As filed with the Securities and Exchange Commission on November 24, 1998
Registration No. 333-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form S-3
Registration Statement Under the
Securities Act of 1933
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TERA COMPUTER COMPANY
(Exact name of registrant as specified in its charter)
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WASHINGTON 93-0962605
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2815 Eastlake Avenue East
Seattle, WA 98102-3027
(206) 325-0800 (telephone)
(206) 323-1318 (facsimile)
(Address, including zip code, and telephone and facsimile numbers,
including area code, of principal executive offices)
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Kenneth W. Johnson, Chief Financial Officer
Tera Computer Company
2815 Eastlake Avenue
Seattle, WA 98102-3027
(206) 490-2000 (telephone)
(206) 323-1318 (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]
<PAGE>
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of Each Amount Proposed Maximum Proposed Maximum Amount of
Class of Securities to be Offering Price Per Aggregate Offering Registration
Registered Registered (1) Share(2) Price (2) Fee
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<S> <C> <C> <C> <C>
Common Stock, 1,472,794 shares $7.1875 $11,368,128 $3,160
$.01 par value
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(1) 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 exercise of the Common Stock purchase warrants described herein
pursuant to the provisions thereof regarding adjustment for stock dividends,
stock splits or similar transactions.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
</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 Securities and Exchange Commission, acting
pursuant to said section 8(a), may determine.
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<PAGE>
PROSPECTUS, Subject to Completion, dated November 24, 1998
1,472,794 Shares of Common Stock
TERA COMPUTER COMPANY
2815 Eastlake Avenue East
Seattle, WA 98102-3027
206-490-2000
THE COMPANY
Tera Computer Company, formed in 1987, designs, develops and markets high
performance general purpose parallel computer systems. Tera's common stock is
listed on the NASDAQ National Market System under the trading symbol TERA.
THIS PROSPECTUS
In this Prospectus, Advantage Fund II Ltd. and Koch Industries, Inc.
(collectively, the "Selling Shareholders") are offering to sell shares of Tera's
common stock that the Selling Shareholders have acquired from Tera and in the
future may acquire from Tera upon exercise of warrants to purchase common stock
and as "Adjustment Shares" (as described below).
The exact number of shares of common stock that the Selling Shareholders
will offer to sell cannot yet be determined because of certain adjustments that
may be made to the number of shares issued to the Selling Shareholders under the
subscription agreement pursuant to which the Selling Shareholders first acquired
their shares from Tera. The additional shares that Tera may be required to issue
under the subscription agreement are referred to as the "Adjustment Shares" in
this Prospectus.
THE OFFERING
The Selling Shareholders may offer to sell the shares to the public at
prices computed as follows:
o fixed prices;
o then-current market prices;
o prices computed with formulas based on then-current market prices; or
o negotiated prices.
Tera will not receive any proceeds from the sale of the shares. The Selling
Shareholders may engage a broker or dealer to sell the shares, and such broker
or dealer, or the Selling Shareholders, may be deemed to be an underwriter and
may receive commissions or other discounts for the sale of the shares.
On November 23, 1998, the closing price for Tera's common stock was $7.50.
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This investment involves a high degree of risk. You should purchase the
shares only if you can afford a complete loss. See "Risk Factors" beginning on
page 4 before purchasing the shares.
---------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the shares, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this Prospectus is _____, 1998.
<PAGE>
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Prospective investors may rely only on information contained in this Prospectus.
Neither Tera nor the Selling Shareholders have authorized any person to provide
prospective investors with information different from that contained in this
Prospectus. This Prospectus is not an offering in any jurisdiction where such
offering is not permitted. The information contained in this Prospectus is
correct only as of the date of the Prospectus, regardless of the time of the
delivery of this Prospectus or any sale of the shares.
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TABLE OF CONTENTS
Section Page
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The Company ........................................................... 3
Incorporation of Certain Documents by Reference ....................... 3
Available Information ................................................. 4
Risk Factors .......................................................... 5
Capitalization ........................................................ 12
Selling Shareholders .................................................. 13
Plan of Distribution .................................................. 15
Experts ............................................................... 16
Limitation of Liability and Indemnification ........................... 16
Special Note Regarding Forward-Looking Statements
Some of the statements contained in this Prospectus discuss future
expectations, contain projections or results of operations or financial
condition or state other "forward-looking" information. These statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ from those contemplated by the statements
and, therefore, these statements are not guarantees of Tera's future
performance.
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<PAGE>
THE COMPANY
The Company designs, develops and markets high performance general purpose
parallel computer systems. The Company's Multithreaded Architecture System ("MTA
system") addresses a wide range of scientific and engineering applications, such
as simulation and visualization of complex mechanical and biochemical systems.
In addition, the MTA system is suited for 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. Typical MTA system configurations
are expected to sell for between $5 million and $40 million.
In December 1997, the Company installed a single processor MTA system at
the San Diego Supercomputer Center ("SDSC"). In April 1998, the Company upgraded
that system to a two-processor MTA system and recognized its first revenue from
system sales in the 1998 second fiscal quarter. The Company plans to upgrade the
MTA system at SDSC in stages to larger configurations as it receives production
printed circuit boards, packaged integrated circuits and other components from
its vendors which are then integrated into a commercially acceptable system. 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) 490-2000.
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"Tera" and "MTA" are trademarks of the Company. This Prospectus also
contains and incorporates trademarks of other companies.
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/A for the year ended December
31, 1997;
(b) The Company's Quarterly Reports on Form 10-Q/A for the quarters ended
March 31, 1998 and June 30, 1998, and the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998;
(c) The Company's Current Reports on Form 8-K, filed on January 7, 1998,
January 22, 1998, October 8, 1998 and November 19, 1998; 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.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act of 1933, as amended (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.
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)
490-2000). 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.
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RISK FACTORS
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You should carefully consider the following factors and other information
in this Prospectus before deciding to invest in shares of Tera's common stock.
You should not purchase any of the shares unless you can afford a complete loss
of your investment.
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History of Losses
The Company had an accumulated net loss from operations of approximately
$58.8 million as of September 30, 1998, and has transitioned 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 until
it makes additional sales on a regular basis, and possibly thereafter.
In April 1998, the Company recognized its first revenue from the sale of an MTA
system; through September 30, 1998, the Company had not generated any net
earnings. Although the Company has installed a two-processor MTA system at the
San Diego Supercomputer Center, it is dependent on third-party vendors to
provide production printed circuit boards, packaged integrated circuits, flex
circuits and other necessary components in order to enlarge that system. Whether
the Company will achieve further revenue, or any earnings, will depend upon a
number of factors, including the following:
o its ability to manufacture the MTA system in commercial quantities;
o its ability to achieve broad market acceptance of the MTA system;
o the level of revenue in any given period;
o the terms and conditions of sale or lease for an MTA system;
o the MTA system model or models sold; and
o 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 any additional production MTA systems, or that it will be
able to generate additional sales or achieve a profitable level of operations in
the future. See "Business-Markets and Applications" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
1997 Annual Report on Form 10-K/A (the "1997 10-K/A").
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 September 30, 1998, the Company has spent
approximately $63.4 million to design and develop the MTA system. The Company's
software and hardware development effort has included the following designs:
Hardware Software
- -------- --------
integrated circuits compilers
packaging and cooling operating system
systems
at-speed testing input-output technology
equipment
The Company only recently has begun to integrate multiple resource modules into
commercially configured systems. Modifications to the hardware components,
software and the integrated system still may be required. Development of system
software is a difficult process, and the Company may not be able to meet all of
the
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<PAGE>
technical challenges required to integrate and complete MTA systems that satisfy
internal performance specifications and are commercially acceptable. 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, the Company's products may not
be commercially successful. See "Business-Markets and Applications" and
"-Competition" in the 1997 10-K/A.
Manufacturing Risks; Reliance On and Capacity Of Third Party Sole Source
Suppliers
The Company subcontracts 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. The manufacture of these components, and in particular the integrated
circuits, is a difficult and complex process. Factors such as minute impurities,
difficulties in the fabrication process, or defects in the masks used to print
circuits on wafers can cause a substantial percentage of wafers to be rejected
or partially non-functional. For these and other reasons, the Company's
suppliers have previously experienced, and may in the future again experience,
problems in manufacturing the components to the Company's design and quantity
specifications. When the Company has experienced such manufacturing problems in
the past, it has been forced to redesign certain components for manufacture by
alternative suppliers. This redesigning was costly and caused delays in the
fabrication of the Company's prototype and delivery of its initial
multi-processor MTA system. There can be no assurance that these suppliers will
in the future be able to manufacture the components to the Company's design and
quantity specifications. Future manufacturing difficulties or limitations of the
suppliers could result in:
o substantial delays in the delivery of necessary hardware components to the
Company;
o a material and adverse affect on the Company's ability to complete and
deliver production models of the MTA system;
o a limitation on the number of MTA systems that can be produced using such
components to fill existing and future orders;
o unacceptably high prices for those components, with a resulting loss of
profitability or loss of competitiveness for the Company's products; and
o increased demands upon the Company's financial resources.
