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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] 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
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
WASHINGTON 93-0962605
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2815 EASTLAKE AVE EAST, SEATTLE, WASHINGTON 98102-3027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (206) 325-0800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER 12(g) OF THE EXCHANGE ACT:
COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS
Check whether the issuer (1) has 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
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
The issuer had no revenues during the year ended December 31, 1996.
The aggregate market value of the Common Stock held by non-affiliates
of the issuer as of March 21, 1997 was $17,148,181.
As of March 21, 1997, there were 6,977,487 shares of Common Stock and
2,226,131 Common Stock Purchase Warrants outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held on May 7, 1997 are
incorporated by reference into Part III.
Transitional Small Business Disclosure Format (check one): Yes No X
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TERA COMPUTER COMPANY
FORM 10-KSB
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
INDEX
Page
PART I
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item E.O. Executive Officers 19
PART II
Item 5. Market For Common Equity and Related Stockholder Matters 20
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 7. Financial Statements 23
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 23
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 24
Item 10. Executive Compensation 24
Item 11. Security Ownership of Certain Beneficial Owners
and Management 24
Item 12. Certain Relationships and Related Transactions 24
Item 13. Exhibits and Reports on Form 8-K 25
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company was formed to design, develop and market high performance
general purpose parallel computer systems. Tera's Multithreaded Architecture
System ("MTA") system is designed to address a wide range of scientific and
engineering applications, such as simulation and visualization of complex
mechanical and biochemical systems, as well as emerging commercial applications,
such as database mining, information-on-demand and computer-aided design and
visualization. The Company believes that its MTA system architecture represents
a significant breakthrough in high performance computing that will enable the
Company to offer systems with several times the price/performance of currently
available commercial high performance computer systems. Typical MTA system
configurations are expected to sell for between $5 million and $40 million.
HIGH PERFORMANCE COMPUTER INDUSTRY
Historically the need for greater computing power for scientific,
engineering and commercial applications has increased significantly. This need
typically has been met by high performance computer systems for scientific and
engineering applications and by mainframes for commercial applications, with
millions of dollars invested per system.
For scientific and engineering applications, the increased need for
computing power has been driven by greater emphasis on computational modeling to
develop and verify engineering solutions across a broad range of industries and
an increased focus on highly challenging basic and applied scientific problems
that can be met only through numerically intensive computation. The U.S.
government has recognized that the continued development and use of high
performance computer systems for these technical applications is of critical
importance to the economic competitiveness of the United States.
For commercial applications, pressures resulting from global competition,
reduced cost of communication and the proliferation of data from the enormous
number of workstations and personal computers also have increased the need for
high performance computing. For competitive reasons, many large commercial users
have concluded that enterprise-wide computing applications require immediate
interactive processing of available data. In order to process data in such a
manner, such users must move away from batch processing but cannot do so because
of the limited computational capacities of their existing systems.
Computer designers have taken a variety of approaches in their efforts to
achieve higher levels of performance. Traditionally, high performance computer
systems employed one or a small number of the fastest available single
processors. Improvements in performance have been achieved by designing
processors having faster switching times and greater densities and, in the case
of numerically intensive applications, by employing vector multiprocessing. This
approach, employed most notably by Cray Research, repeatedly applies the same
operation to each of a sequence of data elements. Vector multiprocessing has
proven to be highly effective for many scientific and engineering applications,
but not for most commercial applications. Moreover, these systems are limited in
performance and have a high cost of computation.
A number of computer companies, including IBM, Intel, Silicon Graphics,
Inc., Cray Research, Fujitsu, Ltd. and Convex Computer Corporation, have turned
to massively parallel processing as a way to achieve greater computational power
and improved price/performance levels. Massively parallel processing enables
large numbers of processors to act concurrently on multiple tasks or in concert
on a single computationally-intensive task. In these systems, each processor is
directly
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connected to its own private memory, so that the programmer must manage the
movement of data among memory units. As a result, computer systems relying on
this architecture are difficult to program and have limited applicability.
While some users have developed scientific and engineering software for
certain of their applications on massively parallel systems, it has not been
practical for them to port a large number of third-party software applications
to these computer systems. The Company believes that the absence of a standard
software development environment has inhibited third-party application programs
which in turn has severely restricted market acceptance of massively parallel
processing systems.
Users of high performance computer systems therefore face a limited choice.
Mainframes and vector multiprocessing systems permit a conventional programming
environment, but are subject to inherent performance limitations and are limited
in the number of processors in a system, while massively parallel processing
systems are difficult or impractical to program and perform poorly for most
applications.
THE TERA SOLUTION
The Company believes that its MTA system architecture represents a
significant breakthrough in high performance computing. The key to this
breakthrough is its scalable shared memory, which the Company believes will
enable the MTA system to overcome limitations of currently available commercial
high performance computer systems. The MTA system is designed to have all of the
following key attributes to serve the evolving needs of the high performance
computer market effectively: (i) sustainable high speed, (ii) broad
applicability, (iii) ease of software programmability and portability, (iv)
scalability, (v) balanced input/output capability and (vi) a future product
migration path. See " -- Technology."
Scalable shared memory provides every processor with equal access to every
memory location. This greatly simplifies programming because it eliminates
concerns about the layout of data in memory. It also provides a very flexible
and efficient approach to parallelism since any available processor can operate
on any data no matter where the data are located. Applications with irregular or
unpredictable internal data flow patterns are facilitated by this capability.
The historical drawback of shared memory has been its slowness due to some
processors being physically distant from some areas of memory and the likelihood
of conflicts when two or more processors attempt to access the same memory
location. Both factors increase the latency, or delay, experienced when a
processor attempts to access a memory location. The MTA system's architecture is
designed to be latency tolerant: a processor never wastes time waiting to access
memory. Tera's design accomplishes this by using a combination of multithreaded
architecture and a high bandwidth interconnection network.
The MTA system software is designed to support and leverage the scalable
shared memory that the architecture provides. Programs are analyzed and
parallelism is extracted automatically, greatly simplifying the implementation
of new applications. In addition, most programs written for Cray Research vector
multiprocessing systems are designed to be automatically translated by Tera's
system software to run at high speed on the MTA system. The Company intends to
further extend its compatibility with competitors' systems to increase the
attractiveness of the MTA system to both potential customers and independent
software vendors ("ISV's").
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STRATEGY
Tera's objective is to be the leading provider of high performance computer
systems to the scientific, engineering and emerging commercial markets. Key
elements of the Company's strategy include:
- - Establish and Leverage Dominant Position in the Very High Performance
Scientific Computer Market.
Initially the Company intends to target the very high performance
scientific computer market. Sales targets in this market include government
agencies and research laboratories in the United States and Western Europe.
These users generally are easily identifiable and well established, possess
significant resources, develop their own application software, and are reliant
upon, and are early customers for, innovative high performance computer systems.
The Company believes that establishing a dominant position in the very high
performance scientific market should provide it with the necessary foundation
and credibility, financial and otherwise, to attract ISV's to port their
application software to the MTA system. The Company believes that the
availability of such third-party software should enable it to address
effectively the worldwide high performance engineering computer market for
applications such as computational fluid dynamics and molecular modeling. The
Company's planned delivery of its MTA system to the San Diego Supercomputer
Center is in furtherance of this strategy.
In addition, the Company intends to develop and support, both internally and in
cooperation with ISV's, application software to enable the Company to address
effectively certain segments of the emerging commercial computer market.
- - Establish and Leverage Strategic Relationships.
The Company intends to establish strategic relationships with leading
participants in various segments of the high performance computer market. The
Company believes these relationships should enable it to take advantage of the
superior resources, technological capabilities and proprietary positions of
these entities in advancing Tera's position in the high performance computer
market.
The Company has received over $18 million from the Department of Defense
Advanced Research Projects Agency ("DARPA") to assist in funding the development
of the MTA system. The Company currently has one contract with DARPA and has
begun work under it to develop certain components of its next generation MTA
system. See "Risk Factors -- Marketing Risks; Government Funding and
Regulation."
The Company intends to emphasize the development of relationships with
large scale high performance computer users, such as Fortune 100 companies and
major financial institutions, in tandem with the ISV's supplying software to
these companies and institutions, to port that software to the MTA system.
- - Establish And Leverage Manufacturing Alliances.
The Company's strategy is to focus its resources on the design and
development of its MTA system hardware and software and on market development,
rather than on manufacturing capability. By using independent hardware
fabrication facilities, the Company will avoid the large capital commitment and
overhead burden associated with establishing a manufacturing facility, which
will provide the Company with the flexibility to adopt new technologies if and
when they become available without the risk of equipment obsolescence. In
accordance with the
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strategy, the Company has established relationships with Vitesse Semiconductor
Corporation ("Vitesse") and TriQuint Semiconductor, Inc. ("TriQuint") to provide
the Company with gallium arsenide ("GaAs") wafers and with Unisys Corporation to
provide semiconductor packaging and testing services. See "Risk Factors --
Manufacturing Risks; Reliance on Third Party Sole Source Suppliers."
TECHNOLOGY
The MTA system is designed to incorporate the following technological
characteristics:
Sustained High Speed. The MTA system's anticipated high speed is due to a
combination of a high clock rate and multithreaded scalar pipelines. Each
processor is expected to have an execution rate of about one billion operations
per second with peak 64-bit floating point performance also about one billion
floating point operations per second. Each input/output processor will have a
peak transfer rate of up to four hundred million bytes per second. Sustained
performance is expected to be approximately 50% of these figures.
Scalability. The MTA system is designed to use a large number of processors
in a single system effectively. The current design supports systems of up to 256
processors; the next generation MTA system is expected to accommodate 1,024 or
more processors. A 256-processor configuration is expected to have peak
performance of about 256 billion instructions per second, 256 billion 64-bit
floating point operations per second, and one hundred billion bytes per second
of input/output performance.
Multithreaded Architecture. The MTA system architecture is designed to
support up to 128 separate threads of execution per processor (over 32,000
threads in a 256-processor system). When a processor dispatches an instruction
for the current thread, it instantly switches to the next thread which is ready
to continue. The hardware is designed to handle this switching automatically,
with no intervening machine cycles, resulting in zero switching overhead.
Threads may come from totally separate programs or from a single program.
Tera's compilers automatically extract parallelism from user programs and create
multiple threads to maximize performance. The MTA operating system is designed
to execute multiple user programs simultaneously, even within a single
processor. The input/output processors are designed to be latency tolerant and
to address data anywhere in the system.
High Bandwidth Interconnection Network. All hardware resources in the MTA
system, namely computational processors, input/output processors and memory
units, will be interconnected via a three-dimensional pipelined network. This
network is expected to provide substantially greater capacity, or bandwidth,
than found in current commercially available computer systems, and is expected
to be a key factor in the ability of MTA systems to scale up to hundreds of
processors without compromising system performance or programmability.
Compilers and Runtime System. The MTA system software is designed to
exploit the speed potential of the hardware without burdening the programmer
with the details of how this is accomplished. The MTA system's parallelizing
compilers analyze programs written in conventional languages, such as FORTRAN, C
or C++, and determine the parts of a program's computations that can be executed
simultaneously. The compiler then generates the machine instructions to create
separate execution threads for these parallel parts.
It is expected that Tera's runtime system, in conjunction with its
compilers, will automatically distribute and balance the threads in a parallel
program to the available processors, and be able to adapt to changing
parallelism as the application runs by acquiring and releasing processors.
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The Tera debugger allows programmers to find mistakes in their applications
by displaying and monitoring the instructions and variables in an application
program. The debugger is tightly integrated with the compiler and runtime system
to allow users to debug parallel programs.
Software Portability. Tera's compilers are designed to compile most
programs written for Cray Research vector multiprocessing systems into parallel
programs automatically. Typical scientific applications contain between 10,000
and 1,000,000 lines of source code. It can take months to rewrite a program to
run on new hardware, and additional months or years of testing and use before
the code is considered trustworthy enough for actual production work. This
portability problem is a major deterrent to the acceptance of any new computer
system. To overcome this problem, Tera has designed its language compilers and
libraries to be compatible with those from Cray Research, with the goal that
most Cray Research applications can be simply recompiled on a MTA system and be
ready for immediate production use with no loss of speed. The Company believes
this feature will give it a significant competitive advantage.
