As filed with the Securities and Exchange Commission on April 23, 1997
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form S-3 Registration Statement
Under
The Securities Act of 1933
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TERA COMPUTER COMPANY
(Exact name of registrant as specified in its charter)
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WASHINGTON 93-0962605
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2815 Eastlake Avenue East
Seattle, WA 98102-3027
(206) 325-0800 (telephone)
(206) 325-2433 (facsimile)
(Address, including zip code, and telephone and facsimile numbers,
including area code, of principal executive offices)
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James E. Rottsolk, President
Tera Computer Company
2815 Eastlake Avenue
Seattle, WA 98102-3027
(206) 325-0800 (telephone)
(206) 325-2433 (facsimile)
(Name, address, including zip
code, and telephone and facsimile numbers, including
area code, of agent for service)
Copy to:
Kenneth W. Johnson
Stoel Rives LLP
One Union Square, 36th Floor
Seattle, WA 98101-3197
(206) 624-0900 (telephone)
(206) 386-7500 (facsimile)
Approximate date of commencement of proposed sale to the public:
From time to time after this registration statement becomes effective
If the only securities being registered on this Form are to be offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with a dividend or
interest reinvestment plan, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Per Aggregate Offering Registration
Registered Registered Share(1) Price (2) Fee
- -------------------- ---------- ------------------ ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock, 1,395,000 shares(2) $4.03 $5,621,850 $1,703.59
$.01 par value
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(2) Pursuant to Rule 416 under the Securities Act of 1933, there are also being
registered such indeterminate number of additional shares of Common Stock
as may be issuable upon conversion of the Preferred Stock described herein
and payment of dividends thereon pursuant to the provisions of the
Preferred Stock regarding determination of the applicable conversion price
and dividend rate.
</TABLE>
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
Subject to Completion, Dated April 23, 1997
PROSPECTUS
TERA COMPUTER COMPANY
1,395,000 Shares of Common Stock
The shares offered hereby (the "Shares") consist of shares of Common Stock, $.01
par value ("Common Stock"), of Tera Computer Company, a Washington corporation
(the "Company"), which may be offered from time to time by the selling
stockholder described herein under "Selling Stockholder" (the "Selling
Stockholder"). The Company will not receive any of the proceeds from the sale of
the Shares by the Selling Stockholder. The Company has agreed to bear all
expenses (other than selling commissions and fees and certain expenses of
counsel and other advisors to the Selling Stockholder) in connection with the
registration of the Shares being offered by the Selling Shareholder. The Company
has agreed to indemnify the Selling Stockholder against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
The Shares may be sold in transactions on the Nasdaq SmallCap Market at the
market prices then prevailing, in privately negotiated transactions or
otherwise. In connection with any sales, the Selling Stockholder and any brokers
and dealers participating in such sales may be deemed to the "underwriters"
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"). See "Plan of Distribution."
On March 24, 1997, the Company sold 3,000 shares of its Series B Convertible
Stock, $.01 par value (the "Preferred Stock"), to the Selling Stockholder in a
private transaction. The Shares include such presently indeterminate number of
shares of Common Stock as may be issued on conversion of or in payment of
dividends on the shares of its Preferred Stock held by the Selling Stockholder
pursuant to the provisions of the Statement of Rights and Preferences of the
Preferred Stock regarding determination of the applicable conversion price and
dividend rate. The actual number of shares of Common Stock issued or issuable
upon conversion of the Preferred Stock and the payment of dividends thereon is
subject to adjustment depending on factors which cannot be predicted by the
Company at this time, including, among others, the future market prices of the
Common Stock.
The Common Stock is listed on the Nasdaq SmallCap Market under the symbol TERA.
On April 21, 1997, the closing price for the Common Stock was $4.00.
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These Securities Involve a High Degree of Risk. See "Risk Factors" beginning on
page 4 for Certain Factors Related to This Offering.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not lawfully be made. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as to which information has
been given herein.
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The date of this Prospectus is __________, 1997.
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TABLE OF CONTENTS
Section Page
- ------- ----
The Company ................................................................. 2
Incorporation of Certain Documents by Reference ............................. 3
Available Information ....................................................... 3
Risk Factors ................................................................ 4
Recent Events ............................................................... 12
Capitalization .............................................................. 13
Selling Stockholder ......................................................... 14
Plan of Distribution ........................................................ 15
Experts ..................................................................... 16
Limitation of Liability and Indemnification ................................. 16
THE COMPANY
The Company was formed to design, develop and market high performance
general purpose parallel computer systems. Tera's Multithreaded Architecture
System ("MTA system") is designed to address a wide range of scientific and
engineering applications, such as simulation and visualization of complex
mechanical and biochemical systems, as well as emerging commercial applications,
such as database mining, information-on-demand and computer-aided design and
visualization. The Company believes that its MTA system architecture represents
a significant breakthrough in high performance computing that will enable the
Company to offer systems with several times the price/performance of currently
available commercial high performance computer systems. The Company believes
that the MTA system overcomes the limitations of currently available commercial
architectures by delivering a general purpose parallel, easy-to-program,
scalable, very high performance computer system. The MTA system is designed to
combine the very high computational price/performance levels of massively
parallel processing with the ease of use of conventional shared memory
programming. Typical MTA system configurations are expected to sell for between
$5 million and $40 million. The Company's initial delivery of an MTA system is
scheduled for mid-1997 to the San Diego Supercomputer Center.
The Company was incorporated in Washington in December 1987. The Company's
principal executive offices are located at 2815 Eastlake Avenue East, Seattle,
Washington 98102-3027, and its telephone number is (206) 325-0800.
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"Tera" and "MTA" are trademarks of the Company. This Prospectus also
contains and incorporates trademarks of other companies.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Securities
and Exchange Commission (the "Commission") pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), are incorporated in this
Prospectus by reference:
(a) The Company's Annual Report on Form 10-KSB for the year ended
December 31, 1996;
(b) The Company's Current Report on Form 8-K, filed on April 1, 1997.
(c) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form SB-2 (Registration No.
33-95460-LA), including any amendment or report filed for the purpose of
updating such description, as incorporated by reference in the Company's
Registration Statement on Form 8-A (Registration No. 0-26820), including
the amendment thereto on Form 8-A/A filed by the Company.
All reports and other documents subsequently filed by the Company pursuant
to sections 13(a), 13(c), 14, and 15(d) of the Exchange Act prior to the
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of the filing of such reports and
documents.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the securities offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. For
further information with respect to the Company and the Shares, reference is
made to the Registration Statement and the exhibits and schedules thereto. The
Registration Statement, including exhibits thereto, may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies may be obtained at the prescribed rates from the
Public Reference Section of the Commission at its principal office in
Washington, D.C. Copies of such documents may also be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street N.W.,
Washington, D.C. 20006. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in its entirety by such reference.
The Company's Common Stock and its Redeemable Common Stock Purchase
Warrants (the "Warrants") are registered with the Commission under Section 12(g)
of the Exchange Act and, in
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accordance therewith, the Company files reports, proxy statements, and other
information with the Commission. Such filings can be inspected and copied at the
Commission's public reference rooms at the above-referenced addresses, at
prescribed rates, or from the Commission's Website at "http://www.sec.gov." The
Company's Common Stock and Warrants are traded on the Nasdaq SmallCap Market
under the symbols "TERA" and TERAW," respectively.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, including any beneficial
owner, on the written or oral request of any such person, a copy of any or all
of the incorporated documents, other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference therein. Requests shall
be directed to Tera Computer Company, 2815 Eastlake Avenue East, Seattle, WA
98102-3027, Attention: President (telephone number (206) 325-0800). The
information relating to the Company contained in this Prospectus does not
purport to be comprehensive and should be read together with the information
contained in the incorporated documents.
RISK FACTORS
In addition to the other information in this Prospectus, each prospective
investor should carefully consider the following factors in evaluating the
Company and its business before purchasing the securities offered hereby. No
investor should participate in the Offering unless such investor can afford a
complete loss of his or her investment. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including but not limited to those
set forth in the following risk factors and elsewhere in this Prospectus.
Development Stage Enterprise; History of Losses. The Company is a development
stage enterprise that had an accumulated loss of approximately $27 million as of
December 31, 1996. The Company has experienced net losses in each year of
operations and expects to incur substantial further losses while it tests and
evaluates its MTA system prototype and commences production, and possibly
thereafter. The Company has had no revenue or earnings and does not expect to
recognize revenue from the sale of its initial MTA system before mid-1997, if
ever. Whether the Company will achieve revenue or earnings will depend upon a
number of factors, including its ability to design, develop, manufacture and
market the MTA system and to achieve broad market acceptance thereof. In
addition, profitability will be dependent on, among other things, the level of
revenue in any given period, the terms and conditions of sale or lease for an
MTA system, the system model or models sold, and the Company's expense levels
and manufacturing costs. There can be no assurance that the Company will be
successful in completing the development of, and delivering and receiving
payments for, production MTA systems, or that it will be able to generate sales
or achieve a profitable level of operations in the future.
Development Status of the MTA System. The development of a new very high
performance computer system is a lengthy and technically challenging process and
requires a significant investment of capital and other resources. Several
companies in this market have experienced extreme financial difficulty in the
past several years, including Thinking Machines Corporation, Cray Computer
Corporation, Kendall Square Research Corporation and Supercomputer Systems, Inc.
Since its
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inception through December 31, 1996, the Company has expended approximately
$38.6 million to design and develop the MTA system. The hardware development
effort has included design of integrated circuits, packaging and cooling systems
and at-speed testing equipment. The software development effort has included
design of compilers, an operating system and input-output software technology.
Until November 1996, when the Company announced that its initial prototype was
undergoing testing and had run its first programs, the MTA system has been
subject only to computer simulation, and the prototype system has undergone only
initial testing and evaluation. Even if the initial testing and evaluation of
the prototype system were successful, the Company has not attempted to integrate
multiple modules into a commercially configured system and only recently
commenced work on its initial production model.
Assuming that the MTA system prototype can be successfully developed,
modifications to the hardware components, software and the integrated system
still may be required. Development of system software is a difficult process,
and there can be no assurance that the Company will be able to meet all of the
technical challenges required to integrate and complete an MTA system that
satisfies both internal and commercially acceptable performance specifications.
Significant delays in completing the various hardware components or software, or
in integrating the full system, would materially and adversely affect the
Company's business and results of operations. Even if the Company is successful
in developing its prototype, there can be no assurance that the Company's
products will be commercially successful.
Manufacturing Risks; Reliance On and Capacity Of Third Party Sole Source
Suppliers. The Company intends to subcontract the manufacture of substantially
all of its hardware components, including integrated circuits, printed circuit
boards, flex circuits and power supplies, on a sole source basis to third party
suppliers, and there can be no assurance that such suppliers will be able to
manufacture the components to the Company's design specifications. Manufacturing
difficulties and limited yields, particularly of gallium arsenide ("GaAs")
integrated circuits and advanced printed circuit boards and flex circuits, could
materially and adversely affect the Company's ability to complete and deliver
production models of the MTA system. The manufacture of integrated circuits, and
in particular the manufacture of GaAs integrated circuits, is a difficult and
complex process. Minute impurities, difficulties in the fabrication process,
defects in the masks used to print circuits on wafers or other factors can cause
a substantial percentage of wafers to be rejected or numerous die on each wafer
to be non-functional. The Company's suppliers may experience problems in
achieving acceptable manufacturing yields for these or other reasons, resulting
in substantial delays in the delivery of necessary hardware components to the
Company and unacceptably high prices for those components, with a resulting loss
of profitability or loss of competitiveness for the Company's products. The
Company has experienced such yield problems already, and these failures forced
the Company to redesign certain components for manufacture by alternative
suppliers which caused delays in the fabrication of the Company's prototype and
increased demands upon the Company's financial resources. There can be no
assurance that the Company's efforts to obtain components in a timely manner
that meet its design specifications will be successful, which may affect the
Company's ability to deliver its first MTA system to the San Diego Supercomputer
Center on schedule. See "RECENT EVENTS - Use of Cash Resources."
Moreover, the production capacity of the Company's integrated circuit
suppliers is very limited and the availability of integrated circuits and other
components will be a limiting factor on the
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number and size of the MTA systems that may be sold in 1997, assuming the
receipt of additional purchase orders. Absent improved yields, increased
production capacity or a reallocation of such suppliers' output to meet it's
needs, the Company may be unable to obtain a sufficient quantity of integrated
circuits or other components to meet future production and delivery schedules.
In addition, some of the Company's key suppliers are small companies with
limited financial and other resources, and may be more likely to experience
financial difficulties than larger, well established companies. Any or all of
the Company's suppliers may make strategic changes in their product lines, which
may result in the delay or suspension of manufacture of the Company's components
or systems. In the event of a reduction or interruption of supply of the
Company's components, it could take the Company a considerable period of time to
identify and qualify alternative suppliers to redesign its products as necessary
and recommence manufacture. The Company's inability to obtain sufficient sole or
limited source components as required, or to develop alternative sources if and
as required in the future, could result in the Company finding itself without a
source of supply for its components; this could materially impair the Company's
ability to deliver its products, which would materially and adversely affect the
Company's business and results of operations.
The Company's current contract with Unisys Corporation provides for
integrated circuit test and packaging services until December 1997. Although the
agreement could be extended, Unisys has informed the Company that it intends to
exit the semiconductor packaging business. After the Unisys contract expires,
the Company either will contract with another vendor for such packaging services
or perform such work internally. The inability of the Company to subcontract for
these services after its agreement with Unisys expires, or the Company's
inability to perform such services internally, would materially and adversely
affect the Company's business and results of operations.
Future Capital Needs. During 1997, the Company's working capital needs will
depend primarily upon its personnel costs, the cost of components purchased to
complete the testing of its initial MTA system prototype and manufacturing
startup costs, and inventory and receivable financing associated with production
MTA systems. The Company has experienced delays in the development of particular
components of the MTA system that have increased the need for working capital,
and the Company could experience significant additional delays in the
manufacturing process that could further substantially increase the Company's
need for working capital. Personnel operating costs will be required to fund
ongoing research, development and engineering efforts, development of a customer
service organization and increases in its sales and marketing efforts.
Additionally, the Company's administrative functions will increase in order to
support its engineering and sales efforts.
To meet its needs in 1997, the Company expects to receive revenues from
sales of MTA systems, from the possible exercise of its presently outstanding
warrants, which are redeemable by the Company in certain situations, and from
the sale of additional equity or debt or other financing transactions, which may
be dilutive to present shareholders. Management believes that the Company will
be able to secure the requisite funding, but there can be no assurance that any
additional financing will be available when needed or, if available, will be on
satisfactory terms. In March 1997, the Company concluded two private financings
for a total of $4.1 million. The Company's current cash resources are sufficient
to meet its current working capital requirements through June 1997. If the
Company does not ship and receive payment for its initial MTA system by the end
of June 1997, the Company likely will need additional capital in order to
continue its present operations and inventory acquisitions. Although management
believes it will be able to secure any requisite funding, there is
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no assurance that any additional financing will be available when needed or, if
available, that it will be on satisfactory terms. If sufficient funding is not
available by July 1997, the Company will have to curtail sharply its present
operations. See "RECENT EVENTS - Private Placements" and " - Use of Cash
Resources."
Marketing Risks; Government Funding and Regulation. The Company's first sales
targets will be U.S. and foreign government agencies and research laboratories,
which constitute more than one-half of the market for very high performance
computer systems. The United States government historically has facilitated the
development of, and has constituted a market for, new and enhanced very high
performance computer systems. A change of policy by the United States government
or foreign governments that results in a reduction of, or delays in, funding of
certain high technology programs employing high performance computing could have
a major impact on the market for very high performance computer systems, and
would materially and adversely affect the Company's business, results of
operations and need for capital.
Most of the Company's potential customers already own or lease very high
performance computer systems. Some of the Company's competitors may offer
trade-in allowances or discounts to potential customers, and the Company may not
be able to match such sales incentives. The Company may be required to provide
discounts in order to make sales or be required to finance the leasing of its
products, which would result in a deferral of the Company's receipt of cash for
such systems. These developments could materially and adversely affect the
Company's business and results of operations.
The United States government regulates the export of high performance
computing systems such as the anticipated MTA system. There can be no assurance
that the U.S. government will grant any necessary export licenses for the sale
of MTA systems to foreign buyers. The Company's prospects for growth will depend
in part on its ability to obtain export licenses for foreign sales, the delay or
denial of which could materially and adversely affect the Company's business and
results of operations.
In order to expand its market beyond the very high performance scientific
market, and particularly beyond government agencies and research laboratories,
to engineering and other commercial markets, the Company must be able to attract
independent software vendors to port their software application programs so that
they will run on the MTA system. There can be no assurance that the Company will
be able to induce independent software vendors to port their applications, and
the failure to do so could materially and adversely affect the Company's
business and results of operations.
Management of Growth; Dependence on Key Personnel. If the Company is successful
in developing and marketing the MTA system, the Company believes it could
undergo a period of rapid growth which could place a significant strain on its
management, financial and other resources. The Company's ability to manage its
growth will require it to continue to improve its operational and financial
systems and to motivate and effectively manage its employees. If the Company
grows, it will have to implement new financial, budgeting, management
information and internal control systems. The success of the Company will depend
on the ability of management to implement effectively these changes and to
manage the Company's operations over the long term. Several senior management
personnel have not yet been identified, including a chief financial officer. The
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Company's success also will depend in large part upon its ability to attract and
retain highly skilled technical personnel to provide technological depth and
support, to complete and enhance its first products and to develop new products.
In addition, marketing and sales personnel will be needed. Competition for
highly skilled management, technical, marketing and sales personnel is intense.
There can be no assurance that the Company will be successful in attracting and
retaining key management, technical, marketing and sales personnel, and its
failure to do so would materially and adversely affect the Company's business
and results of operations.
The Company is dependent on Burton J. Smith, the Company's Chairman of the
Board and Chief Scientist, and James E. Rottsolk, the Company's Chief Executive
Officer, and the loss of services of either could have a material impact on the
ability of the Company to achieve its business objectives. The Company has key
man life insurance policies on the lives of Messrs. Smith and Rottsolk in the
amount of $2 million and $1 million, respectively. The Company has no employment
contracts with either Mr. Smith or Mr. Rottsolk or with any other employee.
Quarterly Performance May Vary Significantly. In the event that the Company is
able to attain broad market acceptance of the MTA system, one or a few system
sales may account for a substantial percentage of the Company's quarterly and
annual revenue because of the anticipated high average sales price of the MTA
system models and the timing of purchase orders and product acceptances. Because
a number of the Company's 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
the control of the Company, such as changes in levels of customer capital
spending, the introduction or announcement of competitive products, the
availability of components, currency fluctuations and international conflicts or
economic crises. Because of these factors, revenue, expenses, net income or loss
and cash flow are likely to fluctuate significantly from quarter to quarter.
Rapid Technological Change and New Products. The market for the Company's
products is characterized by rapidly changing technology, accelerated product
obsolescence and rapidly changing industry standards. The Company's success will
depend upon its ability to complete development of the MTA system and to
introduce new products and features in a timely manner to meet evolving customer
requirements. There can be no assurance that the Company will be successful in
these efforts. The Company's business and results of operations will be
materially and adversely affected if the Company incurs delays in developing its
products or if such products do not gain broad market acceptance. In addition,
there can be no assurance that products or technologies developed by others will
not render the Company's products or technologies noncompetitive or obsolete.
Competition. The Company's competitors can be divided into two general
categories: established companies that are well-known in the high performance
computer market and new entrants capitalizing on developments in parallel
processing and increased computer performance through networking.
The high performance computer market is highly competitive and has been
dominated by Cray Research. Other participants in the market include IBM
Corporation ("IBM"), Intel Corporation ("Intel"), and foreign companies such as
Fujitsu, Ltd., Hitachi, Ltd., and NEC Corporation. Each of
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these competitors has broader product lines and substantially greater research,
engineering, manufacturing, marketing and financial resources than the Company.
A number of companies, including IBM, Intel, Silicon Graphics, Inc.,
Fujitsu Ltd. and Convex Computer Corporation, have developed or plan to develop
massively parallel systems for the high performance computer market. Although to
date this kind of system architecture has been limited in applicability and
difficult to program, a breakthrough in architecture or software technology
could change this situation. There can be no assurance that such a breakthrough
will not occur, and such an advance would materially and adversely affect the
Company's business and results of operations.
There can be no assurance that the performance of the MTA system will be
competitive with the computer systems offered by the Company's competitors or
that the Company will be able to compete successfully over time against new
entrants or innovative competitors at the lower end of the market. Furthermore,
periodic announcements by the Company's competitors of new high performance
computer systems and price adjustments may materially and adversely affect the
Company's business and results of operations. The market has experienced a
recent consolidation as Convex Computer Corporation was absorbed by
Hewlett-Packard in 1995, Cray Research was acquired by Silicon Graphics, Inc. in
1996, and Intel has stated that it would no longer directly market high
performance computer systems.
Proprietary Rights. The Company relies on a combination of copyright and trade
secret protection, non-disclosure agreements and licensing arrangements to
establish, protect and enforce its proprietary rights. Despite the Company's
efforts to safeguard and maintain its proprietary rights, there can be no
assurance that the Company will be successful in doing so or that the Company's
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to the Company's technologies.
Although the Company is not a party to any present litigation regarding
proprietary rights, there can be no assurance that third parties will not assert
intellectual property claims against the Company in the future. Such claims, if
proved, could materially and adversely affect the Company's business and results
of operations. In addition, although any such claims may ultimately prove to be
without merit, the necessary management attention to and legal costs associated
with litigation or other resolution of such claims could materially and
adversely affect the Company's business and results of operations.
The laws of certain foreign 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 the Company continues to implement protective measures and
intends to defend its proprietary rights vigorously, there can be no assurance
that these efforts will be successful.
Shares Eligible for Future Sale. Sale of substantial amounts of the Company's
Common Stock or Warrants in the public market or the prospect of such sales
could materially and adversely affect the market price of the Common Stock and
Warrants. As of March 31, 1997, the Company had outstanding 6,985,487 shares of
Common Stock and 3,000 shares of Series B Convertible Preferred Stock
convertible into the Shares offered hereby. In addition, the Company has
outstanding 2,226,131
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Warrants to purchase 2,739,853 shares of Common Stock and privately placed
warrants to purchase another 214,342 shares of Common Stock. In addition, as of
such date, the Company had granted options under its option plans to purchase an
aggregate of 1,788,414 shares of Common Stock and had granted H.J. Meyers & Co.,
Inc., an investment banking firm, certain warrants evidencing the right to
purchase 406,000 shares of Common Stock and 203,000 Warrants exercisable for
249,846 shares of Common Stock. All of the shares purchased under the stock
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 Common Stock or the
perception that such sales could occur could depress prevailing market prices
for the Common Stock and Warrants. The existence of the Warrants, the warrants
issued to H.J. Meyers & Co., Inc., the private warrants and any other options or
warrants may prove to be a hindrance to future equity financing by the Company.