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 components to meet future production
and delivery schedules.
The Company is exposed to these additional risks based on its reliance on
third party suppliers:
o 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;
o 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;
o if a reduction or interruption of supply of the Company's components
occurred, 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; and
o if the Company were ever unable to locate a supplier for its components, it
would be unable to produce and deliver its products, which would materially
and adversely affect the Company's business and results of operations.
Future Capital Needs
During 1998 and 1999, the Company's working capital needs will depend
primarily upon the following:
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<PAGE>
o personnel costs (research and development, customer service, sales and
marketing and administration);
o the cost of inventory;
o manufacturing costs (capital expenditures, equipment leases);
o financing associated with the production and sale of MTA systems; and
o 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. 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 and 1999, even if revenues
are received from the sale of MTA systems when anticipated, in order to enhance
its financial position for future operations. Additional financings may not be
available to the Company when needed or, if available, may not be available on
satisfactory terms or may be dilutive to the Company's shareholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" in the 1997 10-K/A and Form 10-Q for
the Quarter Ended September 30, 1998.
Government Funding
The Company will initially target U.S. and foreign government agencies and
research laboratories for its sales. These entities make up more than 50% 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. If the U.S.
government or foreign governments were to reduce or delay funding of certain
high technology programs employing high performance computing, then one of the
Company's target markets would be adversely affected. The inability of U.S. and
foreign government agencies to procure additional very high performance computer
systems, due to lack of funding or for any other reason, would materially and
adversely affect the Company's business, results of operations and need for
capital.
Export Regulation
The U.S. government regulates the export of high performance computing
systems such as the anticipated MTA system. The Company's prospects for growth
will depend in part on its ability to obtain export licenses for the sale of the
MTA systems to foreign buyers, but there is no assurance that the U.S.
government will grant any such licenses. Delay or denial in granting such
licenses could materially and adversely affect the Company's business and
results of operations.
Marketing Risks
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 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.
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. The Company also plans to modify and port
third-party software applications to the MTA system to facilitate the expansion
of its potential markets. There can be no assurance that the Company will be
able to induce independent software vendors to port their applications, or that
the Company will successfully port third-party
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<PAGE>
applications to the MTA system, 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 manufacturing 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:
o to continue to improve its operational and financial systems;
o to motivate and effectively manage its employees;
o to implement new financial, budgeting and management information systems;
and
o to enhance internal control systems.
The Company's success will depend on management's ability to make these
changes and to manage the Company's operations effectively over the long term.
The Company's success also will depend in large part upon its ability:
o to attract and retain highly skilled technical personnel;
o to provide technological depth and support;
o to complete and enhance its first products;
o to develop new products; and
o to attract and retain marketing and sales personnel.
Competition for highly skilled management, technical, marketing and sales
personnel is intense. The Company may not succeed 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. The loss of either officer's services 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
If 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. This is due to 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:
o changes in levels of customer capital spending;
o the introduction or announcement of competitive products;
o the availability of components; or
o 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
Rapidly changing technology, accelerated product obsolescence and rapidly
changing industry standards characterize the Company's market. 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. The Company may not
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<PAGE>
succeed 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, products or technologies developed by others may render the Company's
products or technologies noncompetitive or obsolete. See "Business-High
Performance Computer Industry" and "-Competition" in the 1997 10-K/A.
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 Inc., a subsidiary of Silicon Graphics, Inc. Other
participants in the market include IBM Corporation and Japanese companies such
as NEC Corporation, Fujitsu, Ltd., and Hitachi, Ltd. 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 have developed or plan to develop massively parallel
systems for the high performance computer market. To date, this kind of system
architecture has been limited in applicability and difficult to program, but a
breakthrough in architecture or software technology could change this situation.
Such a breakthrough may occur and would materially and adversely affect the
Company's business and results of operations.
The performance of the MTA system may not be competitive with the computer
systems offered by the Company's competitors, and the Company may not 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. See "Business-Technology" and "-Competition" in the 1997 10-K/A.
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. In addition, the Company has several
patent applications pending and expects to file additional patent applications
in the future. There can be no assurance, however, that patents will be issued
from the pending applications or that any issued patent will protect adequately
those aspects of the Company's technology to which any such patents will relate.
Despite the Company's efforts to safeguard and maintain its proprietary rights,
there can be no assurance that the Company will succeed 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, third parties may 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,
even meritless claims require management attention and expense to the Company
that could materially and adversely affect the Company's business and results of
operations. See "Business-Intellectual Property" in the 1997 10-K/A.
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 succeed.
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
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the market price of the common stock. As of November 15, 1998, the Company had
outstanding:
o 13,497,107 shares of common stock;
o 1,785 shares of Series A Convertible Preferred Stock convertible into an
indeterminate number of shares of common stock;
o 6,000 shares of Series B Convertible Preferred Stock convertible into an
indeterminate number of shares of common stock; and
o privately placed warrants to purchase another 1,032,600 shares of common
stock.
Almost all of the Company's outstanding shares of common stock may be sold
without substantial restrictions. In addition, as November 15, 1998, the Company
had granted options under its option plans to purchase an aggregate of 2,637,844
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 preferred stock
or the exercise of the privately placed warrants, could depress prevailing
market prices for the common stock. Even the perception that such sales could
occur may impact market prices.
The existence of the preferred stock and the privately placed warrants and
the possibility of the issuance of Adjustment Shares 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. Such
factors could materially and adversely affect the Company's ability to meet its
capital needs.
Possible Volatility of Stock Price
The trading price of the Company's common stock could be subject to
significant fluctuations in response to:
o variations in quarterly operating results;
o changes in analysts' estimates;
o announcements of technological innovations by the Company or its
competitors;
o 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
particularly affect the market prices for small capitalization, high technology
companies. These fluctuations are often unrelated to their operating
performance.
Possible Illiquidity of Trading Market
The Company's common stock is quoted on the Nasdaq National Market (the
"National Market"). In order to remain listed on the National Market, the
Company must meet Nasdaq's listing maintenance standards. If the Company
continues to experience losses from operations, the price of the Company's
common stock falls below minimum price levels for an extended period, or the
Company is unable to continue to meet Nasdaq's standards for any other reason,
the common stock could be delisted from the National Market.
If the common stock is delisted, the Company likely will seek to list the
common stock on the Nasdaq SmallCap Market or for quotation on the American
Stock Exchange or a regional stock exchange. However, listing or quotation on
such market or exchange could reduce the liquidity of the market for the common
stock.
If the common stock were not listed or quoted on another market or
exchange, trading of the common stock would be conducted in the over-the-counter
market on an electronic bulletin board established for unlisted securities, 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 common stock. In addition, such delisting from the National
Market and failure to obtain listing or quotation on such other market or
exchange would subject the Company's securities to so-called "penny stock" rules
that impose additional sales
-10-
<PAGE>
practice and market-making requirements on broker-dealers who sell and/or make a
market in such securities. Consequently, removal from the National Market and
failure to obtain listing or quotation on another market or exchange could
affect the ability or willingness of broker-dealers to sell and/or make a market
in the common stock and the ability of purchasers of the common stock to sell
their securities in the secondary market. In addition, if the market price of
the 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 National Market. While
such penny stock rules should not affect the quotation of the Company's common
stock on the National Market, such rules may further limit the market liquidity
of the common stock and the ability of investors to sell the common stock 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 the Company. In addition,
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.
These factors could limit the price that certain investors might be willing
to pay in the future for shares of common stock.
Limitations on Liability and Indemnification Matters
As permitted by the Washington Business Corporation Act, the Company has
included in its Restated Articles of Incorporation a provision to eliminate the
personal liability of its directors for monetary damages for breach or alleged
breach of their fiduciary duties as directors, subject to certain exceptions. In
addition, the Bylaws of the Company provide that the Company is required to
indemnify its directors under certain circumstances, including those in which
indemnification would otherwise be discretionary, and the Company is required to
advance expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified.
-11-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998.
September 30,
1998 (1)
-------------
Long-term portion of capital leases ..............................$ 610,999
Shareholders' equity:
Preferred Stock, $.01 par value: 5,000,000 shares
authorized; issued and outstanding, 3,282 shares
of Series A Convertible and 6,000 shares of Series
B Convertible............................................... 8,784,990
Common Stock, $.01 par value:
25,000,000 shares authorized; issued and outstanding,
13,185,775 shares........................................... 64,590,707
Preferred Stock dividend distributable........................ 116,025
Accumulated deficit .......................................... (58,789,109)
------------
Total shareholders' equity ................................ 14,702,613
------------
Total capitalization .................................$ 15,313,612
============
- --------------
(1) Does not include (i) 2,639,229 shares issuable upon exercise of outstanding
stock options as of September 30, 1998 and (ii) 1,032,600 shares of common
stock currently issuable upon exercise of certain privately placed
warrants.
-12-
<PAGE>
SELLING SHAREHOLDERS
On September 30, 1998, each of the Selling Shareholders acquired 300,000
shares of common stock (the "Initial Shares") and warrants (the "Warrants") to
purchase 60,504 shares of common stock (the "September Private Placement").
