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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-26820
TERA COMPUTER COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 93-0962605
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2815 EASTLAKE AVENUE EAST, SEATTLE, WASHINGTON 98102-3027
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 490-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK , $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K.
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant as of March 9, 1998 was approximately $115,507,000 based upon
the last sale price of $12.75 reported for such date on the Nasdaq National
Market System. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by officers and directors of the Registrant have been excluded
because such persons may be deemed to be affiliates. This determination is not
necessarily conclusive.
As of March 9, 1998, there were 11,459,736 shares of Common Stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be delivered to shareholders in connection
with the Registrant's Annual Meeting of Shareholders to be held on May 6, 1998
are incorporated by reference into Part III.
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TERA COMPUTER COMPANY
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
INDEX
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Page
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PART I
<S> <C>
Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item E.O. Executive Officers of the Registrant 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 27
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AMENDED FILING OF FORM 10-K FOR 1997
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
The Company has restated its financial statements for 1996 and 1997 to
reflect the discount resulting from beneficial conversion features and the
amortization of this discount as a return to preferred shareholders with respect
to certain private placements of preferred stock and warrants in 1996 and 1997,
and the reclassification of the Company's Series A Convertible Preferred Stock,
issued in December 1997, as "redeemable securities" for financial reporting
purposes. See Notes 12 and 13 of Notes to Financial Statements.
The Financial statements and related disclosures contained in this amended
filing reflect, were appropriate, changes to conform to the restatement.
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 computer-aided design and visualization, information-on-demand and
database mining. 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. The Company installed a single processor MTA system at the San Diego
Supercomputer Center in December 1997, which it plans to upgrade in stages to
larger configurations as it receives production printed circuit boards and other
components from its vendors which are then integrated into a commercially
acceptable system. See " --Risk Factors - Manufacturing Risks; Reliance On and
Capacity Of Third Party Sole Source Suppliers."
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 and NEC Corporation, 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.
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A number of computer companies, including IBM, Silicon Graphics, Inc.,
Hitachi, Ltd., Fujitsu, Ltd., Sun Microsystems, Inc. and Hewlett-Packard
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 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 " and " -- Products."
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
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attractiveness of the MTA system to both potential customers and independent
software vendors ("ISV's").
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,
supercomputer centers 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 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. See
"-- Risk Factors -- Marketing Risks; Government Funding and Regulation."
- - - - 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 approximately $19 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, and is also engaged as a subcontractor to the University of
California, San Diego, which is the prime contractor under a contract with DARPA
to evaluate certain defense-related software programs on multithreaded
architecture. 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
organizations, to port that software to the MTA system.
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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, although at this time the Company does not plan on building a system
in the current implementation larger than with 64 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 230
billion instructions per second, 230 billion 64-bit floating point operations
per second, and 100 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.
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.
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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.
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.
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 module 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 was used to verify and debug mechanical components and assembly
procedures developed during the design process. In 1997, the Company began
construction of its initial production MTA system. In December 1997, the Company
installed a single processor MTA system at the San Diego Supercomputer Center,
affiliated with the University of California, San Diego, which it plans to
upgrade in stages to larger configurations as it receives production printed
circuit boards and other components from its vendors which are then integrated
into a commercially acceptable system.
The Company has begun planning for successive product generations. By
improving system peak and 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 while
preserving Tera's uniform slowed memory programming model. Finally, the Company
may take advantage of the ability of the MTA system to scale down to compete
with workstation and other microprocessor-based products.
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.
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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, supercomputer centers 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 needs arise.
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, supercomputer centers 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
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:
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- Automobile crash simulation - Petroleum reservoir modeling
- Combustion simulation - Electromagnetic simulation
- Nuclear reactor design - Multidisciplinary optimization
- Drug and chemical design - Animations, computer graphics
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 traditional
commercial applications. These applications include:
-Interactive Simulation and Visualization -- allowing users the ability to
design and develop products such as automobiles, aircraft and buildings.
-Information-on-Demand -- the management, storage and distribution of
multimedia data for instantaneous access by thousands of interactive,
simultaneous users.
-Database Mining -- access and examination of databases to identify
significant data patterns relevant to consumer preferences, insurance
claims and fraud.
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, 1996
and 1997 were approximately $6.7 million, $10.5 million and $13.5 million,
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
subcontracts the manufacture of such components, including integrated circuits,
printed circuit boards, flex circuits and power supplies, on a sole or limited
source basis to third-party suppliers. The Company has contracted with Unisys
Corporation to provide semiconductor test and packaging services through June
1998. The Company currently is negotiating an extension of this agreement with
Unisys, which is expected to be completed shortly. The Company will 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 for the supply of GaAs wafers and with a limited
number of vendors for various printed circuit boards, and purchases other
components on an as-needed basis. 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 in cooperation with the
supplier of the component to determine the cause and to take corrective action.
See " -- Risk Factors -- Manufacturing Risks; Reliance On and Capacity Of 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
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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 has been 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, together with software compatibility. See " -- Technology --
Software Portability." Other participants in the market include IBM and Japanese
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 but have been enjoying increasing success in
foreign markets. 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, Silicon Graphics, Inc., Hitachi, Ltd.,
Fujitsu, Ltd., Sun Microsystems, Inc., and Hewlett-Packard Corporation, through
its subsidiary, Convex Computer, 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 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."
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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. In 1997, the Company was
awarded a software patent covering certain aspects of compiler optimization.
There can be no assurance that this patent will provide any meaningful
protection.
EMPLOYEES
As of December 31, 1997, the Company employed 84 employees on a full-time
basis, of whom 54 were in engineering, 13 were in manufacturing, seven were in
sales and marketing, and 10 were in administration. The Company also employs six
individuals on a part-time or temporary 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 and ownership of the Company's securities:
DEVELOPMENT STAGE STATUS; HISTORY OF LOSSES. The Company had an accumulated loss
from operations of approximately $42.8 million as of December 31, 1997 and is in
transition from a development stage enterprise to a production company. The
Company has experienced net losses in each year of operations and expects to
incur substantial further losses as it commences production, and possibly
thereafter. Through December 31, 1997, the Company has had no revenue from sales
of MTA systems, nor earnings. The Company will recognize system revenue only as
resource modules are accepted by customers. Although the Company has installed a
single processor MTA system at the San Diego Supercomputer Center, it has not
yet delivered a multi-processor MTA system, and is dependent on third-party
vendors to provide production printed circuit boards and other necessary
components. 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 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 " -- Markets and Applications" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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
1990s, including Thinking Machines Corporation, Cray Computer Corporation,
Kendall Square Research Corporation and Supercomputer Systems, Inc. Since its
inception through December 31, 1997, the Company has expended approximately
$52.2 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 announced that its initial prototype was
undergoing testing and had run its first programs, the MTA system had been
subject only to computer simulation. While the initial testing and evaluation of
the prototype system has been successful, the Company only recently has begun to
integrate multiple modules into commercially configured systems.
11
<PAGE> 12
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 MTA systems that
satisfy both internal and commercially acceptable performance specifications.
Additional 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 a commercially configured MTA system, there can be no assurance
that the Company's products will be commercially successful.
See " -- Markets and Applications" and " -- Competition."
MANUFACTURING RISKS; RELIANCE ON AND CAPACITY OF THIRD PARTY SOLE SOURCE
SUPPLIERS. The Company has subcontracted the manufacture of substantially all of
its hardware components, including integrated circuits, printed circuit boards,
flex circuits and power supplies, on a sole or limited 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. The Company also has experienced delays in receiving integrated
circuits and printed circuit boards from its suppliers which meet its design
specifications. 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. Delays in obtaining such components have adversely affected the
Company's ability to deliver its first multi-processor MTA system to the San
Diego Supercomputer Center on schedule and may continue to hinder its ability to
satisfy future delivery schedules with the San Diego Supercomputer Center and
other potential customers.
Moreover, the production capacity of the Company's integrated circuit and
printed circuit board suppliers is very limited and the availability of these
and other components will be a limiting factor on the number and size of the MTA
systems that may be sold in 1998, and thereafter, assuming the receipt of
additional purchase orders. Absent improved yields, increased production
capacity or a reallocation of such suppliers' output to meet the Company's
needs, the Company may be unable to obtain a sufficient quantity of suitable
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 consequently 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 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;
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<PAGE> 13
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 through June 1998. The Company
expects that it will be able to extend this agreement on mutually agreeable
terms. If this agreement is not extended, however, the Company would 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 1998, the Company's working capital needs will
depend primarily upon its personnel costs and the cost of inventory, as well as
manufacturing startup costs, inventory and receivable financing associated with
the production of MTA systems and research and development expenses related to
future implementations of the MTA systems. The Company has experienced delays in
the development of particular components of the MTA system that have increased
the need for working capital, and the Company could experience significant
additional delays in the manufacturing process that could further substantially
increase the Company's need for working capital. Personnel and operating costs
will be required to support ongoing research, development and engineering
efforts, development of a customer service organization, increases in its sales
and marketing efforts, and capital expenditures in lease of goods. Additionally,
the Company's administrative functions will increase in order to support its
engineering and sales efforts. If the Company were not to receive revenue from
the sale of MTA systems, it likely would be required to engage in additional
financings in order to continue current levels of business operations. The
Company may raise additional equity capital in 1998, even if revenues are
received from the sale of MTA systems when anticipated, in order to enhance its
financial position for future operations. There can be no assurance that any
additional financings will be available to the Company when needed or, if
available, will be available on satisfactory terms or that any such financings
will not be dilutive to the Company's shareholders. 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 substantial 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.
