing so or that our competitors will not independently develop or
patent technologies that are substantially equivalent or superior to our
technologies.
Although we are not a party to any present litigation regarding
proprietary rights, third parties may assert intellectual property claims
against us in the future. Such claims, if proved, could materially and adversely
affect our business and results of operations. In addition, even meritless
claims would require management attention and would cause us to incur
significant expense to defend.
The laws of certain countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although we continue to implement protective measures and intend to
defend our proprietary rights vigorously, these efforts may not be successful.
OUR ABILITY TO BUILD CERTAIN PRODUCTS IS LIMITED BY OUR AGREEMENT WITH SGI,
WHICH MAY LIMIT OUR ABILITY TO COMPETE WITH SGI AND OTHER COMPANIES. The
Technology Agreement pursuant to which we acquired and licensed patent,
know-how and other intellectual property rights from SGI contains
restrictions on our ability to develop certain products, including specified
successors to the T3E system, and restrictions on the use of other technology,
such as SGI's IRIX operating system to the SV2.
IT MAY BECOME MORE DIFFICULT TO SELL OUR STOCK IN THE PUBLIC MARKET. Our common
stock is quoted on the Nasdaq National Market. In order to remain listed on this
market, the Company must meet Nasdaq's listing maintenance standards. If the bid
price of our common stock falls
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<PAGE> 21
below $5.00 for an extended period, or we are unable to continue to meet
Nasdaq's standards for any other reason, our common stock could be delisted from
the Nasdaq National Market. If the common stock were delisted, we likely would
seek to list the common stock on the Nasdaq SmallCap Market or for quotation on
the American Stock Exchange or a regional stock exchange. However, listing or
quotation on these markets or exchanges could reduce the liquidity for our
common stock. If the common stock were not listed or quoted on another market or
exchange, trading of the common stock would be conducted in the over-the-counter
market on an electronic bulletin board established for unlisted securities or in
what are commonly referred to as the "pink sheets." As a result, an investor
would find it more difficult to dispose of, or to obtain accurate quotations for
the price of, the common stock. In addition, a delisting from the Nasdaq
National Market and failure to obtain listing or quotation on such other market
or exchange would subject our securities to so-called "penny stock" rules that
impose additional sales practice and market-making requirements on
broker-dealers who sell and/or make a market in such securities. Consequently,
removal from the Nasdaq National Market and failure to obtain listing or
quotation on another market or exchange could affect the ability or willingness
of broker-dealers to sell and/or make a market in the common stock and the
ability of purchasers of the common stock to sell their securities in the
secondary market. In addition, if the market price of the common stock falls to
below $5.00 per share, we may become subject to certain penny stock rules even
if our common stock is still quoted on the Nasdaq National Market. While such
penny stock rules should not affect the quotation of our common stock on the
Nasdaq National Market, such rules may further limit the market liquidity of the
common stock and the ability of investors to sell the common stock in the
secondary market.
PROVISIONS IN OUR AGREEMENT WITH SILICON GRAPHICS MAKE IT MORE DIFFICULT FOR
SPECIFIED COMPANIES TO ACQUIRE US. The asset purchase agreement with SGI
pursuant to which we purchased the Cray Research business assets contains
provisions restricting our ability to transfer the Cray Research business
assets. Sales of these assets to Hewlett-Packard, Sun Microsystems, IBM, Compaq
Computer, NEC or Gores Technology Group, or their affiliates, are prohibited
until the earlier of March 31, 2003 or if SGI were sold. In addition, we must
give SGI a right of first refusal for any sale of these assets to other
purchasers for such period or if earlier, when over a period of four fiscal
quarters the revenue from sales of Cray products is less than 50% of our total
revenue.
PROVISIONS OF OUR ARTICLES AND BYLAWS COULD MAKE A PROPOSED ACQUISITION THAT IS
NOT APPROVED BY OUR MANAGEMENT MORE DIFFICULT. Provisions of our Restated
Articles of Incorporation and Restated Bylaws could make it more difficult for a
third party to acquire us. These provisions could limit the price that investors
might be willing to pay in the future for our common stock. For example, our
Articles and Bylaws provide for:
- a staggered Board of Directors, so that only three of nine directors
are elected each year;
- removal of a director only for cause and only upon the affirmative
vote of not less than two-thirds of the shares entitled to vote to
elect directors;
- the issuance of preferred stock, without shareholder approval, with
rights senior to those of the common stock;
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- no cumulative voting of shares;
- calling a special meeting of the shareholders only upon demand by the
holders of not less than 30% of the shares entitled to vote at such a
meeting;
- amendments to the Restated Articles of Incorporation require the
affirmative vote of not less than two-thirds of the outstanding shares
entitled to vote on the amendment, unless the amendment was approved
by a majority of "continuing directors" (as that term is defined in
our Articles);
- special voting requirements for mergers and other business
combinations, unless the proposed transaction was approved by a
majority of continuing directors;
- special procedures must be followed in order to bring matters before
our shareholders at our annual shareholders' meeting; and
- special procedures must be followed in order for nominating members
for election to the Board of Directors.
WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS. We have never paid any dividends
on our common stock and we intend to continue our policy of retaining any
earnings to finance the development and expansion of our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the quarter ended March 31, 2000, substantially all of our cash
equivalents and marketable securities are held in money market funds or
commercial paper of less than 90 days that is held to maturity. Accordingly we
believe that the market risk arising from our holdings of these financial
instruments is minimal. All of our current contract payments are payable in U.S.
dollars, and consequently we do not have any foreign currency exchange risks. We
do not hold any derivative instruments and have not engaged in hedging
transactions. Beginning in the second quarter, with the acquisition of the
world-wide Cray business operations, we will have transactions in foreign
currencies and anticipate that we will engage in hedging transactions.
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<PAGE> 23
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On February 2, 2000, we raised $26,134,375, prior to fees and expenses
of $1,830,495, in a private placement of 5,226,875 shares of our Common Stock to
20 institutional and 8 individual accredited investors. We sold the shares at a
price of $5.00 per share. These offers and sales were exempt from the
registration provisions of the Securities Act of 1933, as amended, under
Sections 4(2) and 4(6) of the Securities Act, and the rules and regulations
under those provisions, because of the nature of the offerees and investors and
the manner in which we conducted the offering. There were no underwriters or
finders involved.
ITEM 5. OTHER INFORMATION
The Company has acquired certain assets of the Cray Research business
unit operations from Silicon Graphics, Inc. ("SGI"). See "Acquisition of Cray
Research Business Unit" under Notes to Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
------------
<S> <C>
10.1 Asset Purchase Agreement between SGI and the Company,
dated as of March 1, 2000*
10.2 Amendment No. 1 to the Asset Purchase Agreement, dated as
of March 31, 2000*
10.3 Technology Agreement between SGI and the Company,
effective as of March 31, 2000
10.4 Services Contract Agreement between SGI and the Company,
dated as of March 31, 2000
10.5 Transition Services Agreement between SGI and the Company,
dated as of March 31, 2000
10.6 Registration Rights Agreement between SGI and the Company,
dated as of March 31, 2000
27.1 Financial Data Schedule
</TABLE>
*Incorporated by reference to the Company's report on Form 8-K, as filed with
the Commission on April 17, 2000
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<PAGE> 24
(b) Reports on Form 8-K
A report on Form 8-K for an event of February 2, 2000, was filed
on February 15, 2000, reporting our private placement of common stock
under "Other Events."
A report on Form 8-K for an event of March 1, 2000, was filed on
March 3, 2000, reporting our Asset Purchase Agreement for the Cray
Research business unit under "Other Events."
ITEMS 1, 3, AND 4 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
24
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CRAY INC.
May 15, 2000 By: /s/ JAMES E. ROTTSOLK
James E. Rottsolk
Chief Executive Officer
/s/ KENNETH W. JOHNSON
Kenneth W. Johnson
Chief Financial Officer
/s/ PHILISSA SARGIN
Philissa Sargin
Chief Accounting Officer
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<PAGE> 1
Exhibit 10.3
TECHNOLOGY AGREEMENT
This Agreement ("Technology Agreement") is made, entered into, and to be
effective as of the Closing Date (as defined below) by and between Silicon
Graphics, Inc., a Delaware corporation ("Seller") and Tera Computer Company, a
Washington corporation, ("Purchaser").
RECITALS
WHEREAS, Purchaser desires to purchase and acquire from Seller, and
Seller desires to sell, assign, license and transfer to Purchaser, certain
business, property, technology, assets and goodwill of the Business on the terms
and subject to the conditions of this Technology Agreement.
WHEREAS, as part of the foregoing, Seller and Purchaser have entered
into an Asset Purchase Agreement dated as of March 1, 2000 (the "Asset Purchase
Agreement Date");
WHEREAS the Parties desire to enter into this ancillary Technology
Agreement pursuant to which Seller will assign and license to the Purchaser
certain intellectual property specifically related to the Cray Products sold in
connection with the Business, and Purchaser will license back certain rights to
Seller.
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual agreements, provisions and covenants contained in this Technology
Agreement, the Parties hereby agree as follows:
1. DEFINITIONS
1.1. The Parties to this Technology Agreement hereby incorporate by
reference the definition set forth in the Asset Purchase
Agreement.
1.2. "Affiliates" shall mean any corporation or other entity that is
directly or indirectly controlling, controlled by or under
common control with a Party. For the purpose of this definition,
"control" shall mean the direct or indirect ownership of more
than fifty percent (50%) of the capital stock of the subject
entity entitled to vote in the election of directors (or, in the
case of an entity that is not a corporation, interests entitled
to vote in the election of the corresponding managing
authority).
1.3. "Capture Period" means the period starting on the Asset Purchase
Agreement Date and ending one (1) year therefrom .
1.4. "Closing Date" means March 31, 2000.
1.5. "Cray Heritage MPP Products" ("CHMPP") means the T3D and T3E
computer systems as of the Closing Date, and a T3E derivative
product as specifically defined below (" T3Eplus"). "T3Eplus"
means a T3E computer system that has
<PAGE> 2
been modified by (i) enabling adaptive routing; (ii) increasing
system frequency through clock speed enhancements to the EV4,
EV5 or EV56 Alpha processors and corresponding bus multiplier
changes; (iii) supporting through software warm reboot or
dynamic system reconfiguration; (iv) adding support for I/O
controller upgrades (i.e., support for industry standard I/O
cards); or (v) other minor repackaging or remanufacturing
changes of components (e.g., redesign of the clock chip to
ensure an on-going supply). CHMPP shall not include successor
products to the T3D or T3E other than a T3Eplus derivative
product expressly defined above. For example, CHMPP shall not
include a "T3F" or other distributed shared memory parallel
processor computer system derived from the CHMPP Non-Patent
Intellectual Property that incorporate performance enhancing
engineering changes extending the architecture of the T3D and
T3E such as by (a) use of a next generation processor (e.g.,
Alpha EV6 or later, or IA64), (b) reengineering and redesigning
of ASICs or system boards to increase performance and
functionality or (c) reengineering and redesigning the operating
system to increase performance or retarget applications.
1.6. "Cray Heritage Vector Products" ("CHVP") means the Cray 1, X-MP,
X-MP EL, XMS, Y-MP, YMP EL, IOS-E, IOS-F, Cray 2, C90, T90, J90,
SV1, SV1e and SV1ex.
1.7. "Cray Products" means CHMPP, CHVP, SV2 and Cray Software
products.
1.8. "Cray Software Products" means UNICOS and other software
products designated "assigned to Cray" on Schedules G and H.
1.9. "Documentation" means publications and documentation for the
Cray Products used in the Business.
1.10. "Front End Host Computer" means a general purpose computer that
is connected to a specialized back-end computing system and is
responsible for performing general-purpose computing and I/O
tasks for the specialized back-end computing system, including
but not limited to, handling all network and tape I/O,
hierarchical storage management, and compilation tasks for the
back-end computing system.
1.11. "Intellectual Property Right" shall mean (i) Patents; (ii)
copyrights in both published works and unpublished works,
registrations and applications therefor and associated moral
rights (collectively "Copyrights"); (iii) rights in mask works
(collectively "Maskworks"); (iv) Know-How; (v) Software; (vi)
trade secrets, confidential information, technical information,
data, plans, drawings, and blue prints (collectively "Trade
Secrets") whether arising under the laws of the United States or
any other state, country or jurisdiction; and (vii) common law,
state, federal, international and statutory rights in any
trademarks,
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<PAGE> 3
trademark registrations and applications, service marks, trade
names, corporate names and fictitious names (collectively
"Trademarks").
1.12. "Non-Patent Intellectual Property Rights" means Trade Secrets,
Know-How, Maskworks, and Copyrights.
1.13. "Patents" means all classes or types of patents, design patents,
utility patents, including, without limitation, originals,
divisions, continuations, continuations-in-part, extensions,
reexaminations, or reissues, patent applications and invention
disclosures for these classes or types of patent rights in all
countries of the world listed on Schedules A and B.
