As filed with the Securities and Exchange Commission on October 8, 1997
Registration No. __________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-3 Registration Statement
Under
The Securities Act of 1933
TERA COMPUTER COMPANY
(Exact name of registrant as specified in its charter)
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)
Kenneth W. Johnson, Chief Financial Officer
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:
Christopher J. Voss
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. [ ]
<PAGE>
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. [ ]
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
==========================================================================================================================
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, 800,000 shares $ 12.94 $ 10,352,000 $ 3,137
$.01 par value
==========================================================================================================================
<FN>
(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.
</FN>
</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>
PROSPECTUS, Subject to Completion, Dated October 8, 1997
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"). The Company will not receive any of the proceeds from the sale of
the Shares by 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 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 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 7, 1997, the closing price for the Common Stock was $13.75.
---------------
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 __________, 1997.
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
The Company ............................................................ 2
Incorporation of Certain Documents by Reference ........................ 3
Available Information .................................................. 3
Risk Factors ........................................................... 4
Recent Events .......................................................... 11
Capitalization ......................................................... 12
Selling Shareholder .................................................... 13
Plan of Distribution ................................................... 14
Experts ................................................................ 15
Limitation of Liability and Indemnification ............................ 15
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.
2
<PAGE>
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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<PAGE>
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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<PAGE>
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 orders.
5
<PAGE>
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 delay or
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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.
7
<PAGE>
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 business and results
of operations. In addition, although any such claims may ultimately prove to be
without
8
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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, privately
placed warrants to purchase another 1,214,342 shares of Common Stock, and 5,000
shares of Preferred Stock convertible into the Shares offered hereby. Almost all
of the Company's outstanding shares of Common Stock may be sold without
substantial restrictions and the Company has registered for resale 1,068,167
shares of Common Stock underlying the privately placed warrants. In addition, as
of such date, the Company had granted options under its option plans to purchase
an aggregate of 2,081,253 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, including sales of Common Stock
upon conversion of the Preferred Stock, 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 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
9
<PAGE>
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.
10
<PAGE>
RECENT EVENTS
The following summarizes significant events with respect to the Company in
1997.
1. Private Placements. In 1997, the Company completed three private
placements of equity securities. In the first offering, 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 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 raised $5,000,000, less
expenses, through the sale of 5,000 shares of Series C Convertible Preferred
Stock to the Selling Shareholder.
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."
11
<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>
12
<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>
Beneficial Ownership
Shares Beneficially After Offering (2)
Owned Prior to Shares Being ------------------
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 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
13
<PAGE>
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.
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
14
<PAGE>
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.
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.
15
<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............................... $ 3,137
Nasdaq listing fee................................. $ 7,500
Blue Sky filing fees & expenses.................... $ 500
Legal fees......................................... $ 10,000
Accountant's Fees.................................. $ 2,500
Printing Fees...................................... $ 1,000
Miscellaneous...................................... $ 363
----------
Total.............................................. $ 25,000
===========
Item 15. Indemnification of Officers and Directors.
Article XII of the Company's Restated Articles of Incorporation and Section
11 of the Company's Restated 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 Restated 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.
Item 16. Exhibits.
3.1 Restated Articles of Incorporation of the Company(1)
II-1
<PAGE>
3.2 Restated Bylaws of the Company(1)
3.3 Statement of Rights and Preferences of the Series C
Convertible Preferred Stock of the Registrant, as filed with
the Secretary of State of the State of Washington on September
23, 1997
4.1 Subscription Agreement, dated as of September 23, 1997, by and
between the Registrant and Advantage Fund Limited
4.2 Registration Rights Agreement, dated as of September 23, 1997,
by and between the Registrant and Advantage Fund Limited
5 Opinion on Legality
23 Consent of Deloitte & Touche LLP
24 Power of Attorney (included on signature page hereof)
- ------------------
(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;
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.
II-2
<PAGE>
(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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington, on October 8, 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 Registration Statement has been signed by the following persons in the
capacities indicated below on the 8th day of October, 1997:
Signature and Title
/s/ /s/
- ----------------------------------- ---------------------------------------
Burton J. Smith David N. Cutler, Director
Chairman of the Board of Directors
/s/ /s/
- ----------------------------------- ---------------------------------------
James E. Rottsolk Daniel J. Evans, Director
Chief Executive Officer and Director
/s/ /s/
- ----------------------------------- ---------------------------------------
Kenneth W. Johnson Kenneth W. Kennedy, Director
Chief Financial Officer
/s/
---------------------------------------
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 C
Convertible Preferred Stock of the Registrant, as filed
with the Secretary of State of the State of Washington
on September 23, 1997
4.1 Subscription Agreement, dated as of September 23, 1997,
by and between the Registrant and Advantage Fund
Limited
4.2 Registration Rights Agreement, dated as of September
23, 1997, by and between the Registrant and Advantage
Fund Limited
5 Opinion on Legality
23 Consent of Deloitte & Touche LLP
24 Power of Attorney (included on signature page hereof) --
- -------------------
(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
TERA COMPUTER COMPANY
5,000 Shares
Series C Convertible Preferred Stock, $.01 Par Value
Stated Value $1,000 Per Share
Statement of Rights and Preferences
Series C Convertible Preferred Stock. The rights, preferences, privileges,
and limitations granted to and imposed on the Series C Convertible Preferred
Stock (the "Series C Convertible Preferred Stock"), which series shall consist
of 5,000 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 C 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 C Convertible Preferred Stock.
Section 1. Designation and Amount.
The shares of such series shall be designated as "Series C Convertible
Preferred Stock," and the number of shares constituting the Series C Convertible
Preferred Stock shall be 5,000, and shall not be subject to increase.
Section 2. Dividends and Distributions.