Operating System. The dominant operating system in high performance
computing is UNIX. The Tera operating system is designed to be a fully
distributed and symmetric implementation of UNIX, providing high performance
network connections and a highly concurrent file system. Both batch processing
and interactive processing are supported. The Company believes that, due to the
trend toward "open" systems, UNIX also is finding increasing application in
commercial installations.
PLANNED PRODUCTS
The Company has designed a number of configurations of the MTA system. Each
system will be constructed from resource modules with the model number
indicating the number of these resource modules, e.g., the MTA 16 model has 16
resource modules. Each resource module contains:
- a computational processor ("CP")
- an input/output processor ("IOP") and
- either two or four memory units.
Each resource will be individually connected to a separate routing node in
the MTA system's three-dimensional toroidal interconnection network. Each
resource connection is designed to be capable of supporting data transfers to
and from memory at full processor rate in both directions, as are all of the
connections between the network routing nodes themselves.
The Company built a prototype from production components in late 1996. The
prototype is being used to verify and debug mechanical components and assembly
procedures developed during the design process. The prototype will run at or
near full speed and will include the hardware functionality of a production
system. The Company has begun construction of its initial production system.
The Company has begun planning for successive product generations. By
improving price/performance levels and lowering the cost of entry level systems,
these future products will be designed to enhance the Company's technological
position while potentially broadening its market acceptance. The Company
believes that denser integrated circuit technology should enable the scaling up
of systems to 1,024 processors and beyond. Finally, the Company intends to take
advantage of the ability of the MTA system to scale down to compete with
workstation and other microprocessor-based products.
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MARKETS AND APPLICATIONS
The MTA system has been designed for prospective customers with demanding
science, engineering and commercial applications. Because of its general purpose
characteristics, the Company believes that the MTA system may be employed across
a broad range of mainstream and emerging high performance computer applications.
While funding for certain defense programs has decreased in recent years,
total U.S. government expenditures for high performance computer systems have
been augmented by funding under various high performance computing programs. In
addition, important areas of civilian research, such as energy and environmental
studies, weather modeling and toxic mitigation, are receiving federal funding,
and the formerly defense-oriented national research laboratories are in many
cases reorganizing for non-military projects. See "Risk Factors -- Marketing
Risks; Government Funding and Regulation."
Government agencies and research laboratories are particularly attractive
prospective customers for Tera because they generally have a higher tolerance
for risks inherent in a complex, innovative product. This market has, at most,
several hundred sites and a limited number of customers that are well-known to
each other and to their existing and potential suppliers, including Tera. The
Company maintains relationships with many of the management and staff of these
potential customers. Addressing this market initially will help the Company
avoid the costs of assembling a large sales organization and developing a broad
range of application software. With a sales cycle for its intended products of
two years or longer, the Company will add sales, service, training and support
personnel as anticipated needs indicate.
If and when third-party application software becomes available on the MTA
system, the Company intends to increase its marketing efforts to the high
performance commercial computer market, where it believes major growth
opportunities may exist. This market is far more risk-averse, and the Company
does not expect significant sales in this market until the MTA system is well
established. At such time, the Company will need to increase its marketing and
selling efforts considerably and may enter into relationships with major
hardware and software suppliers.
Scientific and Engineering Applications. The Company expects that its
prospective customers running scientific and engineering applications will
purchase MTA systems largely for numerically intensive computations and will
increasingly make use of the MTA system's input/output capabilities to handle
the large amounts of data associated with such computations. The Company's
prospective customers include government agencies and research laboratories that
are expected to use the MTA system for a variety of applications, including
basic research in the fields of biology, chemistry, environmental science,
materials science and physics.
Prospective customers within the United States government include such
organizations as the National Science Foundation, the Department of Defense, the
National Security Agency, the Department of Energy, the National Aeronautics and
Space Administration and the National Institutes of Health. These prospective
customers have a number of computationally intensive applications, including the
following:
- National security - Human genome sequencing
- Severe storm modeling - Military battlefield simulation
- Earth observation - Groundwater pollutant transport
- Climate modeling - Computational biology
- Computational fluid dynamics - Computational chemistry
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The Company intends to market its MTA systems to a wide range of
prospective industrial customers with major computationally-intensive, technical
computing requirements, including the following:
- Nuclear reactor design - Multidisciplinary optimization
- Drug and chemical design - Petroleum reservoir modeling
- Automobile crash simulation - Electromagnetic simulation
- Combustion simulation
Emerging Commercial Applications. The Company expects that prospective
commercial customers may purchase MTA systems either to implement strategic new
applications or to improve their processing capabilities for database related
operations and other traditional commercial applications. These applications
include:
- Database Mining -- access and examination of databases to identify
significant data patterns relevant to consumer preferences, insurance
claims and fraud.
- Information-on-Demand -- the management, storage and distribution of
multimedia data for instantaneous access by thousands of interactive,
simultaneous users.
- On-Line Transaction Processing -- enabling transactions such as
banking, home shopping, travel reservations and related services to
take place directly over a computer network.
- Interactive Simulation and Visualization -- allowing users the ability
to design and develop products such as automobiles, aircraft and
buildings.
RESEARCH AND DEVELOPMENT
The Company's primary implementation task has been the design of the
hardware components and software required for its MTA system. The Company's
research and development expenses for the years ending December 31, 1995, and
1996 were approximately $6,679,000 and $10,504,000, respectively. The Company
believes that its future performance will depend in large part on its ability to
design, develop, contract for the manufacture of, and market its MTA system.
Additionally, the Company must develop ongoing enhancements to its MTA system
and develop new product generations. Consequently, the Company will be required
to continue to devote a substantial portion of its resources to research and
development.
MANUFACTURING
While the Company has designed all of the MTA system hardware components,
it intends to subcontract the manufacture of such components, including
integrated circuits, printed circuit boards, flex circuits and power supplies,
on a sole source basis to third-party suppliers. The Company has contracted with
Unisys Corporation to provide semiconductor test and packaging services through
1997. The Company expects to perform final system integration and test and
design and maintain its MTA system software internally.
Hardware. The Company's general strategy is to capitalize on
state-of-the-art commercial technology available from third-party suppliers. The
Company contracts with Vitesse and TriQuint for the supply of GaAs wafers, and
purchases other components on an as-needed basis through purchase orders. In
general, the Company has designed hardware components using such suppliers'
tools and procedures. The Company has designed at-speed testers to be used for
diagnosis and repair both in manufacturing and in the field. Component failures
will be analyzed
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in cooperation with the supplier of the component to determine the cause and to
take corrective action. See "Risk Factors -- Manufacturing Risks; Reliance on
Third Party Sole Source Suppliers."
Quality Assurance. The Company has designed the MTA system to use the test
and simulation programs developed during product design for both manufacturing
testing and field maintenance. A large amount of built-in test support has been
incorporated in the design of the MTA system to minimize both the time and
effort required to integrate a complete system and the time needed to diagnose
and repair it on-site. Quality assurance will be performed at the component,
board, modular subsystem and complete system level. The Company has designed the
MTA system to incorporate a high degree of manufacturability and serviceability,
including completely scannable logic and lithographic interconnection
techniques.
Software. Most of the MTA system software is being designed and all of it
will be maintained by the Company. Although the operating system is based on
UNIX, the kernel and the file system are being implemented by the Company to
allow much greater parallelism. UNIX utilities are being ported to the MTA
system. The Company has licensed certain mathematical library routines from IBM.
COMPETITION
The high performance computer market is intensely competitive. The barriers
to entry and the cost of remaining competitive are high. The Company's
competitors can be divided into two general categories: established companies
that are well-known in the high performance computer market and new entrants
capitalizing on developments in massively parallel processing and increased
computer performance through clusters or networks of workstations.
The high performance computer market is currently dominated by Cray
Research (now owned by Silicon Graphics, Inc.). Cray Research's large installed
base, user loyalty, and application software, coupled with Silicon Graphic's
financial resources, will continue to make it a formidable force in the
marketplace. Tera intends to compete with Cray Research by offering MTA systems
with superior performance and software compatibility. See " -- Technology --
Software Portability." Other participants in the market include IBM and foreign
companies such as Fujitsu, Ltd., Hitachi, Ltd., and NEC Corporation. To date,
the Japanese suppliers, as a group, have been largely unsuccessful in the U.S.
high performance computer market. To the extent that all of these companies
continue to use vector multiprocessing systems, they remain subject to inherent
limitations of vector multiprocessing system performance and on system
scalability. See " -- High Performance Computer Industry." Each of these
competitors, however, has broader product lines and substantially greater
engineering, manufacturing, marketing and financial resources than the Company.
A number of companies, including IBM, Intel (in March 1996, Intel indicated
it would cease directly marketing high performance computer systems), Silicon
Graphics, Inc., Cray Research (acquired by Silicon Graphics in 1996), Fujitsu,
Ltd., and Convex Computer Corporation (acquired by Hewlett-Packard in 1995),
have developed or plan to develop massively parallel systems for the high
performance market. Massively parallel systems have been limited in
applicability and difficult to program, although a breakthrough in architecture
or software technology could change this situation. See " -- High Performance
Computer Industry" and "Risk Factors -- Competition."
INTELLECTUAL PROPERTY
The Company attempts to protect its trade secrets and other proprietary
rights through formal agreements with employees, customers, suppliers and
consultants. Although the Company intends to protect its rights vigorously,
there can be no assurance that its contractual and other security
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arrangements will be successful. Such arrangements are common in the high
performance computer industry, and the Company anticipates entering into similar
arrangements in the future. There can be no assurance that such arrangements
will not be terminated or that the Company will be able to enter into similar
arrangements on favorable terms if required in the future. Although the Company
has not been a party to any material intellectual property litigation, third
parties may assert proprietary rights claims covering certain of the Company's
products and technologies. See "Risk Factors -- Proprietary Rights."
Due to the abundance of prior art in the computer sciences, Tera does not
expect to acquire broad-based patent protection of its MTA system architecture,
although in due course the Company will attempt to obtain patent protection for
significant aspects of its MTA system architecture. The Company currently has a
patent application pending, although there can be no assurance that a patent
will be issued or, if issued, will provide any meaningful protection.
EMPLOYEES
As of December 31, 1996, the Company employed 61 employees on a full-time
basis, of whom 50 were in engineering, four were in sales and marketing, and
seven were in administration. The Company also employs three individuals on a
part-time basis. The Company has no collective bargaining agreement with its
employees. The Company has never experienced a work stoppage and believes that
its employee relations are excellent.
RISK FACTORS
The following factors should be considered in evaluating the Company's
business, operations and prospects:
DEVELOPMENT STAGE ENTERPRISE; HISTORY OF LOSSES. The Company is a development
stage enterprise that had an accumulated loss of approximately $27 million as of
December 31, 1996. The Company has experienced net losses in each year of
operations and expects to incur substantial further losses while it tests and
evaluates its MTA system prototype and commences production, and possibly
thereafter. The Company has had no revenue or earnings and does not expect to
recognize revenue from the sale of its initial MTA system sooner than the first
half of 1997, if ever. Whether the Company will achieve revenue or earnings will
depend upon a number of factors, including its ability to design, develop,
manufacture and market the MTA system and to achieve broad market acceptance
thereof. In addition, profitability will depend on, among other things, the
level of revenue in any given period, the terms and conditions of sale or lease
for an MTA system, the system model or models sold, and the Company's expense
levels and manufacturing costs. There can be no assurance that the Company will
be successful in completing the development of, and delivering and receiving
payments for, production MTA systems, or that it will be able to generate sales
or achieve a profitable level of operations in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Markets and Applications."
