<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...... to ...... .
Commission file number 0-26820
------------------------------------------------------
TERA COMPUTER COMPANY
(Exact name of registrant as specified in its charter)
------------------------------------------------------
WASHINGTON 93-0962605
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2815 EASTLAKE AVENUE EAST
SEATTLE, WA 98102
(206) 325-0800
(Address of principal executive offices)
(Registrant's telephone number, including area code)
------------------------
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of March 31, 1997, 6,985,488 shares of the Company's Common Stock, par
value $0.01 per share, common equity only were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TERA COMPUTER COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1996 3
and March 31, 1997
Statement of Operations for the Three Months 4
Ended March 31, 1996 and March 31, 1997, and
cumulative from date of inception to March 31, 1997
Condensed Statement of Cash Flows for the Three 5
Months Ended March 31, 1996 and March 31, 1997
and cumulative from date of inception to March 31, 1997
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 2. Changes in Securities 11
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
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TERA COMPUTER COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 928,760 $ 3,083,597
Accounts receivable 40,045 105,544
Inventory 851,960 1,554,965
Advances to suppliers 310,077 325,263
Other assets 146,350 113,793
Stock subscriptions receivable 1,074,997
------------ ------------
Total current assets 3,352,189 5,183,162
PROPERTY AND EQUIPMENT, NET 1,182,422 1,171,615
LEASE DEPOSITS 81,902 103,883
------------ ------------
TOTAL $ 4,616,513 $ 6,458,660
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,070,242 $ 1,236,513
Accrued payroll and related expenses 1,712,971 1,866,305
Potential contract adjustments 250,000 250,000
Current portion of obligations under capital leases 340,765 378,589
------------ ------------
Total current liabilities 3,373,978 3,731,407
OBLIGATIONS UNDER CAPITAL LEASES
less current portion 114,474 107,293
SHAREHOLDERS' EQUITY:
Preferred Stock, par $.01 - Authorized, 5,000,000 shares;
issued and outstanding, 3,000 shares of Series B Convertible 2,858,576
Common stock, par $.01 - Authorized, 25,000,000 shares;
issued and outstanding, 6,496,815 and 6,985,488 shares 27,098,153 29,247,863
Common stock subscribed 1,074,997
Accumulated deficit (27,045,089) (29,486,479)
------------ ------------
1,128,061 2,619,960
TOTAL $ 4,616,513 $ 6,458,660
============ ============
</TABLE>
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TERA COMPUTER COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 7,
1987 (INCEPTION)
THREE MONTHS ENDED THROUGH
MARCH 31, MARCH 31,
1996 1997 1997
------------ ------------ ----------------
<S> <C> <C> <C>
OPERATING EXPENSES:
Research and development $ (3,166,645) $ (2,044,424) $(40,677,624)
Marketing and sales (132,874) (164,683) (1,995,552)
General and administrative (237,886) (306,476) (5,118,943)
------------ ------------ ------------
(3,537,405) (2,515,583) (47,792,119)
RESEARCH FUNDING 10,393 114,794 18,769,639
------------ ------------ ------------
Net operating expense (3,527,012) (2,400,789) (29,022,480)
OTHER EXPENSES (23,896) (14,675) (438,073)
NET LOSS $ (3,550,908) $ (2,415,464) $(29,460,553)
============ ============ ============
NET LOSS PER SHARE $ (0.90 $ (0.36) $ (17.83)
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,925,007 6,663,235 1,652,234
</TABLE>
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TERA COMPUTER COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 7, 1987
(INCEPTION)
THREE MONTHS ENDED THROUGH
MARCH 31, MARCH 31,
1996 1997 1997
------------ ------------ ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,550,908) $ (2,415,464) $(29,460,553)
Net cash used by operating activities (2,814,025) (2,701,576) (26,220,057)
INVESTING ACTIVITIES:
Net cash used by investing activities (102,702) (156,590) (2,732,043)
FINANCING ACTIVITIES:
Net cash provided (used) by financing activities (82,721) 5,013,003 32,035,697
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,999,448) 2,154,837 3,083,597
CASH AND CASH EQUIVALENTS:
Beginning of period 4,284,720 928,760
------------ ------------ ------------
End of period $ 1,285,272 $ 3,083,597 $ 3,083,597
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 26,077 $ 14,152 $ 544,127
============ ============ ============
</TABLE>
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TERA COMPUTER COMPANY
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
The accompanying balance sheets and related interim statements of
operations and cash flows have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S - B. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for fair presentation have
been included. Interim results are not necessarily indicative of results for a
full year. The information included in this Form 10-QSB should be read in
conjunction with Management's Discussion and Analysis and the financial
statements and notes thereto included in the Company's financial statements for
the years ended December 31, 1995 and 1996, and the period from December 7, 1987
through December 31, 1996, contained in the Company's Annual Report on Form
10-KSB filed for the fiscal year ended December 31, 1996.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average number
of common shares outstanding. As outstanding stock options, warrants and other
common stock equivalent shares are antidilutive, their effect has not been
included in the calculation of net loss per share.