Pursuant to the subscription agreement, the Company will be required to issue
Adjustment Shares to the Selling Shareholders if the "Adjustment Price" of the
Company's common stock (which is defined as the average of the closing bid
prices for the immediately preceding fifteen trading days) on February 22, 1999
(or such later date when the Registration Statement of which this Prospectus is
a part is declared effective), is less than $12.00. The Company will issue to
each Selling Shareholder the number of Adjustment Shares, if any, equal to (i)
the product of (x) the quotient obtained by dividing $12.00 by the Adjustment
Price and (y) the number of Initial Shares held by each Selling Shareholder on
such date, less (ii) such number of Initial Shares held by the Selling
Shareholder on such date. Additional Adjustment Shares will be required to be
issued every three months thereafter through September 30, 2001, based on a
similar formula if the Adjustment Price at the end of any such three month
period is lower than any previous Adjustment Price. The Adjustment Price is
subject to reduction under certain conditions primarily involving failure by the
Company to keep the Registration Statement of which this Prospectus forms a part
available for use for resales of the shares offered hereby. The Company may be
required to repurchase the Initial Shares, the Adjustment Shares and the shares
issued upon exercise of the Warrants under certain conditions, including a
default by the Company of its obligations under the subscription agreement, the
continued unavailability of the Registration Statement, and the absence of
reported prices for the Common Stock on the Nasdaq National Market or the Nasdaq
SmallCap Market; provided that the Company may elect not to repurchase such
shares if the circumstances triggering the repurchase obligation is not solely
within the control of the Company.
The Warrants are exercisable at $10.04 per share, which exercise price also
is subject to adjustment in certain circumstances. The Warrants contain
provisions which permit "cashless exercises" pursuant to which the holders may
surrender to the Company a number of underlying shares of common stock having a
market value equal to the aggregate exercise price of the Warrants being
exercised, reducing the total number of shares to be issued by the Company upon
exercise.
The following table sets forth certain information regarding the beneficial
ownership of the common stock by the Selling Shareholders and as adjusted to
give effect to the sale of the shares offered hereby:
<TABLE>
<CAPTION>
Shares Beneficially Beneficial Ownership
Owned Prior to Shares Being After Offering (3)
Selling Shareholder Offering (1) Offered (2) Shares Percent
- ------------------- ------------------- ------------ ------ ---------------------
<S> <C> <C> <C> <C>
Advantage Fund II Ltd. 1,089,288(4) 526,397 - 0 - n/a
Koch Industries, Inc. 360,504 526,397 - 0 - n/a
- --------------
(1) The number of shares of common stock shown as beneficially owned by the
Selling Shareholders represents (i) the number of shares issued in the September
Private Placement; (ii) the number of shares issuable upon exercise of the
Warrants; (iii) the number of shares issuable upon conversion of shares of
Series A Convertible Preferred Stock ("Series A Stock") and Series B Convertible
Preferred Stock ("Series B Stock") issued by the Company to Advantage in
December 1997 and June 1998, respectively, that were outstanding as of November
15, 1998 using an assumed conversion price of $7.8125 based on the conversion
provisions of the respective Statements of Rights and Preferences of the Series
A Stock and Series B Stock (which price is subject to fluctuation from time to
time based on changes in the market price of the common stock) and excluding
accrued dividends; (iv) the number of shares issuable upon the exercise of
common stock purchase warrants issued by the Company to Advantage in December
1997 and June 1998 that were
-13-
<PAGE>
outstanding as of November 15, 1998; and (v) other shares of common stock. Koch
does not own any shares of common stock or any securities convertible into or
exercisable for shares of common stock other than the securities acquired in the
September Private Placement.
Pursuant to the terms of the respective Statements of Rights and Preferences of
the Series A Stock and of the Series B Stock, and of the common stock purchase
warrants issued by the Company to Advantage in December 1997 and June 1998, the
Series A Stock and the Series B Stock are convertible by each holder thereof and
dividends thereon are payable in common stock, and such warrants are exercisable
for 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 Series A Stock and Series B Stock and
unexercised warrants), as determined in accordance with Sections 13(d) and 16 of
the Exchange Act, would not exceed 4.9% of the then outstanding shares of the
Company's common stock. Accordingly, the number of shares of common stock set
forth for Advantage may exceed the actual number of shares of common stock that
Advantage could own beneficially at any given time through its ownership of the
Series A Stock, the Series B Stock and warrants. The number of shares shown as
beneficially owned by the Selling Shareholders assume that the Selling
Shareholders will exercise all warrants for cash. If the Selling Shareholders
use the cashless exercise alternative, the actual number of shares of common
stock issued will be fewer, depending on the market value of the underlying
shares of common stock immediately prior to exercise.
(2) Represents (i) the number of shares of common stock sold to the Selling
Shareholders in the September Private Placement, (ii) the number of shares of
common stock issuable upon exercise of the Warrants issued to the Selling
Shareholders in the September Private Placement, and (iii) the initial number of
shares of common stock that the Company has agreed to register representing the
Adjustment Shares issuable to the Selling Shareholders. The actual number of
shares of common stock issuable as Adjustment Shares is subject to adjustment
depending upon factors that cannot be predicted currently by the Company,
including, among others, the future market prices of the common stock. Excludes
420,000 shares of common stock that the Company has registered in the
Registration Statement of which this Prospectus is a part to cover potential
future issuances of Adjustment Shares.
(3) Assumes sale of (i) all of the shares of common stock issuable upon
conversion of the Series A Stock and upon exercise of warrants that were
registered pursuant to and included in that certain Registration Statement on
Form S-3 (Registration No. 333-44137), (ii) all of the shares of common stock
issuable upon conversion of the Series B Stock and upon exercise of warrants
that were registered pursuant to and included in that certain Registration
Statement on Form S-3 (Registration No. 333-60167), and (iii) all of the shares
being offered hereby.
(4) As of November 15, 1998, Advantage held 1,515 shares of Series A Stock
convertible into 193,920 shares of common stock as of such date, 3,000 shares of
Series B Stock convertible into 384,000 shares of common stock as of such date,
313,364 shares of common stock, and warrants (including the Warrants)
exercisable for 198,004 shares of common stock.
</TABLE>
The Selling Shareholders and their respective 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 Shareholders may wish to be
legally permitted to sell their shares when they deem appropriate, the Company
agreed with the Selling Shareholders to file with the Commission, under the
Securities Act, a Registration Statement on Form S-3, of which this Prospectus
forms a part, with respect to the resale of the shares, and has agreed to
prepare and file such amendments and supplements to the Registration Statement
as may be necessary to keep the Registration Statement effective until the
shares are no longer required to be registered for the sale thereof by the
Selling Shareholders.
-14-
<PAGE>
PLAN OF DISTRIBUTION
The shares offered hereby by the Selling Shareholders 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 on one or more exchanges or
in the over-the-counter market (including the National 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 Shareholders
and purchasers. In addition, the Selling Shareholders 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 Shareholders 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 Shareholders, 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 Shareholders 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 Shareholders 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 Shareholders. The Selling Shareholders 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 Shareholders 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. 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
Shareholders, the purchasers participating in such transaction, or both. None of
the proceeds from the sale of the shares by the Selling Shareholders will be
received by the Company. The Company and the Selling Shareholders each have
agreed to indemnify the other against certain liabilities, including liabilities
arising under the Securities Act, that relate to statements or omissions in the
Registration Statement of which this Prospectus forms a part.
Any shares covered by this Prospectus that qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under such Rule rather pursuant to
this Prospectus.
-15-
<PAGE>
EXPERTS
The financial statements of the Company as of December 31, 1996 and 1997
and for each of the two 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.
-16-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
All expenses in connection with the issuance and distribution of the
securities being registered will be paid by the Company. The following is an
itemized statement of these expenses (all amounts are estimated except for the
SEC and Nasdaq listing fees):
SEC Registration fee................................ $ 3,160
Nasdaq listing fee.................................. $ 17,500
Legal fees.......................................... $ 15,000
Accountant's Fees................................... $ 1,000
Printing Fees....................................... $ 500
Miscellaneous....................................... $ 768
---------
Total............................................... $ 38,000
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.
-17-
<PAGE>
Item 16. Exhibits.
3.1 Restated Articles of Incorporation of the Company (1)
3.2 Restated Bylaws of the Company (1)
4.1 Subscription Agreement, dated as of September 30, 1998, by and between
the Registrant and each of Advantage Fund II Ltd. and Koch Industries,
Inc. (2)
4.2 Registration Rights Agreement, dated as of September 30, 1998, by and
between the Registrant and Advantage Fund II Ltd.
4.3 Registration Rights Agreement, dated as of September 30, 1998, by and
between the Registrant and Koch Industries, Inc.
4.4 Form of Warrant Issued by the Company to Advantage Fund II Ltd. and to
Koch Industries, Inc.
