<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
CHECK THE APPROPRIATE BOX:
[ ] PRELIMINARY PROXY STATEMENT
[X] DEFINITIVE PROXY STATEMENT
[ ] DEFINITIVE ADDITIONAL MATERIALS
[ ] SOLICITING MATERIAL PURSUANT TO RULE 14a-11(c) OR RULE 14a-12
[ ] CONFIDENTIAL, FOR THE USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14a-6(e)(2))
TERA COMPUTER COMPANY
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] NO FEE REQUIRED
[ ] FEE COMPUTED ON TABLE BELOW PER EXCHANGE ACT RULES 14a-6(i)(4) AND 0-11.
(1) TITLE OF EACH CLASS OF SECURITIES TO WHICH TRANSACTION APPLIES:
------------------------------------------------------------------------
(2) AGGREGATE NUMBER OF SECURITIES TO WHICH TRANSACTION APPLIES:
------------------------------------------------------------------------
(3) PER UNIT PRICE OR OTHER UNDERLYING VALUE OF TRANSACTION COMPUTED
PURSUANT TO EXCHANGE ACT RULE 0-11 (SET FORTH THE AMOUNT ON WHICH THE
FILING FEE IS CALCULATED AND STATE HOW IT WAS DETERMINED):
------------------------------------------------------------------------
(4) PROPOSED MAXIMUM AGGREGATE VALUE OF TRANSACTION:
------------------------------------------------------------------------
<PAGE> 2
(5) TOTAL FEE PAID:
------------------------------------------------------------------------
[ ] FEE PAID PREVIOUSLY WITH PRELIMINARY MATERIALS
[ ] CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY EXCHANGE ACT
RULE 0-11(a)(2) AND IDENTIFY THE FILING FOR WHICH THE OFFSETTING FEE WAS
PAID PREVIOUSLY. IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT
NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS FILING.
(1) AMOUNT PREVIOUSLY PAID:
------------------------------------------------------------------------
(2) FORM, SCHEDULE OR REGISTRATION STATEMENT NO.:
------------------------------------------------------------------------
(3) FILING PARTY:
------------------------------------------------------------------------
(4) DATE FILED:
------------------------------------------------------------------------
2
<PAGE> 3
NOTICE OF 1999 ANNUAL MEETING
Dear Tera Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Tera Computer Company which will be held on the 7th floor of our new offices,
located at Merrill Place, 411 First Avenue South, Seattle, Washington
98104-2860, on May 5, 1999 at 2:00 p.m.
At this year's meeting, shareholders will have the opportunity to vote on the
following matters:
- Election of two directors to serve three-year terms;
- Approval of an amendment to our Restated Articles of Incorporation;
- Approval of a new 1999 Stock Option Plan;
- Approval of an amendment to our 1995 Stock Option Plan; and
- Any other business that may properly come before the meeting.
If you were a shareholder of record on March 8, 1999, you will be entitled to
vote on these matters.
At the meeting, management will review Tera's performance during the past
year and comment on the Company's outlook. You will have an opportunity to ask
questions about Tera and its operations.
Regardless of the number of shares you own, your vote is important. Please
sign and return the proxy card in the enclosed envelope at your earliest
convenience.
Details of the business to be conducted are more fully described in the
accompanying Proxy Statement.
We look forward to seeing you. Thank you for your ongoing support of and
interest in Tera.
Sincerely,
James E. Rottsolk
Chief Executive Officer
and President
Seattle, Washington
April 5, 1999
<PAGE> 4
PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING ..................................... 1
INFORMATION ABOUT TERA COMMON STOCK OWNERSHIP ....................................... 4
INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS 5
The Board of Directors .............................................................. 5
The Committees of the Board ......................................................... 6
How We Compensate Directors ......................................................... 7
The Executive Officers .............................................................. 7
How We Compensate Executive Officers ................................................ 7
STOCK PERFORMANCE GRAPH .............................................................13
DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD ....................................14
Proposal 1: Election of Two Directors ...............................................14
Proposal 2: Approve an Amendment to the Restated Articles of Incorporation...........16
Proposals 3 and 4 Pertaining to the Company's Stock Option Plans.....................17
Other Business.......................................................................22
INFORMATION ABOUT SHAREHOLDER PROPOSALS AND
NOMINATING DIRECTOR CANDIDATES ....................................................22
Shareholder Proposals................................................................22
Director Candidates..................................................................23
EXHIBIT A: 1999 STOCK OPTION PLAN
</TABLE>
- --------------------------------------------------------------------------------
IMPORTANT
Whether or not you expect to attend in person, we urge you to sign, date, and
return the enclosed Proxy at your earliest convenience. This will ensure the
presence of a quorum at the meeting. Promptly signing, dating, and returning the
Proxy will save the Company the expenses and extra work of additional
solicitation. An addressed envelope for which no postage is required if mailed
in the United States is enclosed for that purpose. Sending in your Proxy will
not prevent you from voting your stock at the meeting if you desire to do so, as
your Proxy is revocable at your option.
- --------------------------------------------------------------------------------
i
<PAGE> 5
TERA COMPUTER COMPANY
411 FIRST AVENUE SOUTH, SUITE 600
SEATTLE, WASHINGTON 98104-2860
PROXY STATEMENT FOR ANNUAL MEETING
OF SHAREHOLDERS
MAY 5, 1999
INFORMATION ABOUT THE ANNUAL MEETING AND VOTING
Q: Why did you send me this proxy statement?
A: We sent you this Proxy Statement and the enclosed proxy card because Tera's
Board of Directors is soliciting your proxy to vote at the 1999 Annual Meeting
of Shareholders.
This Proxy Statement summarizes the information regarding the matters to be
voted upon at the Annual Meeting. You do not need to attend the Annual Meeting,
however, to vote your shares. You may simply complete, sign and return the
enclosed proxy card.
We began sending this Proxy Statement out on or about April 5, 1999 to all
shareholders entitled to vote. If you owned shares of our common stock at the
close of business on March 8, 1999, our record date, you are entitled to vote
those shares. On the record date, there were 14,328,701 shares of Tera common
stock outstanding, our only class of voting stock.
Q: How many votes do I have?
A: You have one vote for each share of Tera common stock that you owned on the
record date. The proxy card will indicate the number.
Q: How do I vote by proxy?
A: If you properly fill in your proxy card and send it to us in time to vote,
your "proxy" (one of the individuals named on your proxy card) will vote your
shares as you have directed. If you sign the proxy card but do not make specific
choices, your proxy will vote your shares as recommended by the Board as
follows:
- "FOR" electing both nominees for Director,
- "FOR" approving the amendment to our Restated Articles of
Incorporation,
- "FOR" approving our 1999 Stock Option Plan, and
- "FOR" approving the amendment to our 1995 Stock Option Plan.
<PAGE> 6
If any other matter is presented, your proxy will vote in accordance with his
best judgment. At the time we printed this Proxy Statement, we knew of no
matters which needed to be acted on at the Annual Meeting, other than those
discussed in this Proxy Statement.
Q: May I revoke my proxy?
A: Yes. You may change your mind after you send in your proxy card by following
these procedures. To revoke your proxy:
1. Send in another signed proxy with a later date;
2. Send a letter revoking your proxy to Tera's Secretary at the Company's
offices in Seattle, Washington; or
3. Attend the Annual Meeting and vote in person.
Q: What is the quorum requirement for the meeting?
A: The quorum requirement for holding the meeting and transacting business is a
majority of the outstanding shares entitled to be voted. The shares may be
present in person or represented by proxy at the meeting. Both abstentions and
broker non-votes are counted as present for the purpose of determining the
presence of a quorum. Generally, broker non-votes occur when shares held by a
broker for a beneficial owner are not voted with respect to a particular
proposal because (1) the broker has not received voting instructions from the
beneficial owner, or (2) the broker lacks discretionary voting power to vote
such shares.
Q: How do I vote in person?
A: If you plan to attend the Annual Meeting and vote in person, we will give you
a ballot when you arrive. If your shares are held in the name of your broker,
bank or other nominee, you must bring an account statement or letter from the
nominee. The account statement or letter must show that you were the direct or
indirect (beneficial) owner of the shares on March 8, 1999, the record date for
voting.
Q: What vote is required to approve each proposal?
PROPOSAL 1: ELECTION OF TWO DIRECTORS
The two nominees for Director who receive the most votes will be
elected. Accordingly, if you do not vote for a nominee, or you indicate
"withhold authority to vote" for a nominee on your proxy card, your vote
will not count either "for" or "against" the nominee.
PROPOSAL 2: AMENDING OUR RESTATED ARTICLES OF INCORPORATION
2
<PAGE> 7
The affirmative vote of a majority of the outstanding shares of Tera
common stock entitled to vote is required to approve the amendment to
our Restated Articles of Incorporation to increase the number of
authorized shares of common stock from 25 million to 50 million shares.
If you do not vote, or if you abstain from voting, it has the same
effect as if you voted against the proposal.
PROPOSAL 3: APPROVING OUR 1999 STOCK OPTION PLAN
A majority of the shares of Tera common stock voting at the Annual
Meeting is required to approve the 1999 Stock Option Plan. If you do
not vote, or if you abstain from voting, it has no effect on this vote.
PROPOSAL 4: APPROVING THE AMENDMENT TO OUR 1995 STOCK OPTION PLAN
A majority of the shares of Tera common stock voting at the Annual
Meeting is required to approve the amendment to our 1995 Stock Option
Plan. Accordingly, if you do not vote, or if you abstain from voting, it
has no effect on this vote.
THE EFFECT OF BROKER NON-VOTES
Under the rules of the National Association of Securities Dealers, if
your broker holds your shares in its "street" name, the broker may vote
your shares on Proposal 1 even if it does not receive instructions from
you. Your broker may not vote on Proposals 2, 3 or 4 unless it receives
instructions from you.
A broker non-vote would have no effect on the outcome of Proposal 1,
because only a plurality of votes cast is required to elect a director.
A broker non-vote for Proposal 2 would have the same effect as a vote
against this proposal. Broker non-votes will not be voted for or
against Proposals 3 and 4 and will have no effect on the outcome of
these proposals.
Broker non-votes will be counted for the purpose of determining the
presence of a quorum.
Q: Who will count the vote?
A: Representatives of ChaseMellon Shareholder Services, our transfer agent,
will serve as the inspector of elections and count the votes.
