UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 6, 2001
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CRAY INC.
(Exact name of registrant as specified in its charter)
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Washington 0-26820 93-0962605
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
411 First Avenue South, Suite 600
Seattle, WA 98104-2860
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 701-2000
Registrant's facsimile number, including area code: (206) 701-2500
None
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS.
NOVEMBER 2001 PRIVATE PLACEMENT
In November, 2001, in a private placement under the Securities Act of
1933, we sold to six accredited investors (i) 5% convertible subordinated
debentures in the aggregate original principal amount of $9,300,000, convertible
into shares of our common stock as described below, and (ii) common stock
purchase warrants for an aggregate of 367,590 shares of our common stock at an
initial exercise price of $4.4275 per share, subject to adjustment, exercisable
until November 6, 2004. The placement closed in two tranches, on November 6 and
15, 2001. The six investors were Riverview Group, LLC, Omicron Partners, LP,
Laterman & Co., Forevergreen Partners, Clarion Capital Corporation and The
Morton A. Cohen Revocable Living Trust. We received gross proceeds of $9,300,000
in exchange for the issuance of the debentures and the warrants. We have agreed
to pay a finder's fee of $651,000 to Intellect Capital Ltd., which is affiliated
with Terren S. Peizer, a member of our Board of Directors. After payment of the
finder's fee and other expenses of the offering, we expect that the net proceeds
of the offering will be approximately $8,550,000. No underwriters were involved
in this private placement.
The sale of the debentures and the warrants to the investors was
exempt from the registration provisions of the Securities Act, under Sections
4(2) and 4(6) of the Securities Act, and the rules and regulations thereunder,
because of the nature of the offerees and investors and the manner in which the
offering was conducted. The investors have acknowledged that the securities
cannot be resold unless registered or exempt from registration under the
securities laws. We have agreed to register the resale of the shares of common
stock issuable to the investors under the Securities Act.
THE CONVERTIBLE SUBORDINATED DEBENTURES
The debentures bear interest at the rate of 5% per year, payable
semi-annually commencing May 6, 2002. We can elect to pay interest in cash or in
shares of our common stock. The debentures mature on November 6, 2004.
The holders of the debentures can choose to convert all or a portion of
the principal amount outstanding into shares of our common stock at any time
before the maturity date of November 6, 2004. The debentures are convertible
into common stock at a fixed conversion price of $2.35 per share from the date
of issuance until maturity. In addition, during each three-month period
beginning on February 6, 2002, each holder may convert on a cumulative basis up
to 25% of the original principal amount of each holder's debenture at a floating
conversion price. The floating conversion price is equal
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to 94% of the average of the 7 lowest daily volume weighted average prices
during the 20 trading days immediately prior to the date upon which the
debenture is converted.
On the maturity date of November 6, 2004, the holders are obligated to
convert any remaining principal into common stock at a conversion price equal to
the average of the closing prices during the 15 trading days immediately prior
to the maturity date.
The debentures contain subordination provisions in favor of our senior
secured lender, which limit our rights and obligations to make cash payments of
principal, interest or other payments of funds under the debentures and related
transaction documents.
We are not required to issue to the debenture holders in excess of
8,422,204 shares below the market price of our common stock in accordance with
Nasdaq rules, or such greater number of shares permitted under Nasdaq Rule
4350(i). In such event, the debenture holders may elect to require us to convert
the debentures at the lowest possible conversion price that complies with Nasdaq
rules or to redeem the portion of the debentures which were not able to be
converted by payment of 105% of the outstanding principal, plus accrued
interest, if the redemption were by May 6, 2002, or of 110% of the outstanding
principal, plus accrued interest, if the redemption were after May 6, 2002,
provided that we are not obligated to redeem more than 25% of the original
principal amount of the debentures every three months on a cumulative basis
beginning on February 6, 2002.
A debenture holder may not convert its debenture or receive shares of
our common stock as payment of interest to the extent that, at the time of the
conversion or payment, the sum of (i) the number of shares of our common stock
beneficially owned by the holder plus (ii) the number of shares to be issued
upon conversion and payment would exceed 4.999% of the number of shares of our
common stock then issued and outstanding, including other shares of our common
stock issuable upon conversion of, or payment of interest on, the holder's
debenture. The holder may terminate this restriction upon 61 days' prior notice
to us.
In the event that we sell any shares of our common stock (or certain
securities convertible into or exercisable for shares of our common stock) at a
price less than the fixed conversion price of the debentures, then the fixed
conversion price of the debentures generally shall be reduced based on a
weighted average adjustment (subject to certain exceptions). The debentures also
contain customary antidilution provisions for stock dividends, stock splits or
combinations and reclassifications.
In the event that a debenture is converted and we issue the shares of
common stock later than the time permitted in the debenture, we may be required
to make late fee payments to the holder that increase based upon how late we
issue the shares and
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without a limit on the late fee that must be paid. The debentures provide that,
if we deny, or if any of our shareholders obtain a judgment denying, the rights
of the holders to convert the debentures, then the holders have the right to
require us to pay 120% of the outstanding principal amount of the debentures
plus accrued and unpaid interest.
