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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ...... to ...... .
Commission file number 0-26820
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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.)
411 FIRST AVENUE SOUTH, SUITE 600
SEATTLE, WA 98104-2860
(206) 701 - 2000
(Address of principal executive offices)
(Registrant's telephone number, including area code)
----------
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 preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of May 13, 1999, 15,941,337 shares of the Company's Common Stock, par
value $0.01 per share, were outstanding.
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TERA COMPUTER COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1998
and March 31, 1999 3
Statements of Operations for the Three Months
Ended March 31, 1998 and 1999 4
Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 25
PART II OTHER INFORMATION
Item 2. Changes in Securities 25
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
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TERA COMPUTER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
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(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,161,867 $ 4,426,034
Accounts receivable 378,933 378,511
Related party receivable 306,819 325,692
Inventory 10,246,029 9,138,395
Advances to suppliers 415,834 413,261
Prepaid expenses and other assets 585,008 552,423
------------ ------------
Total current assets 15,094,490 15,234,316
PROPERTY AND EQUIPMENT, NET 4,501,613 5,494,087
LEASE DEPOSITS 537,101 537,101
OTHER LONG-TERM ASSETS 155,033 155,033
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TOTAL $ 20,288,237 $ 21,420,537
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,470,617 $ 5,849,852
Accrued payroll and related expenses 1,544,056 1,365,324
Accrued interest 11,243
Deferred revenue 19,178 40,011
Contract adjustment reserve 250,000 250,000
Current portion of obligations under capital leases 542,045 543,370
------------ ------------
Total current liabilities 7,825,896 8,059,800
OBLIGATIONS UNDER CAPITAL LEASES, LESS CURRENT PORTION 573,054 443,208
CONVERTIBLE NOTES PAYABLE, NET OF DISCOUNT 2,186,134
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, par $.01 - Authorized, 5,000,000 shares; issued
and outstanding, 6,000 and 4,381 shares of Series B Convertible 5,674,406 3,985,348
Common Stock, par $.01 - Authorized, 25,000,000 shares;
issued and outstanding, 14,204,430 and 15,900,947 shares 68,744,437 76,107,108
Preferred stock dividend distributable 75,000 54,762
Accumulated deficit (62,604,556) (69,415,823)
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11,889,287 10,731,395
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TOTAL $ 20,288,237 $ 21,420,537
============ ============
</TABLE>
See accompanying notes
3
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TERA COMPUTER COMPANY
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
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<S> <C> <C>
REVENUE:
Product and other revenue $ $ 579,167
Service revenue 20,952 81,426
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20,952 660,593
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OPERATING EXPENSES:
Cost of product and other revenue 579,433
Cost of service revenue 15,873 41,406
Other manufacturing expenses 1,401,823
Research and development 4,313,301 4,074,881
Marketing and sales 410,050 632,479
General and administrative 475,405 465,058
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5,214,629 7,195,080
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RESEARCH FUNDING 27,521 47,626
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Loss from operations (5,166,156) (6,486,861)
OTHER INCOME/(EXPENSE) 104,699 (324,406)
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NET LOSS $ (5,061,457) $ (6,811,267)
PREFERRED STOCK DIVIDEND (130,024) (70,057)
------------ ------------
LOSS FOR COMMON STOCK $ (5,191,481) $ (6,881,324)
============ ============
LOSS PER COMMON SHARE,
BASIC AND DILUTED $ (0.46) $ (0.47)
============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING, BASIC AND DILUTED 11,333,104 14,625,703
============ ============
</TABLE>
See accompanying notes
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TERA COMPUTER COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (5,061,457) $(6,811,267)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 275,270 431,370
Beneficial conversion feature of notes payable 286,466
Cash provided (used) by changes in
operating assets and liabilities:
Accounts receivable (54,988) 250,422
Inventory (1,400,378) 75,527
Other assets (34,959) 32,585
Accounts payable and other accrued liabilities (110,187) 984,769
Accrued payroll and related expenses (392,386) (178,732)
Deferred revenue 20,833
Advances to suppliers 27,818 2,573
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Net cash used by operating activities (6,751,267) (4,905,454)
INVESTING ACTIVITIES:
Purchases of property and equipment (278,129) (391,737)
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Net cash used by investing activities (278,129) (391,737)
FINANCING ACTIVITIES:
Related party (receivable)/payments 103,126 (18,873)
Issuance of notes payable 1,650,000
Sale of common stock 1,998,702 5,058,752
Conversion of preferred stock (1,466,546)
Capital leases, net (25,203) (128,521)
------------ -----------
Net cash provided by financing activities 610,079 6,561,358
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (6,419,317) 1,264,167
CASH AND CASH EQUIVALENTS:
Beginning of period 13,329,115 3,161,867
------------ -----------
End of period $ 6,909,798 $ 4,426,034
============ ===========
SUPPLEMENTAL DISCLOSURE OF
NON CASH INVESTING AND FINANCING
ACTIVITIES:
Inventory reclassed to fixed assets $ 1,032,107
Accounts payable converted to notes $ 594,291
Stock dividends $ 114,701 S 90,295
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 33,349 $ 48,969
</TABLE>
See accompanying notes
5
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TERA COMPUTER COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and
related interim statements of operations and cash flows have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All adjustments considered necessary for fair presentation have been
included. Interim results are not necessarily indicative of results for a full
year. The information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis and the financial statements and notes
thereto included in the Company's financial statements for the years ended
December 31, 1997 and 1998, contained in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Components and Subassemblies $ 9,346,646 $9,060,546
Work in process 252,000 674,409
Finished goods 922,501
Inventory allowance (275,118) (596,560)
----------- ----------
$10,246,029 $9,138,395
=========== ==========
</TABLE>
CONVERTIBLE NOTES
In February and March 1999, the Company issued an aggregate of
$2,494,291 of two-year convertible subordinated 8% notes and 74,829 common
stock purchase warrants. The Company received $1,900,000 in cash and exchanged
trade payables of $594,291 for the notes. The notes are convertible into shares
of common stock at $5.00 per share; the exercise price of the warrants is $5.00
per share. Both prices are subject to adjustment in the event of stock splits,
stock dividends, reorganizations and other usual antidilution events.
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COMMON STOCK ISSUANCES
On March 10, 1999, the Company raised $5,000,000, before issuance costs
of $109,515, from the private sale of 1,111,111 shares of common stock, along
with warrants to purchase 1,111,111 shares of common stock with an exercise
price of $5.16 per share. The investor has the option to invest another
$5,000,000 for shares of common stock at a purchase price of $5.16 per share;
if the option were exercised, the Investor also would receive warrants for
1,076,658 shares with an exercise price of $5.16 per share. The Company also
issued to the investor 103,889 shares of common stock and warrants for 225,000
shares of common stock with an exercise price of $5.16 per share to cover
certain fees relating to this transaction.
OTHER MANUFACTURING EXPENSES
In the first quarter of 1999 the Company began incurring manufacturing
expenses in addition to its research and development efforts, reflecting its
progress to commercial production. These costs reflect the expense of the
manufacturing group, including personnel expense and allocated overhead, as well
as production expenses not directly related to delivered systems.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average
number of shares of common stock outstanding. As outstanding stock options,
warrants and other common stock equivalent shares are antidilutive, their effect
has not been included in the calculation of net loss per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in this Item 2 includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act, as amended, and is
subject to the safe harbor created by those sections. Factors that realistically
could cause results to differ materially from those projected in the
forward-looking statements are set forth under "Risk Factors" later in this
Section beginning on page 13. The following discussion should also be read in
conjunction with the financial statements and notes thereto.
OVERVIEW
We design, develop and market high performance general purpose parallel
computer systems. The name for our computer systems, "MTA," is derived from the
form of computer system architecture on which it is based, known in the computer
industry as "multithreaded" architecture.
We have experienced net losses in each year of operations and expect to
incur substantial further losses until we make additional sales, and possibly
thereafter. We incurred net losses of approximately $15.8 million in 1997, $19.8
million in 1998 and $6.9 million in the first quarter of 1999, compared to a net
loss of approximately $5.1 million in the first quarter of 1998. Our funding
from inception through March 31, 1999 has been primarily from the sale of
approximately $80.6 million of securities, research funding from the Defense
Advanced Research Projects Agency ("DARPA") of approximately $19.3 million, and
revenue of approximately $2.0 million.