Further, the holders of such warrants and options may exercise them at a time
when the Company would otherwise be able to obtain additional equity capital on
terms more favorable to the Company.
Possible Volatility of Stock Price. The trading price of the Company's Common
Stock and Warrants could be subject to significant fluctuations in response to
variations in quarterly operating results, changes in analysts' estimates,
announcements of technological innovations by the Company or its competitors,
general conditions in the very high performance computer industry and other
factors. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies in general, and small
capitalization, high technology companies in particular, and are often unrelated
to their operating performance.
Redemption of Warrants. The Warrants are subject to redemption at $0.05 per
Warrant on 30 days' prior written notice to the Warrantholders (i) if the
closing bid price of the Common Stock as reported on Nasdaq averages in excess
of 150% of the then current purchase price for one share of Common Stock
underlying the Warrants, currently $5.85, over a period of 20 consecutive
trading days ending within 15 days of the notice of redemption, or (ii) with the
prior written consent of H.J. Meyers & Co., Inc., at the current or a lower
exercise price per share of Common Stock In the event the Company elects to
redeem the Warrants, such Warrants would be exercisable until the close of
business on the date fixed for redemption in such notice. If any Warrant called
for redemption is not exercised by such date, it will cease to be exercisable
and the holder will be entitled only to the redemption price. If the Company
chooses to exercise such right to redeem at a time which requires the consent of
H.J. Meyers & Co., Inc., H.J. Meyers & Co., Inc. may use its sole discretion in
determining whether to grant or withhold such consent. H.J. Meyers & Co., Inc.
is under no obligation to grant or withhold such consent under any
circumstances, regardless of the potential effect of such decision on the
Company, its shareholders or the holders of the Warrants. There can be no
assurance that if the Company chooses to exercise its right to redeem the
Warrants at a time that is not advantageous to the holders of the Warrants, H.J.
Meyers & Co., Inc. will withhold its consent to such redemption, or that if the
Company chooses to exercise its right to redeem the Warrants at a time that is
advantageous to the Company and the shareholders, H.J. Meyers & Co., Inc. will
grant such consent.
Possible Illiquidity of Trading Market; Reduction in Public Float. The Common
Stock and the Warrants are quoted on the Nasdaq SmallCap Market (the "Market").
The Market may be significantly less liquid than the Nasdaq National Market. The
number of shares of Common Stock
10
<PAGE>
and Warrants available for resale in the trading market is limited because of
trading restrictions on shares of Common Stock and Warrants owned by affiliates.
In addition, the Nasdaq has proposed more stringent listing and maintenance
requirements and, if the Company should continue to experience losses from
operations or for any other reason have insufficient net tangible assets, it may
be unable to maintain the standards for continued quotation on the Market, and
the Common Stock and the Warrants could be subject to removal therefrom. If such
removal were to occur, trading, if any, in the Common Stock and the Warrants
henceforth would be conducted in the over-the-counter market on an electronic
bulletin board established for securities that do not meet the listing
requirements for the Market, 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 Company's securities. In
addition, such removal would subject the Company's 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 Market could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Company's securities and the
ability of purchasers of the Company's securities to sell their securities in
the secondary market. In addition, if the market price of the Company's Common
Stock falls to below $5.00 per share, the Company may become subject to certain
penny stock rules even if still quoted on the Market. While such penny stock
rules should not affect the quotation of the Company's Common Stock on the
Market, such rules may further limit the market liquidity of the Common Stock
and Warrants and the ability of investors to sell securities in the secondary
market.
No Anticipated Dividends. The Company has not previously paid any dividends on
its Common Stock and for the foreseeable future intends to continue its policy
of retaining any earnings to finance the development and expansion of its
business.
Effect of Antitakeover Provisions. Certain provisions of the Company's Restated
Articles of Incorporation and Restated Bylaws and the laws of the State of
Washington could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of Common Stock. The Company is
authorized to issue Preferred Stock, without shareholder approval, with rights
senior to those of the Common Stock and to impose various procedural and other
requirements that could make it more difficult for shareholders to effect
certain corporate actions.
Limitations on Liability and Indemnification Matters. As permitted by the
Washington Business Corporation Act, the Company has included in its Restated
Articles of Incorporation a provision to eliminate the personal liability of its
directors for monetary damages for breach or alleged breach of their fiduciary
duties as directors, subject to certain exceptions. In addition, the Bylaws of
the Company provide that the Company is required to indemnify its directors
under certain circumstances, including those in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses to
its officers and directors as incurred in connection with proceedings against
them for which they may be indemnified.
11
<PAGE>
RECENT EVENTS
The following summarizes significant events with respect to the Company in
1997.
1. Private Placements. In March 1997, the Company completed two private
placements of equity securities. In the first offering, the Company raised
$1,122,495, less expenses, through the private placement to eight accredited
investors of 299,332 shares of Common Stock and 74,833 warrants (of which 68,167
are private warrants exercisable at $6.00 per share and 6,666 were Redeemable
Common Stock Purchase Warrants). The second private placement raised $3,000,000,
less expenses, through the sale of 3,000 shares of Preferred Stock to the
Selling Stockholder. The Preferred Stock will be convertible from time to time
into shares of Common Stock. In addition, the Company issued private warrants
for 29,041 shares of Common Stock to Chanen Painter Equities Trust Ltd., which
acted as the Company's sales agent in connection with these two private
placements.
The first private placement affected the exercise price of the Company's
outstanding Redeemable Common Stock Purchase Warrants so that the exercise price
for any shares of Common Stock will be $5.85 per share through March 24, 1998,
and $6.61 per share of Common Stock thereafter through September 24, 2000, at
which time the Warrants will expire. The exercise prices may be further affected
depending upon the actual conversion prices of the Preferred Stock.
2. Use of Cash Resources. Since its incorporation through December 31,
1996, the Company's principal sources of liquidity have been proceeds from the
sale of equity of approximately $26 million and the Advanced Research Projects
Agency ("ARPA") research funding of approximately $18.5 million. The Company has
received all $15.5 million allowed under its research contract with ARPA for the
initial system development and currently is billing ARPA under a research
contract awarded in September 1995. At March 31, 1997 and after completion of
the private placements described above, the Company had $3 million in cash and
no bank line of credit. The Company's current cash resources are sufficient to
meet its working capital requirements through June 1997. If the Company does not
ship and receive payment for its initial MTA system by the end of June 1997, the
Company likely will need additional capital in order to continue its present
operations and inventory acquisitions. Although management believes it will be
able to secure any requisite funding, there can be no assurance that any
additional financing will be available when needed or, if available, that it
will be on satisfactory terms. See "RISK FACTORS - Future Capital Needs."
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
December 31, 1996 and (ii) as adjusted to give effect to the private sales in
March 1997 of the Preferred Stock and of the Common Stock (see "RECENT EVENTS -
Private Placements").
<TABLE>
<CAPTION>
December 31, 1996 (1)
------------------------------
Actual As Adjusted
--------- -----------
(in thousands)
<S> <C> <C>
Long-term portion of capital leases ............................... $ 114 $ 114
Shareholders' equity:
Convertible Preferred stock:
5,000,000 shares authorized; none issued,
actual; 3,000 shares as adjusted.......................... - 2,833
Common Stock, $.01 par value:
25,000,000 shares authorized; 6,496,815 shares
issued and outstanding, actual; 6,796,147 shares
as adjusted (2)........................................... 28,173 29,240
Accumulated deficit .......................................... ( 27,045) ( 27,045)
--------- ---------
Total shareholders' equity ............................... 1,128 5,028
--------- ---------
Total capitalization ................................ $ 1,242 $ 5,142
========= =========
- ----------------------
(1) Does not include (i) 1,816,603 shares issuable upon exercise of outstanding
stock options as of December 31, 1996, (ii) 2,739,853 shares of Common
Stock currently issuable upon exercise of outstanding Warrants and 214,342
shares of Common Stock currently issuable upon exercise of certain
privately placed warrants, or (iii) an aggregate of 406,000 shares of
Common Stock and 203,000 Warrants to purchase an additional 249,846 shares
of Common Stock currently issuable upon exercise of warrants issued to H.J.
Meyers & Co., Inc.
(2) The number of shares of Common Stock issued and outstanding excludes
180,976 shares subject to stock subscriptions at December 31, 1996, which
were subsequently issued. If all of the Company's outstanding registered
Warrants were exercised, the Company would issue approximately 2,739,853
shares of Common Stock and receive, after offering expenses estimated at
$50,000, approximately $15,978,000. These numbers do not reflect additional
proceeds, estimated at $3,485,970, the Company would receive if the
warrants (including the underlying Warrants) held by H.J. Meyers & Co.,
Inc. were exercised in full.
</TABLE>
13
<PAGE>
SELLING STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by the Selling Stockholder and as adjusted to give
effect to the sale of the Shares offered hereby.
<TABLE>
<CAPTION>
Beneficial Ownership
Shares Beneficially After Offering (2)
Owned Prior to Shares Being ---------------------------
Selling Stockholder Offering (1) Offered (1) Shares Percent
------------------- ------------------- ------------ ------ -------
<S> <C> <C> <C> <C>
GFL Advantage Fund Limited 1,395,000 1,395,000 -0- -0-
(1) The number of shares of Common Stock shown as beneficially owned and
offered by the Selling Stockholder represents the number of shares which
the Company has initially agreed to register. The number of shares of
Common Stock offered by the Selling Stockholder hereby includes such
presently indeterminate number of shares as may be issued on conversion of
the Preferred Stock and in payment of dividends thereon pursuant to the
provisions of the Statement of Rights and Preferences of the Preferred
Stock regarding determination of the applicable conversion price and the
dividend calculation rate. The actual number of shares of Common Stock
issued or issuable upon the conversion of the Preferred Stock and the
payment of dividends thereon is subject to adjustment depending upon
factors which cannot be predicted by the Company at this time, including,
among others, the future market prices of the Common Stock, the payment of
dividends on the Preferred Stock in additional shares of Common Stock and
antidilution adjustments. Pursuant to the terms of the Statement of Rights
and Preferences governing the Preferred Stock, the Preferred Stock is
convertible by each holder thereof and dividends are payable in Common
Stock only to the extent that the number of shares of Common Stock then
beneficially owned by such holder and its related persons (not including
shares underlying unconverted shares of Preferred Stock) would not exceed
4.9% of the then outstanding shares of Common Stock as determined in
accordance with Sections 13(d) and 16 of the Securities Exchange Act of
1934, as amended. Accordingly, the number of shares of Common Stock set
forth for the Selling Stockholder may exceed the actual number of shares of
Common Stock that the Selling Stockholder could own beneficially at any
given time through its ownership of the Preferred Stock. The number of
shares noted as being offered by the Selling Stockholder is also subject to
increase in the event of a stock split, stock dividend or similar
transaction involving the Common Stock pursuant to Rule 416 under the
Securities Act.
(2) Assumes all of the Shares being offered are sold.
</TABLE>
The Selling Stockholder and its officers and directors have not held any
positions or office or had any other material relationship with the Company or
any of its affiliates within the past three years.
14
<PAGE>
In recognition of the fact that the Selling Stockholder may wish to be
legally permitted to sell its Shares when it deems appropriate, the Company
agreed with the Selling Stockholder to file with the Securities and Exchange
Commission, under the Securities Act, a Registration Statement on Form S-3, of
which this Prospectus forms a part, with respect to the resale of the Shares and
has agreed to prepare and file such amendments and supplements to the
Registration Statement as may be necessary to keep the Registration Statement
effective until the Shares are no longer required to be registered for the sale
thereof by the Selling Stockholder.
PLAN OF DISTRIBUTION
The Shares offered hereby by the Selling Stockholder may be sold from time
to time by the Selling Stockholder, or by pledgees, donees, transferees or other
successors in interest. Such sales may be made on one or more exchanges or in
the over-the-counter market (including the Nasdaq SmallCap Market), in privately
negotiated transactions, through the writing of options on the Shares, or
otherwise at market prices then prevailing or at prices related to the
then-current market price, at fixed prices that may be changed, or at negotiated
prices. The Shares may be sold to or through brokers or dealers, who may act as
agent or principal, or in direct transactions between the Selling Stockholder
and purchasers. In addition, the Selling Stockholder may, from time to time,
sell short the Common Stock, and in such instances, this Prospectus may be
delivered in connection with such short sale and the Shares offered hereby may
be used to cover such short sale.
Transactions involving brokers or dealers may include, without limitation,
(a) ordinary brokerage transactions, (b) transactions in which the broker or
dealer solicits purchasers, (c) block trades in which the broker or dealer will
attempt to sell the Shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction and (d) purchases by a broker
or dealer as a principal and resale by such broker or dealer for its account. In
effecting sales, brokers and dealers engaged by the Selling Stockholder or the
purchasers of the Shares may arrange for other brokers or dealers to
participate. Such brokers or dealers may receive discounts, concessions or
commissions from the Selling Stockholder and/or the purchasers of the Shares for
whom such broker or dealer may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker or dealer may
be in excess of customary commissions). The Selling Stockholder and such brokers
and dealers who act in connection with the sale of Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit on any resale of the Shares as principal may be
deemed to be underwriting discounts and commissions under the Securities Act.
Including and without limiting the foregoing, in connection with
distributions of the Common Stock, the Selling Stockholder may enter into
hedging transactions with brokers or dealers and the brokers or dealers may
engage in short sales of the Common Stock in the course of hedging the positions
they assume with the Selling Stockholder. The Selling Stockholder may also enter
into option or other transactions with brokers or dealers that involve the
delivery of the Common Stock to the brokers or dealers, who may then resell or
otherwise transfer such Common Stock. The Selling Stockholder may also loan or
pledge the Common Stock to a broker or dealer and the broker or dealer may sell
the Common Stock so loaned or upon default may sell or otherwise transfer the
pledged Common Stock.
15
<PAGE>
The Company is bearing all costs relating to the registration of the Shares
other than certain fees and expenses, if any, of counsel or other advisors to
the Selling Stockholder. Any commissions, discounts or other fees payable to
brokers or dealers in connection with any sale of the Shares will be borne by
the Selling Stockholder and/or purchasers participating in such transaction.
None of the proceeds from the sale of the Shares by the Selling Stockholder will
be received by the Company. The Company and the Selling Stockholder have each
agreed to indemnify the other against certain liabilities, including liabilities
arising under the Securities Act.
Any Shares covered by this Prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under such Rule rather pursuant to
this Prospectus.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996
and for each of the two years in the period ended December 31, 1996,
incorporated by reference into this Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports with respect
thereto. Such financial statements have been so incorporated in reliance on the
reports of such firm given upon their authority as experts in accounting and
auditing.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Restated Articles of Incorporation provide that, to the
fullest extent permitted by the Washington Business Corporation Act, the
Company's directors will not be liable for monetary damages to the Company or
its shareholders. The Company's Restated Bylaws provide that the Company will
indemnify its directors and, by action of the Board of Directors, may indemnify
its officers, employees and other agents of the Company to the fullest extent
permitted by applicable law, except for any legal proceeding that is initiated
by such directors, officers, employees or agents without authorization of the
Board of Directors. See "Risk Factors - Limitations on Liability and
Indemnification Matters."
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
--------------------------------------------
All expenses in connection with the issuance and distribution of the
securities being registered will be paid by the Company. The following is an
itemized statement of these expenses (all amounts are estimated except for the
SEC and Nasdaq listing fees):
SEC Registration fee...................... $1,703.59
Nasdaq listing fee......................... 7,500.00
Blue Sky filing fees & expenses....... 2,000.00
Legal fees.................................. 30,000.00
Accountant's Fees........................ 2,500.00
Printing Fees.............................. 1,000.00
Miscellaneous............................. 296.41
-----------
Total........................................ $ 45,000.00
===========
Item 15. Indemnification of Officers and Directors.
------------------------------------------
Article XII of the Company's Articles of Incorporation and Section 11 of
the Company's Bylaws require indemnification of directors, officers, employees
and agents of the company to the fullest extent permitted by the Washington
Business Corporation Act (the "Act"). Sections 23B.08.500 through 23B.08.000 of
the Act authorize a court to award, or a corporation's board of directors to
grant, indemnification to directors and officers on terms sufficiently broad to
permit indemnification under certain circumstances for liabilities arising under
the Securities Act.
Section 23B.08.320 of the Act authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary damages
for acts or omissions as a director, except in certain circumstances involving
intentional misconduct, self-dealing or illegal corporate loans or
distributions, or any transaction from which the director personally receives a
benefit in money, property or services to which the director is not legally
entitled. Article XI of the Company's Articles of Incorporation contains
provisions implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the Company and its shareholders.
II-1
<PAGE>
Item 16. Exhibits.
---------
3.1 Restated Articles of Incorporation of the Company(1)
3.2 Restated Bylaws of the Company(1)
3.3 Statement of Rights and Preferences of the Series B Convertible
Preferred Stock of the Registrant, as filed with the Secretary of
State of the State of Washington on March 24, 1997
4.1 Subscription Agreement, dated as of March 24, 1997, by and between the
Registrant and GFL Advantage Fund Limited
4.2 Registration Rights Agreement, dated as of March 24, 1997, by and
between the Registrant and GFL Advantage Fund Limited
5 Opinion of Stoel Rives LLP
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Stoel Rives LLP (included in Exhibit 5)
24 Power of Attorney (see signature page)
- ------------------
(1) Incorporated by reference to Amendment No. 3 to the Company's Registration
Statement on Form SB-2 Registration No. 33-95460-LA, filed with the
Commission on September 22, 1995
Item 17. Undertakings.
-------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or
the most recent post-effective amendment thereof) that,
individually or in the aggregate, represent a fundamental
change in the information set forth in this Registration
Statement; and
(iii) To include any additional or changed material information
with respect to the plan of distribution;
II-2
<PAGE>
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is incorporated by
reference from periodic reports filed by the registrant pursuant
to Section 13 or Section 15(d) of the Exchange Act.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered that remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Seattle, State of Washington, on April
23, 1997.
TERA COMPUTER COMPANY
By: /s/ JAMES E. ROTTSOLK
------------------------------------------
James E. Rottsolk
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below hereby authorizes and appoints Burton J. Smith and James E. Rottsolk, and
each of them, with full power of substitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each file, any and
all amendments to this Registration Statement, including any and all
post-effective amendments.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities indicated below on the 23rd day of April, 1997:
Signature and Title
- -------------------
/s/ BURTON J. SMITH /s/ DANIEL J. EVANS
- ------------------------------------- -------------------------------------
Burton J. Smith Daniel J. Evans, Director
Chairman of the Board of Directors
/s/ JAMES E. ROTTSOLK /s/ KENNETH W. KENNEDY
- ------------------------------------- -------------------------------------
James E. Rottsolk Kenneth W. Kennedy, Director
Chief Executive Officer, Chief
Financial Officer,
Chief Accounting Officer,
and Director
/s/ DAVID N. CUTLER /s/ JOHN W. TITCOMB, JR.
- ------------------------------------- -------------------------------------
David N. Cutler, Director John W. Titcomb, Jr., Director
II-4
<PAGE>
EXHIBIT INDEX
SEQUENTIAL
EX. NO. DESCRIPTION PAGE NO.
3.1 Restated Articles of Incorporation of the Company(1) --
3.2 Restated Bylaws of the Company(1) --
3.3 Statement of Rights and Preferences of the Series B
Convertible Preferred Stock of the Registrant, as filed with
the Secretary of State of the State of Washington on March
24, 1997 24
4.1 Subscription Agreement, dated as of March 24, 1997, by and
between the Registrant and GFL Advantage Fund Limited 59
4.2 Registration Rights Agreement, dated as of March 24, 1997,
by and between the Registrant and GFL Advantage Fund Limited 76
5 Opinion of Stoel Rives LLP 98
23.1 Consent of Deloitte & Touche LLP 99
23.2 Consent of Stoel Rives LLP (included in Exhibit 5) --
24 Power of Attorney (see signature page) --
- -------------------
(1) Incorporated by reference to Amendment No. 3 to the Company's Registration
Statement on Form SB-2, Registration No. 33-95460-LA, filed on September
22, 1995.
II-5
Exhibit 3.3
ARTICLES OF AMENDMENT
CONTAINING THE
STATEMENT OF RIGHTS AND PREFERENCES OF THE
SERIES B CONVERTIBLE PREFERRED STOCK
OF
TERA COMPUTER COMPANY
These Articles of Amendment containing the Statement of Rights and
Preferences of the Series B Convertible Preferred Stock of TERA COMPUTER
COMPANY, a Washington corporation (the "Corporation"), are herein executed by
the Corporation, pursuant to the provisions of RCW 23B.06.020, as follows:
1. The name of the Corporation is TERA COMPUTER COMPANY.
2. A copy of the resolution of the Board of Directors of the Corporation
amending the Restated Articles of Incorporation of the Corporation to establish
and designate the rights and preferences of the Series B Convertible Preferred
Stock of the Corporation is attached hereto as Attachment A and is incorporated
herein by this reference.
3. The date of the adoption of the amending resolution by the Board of
Directors was March 20, 1997.
4. The amending resolution was duly adopted by the Board of Directors of
the Corporation in accordance with the provisions of RCW 23B.06.020 and
Shareholder action was not required.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment in duplicate and in an official and authorized capacity under penalty
of perjury this 24th day of March 1997.
TERA COMPUTER COMPANY
By /s/ JAMES E. ROTTSOLK
Its President
<PAGE>
Attachment A
------------
RESOLVED, that pursuant to the authority expressly granted to and vested in
the Board of Directors of the Corporation by the provisions of the Articles of
Incorporation, there shall be established a series of the Corporation's
preferred stock consisting of 3,000 shares, $.01 par value, to be designated as
the "Series B Convertible Preferred Stock" (the "Series B Convertible Preferred
Stock"), and that the relative rights and preferences of the shares of the
Series B Convertible Preferred Stock shall be as set forth in the Statement of
Rights and Preferences of the Series B Convertible Preferred Stock attached
hereto as Exhibit A.
<PAGE>
EXHIBIT A
TERA COMPUTER COMPANY
3,000 Shares
Series B Convertible Preferred Stock, $.01 Par Value
Stated Value $1,000 Per Share
Statement of Rights and Preferences
Series B Convertible Preferred Stock. The rights, preferences, privileges,
and limitations granted to and imposed on the Series B Convertible Preferred
Stock (the "Series B Convertible Preferred Stock"), which series shall consist
of 3,000 shares, are as set forth below. The following rights, preferences,
privileges, and limitations are subject to the designation, description, and
terms of one or more subsequent series of Preferred Stock by the Board of
Directors of Tera Computer Company (the "Corporation") pursuant to authority
granted by the Restated Articles of Incorporation. To the extent that the
rights, preferences, privileges, and limitations of any such subsequent series
conflict or are inconsistent with any of the rights, preferences, privileges,
and limitations of the Series B Convertible Preferred Stock, the designation and
description of terms of the subsequent series which is the latest so designated
shall control and prevail over the rights, preferences, privileges, and
limitations of the Series B Convertible Preferred Stock.
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series B Convertible Preferred Stock," and the number of shares
constituting the Series B Convertible Preferred Stock shall be 3,000, and shall
not be subject to increase.
