Filed pursuant to Rule 424(b)(3)
Registration No. 333-37465
PROSPECTUS
TERA COMPUTER COMPANY
800,000 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
shareholder described herein under "Selling Shareholder" (the "Selling
Shareholder") or by pledgees, donees, transferees, or other successors in
interest that receive such shares as a gift, distribution, or other non-sale
related transfer. The Company will not receive any of the proceeds from the sale
of the Shares by the Selling Shareholder. 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 Shareholder) in connection with the
registration of the Shares being offered by the Selling Shareholder. The Company
has agreed to indemnify the Selling Shareholder against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
The Shares may be sold from time to time 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 Shareholder
and any brokers and dealers participating in such sales may be deemed to be
"underwriters" within the meaning of the Securities Act. See "Plan of
Distribution."
On September 24, 1997, the Company sold 5,000 shares of its Series C Convertible
Preferred Stock, $.01 par value (the "Preferred Stock"), to the Selling
Shareholder in a private transaction. The Shares being offered hereby by the
Selling Shareholder may be acquired, from time to time, on conversion of the
Preferred Stock, in payment of dividends on the shares of the Preferred Stock,
or both. The Shares include such presently indeterminate number of additional
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 Shareholder
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 October 29, 1997, the closing price for the Common Stock was $11.50.
These Securities Involve a High Degree of Risk. See "Risk Factors" beginning on
page 4 for Certain Factors Related to This Offering.
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.
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.
The date of this Prospectus is October 30, 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 .............................................. 3
Recent Events ............................................. 10
Capitalization ............................................ 11
Selling Shareholder ....................................... 12
Plan of Distribution ...................................... 13
Experts ................................................... 14
Limitation of Liability and Indemnification ............... 14
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 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 1997 to the San
Diego Supercomputer Center. See "RISK FACTORS - Manufacturing Risks; Reliance On
and Capacity Of Third Party Sole Source Suppliers."
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.
--------------------
"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 Quarterly Reports on Form 10-QSB for the quarters
ended March 31, 1997 and June 30, 1997;
(c) The Company's Current Reports on Form 8-K, filed on April 1, 1997,
May 21, 1997, July 11, 1997, and October 1, 1997; and
(d) 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 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.
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The Company's Common Stock is registered with the Commission under Section
12(g) of the Exchange Act and, in 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 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: Chief Financial Officer (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 $33.4 million as
of June 30, 1997. The Company has experienced net losses in each year of
operation 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. The Company will
recognize revenue only as resource modules are delivered and accepted. Initial
deliveries under the agreement with the San Diego Supercomputer Center are
scheduled for 1997. However, given the Company's reliance on sole source
third-party vendors, it is possible that deliveries could be delayed. 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 June 30, 1997, the Company has expended approximately $43.7
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. While initial testing and evaluation of the
prototype system have been successful, the Company has not integrated 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. The Company also has
experienced delays in receiving integrated circuits and printed circuit boards
from its suppliers which meet its design specifications. 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. Delays in obtaining such
components have adversely affected the Company's ability to deliver its first
MTA system to the San Diego Supercomputer Center on schedule and may continue to
do so. 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 number and size of the MTA systems
that may be sold, assuming the receipt of additional purchase
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orders. Absent improved yields, increased production capacity or a reallocation
of such suppliers' output to meet its needs, the Company may be unable to obtain
a sufficient quantity of integrated circuits or other suitable 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.
Future Capital Needs. During the next year, 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 the
production of 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 and operating costs will be
required to fund ongoing research, development and engineering efforts, develop
a customer service organization and expand the Company's sales and marketing
efforts. Additionally, the Company's administrative functions will increase in
order to support its engineering and sales efforts.
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
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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. The 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.
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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 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
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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 in the public market or the prospect of such sales could materially
and adversely affect the market price of the Common Stock. As of September 30,
1997, the Company had outstanding 10,677,938 shares of Common Stock; 5,000
shares of Series C Convertible Preferred Stock convertible into the Shares
offered hereby; and privately placed warrants to purchase another 1,214,342
shares of Common Stock. In addition, as of such date, the Company had granted
options under its option plans to purchase an aggregate of 2,082,839 shares of
Common Stock. Almost all of the Company's outstanding shares of Common Stock may
be sold without substantial restrictions. Moreover, the Company's Registration
Statement on Form S-3, which registers for resale an aggregate of 1,367,499
shares of Common Stock sold in a private placement and shares underlying certain
of the privately placed warrants, has been declared effective by the Commission.
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,
including sales of Common Stock issued upon conversion of the Series C
Convertible Preferred Stock and the shares of Common Stock issuable upon
exercise of the privately placed warrants, or the perception that such sales
could occur, could depress prevailing market prices for the Common Stock. The
existence of 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 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.
Possible Illiquidity of Trading Market. The Common Stock is quoted on the Nasdaq
SmallCap Market (the "Market"). The Market may be significantly less liquid than
the Nasdaq National Market. In addition, the Nasdaq has adopted more stringent
maintenance requirements and significantly increased its compliance enforcement
efforts. 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 of the Common Stock on the
Market, and the Common Stock could be subject to removal therefrom. If such
removal were to occur, trading, if
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any, in the Common Stock 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 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, excluding, however, liability for acts or omissions
involving intentional misconduct or knowing violations of law, illegal
distributions or transactions from which the director receives benefits to which
the director is not legally entitled. In addition, the Restated 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.
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RECENT EVENTS
The following summarizes significant events with respect to the Company in
1997.
1. Private Placements. The Company completed three private placements of
equity securities in 1997. In March, the Company raised $1,122,495, less
expenses, through the sale 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, since exercised). The second private placement, which also was
completed in March, raised $3,000,000, less expenses, through the sale of 3,000
shares of Series B Convertible Preferred Stock to an institutional purchaser.