In April 1998, we recognized our first revenue from product sales with
our delivery of a two-processor MTA system to the San Diego Supercomputer Center
("SDSC"). In January 1999, we recognized additional revenue from product sales
upon acceptance by SDSC of our upgrade of the MTA system at SDSC to four
processors. Assuming receipt of purchase orders, we plan to upgrade the MTA
system in SDSC in stages to larger configurations as we receive production
printed circuit boards, integrated circuits and other components that we
integrate into a commercially acceptable system.
We generally recognize revenue from sales of MTA systems upon acceptance
of the system by the customer, revenue from the maintenance of the MTA system
ratably over the term of each maintenance agreement, and service revenue as
services are performed.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUE. We had total revenue in the first quarter of 1999 of
approximately $661,0000, up from approximately $21,000 in the first quarter of
1998. The first quarter 1999 revenues included $557,000 in product revenue from
the sale of the four-processor MTA system to SDSC. We had approximately
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$81,000 of service revenue in the first quarter of 1999, up from approximately
$21,000 in the first quarter of 1998. Service revenue in both periods was
pursuant to a subcontract with SDSC to evaluate multithreaded architecture for
certain defense applications. This contract expires on June 30, 1999. We expect
to complete this subcontract for approximately $202,000 in 1999, of which our
portion, after payments to our subcontractors, will be approximately $14,000. We
also anticipate receiving revenue in 1999 from sales of larger configurations to
SDSC and from other sales to potential customers in 1999, although we currently
have no contracts or purchase orders for such sales. See "Risk Factors" below.
OPERATING EXPENSES. Our cost of product and other revenue in the first
quarter of 1999 was approximately $580,000; as we had no product sales in the
first quarter of 1998, we had no cost of product and other revenue in that
quarter. Our cost of product and other revenue was high in the first quarter of
1999 as a percentage of the revenue due to favorable pricing terms provided to
SDSC. The cost of service revenue in the first quarter of 1999 of $41,000 was
51% of service revenue; the percentage represents a decrease from 74% of service
revenue in the first quarter of 1998, due to decreased billings from our
subcontractors; we expect that subcontract billings will constitute a high
percentage of the remaining service revenue.
In the first quarter of 1999 we began incurring manufacturing expenses
in addition to our research and development efforts, reflecting our progress to
commercial production. These costs of $1.4 million reflect the expense of our
manufacturing group of approximately $900,000, including personnel expenses and
allocated overhead, as well as approximately $500,000 of production expenses not
directly related to the four-processor MTA system delivered to SDSC.
Research and development expenses constitute the largest portion of our
operating expenses, and include costs associated with the development of the
MTA system, including personnel expenses, allocated overhead, nonrecurring
engineering, software and hardware costs and preproduction expenses. Research
and development expenses decreased slightly from $4.3 million in the first
quarter of 1998 to $4.1 million in the first quarter of 1999, largely due to
separate recognition of the manufacturing group, including personnel expenses
and allocated overhead, as discussed above. Of the research and development
expenses, approximately $1.5 million related to adjustments in inventory
valuation and reserves due to design changes in the first quarter of 1999
compared to approximately $1.4 million in the first quarter of 1998.
Personnel expenses and allocated overhead for research and development
were approximately $2.6 million in the first quarter of 1999, up approximately
24% from $2.1 million in the first quarter of 1998, largely due to additional
personnel, higher wages and increased overhead from the move to our new
facilities in Seattle at the beginning of 1999.
While we expect that research and development expenditures will continue
to be a major expense, they are expected to decrease as a percentage of total
operating expenses and will generally include expenditures related to continued
engineering of the MTA system, research and development related to the next
generation MTA system and related software development, including personnel
expense and allocated overhead.
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Marketing and sales expenses increased from $410,000 in the first
quarter of 1998 to $632,000 in the first quarter of 1999, largely reflecting
increased marketing activity. We expect that we will continue to increase our
marketing and sales activities as we build larger MTA systems for sale to
industrial and commercial customers.
While our general and administrative expenses usually have increased
each year consistent with expansion of our infrastructure, the 1999 first
quarter expenses of $465,000 were down slightly from $475,000 for the first
quarter of 1998, primarily due to a decrease in expenses related to being a
publicly held company. General and administrative expenses are expected to
increase commensurate with any growth in our operations.
RESEARCH FUNDING. We have been billing DARPA under a $1 million research
contract awarded in September 1995 and which expires in September 1999. For the
first quarter of 1999, billings were approximately $48,000, an increase from
$28,000 from the first quarter of 1998.
OTHER INCOME (EXPENSE) . Interest income on cash balances, net of
interest expense on our lease lines, was approximately $105,000 in the first
quarter of 1998; in the first quarter of 1999, interest expense was greater than
interest income by approximately $22,000. The first quarter 1998 results reflect
an increased cash position after completion of a $10 million financing in
December 1997.
The results for the first quarter of 1999 include a non-cash interest
expense of approximately $278,000 associated with the value of the conversion
feature of certain convertible promissory notes issued in the first quarter of
1999, all of which was recorded in the first quarter; the results also include a
non-cash expense for the value of detachable warrants issued in conjunction with
the convertible promissory notes of approximately $317,000, of which
approximately $8,000 was recognized in the first quarter and the balance will be
recognized over the term of the notes.
TAXES. We made no provision for federal income taxes as we have
continued to incur net operating losses.
PREFERRED STOCK. In the first quarter of 1999, we accrued approximately
$70,000 of dividends on our outstanding shares of our Series B Convertible
Preferred Stock, all of which were paid in shares of common stock based on the
market price at the time of payment. The dividends for the first quarter of 1998
were accrued on our Series A Convertible Preferred Stock, and were higher than
that accrued during the comparable quarter of 1999 because we had issued more
shares of the Series A Convertible Preferred Stock than of the Series B
Convertible Preferred Stock.
YEAR 2000. Issues relating to the Year 2000 result from many computer
programs being written using two digits rather than four to define the
applicable year, so that the year "00" may be interpreted as the year 1900
rather than 2000. A related issue is the ability to recognize the Year 2000 as a
leap year. Software programs and embedded microcircuitry that have
date-sensitive features may have Year 2000 issues. These programs may include
software tools that we use in the development of the hardware and operating
systems of our MTA system, the software programs and embedded chips used in our
internal systems and software programs and equipment used in the normal
operation of our business. In addition,
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key suppliers may have issues relating to the Year 2000 that could affect their
ability to provide needed products and services.
We are conducting a formal review of our products, our internal network
system, the hardware and software tools we are using and our key suppliers
regarding the potential impact on us regarding Year 2000 issues. The review is
being conducted by representatives from our finance, manufacturing, engineering,
purchasing and systems administration departments. We believe there is no
significant exposure relating to our MTA system and its Unix-based operating
system. We expect that our formal review will be largely completed as to other
matters by the end of the second quarter of 1999.
Based upon the responses to date and informal inquiries, we believe no
significant modifications to our internal network or computer systems are
necessary to address Year 2000 issues. We installed a materials requirement
planning II system in 1998 that complies with Year 2000 issues. We have
received assurances that the services provided at our new offices in Seattle
are now Year 2000 compliant. Our review is ongoing with respect to our other
internal systems and the various software development tools we use. We are
making inquiries of our suppliers and service providers to obtain assurances
concerning their Year 2000 compliance and their ability to continue to provide
products and services to us which are Year 2000 compliant. We have assumed that
basic public utilities will continue to be available to us after January 1,
2000, and are not aware of any information to the contrary. To date we have not
identified any material deficiencies or remediation requirements and have not
budgeted for any remediation costs or costs associated with responding to other
parties' Year 2000 noncompliance. We do not separately track the internal costs
for our Year 2000 review, and current and future anticipated costs are expected
to include only payroll and related costs for the employees engaged in the
review. We are reevaluating these positions periodically as we continue our
review.
