<PAGE> 1
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
September 30, 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
- --------------------------------------------------------------------------------
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 November 12, 1999, 23,871,240 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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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1998
and September 30, 1999 3
Statements of Operations for the Three Months
and Nine Months Ended September 30, 1998 and 1999 4
Statement of Shareholders' Equity for the Three Months
Ended March 31, June 30, and September 30, 1999 5
Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1999 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 26
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
2
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TERA COMPUTER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
December 31, 1999
1998 (unaudited)
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,161,867 $ 16,377,547
Restricted cash 544,379
Accounts receivable 378,933 1,193,053
Related party receivable 306,819 343,933
Inventory 10,246,029 3,743,422
Advances to suppliers 415,834 37,301
Prepaid expenses and other assets 585,008 386,679
------------- -------------
Total current assets 15,094,490 22,626,314
PROPERTY AND EQUIPMENT, NET 4,501,613 5,622,220
LEASE DEPOSITS 537,101 537,101
PATENTS 155,033 183,704
------------- -------------
TOTAL $ 20,288,237 $ 28,969,339
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,470,617 $ 4,041,566
Accrued payroll and related expenses 1,544,056 1,931,340
Accrued interest 20,422
Deferred revenue 19,178 111,082
Contract adjustment reserve 250,000 200,455
Current portion of obligations under capital leases 542,045 596,978
Current portion of note payable to bank 164,302
------------- -------------
Total current liabilities 7,825,896 7,066,145
OBLIGATIONS UNDER CAPITAL LEASES 573,054 294,558
NOTE PAYABLE TO BANK 367,144
CONVERTIBLE NOTES PAYABLE, NET OF DISCOUNT 439,777
SHAREHOLDERS' EQUITY:
Preferred Stock, par $.01 - Authorized,
5,000,000 shares; issued and outstanding,
6,000 and none shares of Series B Convertible 5,674,406
Common Stock, par $.01 - Authorized,
50,000,000 shares; issued and outstanding,
14,204,430 and 23,837,747 shares 68,744,437 110,823,642
Preferred stock dividend distributable 75,000
Accumulated deficit (62,604,556) (90,021,927)
------------- -------------
11,889,287 20,801,715
------------- -------------
TOTAL $ 20,288,237 $ 28,969,339
============= =============
</TABLE>
See accompanying notes
3
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TERA COMPUTER COMPANY
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Product and other revenue $ 15,000 $ 849,835 $ 1,259,322 $ 1,451,096
Contract revenue 216,655 519,888 319,709
------------ ------------ ------------ ------------
231,655 849,835 1,779,210 1,770,805
------------ ------------ ------------ ------------
OPERATING EXPENSE:
Cost of product and other revenue 17,312 971,612 1,213,057 1,572,370
Cost of contract revenue 192,071 441,341 162,672
Manufacturing costs and
inventory adjustments 919,843 1,625,543 919,843 5,663,920
Inventory obsolescence charge 6,441,229 6,441,229
Research and development 2,424,720 4,802,044 10,299,279 11,593,789
Marketing and sales 484,165 611,279 1,268,554 1,788,908
General and administrative 516,316 551,337 1,496,551 1,654,063
------------ ------------ ------------ ------------
4,554,427 15,003,044 15,638,625 28,876,951
------------ ------------ ------------ ------------
RESEARCH FUNDING 105,565 50,000 181,348 122,197
------------ ------------ ------------ ------------
Loss from operations (4,217,207) (14,103,209) (13,678,067) (26,983,949)
OTHER INCOME / (EXPENSE) 63,330 168,826 163,648 (433,422)
------------ ------------ ------------ ------------
NET LOSS (4,153,877) (13,934,383) (13,514,419) (27,417,371)
AMORTIZATION OF PREFERRED
STOCK DIVIDEND (464,733) (464,733)
PREFERRED STOCK DIVIDEND (141,300) (365,611) (115,341)
------------ ------------ ------------ ------------
LOSS FOR COMMON STOCK $ (4,759,910) $(13,934,383) $(14,344,763) $(27,532,712)
============ ============ ============ ============
LOSS PER COMMON SHARE,
BASIC AND DILUTED $ (0.39) $ (0.59) $ (1.22) $ (1.31)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING, BASIC AND DILUTED 12,258,238 23,769,199 11,785,680 21,063,711