1.14. "Purchaser Capture Period Patents" means only those patents and
patent applications filed by Purchaser that have an earliest
effective filing date during the Capture Period and constitute
inventions arising from improvements to the Intellectual
Property Rights assigned or licensed herein.
1.15. "Purchaser Products" means the Cray Products and Vector
Supercomputers distributed, licensed and/or sold by Purchaser.
1.16. "Seller Exclusive Issued Patents" means all Patents in all
countries of the world (other than design patents) assigned or
exclusively licensed to the Seller as of the Closing Date that
are not otherwise assigned or licensed to Purchaser in this
Technology Agreement.
1.17. "Seller Group" means Seller and it's Affiliates.
1.18. "Seller Products" means any hardware or software products, or
combinations thereof, distributed, licensed and/or sold by
Seller, excluding the Cray Products.
1.19 "Software" means a set of statements or instructions to be used
directly or indirectly in a computer in order to bring about a
certain result.
1.20. "Source" shall mean the latest commercially released or
internally accepted version of source code, and prior versions
to the extent reasonably available, corresponding to the
specifically identified intellectual property asset.
1.21 "SV2" means the (i) Vector Processor-based supercomputer system
under design by Seller as of the Closing Date, (ii) targeted for
the high performance technical computing market.
1.22. "Vector Processor" means an integrated circuit or collection of
integrated circuits configured to process instructions wherein
the instruction set exposes user registers with more than two
64-bit or greater elements and is designed,
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marketed and optimized for performing vector-based computational
operations.
1.23 "Vector Supercomputer" means hardware, software and combinations
thereof for a scaleable Vector Processor based high performance
computer system.
2. TECHNOLOGY RIGHTS
2.1. Patents Assigned to Purchaser. Seller hereby sells, conveys,
assigns and transfers to Purchaser, and Purchaser hereby
accepts, all of Seller's right, title and interest in and to the
Patents listed in the Schedule A (Assigned Patents), together
with all ancillary rights thereto, including without limitation,
the right to sue and recover damages for past, present and
future infringements and to fully and entirely stand in the
place of Seller in all matters related thereto. Upon Purchaser's
reasonable request, Seller agrees to take further action and to
execute such additional documents at Purchaser's expense as may
be necessary to perfect Purchaser's title in and to the Assigned
Patents.
2.1.1 Patent License to Seller in Assigned Patents. Purchaser
grants to Seller a non-exclusive, royalty-free,
fully-paid, perpetual, worldwide license, without the
right to grant sublicenses to others, to make, have
made, use, import, sell, practice any method of
manufacture, and otherwise dispose of Seller's Products
under the Assigned Patents listed on Schedule A and
Purchaser Capture Period Patents.
2.2. Patents Licensed to Purchaser. Seller hereby grants to the
Purchaser, a non-exclusive, royalty-free, fully-paid, worldwide
license, without the right to grant sublicenses to others, to
make, have made, use, import and sell Purchaser Products, and to
practice any method of manufacture in connection with the
Purchaser Products, under the Patents listed on Schedule B.
2.3. Non-Patent Intellectual Property Rights in CHVP Assigned to
Purchaser. Seller hereby sells, conveys, assigns and transfers
to Purchaser, and Purchaser hereby accepts, all of Seller's
right, title and interest in and to the Non-Patent Intellectual
Property Rights listed in the Schedule C, together with all
ancillary rights thereto, including without limitation, the
right to sue and recover damages for past, present and future
infringements and to fully and entirely stand in the place of
Seller in all matters related thereto. Upon Purchaser's
reasonable request, Seller agrees to take further action and to
execute such additional documents at Purchaser's expense as may
be necessary to perfect Purchaser's title in and to the
Non-Patent Intellectual Property Rights listed on Schedule C.
2.3.1 Non-Patent Intellectual Property Rights in CHVP Licensed
to Seller. Purchaser grants to Seller a nonexclusive,
royalty-free, fully-paid, perpetual, worldwide license,
without the right to grant sublicenses to
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others, to practice any method of manufacture and to
make, have made, use, import and sell Seller Products
under the Non-Patent Intellectual Property Rights listed
on Schedule C.
2.4. Non-Patent Intellectual Property Rights in CHMPP Licensed to
Purchaser. Seller hereby grants to the Purchaser, a
non-exclusive, royalty-free, fully-paid, worldwide license,
without the right to grant sublicenses to others, to make, have
made, use, import and sell Purchaser Products, under the
Non-Patent Intellectual Property Rights listed on Schedule D.
2.4.1 Exclusive Right to Manufacture the CHMPP. Seller further
grants to Purchaser the exclusive, royalty-free, fully
paid, worldwide right under the Non-Patent Intellectual
Property Rights listed on Schedule D to manufacture
CHMPP products.
2.5. Non-Patent Intellectual Property Rights in SV2 Assigned to
Purchaser. Seller hereby sells, conveys, assigns and transfers
to Purchaser, and Purchaser hereby accepts, all of Seller's
right, title and interest in and to the Non-Patent Intellectual
Property Rights listed in the Schedule E, together with all
ancillary rights thereto, including without limitation, the
right to sue and recover damages for past, present and future
infringements and to fully and entirely stand in the place of
Seller in all matters related thereto. Upon Purchaser's
reasonable request, Seller agrees to take further action and to
execute such additional documents at Purchaser's expense as may
be necessary to perfect Purchaser's title in and to the
Non-Patent Intellectual Property Rights listed on Schedule E.
2.5.1 Non-Patent Intellectual Property Rights in SV2 Licensed
to Seller. Purchaser grants to Seller a nonexclusive,
royalty-free, fully-paid, perpetual, worldwide license,
without the right to grant sublicenses to others, to
make, have made, use, import and sell Seller Products,
and to practice any method of manufacture, under the
Non-Patent Intellectual Property Rights listed on
Schedule E.
2.5.2 Non-Patent Intellectual Property Rights Licensed to
Purchaser. Seller hereby grants to the Purchaser, a
non-exclusive, royalty-free, fully-paid, worldwide
license, without the right to grant sublicenses to
others, to make, have made, use, import and sell
Purchaser Products, under the Non-Patent Intellectual
Property Rights listed on Schedule F.
2.5.3 Intellectual Property Rights in the SV2 Retained by
Seller. The Parties acknowledge that the SV2, in its
current stage of development, may include certain
Intellectual Property Rights owned by Seller that are
not being assigned, licensed or otherwise transferred to
Purchaser, including without limit, the components
listed in Schedule L. Except
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for the specific rights granted to Purchaser herein, all
other Intellectual Property Rights in the SV2 are
expressly excluded.
2.6. Assignment of Software and Documentation to Purchaser. Seller
hereby sells, conveys, assigns and transfers to Purchaser, and
Purchaser hereby accepts, all of Seller's right, title and
interest in and to the Software and Documentation designated on
Schedules G and H as "Assign" to Purchaser, together with all
ancillary rights thereto, including without limitation, the
right to sue and recover damages for past, present and future
infringements and to fully and entirely stand in the place of
Seller in all matters related thereto. Upon Purchaser's
reasonable request, Seller agrees to take further action and to
execute such additional documents at Purchaser's expense as may
be necessary to perfect Purchaser's title in and to the assigned
Intellectual Property Rights on Schedules G and H.
2.6.1 Modified Source Distribution License to Seller for
UNICOS. Purchaser hereby grants to the Seller a
non-exclusive, royalty-free, fully-paid, perpetual,
worldwide license, to the UNICOS Software designated on
Schedule H as "Assign" to Purchaser, to use, modify and
create derivative source and object code works from the
associated source code, including the right to
distribute the source or derivatives, or derived object
code to third parties solely as enhancements or
modifications of Seller Products.
2.6.2 "Republication" License to Seller. Purchaser hereby
grants to the Seller a non-exclusive, royalty-free,
fully-paid, perpetual, worldwide license, to the
Documentation designated on Schedule G as "Assign" to
Purchaser and "Republication" to SGI to reproduce,
recreate or republish the associated publications or
documentation (Republished Works) for use in connection
with the Seller Products, under the condition that no
improper use is made of the Trademarks listed on
Schedule K. To the extent that Seller provides service
and/or support for Purchaser Products, Purchaser grants
to the Seller a non-exclusive, royalty-free, fully-paid,
perpetual, worldwide license, to the Documentation
designated on Schedule G as "Assign" to Purchaser to
reproduce, recreate or republish the associated
publications or documentation (Republished Works) for
use in connection with the Purchaser Products.
2.6.3 "Source-Only" License to Seller. Purchaser hereby grants
to the Seller a non-exclusive, royalty-free, fully-paid,
worldwide license to use, modify, and create derivative
source and object code works from the associated source
code solely for internal use in connection with the
design, manufacture and distribution of Seller Products,
without the
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right to grant sublicenses or distribute, under the
Software and Documentation designated on Schedule G as
"Assign" to Purchaser and "Source-Only" to SGI.
2.6.4 "Source-Binary Distribution" License to Seller.
Purchaser hereby grants to the Seller a non-exclusive,
royalty-free, fully-paid, worldwide license to use,
modify and create source and object code works from the
associated source code and distribute object code
derived from the source or its derivatives to third
parties, solely for Seller Products, without rights to
sublicense or distribute source code or source
derivatives to third parties other than source that is
licensed to customers solely for its use in connection
with the support or service of a Seller Product, under
the Software designated on Schedule G as "Assign" to
Purchaser and "Source-Binary Distribution" to SGI.
2.6.5 "Source Distribution" License to Seller. Purchaser
hereby grants to the Seller a non-exclusive,
royalty-free, fully-paid, worldwide license to use,
modify and create derivative source and object code
works from the associated source code, including the
right to distribute and sublicense the source or
derivatives, or derived object code to third parties,
under the Software designated on Schedule G as "Assign"
to Purchaser and "Source Distribution" to SGI.
2.7. "Binary-Only" License to Purchaser. Seller hereby grants to the
Purchaser five (5), royalty-free, non-exclusive, worldwide
licenses to use in binary form, without the right to grant
sublicenses or distribute, for internal use on Purchaser
Products, under the Software designated on Schedule G as
"Binary-Only" to Purchaser, if any, subject to Seller's standard
terms and conditions for such software and only for those
versions of the Software that is made commercially available by
Seller within one-year of the Closing Date.
2.8. "Source-Only" License to Purchaser. Seller hereby grants to the
Purchaser a non-exclusive, royalty-free, fully-paid, worldwide
license to use, modify, and create derivative source and object
code works from the associated source code solely for internal
use in connection with the design, manufacture and distribution
of Purchaser Products, without the right to grant sublicenses or
distribute, under the Software and Documentation designated on
Schedule G as "Source-Only" to Purchaser.
2.9. "Source-Binary Distribution" License to Purchaser. Seller hereby
grants to the Purchaser a non-exclusive, royalty-free,
fully-paid, worldwide license to use, modify and create source
and object code works from the associated source code and
distribute object code derived from the source or its
derivatives to third parties, solely for Purchaser Products,
without rights to sublicense or
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distribute source code or source derivatives to third parties
other than source that is licensed to customers solely for its
use in connection with the support or service of a Purchaser
Product, under the Software designated on Schedule G as
"Source-Binary Distribution" to Purchaser.
2.10. "Source Distribution" License to Purchaser. Seller hereby grants
to the Purchaser a non-exclusive, royalty-free, fully-paid,
worldwide license to use, modify and create derivative source
and object code works from the associated source code, including
the right to distribute and sublicense the source or
derivatives, or derived object code to third parties, under the
Software designated on Schedule G as "Source Distribution" to
Purchaser.
2.11. "Republication" License to Purchaser. Seller hereby grants to
the Purchaser a non-exclusive, royalty-free, fully-paid,
worldwide license, to the Documentation designated on Schedule G
as "Republication" to Purchaser to reproduce, recreate or
republish the associated publications or documentation
(Republished Works) for Purchaser Products, provided that
Purchaser may not use Seller's trademarks without the written
approval from Seller, which approval shall not be unreasonably
withheld.
2.12. "Source-Only" License under IRIX to Purchaser. Seller hereby
grants to the Purchaser a non-exclusive, royalty-free,
fully-paid, worldwide license to use, modify, and create
derivative source and object code works from the associated
source code solely for internal development of the SV2, without
the right to grant sublicenses or distribute, under the Software
and Documentation designated on Schedule I as "Source-Only" to
Purchaser.
2.13. "Source-Binary" Development License to Purchaser under IRIX.