DEVELOPMENT STATUS OF THE MTA SYSTEM. The development of a new very high
performance computer system is a lengthy and technically challenging process and
requires a significant investment of capital and other resources. Several
companies in this market have experienced extreme financial difficulty in the
past several years, including Thinking Machines Corporation, Cray Computer
Corporation, Kendall Square Research Corporation and Supercomputer Systems, Inc.
Since its inception through December 31, 1996, the Company has expended
approximately $38.6 million to design and develop the MTA system. The hardware
development effort has included design of integrated circuits, packaging and
cooling systems and at-speed testing equipment. The software development effort
has included design of compilers, an operating system and input-output software
technology. Until November 1996, when the Company
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announced that its initial prototype was undergoing testing and had run its
first programs, the MTA system has been subject only to computer simulation. The
prototype system has undergone only initial testing and evaluation and, even if
the initial testing and evaluation of the prototype system is successful, the
Company has not attempted to integrate multiple modules into a commercially
configured system and only recently commenced work on its initial production
model.
Assuming that the MTA system prototype can be successfully developed,
modifications to the hardware components, software and the integrated system
still may be required. Development of system software is a difficult process,
and there can be no assurance that the Company will be able to meet all of the
technical challenges required to integrate and complete an MTA system that
satisfies both internal and commercially acceptable performance specifications.
Significant delays in completing the various hardware components or software, or
in integrating the full system, would materially and adversely affect the
Company's business and results of operations. Even if the Company is successful
in completing development of its prototype, there can be no assurance that the
Company's products will be commercially successful. See "Business -- Markets and
Applications" and "Business -- Competition."
MANUFACTURING RISKS; RELIANCE ON AND CAPACITY OF THIRD PARTY SOLE SOURCE
SUPPLIERS. The Company intends to subcontract the manufacture of substantially
all of its hardware components, including integrated circuits, printed circuit
boards, flex circuits and power supplies, on a sole source basis to third party
suppliers, and there can be no assurance that such suppliers will be able to
manufacture the components to the Company's design specifications. Manufacturing
difficulties and limited yields, particularly of gallium arsenide ("GaAs")
integrated circuits and advanced printed circuit boards and flex circuits, could
materially and adversely affect the Company's ability to complete and deliver
production models of the MTA system. The manufacture of integrated circuits, and
in particular the manufacture of GaAs integrated circuits, is a difficult and
complex process. Minute impurities, difficulties in the fabrication process,
defects in the masks used to print circuits on wafers or other factors can cause
a substantial percentage of wafers to be rejected or numerous die on each wafer
to be non-functional. The Company's suppliers may experience problems in
achieving acceptable manufacturing yields for these or other reasons, resulting
in substantial delays in the delivery of necessary hardware components to the
Company and unacceptably high prices for those components, with a resulting loss
of profitability or loss of competitiveness for the Company's products. The
Company has experienced such yield problems already and these failures forced
the Company to redesign certain components for manufacture by alternative
suppliers which caused delays in the fabrication of the Company's prototype and
increased demands upon the Company's financial resources. There can be no
assurance that the Company's efforts to obtain components in a timely manner
that meet its design specifications will be successful.
Moreover, the production capacity of the Company's integrated circuit
suppliers is very limited and the availability of integrated circuits and other
components will be a limiting factor on the number and size of the MTA systems
that may be sold in 1997, assuming the receipt of additional purchase orders.
Absent improved yields, increased production capacity or a reallocation of such
suppliers' output to meet Tera's needs, the Company may be unable to obtain a
sufficient quantity of integrated circuits or other components to meet future
production and delivery schedules. In addition, some of the Company's key
suppliers are small companies with limited financial and other resources, and
may be more likely to experience financial difficulties than larger, well
established companies. Any or all of the Company's suppliers may make strategic
changes in their product lines, which may result in the delay or suspension of
manufacture of the Company's components or systems. In the event of a reduction
or interruption of supply of the Company's components, it could take the Company
a considerable period of time to identify and qualify alternative suppliers to
redesign its products as necessary and recommence manufacture. The Company's
inability to obtain sufficient sole or limited source components as
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<PAGE> 13
required, or to develop alternative sources if and as required in the future,
could result in the Company finding itself without a source of supply for its
components; this could materially impair the Company's ability to deliver its
products, which would materially and adversely affect the Company's business and
results of operations.
The Company's current contract with Unisys Corporation provides for
integrated circuit test and packaging services until December 1997. Although the
agreement could be extended, Unisys has informed the Company that it intends to
exit the semiconductor packaging business. After the Unisys contract expires,
the Company either will contract with another vendor for such packaging services
or perform such work internally. The inability of the Company to subcontract for
these services after its agreement with Unisys expires, or the Company's
inability to perform such services internally, would materially and adversely
affect the Company's business and results of operations.
FUTURE CAPITAL NEEDS. During 1997, the Company's working capital needs will
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. Staff operating costs will be required to fund ongoing
research, development and engineering efforts, development of a customer service
organization 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. 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, and from the sale of additional equity or debt or other financing
transactions, which may be dilutive to present shareholders. Management believes
that the Company will be able to secure the requisite funding, but there can be
no assurance that any additional financing will be available when needed or, if
available, will be on satisfactory terms. In December 1996, two significant
shareholders of the Company exercised warrants with an aggregate exercise price
of $2.15 million and, in March 1997, the Company concluded private financings
for a total of $4.1 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
MARKETING RISKS; GOVERNMENT FUNDING AND REGULATION. The Company's first sales
targets will be U.S. and foreign government agencies and research laboratories,
which constitute more than one-half of the market for very high performance
computer systems. The U.S. government historically has facilitated the
development of, and has constituted a market for, new and enhanced very high
performance computer systems. A change of policy by the U.S. government or
foreign governments that results in a reduction of, or delays in, funding of
certain high technology programs employing high performance computing could have
a major impact on the market for very high performance computer systems, and
would materially and adversely affect the Company's business, results of
operations and need for capital.
Most of the Company's potential customers already own or lease very high
performance computer systems. Some of the Company's competitors may offer
trade-in allowances or discounts to potential customers, and the Company may not
be able to match such sales incentives. The Company may be required to provide
discounts in order to make sales or be required to finance the leasing of its
products, which would result in a deferral of the Company's receipt of cash for
such systems. These developments could materially and adversely affect the
Company's business and results of operations.
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<PAGE> 14
The U.S. government regulates the export of high performance computing
systems such as the anticipated MTA system. There can be no assurance that the
U.S. government will grant any necessary export licenses for the sale of MTA
systems to foreign buyers. The Company's prospects for growth will depend in
part on its ability to obtain export licenses for foreign sales, the delay or
denial of which could materially and adversely affect the Company's business and
results of operations.
In order to expand its market beyond the very high performance scientific
market, and particularly beyond government agencies and research laboratories,
to engineering and other commercial markets, the Company must be able to attract
independent software vendors to port their software application programs so that
they will run on the MTA system. There can be no assurance that the Company will
be able to induce independent software vendors to port their applications, and
the failure to do so could materially and adversely affect the Company's
business and results of operations.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL. If the Company is successful
in developing and marketing the MTA system, the Company believes it could
undergo a period of rapid growth which could place a significant strain on its
management, financial and other resources. The Company's ability to manage its
growth will require it to continue to improve its operational and financial
systems and to motivate and effectively manage its employees. If the Company
grows, it will have to implement new financial, budgeting, management
information and internal control systems. The success of the Company will depend
on the ability of management to implement effectively these changes and to
manage the Company's operations over the long term. Several senior management
personnel have not yet been identified, including a chief financial officer. The
Company's success also will depend in large part upon its ability to attract and
retain highly skilled technical personnel to provide technological depth and
support, to complete and enhance its first products and to develop new products.
In addition, marketing and sales personnel will be needed. Competition for
highly skilled management, technical, marketing and sales personnel is intense.
There can be no assurance that the Company will be successful in attracting and
retaining key management, technical, marketing and sales personnel, and its
failure to do so would materially and adversely affect the Company's business
and results of operations.
The Company is dependent on Burton J. Smith, the Company's Chairman of the
Board and Chief Scientist, and James E. Rottsolk, the Company's Chief Executive
Officer, and the loss of services of either could have a material impact on the
ability of the Company to achieve its business objectives. The Company has key
man life insurance policies on the lives of Messrs. Smith and Rottsolk in the
amount of $2 million and $1 million, respectively. The Company has no employment
contracts with either Mr. Smith or Mr. Rottsolk or with any other employee.
QUARTERLY PERFORMANCE MAY VARY SIGNIFICANTLY. In the event that the Company is
able to attain broad market acceptance of the MTA system, one or a few system
sales may account for a substantial percentage of the Company's quarterly and
annual revenue because of the anticipated high average sales price of the MTA
system models and the timing of purchase orders and product acceptances. Because
a number of the Company's prospective customers receive funding from the U.S. or
foreign governments, the timing of orders from such customers may be subject to
the appropriation and funding schedules of the relevant government agencies. The
timing of orders and shipments also could be affected by other events outside
the control of the Company, such as changes in levels of customer capital
spending, the introduction or announcement of competitive products, the
availability of components, currency fluctuations and international conflicts or
economic crises. Because of these factors, revenue, expenses, net income or loss
and cash flow are likely to fluctuate significantly from quarter to quarter.
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS. The market for the Company's
products is characterized by rapidly changing technology, accelerated product
obsolescence and rapidly
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<PAGE> 15
changing industry standards. The Company's success will depend upon its ability
to complete development of the MTA system and to introduce new products and
features in a timely manner to meet evolving customer requirements. There can be
no assurance that the Company will be successful in these efforts. The Company's
business and results of operations will be materially and adversely affected if
the Company incurs delays in developing its products or if such products do not
gain broad market acceptance. In addition, there can be no assurance that
products or technologies developed by others will not render the Company's
products or technologies noncompetitive or obsolete. See "Business -- High
Performance Computer Industry" and "Business -- Competition."
COMPETITION. The Company's competitors can be divided into two general
categories: established companies that are well-known in the high performance
computer market and new entrants capitalizing on developments in parallel
processing and increased computer performance through networking.
The high performance computer market is highly competitive and has been
dominated by Cray Research. Other participants in the market include IBM
Corporation ("IBM"), Intel Corporation ("Intel"), and foreign companies such as
Fujitsu, Ltd., Hitachi, Ltd., and NEC Corporation. Each of these competitors has
broader product lines and substantially greater research, engineering,
manufacturing, marketing and financial resources than the Company.
A number of companies, including IBM, Intel, Silicon Graphics, Inc.,
Fujitsu Ltd. and Convex Computer Corporation, have developed or plan to develop
massively parallel systems for the high performance computer market. Although to
date this kind of system architecture has been limited in applicability and
difficult to program, a breakthrough in architecture or software technology
could change this situation. There can be no assurance that such a breakthrough
will not occur, and such an advance would materially and adversely affect the
Company's business and results of operations.
There can be no assurance that the performance of the MTA system will be
competitive with the computer systems offered by the Company's competitors or
that the Company will be able to compete successfully over time against new
entrants or innovative competitors at the lower end of the market. Furthermore,
periodic announcements by the Company's competitors of new high performance
computer systems and price adjustments may materially and adversely affect the
Company's business and results of operations. The market has experienced a
recent consolidation as Convex Computer Corporation was absorbed by
Hewlett-Packard in 1995, Cray Research was acquired by Silicon Graphics, Inc. in
1996 and Intel has stated that it would no longer directly market high
performance computer systems. See "Business -- Competition" and "Business --
Technology."
PROPRIETARY RIGHTS. The Company relies on a combination of copyright and trade
secret protection, non-disclosure agreements and licensing arrangements to
establish, protect and enforce its proprietary rights. Despite the Company's
efforts to safeguard and maintain its proprietary rights, there can be no
assurance that the Company will be successful in doing so or that the Company's
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to the Company's technologies.
Although the Company is not a party to any present litigation regarding
proprietary rights, there can be no assurance that third parties will not assert
intellectual property claims against the Company in the future. Such claims, if
proved, could materially and adversely affect the Company's business and results
of operations. In addition, although any such claims may ultimately prove to be
without merit, the necessary management attention to and legal costs associated
with litigation or other resolution of such claims could materially and
adversely affect the Company's business and results of operations. See "Business
- -- Intellectual Property."