============ ============ ============ ============
</TABLE>
See accompanying notes
4
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TERA COMPUTER COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Series B Convertible
Preferred Stock Common Stock
--------------------------------- --------------------------------
Number of Number of
Shares Amount Shares Amount
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1999 6,000 $ 5,674,406 14,204,430 $ 68,744,437
Exercise of stock options 83,578 29,480
Issuance of shares under Employee
Stock Purchase Plan 24,109 144,729
Common stock issued in
private placement, net of
issuance costs of $115,457 1,225,000 4,884,543
Conversion of Series B preferred shares (1,619) (1,689,058) 350,498 1,634,296
Issuance of common stock for
accrued dividends 13,332 75,000
Beneficial conversion feature in
notes & interest expense recognized
on convertible warrants 594,623
Preferred stock dividend distributable
Net loss
------------- ------------- ------------- -------------
BALANCE, March 31, 1999 4,381 3,985,348 15,900,947 76,107,108
Exercise of stock options 6,096 2,135
Options issued for services 69,000
Conversion of Series B preferred shares (4,381) (3,985,348) 937,335 3,985,348
Issuance of common stock for
accrued dividends 9,735 54,762
Common stock issued in
private placement, net of
issuance costs of $1,190,000 6,460,193 27,968,234
Common stock issued in
exchange for notes 433,585 2,046,521
Net loss
------------- ------------- ------------- -------------
BALANCE, June 30, 1999 23,747,891 110,233,108
Issuance of shares under Employee
Stock Purchase Plan 30,407 125,429
Issuance of shares under Company
401(k) Plan 35,876 143,504
Exercise of stock options 18,909 23,714
Exercise of cashless warrants 4,664
Sale of stock purchase warrant 200,000
Issuance costs associated with
private placement (72,812)
Cash received on subscribed stock 170,699
Net loss
------------- ------------- ------------- -------------
BALANCE, September 30, 1999 $ 23,837,747 $ 110,823,642
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Preferred
Stock Accumulated
Dividend Deficit Total
------------- ------------- -------------
<S> <C> <C> <C>
BALANCE, January 1, 1999 $ 75,000 $ (62,604,556) $ 11,889,287
Exercise of stock options 29,480
Issuance of shares under Employee
Stock Purchase Plan 144,729
Common stock issued in
private placement, net of
issuance costs of $115,457 4,884,543
Conversion of Series B preferred shares (54,762)
Issuance of common stock for
accrued dividends (75,000)
Beneficial conversion feature in
notes & interest expense recognized
on convertible warrants 594,623
Preferred stock dividend distributable 54,762 54,762
Net loss (6,811,267) (6,811,267)
------------- ------------- -------------
BALANCE, March 31, 1999 54,762 (69,415,823) 10,731,395
Exercise of stock options 2,135
Options issued for services 69,000
Conversion of Series B preferred shares
Issuance of common stock for
accrued dividends (54,762)
Common stock issued in
private placement, net of
issuance costs of $1,190,000 27,968,234
Common stock issued in
exchange for notes 2,046,521
Net loss (6,671,721) (6,671,721)
------------- ------------- -------------
BALANCE, June 30, 1999 (76,087,544) 34,145,564
Issuance of shares under Employee
Stock Purchase Plan 125,429
Issuance of shares under Company
401(k) Plan 143,504
Exercise of stock options 23,714
Exercise of cashless warrants
Sale of stock purchase warrant 200,000
Issuance costs associated with
private placement (72,812)
Cash received on subscribed stock 170,699
Net loss (13,934,383) (13,934,383)
------------- ------------- -------------
BALANCE, September 30, 1999 $ $ (90,021,927) $ 20,801,715
============= ============= =============
</TABLE>
See accompanying notes
5
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TERA COMPUTER COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(13,514,419) $(27,417,371)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 757,207 1,325,698
Beneficial conversion feature of notes payable 540,107
Inventory write down 6,441,229
Cash provided (used) by changes in
operating assets and liabilities:
Restricted cash (544,379)
Accounts receivable (284,119) (814,120)
Inventory (2,974,805) (970,729)
Other assets (201,137) 169,658
Accounts payable and other accrued liabilities 624,892 (745,338)
Accrued payroll and related expenses (100,768) 387,284
Contract adjustment reserve (49,545)
Deferred revenue 34,178 91,904
Advances to suppliers (629,915) 378,533