Q: Is voting confidential?
A: We keep all the proxies, ballots and voting tabulations private as a matter
of practice. We only let our Inspectors of Election (ChaseMellon Shareholder
Services) examine these documents. We will not disclose your vote to management
unless it is necessary to meet legal requirements. We will forward to
management, however, any written comments that you make on the proxy card or
elsewhere.
Q: Who pays the costs of soliciting these proxies?
A: We will pay all the costs of soliciting these proxies. Although we are
mailing these proxy materials, our officers and employees may also solicit
proxies by telephone, by fax or other electronic means of communication, or in
person. We will reimburse banks, brokers, nominees and other fiduciaries for the
expenses they incur in forwarding the proxy materials to you. W. F. Doring & Co.
may help solicit proxies for an approximate cost of $3,000.00 plus reasonable
expenses.
3
<PAGE> 8
Q: Who will be the Company's independent auditors for 1999?
A: The Board of Directors has appointed the firm of Deloitte & Touche LLP,
certified public accountants, to serve as the Company's auditors for 1999.
Deloitte & Touche LLP has served as the Company's auditors since 1987.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting, and will have an opportunity to make a statement and to respond
to appropriate questions.
Q: Who should I call if I have any questions?
A: If you have any questions about the Annual Meeting or voting, or your
ownership of Tera common stock, please contact Kenneth W. Johnson, our
Secretary, at (206) 701-2000. Mr. Johnson's email is "[email protected]."
INFORMATION ABOUT TERA COMMON STOCK OWNERSHIP
Q: How much stock is owned by 5% shareholders, directors and executive officers?
A: The following table shows, as of March 8, 1999, the number of shares of Tera
common stock beneficially owned by all persons we know to be beneficial owners
of at least 5% of Tera's common stock, Tera's directors, the executive officers
named in the Summary Compensation Table and all directors and executive officers
as a group.
<TABLE>
<CAPTION>
UNEXERCISED TOTAL
OPTIONS AND SHARES
NAME COMMON SHARES CONVERTIBLE BENEFICIALLY
AND ADDRESS* OWNED SECURITIES OWNED (1)(2) PERCENTAGE
- -------------------------- --------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
5% SHAREHOLDERS
William T. Frantz 1,604,663 314,175 1,918,838 13.1
P. O. Box 3965
Bellevue, WA 98009
INDEPENDENT DIRECTORS
David N. Cutler 5,360 26,596 31,956 **
Daniel J. Evans 20,325 19,500 39,825 **
Kenneth W. Kennedy -- 34,183 34,183 **
John W. Titcomb, Jr 189,801 37,733 227,534 1.6
NAMED EXECUTIVES
Burton J. Smith 265,737 153,726 419,463 2.9
James E. Rottsolk 274,386 145,779 420,165 2.9
Kenneth W. Johnson 17,008 39,374 56,382 **
Gerald E. Loe 23,417 82,911 106,328 **
Brian D. Koblenz 19,867 59,992 79,859 **
All Directors and
Executive officers
as a group (11 persons) 834,314 634,782 1,469,096 9.8
</TABLE>
- --------------
* Unless otherwise indicated, all addresses are c/o Tera Computer Company, 411
First Avenue South, 600, Seattle, WA 98104-2860
** Less than 1%
4
<PAGE> 9
(1) This table is based upon information supplied by the named executive
officers, directors and principal shareholders. Unless otherwise indicated
in these notes and subject to community property laws where applicable,
each of the listed shareholders has sole voting and investment power with
respect to the shares shown as beneficially owned by such shareholder. The
number of shares and percentage of beneficial ownership includes shares of
common stock issuable pursuant to stock options, warrants and convertible
notes held by the person or group in question which may be exercised or
converted on March 8, 1999 or within 60 days thereafter.
(2) The following persons disclaim beneficial ownership of the following shares:
- Mr. Titcomb disclaims beneficial ownership of 14,946 shares as to which
he has voting and dispositive powers as a trustee of a trust for his
children under the Washington Uniform Gifts to Minors Act.
- Mr. Rottsolk disclaims beneficial ownership of 1,698 shares as to which
he has voting and dispositive powers as custodian for six nieces and
nephews under the Washington Uniform Gifts to Minors Act.
- Mr. Johnson disclaims beneficial ownership of 2,600 shares as to which
he has voting and dispositive powers as a trustee of trusts for his
children.
Q: Did directors, executive officers and greater-than-10% shareholders comply
with Section 16(a) beneficial ownership reporting in 1998?
A: Section 16(a) of the Securities Exchange Act of 1934 requires that our
directors, executive officers and greater-than-10% shareholders file reports
with the SEC on their initial beneficial ownership of Tera common stock and any
subsequent changes. They must also provide us with copies of the reports.
We are required to tell you in the Proxy Statement if we know about any failure
to report as required. We reviewed copies of all reports furnished to us and
obtained written representations that no other reports were required. Based on
this, we believe that all of these reporting persons complied with their filing
requirements for 1998, except that Mr. Kennedy and Mr. Russell each filed one
report late.
INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS
THE BOARD OF DIRECTORS
The Board of Directors oversees the business and affairs of Tera and
monitors the performance of management. In accordance with corporate governance
principles, the Board does not involve itself in day-to-day operations. The
directors keep themselves informed through discussions with the Chairman and
President, other key executives and our principal external advisers (legal
counsel and outside
5
<PAGE> 10
auditors), by reading the reports and other materials that we send them
regularly and by participating in Board and committee meetings.
The Board met four times during 1998. Each director attended at least 75% of
the meetings of the Board and committees on which they serve.
THE COMMITTEES OF THE BOARD
The Board has an Audit Committee and a Compensation Committee. None of the
Directors who serve as members of these committees is, or has ever been, an
employee or Tera. In addition the Board has established an Executive Committee.
There is no standing nominating or other committee that recommends qualified
candidates to the Board for election as Directors. The entire Board performs
these duties. In addition, our By-laws provide a procedure for you to recommend
candidates for director at an Annual Meeting. For more information, see below at
page 22 under "Information about Shareholder Proposals and Nominating Director
Candidates."
THE AUDIT COMMITTEE. The Audit Committee meets with financial management and the
independent auditors and recommends the selection of the independent auditors to
the Board, approves the scope of the annual audit by the independent auditors,
and reviews audit findings and accounting policies.
Messrs. Evans and Titcomb currently serve on the Audit Committee, with Mr. Evans
serving as Chairman. The Audit Committee met 4 times during 1998.
THE COMPENSATION COMMITTEE. The Compensation Committee reviews the compensation
of the Chairman and Chief Executive Officer and approves the elements of
compensation for the other executive officers. The Compensation Committee
administers Tera's stock option plans and grants options to the executive
officers. The Compensation Committee evaluates existing and proposed employee
benefit plans and may propose plan changes to the Board.
Each year, as the SEC requires, the Compensation Committee reports to you on
executive compensation. The Compensation Committee's Report on Executive
Compensation for 1998 is set forth below beginning on page 11.
Messrs. Cutler, Evans and Kennedy currently serve as members of the Compensation
Committee, with Mr. Cutler serving as Chairman. The Compensation Committee met
twice during 1998.
THE EXECUTIVE COMMITTEE. This Committee meets or takes written action when the
Board is not otherwise meeting. The Executive Committee has the same level of
authority as the full Board, except that it cannot amend Tera's By-laws,
recommend any action that requires the approval of the shareholders or take any
other action not permitted to be delegated to a committee under Washington law.
Messrs. Smith and Rottsolk serve on the Executive Committee, with Mr. Smith
serving as Chairman. The Executive Committee did not formally meet in 1998.
6
<PAGE> 11
HOW WE COMPENSATE DIRECTORS
We do not provide cash compensation to directors for serving on the Board or
committees. We reimburse the directors for travel and related expense incurred
in attending Shareholder, Board and committee meetings.
STOCK OPTION AWARDS. In 1995, the shareholders approved the 1995 Independent
Director Stock Option Plan. Under this plan, each independent director, upon
election to the Board, receives a ten-year option to purchase 4,500 shares of
common stock, vesting over three years. The exercise price of this option is the
market price of our common stock on the date of the grant.
Subject to approval by the shareholders of the 1999 Stock Option Plan,
the Board has terminated the 1995 Independent Director Stock Option Plan. The
Board plans to grant to each independent director, upon election, options for
18,000 shares, vesting over three years and with an exercise price equal to
market value of the common stock on the date of the Shareholders' Meeting at
which the director is elected. The increase in the number of shares of the
grant largely reflects the growth in the number of shares of common stock
outstanding from 1995. If the shareholders approve the 1999 Stock Option Plan,
Mr. Kennedy would receive such an option upon his election to the Board. For
further information, see the discussion about Proposal 3 under "Discussion of
Proposals Recommended by the Board" beginning on page 17.
In addition, again subject to approval by the shareholders of the 1999 Stock
Option Plan, the Board granted options under that Plan for 15,000 shares to each
independent director on February 3, 1999. These options will vest in full upon
approval by the shareholders and are exercisable at $6.125 per share, the market
price of our common stock on February 3, 1999.
THE EXECUTIVE OFFICERS
HOW WE COMPENSATE EXECUTIVE OFFICERS
The tables on pages 8 through 10 show salaries, bonuses and other
compensation paid during the last three years, options granted in 1998, and
option values as of year-end 1998 for our Chief Executive Officer and our next
four most highly compensated executive officers.
7
<PAGE> 12
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPEN-
--------------------------------------------- SATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS OTHER (2)
- ---------------------------------- --------- -------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Burton J. Smith ...................... 1998 $188,750 $ -- 100,000 $ 3,220
Chairman of the Board 1997 177,500 22,077 -- 4,733
and Chief Scientist 1996 150,000 -- 250,000 3,085
James E. Rottsolk .................... 1998 188,750 -- 100,000 2,970
President and 1997 177,500 22,077 -- 3,078
Chief Executive Officer 1996 150,000 -- 250,000 2,970
Kenneth W. Johnson ................... 1998 154,375 -- 30,000 3,220
Vice President - Finance 1997(3) 43,750 -- 90,000 --
and Chief Financial Officer
Gerald E. Loe ........................ 1998 138,550 -- 30,000 1,620
Vice President - Hardware 1997 124,667 15,331 -- 1,044
1996 110,000 -- 40,000 720
Brian D. Koblenz ..................... 1998 138,125 -- 40,000 3,220
Vice President - Software 1997 123,333 15,331 -- 2,192
1996 105,000 -- 40,000 3,095
</TABLE>
- --------------
(1) Bonuses are shown when accrued. The 1997 bonuses were paid in 1998. No
executive bonuses were declared for 1996 or 1998.