4.5 Amendment to Subscription Agreement, dated as of September 30, 1998,
by and between the Registrant and each of Advantage Fund II Ltd. and
Koch Industries, Inc. (2)
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
(2) Incorporated by reference to the Company's Form 10-Q for the Quarterly
Period Ended September 30, 1998.
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,
-18-
<PAGE>
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.
(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.
-19-
<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 November 24, 1998.
TERA COMPUTER COMPANY
By: /s/
-------------------------------------
James E. Rottsolk
Chief Executive Officer
KNOW ALL 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 24th day of November, 1998:
Signature and Title
- -------------------
/s/ BURTON J. SMITH /s/ DANIEL J. EVANS
- ---------------------------------- ----------------------------------
Burton J. Smith Daniel J. Evans, Director
Chairman of the Board of Directors
/s/ JAMES E. ROTTSOLK /s/ KENNETH W. KENNEDY
- ---------------------------------- ----------------------------------
James E. Rottsolk Kenneth W. Kennedy, Director
Chief Executive Officer and Director
/s/ KENNETH W. JOHNSON /s/ JOHN W. TITCOMB, JR.
- ---------------------------------- ----------------------------------
Kenneth W. Johnson John W. Titcomb, Jr., Director
Chief Financial Officer
/s/ DAVID N. CUTLER
- ----------------------------------
David N. Cutler, Director
-20-
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of September 30, 1998 (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 30, 1998, between the Initial Investor, another buyer of Common Stock
(the "Other Buyer"), 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 300,000
shares (the "Initial Shares") of Common Stock, $.01 par value (the "Common
Stock"), and warrants (the "Warrants") to purchase an aggregate of 60,504 shares
of Common Stock of the Company as provided in the Subscription Agreement;
WHEREAS, under the conditions set forth in the Subscription Agreement, the
Company may be obligated from time to time to issue to the Investor additional
shares of Common Stock (the "Adjustment Shares"); 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
Common Shares and the Warrant Shares (as such terms are defined in Section 1(a)
below);
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:
"Affiliate" means, with respect to any person, any other person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the subject person; for
purposes of this definition, "control" (including, with correlative
meanings, the terms "controlled by" and "under common control with"), as
used with respect to any person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of such person, whether through the ownership of voting
securities or by contract or otherwise.
<PAGE>
"Common Shares" means the Initial Shares and the Adjustment Shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"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) or
due to a transfer by the Investor contemplated by Section 10(g).
"Investors" 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.
"Nasdaq" means the Nasdaq National Market.
"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").
"Registrable Securities" means the Common Shares and the Warrant
Shares.
"Registration Period" means the period from the Closing Date to the
earliest of (i) the date which is three years after the date on which the
last Adjustment Shares may be issued pursuant to the Subscription
Agreement, (ii) the date on which each Investor may sell all of its
Registrable Securities (including Adjustment Shares which may be issued
pursuant to the Subscription Agreement) without registration under the
Securities Act pursuant to Rule 144, without restriction on the manner of
sale or the volume of securities which may be sold in any period and
without the requirement for the giving of any notice to, or the making of
any filing with, the SEC and (iii) the date on which the Investors no
longer beneficially own any Registrable Securities.
"Registration Statement" means a registration statement of the Company
under the Securities Act, including any amendment thereto.
"Rule 144" means Rule 144 as promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit
a holder of any securities to sell securities of the Company to the public
without registration under the Securities Act.
-2-
<PAGE>
"SEC Filing Date" means the date the Registration Statement is first
filed with the SEC pursuant to Section 2.
"Warrant Shares" means the shares of Common Stock issuable upon
exercise of the Warrants.
(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 Warrants.
2. Mandatory Registration for Resale.
(a) The Company shall prepare and, on or before October 20, 1998, file
with the SEC a Registration Statement on Form S-3, which on the SEC Filing Date
covers the resale of a number of shares of Common Stock equal to at least the
sum of (i) 150% of the number of Initial Shares, (ii) the number of Adjustment
Shares which would be required to be issued pursuant to the Subscription
Agreement with respect to the initial issuance of Adjustment Shares if the
Initial Adjustment Date was the SEC Filing Date, and (iii) the number of Warrant
Shares issuable to the Investors upon exercise of the Warrants. The Registration
Statement shall also cover the resale of shares of Common Stock issuable to the
Other Buyer consisting of (x) 300,000 shares of Common Stock and (y) 60,504
shares of Common Stock issuable upon the exercise of warrants, which shares are
required to be registered by the Company pursuant to an agreement dated the date
hereof in substantially the form of this Agreement. 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 Adjustment Shares or the number of shares of Common
Stock issuable upon exercise of unexercised Warrants, 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 cover such Adjustment Shares
and permit such exercises. For all purposes of this Agreement such additional
Registration Statement shall be deemed to be the Registration Statement required
to be filed by the Company pursuant to Section 2(a) of this Agreement, and the
Company and the Investors shall have the same rights and obligations with
respect to such additional Registration Statement as they shall have with
respect to the initial Registration Statement required to be filed by the
Company pursuant to this Section 2(a).
(b) 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
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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) The Company, without the prior consent of the holders of a
majority in interest of the outstanding Common Shares, will not file another
registration statement with the SEC covering shares of the Company's Common
Stock prior to the effectiveness of the Registration Statement described in
Section 2(a), other than Registration Statements on Forms S-4 or S-8.
(d) 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
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<PAGE>
from such registration.
(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 comparable 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 October 20,
1998, 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 during 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 two Business Days
after the submission of such request; notify the Investors of the effectiveness
of the Registration Statement on the date that the Company is advised by the SEC
that the Registration Statement has been declared effective; and the Company
represents and warrants to, and covenants and agrees with, the Investors that
the Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein), at the time it is first filed with the SEC, at
the time it is ordered effective by the SEC and at all 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 times 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
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<PAGE>
to state a material fact required to be stated therein, or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep 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 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 of
incorporation 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;
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<PAGE>
(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, file such supplement or amendment with the SEC at
such time as shall permit the Investors to sell Registrable Securities as
promptly as practicable, 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 October 20, 1998 or results in the
delay in the effective date thereof beyond the 90-day period specified in the
definition of "Reset Date" in Section 1 of the Subscription Agreement, the
October 20, 1998 filing deadline and such 90-day period shall be extended by the
amount of such resulting delay;
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<PAGE>
(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 an
underwritten public offering, addressed to the underwriters and the Investors;
(k) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement and 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 Investor 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 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
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<PAGE>
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 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, the American Stock Exchange or the Nasdaq SmallCap Market;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered and the managing underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts as the case may be, as the managing underwriter or underwriters, if
any, or the Investors may reasonably request and registered in such names as the
managing underwriter or underwriters, if any, or the Investors may request; and,
within three business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver 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 shall deliver to the Investors (with a copy to the Company's transfer agent)
an opinion of its general counsel, in the form attached hereto as Exhibit 2;
(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.
<PAGE>
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 but shall not
be relieved of its obligation to file a Registration Statement with the SEC
relating to the Registrable Securities of such Non-Responsive Investor promptly
after such Non-Responsive Investor provides the Requested Information;
(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 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
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<PAGE>
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; and
(f) Each Investor agrees that it will not effect any disposition of
the Registrable Securities except as contemplated in the Registration Statement
or as is otherwise in compliance with applicable securities laws and that it
will promptly notify the Company of any material change in the information set
forth in the Registration Statement regarding such Investor's plan of
distribution. Each Investor agrees (a) to notify the Company in writing in the
event that such Investor enters into any material agreement with a broker or a
dealer for the sale of the Registrable Securities through a block trade, special
offering or exchange distribution and (b) in connection with such agreement, to
provide to the Company in writing the information necessary to enable the
Company to prepare, at the Company's sole cost and expense, any supplemental
prospectus pursuant to Rule 424(c) under the 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; 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.
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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 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, the prospectus 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
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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 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
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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 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 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the amount by which the net amount of proceeds received by such seller from
the sale of such Registrable Securities exceeds the purchase price paid by such
seller for such Registrable Securities.
9. Reports under Exchange Act. With a view to making available to the
Investors the benefits of 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
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<PAGE>
(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.
10. Assignment of 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 (1) holds, or upon
such assignment will hold, at least 20% of the Registrable Securities (or
Warrants exercisable into 20% of the Registrable Securities) (or any equivalent
combination of Warrants and Registrable Securities) or (2) is an Affiliate of
such Investor 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) and the assignment is not made
pursuant to Section 2(c) of the Subscription Agreement, such assignee or
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. In connection with any
such assignment, each Investor shall have the right to assign to such transferee
such Investor's rights under the Subscription Agreement by notice of such
assignment to the Company. Following such notice of assignment of rights under
the Subscription Agreement, the Company shall be obligated to such transferee to
perform all of its covenants under the Subscription Agreement as if such
transferee were the Buyer under the Subscription Agreement.
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
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<PAGE>
Investors who hold or have the right to acquire 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.
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 or courier) or delivered by facsimile: (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: Christopher J. Voss, 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 sent by facsimile, upon
receipt of confirmation of successful transmission.
(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 Initial Shares, less all amounts received by the
Investors from market resales of shares of Common Stock as contemplated by this
Agreement.