------------ ------------
Net cash used by operating activities (16,288,886) (21,207,069)
INVESTING ACTIVITIES:
Purchases of property and equipment (1,375,640) (705,699)
------------ ------------
Net cash used by investing activities (1,375,640) (705,699)
FINANCING ACTIVITIES:
Related party (receivable)/payments 65,832 (37,114)
Issuance of notes payable 1,900,000
Sale of common stock 6,697,057 33,246,727
Proceeds from exercise of options 255,329
Principal payments on bank note (12,931)
Sale of preferred stock 5,674,406
Capital leases, net 175,392 (223,563)
------------ ------------
Net cash provided by financing activities 12,612,687 35,128,448
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (5,051,839) 13,215,680
CASH AND CASH EQUIVALENTS:
Beginning of period 10,329,115 3,161,867
------------ ------------
End of period $ 5,277,276 $ 16,377,547
============ ============
SUPPLEMENTAL DISCLOSURE OF
NON CASH INVESTING AND FINANCING ACTIVITIES:
Inventory reclassed to fixed assets $ 1,032,107
Fixed asset additions through Common Stock $ 164,120
Fixed asset additions through Notes Payable $ 544,379
Note payable converted to common stock $ 2,000,000
Accounts payable converted to notes $ 594,291
Stock dividends $ 249,587 $ 54,762
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 132,316 $ 189,220
</TABLE>
See accompanying notes
6
<PAGE> 7
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, shareholders' equity 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/A for the fiscal year ended December 31, 1998.
INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ ------------
<S> <C> <C>
Components and Subassemblies $ 9,346,646 $ 9,642,235
Work in process 252,000
Finished goods 922,501
Inventory allowance (275,118) (5,898,813)
------------ ------------
$ 10,246,029 $ 3,743,422
============ ============
</TABLE>
MANUFACTURING COSTS AND INVENTORY ADJUSTMENTS
In the third quarter of 1998, we began incurring manufacturing expenses
as a result of our progress to commercial production. These costs reflect the
expense of our manufacturing group, including personnel costs and allocated
overhead, production expenses not directly related to delivered systems, and
inventory adjustments, including revaluations and cost variations because of
changes in production yields,
7
<PAGE> 8
inventory obsolescences, inventory consumed in the manufacturing process and
capitalized manufacturing labor and overhead costs.
INVENTORY OBSOLESCENCE CHARGE
During the quarter ended September 30, 1999, we incurred inventory
obsolescence charges totaling $6,441,229 due to a non-cash reserve for gallium
arsenide processors, integrated circuits and associated components and parts. At
this time we do not expect to ship these parts because of the successful initial
testing of our CMOS (complementary metal-oxide silicon) processor and memory
controller integrated circuits. Of this amount, $5,653,729 were added to the
inventory allowance and $787,500 were recorded in Accounts Payable for parts we
are contractually required to purchase. This charge was separately reported on
the Statements of Operations due to its significance.
NET LOSS PER SHARE
Net loss per share is computed on the basis of the weighted average
number of shares of common stock outstanding. Because 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.
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" beginning on page
16. 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.
8
<PAGE> 9
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 $27.4 million in the first nine months of 1999, compared to
a net loss of approximately $13.5 million in the first nine months of 1998. Our
funding from inception through September 30, 1999 has been primarily from the
sale of approximately $108.7 million of securities, research funding from the
Defense Advanced Research Projects Agency ("DARPA") of approximately $19.3
million, and revenue of approximately $3.8 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 and July 1999, we recognized additional revenue from
product sales upon acceptance by SDSC of our upgrades of the MTA system at SDSC
to four processors and eight processors, respectively. We have received a
purchase order to upgrade the MTA system at SDSC to 16 processors. We plan to
deliver that system to San Diego around the end of the year and record the
revenue from that sale in the first quarter of 2000. SEE "RISK FACTORS" BELOW
BEGINNING ON PAGE 16.