(2) Includes premiums for group term life insurance policies payable for each of
the executive officers and the Company's contributions to a 401(k) savings
plan.
(3) Mr. Johnson joined the Company in September 1997.
8
<PAGE> 13
OPTION GRANTS IN 1998
The following table provides information on option grants in fiscal 1998 to
each of the executive officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES EXERCISE PRESENT
GRANTED IN FISCAL PRICE EXPIRATION VALUE
NAME (1) YEAR(2) PER SHARE DATE (3)
- -------------------- ----------- ------------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
Burton J. Smith 100,000 13.9% $ 8.75 8/5/2008 $777,170
James E. Rottsolk 100,000 13.9% 8.75 8/5/2008 777,170
Kenneth W. Johnson 30,000 4.2% 8.75 8/5/2008 233,151
Gerald E. Loe 30,000 4.2% 8.75 8/5/2008 233,151
Brian D. Koblenz 40,000 5.6% 8.75 8/5/2008 310,868
</TABLE>
- --------------
(1) The options granted in 1998 are exercisable 25% after the first year, and
thereafter become exercisable ratably thereafter per month over the next 36
months. Vesting is accelerated upon death or permanent disability and certain
circumstances following a change of control. Generally, all of the executive
officers' options will expire ten years from the date of grant or earlier if
employment terminates.
(2) Tera granted options for 720,050 shares to employees in 1998.
(3) Tera used a modified Black-Scholes model of option valuation to determine
grant date present value. Tera does not advocate or necessarily agree that the
Black-Scholes model can properly determine the value of an option.
Calculations for the named officers are based on an expected 9.64-year option
term. Other assumptions used for the valuations are:
- interest rate of 5.4%;
- annual dividend yield of 0%; and
- volatility of 93.52%.
We did not adjust the model for non-transferability, risk of forfeiture or
vesting restrictions. The actual value, if any, an executive officer receives
from a stock option will depend upon the amount by which the market value of
Tera common stock exceeds the exercise price of the option on the date of
exercise. There can be no assurance that the amount stated as "Grant Date
Present Value" will be realized.
9
<PAGE> 14
AGGREGATED OPTION VALUES AS OF YEAR-END 1998
The following table provides information concerning the value of unexercised
options held by the officers named in the Summary Compensation Table at December
31, 1998. None of these officers exercised any stock options in 1998.
<TABLE>
<CAPTION>
SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
NAME DECEMBER 31, 1998 DECEMBER 31, 1998 (1)
- ----------------------- -------------------------------------- -------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Burton J. Smith 137,060 225,003 $159,917 $ 93,752
James E. Rottsolk 137,628 225,003 160,468 93,752
Kenneth W. Johnson 29,999 90,001 22,499 45,001
Gerald E. Loe 80,244 50,001 290,302 15,001
Brian D. Koblenz 57,325 60,001 94,689 15,001
</TABLE>
- --------------
(1) This value represents the difference between $6.25, the closing price of
Tera common stock on the Nasdaq National Market System on December 31, 1998, and
the exercise price of stock options which were then "in-the-money."
"In-the-money" stock options are options for which the exercise price is less
than the market price of the underlying stock on a particular date.
MANAGEMENT CONTINUATION AGREEMENTS
The Company recently entered into Management Continuation Agreements with
certain of its employees, including the executive officers named in the Summary
Compensation Table.
Pursuant to these agreements, each such officer or employee is eligible to
receive, in the event that his or her employment is terminated within three
years following a change-of-control of the Company, other than for just cause,
death, disability, retirement or resignation other than for good reason, as such
terms are defined in the agreement, an amount equal to two times his or her
annual compensation, continuation of health benefits and group term life
insurance for twenty-four months thereafter and the acceleration of vesting for
all options held. If these severance payments were to constitute "excess
parachute payments" for federal income tax purposes, the Company has agreed to
pay any excise taxes due with respect to those "excess parachute payments," and
any further excise taxes and federal and state income taxes due with respect to
these additional payments, so that the employee receives the same after-tax
compensation the employee would have received had the tax provisions regarding
such parachute payments not been enacted.
For purposes of these agreements, "annual compensation" means wages, salary
and incentive compensation for 1999 or, if later, the calendar year immediately
preceding the year in which the above-described severance payment becomes
payable. A "change-of-control" includes (i) a merger or acquisition of the
Company resulting in a 50% or greater change in the total voting power of the
Company immediately following such transaction, or (ii) certain changes in the
majority composition of the Board of Directors during a thirty-six month period,
not initiated by the Board of Directors.
10
<PAGE> 15
CERTAIN TRANSACTIONS
In connection with exercises of stock options by Mr. Loe in 1997, the
Company has loaned him a total of $154,608.34 pursuant to a promissory note
currently bearing interest at a per annum rate of 4.33%. The note is due in
December 1999 and is secured by a pledge of shares of the Company's stock. The
Company's rights to payment are not limited to that pledge.
In February and March 1999, the Company raised funds in a private financing
through the sale of 8% convertible notes due March 31, 2001. The notes are
convertible into shares of common stock at a conversion price of $5.00 per
share, the market price for the common stock when the offering began. In
addition, each investor receives a five-year warrant to purchase 3,000 shares of
common stock exercisable at $5.00 per share for each $100,000 invested. Certain
of the Company's 5% shareholders, directors and executive officers have
purchased these notes, on the same terms as other investors, as follows: Mr.
Frantz - $1,000,000; Mr. Evans - $50,000; Mr. Titcomb - $100,000; and Mr.
Johnson - $100,000.
REPORT ON EXECUTIVE COMPENSATION FOR 1998
BY THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
setting and administering the policies governing annual compensation of the
executive officers, including the annual management bonus plan and the Company's
stock option plans. The Compensation Committee is composed exclusively of
directors who are neither employees nor former employees of the Company nor
eligible to participate in any of the Company's executive compensation programs
other than the 1999 Stock Option Plan.
PHILOSOPHY. The Committee's compensation philosophy is to provide salary,
bonus and equity incentives to the Company's officers and other employees
through programs designed to attract and retain the best personnel to allow the
Company to achieve its goals and maintain its competitive posture. The Company
seeks to foster an environment that rewards superior performance and aligns the
interests of employees to those of the shareholders through equity incentives.
ANNUAL SALARY AND BONUS PLAN. At the beginning of every year, the
Compensation Committee reviews with the Chief Executive Officer and approves,
with modifications it deems appropriate, an annual compensation plan for the
Company's executive officers. In making individual base salary decisions, the
Compensation Committee considers each officer's duties, the quality of the
individual's performance, the individual's potential, market compensation
practices, the contribution the officer has made to the Company's overall
performance, and the financial status of the Company. The Compensation Committee
also compares the salary of each officer with other officers' salaries, taking
into account the number of years employed by the Company, the possibility of
future promotions and the extent and frequency of prior salary adjustments.
The Company's bonus plan is a material element of the annual compensation
program for the Company's executive officers and other key employees. The 1998
plan proposed bonuses as a percentage of salary based upon the Company achieving
certain specified goals regarding revenues, bookings and stock market
performance of the Company's common stock, with a discretionary element
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<PAGE> 16
depending upon how each officer met certain individual performance goals. No
bonuses were awarded for 1998. The 1999 plan is similarly structured.
EQUITY. In determining the amount of equity compensation to be awarded to
executive officers in any fiscal year, the Compensation Committee considers the
current stock ownership of the officer, relevant industry experience, the impact
of the officer's contribution, the number of years each officer has been
employed by the Company, the possibility of future promotions, and the extent
and frequency of prior option grants. Options have been granted subject to four
and five year vesting periods to encourage the officers and key employees to
remain in the employ of the Company.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER. The Compensation Committee reviews and
sets the base salary of Mr. Rottsolk, the President and Chief Executive Officer,
and Mr. Smith, the Chairman and Chief Scientist, using the same process as with
other executive officers as well as an assessment of their past performances,
and its expectations as to their future performances in leading the Company and
its business. Messrs. Rottsolk and Smith participate in the bonus and stock
option plans on the same basis as with the other executive officers. As
co-founders and the principal executives of the Company, it is anticipated that
their compensation will remain equal in amount.
Section 162(m) of the Internal Revenue Code limits to $1 million per person
the amount that the Company may deduct for compensation paid to any of its most
highly compensated officers in any year. The levels of salary and bonus paid by
the Company do not exceed this limit. Under IRS regulations, the $1 million
limit on deductibility does not apply to compensation received through the
exercise of stock options that meet certain requirements. It is the Company's
current policy generally to grant options that meet those requirements.
The Compensation Committee
David N. Cutler
Daniel J. Evans
Kenneth W. Kennedy
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total return to shareholders for
Tera common stock with the comparable return of the Nasdaq Stock Market (U.S.
companies) Index and the Nasdaq Computer Manufacturer Stock Index.
The graph assumes that you invested $100 in Tera common stock on September
26, 1995, the date on which Tera common stock was first quoted, and that all
dividends were reinvested. The Company has not
12
<PAGE> 17
paid cash dividends on its common stock. All return information is historical
and is not necessarily indicative of future performance.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
TERA COMPUTER COMPANY COMMON STOCK, THE NASDAQ
MARKET (U.S.) INDEX AND THE NASDAQ COMPUTER MANUFACTURER
STOCKS INDEX THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
9/26/95 12/29/95 12/31/96 12/31/97 12/31/98
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Tera Computer Company 100 73.47 63.27 248.98 102.04
Nasdaq Market (US) 100 101.22 124.47 152.70 214.65
Nasdaq Computer
Manufacturer Stocks 100 102.14 136.94 165.66 360.33
</TABLE>
DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD
PROPOSAL 1: ELECTION OF TWO DIRECTORS
Six directors, divided into three classes, presently serve on our Board of
Directors for three year terms. Four of these six directors will continue to
serve according to their previous elections. Two directors, Messrs. Kennedy and
Rottsolk, are nominees for reelection, each to hold office until the Annual
Meeting in 2002.