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
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<PAGE> 14
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. 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 such 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 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
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<PAGE> 15
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 " --High Performance
Computer Industry" and " -- 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 and Japanese 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, Silicon Graphics, Inc., Hitachi, Ltd.,
Fujitsu Ltd., Sun Microsystems, Inc., and Hewlett-Packard Corporation, through
its subsidiary, Convex Computer, 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. See " -- Technology" and " --
Competition."
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 " --
Intellectual Property."
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 in the public market or the prospect of such sales could materially
and adversely affect the market price of the Common Stock. As of March 9, 1998,
the Company had outstanding 11,459,736 shares
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<PAGE> 16
of Common Stock; 8,578 shares of Series A Convertible Preferred Stock
convertible into shares of Common Stock, and privately placed warrants to
purchase another 1,117,642 shares of Common Stock. Almost all of the Company's
outstanding shares of Common Stock may be sold without substantial restrictions.
In addition, as of such date, the Company had granted options under its option
plans to purchase an aggregate of 2,047,208 shares of Common Stock. All of the
shares purchased under the 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,
including sales of Common Stock issuable upon conversion of the Series A
Convertible Preferred Stock and issuable upon exercise of the privately placed
warrants, or the perception that such sales could occur could depress prevailing
market prices for the Common Stock. The existence of the Series A Convertible
Preferred Stock and 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 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.
POSSIBLE ILLIQUIDITY OF TRADING MARKET. The Common Stock is quoted on the Nasdaq
National Market (the "Market"). Nasdaq has proposed more stringent listing and
maintenance requirements and significantly increased its compliance enforcement
efforts. If the Company should continue to experience losses from operations, it
may be unable to maintain the standards for continued quotation on the Market,
and the Common Stock could be subject to removal therefrom. If such removal were
to occur, trading, if any, in the Common Stock 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
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<PAGE> 17
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 $72,000. The Company has executed a
ten-year lease beginning on November 1, 1998, for a new facility to house all
its operations in Seattle. Under the lease, the Company initially will occupy
approximately 85,000 square feet and in three years is committed to occupy
approximately 132,000 square feet. The initial base rental, excluding parking,
will be approximately $145,000 per month. The Company will have an option to
extend the lease for another five years after the initial ten-year term. The
Company expects this space to be adequate for its needs for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any 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 1997.
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ITEM E.O. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of March 20, 1998 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Burton J. Smith 57 Chairman of the Board and
Chief Scientist
James E. Rottsolk 53 Chief Executive Officer and President
Kenneth W. Johnson 55 Vice President - Finance, Chief
Financial Officer, and Secretary
Brian D. Koblenz 37 Vice President - Software
Gerald E. Loe 48 Vice President - Hardware Engineering
and Manufacturing
Richard M. Russell 53 Vice President - Marketing
</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 and President 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.
Kenneth W. Johnson joined the Company in September 1997 as Vice President -
Finance, Chief Financial Officer and Secretary. Prior to joining the Company,
Mr. Johnson practiced law in Seattle for twenty years with Stoel Rives LLP and
predecessor firms, where his practice emphasized corporate finance. Mr. Johnson
received his A.B. degree from Stanford University and his J.D. degree from
Columbia University Law School.
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. He was named Vice President - Hardware in 1996
and resumed his former position in March 1998. Prior to joining Tera 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.
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<PAGE> 19
Richard M. Russell joined the Company as Director of New Business
Development in 1995 and was named Vice President, Marketing in March 1998. Prior
to joining the Company, he worked in a variety of sales and marketing positions
at several high technology companies, including Cray Research from 1976 through
1990 and Kendall Square Research from 1991 through 1994. Mr. Russell was
educated in England.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol TERA; prior to January 20, 1998, the Company's stock was traded on the
Nasdaq SmallCap Market. On March 9, 1998, there were 326 holders of record of
the Common Stock. The Company has not paid cash dividends on its Common Stock.
The Company currently anticipates that it will retain all available funds for
use in its business and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future.
The quarterly high, low and closing sales prices of the Common Stock for the
periods indicated are as follows:
<TABLE>
<CAPTION>
1996 1997
-------------------------------- -----------------------------------
High Low Close High Low Close
---------- ---------- --------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
First Quarter 6 1/8 3 3/4 5 1/4 6 1/4 3 5/16 5 5/8
Second Quarter 7 1/8 4 1/8 5 1/2 6 3/8 3 7/8 5 1/2
Third Quarter 5 7/8 3 5/8 4 3/4 18 3/16 4 7/16 12 7/8
Fourth Quarter 7 3 1/4 3 7/8 17 3/4 9 3/4 15 1/4
</TABLE>
On March 9, 1998, the closing sale price for the Common Stock was $12.75.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
SALES OF UNREGISTERED SECURITIES
On August 6, 1997, the Company issued 4,000 shares of Common Stock to a
consultant, Alan Honick, as payment for services rendered in a private placement
exempt from the registration provisions of the Securities Act of 1933 under
Section 4(2) thereof, based on the nature of the offering and the status of the
recipient.
On December 23, 1997, the Company raised $9,500,000 in cash through the
negotiated private sale of 10,000 shares of its Series A Convertible Preferred
Stock (the "Series A Stock") and 125,000 common stock purchase warrants to two
accredited investors, Advantage Fund II Ltd. and Genesee Fund Limited -
Portfolio B. The Series A Stock is convertible from time to time into shares of
Common Stock at a conversion price equal to the lower of $19.185 per share or
the lowest sale (regular way) price during the five consecutive trading days
ending one day prior to the date on which a notice of conversion is delivered to
the Company, with the conversion price subject to adjustment in certain
conditions. The Series A Stock is redeemable at the option of the Company and,
in certain situations, by the holders. The warrants are exercisable at a price
of $19.185 per share, subject to adjustment in certain conditions. Further
information regarding these securities is contained in Notes 9 and 12 of the
Notes to Financial Statements. There were no sales agents or underwriters
involved in this placement. The sale was exempt from the registration provisions
of the Securities Act of 1933 under Section 4(2) thereof, based on the nature of
the offering and status of the offerees.
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<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts and Statistical Data)
<TABLE>
<CAPTION>
Years Ended December 31, 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(As Restated) (As Restated)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenue $ - $ - $ - $ - $ 74
Research and Development 5,124 5,575 6,679 10,504 13,547
Research Funding 3,172 4,410 2,196 185 349
Net Loss 2,789 2,123 5,646 12,077 15,755
Net Loss for Common Stock(1) 2,789 2,123 5,646 18,806 18,672
Net Loss per Common Share(1) $ 1.40 $ 1.00 $ 2.13 $ 3.53 $ 2.13
Weighted Average Shares
Outstanding 1,986 2,119 2,646 5,321 8,785
Balance Sheet Data:
Cash and Cash Equivalents $ 85 $ 21 $ 4,285 $ 929 $ 13,329
Working Capital (4,002) (3,850) 2,642 (22) 14,342
Capital leases, long-term portion 271 168 419 114 532
Total Assets 841 1,168 7,269 4,617 20,859
Shareholders' Equity(1) (3,523) (3,219) 4,092 1,128 6,368
Statistical Data:
Number of Full-Time Employees 43 56 66 61 84
</TABLE>
(1) These items have been restated for the periods indicated to reflect the
discount resulting from beneficial conversion features and the amortization of
this discount as a return to preferred shareholders with respect to the issuance
of certain securities in 1996 and 1997 and the reclassification of the Company's
Series A Convertible Preferred Stock as "redeemable securities" for financial
reporting purposes, as described in Note 13 of Notes to Financial Statements.
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<PAGE> 22
ITEM 7. 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 and under "Business
- - - -- Risk Factors." The following discussion should also be read in conjunction
with the Financial Statements and Notes thereto.
