PROSPECTUS Filed pursuant to Rule 424(b)(3)
Registration No. 333-36563
TERA COMPUTER COMPANY
1,267,447 Shares of Common Stock
This Prospectus covers the resale of shares of Common Stock of Tera Computer
Company, a Washington corporation ("Tera" or the "Company"), by certain
shareholders (the "Selling Shareholders") of the Company. These shares were
first issued by the Company through (1) a private placement of 299,332 shares of
Common Stock and warrants to purchase an additional 68,167 shares of Common
Stock in March 1997 and (2) the issuance of warrants to purchase an aggregate of
1,000,000 shares to H.J. Meyers & Co., Inc., which warrants were subsequently
distributed in part to certain principals and affiliates thereof. See "Selling
Shareholders"
The shares of Common Stock may be offered or sold by the Selling Shareholders of
the Company from time to time in the over-the-counter market or otherwise at
market prices then prevailing, in negotiated transactions or otherwise. Brokers
or dealers will receive commissions or discounts from Selling Shareholders in
amounts to be negotiated immediately prior to the sale. Such resales are subject
to the prospectus delivery and other requirements of the Securities Act of 1933,
as amended (the "Securities Act"). The Company will not receive any of the
proceeds from the resale of the Common Stock but will receive the proceeds from
the cash exercises, if any, of the warrants. See "Selling Shareholders" and
"Plan of Distribution." In connection with any sales, the Selling Shareholders
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."
The Common Stock is listed on the Nasdaq National Market under the symbol TERA.
On April 9, 1998, the closing price for the Common Stock was $11.625.
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These Securities Involve a High Degree of Risk. See "Risk Factors" beginning on
page 4 for Certain Factors Related to This Offering.
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 April 10, 1998.
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Section Page
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The Company 2
Incorporation of Certain Documents by Reference 3
Available Information 3
Risk Factors 4
Capitalization 10
Selling Shareholders 11
Plan of Distribution 13
Experts 14
Limitation of Liability and Indemnification 14
THE COMPANY
The Company was formed to design, develop and market high performance
general purpose parallel computer systems. Tera's Multithreaded Architecture
System ("MTA system") is designed to address a wide range of scientific and
engineering applications, such as simulation and visualization of complex
mechanical and biochemical systems, as well as emerging commercial applications,
such as computer-aided design and visualization, information-on-demand and
database mining. 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 installed a single processor MTA system
at the San Diego Supercomputer Center in December 1997, which it plans to
upgrade in stages to larger configurations as it receives production printed
circuit boards and other components from its vendors which are then integrated
into a commercially acceptable system.kwj requested On and Of be initial caps
here See, however, "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.
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"Tera" and "MTA" are trademarks of the Company. This Prospectus also
contains and incorporates trademarks of other companies.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Securities
and Exchange Commission (the "Commission") pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), are incorporated in this
Prospectus by reference:
(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1997; and
(b) 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 securities offered hereby, reference is made
to the Registration Statement and the exhibits and schedules thereto. The
Registration Statement, including exhibits thereto, may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies may be obtained at the prescribed rates from the
Public Reference Section of the Commission at its principal office in
Washington, D.C. Copies of such documents may also be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street N.W.,
Washington, D.C. 20006. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in its entirety by such reference.
The Company's Common Stock 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."
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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 and
those set forth in the documents incorporated herein by reference.
Development Stage Status; History of Losses. The Company had an accumulated loss
from operations of approximately $42.8 million as of December 31, 1997 and is in
transition from a development stage enterprise to a production company. The
Company has experienced net losses in each year of operations and expects to
incur substantial further losses as it commences production, and possibly
thereafter. Through December 31, 1997, the Company has had no revenue from sales
of MTA systems, nor earnings. The Company will recognize system revenue only as
customers accept resource modules. Although the Company has installed a single
processor MTA system at the San Diego Supercomputer Center, it has not yet
delivered a multi-processor MTA system, and is dependent on third-party vendors
to provide production printed circuit boards and other necessary components.
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 depend 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
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
1990s, including Thinking Machines Corporation, Cray Computer Corporation,
Kendall Square Research Corporation and Supercomputer Systems, Inc. Since its
inception through December 31, 1997, the Company has expended approximately
$52.2 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 had been
subject only to computer simulation. While the initial testing and evaluation of
the prototype system has been successful, the Company only recently has begun to
integrate multiple modules into commercially configured systems.