Section 2. Dividends and Distributions.
(a) The holders of outstanding shares of Series B Convertible
Preferred Stock shall be entitled to receive, when, as, and if declared by the
Board of Directors of the Corporation (the "Board of Directors" or the "Board")
out of funds legally available for such purpose, dividends at the rate of $50.00
per annum per share, and no more, which shall be fully cumulative, shall accrue
without interest (except as otherwise provided herein as to dividends in
arrears) from the date of original issuance and shall be payable quarterly on
January 1, April 1, July 1, and October 1 of each year, commencing July 1, 1997
(except that if any such date is a Saturday, Sunday, or legal holiday, then such
dividend shall be payable on the next succeeding day that is not a Saturday,
Sunday, or legal holiday) to holders of record as they appear on the stock books
of the Corporation on such record dates, not more than 20 nor less than 10 days
preceding the payment dates for such dividends, as
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shall be fixed by the Board. Dividends on the Series B Convertible Preferred
Stock shall be paid in cash or, subject to the limitations in Section 2(b)
hereof, shares of Common Stock of the Corporation or any combination of cash and
shares of Common Stock, at the option of the Corporation as hereinafter
provided. The amount of the dividends payable per share of Series B Convertible
Preferred Stock for each quarterly dividend period shall be computed by dividing
the annual dividend amount by four. The amount of dividends payable for the
initial dividend period and any period shorter than a full quarterly dividend
period shall be computed on the basis of a 360-day year of twelve 30-day months.
Dividends not paid on a payment date, whether or not such dividends have been
declared, will bear interest at the rate of 12% per annum until paid. No
dividends or other distributions, other than dividends payable solely in shares
of Common Stock or other capital stock of the Corporation ranking junior as to
dividends to the Series B Convertible Preferred Stock (collectively, the "Junior
Dividend Stock"), shall be paid or set apart for payment on any shares of Junior
Dividend Stock, and no purchase, redemption, or other acquisition shall be made
by the Corporation of any shares of Junior Dividend Stock unless and until all
accrued and unpaid dividends on the Series B Convertible Preferred Stock and
interest on dividends in arrears at the rate specified herein shall have been
paid or declared and set apart for payment.
If at any time any dividend on any capital stock of the Corporation ranking
senior as to dividends to the Series B Convertible Preferred Stock (the "Senior
Dividend Stock") shall be in default, in whole or in part, no dividend shall be
paid or declared and set apart for payment on the Series B Convertible Preferred
Stock unless and until all accrued and unpaid dividends with respect to the
Senior Dividend Stock, including the full dividends for the then current
dividend period, shall have been paid or declared and set apart for payment,
without interest. No full dividends shall be paid or declared and set apart for
payment on any class or series or the Corporation's capital stock ranking, as to
dividends, on a parity with the Series B Convertible Preferred Stock (the
"Parity Dividend Stock") for any period unless all accrued but unpaid dividends
(and interest on dividends in arrears at the rate specified herein) have been,
or contemporaneously are, paid or declared and set apart for such payment on the
Series B Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series B Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series B Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series B
Convertible Preferred Stock (and interest on dividends in arrears at the rate
specified herein) and the Parity Dividend Stock shall be paid or declared and
set apart for payment pro rata, so that the amount of dividends paid or declared
and set apart for payment per share on the Series B Convertible Preferred Stock
and the Parity Dividend Stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of Series B
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
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Any references to "distribution" contained in this Section 2 shall not be
deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(b) If the Corporation elects in the exercise of its sole discretion
to issue shares of Common Stock in payment of dividends on the Series B
Convertible Preferred Stock, the Corporation shall issue and dispatch, or cause
to be issued and dispatched, by the third trading day after such dividend
payment date to each holder of such shares a certificate representing the number
of whole shares of Common Stock arrived at by dividing the per share Computed
Price of such shares of Common Stock into the total amount of cash dividends
such holder would be entitled to receive if the aggregate dividends on the
Series B Convertible Preferred Stock held by such holder which are being paid in
shares of Common Stock were being paid in cash; provided, however, that if
certificates representing shares of Common Stock are issued and dispatched to
holders of Series B Convertible Preferred Stock subsequent to the fifth trading
day after a dividend payment date, the percentage used to calculate the Computed
Price will be reduced by one for each trading day after the third trading day
following such dividend payment date to the date of dispatch of shares of Common
Stock. No fractional shares of Common Stock shall be issued in payment of
dividends. In lieu thereof, the Corporation shall pay cash in an amount equal to
the product of (x) the Market Price of the Common Stock for the Measurement
Period applicable to such dividend payment date times (y) the fraction of a
share of Common Stock which would otherwise be issuable by the Corporation. The
Corporation shall not exercise its right to issue shares of Common Stock in
payment of dividends on Series B Convertible Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay the portion
of such dividends to be paid in shares of Common Stock;
(ii) the issuance or delivery of shares of Common Stock as a
dividend payment would require registration with or approval of any
governmental authority under any law or regulation, and such registration
or approval has not been effected or obtained;
(iii) the shares of Common Stock to be issued as a dividend
payment have not been authorized for listing, upon official notice of
issuance, on any securities exchange or market on which the Common Stock is
then listed, or have not been approved for quotation if the Common Stock is
traded in the over-the-counter market;
(iv) the Computed Price (determined without regard to the proviso
to the definition thereof) is less than the par value of one share of
Common Stock;
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(v) the shares of Common Stock (A) cannot be sold or transferred
without restriction by unaffiliated holders who receive such shares of
Common Stock as a dividend payment or (B) are no longer listed on a
national securities exchange, on the Nasdaq National Market or the Nasdaq
SmallCap Market;
(vi) the issuance of shares of Common Stock in payment of
dividends on Series B Convertible Preferred Stock held by any Restricted
Person (as defined in Section 7(a) hereof) would result in any Restricted
Person beneficially owning more than 4.9% of the Common Stock, determined
as provided in the proviso to the second sentence of Section 7(a) hereof;
(vii) an Optional Redemption Event (as defined herein) shall have
occurred and any holder shall be entitled to exercise optional redemption
rights under Section 8 hereof by reason of such Optional Redemption Event.
Shares of Common Stock issued in payment of dividends on Series B
Convertible Preferred Stock pursuant to this Section shall be, and for all
purposes shall be deemed to be, validly issued, fully paid and nonassessable
shares of Common Stock of the Corporation; the issuance and delivery thereof is
hereby authorized; and the dispatch thereof will be, and for all purposes shall
be deemed to be, payment in full of the cumulative dividends to which holders
are entitled on the applicable dividend payment date.
"Computed Price" of one share of Common Stock on any date means the product
obtained by multiplying (1) the Conversion Percentage (as defined in Section
7(b)) applicable on such date times (2) the arithmetic average of the per share
Market Price (as defined in Section 7(b)) of the Common Stock for the
Measurement Period with respect to the applicable dividend payment date;
provided, however, that, notwithstanding the foregoing, in no event shall the
Computed Price be less than $.01 per share or greater than $6.15 per share
(subject to equitable adjustments for stock splits, stock dividends,
combinations, recapitalizations, reclassifications and similar events occurring
on or after the date of filing of this Statement of Rights and Preferences with
the Secretary of State of the State of Washington).
(c) Neither the Corporation nor any subsidiary of the Corporation
shall redeem, repurchase or otherwise acquire in any one transaction or series
of related transactions any shares of Common Stock, Junior Dividend Stock or
Junior Liquidation Stock if the number of shares so repurchased, redeemed or
otherwise acquired in such transaction or series of related transactions is more
than either (x) 5.0% of the number of shares of Common Stock, Junior Dividend
Stock or Junior Liquidation Stock, as the case may be, outstanding immediately
prior to such transaction or series of related transactions or (y) 1% of the
number of shares of Common Stock, Junior Dividend Stock or Junior Liquidation
Stock, as the case may be, outstanding immediately prior to such transaction or
series of related transactions if such transaction or series of related
transactions is with any one person
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or group of affiliated persons, unless the Corporation or such subsidiary offers
to purchase for cash from each holder of shares of Series B Convertible
Preferred Stock at the time of such redemption, repurchase or acquisition the
same percentage of such holder's shares of Series B Convertible Preferred Stock
as the percentage of the number of outstanding shares of Common Stock, Junior
Dividend Stock or Junior Liquidation Stock, as the case may be, to be so
redeemed, repurchased or acquired at a purchase price per share of Series B
Convertible Preferred Stock equal to the greater of (i) the sum of (a) the sum
of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends on such
share of Series B Convertible Preferred Stock, plus (3) an amount equal to the
accrued and unpaid interest on dividends in arrears (determined as provided in
Section 2) through the date of purchase pursuant to this Section 2(c) plus (b)
an amount equal to the product obtained by multiplying (x) the sum stated in the
immediately preceding clause (a) times (y) the quotient (expressed as a
percentage) obtained by dividing (A) the amount determined by subtracting from
100 percent the Conversion Percentage in effect on the date of purchase pursuant
to this Section 2(c) by (B) the Conversion Percentage in effect on the date of
purchase pursuant to this Section 2(c), or (ii) an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which would,
but for the purchase pursuant to this Section 2(c), be issuable on conversion in
accordance with Section 7(a) of one share of Series B Convertible Preferred
Stock and any accrued and unpaid dividends thereon and any accrued and unpaid
interest on dividends thereon in arrears if a Conversion Notice were given by
the holder of such share of Series B Convertible Preferred Stock on the date of
purchase pursuant to this Section 2(c) (determined without regard to any
limitation on conversion contained in Section 7(a)) times (y) the arithmetic
average of the Market Price (as defined in Section 7(b)) of the Common Stock for
the Measurement Period with respect to the date of purchase pursuant to this
Section 2(c).
(d) Neither the Corporation nor any subsidiary of the Corporation
shall (1) make any tender offer or exchange offer (a "Tender Offer") for
outstanding shares of Common Stock, unless the Corporation contemporaneously
therewith makes an offer, or (2) enter into an agreement regarding a Tender
Offer for outstanding shares of Common Stock by any person other than the
Corporation or any subsidiary of the Corporation, unless such person agrees with
the Corporation to make an offer, in either such case to each holder of
outstanding shares of Series B Convertible Preferred Stock to purchase for cash
at the time of purchase in such Tender Offer the same percentage of shares of
Series B Convertible Preferred Stock held by such holder as the percentage of
outstanding shares of Common Stock offered to be purchased in such Tender Offer
at a price per share of Series B Convertible Preferred Stock equal to the
greater of (i) the sum of (a) the sum of (1) $1,000, (2) an amount equal to the
accrued but unpaid dividends on such share of Series B Convertible Preferred
Stock, and (3) an amount equal to the accrued and unpaid interest on dividends
in arrears (determined as provided in Section 2) through the date of purchase
pursuant to this Section 2(d) plus (b) an amount equal to the product obtained
by multiplying (x) the sum stated in the immediately preceding clause (a) times
(y) the quotient (expressed as a percentage) obtained by dividing (A) the amount
determined by subtracting from 100
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percent the Conversion Percentage in effect on the date of purchase pursuant to
this Section 2(d) by (B) the Conversion Percentage in effect on the date of
purchase pursuant to this Section 2(d), or (ii) an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which would,
but for the purchase pursuant to this Section 2(d), be issuable on conversion in
accordance with Section 7(a) of one share of Series B Convertible Preferred
Stock and any accrued and unpaid dividends thereon and any accrued and unpaid
interest on dividends thereon in arrears if a Conversion Notice were given by
the holder of such share of Series B Convertible Preferred Stock on the date of
purchase pursuant to this Section 2(d) (determined without regard to any
limitation on conversion contained in Section 7(a)) times (y) the price per
share of Common Stock offered in such Tender Offer. This provision shall not
apply to any tender offer, exchange offer or redemption of any of the
Corporation's outstanding redeemable common stock purchase warrants.
Section 3. Liquidation Preference. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series B Convertible Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets constitute stated
capital or surplus of any nature, an amount per share of Series B Convertible
Preferred Stock equal to the sum of (i) all dividends accrued and unpaid thereon
to the date of final distribution to such holders, (ii) accrued and unpaid
interest on dividends in arrears (computed in accordance with Section 2(a)) to
the date of distribution, and (iii) $1,000.00 (collectively, "the Liquidation
Preference"), and no more, before any payment shall be made or any assets
distributed to the holders of Common Stock or any other class or series of the
Corporation's capital stock ranking junior as to liquidation rights to the
Series B Convertible Preferred Stock (collectively, the "Junior Liquidation
Stock"); provided, however, that such rights shall accrue to the holders of
Series B Convertible Preferred Stock only in the event that the Corporation's
payments with respect to the liquidation preference of the holders of capital
stock of the Corporation ranking senior as to liquidation rights to the Series B
Convertible Preferred Stock (the "Senior Liquidation Stock") are fully met.
After the liquidation preferences of the Senior Liquidation Stock are fully met,
the entire assets of the Corporation available for distribution shall be
distributed ratably among the holders of the Series B Convertible Preferred
Stock and any other class or series of the Corporation's capital stock having
parity as to liquidation rights with the Series B Convertible Preferred Stock
(the "Parity Liquidation Stock") in proportion to the respective preferential
amounts to which each is entitled (but only to the extent of such preferential
amounts). After payment in full of the liquidation price of the shares of the
Series B Convertible Preferred Stock and the Parity Liquidation Stock, the
holders of such shares shall not be entitled to any further participation in any
distribution of assets by the Corporation. Neither a consolidation or merger of
the Corporation with another corporation nor a sale or transfer of all or part
of the Corporation's assets for cash, securities, or other property in and of
itself will be considered a liquidation, dissolution, or winding up of the
Corporation.
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Section 4. Mandatory Redemption.
(a) Mandatory Redemption Based on Maximum Share Amount.
(1) If rules of the Nasdaq SmallCap Market ("Nasdaq") relating to
stockholder approval of certain matters which rules, at the date of filing the
Articles of Amendment of which this Statement of Rights and Preferences forms a
part, are proposed to be adopted by the Nasdaq, are adopted by the Nasdaq and
are applicable to conversion of shares of Series B Convertible Preferred Stock
so as to limit the number of shares of Common Stock which the Corporation may
issue upon conversion of shares of Series B Convertible Preferred Stock and
payment of dividends on shares of Series B Convertible Preferred Stock, then the
provisions of this Section 4 shall be applicable. In such event, notwithstanding
any other provision herein, unless the Stockholder Approval shall have been
obtained from the stockholders of the Corporation or waived by the Nasdaq, the
Corporation shall not be required to issue upon conversion of shares of Series B
Convertible Preferred Stock pursuant to Section 7 more than 1,395,497 shares of
Common Stock, or such greater number as permitted by the rules of the Nasdaq
(such amount to be subject to equitable adjustment from time to time for stock
splits, stock dividends, combinations, capital reorganizations and similar
events relating to the Common Stock occurring after the date of filing this
Statement of Rights and Preferences with the Secretary of State of the State of
Washington), of Common Stock (the "Maximum Share Amount"), less the aggregate
number of shares of Common Stock issued by the Corporation pursuant to Section 2
as dividends on the Series B Convertible Preferred Stock. The Maximum Share
Amount shall be allocated among the shares of Series B Convertible Preferred
Stock at the time of initial issuance thereof pro rata based on the total number
of authorized shares of Series B Convertible Preferred Stock provided in Section
1. Each certificate for shares of Series B Convertible Preferred Stock initially
issued shall bear a notation as to the number of shares constituting the portion
of the Maximum Share Amount allocated to the shares of Series B Convertible
Preferred Stock represented by such certificate for purposes of conversion
thereof. The Corporation shall maintain records which show the number of shares
of Common Stock issued by the Corporation pursuant to Section 2 as dividends on
the shares of Series B Convertible Preferred Stock represented by each
certificate, which records shall be controlling in the absence of manifest
error. Upon surrender of any certificate for shares of Series B Convertible
Preferred Stock for transfer or re-registration thereof (or, at the option of
the holder, for conversion pursuant to Section 7(a) of less than all of the
shares of Series B Convertible Preferred Stock represented thereby), the
Corporation shall make a notation on the new certificate issued upon such
transfer or re-registration or evidencing such unconverted shares, as the case
may be, as to the remaining number of shares of Common Stock from the Maximum
Share Amount remaining available for conversion of the shares of Series B
Convertible Preferred Stock evidenced by such new certificate (including,
without limitation, by taking into account the number of shares of Common Stock
issued by the Corporation pursuant to Section 2 as a dividend on the shares of
Series B Convertible Preferred Stock represented by the certificate so
surrendered and not previously reflected on
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the certificate so surrendered, as shown on the records maintained by the
Corporation). If any certificate for shares of Series B Convertible Preferred
Stock is surrendered for split-up into two or more certificates representing an
aggregate number of shares of Series B Convertible Preferred Stock equal to the
number of shares of Series B Convertible Preferred Stock represented by the
certificate so surrendered (as reduced by any contemporaneous conversion of
shares of Series B Convertible Preferred Stock represented by the certificate so
surrendered), each certificate issued on such split-up shall bear a notation of
the portion of the Maximum Share Amount allocated thereto determined by pro rata
allocation from among the remaining portion of the Maximum Share Amount
allocated to the certificate so surrendered. If any shares of Series B
Convertible Preferred Stock represented by a single certificate are converted in
full pursuant to Section 7, all of the portion of the Maximum Share Amount
allocated to such shares of Series B Convertible Preferred Stock which remains
unissued after such conversion shall be re-allocated pro rata to the outstanding
shares of Series B Convertible Preferred Stock held of record by the holder of
record at the close of business on the date of such conversion of the shares of
Series B Convertible Preferred Stock so converted, and if there shall be no
other shares of Series B Convertible Preferred Stock held of record by such
holder at the close of business on such date, then such portion of the Maximum
Share Amount shall be allocated pro rata among the shares of Series B
Convertible Preferred Stock outstanding on such date.
(2) The Corporation shall promptly, but in no event later than
five business days after the occurrence, give notice to each holder (by
telephone line facsimile transmission at such number as such holder has
specified in writing to the Corporation for such purposes or, if such holder
shall not have specified any such number, by overnight courier or first class
mail, postage prepaid, at such holder's address as the same appears on the stock
books of the Corporation) and any holder may at any time after the occurrence
give notice to the Corporation, in either case, if on any ten trading days
within any period of 20 consecutive trading days the Corporation would not have
been required to convert shares of Series B Convertible Preferred Stock of such
holder in accordance with Section 7(a) as a consequence of the limitations set
forth in Section 4(a)(1) had all outstanding shares of Series B Convertible
Preferred Stock held by such holder been converted into Common Stock on each
such day, determined without regard to the limitation, if any, on such holder
contained in the proviso to the second sentence of Section 7(a) (any such
notice, whether given by the Corporation or a holder, an "Inconvertibility
Notice"). If the Corporation shall have given or been required to give any
Inconvertibility Notice, or if a holder shall have given any Inconvertibility
Notice, then within ten business days after such Inconvertibility Notice is
given or was required to be given, the holder receiving or giving, as the case
may be, the Inconvertibility Notice shall have the right by written notice to
the Corporation (which written notice may be contained in the Inconvertibility
Notice given by the holder) to direct the Corporation to redeem the portion of
such holder's outstanding shares of Series B Convertible Preferred Stock (which,
if applicable, shall be all of such holder's outstanding shares of Series B
Convertible Preferred Stock if all of such shares are so inconvertible) as shall
not, on the business day prior to the date of such redemption, be convertible
into shares
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of Common Stock by reason of the limitations set forth in Section 4(a)(1)
(determined without regard to the limitation, if any, on such holder contained
in the proviso to the second sentence of Section 7(a)), within ten business days
after such holder so directs the Corporation, at a price per share equal to the
Share Limitation Redemption Price (as defined herein), unless prior to the date
the Corporation is required to redeem such shares of Series B Convertible
Preferred Stock the Corporation delivers a written notice to the holder
otherwise so entitled to redemption of such shares of Series B Convertible
Preferred Stock stating that the Corporation has elected to seek the Stockholder
Approval (a "Stockholder Approval Notice"). If a holder directs the Corporation
to redeem outstanding shares of Series B Convertible Preferred Stock and, prior
to the date the Corporation is required to redeem such shares of Series B
Convertible Preferred Stock, the Corporation would have been able, within the
limitations set forth in Section 4(a)(1), to convert all of such holder's
outstanding shares of Series B Convertible Preferred Stock (determined without
regard to the limitation, if any, on such holder contained in the proviso to the
second sentence of Section 7(a)) on any ten trading days within any period of 20
consecutive trading days commencing after the period of 20 consecutive trading
days which gave rise to the applicable Inconvertibility Notice from the
Corporation or such holder of shares of Series B Convertible Preferred Stock, as
the case may be, had all of such holder's outstanding shares of Series B
Convertible Preferred Stock been surrendered for conversion into Common Stock on
each of such ten trading days within such 20 trading day period, then the
Corporation shall not be required to redeem any shares of Series B Convertible
Preferred Stock by reason of such Inconvertibility Notice.
(3) If the Corporation shall have given a Stockholder Approval
Notice, then the Corporation thereafter shall use its best efforts to convene a
meeting of the stockholders of the Corporation or to seek written consents in
lieu thereof to obtain the Stockholder Approval. If (x) the Stockholder Approval
is sought but is not obtained at such meeting or any adjournment thereof (or
through solicitation of written consents), (y) the Corporation abandons its
efforts to obtain the Stockholder Approval or (z) the Stockholder Approval is
not obtained within 60 days after the earliest Inconvertibility Notice in
respect of which shares of Series B Convertible Preferred Stock have not been
redeemed by reason of the Corporation's decision to seek the Stockholder
Approval, then in each such case the Corporation shall thereafter promptly (but
in no event more than 10 days thereafter) redeem such portion (which may be all,
if all shares of Series B Convertible Preferred Stock are not convertible by
reason of the limitations in Section 4(a)(1)) of the outstanding shares of
Series B Convertible Preferred Stock as shall not, on the business day prior to
the date of such redemption, be convertible into shares of Common Stock by
reason of the limitations as set forth in Section 4(a)(1), on and subject to the
terms and conditions of this Section 4(a).
(4) Notwithstanding the giving of any notice by the Corporation
to the holders of Series B Convertible Preferred Stock pursuant to Section
4(a)(1) or the giving or the absence of any notice by the holders of the Series
B Convertible Preferred Stock in response thereto or any redemption of shares of
Series B Convertible Preferred Stock
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<PAGE>
pursuant to Section 4(a)(2), thereafter the provisions of Section 4(a)(2) shall
continue to be applicable on any occasion unless the Stockholder Approval shall
have been obtained from the stockholders of the Corporation or waived by the
Nasdaq.