As discussed in Note 13 to the financial statements, subsequent to the
issuance of the Company's December 31, 1997 financial statements, management
determined that the Company's Series A convertible preferred stock, issued
during the second and third quarters of 1996, and the separate Series A
convertible preferred stock issued in December 1997 should have been accounted
for in accordance with the guidance in Emerging Issues Task Force ("EITF") D-60,
"Accounting for the Issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature." EITF D-60 requires that a portion of
the proceeds from the issuance of convertible preferred stock with a beneficial
conversion feature equal to the intrinsic value of the beneficial conversion
feature be allocated to paid-in capital. The resulting preferred stock discount
is amortized as a return on the preferred stock and reducing income attributable
to common stock, during the period from the date of issuance to the date the
security is first convertible. Management also determined that the amortization
of preferred stock discount previously recorded as a charge to accumulated
deficit should have been charged to common stock because the Company does not
have retained earnings. Additionally, management determined that the provisions
of the Company's Series A convertible preferred stock, issued in December 1997,
contain redemption features which result in the requirement to present such
preferred stock as Redeemable Securities outside of Shareholders' Equity on the
Balance Sheet.
The Company's financial statements as of December 31, 1997 and for the
years ended December 31, 1996 and 1997 and the period from December 7, 1987
(inception) to December 31, 1997, have been restated to account for the Series A
convertible preferred stock, which included beneficial conversion features, in
accordance with EITF D-60, to reclassify as a charge to common stock the
amortization of preferred stock discount previously charged to accumulated
deficit, and to present the Series A convertible preferred stock issued in
December 1997 as a Redeemable Security. The adjustments have no effect on the
Net Loss of the Company or on its cash flows.
OVERVIEW
The Company is a development stage enterprise that had an accumulated net
loss of approximately $42.8 million as of December 31, 1997. Approximately 76%
of the Company's funding to date has been from the sale of securities, with the
remaining 24% provided from DARPA research funding.
The Company has experienced net losses in each year of operations and
expects to incur substantial further losses as it commences production, and
possibly thereafter. Through December 31, 1997, the Company had no revenue from
the sale of MTA systems, nor earnings. In November 1996 the Company announced
that the University of California at San Diego had ordered the first MTA system
production model for installation and evaluation at the San Diego Supercomputer
Center ("SDSC"), utilizing a grant from the National Science Foundation. The
agreement calls for the phased-in delivery of an MTA system which the Company
of up to eight resource modules, for a total consideration to the Company of
$4 million. At the end of December 1997, the Company delivered a
single-processor MTA system to SDSC, which the Company plans to upgrade in
stages to larger configurations as it receives production printed circuit
boards and other components which are integrated intoa commercially acceptable
system. See "Business -- Risk Factors -- Development Status of the MTA System"
and "Business -- Strategy."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
REVENUE. The Company received revenue in 1997 of approximately $73,500
pursuant to a subcontract with SDSC to evaluate multithreaded architecture for
certain defense applications. The Company expects to complete its portion of
this subcontract in 1998 for approximately $490,000. The Company also
anticipates receiving revenue in 1998 from the sale of its initial MTA system,
including larger configurations to SDSC and from other sales to potential
customers in 1998, although it currently has no contracts or purchase orders for
such other sales. See "Business--Risk Factors."
OPERATING EXPENSES. 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, nonrecurring
engineering, software and hardware costs and preproduction expenses. Research
and development expenses increased from $6.7 million in 1995 to $10.5 million in
1996 to $13.5 million in 1997, representing approximately 86% of total operating
expenses in 1995 and 1996, and decreasing slightly to just under 84% in 1997.
Research and development expenditures for 1997 included an $832,000 charge as
compensation expense related to certain performance-based stock options; without
that charge, 1997 research and development expenditures would have been
approximately $12.7 million, or about 83% of total operating expenditures. The
1996 increase over 1995 primarily reflected increased prototype costs. Prototype
expenditures declined by $938,000 to $402,000 in 1997, and essentially ceased
after the third quarter of 1997. This decrease only partially offset increases
in manufacturing costs and wages and benefits due to increased staff (even after
excluding the compensation charge for certain performance-based stock options),
plus almost $2.3 million in preproduction costs and expenses relating to
inventory obsolescence,
22
<PAGE> 23
expensed parts and inventory revaluation. A decline of approximately $1.6
million in nonrecurring engineering expenses pertaining to the MTA system in
1997 over 1996 was offset almost entirely by increased nonrecurring engineering
expenditures on the next generation MTA system.
While the Company expects that research and development will continue to be
a major expense, 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.
Marketing and sales expenses have increased from $281,000 in 1995 to nearly
$1,120,000 in 1997, as the Company has continued to increase sales and customer
support staff and expenditures in connection with sales and marketing,
benchmarks and development of third party applications software. In 1997,
marketing and sales expenses increased to 6.9% of total operating expenses, with
a significant increase in the fourth quarter as the Company then opened a
two-person, branch sales office in Japan and added a third U.S. salesperson.
These expenses are expected to continue to grow as the Company increases its
marketing and sales activities.
The Company's general and administrative expenses have increased each year
consistent with expansion of the Company's infrastructure. In 1995, 1996 and
1997 these expenses were $749,000, $1,057,000 and $1,561,000, respectively, an
increase of 41% in 1996 over 1995 and a further 48% increase in 1997 over 1996.
The increase in amount of expenditures in 1996 over 1995 was due primarily to
the first full year's cost of liability insurance and professional services
associated with becoming a publicly owned company, while the 1997 increase was
primarily due to additional staff and further increases in legal, investor
relations, stock transfer and other costs associated with being a publicly owned
company. General and administrative expenses are expected to increase
commensurate with any growth in the Company's operations.
RESEARCH FUNDING. The Company has been billing DARPA under an approximately
$1 million research contract awarded in September 1995. Billings increased in
1997 to $349,000 over $185,000 in 1996. The Company expects to bill
approximately $400,000 under this contract in 1998.
OTHER INCOME (EXPENSE). Other 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. Other income increased in
1997 to $101,000 as interest income increased to $140,000 while interest expense
declined to $27,000, reflecting the Company's increased cash position due to the
sales of equity securities throughout the year.
TAXES. There was no provision for federal income taxes in 1995, 1996, or
1997 as the Company has continued to incur net operating losses. As of December
31, 1997, the Company had net operating loss carryforwards of approximately
$39,153,000, which expire in years 2003 through 2012, if not utilized. The
Company's net operating loss carryforwards and certain other tax attributes
(including its research credit of approximately $1,825,000 at December 31, 1997)
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.
PREFERRED STOCK. In 1997, the Company recognized beneficial conversion
features related to the issuance of its Series A, Series B and Series C
Convertible Preferred Stock during the year totaling $2,827,000, and recorded
cummulative dividends of $90,000 on these securities.
23
<PAGE> 24
YEAR 2000. The Company does not expect that issues relating to the Year 2000
problem will be significant to its financial condition or results of operations.
No significant modifications to its computer system are necessary to address
Year 2000 issues, and it does not anticipate that any issues affecting its
suppliers and customer will affect the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through December 31, 1997, the Company's principal
sources of liquidity have been net proceeds from the sale of securities totaling
$58.7 million and DARPA research funding and subcontracts totaling $19 million.
Billings under the current contracts and subcontracts with DARPA are expected to
approximate $900,000 in 1998. At December 31, 1997, the Company had $13.3
million in cash and had no bank line of credit.
During 1998, the Company's working capital needs will depend primarily upon
personnel costs and the cost of inventory, as well as manufacturing startup
costs, inventory and receivable financing associated with the production and
sale of MTA systems and research and development expenses related to future
implementations of the MTA system. In 1997, overall wages and benefits increased
by about 21% over 1996 to $6.2 million, while total expenses related to
inventory increased in 1997 to approximately $5.7 million, a $4.8 million
increase over 1996; these expenses are expected to increase in 1998. The Company
has experienced delays in the development of particular components of the MTA
system which have increased the need for working capital, and the Company could
experience significant additional delays in the manufacturing process that could
further substantially increase the Company's need for working capital. Personnel
and operating costs will be required to support ongoing research, development
and engineering efforts, development of a customer service organization,
increases in sales and marketing efforts, and capital expenditures for leased
equipment.