CHANGES IN CAPITAL
In March 1997, the Company completed two private placements of equity
securities to accredited investors. In the first offering, the Company issued
74,833 units, each unit consisting of four shares of the Company's Common Stock
and either a private non-redeemable warrant to purchase one share of Common
Stock at an exercise price of $6.00 per share or one Redeemable Common Stock
Purchase Warrant identical to Warrants publicly issued and outstanding, for
proceeds of $1,122,500 (less $62,000 in issuance costs).
In the second offering the Company issued 3,000 shares of Series B
Convertible Preferred Stock for total proceeds of $3,000,000 (less $167,350 in
issuance costs). Holders of Series B Preferred Stock are entitled to receive
cumulative dividends at the rate of $50.00 per annum per share of the Series B
Preferred Stock. Dividends are payable in cash or common stock at the Company's
option, quarterly on January 1, April 1, July 1, and October 1 of each year,
commencing July 1, 1997. The Series B Preferred Stock is redeemable at the
option of the Company. Each share of the Series B Preferred Stock is also
convertible at the option of the holder at a conversion price equal
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to the lesser of $6.15 or at conversion percentages ranging from 80% to 75% of
the market price of the underlying shares of Common Stock measured over a
specified period immediately prior to each conversion date. The discount to be
realized by the difference between the conversion value and the stated value of
the Series B Preferred Stock issued will be recognized ratably by the Company in
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
68, Increasing Rate Preferred Stock, as a non-cash dividend in the amount of
$1,000,000. In the first quarter, the Company recognized $25,926 as a non-cash
dividend.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in this Item 2 includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act, as amended, and is
subject to the safe harbor created by those sections. For a discussion of Risk
Factors that could affect the Company's future performance, please see "Risk
Factors" contained in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996.
OVERVIEW
The Company is a development stage enterprise that has an accumulated net
loss of approximately $29.5 million as of March 31, 1997. Approximately 37% of
the Company's funding to date has been from Defense Advanced Research Projects
Agency ("DARPA") research funding, with the remainder provided primarily through
the sale of equity.
The Company has experienced net losses in each year of operations and
expects to incur further substantial losses while it tests its Multithreaded
Architecture (MTA) system prototype and commences production, and possibly
thereafter. The Company has had no revenue or earnings. In November 1996, the
Company announced that the University of California at San Diego had ordered the
first MTA system production model for installation and evaluation at the San
Diego Supercomputer Center, utilizing a grant from the National Science
Foundation. The agreement calls for the phased-in delivery of an MTA system of
up to eight resource modules, for total consideration to the Company of up to $4
million. Initial deliveries under this agreement are scheduled for June 1997.
The Company will recognize revenue only as resource modules are delivered and
accepted. Given the Company's reliance on sole source third-party vendors, it is
possible that deliveries will not be made until the third quarter. See "Risk
Factors - Manufacturing Risks; Reliance On And Capacity Of Third Party Sole
Source Suppliers" in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1996. Until such time as the Company has obtained
additional
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commitments from customers for early MTA systems, it plans to increase personnel
only as necessary.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
Research and development expense for the three months ended March 31, 1997
was $2 million, compared to $3.2 million for the same period in 1996. The
reduction was primarily due to a decrease in non-recurring hardware engineering
expense and prototype parts cost. Costs related to the development of the MTA
system accounted for approximately 81% of the Company's operating expenses in
the first three months of 1997, a decrease from approximately 90% in the
comparable 1996 period. During the first three months of 1997, $442,000 was
directly related to the completion and testing of the prototype and
pre-production costs. In 1997, development expense will increase as the Company
commences development of its next generation systems.