(5) As used herein, the term "Share Limitation Redemption Date"
means each date on which the Corporation is required to redeem shares of Series
B Convertible Preferred Stock as provided in this Section 4(a). On each Share
Limitation Redemption Date, the Corporation shall make payment in immediately
available funds of the applicable Share Limitation Redemption Price to such
holder of shares of Series B Convertible Preferred Stock to be redeemed to or
upon the order of such holder as specified by such holder in writing to the
Corporation at least one business day prior to such Share Limitation Redemption
Date. If the Corporation is required to redeem all or any portion of a holder's
outstanding shares of Series B Convertible Preferred Stock pursuant to this
Section 4(a), the Corporation shall make payment to such holder of the shares of
Series B Convertible Preferred Stock to be redeemed in respect of each share of
Series B Convertible Preferred Stock to be redeemed of an amount equal, for each
share to be so redeemed, to the product obtained by multiplying (x) the number
of shares of Common Stock which would be issuable upon conversion in accordance
with Section 7(a) of one share of Series B Convertible Preferred Stock and any
accrued and unpaid dividends thereon and any accrued and unpaid interest on
dividends thereon in arrears if a Conversion Notice were given by the holder of
such share of Series B Convertible Preferred Stock on the applicable Share
Limitation Redemption Notice Date (determined without regard to any limitation
on conversion contained in Section 7(a)) times (y) the arithmetic average of the
Market Price (as defined in Section 7(b)) of the Common Stock for the five
consecutive trading days ending one trading day prior to the date the notice of
redemption is given (the "Share Limitation Redemption Price"). Upon redemption
of less than all of the shares of Series B Convertible Preferred Stock evidenced
by a particular certificate, promptly, but in no event later than three business
days after surrender of such certificate to the Corporation, the Corporation
shall issue a replacement certificate for the shares of Series B Convertible
Preferred Stock evidenced by such certificate which have not been redeemed. Only
whole shares of Series B Convertible Preferred Stock may be redeemed.
(6) As used in this Section 4(a), "Stockholder Approval" means
the approval by a majority of the votes cast by the holders of shares of Common
Stock (in person or by proxy) at a meeting of the stockholders of the
Corporation (duly convened at which a quorum was present), or a written consent
of holders of shares of Common Stock entitled to such number of votes given
without a meeting, of the issuance by the Corporation of 20% or more of the
outstanding Common Stock of the Corporation for less than the greater of the
book or market value of such Common Stock on conversion of the Series B
Convertible Preferred Stock, as and to the extent required under the rules of
the Nasdaq as in effect from time to time.
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(b) No Other Mandatory Redemption. The shares of Series B Convertible
Preferred Stock shall not be subject to mandatory redemption by the Corporation
except as provided herein.
Section 5. No Sinking Fund. The shares of Series B Convertible Preferred
Stock shall not be subject to the operation of a purchase, retirement, or
sinking fund.
Section 6. Optional Redemption. So long as the Corporation is in compliance
in all material respects with its obligations to the holders of shares of Series
B Convertible Preferred Stock (including, without limitation, its obligations
under the Registration Rights Agreement (as defined herein) and the provisions
of this Statement of Rights and Preferences), the Corporation shall have the
right, exercisable on not less than 20 days or more than 30 days written notice
to the holders of record of the shares of Series B Convertible Preferred Stock
to be redeemed, at any time on or after the Issuance Date (as defined herein) to
redeem all, and from time to time to redeem any part of not less than 200 shares
(or such lesser number of shares of Series B Convertible Preferred Stock as
shall remain outstanding at the time of exercise of such redemption right), of
Series B Convertible Preferred Stock in accordance with this Section 6. Any
notice of redemption (a "Notice of Redemption") under this Section shall be
delivered to the holders of the shares of Series B Convertible Preferred Stock
at their addresses appearing on the records of the Corporation; provided,
however, that any failure or defect in the giving of notice to any such holder
shall not affect the validity of notice to or the redemption of shares of Series
B Convertible Preferred Stock of any other holder. Any Notice of Redemption
shall state (1) that the Corporation is exercising its right to redeem all or a
portion of the outstanding shares of Series B Convertible Preferred Stock
pursuant to this Section 6, (2) the number of shares of Series B Convertible
Preferred Stock held by such holder which are to be redeemed, (3) the formula
for determining the Redemption Price per share of Series B Convertible Preferred
Stock, determined in accordance herewith and (4) the date of redemption of such
shares of Series B Convertible Preferred Stock, determined in accordance with
this Section (the "Redemption Date"). On the Redemption Date and after receipt
by the Corporation of certificates for shares of Series B Preferred Stock to be
redeemed pursuant to this Section 6, the Corporation shall make payment of the
applicable Redemption Price to each holder of shares of Series B Convertible
Preferred Stock to be redeemed to or upon the order of such holder as specified
by such holder in writing to the Corporation at least one business day prior to
the Redemption Date. If the Corporation exercises its right to redeem all or a
portion of the outstanding shares of Series B Convertible Preferred Stock the
Corporation shall make payment to the holders of the shares of Series B
Convertible Preferred Stock to be redeemed in respect of each share of Series B
Convertible Preferred Stock to be redeemed of an amount equal to the Redemption
Price. Upon redemption of less than all of the shares of Series B Convertible
Preferred Stock evidenced by a particular certificate, promptly, but in no event
later than three business days after surrender of such certificate to the
Corporation, the Corporation shall issue and deliver to the holder of record of
the surrendered certificate (or such holder's assignee) a replacement
certificate for the shares of
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Series B Convertible Preferred Stock which have not been redeemed. Only whole
shares of Series B Convertible Preferred Stock may be redeemed. If the
Corporation exercises its right to redeem less than all outstanding shares of
Series B Convertible Preferred Stock, then such redemption shall be made, as
nearly as practical, pro rata among the holders of record of the Series B
Convertible Preferred Stock. No share of Series B Convertible Preferred Stock as
to which the holder exercises the right of conversion pursuant to Section 7 or
the optional repurchase right pursuant to Section 8 may be redeemed by the
Corporation pursuant to this Section 6 on or after the date of exercise of such
conversion right or optional redemption right, as the case may be, regardless of
whether the Notice of Redemption shall have been given prior to the date of
exercise of such conversion right or optional redemption right, as the case may
be.
As used herein, "Redemption Price" means the greater of (i) the sum of (a)
the sum of (1) $1,000, (2) an amount equal to the accrued but unpaid dividends
on such share of Series B Convertible Preferred Stock, and (3) an amount equal
to the accrued and unpaid interest on dividends in arrears (determined as
provided in Section 2) through the Redemption Date plus (b) an amount equal to
the product obtained by multiplying (x) the sum stated in the immediately
preceding clause (a) times (y) the quotient (expressed as a percentage) obtained
by dividing (A) the amount determined by subtracting from 100 percent the
Conversion Percentage in effect on the Redemption Date by (B) the Conversion
Percentage in effect on the Redemption Date, or (ii) an amount equal to the
product obtained by multiplying (x) the number of shares of Common Stock which
would, but for the redemption pursuant to this Section 6, be issuable on
conversion in accordance with Section 7(a) of one share of Series B Convertible
Preferred Stock and any accrued and unpaid dividends thereon and any accrued and
unpaid interest on dividends thereon in arrears if a Conversion Notice were
given by the holder of such share of Series B Convertible Preferred Stock on the
Redemption Date (determined without regard to any limitation on conversion
contained in Section 7(a)) times (y) the arithmetic average of the Market Price
(as defined in Section 7(b)) of the Common Stock for the five consecutive
trading days ending one trading day prior to the Redemption Date.
Section 7. Conversion.
(a) Conversion at Option of Holder. The holders of the Series B
Convertible Preferred Stock may convert any or all of their shares of Series B
Convertible Preferred Stock into fully paid and nonassessable shares of Common
Stock and such other securities and property as hereinafter provided, that no
such conversion shall be for less than 50 shares of Series B Convertible
Preferred Stock unless the holder so converting holds less than 50 shares of
Series B Convertible Preferred Stock and is converting all of such shares held
by such holder. Commencing on the earlier of (1) the date which is 90 days after
the Issuance Date and (2) the Registration Effective Date, and at any time
thereafter, each share of Series B Convertible Preferred Stock may be converted
at the office of the Conversion Agent for the Series B Convertible Preferred
Stock which was appointed prior to issuance of
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the shares of Series B Convertible Preferred Stock or at such other additional
office or offices, if any, as the Board of Directors may designate, initially
into such number of fully paid and nonassessable shares of Common Stock
(calculated as to each conversion to the nearest 1/100th of a share) determined
by dividing (x) the sum of (i) the Conversion Amount, (ii) accrued but unpaid
dividends to the applicable Conversion Date on the share of Series B Convertible
Preferred Stock being converted, and (iii) accrued but unpaid interest on the
dividends on the share of Series B Convertible Preferred Stock being converted
in arrears to the applicable Conversion Date at the rate provided in Section 2
by (y) the lower of (a) the product of (I) the Conversion Percentage with
respect to the applicable conversion date times (II) the arithmetic average of
the Market Price of the Common Stock for the Measurement Period with respect to
the applicable Conversion Date or (b) $6.15 (subject to equitable adjustments
for stock splits, stock dividends, combinations, recapitalizations,
reclassifications and similar events occurring on or after the date of filing of
this Statement of Rights and Preferences with the Secretary of State of the
State of Washington), in each case subject to adjustment as hereinafter provided
(the "Conversion Rate"); provided, however, that in no event shall any holder of
shares of Series B Convertible Preferred Stock be entitled to convert any shares
of Series B Convertible Preferred Stock in excess of that number of shares of
Series B Convertible Preferred Stock upon conversion of which the sum of (1) the
number of shares of Common Stock beneficially owned by such holder and any
person whose beneficial ownership of shares of Common Stock would be aggregated
with such holder's beneficial ownership of shares of Common Stock for purposes
of Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Regulation 13D-G thereunder (each a "Restricted Person" and
collectively, the "Restricted Persons") (other than shares of Common Stock
deemed beneficially owned through the ownership of unconverted shares of Series
B Convertible Preferred Stock) and (2) the number of shares of Common Stock
issuable upon the conversion of the number of shares of Series B Convertible
Preferred Stock with respect to which the determination in this proviso is being
made, would result in beneficial ownership by such holder and all Restricted
Persons of such holder of more than 4.9% of the outstanding shares of Common
Stock. For purposes of the proviso to the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in
clause (1) of the proviso to the immediately preceding sentence.
(b) Certain Definitions.
As used herein "Computation Date" means
(1) if the Corporation shall not have filed the Registration
Statement with the SEC within 30 days after the Issuance Date, the date which is
60 days after the Issuance Date (if the Corporation shall not have so filed the
Registration Statement prior to such 60th day);
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(2) each date which is 30 days after the Computation Date
specified in the preceding clause (1), if the Corporation shall not have filed
the Registration Statement with the SEC prior to such 30th day;
(3) if the Corporation shall not have filed the Registration
Statement with the SEC within 30 days after the Issuance Date, the date on which
the Corporation shall have so filed the Registration Statement;
(4) the date which is 91 days after the Issuance Date, unless the
Registration Statement theretofore has been declared effective by the SEC;
(5) each date which is 30 days after a Computation Date, if the
Registration Statement has not been declared effective by the SEC prior to such
30th day,
(6) if the Registration Statement has not been declared effective
by the SEC within 90 days after the Issuance Date, the date on which the
Registration Statement is declared effective by the SEC,
(7) if the Corporation shall have failed to request acceleration
of the Registration Statement as and when required by Section 3(a) of the
Registration Rights Agreement, the date which is 30 days after the date the
Corporation was so required to request acceleration (if the Corporation shall
not have so requested acceleration prior to such 30th day);
(8) each date which is 30 days after the Computation Date
referred to in the preceding clause (7), if the Corporation shall have failed to
so request acceleration of the Registration Statement prior to such 30th day;
(9) if the Corporation shall have failed to request acceleration
of the Registration Statement as and when required by Section 3(a) of the
Registration Rights Agreement, the date on which the Corporation shall have so
requested acceleration of the Registration Statement;
(10) the date on which the Registration Statement has ceased for
30 days (whether or not consecutive) to be available, for use by any holder of
shares of Series B Convertible Preferred Stock which is named therein as a
selling stockholder with the SEC, if, at any time during which the Registration
Statement is required by the Registration Rights Agreements to remain available
for such use, the Registration Statement ceases to be so available for any
reason (including, without limitation, by reason of an SEC stop order, a
material misstatement or omission therein or the information contained in the
Registration Statement having become outdated) and shall remain so unavailable
on such 30th day and each date which is the 30th day (whether or not
consecutive) after such 30th day on which
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the Registration Statement shall have remained so unavailable, excluding any
Excluded Period as defined in the Registration Rights Agreement;
(11) the date on which the Registration Statement becomes
available for use by holders of shares of Series B Convertible Preferred Stock,
if the Registration Statement shall have become unavailable for such use as
described in the preceding clause (10) of this paragraph;
(12) the date which is 30 days after the date on which any holder
of shares of Series B Convertible Preferred Stock shall have become unable to
convert shares of Series B Convertible Preferred Stock in accordance with
Section 7(a) for any reason (other than by reason of the 4.9% limitation set
forth in Section 7(a)), including, without limitation, any period during which
the Corporation is seeking Stockholder Approval pursuant to Section 4(a), if any
holder of shares of Series B Convertible Preferred Stock shall remain unable so
to convert shares of Series B Convertible Preferred Stock on such 30th day and
each date which is 30 days after such 30th day if holders remain unable to so
convert;
(13) the date on which holders of shares of Series B Convertible
Preferred Stock become able to convert shares of Series B Convertible Preferred
Stock in accordance with Section 7(a) for any reason (other than by reason of
the 4.9% limitation set forth in Section 7(a)), including, without limitation,
any period during which the Corporation is seeking Stockholder Approval pursuant
to Section 4(a), if any holder of shares of Series B Convertible Preferred Stock
shall have become so unable to convert such shares; and
(14) the date which is 32 days after the date on which any holder
of shares of Series B Convertible Preferred Stock is first not permitted to sell
shares of Common Stock pursuant to Section 4(f) of the Registration Rights
Agreement, if any holder of shares of Series B Convertible Preferred Stock shall
remain unable so to sell shares of Common Stock on such 32nd day and each date
which is 30 days after such 32nd day if holders remain unable to so sell;
provided, however, that if more than one event which could give rise to a
Computation Date during any period shall have occurred, only one of such events
shall be deemed to result in a Computation Date so that the adjustments provided
herein by reason of the occurrence of a Computation Date shall be made only once
in respect of any period of time and then in the maximum amount based on all
such Computation Dates.
As used herein, the "Conversion Amount" initially shall be equal to
$1,000.00, subject to adjustment as hereinafter provided.
As used herein, "Conversion Date" shall mean the date on which the notice
of conversion is actually received by the Conversion Agent, whether by mail,
courier, personal
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service, telephone line facsimile transmission or other means, in case of a
conversion at the option of the holder pursuant to Section 7(a).
As used herein, "Conversion Percentage" shall mean with respect to a
Conversion Date or a dividend payment date during the following periods the
following percentages:
(i) prior to 180 days following the Issuance Date, 80%;
(ii) on each date during the period from and after the date which
is 180 days following the Issuance Date, to and including the date which is
270 days following the Issuance Date:
(A) 80%, if the Minimum Average Trading Volume applicable to
such date has been met; and
(B) 77.5%, if the Minimum Average Trading Volume applicable
to such date has not been met; and
(iii) after the date which is 270 days after the Issuance Date:
(A) 77.5%, if the Minimum Average Trading Volume applicable
to such date has been met; and
(B) 75%, if the Minimum Average Trading Volume applicable to
such date has not been met;
and provided, however, that notwithstanding any other provision hereof (1) if
(u) the Corporation shall fail to file the Registration Statement with the SEC
within 30 days after the Issuance Date, (v) the Registration Statement is not
ordered effective by the SEC on or before 90 days after the Issuance Date, (w)
the Corporation shall fail to request acceleration of the Registration Statement
as and when required by Section 3(a) of the Registration Rights Agreement, (x)
the Registration Statement shall cease to be available for use by any holder of
shares of Series B Convertible Preferred Stock which is named therein as a
selling stockholder for any reason (including, without limitation, by reason of
an SEC stop order, a material misstatement or omission in the Registration
Statement or the information contained in the Registration Statement having
become outdated) as contemplated by clauses (7) and (8) of the definition of
Computation Date, (y) a holder of shares of Series B Convertible Preferred Stock
having become unable to convert any shares of Series B Convertible Preferred
Stock in accordance with Section 7(a) (other than by reason of the 4.9%
limitation set forth in Section 7(a)), as contemplated by clauses (12) and (13)
of the definition of Computation Date, or (z) a holder of shares of Common Stock
issued on conversion of Series B Convertible Preferred Stock shall be unable to
sell such shares of Common Stock for more than 32 days pursuant to Section 4(f)
of the Registration Rights Agreement, then in each such
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case the applicable percentage stated above in this paragraph shall be reduced
by three percentage points on each Computation Date (pro rated in the case of
any Computation Date which is less than 30 days after a Computation Date) and
(2) the Conversion Percentage applicable to a particular conversion shall be
subject to reduction as provided in Section 7(c)(6).
As used herein, "Issuance Date" means the first date of original issuance
of any shares of Series B Convertible Preferred Stock.
As used herein, the "Market Price" of any security on any date shall mean
the closing bid price of such security on such date on the principal securities
exchange or other market on which such security is listed for trading, as
reported by such exchange or other market; provided, however, that if during any
Measurement Period:
(i) The Corporation shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock or fix any record date for any such action, then the Market
Price of the Common Stock for each day in such Measurement Period prior to
the earlier of (1) the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution and (2) the date on
which ex-dividend trading in the Common Stock with respect to such dividend
or distribution begins shall be reduced by multiplying the Market Price
(determined without regard to this proviso) for each such day in such
Measurement Period by a fraction of which the numerator shall be the number
of shares of Common Stock outstanding at the close of business on the
earlier of (1) the record date fixed for such determination and (2) the
date on which ex-dividend trading in the Common Stock with respect to such
dividend or distribution begins and the denominator shall be the sum of
such number of shares and the total number of shares constituting such
dividend or other distribution;
(ii) The Corporation shall issue rights or warrants to all
holders of its outstanding shares of Common Stock, or fix a record date for
such issuance, which rights or warrants entitle such holders (for a period
expiring within forty-five (45) days after the date fixed for the
determination of stockholders entitled to receive such rights or warrants)
to subscribe for or purchase shares of Common Stock at a price per share
less than the Market Price (determined without regard to this proviso) for
any day in such Measurement Period which is prior to the end of such 45-day
period, then the Market Price for such day shall be reduced so that the
same shall equal the price determined by multiplying the Market Price
(determined without regard to this proviso) by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the
close of business on the record date fixed for the determination of
stockholders entitled to receive such rights or warrants plus the number of
shares which the aggregate offering price of the total number of shares so
offered would purchase at such Market Price, and of which the denominator
shall be
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the number of shares of Common Stock outstanding on the close of business
on such record date plus the total number of additional shares of Common
Stock so offered for subscription or purchase. In determining whether any
rights or warrants entitle the holders to subscribe for or purchase shares
of Common Stock at less than the Market Price (determined without regard to
this proviso), and in determining the aggregate offering price of such
shares of Common Stock, there shall be taken into account any consideration
received for such rights or warrants, the value of such consideration, if
other than cash, to be determined in good faith by a resolution of the
Board of Directors of the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock or a record date for any
such subdivision shall be fixed, then the Market Price of the Common Stock
for each day in such Measurement Period prior to the earlier of (1) the day
upon which such subdivision becomes effective and (2) the date on which
ex-dividend trading in the Common Stock with respect to such subdivision
begins shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number
of shares of Common Stock, the Market Price for each day in such
Measurement Period prior to the day upon which such combination becomes
effective shall be proportionately increased;
(iv) The Corporation shall, by dividend or otherwise, distribute
to all holders of its Common Stock shares of any class of capital stock of
the Corporation (other than any dividends or distributions to which clause
(i) of this proviso applies) or evidences of its indebtedness, cash or
other assets (including securities, but excluding any rights or warrants
referred to in clause (ii) of this proviso and dividends and distributions
paid exclusively in cash and excluding any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation)
(the foregoing hereinafter in this clause (iv) of this proviso called the
"Securities"), or fix a record date for any such distribution, then, in
each such case, the Market Price for any day in such Measurement Period
prior to the earlier of (1) the record date for such distribution and (2)
the date on which ex-dividend trading in the Common Stock with respect to
such distribution begins shall be reduced so that the same shall be equal
to the price determined by multiplying the Market Price (determined without
regard to this proviso) by a fraction of which the numerator shall be the
Market Price (determined without regard to this proviso) on such date less
the fair market value (as determined in good faith by resolution of the
Board of Directors of the Corporation) on such date of the portion of the
Securities so distributed or to be distributed applicable to one share of
Common Stock and the denominator shall be the Market Price (determined
without regard to this proviso); provided, however, that in the event the
then fair market value (as so determined) of the portion of the Securities
so distributed applicable to one share of Common Stock is equal to or
greater than the Market Price (determined without regard to this clause
(iv) of this proviso) on any
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such day, in lieu of the foregoing adjustment, adequate provision shall be
made so that the holders of shares of Series B Convertible Preferred Stock
shall have the right to receive in payment of dividends on the shares of
Series B Convertible Preferred Stock or upon conversion of the shares of
Series B Convertible Preferred Stock, as the case may be, the amount of
Securities the holders of shares of Series B Convertible Preferred Stock
would have received had the number of shares of Common Stock to be issued
in payment of such dividends on the shares of Series B Convertible
Preferred Stock, or had the holders of shares of Series B Convertible
Preferred Stock converted the shares of Series B Convertible Preferred
Stock, in either such case immediately prior to the record date for such
distribution. If the Board of Directors of the Corporation determines the
fair market value of any distribution for purposes of this clause (iv) by
reference to the actual or when issued trading market for any securities
comprising all or part of such distribution, it must in doing so consider
the prices in such market on the same day for which an adjustment in the
Market Price is being determined.