Although the Company believes that its current funds, together with revenue
from anticipated sales of MTA systems, may be adequate to continue current
levels of business operations through 1998, the Company may require further
additional working capital if the sales of the MTA system are substantially
delayed. The Company may raise additional equity capital in 1998, even if
revenues are received from the sale of MTA systems when anticipated, in order to
enhance its financial position for future operations. There can be no assurance
that any additional financing will be available on acceptable terms when needed
or, if available, will be available on satisfactory terms or that such
financings will not be dilutive to the Company's shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a "small business issuer," as defined under the applicable
rules under the Securities Exchange Act of 1934, and is not required to provide
the information set forth in Item 305 of Regulation S-K.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Balance Sheets at December 31, 1996 and December 31, 1997
(As restated, see Notes to Financial Statements).............................................F1
Statements of Operations for the three years ended December 31, 1997 and from inception
(As restated, see Notes to Financial Statements).............................................F2
Statements of Shareholders' Equity from inception through December 31, 1997
(As restated, see Notes to Financial Statements).............................................F3
Statements of Cash Flows for the three years ended December 31, 1997 and from inception........F9
Notes to Financial Statements..................................................................F10
Independent Auditors' Report...................................................................F19
</TABLE>
QUARTERLY FINANCIAL DATA -- unaudited
(in thousands, except per share data)
The following table presents unaudited quarterly financial information for
the two years ended December 31, 1997. In the opinion of management, this
information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation thereof. The operating results
are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
1996 1997
----------------------------------------------- -----------------------------------------------
For quarter ended: 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
---- ---- ---- ----- ---- ---- ---- -----
(1) (1) (1) (1) (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 74
Gross Profit $ 21
Net Operating Expense $ 3,527 $ 3,721 $ 2,586 $ 2,206 $ 2,401 $ 3,555 $ 4,380 $ 5,520
Net Loss $(3,551) $(3,737) $(2,574) $(2,215) $(2,415) $(3,565) $(4,275) $(5,500)
Amortization of Preferred
Stock Discount (as previously
reported) $ 0 $ 0 $ 0 $ 0 $ 0 $ (337) $ (484) $(1,198)
Amortization of Preferred
Stock Discount (as restated) $ 0 $ (179) $ (563) $(5,987) $ (26) $ (337) $ (484) $(1,980)
Net Loss for Common Stock (as
previously reported) $(3,551) $(3,737) $(2,574) $(2,215) $(2,415) $(3,940) $(4,775) $(6,734)
Net Loss for Common Stock (as
restated) $(3,551) $(3,916) $(3,137) $(8,202) $(2,441) $(3,940) $(4,775) $(7,516)
Net Loss Per Common Share - basic
and diluted (as previously
reported) $ (0.90) $ (0.79) $ (0.41) $ (0.35) $ (0.36) $ (0.55) $ (0.46) $ (0.61)
Net Loss Per Common Share - basic
and diluted (as restated) $ (0.90) $ (0.83) $ (0.50) $ (1.83) $ (0.37) $ (0.55) $ (0.46) $ (0.69)
</TABLE>
- - - ------------
(1) These items have been restated for the periods indicated to reflect the
discount resulting from beneficial conversion features and the amortization of
this discount as a return to preferred shareholders with respect to the issuance
of certain securities in 1996 and 1997, as described in Note 13 of Notes to
Financial Statements.
The Company's future operating results may be subject to quarterly
fluctuations as a result of a number of factors, including the timing of
deliveries of the Company's products. See "Business - Risk Factors."
Quarter-to-quarter comparisons should not be relied upon as indicators of future
performance.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
<PAGE> 26
PART III
Certain information required by Part III is omitted from this Report as the
Company will file a definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 6, 1998 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 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 pages 18 and 19 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" in the
Proxy Statement and is incorporated herein by reference.
ITEM 11. 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 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the last paragraph under the caption "Stock
Options" in the Proxy Statement is incorporated herein by reference.
26
<PAGE> 27
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBIT LISTING
3.1 Restated Articles of Incorporation (1)
3.2 Restated Bylaws (1)
4.1 Statement of Rights and Preferences of the Series A Convertible
Preferred Stock of the Registrant, as filed with the Secretary of
State of the State of Washington on December 23, 1997 (7)
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 and the Registrant,
dated November 11, 1996 (6)
10.16 Agreement between Unisys Corporation and the Registrant, dated
September 17, 1997 (8)
10.17 Subcontract Agreement Between the Regents of the University of
California and the Registrant, effective July 1, 1997(9)
10.18 Lease Agreement between Merrill Place, LLC and the Registrant, dated
November 21, 1997.(9)
11.1 Computation of Earnings Per Share
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
(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.
(7) Incorporated by reference to Form S-3 Registration Statement, Registration
No. 333-44137, as filed with the Commission on January 12, 1998.
(8) Incorporated by reference to Form 10-QSB, as filed with the Commission for
the quarterly period ended September 30, 1997.
(9) Incorporated by reference to Form 10-K, as filed with the Commission for
the fiscal year ended December 31, 1997.
(b) REPORTS ON FORM 8-K
One Form 8-K, dated and filed on October 1, 1997, reported the raising of
$5,000,000 through a private placement of preferred stock under Item 5.
27
<PAGE> 28
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
November 16, 1998.
TERA COMPUTER COMPANY
By JAMES E. ROTTSOLK
-------------------------------------
James E. Rottsolk
Chief Executive Officer
and President
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 November 16, 1998.
Signature Title
--------- -----
By JAMES E. ROTTSOLK Chief Executive Officer, President
---------------------------------- and Director
James E. Rottsolk
By BURTON J. SMITH Chairman of the Board of Directors
---------------------------------- and Chief Scientist
Burton J. Smith
By KENNETH W. JOHNSON Chief Financial Officer
----------------------------------
Kenneth W. Johnson
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.
28
<PAGE> 29
EXHIBIT INDEX
3.1 Restated Articles of Incorporation (1)
3.2 Restated Bylaws (1)
4.1 Statement of Rights and Preferences of the Series A Convertible
Preferred Stock of the Registrant, as filed with the Secretary of
State of the State of Washington on December 23, 1997 (7)
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)
10.16 Agreement between Unisys Corporation and the Registrant, dated
September 17, 1997 (8)
10.17 Subcontract Agreement Between the Regents of the University of
California and the Registrant, effective July 1, 1997(9)
10.18 Lease Agreement between Merrill Place, LLC and the Registrant, dated
November 21, 1997.(9)
11.1 Computation of Earnings Per Share
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
(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.
(7) Incorporated by reference to Form S-3 Registration Statement, Registration
No. 333-44137, as filed with the Commission on January 12, 1998.
(8) Incorporated by reference to Form 10-QSB, as filed with the Commission for
the quarterly period ended September 30, 1997.
(9) Incorporated by reference to Form 10-K, as filed with the Commission for the
fiscal year ended December 31, 1997.
29
<PAGE> 30
TERA COMPUTER COMPANY
(a development stage company)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1997
------------ ------------
(As Restated;
see Note 13 to
Financial
Statements
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 928,760 $ 13,329,115
Accounts receivable 40,045 99,696
Related party receivable 368,008
Inventory 851,960 4,290,873
Advances to suppliers 310,077 325,385
Other assets 146,350 410,754
Stock subscriptions receivable 1,074,997
----------- -----------
Total current assets 3,352,189 18,823,831
PROPERTY AND EQUIPMENT, NET 1,182,422 1,914,925
LEASE DEPOSITS 81,902 120,629
----------- -----------
TOTAL $ 4,616,513 $ 20,859,385
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,070,242 $ 2,138,343
Accrued payroll and related expenses 1,712,971 1,713,553
Potential contract adjustments 250,000 250,000
Current portion of obligations under
capital leases 340,765 379,597
------------ -----------
Total current liabilities 3,373,978 4,481,493
OBLIGATIONS UNDER CAPITAL LEASES,
Less current portion 114,474 532,321
REDEEMABLE SECURITIES: (SEE NOTES)
10,000 shares issued and outstanding of Series A
Convertible Preferred Stock, $.01 par value;
Liquidity preference - $11,512,777 9,477,709
SHAREHOLDERS' EQUITY: (SEE NOTES)
Common Stock, par $.01 -- Authorized,
25,000,000 shares; issued and outstanding,
6,496,815 and 11,248,096 shares 27,098,153 49,168,180
Common Stock subscribed 1,074,997
Accumulated deficit (27,045,089) (42,800,318)
------------ -----------
Total shareholders' equity 1,128,061 6,367,862
============ ============
TOTAL $ 4,616,513 $ 20,859,385
============ ============
</TABLE>
---
See notes to financial statements. F1
<PAGE> 31
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCEPTION
THROUGH
DECEMBER 31,
1995 1996 1997 1997
------------ ------------ --------------- -------------
(As Restated; (As Restated; (As Restated;
see Note 13 see Note 13 see Note 13
to Financial to Financial to Financial
Statements) Statements) Statements)
<S> <C> <C> <C> <C>
REVENUE