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<PAGE> 16
The laws of certain foreign countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although the Company continues to implement protective measures and
intends to defend its proprietary rights vigorously, there can be no assurance
that these efforts will be successful.
SHARES ELIGIBLE FOR FUTURE SALE. Sale of substantial amounts of the Company's
Common Stock or Common Stock Purchase Warrants ("Warrants") in the public market
or the prospect of such sales could materially and adversely affect the market
price of the Common Stock and Warrants. As of December 31, 1996, the Company had
outstanding 6,496,815 shares of Common Stock and Warrants to purchase 2,368,771
shares of Common Stock. In addition, at December 31, 1996, the Company had
granted options under its option plans to purchase an aggregate of 1,816,603
shares of Common Stock and had granted an investment banking firm the right to
purchase an aggregate of 406,000 shares of Common Stock and 203,000 Warrants.
All of the shares purchased under the stock option plans are available for sale
in the public market, subject in some cases to volume and other limitations.
Sales in the public market of substantial amounts of Common Stock or the
perception that such sales could occur could depress prevailing market prices
for the Common Stock and Warrants. The existence of the Warrants, the warrants
issued to the investment banking firm and any other options or warrants may
prove to be a hindrance to future equity financing by the Company. Further, the
holders of such warrants and options may exercise them at a time when the
Company would otherwise be able to obtain additional equity capital on terms
more favorable to the Company.
POSSIBLE VOLATILITY OF STOCK PRICE. The trading price of the Company's Common
Stock and Warrants could be subject to significant fluctuations in response to
variations in quarterly operating results, changes in analysts' estimates,
announcements of technological innovations by the Company or its competitors,
general conditions in the very high performance computer industry and other
factors. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies in general, and small
capitalization, high technology companies in particular, and are often unrelated
to their operating performance.
REDEMPTION OF WARRANTS. The Warrants are subject to redemption at $0.05 per
Warrant on 30 days' prior written notice to the Warrantholders (i) if the
closing bid price of the Common Stock as reported on Nasdaq averages in excess
of 150% of the then current purchase price for one share of Common Stock
underlying the Warrants, currently $5.85, over a period of 20 consecutive
trading days ending within 15 days of the notice of redemption, or (ii) with the
prior written consent of H.J. Meyers & Co., Inc. at the current or a lower
exercise price per share of Common Stock. In the event the Company elects to
redeem the Warrants, such Warrants would be exercisable until the close of
business on the date fixed for redemption in such notice. If any Warrant called
for redemption is not exercised by such date, it will cease to be exercisable
and the holder will be entitled only to the redemption price. If the Company
chooses to exercise such right to redeem at a time which requires the consent of
H.J. Meyers & Co., Inc., H.J. Meyers & Co., Inc. may use its sole discretion in
determining whether to grant or withhold such consent. H.J. Meyers & Co., Inc.
is under no obligation to grant or withhold such consent under any
circumstances, regardless of the potential effect of such decision on the
Company, its shareholders or the holders of the Warrants. There can be no
assurance that if the Company chooses to exercise its right to redeem the
Warrants at a time that is not advantageous to the holders of the Warrants, H.J.
Meyers & Co., Inc. will withhold its consent to such redemption, or that if the
Company chooses to exercise its right to redeem the Warrants at a time that is
advantageous to the Company and the shareholders, H.J. Meyers & Co., Inc. will
grant such consent.
POSSIBLE ILLIQUIDITY OF TRADING MARKET; REDUCTION IN PUBLIC FLOAT. The Common
Stock and the Warrants are quoted on the Nasdaq SmallCap Market (the "Market").
The Market may be
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<PAGE> 17
significantly less liquid than the Nasdaq National Market. The number of shares
of Common Stock and Warrants available for resale in the trading market is
limited because of trading restrictions on shares of Common Stock and Warrants
owned by affiliates. In addition, the Nasdaq has proposed more stringent listing
and maintenance requirements and, if the Company should continue to experience
losses from operations, or for any other reason have insufficient net tangible
assets, it may be unable to maintain the standards for continued quotation on
the Market, and the Common Stock and the Warrants could be subject to removal
therefrom. If such removal were to occur, trading, if any, in the Common Stock
and the Warrants henceforth would be conducted in the over-the-counter market on
an electronic bulletin board established for securities that do not meet the
listing requirements for the Market, or in what are commonly referred to as the
"pink sheets." As a result, an investor would find it more difficult to dispose
of, or to obtain accurate quotations for the price of, the Company's securities.
In addition, such removal would subject the Company's securities to so-called
"penny stock" rules that impose additional sales practice and market-making
requirements on broker-dealers who sell and/or make a market in such securities.
Consequently, removal from the Market could affect the ability or willingness of
broker-dealers to sell and/or make a market in the Company's securities and the
ability of purchasers of the Company's securities to sell their securities in
the secondary market. In addition, if the market price of the Company's Common
Stock falls to below $5.00 per share, the Company may become subject to certain
penny stock rules even if still quoted on the Market. While such penny stock
rules should not affect the quotation of the Company's Common Stock on the
Market, such rules may further limit the market liquidity of the Common Stock
and Warrants and the ability of investors to sell securities in the secondary
market.
NO ANTICIPATED DIVIDENDS. The Company has not previously paid any dividends on
its Common Stock and for the foreseeable future intends to continue its policy
of retaining any earnings to finance the development and expansion of its
business.
EFFECT OF ANTITAKEOVER PROVISIONS. Certain provisions of the Company's Restated
Articles of Incorporation and Restated Bylaws and the laws of the State of
Washington could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of Common Stock. The Company is
authorized to issue Preferred Stock, without shareholder approval, with rights
senior to those of the Common Stock and to impose various procedural and other
requirements that could make it more difficult for shareholders to effect
certain corporate actions.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS. As permitted by the
Washington Business Corporation Act, the Company has included in its Restated
Articles of Incorporation a provision to eliminate the personal liability of its
directors for monetary damages for breach or alleged breach of their fiduciary
duties as directors, subject to certain exceptions. In addition, the Bylaws of
the Company provide that the Company is required to indemnify its directors
under certain circumstances, including those in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses to
its officers and directors as incurred in connection with proceedings against
them for which they may be indemnified.
ITEM 2. PROPERTIES
The Company entered into a five year lease in April 1994 and occupies
42,000 square feet of a commercial building in Seattle with a monthly rental,
including expenses and parking, of approximately $66,000. The Company expects
that this space will be adequate for its needs for the next twelve months, and
believes adequate alternate space will be available, if necessary.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
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ITEM E.O. EXECUTIVE OFFICERS
The executive officers of the Company as of December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Burton J. Smith 56 Chairman of the Board and
Chief Scientist
James E. Rottsolk 52 President, Chief Executive Officer
and Chief Financial Officer
Brian D. Koblenz 36 Vice President - Software
Gerald E. Loe 47 Vice President - Hardware
Katherine L. Rowe 40 Vice President - Manufacturing
</TABLE>
Burton J. Smith 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.
Mr. Smith was a member of the National Science Foundation Advisory Committee on
Computer Research from 1983 to 1987, a member of the National Science Foundation
Blue Ribbon Panel on High Performance Computing in 1993, and a member of the
Universities Space Research Association Science Council from 1987 to 1991. 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.
James E. Rottsolk 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
start-up companies. Mr. Rottsolk received his A.M. and J.D. degrees from the
University of Chicago.
Brian D. Koblenz served as Tera's Group Leader, Languages and Compilers,
from 1990 until May 1994, when he assumed his present position as Vice President
- - Software. Prior to joining the Company, Mr. Koblenz was Principal Software
Engineer at Digital Equipment Corporation ("Digital"), from 1986 to 1989. He was
lead designer of Digital's high performance FORTRAN compiler and participated in
the Alpha architecture and VAX vectorization efforts. He received his B.S. from
the University of Vermont and his M.S. from the University of Washington.
Gerald E. Loe joined the Company in 1992 as Vice President - Hardware
Engineering and Manufacturing. Prior to that he was Vice President of Operations
at Siemens Quantum Inc., a high-end radiology ultrasound company, from 1989 to
1992. Mr. Loe received his B.S.M.E. from the Massachusetts Institute of
Technology and his M.B.A. from Harvard Business School.
Katherine L. Rowe joined the Company as Director of Manufacturing in 1994
and was named Vice President, Manufacturing in 1996. Prior to joining the
Company, Ms. Rowe was an Engineering Manager at ELDEC Corporation, an aerospace
electronics company, and was Manufacturing Manager and Project Manager in new
product development at Physio-Control Corporation, a medical electronics
company. She received her S.M. from Massachusetts Institute of Technology and
her B.S.M.E. from Purdue University.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Common Stock Purchase Warrants ("Warrants")
are traded on the Nasdaq SmallCap Market under the symbols TERA and TERAW,
respectively. On March 21, 1997, there were 299 holders of record of the Common
Stock and 141 holders of record of the Warrants. The Company has not paid cash
dividends on its Common Stock or Warrants.
The quarterly high and low sales prices since September 26, 1995, when the
Company's Common Stock and Warrants began trading publicly, are as follows:
<TABLE>
<CAPTION>
Quarter ended Common Stock Warrants
- ------------- ------------ --------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
September 30, 1995 6 1/2 5 1/4 1 1/2 3/4
December 31, 1995 5 7/8 3 7/8 1 5/8 1 1/8
March 31, 1996 6 1/8 3 3/4 1 11/16 5/8
June 30, 1996 7 1/8 4 1/8 3 3/8 1 1/4
September 30, 1996 5 7/8 3 5/8 2 1/4 1 1/8
December 31, 1996 7 3 1/4 2 7/8 15/16
</TABLE>
On March 21, 1997, the closing sale price for the Common Stock was $4 1/8 and
for the Warrants was $ 15/16 .
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below includes "forward- looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, and is subject to the safe harbor created by that section. Factors that
realistically could cause results to differ materially from those projected in
the forward looking statements are set forth in this section. The following
discussion should also be read in conjunction with the Financial Statements and
Notes thereto.
OVERVIEW
The Company is a development stage enterprise that had an accumulated net
loss of approximately $27 million as of December 31, 1996. Approximately 40% of
the Company's funding to date has been from DARPA research funding, with the
remaining 60% provided through the sale of equity.
The Company has experienced net losses in each year of operations and
expects to incur substantial further losses while it tests its MTA system
prototype and commences production, and possibly thereafter. The Company has had
no revenue or earnings and does not expect to recognize revenue from the sale of
its initial MTA system sooner than the first half of 1997, if ever. In
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<PAGE> 21
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 ("SDSC"), 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. Initial deliveries under this
agreement are scheduled for the first half of 1997. See "Business -- Risk
Factors -- Development Status of the MTA System" and "Business -- Strategy."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
Research and development expenses include costs associated with the
development of the MTA system, including personnel expense, depreciation and
lease expense on facilities and equipment, and nonrecurring engineering software
and hardware costs. Although research and development expenses increased from
$6.7 million in 1995 to $10.5 million in 1996, reflecting increased prototype
fabrication costs, research and development expense as a percentage of total
operating expenses remained relatively consistent at approximately 86% over both
years.
While the Company expects to increase expenses for ongoing research and
development as it hires additional software and hardware engineers, these
expenses are expected to decrease as a percentage of total operating expenses
and will generally include expenditures related to continuing engineering of the
MTA system, research and development related to the next generation MTA system
and related software development.
Sales and marketing expenses increased 137% in 1996 compared to 1995, from
$281,000 to $665,000, due to both an increase in staff and expenditures in
connection with marketing and development of third party applications software.
The Company's general and administrative expenses have increased each year
consistent with expansion of the Company's infrastructure. In 1995 and 1996
these expenses were $749,000 and $1,057,000 respectively, an increase of 41%
over the previous year, but a decrease from 9.7% to 8.6% of total operating
expenses. The increase in amount of expenditures was due primarily to the first
full year's cost of liability insurance and professional services associated
with becoming a publicly owned company. General and administrative expenses are
expected to increase commensurate with any growth in the Company's business or
operations.