The shares of the Series B Convertible Preferred Stock were converted into an
aggregate of 740,266 shares of Common Stock upon conversion and the payment of
accrued dividends thereon, which shares have since been resold by the holder
thereof. The Company issued private warrants for 29,041 shares of Common Stock
to an investment banking firm which acted as the Company's sales agent in
connection with these two private placements. The third private placement, which
closed in September, raised $5,000,000, less expenses, through the sale of 5,000
shares of Series C Convertible Preferred Stock to an institutional purchaser.
The Company's Registration Statement on Form S-3 to register the resale of the
shares of Common Stock sold in the March 1997 private placement and issuable
upon the exercise of certain of the Company's privately placed warrants has been
declared effective by the Commission.
2. Warrant Exercises/Redemption. On June 25, 1997, the Company redeemed all
of its unexercised publicly held Warrants. The Company received approximately
$10.6 million from the exercise of 2,130,527 Warrants, net of expenses, with
95,604 Warrants redeemed at $.05 per Warrant.
3. Use of Cash Resources. Since its incorporation through June 30, 1997,
the Company's principal sources of liquidity have been net proceeds from the
sale of equity of approximately $43.2 million and research funding of
approximately $18.8 million from the Defense Advanced Research Projects Agency
("DARPA"). As of September 30, 1997, and after completion of the private
placements and warrant exercises and redemptions described above, the Company
had in excess of $9 million in cash and no bank line of credit. These funds,
along with funds anticipated from sales of MTA systems, are expected to be
sufficient to fund the Company for the next twelve months. See "RISK FACTORS -
Future Capital Needs" and "- Manufacturing Risks; Reliance On and Capacity of
Third Party Sole Source Suppliers."
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, and (ii) as adjusted to give effect to the private placement of
the Preferred Stock and the issuance of an aggregate of 740,266 shares of Common
Stock upon the conversion of the Series B Convertible Preferred Stock and the
payment of accrued dividends thereon.
<TABLE>
<CAPTION>
June 30, 1997 (1)
-----------------
Actual As Adjusted
------ -----------
(in thousands)
<S> <C> <C>
Long-term portion of capital leases ......................................... $ 134 $ 134
Shareholders' equity:
Convertible Preferred Stock, $.01 par value: 5,000,000 shares authorized;
issued and outstanding, 3,000 shares of Series B, actual; issued and
outstanding, 5,000 shares
of Series C, as adjusted ............................................. 3,192 4,970
Common Stock, $.01 par value:
25,000,000 shares authorized; 9,868,897 shares issued and outstanding,
actual; 10,609,163 shares issued and outstanding, as
adjusted ............................................................. 39,964 43,156
Preferred stock dividend distributable .................................. 38 38
Accumulated deficit ..................................................... (33,426) (33,426)
-------- --------
Total shareholders' equity ........................................... 9,767 14,738
-------- --------
Total capitalization ............................................ $ 9,901 $ 14,872
======== ========
<FN>
- ----------------------
(1) Does not include (i) 1,774,420 shares issuable upon exercise of outstanding
stock options as of June 30, 1997 or (ii) 1,214,342 shares of Common Stock
currently issuable upon exercise of certain privately placed warrants.
</FN>
</TABLE>
11
<PAGE>
SELLING SHAREHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by the Selling Shareholder and as adjusted to give
effect to the sale of the Shares offered hereby.
<TABLE>
<CAPTION>
Shares Beneficially Beneficial Ownership
Owned Prior to Shares Being After Offering (2)
Selling Shareholder Offering (1) Offered (1) Shares Percent
<S> <C> <C> <C> <C>
Advantage Fund Limited 800,000 800,000 -0- -0-
<FN>
(1) The number of shares of Common Stock shown as beneficially owned and
offered by the Selling Shareholder represents the number of shares which
the Company has initially agreed to register. Pursuant to Rule 416 under
the Securities Act, the number of shares of Common Stock offered by the
Selling Shareholder hereby and included in the Registration Statement of
which this Prospectus is a part also includes such presently indeterminate
number of additional 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. Accordingly, 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 and the payment
of dividends on the Preferred Stock in additional shares of Common Stock.
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
Exchange Act. Accordingly, the number of shares of Common Stock set forth
for the Selling Shareholder may exceed the actual number of shares of
Common Stock that the Selling Shareholder could own beneficially at any
given time through its ownership of the Preferred Stock.
(2) Assumes all of the Shares being offered are sold.
</FN>
</TABLE>
The Selling Shareholder 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.
In recognition of the fact that the Selling Shareholder may wish to be
legally permitted to sell its Shares when it deems appropriate, the Company
agreed with the Selling Shareholder to file with the 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 Shareholder.
12
<PAGE>
PLAN OF DISTRIBUTION
The Shares offered hereby by the Selling Shareholder may be sold from time
to time by the Selling Shareholder, 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 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 Shareholder
and purchasers. In addition, the Selling Shareholder 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 Shareholder 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 Shareholder 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 Shareholder 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 Shareholder 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 Shareholder. The Selling Shareholder also may 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 Shareholder also may 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.
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 Shareholder. 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 Shareholder, the purchasers participating in such transaction, or
both. None of the proceeds from the sale of the Shares by the Selling
Shareholder will be received by the Company. The Company and the Selling
Shareholder each have 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.
13
<PAGE>
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, excluding, however, liability for acts or omissions involving
intentional misconduct or knowing violations of law, illegal distributions or
transactions from which the director receives benefits to which the director is
not legally entitled. 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.
14