Seller hereby grants to the Purchaser a non-exclusive,
royalty-free, fully-paid, worldwide license to use and modify,
without rights to sublicense or distribute to third parties, to
create derivative source and object code works from the Software
designated on Schedule I as "SV2 IRIX Source-Binary
Distribution" to Purchaser, solely for the SV2, provided that
all licenses granted to the Software on Schedule I under the
heading "Specially-Protected IRIX Source" shall terminate
immediately if (i) the Purchaser transfers, whether by sale,
assignment, merger, operation of law or otherwise any of its
rights under this Technology Agreement or (ii) upon a Purchaser
Change of Control. As used in sections 2.13 and 2.14, "Purchaser
Change of Control" shall mean more than thirty percent (30%) of
the outstanding shares or securities (representing the right to
vote for the election of directors or other managing authority)
of Purchaser becomes owned or controlled, directly or
indirectly, by any person (as such term is used in section 13(d)
and section 14(d)(2) of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"), as in effect on the
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Closing Date) or related persons constituting a group (as such
term is used in Rule 13d-5 under the Exchange Act).
2.14. "Source-Binary Distribution" License to Purchaser under IRIX.
Seller hereby grants to the Purchaser a non-exclusive, worldwide
license to distribute the derivative works licensed under
Section 2.13 in object code form solely for use on the SV2,
subject to a license fee paid by Purchaser to Seller of five
thousand dollars ($5,000.00) for each such license granted and
without rights to sublicense or distribute source code or source
derivatives to third parties other than source that is licensed
to customers solely for its use in connection with the support
or service of an SV2, under the Software designated on Schedule
I as "SV2 IRIX Source-Binary Distribution" to Purchaser,
provided that all licenses granted to the Software on Schedule I
under the heading "Specially-Protected IRIX Source" shall
terminate immediately if (i) the Purchaser transfers, whether by
sale, assignment, merger, operation of law or otherwise any of
its rights under this Technology Agreement or (ii) upon a
Purchaser Change of Control.
2.15. Assignment of Rights in Third Party Licenses and Contracts to
Purchaser. To the extent permitted by the underlying contracts
and licenses, and subject to all of the rights, conditions and
obligations contained therein, Seller assigns and transfers to
Purchaser, and Purchaser hereby accepts, all of Seller's rights
and obligations under the contracts and licenses designated on
Schedule J. Upon Purchaser's reasonable request, Seller agrees
to take further action and to execute such additional documents
at Purchaser's expense as may be necessary to perfect
Purchaser's title in and to the assigned Intellectual Property
Rights designated on Schedule J.
2.16. Trademarks Assigned to Purchaser. Seller hereby sells, conveys,
assigns and transfers to Purchaser, and Purchaser hereby
accepts, any and all of Seller's right, title and interest in
and to the Trademarks designated on Schedule K ("Assigned
Trademarks"), together with the goodwill of the Business
connected with the use of and symbolized by the Trademarks,
including without limitation, the right to sue and recover
damages for past, present and future infringements and to fully
and entirely stand in the place of Seller in all matters related
thereto. Upon Purchaser's reasonable request, Seller agrees to
take further action and to execute such additional documents at
Purchaser's expense as may be necessary to perfect Purchaser's
title in and to the Assigned Trademarks.
2.17. Right to Retain Information. Seller shall have the right to
retain copies of all materials included in and associated with
the Intellectual Property Rights assigned to Purchaser in this
Section 2.
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2.18. No Other Rights To the extent that any of the Intellectual
Property Rights covered or identified in this Technology
Agreement are not expressly assigned or licensed, all such
Intellectual Property Rights shall remain with the Seller. No
other rights are granted hereunder, by implication, estoppel,
statute or otherwise, except as expressly provided herein.
Except as expressly provided in this Section 2, nothing in the
licenses granted hereunder or otherwise contained in this
Technology Agreement shall expressly or by implication, estoppel
or otherwise give either party any right to license the other
Party's Intellectual Property to third parties. No license or
immunity is granted by either Party hereto directly or by
implication, estoppel or otherwise to any third parties
acquiring products from either Party for the combination of such
products with other items or for the use of such combination.
2.19 Residuals. Notwithstanding anything herein to the contrary,
either party may use Residuals for any purpose, including use in
the development, manufacture, promotion, sale and maintenance of
its products and services; provided that this right to Residuals
does not represent a license under any Intellectual Property
Rights of the disclosing party. The term "Residuals" means
information of a general nature, such as general knowledge,
ideas, concepts, know-how, professional skills, work experience
or techniques, that is retained in the unaided memories of
either party's employees who have had access to the other
party's information prior to execution of this Agreement. An
employee's memory is unaided if the employee has not
intentionally memorized the Information for the purpose of
retaining and subsequently using or disclosing it.
2.20. Duty to Maintain Patents and Non-Patent Intellectual Property.
In the event that the Purchaser decides not to file a Patent
application or to abandon the prosecution of any such Patent
application or not to maintain any granted Patent that is
assigned to the Purchaser under this Technology Agreement,
Purchaser will (i) notify the Seller within a reasonable time to
permit the Seller to continue such prosecution or maintain such
Patent (at the Seller's expense), and (ii) assign to the Seller
the right, title and interest in and to such Patents. Purchaser
shall take all commercially reasonably actions necessary to
maintain the validity and enforceability of the Non-Patent
Intellectual Property Rights assigned to it herein.
2.21. No Foundry Rights. Purchaser understands and acknowledges that
the licenses granted to it by Seller under Section 2 are
intended to cover only the Purchaser Products and are not
intended to cover foundry activities that Purchaser may
undertake on behalf of third parties.
2.22. Third Party Rights. Purchaser understands that some of the
Intellectual Property Rights and materials assigned or licensed
to Purchaser hereunder may
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contain third party intellectual property. Purchaser agrees
that: (i) Seller's obligations and Purchaser's licenses under
this Section 2 are subject in all cases to any restrictions,
limitations or obligations contained in agreements entered into
between Seller and third parties, (ii) Purchaser shall be solely
responsible for obtaining such licenses or consents, provided,
however, that upon request by Purchaser, Seller shall cooperate
with Purchaser in obtaining such licenses or consents, as
appropriate, (iii) Purchaser agrees that in the event any third
party licenses or consents are required, Purchaser will obtain
such third party licenses or will not use such third party
intellectual property or Seller Intellectual Property Rights
into which such third party intellectual property is integrated,
and (iv) Purchaser will undertake all efforts necessary to
protect Seller's rights and meet Seller's obligations under
agreements with third parties to the extent such rights and
obligations are affected by this Technology Agreement.
2.23. Confidentiality Agreement with Former Employees of Seller. All
offers of employment made to, and employment agreements made
with, former employees of Seller shall include the provisions
set forth in Schedule M.
3. COVENANT NOT TO SUE
3.1. Seller's Covenant Not to Sue. Seller hereby covenants and agrees
with Purchaser that Seller will not bring suit or otherwise
assert a patent claim against Purchaser or its customers before
any court or administrative agency in any country of the world
under the Seller Exclusive Issued Patents in connection with the
sale of Cray Products to the extent the Cray Products existing
as of the Closing Date infringed such claim of Seller Exclusive
Issued Patents. This covenant shall run with the title of the
Seller Exclusive Issued Patents and shall bind any assignee or
other person to whom the Seller may convey an interest in the
Seller Exclusive Issued Patents.
3.2. Purchaser's Covenant Not to Sue. Purchaser hereby covenants and
agrees with Seller Group that Purchaser will not bring suit or
otherwise assert any claim against the Seller or its customers
before any court or administrative agency in any country of the
world under the Intellectual Property Rights assigned or
licensed to Purchaser in this Technology Agreement to the extent
such Intellectual Property Rights are incorporated, in whole or
in part, into Seller's hardware or software products
commercially available or under development prior to the Closing
Date. This covenant shall run with the title of the Intellectual
Property Rights assigned or licensed to Purchaser herein and
shall bind any assignee or other person to whom the Purchaser
may convey an interest in such Intellectual Property Rights.
4. DISCLAIMER
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4.1. No Implications. Nothing contained in this Technology Agreement
shall be construed as:
4.1.1. A representation or warranty by either of the Parties to
this Technology Agreement as to the validity,
enforceability or scope of any class or type of
Intellectual Property Rights assigned or licensed
herein;
4.1.2. A warranty or representation that anything made, used
sold or otherwise disposed of under any assignment or
license set forth in this Technology Agreement is or
will be free from infringement of any third party
Intellectual Property Rights other than those which are
assigned or licensed hereunder;
4.1.3. Except as explicitly set forth in Section 8, an
agreement to bring or prosecute or any grant of a right
to bring or prosecute actions or suits against third
parties for infringement;
4.1.4. Requiring either Party to obtain the right to license
for the other Party, third party technology contained in
any know-how, software or other materials licensed,
assigned or provided hereunder. The Parties agree that
the receiving Party shall be solely responsible for
obtaining any necessary third party licenses;
4.1.5. Except as expressly set forth herein, requiring Seller
to furnish, locate, compile or disclose technical
information relating to the Intellectual Property Rights
assigned or licensed to Purchaser herein;.
4.1.6. Conferring by implication, estoppel or otherwise, upon
either Party licensed hereunder, any license or other
right under any Intellectual Property Rights except the
assignments, licenses and rights expressly granted
hereunder regardless of whether such Intellectual
Property Rights are dominant or subordinate to the
rights granted hereunder;
4.1.7. Assuming any obligation to provide support, updates,
revisions, errors, bug fixes or other service in
connection with any of the assignments or licenses
expressed;
4.1.8. A warranty or representation that Seller has the right
to assign, sublicense or otherwise transfer, in whole or
in part, any of the contracts or licenses listed on
Schedule J;
4.1.9. A warranty or representation as to the commercial or
technical viability of any of the Cray Products; or
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4.1.10. A warranty or representation as to the commercial
availability of any component, sub-component or
assemblies required to manufacture and sell the Cray
Products.
4.2. No Warranties. EACH PARTY HEREBY DISCLAIMS ANY EXPRESS OR
IMPLIED WARRANTIES WITH RESPECT TO THE INTELLECTUAL PROPERTY
RIGHTS OR RELATED MATERIALS ASSIGNED OR LICENSED HEREUNDER,
INCLUDING WITHOUT LIMITATION THE WARRANTIES OF MERCHANTABILITY,
NONINFRINGEMENT OR FITNESS FOR A PARTICULAR PURPOSE. UNLESS
SPECIFICALLY PROVIDED ALL ASSIGNMENTS AND LICENSES ARE "AS IS,
WHERE IS."
5. CONFIDENTIALITY
5.1. Obligation. Purchaser and Seller each acknowledges that by
reason of its relationship with the other Party, it has and will
have access to certain information and materials that is
confidential and of substantial value to the other Party
("Confidential Information"), which value would be impaired if
such information were disclosed to third parties. Each Party
agrees that, except as specifically authorized hereunder, it
will not use in any way for its own account or the account of
any third party, nor disclose to any third party, any such
Confidential Information, and will take every reasonable
precaution to protect the confidentiality of such information
which shall in no event be less than the industry standard and
shall include: entering into non-disclosure agreements with
third parties prior to disclosing any Confidential Information
that the other Party grants permission to disclose, entering
into employment agreements with all employees requiring
employees to protect Confidential Information, providing to
employees access to Confidential Information on a need to know
basis only, where appropriate based on the nature of the
Confidential Information, password protect servers that contain
Confidential Information, restricting access to Confidential
Information by third parties (including contractors) unless they
have a need to know and they have entered into appropriate
non-disclosure agreement. Upon request by a Party, the other
Party will advise the requesting Party whether or not it
considers any particular information or materials to be
Confidential Information.
5.2. Transfer of Information. Purchaser acknowledges that (i) all
technical information, know-how, software, or other materials
(excluding non-technical business materials) transferred by
Purchaser from Seller are listed on Schedules to this Technology
Agreement and will be transferred to Purchaser as agreed to by
the Parties, and (ii) Purchaser will not have access to the
Seller's servers as of the Closing Date or as mutually agreed.
Purchaser agrees to promptly return or destroy all copies of any
unauthorized Seller Confidential
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Information in its possession or control. Seller agrees to
cooperate with Purchaser in identifying Seller Confidential
Information in the possession or control of Purchaser. Purchaser
agrees that Seller, during the period up to three hundred and
sixty (360) days after the Closing Date, shall have the right to
audit Purchaser's servers, files, and premises to ensure
compliance with this Section 5. In the event Seller discovers
material unauthorized use of Seller Confidential Information,
Purchaser shall pay the cost of the audit and shall use its best
efforts to correct such unauthorized use including without
limitation, obtaining a license to use such information,
destroying or returning such information, and ceasing to license
or distribute products or materials that contain such
information.
5.3. Exceptions. The foregoing restrictions will not apply to
information that (i) has become publicly known through no
wrongful act of the receiving Party; (ii) has been rightfully
received from a third party authorized to make such disclosure
without restriction; (iii) has been independently developed by
the receiving Party after the Closing Date of this Technology
Agreement; (iv) has been approved for release by written
authorization of the disclosing Party, or (v) is required by law
or regulation to be disclosed; provided, however, that the
receiving Party has provided written notice to the disclosing
Party promptly to enable disclosing Party to seek a protective
order or otherwise prevent disclosure of Confidential
Information.