If an event of default occurs under the debentures, the holders have
the right to require us to pay a mandatory redemption amount, subject to the
subordination provisions of the debentures in favor of our senior secured
lender. The mandatory redemption amount is the greater of (i) 120% of the
outstanding principal on the debentures, plus accrued interest or (ii) the
outstanding principal amount, plus accrued interest, divided by the applicable
conversion price, and multiplied by the closing price of our common stock on the
applicable date provided in the debentures.
The events of default include: (i) failure to pay scheduled principal
or interest payments, (ii) breach of any material representation or warranty in
the debentures or the related transaction agreements, (iii) failure to timely
issue shares upon conversion of the debentures, to timely transfer such issued
shares or to timely remove restrictive legends if lawful and required by the
debentures and the related agreements, which failure continues uncured for ten
trading days, (vi) failure to perform our obligations in the debentures or
related agreements for a period of 20 business days after notice, (vii)
commencement of bankruptcy or insolvency proceedings or appointment of a
receiver or similar assumption of control of a material portion of our
properties and assets, (viii) any judgment or claim becoming a lien or
encumbrance on any material portion of our assets, (ix) delisting or suspension
of trading of our common stock for more than 5 consecutive trading days or 8
total trading days, (x) the failure of a registration statement that we are
required to file being declared effective by the SEC by May 6, 2002, (xi) a
lapse in the effectiveness of the registration statement for more than 20
trading days during any 12-month period (subject to exceptions for material
transactions), or (xii) a change of control transaction. A change of control
transaction includes the acquisition of more than 40% of our voting stock in a
transaction not approved by our board of directors, the replacement of more than
one-half of the current members of the board of directors without the approval
of such directors, the consolidation or merger of us where the shareholders
prior to such transaction do not own at least 51% of our voting stock after the
transaction or the common stock is no longer listed on Nasdaq National Market
System or a national exchange, the sale of all or substantially all of our
assets, or the execution by us of an agreement providing for one of the
foregoing events. These change of control provisions may have the effect of
discouraging third parties from making a bid to acquire control of us in a
transaction not approved by our board of directors.
THE WARRANTS
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The warrants are exercisable for a total of 367,590 shares of our
common stock at an exercise price of $4.4275 payable in cash. The warrants are
exercisable until November 6, 2004. The number of shares issuable upon exercise
and the exercise price are subject to adjustment in the event of a stock
dividend, a stock split or combination or a reclassification of our common
stock, but otherwise do not have exercise price adjustments.
THE REGISTRATION RIGHTS AGREEMENT
In the registration rights agreement, we agreed to file a registration
statement covering (i) the resale of up to 7,914,894 shares of common stock,
which was calculated by multiplying 200% by the number of shares into which the
debentures are convertible using the fixed conversion price of $2.35 per share,
and (ii) the resale of 367,590 shares of common stock issuable upon exercise of
the warrants. If we are required to issue additional shares under the debentures
and the related agreements, we may be required to file additional registration
statements. We must pay penalties if we breach certain of our obligations under
the registration rights agreement. These penalties may be paid in cash or, at
our option, in shares of our common stock.
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THE PURCHASE AGREEMENT
Under our purchase agreement with the investors, we generally are
prohibited from entering into any financing transaction until after May 6, 2002
without the consent of a majority in interest of the investors, which cannot be
unreasonably withheld. We may however grant equity incentive awards and issue
our securities in connection with stock option, stock purchase and other
compensatory plans, strategic business transactions or an underwritten
registered public offering. The purchase agreement also contains
representations, warranties, covenants and indemnification provisions customary
for agreements of its type.
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE DEBENTURES AND
EXERCISE OF THE WARRANTS
The following table outlines the number of shares of common stock that
would be issuable upon conversion in full of the debentures at several
hypothetical conversion prices. The table also sets forth the total number of
shares the investors would beneficially own at such hypothetical adjustment
prices, and assuming exercise in full of the warrants, and the percentage that
such shares would constitute of our resulting outstanding common stock, assuming
the investors had not purchased or sold any of our securities.
During calendar year 2000, the closing price of our common stock ranged
from a low of $1.125 to a high of $11.50 per share. During calendar year 2001,
through November 19, 2001, the closing price of our common stock has ranged from
a low of $1.531 to a high of $3.45 per share.
Shares Issuable Under Total Shares Total Shares as a
Hypothetical Convertible Shares Issuable Under Issuable to Percent of
Conversion Price (1) Debentures (1) Warrants Investors Outstanding Stock (2)
-------------------- -------------- -------- --------- ---------------------
$1.00 9,300,000 367,590 9,667,590 18.7%
$1.25 7,440,000 367,590 7,807,590 15.6%
$1.50 6,200,000 367,590 6,567,590 13.5%
$1.75 5,314,286 367,590 5,681,876 11.9%
$2.00 4,650,000 367,590 5,017,590 10.7%
$2.25 4,133,333 367,590 4,500,923 9.7%
$2.35(3) 3,957,447 367,590 4,325,037 9.3%
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(1) Assumes conversion in full of all debentures at the hypothetical conversion
price set forth above. Assumes interest is paid in cash and not in shares of
common stock.