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<PAGE> 18
We know of no reason why any nominee may be unable to serve as a director.
If any nominee is unable to serve, your proxy may vote for another nominee
proposed by the Board, or the Board may reduce the number of directors to be
elected. If any director resigns, dies or is otherwise unable to serve out his
term, or the Board increases the number of directors, the Board may fill the
vacancy until the next Annual Meeting.
NOMINEES FOR DIRECTORS FOR TERMS EXPIRING IN 2002
KENNETH W. KENNEDY
Mr. Kennedy, 53, joined the Board of Directors in 1989. Mr. Kennedy is the
Ann and John Doerr Professor of Computational Engineering and Director of the
Center for Research on Parallel Computation at Rice University, an NSF Science
and Technology Center that includes seven participating institutions and six
affiliated sites across the country. Since February 1997, Professor Kennedy has
served as Co-Chairman of the President's Information Technology Advisory
Committee. He is a fellow of the Institute of Electrical and Electronics
Engineers, the Association for Computing Machinery, and the American Association
for the Advancement of Science and has been a member of the National Academy of
Engineering since 1990. In recognition of his contributions to software for high
performance computation, he received the 1995 W. Wallace McDowell Award, the
highest research award of the IEEE Computer Society. In 1999, he was named
recipient of the ACM SIGPLAN Programming Languages Achievement Award, the third
time this award was given. He received his M.S. and Ph.D. from New York
University.
JAMES E. ROTTSOLK
Mr. Rottsolk, 54, is a co-founder of the Company and has served as its Chief
Executive Officer since its inception. Prior to co-founding Tera in 1987, Mr.
Rottsolk served as an executive officer with several high technology companies.
Mr. Rottsolk received his A.M. and J.D. degrees from the University of Chicago.
The Board of Directors recommends that you vote "FOR" the election of both
nominees for Director.
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<PAGE> 19
CONTINUING DIRECTORS
Information about each of our continuing Directors is set forth below:
DIRECTORS WHOSE TERMS EXPIRE IN 2000
BURTON J. SMITH
Mr. Smith, 58, has been the Chairman of the Board and Chief Scientist since the
Company's inception. He is a recognized authority on high performance computer
architecture and programming languages for parallel computers, and is the
principal architect of the MTA system. Prior to co-founding Tera, Mr. Smith was
a Fellow of the Supercomputing Research Center (now Center for Computing
Sciences), a division of the Institute for Defense Analyses, from 1985 to 1988.
He was honored in 1990 with the Eckert-Mauchly Award given jointly by the
Institute for Electrical and Electronic Engineers and the Association for
Computing Machinery, and was elected a Fellow of both organizations in 1994. Mr.
Smith received his S.M., E.E. and Sc.D. degrees from the Massachusetts Institute
of Technology.
JOHN W. TITCOMB, JR.
Mr. Titcomb, 48, joined the Board of Directors in 1991. During the last
seven years he has been a private investor and serves as a director of several
privately held companies involved in various technology, manufacturing and real
estate businesses. Mr. Titcomb received his A.B. and J.D. degrees from Harvard
University.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
DAVID N. CUTLER
Mr. Cutler, 57, became a member of the Company's Board of Directors in 1993.
Mr. Cutler joined Microsoft Corporation in 1988 as Engineering Manager of
Operating System Development and has been responsible for Windows NT
development. Prior to joining Microsoft, he was Senior Corporate Consultant at
Digital Equipment Corporation. During his tenure at Digital, he managed DecWest
in Bellevue, Washington, which produced the VAXELN operating system and the
first Microvax computer. He previously managed the development of VMS and RSX 11
M, principal operating systems for Digital computers.
DANIEL J. EVANS
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<PAGE> 20
Mr. Evans, 73, became a member of the Company's Board of Directors in 1990.
Since 1989, Mr. Evans has been Chairman of Daniel J. Evans Associates, a
consulting firm. He served as United States Senator from the State of Washington
from 1983 to 1989; Chairman, the Pacific Northwest Power and Conservation
Planning Council from 1981 to 1983; President of the Evergreen State College in
Olympia, Washington from 1977 to 1983; and for three terms as Governor of the
State of Washington from 1965 to 1977. Mr. Evans is a Director of Puget Sound
Energy, Inc.; Burlington Northern/Santa Fe, Inc.; Washington Mutual Bank; Flow
International Corporation; Western Wireless, Inc., and Attachmate Corporation.
He is also President of the Board of Regents of the University of Washington.
Mr. Evans received his M.S. degree in civil engineering from the University of
Washington.
PROPOSAL 2: APPROVE AN AMENDMENT TO OUR RESTATED ARTICLES OF INCORPORATION.
We propose to amend Article II(a) of our Restated Articles of Incorporation
to increase the number of authorized shares of common stock from 25 million to
50 million.
As of the date of this Proxy Statement, we had approximately 15.9 million
shares issued and outstanding and had reserved nearly all of the remaining 9.1
million shares for issuance under existing convertible securities, warrants and
employee benefit plans.
Our proposed amendment increases the number of authorized shares of common
stock by 25 million to 50 million. The rights of additional authorized shares
would be identical to shares now authorized. The authorization will not, in
itself, have any effect on your rights as a shareholder. If the Board were to
issue additional shares for other than a stock split or dividend, however, it
could have a dilutive effect on Tera's earnings per share and on your voting
power in Tera.
We believe that the proposed increase is in the best interests of Tera and
our shareholders. It is important for the Board to have the flexibility to act
promptly to meet future business needs as they arise. Sufficient shares should
be readily available to maintain our financing and capital raising flexibility,
employee benefit plans such as the 1999 Option Plan, acquisitions and mergers,
stock splits and dividends and other proper business purposes. Having
practically no shares available severely limits the Board's flexibility and
hinders the Company's ability to raise capital and attract employees.
By having additional shares readily available for issuance, the Board will
be able to act expeditiously without spending the time and incurring the expense
of soliciting proxies and holding special meetings of shareholders.
The Board has no present plans, agreements, commitments or understandings
for the issuance or use of these proposed additional shares, other than with
respect to the 1999 Stock Option Plan and the 1995 Stock Option Plan discussed
later in this Proxy Statement. The Company considers from time to time financing
proposals, and additional authorized and unreserved shares may be necessary to
complete a financing. The approval of this amendment is necessary for the
approval of the 1999 Stock Option Plan and the approval of the amendment to the
1995 Plan increasing the number of shares issuable pursuant to the 1995 Plan.
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<PAGE> 21
The Board may only issue additional shares of common stock without action on
your part if the action is permissible under Washington corporate law and the
rules of the Nasdaq National Market System, on which our common stock is listed.
For example, approval by the shareholders would be required by Nasdaq rules if
the issuance of shares of common stock, or securities convertible into common
stock, would result in a change of control of the Company. Nasdaq also requires
shareholder approval before the issuance of shares in private transactions equal
to 20% or more of the voting power outstanding before the issuance for less than
the greater of the book value or market value of the common stock. Exceptions to
these rules may be made upon application to Nasdaq.
The future issuance of additional shares of Common Stock also could be used
to block an unsolicited acquisition through the issuance of large blocks of
stock to persons or entities considered by the Company's officers and directors
to be opposed to such acquisition, which might be deemed to have an
anti-takeover effect (i.e., might impede the completion of a merger, tender
offer or other takeover attempt). In fact, the mere existence of such a block of
authorized but unissued shares, and the Board's ability to issue such shares
without shareholder approval, might deter a bidder from seeking to acquire
shares of the Company on an unfriendly basis. While the authorization of
additional shares of Common Stock might have such effect, the Board of Directors
of the Company does not intend or view the proposed increase in authorized
Common Stock as an anti-takeover measure, nor is the Company aware of any
proposed transactions of this type.
The Board of Directors recommends that you vote "FOR" our amendment to the
Restated Articles of Incorporation to increase the number of authorized shares
of common stock from 25 million to 50 million.
PROPOSALS 3 AND 4 PERTAINING TO THE COMPANY'S STOCK OPTION PLANS
On February 3, 1999, the Board of Directors approved two actions regarding
the Company's stock option plans - the adoption of a new 1999 Stock Option Plan
(the "1999 Plan") and the approval of an amendment to our Company's 1995 Stock
Option Plan (the "1995 Plan") to increase the number of shares reserved for
issuance from 2,000,000 to 2,215,686. Shareholder approval of our amendment to
the Restated Articles of Incorporation increasing the number of authorized
shares of common stock from 25 million to 50 million is necessary for the
approval of the 1999 Plan and the amendment to the 1995 Plan.
If these proposals are adopted by the shareholders, the 1999 Plan will
replace the 1995 Plan, which has been terminated and under which no more options
will be granted, and the Company's 1995 Independent Director Stock Option Plan
also will terminate.
The 1999 Plan and the 1995 Plan are identical in most respects. The
following describes both Plans and also notes their principal differences.
The full text of the 1999 Plan is set out in Exhibit A to this Proxy
Statement.
PURPOSES OF THE PLANS. The purposes of the 1999 and the 1995 Plans are to
provide a means for the Company to attract, reward and retain the services and
advice of the Company's employees, officers,
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<PAGE> 22
agents and consultants, and to provide them with added incentives by encouraging
ownership of the Company's common stock.
MAXIMUM NUMBER OF SHARES. The 1999 Plan provides that up to 3,000,000 shares of
Common Stock may be issued. The 1995 Plan reserves 2,000,000 shares for award,
subject to approval by the shareholders of the increase to 2,215,686 shares.
These numbers would be adjusted for changes in the Company's capital structure,
such as a stock split. Shares subject to options, which have lapsed unexercised,
may be granted again under the 1999 Plan.
TYPES OF OPTIONS. Under both the 1999 and 1995 Plans, the options granted may be
either incentive stock options ("ISOs") or nonqualified stock options, although
ISOs may be granted only to employees. The Board determines the term of each
option, and when options are exercisable. Generally options granted under these
plans become exercisable over a four-year period, with 25% becoming exercisable
one year after grant and then ratably monthly over the next 36 months. Options
expire no later than ten years from the date of grant although the Board may
grant options which expire earlier.