At this point we cannot predict the effect of the Year 2000 issues on
our suppliers or the resulting effect on us. We have not yet developed a
contingency plan of operating in the event that critical systems of vendors,
suppliers or other third parties are not Year 2000 compliant, or that the
software development tools, software programs and equipment we use internally
are not Year 2000 compliant. We plan on completing a contingency plan once our
inquiries are completed and to have a contingency plan in place by the end of
the third quarter of 1999. If any of our critical systems are not in fact Year
2000 compliant or if critical suppliers from whom we obtain products and
services are not Year 2000 compliant, then Year 2000 issues could have a
material adverse effect on our business, financial condition and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in 1987 through March 31, 1999, our principal
sources of liquidity have been net proceeds from the sale of equity totaling
$80.6 million, DARPA research funding and subcontracts totaling $19.3 million
and sales receipts of approximately $2.0 million. At March 31, 1999, we had $4.4
million in cash and had no bank line of credit.
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During the first quarter of 1999, we spent approximately $4.9 million of
cash on operating activities, a decrease of approximately $1.8 million from the
approximately $6.8 million we spent in the first quarter of 1998. During 1999,
our operating activity expenses will depend primarily upon personnel costs, the
cost of inventory and third party engineering expenses related to future
implementations of the MTA system, primarily the conversion from using gallium
arsenide integrated circuits to using integrated circuits made of complementary
metal-oxide silicon, or CMOS. Our overall personnel expense increased by
$800,000 over the first quarter of 1998 to $2.8 million in the first quarter of
1999, while total expenses related to inventory, including inventory additions
and scrap, were approximately $2.6 million in the first quarters of both 1999
and 1998. We expect that personnel costs will continue to increase in 1999,
although not as rapidly as in previous periods as we have slowed the growth of
personnel pending the receipt of additional sales orders. Similarly, we expect
inventory costs to decrease in 1999, as we plan only modest inventory additions
pending receipt of purchase orders. We anticipate that third party engineering
expenses related to the CMOS implementation of the MTA system to increase during
the rest of 1999.
In the first quarter of 1999, our investing activities consisted of
additional property, plant and equipment of approximately $392,000, primarily
for additional computers and electronic test equipment.
In the first quarter of 1999, we raised approximately $6.7 million of
cash through the sale of securities, primarily through privately negotiated
sales of common stock for $5 million and convertible promissory notes of $1.65
million (an additional $250,000 was received immediately after the quarter
ended), and the remainder upon stock option exercises. We believe that, in
addition to our current funds and revenue from anticipated sales of MTA systems,
we will need to raise an additional $10 to $15 million in equity and/or debt
financings during the remainder of 1999 to meet our contractual commitments,
which principally consist of operating leases and licenses for software tools
and third-party engineering services pertaining to the CMOS implementation of
our MTA system, and to continue our present level of business activities in 1999
and beyond. A current investor has an option to purchase an additional $5
million of our common stock. We also are seeking a lease line of credit for
capital goods for up to $1.5 million.
We will require further additional working capital if anticipated sales
of the MTA system are delayed. We plan to raise additional funds in 1999, even
if revenues are received from sales of MTA systems when anticipated, in order to
enhance our 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 our shareholders. See "Risk
Factors--Additional Shares Issuable By Us Would Dilute Existing Shareholdings
and Could Hinder Our Ability To Obtain Additional Financing," below.
If we were unable to raise the necessary funds, then we would delay
inventory purchases, reduce third-party engineering services and reduce
personnel. We believe that we will be cash-flow positive once we have sales
receipts of approximately $10 million per quarter; we do not anticipate such
level of sales prior to 2000, if then.
In certain circumstances, the holders of our Series B Convertible
Preferred Stock and common stock with adjustment rights could demand that we
repurchase such shares. These circumstances generally relate to the inability of
such holders to sell their shares in market transactions, material defaults by
us in performing under the relevant transaction documents, a merger or
consolidation resulting in a
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change of control and an inability by us, as a result of applicable Nasdaq
rules, to issue all of the shares of common stock that the holders would be
entitled. If the event giving rise to this repurchase obligation was not within
our sole control, such as a decline in the market price of our common stock,
then we could elect not to repurchase these shares. To the extent that the
events giving rise to any such repurchase obligation are within our control, we
plan to conduct our operations so as not to cause any event that would give rise
to a repurchase obligation. If the event giving rise to any such repurchase
obligation is within our control, we likely would be unable to repurchase any
shares delivered to us for repurchase absent receipt of additional capital. We
would be subject to certain penalties for failure to repurchase any such shares
in these circumstances.
RISK FACTORS
The following factors should be considered in evaluating our business,
operations and prospects and may affect our future results and financial
condition.
FAILURE TO COMPLETE DEVELOPMENT OF A COMMERCIALLY ACCEPTABLE MTA SYSTEM WOULD
JEOPARDIZE OUR VIABILITY. Our inability to overcome the technical challenges
involved in integrating and completing MTA systems that satisfy internal
performance specifications and that are commercially acceptable would jeopardize
our viability as an ongoing business. 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 experienced extreme financial difficulty in the 1990s,
including Thinking Machines Corporation, Cray Computer Corporation, Kendall
Square Research Corporation and Supercomputer Systems, Inc. We first integrated
multiple MTA resource modules into commercially configured computer systems in
1998. We have not yet built the MTA system to meet stringent commercial
reliability standards and cannot be certain when, if ever, we will do so.
FAILURE TO OVERCOME THE TECHNICAL CHALLENGES OF COMPLETING THE DEVELOPMENT OF
THE MTA SYSTEM COULD ADVERSELY AFFECT OUR BUSINESS. Continued delays in
completing the hardware components or software of our MTA system, or in
integrating the full system, could materially and adversely affect our business
and results of operations. From time to time during the development process of
the MTA system, we have been required to redesign certain components of the MTA
system because of previously unforeseen design flaws. For example, various
processor and network chip technologies that we thought were functional across
multiple configurations have subsequently been discovered to require additional
design features to function as intended and to achieve a fully operational
system scalable to multiple processors. We also continue to find certain flaws
or "bugs" in our proprietary UNIX-based system software which require
correction. This redesign work, particularly on integrated circuits and printed
circuit boards, has been costly and caused delays in the development of our
prototype systems, in the delivery of our initial MTA system and in upgrades to
that system. We expect that additional modifications to the hardware components,
system software and the integrated system will be necessary as we build larger
MTA systems for the commercial market.
OUR INABILITY TO OBTAIN ACCEPTABLE HARDWARE COMPONENTS WILL DELAY OUR
DEVELOPMENT EFFORTS AND STRAIN OUR FINANCIAL RESOURCES. The manufacture of
components for the MTA system is a difficult and
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complex process, and few companies can meet our design requirements.
Manufacturing difficulties or limitations of suppliers could result in:
o a limitation on the number of MTA systems that can be assembled using
such components;
o unacceptably high prices for those components, with a resulting loss
of profitability and loss of competitiveness for our products; and
o increased demands on our financial resources, requiring additional
equity and/or debt financings to continue business operations.
Our suppliers have previously experienced problems in manufacturing MTA system
components to our design and quality specifications. In prior years we have been
forced to redesign certain components for manufacture by alternative suppliers
because our original suppliers were unable to consistently manufacture
components of satisfactory quality. In 1997 and 1998, we experienced varying
(and sometimes "zero") yields of gallium arsenide integrated circuits, limited
and delayed deliveries of such integrated circuits, poor yields on packaged
integrated circuits and deliveries of a very limited number of reliable printed
circuit boards. Together, these supply constraints caused substantial delays in
our ability to deliver the initial MTA system to the San Diego Supercomputer
Center and upgrading that system to larger configurations.
Although we are working with our suppliers to solve these problems, we
cannot assure that they will be able to manufacture the components to our design
and quality specifications.
IF WE DO NOT RECEIVE ADDITIONAL CAPITAL, WE WOULD NEED TO REDUCE OUR CURRENT
BUSINESS OPERATIONS. Our present cash resources and revenue from anticipated
sales of MTA systems and existing service contracts will not be sufficient to
finance our planned operations throughout 1999. We believe we will need to raise
from $10 to $15 million during the rest of 1999 to meet our contractual
commitments and to continue our current levels of business operations even if we
receive revenues from product sales when anticipated. If we do not receive
revenues from system sales when anticipated, then we will need additional
capital. We are seeking a lease line of credit for capital goods for up to $1.5
million. Even if we raise from $10 to $15 million, receive revenue from product
sales, and obtain the lease line of credit, we likely will raise additional
equity and/or debt capital in 1999 to enhance our financial position for future
operations. Financings may not be available to us when needed or, if available,
may not be available on satisfactory terms or may be dilutive to our
shareholders. If no financing is available to us or is available only on a
limited basis, then we would have to significantly reduce our current
operations, including inventory purchases, research and design expenditures and
numbers of employees.