Other income and expense decreased from $133,000 in 1995 to $37,000 in 1996
as a result of an increase in interest income and a decrease in interest expense
as lease obligations were fulfilled.
There was no provision for federal income taxes in 1995 or 1996, as the
Company incurred net operating losses which were fully offset by a valuation
allowance. As of December 31, 1996, the Company had net operating loss
carryforwards of approximately $24,063,000, which expire in years 2003 through
2011, if not utilized. The Company's net operating loss carryforwards and
certain other tax attributes (including its research credit of approximately
$1,283,000 at December 31, 1996) would be limited to an annual utilization for
losses and credits for periods prior to 1996 of approximately $700,000. This
limitation may result in the expiration of net operating losses and credits
before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Since its incorporation through December 31, 1996, the Company's principal
sources of liquidity have been DARPA research funding which totaled $18.7
million and net proceeds from the sale of equity totaling $28 million. The
Company has billed all $15.5 million allowed under
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<PAGE> 22
its research contract with DARPA for the initial system development and has just
begun to bill DARPA for research under a new research contract awarded in
September 1995. Billings under the September 1995 contract are expected to be
approximately $500,000 in 1997. At December 31, 1996, the Company had less than
$1 million in cash and had no bank line of credit.
The Company used cash from operations of $7,285,000 and $10,503,000 in 1995
and 1996, respectively. The Company spent $852,000 in building of initial
inventory offset by reductions in advances to suppliers of $673,000, and
increases in accrued payroll and related expenses and accounts payable of
$420,000 and $384,000, respectively. The Company's net loss in 1996 of $12
million includes depreciation expense of $858,000.
The Company's investing activities have consisted primarily of expenditures
for fixed assets, which have totaled $2,575,000 from the date of inception
through December 31, 1996, net of proceeds on disposal of assets. Expenditures
were $1,349,000 and $399,000 in 1995 and 1996, respectively.
Including the lease financing of equipment, the Company raised $7.5 million
in 1996 compared to $13 million in 1995. These financings were achieved
primarily through the sale of equity in each period. At December 31, 1996, the
Company had stock subscription receivables which were paid in February 1997.
During 1997, the Company's working capital needs will depend primarily upon
its level of staffing, the cost of components to complete the fabrication and
testing of its initial MTA system prototype and startup costs associated with
production, if any. The Company has experienced delays in the development of
particular components of the MTA system which have increased the need for
working capital and could experience significant additional delays in the
development process which could further substantially increase the Company's
need for working capital. Other than prototype costs and manufacturing startup
costs, the Company's needs for working capital for 1997 will primarily be
operating costs required to fund ongoing research, development and engineering
efforts, development of a customer service organization, and capital
expenditures for leased equipment. The Company intends to increase its sales and
marketing efforts. Additionally, the Company's administrative functions will
increase to support its engineering and sales efforts.
The Company will require additional capital in 1997 and expects to raise
such additional working capital through equity and/or debt financing. During
March 1997, the Company completed equity fundings for total proceeds of $4.1
million. Although the Company believes these funds may be adequate to meet its
working capital requirements for 1997, the Company may require further
additional working capital if the development or initial production of the MTA
system is substantially delayed, to finance the lease of MTA systems to
customers or accounts receivable from customers, to finance increases in
inventory, or for other purposes. There can be no assurance that any additional
financing will be available when needed or, if available, will be on
satisfactory terms.
22
<PAGE> 23
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Balance Sheets at December 31, 1995 and December 31, 1996.................................. F 1
Statements of Operations for the two years ended December 31, 1996 and from inception...... F 2
Statements of Shareholders' Equity from inception through December 31, 1996................ F 3
Statements of Cash Flows for the two years ended December 31, 1996 and from inception...... F 7
Notes to Financial Statements.............................................................. F 8
Independent Auditors' Report............................................................... F15
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
23
<PAGE> 24
TERA COMPUTER COMPANY
(a development stage company)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
================================================================================
<TABLE>
<CAPTION>
1995 1996
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,284,720 $ 928,760
Accounts receivable 42,065 40,045
Inventory 851,960
Advances to suppliers 982,972 310,077
Other assets 90,322 146,350
Stock subscriptions receivable 1,074,997
------------ ------------
Total current assets 5,400,079 3,352,189
PROPERTY AND EQUIPMENT, net 1,641,351 1,182,422
LEASE DEPOSITS 227,702 81,902
------------ ------------
TOTAL $ 7,269,132 $ 4,616,513
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 686,115 $ 1,070,242
Accrued payroll and related expenses 1,292,626 1,712,971
Potential contract adjustments 250,000 250,000
Current portion of obligations under capital leases 529,516 340,765
------------ ------------
Total current liabilities 2,758,257 3,373,978
OBLIGATIONS UNDER CAPITAL LEASES,
Less current portion 418,808 114,474
SHAREHOLDERS' EQUITY
Common stock, par $.01 - Authorized, 25,000,000 shares;
issued and outstanding, 3,889,455 and 6,496,815 shares 19,059,818 27,098,153
Common stock subscribed 1,074,997
Accumulated deficit (14,967,751) (27,045,089)
------------ ------------
4,092,067 1,128,061
------------ ------------
TOTAL $ 7,269,132 $ 4,616,513
============ ============
</TABLE>
See notes to financial statements.
F1
<PAGE> 25
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
INCEPTION
THROUGH
DECEMBER 31,
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING EXPENSES:
Research and development $ (6,679,492) $(10,503,747) $(38,633,200)
Marketing and sales (281,113) (664,911) (1,830,869)
General and administrative (748,569) (1,057,168) (4,812,467)
------------ ------------ ------------
(7,709,174) (12,225,826) (45,276,536)
RESEARCH FUNDING 2,196,288 185,236 18,654,845
------------ ------------ ------------
Net operating expenses (5,512,886) (12,040,590) (26,621,691)
OTHER EXPENSE (133,445) (36,748) (423,398)
------------ ------------ ------------
NET LOSS $ (5,646,331) $(12,077,338) $(27,045,089)
============ ============ ============
NET LOSS PER SHARE $ (2.13) $ (2.27) $ (17.74)
============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,646,243 5,320,785 1,524,445
============ ============ ============
</TABLE>
See notes to financial statements.
F2
<PAGE> 26
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1996
================================================================================
<TABLE>
<CAPTION>
Convertible preferred stock
------------------------------------------------------------------------
Series A Series B Series C Series D Series E
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 7, 1987 $ -- $ -- $ -- $ -- $ --
Common Stock (1)
BALANCE, December 31, 1987
Series A preferred stock (2) 215,000
Common stock (3)
Series B preferred stock (4) 486,240
Net loss --
------------ ------------
BALANCE, December 31, 1988 215,000 486,240
Common stock (5)
Series B preferred stock (6) 54,760
Net loss
------------ ------------
BALANCE, December 31, 1989 215,000 541,000
Common stock (7)
Series B preferred stock (8) 948
Series C preferred stock (9) 460,000
Net loss
------------ ------------ ------------
BALANCE, December 31, 1990 215,000 541,948 460,000
Common stock (10)
Series A preferred stock (11) 35,000
Series C preferred stock (12) 430,453
Series D preferred stock (13) 260,000
Net loss
------------ ------------ ------------ ------------
BALANCE, December 31, 1991 250,000 541,948 890,453 260,000
Common stock (14)
Series D preferred stock (15) 521,498
Net loss
------------ ------------ ------------ ------------
BALANCE, December 31, 1992 250,000 541,948 890,453 781,498
Common stock (16)
Series D preferred stock (17) 30,000
Series E preferred stock (18) 893,876
Net loss
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1993 250,000 541,948 890,453 811,498 893,876
Additional paid-in capital (19)
Common stock (20)
Series E preferred stock (21) 1,669,994
Net loss
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1994 250,000 541,948 890,453 811,498 2,563,870
Common stock (22)
Series E preferred stock (23) 402,340
Common stock (24)
Common stock (25)
Common stock (26) (250,000) (541,948) (890,453) (811,498) (2,966,210)
Common stock (27)
Common stock (28)
Net loss
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995
Common stock (29)
Common stock (30)
Sale A preferred stock (31) 6,888,194
Common stock (32)
Common stock (33)
Common stock (34) (6,888,194)
Net loss
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
<CAPTION>
Common Accumulated
stock deficit Total
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, December 7, 1987 $ -- $ -- $ --
Common Stock (1) 500 500
------------ ------------
BALANCE, December 31, 1987 500 500
Series A preferred stock (2) 215,000
Common stock (3) 8,000 8,000
Series B preferred stock (4) 486,240
Net loss (455,684) (455,684)
------------ ------------ ------------
BALANCE, December 31, 1988 8,500 (455,684) 254,056
Common stock (5) 1,750 1,750
Series B preferred stock (6) 54,760
Net loss (18,455) (18,455)
------------ ------------ ------------
BALANCE, December 31, 1989 10,250 (474,139) 292,111
Common stock (7) 1,550 1,550
Series B preferred stock (8) 948
Series C preferred stock (9) 460,000
Net loss (1,459,889) (1,459,889)
------------ ------------ ------------
BALANCE, December 31, 1990 11,800 (1,934,028) (705,280)
Common stock (10) 4,016 4,016
Series A preferred stock (11) 35,000
Series C preferred stock (12) 430,453
Series D preferred stock (13) 260,000
Net loss (348,201) (348,201)
------------ ------------ ------------
BALANCE, December 31, 1991 15,816 (2,282,229) (324,012)
Common stock (14) 4,000 4,000
Series D preferred stock (15) 521,498
Net loss (2,127,603) (2,127,603)
------------ ------------ ------------
BALANCE, December 31, 1992 19,816 (4,409,832) (1,926,117)
Common stock (16) 267,846 267,846
Series D preferred stock (17) 30,000
Series E preferred stock (18) 893,876
Net loss (2,788,930) (2,788,930)
------------ ------------ ------------
BALANCE, December 31, 1993 287,662 (7,198,762) (3,523,325)
Additional paid-in capital (19) 668,337 668,337
Common stock (20) 88,307 88,307
Series E preferred stock (21) 1,669,994
Net loss (2,122,658) (2,122,658)
------------ ------------ ------------
BALANCE, December 31, 1994 1,044,306 (9,321,420) (3,219,345)
Common stock (22) 13,545 13,545
Series E preferred stock (23) 402,340
Common stock (24) 3,629,400 3,629,400
Common stock (25) 8,409,606 8,409,606
Common stock (26) 5,460,109
Common stock (27) 11,612 11,612
Common stock (28) 491,240 491,240
Net loss (5,646,331) (5,646,331)
------------ ------------ ------------
BALANCE, December 31, 1995 19,059,818 (14,967,751) 4,092,067
Common stock (29) 59,228 59,228
Common stock (30) 14,604 14,604
Sale A preferred stock (31) 6,888,194
Common stock (32) 1,311 1,311
Common stock (33) 2,149,995 2,149,995
Common stock (34) 6,888,194
Net loss (12,077,338) (12,077,338)
------------ ------------ ------------
BALANCE, December 31, 1996 $ 28,173,510 $ 27,045,089 $ 1,128,061
============ ============ ============
</TABLE>
See notes to financial statements.
F3
<PAGE> 27
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1996
- -------------------------------------------------------------------------------
(1) Issued 319,321 shares of common stock for cash at $0.001 per share on
December 9, 1987.
(2) Issued 87,162 shares of Series A preferred stock for cash at $2.46 per
share on January 1, 1988.
(3) Issued 319,321 shares of common stock for cash at $0.001 per share on
February 8, 1988, and 42,576 shares of common stock for cash at $0.18 per
share on October 30, 1988.
(4) Issued 92,009 shares of Series B preferred stock for cash at $5.28 per
share between September 1 and December 30, 1988.
(5) Options issued under the 1988 stock plan were exercised for 709, 709, and
3,548 shares of common stock at the option price of $0.35 per share on
January 2, March 10, and August 7, 1989, respectively.