ELIGIBLE PARTICIPANTS. Eligible participants under both Plans include current
or future employees (including employees who are directors), officers, agents
and consultants. In addition, the 1999 Plan permits options to be granted to
independent directors (those directors who are not employees of the Company),
while the 1995 Plan did not permit options to be granted to independent
directors.
The Board of Directors has the authority to select the persons to whom
awards are given. In addition, the Executive Committee may make awards, subject
to ratification by the Board, to employees, agents and consultants but not to
officers and directors.
The Company's practice is to grant options to all employees of the Company
upon employment and to grant additional options to all employees as part of
their annual reviews.
As of March 8, 1999, all current employees of the Company who joined the
Company on or before February 3, 1999, held options under the 1995 Plan and,
subject to shareholder approval of the 1999 Plan, all current employees and the
four independent directors are eligible for participation in the 1999 Plan.
EXERCISE PRICES. The Board determines the exercise price for share of any stock
option granted under both Plans. The exercise price for an ISO may not be less
than 100% of the fair market value on the date of grant. For any grant of ISOs
to employees who own more than 10% of the voting stock of the Company, the
exercise price must be not less than 110% of the fair market value on the date
of grant and the term of the ISO cannot exceed five years.
MAXIMUM SIZE OF GRANTS. Under the 1995 Plan, no one optionee could receive
options for more than 250,000 shares in any one year. Under the 1999 Plan, the
limit is 300,000 shares.
TRANSFERABILITY. Recent changes to the Internal Revenue Code and SEC rules now
permit non-qualified options to be transferable. While generally such options
remain non-transferable under both Plans other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order,
under both Plans the Board, in its discretion and subject to such terms and
conditions as it shall specify, may permit the transfer of a non-qualified
option to an optionee's family members or to one or more trusts or
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<PAGE> 23
partnerships established for the benefit of such family members. ISOs remain
non-transferable other than by will or the laws of descent and distribution.
CHANGE IN CONTROL PROVISIONS. In order to maintain the rights of participants in
the event of a merger, consolidation or plan of exchange, other than in which
the holders of at least 50% of the voting securities of the Company hold at
least 50% of the voting securities of the surviving corporation, or a sale of
all or substantially all of the assets of the Company, or a liquidation or
dissolution of the Company, then, unless the existing options are continued or
assumed by the successor entity, with appropriate adjustments, then the Plan and
existing options shall terminate upon the effective date of the transaction. In
such event, each optionee would have the opportunity to exercise his or her
options in full, including any portion not then vested, prior to the effective
date of the transaction.
AMENDMENTS. The Board is authorized to amend both the 1999 and 1995 Plans,
except that shareholder approval is required for any amendment that would:
1) increase the number of shares available,
2) permit the granting of stock options to a new class of persons not
presently covered by the Plan, or
3) be required by applicable law or regulation.
The Board, in its discretion, may include further provisions and limitations
in any option agreement as it deems equitable and in the best interests of the
Company.
TAX CONSEQUENCES OF THE PLANS. The grant of a stock option will not result in
taxable income at the time of the grant for the optionee or the Company. The
optionee will have no taxable income upon exercising an ISO (except that the
alternative minimum tax may apply), and the Company will receive no deduction
when an ISO is exercised. Upon exercising a nonqualified stock option, the
optionee will recognize ordinary income in the amount by which the fair market
value of the common stock at the time of exercise exceeds the option price; the
Company will be entitled to a deduction for the same amount. Such income is
subject to withholding tax as "wages".
The tax treatment of an optionee for a disposition of shares acquired
through the exercise of an option is dependent upon the length of time the
shares have been held and on whether such shares were acquired by exercising an
ISO or a nonqualified stock option. Generally upon the sale of shares obtained
by exercising a non-qualified option, the gain realized on the sale over the
market value of the Company's common stock on the exercise will be treated by
the optionee as a capital gain. If an employee exercises an ISO and holds the
shares for two years from the date of grant and one year after exercise, then
any gain or loss realized based on the exercise price of the option will be
treated as long-term capital gain or loss. Shares obtained by an exercise of an
ISO which are sold without satisfying these holding periods will be treated as
shares received from the exercise of a non-qualified option.
Generally, there will be no tax consequence to the Company in connection
with the disposition of shares acquired under an option except that the Company
may be entitled to a deduction in the case of a disposition of shares acquired
upon exercise of an ISO before the applicable ISO holding periods have been
satisfied.
Section 162(m) of the Internal Revenue Code limits to $1 million per person
the amount the Company may deduct for compensation paid to any of its most
highly compensated employees. Compensation
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<PAGE> 24
received through the exercise of stock options is not subject to this $1 million
limit if the option and plan meet certain requirements, including granting
options granted with an exercise price at not less than fair market value. The
Company's policy is to grant options meeting the requirements of Section 162(m)
and applicable regulations to its most highly compensated employees.
STOCK PRICE INFORMATION. The closing price of the Company's common stock as
reported on the Nasdaq National Market System on March 22, 1999, was $6.5625.
PROPOSAL 3: APPROVE OUR 1999 STOCK OPTION PLAN
The Board of Directors adopted the 1999 Plan on February 3, 1999, subject to
shareholder approval of the 1999 Plan and our amendment to the Restated Articles
of Incorporation increasing the number of authorized shares of common stock from
25 million to 50 million.
As under changes to SEC rules, independent directors now may participate in
stock option plans along with officers, employees and others, the Board has
terminated the 1995 Independent Director Stock Option Plan, subject to
shareholder approval of the 1999 Plan. Under the 1995 Independent Director Plan,
each independent director received ten-year options for 4,500 shares upon
election as a director, exercisable at fair market value upon grant. The options
vested over 3 years. If the 1999 Plan is approved by the shareholders, the Board
plans to continue the policy of the 1995 Independent Director Option Plan of
granting options to each independent director upon election to the Board, but
will increase the number of shares of each grant from 4,500 shares to 18,000
shares. The other terms of the options to the Independent Directors would remain
the same.
As of March 8, 1999, the Board has granted options for 534,761 shares under
the 1999 Plan, subject to shareholder approval, including the following:
- options for 15,000 shares to each of Messrs. Cutler, Evans, Kennedy
and Titcomb, with an exercise price of $6.125 per share; these options
will be fully exercisable upon shareholder approval of the 1999 Plan;
and
- the following options for the following officers named in the Summary
Compensation Table, each exercisable at $6.125 per share: Mr. Smith -
100,000 shares; Mr. Rottsolk - 100,000 shares; Mr. Johnson - 40,000
shares; Mr. Koblenz - 50,000 shares; and Mr. Loe - 30,000 shares.
In addition, the Board has granted options under the 1999 Plan, subject to
shareholder approval of the 1999 Plan, to other executive officers for an
aggregate of 60,000 shares, exercisable at $6.125 per share, and options to
other employees and consultants for an aggregate of 94,761 shares at exercise
prices ranging from $4.50 per share to $6.125 per share.
The Board plans to grant an option to Mr. Kennedy, upon his election to the
Board at the Annual Meeting, for 18,000 shares under the 1999 Plan, with an
exercise price per share equal to the fair market value of the Common Stock as
of the date of the Annual Meeting.
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<PAGE> 25
The Board of Directors recommends that you vote "FOR" the approval of the 1999
Stock Option Plan.
PROPOSAL 4: APPROVE AN AMENDMENT TO OUR 1995 STOCK OPTION PLAN
The 1995 Plan currently reserves a total of 2,000,000 shares for issuance.
As of February 3, 1999, there were options outstanding under the 1995 Plan for
an aggregate of 2,215,686 shares. On February 3, 1999, the Board approved an
amendment to our 1995 Plan increasing the number of shares authorized for
issuance to 2,215,686 shares, subject to shareholder approval and of the
amendment to our Restated Articles of Incorporation increasing the number of
authorized shares of common stock from 25 million to 50 million.
The Board terminated the 1995 Plan, effective February 3, 1999, and no more
options will be granted under the 1995 Plan.
The Board granted options in August 1998 to the following executive officers
named in the Summary Compensation Table, each exercisable at $8.75 per share,
subject to shareholder approval of the amendment to the 1995 Plan:
- - Mr. Smith - 100,000 shares,
- - Mr. Rottsolk - 100,000 shares,
- - Mr. Johnson - 30,000 shares,
- - Mr. Koblenz - 40,000 shares, and
- - Mr. Loe - 30,000 shares.
The Board of Directors recommends that you vote "FOR" the approval of the
amendment to the 1995 Plan.
OTHER BUSINESS
Our management knows of no other matters to be voted on at the Annual
Meeting. If, however, other matters are presented for a vote at the meeting, the
proxy holders (the individuals designated on the proxy card) will vote your
properly executed proxy according to their judgement on those matters.
INFORMATION ABOUT SHAREHOLDER PROPOSALS
AND NOMINATING DIRECTOR CANDIDATES
SHAREHOLDER PROPOSALS
In order for a shareholder proposal to be considered for inclusion in our
proxy statement for the year 2000 Annual Meeting, the written proposal must be
received by the Company no later than December 4,
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<PAGE> 26
1999. Such proposals also must comply with Securities and Exchange Commission
regulations regarding the inclusion of shareholder proposals in company
sponsored proxy materials.
In order for a shareholder proposal to be raised from the floor during the
year 2000 Annual Meeting, written notice of the proposal must be received by the
Company not less than 60 nor more than 90 days prior to the meeting or, if later
by the 10th business day following the first public announcement of the meeting.
The proposal must also contain the information required in our Bylaws for
shareholder proposals, including:
1. a brief description of the business you wish to bring before the meeting,
the reasons for conducting such business and the language of the proposal,
2. your name and address,
3. the number of shares of our stock which you own and when you acquired them,
4. a representation that you intend to appear at the meeting, in person or by
proxy, and
5. any material interest you have in the business to be brought before the
meeting.
The Chairman, if the facts so warrant, may direct that any business was not
properly brought before the meeting in accordance with our Bylaws.
DIRECTOR CANDIDATES
You may propose director candidates for consideration by our Board by simply
writing us.
In addition, our Bylaws permit shareholders to nominate directors at a
shareholder meeting. In order to nominate a director at a shareholder meeting,
you must notify us not fewer than 60 nor more than 90 days in advance of the
meeting or, if later, by the 10th business day following the first public
announcement of the meeting. In addition, the proposal must contain the
information required in our Bylaws for director nominations, including:
- your name and address,
- the number of shares of our stock which you own and when you acquired
them,
- a representation that you intend to appear at the meeting, in person
or by proxy,
- each nominee's name, age, address, and principal occupation or
employment,
- all information concerning the nominee that must be disclosed about
nominees in proxy solicitations under the SEC proxy rules, and
- each nominee's executed consent to serve as a director if so elected.