OUR UNCERTAIN PROSPECTS FOR REVENUES AND EARNINGS COULD ADVERSELY AFFECT AN
INVESTMENT IN US. We cannot be certain that we will be successful in delivering
and receiving payments for any additional MTA systems, or whether we will be
able to generate additional sales or achieve a profitable level of operations in
the future. We have experienced net losses in each year of our operations. We
incurred net losses of approximately $15.8 million in 1997, $19.8 million in
1998 and $6.9 million in the first quarter of 1999. We expect to incur
substantial further losses until we make sales on a regular basis. We do not
14
<PAGE> 15
expect to have a profitable fiscal quarter prior to 2000, if then. Whether we
will achieve additional revenue, or any earnings, will depend upon a number of
factors, including:
o our ability to assemble production quality MTA systems in commercial
quantities;
o our ability to achieve broad market acceptance of the MTA system;
o the level of revenue in any given period;
o the terms and conditions of sale or lease for an MTA system;
o the MTA system model or models sold; and
o our expense levels and manufacturing costs.
OUR RELIANCE ON THIRD PARTY SUPPLIERS POSES SIGNIFICANT RISKS TO OUR BUSINESS
AND PROSPECTS. We subcontract the manufacture of substantially all of our
hardware components, including integrated circuits, printed circuit boards, flex
circuits and power supplies, on a sole or limited source basis to third party
suppliers. We obtain our gallium arsenide integrated circuits primarily from
Vitesse Semiconductor Corporation; printed circuit boards from Multilayer
Technology, Inc. and Johnson Matthey Electronics; flex circuits from
Compunetics, Inc.; power supplies from ABB Power Supplies, Inc.; uninterruptible
power supplies from Piller, Inc.; cooling distribution units from C.H. Bull
Company; and will receive our CMOS integrated circuits from Taiwan Semiconductor
Manufacturing Company. We rely on Cadence Design Systems, Inc., for significant
design assistance on the implementation of our CMOS integrated circuits. We are
exposed to substantial risks because of our reliance on these and other limited
or sole source suppliers. For example:
o if a reduction or interruption of supply of our components occurred,
it could take us a considerable period of time to identify and
qualify alternative suppliers to redesign our products as necessary
and recommence manufacture;
o if we were ever unable to locate a supplier for a component, we would
be unable to assemble and deliver our products;
o one or more suppliers may make strategic changes in their product
lines, which may result in the delay or suspension of manufacture of
our components or systems; and
o some of our 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.
REPLACEMENT OF OUR CURRENT INTEGRATED CIRCUITS WILL REQUIRE SIGNIFICANT
RESOURCES AND MAY NOT BE SUCCESSFUL. Over the next several years we plan to
replace in stages most of our gallium arsenide integrated circuits with
integrated circuits made of complementary metal-oxide silicon, or CMOS. We
15
<PAGE> 16
believe that CMOS integrated circuits will enable us to offer larger, more cost
effective systems. For example, the 24 gallium arsenide integrated circuits
currently on each processor board will be replaced by one CMOS microprocessor.
This process requires the redesign of most of our integrated circuits,
integrated circuit packages and printed circuit boards, which in turn involves
significant effort by our engineers and requires us to devote significant
capital for non-recurring engineering expenses, including payments to potential
suppliers for design assistance. If we encounter significant problems with this
redesign, we may be delayed substantially in delivering larger systems, which
would materially and adversely affect our working capital, business and results
of operations. If we are successful in producing CMOS components as planned, we
may not be able, or desire, to use most of the then remaining inventory of
gallium arsenide components, and we may incur a substantial expense in writing
off such inventory.
A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE AND COULD
DEPRESS MARKET PRICES OF OUR STOCK. Sales of a substantial number of our shares
of 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 31, 1999, we had outstanding:
o 15,931,602 shares of common stock, of which 1,511,111 shares have
certain "adjustment rights" that may require us to issue additional
shares;
o 4,381 shares of Series B Convertible Preferred Stock convertible into
an indeterminate number of shares of common stock; and_
o privately placed warrants to purchase another 3,220,461 shares of
common stock, including 536,585 warrants that have certain
"adjustment rights" that may require us to issue additional shares or
warrants.
Almost all of our outstanding shares of common stock may be sold without
substantial restrictions. In addition, as of March 31,1999, we had outstanding
options under our option plans to purchase an aggregate of 3,034,730 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 our common stock,
including sales of common stock issuable upon conversion of the Series B
Convertible Preferred Stock or the exercise of the privately placed warrants or
under the adjustment rights, could depress prevailing market prices for the
common stock. Even the perception that such sales could occur may impact market
prices.
ADDITIONAL SHARES ISSUABLE BY US WOULD DILUTE EXISTING SHAREHOLDINGS AND COULD
HINDER OUR ABILITY TO OBTAIN ADDITIONAL FINANCING. We may be required to issue
substantial additional shares of common stock to holders of our Series B
Convertible Preferred Stock and to holders of common stock and warrants that
have certain "adjustment" rights. The Series B Convertible Preferred Stock has a
variable conversion rate, equal to the lowest market "sale" price in the five
trading days prior to each conversion. The number of shares that would be
issuable upon conversion of the $4,381,000 of Series B Convertible Preferred
Stock outstanding as of March 31, 1999, is illustrated in the table below. These
figures do not include any issuance of common stock in payment of 5% per annum
accrued dividends on the Series B Convertible Preferred Stock.
16
<PAGE> 17
<TABLE>
<CAPTION>
---------------------------------------------------------
Conversion Number of Shares of
Price Common Stock Issuable
=========================================================
<S> <C>
$10.00 438,100
---------------------------------------------------------
$ 8.00 547,625
---------------------------------------------------------
$ 6.00 730,166
---------------------------------------------------------
$ 4.00 1,095,250
---------------------------------------------------------
</TABLE>
The Series B Convertible Preferred Stock may be converted at any time,
but tends to be converted when there are substantial increases in market prices
in a short period. Such sales may lessen such increases. As of May 10, 1999, a
total of $1,619,000 of the Series B Convertible Preferred Stock had been
converted into an aggregate of 339,799 shares of common stock, excluding any
shares of common stock issued in payment of dividends.
In September and December 1998, we sold a total of 800,000 shares of
common stock with certain "adjustment" rights pursuant to which we are required
to issue warrants to purchase additional shares of common stock with an exercise
price of $0.01 per share to the holders if the market price of our common stock
is less than a specified target value on certain "measurement dates," based on
the average closing bid prices for the 15 trading days ending prior to the
measurement dates. We agreed with the holders that the first measurement date
would be on February 22, 1999, and on that date we issued warrants to acquire
536,585 additional shares of common stock (the "February Adjustment Warrants").
The next measurement date will be on May 22, 1999. Assuming that the
holders continue to hold all of the 800,000 shares issued to them in September
and December 1998 and all of the February Adjustment Warrants, the number of
warrants to purchase additional shares that would be issued to the investors on
that date is illustrated in the following table:
<TABLE>
<CAPTION>
-------------------------------------------------------------
Market Price Number of Additional Shares
of of Common Stock Issuable
Common Stock
=============================================================
<S> <C>
$12.00+ - 0 -
-------------------------------------------------------------
$10.00 80,000
-------------------------------------------------------------
$ 8.00 200,000
-------------------------------------------------------------
$ 6.00 478,048
-------------------------------------------------------------
$ 4.00 1,385,365
-------------------------------------------------------------
</TABLE>
For subsequent measurement dates, the adjustment provision operates
similarly. If the market price is less than the applicable target value for
measurement dates after May 22, 1999, then the number of shares to be issued
will be increased by 1.25%, which reflects a negotiated issuance premium.