Service revenue $ $ $ 73,531 $ 73,531
OPERATING EXPENSES:
Cost of sales (51,891) (51,891)
Research and development (6,679,492) (10,503,747) (13,546,785) (52,179,985)
Marketing and sales (281,113) (664,911) (1,119,431) (2,950,300)
General and administrative (748,569) (1,057,168) (1,561,145) (6,373,612)
----------- ------------ ------------ -------------
(7,709,174) (12,225,826) (16,205,721) (61,482,257)
RESEARCH FUNDING 2,196,288 185,236 349,407 19,004,252
----------- ------------ ------------ ----------
Net operating expenses (5,512,886) (12,040,590) (15,856,314) (42,478,005)
OTHER INCOME (EXPENSE) (133,445) (36,748) 101,085 (322,313)
----------- ------------ ----------- ---------
NET LOSS (5,646,331) (12,077,338) $15,755,229) (42,800,318)
PREFERRED STOCK DIVIDEND (89,964) (89,964)
AMORTIZATION OF PREFERRED
STOCK DISCOUNT (6,728,603) (2,827,242) $ (9,555,845)
------------ ------------ ------------ ----------
LOSS FOR COMMON STOCK (5,646,331) $(18,805,941) $(18,672,435) $(52,446,127)
============ ============ ============ ==========
LOSS PER COMMON SHARE $ (2.13) $ (3.53) $ (2.13) $ (23.91)
============ ============ ============ ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,646,243 5,320,785 8,784,943 2,193,839
============ ============ ============ ==========
</TABLE>
---
See notes to financial statements. F2
<PAGE> 32
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------
<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)
Common stock(31)
Common stock(32)
Common stock(33)
Common stock(34)
Common stock(35)
Net loss
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996
Common stock(36)
Common stock(37)
Common stock(38)
Common stock(39)
Common stock(40)
Common stock(41)
Common stock(42)
Common stock(43
Common stock(44)
Common stock(45)
Common stock(46)
Net loss
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 $ -- $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<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
Common stock(31) 6,728,603 6,728,603
Common stock(32) 1,311 1,311
Common stock(33) (6,728,603) (6,728,603)
Common stock(34) 2,149,995 2,149,995
Common stock(35) 6,888,194 6,888,194
Net loss (12,077,338) (12,077,338)
----------- ------------ ------------
BALANCE, December 31, 1996 28,173,150 (27,045,089) 1,128,061
Common stock(36) 1,244,136 1,244,136
Common stock(37) 1,060,405 1,060,405
Common stock(38) 105,296 105,296
Common stock(39) 2,827,242 2,827,242
Common stock(40) 10,585,646 10,585,646
Common stock(41) (2,827,242) (2,827,242)
Common stock(42) 2,814,386 2,814,386
Common stock(43) 17,500 17,500
Common stock(44) 87,365 87,365
Common stock(45) 4,962,171 4,962,171
Common stock(46) 118,125 118,125
Net loss (15,755,229) (15,755,229)
----------- ------------ ------------
BALANCE, December 31, 1997
(As Restated, see Note 13 to
Financial Statements) 49,168,180 $(42,800,318) $ 6,367,862
=========== ============ ============
</TABLE>
---
See notes to financial statements. F3
<PAGE> 33
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------
(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> 34
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------
(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> 35
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------
(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) Allocation of beneficial conversion feature to common stock resulting from
issuance of Series A Preferred Stock.
(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) Amortization of beneficial conversion feature as a return to the preferred
shareholders for Series A Preferred Stock.
(34) 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.
(35) 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 sgtatements. F6
<PAGE> 36
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------
(36) Options were exercised under the 1988 stock option plan between March 12,
1997 and December 29, 1997, for cash, as follows: 7,827 shares at $0.35 per
share, 6,244 shares at $0.88 per share, 96,299 shares at $1.76 per share
net of 30,655 shares at $1.76 per share for shares exercised against notes
receivable, and 1,960 shares at $5.28 per share; options were exercised
under the 1993 stock option plan between March 12, 1997 and September 17,
1997, for cash, for 19,201 shares at $0.35 per share; and options were
exercised under the 1995 stock option plan between May 15, 1997 and
December 15, 1997, for cash, as follows: 500 shares at $4.00 per share,
1,250 shares at $4.125 per share, 1,000 shares at $4.813 per share, 989
shares at $4.87 per share, 5,998 shares at $5.00 per share, 3,166 shares at
$5.25 per share, and 25,000 shares at $5.50 per share. A $902,402
compensation expense was recognized for performance-based options.
(37) The Company issued 299,332 shares of common stock, 6,666 redeemable stock
purchase warrants and 68,167 private warrants exercisable at $6.00 per
share for a total of $1,122,540, in a private placement completed on March
21, 1997, less issuance costs of $62,135. In connection with this offering,
the Company issued 29,041 warrants exercisable at $6.00 per share to a
sales agent.
(38) The Company issued 21,577 shares at a purchase price of $4.88 per share
pursuant to the 1996 Employee Stock Purchase Plan on May 7, 1997.
(39) Allocation of beneficial conversion feature to common stock results from
the issuance of Series A, Series B and Series C preferred stock.
(40) The Company issued 2,838,665 shares of common stock in connection with the
exercise of its redeemable stock purchase warrants for an aggregate sum of
$10,652,635 or $4.00 per share, less transaction costs of $66,989, on June
25, 1997. All remaining redeemable stock purchase warrants were redeemed at
$ .05 per warrant.
(41) Amortization of beneficial conversion feature as a return to the preferred
shareholders of Series A, Series B and Series C preferred stock.
(42) The Company issued an aggregate of 740,266 shares of common stock in
connection with the conversion of all of the Series B preferred shares
issued in March 1997, including in payment of accrued dividends thereon,
from July 1, 1997 through August 8, 1997. The Company also paid cash
dividends of $14,716 on these shares.
(43) The Company issued 4,000 shares at $4.38 per share, for services rendered
by an independent consultant on August 6, 1997.
(44) The Company issued 19,159 shares of common stock at a purchase price of
$4.56 per share pursuant to the 1996 Employee Stock Purchase Plan on
September 30, 1997.
(45) The Company issued an aggregate of 478,526 shares of common stock in
connection with the conversion of all of the Series C preferred shares
issued in September 1997, including in payment of accrued dividends
thereon, from November 5 through December 9, 1997.
---
See notes to financial statements. F7
<PAGE> 37
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (continued)
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------
(46) The Company issued 30,000 shares of common stock pursuant to the exercise
of warrants for cash at an exercise price of $3.9375 per share on December
9, 1997.
---
See notes to financial statements. F8
<PAGE> 38
TERA COMPUTER COMPANY
(a development stage company)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND 1997, AND
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCEPTION
THROUGH
DECEMBER 31,
1995 1996 1997 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,646,331) $(12,077,338) $(15,755,229) $(42,800,318)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 414,953 836,964 801,753 2,703,300
Loss on disposal of assets 20,616 8,087 30,270
Cash provided (used) by changes in
operating assets and liabilities:
Accounts receivable 272,572 2,020 (59,651) (99,696)
Inventory (851,960) (3,438,913) (4,290,873)
Other assets (192,995) 89,772 (303,131) (531,383)
Accounts payable and other accrued liabilities (793,869) 384,127 1,068,100 2,388,343
Accrued payroll and related expenses (241,501) 420,345 582 1,713,553
Deferred research funding (115,177)
Advances to suppliers (982,972) 672,895 (15,308) (325,385)
------------ ------------ ------------ ------------
Net cash used by operating activities (7,285,320) (10,502,559) (17,693,709) (41,212,188)
INVESTING ACTIVITIES:
Purchase of property and equipment (1,348,809) (423,151) (1,542,344) (4,201,023)
Proceeds from disposal of assets 24,500 83,226
------------ ------------ ------------ ------------
Net cash used by investing activities (1,348,809) (398,651) (1,542,344) (4,117,797)
FINANCING ACTIVITIES:
Bank borrowings 800,000
Bank repayment (800,000)
Related party receivable (368,008) (368,008)
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 2,226,407 21,927,031 50,100,181
Sale (conversion) of preferred stock (5,057,769) 6,886,925 8,545,709 8,545,709
Capital leases, net 561,552 (493,085) 456,679 456,218
------------ ------------ ------------ ------------
Net cash provided by financing activities 12,898,065 7,545,250 31,636,408 58,659,100
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 4,263,936 (3,355,960) 12,400,355 13,329,115
CASH AND CASH EQUIVALENTS:
Beginning of period 20,784 4,284,720 928,760
------------ ------------ ------------ ------------
End of period $4,284,720 $928,760 $13,329,115 $13,329,115
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $205,197 $117,732 $97,598 $596,281
============ ============ ============ ============
</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.
Preferred stock in the amount of $6,888,000 was converted into 2,360,000 shares
of common stock in 1996.
Preferred stock in the amount of $7,791,000 was converted into 1,218,792 shares
of common stock in 1997.
---
See notes to financial statements. F9
<PAGE> 39
TERA COMPUTER COMPANY
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND
PERIOD FROM DECEMBER 7, 1987 (inception) THROUGH DECEMBER 31, 1997
- - - --------------------------------------------------------------------------------
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. In 1997, the Company completed development
work on its initial prototype hardware and commenced production of its initial
production system. The Company currently is in transition from a development
stage enterprise to a production company.