The Chairman, in his discretion, may determine that a proposed nomination
was not made in accordance with the required procedures and, if so, disregard
the nomination.
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<PAGE> 27
If you wish to obtain a free copy of our By-laws or make proposals or
nominate candidates for the Board, please contact Kenneth W. Johnson, Secretary,
Tera Computer Company, 411 First Avenue South, Suite 600, Seattle, WA
98104-2860.
By order of the Board of Directors,
Kenneth W. Johnson
Vice President - Finance,
Chief Financial Officer
and Secretary
Seattle, Washington
April 2, 1999
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EXHIBIT A
TERA COMPUTER COMPANY
1999 STOCK OPTION PLAN
<PAGE> 29
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
1. Purpose 1
2. Stock Subject to This Plan 1
3. Administration 1
3.1 Powers 1
3.2 Limited Liability 2
3.3 Securities Exchange Act of 1934 2
3.4 Committee 2
4. Eligibility 2
5. Awards 2
5.1 Incentive Stock Options 3
5.2 Non-Qualified Stock Options 4
5.3 Vesting 4
5.4 Transferability 4
5.5 Termination of Options 5
5.6 Exercise 7
5.7 Foreign Qualified Grants 8
5.8 Corporate Mergers, Acquisitions, Etc. 8
5.9 Holding Period 8
5.10 Option Agreements 8
6. Adjustments Upon Changes in Capitalization 9
6.1 Stock Splits, Capital Stock Adjustments 9
6.2 Effect of Merger, Sale of Assets, Liquidation or Dissolution 9
6.3 Fractional Shares 10
6.4 Determination of Board to Be Final 10
7. Securities Regulations 10
7.1 Compliance with Law 10
7.2 Investment Purpose 10
8. Amendment and Termination 11
8.1 Plan 11
8.2 Options 11
8.3 Automatic Termination 11
9. Miscellaneous 12
9.1 Time of Granting Options 12
9.2 No Status as Shareholder 12
9.3 Status as an Employee 12
9.4 Reservation of Shares 12
10. Effectiveness of This Plan 12
</TABLE>
i
<PAGE> 30
EXHIBIT A
TERA COMPUTER COMPANY
1999 STOCK OPTION PLAN
1. Purpose. The purpose of the 1999 Stock Option Plan (the "Plan") is to enable
Tera Computer Company (the "Company") to attract, reward and retain the services
or advice of the Company's current or future employees, officers, directors,
agents and consultants, and to provide added incentives to them by encouraging
stock ownership in the Company.
2. Stock Subject to This Plan. Subject to adjustment as provided below and in
Section 6 hereof, the stock subject to this Plan shall consist of shares of the
Company's common stock (the "Common Stock"), and the total number of shares of
Common Stock to be delivered upon the exercise of all options granted under this
Plan shall not exceed 3,000,000 shares, as such Common Stock was constituted on
the effective date of this Plan. If any option granted under this Plan shall
expire, be surrendered, exchanged for another option, cancelled or terminated
for any reason without having been exercised in full, the unpurchased shares
subject to such option shall again be available for purposes of this Plan,
including for replacement options which may be granted in exchange for such
surrendered, cancelled or terminated options. Shares issued upon exercise of
options granted under this Plan may be subject to such restrictions on transfer,
repurchase rights or other restrictions as may be determined by the Board.
3. Administration. This Plan shall be administered by the Board of Directors of
the Company (the "Board"). The Board may suspend, amend or terminate this Plan
as provided in Section 8.
3.1 Powers. Subject to the specific provisions of this Plan, the Board
shall have the authority, in its discretion from time to time: (a) to grant the
stock options described in Section 5, including Incentive Stock Options and
Non-Qualified Stock Options, and to designate each option granted as an
Incentive Stock Option or a Non-Qualified Stock Option; (b) to determine, in
accordance with Section 5.1(f) of this Plan, the fair market value of the shares
of Common Stock subject to options; (c) to determine the exercise price per
share of options; (d) to determine the Optionees (as defined herein) to whom,
and the time or times at which, options shall be granted and the number of
shares of Common Stock to be represented by each option; (e) to interpret this
Plan; (f) to prescribe, amend and rescind rules and regulations relating to this
Plan; (g) to determine the terms and provisions of each option granted (which
need not be identical) and, with the consent of the holder thereof, modify or
amend each option; (h) to reduce the exercise price per share of outstanding and
unexercised options; (i) to defer, with the consent of the Optionee, or to
accelerate the exercise date of any option; (j) to waive or modify any term or
provision contained in any option applicable to the underlying shares of Common
Stock; (k) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an option previously granted by
the Board; (l) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any stock option agreement in the manner and to
the extent it shall deem expedient to carry the Plan into effect; and (m) to
make all other determinations deemed necessary or advisable for the
administration of this Plan. The interpretation and construction by
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<PAGE> 31
the Board of any terms or provisions of this Plan, any option issued hereunder
or of any rule or regulation promulgated in connection herewith and all actions
taken by the Board shall be conclusive and binding on all interested parties.
The Board may delegate administrative functions to individuals who are officers
or employees of the Company.
3.2 Limited Liability. No member of the Board or officer of the Company
shall be liable for any action or inaction of the entity or body, or another
person or, except in circumstances involving bad faith, of himself or herself.
Subject only to compliance with the explicit provisions hereof, the Board may
act in its absolute discretion in all matters related to this Plan.
3.3 Securities Exchange Act of 1934. At any time that the Company has a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), this Plan shall be administered by
the Board in accordance with Rule 16b-3 adopted under the Exchange Act, as such
rule may be amended from time to time.
3.4 Committee. The Board by resolution may delegate to a committee of
the Board consisting of one or more members (the "Committee") any or all
authority for administration of the Plan. If a Committee is appointed, all
references to the Board of Directors in the Plan shall mean and relate to such
Committee, except that only the Board of Directors may amend, modify, suspend or
terminate the Plan as provided in Section 8.
4. Eligibility. The Board may award options to any current or future employee,
officer, director, agent or consultant of the Company. Any party to whom an
option is granted under this Plan is referred to as an "Optionee."
5. Awards. The Board, may take the following actions from time to time,
separately or in combination, under this Plan: (a) grant Incentive Stock
Options, as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), to any employee of the Company or its subsidiaries, as
provided in Section 5.1 of this Plan; (b) grant options other than Incentive
Stock Options ("Non-Qualified Stock Options"), as provided in Section 5.2 of
this Plan; (c) grant options to officers, employees and others in foreign
jurisdictions, as provided in Section 5.7 of this Plan; and (d) grant options in
certain acquisition transactions, as provided in Section 5.8 of this Plan. No
person may be granted options to acquire more than 300,000 shares of Common
Stock in any fiscal year of the Company.
5.1 Incentive Stock Options. Incentive Stock Options shall be subject to
the following terms and conditions:
(a) Incentive Stock Options may be granted under this Plan only
to employees of the Company or its subsidiaries, including employees who are
directors.
(b) No employee may be granted Incentive Stock Options under this
Plan to the extent that the aggregate fair market value, on the date of grant,
of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by that employee during any calendar year, under
this Plan and under any other incentive stock option plan (within the
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<PAGE> 32
meaning of Section 422 of the Code) of the Company or any subsidiary, exceeds
$100,000. To the extent that any option designated as an Incentive Stock Option
exceeds the $100,000 limit, such option shall be treated as a Non-Qualified
Stock Option. In making this determination, options shall be taken into account
in the order in which they were granted, and the fair market value of the shares
of Common Stock shall be determined as of the time that the option with respect
to such shares was granted.
(c) An Incentive Stock Option may be granted under this Plan to
an employee possessing more than 10% of the total combined voting power of all
classes of stock of the Company (as determined pursuant to the attribution rules
contained in Section 424(d) of the Code) only if the exercise price is at least
110% of the fair market value of the Common Stock subject to the option on the
date the option is granted, as described in Section 5.1(f) of this Plan, and
only if the option by its terms is not exercisable after the expiration of five
years from the date it is granted.
(d) Except as provided in Section 5.5 of this Plan, no Incentive
Stock Option granted under this Plan may be exercised unless at the time of such
exercise the Optionee is employed by the Company or any subsidiary of the
Company and the Optionee has been so employed continuously since the date such
option was granted.
(e) Subject to Sections 5.1(c) and 5.1(d) of this Plan, Incentive
Stock Options granted under this Plan shall continue in effect for the period
fixed by the Board, except that no Incentive Stock Option shall be exercisable
after the expiration of 10 years from the date it is granted.
(f) The exercise price shall not be less than 100% of the fair
market value of the shares of Common Stock covered by the Incentive Stock Option
at the date the option is granted. The fair market value of shares shall be the
closing price per share of the Common Stock on the date of grant as reported on
a securities quotation system or stock exchange or other principal market for
the Common Stock. If such shares are not so reported or listed, the Board shall
from time to time determine the fair market value of the shares of Common Stock
in its discretion.
(g) The provisions of clauses (b) and (c) of this Section shall
not apply if either the applicable sections of the Code or the regulations
thereunder are amended so as to change or eliminate such limitations or to
permit appropriate modifications of those requirements by the Board.
5.2 Non-Qualified Stock Options. Non-Qualified Stock Options shall be
subject to the following terms and conditions:
(a) The exercise price may be more or less than or equal to the
fair market value of the shares of Common Stock covered by the Non-Qualified
Stock Option on the date the option is granted, and the exercise price may
fluctuate based on criteria determined by the Board.
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<PAGE> 33
The fair market value of shares of Common Stock covered by a Non-Qualified Stock
Option shall be determined by the Board, as described in Section 5.1(f).
(b) Unless otherwise established by the Board, any Non-Qualified
Stock Option shall terminate 10 years after the date it is granted.
5.3 Vesting. To ensure that the Company will achieve the purposes of and
receive the benefits contemplated in this Plan, the Board, at its discretion,
may establish a vesting schedule, change such vesting schedule or provide for no
vesting schedule for options granted under the Plan. In establishing a vesting
schedule, the Board may set a "Base Date", meaning a reference date for the
specific option grant and Optionee. If no Base Date is established by the Board
for a specific option grant, then the date of grant of the option by the Board
shall constitute the Base Date.