(a) The holders of outstanding shares of Series C 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
-1-
<PAGE>
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 January 1, 1998 (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
shall be fixed by the Board. Dividends on the Series C 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 C 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 C 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 C 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 C 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 C 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 C 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 C Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series C 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 C Convertible Preferred Stock and the Parity Dividend Stock,
-2-
<PAGE>
all dividends paid or declared and set apart for payment upon shares of Series C
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 C 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 C
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
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 C
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 (as defined below) 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 C 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 C 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 (as defined in
Section 7(b)) of the Common Stock for the Measurement Period (as defined in
Section 7(b)) applicable to such dividend payment date and (y) the fraction of a
share of Common Stock that 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 C 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;
-3-
<PAGE>
(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;
(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 not then
listed on a national securities exchange, on the Nasdaq National
Market or the Nasdaq SmallCap Market (collectively referred to
herein as the "Nasdaq");
(vi) the issuance of shares of Common Stock in payment of dividends on
Series C Convertible Preferred Stock held by any Restricted
Person (as defined in Section 7(a)) 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; or
(vii) an Optional Redemption Event (as defined in Section 8(a)) 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 C
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
of (1) the Conversion Percentage (as defined in Section 7(b)) applicable on such
date and (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 $14.52 per share (subject to equitable adjustments for stock
splits, stock dividends, combinations, recapitalizations, reclassifications and
similar
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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 (as defined in Section 3) 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 or group of affiliated
persons, unless the Corporation or such subsidiary offers to purchase for cash
from each holder of shares of Series C Convertible Preferred Stock at the time
of such redemption, repurchase or acquisition the same percentage of such
holder's shares of Series C 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 C 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 C 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
of (x) the sum stated in the immediately preceding clause (a) and (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 of (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 C 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 C 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)) and (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).
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(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 C Convertible Preferred Stock to purchase for cash
at the time of purchase in such Tender Offer the same percentage of shares of
Series C 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 C 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 C 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 of (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(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 of (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 C 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 C 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)) and (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 C
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 C 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 C Convertible
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<PAGE>
Preferred Stock (collectively, the "Junior Liquidation Stock"); provided,
however, that such rights shall accrue to the holders of Series C 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 C 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 C Convertible Preferred Stock and any other class or
series of the Corporation's capital stock having parity as to liquidation rights
with the Series C 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 C 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.
Section 4. Mandatory Redemption.
(a) Mandatory Redemption Based on Maximum Share Amount.
(1) If rules of the Nasdaq relating to shareholder approval of
certain matters are applicable to conversion of shares of Series C Convertible
Preferred Stock so as to limit the number of shares of Common Stock that the
Corporation may issue upon conversion of shares of Series C Convertible
Preferred Stock and payment of dividends on shares of Series C Convertible
Preferred Stock, then the provisions of this Section 4 shall be applicable. In
such event, notwithstanding any other provision herein, unless the Shareholder
Approval shall have been obtained from the shareholders of the Corporation or
waived by the Nasdaq, the Corporation shall not be required to issue upon
conversion of shares of Series C Convertible Preferred Stock pursuant to Section
7 more than 2,128,000 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 C
Convertible Preferred Stock. The Maximum Share Amount shall be allocated among
the shares of Series C Convertible Preferred Stock at the time of initial
issuance thereof pro rata based on the total number of authorized shares of
Series C Convertible Preferred Stock provided in Section 1. Each certificate for
shares of
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<PAGE>
Series C 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 C 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 C
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 C 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 C 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 C 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 C Convertible Preferred Stock represented
by the certificate so surrendered and not previously reflected on the
certificate so surrendered, as shown on the records maintained by the
Corporation). If any certificate for shares of Series C Convertible Preferred
Stock is surrendered for split-up into two or more certificates representing an
aggregate number of shares of Series C Convertible Preferred Stock equal to the
number of shares of Series C Convertible Preferred Stock represented by the
certificate so surrendered (as reduced by any contemporaneous conversion of
shares of Series C 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 C
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 C Convertible Preferred Stock which remains
unissued after such conversion shall be re-allocated pro rata to the outstanding
shares of Series C 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 C Convertible Preferred Stock so converted, and if there shall be no
other shares of Series C 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 C
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
facsimile to 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
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<PAGE>
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 C 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 C 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 C Convertible Preferred Stock (which,
if applicable, shall be all of such holder's outstanding shares of Series C
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 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 in Section 4(a)(5)),
unless prior to the date the Corporation is required to redeem such shares of
Series C Convertible Preferred Stock the Corporation delivers a written notice
to the holder otherwise so entitled to redemption of such shares of Series C
Convertible Preferred Stock stating that the Corporation has elected to seek the
Shareholder Approval (a "Shareholder Approval Notice"). If a holder directs the
Corporation to redeem outstanding shares of Series C Convertible Preferred Stock
and, prior to the date the Corporation is required to redeem such shares of
Series C 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 C 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 C Convertible
Preferred Stock, as the case may be, had all of such holder's outstanding shares
of Series C 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 C
Convertible Preferred Stock by reason of such Inconvertibility Notice.