(6) Issued 10,362 shares of Series B preferred stock for cash at $5.28 per
share between March 31 and August 15, 1989.
(7) Options issued under the 1988 stock plan were exercised for 4,399 shares
of common stock at the option price of $0.35 per share on December 31,
1990.
(8) Issued 160 shares of Series B preferred stock for cash at $5.92 per share
on April 30, 1990.
(9) Issued 65,283 shares of Series C preferred stock for cash at $7.05 per
share between April 25 and December 21, 1990.
(10) Options issued under the 1988 stock plan were exercised in lieu of
directors' fees and travel expenses for 1,464, 4,612, and 2,128 shares of
common stock at the option price of $0.35, $0.35, and $0.88 per share on
May 10, 1991, December 31, 1991, and December 31, 1991, respectively.
(11) Issued 7,450 shares of Series A preferred stock for cash at $4.70 per
share on May 16, 1991.
(12) Issued 41,866 shares of Series C preferred stock for cash and 19,223
shares in lieu of convertible debt at $7.05 per share between April 8 and
May 29, 1991, and February 25 and May 29, 1991, respectively.
(13) Issued 24,599 shares of Series D preferred stock for cash at $10.57 per
share between December 3 and December 18, 1991.
(14) Options issued under the 1988 stock plan were exercised in lieu of
directors' fees and travel expenses for 1,419 and 4,257 shares of common
stock at the option price of $0.35 per share on December 31, 1992; and for
2,270 shares of common stock at the exercise price of $0.88 per share on
December 31, 1992.
See notes to financial statements.
F4
<PAGE> 28
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1996
- -------------------------------------------------------------------------------
(15) Issued 49,340 shares of Series D preferred stock for cash at $10.57 per
share between February 13 and August 17, 1992.
(16) Options issued under the 1988 stock plan were exercised for 6,918 and
31,222 shares of common stock for cash and in lieu of compensation at the
option price of $0.35 per share on January 19, 1993, and between January
29 and December 22, 1993, respectively; and for 56 and 15,327 shares of
common stock for cash and in lieu of compensation at the option price of
$1.76 per share on November 1, 1993, and on December 22, 1993,
respectively; and for 9,440 shares of common stock in lieu of compensation
at the option price of $0.88 per share between September 1 and December
22, 1993; and for 283 shares of common stock in exchange for third-party
fees at the option price of $3.52 per share on December 4, 1993.
Warrants were also exercised for 27,532 and 2,270 shares of common stock
for cash at the exercise price of $7.05 and $10.57 per share between
January 20 and March 30, 1993, and September 13, 1993, respectively.
(17) Issued 2,838 shares of Series D preferred stock for cash at $10.57 per
share on January 14, 1993.
(18) Issued 67,658 shares of Series E preferred stock for cash at $13.21 per
share between November 10 and December 28, 1993.
(19) Issued stock options of 112, 911, 887, and 13,718 under the 1993 stock
plan at an option price of $0.35 per share in lieu of deferred pay,
directors' fees, and bonuses for $556,921, $43,750, and $67,666,
respectively, on March 15, 1994.
(20) Warrants were exercised for 6,149 shares of common stock at the exercise
price of $14.09 per share between March 31 and April 4, 1994, and options
issued under the 1988 stock plan were exercised for 4,652 shares of common
stock at the option price of $0.35 per share between March 10 and July 19,
1994.
(21) Issued 3,358, 3,784, and 19,017 shares of Series E preferred stock for
cash at $13.21 per share between March 17 and September 2, on September 7,
and between June 21 and July 1, 1994, respectively; 2,483, 15,966, 58,542,
and 17,740 shares of Series E preferred stock for cash at $14.09 per share
between September 8 and October 31, June 30 and July 27, August 2 and
December 20, and on October 31, 1994, respectively; and 7,130 shares of
Series E preferred stock in lieu of conversion of debt at $14.09 per share
on November 10, 1994. Issuance costs related to these transactions
amounted to $111,363.
(22) Options issued under the 1988 stock plan were exercised for 4,030, 6,954,
and 851 shares of common stock for cash at $0.35, $0.88, and $1.76,
respectively, on January 1, 1995; options were exercised for 1,419 shares
of common stock for cash at $1.76 per share on January 17, 1995; and
options were exercised for 2,270 shares of common stock in lieu of
deferred compensation at $0.88 per share on March 7, 1995.
See notes to financial statements.
F5
<PAGE> 29
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1996
- -------------------------------------------------------------------------------
(23) Issued 17,385 shares of Series E preferred stock for cash at $14.09 per
share between January 25 and June 19, 1995 (net of $17,150 in total
issuance costs); and 4,967 and 11,353 shares of Series E preferred stock
in lieu of conversion of debt at $14.09 and $9.19 per share on March 6 and
April 10, 1995, respectively.
(24) Convertible notes in the amount of $3,629,400 were converted into 617,546
shares of common stock on September 29, 1995.
(25) Issued 1,700,000 shares of common stock and 850,000 securityholder
warrants for cash at $6.00 per share for $8,409,606 (net of $1,790,394 in
total issuance costs) on September 28, 1995. The securityholder warrants
are exercisable at $7.20.
(26) On September 29, 1995, 94,612, 102,531, 126,372, 76,777, and 229,383
shares of Series A, B, C, D and E preferred stock were converted into
common stock.
(27) Options under the 1988 and 1993 stock plan were exercised for 4,186 and
12,025 shares of common stock for cash at $1.76 and $0.35, respectively,
on October 1, 1995.
(28) Issued 100,000 shares of common stock and 50,000 securityholder warrants
for cash at $6.00 per share for $491,240 (net $108,760 in total issuance
costs) on October 23, 1995. The securityholder warrants are exercisable at
$7.20.
(29) Options issued under the 1988 stock plan were exercised for 5,677, 23,992
and 2,838 shares of common stock for cash at $0.35, $1.76 and $5.29 per
share, respectively, between January 17 and December 23, 1996.
(30) Options issued under the 1988 stock plan were exercised for 6,007 and
24,126 shares of common stock at $1.02 and $0.35 per share, respectively,
for shareholder notes which are due and payable in 1997 and 1999,
respectively.
(31) Issued 2,360,000 shares of Series A convertible preferred stock and
1,180,000 warrants for cash at $3.40 per share for $8,024,000 (net
$1,135,806 in total issuance costs) between May and July 1996.
(32) Options issued under the 1993 stock plan were exercised for 999 and 2,745
shares of common stock on May 28 and December 26, 1996, respectively, for
cash at $0.35 per share.
(33) Warrants were exercised for 361,952 shares of common stock at $5.94 per
share, of which 180,976 were exercised for cash and 180,976 for
shareholder notes which were paid by February 1997. In connection with the
exercise of these warrants, the Company issued additional warrants to
purchase 90,488 shares of common stock at $6.00 per share.
(34) On December 11, 1996, 2,360,000 shares of Series A preferred stock were
converted into the same number of shares of common stock.
See notes to financial statements.
F6
<PAGE> 30
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996, AND
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1996
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
Inception through
December 31,
1995 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,646,331) $(12,077,338) $(27,045,089)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 414,953 857,580 1,923,729
Cash provided (used) by changes in
operating assets and liabilities:
Accounts receivable 272,572 2,020 (40,045)
Inventory (851,960) (851,960)
Other assets (192,995) 89,772 (228,252)
Accounts payable and other accrued liabilities (793,869) 384,127 1,320,242
Accrued payroll and related expenses (241,501) 420,345 1,712,971
Deferred research funding (115,177)
Advances to suppliers (982,972) 672,895 (310,077)
------------ ------------ ------------
Net cash used by operating activities (7,285,320) (10,502,559) (23,518,481)
INVESTING ACTIVITIES:
Purchase of property and equipment (1,348,809) (423,151) (2,658,679)
Proceeds from disposal of assets 24,500 83,226
------------ ------------ ------------
Net cash used by investing activities (1,348,809) (398,651) (2,575,453)
FINANCING ACTIVITIES:
Bank borrowings 800,000
Repayment of bank borrowings (800,000)
Shareholder receivable (1,074,997) (1,074,997)
Issuance of notes payable 1,004,726
Repayment of notes payable (621,230) (1,079,726)
Sale of common stock 18,015,512 9,113,332 28,173,150
Conversion of preferred stock (5,057,769)
Capital leases, net 561,552 (493,085) (459)
------------ ------------ ------------
Net cash provided by financing activities 12,898,065 7,545,250 27,022,694
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 4,263,936 (3,355,960) 928,760
CASH AND CASH EQUIVALENTS:
Beginning of period 20,784 4,284,720
------------ ------------ ------------
End of period $ 4,284,720 $ 928,760 $ 928,760
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 205,197 $ 117,732 $ 529,975
</TABLE>
Notes payable of $1,249,400 were converted into 88,657 shares of common stock on
September 29, 1995.
The Company issued convertible notes in the amount of $2,380,000 during July
1995 which were converted into 528,889 shares of common stock on September 29,
1995
See notes to financial statements.
F7
<PAGE> 31
TERA COMPUTER COMPANY
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1996
- ------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL: Tera Computer Company (the Company) was incorporated in December 1987
for the purpose of designing, developing, and marketing high performance general
purpose parallel computer systems. The Company's initial prototype hardware and
software are currently being tested and fabrication of the Company's initial
production system has begun.
The Company is a development stage company which has received funding for a
significant portion of its research and development expenditures under federal
government contracts with the Defense Advanced Research Projects Agency
("DARPA"). To date, no revenue has been generated from product sales. From
inception to December 31, 1996, the Company incurred expenses for research,
development, selling and administration, resulting in an accumulated deficit of
approximately $27 million. A substantial amount of additional funds will be
required for the Company to complete testing of its first system prototype; to
fund ongoing research, development, and engineering; and to develop
manufacturing and customer service organizations. Management's plans for
obtaining funding include additional equity and debt financings. If adequate
funding is not obtained, the Company would be required to reduce its research
and development expenditures.
RESEARCH FUNDING: Research funding is recorded upon submission of vouchers for
payment pursuant to government contracts. In July 1991, the Company entered into
a three-year cost-sharing contract with DARPA, which expired in December 1996.
The Company billed the entire $15.5 million committed under this contract by the
end of 1995. In September 1995, the Company entered into a three-year,
cost-sharing contract with DARPA. As of December 31, 1996, the Company has
billed $192,000 under the new contract.
RESEARCH AND DEVELOPMENT: Research and development costs include costs incurred
in the development and production of the Company's initial prototype system,
hardware and software development expenses, and costs incurred to enhance and
support existing software features. Research and development costs are expensed
as incurred.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly liquid
financial instruments that are readily convertible to cash and have original
maturities of three months or less at the time of acquisition.
INVENTORY: Inventory is valued at standard costs that approximate actual costs
computed on a first-in, first-out basis, not in excess of market values. As of
December 31, 1996, 100% of the inventory consisted of components and
subassemblies.
PROPERTY AND EQUIPMENT: Property and equipment consist of office furniture,
equipment, software, and computer equipment and are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the classes of assets, which generally range from three to seven
years. Maintenance and repairs which do not increase the value of an asset nor
extend its useful life are charged to expense as incurred.
F8
<PAGE> 32
INCOME TAXES: Effective January 1, 1993, the Company has accounted for taxes
under Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Under SFAS No. 109, the liability method is used in accounting for
income taxes. Its adoption had no impact on previous periods.
STOCK SPLIT: Share and per share amounts have been restated to reflect a reverse
stock split of approximately one-for-3.5231 in September 1995.
NOTE 2: SIGNIFICANT RISKS AND UNCERTAINTIES
MANUFACTURING RISKS AND RELIANCE ON THIRD-PARTY SOLE SOURCE SUPPLIERS: The
Company's ability to build its computer systems is dependent upon several
third-party sole source suppliers. The failure of any of these suppliers to
deliver components that meet the Company's specifications would cause delays
which would severely affect the Company's business. The Company has experienced
such problems already and these failures have forced the Company to redesign
certain components for manufacture by alternative suppliers. This has caused
delays in the fabrication of the Company's initial prototype as well as
increased demands upon the Company's financial resources.