Through 1997, no revenue had been generated from product sales. The Company
intends to fund its ongoing expenses, including personnel costs, cost of
inventory, manufacturing start-up costs and research, development and
engineering costs, primarily through use of current cash resources and
anticipated revenues from sales of MTA systems. If such sales do not occur or
are delayed, then management plans to obtain funding through additional equity
and/or debt financings. If the Company does not receive adequate funds, then it
would be required to reduce current expenditures, including funds spent on
personnel and research and development.
REVENUE RECOGNITION: The Company will recognize revenue from sales of MTA
systems as such systems, including resource modules, are accepted by customers.
Maintenance revenues generally will be recognized ratably over the term of the
maintenance contract. Service revenues are generally recognized as services are
performed.
The Company's revenues in 1997 were for services performed under an evaluation
subcontract with the San Diego Supercomputer Center, which is the prime
contractor with the Defense Advanced Research Projects Agency ("DARPA"). This
subcontract expires at the end of 1998.
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 $1 million,
three-year, cost-sharing contract with DARPA. As of December 31, 1997, the
Company had billed $542,000 under this 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, costs incurred to enhance and
support existing software features and expenses related to future
implementations of the MTA system. 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.
---
F10
<PAGE> 40
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. Equipment under capital leases is depreciated over the lease term.
Maintenance and repairs which do not increase the value of an asset nor extend
its useful life are charged to expense as incurred.
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.
LOSS PER COMMON SHARE: Loss per common share is computed on the basis of the
weighted average number of common shares outstanding during the period after
giving effect for any dilutive stock options, warrants and convertible preferred
stock. For the years ended December 31, 1995, 1996 and 1997, options, warrants
and convertible preferred stock outstanding are excluded because their inclusion
would have the effect of decreasing the loss per share.
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.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
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 or limited 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, resulting in delays in the fabrication of the
Company's initial prototype and the delivery of its MTA system to the San Diego
Supercomputer Center and increasing the demands upon the Company's financial
resources.
MARKETING RISKS: The Company's initial market 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 or funding 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.
---
F11
<PAGE> 41
NOTE 3: RELATED PARTY RECEIVABLE
The Company received promissory notes in the aggregate principal amount of
$317,716 and other commitments which net to $50,292 from certain of its
employees in connection with the exercise of stock options in 1997. The notes
generally are payable in twelve months or less, bear interest at the rate of
5.68% and 5.84% per year, and are secured by pledges of the stock received upon
such exercises.
NOTE 4: INVENTORY
As of December 31, 1996 and 1997, the Company's inventory consisted of
components, subassemblies, and work in process, as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Components and subassemblies $851,960 $3,405,120
Work in process 885,753
-------- ----------
$851,960 $4,290,873
======== ==========
</TABLE>
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Computer and electronic equipment $ 2,247,011 $3,337,827
Computer software 527,650 886,030
Furniture, fixtures and equipment 279,944 347,117
----------- ----------
3,054,605 4,570,974
Less accumulated depreciation and
amortization (1,872,183) (2,656,049)
----------- ----------
$ 1,182,422 $1,914,925
=========== ==========
</TABLE>
Depreciation and amortization expense was $414,953, $836,964 and $801,753 for
1995, 1996 and 1997, respectively.
NOTE 6: LEASES
The Company has acquired computer and other equipment under capital lease lines
of credit in the amount of $406,927 and $890,785, net of accumulated
amortization of $394,018 and $804,526 in 1996 and 1997. See Note 5 above. The
capital lease line of credit for $800,000, of which $500,000 had been expended
as of December 31, 1997, expired on that date. An interim lease line of credit
for $425,000 was granted on January 9, 1998 which will expire on April 30, 1998;
the Company expects to enter into another lease line of credit at that time.
The Company leases its office space in Seattle under an operating lease. Sales
offices are rented pursuant to month-to-month or similar arrangements. The
Company has executed a ten-year lease beginning on November 1, 1998 for a new
facility to house all of its Seattle operations. Under this lease the Company
initially will occupy approximately 85,000 square feet and in three years will
occupy approximately 132,000 square feet.
---
F12
<PAGE> 42
Minimum lease commitments are:
<TABLE>
<CAPTION>
Capital Operating
leases leases
---------- -----------
<S> <C> <C>
1998 $ 476,908 $ 1,040,000
1999 375,570 2,032,000
2000 226,448 2,003,000
2001 2,228,000
2002 3,015,000
Later years 18,204,000
---------- ----------
1,078,926 28,522,000
Less amounts representing interest 167,009
---------- ----------
$ 911,917 $28,522,000
========== ===========
</TABLE>
Minimum operating lease expenses for 1995, 1996 and 1997 were $524,442, $585,017
and $601,215, respectively.
NOTE 7: COMMITMENTS
The Company is contractually committed to acquire components, and manufacturing
and engineering services totaling $3,450,000 and $1,692,000, of which $310,000
and $325,000 had been advanced to suppliers as of December 31, 1996 and December
31, 1997, respectively.
NOTE 8: 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, 1997.
As of December 31, 1995, 1996 and 1997, the Company had federal net operating
loss carryforwards of approximately $11,930,000, $24,063,000 and $39,153,000,
respectively. The Company also had federal research and experimentation tax
credit carryforwards of approximately $1,106,000, $1,283,000 and $1,825,000,
respectively. The net operating loss credit carryforwards will expire at various
dates beginning in 2003 through 2012 if not utilized.
The Company's September 1995 initial 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:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Warranty reserve $ 85,000 $ 85,000 $ 85,000
Accrued compensation 291,000 419,000 236,000
Other 31,000 32,000 6,000
Research and experimentation 1,106,000 1,283,000 1,825,000
Net operating loss carryforwards 3,919,000 8,181,000 13,312,000
----------- ------------- ------------
Total deferred tax assets 5,432,000 10,000,000 15,464,000
----------- ------------- ------------
Valuation allowance for deferred tax assets $(5,432,000) $(10,000,000) $(15,464,000)
=========== ============= ============
</TABLE>
---
F13
<PAGE> 43
NOTE 9: SHAREHOLDERS' EQUITY
SECURITYHOLDER WARRANTS: At December 31, 1997, the Company had outstanding
private warrants to purchase an aggregate of 214,342 shares of common stock, as
follows: warrants covering 20,321 shares exercisable at $14.09 per share through
September 24, 2000; warrants covering 90,488 shares exercisable at $6.00 per
share through February 28, 2002; warrants covering 5,801 shares exercisable at
$6.00 per share through November 7, 2005; and warrants covering 524 shares
exercisable at $6.00 per share through May 21, 2006.
As part of the December 1997 issuance of its Series A preferred stock, the
Company also issued warrants to the holders of the Series A preferred stock to
purchase 125,000 shares of common stock. The warrants are exercisable through
December 23, 2002, at an exercise price of $19.185 per share.
---
F14
<PAGE> 44
REPRESENTATIVE WARRANTS: In 1997, The Company issued warrants to purchase
700,000 shares of common stock at an exercise price of $3.9375 per share,
expiring on April 21, 2002, and warrants to purchase 300,000 shares of common
stock at an exercise price of $4.50 per share, expiring on June 25, 2002 in
exchange for certain financial advisory services and the cancellation of earlier
warrants issued as representative warrants in connection with the Company's 1995
initial public offering and sales agent's warrants issued in connection with a
1996 private placement. At December 31, 1997, warrants to purchase 670,000
shares of common stock at $3.9375 per share and warrants to purchase 300,000
shares of common stock at $4.50 per share were outstanding.
STOCK OPTIONS: The Company's 1988 Employee Stock Option Plan ("1988 Plan")
provided 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. Options
for 453,107 shares remain outstanding under the 1988 Plan as of December 31,
1997.
Options for 58,301 shares granted under the 1988 Plan to certain employees,
including executive officers, contained performance conditions for exercise,
permitting one-half of the options to be exercised when the Company's MTA system
exceeded certain benchmark tests and upon initial shipment of the MTA system to
a customer. In addition, Burton J. Smith and James E. Rottsolk, the respective
Chairman and President of the Company, together matched the Company's options
with options covering the same number of shares and containing the same terms on
shares of the Company's common stock which they owned. The performance criteria
were satisfied in 1997, and all such options were exercised. In connection with
these exercises, the Company recognized as compensation expense the aggregate
amount of $902,402, measured as the difference between the fair market value of
the Company's common stock on the day the performance criteria were satisfied
and the $1.76 per share exercise price. The Company also accepted notes as
payment for the exercise price and related payroll taxes from certain employees,
including two executive officers. See Note 3, above.