Assuming that the market price of the common stock on May 22, 1999 were $8.00
per share and the holders
17
<PAGE> 18
continue to hold the original 800,000 shares, the February Adjustment Warrants,
and the warrants to purchase an additional 200,000 shares assumed to be issued
on May 22, 1999, our obligation to issue warrants to acquire additional shares
on August 22, 1999, the third measurement date, may be illustrated as follows:
18
<PAGE> 19
<TABLE>
<CAPTION>
-----------------------------------------------------------
Market Price Number of Additional
of Shares of Common Stock
Common Stock Issuable
===========================================================
<S> <C>
$12.00+ - 0 -
-----------------------------------------------------------
$10.00 - 0 -
-----------------------------------------------------------
$ 8.00 - 0 -
-----------------------------------------------------------
$ 6.00 300,731
-----------------------------------------------------------
$ 4.00 1,219,390
-----------------------------------------------------------
</TABLE>
In March 1999, we issued 1,111,111 shares of common stock and warrants
for another 1,111,111 shares of common stock with certain "adjustment" rights
pursuant to which we are required to issued additional shares of common stock to
the holders if the market price for our common stock is below a specified target
price, initially $6.00, on certain "measurement dates." The purpose of this
"adjustment" is to provide a definite market value to the holders for the shares
of common stock it continues to hold during the adjustment period. The provision
also reduces the incentive for the holders to sell its shares if the market
price of the common stock falls below the initial target value of $6.00 per
share.
The first measurement date is the date the registration statement
covering the resale of the shares of common stock is declared effective. If the
average of the closing bid prices for our common stock for the five days prior
to the first measurement date were less that $6.00, we would issue additional
shares, as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
Average Closing Bid Number of Shares Issuable
Price for Prior 5 Days
=========================================================
<S> <C>
$5.00 222,222
---------------------------------------------------------
$4.00 555,555
---------------------------------------------------------
$3.00 1,111,111
---------------------------------------------------------
</TABLE>
If the Company is required to issue additional shares of Common Stock to the
holders on the first measurement date, it also must issue to the holders an
equal number of warrants.
Subsequent measurement dates will occur every three months for the next
nine months and thereafter every six months for one year. On each subsequent
measurement date, we will issue additional shares of our common stock to the
holders on a similar basis if the market price for our common stock at the end
of such period is less than the lower of $6.00 or the lowest of any previous
market price resulting in an adjustment in the number of shares. Price. The
number of additional shares we are required to issue
19
<PAGE> 20
on any subsequent measurement date will depend upon the number of shares held by
the Investor on the measurement date and the applicable market price of the
common stock.
For example, if on a subsequent measurement date the holders holds all of the
shares of common stock and had received and continued to hold 222,222 additional
shares on the first measurement date because the market price for our common
stock had been $5.00 on that date, we would issue the following additional
shares:
<TABLE>
<CAPTION>
---------------------------------------------------------
Average Closing Bid Number of Shares Issuable
Price for Prior 5 Days
=========================================================
<S> <C>
$5.00 -0-
---------------------------------------------------------
$4.00 333,333
---------------------------------------------------------
$3.50 571,428
---------------------------------------------------------
$3.00 888,888
---------------------------------------------------------
</TABLE>
The existence of the Series B Convertible Preferred Stock and the
possibility of the issuance of additional shares of common stock and warrants to
acquire additional shares upon adjustment, as described above, as well as the
existence of outstanding warrants and options, may prove to be a hindrance to
our future equity financings. Further, the holders of such warrants and options
may exercise them at a time when we would otherwise be able to obtain additional
equity capital on terms more favorable to us. Such factors could materially and
adversely affect our ability to meet our capital needs.
OUR INABILITY TO SELL OUR MTA SYSTEMS AT EXPECTED PRICES WOULD ADVERSELY AFFECT
OUR BUSINESS AND PROFITABILITY. Most of our potential customers already own or
lease very high performance computer systems. Some of our competitors may offer
trade-in allowances or substantial discounts to potential customers, and we may
not be able to match these sales incentives. We may be required to provide
discounts to make sales or to finance the leasing of our products, which would
result in a deferral of our receipt of cash for such systems. These developments
could materially and adversely affect our business and results of operations.
LACK OF GOVERNMENT FUNDING FOR HIGH PERFORMANCE SYSTEMS WOULD ADVERSELY AFFECT
OUR BUSINESS AND INCREASE OUR CAPITAL REQUIREMENTS. The inability of U.S. and
foreign government agencies to procure additional high performance computer
systems, due to lack of funding or for any other reason, would materially and
adversely affect our business, results of operations and need for capital. We
have targeted U.S. and foreign government agencies and research laboratories for
our early sales. Our first sale was to the U.S. National Science Foundation for
installation at the San Diego Supercomputer Center. The U.S. Government
historically has facilitated the development of, and has constituted a market
for, new and enhanced very high performance computer systems. If the U.S.
government or foreign governments
20
<PAGE> 21
were to reduce or delay funding of certain high technology programs employing
high performance computing, then one of our target markets would be seriously
adversely affected.
THE ABSENCE OF THIRD-PARTY APPLICATION SOFTWARE TRANSLATED TO RUN ON THE MTA
COULD ADVERSELY AFFECT OUR ABILITY TO MAKE COMMERCIAL SALES. In order to make
sales in markets beyond the very high performance scientific market, such as
government agencies and research laboratories, to engineering and other
commercial markets, we must be able to attract independent software vendors to
rewrite their software application programs so that they will run on our MTA
system. We also plan to modify and rewrite third-party software applications to
run on the MTA system ourselves to facilitate the expansion of our potential
markets. There can be no assurance that we will be able to induce independent
software vendors to rewrite their applications, or that we will successfully
rewrite third-party applications, to run on our MTA system, and the failure to
do so could materially and adversely affect our business and results of
operations.
RAPID GROWTH COULD STRAIN OUR MANAGEMENT AND FINANCIAL RESOURCES. If we are
successful in manufacturing and marketing the MTA system, we believe that we
would undergo a period of rapid growth that could place a significant strain on
our management, financial and other resources. Our ability to manage our growth
will require us:
o to continue to improve our operational and financial systems;
o to motivate and effectively manage our employees;
o to complete the implementation of a new financial, budgeting and
management information system; and
o to enhance internal control systems.
Our success will depend on our management's ability to make these changes and to
manage our operations effectively over the long term.
OUR INABILITY TO ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL WOULD JEOPARDIZE OUR
SUCCESS. Our success also will depend in large part upon our ability to attract,
retain and motivate highly skilled technical and marketing and sales personnel.
Competition for highly skilled management, technical, marketing and sales
personnel is intense, and we may not be successful in attracting and retaining
such personnel.
We are dependent on Burton J. Smith, our Chairman of the Board and Chief
Scientist, and James E. Rottsolk, our Chief Executive Officer. The loss of
either officer's services could have a material impact on our ability to achieve
our business objectives. We are the beneficiary of key man life insurance
policies on the lives of Messrs. Smith and Rottsolk in the amount of $2 million
and $1 million, respectively. We have no employment contracts with either Mr.
Smith or Mr. Rottsolk, or with any other employee.
OUR QUARTERLY PERFORMANCE MAY VARY SIGNIFICANTLY AND COULD CAUSE OUR STOCK PRICE
TO BE VOLATILE. If we are able to attain market acceptance of the MTA system,
one or a few system sales may account for a substantial percentage of our
quarterly and annual revenue. This is due to the anticipated high average
21
<PAGE> 22
sales price of the MTA system models and the timing of purchase orders and
product acceptances. Because a number of our 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 our control, such as:
o changes in levels of customer capital spending;
o the introduction or announcement of competitive products;
o the availability of components; or
o currency fluctuations and international conflicts or economic crises.
Because of these factors, revenue, net income or loss and cash flow are likely
to fluctuate significantly from quarter to quarter.
OUR STOCK PRICE MAY BE VOLATILE. In addition to price swings due to variations
in our quarterly results, the trading price of our common stock could be subject
to significant fluctuations in response to, among other factors:
o changes in analysts' estimates;
o announcements of technological innovations by us or our competitors;
and
o general conditions in the high performance computer industry.
In addition, the stock market is subject to price and volume fluctuations that
particularly affect the market prices for small capitalization, high technology
companies. These fluctuations are often unrelated to the operating performance
of these companies. Continued stock price volatility could result in the
issuance of additional shares of common stock. See "Additional Shares Issuable
By Us Would Dilute Existing Shareholdings and Could Hinder Our Ability to Obtain
Additional Financing" above.
U.S. EXPORT CONTROLS COULD HINDER OUR SALES TO FOREIGN CUSTOMERS. The U.S.