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<PAGE>
(3) If the Corporation shall have given a Shareholder Approval
Notice, then the Corporation thereafter shall use its best efforts to convene a
meeting of the shareholders of the Corporation or to seek written consents in
lieu thereof to obtain the Shareholder Approval. If (x) the Shareholder 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 Shareholder Approval or (z) the Shareholder Approval is
not obtained within 60 days after the earliest Inconvertibility Notice in
respect of which shares of Series C Convertible Preferred Stock have not been
redeemed by reason of the Corporation's decision to seek the Shareholder
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 C Convertible Preferred Stock are not convertible by
reason of the limitations in Section 4(a)(1)) of the outstanding shares of
Series C 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 C Convertible Preferred Stock pursuant to Section
4(a)(1) or the giving or the absence of any notice by the holders of the Series
C Convertible Preferred Stock in response thereto or any redemption of shares of
Series C Convertible Preferred Stock pursuant to Section 4(a)(2), thereafter the
provisions of Section 4(a)(2) shall continue to be applicable on any occasion
unless the Shareholder Approval shall have been obtained from the shareholders
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
C 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 C 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 C Convertible Preferred Stock pursuant to this
Section 4(a), the Corporation shall make payment to such holder of the shares of
Series C Convertible Preferred Stock to be redeemed in respect of each share of
Series C Convertible Preferred Stock to be redeemed of an amount equal, for each
share to be so redeemed, to the product of (x) the number of shares of Common
Stock that would be issuable upon conversion in accordance with Section 7(a) of
one share of Series C 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
C Convertible Preferred Stock on the applicable Share Limitation Redemption
Notice Date (determined without regard to any limitation on conversion contained
in Section
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7(a)) and (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 C 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 C Convertible Preferred Stock evidenced by
such certificate that have not been redeemed. Only whole shares of Series C
Convertible Preferred Stock may be redeemed.
(6) As used in this Section 4(a), "Shareholder 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 shareholders 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 C
Convertible Preferred Stock, as and to the extent required under the rules of
the Nasdaq as in effect from time to time.
(b) No Other Mandatory Redemption. The shares of Series C 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 C 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 C Convertible Preferred Stock
(including, without limitation, its obligations under the Registration Rights
Agreement (as defined in Section 7(b)) 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 C Convertible Preferred Stock to be redeemed, at
any time on or after the Issuance Date (as defined in Section 7(b)) 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 C Convertible Preferred Stock as shall
remain outstanding at the time of exercise of such redemption right), of Series
C Convertible Preferred Stock in accordance with this Section 6. Any notice of
redemption (a "Notice of Redemption") under
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this Section shall be delivered to the holders of the shares of Series C
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 C 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 C Convertible Preferred Stock pursuant to this Section 6, (2) the number
of shares of Series C Convertible Preferred Stock held by such holder which are
to be redeemed, (3) the formula for determining the Redemption Price (as defined
below) per share of Series C Convertible Preferred Stock, determined in
accordance herewith, and (4) the date of redemption of such shares of Series C
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 C 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 C 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 C Convertible Preferred Stock the
Corporation shall make payment to the holders of the shares of Series C
Convertible Preferred Stock to be redeemed in respect of each share of Series C
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 C 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 Series C Convertible Preferred Stock that have not
been redeemed. Only whole shares of Series C Convertible Preferred Stock may be
redeemed. If the Corporation exercises its right to redeem less than all
outstanding shares of Series C Convertible Preferred Stock, then such redemption
shall be made, as nearly as practical, pro rata among the holders of record of
the Series C Convertible Preferred Stock. No share of Series C 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 C 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 of (x) the sum stated in the immediately preceding clause (a) and
(y) the quotient (expressed as a percentage) obtained by
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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 of (x) the number of shares of Common Stock that 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 C 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 C Convertible Preferred Stock on the Redemption Date
(determined without regard to any limitation on conversion contained in Section
7(a)) and (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 C
Convertible Preferred Stock may convert any or all of their shares of Series C
Convertible Preferred Stock into fully paid and nonassessable shares of Common
Stock and such other securities and property as hereinafter provided, except
that no such conversion shall be for less than 50 shares of Series C Convertible
Preferred Stock unless the holder so converting holds less than 50 shares of
Series C Convertible Preferred Stock and is converting all of such shares held
by such holder. Commencing on the earlier of (1) the date that is 90 days after
the Issuance Date and (2) the Registration Effective Date, and at any time
thereafter, each share of Series C Convertible Preferred Stock may be converted
at the office of the conversion agent for the Series C Convertible Preferred
Stock that was appointed prior to issuance of the shares of Series C 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 C Convertible Preferred Stock being
converted, and (iii) accrued but unpaid interest on the dividends on the share
of Series C 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 and (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) $14.52 (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
C Convertible Preferred Stock be entitled to convert any shares of Series C
Convertible Preferred Stock in excess of that number of shares of Series C
Convertible Preferred Stock upon conversion of which the sum
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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 C Convertible Preferred Stock) and (2) the number of shares of Common
Stock issuable upon the conversion of the number of shares of Series C
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 15 days after the Issuance Date, the date that is
60 days after the Issuance Date (if the Corporation shall not have so filed the
Registration Statement prior to such 60th day);
(2) each date that 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 15 days after the Issuance Date, the date on which
the Corporation shall have so filed the Registration Statement;
(4) the date that is 91 days after the Issuance Date, unless the
Registration Statement theretofore has been declared effective by the SEC;
(5) each date that 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,
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(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 that 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 that 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 C Convertible Preferred Stock which is named therein as a
selling shareholder 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 that is the 30th day (whether or not consecutive)
after such 30th day on which 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 C 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 that is 30 days after the date on which any holder
of shares of Series C Convertible Preferred Stock shall have become unable to
convert shares of Series C 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 Shareholder Approval pursuant to Section 4(a), if any
holder of shares of Series C Convertible Preferred Stock shall remain unable so
to convert shares of Series C Convertible Preferred Stock on such 30th day and
each date that is 30 days after such 30th day if holders remain unable to so
convert;
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(13) the date on which holders of shares of Series C Convertible
Preferred Stock become able to convert shares of Series C 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 Shareholder Approval pursuant
to Section 4(a), if any holder of shares of Series C Convertible Preferred Stock
shall have become so unable to convert such shares; and
(14) the date that is 32 days after the date on which any holder
of shares of Series C 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 C Convertible Preferred Stock shall
remain unable so to sell shares of Common Stock on such 32nd day and each date
that is 30 days after such 32nd day if holders remain unable to so sell;
provided, however, that if more than one event that 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 service, facsimile 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 80%, provided, however,
that notwithstanding any other provision hereof (1) if (u) the Corporation shall
fail to file the Registration Statement with the SEC within 15 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
C Convertible Preferred Stock which is named therein as a selling shareholder
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, or
(y) a holder of shares of Series C Convertible Preferred Stock shall be unable
to convert any shares of Series C 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
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contemplated by clauses (12) and (13) of the definition of Computation Date,
then in each such 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 that 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 C 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 shareholders 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 shareholders 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
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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 shareholders
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 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
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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 such day, in
lieu of the foregoing adjustment, adequate provision shall be
made so that the holders of shares of Series C Convertible
Preferred Stock shall have the right to receive in payment of
dividends on the shares of Series C Convertible Preferred Stock
or upon conversion of the shares of Series C Convertible
Preferred Stock, as the case may be, the amount of Securities the
holders of shares of Series C 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 C
Convertible Preferred Stock, or had the holders of shares of
Series C Convertible Preferred Stock converted the shares of
Series C 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
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<PAGE>
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 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
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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 C
Convertible Preferred Stock shall have the right to receive in
payment of dividends on shares of Series C Convertible Preferred
Stock or upon conversion of shares of Series C Convertible
Preferred Stock, as the case may be, the amount of cash the
holders of shares of Series C 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 C
Convertible Preferred Stock, or had the holders of shares of
Series C Convertible Preferred Stock converted shares of Series C
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 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 shareholders (based on the
acceptance (up to any maximum specified in the terms of 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
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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 shareholders 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 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
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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, "Registration Effective Date" shall mean, with respect to
any share of Series C Convertible Preferred Stock, the date on which the
Registration Statement is first ordered effective by the SEC.