In 1993, the Company established the 1993 Employee Stock Option Plan ("1993
Plan"). The 1993 Plan made 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, although
options generally vest over four or five year periods. The 1993 Plan was
terminated by the Board of Directors in 1995. Options for 98,781 shares remain
outstanding under the 1993 Plan as of December 31, 1997.
In 1995, the Company established the 1995 Employee Stock Option Plan ("1995
Plan"). As amended, the 1995 Plan permits options for 2,000,000 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, although options generally vest over four or five year
periods. As of December 31, 1997, options covering 532,483 shares of common
stock remained available for grant under the 1995 Plan.
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, with options covering 1,500
shares of common stock awarded for each year of the term for which each director
is elected or re-elected at an exercise price equal to the fair market value of
the common stock on the date of award. 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, 1997, 83,500 shares remained available for grant under the 1995 Directors
Plan.
---
F15
<PAGE> 45
The following table summarizes plan activity under the Company's Stock Option
Plans for the three years ended December 31, 1997:
<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 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
Exercisable at
December 31, 1995 445,616 $1.71 121,726 $0.35
Granted 878,650 5.21 12,000 $5.50
Exercised (29,670) 1.49 (3,744) 0.35
Canceled (20,053) 4.85 (19,467) 4.92
-------- ----- ------- ----- --------- ----- ------ -----
Outstanding at
December 31, 1996 569,953 $2.21 117,982 $0.35 1,111,133 $5.16 12,000 $5.50
Exercisable at
December 31, 1996 460,181 $1.97 117,982 $0.35 82,595 $4.99
Granted 412,357 6.43 4,500
Exercised (112,330) 1.67 (19,201) 0.35 (37,903) 5.30
Canceled (4,516) 4.48 (18,020) 4.51
-------- ----- ------- ----- --------- ----- ------ -----
Outstanding at
December 31, 1997 453,107 $2.32 98,781 $0.35 1,467,517 $5.52 16,500 $5.16
======= ===== ====== ===== ========= ===== ====== =====
Exercisable at
December 31, 1997 435,376 $2.20 98,781 $0.35 391,152 $5.11 6,000 $5.50
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -----------------------------------
Weighted-
Outstanding average Exercisable
Range of as of remaining Weighted- as of Weighted
exercise December 31, contractual average December 31, average
prices 1997 life exercise price 1997 exercise price
------ ---- ---- -------------- ---- --------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.00 - $ 2.00 413,714 2.6 $ 0.93 413,634 $0.93
$ 2.01 - $ 4.00 44,237 7.9 3.78 17,591 3.56
$ 4.01 - $ 6.00 1,528,154 8.4 5.23 500,084 5.15
$ 6.01 - $10.00
$10.01 - $12.00 5,000 9.8 11.50
$12.01 - $14.00 28,500 9.7 13.30
$14.01 - $16.00 2,000 9.6 16.00
$16.01 - $18.00 14,300 9.6 17.70
--------- --- ------ ------- -----
2,035,905 7.2 $ 4.56 931,309 $3.25
========= === ====== ======= =====
</TABLE>
---
F16
<PAGE> 46
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 the 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 1996 ESPP is 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.
FAIR VALUE INFORMATION: The Company applies Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees and related Interpretations in
accounting for its stock option and purchase plans. 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 Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, the Company's loss for common
stock and loss per common share for the years ended December 31, 1995, 1996 and
1997 would have been increased to the pro forma amounts indicated below:
Loss for common stock --
<TABLE>
<CAPTION>
1995 1996 1997 Inception to Date
---- ---- ---- -----------------
<S> <C> <C> <C> <C>
As reported $(5,646,243) $(18,805,941) $(18,672,435) $(52,446,127)
Pro forma $(5,901,930) $(19,622,343) $(20,168,155) $(55,013,936)
Loss per common and common equivalent share --
1995 1996 1997 Inception to Date
---- ---- ---- -----------------
As reported $(2.13) $(3.53) (2.13) $(23.91)
Pro forma $(2.23) $(3.69) (2.30) $(25.08)
</TABLE>
The estimated fair values of options granted during 1995, 1996 and 1997 were
$4.62, $4.76 and $5.85 per share, respectively; these fair values were
estimated as of the dates of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: no dividend yield,
expected volatility of 101%, risk-free interest rate of 5.58%, 6.50% and
5.74% for 1995, 1996 and 1997, respectively, and an expected term of 9.75
years. Pro forma compensation cost of options granted under the 1996 ESPP is
measured based on the discount from market value.
The pro forma disclosure above includes the amortization of the fair value
of all options granted during 1995, 1996 and 1997. If only options granted
during 1996 and 1997 were valued, as prescribed by SFAS No. 123, pro forma
loss for common stock would have been $19,395,460 and $19,802,773, and loss
per common share would have been $3.65 and $2.25 for 1996 and 1997.
Because SFAS No. 123 does not apply to awards granted prior to 1995, the
resulting compensation expense reflected in the pro forma disclosure above may
not be indicative of future amounts.
NOTE 10: LOSS PER COMMON SHARE
The Company adopted SFAS No. 128, Earnings Per Share, for the year ended
December 31, 1997, as required. On February 3, 1998, the SEC released Staff
Accounting Bulletin (SAB) No. 98, which
---
F17
<PAGE> 47
requires companies to restate all prior periods presented in accordance with the
provisions of SFAS No. 128, including those periods prior to an initial public
offering.
The weighted average number of shares outstanding used to compute basic loss per
share were 2,646,243, 5,320,785 and 8,784,943 for the years ended December 31,
1995, 1996 and 1997, respectively. Because the results from operations reflect a
net loss for all years presented, basic and diluted loss per share are
calculated based on the same weighted average number of shares outstanding.
The following outstanding warrants, options and preferred stock were not
included in the computation of diluted loss per share, as of December 31,
because the effect was antidilutive:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------------- ---------------------------- -----------------------------
Exercise Exercise Exercise
Number Price Number Price Number Price
-------------- ----------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stock warrants 1,364,199 $6.00-$8.40 2,440,473 $5.94-$14.09 1,309,342 $3.94-$19.19
Common stock options 995,852 $0.35-$5.28 1,811,068 $0.35-$ 5.75 2,035,905 $0.35-$17.75
Convertible preferred 10,000 $14.44
stock
</TABLE>
NOTE 11: RETIREMENT PLAN
In 1989, the Company adopted a tax-qualified savings plan and trust, which was
amended and restated as of April 1, 1994, under Section 401(k) of the Internal
Revenue Code of 1986 (the "Plan"). All employees are eligible to participate as
of the first day of the fiscal quarter following employment. The Plan is funded
by voluntary employee salary contributions from 1% to 15% of annual
compensation. The Company may make voluntary matching contributions in amounts
determined annually by the Board of Directors. As of December 31, 1997, the
Company had contributed $219,133 to the Plan, and has accrued $102,158 as a
contribution to the Plan for 1997.
NOTE 12: REDEEMABLE SECURITIES
PREFERRED STOCK: In 1997, the Company issued 3,000 shares of Series B
convertible preferred stock (the "Series B Preferred Stock") for $3,000,000,
less issuance costs of $170,898, and 5,000 shares of Series C convertible
preferred stock (the "Series C Preferred Stock") for $5,000,000, less issuance
costs of $37,829, in two private placements. All shares of the Series B and
Series C preferred stock were converted into shares of common stock during 1997
at a discount from the market price of the underlying shares of common stock,
measured over a specified period immediately prior to each conversion date. In
accordance with Securities and Exchange Commission Staff Accounting Bulletin No.
68, "Increasing Rate Preferred Stock," the Company calculated the amount of the
discount during 1997 by dividing the proceeds from the private placements by the
amount of the conversion feature. With respect to the Series B and Series C
preferred stock, the conversion feature was 80%, which was divided into the
$8,000,000 total proceeds, resulting in an aggregate $2,000,000 discount which
was amortized fully in 1997 (of this amount, $750,000 was allocated to the
Series B preferred stock and $1,250,000 was allocated to the Series C preferred
stock). The Series B and Series C preferred stock each bore a 5% cumulative
annual dividend payable in cash or, at the Company's option, in shares of common
stock at the same discount from the market price of the common stock. The
Company also amortized an aggregate discount of $18,794 during 1997 for
dividends paid in shares of common stock.
In December 1997, the Company issued 10,000 shares of Series A
convertible preferred stock ("Series A Preferred Stock") with a stated value of
$1,000 per share, less issuance costs of $522,291, all of which were
outstanding at December 31, 1997. The Series A preferred stock may be converted
into shares of common stock at any time at a conversion price equal to the
lesser of $19.185 per share or the lowest sale price of the common stock during
the five trading days immediately prior to the conversion. The Company recorded
a discount of $808,448 arising from the allocation of net offering proceeds to
the issuance of warrants along with the Series A preferred stock.