(j) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
TERA COMPUTER COMPANY
By: /s/ JAMES E. ROTTSOLK
------------------------------------
Name: James E. Rottsolk
Title: President and
Chief Executive Officer
ADVANTAGE FUND II LTD.
By: /s/
-----------------------------------
Name:
Title:
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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) to issue shares (the "Underlying
Shares") of Common Stock to or upon the order of the holder from time to time
upon exercise of Common Stock purchase warrants exercisable for Common Stock,
issued by the Company upon receipt by you of a Form of Subscription 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 Underlying 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 Kenneth W. Johnson, general counsel to the
Company, as to registration of the resale of the Outstanding Shares and the
Underlying Shares under the Securities Act of 1933, as amended.
Should you have any questions concerning this matter, please contact me.
Very truly yours,
TERA COMPUTER COMPANY
By:
------------------------------------
Name:
Title:
Enclosures
cc: [Names of Investors]
1-19
<PAGE>
EXHIBIT 2
to
Registration Rights Agreement
[Date]
TERA COMPUTER COMPANY
Shares of Common Stock
To the Investors listed on Schedule A
ChaseMellon Shareholder Services, L.L.C.
as Transfer Agent and Registrar
520 Pike Street, Suite 1220
Seattle, WA 98101
Ladies and Gentlemen:
I have acted as counsel to Tera Computer Company, a Washington corporation
(the "Company"), and I understand that [Names of Investors] (the "Holders") have
purchased from the Company an aggregate of ____________ shares (the "Initial
Shares") of the Company's Common Stock, $.01 par value (the "Common Stock"), and
acquired warrants to purchase _______ shares of Common Stock (the "Warrants").
The Initial Shares were purchased and Warrants were acquired by the Holders
pursuant to the Subscription Agreement, dated as of September 30, 1998, by and
between each Holder and the Company (the "Subscription Agreement"). Pursuant to
the several Registration Rights Agreements, dated as of September 30, 1998, by
and between the Company and each Holder (the "Registration Rights Agreements")
entered into in connection with the purchase by the Holders of the Initial
Shares, the Company agreed with each Holder, among other things, to register for
resale the Initial Shares, the Adjustment Shares (as defined in the Subscription
Agreement) and the shares of Common Stock issuable upon and exercise of the
Warrants (collectively, the "Common Shares") under the Securities Act of 1933,
as amended (the "Securities Act"), upon the terms provided in the Registration
Rights Agreements. Pursuant to the Registration Rights Agreements, 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 Common Shares, which names the Holders as
selling shareholders thereunder.
I advise you that, on ________, 1998, the Registration Statement became
effective under the Securities Act with respect to the resale of the Common
Shares and Warrants held by or which may be issued to the Holders. Therefore, I
am of the opinion that the Common Shares
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<PAGE>
may be resold by the selling shareholders named in the Prospectus included in
the Registration Statement and the certificates evidencing the Common Shares
need not bear any Securities Act restrictive legend.
I have participated in the preparation of the Registration Statement and
the Prospectus, including review and discussions with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives at which the contents of
the Registration Statement and the Prospectus contained therein and related
matters were discussed, and, although I am not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus contained therein, on
the basis of the foregoing, nothing has come to our attention that leads us to
believe either that the Registration Statement at the time the Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus contained in
the Registration Statement, as of its date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that I have not
been requested to and do not express any view with respect to the financial
statements and schedules and other financial and statistical data included or
incorporated by reference in the Registration Statement or the Prospectus
contained therein).
Very truly yours,
2-21
<PAGE>
Schedule A
List of Investors
A-22
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of September 30, 1998 (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 30, 1998, between the Initial Investor, another buyer of Common Stock
(the "Other Buyer"), 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 300,000
shares (the "Initial Shares") of Common Stock, $.01 par value (the "Common
Stock"), and warrants (the "Warrants") to purchase an aggregate of 60,504 shares
of Common Stock of the Company as provided in the Subscription Agreement;
WHEREAS, under the conditions set forth in the Subscription Agreement, the
Company may be obligated from time to time to issue to the Investor additional
shares of Common Stock (the "Adjustment Shares"); 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
Common Shares and the Warrant Shares (as such terms are defined in Section 1(a)
below);
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:
"Affiliate" means, with respect to any person, any other person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the subject person; for
purposes of this definition, "control" (including, with correlative
meanings, the terms "controlled by" and "under common
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<PAGE>
control with"), as used with respect to any person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such person, whether through
the ownership of voting securities or by contract or otherwise.
"Common Shares" means the Initial Shares and the Adjustment Shares.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"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) or
due to a transfer by the Investor contemplated by Section 10(g).
"Investors" 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.
"Nasdaq" means the Nasdaq National Market.
"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").
"Registrable Securities" means the Common Shares and the Warrant
Shares.
"Registration Period" means the period from the Closing Date to the
earliest of (i) the date which is three years after the date on which the
last Adjustment Shares may be issued pursuant to the Subscription
Agreement, (ii) the date on which each Investor may sell all of its
Registrable Securities (including Adjustment Shares which may be issued
pursuant to the Subscription Agreement) without registration under the
Securities Act pursuant to Rule 144, without restriction on the manner of
sale or the volume of securities which may be sold in any period and
without the requirement for the giving of any notice to, or the making of
any filing with, the SEC and (iii) the date on which the Investors no
longer beneficially own any Registrable Securities.
"Registration Statement" means a registration statement of the Company
under the Securities Act, including any amendment thereto.
2
<PAGE>
"Rule 144" means Rule 144 as promulgated under the Securities Act or
any other similar rule or regulation of the SEC that may at any time permit
a holder of any securities to sell securities of the Company to the public
without registration under the Securities Act.
"SEC Filing Date" means the date the Registration Statement is first
filed with the SEC pursuant to Section 2.
"Warrant Shares" means the shares of Common Stock issuable upon
exercise of the Warrants.
(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 Warrants.
2. Mandatory Registration for Resale.
(a) The Company shall prepare and, on or before October 20, 1998, file
with the SEC a Registration Statement on Form S-3, which on the SEC Filing Date
covers the resale of a number of shares of Common Stock equal to at least the
sum of (i) 150% of the number of Initial Shares, (ii) the number of Adjustment
Shares which would be required to be issued pursuant to the Subscription
Agreement with respect to the initial issuance of Adjustment Shares if the
Initial Adjustment Date was the SEC Filing Date, and (iii) the number of Warrant
Shares issuable to the Investors upon exercise of the Warrants. The Registration
Statement shall also cover the resale of shares of Common Stock issuable to the
Other Buyer consisting of (x) 300,000 shares of Common Stock and (y) 60,504
shares of Common Stock issuable upon the exercise of warrants, which shares are
required to be registered by the Company pursuant to an agreement dated the date
hereof in substantially the form of this Agreement. 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 Adjustment Shares or the number of shares of Common
Stock issuable upon exercise of unexercised Warrants, 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 cover such Adjustment Shares
and permit such exercises. For all purposes of this Agreement such additional
Registration Statement shall be deemed to be the Registration Statement required
to be filed by the Company pursuant to Section 2(a) of this Agreement, and the
Company and the Investors shall have the same rights and obligations with
respect to such additional Registration Statement as they shall have with
respect to the initial Registration
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<PAGE>
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) The Company, without the prior consent of the holders of a
majority in interest of the outstanding Common Shares, will not file another
registration statement with the SEC covering shares of the Company's Common
Stock prior to the effectiveness of the Registration Statement described in
Section 2(a), other than Registration Statements on Forms S-4 or S-8.
(d) 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
4
<PAGE>
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.
(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 comparable 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 October 20,
1998, 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 during 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
5
<PAGE>
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 two Business Days after the submission of such request;
notify the Investors of the effectiveness of the Registration Statement on the
date that the Company is advised by the SEC that the Registration Statement has
been declared effective; and the Company represents and warrants to, and
covenants and agrees with, the Investors that the Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein), at the time it is first filed with the SEC, at the time it is ordered
effective by the SEC and at all 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 times during which it is available for use in
connection with the offer and sale of the Registrable Securities) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading;
(b) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep 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
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effect at all times during the Registration Period and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto (I) to qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 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 of
incorporation 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, file such supplement or amendment with the SEC at
such time as shall permit the Investors to sell Registrable Securities as
promptly as practicable, 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;
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(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 October 20, 1998 or results in the
delay in the effective date thereof beyond the 90-day period specified in the
definition of "Reset Date" in Section 1 of the Subscription Agreement, the
October 20, 1998 filing deadline and such 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 an
underwritten public offering, addressed to the underwriters and the Investors;
(k) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement and 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 Investor 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
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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 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 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, the American Stock Exchange or the Nasdaq SmallCap Market;
(m) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities not later than the effective date of the
Registration Statement;
(n) cooperate with the Investors who hold Registrable Securities being
offered and the managing underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be offered pursuant to the
Registration Statement and enable such certificates to be in such denominations
or amounts as the case may be, as the managing underwriter or underwriters, if
any, or the Investors may reasonably request and registered in such names as the
managing underwriter or underwriters, if any, or the Investors may request; and,
within three business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the Company shall
deliver to the transfer agent for the Registrable Securities (with
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<PAGE>
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 shall deliver to the Investors (with a copy to the Company's
transfer agent) an opinion of its general counsel, in the form attached hereto
as Exhibit 2;
(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 but shall not
be relieved of its obligation to file a Registration Statement with the SEC
relating to the Registrable Securities of such Non-Responsive Investor promptly
after such Non-Responsive Investor provides the Requested Information;
(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
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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 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; and
(f) Each Investor agrees that it will not effect any disposition of
the Registrable Securities except as contemplated in the Registration Statement
or as is otherwise in compliance with applicable securities laws and that it
will promptly notify the Company of any material change in the information set
forth in the Registration Statement regarding such Investor's plan of
distribution. Each Investor agrees (a) to notify the Company in writing in the
event that such Investor enters into any material agreement with a broker or a
dealer for the sale of the Registrable Securities through a block trade, special
offering or exchange distribution and (b) in connection with such agreement, to
provide to the Company in writing the information necessary to enable the
Company to prepare, at the Company's sole cost and expense, any
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<PAGE>
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; 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 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
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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, the prospectus 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 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
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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 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.