As used herein, "Registration Rights Agreement" means the Registration
Rights Agreement entered into between the Corporation and the original holder of
the shares of Series C Convertible Preferred Stock, as amended or modified from
time to time in accordance with its 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 Agreement.
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 par value of the Common Stock into which shares of Series C Convertible
Preferred Stock are at the time convertible.
(2) The holders of shares of Series C Convertible Preferred Stock
at the close of business on the record date for any dividend payment to holders
of Series C 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
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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 C 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 C 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 C
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 C Convertible Preferred Stock. Except as provided
above, no adjustment shall be made in respect of cash dividends on Common Stock
or Series C Convertible Preferred Stock that may be accrued and unpaid at the
date of surrender of shares of Series C Convertible Preferred Stock.
(3) The right of the holders of Series C Convertible Preferred
Stock to convert their shares shall be exercised by delivering (which may be
done by facsimile) 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 C Convertible Preferred Stock to be converted in the form specified in
the Subscription Agreements (the "Conversion Notice"). If a holder of Series C
Convertible Preferred Stock elects to convert any shares of Series C 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 C Convertible Preferred Stock to the Corporation unless all of the shares
of Series C Convertible Preferred Stock represented thereby are so converted.
Each holder of shares of Series C 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 C Convertible Preferred Stock evidenced by a particular
certificate therefor are converted as aforesaid, the holder of Series C
Convertible Preferred Stock may not transfer the certificate(s) representing
such shares of Series C Convertible Preferred Stock unless such 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 C Convertible Preferred Stock new certificate(s) of like tenor,
registered as such holder of shares of Series C Convertible Preferred Stock
(upon payment by such holder of shares of Series C Convertible Preferred Stock
of any applicable transfer taxes) may request, representing in the aggregate the
remaining number of shares of Series C Convertible Preferred Stock represented
by such
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certificate(s). Each holder of shares of Series C 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 C Convertible Preferred Stock represented by
such certificate, the number of shares of Series C 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 C 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 C 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 C 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 C 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 C 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 C 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 C Convertible Preferred
Stock outstanding upon the basis 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 that would change the number of shares of Common Stock into which each
share of the Series C Convertible Preferred Stock shall be convertible as herein
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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 C 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 C
Convertible Preferred Stock, the Corporation promptly shall take 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 C Convertible
Preferred Stock then outstanding shall have the right thereafter to convert such
shares of Series C 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 C 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 C
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 C Convertible Preferred Stock the right to
elect the securities, cash, or other assets into which the Series C 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.
(6) If a holder shall have given a Conversion Notice for shares
of Series C 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
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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 set off,
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 that 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 C 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 facsimile) 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 C Convertible
Preferred Stock, rescind such conversion, whereupon such holder shall have the
right to convert such shares of Series C Convertible Preferred Stock thereafter
in accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series C Convertible Preferred Stock but, in lieu of any fraction
of a share of Common Stock that 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:
(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
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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 shareholders 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 defined below)
evidences of its indebtedness or assets (including securities, but excluding any
rights or warrants 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
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<PAGE>
C1 = C x M
-----
M - F
where
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 shareholders 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 C 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 Section 7(c)(5), the holder of any Series C 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 C 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
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faith, shall be binding upon all shareholders and upon the Corporation. Whenever
the Conversion Amount is adjusted, the Corporation will give notice by mail to
the holders of record of Series C 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 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) that would result in any adjustment in the Conversion Amount under this
Section 7(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 C 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 C 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") that is three years after the
Issuance Date all of the outstanding shares of Series C 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 C Convertible Preferred Stock
(or such lesser number of shares of Series C 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 C 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 C Convertible Preferred Stock. Upon receipt by the
Corporation of certificates for shares of Series C 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 C Convertible Preferred Stock converted, together with accrued and
unpaid dividends thereon to the date of conversion and accrued
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<PAGE>
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 C Convertible Preferred Stock,
if any.
Section 8. Redemption at Option of Holders.