MARKETING RISKS: The Company's first sales targets will be U.S. and foreign
government agencies and research laboratories, which constitute more than
one-half of the market for very high performance computer systems. The U.S.
Government historically has facilitated the development of, and has constituted
a market for, new and enhanced very high performance computer systems. A change
of policy by the U.S. Government or foreign governments that results in a
reduction of, or delays in, funding of certain high technology programs
employing high performance computing could have a major impact on the market for
very high performance computer systems, and would materially and adversely
affect the Company's business and results of operations. In addition, the
Company's ability to export their products could depend on U.S. Government
policy related to high technology exports.
RAPID TECHNOLOGICAL CHANGE: The computer industry is characterized by rapid
changes in technology and uncertainty over the impact of emerging technologies.
The Company's business would be adversely affected by delays in product
development, the failure to gain market acceptance, or products or technologies
developed by others which could render the Company's products or technologies
noncompetitive or obsolete.
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Computer and electronic equipment $ 500,145 $ 1,446,066
Computer software 451,676 527,650
Furniture, fixtures and equipment 234,768 279,944
----------- -----------
1,186,589 2,253,660
Less accumulated depreciation (635,755) (1,478,165)
----------- -----------
$ 550,834 $ 775,495
=========== ===========
</TABLE>
F9
<PAGE> 33
NOTE 4: LEASES
The Company has computer equipment under capital leases in the amount of
$1,090,517 and $406,927, net of accumulated amortization of $412,972 and
$394,018 in 1995 and 1996, respectively. Computer equipment under capital leases
is amortized over the lease term. The Company leases office space, which has
been classified as an operating lease.
Minimum lease commitments are:
<TABLE>
<CAPTION>
Capital Operating
leases leases
------ ------
<S> <C> <C>
1997 $ 430,751 $ 795,300
1998 161,455 795,300
1999 56,360 331,400
2000 8,129
---------- -----------
656,695 1,922,000
Less amounts representing interest (81,998)
---------- -----------
$ 574,697 $ 1,922,000
========== ===========
</TABLE>
NOTE 5: COMMITMENTS
The Company is contractually committed to acquire components and manufacturing
services totaling $3,450,000, of which $310,000 had been advanced to suppliers
as of December 31, 1996.
NOTE 6: FEDERAL INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes for
the period from December 7, 1987 (inception) through December 31, 1996.
As of December 31, 1995 and 1996, the Company had federal net operating loss
carryforwards of approximately $11,930,000 and $24,063,000, respectively. The
Company also had federal research and experimentation tax credit carryforwards
of approximately $1,106,000, and $1,283,000, respectively. The net operating
loss credit carryforwards will expire at various dates beginning in 2003 through
2011 if not utilized.
The September 1995 public offering resulted in a change in stock ownership of
the Company as defined by Section 382 of the Internal Revenue Code of 1986, as
amended. The net operating loss carryforwards incurred prior to the public
offering are limited to an annual utilization of approximately $700,000. The
research and experimentation credit is similarly limited. The annual limitations
may result in the expiration of net operating losses and credits before
utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
deferred tax assets are as follows at December 31:
F10
<PAGE> 34
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Warranty reserve $ 85,000 $ 85,000
Accrued compensation 291,000 419,000
Other 31,000 32,000
Research and experimentation 1,106,000 1,283,000
Net operating loss carryforwards 3,919,000 8,181,000
----------- ------------
Total deferred tax assets 5,432,000 10,000,000
----------- ------------
Valuation allowance for deferred tax assets $(5,432,000) $(10,000,000)
=========== ============
</TABLE>
NOTE 7: CONVERTIBLE NOTES AND WARRANTS
During May and June 1995, the Company issued $1,249,400 of convertible notes.
Upon the completion of the public offering in September 1995, these notes were
converted automatically into 88,657 shares of the Company's common stock at a
price of $14.09 per share.
In connection with the issuance of the convertible notes, the Company issued
warrants to purchase shares of the Company's common stock for $14.09 per share.
Each warrant is exercisable for the number of shares of common stock determined
by dividing the original principal amount of the convertible note by $14.09 (for
an aggregate of 88,657 shares). Upon the completion of the public offering,
these warrants were exchanged for securityholder warrants for the same number of
shares initially exercisable at $7.20 per share.
In July 1995, the Company issued $2,380,000 of convertible notes. The notes were
converted automatically into 528,889 shares of the Company's common stock at a
price of $4.50 per share upon completion of the public offering. In connection
with the issuance of these notes, and upon completion of the public offering,
the Company issued securityholder warrants to purchase one share of common stock
initially exercisable at $7.20 per share, for every three shares received upon
the conversion of the notes.
NOTE 8: COMMON AND PREFERRED STOCK
On July 31, 1995, the Board of Directors adopted, and on August 31, 1995, the
shareholders approved an amendment of the Company's Articles of Incorporation to
effect the following: (i) a reverse split of the Company's common stock and
preferred stock of approximately one-for-3.5231; (ii) set the authorized shares
of undesignated preferred stock at 5,000,000 shares; (iii) set the authorized
shares of common stock at 25,000,000; (iv) amend the automatic conversion
provisions of the Company's preferred stock in the event of a public offering;
(v) waive certain anti-dilution protections of the preferred stock previously
issued; (vi) authorize the issuance of securityholder warrants to holders of the
Company's Series E preferred stock on the basis of a warrant to purchase one
share for each three shares received upon conversion of the Series E preferred
stock to common stock; and (vii) authorize the exchange of securityholder
warrants for all other warrants outstanding. Upon completion of the public
offering in September 1995, all outstanding shares of preferred stock were
converted into common stock. There were no outstanding shares of preferred stock
at December 31, 1995. During 1996 the Company issued 2,360,000 shares of Series
A convertible preferred stock. In December, upon registration of the common
shares into which the Series A preferred stock was convertible, all outstanding
shares of preferred stock were converted into common stock so that no preferred
shares were outstanding at December 31, 1996.
F11
<PAGE> 35
SECURITYHOLDER WARRANTS: At December 31, 1996, the Company had outstanding
2,368,771 securityholder warrants to purchase an aggregate 2,868,212 shares
of common stock. Each warrant entitles the holder to purchase approximately
1.21 shares of common stock at a price of $7.20 per warrant until March 24,
1998 and approximately 1.41 shares of common stock at a price of $8.40 per
warrant until September 24, 2000.
The exercise price and number of shares purchasable upon exercise of the
warrants are subject to adjustment upon the occurrence of certain events,
including the sale by the Company of shares of its common stock or other
securities convertible into common stock at a price below the then
applicable exercise price of the warrants. The warrants are subject to
redemption at $0.05 per warrant on 30 days' prior written notice to the
warrantholders (i) if the closing bid price of the common stock as reported
on Nasdaq averages in excess of 150% of the then current purchase price for
one share of common stock underlying the warrants over a period of 20
consecutive trading days ending within 15 days of the notice of redemption,
or (ii) with the prior written consent of H.J. Meyers & Co., Inc. The
warrants do not confer holders any voting, dividend, or other rights as
shareholders of the Company.
REPRESENTATIVE WARRANTS: At December 31, 1996, the Company had outstanding
85,000 representative warrants to purchase an aggregate 85,000 units and a
sales agent warrant to purchase 118,000 units, each unit consisting of two
shares of common stock and one securityholder warrant. The representative
warrants are exercisable until September 25, 2000, at a price of $17.52 per
unit and the sales agent warrant is exercisable until July 10, 2001 at a
price of $6.80 per unit.
STOCK OPTIONS: The Company's 1988 Employee Stock Option Plan ("1988 Plan")
provides for issuance to eligible employees and advisors of incentive stock
options and nonstatutory stock options to purchase common stock at or below
fair market value at the date of grant. Outstanding options expire ten years
from the date of grant and are generally exercisable in full upon grant, but
are subject to repurchase rights based on a four-year vesting schedule and
rights of first refusal. The 1988 Plan was terminated by the Board of
Directors in 1995.
In 1993, the Company established the 1993 Employee Stock Option Plan ("1993
Plan"). The 1993 Plan makes available options for 283,840 shares to be
issued to eligible employees and advisors. Outstanding options expire five
years from the date of grant, with vesting provisions to be specified upon
grant. The 1993 Plan was terminated by the Board of Directors in 1995.
In 1995, the Company established the 1995 Employee Stock Option Plan ("1995
Plan"). The 1995 Plan makes available options for 400,000 shares to be
issued to eligible employees, officers, or agents of the Company.
Outstanding options expire ten years from the date of grant, with vesting
provisions to be specified upon grant. As of December 31, 1996, 1,111,133
had been granted under the 1995 Plan, of which options for 711,133 shares
were subject to approval by shareholders of an amendment to the 1995 Plan
increasing the number of shares available.
In 1995, the Company established the 1995 Independent Directors Stock Option
Plan ("1995 Directors Plan"). The 1995 Directors Plan makes available
100,000 shares to be issued to independent directors only. Outstanding
options expire ten years from the date of grant. Options vest cumulatively,
with 1,500 shares becoming exercisable for each year that the optionee
remains a director. As of December 31, 1995, 100,000 shares remained
available for grant under the 1995 Directors Plan. As of December 31, 1996,
88,000 shares remained available for grant under the 1995 Directors Plan.
F12
<PAGE> 36
The following table summarizes plan activity under the Company's Stock Option
Plans for the two years ended December 31, 1996:
<TABLE>
<CAPTION>
Number of Shares
- ------------------------------------------------------------------------------------------------------------------------------------
Wgdt. Wgdt. Wgdt. Wgdt.
avg. avg. avg. 1995 avg.
1988 exer. 1993 exer. 1995 exer. Directors exer.
Options Plan price Plan price Plan price Plan price
------- ---- ----- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1994 625,884 $ 1.96 133,746 $ 0.35 $ $
Granted in 1995 56,386 5.28 255,450 5.00
Exercised (19,710) 1.97 (12,020) 0.33
Canceled (42,884) 2.65 (1,000) 5.00
------- --------- ------- --------- --------- --------- ------ ---------
Outstanding at
December 31, 1995 619,676 2.24 121,726 0.35 254,450 5.00
Outstanding at
January 1, 1996
Granted in 1996 878,650 5.21 12,000 5.50
Exercised (29,670) 1.49 (3,744) 0.35
Canceled (14,518) 4.85 (19,467) 4.92
------- --------- ------- --------- --------- --------- ------ ---------
Outstanding at
December 31, 1996 575,488 $ 2.21 117,982 $ .35 1,111,133 $ 5.16 12,000 $ 5.50
======= ========= ======= ========= ========= ========= ====== =========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------
Weighted-
Outstanding average Weighted- Exercisable Weighted
Range of as of remaining average as of average
exercise December contractual exercise December exercise
prices 31, 1996 life price 31, 1996 price
------ -------- ---- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$0.00 - $1.00 293,680 2.6 $0.45 293,680 $0.45
$1.01 - $2.00 256,162 4.6 1.76 188,377 1.76
$2.01 - $3.00
$3.01 - $4.00 22,737 7.6 3.66 13,057 3.52
$4.01 - $5.00 409,583 9.1 4.60 80,471 4.99
$5.01 - $6.00 834,441 9.1 5.46 85,173 5.28
--------- --- ----- ------- -----
1,816,603 7.4 $3.91 660,758 $2.06
</TABLE>
In 1996, the Company established an Employee Stock Purchase Plan ("1996 ESPP").
The maximum number of shares of the Company's common stock that employees may
acquire under this 1996 ESPP is 1,000,000 shares. Eligible employees are
permitted to acquire shares of the Company's common stock through payroll
deductions not exceeding 15% of base wages. The purchase price per share under
the Plan will be the lower of (a) 85% of the fair market value of the Company's
Common Stock at the beginning of each six month offering period or (b) the fair
market value of the Common Stock at the end of each six month offering period.