For purposes of this clause (iv) and clauses (i) and (ii) of this proviso,
any dividend or distribution to which this clause (iv) is applicable that
also includes shares of Common Stock, or rights or warrants to subscribe
for or purchase shares of Common Stock to which clause (ii) of this proviso
applies (or both), shall be deemed instead to be (1) a dividend or
distribution of the evidences of indebtedness, assets, shares of capital
stock, rights or warrants other than such shares of Common Stock or rights
or warrants to which clause (ii) of this proviso applies (and any Market
Price reduction required by this clause (iv) with respect to such dividend
or distribution shall then be made) immediately followed by (2) a dividend
or distribution of such shares of Common Stock or such rights or warrants
(and any further Market Price reduction required by clauses (i) and (ii) of
this proviso with respect to such dividend or distribution shall then be
made), except that any shares of Common Stock included in such dividend or
distribution shall not be deemed "outstanding at the close of business on
the date fixed for such determination" within the meaning of clause (i) of
this proviso;
(v) The Corporation or any subsidiary of the Corporation shall
(x) by dividend or otherwise, distribute to all holders of its Common Stock
cash in (or fix any record date for any such distribution), or (y)
repurchase or reacquire shares of its Common Stock for, in either case, an
aggregate amount that, combined with (1) the aggregate amount of any other
such distributions to all holders of its Common Stock made exclusively in
cash within the twelve (12) months preceding the date of payment of such
distribution, and in respect of which no adjustment pursuant to this clause
(v) has been made, (2) the aggregate amount of any cash plus the fair
market value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration paid in respect of any
repurchase or other reacquisition by the Corporation or any subsidiary of
the Corporation of any shares of Common Stock
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made within the twelve (12) months preceding the date of payment of such
distribution or making of such repurchase or reacquisition, as the case may
be, and in respect of which no adjustment pursuant to this clause (v) has
been made, and (3) the aggregate of any cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Corporation) of consideration payable in respect of any tender offer by the
Corporation or any of its subsidiaries for all or any portion of the Common
Stock concluded within the twelve (12) months preceding the date of payment
of such distribution or completion of such repurchase or reacquisition, as
the case may be, and in respect of which no adjustment pursuant to clause
(vi) of this proviso has been made, exceeds 10% of the product of the
Market Price (determined without regard to this proviso) on any day in such
Measurement Period prior to the earlier of (1) the record date with respect
to such distribution and (2) the date on which ex-dividend trading in the
Common Stock with respect to such distribution begins or the date of such
repurchase or reacquisition, as the case may be, times the number of shares
of Common Stock outstanding on such date, then, and in each such case, the
Market Price for such day shall be reduced so that the same shall equal the
price determined by multiplying the Market Price (determined without regard
to this proviso) for such day by a fraction (i) the numerator of which
shall be equal to the Market Price (determined without regard to this
proviso) for such day less an amount equal to the quotient of (x) the
excess of such combined amount over such 10% and (y) the number of shares
of Common Stock outstanding on such day and (ii) the denominator of which
shall be equal to the Market Price (determined without regard to this
proviso) on such day; provided, however, that in the event the portion of
the cash so distributed or paid for the repurchase or reacquisition of
shares (determined per share based on the number of shares of Common Stock
outstanding) applicable to one share of Common Stock is equal to or greater
than the Market Price (determined without regard to this clause (v) of this
proviso) of the Common Stock on any such day, in lieu of the foregoing
adjustment, adequate provision shall be made so that the holders of shares
of Series B Convertible Preferred Stock shall have the right to receive in
payment of dividends on shares of Series B Convertible Preferred Stock or
upon conversion of shares of Series B Convertible Preferred Stock, as the
case may be, the amount of cash the holders of shares of Series B
Convertible Preferred Stock would have received had the number of shares of
Common Stock to be issued in payment of such dividends on shares of Series
B Convertible Preferred Stock, or had the holders of shares of Series B
Convertible Preferred Stock converted shares of Series B Convertible
Preferred Stock, in either such case, immediately prior to the record date
for such distribution or the payment date of such repurchase, as
applicable; or
(vi) A tender offer made by the Corporation or any of its
subsidiaries for all or any portion of the Common Stock shall expire and
such tender offer (as amended upon the expiration thereof) shall require
the payment to stockholders (based on the acceptance (up to any maximum
specified in the terms of
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the tender offer) of Purchased Shares (as defined below)) of an aggregate
consideration having a fair market value (as determined in good faith by
resolution of the Board of Directors of the Corporation) that combined
together with (1) the aggregate of the cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Corporation), as of the expiration of such tender offer, of consideration
payable in respect of any other tender offers, by the Corporation or any of
its subsidiaries for all or any portion of the Common Stock expiring within
the twelve (12) months preceding the expiration of such tender offer and in
respect of which no adjustment pursuant to this clause (vi) has been made,
(2) the aggregate amount of any cash plus the fair market value (as
determined in good faith by a resolution of the Board of Directors of the
Corporation) of consideration paid in respect of any repurchase or other
reacquisition by the Corporation or any subsidiary of the Corporation of
any shares of Common Stock made within the twelve (12) months preceding the
expiration of such tender offer and in respect of which no adjustment
pursuant to this clause (vi) has been made, and (3) the aggregate amount of
any distributions to all holders of the Corporation's Common Stock made
exclusively in cash within twelve (12) months preceding the expiration of
such tender offer and in respect of which no adjustment pursuant to clause
(v) of this proviso has been made, exceeds 10% of the product of the Market
Price (determined without regard to this proviso) on any day in such period
times the number of shares of Common Stock outstanding on such day, then,
and in each such case, the Market Price for such day shall be reduced so
that the same shall equal the price determined by multiplying the Market
Price (determined without regard to this proviso) for such day by a
fraction of which the numerator shall be the number of shares of Common
Stock outstanding on such day multiplied by the Market Price (determined
without regard to this proviso) for such day and the denominator shall be
the sum of (x) the fair market value (determined as aforesaid) of the
aggregate consideration payable to stockholders based on the acceptance (up
to any maximum specified in the terms of the tender offer) of all shares
validly tendered and not withdrawn as of the last time tenders could have
been made pursuant to such tender offer (the "Expiration Time") (the shares
deemed so accepted, up to any such maximum, being referred to as the
"Purchased Shares") and (y) the product of the number of shares of Common
Stock outstanding (less any Purchased Shares) on such day and the Market
Price (determined without regard to this proviso) of the Common Stock on
the trading day next succeeding the Expiration Time. If the application of
this clause (vi) to any tender offer would result in an increase in the
Market Price (determined without regard to this proviso) for any day, no
adjustment shall be made for such tender offer under this clause (vi) for
such day;
provided further, however, that if on any date there shall be no reported
closing bid price of such security, the "Market Price" on such date shall be the
closing bid of such security on the date next preceding such date on which a
closing bid price for such security has been so reported; provided further,
however, that if on any date there shall be no reported closing
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bid price of such security and at the time the closing bid price for such date
is being determined there shall be a closing bid price so reported for the date
next subsequent to such date on which a closing bid price shall have been so
reported, then the Market Price on such date for which there shall have been no
reported closing bid price shall be the lower of (x) the Market Price as
determined pursuant to the second proviso to this definition and (y) the closing
bid price as so reported for such succeeding day for which a closing bid price
as so reported is known.
As used herein, "Measurement Period" means, with respect to any date, the
period of five (5) consecutive trading days ending one trading day prior to such
date.
As used herein, "Minimum Average Trading Volume" applicable to any date
shall mean an average daily trading volume of 75,000 shares of Common Stock for
the 20 consecutive trading days ending on the trading day immediately preceding
such date, as reported by Nasdaq or such other market or exchange as shall be
the principal market or exchange on which the Common Stock is traded.
As used herein, "Registration Effective Date" shall mean, with respect to
any share of Series B Convertible Preferred Stock, the date on which the
Registration Statement is first ordered effective by the SEC.
As used herein, "Registration Rights Agreements" means the several
Registration Rights Agreements entered into between the Corporation and the
original holders of the shares of Series B Convertible Preferred Stock, as
amended or modified from time to time in accordance with their terms.
As used herein, "Registration Statement" shall mean the Registration
Statement required to be filed by the Corporation with the SEC pursuant to
Section 2(a) of the Registration Rights Agreements.
As used herein, "SEC" shall mean the United States Securities and Exchange
Commission.
(c) Other Provisions.
(1) Notwithstanding anything in this Section 7(c) to the
contrary, no change in the Conversion Amount pursuant to Section 7(c) shall
actually be made until the cumulative effect of the adjustments called for by
this Section 7(c) since the date of the last change in the Conversion Amount
would change the Conversion Amount by more than 1%. However, once the cumulative
effect would result in such a change, then the Conversion Rate shall actually be
changed to reflect all adjustments called for by this Section 7(c) and not
previously made. Notwithstanding anything in this Section 7(c), no change in the
Conversion Amount shall be made that would result in a Conversion Price of less
than the
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par value of the Common Stock into which shares of Series B Convertible
Preferred Stock are at the time convertible.
(2) The holders of shares of Series B Convertible Preferred Stock
at the close of business on the record date for any dividend payment to holders
of Series B Convertible Preferred Stock shall be entitled to receive the
dividend payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after such dividend payment record date
or the Corporation's default in payment of the dividend due on such dividend
payment date; provided, however, that the holder of shares of Series B
Convertible Preferred Stock surrendered for conversion during the period between
the close of business on any record date for a dividend payment and the opening
of business on the corresponding dividend payment date must pay to the
Corporation, within five days after receipt by such holder, an amount equal to
the dividend payable on such shares on such dividend payment date if such
dividend is paid by the Corporation to such holder. A holder of shares of Series
B Convertible Preferred Stock on a record date for a dividend payment who (or
whose transferee) tenders any of such shares for conversion into shares of
Common Stock on or after such dividend payment date will receive the dividend
payable by the Corporation on such shares of Series B Convertible Preferred
Stock on such date, and the converting holder need not make any payment of the
amount of such dividend in connection with such conversion of shares of Series B
Convertible Preferred Stock. Except as provided above, no adjustment shall be
made in respect of cash dividends on Common Stock or Series B Convertible
Preferred Stock that may be accrued and unpaid at the date of surrender of
shares of Series B Convertible Preferred Stock.
(3) The right of the holders of Series B Convertible Preferred
Stock to convert their shares shall be exercised by delivering (which may be
done by telephone line facsimile transmission) to the Conversion Agent, as
provided above, a written notice, duly signed by or on behalf of the holder,
stating the number of shares of Series B Convertible Preferred Stock to be
converted in the form specified in the Subscription Agreements (the "Conversion
Notice"). If a holder of Series B Convertible Preferred Stock elects to convert
any shares of Series B Convertible Preferred Stock in accordance with Section
7(a), such holder shall not be required to physically surrender the
certificate(s) representing such shares of Series B Convertible Preferred Stock
to the Corporation unless all of the shares of Series B Convertible Preferred
Stock represented thereby are so converted. Each holder of shares of Series B
Convertible Preferred Stock and the Corporation shall maintain records showing
the number of shares so converted and the dates of such conversions or shall use
such other method, satisfactory to such holder and the Corporation, so as to not
require physical surrender of such certificates upon each such conversion. In
the event of any dispute or discrepancy, such records of the Corporation shall
be controlling and determinative in the absence of manifest error.
Notwithstanding the foregoing, if any shares of Series B Convertible Preferred
Stock evidenced by a particular certificate therefor are converted as aforesaid,
the holder of Series B Convertible Preferred Stock may not transfer the
certificate(s) representing such shares of Series B Convertible Preferred Stock
unless such
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<PAGE>
holder first physically surrenders such certificate(s) to the Corporation,
whereupon the Corporation will forthwith issue and deliver upon the order of
such holder of shares of Series B Convertible Preferred Stock new certificate(s)
of like tenor, registered as such holder of shares of Series B Convertible
Preferred Stock (upon payment by such holder of shares of Series B Convertible
Preferred Stock of any applicable transfer taxes) may request, representing in
the aggregate the remaining number of shares of Series B Convertible Preferred
Stock represented by such certificate(s). Each holder of shares of Series B
Convertible Preferred Stock, by acceptance of a certificate for such shares,
acknowledges and agrees that (1) by reason of the provisions of this paragraph
and Section 6, following conversion of any shares of Series B Convertible
Preferred Stock represented by such certificate, the number of shares of Series
B Convertible Preferred Stock represented by such certificate may be less than
the number of shares stated on such certificate and the number of shares of
Common Stock from the Maximum Share Amount allocated to the shares of Series B
Convertible Preferred Stock represented by such certificate for purposes of
conversion of such shares may be less than the number thereof on such
certificate and (2) the Corporation may place a legend on the certificates for
shares of Series B Convertible Preferred Stock which refers to or describes the
provisions of this paragraph. The Corporation shall pay any tax arising in
connection with any conversion of shares of Series B Convertible Preferred Stock
except that the Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery
upon conversion of shares of Common Stock or other securities or property in a
name other than that of the holder of the shares of the Series B Convertible
Preferred Stock being converted, and the Corporation shall not be required to
issue or deliver any such shares or other securities or property unless and
until the person or persons requesting the issuance thereof shall have paid to
the Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid. The number of
shares of Common Stock to be issued upon each conversion of shares of Series B
Convertible Preferred Stock shall be the number set forth in the applicable
Conversion Notice which number shall be conclusive absent manifest error. The
Corporation shall notify a holder who has given a Conversion Notice of any claim
of manifest error within two business days after such holder gives such
Conversion Notice and no such claim of error shall limit or delay performance of
the Corporation's obligation to issue upon such conversion the number of shares
of Common Stock which are not in dispute. A Conversion Notice shall be deemed
for all purposes to be in proper form unless the Corporation notifies a holder
of shares of Series B Convertible Preferred Stock being converted within two
business days after a Conversion Notice has been received (which notice shall
specify all defects in the Conversion Notice) and any Conversion Notice
containing any such defect shall nonetheless be effective on the date given if
the converting holder promptly undertakes in writing to correct all such
defects.
(4) The Corporation (and any successor corporation) shall take
all action necessary so that a number of shares of the authorized but unissued
Common Stock (or common stock in the case of any successor corporation)
sufficient to provide for the conversion of the Series B Convertible Preferred
Stock outstanding upon the basis
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hereinbefore provided are at all times reserved by the Corporation (or any
successor corporation), free from preemptive rights, for such conversion,
subject to the provisions of the next succeeding paragraph. If the Corporation
shall issue any securities or make any change in its capital structure which
would change the number of shares of Common Stock into which each share of the
Series B Convertible Preferred Stock shall be convertible as herein provided,
the Corporation shall at the same time also make proper provision so that
thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the
outstanding Series B Convertible Preferred Stock on the new basis. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all of the outstanding shares of Series B
Convertible Preferred Stock, the Corporation promptly shall seek such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
(5) In case of any consolidation or merger of the Corporation
with any other corporation (other than a wholly-owned subsidiary of the
Corporation) in which the Corporation is not the surviving corporation, or in
case of any sale or transfer of all or substantially all of the assets of the
Corporation, or in the case of any share exchange pursuant to which all of the
outstanding shares of Common Stock are converted into other securities or
property, the Corporation shall make appropriate provision or cause appropriate
provision to be made so that each holder of shares of Series B Convertible
Preferred Stock then outstanding shall have the right thereafter to convert such
shares of Series B Convertible Preferred Stock into the kind of shares of stock
and other securities and property receivable upon such consolidation, merger,
sale, transfer, or share exchange by a holder of shares of Common Stock into
which such shares of Series B Convertible Preferred Stock could have been
converted immediately prior to the effective date of such consolidation, merger,
sale, transfer, or share exchange and on a basis which preserves the economic
benefits of the conversion rights of the holders of shares of Series B
Convertible Preferred Stock on a basis as nearly as practical as such rights
exist hereunder prior thereto. If, in connection with any such consolidation,
merger, sale, transfer, or share exchange, each holder of shares of Common Stock
is entitled to elect to receive securities, cash, or other assets upon
completion of such transaction, the Corporation shall provide or cause to be
provided to each holder of Series B Convertible Preferred Stock the right to
elect the securities, cash, or other assets into which the Series B Convertible
Preferred Stock held by such holder shall be convertible after completion of any
such transaction on the same terms and subject to the same conditions applicable
to holders of the Common Stock (including, without limitation, notice of the
right to elect, limitations on the period in which such election shall be made,
and the effect of failing to exercise the election). The Corporation shall not
effect any such transaction unless the provisions of this paragraph have been
complied with. The above provisions shall similarly apply to successive
consolidations, mergers, sales, transfers, or share exchanges.
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(6) If a holder shall have given a Conversion Notice for shares
of Series B Convertible Preferred Stock, the Corporation shall issue and deliver
to such person certificates for the Common Stock issuable upon such conversion
within three business days after such Conversion Notice is received and the
person converting shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion as of the date of receipt, and all rights with
respect to the shares surrendered shall forthwith terminate except the right to
receive the Common Stock or other securities, cash, or other assets as herein
provided. If a holder shall have given a Conversion Notice as provided herein,
the Corporation's obligation to issue and deliver the certificates for Common
Stock shall be absolute and unconditional, irrespective of any action or
inaction by the converting holder to enforce the same, any waiver or consent
with respect to any provision thereof, the recovery of any judgment against any
person or any action to enforce the same, any failure or delay in the
enforcement of any other obligation of the Corporation to the holder of record,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the holder of any obligation to the Corporation, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Corporation to the holder in connection with such conversion.
If the Corporation fails to issue and deliver the certificates for the Common
Stock to the holder converting shares of Series B Convertible Preferred Stock
pursuant to the first sentence of this paragraph as and when required to do so,
in addition to any other liabilities the Corporation may have hereunder and
under applicable law (1) the Corporation shall pay or reimburse such holder on
demand for all out-of-pocket expenses including, without limitation, fees and
expenses of legal counsel incurred by such holder as a result of such failure,
(2) the Conversion Percentage applicable to such conversion shall be reduced by
three percentage points from the Conversion Percentage applicable to such
conversion and (3) such holder may by written notice (which may be given by
mail, courier, personal service or telephone line facsimile transmission) or
oral notice (promptly confirmed in writing) given at any time prior to delivery
to such holder of the certificates for the shares of Common Stock issuable upon
such conversion of shares of Series B Convertible Preferred Stock, rescind such
conversion, whereupon such holder shall have the right to convert such shares of
Series B Convertible Preferred Stock thereafter in accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series B Convertible Preferred Stock but, in lieu of any fraction
of a share of Common Stock which would otherwise be issuable in respect of the
aggregate number of such shares surrendered for conversion at one time by the
same holder, the Corporation shall pay in cash an amount equal to the product of
(i) the arithmetic average of the Market Price of a share of Common Stock on the
three consecutive trading days ending on the trading day immediately preceding
the Conversion Date and (ii) such fraction of a share.
(8) The Conversion Amount shall be adjusted from time to time
under certain circumstances, subject to the provisions of the first three
sentences of the first paragraph of this Section 7(c), as follows:
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(i) In case the Corporation shall issue rights or warrants on a
pro rata basis to all holders of the Common Stock entitling such holders to
subscribe for or purchase Common Stock on the record date referred to below
at a price per share less than the average daily Market Prices of the
Common Stock on the 30 consecutive business days commencing 45 business
days before the record date (the "Current Market Price"), then in each such
case the Conversion Amount in effect on such record date shall be adjusted
in accordance with the formula
C1 = C x O + N
-------------
O + N x P
-------
M
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the
record date.
N = the number of additional shares of Common Stock
issuable pursuant to the exercise of such rights
or warrants.
P = the offering price per share of the additional
shares (which amount shall include amounts received
by the Corporation in respect of the issuance and the
exercise of such rights or warrants).
M = the Current Market Price per share of Common Stock
on the record date.
Such adjustment shall become effective immediately after the record date
for the determination of stockholders entitled to receive such rights or
warrants. If any or all such rights or warrants are not so issued or expire
or terminate before being exercised, the Conversion Amount then in effect
shall be readjusted appropriately.
(ii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Junior Stock (as hereinafter defined)
evidences of its indebtedness or assets (including securities, but
excluding any warrants or subscription rights referred to in subparagraph
(i) above and any dividend or distribution paid in cash out of the retained
earnings of the Corporation), then in each such case the Conversion Amount
then in effect shall be adjusted in accordance with the formula
C1 = C x M
-----
M - F
where
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<PAGE>
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Market Price per share of Common Stock
on the record date mentioned below..
F = the aggregate amount of such cash dividend and/or
the fair market value on the record date of the
assets or securities to be distributed divided by the
number of shares of Common Stock outstanding on the
record date. The Board of Directors shall determine
such fair market value, which determination shall be
conclusive.
Such adjustment shall become effective immediately after the record date
for the determination of stockholders entitled to receive such dividend or
distribution. For purposes of this subparagraph (ii), "Junior Stock" shall
include any class of capital stock ranking junior as to dividends or upon
liquidation to the Series B Convertible Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest
cent or to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to
the fifth paragraph of this Section 7(c), the holder of any Series B
Convertible Preferred Stock thereafter surrendered for conversion shall
become entitled to receive securities, cash, or assets other than Common
Stock, the number or amount of such securities or property so receivable
upon conversion shall be subject to adjustment from time to time in a
manner and on terms nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in subparagraphs (i) to (iii) above.
(9) Except as otherwise provided above in this Section 7, no
adjustment in the Conversion Amount shall be made in respect of any conversion
for share distributions or dividends theretofore declared and paid or payable on
the Common Stock.
(10) Whenever the Conversion Amount is adjusted as herein
provided, the Corporation shall send to each holder and each transfer agent, if
any, for the Series B Convertible Preferred Stock and the Common Stock, a
statement signed by the Chairman of the Board, the President, or any Vice
President of the Corporation and by its Treasurer or its Secretary or an
Assistant Secretary stating the adjusted Conversion Amount determined as
provided in this Section 7, and any adjustment so evidenced, given in good
faith, shall be binding upon all stockholders and upon the Corporation. Whenever
the Conversion Amount is adjusted, the Corporation will give notice by mail to
the holders of record of Series B Convertible Preferred Stock, which notice
shall be made within 15 days after the effective date of such adjustment and
shall state the adjustment and the Conversion Amount. Notwithstanding the
foregoing notice provisions, failure by the Corporation to give
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such notice or a defect in such notice shall not affect the binding nature of
such corporate action of the Corporation.
(11) Whenever the Corporation shall propose to take any of the
actions specified in Section 7(c)(5) or in subparagraphs (i) or (ii) of Section
7(c)(8) which would result in any adjustment in the Conversion Amount under this
Section 9(c), the Corporation shall cause a notice to be mailed at least 20 days
prior to the date on which the books of the Corporation will close or on which a
record will be taken for such action, to the holders of record of the
outstanding Series B Convertible Preferred Stock on the date of such notice.
Such notice shall specify the action proposed to be taken by the Corporation and
the date as of which holders of record of the Common Stock shall participate in
any such actions or be entitled to exchange their Common Stock for securities or
other property, as the case may be. Failure by the Corporation to mail the
notice or any defect in such notice shall not affect the validity of the
transaction.
(d) Mandatory Conversion. So long as the Corporation shall be in
compliance in all material respects with its obligations to the holders of the
Series B Convertible Preferred Stock (including its obligations under the
Registration Rights Agreements and the provisions of this Statement of Rights
and Preferences) and so long as the Registration Statement shall be effective,
on the date (the "Mandatory Conversion Date") which is three years after the
Issuance Date all of the outstanding shares of Series B Convertible Preferred
Stock shall be converted, in accordance with the provisions, and subject to the
limitations, of this Section 7, into shares of Common Stock to the extent the
same are at such time convertible into shares of Common Stock. On the Mandatory
Conversion Date all outstanding shares of Series B Convertible Preferred Stock
(or such lesser number of shares of Series B Convertible Preferred Stock as are
convertible into Common Stock on the Mandatory Conversion Date) shall be
converted into such number of shares of Common Stock as shall be determined
pursuant to this Section 7 as if the conversion of such number of shares of
Series B Convertible Preferred Stock were made by the holders thereof in
accordance herewith without any further action on the part of the holders of
such shares of Series B Convertible Preferred Stock. Upon receipt by the
Corporation of certificates for shares of Series B Convertible Preferred Stock
converted into shares of Common Stock in accordance with this Section 7(d), the
Corporation shall issue and, within three trading days after such surrender,
deliver to or upon the order of such holder (1) that number of shares of Common
Stock as shall be issuable in respect of the conversion of the number of shares
of Series B Convertible Preferred Stock converted, together with accrued and
unpaid dividends thereon to the date of conversion and accrued and unpaid
interest on dividends on such shares which are in arrears, into Common Stock as
shall be determined in accordance herewith and (2) a new certificate for the
balance of shares of Series B Convertible Preferred Stock, if any.