(a) Each holder of shares of Series C 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 (as defined
below), 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 on the Nasdaq;
(2) The Common Stock ceases to be listed for trading on the
Nasdaq, the NYSE, or the AMEX for five consecutive trading days;
(3) The inability for 30 or more days (whether or not
consecutive) of any holder of shares of Series C 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 C
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 C
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 C
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 (as defined in Section 8(b));
(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
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<PAGE>
immediately following such transaction or the common stock of such surviving
corporation is not listed for trading on the Nasdaq, the NYSE, or the AMEX; or
(6) The taking of any action, including any amendment to this
Statement of Rights and Preferences, which materially and adversely affects the
rights of any holder of shares of Series C Convertible Preferred Stock.
(b) To exercise the optional redemption right, a holder of shares of
Series C 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 C 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 C
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 C 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 in Section 8(c))
applicable on the date of such redemption with respect to the shares of Series C
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 C 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 C Convertible
Preferred Stock that have not been redeemed. Only whole shares of Series C
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 C 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 of (x) the sum stated in the
immediately preceding clause (a) and (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 of (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 C 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 C 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)) and (y)
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<PAGE>
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 C Convertible Preferred Stock shall not be entitled to vote on any
matter.
The affirmative vote or consent of the holders of a majority of the
outstanding shares of the Series C 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 C
Convertible Preferred Stock, (2) the waiver of any preference, right, privilege
or power of the Series C 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 C 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 C Convertible Preferred Stock shall be deemed outstanding except (i) from
the date of receipt by the Corporation of a Conversion Notice requesting that
Series C Convertible Preferred Stock be converted into Common Stock, all shares
of Series C Convertible Preferred Stock that are so converted into Common Stock;
(ii) from the date of registration of transfer, all shares of Series C
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 C Convertible Preferred Stock that 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 C Convertible Preferred Stock shall have been paid by the
Corporation as and when required hereby.
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<PAGE>
Section 11. Amendment Upon Conversion or Redemption of Outstanding Shares.
When, as a result of the conversion or redemption of the Series C
Convertible Preferred Stock no shares of Series C 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 C
Convertible Preferred Stock designated hereby shall thereby return to the status
of authorized but unissued and undesignated shares of Preferred Stock of the
Corporation.
-34-
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT, dated as of September 23, 1997, is by and
between TERA COMPUTER COMPANY, a Washington corporation, with headquarters
located at 2815 Eastlake Avenue East, Seattle, Washington 98102 (the "Company"),
and 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; PAYMENT OF PURCHASE PRICE.
(a) Subscription. The Buyer hereby agrees to purchase from the Company
the number of shares (the "Preferred Shares") of Series C 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 C 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, if the parties use the services of an escrow agent (the "Escrow Agent")
in connection with the purchase and sale of the Preferred Shares, the Buyer
shall pay the purchase price for the Preferred Shares by delivering good funds
in United States Dollars to the Escrow Agent identified in the Joint Escrow
Instructions attached hereto as Annex II (the
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<PAGE>
"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,
(1) promptly following payment by the Buyer to the Escrow Agent of the purchase
price for the Preferred Shares, but in no event later than 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, (2) 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, and (3) 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. Unless otherwise agreed by the Buyer and the
Company, 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
Unless otherwise agreed by the Buyer and the Company, not later than 4:00 p.m.,
New York City time, on the date which is not later than two Business Days after
the Company shall have accepted this Agreement and returned a signed counterpart
thereof to the Buyer or its legal counsel, the Buyer shall deposit with the
Escrow Agent the aggregate purchase price for the Preferred Shares.
(d) Use of Escrow Agent Optional. If the parties agree not to use the
Escrow Agent in connection with the purchase and sale of the Preferred Shares,
the Buyer shall pay the purchase price for the Preferred Shares directly to the
Company by certified bank check or wire transfer to an account designated in
writing by the Company, and the Company shall deliver the certificates for the
Preferred Shares directly to the Buyer, not later than 4:00 p.m., New York City
time, on the date which is not later than two Business Days after the Company
shall have accepted this Agreement and returned a signed counterpart thereof to
the Buyer or its legal counsel.
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<PAGE>
2. BUYER REPRESENTATIONS AND WARRANTIES.
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
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, 1996; (2) Quarterly Reports on Form 10-QSB for the fiscal quarters ended
March 31, 1997 and June 30, 1997; (3) Current Reports on Form 8-K, filed on
April 1, 1997, May 21, 1997, and July 11, 1997, with the SEC; and (4) proxy
statement for the Company's 1997 Annual Meeting (collectively, the "Disclosure
Documents"); and the Buyer understands that its investment in the Shares
involves a high degree of risk.
-3-
<PAGE>
(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.
(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.
(h) No Current Holdings. The Buyer owns no shares of Common Stock or
other securities of the Company.
3. COMPANY REPRESENTATIONS AND WARRANTIES.
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 10,658,416
shares were outstanding as of September 22, 1997, all of which are fully paid
and nonassessable; and (b) 5,000,000 shares of Preferred Stock, $.01 par value,
of which (i) none are outstanding and (ii) 5,000 shares will be designated as
Series C Convertible Preferred Stock prior to the Closing Date (as such term is
defined in Section 6 hereof). As of September 22, 1997, the Company had
outstanding options entitling the holders thereof to purchase 2,082,839 shares
of Common Stock and outstanding warrants entitling the holders thereof to
purchase 1,214,342 shares of Common Stock. On the Closing Date there will be no
material increase from September 22, 1997 in the number of shares of Common
Stock outstanding other than
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<PAGE>
pursuant to the exercise of such options and/or warrants. 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 or as set forth in Section 3(b) of the disclosure
letter delivered to the Buyer at or before the execution of this Agreement (the
"Disclosure Letter"). 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 security holder 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 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.
(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 security holder 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, except as set forth in Section 3(c)
of the Disclosure Letter, (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; (4) the Company knows of no reason that the Common Shares will not be
eligible for listing on Nasdaq; and (5) the Company has submitted an application
for listing of the Common Stock on the Nasdaq National Market ("NNM").