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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 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the amount by which the net amount of proceeds received by such seller from
the sale of such Registrable Securities exceeds the purchase price paid by such
seller for such Registrable Securities.
9. Reports under Exchange Act. With a view to making available to the
Investors the benefits of 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.
10. Assignment of 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 (1) holds, or upon
such assignment will hold, at least 20% of the Registrable Securities (or
Warrants exercisable into 20% of the Registrable Securities) (or any equivalent
combination of Warrants and Registrable Securities) or (2) is an Affiliate of
such Investor 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
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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) and the
assignment is not made pursuant to Section 2(c) of the Subscription Agreement,
such assignee or 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. In connection with any such assignment, each Investor shall have
the right to assign to such transferee such Investor's rights under the
Subscription Agreement by notice of such assignment to the Company. Following
such notice of assignment of rights under the Subscription Agreement, the
Company shall be obligated to such transferee to perform all of its covenants
under the Subscription Agreement as if such transferee were the Buyer under the
Subscription Agreement.
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 or have the right to
acquire 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.
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 or courier) or delivered by facsimile: (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,
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Washington 98101, Attention: Christopher J. Voss, facsimile no. (206) 386-7500;
(ii) if to the Initial Investor, Koch Industries, Inc., 4111 East 37th Street
North, Wichita, KS 67270, Attn: Mr. Josh Taylor, facsimile No. (316) 828-7947;
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 sent by facsimile,
upon receipt of confirmation of successful transmission.
(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.
(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
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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 Initial Shares, less
all amounts received by the Investors from market resales of shares of Common
Stock as contemplated by this Agreement.
(j) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
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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
KOCH INDUSTRIES, INC.
By: /s/
------------------------------------
Name: ______________________________
Title: _____________________________
19
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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) to issue shares (the "Underlying
Shares") of Common Stock to or upon the order of the holder from time to time
upon exercise of Common Stock purchase warrants exercisable for Common Stock,
issued by the Company upon receipt by you of a Form of Subscription 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 Underlying 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 Kenneth W. Johnson, general counsel to the
Company, as to registration of the resale of the Outstanding Shares and the
Underlying Shares under the Securities Act of 1933, as amended.
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Should you have any questions concerning this matter, please contact me.
Very truly yours,
TERA COMPUTER COMPANY
By:
------------------------------------
Name: ______________________________
Title: _____________________________
Enclosures
cc: [Names of Investors]
21
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EXHIBIT 2
to
Registration Rights Agreement
[Date]
TERA COMPUTER COMPANY
To the Investors listed on Schedule A
ChaseMellon Shareholder Services, L.L.C.
as Transfer Agent and Registrar
520 Pike Street, Suite 1220
Seattle, WA 98101
Ladies and Gentlemen:
I have acted as counsel to Tera Computer Company, a Washington corporation
(the "Company"), and understand that [Names of Investors] (the "Holders") have
purchased from the Company an aggregate of 600,000 shares (the "Initial Shares")
of the Company's Common Stock, $.01 par value (the "Common Stock"), and acquired
warrants to purchase 121,008 shares of Common Stock (the "Warrants"). The
Initial Shares were purchased and Warrants were acquired by the Holders pursuant
to the Subscription Agreement, dated as of September 30, 1998, by and between
each Holder and the Company (the "Subscription Agreement"). Pursuant to the
several Registration Rights Agreements, dated as of September 30, 1998, by and
between the Company and each Holder (the "Registration Rights Agreements")
entered into in connection with the purchase by the Holders of the Initial
Shares, the Company agreed with each Holder, among other things, to register for
resale the Initial Shares, the Adjustment Shares (as defined in the Subscription
Agreement) and the shares of Common Stock issuable upon and exercise of the
Warrants (collectively, the "Common Shares") under the Securities Act of 1933,
as amended (the "Securities Act"), upon the terms provided in the Registration
Rights Agreements. Pursuant to the Registration Rights Agreements, 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 Common Shares, which names the Holders as
selling shareholders thereunder.
I advise you that, on ________, 1998, the Registration Statement became
effective under the Securities Act with respect to the resale of the Common
Shares and Warrants held by or which may be issued to the Holders. Therefore, I
am of the opinion that the Common Shares may be resold by the selling
shareholders named in the Prospectus included in the Registration
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Statement and the certificates evidencing the Common Shares need not bear any
Securities Act restrictive legend.
I have participated in the preparation of the Registration Statement and
the Prospectus, including review and discussions with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives at which the contents of
the Registration Statement and the Prospectus contained therein and related
matters were discussed, and, although I am not passing upon and do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus contained therein, on
the basis of the foregoing, nothing has come to my attention that leads me to
believe either that the Registration Statement at the time the Registration
Statement became effective contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or that the Prospectus contained in
the Registration Statement, as of its date, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that I have not
been requested to and do not express any view with respect to the financial
statements and schedules and other financial and statistical data included or
incorporated by reference in the Registration Statement or the Prospectus
contained therein).
Very truly yours,
23
<PAGE>
Schedule A
List of Investors
24
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. THE SALE TO THE HOLDER OF
THIS SECURITY OF THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS
SECURITY ARE NOT COVERED BY A REGISTRATION STATEMENT UNDER THE ACT OR
REGISTRATION UNDER STATE SECURITIES LAWS. THIS SECURITY HAS BEEN ACQUIRED, AND
SUCH SHARES OF COMMON STOCK MUST BE ACQUIRED, FOR INVESTMENT ONLY AND MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF REGISTRATION OF THE RESALE
THEREOF OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE IN FORM, SCOPE AND
SUBSTANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase 60,504 Shares of Common Stock of Tera Computer Company
TERA COMPUTER COMPANY
Common Stock Purchase Warrant
No. WY1
TERA COMPUTER COMPANY, a Washington corporation (the "Company"), hereby
certifies that, for value received, ADVANTAGE FUND II LTD., or registered
assigns (the "Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time after the date
hereof, and before 5:00 p.m., New York City time, on the Expiration Date (as
defined herein), 60,504 fully paid and nonassessable shares of Common Stock,
$.01 par value, of the Company at a purchase price per share equal to the
Purchase Price (as hereinafter defined). The number of such shares of Common
Stock and the Purchase Price are subject to adjustment as provided in this
Warrant.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Business Day" as used herein shall mean a day on which
the New York Stock Exchange is open for business.
(b) The term "Common Stock" includes the Company's Common Stock, $.01
par value per share, as authorized on the date hereof, and any other
securities into which
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or for which the Common Stock may be converted or exchanged pursuant to
a plan of recapitalization, reorganization, merger, sale of assets or
otherwise.
(c) The term "Company" shall include Tera Computer Company and any
corporation that shall succeed to or assume the obligations of Tera
Computer Company hereunder.
(d) The term "Expiration Date" refers to September 28, 2003.
(e) The term "Other Securities" refers to any capital stock (other
than Common Stock) and other securities of the Company or any other person
(corporate or otherwise) which the Holder of this Warrant at any time shall
be entitled to receive, or shall have received, on the exercise of this
Warrant, in lieu of or in addition to Common Stock, or which at any time
shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 4.
(f) The term "Purchase Price" shall mean $10.04, subject to adjustment
as provided in this Warrant.
1. Exercise of Warrant.
1.1 Exercise at Option of Holder. This Warrant may be exercised by the
Holder hereof in full or in part at any time or from time to time during the
exercise period specified in the first paragraph hereof until the Expiration
Date by surrender of this Warrant and the subscription form annexed hereto (duly
executed by such Holder) to the Company's transfer agent and registrar for the
Common Stock and by making payment, in cash or by certified or official bank
check payable to the Company, or by wire transfer to an account designated by
the Company, in the amount obtained by multiplying (1) the number of shares of
Common Stock designated by the Holder in the subscription form by (2) the
Purchase Price then in effect. On any partial exercise the Company will
forthwith issue and deliver to or upon the order of the Holder hereof a new
Warrant or Warrants of like tenor, in the name of the Holder hereof or as such
Holder (upon payment by such Holder of any applicable transfer taxes) may
request, providing in the aggregate on the face or faces thereof for the
purchase of the number of shares of Common Stock for which such Warrant or
Warrants may still be exercised.