Government regulates the export of high performance computer systems such as the
MTA system. Delay or denial in the granting of any required licenses could
materially and adversely affect our business and results of operations.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE. Our market is
characterized by rapidly changing technology, accelerated product obsolescence,
and continuously evolving industry standards. Our success will depend upon our
ability to complete development of the MTA system and to introduce new products
and features in a timely manner to meet evolving customer requirements. We may
not succeed in these efforts. Our business and results of operations will be
materially and adversely affected if we incur delays in developing our products
or if such products do not gain broad market
22
<PAGE> 23
acceptance. In addition, products or technologies developed by others may render
our products or technologies noncompetitive or obsolete.
WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGH PERFORMANCE
COMPUTER MARKET. The performance of our MTA system may not be competitive with
the computer systems offered by our competitors, and we may not compete
successfully over time against new entrants or innovative competitors at the
lower end of the market. Furthermore, periodic announcements by our competitors
of new high performance computer systems and price adjustments may materially
and adversely affect our business and results of operations.
Our competitors include 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, Inc., a subsidiary of Silicon Graphics, Inc. Other
participants in the market include IBM Corporation and Japanese companies such
as NEC Corporation, Fujitsu, Ltd., and Hitachi, Ltd. Each of these competitors
has broader product lines and substantially greater research, engineering,
manufacturing, marketing and financial resources than we do.
A number of companies have developed or plan to develop parallel systems
for the high performance computer market. To date, these products have been
limited in applicability and scalability and are often difficult to program. A
breakthrough in architecture or software technology could change this situation.
Such a breakthrough would materially and adversely affect our business and
results of operations.
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY INFORMATION AND RIGHTS ADEQUATELY.
We rely on a combination of copyright and trade secret protection,
non-disclosure agreements and licensing arrangements to establish, protect and
enforce our proprietary information and rights. In addition, we have 15 patent
applications pending and plan to file additional patent applications. There can
be no assurance, however, that patents will be issued from the pending
applications or that any issued patents will protect adequately those aspects of
our technology to which such patents will relate. Despite our efforts to
safeguard and maintain our proprietary rights, there can be no assurance that we
will succeed in doing so or that our competitors will not independently develop
or patent technologies that are substantially equivalent or superior to our
technologies.
Although we are not a party to any present litigation regarding
proprietary rights, third parties may assert intellectual property claims
against us in the future. Such claims, if proved, could materially and adversely
affect our business and results of operations. In addition, even meritless
claims require management attention and cause us to incur significant expense.
The laws of certain 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 we continue to implement protective measures and intend to
defend our proprietary rights vigorously, these efforts may not be successful.
23
<PAGE> 24
IT MAY BECOME MORE DIFFICULT TO SELL OUR STOCK IN THE PUBLIC MARKET. Our common
stock is quoted on the Nasdaq National Market. In order to remain listed on this
market, we must meet Nasdaq's listing maintenance standards. If the bid price of
our common stock falls below $5.00 for an extended period, or we are unable to
continue to meet Nasdaq's standards for any other reason, our common stock could
be delisted from the Nasdaq National Market.
If our common stock were delisted, we likely would seek to list the
common stock on the Nasdaq SmallCap Market or for quotation on the American
Stock Exchange or a regional stock exchange. However, listing or quotation on
these markets or exchanges could reduce the liquidity for our common stock.
If our common stock were not listed or quoted on another market or
exchange, trading of the common stock would be conducted in the over-the-counter
market on an electronic bulletin board established for unlisted securities 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, our common stock. In addition, a delisting from the Nasdaq
National Market and failure to obtain listing or quotation on such other market
or exchange would subject our 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 Nasdaq National Market and failure to obtain listing or
quotation on another market or exchange could affect the ability or willingness
of broker-dealers to sell and/or make a market in the common stock and the
ability of purchasers of the common stock to sell their securities in the
secondary market. In addition, if the market price of the common stock falls to
below $5.00 per share, we may become subject to certain penny stock rules even
if our common stock is still quoted on the Nasdaq National Market. While such
penny stock rules should not affect the quotation of our common stock on the
Nasdaq National Market, such rules may further limit the market liquidity of the
common stock and the ability of investors to sell the common stock in the
secondary market.
WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS. We have not previously paid any
dividends on our common stock and for the foreseeable future we intend to
continue our policy of retaining any earnings to finance the development and
expansion of our business.
CERTAIN PROVISIONS OF OUR ARTICLES AND BYLAWS COULD MAKE A PROPOSED ACQUISITION
THAT IS NOT APPROVED BY OUR MANAGEMENT MORE DIFFICULT. Certain provisions of our
Restated Articles of Incorporation and Restated Bylaws could make it more
difficult for a third party to acquire us. These provisions could limit the
price that certain investors might be willing to pay in the future for our
common stock. For example, our Articles and Bylaws provide for:
o a staggered Board of Directors, so that only two of six new directors
are elected each year;
o removal of a director only for cause and only upon the affirmative
vote of not less than two-thirds of the shares entitled to vote to
elect directors;
o the issuance of preferred stock, without shareholder approval, with
rights senior to those of the common stock;
24
<PAGE> 25
o no cumulative voting of shares;
o calling a special meeting of the shareholders only upon demand by the
holders of not less than 30% of the shares entitled to vote at such a
meeting;
o amendments to the Articles of Incorporation require the affirmative
vote of not less than two-thirds of the outstanding shares entitled
to vote on the amendment, unless the amendment was approved by a
majority of "continuing directors," as that term is defined in our
Articles;
o special voting requirements for mergers and other business
combinations, unless the proposed transaction was approved by a
majority of continuing directors;
o special procedures to bring matters before our shareholders at our
annual shareholders' meeting; and
o special procedures for nominating members for election to the Board
of Directors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our cash equivalents and marketable securities are
held in money market funds or commercial paper of less than 90 days that is
held to maturity. Accordingly we believe that the market risk arising from our
holdings of these financial instruments is minimal. All of our current contract
payments are payble in U.S. dollars, and consequesntly we do not have any
foreign currency exhcange risk. We do not hold any derivative instruments and
have not engaged in hedging transactions.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
1. In February and March 1999, we issued an aggregate of $2,494,291 of
two-year convertible subordinated 8% notes and 74,829 common stock purchase
warrants in a private placement to 11 accredited investors. We received
$1,900,000 in cash and exchanged trade payables of $594,291 for notes. The notes
are convertible into shares of common stock at $5.00 per share; the exercise
price of the warrants is $5.00 per share. Both prices are subject to adjustment
in the event of stock splits, stock dividends, reorganizations and other usual
antidilution events. There were no underwriters or finders involved.
2. On March 10, 1999, we raised $5,000,000, before issuance costs of
$109,515, from the sale of 1,111,111 shares of Common Stock, along with
warrants to purchase 1,111,111 shares of Common Stock with an exercise price of
$5.16 per share, to one institutional investor, the Banca del Gottardo of
Lugano, Switzerland (the "Investor"). The Investor has the option to invest
another $5,000,000 in Common Stock at a purchase price of $5.16 per share; if
the option were exercised, the Investor also would receive warrants for
1,076,658 shares with an exercise price of $5.16 per share. We also issued to
the Investor 103,889 shares of Common Stock and warrants for 225,000 shares of
Common Stock with an exercise price of $5.16 per share to cover certain fees
relating to this transaction, including finder's fees. For a complete
25
<PAGE> 26
description of this transaction, see our Current Report on Form 8-K for the
event of March 10, 1999, as filed with the SEC on March 25, 1999.
3. On March 22, 1999, we issued warrants to purchase an aggregate of
536,585 shares of common stock at an exercise price of $0.01 per share to three
institutional investors, Advantage Fund II Ltd., Genesee Fund Limited -
Portfolio B, Koch Industries, Inc. These warrants were issued in consideration
of amendments to certain transaction documents that obligated us to issue
additional shares of common stock to Advantage, Genesee, and Koch on specified
measurement dates. For a complete description of this transaction, see our
Current Report on Form 8-K for the event of March 22, 1999, as filed with the
SEC on March 25, 1999.
4. On March 22, 1999, we exchanged warrants to purchase an aggregate of
383,344 shares of common stock at exercise prices ranging between $19.04 and
10.04 per share held by Advantage, Genesee, and Koch for warrants to purchase an
aggregate of 383,344 shares of common stock at an exercise price of $6.00 per
share. These warrants were exchanged in consideration of amendments to certain
transaction documents that obligated us to issue additional shares of common
stock to Advantage, Genesee, and Koch on specified measurement dates. For a
complete description of this transaction, see our Current Report on Form 8-K for
the event of March 22, 1999, as filed with the SEC on March 25, 1999.