We generally recognize revenue from sales of MTA systems upon acceptance
of the system by the customer, although depending on sales contract terms,
revenue may be recognized upon shipment or delayed until clarification of
funding. We recognize 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 AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
REVENUE. We had revenue for the three months ended September 30, 1999,
of $850,000 compared to $232,000 for the three months ended September 30, 1998;
for the respective nine month periods, our revenues were $1.8 million in both
1999 and 1998. In the third quarter of 1999 we recognized $814,000 of product
sale revenue upon the upgrade of the MTA system at SDSC to eight processors; we
expect to recognize another $300,000 of revenue for that upgrade in the fourth
quarter of 1999. We had zero and $320,000 of contract revenue for the three and
nine months ended September 30, 1999, compared to $217,000 and $520,000 for the
three and nine months ended September 30, 1998. Contract revenue was pursuant to
a subcontract with SDSC to evaluate multithreaded architecture for certain
defense applications. The subcontract expired on June 30, 1999, and we currently
have no contracts for additional contract revenue.
OPERATING EXPENSE. Our cost of product and other revenue increased from
$17,000 for the three months ended September 30, 1998 to $972,000 for the three
months ended September 30, 1999. Our cost of product and other revenue increased
from $1.2 million to $1.6 million for the nine months ended September 1998 and
1999,
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respectively. These costs relate to the acceptances by SDSC of the two-processor
MTA system in the second quarter of 1998 and of the upgrades to four-processors
and eight-processors in the first and third quarters of 1999. Our cost of
product and other revenue was high as a percentage of the revenue due to
favorable pricing terms provided to SDSC.
The cost of contract revenue for the three months ended September 30,
1999, was zero compared to $192,000 for the three months ended September 30,
1998, and $163,000 for the nine months ended September 30, 1999, compared to
$441,000 for the nine months ended September 30, 1998. The decrease in the third
quarter of 1999 is due to the completion of the SDSC subcontract on June 30,
1999.
Manufacturing costs and inventory adjustments were $1.6 million for the
three months ended September 30, 1999 compared to $920,000 for the three months
ended September 30, 1998. These costs reflect the expense of our manufacturing
group, including personnel costs and allocated overhead, of approximately
$859,000 for the three months ended September 30, 1999, compared to $671,000 for
the three months ended September 30, 1998. The increase of $188,000 in the third
quarter 1999 is primarily due to increased overhead and rent for our new
facilities in Seattle.
We also incurred production expenses not directly related to systems
delivered to SDSC of $320,000 for the three months ended September 30, 1999,
compared to $241,000 for the three months ended September 30, 1998, and net
inventory adjustments of $447,000 for the three months ended September 30, 1999,
compared to $8,000 for the three months ended September 30, 1998.
Manufacturing costs and inventory adjustments were $5.7 million for
the nine months ended September 30, 1999 compared to $920,000 for the nine
months ended September 30, 1998. In the third quarter of 1998 we began incurring
manufacturing expenses separate from our research and development efforts,
reflecting our progress to commercial production. In the first half of 1998,
these costs were classified as part of our research and development expenses,
and we estimate that if these costs had been separately reported, they would
have been $3.6 million for the nine months ended September 30, 1998 compared to
$5.7 million for the nine months ended September 30, 1999. These costs include
personnel costs and allocated overhead of $2.6 million for the nine months ended
September 30, 1999, compared to an estimate of $1.8 million for the nine months
ended September 30, 1998. The increase of approximately $800,000 for the
respective nine month periods is primarily due to increased overhead and rent
for our new facilities in Seattle.
We also incurred production expenses not directly related to systems
delivered to SDSC of $678,000 for the nine months ended September 30, 1999,
compared to an estimate of $659,000 for the nine months ended September 30,
1998, and net inventory
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<PAGE> 11
adjustments of $2.4 million for the nine months ended September 30, 1999,
compared to an estimate of $1.2 million for the nine months ended September 30,
1998.
An inventory obsolescence charge of $6.4 million was recorded for the
three months ended September 30, 1999, due to a non-cash reserve for gallium
arsenide processors, integrated circuits and associated components and parts. At
this time we do not expect to ship these parts because of the successful initial
testing of our CMOS processor and memory controller integrated circuits. This
charge was separately reported on the Statements of Operations due to its
significance.