1.2 Net Issuance. Notwithstanding anything to the contrary contained
in Section 1.1, the Holder may elect to exercise this Warrant in whole or in
part by receiving shares of Common Stock equal to the net issuance value (as
determined below) of this Warrant, or any part hereof, upon surrender of this
Warrant at the principal office of the Company together with
2
<PAGE>
the subscription form annexed hereto (duly executed by the Holder), in which
event the Company shall issue to the Holder a number of shares of Common Stock
computed using the following formula:
X = Y (A-B)
-------
A
Where: X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock as to which this Warrant
is to be exercised
A = the current fair market value of one share of Common Stock
calculated as of the last trading day immediately preceding
the exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of Common Stock as of a specified
date shall mean with respect to each share of Common Stock the average of the
closing bid prices of the Common Stock on the principal securities market on
which the Common Stock may at the time be traded over a period of five Business
Days consisting of the day as of which the current fair market value of a share
of Common Stock is being determined (or if such day is not a Business Day, the
Business Day next preceding such day) and the four consecutive Business Days
prior to such day. If on the date for which current fair market value is to be
determined the Common Stock is not eligible for trading on any securities
market, the current fair market value of Common Stock shall be the highest price
per share which the Company could then obtain from a willing buyer (other than a
current employee or director) for shares of Common Stock sold by the Company,
from authorized but unissued shares, as determined in good faith by the Board of
Directors of the Company, unless prior to such date the Company has become
subject to a merger, acquisition or other consolidation pursuant to which the
Company is not the surviving party, in which case the current fair market value
of the Common Stock shall be deemed to be the value received by the holders of
the Company's Common Stock for each share thereof pursuant to the Company's
acquisition.
2. Delivery of Stock Certificates, etc., on Exercise. As soon as
practicable after the exercise of this Warrant, and in any event within three
Business Days thereafter, the Company at its expense (including the payment by
it of any applicable issue or stamp taxes) will cause to be issued in the name
of and delivered to the Holder hereof, or as such Holder (upon payment by such
Holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of fully paid and nonassessable shares of Common
Stock (or Other Securities)
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<PAGE>
to which such Holder shall be entitled on such exercise, in such denominations
as may be requested by such Holder, plus, in lieu of any fractional share to
which such Holder would otherwise be entitled, cash equal to such fraction
multiplied by the then current fair market value (as determined in accordance
with subsection 1.2) of one full share, together with any other stock or other
securities or property (including cash, where applicable) to which such Holder
is entitled upon such exercise pursuant to Section 1 or otherwise. Upon exercise
of this Warrant as provided herein, the Company's obligation to issue and
deliver the certificates for Common Stock shall be absolute and unconditional,
irrespective of any action or inaction by the 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 Company to the Holder,
or any setoff, counterclaim, recoupment, limitation or termination, or any
breach or alleged breach by the Holder or any other person of any obligation to
the Company or any violation or alleged violation of law by the Holder or any
other person, and irrespective of any other circumstance which might otherwise
limit such obligation of the Company to the Holder in connection with such
exercise. If the Company fails to issue and deliver the certificates for the
Common Stock to the Holder pursuant to the first sentence of this paragraph as
and when required to do so, in addition to any other liabilities the Company may
have hereunder and under applicable law, the Company shall pay or reimburse the
Holder on demand for all out-of-pocket expenses including, without limitation,
fees and expenses of legal counsel incurred by the Holder as a result of such
failure.
3. Adjustment for Dividends in Other Stock, Property, etc.;
Reclassification, etc. In case at any time or from time to time, all the holders
of Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of shareholders eligible to receive)
shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of earnings
or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder of this Warrant, on the
exercise hereof as provided in Section 1, shall be entitled to receive the
amount of stock and other securities and property (including cash in the cases
referred to in subdivisions (b) and (c) of this Section 3) which such Holder
would hold on
4
<PAGE>
the date of such exercise if on the date hereof the Holder had been the holder
of record of the number of shares of Common Stock called for on the face of this
Warrant and had thereafter, during the period from the date hereof to and
including the date of such exercise, retained such shares and all such other or
additional stock and other securities and property (including cash in the case
referred to in subdivisions (b) and (c) of this Section 3) receivable by the
Holder as aforesaid during such period, giving effect to all adjustments called
for during such period by Section 4.
4. Exercise upon Reorganization, Consolidation, Merger, etc. In case at any
time or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person, (c) effect an exchange of
outstanding shares of the Company for securities of any other person or (d)
transfer all or substantially all of its properties or assets to any other
person under any plan or arrangement contemplating the dissolution of the
Company, then, in each such case, as a condition of such reorganization,
consolidation, merger, share exchange, sale or conveyance, the Company shall
cause effective provisions to be made so that the Holder shall have the right
thereafter, by exercising this Warrant (in lieu of the shares of Common Stock of
the Company purchasable and receivable upon exercise of the rights represented
hereby immediately prior to such transaction) to purchase the kind and amount of
shares of stock and other securities and property (including cash) receivable
upon such reorganization, consolidation, merger, share exchange, sale or
conveyance by a holder of the number of shares of Common Stock that might have
been received upon exercise of this Warrant immediately prior to such
reorganization, consolidation, merger, share exchange, sale or conveyance;
provided, however, that in the event (x) the value of the stock, securities or
other assets or property (determined in good faith by the Board of Directors of
the Company) issuable or payable with respect to one share of Common Stock of
the Company purchasable and receivable upon the exercise of the rights
represented hereby immediately prior to such transaction is in excess of the
Purchase Price hereof in effect at the time of such reorganization,
consolidation, merger, share exchange, sale or conveyance (after giving effect
to any adjustment in such Purchase Price required to be made under the terms of
this Warrant), and (y) the securities, if any, to be received in such
reorganization, consolidation, merger, share exchange, sale or conveyance are
publicly traded, then if the Company gives the Holder at least 20 Business Days
(or such lesser period as the Company gives notice of such transaction to the
holders of the outstanding shares of Common Stock) prior notice of such
reorganization, merger, share exchange, sale or conveyance this Warrant shall
expire unless exercised prior to such reorganization, consolidation, merger,
share exchange, sale or conveyance. Any such provision shall include provisions
for adjustments in respect of such shares of stock and other securities and
property that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Warrant. The provisions of this Section shall
apply to successive reorganizations, consolidations, mergers, share exchanges,
sales and conveyances.
5
<PAGE>
5. Adjustment for Extraordinary Events. In the event that the Company shall
(a) issue additional shares of the Common Stock as a dividend or other
distribution on outstanding Common Stock, (b) subdivide or reclassify its
outstanding shares of Common Stock, or (c) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the Purchase Price in effect immediately prior
to such event by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock outstanding
immediately after such event, and the product so obtained shall thereafter be
the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be
readjusted in the same manner upon the happening of any successive event or
events described herein in this Section 5. The Holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive that number of shares of Common Stock determined by multiplying the
number of shares of Common Stock which would be issuable on such exercise as of
immediately prior to such issuance by a fraction of which (x) the numerator is
the Purchase Price in effect immediately prior to such issuance and (y) the
denominator is the Purchase Price in effect on the date of such exercise.
6. Further Assurances. The Company will take all action that may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock, free from all taxes, liens and
charges with respect to the issue thereof, on the exercise of all or any portion
of this Warrant from time to time outstanding.
7. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend on, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all
or substantially all of the assets of the Company to or consolidation or
merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and
6
<PAGE>
character of such dividend, distribution or right; (ii) the date on which any
such reorganization, reclassification, recapitalization, transfer,
consolidation, merger, dissolution, liquidation or winding-up is to take place,
and the time, if any is to be fixed, as of which the holders of record of Common
Stock (or Other Securities) shall be entitled to exchange their shares of Common
Stock (or Other Securities) for securities or other property deliverable on such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up; and (iii) the amount and
character of any stock or other securities, or rights or options with respect
thereto, proposed to be issued or granted, the date of such proposed issue or
grant and the persons or class of persons to whom such proposed issue or grant
is to be offered or made. Such notice shall also state that the action in
question or the record date is subject to the effectiveness of a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
or a favorable vote of shareholders, if either is required. Such notice shall be
mailed at least ten days prior to the date specified in such notice on which any
such action is to be taken or the record date, whichever is earlier.
8. Reservation of Stock, etc., Issuable on Exercise of Warrants. The
Company will at all times reserve and keep available, solely for issuance and
delivery on the exercise of this Warrant, all shares of Common Stock (or Other
Securities) from time to time issuable on the exercise of this Warrant.