Section 8. Redemption at Option of Holders.
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(a) Each holder of shares of Series B Convertible Preferred Stock
shall be entitled, at such holder's option, by notice to the Corporation given
within 20 days after the occurrence of an Optional Redemption Event, to require
the Corporation to redeem all or a portion of such shares following the
occurrence of an Optional Redemption Event.
An Optional Redemption Event means any one of the following events:
(1) For any period of five consecutive trading days there shall
be no closing bid price of the Common Stock on any national securities exchange
or the Nasdaq;
(2) The Common Stock ceases to be listed for trading on the
Nasdaq, the NYSE, the AMEX or the Nasdaq National Market for five consecutive
trading days;
(3) The inability for 30 or more days (whether or not
consecutive) of any holder of shares of Series B Convertible Preferred Stock who
is entitled to optional redemption rights under this Section 8 to sell such
shares of Common Stock issued or issuable on conversion of shares of Series B
Convertible Preferred Stock pursuant to the Registration Statement for any
reason on each of such 30 days, other than for an Excluded Period as defined in
the Registration Rights Agreement;
(4) The Corporation shall fail or default in the timely
performance of any material obligation to a holder of shares of Series B
Convertible Preferred Stock under the terms of this Statement of Rights and
Preferences or under the Registration Rights Agreement or any other agreements
or documents entered into in connection with the issuance of shares of Series B
Convertible Preferred Stock, as such instruments may be amended from time to
time, provided such failure or default is not cured prior to the delivery of an
Optional Redemption Notice;
(5) Any consolidation or merger of the Corporation with or into
another entity (other than a merger or consolidation of a subsidiary of the
Corporation into the Corporation or a wholly-owned subsidiary of the
Corporation) where the shareholders of the Corporation immediately prior to such
transaction do not collectively own at least 51% of the outstanding voting
securities of the surviving corporation of such consolidation or merger
immediately following such transaction or the common stock of such surviving
corporation is not listed for trading on the Nasdaq, the NYSE, the AMEX or the
Nasdaq National Market; or
(6) The taking of any action, including any amendment to the
Corporation's Statement of Rights and Preferences, which materially and
adversely affects the rights of any holder of shares of Series B Convertible
Preferred Stock.
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<PAGE>
(b) To exercise the optional redemption right, a holder of shares of
Series B Convertible Preferred Stock shall deliver to the Corporation a notice
of redemption (an "Optional Redemption Notice"), accompanied by the certificate
for the shares of Series B Convertible Preferred Stock to be redeemed. Any
Optional Redemption Notice shall state (1) that the holder delivering such
notice is thereby requiring the Corporation to redeem shares of Series B
Convertible Preferred Stock pursuant to this Section 8, (2) the Optional
Redemption Event giving rise to such redemption, and (3) the number of shares of
Series B Convertible Preferred Stock held by such holder which are to be
redeemed. In no event later than five business days following receipt of such
notice by the Corporation, the Corporation shall make payment in immediately
available funds of the Optional Redemption Price (as defined herein) applicable
on the date of such redemption with respect to the shares of Series B
Convertible Preferred Stock to be redeemed to or upon the order of such holder
as specified by such holder in the Optional Redemption Notice. Upon redemption
of less than all of the shares of Series B Convertible Preferred Stock evidenced
by a particular certificate, promptly, but in no event later than three business
days after surrender of such certificate to the Corporation, the Corporation
shall issue a replacement certificate for the shares of Series B Convertible
Preferred Stock which have not been redeemed. Only whole shares of Series B
Convertible Preferred Stock may be redeemed.
(c) As used herein, "Optional Redemption Price" means the greater of
(i) the sum of (a) the sum of (1) $1,000, (2) an amount equal to the accrued but
unpaid dividends on such share of Series B Convertible Preferred Stock, and (3)
an amount equal to the accrued and unpaid interest on dividends in arrears
through the date of redemption pursuant to this Section 8 (as provided in
Section 2) plus (b) an amount equal to the product obtained by multiplying (x)
the sum stated in the immediately preceding clause (a) times (y) the quotient
(expressed as a percentage) obtained by dividing (A) the amount determined by
subtracting from 100 percent the Conversion Percentage in effect on the date of
redemption pursuant to this Section 8 by (B) the Conversion Percentage in effect
on the date of redemption pursuant to this Section 8, or (ii) an amount equal to
the product obtained by multiplying (x) the number of shares of Common Stock
which would, but for the redemption pursuant to this Section 8, be issuable on
conversion in accordance with Section 7(a) of one share of Series B Convertible
Preferred Stock and any accrued and unpaid dividends thereon and any accrued and
unpaid interest on dividends thereon in arrears if a Conversion Notice were
given by the holder of such share of Series B Convertible Preferred Stock on the
date of redemption pursuant to this Section 8 (determined without regard to any
limitation on conversion contained in Section 7(a)) times (y) the arithmetic
average of the Market Price (as defined in Section 7(b)) of the Common Stock for
the five consecutive trading days ending one trading day prior to the date of
redemption pursuant to this Section 8.
Section 9. Voting Rights. Except as otherwise required by law or expressly
provided herein, shares of Series B Convertible Preferred Stock shall not be
entitled to vote on any matter.
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The affirmative vote or consent of the holders of a majority of the
outstanding shares of the Series B Convertible Preferred Stock, voting
separately as a class, will be required for (1) any amendment, alteration, or
repeal, whether by merger or consolidation or otherwise, of the Corporation's
Articles of Incorporation if the amendment, alteration, or repeal materially and
adversely affects the powers, preferences, or special rights of the Series B
Convertible Preferred Stock (2) the waiver of any preference, right, privilege
or power of the Series B Convertible Preferred Stock or any term or condition
pertaining thereto, or (3) the creation and issuance of any Senior Dividend
Stock, Senior Liquidation Stock, Parity Dividend Stock or Parity Liquidation
Stock; provided, however, that any increase in the authorized preferred stock of
the Corporation or the creation and issuance of any stock which is both Junior
Dividend Stock and Junior Liquidation Stock shall not be deemed to affect
materially and adversely such powers, preferences, or special rights and any
such increase or creation and issuance may be made without any such vote by the
holders of Series B Convertible Preferred Stock except as otherwise required by
law.
Section 10. Outstanding Shares. For purposes of this Statement of Rights
and Preferences, all shares of Series B Convertible Preferred Stock shall be
deemed outstanding except (i) from the date of receipt by the Corporation of a
Conversion Notice requesting that Series B Convertible Preferred Stock be
converted into Common Stock, all shares of Series B Convertible Preferred Stock
which are so converted into Common Stock; (ii) from the date of registration of
transfer, all shares of Series B Convertible Preferred Stock held of record by
the Corporation or any subsidiary, and (iii) from the Share Limitation
Redemption Date, Redemption Date or Optional Redemption Date, all shares of
Series B Convertible Preferred Stock which are redeemed, so long as in each case
the Share Limitation Redemption Price, the Redemption Price or the Optional
Redemption Price, as the case may be, of such shares of Series B Convertible
Preferred Stock shall have been paid by the Corporation as and when required
hereby.
Section 11. Amendment Upon Conversion or Redemption of Outstanding Shares.
When, as a result of the conversion or redemption of the Series B Convertible
Preferred Stock no shares of Series B Convertible Preferred Stock remain
outstanding, the Board of Directors may, at its discretion and without a vote of
the shareholders of the Corporation, withdraw this designation in its entirety
by providing for the filing of an applicable amendment or restatement of the
Corporation's Restated Articles of Incorporation, and the Series B Convertible
Preferred Stock designated hereby shall thereby return to the status of
authorized but unissued and undesignated shares of Preferred Stock of the
Corporation.
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Exhibit 4.1
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT, dated as of March 24, 1997, by and between
TERA COMPUTER COMPANY, a Washington corporation, with headquarters located at
2815 Eastlake Avenue East, Seattle, Washington 98102 (the "Company"), and GFL
ADVANTAGE FUND LIMITED, a British Virgin Islands corporation (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D as promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to the
conditions of this Agreement, shares of non-voting, convertible preferred stock
of the Company which will be convertible into shares of Common Stock, $.01 par
value (the "Common Stock"), of the Company;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.
(a) Subscription. The Buyer hereby agrees to purchase from the Company
the number of shares (the "Preferred Shares") of Series B Convertible Preferred
Stock, $.01 par value (the "Preferred Stock"), of the Company set forth on the
signature page of this Agreement, having the terms and conditions as set forth
in the form of Statement of Rights and Preferences of the Series B Convertible
Preferred Stock included in the form of Articles of Amendment attached hereto as
Annex I (the "Statement of Rights") at the price per share and for the aggregate
purchase price set forth on the signature page of this Agreement. The purchase
price for the Preferred Shares shall be payable in United States Dollars. The
shares of Common Stock issuable upon conversion of the Preferred Shares are
referred to herein as the "Common Shares." The Common Shares and the Preferred
Shares are referred to herein collectively as the "Shares."
(b) Form of Payment. Unless otherwise agreed by the Buyer and the
Company, the Buyer shall pay the purchase price for the Preferred Shares by
delivering good funds in United States Dollars to the escrow agent (the "Escrow
Agent") identified in the
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<PAGE>
Joint Escrow Instructions attached hereto as Annex II (the "Joint Escrow
Instructions"). Such delivery of funds shall be made against delivery by the
Company of the certificates for the Preferred Shares registered in the name of
the Buyer. Unless otherwise agreed by the Buyer and the Company, promptly
following payment by the Buyer to the Escrow Agent of the purchase price of the
Preferred Shares, but in no event later than the two Business Days after such
payment, the Company shall deliver certificates for the Preferred Shares,
registered in the name of the Buyer, to the Escrow Agent. The certificates for
the Preferred Shares shall be delivered by the Company to the Escrow Agent on a
delivery against payment basis at the closing. By signing this Agreement, the
Buyer and the Company each agree to all of the terms and conditions of, and
become a party to, the Joint Escrow Instructions, all of the provisions of which
are incorporated herein by this reference as if set forth in full. As used in
this Agreement, the term "Business Day" means any day other than a Saturday,
Sunday or other day on which commercial banks in The City of New York are
authorized or required by law to remain closed.
(c) Method of Payment. Payment to the Escrow Agent of the purchase
price for the Preferred Shares shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For credit to A/C#37179446
For credit to the account of Brian W. Pusch Attorney Escrow Account
Reference: Advantage/Tera
Not later than 4:00 p.m., New York City time, on the date which is two Business
Days after the Company shall have accepted this Agreement and returned a signed
counterpart of this Agreement to the Buyer or its legal counsel, the Buyer shall
deposit with the Escrow Agent the aggregate purchase price for the Preferred
Shares.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.
The Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
(a) Purchase for Investment. The Buyer is purchasing the Preferred
Shares for its own account for investment only and not with a view towards the
public sale or distribution thereof;
(b) Accredited Investor; No Broker-Dealer. The Buyer is an "accredited
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investor" as that term is defined in Rule 501 of the General Rules and
Regulations under the 1933 Act by reason of Rule 501(a)(3). The Buyer is not a
person required to be registered as a broker or dealer under Section 15(a) of
the Securities Exchange Act of 1934, as amended (the "1934 Act") or a member of
the National Association of Securities Dealers.
(c) Reoffers and Resales. All subsequent offers and sales of the
Shares by the Buyer shall be made pursuant to registration of the Shares being
offered and sold under the 1933 Act or pursuant to an exemption from
registration;
(d) Company Reliance. The Buyer understands that the Preferred Shares
are being offered and sold, and the Common Shares are being offered, to it in
reliance on specific exemptions from the registration requirements of United
States federal and state securities laws and that the Company is relying upon
the truth and accuracy of, and the Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set
forth herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Preferred Shares and to receive an offer
of the Common Shares;
(e) Information Provided. The Buyer and its advisors, if any, have
been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Preferred Shares and the offer of the Common Shares which have been requested by
the Buyer. The Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company and have received complete and
satisfactory answers to any such inquiries. Without limiting the generality of
the foregoing, the Buyer has had the opportunity to obtain and to review the
Company's (1) Annual Report on Form 10-KSB for the fiscal year ended December
31, 1995; (2) Quarterly Reports on Form 10-QSB for the fiscal quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996 (and Amendment No. 1
thereto on Form 10-Q/A); (3) Current Reports on Form 8-K, filed on July 1, 1996,
July 15, 1996 and September 11, 1996, with the SEC; and (4) the Confidential
Private Placement Memorandum dated February 21, 1997 (collectively, the
"Disclosure Documents"); and the Buyer understands that its investment in the
Shares involves a high degree of risk;
(f) Absence of Approvals. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Shares; and
(g) Subscription Agreement. This Agreement has been duly and validly
authorized, executed and delivered on behalf of the Buyer and is a valid and
binding agreement of the Buyer enforceable in accordance with its terms, subject
as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium and other similar laws affecting the enforcement of
creditors' rights generally.
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(h) No Current Holdings. The Buyer owns no shares of Common Stock or
other securities of the Company.
3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.
The Company represents and warrants to, and covenants and agrees with, the
Buyer that:
(a) Organization and Authority. The Company is a corporation duly
organized and validly existing under the laws of the State of Washington, and
has all requisite corporate power and authority (i) to own, lease and operate
its properties and to carry on its business as now being conducted, and (ii) to
execute, deliver and perform its obligations under this Agreement, the
Registration Rights Agreement, the form of which is attached hereto as Annex III
(the "Registration Rights Agreement"), the Statement of Rights and the other
agreements to be executed and delivered by the Company in connection herewith,
and to consummate the transactions contemplated hereby and thereby. The Company
is duly qualified to do business as a foreign corporation and is in good
standing in all jurisdictions wherein such qualification is necessary and where
failure so to qualify could have a material adverse effect on the business,
properties, operations, condition (financial or other), results of operations or
prospects of the Company. The Company has no subsidiaries.
(b) Capitalization. The authorized capital stock of the Company
currently consists of (a) 25,000,000 shares of Common Stock of which 6,977,487
shares were outstanding as of March 21, 1997, all of which are fully paid and
nonassessable; and (b) 5,000,000 shares of Preferred Stock, $.01 par value, of
which 2,360,000 shares are designated Series A Convertible Preferred Stock, none
of which are outstanding, and 3,000 shares will be designated as Series B
Convertible Preferred Stock; and on the Closing Date (as defined in Section 6
herein) there will be no material increase from March 21, 1997 in the number of
shares of Common Stock outstanding. As of March 21, 1997, the Company had
outstanding options and warrants entitling the holders to purchase 5,421,832
shares of Common Stock on such date. The Company does not have outstanding any
material amount of securities (or obligations to issue any such securities)
convertible into, exchangeable for or otherwise entitling the holders thereof to
acquire shares of Common Stock, except as disclosed above or in the Disclosure
Documents. The outstanding shares of Common Stock and outstanding options,
warrants and other securities to purchase Common Stock have been duly authorized
and validly issued. None of such outstanding shares of Common Stock, options,
warrants and other securities has been issued in violation of the preemptive
rights of any securityholder of the Company. The offers and sales of the
outstanding shares of Common Stock and options, warrants and other rights to
acquire Common Stock were at all relevant times either registered under the 1933
Act and applicable state securities laws or
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exempt from such requirements. No holder of any of the Company's securities has
any rights, "demand," "piggy-back" or otherwise, to have such securities
registered by reason of the intention to file, filing or effectiveness of the
Registration Statement (as defined in the Registration Rights Agreement), except
as set forth in Section 3(b) of the Disclosure Letter delivered to the Purchaser
at or before the execution of this Agreement (the "Disclosure Letter").
(c) Concerning the Securities. The Shares have been duly authorized
and the Preferred Shares, when issued and paid for in accordance with this
Agreement, and the Common Shares, when issued upon conversion of the Preferred
Shares or in payment of dividends thereon, as the case may be, will be duly and
validly issued, fully paid and non-assessable and will not subject the holder
thereof to personal liability by reason of being such holder. There are no
preemptive or similar rights of any stockholder of the Company or any other
person to acquire any of the Shares. The Common Stock is listed for trading on
the Nasdaq SmallCap Market ("Nasdaq") and (1) the Company and the Common Stock
meet the currently applicable criteria for continued listing and trading on
Nasdaq; (2) the Company has not been notified since September 25, 1995, by
Nasdaq of any failure or potential failure to meet the criteria for continued
listing and trading on Nasdaq; (3) no suspension of trading in the Common Stock
is in effect; and (4) the Company knows of no reason that the Common Shares will
not be eligible for listing on Nasdaq; except as set forth in Section 3(c) of
the Disclosure Letter.
(d) Subscription Agreement; Registration Rights Agreement. This
Agreement and the Registration Rights Agreement have been duly and validly
authorized by the Company, this Agreement has been duly executed and delivered
on behalf of the Company and this Agreement is, and the Registration Rights
Agreement, when executed and delivered by the Company, will be, valid and
binding obligations of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of equity
and to bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditors' rights generally and limits upon rights to indemnity.
(e) Non-contravention. The execution and delivery of this Agreement by
the Company and the consummation by the Company of the issuance of the Preferred
Shares as contemplated by this Agreement and the other transactions contemplated
by this Agreement, the Registration Rights Agreement and the terms of the
Preferred Stock do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under, the
Restated Articles of Incorporation or Bylaws of the Company, or any indenture,
mortgage, deed of trust or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound
which would have a material adverse effect on the Company or any applicable law,
rule or regulation or any applicable decree, judgment or order of any court,
United States federal or state regulatory body, administrative agency or other
governmental body
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<PAGE>
having jurisdiction over the Company or any of its properties or assets which
would have a material adverse effect on the Company.
(f) Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for (1) the issuance and sale of the Preferred Shares as
contemplated by this Agreement and (2) the issuance of Common Shares on
conversion of the Preferred Shares.
(g) Information Provided. The information provided by or on behalf of
the Company to the Buyer in connection with the transactions contemplated by the
Agreement, including, without limitation, the information referred to in Section
2(e) of this Agreement, does not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstance under which they are made, not
misleading.
(h) Absence of Certain Changes. Since December 31, 1995, there has
been no material adverse change and no material adverse development in the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company, except as disclosed in the Disclosure
Documents.
(i) Absence of Certain Proceedings. There is no action, suit or
proceeding, before or by any court, public board or body or governmental agency
pending or, to the knowledge of the Company, threatened against the Company and,
to the knowledge of the Company, there is no inquiry or investigation before or
by any court, public board or body or governmental agency pending or threatened
against the Company, in any such case wherein an unfavorable decision, ruling or
finding would have a material adverse effect on the properties, business,
condition (financial or other), results of operations or prospects of the
Company taken as a whole or the transactions contemplated by this Agreement or
any of the documents contemplated hereby or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of such other documents.
The Company does not have pending before the SEC any request for confidential
treatment of information and to the best of the Company's knowledge no such
request will be made by the Company prior to the time the Registration Statement
relating to the Common Shares which is contemplated by the Registration Rights
Agreement is first ordered effective by the SEC; and to the best of the
Company's knowledge there is not pending or contemplated and has not been any
investigation by the SEC of the Company or any director or officer of the
Company.
(j) Properties. The Company has good title to all property, real and
personal (tangible and intangible), and other assets owned by it, free and clear
of all security interests, charges, mortgages, liens or other encumbrances,
except such as are described in
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the Disclosure Documents or such as do not materially interfere with the use of
such property made, or proposed to be made, by the Company. The leases, licenses
or other contracts or instruments under which the Company leases, holds or is
entitled to use any property, real or personal, are valid, subsisting and
enforceable with only such exceptions as do not materially interfere with the
use of such property made, or proposed to be made, by the Company. The Company
has received no notice of any material violation of any applicable law,
ordinance, regulation, order or requirement relating to its owned or leased
properties.
(k) Labor Relations. No material labor problem exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company.
(l) SEC Filings. The Company has timely filed all required forms,
reports and other documents with the SEC. All of such forms, reports and other
documents complied, when filed, in all material respects, with all applicable
requirements of the 1933 Act and the 1934 Act.
(m) Absence of Brokers, Finders, Etc. Except as set forth in Section
3(m) of the Disclosure Letter, no broker, finder or similar person is entitled
to any commission, fee or other compensation by reason of the transactions
contemplated by this Agreement and the Company shall pay, and indemnify and hold
harmless the Buyer from, any claim made against the Buyer by any person for any
such conversion, fee or other compensation.
4. Certain Covenants and Acknowledgments.
(a) Transfer Restrictions. The Buyer acknowledges that (1) the
Preferred Shares have not been and are not being registered under the provisions
of the 1933 Act and, except as provided in the Registration Rights Agreement,
the Common Shares have not been and are not being registered under the 1933 Act,
and may not be transferred unless (A) subsequently registered thereunder or (B)
the Buyer shall have delivered to the Company an opinion of counsel, reasonably
satisfactory in form, scope and substance to the Company, to the effect that the
Shares to be sold or transferred may be sold or transferred pursuant to an
exemption from such registration; (2) any sale of the Shares made in reliance on
Rule 144 promulgated under the 1933 Act may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any such resale
of Shares under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (3) neither the
Company nor any other person is under any obligation to register the Shares
(other than pursuant to the Registration Rights Agreement) under the 1933 Act or
to comply
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<PAGE>
with the terms and conditions of any exemption thereunder (other than pursuant
to Section 4(d) hereof and pursuant to the Registration Rights Agreement).
(b) Restrictive Legend. The Buyer acknowledges and agrees that the
certificates for the Preferred Shares and, until such time as the Common Shares
have been registered under the 1933 Act as contemplated by the Registration
Rights Agreement, the certificates for the Common Shares issued upon conversion
of the Preferred Shares, may bear a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against transfer of the
certificates for the Shares):
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be
sold, transferred or assigned in the absence of an effective
registration statement for the securities under the
Securities Act of 1933, as amended, or an opinion of counsel
that registration is not required under said Act.
Once the Registration Statement required to be filed by the Company pursuant to
Section 2 of the Registration Rights Agreement has been declared effective,
thereafter (1) upon request of the Buyer the Company will substitute
certificates without this restrictive legend for certificates for any Common
Shares issued prior to the date such Registration Statement is declared
effective by the SEC which bear such restrictive legend and remove any
stop-transfer restriction relating thereto promptly, but in no event later than
three days after surrender of such certificates by the Buyer and (2) the Company
shall not place any restrictive legend on certificates for Common Shares issued
on conversion of the Preferred Shares or impose any stop-transfer restriction
thereon except as permitted under the Registration Rights Agreement.