Research and development expenses reflect our costs associated with the
development of the MTA system, including next generation systems and related
software development, and cover personnel expense, allocated overhead and
operating expenses, software, materials, and engineering expenses, including
payments to third parties. Research and development expenses increased from $2.4
million for the three months ended September 30, 1998 to $4.8 million for three
months ended September 30, 1999. The increase is due in part to engineering
expenses of $291,000 for the three months ended September 30, 1998 compared to
$1.8 million for the three months ended September 30, 1998. This increase was
largely due to expenses associated with the change from gallium arsenide
integrated circuits for the processor and memory controller to integrated
circuits utilizing CMOS. Personnel expenses also increased by $482,000 over
1998, due to additions in our personnel and higher wages, and allocated overhead
and operating expenses increased $368,000 over 1998, primarily due to increased
overhead from our move to our new facilities in Seattle of approximately
$185,000.
Research and development expenses increased from $10.3 million for the
nine months ended September 30, 1998 to $11.6 million for the nine months ended
September 30, 1999. In the first half of 1998, research and development expenses
also included our manufacturing costs and inventory adjustments described above.
If the estimated manufacturing costs and inventory adjustments described above
are considered, then research and development expenses would have increased from
an estimated $7.6 million to $11.6 million for the first nine months of 1998 and
1999. The increase is due in part to engineering expenses of $1.6 million for
the nine months ended September 30, 1998 compared to $2.8 million for the nine
months ended September 30, 1999. This increase was largely due to expenses
associated with the change from gallium arsenide integrated circuits for the
processor and memory controller to integrated circuits utilizing CMOS. Personnel
expenses also increased by $1.2 million over 1998 due to additions in our
personnel and higher wages; and allocated overhead and operating expenses
increased $1.1 million, primarily due to increased overhead from the move to our
new facilities in Seattle of approximately $700,000. Materials expense increased
by approximately $500,000 over the comparative 1998 period.
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<PAGE> 12
Marketing and sales expenses for the three months ended September 30,
1999 increased 26% to $611,000 from $484,000 for the three months ended
September 30, 1998. Marketing and sales expenses for the nine months ended
September 30, 1999 increased 41% to $1.8 million from $1.3 million for the nine
months ended September 30, 1998. The increase in both periods was due in part to
increased personnel costs of $32,000 and $117,000 for the three and nine months
ended September 30, 1999, over the corresponding 1998 periods, and increased
overhead allocations and rent during the respective 1999 periods of
approximately $49,000 and $146,000. Costs associated with marketing activities
increased $36,000 and $103,000 for the three and nine months ended September 30,
1999, over the corresponding 1998 periods. We will continue to increase our
marketing and sales activities as we sell larger MTA systems to industrial and
commercial customers.
General and administrative expenses for the three months ended September
30, 1999 increased 6.8% to $551,000 from $516,000 for the three months ended
September 30, 1998. General and administrative expenses for the nine months
ended September 30, 1999 increased 10.5% to $1.7 million from $1.5 million. The
increase for both periods was due in part to increased personnel costs of
$33,000 and $97,000 for the three and nine month periods ending September 30,
1999, compared to the corresponding 1998 periods, and increased overhead
allocations and rent of approximately $72,000 for the nine months ended
September 30, 1999, compared to the nine months ended September 30, 1998,
including our move to our new facilities in Seattle at the beginning of 1999.
General and administrative expenses are expected to increase commensurate with
growth in our operations.
RESEARCH FUNDING. We have been billing DARPA under a $1 million research
contract awarded in September 1995. Although the contract extends through
October 31, 2000, we will not receive any more funds under this contract. For
the three months ended September 30, 1999 billings were approximately $50,000
under a separate research contract, which was then completed. We currently have
no additional research contracts.
OTHER INCOME (EXPENSE). Interest income for the three months ended
September 30, 1999 increased 150% to $235,000 from $94,000 for the three months
ended September 30, 1998, due to higher average cash balances from the financing
completed in June 1999. Interest income for the nine months ended September 30,
1999 decreased about 20% to $235,000 from $293,000 for the nine months ended
September 30, 1998. The decrease in interest income in the nine months ended
September 30, 1999 is attributable to higher average cash balances in the same
period in 1998 from a financing completed in December 1997.
Interest expense for the three months ended September 30, 1999 increased
71% to $53,000 from $31,000 for the three months ended September 30, 1998.