5.4 Transferability. Each option granted under this Plan and the rights
and privileges conferred hereby may not be transferred, assigned, pledged or
hypothecated in any manner (whether by operation of law or otherwise) other than
by will or by the applicable laws of descent and distribution or pursuant to a
qualified domestic relations order. The foregoing notwithstanding, the Board on
conditions it determines may permit the transferability of a Non-Qualified Stock
Option by an Optionee solely to members of the Optionee's family members or to
one or more trusts or partnerships for the benefit of such family members. Any
purported transfer or assignment in violation of this provision shall be void.
5.5 Termination of Options.
5.5.1 Generally. Unless otherwise determined by the Board or
specified in the Optionee's Option Agreement, if the Optionee's employment or
service with the Company terminates for any reason other than for cause,
resignation, retirement, disability or death, and unless by its terms the option
sooner terminates or expires, then the Optionee may exercise, for a three-month
period, that portion of the Optionee's option which was exercisable at the time
of such termination of employment or service (provided the conditions of Section
5.6.4 and any other conditions specified in the Option Agreement shall have been
met by the date of exercise of such option).
5.5.2 For Cause; Resignation.
(a) If an Optionee is terminated for cause or resigns in lieu of
dismissal, any option granted hereunder shall be deemed to have terminated as of
the time of the first act which led or would have led to the termination for
cause or resignation in lieu of dismissal, and such Optionee shall thereupon
have no right to purchase any shares of Common Stock pursuant to the exercise of
such option, and any such exercise shall be null and void. Termination for
"cause" shall include (i) the violation by the Optionee of any reasonable rule
or policy of the Board of Directors or the Optionee's superiors or the chief
executive officer or the President of the Company that results in damage to the
Company or which, after notice to do so, the Optionee fails to correct within a
reasonable time; (ii) any willful misconduct or gross negligence by the Optionee
in the
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responsibilities assigned to him or her; (iii) any willful failure to perform
his or her job as required to meet the objectives of the Company; (iv) any
wrongful conduct of an Optionee which has an adverse impact on the Company or
which constitutes a misappropriation of the assets of the Company; (v)
unauthorized disclosure of confidential information; or (vi) the Optionee's
performing services for any other company or person which competes with the
Company while he or she is employed by or provides services to the Company,
without the prior written approval of the Chairman or President of the Company.
"Resignation in lieu of dismissal" shall mean a resignation by an Optionee of
employment with or service to the Company if (i) the Company has given prior
notice to such Optionee of its intent to dismiss the Optionee for circumstances
that constitute cause, or (ii) within two months of the Optionee's resignation,
the Chairman or President of the Company or the Board of Directors determines,
which determination shall be final and binding, that such resignation was
related to an act which would have led to a termination for cause.
(b) If an Optionee resigns from the Company, the right of the
Optionee to exercise his or her option shall be suspended for a period of two
months from the date of resignation, unless the Chairman or the President of the
Company or the Board of Directors determines otherwise in writing. Thereafter,
unless there is a determination that the Optionee resigned in lieu of dismissal,
the option may be exercised at any time prior to the earlier of (i) the
expiration date of the option (which shall have been similarly suspended) or
(ii) the expiration of three months after the date of resignation, for that
portion of the Optionee's option which was exercisable at the time of such
resignation (provided the conditions of Section 5.6.4 and any other conditions
specified in the Option Agreement shall have been met at the date of exercise of
such option).
5.5.3 Retirement. Unless otherwise determined by the Board, if an
Optionee's employment or service with the Company is terminated with the
Company's approval for reasons of age, the Option may be exercised at any time
prior to the earlier of (a) the expiration date of the option or (b) the
expiration of three months after the date of such termination of employment or
service, for that portion of the Optionee's option which was exercisable at the
time of such termination of employment or service (provided the conditions of
Section 5.6.4 and any other conditions specified in the Option Agreement shall
have been met at the date of exercise of such option).
5.5.4 Disability. Unless otherwise determined by the Board, if an
Optionee's employment or relationship with the Company terminates because of a
permanent and total disability (as defined in Section 22(e)(3) of the Code), the
Option may be exercised at any time prior to the earlier of (a) expiration date
of the Option or (b) the expiration of 12 months after the date of such
termination for up to the full number of shares of Common Stock covered thereby,
including any portion not yet vested (provided the conditions of Section 5.6.4
and any other conditions specified in the Option Agreement shall have been met
by the date of exercise of such Option).
5.5.5 Death. Unless otherwise determined by the Board, in the
event of the death of an Optionee while employed by or providing service to the
Company, the Option may be exercised at any time prior to the earlier of (a) the
expiration date of the Option or (b) the expiration
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<PAGE> 35
of 12 months after the date of death by the person or persons to whom such
Optionee's rights under the option shall pass by the Optionee's will or by the
applicable laws of descent and distribution for up to the full number of shares
of Common Stock covered thereby, including any portion not yet vested (provided
the conditions of Section 5.6.4 and any other conditions specified in the Option
Agreement shall have been met by the date of exercise of such Option).
5.5.6 Extension of Exercise Period. The Board, at the time of
grant or at any time thereafter, may extend the three-month and 12-month
exercise periods to any length of time not longer than the original expiration
date of the option, and may increase the portion of an option that is
exercisable, subject to such terms and conditions as the Board may determine;
provided, that any extension of the exercise period or other modification of an
Incentive Stock Option shall be subject to the written agreement and
acknowledgment by the Optionee that the extension or modification disqualifies
the option as an Incentive Stock Option.
5.5.7 Failure to Exercise Option. To the extent that the option
of any deceased Optionee or of any Optionee whose employment or service
terminates is not exercised within the applicable period, all rights to purchase
shares of Common Stock pursuant to such options shall cease and terminate.
5.5.8 Leaves. For purposes of this Section 5.5, with respect to
Incentive Stock Options, employment shall be deemed to continue while the
Optionee is on military leave, sick leave or other bona fide leave of absence
(as determined by the Board) in accordance with the policies of the Company.
5.6 Exercise.
5.6.1 Procedure. Subject to the provisions of Section 5.3 above,
each Option may be exercised in whole or in part; provided, however, that no
fewer than 100 shares (or the remaining shares then purchasable under the
Option, if less than 100 shares) may be purchased upon any exercise of any
Option granted hereunder and that only whole shares will be issued pursuant to
the exercise of any Option (the number of 100 shares shall not be changed by any
transaction or action described in Section 6 unless the Board determines that
such a change is appropriate). Options shall be exercised by delivery to the
Secretary of the Company or his or her designated agent of written notice of the
number of shares with respect to which the Option is exercised, together with
payment in full of the exercise price.
5.6.2 Payment. Payment of the option exercise price shall be made
in full at the time the written notice of exercise of the option is delivered to
the Secretary of the Company or his or her designated agent and shall be in cash
or check or pursuant to irrevocable instructions to a stock broker to deliver
the amount of sales proceeds necessary to pay the appropriate exercise price and
withholding tax obligations, all in accordance with applicable governmental
regulations, for the shares of Common Stock being purchased. The Board may
determine at the time the option is granted for Incentive Stock Options, or at
any time before exercise for Non-Qualified Stock Options, that additional forms
of payment will be permitted, including without limitation full
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<PAGE> 36
recourse promissory notes. In addition, with the prior consent of the Board, an
Optionee may deliver previously owned shares of Common Stock or apply
automatically the shares to be received upon the exercise of a portion of a
stock option (even though stock certificates have not yet been issued) to
satisfy the purchase price for additional portions of the option.
5.6.3 Withholding. Prior to the issuance of shares of Common
Stock upon the exercise of an option, the Optionee shall pay to the Company the
amount of any applicable federal, state or local tax withholding obligations.
The Company may withhold any distribution in whole or in part until the Company
is so paid. The Company shall have the right to withhold such amount from any
other amounts due or to become due from the Company, as the case may be, to the
Optionee, including salary (subject to applicable law) or to retain and withhold
a number of shares having a market value not less than the amount of such taxes
required to be withheld by the Company to reimburse it for any such taxes and
cancel (in whole or in part) any such shares so withheld.
5.6.4 Conditions Precedent to Exercise. The Board may establish
conditions precedent to the exercise of any option, which shall be described in
the relevant Option Agreement.
5.7 Foreign Qualified Grants. Options under this Plan may be granted to
officers and employees of the Company and other persons described in Section 4
who reside in foreign jurisdictions as the Board may determine from time to
time. The Board may adopt such supplements to the Plan as are necessary to
comply with the applicable laws of such foreign jurisdictions and to afford
Optionees favorable treatment under such laws; provided, however, that no award
shall be granted under any such supplement on terms which are more beneficial to
such Optionees than the terms permitted by this Plan.
5.8 Corporate Mergers, Acquisitions, Etc. The Board may also grant
options under this Plan having terms, conditions and provisions that vary from
those specified in this Plan provided that such options are granted in
substitution for, or in connection with the assumption of, existing options
granted, awarded or issued by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
transaction involving a corporate merger, consolidation, acquisition of property
or stock, reorganization or liquidation to which the Company is a party.
5.9 Holding Period. Unless otherwise determined by the Board, if a
person subject to Section 16 of the Exchange Act exercises an option within six
months of the date of grant of the option, the shares of Common Stock acquired
upon exercise of the option may not be sold until six months after the date of
grant of the option.
5.10 Option Agreements. Options granted under this Plan shall be
evidenced by written stock option agreements ("Option Agreements") which shall
contain such terms, conditions, limitations and restrictions as the Board shall
deem advisable and which are consistent with this Plan. All Option Agreements
shall include or incorporate by reference the applicable terms and conditions
contained in this Plan.
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6. Adjustments Upon Changes in Capitalization.
6.1 Stock Splits, Capital Stock Adjustments. The aggregate number and
class of shares for which options may be granted under this Plan, the number and
class of shares covered by each outstanding option and the exercise price per
share thereof (but not the total price), and each such option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a stock split, stock
dividend or consolidation of shares or any like capital stock adjustment.