The transactions described in paragraphs (1), (2) and (3) above were
exempt from registration under the Securities Act pursuant to Sections 4(2) and
4(6) of that act, and the transaction described in paragraph (4) above was
exempt from registration under the Securities Act pursuant to Section 3(a)(9) of
that Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
10.1 Form of Management Continuation Agreement between the Company and
each of its executive officers and corporate scientists
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
A report on Form 8-K for an event of March 10, 1999, was filed on
March 25, 1999, reporting our sale of common stock and warrants under
"Other Events."
A report on Form 8-K for an event of March 22, 1999, was filed on
March 25, 1999, reporting certain amendments and agreements pertaining
to shares of our common stock under "Other Events."
ITEMS 1, 3, 4 AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
26
<PAGE> 27
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERA COMPUTER COMPANY
May 17, 1999 By: /s/ JAMES E. ROTTSOLK
James E. Rottsolk
Chief Executive Officer
/s/ KENNETH W. JOHNSON
Kenneth W. Johnson
Chief Financial Officer
/s/ PHILISSA SARGIN
Philissa Sargin
Chief Accounting Officer
27
<PAGE> 1
Exhibit 10.1
March 16, 1999
Dear
Tera Computer Company (the "Company") considers it essential to the best
interests of its shareholders to attract the best talent and foster the
continuous employment of key personnel. The Board of Directors of the Company
(the "Board") recognizes that the possibility of a change of control may exist
and that such possibility, and the uncertainty and questions which it may raise,
may result in the departure or distraction of key personnel to the detriment of
the Company and its shareholders.
The Board has determined that appropriate steps should be taken to ensure the
continuity of management and to foster objectivity in the face of potentially
disturbing circumstances arising from the possibility of a change of control of
the Company, although no such change is now contemplated.
In order to induce you to remain in the employ of the Company and in
consideration of your further services to the Company, the Company agrees that
you shall receive the severance benefits set forth in this letter agreement
("Agreement") in the event your employment with the Company terminates
subsequent to a "Change of Control" of the Company (as defined in Section 2(c)
hereof) under the circumstances described below.
1. Term of Agreement. This Agreement shall commence on the date hereof and
shall continue in effect until your employment with the Company is
terminated other than after a Change of Control, unless sooner terminated
by written agreement of the Company and you.
2. Definitions. As used in this Agreement:
a. "Annual Compensation" means the total of one year of base salary, at
the highest base salary rate that you were paid by the Company in the
12-month period prior to the date of your termination of employment
(the "Look-Back Period"), plus 100% of the annual bonus for which you
were eligible within the Look-Back Period, or such salary and bonus
for the year 1999, which ever is later.
<PAGE> 2
b. "Beneficial Owner" shall have the meaning given in Rule 13d-3 of the
General Rules and Regulations under the Securities Exchange Act of
1934, as amended (the "Exchange Act").
c. "Change of Control" of the Company means and includes each and all of
the following:
(i) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other
than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity)
at least 50% of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the
shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition of all or substantially all of the Company's assets.
(ii) The acquisition by any Person as Beneficial Owner, directly or
indirectly, of securities of the Company representing 50% or
more of the total voting power represented by the Company's then
outstanding voting securities, except pursuant to a negotiated
agreement with the Company and pursuant to which such securities
are purchased for the Company.
(iii) A majority of the Board in office at the beginning of any 36
month period is replaced during the course of such 36 month
period (other than by voluntary resignation of individual
directors in the ordinary course of business) and such placement
was not initiated by the Board as constituted at the beginning
of such 36 month period.
Any other provisions of this Section notwithstanding, the term "Change
of Control" shall not include, if undertaken at the election of the
Company, either a transaction the sole purpose of which is to change
the state of the Company's incorporation, or a transaction, the result
of which is to sell all or substantially all of the assets of the
Company to another corporation (the "surviving corporation"), provided
that the surviving corporation is owned directly or indirectly by the
shareholders of the Company immediately following such transaction in
substantially the same proportions as their ownership of the Company's
Common Stock immediately preceding such
2
<PAGE> 3
transaction; and provided further that the surviving corporation
expressly assumes this Agreement.
d. "COBRA" means Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended.
e. "Code" means the Internal Revenue Code of 1986, as amended.
f. "Company" means Tera Computer Company, a Washington corporation, and
any successor as provided in Section 10 hereof.
g. "Person" shall have the meaning given such term in Section 3(a)(9) of
the Exchange Act and as used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange Act
but excluding the Company and any subsidiary and any employee benefit
plan sponsored or maintained by the Company or any subsidiary
(including any trustee of such plan acting as Trustee).
h. "Severance Payment" means the payment of severance compensation as
provided in Section 3 of this Agreement.
3. Compensation Upon Termination of Employment Following a Change in Control.
If your employment with the Company is terminated within 36 months after a
Change in Control:
a. you will be entitled to a Severance Payment in an amount computed as
follows:
(i) an amount equal to two times your Annual Compensation
("Termination Payment"); plus
(ii) any accrued vacation calculated at the rate of your final
salary, plus
(iii) the same percentage of Company-paid health and group-term life
insurance and disability benefits as were provided to you and
your family under plans of the Company, as of immediately prior
to the Change of Control, for 24 months following your
termination.
b. the Company agrees that in addition to the Termination Payment, all
outstanding stock options previously granted to you under the
Company's stock option plans prior to the Change in Control (including
any options issued in substitution or assumption of such options as a
result of a Change in Control), whether vested or unvested, shall
immediately have their vesting accelerated upon such termination, and
such
3
<PAGE> 4
options shall be exercisable for the full number of shares covered
thereby (including any portion not previously vested) and all such
outstanding non-qualified stock options shall be exercisable at any
time before the earlier of (A) the expiration date of the option or
(B) the expiration of twelve months after such termination.
c. any cash payment to you under Section 3(a) shall be made within 30
calendar days of your termination of employment.
d. notwithstanding anything contained in Sections 3(a) and (b) above, the
Company shall have no obligation to make any payment or offer benefits
to you under this Section 3 if your employment is terminated prior to
a Change in Control, or if your employment is terminated after a
Change of Control, for Cause (as defined in Section 4), death,
Disability (as defined in Section 5), retirement or resignation other
than for Good Reason (as defined in Section 6).
e. for purposes of COBRA, the date of a "qualifying event" for you and
your covered dependents shall be the date upon which the coverage
provided under Section 3(a)(ii) above terminates.
f. Furthermore, for purposes of this Agreement, if it is determined by
the Company's independent public accountants (the "Accountants") that
acceleration, in whole or in part, of vesting of options pursuant to
this Agreement (and similar agreements with other members of
management of the Company) is the sole reason which precludes
accounting for the acquisition of the Company as a pooling of
interests, and it is a condition to the closing of the Change of
Control transaction that the transaction be accounted for as a pooling
of interests, then the Company shall not, to the extent required to
permit pooling, accelerate the vesting of your options under this
Section 3.
4. Cause. For purposes of this Agreement, "Cause" means a termination of
employment resulting from a good faith determination by the Board of
Directors that:
a. you have willfully failed or refused in a material respect to follow
reasonable policies or directives established by the Board of
Directors or the President or willfully failed to attend to material
duties or obligations of your office (other than any such failure
resulting from your incapacity due to physical or mental illness),
which you have failed to correct within a reasonable period following
written notice to you; or
b. there has been an act by you involving wrongful misconduct which has a
demonstrably adverse impact on or material
4
<PAGE> 5
damage to the Company or its subsidiaries, or which constitutes a
misappropriation of the assets of the Company; or
c. you have engaged in an unauthorized disclosure of confidential
information; or
d. you, while employed by the Company, have performed services for
another company or person which competes with the Company, without the
prior written approval of the President of the Company; or
e. you have materially breached your obligations hereunder.
5. Disability. For purposes of this agreement, "Disability" means that, at the
time your employment is terminated, you have been unable to perform the
duties of your position for a period of six consecutive months as a result
of your incapability due to physical or mental illness.