Interest expense for the nine months ended September 30, 1999 increased 47% to
$189,000 from $129,000
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<PAGE> 13
for the nine months ended September 30, 1998. The increase in interest expense
for both periods is due to a bank loan for the purchase of capital assets issued
in the third quarter 1999, and in the nine months due also to promissory notes
issued in a financing in the first quarter of 1999.
The results for the first nine months 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 which $9,000 was
recognized in the third quarter of 1999.
TAXES. We made no provision for federal income taxes as we have
continued to incur net operating losses.
PREFERRED STOCK. In the second quarter of 1999, all of our outstanding
preferred stock was converted to common stock. The dividends for the first half
of 1998 were accrued on our Series A Convertible Preferred Stock, and were
higher than that accrued during the comparable period of 1999 because we had
more shares of Preferred Stock then outstanding.
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, 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, our internal network system, the hardware and software tools or from key
suppliers.
Based upon the responses to date, 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 is Year 2000 compliant. We have received assurances that the
services provided at our new offices in Seattle are
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Year 2000 compliant, except for one system that our landlord has replaced. All
necessary upgrades to operating systems have been supplied at no cost. We have
made 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. To date we have
identified no supplier that is not able to provide products and services which
are Year 2000 compliant. No significant software tool has been identified as not
being 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
continue to reevaluate 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. Because we have not identified any
particular area in which we anticipate significant Year 2000 issues, we are not
developing a formal 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. If any of our critical
systems are not 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 September 30, 1999, our principal
sources of liquidity have been net proceeds from the sale of equity totaling
$108.7 million, DARPA research funding and subcontracts totaling $19.3 million
and sales receipts of approximately $3.8 million. At September 30, 1999, we had
$16.4 million in cash and had no bank line of credit except for the acquisition
of capital equipment.
Net cash used in operating activities was $21.2 million for the nine
months ended September 30, 1999, an increase of $4.9 million from the $16.3
million used in the nine months ended September 30, 1998. Net operating cash
flows were primarily attributable to quarterly net losses, personnel costs and
costs of inventory, including inventory write-downs. Cash used for personnel
expenditures increased from approximately $6.7 million in the first nine months
of 1998 to $8.2 million for the nine months of 1999; inventory purchases
decreased from $3.4 million to $2.2 million. During the last quarter of 1999 and
in 2000, our operating activity expenses will depend primarily upon personnel
costs, the cost of inventory and third party engineering expenses related to
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<PAGE> 15
future implementations of the MTA system, primarily the conversion from using
gallium arsenide integrated circuits to using integrated circuits made of CMOS.
We expect that personnel costs will continue to increase in 1999 and
2000, 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 plan only modest inventory additions in the last quarter of 1999 and in 2000
pending receipt of purchase orders. We anticipate that third party engineering
expenses related to the CMOS implementation of the MTA system to continue during
the rest of 1999 and in 2000, but at lower levels.
Net cash spent on investing activities for the nine months ended
September 30, 1999 was $706,000, and consisted of additional property, plant and
equipment, primarily for computers and electronic test equipment, computer
software and furniture and fixtures.
Net cash provided by financing activities for the nine months ended
September 30, 1999, consisted of approximately $35.1 million of cash raised,
primarily through the sale of common stock in private placements, including
$29.0 million in the second quarter.
Our current cash resources and revenue from anticipated sales of MTA
systems are sufficient for us to conduct our planned operations through at least
the first six months of 2000. We believe that we will be cash-flow positive once
we have sales receipts of approximately $10 million per quarter. We may raise
additional funds to cover the costs of planned operations until we are cash-flow
positive and may raise additional funds in order to enhance our financial
position for future operations. If we were not able to complete development of a
commercially acceptable MTA system, obtain acceptable hardware components or
complete the replacement of gallium arsenide integrated circuits with CMOS
integrated circuits or if we need to purchase inventory to fulfill new purchase
orders, we may need additional capital earlier than planned. 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--We
May Engage in Additional Financings Which May Be Dilutive to Existing
Shareholders," below.
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<PAGE> 16
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 processors into commercially configured computer systems in 1998.
We have not yet achieved the level of stability required to meet stringent
commercial reliability standards and cannot be certain when, if ever, we will do
so.