5.4. Term. The obligations of each Party pursuant to this Section 5
with respect to Confidential Information shall continue in full
force and effect for a period of ten (10) years after the
Closing Date of this Technology Agreement; provided that if the
disclosing Party requests an additional ten (10) year period for
maintaining the confidentiality of any specified Confidential
Information, the obligations under this Section 5 shall continue
with respect to such Confidential Information for an additional
ten (10) years.
5.5. Injunctive Relief. Each Party acknowledges that any breach of
any of its obligations under this Section 5 may cause
irreparable harm and significant injury to the disclosing Party
to an extent that may be extremely difficult to measure.
Accordingly, the receiving Party agrees that the disclosing
Party will have, in addition to any other rights or remedies
available to it at law or in equity, the right to seek
injunctive relief to enjoin any breach of this Section 5.
6. TERM AND TERMINATION
6.1. Term. This Technology Agreement and the rights and licenses
granted hereunder shall become effective on the Closing Date and
shall continue in effect, unless terminated as provided below,
until the latter of: (i) expiration,
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revocation, invalidation or abandonment of the last Patent
licensed hereunder, or (ii) the Parties cease to use the
Non-Patent Intellectual Property Rights.
6.2. Termination
6.2.1. Termination for Bankruptcy. Either Party may terminate
this Technology Agreement effective immediately and
without liability upon written notice to the other Party
if any one of the following events occurs:
(a) the other Party files a voluntary petition in
bankruptcy or otherwise seeks protection under
any law for the protection of debtors;
(b) A proceeding is instituted against the other
Party under any provision of any bankruptcy laws
that is not dismissed within ninety (90) days;
(c) Any adjudication that the other Party is
bankrupt or insolvent;
(d) A court assumes jurisdiction of all or a
substantial portion of the assets of the other
Party under a reorganization law;
(e) A trustee or receiver is appointed by a court
for all or a substantial portion of the assets
of the other Party;
(f) The other Party becomes insolvent, ceases or
suspends business;
(g) The other Party makes an assignment of the
majority of its assets for the benefit of its
creditor; or
(h) The other Party admits in writing its inability
to pay its debts as they become due.
6.2.2. Termination for Breach. If either Party materially
breaches any material term or condition ("Material
Breach") of this Technology Agreement or the Asset
Purchase Agreement ("Breaching Party"), than the Other
Party may terminate this Technology Agreement if (i) the
Other Party gives written notice to the Breaching Party
describing the nature of the Material Breach; and (ii)
the Breaching Party does not cure the Material Breach
within forty-five (45) days of receipt of the notice of
the Material Breach, unless the default reasonably
requires more than forty-five (45) days to correct and
the Breaching Party has begun substantial corrective
actions to remedy the default and is
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diligently pursuing such actions, in which event, the
Breaching Party shall have so much time as is reasonably
necessary to cure such default.
6.3. Effect of Termination. In the event of termination pursuant to
Section 6.2 above, (i) the Party terminating the Technology
Agreement pursuant to Section 6.2 above shall retain all
licenses and rights granted to it under this Technology
Agreement for the term of the Technology Agreement, and all
licenses granted to the other Party shall terminate subject to
any sublicenses previously granted, and (ii) the following
sections shall survive any termination or expiration of the
Technology Agreement: Sections 2.1, 2.1.1, 2.3, 2.3.1, 2.5,
2.5.1, 2.5.3, 2.6, 2.6.1, 2.6.2, 2.15, 2.16, 2.17, 2.18, 2.19,
2.20, 2.21, 2.22, 2.23, 3, 4, 5, 6, 7, 8, and 9.
7. ASSIGNMENT AND CHANGE OF CONTROL
7.1. Purchaser. Assignment, sale, sublicense or transfer by Purchaser
of any rights and/or obligations of this Technology Agreement
are governed by Section 16.3 of the Asset Purchase Agreement.
Any purported assignment, sale, sublicense or transfer, except
as explicitly permitted therein, shall be deemed a breach of
this Technology Agreement and shall be null and void. This
Technology Agreement shall be binding upon and inure to the
benefit of the Parties and their permitted successors and
assigns.
7.2 Seller. The Seller may sublicense, assign or transfer this
Technology Agreement and any right or obligation under it,
provided that if it assigns or transfers the licenses in
Sections 2.1.1, 2.3.1 and 2.5.1 of this Technology Agreement to
NEC Corporation, Hitachi, Ltd. Fujitsu Limited, or any other
manufacture of Vector Supercomputers (hereinafter "Buyer
Competitors") during a period of three years from the Closing
Date ("Restrictive Period"), the licenses in Sections 2.1.1,
2.3.1 and 2.5.1 shall be limited to Seller Products, or
combinations thereof, designed and/or manufactured by or on
behalf of Seller as of any such assignment or transfer, or
follow-on Seller Products or products in Seller's future product
development plan (i.e., Road Map). In addition, if any of the
Buyer Competitors merges or consolidates with Seller, or owns or
controls, directly or indirectly, more than fifty percent (50%)
of the outstanding shares or securities representing the right
to vote for the election of directors or other managing
authority during the Restricted Period, then the licenses in
Sections 2.1.1, 2.3.1 and 2.5.1 shall be limited to Seller
Products, or combinations thereof, designed and/or manufactured
by or on behalf of Seller as of such merger, consolidation or
change of control, or follow-on Seller Products or products in
Seller's future product development plan. Nothing in this
section shall restrict Seller from selling any Seller Products
to any person or party on an end-user basis in the ordinary
course of business.
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8. INFRINGEMENT ACTIONS
8.1. Cooperation in Infringement Actions. Each Party agrees, at the
other's expense, to make available at reasonable times and under
appropriate conditions all relevant personnel, records, papers,
information, samples, specimens and other similar materials in
its possession that are reasonably necessary to allow Seller or
Purchaser to litigate or settle such suit, including without
limitation, becoming party to the suit.
9. GENERAL
9.1. Ownership of Technology. The Parties agree that the technical
materials and Intellectual Property Rights assigned or licensed
to Purchaser are limited to those expressly provided for
hereunder. All other technology, materials and information
(excluding non-technical business materials) under Seller's
control shall be owned exclusively by Seller, and Purchaser
shall have no rights or interest in such technology, materials
and information unless expressly provided in this Technology
Agreement. Purchaser shall not remove any tangible materials
embodying such Intellectual Property Rights or information from
Seller's premises other than those explicitly listed on the
Schedules attached to this Technology Agreement. Except for the
express licenses granted to Seller under the Intellectual
Property Rights assigned to Purchaser hereunder, all rights
thereto shall be owned exclusively by Purchaser and Seller shall
have no rights or interest in such assigned Intellectual
Property Rights.
9.2. Delivery of Assigned Technology or Purchaser Licensed
Technology. All transfers of technology shall be conducted per
the Transition Services Agreement. The Parties expressly agree
that all such technology is provided on an "as is, where is"
basis, and each Party shall have no obligation to locate,
assemble, compile, deliver or otherwise assist the other Party
in the transfer of such technology, provided that Seller agrees
to cooperate with Purchaser's efforts.
9.3. Confidentiality of Technology Agreement. Each Party agrees that
the terms and conditions of this Technology Agreement shall be
treated as confidential information and that neither Party will
disclose the terms or conditions to any third party without the
prior written consent of the other Party, provided, however,
that each Party may disclose the terms and conditions of this
Technology Agreement, to the extent necessary:
(a) as required by any court or other governmental body;
(b) as otherwise required by law;
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(c) to legal counsel of the Parties, accountants, and other
professional advisors;
(d) in confidence, to banks, investors and other financing
sources and their advisors;
(e) in connection with the enforcement of this Technology
Agreement; or
(f) in confidence, in connection with an actual or
prospective merger or acquisition or similar
transaction.
With respect to disclosure required by a court order, the
disclosing Party shall provide prior notification of such
impending disclosure to the non-disclosing Party. All reasonable
efforts to preserve the confidentiality of the terms of this
Technology Agreement shall be expended by the disclosing Party
in complying with such an order, including obtaining a
protective order to the extent reasonably possible. The Parties
shall cooperate in preparing and releasing an announcement or
other form of publicity, if any, relating to this Technology
Agreement.
9.4. Export Controls. Each Party understands and acknowledges that
certain technology licensed or assigned hereunder is subject to
regulation by agencies of the U.S. government, including the
U.S. Department of Commerce, which prohibit export or diversion
of certain products and technology to certain countries. Each
Party warrants that it will comply in all respects with the
export restrictions applicable to any materials or technology
provided hereunder and will otherwise comply with the Export
Administration Regulations or other United States laws and
regulations in effect from time to time.
9.5 Entire Agreement. This Technology Agreement including the
Schedules and any schedules thereto, together with the Asset
Purchase Agreement constitute the entire understanding of the
Parties hereto with respect to the subject matter hereof,
superseding all negotiations, prior discussions and prior
agreements and understandings relating to such subject matter.
If there is any conflict or inconsistency between any
definitions, terms, or conditions of the Asset Purchase
Agreement (or any interpretation thereof) and any term or
condition of this Technology Agreement, this Technology
Agreement shall prevail and the Asset Purchase Agreement will be
deemed modified and/or interpreted to conform to this Technology
Agreement. If there is any conflict or inconsistency between any
definitions, terms, or conditions of the Technology Agreement
(or any interpretation thereof) and any of the items on the
Schedules to the Technology Agreement, the Schedules to the
Technology Agreement shall prevail and the Technology Agreement
will be deemed
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modified and/or interpreted to conform to the Schedules to the
Technology Agreement.
9.6 Expenses. All costs incurred in the interpretation, execution,
delivery and implementation of this Technology Agreement and
with the consummation of the transactions contemplated herein
shall be paid by the Party incurring the expense.
9.7 Severability. The provisions of this Technology Agreement shall
be deemed separable. Therefore, if any part of this Technology
Agreement is rendered void, invalid or unenforceable, such
rendering shall not affect the validity or enforceability of the
remainder of this Technology Agreement.
9.8 No Waiver. Any failure by either Party to enforce at any time
any terms and conditions of this Technology Agreement shall not
be considered a waiver of the other Party's rights to enforce
each and every term and condition of this Agreement.
9.9 Unavoidable Delay. Neither Party shall be considered in default
or be liable to the other Party for any delay in performance or
non-performance caused by circumstances beyond the reasonable
control of such Party, including but not limited to acts of God,
explosion, fire, flood, war, whether declared or not, accident,
labor strike or labor disturbances, inability to procure
supplies from third party vendors, sabotage, order or decrees of
any court, or action of government authority.
9.10. Choice of Law. This Technology Agreement shall be governed by
and interpreted under the substantive laws of the State of
California.
9.11 Resolution of Disputes. Disputes involving this Technology
Agreement shall be resolved in accordance with the procedure set
forth in paragraph 29 of the Asset Purchase Agreement.
IN WITNESS WHEREOF, the Parties hereto have duly executed this
Technology Agreement effective as of the date set forth above.
Seller Purchaser
By: By:
--------------------------------- ---------------------------------
Name: Name:
Title: Title:
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<PAGE> 1
Exhibit 10.4
SERVICES CONTRACT AGREEMENT
SERVICES CONTRACT AGREEMENT, dated as of March 31, 2000 (this
"Agreement"), by and between SILICON GRAPHICS, INC., a Delaware corporation (the
"Contractor"), and TERA COMPUTER COMPANY, a Washington corporation (the
"Company"). The Contractor and the Company are sometimes hereinafter
collectively referred to as the "Parties."
RECITALS
A. The Contractor and the Company are parties to an Asset Purchase
Agreement, dated as of March 1, 2000, as amended March 31, 2000 (the "Asset
Purchase Agreement"), pursuant to which Company has agreed to acquire certain
business and assets of the Contractor.
B. The Contractor provides maintenance and services pursuant to various
service agreements with its customers pertaining to the Products (the "Service
Contracts").
C. The Company is willing to provide the services of Contractor under
the Service Contracts upon consummation of the Asset Purchase Agreement.
D. The execution and delivery of this Agreement is a condition to the
consummation of the Asset Purchase Agreement.
NOW, THEREFORE, the Parties, in consideration of the premises and the
mutual covenants and agreements contained herein, and intending to become
legally bound, hereby agree as follows:
SECTION 1
AGREEMENT TO PROVIDE SERVICES
1.1 Definitions. Except as otherwise defined in this Contract Services
Agreement, all capitalized terms shall have the respective meanings assigned to
them in the Asset Purchase Agreement.