6. Good Reason. The Company will be obligated to make payments and provide
benefits under Section 3 if you terminate your employment for Good Reason
within 36 months after a Change in Control. For purposes of the Agreement,
"Good Reason" means:
a. a reduction in salary or benefits;
b. a material change in job responsibilities;
c. a request to relocate, except for office relocations that would not
increase your one-way commute by more than 25 miles; or
d. the failure of the Company to obtain the assumption of the Agreement
as stipulated in Section 10.
7. Parachute Payments
a. If it is established pursuant to a final determination of a court or
an Internal Revenue Service administrative appeals proceeding that,
notwithstanding the good faith of you and the Company in applying the
terms of this Section 7(a), a payment (or portion thereof) made is an
Excess Parachute Payment, then, the Company shall pay to you an
additional amount in cash (a "Gross-Up Payment") equal to the amount
necessary to cause the amount of the aggregate after-tax compensation
and benefits received by you hereunder (after payment of the excise
tax under Section 4999 of the Code with respect to any Excess
Parachute Payment, and any state and federal income taxes
5
<PAGE> 6
with respect to the Gross-Up Payment) to be equal to the aggregate
after-tax compensation and benefits you would have received as if
Sections 280G and 4999 of the Code had not been enacted.
b. Subject to the provisions of Section 7(c), the amount of any Gross-Up
Payment and the assumptions to be utilized in arriving at such amount,
shall be determined by the Accountants. All fees and expenses of the
Accountants shall be borne solely by the Company. Any Gross-Up
Payment, as determined pursuant to Section 7(a), shall be paid by the
Company to you within five (5) business days after the receipt of the
Accountant's determination. Any determination by the Accountants shall
be binding upon the Company and you.
c. You shall notify the Company in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by
Company of a Gross-Up Payment. Such notification shall be given no
later than ten (10) business days after you are informed in writing of
such claim and shall apprise the Company of the nature of the claim
and the date of requested payment. You shall not pay the claim prior
to the expiration of the thirty (30) day period following the date on
which you give notice to the Company. If the Company notifies you in
writing prior to the expiration of the period that it desires to
contest such claim, you shall:
(i) give the Company any information reasonably requested by the
Company relating to such claim;
(ii) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation
with respect to such claim by an attorney selected by the Company
and reasonably acceptable to you;
(iii) cooperate with the Company in good faith in order to effectively
contest such claim; and
(iv) permit the Company to participate in any proceedings relating to
such claim. Without limitation on the foregoing provisions of
this Section 7(c), the Company shall control all proceedings
taken in connection with
6
<PAGE> 7
such contest and, at its sole option, may pursue or forego any
and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct you to pay the tax
claimed and sue for a refund or contest the claim in any
permissible manner, and you agree to prosecute such contest to a
determination before any administration tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the
Company shall determine; provided, however, that the Company
shall bear and pay directly all costs and expenses (including
additional interest and penalties) incurred in connection with
such contest and shall indemnify and hold you harmless, on an
after-tax basis, for any Excise Tax or income tax (including
interest and penalties with respect thereto) imposed as a result
of the contest; provided, further, that if the Company directs
you to pay any claim and sue for a refund, the Company shall
advance the amount of the payment to you, on an interest-free
basis, and shall indemnify and hold you harmless, on an after-tax
basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to the
advance or with respect to any imputed income with respect to the
advance.
d. In the event that the Company exhausts its remedies pursuant to
Section 7(c) and you thereafter are required to make a payment of any
Excise Tax, the Accountants shall determine the amount of the Gross-Up
Payment required and such payment shall be promptly paid by the
Company to or for your benefit.
e. If, after the receipt by you of an amount advanced by the Company
pursuant to Section 7(c), you become entitled to receive any refund
with respect to such claim, you shall promptly after receiving such
refund pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto). If,
after the receipt by you of an amount advanced by the Company pursuant
to Section 7(c), a determination is made that you shall not be
entitled to any refund with respect to such claim and the Company does
not notify you in writing of its intent to contest such denial of
refund prior to the expiration of thirty (30) days after such
determination, then such advance shall be forgiven
7
<PAGE> 8
and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.
8. Disputes. If you disagree with your allotment of benefits under this
Agreement, you may file a written appeal with the General Counsel of the
Company. Any claim relating to this Agreement shall be subject to this
appeal process. The written appeal must be filed within sixty (60) days of
your termination date or breach by the Company of its obligations
hereunder, whichever is later.
The appeal must state the reasons that you believe you are entitled to
different benefits under the Agreement. A representative designated by the
General Counsel shall review the claim. If the claim is wholly or partially
denied, the General Counsel (or the designated representative) shall
provide you with a written notice of the denial, specifying the reasons the
claim was denied. Such notice shall be provided within thirty (30) days of
receiving your written appeal.
If your appeal is denied, you shall have the right and option to elect
review of such denial by either a court of competent jurisdiction or by
arbitration.
9. No Mitigation.
a. You shall not be required to mitigate the amount of any payment
provided for in Section 3 hereof by seeking other employment or
otherwise, nor shall the amount of such payment be reduced by reason
of compensation or other income you receive for services rendered
after your termination of employment with the Company.
b. In addition to the Termination Payment payable pursuant to Section 3
of this letter, you shall be entitled to receive all benefits payable
to you under any benefit plan of the Company in which you participate.
10. Company's Successors. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all
or substantially all of the business and/or assets of the Company, to
expressly assume and agree to perform the obligations under this Agreement
in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. As used in this
Section 10, "Company" includes any successor to its business or assets as
aforesaid which executes and delivers this Agreement or which
8
<PAGE> 9
otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.
11. Notice. Notices and all other communications provided for in this Agreement
shall be in writing and shall be deemed to have been duly given when
personally delivered or five (5) days after deposit with postal authorities
transmitted by United States registered or certified mail, return receipt
requested, postage prepaid, addressed to the respective addresses set forth
on the first or last page of this Agreement, or to such other address as
either party may have furnished to the other in writing in accordance
herewith, except that notices of change address shall be effective only
upon receipt.
12. Amendment or Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is
agreed to in writing by you and the Company. No waiver of either party at
any time of the breach of, or lack of compliance with, any conditions or
provisions of this Agreement shall be deemed a waiver of the provisions or
conditions hereof.
13. Sole Agreement. This Agreement represents the entire agreement between you
and the Company with respect to the matters set forth herein and supersedes
and replaces any prior agreements in their entirety. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter of this Agreement will be made by either party which are not
set forth expressly herein.
14. Employee's Successors. This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amounts are still payable to you hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to your devisee, legatee, or other
designee or, if there be no such designees, to your estate.
15. Funding. This Agreement shall be funded from the Company's general assets.
16. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
9
<PAGE> 10
17. Applicable Law. This Agreement shall be interpreted and enforced in
accordance with the internal laws of the State of Washington.
18. Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which together will constitute one
and the same instrument.
If the foregoing conforms with your understanding, please indicate your
agreement to the terms hereof by signing where indicated below and returning one
copy of this Agreement to the undersigned.
IN WITNESS WHEREOF, this Agreement is executed effective as of the date set
forth above.
Very truly yours,
TERA COMPUTER COMPANY
-------------------------------
James E. Rottsolk, President
ACCEPTED AND AGREED TO AS OF THE DATE FIRST SET FORTH ABOVE:
- -------------------------------
- -------------------------------
(Street Address)
- -------------------------------
(City, State, Zip)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF TERA COMPUTER COMPANY FOR THE QUARTER ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,426,034
<SECURITIES> 0
<RECEIVABLES> 378,511
<ALLOWANCES> 0
<INVENTORY> 9,138,395
<CURRENT-ASSETS> 15,234,316
<PP&E> 9,384,169
<DEPRECIATION> 3,890,082
<TOTAL-ASSETS> 21,420,537
<CURRENT-LIABILITIES> 8,059,800
<BONDS> 2,186,134
0
3,985,348
<COMMON> 76,107,108
<OTHER-SE> (69,415,823)
<TOTAL-LIABILITY-AND-EQUITY> 21,420,537
<SALES> 660,593
<TOTAL-REVENUES> 660,593
<CGS> 620,839
<TOTAL-COSTS> 620,839
<OTHER-EXPENSES> 7,195,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 335,435
<INCOME-PRETAX> (6,811,267)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,811,267)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,881,324)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