(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.
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(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 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 shareholders 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, 1996, 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,
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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 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)
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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 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.
(1) 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 Business 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.
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(2) The Buyer further acknowledges and agrees that the
certificates for the Preferred Shares may bear the following additional
restrictive legends in substantially the following form:
WITH REFERENCE TO THE STATEMENT OR RIGHTS AND PREFERENCES OF
THE SERIES C CONVERTIBLE PREFERRED STOCK (THE "STATEMENT OF
RIGHTS') PURSUANT TO WHICH THE SECURITIES REPRESENTED BY
THIS CERTIFICATE WERE ISSUED, THE PORTION OF THE MAXIMUM
SHARE AMOUNT (AS DEFINED IN SECTION 4(a)(1) OF THE STATEMENT
OR RIGHTS) ALLOCATED TO THE SECURITIES REPRESENTED BY THIS
CERTIFICATE FOR PURPOSES OF CONVERSION THEREOF IS 2,131,000
SHARES OR SUCH GREATER NUMBER AS PERMITTED BY THE RULES OF
THE NASDAQ.
SECTION 7(c)(3) OF THE STATEMENT OR RIGHTS PERMITS A HOLDER
OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE TO CONVERT
SUCH SECURITIES IN ACCORDANCE WITH THE STATEMENT OF RIGHTS
WITHOUT BEING REQUIRED TO PHYSICALLY SURRENDER THIS
CERTIFICATE TO THE COMPANY UNLESS ALL OF THE SECURITIES
REPRESENTED HEREBY ARE SO CONVERTED. CONSEQUENTLY, FOLLOWING
CONVERSION OF ANY OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE, THE NUMBER OF SHARES REPRESENTED BY THIS
CERTIFICATE MAY BE LESS THAN THE NUMBER OF SHARES STATED
HEREON.
(c) Registration Rights Agreement. The parties hereto agree
to enter into the Registration Rights Agreement on or before the
Closing Date.
(d) Form D. The Company agrees to file a Form D with the SEC
with respect to the Shares as required under Regulation D promulgated
under the 1933 Act 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 or, if the
Common Stock is then listed on the NNM, then the NNM, and shall
provide evidence of such filing to the Buyer. From the Closing Date
until such time as the Registration Statement is no longer
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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 that might constitute the transactions
contemplated by this Agreement as 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 to the Buyer 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 $10,000)
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 Nasdaq or NNM rules requiring shareholder approval of
certain transactions (the "Nasdaq Shareholder Approval Rules") then unless
the Company obtains Shareholder Approval (as defined in the Statement of
Rights) or a waiver thereof from Nasdaq or
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NNM, as applicable, 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 Shareholder 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 Shareholder 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.
(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 in Section
5(b) herein) has been submitted to the Company and the Transfer Agent (as
defined in Section 5(a) 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
Sections 1(b) and 1(c) or 1(d) hereof, and prior to the Closing Date, the
Company will 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 delivered 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
legends 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 (z)
the instructions required by Section 4(n) of the Registration Rights Agreement
will be given by the Company to the Transfer Agent and that the Common Shares
otherwise shall 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 Business 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 4(n) of the
Registration Rights Agreement shall be in addition to this Section 5(a) once
said Section 4(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 Transfer
Agent, with a copy to the Company, 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 7(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 in the applicable Conversion Notice, the
Company shall have the right immediately to notify
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the converting holder of such error (with a copy of such notice given to the
Transfer Agent by facsimile), 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
(i) 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, (ii) the date specified in Section 1(d) hereof, if
applicable, or (iii) such other mutually agreed to date and time. The closing
shall occur on the Closing Date at the offices of the Escrow Agent or such other
mutually agreed location.
7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligation to sell and issue 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;
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(b) Delivery by the Buyer to the Escrow Agent or to the Company of
good funds as payment in full of an amount equal to the purchase price for the
Preferred Shares in accordance with Section 1(c) hereof, if applicable; 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.
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9. MISCELLANEOUS.
(a) This Agreement shall be governed by and interpreted in accordance
with the laws of the State of Washington.
(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 copy 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 facsimile) 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 (facsimile number (206) 323-1318), copy to Stoel Rives LLP,
Suite 3600, One Union Square, 600 University Street, Seattle, WA 98101, Attn: L.
John Stevenson (facsimile 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 (facsimile number 425-462-4645) 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
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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: Advantage
Fund Limited, c/o Genesee International, Inc., 10500 N.E. 8th Street, Suite
1920, Bellevue, Washington 98004-4332 (facsimile number 425-462-4645), until the
Buyer shall designate 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
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(3) the closing shall not have occurred on a Closing Date on or
before September 29, 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 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 and
the Company by their respective officers thereunto duly authorized as of the
date set forth above.
NUMBER OF SHARES: 5,000
PRICE PER SHARE: $1,000.00
AGGREGATE PURCHASE PRICE: $5,000,000.00
ADVANTAGE FUND LIMITED
By: /s/
-----------------------------------------
Title: President
Address: c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
TERA COMPUTER COMPANY
By: /s/
-----------------------------------------
Title: President and Chief Executive Officer
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REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of September 23, 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
September 23, 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 5,000 shares of Series C Convertible Preferred Stock
(the "Preferred Shares") of the Company as provided in the Subscription
Agreement, which Preferred Shares 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 any Investor pursuant
to Section 4(f) pertaining to a "Negotiation Event" (as therein defined),
Section 5(f) or due to a transfer by the Investor contemplated by Section
10(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 10 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) 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 Statement of Rights and Preferences of the Preferred Shares.