1.2 Service Contracts. Attached hereto as Schedule A is a list of
Service Contracts showing, among other matters, the name of the customer, the
equipment as to which services are to be provided, the date each Service
Contract expires and the scheduled monthly payments for such services
(irrespective of whether such payments have been prepaid or are billed monthly
or on some other basis). The Parties recognize that all Service Contracts are
not yet listed on Schedule A, and they shall work together in good faith to
complete the listing of all Service Contracts as soon as possible. In addition,
the Parties shall update
<PAGE> 2
Schedule A monthly to reflect the changing status of Service Contracts, and
changes in computer installations, such as additional or fewer modules and other
configuration changes, that result in changes in service payments under the
Service Contracts. If a Service Contract is renewed or a new Service Contract is
entered into by either Party that covers service prior to and after the date of
this Agreement, then related service revenue shall be shared proportionally
between the Contractor and the Company based upon the periods of service prior
to and after the date of this Agreement
1.3 Provision of Services. The Company shall provide all the services
required to be provided by the Contractor under each Service Contract for the
period beginning on the day after the Closing Date and ending on the date which
is twelve (12) months thereafter, except as otherwise specified on Schedule A or
pursuant to Section 3.1. The Company shall use commercially reasonable efforts
to perform all the services in accordance with the applicable Service Agreement,
which shall be of a nature and quality consistent with the services provided by
the Contractor prior to the date of this Agreement.
SECTION 2
PAYMENT; INDEPENDENT CONTRACTOR
2.1 Payment. The Company will deliver an invoice for its services to the
Contractor as of the first of the month for which the services are to be
performed under all Service Contracts for that month. The amount of the invoice
shall be the scheduled payment shown on Schedule A for such month, subject, in
the case of foreign contracts, to any adjustments for fluctuations in exchange
rates at the time of collection and subject to agreed to changes pursuant to
this Agreement. The first such invoice shall be for April 2000. Invoiced amounts
shall be due and payable by the 15th of such month. Invoices not paid when due
shall be subject to late charges for each month and portion thereof that the
invoice is overdue, with such late charges calculated at the lesser of (i) 18%
and (ii) the maximum rate allowed by applicable law.
2.2 Billings. The Contractor shall be responsible for billing each of
the customers shown on Schedule A pursuant to the terms of each Service Contract
and collecting all funds from such billings. It shall retain all amounts so
received. Subject to Section 2.3, the Contractor's collection of such funds
shall have no effect on its obligation to pay the Company's invoices under
Section 2.1. The Company and the Contractor shall cooperate and work with each
other in good faith with respect to any disputed amounts.
2.3 Payment Adjustments for Early Termination. If any customer fails to
make payments under any Service Contract beyond the applicable grace period,
Contractor may terminate such Service Contract and upon such termination,
Contractor shall not be required to make any further payments to the Company in
respect of such Service Contract and Schedule A shall be deemed amended to
delete such Service Contract. If any customer
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shown on Schedule A terminates the Service Contract applicable to such customer,
invokes penalties thereunder or otherwise ceases to make payments thereunder,
prior to the scheduled expiration date of such Service Contract, as set forth on
Schedule A, due to a breach of such Service Contract by Contractor arising from
the Company's failure to perform the services contemplated by this Agreement
under such Service Contract, appropriate adjustment shall be made to the payment
amounts shown on Schedule A. If any customer shown on Schedule A commences, or
has entered against it, a voluntary or involuntary case or proceeding under any
applicable federal or state bankruptcy, insolvency, reorganization, or other
similar law or any other case or proceeding to be adjudicated as bankrupt or
insolvent, prior to the scheduled expiration date of such Service Contract, as
set forth on Schedule A, appropriate adjustment shall be made to the payment
amounts shown on Schedule A.
2.4 Right of Offset. If the Company fails to make (i) any payment under
the Promissory Note when due, whether by regular installment, by acceleration,
upon maturity or otherwise, (ii) any payment under the Asset Purchase Agreement
when due, or (iii) any payment under the Transition Services Agreement when due,
the Contractor may deduct the amount of such delinquent payment from any payment
due from the Contractor to the Company hereunder.
2.5 Transition Provisions. If any Transferred Employee who is required
by the Company to perform services hereunder is unable to commence his
employment with the Company on the Closing Date due to the laws of any
jurisdiction, or if any material Contract required by the Company to perform
services hereunder cannot be assigned as of the Closing Date, the Contractor
will use commercially reasonable efforts to provide to the Company the services
of such Transferred Employee and benefits of such Contract pending assignment or
transfer to the Company; provided that the Company shall reimburse the
Contractor for such services pursuant to the Transition Services Agreement.
2.6 Independent Contractor. All services performed by the Company under
this Contract Services Agreement shall be performed by the Company as an
independent contractor, and employees of the Company or any other entities
providing services shall at all times be under the Company's sole discretion and
control. Neither the Company nor any other person or entity performing any
services hereunder shall be deemed for any purpose to be the agent, servant,
employee, or representative of the Contractor in the performance of this
Contract Services Agreement. Nothing in this Contract Services Agreement shall
be construed to mean that the Company is a partner of the Contractor or a joint
venturer with the Contractor. The relationship of the Company to the Contractor
under this Contract Services Agreement, and with respect to the services, shall
be that of an independent contractor. The Company shall be responsible for and
shall withhold or pay, or both, as may be required by law, all taxes pertaining
to the employment of its personnel and/or performance by it of the services. The
Company also assumes full responsibility for the payment of all payroll burdens,
fringe benefits and payroll taxes, whether federal, state, municipal or
otherwise, as to its employees, servants or agents engaged in the performance of
any services.
3
<PAGE> 4
SECTION 3
SERVICE CONTRACTS
3.1 Term of Services. The provision of services shall commence on the
day immediately following the date hereof and, with respect to services on each
Service Contract listed in Schedule A, shall terminate when each such Service
Contract expires, as set forth on Schedule A or as otherwise agreed pursuant to
Sections 3.2 and 3.3 below.
3.2 Expiration; Renewals. As each Service Contract expires as set forth
on Schedule A or is otherwise terminated pursuant to its terms, the Company and
the Contractor shall cooperate and work with each other in good faith to renew
of such Service Contract in the name of the Company. The Company and the
Contractor will cooperate and work with each other in good faith with respect to
renewals of Service Contracts that currently cover Company equipment and
Contractor equipment.
3.3 Long-Term Service Contracts. The Company and the Contractor will
cooperate and work with each other in good faith with respect to assignments
and/or new contracts with customers with Service Contracts that expire (as set
forth on Schedule A) in more than a year from the date hereof, as appropriate in
each particular situation. Such matters shall be handled on a case-by-case
basis. With respect to such Service Contracts that expire after one year from
the date of this Agreement and are not assigned to the Company in such one-year
period, then the Company shall continue to provide the appropriate services
thereunder in the manner set forth in Section 1.3 until each such Service
Contract expires, is otherwise terminated pursuant to its terms or is assigned
to the Company. To the extent that the Contractor has been prepaid for such
services for a period after one year from the date of this Agreement, then the
Company shall be permitted to offset the amount of such prepayment from its
final payment under the Promissory Note issued pursuant to the Asset Purchase
Agreement. To the extent that the Contractor has not been prepaid for such
services after one year from the date of this Agreement, the Contractor shall
continue to reimburse the Company pursuant to the procedures described in
Section 2 for its services until each such Service Contract expires, is
otherwise terminated pursuant to its terms or is assigned to the Company.
SECTION 4
LIABILITIES
4.1 Consequential and Other Damages. The Company shall not be liable
for, and the Contractor expressly waives any right to recover, whether in
contract, in tort (including without limitation negligence and strict
liability), or otherwise, any punitive, exemplary, special, indirect, incidental
or consequential damages whatsoever, which in any way arise out
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<PAGE> 5
of, relate to, or are a consequence of, the Company's performance or
nonperformance hereunder or under any particular Service Contract, or the
provision of or failure to provide any service hereunder or thereunder,
including, but not limited to, loss of profits, and business interruptions;
provided, that, notwithstanding the foregoing, the Company shall be liable for,
and shall reimburse the Contractor for any penalties or other claims by
customers under the Service Contracts arising from any performance or
non-performing by the Company hereunder.
4.2 Limitation of Liability. In any event, the liability of the Company
with respect to this Agreement or anything done in connection herewith,
including, but not limited to, the performance or breach hereof, or from the
sale, delivery, provision or use of any service or product provided under or
covered by this Agreement, whether in contract, tort (including without
limitation negligence or strict liability) or otherwise, shall not exceed the
aggregate of all fees then paid by the Contractor to the Company hereunder.
4.3 Obligation to Reperform. In the event of any material breach of this
Agreement by the Company with respect to any error or defect in the provision of
any service under any Service Contract, the Contractor shall promptly notify the
Company of said breach, and the Company shall, at the Contractor's reasonable
request, promptly make all reasonable efforts to correct such error or defect.
SECTION 5
TERMINATION
With respect to any service under any individual Service Contract, this
Agreement shall terminate on (i) the date of termination for such Service
Contract as provided in Schedule A hereto or (ii) the date such Service Contract
has been renewed in the name of the Company or otherwise terminated pursuant to
Sections 3.2 or 3.3 hereof. This Agreement shall terminate on the date on which
the provision of all services under all Service Contracts has been terminated
pursuant to the preceding sentence.
SECTION 6
MISCELLANEOUS
6.1 Notices. All notices or other communications made in connection with
this Services Agreement shall be in writing, except as otherwise expressly
permitted herein. Any notice or other communication in connection herewith shall
be duly given: (a) on the day of delivery, if personally delivered to the person
identified below; (b) three (3) days after mailing if mailed by certified or
registered mail, postage prepaid, return receipt requested; (c) one business day
after delivery to any overnight express courier service; and (d) on the
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<PAGE> 6
business day of receipt if sent by facsimile or other customary means of
telecommunication, provided receipt thereof is orally confirmed and a copy
thereof is sent in the manner provided by clause (a) or (b) hereof, addressed as
follows:
(a) If to the Contractor:
Silicon Graphics, Inc.
2011 North Shoreline Boulevard
Mountain View, California 94043-1389
Attention: Legal Services
Fax No.: (650) 932-0652
(b) If to the Company:
Tera Computer Company
411 First Avenue South, Suite 600
Seattle, Washington 98104-2860
Fax No.: (206) 701-2218
Tel. No.: (206) 701-2000
Attention: Kenneth W. Johnson
Chief Financial Officer
Such addresses may be changed, from time to time, by means of a written notice
given in the manner provided in this Section. Copies delivered to outside or
in-house counsel shall not constitute notice.
6.2 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. Except as specifically agreed herein, no Party may assign
either this Agreement or any of its rights, interests, or obligations hereunder
without the prior written approval of the other Party; provided, however, that
without the consent of the other Party, (i) a Party may assign any or all of its
rights and obligations hereunder to any of its subsidiaries, in which event the
assigning Party shall remain fully liable for the performance of all its
obligations hereunder; and (ii) subject to the limitations of Section 16.3 of
the Asset Purchase Agreement, a successor in interest by merger, by operation of
law, or by assignment, purchase or other acquisition of all or substantially all
the business of a Party may acquire the respective rights and obligations of
such Party under this Agreement. Any prohibited assignment shall be null and
void.
6.3 No Third-Party Beneficiaries. Nothing in this Contract Services
Agreement shall confer any rights upon any person or entity other than the
Parties, and each such Party's respective successors and permitted assigns.
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<PAGE> 7
6.4 Amendment, Waivers, Etc. No amendment, modification or discharge of
this Agreement, and no waiver hereunder, shall be valid or binding unless set
forth in writing and duly executed by an executive officer of the Party against
whom enforcement of the amendment, modification, discharge or waiver is sought.
Any such waiver shall constitute a waiver only with respect to the specific
matter described in such writing and shall in no way impair the rights of the
Party granting such waiver in any other respect or at any other time.
6.5 Confidential Information. Each of the Parties acknowledges that any
information of the other Party received in the course of performance under this
Contract Services Agreement shall be confidential information and shall be
subject to the restrictions on disclosure set forth in the Asset Purchase
Agreement between the Company and Contractor.
6.6 Governing Law. THIS SERVICES AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF WASHINGTON, WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAWS RULES THEREOF.
6.7 Dispute Resolution.
(a) Negotiation. The Parties shall attempt in good faith to
resolve any dispute arising out of or relating to this Agreement promptly by
negotiation between executives who have authority to settle the controversy and
who are at a higher level of management than the persons with direct
responsibility for administration of this contract. Any Party may give the other
Party written notice of any dispute not resolved in the normal course of
business. Within fifteen (15) days after delivery of the disputing Party's
notice, the executives of both Parties shall meet at a mutually acceptable time
and place, and thereafter as often as they reasonably deem necessary, to attempt
to resolve the dispute. All reasonable requests for information made by one
Party to the other will be honored. If the matter has not been resolved by these
persons within fifteen (15) days of the first meeting, the dispute shall be
referred to more senior executives of both Parties who have authority to settle
the dispute and who shall likewise meet to attempt to resolve the dispute.
