<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
September 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 November 7, 1997, 10,901,320 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> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1996 3
and September 30, 1997
Statement of Operations for the Three Months and 4
Nine Months Ended September 30, 1996 and
September 30, 1997, and cumulative from date of
inception to September 30, 1997
Condensed Statement of Cash Flows for the Three 5
Months and Nine Months Ended September 30, 1996
and September 30, 1997 and cumulative from date of
inception to September 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 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, SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 928,760 $ 9,045,051
Accounts receivable 40,045 92,753
Inventory 851,960 3,063,099
Advances to suppliers 310,077 606,411
Other assets 146,350 264,004
Stock subscriptions receivable 1,074,997
------------ ------------
Total current assets 3,352,189 13,071,318
PROPERTY AND EQUIPMENT, NET 1,182,422 1,646,895
LEASE DEPOSITS 81,902 76,730
------------ ------------
TOTAL $ 4,616,513 $ 14,794,943
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,070,242 $ 1,682,847
Accrued payroll and related expenses 1,712,971 1,524,268
Potential contract adjustments 250,000 250,000
Current portion of obligations under capital leases 340,765 361,111
------------ ------------
Total current liabilities 3,373,978 3,818,226
OBLIGATIONS UNDER CAPITAL LEASES
less current portion 114,474 358,728
SHAREHOLDERS' EQUITY:
Preferred Stock, par $.01 - Authorized, 5,000,000 shares;
5,000 shares issued and outstanding of Series C Convertible 5,064,986
Common Stock, par $.01 - Authorized, 25,000,000 shares;
issued and outstanding, 6,496,815 and 10,677,938 shares 27,098,153 43,754,260
Common stock subscribed 1,074,997
Accumulated deficit (27,045,089) (38,201,257)
------------ ------------
1,128,061 10,617,989
TOTAL $ 4,616,513 $ 14,794,943
============ ============
</TABLE>
See notes to financial statements
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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 NINE MONTHS ENDED THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------- ------------
1996 1997 1996 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES:
Research and development $ (2,195,293) $ (3,871,400) $ (8,704,416) $ (8,984,018) $(47,617,218)
Marketing and sales (162,848) (262,065) (441,072) (635,225) (2,466,094)
General and administrative (276,166) (366,560) (766,618) (1,066,076) (5,878,543)
------------ ------------ ------------ ------------ ------------
$ (2,634,307) $ (4,500,025) $ (9,912,106) $(10,685,319) $(55,961,855)
RESEARCH FUNDING 48,355 119,815 77,831 349,169 19,004,014
------------ ------------ ------------ ------------ ------------
Net operating expense $ (2,585,952) $ (4,380,210) $ (9,834,275) $(10,336,150) $(36,957,841)
OTHER INCOME (EXPENSE) 12,178 104,382 (27,637) 79,418 (343,980)
------------ ------------ ------------ ------------ ------------
NET LOSS $ (2,573,774) $ (4,275,828) $ (9,861,912) $(10,256,732) $(37,301,821)
PREFERRED STOCK DIVIDEND 0 (14,714) 0 (52,214) (52,214)
AMORTIZATION OF PREFERRED
STOCK DISCOUNT 0 (484,259) 0 (847,221) (847,221)
NET LOSS APPLICABLE TO ------------ ------------ ------------ ------------ ------------
COMMON STOCK $ (2,573,774) $ (4,774,801) $ (9,861,912) $(11,156,167) $(38,201,256)
============ ============ ============ ============ ============
NET LOSS PER COMMON SHARE $ (0.41) $ (0.46) $ (1.98) $ (1.38) $ (18.95)
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,284,358 10,331,862 4,981,174 8,064,929 2,015,951
</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 Nine Months Ended through
September 30, September 30, September 30,
---------------------------- ---------------------------- ------------
1996 1997 1996 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (2,573,774) $ (4,275,828) (9,861,912) $(10,256,732) $(37,301,821)
Net cash used by operating activities (2,670,434) (5,461,944) (8,440,189) (11,962,494) (35,480,975)
INVESTING ACTIVITIES:
Net cash used by investing activities (181,452) (742,103) (392,778) (1,007,473) (3,582,926)
FINANCING ACTIVITIES:
Net cash provided by financing activities 165,615 5,384,354 6,592,034 21,086,258 48,108,952
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (2,686,271) (819,693) (2,240,933) 8,116,291 9,045,051
CASH AND CASH EQUIVALENTS:
Beginning of period 4,730,058 9,864,744 4,284,720 928,760
------------ ------------ ------------ ------------ ------------
End of period $ 2,043,787 $ 9,045,051 2,043,787 $ 9,045,051 $ 9,045,051
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 35,955 $ 22,068 93,047 $ 56,882 $ 586,857
============ ============ ============ ============ ============
</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
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.
During the third quarter of 1997, the Company issued an aggregate of 740,266
shares of Common Stock upon conversion of and in payment of accrued dividends on
the Series B Convertible Preferred Stock.