(c) Registration Rights Agreement. The parties hereto agree to enter
into the Registration Rights Agreement on or before the Closing Date.
(d) Form D; Blue Sky Laws. The Company agrees to file a Form D with
respect to the Shares as required under Regulation D and to provide a copy
thereof to the Buyer promptly after such filing. The Buyer agrees to cooperate
with the Company in connection with such filing and, upon request of the
Company, to provide all information relating to the Buyer reasonably required
for such filing.
(e) Authorization for Trading; Reporting Status. On or before the date
that is 30 days after the Closing Date, but in any event before the effective
date of the Registration Statement (as defined in the Registration Rights
Agreement), the Company shall file a listing application for the Common Shares
with the Nasdaq and shall provide evidence
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of such filing to the Buyer. From the Closing Date until such time as the
Registration Statement is no longer required to be in effect, the Company shall
file all reports required to be filed with the SEC pursuant to Section 13 or
15(d) of the 1934 Act and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.
(f) Use of Proceeds. The Company does not own or have any present
intention of acquiring any "margin stock" as defined in Regulation G (12 C.F.R.
Part 207) of the Board of Governors of the Federal Reserve System ("margin
stock"). The proceeds of sale of the Preferred Shares will be used for general
working capital purposes and in the operation of the Company's business. None of
such proceeds will be used, directly or indirectly (1) to make any loan to or
investment in any other person or (2) for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying any margin stock or for the
purpose of maintaining, reducing or retiring any indebtedness which was
originally incurred to purchase or carry any stock that is currently a margin
stock or for any other purpose which might constitute the transactions
contemplated by this Agreement a "purpose credit" within the meaning of such
Regulation G. Neither the Company nor any agent acting on its behalf has taken
or will take any action which might cause this Agreement or the transactions
contemplated hereby to violate Regulation G, Regulation T or any other
regulation of the Board of Governors of the Federal Reserve System or to violate
the 1934 Act, in each case as in effect now or as the same may hereafter be in
effect.
(g) Blue Sky Laws. On or before the Closing Date, the Company shall
take such action as shall be necessary to qualify, or to obtain an exemption
for, the Preferred Shares for sale to the Buyer pursuant to this Agreement and
the Common Shares for issuance to the Buyer on conversion of the Preferred
Shares under such of the securities or "blue sky" laws of jurisdictions as shall
be applicable to the sale of the Preferred Shares pursuant to this Agreement and
the issuance to the Buyer of Common Shares on conversion of the Preferred
Shares. The Company shall furnish copies of all filings, applications, orders
and grants or confirmations of exemptions relating to such securities or "blue
sky" laws on or prior to the Closing Date.
(h) Certain Expenses. Whether or not the closing occurs, the Company
shall pay or reimburse the Buyer for all reasonable expenses (including, without
limitation, legal fees and expenses of counsel to the Buyer of up to $15,000)
incurred by the Buyer in connection with this Agreement and the transactions
contemplated hereby.
(i) Certain Issuances of Securities.
(1) If the transactions contemplated by this Agreement are
subject to the rules proposed to be adopted by Nasdaq which would require
stockholder approval of certain transactions (the "Nasdaq Stockholder
Approval Rules") then unless the
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Company obtains Stockholder Approval (as defined in the Statement of
Rights) or a waiver thereof from Nasdaq, the Company will not issue any
shares of Common Stock or shares of any other series of preferred stock or
other securities convertible into, exchangeable for or otherwise entitling
the holder to acquire shares of Common Stock which issuance would be
subject to the Nasdaq Stockholder Approval Rules (or any successor or
replacement provision thereof) and which would be integrated with the sale
of the Preferred Shares to the Buyer or the issuance of Common Shares upon
conversion thereof for purposes of the Nasdaq Stockholder Approval Rules
(or any successor or replacement provision thereof).
(2) The Company shall not offer, sell, contract to sell or issue
(or engage any person to assist the Company in taking any such action) any
equity securities or securities convertible into, exchangeable for or
otherwise entitling the holder to acquire, any Common Stock (collectively,
"Equity Securities") at a price below the market price of the Common Stock
during the period from the Closing Date to the date on which the
Registration Statement shall have been effective with the SEC for 60
consecutive days; provided, however, that nothing in this Section 4(i)(2)
shall prohibit the Company from issuing securities (x) pursuant to
compensation plans for employees, directors, officers, advisers or
consultants of the Company and in accordance with the terms of such plans
as in effect as of the date of this Agreement or (y) upon exercise of
conversion, exchange, purchase or similar rights issued, granted or given
by the Company and outstanding as of the date of this Agreement, including
without limitation amending any outstanding warrants of the Company to
lower the exercise price thereof and calling for the redemption of such
warrants.
(j) Best Efforts. Each of the parties shall use its best efforts
timely to satisfy each of the conditions to the other party's obligations to
sell and purchase the Preferred Shares set forth in Section 7 or 8, as the case
may be, of this Agreement on or before the Closing Date.
(k) Certain Trading Restrictions. The Buyer agrees that, during the
period from the date the Registration Statement is first declared effective by
the SEC to the date of the conversion in full or redemption of all Preferred
Shares owned by the Buyer, the Buyer shall not engage in short sales or other
hedging transactions relating to the Common Stock, except that the Buyer may
enter into such transactions involving a number of shares of Common Stock not to
exceed the number of shares for which a Conversion Notice (as defined herein)
has been submitted to the Company and the Transfer Agent (as defined herein).
The Buyer further agrees that, from the Closing Date until the date the
Registration Statement is first declared effective by the SEC, it will not sell
or contract to sell any equity security of the Company.
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5. TRANSFER AGENT INSTRUCTIONS; CONVERSION PROCEDURE.
(a) Transfer Agent Instructions. Promptly after the Buyer's delivery
of the aggregate purchase price for the Preferred Shares in accordance with
Section 1(c) hereof, and prior to the Closing Date, the Company will irrevocably
instruct ChaseMellon Shareholder Services, L.L.C., as Transfer Agent and
Registrar (the "Transfer Agent"), by letter in the form attached hereto as Annex
IV, to issue certificates for the Common Shares from time to time on conversion
of the Preferred Shares in such amounts as specified from time to time to the
Company in the Conversion Notices surrendered in connection with such
conversions and referred to in Section 5(b) of this Agreement. The Common Shares
shall be registered in the name of the Buyer or its nominee and in such
denominations to be specified by the Buyer in connection with each conversion of
Preferred Shares. Such certificates may bear the restrictive legend specified in
Section 4(b) of this Agreement prior to registration of the resale of the Common
Shares under the 1933 Act. The Company warrants that no instructions other than
(x) such instructions referred to in this Section 5(a), (y) stop-transfer
instructions to give effect to Section 4(a) hereof prior to the registration of
the resale of the Common Shares under the 1933 Act, and, if applicable, pursuant
to Section 4(f) of the Registration Rights Agreement, and (z) the instructions
required by Section 3(n) of the Registration Rights Agreement will be given by
the Company to the Transfer Agent and that the Common Shares shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement. Nothing in this Section 5(a) shall limit in any way
the Buyer's obligation and agreement to comply with all applicable securities
laws upon resale of the Shares. If the Buyer provides the Company with an
opinion of counsel reasonably satisfactory in form, scope, and substance to the
Company that registration of a resale by the Buyer of any of the Shares in
accordance with clause (1)(B) of Section 4(a) of this Agreement is not required
under the 1933 Act, the Company shall permit the transfer of such Shares and, in
the case of the Common Shares, promptly, but in no event later than three days
after receipt of such opinion, instruct the Transfer Agent to issue upon
transfer one more share certificates in such name and such denominations as
specified by the Buyer. The provisions of Section 3(n) of the Registration
Rights Agreement shall be in addition to this Section 5(a) once said Section
3(n) becomes applicable.
(b) Conversion Procedure. In connection with the exercise of
conversion rights relating to the Preferred Shares, the Buyer or any subsequent
holder of the Preferred Shares shall complete, sign and furnish to the Company,
with a copy to the Transfer Agent, a Notice of Conversion in the form attached
hereto as Annex V, which shall be deemed to satisfy all requirements of the
Statement of Rights (a "Conversion Notice"). As set forth in Section 9(c)(3) of
the Statement of Rights, the number of Common Shares to be issued in connection
with a particular conversion of Preferred Shares is, absent manifest error,
conclusively the number of Common Shares stated in the applicable Conversion
Notice. If in connection with a particular conversion of Preferred Shares the
Company determines that manifest error has been made by virtue of the conversion
price or other information set forth
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in the applicable Conversion Notice, the Company shall have the right
immediately to notify the Transfer Agent of such error (with a copy of such
notice given to the Buyer by telephone line facsimile transmission), which
notice shall state the number of Common Shares in dispute, and, notwithstanding
such notice from the Company, shall direct the Transfer Agent to issue and
deliver the number of Common Shares not in dispute as and when required by the
Statement of Rights. If the Company shall have notified the Transfer Agent of
any such error, the Company shall, on the date such notice is given, submit the
dispute to Deloitte & Touche LLP or another firm of independent public
accountants of recognized national standing (the "Auditors") for determination
and shall instruct the Auditors to resolve such dispute and to notify the
Company, the Transfer Agent, and the converting holder of Preferred Shares
within one Business Day after such dispute is submitted to the Auditors.
Immediately after receipt of timely notice of the Auditors' determination, the
Company shall instruct the Transfer Agent to issue to the converting holder any
additional Common Shares to which such holder is entitled based on the
determination of the Auditors. If the Auditors shall fail to notify the Transfer
Agent within three Business Days after the applicable Conversion Notice is given
to the Company and the Transfer Agent, then the Company shall instruct the
Transfer Agent to issue, within three Business Days after receipt of the
applicable Conversion Notice, to the converting holder any additional Common
Shares to which such holder is entitled based on the applicable Conversion
Notice. Such immediate action shall be taken by the Company to assure that there
shall be full compliance with the Company's unqualified obligation that all
Common Shares issuable on such conversion be issued by the due date therefor as
provided in the Statement of Rights.
6. CLOSING DATE.
The date and time of the issuance and sale of the Preferred Shares (the
"Closing Date") shall be 12:00 noon, New York City time, on the date which is
one Business Day after the date on which the Buyer has deposited the purchase
price for the Preferred Shares with the Escrow Agent in accordance with Section
1(c) hereof, or such other mutually agreed to time. The closing shall occur on
the Closing Date at the offices of the Escrow Agent.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell the Preferred
Shares to the Buyer pursuant to this Agreement is conditioned upon:
(a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
(b) Delivery by the Buyer to the Escrow Agent or to the Company of
good
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funds as payment in full of an amount equal to the purchase price for the
Preferred Shares in accordance with Section 1(c) hereof; and
(c) The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the Closing
Date and the performance by the Buyer on or before the Closing Date of all
covenants and agreements of the Buyer required to be performed on or before the
Closing Date.
8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Shares on the Closing Date is conditioned upon:
(a) Delivery by the Company to the Escrow Agent or the Buyer of the
certificates for the Preferred Shares in accordance with this Agreement;
(b) The accuracy on the Closing Date of the representations and
warranties of the Company contained in this Agreement as if made on the Closing
Date and the performance by the Company on or before the Closing Date of all
covenants and agreements of the Company required to be performed on or before
the Closing Date and receipt by the Buyer of a certificate, dated the Closing
Date, of the Chief Executive Officer or the Chief Financial Officer of the
Company confirming such matters;
(c) The receipt by the Buyer of confirmation of the filing with the
Secretary of State of the State of Washington of the Statement of Rights in the
form attached hereto as Annex I;
(d) The receipt by the Buyer of a certificate, dated the Closing Date,
of the Secretary of the Company certifying (1) the Articles of Incorporation and
By-Laws of the Company as in effect on the Closing Date, (2) all resolutions of
the Board of Directors (and committees thereof) of the Company relating to this
Agreement and the transactions contemplated hereby and (3) such other matters as
reasonably requested by the Buyer; and
(e) Receipt by the Buyer on the Closing Date of an opinion of counsel
for the Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in Annex VI attached hereto.
9. MISCELLANEOUS.
(a) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of Washington.
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(b) This Agreement may be executed in counterparts and by the parties
hereto on separate counterparts, all of which together shall constitute one and
the same instrument. A facsimile transmission of this Agreement bearing a
signature on behalf of a party hereto shall be legal and binding on such party.
(c) The headings, captions and footers of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(d) If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
(e) This Agreement may be amended only by an instrument in writing
signed by the party to be charged with enforcement.
(f) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
or any course of dealings between the parties, shall not operate as a waiver
thereof or an amendment hereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of steps to enforce
such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.
(g) Any notices required or permitted to be given under the terms of
this Agreement shall be sent by mail or delivered personally (which shall
include telephone line facsimile transmission) or by courier and shall be
effective five days after being placed in the mail, if mailed, or upon receipt
(or on the next Business Day, if the date of such receipt is not a Business
Day), if delivered personally or by courier, in the case of the Company
addressed to the Company at its address shown in the introductory paragraph of
this Agreement, Attention: Chief Executive Officer (telephone line facsimile
transmission number (206) 323-1318), copy to Stoel Rives LLP, Suite 3600, One
Union Square, 600 University Street, Seattle, WA 98101, Attn: Kenneth W. Johnson
(telephone line facsimile transmission number (206) 386-7500) or, in the case of
the Buyer, at its address shown on the signature page of this Agreement, with a
copy to Genesee International, Inc., 10500 N.E. 8th Street, Suite 1920,
Bellevue, Washington 98004-4332 (telephone line facsimile transmission number
206-462-4645) or such other address as a party shall have provided by notice to
the other party in accordance with this provision. The Buyer hereby designates
as its address for any notice required or permitted to be given to the Buyer
pursuant to the Statement of Rights the address shown on the signature page of
this agreement, with a copy to: GFL Advantage Fund Limited, c/o Genesee
International, Inc., 10500 N.E. 8th Street, Suite 1920, Bellevue, Washington
98004-4332 (facsimile number 206-462-4645), until the Buyer shall designate
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another address for such purpose.
(h) Prior to the Closing Date, the Buyer shall have the right to
assign all of its rights and obligations under this Agreement with respect to
the purchase of all or any portion of the Preferred Shares, provided any such
assignee, by written instrument duly executed by such assignee, assumes all
obligations of the Buyer hereunder with respect to the purchase of the portion
of the Preferred Shares so assigned and makes the same representations and
warranties with respect thereto as the Buyer makes in this Agreement, whereupon
the Buyer shall be relieved of any further obligations, responsibilities and
liabilities with respect to the purchase of all or the portion of the Preferred
Shares the obligation for the purchase of which has been so assigned. In the
case of any such assignment, the Company shall agree in writing with such
assignee to make available to such assignee the benefits of the Registration
Rights Agreement with respect to the Common Shares issuable on conversion of the
Preferred Shares with respect to which the purchase under this Agreement has
been so assigned.
(i) The respective representations, warranties, covenants and
agreements of the Buyer and the Company contained in this Agreement or made by
or on behalf of them, respectively, pursuant to this Agreement shall survive the
delivery of payment for the Preferred Shares and shall remain in full force and
effect regardless of any investigation made by or on behalf of them or any
person controlling or advising any of them.
(j) This Agreement and its Annexes set forth the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersede all prior agreements and understandings, whether written or oral, with
respect thereto.
(k) The Buyer shall have the right to terminate this Agreement by
giving notice to the Company at any time at or prior to the Closing Date if:
(1) the Company shall have failed, refused, or been unable at or
prior to the date of such termination of this Agreement to perform any of
its obligations hereunder;
(2) any other condition of the Buyer's obligations hereunder is
not fulfilled; or
(3) the closing shall not have occurred on a Closing Date on or
before April 7, 1997, other than solely by reason of a breach of this
Agreement by the Buyer.
Any such termination shall be effective upon the giving of notice thereof by the
Buyer. Upon such termination, the Buyer shall have no further obligation to the
Company hereunder
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and the Company shall remain liable for any breach of this Agreement or the
other documents contemplated hereby which occurred on or prior to the date of
such termination.
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IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer or
one of its officers thereunto duly authorized as of the date set forth below.
NUMBER OF SHARES: 3,000
PRICE PER SHARE: $1,000.00
AGGREGATE PURCHASE PRICE: $3,000,000.00
GFL ADVANTAGE FUND LIMITED
By /s/ A. P. DE ROOT
Title: President
Address: c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
TERA COMPUTER COMPANY
By: /s/ JAMES E. ROTTSOLK
Title: Chief Executive Officer
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Exhibit 4.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of March 24, 1997 (this
"Agreement"), is made by and between TERA COMPUTER COMPANY, a Washington
corporation (the "Company"), and the person named on the signature page hereto
(the "Initial Investor").
W I T N E S S E T H:
WHEREAS, in connection with the Subscription Agreement, dated as of March
24, 1997, between the Initial Investor and the Company (the "Subscription
Agreement"), the Company has agreed, upon the terms and subject to the
conditions of the Subscription Agreement, to issue and sell to the Initial
Investor an aggregate of 3,000 shares (the "Preferred Shares") of preferred
stock of the Company as provided in the Subscription Agreement, which shares of
Preferred Stock are convertible into shares (the "Conversion Shares") of Common
Stock, $.01 par value (the "Common Stock"), of the Company; and
WHEREAS, to induce the Initial Investor to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Conversion Shares;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investor hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Excluded Period" means any period during which the Company
is entitled to suspend trading of the Common Stock by the Investor pursuant
to Section 3(f) pertaining to a "Negotiation Event" (as therein defined),
Section 4(f) or due to a transfer by the Investor contemplated by Section
9(g).
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(ii) "Investor" means the Initial Investor and any transferee or
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(iii) "Register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415
under the Securities Act or any successor rule providing for offering
securities on a continuous basis ("Rule 415"), and the declaration or
ordering of effectiveness of such Registration Statement by the United
States Securities and Exchange Commission (the "SEC").
(iv) "Registrable Securities" means the Conversion Shares and any
shares of Common Stock issued by the Company to any Investor as a dividend
on the Preferred Shares and as payment of any interest on accrued dividends
in arrears.
(v) "Registration Statement" means a registration statement of
the Company under the Securities Act, including any amendment thereto.
(b) As used in this Agreement, the term Investor includes (i) each
Investor (as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
(c) Capitalized terms defined in the introductory paragraph or the
recitals to this Agreement shall have the respective meanings therein provided.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Subscription Agreement, or, if applicable,
in the Designation of the Rights and Preferences of the Preferred Shares.
2. Registration.
(a) Mandatory Registration. The Company shall prepare, and on or prior
to the date which is 30 days after the Closing Date, file with the SEC a
Registration Statement on Form S-3 covering the resale of at least 1,395,000 of
the Registrable Securities, and which Registration Statement shall state that,
in accordance with Rule 416 under the Securities Act, such Registration
Statement also covers such indeterminate number of additional shares of Common
Stock as may become issuable upon conversion of the Preferred Shares to prevent
dilution resulting from stock splits, stock dividends or similar transactions or
by reason of changes in the conversion price of the Preferred Shares in
accordance with the terms thereof. If at any time the number of shares of Common
Stock included in the Registration Statement required to be filed as provided in
the first sentence of this Section 2(a) shall be insufficient to cover the
number of shares of Common Stock issuable on conversion in full of the
unconverted Preferred Shares, then promptly, but in no event later
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than 20 days after such insufficiency shall occur, the Company shall file with
the SEC an additional Registration Statement on Form S-3 (which shall not
constitute a post-effective amendment to the Registration Statement filed
pursuant to the first sentence of this Section 2(a)) covering such number of
shares of Common Stock as shall be sufficient to permit such conversion. For all
purposes of this Agreement such additional Registration Statement shall be
deemed to be the Registration Statement required to be filed by the Company
pursuant to Section 2(a) of this Agreement, and the Company and the Investors
shall have the same rights and obligations with respect to such additional
Registration Statement as they shall have with respect to the initial
Registration Statement required to be filed by the Company pursuant to this
Section 2(a).
(b) Certain Offerings. If any offering pursuant to a Registration
Statement pursuant to Section 2(a) hereof involves an underwritten offering, the
Company shall have the right to select one legal counsel and an investment
banker or bankers and manager or managers to administer the offering, which
investment banker or bankers or manager or managers shall be reasonably
satisfactory to the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering. The Investors who hold the
Registrable Securities to be included in such underwriting shall pay all
underwriting discounts and commissions and other fees and expenses of such
investment banker or bankers and manager or managers so selected in accordance
with this Section 2(b) (other than fees and expenses relating to registration of
Registrable Securities under federal or state securities laws, which are payable
by the Company pursuant to Section 5 hereof) with respect to their Registrable
Securities and the fees and expenses of such legal counsel so selected by the
Investors.
(c) Adjustments of Conversion Terms; Payments by the Company. If (1)
the Company fails to file the Registration Statement with the SEC within 30 days
after the Closing Date, (2) the Registration Statement covering the Registrable
Securities which is required to be filed by the Company pursuant to the first
sentence of Section 2(a) hereof is not effective within 90 days after the
Closing Date, (3) the Company fails to submit a request for acceleration of the
effective date of the Registration Statement in accordance with Section 3(a),
(4) the Registration Statement required to be filed by the Company pursuant to
Section 2(a) shall cease to be available for use by any holder of shares of
Series B Convertible Preferred Stock which is named therein as a selling
stockholder for any reason (including, without limitation, by reason of an SEC
stop order, a material misstatement or omission in such Registration Statement
or the information contained in such Registration Statement having become
outdated) other than for an Excluded Period or for action caused by the selling
stockholder, including without limitation the attempt to sell securities other
than pursuant to the method of disposition described in the Registration
Statement, (5) a holder of shares of Series B Convertible Preferred Stock having
become unable to convert any shares of Series B Convertible Preferred Stock in
accordance with Section (7)(a) of the Statement of Rights (other than by reason
of the 4.9% limitation set forth therein), or (6) a holder of
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shares of Common Stock issued upon conversion of the Series B Convertible
Preferred Stock shall be unable to sell shares of Common Stock for more than 32
days by reason of Section 4(f) of this Agreement, then the Conversion Percentage
(as defined in the Statement of Rights) shall be adjusted as provided in the
Statement of Rights.
(d) Other Registration Statements. The Company, without the prior
consent of the holders of a majority-in-interest of the Preferred Shares, will
not file another registration statement with the SEC covering shares of the
Company's Common Stock prior to the effectiveness of the Registration Statement
described in Section 2(a), other than Registration Statements on Forms S-4 or
S-8 and other than a Registration Statement on Form S-3 covering the resale of
not more than 400,000 shares of Common Stock sold to certain private investors
in a private offering completed on March 20, 1997, including shares of Common
Stock issuable upon exercise of warrants issued in such private offering.
(e) Eligibility for Form S-3. The Company meets the requirements for
the use of Form S-3 for registration of the Registrable Securities for resale by
the Investors. The Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to become eligible for the use of
Form S-3 and so as to maintain such eligibility for the use of Form S-3.