Marketing and sales expense for the three months ended March 31, 1997 was
$165,000, compared to $133,000 for the same period in 1996. General and
administrative expense for the three months ended March 31, 1997 was $306,000,
compared to $238,000 for the same period in 1996. The increase in marketing and
sales expense was due to increased sales staff and the increase in general and
administrative expense was due largely to increased operating costs associated
with being a publicly owned company. These expenses are expected to increase
commensurate with any growth in the Company's business or operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its incorporation through March 31, 1997, the Company's principal
sources of liquidity have been DARPA research funding of approximately $18.8
million and net proceeds from the sale of equity totaling $32 million. The
Company currently is billing DARPA under a research contract awarded in
September 1995. Billings under this contract were approximately $200,000 in 1996
and are expected to be approximately $500,000 in 1997. At March 31, 1997, the
Company had $3 million in cash and no bank line of credit.
The Company used cash for operations of $2,702,000 during the first three
months of 1997, as compared to $2,814,000 during the first three months of 1996.
The decrease in the first three months of 1997 over the comparable quarter of
1996 was primarily due to the reduced loss from operations which in turn was
principally due to reduced research and development expenditures, as discussed
above under "Results of Operations." This decrease in the first three months of
1997 was largely offset by inventory purchases of $703,000 and increases in
advances to suppliers of $319,000 over the comparable quarter of 1996. The loss
of $2.4 million in the first quarter of 1997 includes depreciation expense of
$167,000, a decrease of $44,000 over the first quarter of 1996.
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The Company's investing activities have consisted primarily of
expenditures for fixed assets, which have totaled $2,732,000 from the date of
inception through March 31, 1997, net of proceeds on disposal of assets.
Expenditures were $103,000 and $157,000 for the first three months of 1996 and
1997, respectively.
In February 1997, the Company received $1,075,000 from two shareholders
through warrant exercises pursuant to subscription agreements entered into in
December 1996. In March 1997, the Company raised $1,222,500 through a private
placement to accredited investors of 299,332 shares of common stock and 74,833
warrants (of which 68,167 are private warrants exercisable at $6.00 per share
and 6,666 were Redeemable Common Stock Purchase Warrants). Also in March 1997,
the Company raised $3,000,000 through the sale of 3,000 shares of Series B
Convertible Preferred Stock to one accredited investor. The Series B Preferred
Stock is convertible into common stock upon registration of the underlying
common stock with the Securities and Exchange Commission. In accordance with the
Securities and Exchange Commission Staff Accounting Bulletin No. 68, the Company
recognized $25,926 as a non-cash dividend in the first quarter.
The Company's current working capital needs depend primarily upon its
personnel costs, the cost of components purchased to complete the testing of its
initial MTA system prototype, manufacturing startup costs, and inventory and
receivable financing associated with production MTA systems. The Company has
experienced delays in the development of particular components of the MTA system
that have increased the need for working capital, and the Company could
experience significant additional delays in the manufacturing process that could
further substantially increase the Company's need for working capital.
Additional working capital will be required to fund ongoing research,
development and engineering efforts, development of a customer service
organization, capital expenditures for leased equipment and increases in its
sales and marketing efforts. Additionally, the Company's administrative
functions will increase in order to support its engineering and sales efforts.
The Company's current cash resources are sufficient to meet the Company's
working capital requirements through June 1997. If the shipment and acceptance
of the Company's initial MTA system are delayed substantially beyond June 1997,
the Company will likely need additional capital in order to continue its present
operations and inventory acquisitions. To meet its needs in 1997, the Company
expects to receive revenues from sales of MTA systems, from the possible
exercise of its presently outstanding Warrants, which are redeemable by the
Company in certain situations, at the current or lower exercise price per share
of Common Stock, and from the sale of additional equity or debt or other
financing transactions, which may be dilutive to present shareholders. There can
be no assurance that any additional financing will be available when needed or,
if available, will be on satisfactory terms.