On September 24, 1997, the Company issued 5,000 shares of Series C
Convertible Preferred Stock for total proceeds of $5,000,000. Holders of Series
C Convertible Preferred Stock are entitled to receive cumulative dividends at
the rate of $50.00 per annum per share of the Series C Convertible Preferred
Stock. Each share of the Series C Convertible Preferred Stock is convertible at
the option of the holder at a conversion price equal to the lesser of $14.52 or
80% of the market price of the underlying shares of Common Stock measured over a
specified period immediately prior to each conversion date (all as set forth in
the Statement of Rights and Preferences for the Series C Convertible Preferred
Stock). In accordance with Securities and Exchange Commission
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Staff Accounting Bulletin No. 68, Increasing Rate Preferred Stock, a non-cash
dividend in the amount of $1.25 million will be recognized by the Company. The
dividend amount has been calculated taking total proceeds received in the
offering divided by 80%, 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 90 days, the shortest conversion period available to the holders of the
preferred stock. The Company amortized $97,222 as an implicit dividend in the
third quarter on the Series C Convertible Preferred Stock. On November 5, 1997,
the holder converted 2,000 shares of Series C Convertible Preferred Stock and
accrued dividends thereon into an aggregate of 212,171 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 $38.2 million as of September 30, 1997. Approximately 28%
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
accepted. Initial deliveries under this agreement may occur during the fourth
quarter of 1997. The Company has experienced delays, however, in receiving
integrated circuits and printed circuit boards from its suppliers which meet its
design specifications and, given the Company's reliance on sole source
third-party vendors, it
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is possible that deliveries will not be made until 1998, if ever. 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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Research and development expense for the nine months ended September 30,
1997 was $9.0 million, compared to $8.7 million for the same period in 1996.
Increases in manufacturing costs and in wages and benefits due to increased
staff were largely offset by decreases in non-recurring hardware engineering
expense and prototype parts cost. Costs related to the development of MTA
systems accounted for approximately 84% of the Company's operating expenses in
the first nine months of 1997, a decrease from approximately 88% in the
comparable 1996 period. However, these expenses increased from $3.1 million in
the second quarter of 1997 to $3.9 million in the third quarter. During the
second quarter of 1997, $1.3 million was directly related to the completion and
testing of the prototype, and pre-production costs, whereas such costs, plus the
expenses relating to inventory obsolescence, to lower of cost or market
inventory adjustments and to future system development accounted for over $2.0
million in the third quarter. In the fourth quarter of 1997 and in 1998,
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 nine months ended September 30, 1997
was $635,000 compared to $441,000 for the same period in 1996, an increase of
44%. General and administrative expense for the nine months ended September 30,
1997 was $1,066,000 compared to $767,000 for the same period in 1996, an
increase of 39%. The increase in marketing and sales expense was due to
additional sales and customer support staff, and the increase in general and
administrative expense was due largely to additional staff and increased legal,
accounting and other 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.
The Company currently is billing DARPA under a research contract awarded
in September 1995. Billings under this contract were approximately $186,000 in
1996, primarily in the fourth quarter, and are expected to be approximately
$400,000 in 1997, with $349,000 collected in the first nine months. In August
1997, the Company was awarded a $1,080,000 subcontract from the San Diego
Supercomputer Center as part of an 18-month contract between DARPA and the San
Diego Supercomputer Center to implement, optimize and evaluate certain defense
related applications on the Tera MTA system. Of that sum, the Company will
subcontract approximately an aggregate of $515,000 to The Boeing Company and the
Sanders division of Lockheed Martin
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Corporation. The Company expects to begin billing under this subcontract in the
fourth quarter.
In the first nine months of 1997, the Company recorded a $52,000 charge
for dividends on the Company's Series B Convertible Preferred Stock and
amortized an aggregate of $847,000 of an implicit dividend arising from the
conversion of the Series B Convertible Preferred Stock in August 1997 and the
issuance of the Series C Convertible Preferred Stock in September. The Company
will recognize approximately $1,153,000 as an implicit dividend on the Series C
Convertible Preferred Stock in the fourth quarter of 1997. See the discussion
under "Changes in Capital" in the "Notes to Financial Statements," above.
LIQUIDITY AND CAPITAL RESOURCES
Since its incorporation through September 30, 1997, the Company's
principal sources of liquidity have been net proceeds from the sale of equity
totaling $48.1 million and DARPA research funding of approximately $19 million.
At September 30, 1997, the Company had $9.0 million in cash and no bank line of
credit.
The Company used cash for operations of $12.0 million during the first
nine months of 1997, as compared to $8.4 million during the comparable period in
1996. The increase in the first nine months of 1997 over the comparable period
of 1996 was primarily due to increases in inventory purchases, advances to
suppliers and payroll, offset in part by a decreases in accounts payable and
depreciation expense. Although depreciation expense decreased by $65,000 to
$543,000 for the first nine months of 1997 over the comparable period in 1996,
primarily due to expiration of capital leases in the first six months of 1997,
depreciation expense increased by $12,000 to $200,000 in the third quarter of
1997 over the third quarter of 1996.