The Company may redeem any or all of the Series A preferred stock at any time
upon a minimum of 20 days notice at a redemption price equal to the greater of
(i) the sum of the stated value of the shares being redeemed and the accrued and
unpaid dividends thereon times 115% plus any dividends in arrears, or (ii) the
result of multiplying the number of shares issuable upon conversion of the
shares being redeemed, including any accrued and unpaid dividends thereon and
any dividends in arrears, times the arithmetic average of the closing prices of
the common stock during the five trading days immediately prior to the
redemption date.
The Series A preferred stock is redeemable at the option of the holders upon the
occurrence of certain "Optional Redemption Events," including the lack of a
sales price for the common stock on the Nasdaq National Market System ("Nasdaq")
or a national securities exchange for 5 consecutive trading days, the Common
Stock is not listed for trading on Nasdaq, the New York Stock Exchange ("NYSE")
or American Stock Exchange ("Amex") for 5 consecutive trading days, the
inability to sell the common stock pursuant to a registration statement for 30
or more days, certain defaults by the Company, a merger or consolidation
pursuant to which the common stock is no longer listed on Nasdaq, the NYSE or
Amex or the stockholders prior to such transaction no longer hold at least 51%
of the common stock after the transaction, or the taking of action which
materially and adversely affects the rights of the holders of the Series A
preferred stock. In addition, unless the Company obtains approval of its
shareholders or receives a waiver from Nasdaq it is not required to issue more
than an aggregate of 2,249,330 shares of common stock upon conversion of the
Series A preferred stock; if more than such shares become so issuable, and
shareholder approval or such waiver is not obtained, then the Company may be
required to redeem sufficient shares of Series A preferred stock so that the
Company is obligated to issue no more than 2,249,330 shares of common stock upon
conversion of the Series A preferred stock.
The preferred stockholders are entitled to receive quarterly cash dividends at
the rate of 5% of the stated value per annum. Dividends accrue from the date of
issuance through and including the date that the shares are converted or
redeemed. Dividends may be paid in cash or, at the Company's option, in common
stock based on the lowest sale price during the five trading days preceding the
date of payment.
Holders of Series A preferred stock have no voting rights. In the event of
voluntary or involuntary liquidation, the holders of the Series A preferred
stock are entitled to receive in cash, before any amount is paid to holders of
common stock, an amount equal to the stated value of Series A preferred stock
plus any accrued and unpaid dividends.
NOTE 13: RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of the Company's December 31, 1997 financial
statements, management determined that the Company's Series A convertible
preferred stock, issued during the second and third quarters of 1996, and the
separate Series A convertible preferred stock issued in December 1997 should
have been accounted for in accordance with the guidance in Emerging Issues Task
Force ("EITF") D-60, "Accounting for the Issuance of Convertible Preferred Stock
and Debt Securities with a Nondetachable Conversion Feature." EITF D-60 requires
that a portion of the proceeds from the issuance of convertible preferred stock
with a beneficial conversion feature equal to the intrinsic value of the
beneficial conversion feature be allocated to paid-in capital. The resulting
preferred stock discount is amortized as a return on the preferred stock and
reducing income attributable to common stock, during the period from the date of
issuance to the date the security is first convertible. Management also
determined that the amortization of preferred stock discount previously recorded
as a charge to accumulated deficit should have been charged to common stock
because the Company does not have retained earnings. Additionally, management
determined that the provisions of the Company's Series A convertible preferred
stock, issued in December 1997, contain redemption features which result in the
requirement to present such preferred stock as Redeemable Preferred Stock
outside of Shareholders' Equity on the Balance Sheet.
The accompanying financial statements as of December 31, 1997 and for the years
ended December 31, 1996 and 1997 and the period from December 7, 1987
(inception) to December 31, 1997, have been restated to account for the Series
A convertible preferred stock, which included beneficial conversion features,
in accordance with EITF D-60, to reclassify as a charge to common stock the
amortization of preferred stock discount previously charged to accumulated
deficit, and to present the Series A convertible preferred stock issued in
December 1997 as Redeemable Preferred Stock. The following presents the effects
of the restatement on the accompanying financial statements:
BALANCE SHEET:
<TABLE>
<CAPTION>
As of
December 31, 1997
-------------------------------
As previously
reported As restated
------------- -------------
<S> <C> <C>
Redeemable Securities $ 0 $ 9,477,709
------------ ------------
Stockholders Equity:
Series A Convertible Preferred Stock $ 8,545,709 $ 0
Common Stock $ 52,208,938 $ 49,168,180
Accumulated Deficit $(44,909,076) $(42,800,318)
------------ ------------
Total Shareholders' Equity $ 15,845,571 $ 6,367,862
------------ ------------
Total Liabilities and Shareholders
Equity $ 20,859,385 $ 20,859,385
============ ============
</TABLE>
<TABLE>
<CAPTION>
Period from December 7, 1987
As of As of (inception) through
December 31, 1996 December 31, 1997 December 31, 1997
----------------------------- ----------------------------- ----------------------------
As previously As previously As previously
reported As restated reported As restated reported As restated
------------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss $(12,077,338) $(12,077,338) $(15,755,229) $(15,755,229) $(42,800,318) $(42,800,318)
Preferred Stock Dividend $ 0 $ 0 $ (89,964) $ (89,964) $ (89,964) $ (89,964)
Amortization of Preferred
Stock Discount $ 0 $ (6,728,603) $ (2,018,794) $ (2,827,242) $ (2,018,794) $ (9,555,845)
------------ ------------ ------------ ------------ ------------ ------------
Loss For Common Stock $(12,077,338) $(18,805,941) $(17,863,987) $(18,672,435) $(44,909,076) $(52,446,127)
------------ ------------ ------------ ------------ ------------ ------------
Loss Per Common Share $ (2.27) $ (3.53) $ (2.03) $ (2.13) $ (20.47) $ (23.91)
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
---
F18
<PAGE> 48
[DELOITTE & TOUCHE LLP LOGO]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Tera Computer Company
Seattle, Washington
We have audited the accompanying balance sheets of Tera Computer Company
(a development stage company) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997 and the period from December
7, 1987 (inception) through December 31, 1997. 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 misstatement. 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 Tera Computer Company as of December 31,
1996 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, and the period from
December 7, 1987 (inception) to December 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 13, the accompanying 1996 and 1997 financial statements
have been restated.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
January 21, 1998
November 13, 1998 as to the effects of matters discussed in Note 13
---
F19
<PAGE> 1
Exhibit 11.1
------------
TERA COMPUTER COMPANY
(a development stage company)
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED INCEPTION
DECEMBER 31, THROUGH
------------------------------------------------------------------ DECEMBER 31,
1995 1996 1997 1997
----------- ------------ ------------ ------------
(As restated; (As restated; (As restated;
see note 13 see note 13 see note 13
to financial to financial to financial
statements) statements) statements)
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE SHARES
OUTSTANDING 2,646,243 5,320,785 8,784,943 2,193,839
NET LOSS APPLICABLE TO
COMMON STOCK ($5,646,331) ($18,805,941) ($18,672,435) ($44,909,076)
=========== ============ ============ ============
NET LOSS PER COMMON SHARE ($2.13) ($3.53) ($2.13) ($20.47)
</TABLE>
<PAGE> 1
EXHIBIT 23-1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference into Registration Statement Nos.
333-1430 and 333-12747 on Form S-8 of Tera Computer Company (a development stage
company) of our report dated January 21, 1998, November 13, 1998 as to the
effects of the matters discussed in Note 13 (which expresses an unqualified
opinion and includes an explanatory paragraph relating to the restatement
described in Note 13), included in this Annual Report on Form 10-K/A of Tera
Computer Company for the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
Seattle, Washington
November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the audited
financial statements of Tera Computer Company (As restated -- see Note 13) for
the year ended Dec 31, 1997 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,329,115
<SECURITIES> 0
<RECEIVABLES> 99,696
<ALLOWANCES> 0
<INVENTORY> 4,290,873
<CURRENT-ASSETS> 18,823,831
<PP&E> 4,570,975
<DEPRECIATION> (2,656,050)
<TOTAL-ASSETS> 20,859,385
<CURRENT-LIABILITIES> 4,481,493
<BONDS> 0
0
9,477,709
<COMMON> 49,162,180
<OTHER-SE> (42,800,318)
<TOTAL-LIABILITY-AND-EQUITY> 20,859,385
<SALES> 73,531
<TOTAL-REVENUES> 73,531
<CGS> (51,891)
<TOTAL-COSTS> (51,891)
<OTHER-EXPENSES> (16,126,276)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,237
<INCOME-PRETAX> (15,755,229)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,755,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,672,435)
<EPS-PRIMARY> (2.13)
<EPS-DILUTED> (2.13)
</TABLE>
