<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
June 30, 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 August 11, 1997, 10,614,836 shares of the Company's Common
Stock, par value $0.01 per share, 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
W Item 1. Financial Statements:
Balance Sheets as of December 31, 1996 3
and June 30, 1997
Statement of Operations for the Three Months and Six 4
Months Ended June 30, 1996 and June 30, 1997, and
cumulative from date of inception to June 30, 1997
Condensed Statement of Cash Flows for the Three Months 5
and Six Months Ended June 30, 1996 and June 30, 1997
and cumulative from date of inception to June 30, 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 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
</TABLE>
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TERA COMPUTER COMPANY
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 928,760 $ 9,864,744
Accounts receivable 40,045 49,229
Inventory 851,960 2,191,566
Advances to suppliers 310,077 496,607
Other assets 146,350 153,853
Stock subscriptions receivable 1,074,997
------------ ------------
Total current assets 3,352,189 12,755,999
PROPERTY AND EQUIPMENT, NET 1,182,422 1,105,024
LEASE DEPOSITS 81,902 34,930
------------ ------------
TOTAL $ 4,616,513 $ 13,895,953
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,070,242 $ 1,785,377
Accrued payroll and related expenses 1,712,971 1,631,274
Potential contract adjustments 250,000 250,000
Current portion of obligations under capital leases 340,765 328,760
------------ ------------
Total current liabilities 3,373,978 3,995,411
OBLIGATIONS UNDER CAPITAL LEASES
LESS CURRENT PORTION 114,474 133,683
SHAREHOLDERS' EQUITY:
Preferred Stock, par $.01 - Authorized, 5,000,000 shares;
issued and outstanding, 3,000 shares of Series B Convertible 3,192,063
Common stock, par $.01 - Authorized, 25,000,000 shares;
issued and outstanding, 6,496,815 and 9,868,897 shares 27,098,153 39,963,752
Common stock subscribed 1,074,997
Preferred stock dividend distributable 37,500
Accumulated deficit (27,045,089) (33,426,456)
------------ ------------
1,128,061 9,766,859
TOTAL $ 4,616,513 $ 13,895,953
============ ============
</TABLE>
See Notes to financial statements
Page 3
<PAGE> 4
TERA COMPUTER COMPANY
(a development stage company)
STATEMENT OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Period from
December 7,
1987 (inception)
Three Months Ended Six Months Ended through
June 30, June 30, June 30,
1996 1997 1996 1997 1997
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
Research and development $ (3,342,478) (3,068,194) $ (6,509,123) $ (5,112,618) $(43,745,818)
Marketing and sales (145,350) (208,477) (278,224) (373,160) (2,204,029)
General and administrative (252,566) (393,040) (490,452) (699,516) (5,511,983)
------------ ------------ ------------ ------------ ------------
(3,740,394) (3,669,711) (7,277,799) (6,185,294) (51,461,830)
RESEARCH FUNDING 19,083 114,560 29,476 229,354 18,884,199
------------ ------------ ------------ ------------ ------------
Net operating expense (3,721,311) (3,555,151) (7,248,323) (5,955,940) (32,577,631)
OTHER EXPENSE (15,919) (10,289) (39,815) (24,964) (448,362)
------------ ------------ ------------ ------------ ------------
NET LOSS (3,737,230) (3,565,440) (7,288,138) (5,980,904) (33,025,993)
PREFERRED STOCK DIVIDEND (37,500) (37,500) (37,500)
AMORTIZATION OF PREFERRED
STOCK DISCOUNT (337,037) (362,963) (362,963)
NET LOSS APPLICABLE ------------ ------------ ------------ ------------ ------------
TO COMMON STOCK $ (3,737,230) $ (3,939,977) $ (7,288,138) $ (6,381,367) $(33,426,456)
============ ============ ============ ============ ============
NET LOSS PER COMMON SHARE $ (0.79) $ (0.55) $ (1.69) $ (0.92) $ (18.18)
WEIGHTED AVERAGE SHARES
OUTSTANDING 4,718,657 7,159,373 4,315,780 6,912,675 1,839,029
</TABLE>
See Notes to financial statements
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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 Six Months Ended through
June 30, June 30, June 30,
1996 1997 1996 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,737,230) $ (3,565,440) $ (7,288,138) $ (5,980,904) $(33,025,993)
Net cash used by operating activities (2,955,730) (3,798,974) (5,799,278) (6,500,550) (30,019,031)
INVESTING ACTIVITIES:
Net cash used by investing activities (108,624) (108,780) (181,804) (265,370) (2,840,823)
FINANCING ACTIVITIES:
Net cash used by financing activities 6,509,140 10,688,901 6,426,419 15,701,904 42,724,598
NET INCREASE IN CASH AND CASH
EQUIVALENTS 3,444,786 6,781,147 445,338 8,935,984 9,864,744
CASH AND CASH EQUIVALENTS:
Beginning of period 1,285,272 3,083,597 4,284,720 928,760
------------ ------------ ------------ ------------ ------------
End of period $ 4,730,058 $ 9,864,744 $ 4,730,058 $ 9,864,744 $ 9,864,744
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 31,015 $ 20,662 $ 57,092 $ 34,814 $ 564,789
============ ============ ============ ============ ============
</TABLE>
See Notes to financial statements
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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 June 1997, the Company completed a Warrant redemption and
exercise offer which raised $10,652,000 from the exercise of 2,130,527
Warrants. As a result of this transaction, the Company issued 2,838,665
additional shares of Common Stock, which, together with the issuance of
shares pursuant to employee stock option exercises, increased the number of
shares of Common Stock outstanding at June 30, 1997 to 9,868,897. The
Company redeemed all of its unexercised redeemable Warrants.