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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 MTA systems that
satisfy both internal and commercially acceptable performance specifications.
Additional 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 completing a commercially configured MTA system, 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 has subcontracted the manufacture of substantially all of
its hardware components, including integrated circuits, printed circuit boards,
flex circuits and power supplies, on a sole or limited 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 multi-processor MTA system to the San
Diego Supercomputer Center on schedule and may continue to hinder its ability to
satisfy future delivery schedules with the San Diego Supercomputer Center and
other potential customers.
Moreover, the production capacity of the Company's integrated circuit and
printed circuit board suppliers is very limited and the availability of these
and other components will be a limiting factor on the number and size of the MTA
systems that may be sold in 1998, and thereafter, assuming the receipt of
additional purchase orders. Absent improved yields, increased production
capacity or a reallocation of such suppliers' output to meet the Company's
needs, the Company may be unable to obtain a sufficient quantity of suitable
omponents 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 consequently 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
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products, which would materially and adversely affect the Company's business and
results of operations.
The Company's current contract with Unisys Corporation provides for
integrated circuit test and packaging services through June 1998. The Company
expects that it will be able to extend this agreement on mutually agreeable
terms. If this agreement were not extended, however, the Company would contract
with another vendor for such packaging services or perform such work internally.
The inability of the Company to subcontract for these services after its
agreement with Unisys expires, or the Company's inability to perform such
services internally, would materially and adversely affect the Company's
business and results of operations.
Future Capital Needs. During 1998, the Company's working capital needs will
depend primarily upon its personnel costs and the cost of inventory, as well as
manufacturing startup costs, inventory and receivable financing associated with
the production of MTA systems and research and development expenses related to
future implementations of the 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 support ongoing research, development and engineering
efforts, development of a customer service organization, increases in its sales
and marketing efforts, and capital expenditures in lease of goods. Additionally,
the Company's administrative functions will increase in order to support its
engineering and sales efforts. If the Company were not to receive revenue from
the sale of MTA systems, it likely would be required to engage in additional
financings in order to continue current levels of business operations. The
Company may raise additional equity capital in 1998, even if revenues are
received from the sale of MTA systems when anticipated, in order to enhance its
financial position for future operations. There can be no assurance that any
additional financings will be available to the Company when needed or, if
available, will be available on satisfactory terms or that any such financings
will not be dilutive to the Company's shareholders.
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 U.S. 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 U.S. 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 substantial 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 U.S. 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
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will depend in part on its ability to obtain export licenses for foreign sales,
the delay or denial of which could materially and adversely affect the Company`s
business and results of operations.
In order to expand its market beyond the very high performance scientific
market, and particularly beyond government agencies and research laboratories,
to engineering and other commercial markets, the Company must be able to attract
independent software vendors to port their software application programs so that
they will run on the MTA system. There can be no assurance that the Company will
be able to induce independent software vendors to port their applications, and
the failure to do so could materially and adversely affect the Company`s
business and results of operations.
Management of Growth; Dependence on Key Personnel. If the Company is successful
in developing and marketing the MTA system, the Company believes it could
undergo a period of rapid growth that 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 such personnel,
and its failure to do so would materially and adversely affect the Company's
business and results of operations.
The Company is dependent on Burton J. Smith, the Company's Chairman of the
Board and Chief Scientist, and James E. Rottsolk, the Company's Chief Executive
Officer, and the loss of services of either could have a material impact on the
ability of the Company to achieve its business objectives. The Company has key
man life insurance policies on the lives of Messrs. Smith and Rottsolk in the
amount of $2 million and $1 million, respectively. The Company has no employment
contracts with either Mr. Smith or Mr. Rottsolk or with any other employee.