(b) Mediation. If the Parties are unable to resolve the matter
within thirty (30) days of the delivery of the disputing Party's notice, or if
the Parties fail to meet within twenty (20) days, the Parties shall endeavor to
settle the dispute by mediation. The Parties shall select a neutral mediator
that is acceptable to both Parties. The Parties shall have forty-five (45) days
from the date a neutral mediator is selected to gather information and perform
discovery relating to the dispute (the "Discovery Period"). The costs of
mediation shall be split evenly by the Parties.
(c) Litigation. If the Parties are unable to resolve the dispute
after a reasonable period of mediation, either Party may seek resolution through
the judicial process, consistent with the terms of this Agreement.
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<PAGE> 8
(d) Confidentiality. All discussions and negotiations pursuant to
this Section shall be treated as comprise and settlement discussions for
purposes of the applicable rules of evidence. Notwithstanding the foregoing,
materials gathered during the Discovery Period shall not be excluded from any
subsequent litigation in the event that mediation is not successful.
6.8 Schedules; Exhibits. All Schedules and exhibits to this Agreement
shall be construed with and as integral parts of this Agreement to the same
extent as if they were set forth verbatim herein.
6.9 Entire Agreement. This Agreement constitutes the entire agreement
and supersedes all prior agreements and understandings, both written and oral,
between the Parties with respect to the subject matter hereof.
6.10 Counterparts. This Agreement maybe executed in counterparts, each
of which shall be deemed an original and all of which shall together constitute
one and the same instrument.
6.11 Headings. The headings contained in this Agreement are for purposes
of convenience only and shall not affect the meaning or interpretation of this
Contract Services Agreement.
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
8
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IN WITNESS WHEREOF, the Parties have execute and delivered this Contract
Services Agreement as of the date first written above.
SILICON GRAPHICS, INC.
By:
---------------------------------
Its:
-----------------------------
TERA COMPUTER COMPANY
By:
---------------------------------
Its:
----------------------------
[Services Contract Agreement]
9
<PAGE> 1
Exhibit 10.5
TRANSITION SERVICES AGREEMENT
TRANSITION SERVICES AGREEMENT, dated as of March 31, 2000 (the "Services
Agreement"), by and between SILICON GRAPHICS, INC., a Delaware corporation
("SGI"), and TERA COMPUTER COMPANY, a Washington corporation ("Tera"). SGI and
Tera are sometimes hereinafter collectively referred to as the "Parties."
RECITALS
A. SGI and Tera are parties to an Asset Purchase Agreement, dated as of
March 1, 2000, as amended March 31, 2000 (the "Asset Purchase Agreement"),
pursuant to which Tera has agreed to acquire certain business and assets of SGI.
B. The Parties are interested in purchasing from each other certain
transition services listed and described in Schedule A and Schedule B attached
hereto during certain transition periods commencing from the date hereof.
NOW, THEREFORE, the Parties, in consideration of the premises and the
mutual covenants and agreements contained herein, and intending to become
legally bound, hereby agree as follows:
SECTION 1
AGREEMENT TO SELL AND BUY SERVICES
1.1 Definitions. Except as otherwise defined in this Services Agreement,
all capitalized terms shall have the meaning assigned to them in the Asset
Purchase Agreement.
1.2 Provision of Services.
(a) SGI shall provide to Tera the services described on Schedule
A (the "SGI Services") for the period set forth on Schedule A for each such SGI
Service. All of the SGI Services shall be provided in accordance with the terms,
limitations and conditions set forth herein and on Schedule A.
(b) Tera shall provide to SGI the services described on Schedule
B (the "Tera Services" and together with the SGI Services, the "Services") for
the period set forth on Schedule B for each such Tera Service. All of the Tera
Services shall be provided in accordance with the terms, limitations and
conditions set forth herein and on Schedule B.
(c) The Party providing Services (the "Service Provider") shall
receive, as payment for providing each Service, the amount, if any, set forth on
Schedule A or B, as the case may be, for each such Service.
<PAGE> 2
(d) If the Service Provider's obligation to perform any Service
expires or is terminated pursuant to this Agreement, there shall be no
obligation to reinstate such Service, unless the Parties mutually agree in
writing.
(e) If after the date of this Agreement, either Party identifies
any additional Service it reasonably requires from the other Party in order to
operate its business, the Parties will negotiate in good faith for such
additional Service and amend Schedule A or B, as the case may be, to reflect the
same; provided that this Section 1.2(e) shall not require any Party to provide
any additional Services absent the agreement of such Party.
1.3 Access.
(a) Tera shall make available on a timely basis to SGI all
information and materials reasonably required by SGI to enable it to provide the
SGI Services. SGI shall not be liable for any claims, errors or omissions
resulting from untimely or incorrect information provided by Tera. To the extent
reasonably necessary in order to provide the SGI Services, upon reasonable
advance notice to the applicable Tera Representative (as defined below), Tera
shall give appropriate representatives of SGI reasonable access, during regular
business hours and at such other times as are reasonably required, to the
premises of Tera.
(b) SGI shall make available on a timely basis to Tera all
information and materials reasonably required by Tera to enable it to provide
the Tera Services. Tera shall not be liable for any claims, errors or omissions
resulting from untimely or incorrect information provided by SGI. To the extent
reasonably necessary in order to provide the Tera Services, upon reasonable
advance notice to the applicable SGI Representative (as defined below), SGI
shall give appropriate representatives of Tera reasonable access, during regular
business hours and at such other times as are reasonably required, to the
premises of SGI.
1.4 Tera Representatives. Tera has designated the individual(s) set
forth on Schedule B for each Tera Service as its representative(s) for such Tera
Service (the "Tera Representatives") who have the authority to act on Tera's
behalf in connection with the performance of such Tera Services for which they
are the named Tera Representative, and who shall serve as the primary contact
for communications between SGI and Tera concerning the performance of such Tera
Services for which they are the named Tera Representative. No Tera
Representative has the authority to (i) amend or supplement the terms,
limitations or conditions of any Tera Service set forth on Schedule B or (ii)
agree to provide any services beyond the Tera Services described on Schedule B.
1.5 SGI Representatives. SGI has designated the individual(s) set forth
on Schedule A for each SGI Service as its representative(s) for such SGI Service
(the "SGI Representatives") who have the authority to act on SGI's behalf in
connection with the performance of such SGI Services for which they are the
named SGI Representative, and who shall serve as the primary contact for
communications between Tera and SGI concerning
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the performance of such SGI Services for which they are the named SGI
Representative. No SGI Representative has the authority to (i) amend or
supplement the terms, limitations or conditions of any SGI Service set forth on
Schedule A or (ii) agree to provide any services beyond the SGI Services
described on Schedule A.
SECTION 2
SERVICES, PAYMENT; INDEPENDENT CONTRACTOR
2.1 Services to be Provided.
(a) Unless otherwise agreed in writing by the Parties, the
Service Provider shall use commercially reasonable efforts to perform all
Services to be performed under this Services Agreement. Notwithstanding anything
to the contrary contained herein, the Service Provider shall not be in default
of its obligations to provide any Service hereunder to the extent the inability
to provide such Service arises out of the other Party's failure to perform such
tasks as are required to be performed by the other Party to enable the Service
Provider to provide such Service.
(b) SGI and Tera agree to cooperate, to provide such information,
and to take such actions as may be reasonably required to assist each other in
accomplishing the Services, including, without limitation, in the manner
specifically set forth in Schedules A and B hereto. The Parties agree to
maintain the confidentiality of all non-public information relating to the other
Party and its affiliates regarding the Services and each Party's business
activities, except as may be required to be disclosed by law.
(c) Any amendment, supplement, variation, alteration or
modification to any Service as described on Schedule A or B must be made in
writing and signed by an executive officer or agent of each of the Parties.
(d) The Service Provider shall have the right to cease
temporarily for maintenance purposes the operation of the equipment or
facilities providing any Service whenever in its reasonable and good faith
judgment such action is necessary. In the event such maintenance is required,
the other Party shall be reasonably notified of such maintenance (which notice
may be given during or after any emergency maintenance). Notwithstanding the
above, the Service Provider shall give the other Party as much advance notice of
any shutdown as is practicable, but in no event less that five business days
(except in the case of an emergency as set forth above). Where written notice is
not feasible, oral notice may be given. The Service Provider shall be relieved
of its obligations to provide such Service during the period that its equipment
or facilities are shut down; provided that the Service Provider shall use all
reasonable efforts to restart such equipment or reopen such facilities as
promptly as practicable.
2.2 Payment. Invoices for SGI Services rendered will be delivered to
Tera as provided in Schedule A for each SGI Service for which SGI will be paid,
and amounts
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charged shall be payable as provided in Schedule A. Invoices for Tera Services
rendered will be delivered to SGI as provided in Schedule B for each Tera
Service for which Tera will be paid, and amounts charged shall be payable as
provided in Schedule B. Invoiced amounts not paid when due shall be subject to
late charges for each month and portion thereof that the invoice is overdue,
with such late charges calculated at the lesser of (i) 18% and (ii) the maximum
rate allowed by applicable law.
2.3 Independent Contractor. All Services performed by a Service Provider
under this Services Agreement shall be performed by the Service Provider as an
independent contractor, and employees of the Service Provider or any other
entities providing Services shall at all times be under the Service Provider's
sole discretion and control. Neither the Service Provider nor any other person
or entity performing any Services hereunder shall be deemed for any purpose to
be the agent, servant, employee, or representative of the other Party in the
performance of this Services Agreement. Nothing in this Services Agreement shall
be construed to mean that a Service Provider is a partner of the other Party or
a joint venturer with the other Party. The relationship of the Service Provider
to the other Party under this Services Agreement, and with respect to the
Services, shall be that of an independent contractor. The Service Provider shall
be responsible for and shall withhold or pay, or both, as may be required by
law, all taxes pertaining to the employment of its personnel and/or performance
by it of the Services. The Service Provider also assumes full responsibility for
the payment of all payroll burdens, fringe benefits and payroll taxes, whether
federal, state, municipal or otherwise, as to its employees, servants or agents
engaged in the performance of any Services.
SECTION 3
TERM OF PARTICULAR SERVICES
The provision of SGI Services shall commence on the date hereof and,
with respect to each SGI Service listed in Schedule A, shall terminate as set
forth in Section 6.1 below; provided, however, that (i) Tera may cancel any SGI
Service with written notice to SGI; and (ii) SGI may cancel any SGI Service in
accordance with the terms and conditions in Schedule A. The provision of Tera
Services shall commence on the date hereof and, with respect to each Tera
Service listed in Schedule B, shall terminate as set forth in Section 6.1 below;
provided, however, that (i) SGI may cancel any Tera Service with written notice
to Tera; and (ii) Tera may cancel any Tera Service in accordance with the terms
and conditions in Schedule B.
SECTION 4
FORCE MAJEURE
The Service Provider shall not be liable for any interruption of
service, delay or failure to perform under this Services Agreement when such
interruption, delay or failure results from causes beyond its reasonable
control, including, but not limited to, any strikes, lockouts or other labor
difficulties, acts of any government, riot, insurrection or other
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hostilities, embargo, fuel or energy shortage, fire, flood, acts of God, wrecks
or transportation delays, or inability to obtain necessary labor, materials or
utilities. In any such event, the Service Provider's obligations hereunder and
the other Party's obligations to pay for any Service so suspended or delayed
hereunder shall be postponed for such time as the Service Provider's performance
is suspended or delayed on account thereof. The Service Provider will notify the
other Party promptly, either orally or in writing, upon learning of the
occurrence of such event of force majeure. Upon the cessation of the force
majeure event, the Service Provider will use all reasonable efforts to resume
its performance as soon as reasonably practicable. The Parties agree that the
terms of this Services Agreement shall be extended for a period of time equal to
the period of time during which the Service Provider's obligations under this
Services Agreement are suspended pursuant to this Section 4.
SECTION 5
LIABILITIES
5.1 Consequential and Other Damages. The Service Provider shall not be
liable for, and the other Party expressly waives any right to recover, whether
in contract, in tort (including without limitation negligence and strict
liability), or otherwise, any punitive, exemplary, special, indirect, incidental
or consequential damages whatsoever, which in any way arise out of, relate to,
or are a consequence of, the Service Provider's performance or nonperformance
hereunder, or the provision of or failure to provide any Service hereunder,
including, but not limited to, loss of profits, business interruptions and
claims of customers.
5.2 Limitation of Liability. In any event, the liability of the Service
Provider with respect to this Services Agreement or anything done in connection
herewith, including, but not limited to, the performance or breach hereof, or
from the sale, delivery, provisions or use of any Service or product provided
under or covered by this Services Agreement, whether in contract, tort
(including without limitation negligence or strict liability) or otherwise,
shall not exceed the aggregate of all fees then paid by the other Party to the
Service Provider hereunder.