2. Mandatory Registration for Resale.
(a) The Company shall prepare and, on or prior to the date which is 15
days after the Closing Date, file with the SEC a Registration Statement on Form
S-3 covering the resale of at least 800,000 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 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
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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) If any offering pursuant to a Registration Statement under Section
2(a) hereof involves an underwritten offering, the Investors who hold a majority
in interest of the Registrable Securities subject to such underwritten offering
shall have the right to select legal counsel and an investment banker or bankers
and manager or managers to administer the offering, which investment banker(s)
or manager(s) shall be reasonably satisfactory to the Company. The Investors who
hold the Registrable Securities to be included in such underwritten offering
shall pay all underwriting discounts and selling commissions and other fees and
expenses of such investment banker(s) and manager(s) (other than registration
expenses payable by the Company pursuant to Section 6 hereof) with respect to
their Registrable Securities and the fees and disbursements of such legal
counsel selected by the Investors.
(c) If (i) the Company fails to file the Registration Statement with
the SEC within 15 days after the Closing Date, (ii) 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, (iii) the Company fails to submit a request for
acceleration of the effective date of the Registration Statement in accordance
with Section 4(a), (iv) 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 Preferred Shares which is named therein as a selling shareholder 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
shareholder, including without limitation the attempt to sell securities other
than pursuant to the method of disposition described in the Registration
Statement, or (v) a holder of Preferred Shares has become unable to convert any
Preferred Shares in accordance with Section (7)(a) of the Statement of Rights
(other than by reason of the 4.9% limitation set forth therein), then the
Conversion Percentage (as defined in the Statement of Rights) shall be adjusted
as provided in the Statement of Rights.
(d) 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 (i) Registration Statements on Forms S-4 or S-8, (ii) a Registration
Statement on Form S-3 covering the resale of not more
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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, and (iii) a
Registration Statement on Form S-3 covering the resale of not more than
1,000,000 shares of Common Stock issuable upon exercise of certain warrants
issued in a private offering.
(e) 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 maintain such eligibility for the use of Form S-3.
3. Company Registration and Underwritten Offering.
(a) If at any time or from time to time the Company shall determine to
register any of its shares of Common Stock for its own account for offer and
sale in a firmly underwritten public offering, it shall (i) promptly give
written notice thereof to each Investor that owns of record any Registrable
Securities as of the date of such notice, and (ii) include in such registration
and underwritten offering all Registrable Securities requested to be so included
by any such Investor in a writing delivered to the Company within 20 days after
receipt of such written notice from the Company by the Investor, except as set
forth below.
(b) Investors proposing to distribute all or a portion of their
Registrable Securities through such underwritten offering shall (together with
the Company and any other shareholders distributing their securities through
such underwritten offering) enter into an underwriting agreement in usual and
customary form with the managing underwriter(s) selected for such underwritten
offering by the Company. Notwithstanding any other provision of this Section 3,
if the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, the managing underwriter
in its sole discretion may limit the number of Registrable Securities to be
included in the registration, or may exclude Registrable Securities entirely
from such registration. In such case, the Company shall so advise all Investors
whose Registrable Securities otherwise would be included in such registration,
and the number of shares of Registrable Securities that may be included in such
registration and underwritten offering shall be allocated among the Investors
requesting registration in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities held by each of such Investors at
the date of filing of the Registration Statement. If any Investor disapproves of
the terms and conditions of the underwritten offering, such Investor may
withdraw therefrom by written notice to the Company and the managing
underwriter(s). Any Registrable Securities excluded or withdrawn from such
underwritten offering shall be withdrawn from such registration.
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(c) Each Investor hereby agrees that, if requested by the Company and
the managing underwriter(s), it will enter into a customary form of "lock-up"
agreement with the Company and the managing underwriter(s) with respect to any
Registrable Securities then held by such Investor (other than those included in
the registration and underwritten offering described in this Section 3), which
agreement shall contain such terms and conditions no more restrictive on the
Investor's ability to sell or otherwise transfer such Registrable Securities
than those contained in any other such agreements then entered into by the
Company and the managing underwriter(s) with other holders of the Company's
Common Stock.
(d) Promptly following the expiration or termination of any such
lock-up agreement, the Company will take all reasonable steps, including filing
a Registration Statement in accordance with Section 2(a) hereof (or, in
accordance with Section 4(a) hereof, a post-effective amendment or supplement to
any Registration Statement and prospectus contained therein that previously was
filed in accordance with Section 2(a)), to enable Investors to sell their
remaining Registrable Securities free from restrictions under applicable
securities laws.
(e) The Company shall have the right to terminate or withdraw any
registration initiated by the Company under this Section 3 prior to the
effectiveness of such registration whether or not any Investor has elected to
include Registrable Securities in such registration.
4. Obligations of the Company. In connection with the registration of the
Registrable Securities pursuant to Sections 2 and 3 hereof, as applicable, the
Company shall:
(a) prepare promptly, and file with the SEC not later than 15 days
after the Closing Date, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter 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 (i) such date as is three years after the Closing Date, (ii) 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 (iii) 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
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(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 times during which it is required to be
effective hereunder (and each such amendment and 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 therewith as may be necessary to keep such
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
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, (i) 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 that contains information for which the Company has sought confidential
treatment) and (ii) 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
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where it would not otherwise be required to qualify but for this Section 4(d),
(II) to subject itself to general taxation in any such jurisdiction, (III) to
file a general consent to service of 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 articles 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 shareholders;
(e) in the event that the Registrable Securities are being offered in
an underwritten offering, 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;
(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 reasonable 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
shareholders' 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 delay in the
filing of the registration statement beyond the 15 day period specified in
Section
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2(c)(i) or results in the delay in the effective date thereof beyond the 90 day
period specified in Section 2(c)(ii), the 15 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 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
underwritten public offerings, 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
underwritten public offerings, 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 a
single firm of counsel and a single 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 that any Inspector reasonably
may 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
4(k). Each Investor agrees that it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt
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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 Sections 5(a) and 5(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
or the Nasdaq National Market (collectively, the "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(s), 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(s), if any, or the Investors may
reasonably request and registered in such names as the managing underwriter(s),
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 Registration Period 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 Investors of the Registrable Securities pursuant
to the Registration Statement.