Quarterly Performance May Vary Significantly. In the event that the Company is
able to attain broad market acceptance of the MTA system, one or a few system
sales may account for a substantial percentage of the Company's quarterly and
annual revenue because of the anticipated high average sales price of the MTA
system models and the timing of purchase orders and product acceptances. Because
a number of the Company's prospective customers receive funding from the U.S. or
foreign governments, the timing of orders from such customers may be subject to
the appropriation and funding schedules of the relevant government agencies. The
timing of orders and shipments also could be affected by other events outside
the control of the Company, such as changes in levels of customer capital
spending, the introduction or announcement of competitive products, the
availability of components, currency fluctuations and international conflicts or
economic crises. Because of these factors, revenue, expenses, net income or loss
and cash flow are likely to fluctuate significantly from quarter to quarter.
Rapid Technological Change and New Products. The market for the Company's
products is characterized by rapidly changing technology, accelerated product
obsolescence and rapidly changing industry standards. The Company's success will
depend upon its ability to complete development of the MTA system and to
introduce new products and features in a timely manner to meet evolving customer
requirements. There can be no assurance that the Company will be successful in
these efforts. The Company's business and results of operations will be
materially and adversely affected if the Company incurs delays in developing its
products or if such products do not gain broad market
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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 and Japanese 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, Silicon Graphics, Inc., Hitachi,
Ltd., Fujitsu Ltd., Sun Microsystems, Inc., and Hewlett-Packard Corporation,
through its subsidiary, Convex Computer, 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.
Proprietary Rights. The Company relies on a combination of copyright and trade
secret protection, non-disclosure agreements and licensing arrangements to
establish, protect and enforce its proprietary rights. Despite the Company's
efforts to safeguard and maintain its proprietary rights, there can be no
assurance that the Company will be successful in doing so or that the Company`s
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to the Company's technologies.
Although the Company is not a party to any present litigation regarding
proprietary rights, there can be no assurance that third parties will not assert
intellectual property claims against the Company in the future. Such claims, if
proved, could materially and adversely affect the Company's business and results
of operations. In addition, although any such claims may ultimately prove to be
without merit, the necessary management attention to and legal costs associated
with litigation or other resolution of such claims could materially and
adversely affect the Company's business and results of operations.
The laws of certain foreign countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although the Company continues to implement protective measures and
intends to defend its proprietary rights vigorously, there can be no assurance
that these efforts will be successful.
Shares Eligible for Future Sale. Sale of substantial amounts of the Company's
Common Stock in the public market or the prospect of such sales could materially
and adversely affect the market price of the Common Stock. As of March 9, 1998,
the Company had outstanding 11,459,736 shares of Common
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Stock; 8,578 shares of Series A Convertible Preferred Stock convertible into
shares of Common Stock, and privately placed warrants to purchase another
1,117,642 shares of Common Stock. Almost all of the Company's outstanding shares
of Common Stock may be sold without substantial restrictions. In addition, as of
such date, the Company had granted options under its option plans to purchase an
aggregate of 2,047,208 shares of Common Stock. All of the shares purchased under
the option plans are available for sale in the public market, subject in some
cases to volume and other limitations.
Sales in the public market of substantial amounts of Common Stock,
including sales of Common Stock issuable upon conversion of the Series A
Convertible Preferred Stock and issuable upon exercise of the privately placed
warrants, or the perception that such sales could occur could depress prevailing
market prices for the Common Stock. The existence of the Series A Convertible
Preferred Stock and 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
National Market (the "Market"). Nasdaq has proposed more stringent listing and
maintenance requirements and significantly increased its compliance enforcement
efforts. If the Company should continue to experience losses from operations, it
may be unable to maintain the standards for continued quotation 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 would be conducted in the
over-the-counter market on an electronic bulletin board established for
securities that do not meet the listing requirements for the Market, or in what
are commonly referred to as the "pink sheets." As a result, an investor would
find it more difficult to dispose of, or to obtain accurate quotations for the
price of, the Company's securities. In addition, such removal would subject the
Company's securities to so-called "penny stock" rules that impose additional
sales practice and market-making requirements on broker-dealers who sell and/or
make a market in such securities. Consequently, removal from the Market could
affect the ability or willingness of broker-dealers to sell and/or make a market
in the Company's securities and the ability of purchasers of the Company's
securities to sell their securities in the secondary market. In addition, if the
market price of the Company's Common Stock falls to below $5.00 per share, the
Company may become subject to certain penny stock rules even if still quoted on
the Market. While such penny stock rules should not affect the quotation of the
Company's Common Stock on the Market, such rules may further limit the market
liquidity of the Common Stock and Warrants and the ability of investors to sell
securities in the secondary market.