OUR INABILITY TO OVERCOME THE TECHNICAL CHALLENGES OF COMPLETING THE DEVELOPMENT
OF THE MTA SYSTEM COULD CAUSE OUR BUSINESS TO FAIL. 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 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 complex process, and few
companies can meet our design requirements. Manufacturing difficulties or
limitations of suppliers could result in:
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<PAGE> 17
- - a limitation on the number of MTA systems that can be assembled using
such components;
- - unacceptably high prices for those components, with a resulting loss of
profitability and loss of competitiveness for our products; and
- - 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 1999 and in previous years, 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 to upgrade that system to larger configurations.
Although we work continually with our suppliers to solve these problems, we
cannot be certain that they will be able to manufacture the components to our
design and quality specifications.
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 $27.4 million in the first nine months of 1999. We expect to incur
substantial further losses until we make sales on a regular basis. We do not
expect to have a profitable fiscal quarter prior to mid-2000, if then. Whether
we will achieve additional revenue, or any earnings, will depend upon a number
of factors, including:
- - our ability to assemble production quality MTA systems in commercial
quantities;
- - our ability to achieve broad market acceptance of the MTA system;
- - the level of revenue in any given period;
- - the terms and conditions of sale or lease for an MTA system;
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<PAGE> 18
- - the MTA system model or models sold; and
- - our expense levels and manufacturing costs.
OUR INABILITY TO COMPLETE THE REPLACEMENT OF OUR CURRENT INTEGRATED CIRCUITS
WITH CMOS INTEGRATED CIRCUITS COULD DELAY COMMERCIAL SALES AND RESULTING
REVENUES. Over the next two 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 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 MTA systems, which would materially
and adversely affect the receipt of revenues, working capital and results of
operations.
OUR RELIANCE ON THIRD PARTY SUPPLIERS JEOPARDIZES OUR ABILITY TO MEET PRODUCTION
SCHEDULES AND TO SATISFY FUTURE CUSTOMER ORDERS. We subcontract the manufacture
of substantially all of our hardware components and related materials, 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
AlliedSignal Inc.; flex circuits from Compunetics, Inc.; power supplies from
Ascom Energy Systems, Inc.; uninterruptible power supplies from Piller, Inc.;
cooling distribution units from C.H. Bull Company; and 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:
- - if a reduction or interruption of supply of our components or materials
occurred, it could take us a considerable period of time to identify and
qualify alternative suppliers, to redesign our products as necessary and
to recommence manufacture of the redesigned components;
- - if we were ever unable to locate a supplier for a component or material,
we would be unable to assemble and deliver our products;
- - 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
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<PAGE> 19
- - 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.
A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE WHICH MAY
DEPRESS MARKET PRICES OF OUR STOCK AND HINDER OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING. Sales of a substantial number of shares of our 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 September 30, 1999, we had
outstanding:
- - 23,868,402 shares of common stock,
- - warrants to purchase another 14,401,330 shares of common stock,
- - 8% Convertible Promissory Notes in the principal amount of $494,291,
convertible at $5.00 per share into 98,858 shares of common stock, and
- - stock options to purchase an aggregate of 3,738,922 shares of common
stock.
As part of the financing completed on June 21, 1999, we issued a warrant
to Terren S. Peizer exercisable for a minimum of 1,591,723 shares of common
stock, and such number is included in the 14,401,330 shares described above as
issuable upon exercise of outstanding warrants. On June 21, 2000, and in certain
circumstances prior to that date, such as if we were involved in a merger or
similar transaction or if we terminated our relationship with Mr. Peizer, the
number of shares subject to this warrant increases to 10% of our issued and
outstanding shares, on a fully diluted basis, with certain limited exceptions.
If this warrant had been so exercisable as of September 30, 1999, it would have
exercisable for a total of 4,445,415 shares.
Almost all of our outstanding shares of common stock may be sold without
substantial restrictions. 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 the exercise of the warrants,
could depress prevailing market prices for the common stock. Even the perception
that such sales could occur may impact market prices.
In addition, the existence of outstanding warrants and options may prove
to be a hindrance to our future equity financings. Further, the holders of the
warrants and options may exercise them at a time when we would otherwise be able
to obtain
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<PAGE> 20
'
additional equity capital on terms more favorable to us. Such factors could
materially and adversely affect our ability to meet our capital needs.