The Company previously reported the issuance in March 1997 of
3,000 shares of Series B Convertible Preferred Stock for total proceeds of
$3,000,000. 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. The initial dividend of $37,500 was accrued
during the quarter ended June 30, 1997 and paid by the issuance of 10,193
shares of Common Stock on July 1, 1997. Each share of the Series B
Preferred Stock is convertible at the option of the holder at a conversion
price equal to the lesser of $6.15 or at conversion percentage discounts
ranging from 80% to 75% of the market price of the underlying shares of
Common Stock measured over a specified period immediately
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prior to each conversion date (all as set forth in the Statement of Rights
and Preferences for the Series B Preferred Stock). In accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 68,
Increasing Rate Preferred Stock, a non-cash dividend in the amount of $1
million will be recognized by the Company. The dividend amount has been
calculated taking total proceeds received in the offering divided by 75%,
the most beneficial conversion feature offered to preferred shareholders,
resulting in the fair value of the underlying common stock. The difference
between the fair value and proceeds received by the Company has been
accounted for as an implicit dividend and will be amortized over 270 days,
the most beneficial conversion period offered to the holders of the
preferred stock. The Company recognized $25,926 and $337,037 as non-cash
dividends in the first and second quarter, respectively. All 3,000 shares
of Series B Preferred Stock were converted into 730,073 shares of Common
Stock during August 1997. At August 11, 1997, the Company had outstanding
10,614,836 shares of Common Stock.
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 $33.4 million as of June 30, 1997.
Approximately 30% 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 a total consideration to the Company of $4 million. The
Company will recognize revenue only as resource modules are delivered and
accepted. Initial deliveries under this agreement may occur
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during the third quarter of 1997. However, given the Company's reliance on
sole source third-party vendors, it is possible that deliveries will not be
made until the fourth quarter, if ever. See "Risk Factors - Manufacturing
Risk; 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.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
Research and development expense for the six months ended June
30, 1997 was $5.1 million, compared to $6.5 million for the same period in
1996, a decrease of 22%. The reduction was primarily due to a decrease in
non-recurring hardware engineering expense and prototype parts cost. Costs
related to the development of MTA systems accounted for approximately 83%
of the Company's operating expenses in the first six months of 1997, a
decrease from approximately 90% in the comparable 1996 period. However,
these expenses increased from $2.0 million in the first quarter of 1997 to
$3.1 million in the second quarter. During the first quarter of 1997,
$486,000 was directly related to the completion and testing of the
prototype, and pre-production costs, whereas such costs, plus costs
incurred for future system development, accounted for over $1.3 million in
the second quarter. In 1997, although non-recurring hardware engineering
expense and prototype parts cost for the current MTA implementation should
continue to decrease, research and development expense will continue to be
a major expense as the Company devotes greater effort to future system
development.
Marketing and sales expense for the six months ended June 30,
1997 was $373,000, compared to $278,000 for the same period in 1996, an
increase of 34%. General and administrative expense for the six months
ended June 30, 1997 was $700,000, compared to $490,000 for the same period
in 1996, an increase of 43%. The increase in marketing and sales expense
was due to additional sales staff, software applications and customer
support 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 June 30, 1997, the Company's
principal sources of liquidity have been DARPA research funding of
approximately $18.9 million and net proceeds from the sale of equity
totaling $43 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 June 30, 1997, the Company had $9.9 million in cash
and no bank line of credit.