9. Transfer of Warrant. This Warrant shall inure to the benefit of the
successors to and assigns of the Holder. This Warrant and all rights hereunder,
in whole or in part, is registrable at the office or agency of the Company
referred to below by the Holder hereof in person or by his duly authorized
attorney, upon surrender of this Warrant properly endorsed.
10. Register of Warrants. The Company shall maintain, at the principal
office of the Company (or such other office as it may designate by notice to the
Holder hereof), a register in which the Company shall record the name and
address of the person in whose name this Warrant has been issued, as well as the
name and address of each successor and prior owner of such Warrant. The Company
shall be entitled to treat the person in whose name this Warrant is so
registered as the sole and absolute owner of this Warrant for all purposes.
11. Exchange of Warrant. This Warrant is exchangeable, upon the surrender
hereof by the Holder hereof at the office or agency of the Company referred to
in Section 10, for one or more new Warrants of like tenor representing in the
aggregate the right to subscribe for and purchase the number of shares of Common
Stock which may be subscribed for purchase hereunder, each of such new Warrants
to represent the right to subscribe for and purchase such number of shares as
shall be designated by said Holder hereof at the time of such surrender.
12. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such
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loss, theft or destruction of this Warrant, on delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of this
Warrant, the Company at its expense will execute and deliver, in lieu thereof, a
new Warrant of like tenor.
13. Warrant Agent. Promptly following the issuance of this Warrant, the
Company will instruct ChaseMellon Shareholder Services, L.L.C. (the "Transfer
Agent") to act as the exercise agent for the purpose of issuing Common Stock (or
Other Securities) on the exercise of this Warrant pursuant to Section 1. The
Company may, by written notice to the Holder, appoint an agent having an office
in the United States of America, for the purpose of issuing Common Stock (or
Other Securities) on the exercise of this Warrant pursuant to Section 1,
exchanging this Warrant pursuant to Section 11, and replacing this Warrant
pursuant to Section 12, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such
office by such agent.
14. Remedies. The Company stipulates that the remedies at law of the Holder
of this Warrant in the event of any default or threatened default by the Company
in the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate, and that such terms may be specifically enforced
by a decree for the specific performance of any agreement contained herein or by
an injunction against a violation of any of the terms hereof or otherwise.
15. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the Holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the Holder hereof to purchase Common Stock, and no mere enumeration
herein of the rights or privileges of the Holder hereof, shall give rise to any
liability of such Holder for the Purchase Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
16. Notices, etc. All notices and other communications from the Company to
the registered Holder of this Warrant shall be mailed by first class certified
mail, postage prepaid, at such address as may have been furnished to the Company
in writing by such Holder or at the address shown for such Holder on the
register of Warrants referred to in Section 10.
17. Investment Representations. By acceptance of this Warrant, the Holder
represents to the Company that this Warrant is being acquired for the Holder's
own account and for the purpose of investment and not with a view to, or for
sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling the Warrant or the Common Stock issuable
upon exercise of the Warrant. The Holder acknowledges that the Holder has been
afforded the opportunity to meet with the management of the Company and to ask
questions of, and receive answers from, such management and the Company's
counsel about the
8
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business and affairs of the Company and concerning the terms and conditions of
the offering of this Warrant, and to obtain any additional information, to the
extent that the Company possessed such information or could acquire it without
unreasonable effort or expense, necessary to verify the accuracy of the
information otherwise obtained by or furnished to the Holder in connection with
the offering of this Warrant. The Holder asserts that it may be considered to be
a sophisticated investor, is familiar with the risks inherent in speculative
investments such as in the Company, has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the investment in this Warrant and the Common Stock issuable upon
exercise of this Warrant, and is able to bear the economic risk of the
investment. The Holder acknowledges and agrees that this Warrant and, except as
otherwise provided in the Registration Rights Agreement between the original
Holder of this Warrant and the Company, as amended or modified from time to time
(the "Registration Rights Agreement"), the shares of Common Stock issuable upon
exercise of this Warrant (if any) have not been (and at the time of acquisition
by the Holder, will not have been or will not be) registered under the
Securities Act or under the securities laws of any state, in reliance upon
certain exemptive provisions of such statutes. The Holder recognizes and
acknowledges that such claims of exemption are based, in part, upon the
representations of the Holder contained herein. The Holder further recognizes
and acknowledges that because this Warrant and, except as provided in the
Registration Rights Agreement, the Common Stock issuable upon exercise of this
Warrant (if any) are unregistered, they may not be eligible for resale, and may
only be resold in the future pursuant to an effective registration statement
under the Securities Act and any applicable state securities laws, or pursuant
to a valid exemption from such registration requirements. Unless the shares of
Common Stock have theretofore been registered for resale or are otherwise exempt
from registration under the Securities Act, the Company may require, as a
condition to the issuance of Common Stock upon the exercise of this Warrant (i)
in the case of an exercise in accordance with Section 1.1 hereof, a confirmation
as of the date of exercise of the Holder's representations pursuant to this
Section 17 or (ii) in the case of an exercise in accordance with Section 1.2
hereof, an opinion of counsel (in form, scope and substance reasonably
satisfactory to the Company) that the shares of Common Stock to be issued upon
such exercise may be issued without registration under the Securities Act.
18. Legend. Unless theretofore registered for resale under the Securities Act or
otherwise exempt from registration under the Securities Act when issued upon
exercise of this Warrant and when resold thereafter, each certificate for shares
issued upon exercise of this Warrant shall bear the following legend:
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,
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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
reasonably satisfactory in form, scope and substance to the
Company that registration is not required under said Act.
19. Miscellaneous. This Warrant and any terms hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement or such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the internal laws of the State of Washington. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
IN WITNESS WHEREOF, Tera Computer Company has caused this Warrant to be
executed on its behalf by one of its officers thereunto duly authorized.
Dated: September 30, 1998 TERA COMPUTER COMPANY
By:
------------------------------------
Kenneth W. Johnson
Chief Financial Officer
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FORM OF SUBSCRIPTION
COMMON STOCK PURCHASE WARRANT
OF TERA COMPUTER COMPANY
(To be signed only on exercise of Warrant)
TO: ChaseMellon Shareholder Services, LLC,
as Exercise Agent
520 Pike Street
Suite 1220
Seattle, Washington 98101
1. The undersigned Holder of the attached original, executed Warrant hereby
elects to exercise its purchase right under such Warrant with respect to
______________ shares of Common Stock, as defined in the Warrant, of Tera
Computer Company, a Washington corporation (the "Company").
2. The undersigned Holder (check one):
o (a) elects to pay the aggregate purchase price for such shares of
Common Stock (i) by lawful money of the United States or the enclosed
certified or official bank check payable in United States dollars to
the order of the Company in the amount of $___________, or (ii) by
wire transfer of United States funds to the account of the Company in
the amount of $____________, which transfer has been made before or
simultaneously with the delivery of this Form of Subscription pursuant
to the instructions of the Company;
or
o (b) elects to receive shares of Common Stock having a value equal to
the value of the Warrant calculated in accordance with Section 1.2 of
the Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the undersigned or
in such other names as is specified below:
Name: _________________________________
Address: ______________________________
______________________________
Dated: ________________ _____________________________________
(Signature must conform to name of Holder
as specified on the face of the Warrant)
_________________________________________
_________________________________________
(Address)
11
November 24, 1998
Board of Directors of
Tera Computer Company
Dear Sirs:
I have supervised the corporate proceedings relative to the issuance of
600,000 shares (the "Shares") of common stock,$.01 par value (the "Common
Stock"), and warrants to purchase 121,008 shares of common stock (the
"Warrants"), of Tera Computer Company, a Washington corporation (the "Company"),
and of the authorization of shares of Common Stock issuable upon exercise of the
Warrants and upon certain adjustments ("Adjustment Shares") as set forth in
Section 3 of the Subscription Agreement, dated September 30, 1998, between the
Company and Advantage Fund II Ltd. and Koch Industries, Inc.
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 incorporated and validly existing
under the laws of the State of Washington, with full corporate power to issue
the Shares and the Warrants, and to issue the Common Stock reserved for issuance
upon exercise of the Warrants and as Adjustment Shares.
2. The Shares have been duly authorized by appropriate corporate action and
are validly issued, fully paid, and nonassessable.
3. The shares of Common Stock issuable upon exercise of the Warrants and as
Adjustment Shares have been duly authorized and reserved for such purpose by
appropriate corporate action. The shares of Common Stock issuable upon exercise
of the Warrants will be validly issued, fully paid, and nonassessable upon such
exercise.
Very truly yours,
/s/ KENNETH W. JOHNSON
Kenneth W. Johnson, Esq.
Vice President - Finance
and General Counsel
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement on
Form S-3 of Tera Computer Company of our reports dated January 21, 1998 and
November 13, 1998 as to Note 13 (which expresses an unqualified opinion and
includes an explanatory paragraph relating to the restatement described in Note
13), appearing in the Annual Report on Form 10-K/A of Tera Computer Company for
the year ended December 31, 1997, and to the reference to Deloitte & Touche LLP
under the heading "Experts" in the Prospectus, which is part of this
Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
November 23, 1998