WE MAY ENGAGE IN ADDITIONAL FINANCINGS THAT MAY BE DILUTIVE TO EXISTING
SHAREHOLDERS. Our present cash resources and revenue from anticipated sales of
MTA systems are sufficient to finance our planned operations into the third
quarter of 2000. We may raise funds to cover planned operations until we are
cash-flow positive and may raise additional funds in order to enhance our
financial position for future operations. If we were not able to complete
development of a commercially acceptable MTA system, obtain acceptable hardware
components or complete the replacement of CMOS integrated circuits, as described
above, or if we need to purchase inventory to fulfill new purchase orders, we
may need additional capital earlier than planned. 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.
OUR INABILITY TO SELL OUR MTA SYSTEMS AT EXPECTED PRICES WOULD ADVERSELY AFFECT
OUR GROWTH PROSPECTS AND FINANCIAL VIABILITY. 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 would reduce our revenues and delay profitability,
thereby materially and adversely affecting our business and results of
operations.
LACK OF GOVERNMENT FUNDING FOR SUPERCOMPUTER 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 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.
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THE ABSENCE OF THIRD-PARTY APPLICATION SOFTWARE TRANSLATED TO RUN ON THE MTA
SYSTEM COULD ADVERSELY AFFECT OUR ABILITY TO MAKE COMMERCIAL SALES. In order to
make sales 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
reduce our revenues and delay profitability.
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:
- - to continue to improve our operational and financial systems;
- - to motivate and effectively manage our employees;
- - to complete the implementation of a new financial, budgeting and
management information system; and
- - 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.
WE MAY BE UNABLE TO ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL, AND AS A RESULT
WE MAY NOT BE ABLE TO GROW AS WE EXPECT OR EFFECTIVELY IMPLEMENT OUR BUSINESS
PLAN. Our success also depends 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 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 contract with Mr. Smith or Mr. Rottsolk, or
with any other employee.
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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 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:
- changes in levels of customer capital spending;
- the introduction or announcement of competitive products;
- the availability of components; or
- 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. The trading price of our common stock could be
subject to significant fluctuations in response to, among other factors:
- changes in analysts' estimates;
- announcements of technological innovations by us or our
competitors; and
- 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.
U.S. EXPORT CONTROLS COULD HINDER OUR SALES TO FOREIGN CUSTOMERS AND OUR FUTURE
Prospects. 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 delay receipt of revenue, thereby materially and adversely
affecting our business and results of operations.
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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 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, a division 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 ability to sell MTA
systems and the receipt of revenue.
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
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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.
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 another 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 for an extended period. In addition, if the market price of the
common stock falls 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
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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
WHICH 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:
- a staggered Board of Directors, so that only two or three of our
seven directors are elected each year;
- 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;
- the issuance of preferred stock, without shareholder approval,
with rights senior to those of the common stock;
- no cumulative voting of shares;
- 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;
- 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);
- special voting requirements for mergers and other business
combinations, unless the proposed transaction was approved by a
majority of continuing directors;
- special procedures to bring matters before our shareholders at
our annual shareholders' meeting; and
- special procedures for nominating members for election to the
Board of Directors.
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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 payable in U.S. dollars, and consequently we do not have any
foreign currency exchange risks. We do not hold any derivative instruments and
have not engaged in hedging transactions.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
ITEMS 1, 2, 3, 4 AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERA COMPUTER COMPANY
November 15, 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
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF TERA COMPUTER COMPANY FOR THE QUARTER ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,921,926
<SECURITIES> 0
<RECEIVABLES> 1,536,986
<ALLOWANCES> 0
<INVENTORY> 3,743,422
<CURRENT-ASSETS> 22,626,314
<PP&E> 10,405,671
<DEPRECIATION> 4,783,451
<TOTAL-ASSETS> 28,969,339
<CURRENT-LIABILITIES> 7,066,145
<BONDS> 0
0
0
<COMMON> 110,823,642
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,969,339
<SALES> 849,835
<TOTAL-REVENUES> 849,835
<CGS> 971,612
<TOTAL-COSTS> 971,612
<OTHER-EXPENSES> 15,003,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 13,934,383
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,934,383
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,934,383
<EPS-BASIC> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