The Company's investing activities have consisted primarily of
expenditures for fixed assets, which have totaled $3.6 million from the date of
incorporation through September 30, 1997, net of proceeds on disposal of assets.
Expenditures were $393,000 and $1,007,000 for the first nine months of 1996 and
1997, respectively, with $742,000 spent in the third quarter of 1997, an
increase of $561,000 over the third quarter of 1996. This increase primarily
reflects acquisitions of additional electronic and computing resources.
On September 24, 1997, the Company raised $5,000,000 from the sale of its
Series C Convertible Preferred Stock, as discussed under "Changes in Capital" in
the "Notes to Financial Statements," above.
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
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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, along with funds anticipated from
sales of MTA systems, are sufficient to meet the Company's working capital
requirements through the next twelve months. If the shipment and acceptance of
the Company's initial MTA system are delayed substantially beyond the fourth
quarter in 1997, or if the Company does not receive additional purchase orders
for MTA systems in the first quarter of 1998, the Company will 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, 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
For certain information regarding the conversion of the Company's Series
B Convertible Preferred Stock and the issuance of the Company's Series C
Convertible Preferred Stock, see "Changes In Capital" under "Notes To Financial
Statements," above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Statement of Rights and Preferences of the Series C Convertible
Preferred Stock of the Registrant, as filed with the Secretary of
State of the State of Washington on September 23, 1997*
10.1 Agreement between Unisys Corporation and the Registrant, dated
September 17, 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. 333-37465, as filed with the Commission on
October 8, 1997.
(b) Reports on Form 8-K
A report on Form 8-K was filed on July 11, 1997.
ITEMS 1, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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
By: /s/ JAMES E. ROTTSOLK
----------------------------
James E. Rottsolk
Chief Executive Officer
/s/ KENNETH W. JOHNSON
----------------------------
Kenneth W. Johnson
Chief Financial Officer
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Exhibit 4.1
[UNISYS LOGO]
September 17, 1997
To: Katherine Rowe
Tera Computer Company
Subject: Proposed Contract Extension
Tera Computer Company and Unisys Corporation have a manufacturing agreement
which covers the delivery of 850 ASIC devices and terminates at the end of
calendar year 1997.
Within the next month, it is likely that shipments to Tera will exceed the
volumes specified in the original agreement.
It is believed that in 1998 Tera's product volume will substantially increase.
At this time, it is not possible to accurately forecast the expected volume
levels and timing. Unisys believes that when sufficient visibility occurs, it
will be in both company's interest to draft a comprehensive new agreement.
In the interim and to insure that Tera and Unisys can continue in our mutually
beneficial relationship, Unisys proposes the following extension and slight
modification of terms:
1.) the current contract (and extension) be extended for an additional six
month term (through June 1998) for a total volume not to exceed 1600 device
deliveries. This modification provides coverage for an additional 750 devices
and includes both Bin 1 and Bin 2 devices.
2.) the price for device deliveries exceeding 850 be adjusted upward from $275
to $300 to compensate for continued interposer inspection that was not
contemplated in the original agreement. In addition for small lot starts
(defined as five or less devices per type), that an additional $15 be added per
device to recognize the impact of setup costs.
/s/ David L. Kirkwood 9/17/97 /s/ Katherine L. Rowe 9/17/97
- - ------------------------------ ------------------------------
David L. Kirkwood Katherine L. Rowe
Advanced Technology VP - Manufacturing
Operations, Vice President Tera Computer Company
Unisys Corporation
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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,
THREE MONTHS ENDED NINE MONTHS ENDED 1987 (INCEPTION)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
---------------------------- ---------------------------- SEPTEMBER 30,
1996 1997 1996 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES
OUTSTANDING 6,284,358 10,331,862 4,981,174 8,064,929 2,015,951
NET LOSS APPLICABLE TO
COMMON STOCK $ (2,573,774) $ (4,774,801) $ (9,861,912) $(11,156,167) $(38,201,256)
NET LOSS PER COMMON SHARE $ (0.41) $ (0.46) $ (1.98) $ (1.38) $ (18.95)
</TABLE>
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 9,045,051
<SECURITIES> 0
<RECEIVABLES> 92,753
<ALLOWANCES> 0
<INVENTORY> 3,063,099
<CURRENT-ASSETS> 13,071,318
<PP&E> 4,062,078
<DEPRECIATION> (2,415,183)
<TOTAL-ASSETS> 14,794,943
<CURRENT-LIABILITIES> 3,818,226
<BONDS> 0
0
5,064,986
<COMMON> 43,754,260
<OTHER-SE> (38,201,257)
<TOTAL-LIABILITY-AND-EQUITY> 14,794,943
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,254,516
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,312
<INCOME-PRETAX> (4,275,828)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,275,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,275,828)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