F13
<PAGE> 37
The estimated fair value of options granted during 1996 was $5.22 per share. The
Company applies Accounting Principles Board Opinion No. 25 and Related
Interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized for its stock option plans
and its stock purchase plan. Had compensation cost for the Company's stock
option plans and its stock purchase plan been determined based on the fair value
at the grant dates for awards under those plans consistent with the method of
FASB No. 123, the Company's net income and earnings per share for the year ended
December 31, 1996 would have been reduced to the pro forma amounts indicated
below:
Net income to common shareholders
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
As reported $(5,646,243) $(12,077,338)
Pro forma $(5,901,930) $(12,893,740)
</TABLE>
Net income per common and common equivalent share
<TABLE>
<CAPTION>
1995 1996 Inception to Date
---- ---- -----------------
<S> <C> <C> <C>
As reported $(2.13) $(2.27) $(17.74)
Pro forma $(2.23) $(2.42) $(18.28)
</TABLE>
The fair value of options granted under the Company's fixed stock option plans
during 1996 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 102%, and risk-free interest rate of
6.5%. Pro forma compensation cost of options granted under the 1996 ESPP is
measured based on the discount from market value.
NOTE 9: STOCK SUBSCRIPTION RECEIVABLE
In December 1996, two shareholders exercised warrants for 361,952 shares of
common stock at $5.94 per share, of which 180,976 shares were exercised for cash
in the amount of $1,075,000 and 180,976 shares in the amount of $1,075,000 for
shareholder receivables, which were subsequently paid on February 7, 1997. In
connection with the exercise of these warrants, the Company issued additional
warrants to purchase 90,488 shares of common stock at $6.00 per share.
F14
<PAGE> 38
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Stockholders of Tera Computer Company
Seattle, Washington
We have audited the accompanying balance sheets of Tera Computer Company (a
development stage company) (the Company) as of December 31, 1995 and 1996, and
the related statements of operations, shareholders' equity, and cash flows for
the years ended December 31, 1995 and 1996, and the period from December 7,
1987 (inception) through December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and
1996, and the results of its operations and its cash flows for the years then
ended and the period from inception to December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 7, 1997
<PAGE> 39
PART III
Certain information required by Part III is omitted from the Report as the
Company will file a definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 7, 1997 pursuant to Regulation 14A (the "Proxy
Statement") not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included therein is incorporated herein by
reference. Only those sections of the Proxy Statement which specifically address
the items set forth herein are incorporated by reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information with respect to Directors may be found under the caption
"Election of Directors" in the Company's Proxy Statement. Such information is
incorporated herein by reference. Information with respect to Executive Officers
may be found on page 18 hereof, under the caption "Executive Officers of the
Registrant." Information with respect to compliance with Section 16(a) of the
Exchange Act by the persons subject thereto may be found under the caption
"Compliance With Section 16(a) of the Securities Exchange Act of 1934" of the
Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information in the Proxy Statement set forth under the captions
"Information Regarding Executive Officer Compensation" and "Board of Directors
and Committee Meetings" is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The information in the Proxy Statement set forth under the caption "Security
Ownership of Certain Beneficial Holders and Management" is incorporated herein
by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" in the
Proxy Statement is incorporated herein by reference.
24
<PAGE> 40
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit listing
3.1 Restated Articles of Incorporation (1)
3.2 Restated Bylaws (1)
4.1 Warrant Agreement (1)
10.1 1988 Stock Option Plan (2)
10.2 1993 Stock Option Plan (2)
10.3 1995 Stock Option Plan (2)
10.4 1995 Independent Director Stock Option Plan (2)
10.5 Agreement between the Defense Advanced Research Projects
Agency and the Registrant, Contract No.MDA972-91-C-0021, dated
July 1, 1991 (2)
10.6 Agreement between the Defense Advanced Research Projects
Agency and the Registrant, Contract No. MDA972-95-C-0003,
dated February 23, 1995 (3)
10.7 Cooperative Research and Development Agreement No. SC94/01282
between Sandia Corporation and the Registrant, dated July 26,
1994 (2)
10.8 Cooperative Research and Development Agreement No. TC-695-93
between Regents of the University of California and the
Registrant, dated July 15, 1994 (2)
10.9 Agreement between Cadence Design Systems, Inc. and the
Registrant entitled "Statement of Work for Gate Array and
Standard Cell Place and Route," dated May 30, 1995 (3)
10.11 Office Lease Agreement between Blume Eastlake Limited
Partnership and the Registrant, dated January 24, 1994 (2)
10.12 Agreement between the Advanced Research Projects Agency and
the Registrant, Contract No. DABT63-95-C-0096, dated September
27, 1995 (5)
10.13 Agreement between Unisys Corporation and the Registrant, dated
December 5, 1995 (5)
10.14 Agreement between Unisys Corporation and the Registrant, dated
August 16, 1996 (4)
10.15 Cooperative Agreement between The Regents of the University of
California, University of California, San Diego, Office of
Advanced Scientific Computing and the Registrant, dated
November 11, 1996 (6)
11.1 Computation of Earnings Per Share
23.1 Independent Auditors' Consent
- ----------
(1) Incorporated by reference to Amendment No. 3 to Form SB-2 Registration
Statement, Registration No. 33-95460-LA, as filed with the Commission on
September 22, 1995.
(2) Incorporated by reference to Form SB-2 Registration Statement, Registration
No. 33-95460-LA, as filed with the Commission on August 3, 1995.
(3) Incorporated by reference to Form SB-2 Registration Statement, Registration
No. 33-95460-LA, as filed with the Commission on August 3, 1995, and to the
Order granting the Company's application respecting Confidential Treatment.
(4) Incorporated by reference to Post-Effective Amendment No. 3 on Form S-3 to
Form SB-2 Registration Statement, Registration Statement No. 33-95460-LA, as
filed with the Commission on December 6, 1996, and to the Order granting the
Company's application respecting Confidential Treatment.
(5) Incorporated by reference to Form 10K-SB as filed with the Commission for
fiscal year ended December 31, 1995, and to the Order granting the Company's
application respecting Confidential Treatment.
(6) Incorporated by reference to Form 10-QSB as filed with the Commission for
the quarterly period ended September 30, 1996, and to the Order granting the
Company's application respecting Confidential Treatment.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1996.
25
<PAGE> 41
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act , the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Seattle, State of Washington, on March
21, 1997.
TERA COMPUTER COMPANY
By JAMES E. ROTTSOLK
---------------------------
James E. Rottsolk,
Chief Executive Officer
and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of registrant and in the capacities indicated
on March 21, 1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
By JAMES E. ROTTSOLK President, Chief Executive Officer,
--------------------
James E. Rottsolk Chief Financial Officer and Director
By BURTON J. SMITH Chairman of the Board of Directors
--------------------
Burton J. Smith and Chief Scientist
By DAVID N. CUTLER Director
--------------------
David N. Cutler
By DANIEL J. EVANS Director
--------------------
Daniel J. Evans
By KENNETH W. KENNEDY Director
--------------------
Kenneth W. Kennedy
By JOHN W. TITCOMB, JR. Director
--------------------
John W. Titcomb, Jr.
</TABLE>
26
<PAGE> 42
EXHIBIT INDEX
3.1 Restated Articles of Incorporation (1)
3.2 Restated Bylaws (1)
4.1 Warrant Agreement (1)
10.1 1988 Stock Option Plan (1)
10.2 1993 Stock Option Plan (1)
10.3 1995 Stock Option Plan (1)
10.4 1995 Independent Director Stock Option Plan (1)
10.5 Agreement between the Defense Advanced Research Projects
Agency and the Registrant, Contract No.MDA972-91-C-0021, dated
July 1, 1991 (1)
10.6 Agreement between the Defense Advanced Research Projects
Agency and the Registrant, Contract No. MDA972-95-C-0003,
dated February 23, 1995 (1)
10.7 Cooperative Research and Development Agreement No. SC94/01282
between Sandia Corporation and the Registrant, dated July 26,
1994 (1)
10.8 Cooperative Research and Development Agreement No. TC-695-93
between Regents of the University of California and the
Registrant, dated July 15, 1994 (1)
10.9 Agreement between Cadence Design Systems, Inc. and the
Registrant entitled "Statement of Work for Gate Array and
Standard Cell Place and Route," dated May 30, 1995 (1)
10.11 Office Lease Agreement between Blume Eastlake Limited
Partnership and the Registrant, dated January 24, 1994 (1)
10.12 Agreement between the Advanced Research Projects Agency and
the Registrant, Contract No. DABT63-95-C-0096, dated September
27, 1995 (5)
10.13 Agreement between Unisys Corporation and the Registrant, dated
December 5, 1995 (5)
10.14 Agreement between Unisys Corporation and the Registrant, dated
August 16, 1996 (4)
10.15 Cooperative Agreement between The Regents of the University of
California, University of California, San Diego, Office of
Advanced Scientific Computing and the Registrant, dated
November 6, 1996 (6)
11.1 Computation of Earnings Per Share
23.1 Independent Auditors' Consent
- ----------
(1) Incorporated by reference to Amendment No. 3 to Form SB-2 Registration
Statement, Registration No. 33-95460-LA, as filed with the Commission on
September 22, 1995.
(2) Incorporated by reference to Form SB-2 Registration Statement, Registration
No. 33-95460-LA, as filed with the Commission on August 3, 1995.
(3) Incorporated by reference to Form SB-2 Registration Statement, Registration
No. 33-95460-LA, as filed with the Commission on August 3, 1995, and to the
Order granting the Company's application respecting Confidential Treatment.
(4) Incorporated by reference to Post-Effective Amendment No. 3 on Form S-3 to
Form SB-2 Registration Statement, Registration Statement No. 33-95460-LA, as
filed with the Commission on December 6, 1996, and to the Order granting the
Company's application respecting Confidential Treatment.
(5) Incorporated by reference to Form 10K-SB as filed with the Commission for
fiscal year ended December 31, 1995, and to the Order granting the Company's
application respecting Confidential Treatment.
(6) Incorporated by reference to Form 10-QSB as filed with the Commission for
the quarterly period ended September 30, 1996, and to the Order granting the
Company's application respecting Confidential Treatment.
27
<PAGE> 1
TERA COMPUTER COMPANY
(a development stage company)
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
INCEPTION
TWELVE MONTHS ENDED THROUGH
DECEMBER 31, DECEMBER 31,
------------------------------ ------------
1995 1996 1996
------------ ------------ -------------
<S> <C> <C> <C>
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,646,243 5,320,785 1,524,445
NET LOSS $(5,646,331) $(12,077,338) $(27,045,089)
=========== ============ ============
NET LOSS PER SHARE $ (2.13) $ (2.27) $ (17.74)
</TABLE>
Exhibit 11.1
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference into Registration Statements Nos.
333-1430 and 333-12747, both on Form S-8, and No. 333-12759 on Form S-3, as
amended, of Tera Computer Company of our report dated February 7, 1997,
appearing in the Annual Report on Form 10-KSB of Tera Computer Company for the
year ended December 31, 1996, and to the reference to us under the heading
"Experts" in the Prospectus, which is part of Registration Statement No.
333-12759.
/s/ Deloitte & Touche LLP
Seattle, Washington
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the audited
financial statements of Tera Computer Company for the year ended December 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 928,760
<SECURITIES> 0
<RECEIVABLES> 40,045
<ALLOWANCES> 0
<INVENTORY> 851,960
<CURRENT-ASSETS> 3,352,189
<PP&E> 3,054,604
<DEPRECIATION> (1,872,182)
<TOTAL-ASSETS> 4,616,513
<CURRENT-LIABILITIES> 3,373,978
<BONDS> 0
0
0
<COMMON> 28,173,150
<OTHER-SE> (27,045,089)
<TOTAL-LIABILITY-AND-EQUITY> 4,616,513
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,892,102
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,788
<INCOME-PRETAX> (12,077,338)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,077,338)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,077,338)
<EPS-PRIMARY> (2.27)
<EPS-DILUTED> (2.27)
</TABLE>