5.3 Obligation to Reperform. In the event of any material breach of this
Services Agreement by the Service Provider with respect to any error or defect
in the provision of any Service, the other Party shall promptly notify the
Service Provider of said breach, and the Service Provider shall, at the other
Party's reasonable request, promptly make all reasonable efforts to correct such
error or defect.
5.4 Release and Indemnity. Except as specifically set forth in this
Services Agreement, the Party receiving Services shall indemnify and hold
harmless the Service Provider, its subsidiaries, affiliates, successors and
assigns, and its and their respective directors, officers, members,
shareholders, agents and employees (collectively, the "Service Provider
Indemnitees"), against and from any and all claims, demands, complaints,
liabilities, losses, damages and all costs and expenses arising from or relating
to (i) the use of any Service by such Party, or (ii) the presence of such Party
or its employees, agents or
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subcontractors on the Service Provider's premises; provided, however, that no
Service Provider Indemnitee shall be entitled to indemnification hereunder to
the extent its claim for indemnification shall be finally adjudged to be
attributable to its gross negligence, bad faith or willful misconduct, as may be
finally determined by a court of competent jurisdiction.
SECTION 6
TERMINATION
6.1 Termination. This Services Agreement shall terminate on the earliest
to occur of (i) with respect to any individual Service, the date of termination
as provided in Schedule A or B hereto, (ii) the date on which the provision of
all Services has been terminated pursuant to Section 6.1 (i), or has been
canceled pursuant to Section 3, and (iii) the date on which this Services
Agreement is terminated pursuant to Section 6.2 below.
6.2 Breach of Services Agreement. If any Party shall cause or suffer to
exist any material breach of any of its obligations under this Services
Agreement, including, but not limited to, any failure to deliver Services or to
make payments when due, and said Party does not cure such default within twenty
(20) days (or, in the case of any payment default, within fifteen (15) days)
after receiving written notice thereof from the non-breaching Party (unless the
Party receiving the notice of default disputes the existence of such default, in
which case the cure periods referred to above shall begin to run from and after
the date of a final decision by a court of competent jurisdiction finding that a
default exists hereunder), the non-breaching Party may terminate this Services
Agreement including the provision of Services pursuant hereto, immediately by
providing written notice of termination.
6.3 Sums Due. In the event of a termination of this Services Agreement,
the Service Provider shall be entitled to all outstanding amounts due from the
other Party for Services provided under this Services Agreement up to the date
of termination.
6.4 Effect of Termination. Sections 2.2, 5.1, 5.2, 5.3, 5.4, 6.3, 7.5,
7.7, 7.8 and this Section 6.4 shall survive any termination of this Services
Agreement.
SECTION 7
MISCELLANEOUS
7.1 Notices. All notices or other communications made in connection with
this Services Agreement shall be in writing, except as otherwise expressly
permitted herein. Any notice or other communication in connection herewith shall
be duly given: (a) on the day of delivery, if personally delivered to the person
identified below; (b) three (3) days after mailing if mailed by certified or
registered mail, postage prepaid, return receipt requested; (c) one business day
after delivery to any overnight express courier service; and (d) on the business
day of receipt if sent by facsimile or other customary means of
telecommunication, provided receipt thereof is orally confirmed and a copy
thereof is sent in the manner provided by clause (a) or (b) hereof, addressed as
follows:
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(a) If to SGI:
Silicon Graphics, Inc.
2011 North Shoreline Boulevard
Mountain View, California 94043-1398
Attention: Legal Services
Telecopier: (650) 932-0652
(b) If to Tera:
Tera Computer Company
411 First Avenue South, Suite 600
Seattle, Washington 98104-2860
Attention: Kenneth W. Johnson
Telecopier: (206) 701-2218
Such addresses may be changed, from time to time, by means of a written notice
given in the manner provided in this Section. Copies delivered to outside or
in-house counsel shall not constitute notice.
7.2 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. Except as specifically agreed herein, no Party may assign
either this Agreement or any of its rights, interests, or obligations hereunder
without the prior written approval of the other Party; provided, however, that
without the consent of the other Party, (i) a Party may assign any or all of its
rights and obligations hereunder to any of its subsidiaries, in which event the
assigning Party shall remain fully liable for the performance of all its
obligations hereunder; and (ii) subject to the limitations of Section 16.3 of
the Asset Purchase Agreement, a successor in interest by merger, by operation of
law, or by assignment, purchase or other acquisition of all or substantially all
the business of a Party may acquire the respective rights and obligations of
such Party under this Agreement. Any prohibited assignment shall be null and
void.
7.3 No Third-Party Beneficiaries. Except as provided in Section 5.4 with
respect to release and indemnity, nothing in this Services Agreement shall
confer any rights upon any person or entity other than the Parties, and each
such Party's respective successors and permitted assigns.
7.4 Amendment, Waivers, Etc. No amendment, modification or discharge of
this Agreement, and no waiver hereunder, shall be valid or binding unless set
forth in writing and duly executed by an executive officer of the Party against
whom enforcement of the amendment, modification, discharge or waiver is sought.
Any such waiver shall constitute a
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waiver only with respect to the specific matter described in such writing and
shall in no way impair the rights of the Party granting such waiver in any other
respect or at any other time.
7.5 Confidential Information; Title to Date.
(a) Each of the Parties acknowledges that any information of the
other Party received in the course of performance under this Services Agreement
shall be confidential information and shall be subject to the restrictions on
disclosure set forth in the Mutual Nondisclosure Agreement, dated as of August
4, 1999, as amended by Amendment No. 1 thereto, dated as of December 13, 1999,
and as further amended by Section 16.2 of the Asset Purchase Agreement, between
the Company and Service Provider.
(b) The Company acknowledges that, except as expressly provided
in the Asset Purchase Agreement, it will acquire no right, title or interest
(including without limitation any license rights or rights of use) in any
software or the licenses therefor which are owned or used by the Service
Provider, solely by reason of the Service Provider's provision of the Services
provided hereunder.
7.6 Governing Law. THIS SERVICES AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF WASHINGTON, WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAWS RULES THEREOF.
7.7 Dispute Resolution.
(a) Negotiation. The Parties shall attempt in good faith to
resolve any dispute arising out of or relating to this Agreement promptly by
negotiation between executives who have authority to settle the controversy and
who are at a higher level of management than the persons with direct
responsibility for administration of this contract. Any Party may give the other
Party written notice of any dispute not resolved in the normal course of
business. Within fifteen (15) days after delivery of the disputing Party's
notice, the executives of both Parties shall meet at a mutually acceptable time
and place, and thereafter as often as they reasonably deem necessary, to attempt
to resolve the dispute. All reasonable requests for information made by one
Party to the other will be honored. If the matter has not been resolved by these
persons within fifteen (15) days of the first meeting, the dispute shall be
referred to more senior executives of both Parties who have authority to settle
the dispute and who shall likewise meet to attempt to resolve the dispute.
(b) Mediation. If the Parties are unable to resolve the matter
within thirty (30) days of the delivery of the disputing Party's notice, or if
the Parties fail to meet within twenty (20) days, the Parties shall endeavor to
settle the dispute by mediation. The Parties shall select a neutral mediator
that is acceptable to both Parties. The Parties shall have forty-five (45) days
from the date a neutral mediator is selected to gather information and perform
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discovery relating to the dispute (the "Discovery Period"). The costs of
mediation shall be split evenly by the Parties.
(c) Litigation. If the Parties are unable to resolve the dispute
after a reasonable period of mediation, either party may seek resolution through
the judicial process, consistent with the terms of this Agreement.
(d) Confidentiality. All discussions and negotiations pursuant to
this Section are confidential and shall be treated as compromise and settlement
discussions for purposes of the applicable rules of evidence. Notwithstanding
the foregoing, materials gathered during the Discovery Period shall not be
excluded from any subsequent litigation in the event that mediation is not
successful.
7.8 Schedules. All Schedules to this Services Agreement and all terms
and conditions contained therein shall be construed with and as integral parts
of this Services Agreement to the same extent as if they were set forth verbatim
herein.
7.9 Entire Agreement. This Services Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, between the Parties with respect to the subject matter hereof.
7.10 Counterparts. This Services Agreement maybe executed in
counterparts, each of which shall be deemed an original and all of which shall
together constitute one and the same instrument.
7.11 Headings. The headings contained in this Services Agreement are for
purposes of convenience only and shall not affect the meaning or interpretation
of this Services Agreement.
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Parties have executed this Services Agreement as
of the date first written above.
SILICON GRAPHICS, INC.
By:
---------------------------------
Its:
-----------------------------
TERA COMPUTER COMPANY
By:
---------------------------------
Its:
-----------------------------
[Transition Services Agreement]
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Exhibit 10.6
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is entered into as of March
31, 2000 by and between Tera Computer Company, a Washington corporation
("Tera"), and Silicon Graphics, Inc., a Delaware corporation ("SGI").
RECITALS
A Tera and SGI have entered into an Asset Purchase Agreement, dated as
of March 1, 2000 (the "Purchase Agreement"), pursuant to which Tera will acquire
certain assets of SGI in exchange for, among other consideration, 1,000,000
shares of the Common Stock of Tera.
B. Tera has agreed to take steps to permit SGI to resell the Shares
without restriction under the Securities Act.
Capitalized terms used herein and not otherwise defined shall have the meaning
given to them in the Purchase Agreement.
AGREEMENTS
1. Definitions.
The following terms shall have the following meaning:
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the Securities and Exchange Commission
thereunder, all as the same shall be in effect at the relevant time.
"Blackout Period" means a period (a) commencing upon notice by
Tera to SGI of Tera's good faith determination that sales of Shares pursuant to
a Registration Statement would require the disclosure of material non-public
information at a time when such disclosure would be disadvantageous to Tera or
otherwise inconsistent with Tera's normal timing for disclosures and (b) ending
on the earliest of (i) the date upon which such material non-public information
is disclosed to the public or ceases to be material, (ii) 60 days after Tera
first gives notice to SGI of such Blackout Period, or (iii) the date on which
Tera gives notice to SGI that the Blackout Period is terminated; provided,
however, that Blackout Periods in any calendar year shall not exceed a total of
90 days.
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"Business Day" means any day other than a Saturday, a Sunday, or
a day on which the Nasdaq Stock Market is not open for trading.
"Common Stock" means the common stock of Tera.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Securities and Exchange Commission
thereunder, all as the same shall be in effect at the relevant time.
"Person" means an individual, partnership, corporation, trust or
unincorporated organization.
"Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement with respect
to the terms of the offering of any portion of the Shares covered by the
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated by
reference in such prospectus.
"Registration Statement" means any registration statement of Tera
filed under the Securities Act which covers Shares pursuant to the provisions of
this Agreement, including the Prospectus, amendments and supplements to such
Registration Statement, including post-effective amendments, and all exhibits
and all material incorporated by reference in such Registration Statement.
"SEC" means the U.S. Securities and Exchange Commission.
"Shares" means (i) 1,000,000 shares of Common Stock of Tera
issued to SGI pursuant to the Purchase Agreement and (ii) any additional shares
of Common Stock issued or issuable with respect to the Common Stock referred to
in clause (i) above by way of a stock dividend or stock split or in connection
with a combination of stock, recapitalization, merger, consolidation or other
reorganization; provided, however, that securities shall cease to be Shares when
a Registration Statement with respect to the sale of such securities shall have
become effective under the Securities Act and such securities shall have been
sold in accordance with such Registration Statement.
"S-3 Registration" means a registration statement on Form S-3
filed under the Securities Act to register the Shares.
2. S-3 Registration.
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2.1. Requirement to File. As soon as practicable after the
Closing Date, and in no event later than 60 days thereafter, Tera shall file the
S-3 Registration. The obligation of Tera to include in the S-3 Registration the
Shares held by SGI shall be conditioned upon the provision by SGI of such
information regarding SGI, the Shares held by SGI and the intended method of
distribution as shall be requested by Tera and required for the registration.
2.2 Plan of Distribution. Except for restrictions which may be
imposed pursuant to Section 4, the plan of distribution of the Shares by SGI,
which shall be stated in the S-3 Registration, shall be substantially as follows
(except as may be required by the SEC or state securities law regulators):
The Shares may be sold from time to time by SGI, or by pledgees,
donees, transferees or other successors in interest. Such sales may be
made on stock exchanges (including the Nasdaq National Market) or
otherwise at prices and on terms then prevailing or at prices related to
the then current market price, or in negotiated transactions. The Shares
may be sold by one or more of the following methods: (a) block trades in
which the broker or dealer so engaged will attempt to sell the Shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction; (b) purchases by a broker or dealer as
principal, in a market maker capacity or otherwise, and resale by such
broker or dealer for its account pursuant to this Prospectus; and (c)
ordinary brokerage transactions and transactions in which the broker
solicits purchasers. In effecting sales, brokers or dealers engaged by
SGI may arrange for other brokers or dealers to participate. Brokers or
dealers will receive commissions or discounts from SGI in amounts to be
negotiated immediately prior to the sale. SGI, such brokers or dealers,
and any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 (the
"Securities Act") in connection with such sales. In addition, any
securities covered by this Prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under Rule 144 rather than
pursuant to this Prospectus.