No Anticipated Dividends. The Company has not previously paid any dividends on
its Common Stock and for the foreseeable future intends to continue its policy
of retaining any earnings to finance the development and expansion of its
business.
Effect of Antitakeover Provisions. Certain provisions of the Company's Restated
Articles of Incorporation and Restated Bylaws and the laws of the State of
Washington could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of Common Stock. The Company is
authorized to issue
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Preferred Stock, without shareholder approval, with rights senior to those of
the Common Stock and to impose various procedural and other requirements that
could make it more difficult for shareholders to effect certain corporate
actions.
Limitations on Liability and Indemnification Matters. As permitted by the
Washington Business Corporation Act, the Company has included in its Restated
Articles of Incorporation a provision to eliminate the personal liability of its
directors for monetary damages for breach or alleged breach of their fiduciary
duties as directors, subject to certain exceptions. In addition, the Bylaws of
the Company provide that the Company is required to indemnify its directors
under certain circumstances, including those in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses to
its officers and directors as incurred in connection with proceedings against
them for which they may be indemnified.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997:
December 31,
1997 (1)
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(in thousands)
Long-term portion of capital leases $ 532
Shareholders' equity:
Convertible Preferred Stock, $.01 par value:
5,000,000 shares authorized; issued and
outstanding, 10,000 shares of Series A 8,546
Common Stock, $.01 par value:
25,000,000 shares authorized; 11,248,096 shares
issued and outstanding 52,209
Accumulated deficit (44,909)
Total shareholders' equity 15,846
Total capitalization $ 16,378
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(1) Does not include (i) 2,047,208 shares issuable upon exercise of outstanding
stock options as of March 9, 1998 or (ii) 1,117,642 shares of Common Stock
issuable upon exercise of certain privately placed warrants (including
1,068,167 shares covered by this Prospectus), as of such date.
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SELLING SHAREHOLDERS
As part of a private placement to eight accredited investors in March 1997,
the Company agreed to register the resale of 299,332 shares of Common Stock then
sold, as well as 68,167 shares of Common Stock issuable upon exercise of
warrants then issued.
In April 1997, the Company issued a warrant to H.J. Meyers & Co., Inc. to
purchase 700,000 shares of Common Stock at an exercise price of $3.9375 per
share. This warrant was issued in consideration for services rendered under a
financial consulting agreement and, in connection therewith, certain warrants
previously issued to H.J. Meyers & Co., Inc. as compensation for its services as
representative in the Company's initial public offering in September 1995 and as
sales agent for the Company's private offering completed in July 1996 were
canceled. This warrant is exercisable through April 21, 2002.
In June 1997, the Company issued a separate warrant to H.J. Meyers & Co.,
Inc. to purchase 300,000 shares of Common Stock at an exercise price of $4.50
per share, as compensation for certain consulting and financial advisory
services. This warrant is exercisable through June 25, 2002.
The warrants issued to H.J. Meyers & Co., Inc., have been distributed in
part to certain of its principals and affiliates, as indicated below.
The warrants issued to H.J. Meyers & Co., Inc. contain provisions which
permit "cashless exercises" pursuant to which the holders may surrender to the
Company a number of shares of Common Stock having a market value equal to the
aggregate exercise price of the warrants being exercised. To the extent that the
holders use the cashless exercise feature, the total number of shares of Common
Stock issuable to the holders will be less than 1,000,000.
These shares of Common Stock may be sold at any time or from time to time
if a current prospectus relating to such Common Stock is in effect and the
securities have qualified for sale. In addition, the shares of Common Stock sold
in March 1997 may be resold pursuant to Rule 144 of the Securities Act. The
Company will not receive any proceeds from the market sales of the shares of
Common Stock. Sales of these shares of Common Stock, or even the potential of
such sales, could have an adverse effect on the market prices for the Common
Stock. See "RISK FACTORS -- Shares Eligible for Future Sale."