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The Company used cash for operations of $6.5 million during the
first six months of 1997, as compared to $5.8 million during the comparable
period in 1996. The increase in the first half of 1997 over the comparable
period of 1996 was primarily due to an increase in inventory purchases,
payroll and advances to suppliers, offset by a decrease in accounts
payable. The loss of $6 million in the first half of 1997 includes
depreciation expense of $343,000, a decrease of $64,000 over the first half
of 1996.
The Company's investing activities have consisted primarily of
expenditures for fixed assets, which have totaled $2.8 million from the date
of incorporation through June 30, 1997, net of proceeds on disposal of
assets. Expenditures were $182,000 and $265,000 for the first half of 1996
and 1997, respectively.
On June 25, 1997, the Company redeemed all of its unexercised
publicly held Warrants. The Company received approximately $10.6 million
from the exercise of 2,130,527 Warrants, net of expenses, with 95,604
Warrants redeemed at $.05 per Warrant.
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 and 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. Personnel operating costs
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 1997. If the shipment and
acceptance of the Company's initial MTA system is delayed substantially
beyond the fourth quarter in 1997, the Company will likely need additional
capital in order to continue its present operations and inventory
acquisitions. To meet its needs in 1998, the Company expects to receive
revenues from sales of MTA systems, 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.
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,
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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
In May 1997, the Company called for the redemption of all
outstanding Redeemable Common Stock Purchase Warrants (the "Warrants") on
June 25, 1997. To encourage holders to exercise Warrants, the Board of
Directors amended the Warrants to provide that each Warrant was exercisable
for 1.25 shares of Common Stock with an exercise price of $5 per Warrant
(that is, $4 per common share). On June 25, 1997, the Company redeemed all
of its unexercised publicly held Warrants. The Company received
approximately $10.6 million from the exercise of 2,130,527 Warrants, net of
expenses, with 95,604 Warrants redeemed at $.05 per Warrant. For certain
information regarding conversion of the Company's Warrants resulting in
cash proceeds to the Company of $10.6 million in the second quarter of 1997
and the issuance and subsequent conversion of the Company's Series B
Preferred Stock, see "Changes In Capital" under "Notes To Financial
Statements," above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on May 7, 1997.
Burton J. Smith and John W. Titcomb, Jr. were elected as directors for
three-year terms expiring in 2000, each receiving at least 5,470,767 votes
(or 99.99% of the votes cast). James E. Rottsolk, David N. Cutler, Daniel
J. Evans and Kenneth W. Kennedy continue to serve as directors.
The 1996 Employee Stock Purchase Plan was approved by shareholders with
3,692,750 shares voting in favor (98.57%), 41,090 shares voting against
(1.1%) and 12,519 shares abstaining (.33%).
Amendments to the 1995 Stock Option Plan were approved by shareholders with
3,598,852 shares voting in favor (96.06%), 106,059 shares voting against
(2.83%) and 41,448 shares abstaining (1.11%).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Earnings (Loss) Per Share
27. Financial Data Schedule
(b) Reports on Form 8-K
Reports on Form 8-k were filed on April 1, 1997 and May 21, 1997 during
the quarter ended June 30, 1997.
Items 1, 3 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: August 14, 1997 By: /s/ 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 Six Months Ended through
June 30, June 30, June 30,
1996 1997 1996 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE
SHARES OUTSTANDING 4,718,657 7,159,373 4,315,780 6,912,675 1,839,029
NET LOSS APPLICABLE
TO COMMON STOCK $(3,737,230) $(3,939,977) $(7,288,138) $(6,381,367) $(33,426,456)
NET LOSS PER SHARE $ (0.79) $ (0.55) $ (1.69) $ (0.92) $ (18.18)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF TERA COMPUTER COMPANY FOR THE QUARTER
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 9,864,744
<SECURITIES> 0
<RECEIVABLES> 49,229
<ALLOWANCES> 0
<INVENTORY> 2,191,566
<CURRENT-ASSETS> 12,755,999
<PP&E> 3,319,974
<DEPRECIATION> (2,214,950)
<TOTAL-ASSETS> 13,895,953
<CURRENT-LIABILITIES> 3,995,411
<BONDS> 0
0
3,192,063
<COMMON> 39,963,752
<OTHER-SE> (33,388,956)
<TOTAL-LIABILITY-AND-EQUITY> 13,895,953
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,680,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,423
<INCOME-PRETAX> (3,565,440)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,565,440)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,939,977)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