3. Obligations of the Company. In connection with the registration of the
Registrable Securities, the Company shall:
(a) prepare promptly, and file with the SEC not later than 30 days
after the Closing Date, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter to use its best
efforts to cause each Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing, and keep the
Registration Statement effective pursuant to Rule 415 at all times until the
earliest of (1) such date as is three years after the Closing Date, (2) the
date, on or after two years after the Closing Date, on which all of Registrable
Securities may be sold without regard to any requirement under the Securities
Act with respect to volume or manner of sale or the filing of any notice
relating thereto and (3) the date on which the Investors no longer beneficially
own any Registrable Securities (the period until such date, the "Registration
Period"); submit to the SEC, within five business days after the Company learns
that no review of the Registration Statement will be made by the staff of the
SEC or that the staff of the SEC has no further comments on the Registration
Statement, as the case may be, a request for acceleration of effectiveness of
the Registration Statement to a time and date not later than 48 hours after the
delivery of such request; and the Company represents and warrants to, and
covenants and agrees with, the Investors that the Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein), at the time it is first filed with the SEC, at the time it is ordered
effective by the SEC and at all time during which it is required to be effective
hereunder (and each such amendment and
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supplement at the time it is filed with the SEC and at all time during which it
is available for use in connection with the offer and sale of the Registrable
Securities) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times during the
Registration Period, and, during the Registration Period, comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration Statement
until such time as all of such Registrable Securities have been disposed of in
accordance with the intended methods of disposition by the seller or sellers
thereof as set forth in the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are included
in the Registration Statement and its legal counsel, (1) promptly after the same
is prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
each letter written by or on behalf of the Company to the SEC or the staff of
the SEC and each item of written correspondence from the SEC or the staff of the
SEC relating to such Registration Statement (other than any portion of any
thereof which contains information for which the Company has sought confidential
treatment) and (2) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such securities or blue
sky laws of such jurisdictions as the Investors who hold a majority in interest
of the Registrable Securities being offered reasonably request, (ii) prepare and
file in those jurisdictions such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof at all times during the
Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during the
Registration Period and (iv) take all other actions reasonably necessary or
advisable to qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Company shall not be required in connection
therewith or as a condition thereto (I) to qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 3(d), (II) to subject itself to general taxation in any such
jurisdiction, (III) to file a general consent to service of
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process in any such jurisdiction, (IV) to provide any undertakings that cause
more than nominal expense or burden to the Company or (V) to make any change in
its charter or by-laws, which in each case the Board of Directors of the Company
determines to be contrary to the best interests of the Company and its
stockholders;
(e) in the event that the Registrable Securities are being offered in
an underwritten offering at the request of the Inventors, enter into and perform
its obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the underwriters of such offering, provided, that the
incremental cost incident to such an underwritten offering shall be paid by the
participating Investors, pro rata based on the number of Registerable Securities
sold by each of them;
(f) as promptly as practicable after becoming aware of such event or
circumstance, notify each Investor of any event or circumstance of which the
Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and use its best efforts promptly to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, and deliver a number of copies of such supplement
or amendment to each Investor as such Investor may reasonably request. If such
event is the conduct of negotiations with respect to a transaction, the
disclosure of which the Company reasonably concludes would be detrimental to the
Company (each, a "Negotiation Event"), the Company shall be entitled, upon
giving notice of a Negotiation Event to each holder (the "Negotiation Notice")
and upon the reasonably determination of the Company, after consulting with
counsel, that failure to disclose the Negotiation Event would constitute an
omission to state a material fact required to be stated in the Registration
Statement, to require the Investors to suspend sales of the Common Stock
pursuant to the Registration Statement for a period of up to fifteen (15) days
after the giving of the Negotiation Notice; provided, however, that the Company
shall not give more than one (1) Negotiation Notice in any twelve-month period;
(g) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the SEC of any stop order or other suspension of effectiveness of the
Registration Statement at the earliest possible time;
(h) permit a single firm of counsel designated as selling
stockholders' counsel by the Investors who hold a majority in interest of the
Registrable Securities being sold to review and comment on the Registration
Statement and all amendments and supplements thereto a reasonable period of time
prior to their filing with the SEC, provided, that to the extent that the
failure of such counsel to respond promptly hereunder results in a
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delay in the filing of the registration statement beyond the 30 day period
specified in Section 2(c)(1) or results in the delay in the effective date
thereof beyond the 90 day period specified in Section 2(c)(2), the 30 day period
and the 90 day period shall be extended by the amount of such resulting delay;
(i) make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Registration Statement;
(j) at the request of the Investors who hold a majority in interest of
the Registrable Securities being sold, furnish on the date that Registrable
Securities are delivered to an underwriter, if any, for sale in connection with
the Registration Statement (i) a letter, dated such date, from the Company's
independent certified public accountants in form and substance as is customarily
given by independent certified public accountants to underwriters in an
underwritten public offering, addressed to the underwriters; and (ii) an
opinion, dated such date, from counsel representing the Company for purposes of
such Registration Statement, in form and substance as is customarily given in an
underwritten public offering, addressed to the underwriters and the Investors;
(k) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement and one
firm of attorneys and one firm of accountants or other agents retained by any
such investor and one firm of attorneys retained by all such underwriters
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably necessary to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (ii) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction or (iii)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
3(k). Each Investor agrees that it shall, upon learning that disclosure of such
Records is sought in or by
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a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at the Company's own
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, the Records deemed confidential. The Company shall hold
in confidence and shall not make any disclosure of information concerning an
Investor provided to the Company pursuant to Section 4(e) hereof unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor, at
such Investor's own expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, such information;
(l) use its best efforts (i) to cause all the Registrable Securities
covered by the Registration Statement to be listed on the Nasdaq SmallCap Market
("Nasdaq") or such other principal securities market on which securities of the
same class or series issued by the Company are then listed or traded or (ii) if
securities of the same class or series as the Registrable Securities are not
then listed on Nasdaq or any such other securities market, to cause all of the
Registrable Securities covered by the Registration Statement to be listed on the
New York Stock Exchange or the American Stock Exchange;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered and the managing underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts as the case may be, as the managing underwriter or underwriters, if
any, or the Investors may reasonably request and registered in such names as the
managing underwriter or underwriters, if any, or the Investors may request; and,
within three business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver, and shall cause legal counsel selected by the Company to deliver, to
the transfer agent for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such Registration Statement) an
instruction substantially in the form attached hereto as Exhibit 1 and an
opinion of such counsel, if required by the Company's transfer agent, in the
form attached hereto as Exhibit 2;
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(o) during the period the Company is required to maintain
effectiveness of the Registration Statement pursuant to Section 3(a), the
Company shall not bid for or purchase any Common Stock or any right to purchase
Common Stock or attempt to induce any person to purchase any such security or
right if such bid, purchase or attempt would in any way limit the right of the
Investors to sell Registrable Securities by reason of the limitations in
Regulation M under the Exchange Act; and
(p) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investor of the Registrable Securities pursuant to
the Registration Statement.
4. Obligations of the Investors. In connection with the registration of the
Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request. At least four (4)
days prior to the first anticipated filing date of the Registration Statement,
the Company shall notify each Investor of the information the Company requires
from each such Investor (the "Requested Information") if any of such Investor's
Registrable Securities are eligible for inclusion in the Registration Statement.
If at least one (1) business day prior to the filing date the Company has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement;
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
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disposition of the Registrable Securities, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from the Registration Statement; the incremental cost
incident to such an unwritten offering shall be paid by the Investors to the
extent provided in Section 3(e);
(d) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved by
the Investors entitled hereunder to approve such arrangements, (ii) completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of such
underwriting arrangements and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of investment
bankers and any manager or managers of such underwriting and legal expenses of
the underwriters applicable with respect to its Registrable Securities, in each
case to the extent not payable by the Company pursuant to the terms of this
Agreement.
(f) Each Investor agrees that, so long as such Investor has been
notified (the "Redemption Notice") by the Company that it intends to redeem its
publicly traded warrants and such Investor then holds at least one percent (1%)
of the Company's outstanding Common Stock, or Preferred Shares convertible into
one percent (1%) of the Company's outstanding Common Stock, during a forty (40)
day period commencing on a date specified in a notice to such holder (which date
shall be at least fifteen (15) days subsequent to the date of the Redemption
Notice), provided that such period shall not extend more than thirty (30) days
after the date the Company publicly announces the redemption of its publicly
traded warrants, such Investor shall not, to the extent requested by the Company
and its investment banking advisers, sell or otherwise transfer or dispose of
any Common Stock held by such Investor, and provided, further, that the Company
shall not utilize more than one such Redemption Notice in the two-year period
following the Closing Date. In order to enforce the foregoing covenant, the
Company may impose a stop-transfer instructions with respect to the Common Stock
held by each Investor until the end of such 40-day (or shorter) period.
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<PAGE>
(g) Each Investor agrees that during the period from the date the
Registration Statement is first declared effective by the SEC to the date of
conversion in full or redemption of all Preferred Shares owned by the Investor,
the Investor shall not engage in short sales or other hedging transactions
relating to the Common Stock, except that the Investor may enter into such
transactions involving a number of shares of Common Stock not to exceed the
number of shares for which a Conversion Notice has been submitted to the Company
and the Transfer Agent.
(h) Each Investor agrees that it will not effect any disposition of
the Registrable Securities except as contemplated in the Registration Statement
or as is otherwise in compliance with applicable securities laws and that it
will promptly notify the Company of any material change in the information set
forth in the Registration Statement regarding such Investor's plan of
distribution. Each Investor agrees (a) to notify the Company in writing in the
event that such Investor enters into any material agreement with a broker or a
dealer for the sale of the Registrable Securities through a block trade, special
offering or exchange distribution and (b) in connection with such agreement, to
provide to the Company in writing the information necessary to enable the
Company to prepare, at the Company's sole cost and expense, any supplemental
prospectus pursuant to Rule 424(c) under the 1933 Act which is required with
respect to such transaction. In connection with any sale of Registrable
Securities which is made pursuant to the Registration Statement, each Investor
shall instruct its broker or brokers to deliver the prospectus to the purchaser
or purchasers in connection with such sale, shall supply copies of such
prospectus to such broker or brokers and shall otherwise use its reasonable best
efforts to comply with the prospectus delivery requirements of the Securities
Act.
5. Expenses of Registration. All reasonable expenses, other than
underwriting discounts and commissions and other fees and expenses of investment
bankers and other than brokerage commissions, incurred in connection with
registrations, filings or qualifications pursuant to Section 3, including,
without limitation, all registration, listing and qualifications fees, printers
and accounting fees and the fees and disbursements of counsel for the Company
and the Investors, shall be borne by the Company, provided, however, that the
Investors shall bear the fees and out-of-pocket expenses of the one legal
counsel selected by the Investors pursuant to Section 2(b) hereof and the
provisions of Section 3(e) and 4(c) shall govern.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such Investor,
each person, if any, who controls any Investor within the meaning of the
Securities Act or the Exchange Act, any underwriter (as
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<PAGE>
defined in the Securities Act) for the Investors, the directors, if any, of such
underwriter and the officers, if any, of such underwriter, and each person, if
any, who controls any such underwriter within the meaning of the Securities Act
or the Exchange Act (each, an "Indemnified Person"), against any losses, claims,
damages, liabilities or expenses (joint or several) incurred (collectively,
"Claims") to which any of them may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such Claims (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any of the following statements, omissions or violations in the
Registration Statement, or any post-effective amendment thereof, or any
prospectus included therein: (i) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
post-effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading or (iii) any violation or alleged violation by the Company
of the Securities Act, the Exchange Act, any state securities law or any rule or
regulation under the Securities Act, the Exchange Act or any state securities
law (the matters in the foregoing clauses (i) through (iii) being, collectively,
"Violations"). Subject to the restrictions set forth in Section 6(d) with
respect to the number of legal counsel, the Company shall reimburse the
Investors and each such underwriter or controlling person, promptly as such
expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or
defending any such Claim. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(a): (I) shall
not apply to a Claim arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by any Indemnified Person or underwriter for such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, if such
prospectus was timely made available by the Company pursuant to Section 3(c)
hereof; (II) with respect to any preliminary prospectus shall not inure to the
benefit of any such person from whom the person asserting any such Claim
purchased the Registrable Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus was
timely made available by the Company pursuant to Section 3(c) hereof; and (III)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect
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<PAGE>
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9.
(b) In connection with any Registration Statement in which an Investor
is participating, each such Investor agrees to indemnify and hold harmless, to
the same extent and in the same manner set forth in Section 6(a), the Company,
each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, any underwriter and any other
stockholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the Securities Act or the Exchange Act
(collectively and together with an Indemnified Person, an "Indemnified Party"),
against any Claim to which any of them may become subject, under the Securities
Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by such Investor expressly for use in
connection with such Registration Statement; and such Investor will reimburse
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such Claim; provided, however, that the indemnity
agreement contained in this Section 6(b) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of such Investor, which consent shall not be unreasonably withheld;
provided, further, however, that the Investor shall be liable under this Section
6(b) for only that amount of a Claim as does not exceed the amount by which the
net proceeds to such Investor from the sale of Registrable Securities pursuant
to such Registration Statement exceeds the cost of such Registrable Securities
to such Investor. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
(c) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in
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<PAGE>
respect thereof is to be made against any indemnifying party under this Section
6, deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel selected by the indemnifying party but reasonably acceptable to the
Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. In such event, the Company shall pay for only one separate legal
counsel for the Investors; such legal counsel shall be selected by the Investors
holding a majority in interest of the Registrable Securities included in the
Registration Statement to which the Claim relates. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its ability to
defend such action. The indemnification required by this Section 6 shall be made
by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
7. Contribution. To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the amount by which the net amount of proceeds received by such seller from
the sale of such Registrable Securities exceeds the purchase price paid by such
seller for such Registrable Securities.
8. Reports under Exchange Act. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
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<PAGE>
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to any transferee who holds at least 600
Preferred Shares, or Registrable Securities acquired upon conversion of at least
600 Preferred Shares (or any equivalent combination of Preferred Shares and
Registrable Securities) only if: (a) the Investor agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment, (b) the
Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (i) the name and address of such transferee or
assignee and (ii) the securities with respect to which such registration rights
are being transferred or assigned, (c) immediately following such transfer or
assignment the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and applicable state securities
laws, (d) at or before the time the Company received the written notice
contemplated by clause (b) of this sentence the transferee or assignee agrees in
writing with the Company to be bound by all of the provisions contained herein,
(e) such transfer shall have been made in accordance with the applicable
requirements of the Securities Purchase Agreement, (f) such transferee shall be
an "Accredited Investor" as that term defined in Rule 501 of Regulation D
promulgated under the 1933 Act but shall not be a broker-dealer or a member of
the National Association of Securities Dealers, Inc., and (g) in the event the
assignment occurs subsequent to the date of effectiveness of the Registration
Statement required to be filed pursuant to Section 2(a), the transferee agrees
to pay all reasonable expenses of amending or supplementing such Registration
Statement to reflect such assignment. In connection with any such transfer the
Company shall promptly after such assignment take such actions as shall be
reasonably acceptable to the Initial Investor and such transferee to assure that
the Registration Statement and related prospectus are available for use by such
transferee for sales of the Registrable Securities in respect of which the
rights to registration have been so assigned.
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<PAGE>
10. Amendment of Registration Rights. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold a majority in interest of
the Registrable Securities. Any amendment or waiver effected in accordance with
this Section 10 shall be binding upon each Investor and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission or other means)
or sent by certified mail, return receipt requested, properly addressed and with
proper postage pre-paid (i) if to the Company, at Tera Computer Company, 2815
Eastlake Avenue East, Seattle, Washington 98102, Attention: Chief Executive
Officer, telephone line facsimile transmission No. (206) 323-1318, with a copy
to Stoel Rives LLP, One Union Square, 36th Floor, Seattle, Washington 98101,
Attention: Kenneth W. Johnson, telephone line facsimile transmission no. (206)
386-7500, (ii) if to the Initial Investor, c/o Genesee International, Inc.,
10500 N.E. 8th Street, Suite 1920, Bellevue, Washington 98004-4332, telephone
line facsimile transmission No. (206) 462-4645 and (iii) if to any other
Investor, at such address as such Investor shall have provided in writing to the
Company, or at such other address as each such party furnishes by notice given
in accordance with this Section 11(b), and shall be effective, when personally
delivered, upon receipt and, when so sent by certified mail, four days after
deposit with the United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of Washington applicable to agreements
made and to be performed entirely within such State. In the event that any
provision of this Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to conform
with such statute or rule of law. Any provision hereof which may
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<PAGE>
prove invalid or unenforceable under any law shall not affect the validity or
enforceability of any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(i) The Company acknowledges that any failure by the Company to
perform its obligations under this Agreement, including, without limitation, the
Company's obligations under Section 3(n), or any delay in such performance could
result in damages to the Investors and the Company agrees that, in addition to
any other liability the Company may have by reason of any such failure or delay,
the Company shall be liable for all direct and consequential damages caused by
any such failure or delay; provided, however, that in no event shall the total
damages recoverable by the Investors for claims arising from or related to this
Agreement exceed 150% of the aggregate purchase price paid by the Initial
Investor to the Company for the Preferred Shares, less all amounts received by
the Investors from market resales of shares of Common Stock as contemplated by
this Agreement.
(j) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
TERA COMPUTER COMPANY
By: /s/ JAMES E. ROTTSOLK
Name: James E. Rottsolk
Title: Chief Executive Officer
GFL ADVANTAGE FUND LIMITED
By: /s/ A. P. DE GROOT
Name: A. P. de Groot
Title: President
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<PAGE>
EXHIBIT 1
to
Registration
Rights Agreement
[Company Letterhead]
[Date]
[Name and address of Transfer Agent]
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and direction to
you [(1) to transfer or re-register the certificates for the shares of Common
Stock, $.01 par value (the "Common Stock"), of Tera Computer Company, a
Washington corporation (the "Company"), represented by certificate numbers
_______ and _______ for an aggregate of _______ shares (the "Outstanding
Shares") of Common Stock presently registered in the name of [Name of Investor]
upon surrender of such certificate(s) to you, notwithstanding the legend
appearing on such certificates, and (2) ]<F1> to issue shares (the "Conversion
Shares") of Common Stock to or upon the order of the holder from time to time on
conversion of the shares (the "Preferred Shares") of Series B Convertible
Preferred Stock, $.01 par value, of the Company, issued by the Company upon
receipt by you of a Notice of Conversion from such holder in the form enclosed
herewith. [The transfer or re-registration of the certificates for the
Outstanding Shares by you should be made at such time as you are requested to do
so by the record holder of the Outstanding Shares. The certificate issued upon
such transfer or re-registration should be registered in such name as requested
by the holder of record of the certificate surrendered to you and should not
bear any legend which would restrict the transfer of the shares represented
thereby. In addition, you are hereby directed to remove any stop-transfer
instruction relating to the Outstanding Shares.] Certificates for the Conversion
Shares should not bear any restrictive legend and should not be subject to any
stop-transfer restriction.
Contemporaneously with the delivery of this letter, the Company is
delivering to you an opinion of ____________________ as to registration of [the
Outstanding Shares and]* the Conversion Shares under the Securities Act of 1933,
as amended.
- --------------
<F1> Omit if no conversions of Preferred Stock have occurred before SEC
registration is declared effective.
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<PAGE>
Should you have any questions concerning this matter, please contact me.
Very truly yours,
TERA COMPUTER COMPANY
By: ____________________________________
Name:
Title:
Enclosures
cc: [Name of Investor]
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EXHIBIT 2
to
Registration
Rights Agreement
[Date]
[Name and address of Transfer Agent]
TERA COMPUTER COMPANY
Shares of Common Stock
----------------------
Ladies and Gentlemen:
We are counsel to Tera Computer Company, a Washington corporation (the
"Company"), and we understand that [Name of Investor] (the "Holder") has
purchased from the Company an aggregate of ____________ shares (the "Preferred
Shares") of the Company's Series B Convertible Preferred Stock, $.01 par value
(the "Preferred Stock"). The Preferred Shares were purchased by the Holder
pursuant to a Subscription Agreement, dated as of March __, 1997, between the
Holder and the Company (the "Subscription Agreement"). Pursuant to a
Registration Rights Agreement, dated as of March __, 1997, between the Company
and the Holder (the "Registration Rights Agreement") entered into in connection
with the purchase by the Holder of the Preferred Shares, the Company agreed with
the Holder, among other things, to register for resale the shares of Common
Stock issuable upon conversion of the Preferred Shares (the "Conversion Shares")
under the Securities Act of 1933, as amended (the "Securities Act"), upon the
terms provided in the Registration Rights Agreement. Pursuant to the
Registration Rights Agreement, on __________, the Company filed a Registration
Statement on Form S-3 (File No. 333-__________) (the "Registration Statement")
with the Securities and Exchange Commission (the "SEC") relating to the
Conversion Shares, which names the Holder as a selling stockholder thereunder.
[Other introductory and scope of examination language to be inserted]
Based on the foregoing, we are of the opinion that the Conversion Shares
have been registered for resale under the Securities Act.
This opinion may be relied upon by the Holder as if addressed to the
Holder. [Other appropriate language to be included.]
Very truly yours,
cc: [Name of Investor]
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STOEL RIVES LLP
---------------
ATTORNEYS
One Union Square
600 University Street, Suite 3600 EXHIBIT 5
Seattle, Washington 98101-3197
Telephone (206) 624-0900
Fax (206) 386-7500
April 23, 1997
Board of Directors of
Tera Computer Company
Dear Sirs:
We have supervised the corporate proceedings relative to the issuance of
3,000 shares of Series B Convertible Preferred Stock, $.01 par value (the"Series
B Preferred Stock"), of Tera Computer Company, a Washington corporation (the
"Company"), and of the authorization of shares of Common Stock, $.01 par value
(the "Common Stock"), issuable upon conversion of the Series B Preferred Stock.
We are also familiar with the corporate proceedings relative to the
incorporation of the Company and its present corporate status. Based upon the
foregoing and having regard for such legal considerations as we have deemed
relevant, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing under
the laws of the State of Washington, with full corporate power to issue the
Series B Preferred Stock and to issue the Common Stock reserved for issuance
upon conversion of the Series B Preferred Stock.
2. The shares of the Series B Preferred Stock have been duly authorized by
appropriate corporate action and are validly issued, fully paid and
nonassessable.
3. The shares of Common Stock issuable upon conversion of the Series B
Preferred Stock have been duly authorized and reserved for such purpose by
appropriate corporate action and, when issued upon such conversion, will be
validly issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement filed with the Securities and Exchange Commission
relating to the shares of Common Stock issuable upon conversion of the Series B
Preferred Stock and the use of this opinion in connection with qualification of
such shares of Common Stock under the applicable securities laws of any state.
Very truly yours,
STOEL RIVES LLP
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference into this Registration Statement on
Form S-3 of Tera Computer Company of our report, dated February 7, 1997,
appearing in the Annual Report on Form 10-KSB of Tera Computer Company for the
year ended December 31, 1996, and to the reference to us under the heading
"Experts" in the Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Seattle, Washington
April 23, 1997