3. Registration Procedures. In connection with the filing of the S-3
Registration, Tera will as expeditiously as possible:
3.1 Use its best efforts to cause the S-3 Registration to be
declared effective by the SEC.
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3.2 Subject to Section 3.5, prepare and file with the SEC such
amendments and post-effective amendments to any S-3 Registration, and such
supplements to the Prospectus, as may be necessary to keep such S-3 Registration
continuously effective until all Shares included in the Registration Statement
shall have been sold or until all Shares held by SGI may be sold within any
three month period by SGI pursuant to Rule 144 of the Securities Act (or any
successor provision to such Rule).
3.3 Promptly notify SGI and (if requested by SGI) confirm such
advice in writing,
(a) when the S-3 Registration or any post-effective
amendment thereto has become effective,
(b) of the issuance by the SEC of any stop order
suspending the effectiveness of the S-3 Registration or the initiation of any
proceedings for that purpose,
(c) of the receipt by Tera of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose, and
(d) of the existence of any fact which results in the
Prospectus or any document incorporated therein by reference containing an
untrue statement of a material fact or omitting to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
SGI agrees that, upon receipt of any notice from Tera of the happening of any
event of the kind described in Section 3.3(d), SGI will forthwith discontinue
disposition of Shares until SGI's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3.4.
3.4 Subject to Section 3.5, if any fact contemplated by Section
3.3(d) above shall exist, prepare a supplement or post-effective amendment to
the S-3 Registration or the related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Shares, the Prospectus will not contain an
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
3.5 At any time when the S-3 Registration is effective, Tera may
give written notice to SGI that a Blackout Period has commenced, upon receipt of
which
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SGI shall suspend sales of Shares pursuant to the S-3 Registration until the
Blackout Period terminates. During the Blackout Period, Tera's obligations under
Sections 3.2 and 3.4 shall also be suspended.
3.6 Make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the S-3 Registration.
3.7 Deliver to SGI, without charge, as many copies of the
Prospectus and any amendment or supplement thereto as SGI may reasonably
request.
3.8 Cause all Shares covered by the S-3 Registration to be listed
on the Nasdaq National Market.
3.9 Pay all expenses of Tera in connection with the registration
of the Shares.
3.10 Cause to be delivered to SGI an opinion of Stoel Rives LLP,
counsel to Tera, to the effect that the Shares have been registered, and the
Registration Statement has been declared effective by the Securities and
Exchange Commission, under the Securities Act and that, to the actual knowledge
of such counsel, no stop order suspending the effectiveness of the Registration
Statement has been issued.
3.11 Upon being notified by SGI that any material arrangement has
been entered into with a broker or dealer for the sale of Shares which
arrangement requires a supplement to the Prospectus, to promptly file a
supplemented Prospectus pursuant to Rule 424 under the Securities Act setting
forth such additional information as is required under the Securities Act and
rules and regulations of the SEC.
4. Restrictions on Sale of Shares by SGI. In addition to any limitations
on sale of Shares resulting from the provisions of Section 3.5 relating to a
Blackout Period, no Shares may be sold by SGI except in compliance with the
provisions of this Section 4.
4.1 If SGI proposes to sell more than 100,000 Shares, as adjusted
for any subsequent stock splits, combinations or similar recapitalizations,
within five Business Days, including a sale pursuant to Rule 144 under the
Securities Act, SGI shall deliver to Tera written notice of the proposed sale
and, if any of the following applies, may not effect the sale during the period
specified:
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(a) if Tera, within five Business Days after receipt of notice of
the proposed sale, delivers notice to SGI that it has commenced or
proposes to commence the registration of an underwritten public offering
of securities for the account of Tera, SGI may not sell any Shares
during the period starting with the date 60 days prior to Tera's good
faith estimate of the date of filing of, and ending on a date 90 days
following the effective date of, such registration statement, provided
that at all times during such period prior to effectiveness of such
registration statement Tera is actively employing in good faith all
reasonable efforts to cause such registration statement to become
effective, provided however, that Tera may not exercise its rights under
this clause (a) more than once in any twelve-month period; or
(b) if Tera, within five Business Days after the receipt of
notice of the proposed sale, delivers to SGI a certificate signed by the
President or any Vice President of Tera stating that in the opinion of
the Board of Directors, a disposition of Shares by SGI would materially
adversely affect the market price of Tera's securities or any
contemplated transaction involving Tera, provided that such sale of
Shares shall be deferred for a period not to exceed 60 days from the
receipt of Tera's notice of sale by SGI and provided further that Tera
shall not exercise its rights under this clause (b) to defer a sale more
than once in any twelve-month period; or
(c) if Tera, within five Business Days after receipt of notice of
the proposed sale, delivers notice to SGI that it has commenced a
transaction that would require the filing of a Form 8-K, SGI may not
sell any Shares for a reasonable period necessary for Tera to complete
the transaction.
To the extent than Tera exercises its rights under clause (b) and (c)
above, then the period in which SGI may not any Shares for such reason shall
count against the total of 90-days permitted in Blackout Periods.
5. Indemnification.
5.1. Indemnification by Tera. Tera agrees to indemnify and hold
harmless SGI, its officers, directors, employees and agents and each Person who
controls SGI within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act (each such person being sometimes hereinafter
referred to as an "Indemnified Holder") from and against all losses, damages,
liabilities and expenses arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or
6
<PAGE> 7
Prospectus or in any amendment or supplement thereto, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any such untrue statement or omission or allegation
thereof based upon information furnished in writing to Tera by SGI expressly for
use therein; provided, however, that Tera shall not be liable in any such case
to the extent that any such loss, claim, damage, liability or expense arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission in the Prospectus, if such untrue statement or alleged
untrue statement, omission or alleged omission is corrected in an amendment or
supplement to the Prospectus and if, having previously been furnished by or on
behalf of Tera with copies of the Prospectus as so amended or supplemented, SGI
(or an underwriter on behalf of SGI) thereafter fails to deliver such Prospectus
as so amended or supplemented prior to or concurrently with a sale of Shares to
the person asserting such loss, claim, damage, liability or expense who
purchased such Shares from SGI; and provided, further, that Tera shall not be
liable with respect to any sale that occurs during a Blackout Period in
violation of Section 3.5 or in violation of Section 4.
6.2 Indemnification by SGI. SGI agrees to indemnify and hold
harmless Tera, its directors and officers and each Person, if any, who controls
Tera within the meaning of either Section 15 of the Securities Act or Section 20
of the Exchange Act to the same extent as the foregoing indemnity from Tera to
SGI, but only with respect to information relating to SGI furnished in writing
by SGI expressly for use in any Registration Statement or Prospectus, or any
amendment or supplement thereto. In case any action or proceeding shall be
brought against Tera or its directors or officers or any such controlling
person, in respect of which indemnity may be sought against SGI, SGI shall have
the rights and duties given to Tera and Tera or its directors or officers or
such controlling person shall have the rights and duties given to SGI by the
preceding paragraph. In no event shall SGI's liability hereunder be greater than
the dollar amount of the proceeds received by SGI upon the sale of the Shares
giving rise to such indemnification obligation.
5.3 Indemnification Procedures. Promptly after receipt by an
indemnified party pursuant to the provisions of Section 5.1 or 5.2 of notice of
the commencement of any action involving the subject matter of the foregoing
indemnity provisions such indemnified party will, if a claim thereof is to be
made against the indemnifying party, promptly notify the indemnifying party of
the commencement thereof; but the omission to so notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party otherwise than hereunder. In case such action is brought against any
indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party shall have
7
<PAGE> 8
the right to participate in, and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party, provided, however, if the
defendants in any action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that there may
be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, or if
there is a conflict of interest which would prevent counsel for the indemnifying
party from also representing the indemnified party, the indemnified party or
parties shall have the right to select separate counsel to participate in the
defense of such action on behalf of such indemnified party or parties. 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 pursuant to the provisions of Section 5.1 or 5.2 for any legal
expense subsequently incurred by such indemnified party in connection with the
defense thereof, unless (i) the indemnified party shall have employed counsel in
accordance with the proviso of the preceding sentence, (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time after the
notice of the commencement of the action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party.
6. General.
6.1 Modification. This Agreement may be modified, amended or
supplemented in any manner and at any time only by a written instrument executed
by SGI and Tera.
6.2 Entire Agreement. This Agreement constitutes the entire agreement
and understanding of SGI and Tera with respect to the subject matter hereof and
supersedes any agreements or understandings between the parties prior to the
execution and delivery of this Agreement.
6.3 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand, or sent by telecopy or nationally recognized express courier
service, in each case addressed as follows:
8
<PAGE> 9
(a) If to SGI:
Silicon Graphics, Inc.
2011 North Shoreline Boulevard
Mountain View, California 94043-1389
Attention: Legal Services
Telecopier: (650) 932-0652
(b) If to Tera:
Tera Computer Company
411 First Avenue South, Suite 600
Seattle, Washington 98104-2860
Attention: Kenneth W. Johnson
Telecopier: (206) 701-2218
with a copy to:
Robert J. Moorman
Stoel Rives LLP
900 SW Fifth Avenue, Suite 2600
Portland, Oregon 97204
Telecopier: (503) 220-2480
or to such other Person or address in the United States of America as any party
hereto shall have last designated by notice given to the other party in
accordance with this Section 6.3. Any notice given hereunder shall be deemed to
have been given at the time of receipt thereof by the party to whom such notice
is addressed; provided, any notice given by telecopy and received after 5:00
p.m. at the location of the receiving party's address for notice shall be deemed
received by such party on the immediately succeeding Business Day.
9
<PAGE> 10
6.4 Assignment; Third Party Beneficiaries.
(a) This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but, except as expressly provided herein,
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned, by operation of law or otherwise, by any party hereto without
the prior written consent of the other party.
(b) Nothing in this Agreement, express or implied, is intended to
or shall confer upon any Person other than the parties hereto and their said
successors and permitted assigns, any rights, remedies or obligations under or
by reason of this Agreement.
6.5 Severability. If any provision of this Agreement is invalid or
unenforceable, all other provisions of this Agreement shall nevertheless remain
in full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any material adverse manner
to either party. Upon such determination that any provision is invalid or
unenforceable, the parties hereto shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner to the end that the transactions contemplated
hereby are fulfilled to the extent possible.
6.6 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same instrument. Any counterpart of this Agreement
having attached thereto one or more counterparts of the signature pages of this
Agreement containing in the aggregate the original signatures of the parties
hereto shall be deemed to be a fully executed original.
6.7 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED, PERFORMED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF WASHINGTON, EXCLUSIVE OF
CHOICE OF LAW PROVISIONS.
6.8 Attorneys' Fees. If any action or suit is instituted to enforce any
term of this Agreement, the prevailing party shall be entitled to recover from
the other party, in addition to any other rights and remedies it may have, all
reasonable expense and attorney fees at trial, on appeal, and in connection with
any petition for review.
10
<PAGE> 11
6.9 Legend. The certificates representing the Shares, for so long as the
represented shares of Common Stock are Shares, as defined in Section 1 hereof,
shall bear the following legend:
The shares represented by this certificate are subject to a Registration
Rights Agreement among Silicon Graphics, Inc. and the Company and may
not be sold or transferred except in accordance with that agreement, a
copy of which is available for inspection at the principal office of the
Company or may be obtained upon written request to the secretary of the
Company.
[SIGNATURE PAGE FOLLOWS]
11
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have caused this
Registration Rights Agreement to be executed as of the date first above written.
TERA COMPUTER COMPANY SILICON GRAPHICS, INC.
- ---------------------------------- ------------------------------------
By: By:
Its: Its:
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF CRAY INC. FOR THE THREE MONTHS ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 31,230,050
<SECURITIES> 0
<RECEIVABLES> 658,456
<ALLOWANCES> 0
<INVENTORY> 4,482,710
<CURRENT-ASSETS> 42,428,621
<PP&E> 13,027,392
<DEPRECIATION> 5,869,070
<TOTAL-ASSETS> 50,345,731
<CURRENT-LIABILITIES> 8,143,035
<BONDS> 1,286,661
0
0
<COMMON> 146,057,003
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 49,618,277
<SALES> 42,978
<TOTAL-REVENUES> 42,978
<CGS> 26,250
<TOTAL-COSTS> 26,250
<OTHER-EXPENSES> 8,353,842
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,278
<INCOME-PRETAX> (8,004,880)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,004,880)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,004,880)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