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RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which modifies the existing standards for computing and presenting
earnings per share. This statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. The Company does not expect the application of
SFAS No. 128 to have a material effect on the Company's earnings (loss) per
share.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Board of Directors authorized the issuance of 3,000 shares of Series B
Preferred Stock, all of which have been issued and are outstanding. The Series B
Preferred Stock has certain rights, privileges and preferences that limit and
qualify the rights of the Common Stock of the Company. Holders of the Series B
Preferred Stock are entitled to receive cumulative dividends at the rate of
$50.00 per annum per share of the Series B Preferred Stock, which are payable in
cash or common stock at the Company's option, quarterly on January 1, April 1,
July 1 and October 1 of each year, commmencing July 1, 1997. The Statement of
Rights and Preferences of the Series B Preferred Stock provides that no
dividends or other distributions, other than dividends payable solely in shares
of common stock or other capital stock of the Company, shall be paid or set
apart on any share of common stock, that no purchase, redemption or acquisition
shall be made by the Company of any shares of common stock unless and until all
accrued and unpaid dividends on the Series B Preferred Stock and interest on
dividends in arrears shall have been paid or declared and set apart for payment,
and that the Company may not make any tender offer or exchange offer for
outstanding shares of its common stock unless a similar offer is made with
respect to the Series B Preferred Stock. The Series B Preferred Stock is
redeemable at the option of the Company; in certain situations, the Company may
be required to redeem certain shares of the Series B Preferred Stock and, in
other circumstances, the Series B Preferred Stock is redeemable at the option of
holders. Further, holders of the Series B Preferred Stock have certain
preferential distribution rights in the event of any liquidation, dissolution or
winding-up of the Company. Although holders of the Series B Preferred Stock have
no voting rights, the Company must obtain the consent of the holders of record
of a majority of the outstanding shares of Series B Preferred Stock in order to
authorize or issue any shares of any new class of stock having preferences
greater than or equal to the Series B Preferred Stock as to dividends or assets,
to change the designation of the rights, preferences or privileges of the Series
B Preferred Stock so as to materially and adversely affect the Series B
Preferred Stock, and to waive any preference, right or privilege of the Series B
Stock.
For certain information regarding two private placements of equity
securities in the first quarter of 1997, please see "Changes In Capital" under
"Notes To Financial Statements," above.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Statement of Rights and Preferences of the Series B Convertible
Preferred Stock of the Registrant, as filed with the Secretary of
State of the State of Washington on March 24, 1997.*
11. Computation of Earnings (Loss) Per Share
27. Financial Data Schedule
---------
* Incorporated by reference to the Company's Form S-3 Registration
Statement, Registration No. 333-25675, as filed with the Commission on
April 23, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERA COMPUTER COMPANY
Date: May 14, 1997 By: JAMES E. ROTTSOLK
------------------
James E. Rottsolk
Chief Executive Officer
and Chief Financial Officer
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Exhibit 11.
TERA COMPUTER COMPANY
(A DEVELOPMENT STAGE COMPANY)
COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 7,
1987 (INCEPTION)
THREE MONTHS ENDED THROUGH
MARCH 31, MARCH 31,
1996 1997 1997
------------ ------------ ----------------
<S> <C> <C> <C>
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,925,007 6,663,235 1,652,234
NET LOSS $ (3,550,908) $ (2,415,464) $(29,460,553)
NET LOSS PER SHARE $ (0.09) $ (0.36) $ (17.83)
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the audited
financial statements of Tera Computer Company for the quarter ended March 31,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 3,083,597
<SECURITIES> 0
<RECEIVABLES> 105,544
<ALLOWANCES> 0
<INVENTORY> 1,554,965
<CURRENT-ASSETS> 5,183,162
<PP&E> 3,211,193
<DEPRECIATION> (2,039,578)
<TOTAL-ASSETS> 6,458,660
<CURRENT-LIABILITIES> 3,731,407
<BONDS> 0
0
2,858,576
<COMMON> 29,247,863
<OTHER-SE> (29,486,479)
<TOTAL-LIABILITY-AND-EQUITY> 6,458,660
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,530,258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,766
<INCOME-PRETAX> (2,415,464)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,415,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,415,464)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