5. 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 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 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 thereby
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, or if an Investor seeks to participate in a registration and
underwritten offering pursuant to Section 3 hereof, each Investor or each such
participating Investor, as the case may be, 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(s) of such offering and
take such other actions as are reasonably required in order to expedite or
facilitate the disposition of the Registrable
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Securities, unless such Investor has notified the Company in writing of such
Investor's election to exclude all or a portion of such Investor's Registrable
Securities from the Registration Statement;
(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 4(f) or
4(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 4(f) or 4(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;
(e) No Investor may participate in any registration relating to an
underwritten offering 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, with respect to an underwritten offering under Section 2 hereof,
or approved by the Company, with respect to an underwritten offering under
Section 3 hereof; (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 selling commissions
(and, with respect to an underwritten offering pursuant to Section 2(b) hereof,
any other fees and expenses) of any investment banker(s) and manager(s) with
respect to its Registrable Securities sold in such offering and of the fees and
expenses of counsel selected by the Investors.
(f) 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
Transfer Agent and the Company.
(g) 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
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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 Securities 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.
6. Expenses of Registration. All reasonable expenses incurred in effecting
any registration pursuant to this Agreement, including, without limitation, all
registration, listing, qualification, and filing fees, printing and accounting
expenses, fees and disbursements of counsel for the Company, shall be borne by
the Company (except as otherwise may be required under applicable state
securities or blue sky laws); provided, however, that the Investors shall pay
all (i) underwriting discounts and selling commissions (and, with respect to an
underwritten offering pursuant to Section 2(b) hereof, any other fees and
expenses) of any investment banker(s) and manager(s) applicable to the sale of
Registrable Securities in an underwritten offering and (ii) fees and
disbursements of counsel to the Investors, in accordance with Sections 2(b) and
5(e) hereof.
7. 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 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
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<PAGE>
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 7(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 7(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 4(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 4(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 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 10.
(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 7(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
shareholder selling securities pursuant to the Registration Statement or any of
its directors or officers or any person who controls such shareholder 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
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<PAGE>
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 7(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
7(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 10. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 7(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 7 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 7, 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
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<PAGE>
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 7, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action. The indemnification required by
this Section 7 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.
8. 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 7 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 7, (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 12(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.
9. 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:
(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.
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<PAGE>
10. 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
1,000 Preferred Shares, or Registrable Securities acquired upon conversion of at
least 1,000 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 Subscription Agreement; (f) such transferee shall be an
"Accredited Investor" as that term defined in Rule 501 of Regulation D
promulgated under the Securities 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.
11. 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 11 shall be binding upon each Investor and the Company.
-16-
<PAGE>
12. 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 facsimile 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, facsimile No.
(206) 323-1318, with a copy to Stoel Rives LLP, One Union Square, 36th Floor,
Seattle, Washington 98101, Attention: L. John Stevenson, Jr., facsimile 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,
facsimile No. (425) 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 12(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 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.
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<PAGE>
(f) Subject to the requirements of Section 10 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 4(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 facsimile 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: President and Chief Executive
Officer
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]
ChaseMellon Shareholder Services, L.L.C.
as Transfer Agent and Registrar
520 Pike Street, Suite 1220
Seattle, WA 98101
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) ][1] 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 C 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 Stoel Rives LLP as to registration of [the
Outstanding Shares and]* the Conversion Shares under the Securities Act of 1933,
as amended.
- --------
[1] Omit if no conversions of Preferred Stock have occurred before SEC
registration is declared effective.
<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]
<PAGE>
EXHIBIT 2
to
Registration
Rights Agreement
[Date]
TERA COMPUTER COMPANY
Shares of Common Stock
ChaseMellon Shareholder Services, L.L.C.
as Transfer Agent and Registrar
520 Pike Street, Suite 1220
Seattle, WA 98101
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 C 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 September 23, 1997, between
the Holder and the Company (the "Subscription Agreement"). Pursuant to a
Registration Rights Agreement, dated as of September 23, 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 shareholder thereunder.
We advise you that, on ________, 1997, a registration statement under the
Securities Act of 1993 became effective with respect to the resale of the shares
of Common Stock underlying the shares of Preferred Stock held by the Holder.
Therefore, we are of the opinion that, with respect to the issuance of shares of
Common Stock pursuant to the procedures described in the Company's letter of
September 23, 1997, to you, the certificates evidencing the underlying shares of
Common Stock need not bear the Securities Act restrictive legend described in
such letter and may be issued without such legend.
Very truly yours,
cc: [Name of Investor]
October 7, 1997
Board of Directors of
Tera Computer Company
Dear Sirs:
I have supervised the corporate proceedings relative to the issuance of
5,000 shares of Series C Convertible Preferred Stock, $.01 par value (the
"Series C 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 C Preferred
Stock.
I also am familiar with the corporate proceedings relative to the
incorporation of the Company and to its present corporate status. Based upon the
foregoing and having regard for such legal considerations as I have deemed
relevant, I am 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 C Preferred Stock and to issue the Common Stock reserved for issuance
upon conversion of the Series C Preferred Stock.
2. The shares of the Series C 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 C
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.
This opinion may be used in connection with qualification of such shares of
Common Stock under the applicable securities laws of any state.
Very truly yours,
/s/ KENNETH W. JOHNSON, ESQ.
Kenneth W. Johnson, Esq.
Vice President - Finance
and General Counsel
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in 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.
/s/ Deloitte & Touche LLP
Seattle, Washington
October 8, 1997