(2) Based on 42,111,021 shares of common stock outstanding on November 19, 2001,
plus the shares issuable to the investors under the debentures and the warrants
shown above.
(3) At floating conversion prices above $2.35 per share, the investors would
convert at the fixed conversion price of $2.35 per share.
ADDITIONAL FACTORS THAT COULD AFFECT FUTURE RESULTS
In addition to the factors below relating to the debentures and the
warrants, investors should carefully consider the "Factors That Could Affect
Future Results" contained in our quarterly report on Form 10-Q for the quarter
ending September 30, 2001, and in our future filings made with the Securities
and Exchange Commission in determining whether to purchase shares of our common
stock.
THE CONVERSION OF THE DEBENTURES AND THE EXERCISE OF THE WARRANTS MAY
SUBSTANTIALLY DILUTE OUR COMMON SHAREHOLDERS. We are obligated initially to
register 8,282,484 shares of common stock issuable under the debentures, the
warrants issued to the investors and the related transaction agreements, and we
may become obligated to register additional shares to cover the conversion of
the debentures and the exercise of the warrants. The conversion prices of the
debentures and the exercise price of the warrants could be lower than the
trading price of our common stock from time to time. The debentures are
convertible into common stock at a fixed conversion price of $2.35 per share
from the date of issuance until maturity. In addition, during each three-month
period beginning on February 6, 2002, each investor may convert on a cumulative
basis up to 25% of the original principal amount of the debentures at a floating
conversion price. The floating conversion price is equal to 94% of the average
of the 7 lowest daily volume weighted average prices during the 20 trading days
immediately prior to the date upon which the debenture is converted. The
floating conversion price generally ensures that the debentures can be converted
at a discount from the market price of our common stock at the time of
conversion. For that reason, we expect the investors ultimately to convert the
entire principal amount of the debentures and to resell the common stock issued
to them. The potential or actual issuance of shares under the debentures and
upon exercise of the warrants could have a substantial dilutive impact on the
holders of our common stock.
THE SALES OF MATERIAL AMOUNTS OF OUR COMMON STOCK UPON CONVERSION OF THE
DEBENTURES, OR THE PROSPECT OF SUCH SALES, COULD REDUCE THE MARKET PRICE OF OUR
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COMMON STOCK AND ENCOURAGE SHORT SALES. Our common stock price may decrease if
the holders of the debentures elect to convert and resell their shares of common
stock. In particular, as the price of our common stock decreases, if the holders
of the debentures elect to convert, we will be required to issue more shares of
our common stock, based on the floating conversion price, for any given dollar
amount invested by the holders of the debentures. See the table above under
"Shares of Common Stock Issuable upon Conversion of the Debentures and Exercise
of the Warrants." Any future issuance of a significant number of common shares,
or any future sales by the investors of a significant number of common shares,
or the prospect of such issuances or sales, could reduce the market price of our
common stock. This may encourage short sales by third parties, which could place
further downward pressure on the price of our common stock.
OUR ABILITY TO OBTAIN FUTURE FINANCING MAY BE HINDERED BY THE UNCERTAIN AND
POTENTIALLY SUBSTANTIAL NUMBER OF SHARES ISSUABLE UNDER THE DEBENTURES. The
shares issuable upon conversion of the debentures are linked to a percentage
discount to the market price of our common stock at the time of the conversion.
We cannot predict the number of shares of common stock that may be issued upon
conversion. The lower the price of our common stock at the time of conversion,
the more shares of common stock that we will be required to issue upon
conversion, which will further dilute holders of our other securities. See the
table above under "Shares of Common Stock Issuable upon Conversion of the
Debentures and Exercise of the Warrants." This uncertain and potentially
substantial number of shares issuable upon conversion of the debentures may
hinder our ability to obtain additional financing.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
4.1 Convertible Subordinated Debentures and Warrants Purchase
Agreement, dated as of November 6, 2001, between Cray Inc. and
the investors
4.2 Form of 5% Convertible Subordinated Debenture, due November 6,
2004, issued to the investors
4.3 Form of Stock Purchase Warrant, dated November 6, 2001, issued
to the investors
4.4 Registration Rights Agreement, dated as of November 6, 2001,
between Cray Inc. and the investors
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4.5 Amendment No. 1 to the Convertible Subordinated Debentures and
Warrants Purchase Agreement and Other Transaction Documents,
between Cray Inc. and the investors
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CRAY INC.
/S/
By: __________________________
Kenneth W. Johnson
Chief Financial Officer
November 28, 2001
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