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No Selling Shareholder has had a material relationship with the Company
within the past three years except for the WBW Trust Number One, which owned
more than five percent of the Company's outstanding securities at certain times
during such period. The Selling Shareholders and the number of shares of Common
Stock (including shares of Common Stock issuable upon exercise of warrants) held
by each of them and offered hereby are listed below, as of April 8, 1998:
Shares of
Selling Shareholder Common Stock
------------------- ------------
Robert M. Arnold 33,335
Karl D. Dillon 16,665
First Washington Corp. Profit Sharing Trust 17,500
Kestrel Software, L.L.C. 35,000
Gainor R. Lewis and Carder R. Lewis 70,000
Preston Interests, Ltd. 133,335
Stephen B. and Laurel B. Preston 35,000
WBW Trust Number One 26,664
H. J. Meyers & Co., Inc. 384,000*
Michael A. Bresner 39,500*
Patrick W. Grady 274,948*
Michael Bergin 5,000*
Glenn Busch 5,000
Angel Cruz 29,000*
James C. Witzel 14,100*
Robert J. Setteducati 59,600*
Thomas S. Parigian 32,800*
Joseph Galigan 14,750*
Michael Vanechanos 11,750
William E. Massucci 29,500*
------------
Total 1,267,447
============
*Assumes that the Selling Shareholder will exercise the warrants for cash.
If the Selling Shareholder uses the cashless exercise alternative, the actual
number of shares of Common Stock issued thereto will be fewer, depending on the
market value of the underlying shares of Common Stock on the date of exercise.
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PLAN OF DISTRIBUTION
The shares of Common Stock may be sold from time to time by the Selling
Shareholders or by pledgees, donees, transferees or other successors in
interest. Such sales may be made in open market transactions on stock exchanges
(including the Market) or otherwise at prices and at terms then prevailing, at
prices related to the then current market price or in negotiated transactions.
These securities may be sold by one or more of the following methods: (a) block
trades in which the broker or dealer so engaged will attempt to sell the
securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer as
principal, in a market maker capacity or otherwise, and resale by such broker or
dealer for its account pursuant to this Prospectus; and (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
effecting sales, brokers or dealers engaged by the Selling Shareholders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from the Selling Shareholders in amounts to be
negotiated immediately prior to the sale.
If any of the following events occurs, this Prospectus will be amended to
include additional disclosure before offers and sales of these shares of Common
Stock are made: (a) to the extent such securities are sold at a fixed price or
by option at a price other than the prevailing market price, such price would be
set forth in the Prospectus; (b) if the securities are sold in block
transactions and the purchaser wishes to resell, such arrangements would be
described in the Prospectus; and (c) if the compensation paid to broker-dealers
is other than usual and customary discounts, concessions or commissions,
disclosure of the terms of the transaction would be included in the Prospectus.
The Prospectus also would disclose if there are other changes to the stated plan
of distribution, including arrangements that either individually or as group
would constitute an orchestrated distribution of the securities.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of these shares of Common Stock may not
simultaneously engage in market making activities with respect to any securities
of the Company for a period of at least two (and possibly nine) business days
prior to the commencement of such distribution. Accordingly, in the event that
any broker-dealer, including H.J. Meyers & Co., Inc., is engaged in a
distribution of these shares of Common Stock, it will not be able to make a
market in the Company's securities during the applicable restrictive period.
However, no broker-dealer that is a market maker has agreed to and none are
obligated to act as broker-dealer in the sale of these shares of Common Stock,
and the Selling Shareholders likely will be required to sell such securities
through a broker-dealer that is not a market maker. In addition, each Selling
Shareholder desiring to sell these shares of Common Stock will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation Regulation M, which provisions may
limit the timing of the purchases and sales of shares of the Company's
securities by such Selling Shareholders.
The Selling Shareholders, such brokers or dealers, and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In addition, any
securities covered by this Prospectus which qualify for sale pursuant to Rule
144 under the Securities Act may be sold under that Rule rather than pursuant to
this Prospectus.
The Company is bearing all costs relating to the registration of the shares
of Common Stock offered hereby other than certain fees and expenses, if any, of
counsel or other advisors to the Selling Shareholders. Any commissions,
discounts or other fees payable to brokers or dealers
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in connection with any sale of the Shares will be borne by the Selling
Shareholder, the purchasers participating in such transaction, or both.
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997
and for each of the three years in the period ended December 31, 1997,
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.
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