6.2 Effect of Merger, Sale of Assets, Liquidation or Dissolution.
6.2.1 Termination Unless Assumption or Substitution. Upon the
effective date of a merger, consolidation or plan of exchange (other than a
merger, consolidation or plan of exchange involving the Company in which the
holders of voting securities of the Company immediately prior to such
transaction own at least 50% of the voting power of the outstanding securities
of the surviving corporation or a parent of the surviving corporation after
such transaction), or a sale of all or substantially all the assets of the
Company, or a liquidation or dissolution of the Company, the Plan and any
option theretofore granted hereunder shall terminate, unless provisions be made
in writing in connection with such transaction for the continuance of the Plan
and for the assumption of options theretofore granted, or the substitution for
such options, with new options covering the shares of a successor corporation,
or a parent, affiliate or subsidiary thereof, with appropriate adjustments as
to number and kind of shares and prices thereof, in which event the Plan and
the options granted under it, or the new options substituted therefor, shall
continue in the manner and under the terms so provided.
6.2.2 Exercise and Vesting. If provision is not made pursuant to
the preceding Section 6.2.1 in connection with such a transaction for the
continuance of the Plan and for the assumption of options, or the substitution
for such options of new options covering the shares of a successor employer
corporation or a parent, affiliate or subsidiary thereof, then each Optionee
under the Plan shall be entitled, prior to the effective date of any such
transaction, to exercise the option for the full number of shares covered
thereby, including any portion not yet vested (provided that the conditions of
Section 5.6.4 and any other conditions specified in the Option Agreement shall
have been met at the date of exercise of such option).
6.3 Fractional Shares. In the event of any adjustment in the number of
shares covered by any option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the number
of full shares resulting from such adjustment.
6.4 Determination of Board to Be Final. All adjustments under this
Section 6 shall be made by the Board of Directors, and its determination as to
what adjustments shall be made, and the extent thereof, shall be final, binding
and conclusive. Unless an Optionee agrees otherwise, any change or adjustment to
an Incentive Stock Option shall be made, if possible, in such a manner so as not
to constitute a "modification," as defined in Section 424(h) of the Code, and so
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<PAGE> 38
as not to cause the Optionee's Incentive Stock Option to fail to continue to
qualify as an Incentive Stock Option.
7. Securities Regulations.
7.1 Compliance with Law. Shares of Common Stock shall not be issued
with respect to an option granted under this Plan unless the exercise of such
option and the issuance and delivery of such shares pursuant thereto shall
comply with all relevant provisions of law, including, without limitation, any
applicable state securities laws, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, applicable laws
of foreign countries and other jurisdictions and the requirements of any
quotation service or stock exchange upon which the shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance, including the availability of an exemption from
registration for the issuance and sale of any shares hereunder. The inability
of the Company to obtain, from any regulatory body having jurisdiction, the
authority deemed by the Company's counsel to be necessary for the lawful
issuance and sale of any shares hereunder or the unavailability of an exemption
from registration for the issuance and sale of any shares hereunder shall
relieve the Company of any liability with respect of the nonissuance or sale of
such shares as to which such requisite authority shall not have been obtained.
7.2 Investment Purpose. As a condition to the exercise of an option, the
Company may require the Optionee to represent and warrant at the time of any
such exercise that the shares of Common Stock are being purchased only for
investment and without any present intention to sell or distribute such shares
if, in the opinion of counsel for the Company, such a representation is required
by any relevant provision of the aforementioned laws. The Company may place a
stop-transfer order against any shares of Common Stock on the official stock
books and records of the Company, and a legend may be stamped on stock
certificates to the effect that the shares of Common Stock may not be pledged,
sold or otherwise transferred unless an opinion of counsel is provided
(concurred in by counsel for the Company) stating that such transfer is not in
violation of any applicable law or regulation. The Board may also require such
other action or agreement by the Optionees as may from time to time be necessary
to comply with the federal and state securities laws. THIS PROVISION SHALL NOT
OBLIGATE THE COMPANY TO UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK
THEREUNDER.
8. Amendment and Termination.
8.1 Plan. The Board of Directors may at any time suspend, amend or
terminate this Plan, provided that, except as set forth in Section 6, the
approval of the Company's shareholders is necessary within 12 months before or
after the adoption by the Board of Directors of any amendment that will:
(a) increase the number of shares of Common Stock that are to be
reserved for the issuance of options under this Plan;
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<PAGE> 39
(b) permit the granting of stock options to a class of persons
other than those presently permitted to receive stock options under this Plan;
or
(c) require shareholder approval under applicable law, including
Section 16(b) of the Exchange Act, and the regulations of any securities market
or exchange on which the Common Stock is then listed for trading or quotation.
8.2 Options. Subject to the requirements of Section 422 of the Code with
respect to Incentive Stock Options and to the terms and conditions and within
the limitations of this Plan, the Board may modify or amend outstanding options
granted under this Plan. The modification or amendment of an outstanding option
shall not, without the consent of the Optionee, impair or diminish any of his or
her rights or any of the obligations of the Company under such option. Except as
otherwise provided in this Plan, no outstanding option shall be terminated
without the consent of the Optionee. Unless the Optionee agrees otherwise, any
changes or adjustments made to outstanding Incentive Stock Options granted under
this Plan shall be made in such a manner so as not to constitute a
"modification," as defined in Section 424(h) of the Code, and so as not to cause
any Incentive Stock Option issued hereunder to fail to continue to qualify as an
Incentive Stock Option as defined in Section 422(b) of the Code.
8.3 Automatic Termination. Unless sooner terminated by the Board of
Directors, this Plan shall terminate ten years from the date on which this Plan
is adopted by the Board. No option may be granted after such termination or
during any suspension of this Plan. The amendment or termination of this Plan
shall not, without the consent of the Optionee, alter or impair any rights or
obligations under any option theretofore granted under this Plan.
9. Miscellaneous.
9.1 Time of Granting Options. The date of grant of an option shall, for
all purposes, be the date on which the Company completes the required corporate
action relating to the grant of an option; the execution of an Option Agreement
and the conditions to the exercise of an option shall not defer the date of
grant.
9.2 No Status as Shareholder. Neither the Optionee nor any party to
which the Optionee's rights and privileges under the option may pass shall be,
or have any of the rights or privileges of, a shareholder of the Company with
respect to any of the shares of Common Stock issuable upon the exercise of any
option granted under this Plan unless and until such option has been exercised
and the issuance (as evidenced by the appropriate entry on the books of the
Company or duly authorized transfer agent of the Company) of the stock
certificate evidencing such shares.
9.3 Status as an Employee. Nothing in this Plan or in any option granted
pursuant to this Plan shall confer upon any Optionee any right to continue in
the employ of the Company, or to interfere in any way with the right of the
Company to terminate his or her employment or other relationship with the
Company at any time.
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<PAGE> 40
9.4 Reservation of Shares. The Company, during the term of this Plan, at
all times will reserve and keep available such number of shares of Common Stock
as shall be sufficient to satisfy the requirements of this Plan.
10. Effectiveness of This Plan. This Plan shall become effective upon adoption
by the Board so long as it is approved by the Company's shareholders any time
within 12 months after the adoption of this Plan. No option granted under this
Plan to any officer or director of the Company shall become exercisable,
however, until the Plan is approved by the shareholders, and any options granted
prior to such approval shall be conditioned upon and are subject to such
approval.
Adopted by the Board of Directors as of February 3, 1999, and approved
by the Shareholders as of ________, 1999.
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<PAGE> 41
PROXY
TERA COMPUTER COMPANY
ANNUAL MEETING MAY 5, 1999, 2:00 P.M.
411 FIRST AVENUE SOUTH, SEATTLE, WASHINGTON
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PLEASE SIGN AND RETURN THIS PROXY
The undersigned hereby appoints Burton J. Smith and James E. Rottsolk, and each
of them, proxies with power of substitution to vote on behalf of the undersigned
all shares that the undersigned may be entitled to vote at the Annual Meeting of
shareholders of Tera Computer Company (the "Company") on May 5, 1999 and any
adjournments thereof, with all powers that the undersigned would possess if
personally present, with respect to the following:
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE
SIDE, BUT IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION
OF DIRECTOR NOMINEES AND FOR THE PROPOSALS TO APPROVE AN AMENDMENT TO THE
RESTATED ARTICLES OF INCORPORATION, THE 1999 STOCK OPTION PLAN AND AN AMENDMENT
TO THE 1995 STOCK OPTION PLAN. THE PROXIES MAY VOTE IN THEIR DISCRETION AS TO
OTHER MATTERS THAT MAY COME BEFORE THIS MEETING.
(This proxy card continues and MUST be signed on the reverse side.)
- --------------------------------------------------------------------------------
* FOLD AND DETACH HERE *
<PAGE> 42
Please mark
your vote as [x]
indicated in
this example.
<TABLE>
<CAPTION>
FOR WITHHOLDING
all nominees AUTHORITY
listed to vote for
(except nominees
as withheld) listed
<S> <C> <C> <C> <C> <C> <C>
1. Election of Two Directors: [ ] [ ] 2. Approve an amendment to our Restated Articles FOR AGAINST ABSTAIN
(Instructions: To withhold of Incorporation. [ ] [ ] [ ]
authority to vote for any
individual, strike a line 3. Approve our 1999 Stock Option Plan. FOR AGAINST ABSTAIN
through the nominee's [ ] [ ] [ ]
name below.)
4. Approve an amendment to our 1995 Stock FOR AGAINST ABSTAIN
Kenneth W. Kennedy Option Plan [ ] [ ] [ ]
James E. Rottsolk
5. Transaction of any business that properly comes before the meeting
DIRECTORS RECOMMENDED THAT YOU VOTE FOR ELECTION OF or any adjournments thereof. A majority of the proxies or
THE NAMED DIRECTORS AND IN FAVOR OF PROPOSALS substitutes at the meeting may exercise all the powers granted
2, 3 AND 4. hereby.
PLEASE COMPLETE, SIGN, DATE AND RETURN THE PROXY
CARD PROMPTLY USING THE ENCLOSED ENVELOPE.
Signature(s)___________________________________________________________________________________________Date: ______________, 1999
Please date and sign exactly as name in imprinted hereon, including designation as executor, trustee, administrator, guardian or
attorney, if applicable. When shares are held by joint tenants, both should sign, A corporation must sign its name by the president
or other authorized officer. If a partnership, please sign in partnership name by an authorized person.
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