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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
June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...... to ...... .
Commission file number 0-26820
TERA COMPUTER COMPANY
(Exact name of registrant as specified in its charter)
WASHINGTON 93-0962605
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2815 EASTLAKE AVENUE EAST
SEATTLE, WA 98102
(206) 325-0800
(Address of principal executive offices)
(Registrant's telephone number, including area code)
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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 August 10, 1998, 12,221,356 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
Page No.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of December 31, 1997 3
and 1998
Statements of Operations for the Three Months and 4
Six Months Ended June 30, 1997 and 1998
Condensed Statements of Cash Flows for the Three 5
Months and Six Months Ended June 30, 1997 and 1998
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 10
PART II OTHER INFORMATION
Item 2. Changes in Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
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TERA COMPUTER COMPANY
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1997 1998
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(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,329,115 $ 8,949,729
Accounts receivable 99,696 186,240
Related party receivable 368,008 296,288
Inventory 4,290,873 5,616,840
Advances to suppliers 325,385 344,924
Other assets 410,754 434,655
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Total current assets 18,823,831 15,828,676
PROPERTY AND EQUIPMENT, NET 1,914,925 2,398,387
LEASE DEPOSITS 120,629 179,526
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TOTAL $ 20,859,385 $ 18,406,589
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,138,343 $ 2,655,442
Accrued payroll and related expenses 1,713,553 1,591,899
Deferred revenue 49,178
Potential contract adjustments 250,000 250,000
Current portion of obligations under capital leases 379,597 443,671
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Total current liabilities 4,481,493 4,990,190
OBLIGATIONS UNDER CAPITAL LEASES
less current portion 532,321 667,244
SHAREHOLDERS' EQUITY:
Preferred Stock, par $.01 - Authorized, 5,000,000 shares; issued and
outstanding, 10,000 and 5,890 shares of Series A Convertible
issued and outstanding, 0 and 6,000 shares of Series B Convertible 8,545,709 9,587,776
Common Stock, par $.01 - Authorized, 25,000,000 shares;
issued and outstanding, 11,248,096 and 12,154,721 shares 52,208,938 57,581,683
Preferred stock dividend distributable 73,625
Accumulated deficit (44,909,076) (54,493,929)
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15,845,571 12,749,155
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TOTAL $ 20,859,385 $ 18,406,589
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See notes to financial statements
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TERA COMPUTER COMPANY
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
------------ ------------- ------------ -------------
REVENUE $ $ 1,526,603 $ $ 1,547,555
OPERATING EXPENSES:
Cost of revenue (1,429,144) (1,445,017)
Research and development (3,068,194) (3,561,256) (5,112,618) (7,874,557)
Marketing and sales (208,477) (374,339) (373,160) (784,389)
General and administrative (393,040) (504,830) (699,516) (980,235)
------------ ------------- ------------ -------------
(3,669,711) (5,869,569) (6,185,294) (11,084,198)
RESEARCH FUNDING 114,560 48,262 229,354 75,783
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Net operating expense (3,555,151) (4,294,704) (5,955,940) (9,460,860)
OTHER INCOME (EXPENSE) (10,289) (4,381) (24,964) 100,318
------------ ------------- ------------ -------------
NET LOSS (3,565,440) (4,299,085) (5,980,904) (9,360,542)
PREFERRED STOCK DIVIDEND (37,500) (94,287) (37,500) (224,311)
AMORTIZATION OF PREFERRED
STOCK DISCOUNT (337,037) (362,963)
------------ ------------- ------------ -------------
LOSS FOR COMMON STOCK $ (3,939,977) $ (4,393,372) $ (6,381,367) $ (9,584,853)
============ ============= ============ =============
LOSS PER COMMON SHARE $ (0.55) $ (0.37) $ (0.92) $ (0.83)
WEIGHTED AVERAGE SHARES
OUTSTANDING 7,159,373 11,755,569 6,912,675 11,545,504
See notes to financial statements
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TERA COMPUTER COMPANY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1998 1997 1998
------------ ------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $ (3,565,440) $ (4,299,085) $ (5,980,904) $ (9,360,542)
Net cash used by operating activities (3,798,974) (3,179,759) (6,500,550) (9,931,026)
INVESTING ACTIVITIES:
Net cash used by investing activities (108,780) (705,073) (265,370) (983,202)
FINANCING ACTIVITIES:
Net cash provided by financing activities 10,688,901 5,924,763 15,701,904 6,534,842
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 6,781,147 2,039,931 8,935,984 (4,379,386)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,083,597 6,909,798 928,760 13,329,115
------------ ------------ ------------ ------------
End of period $ 9,864,744 $ 8,949,729 $ 9,864,744 $ 8,949,729
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 20,662 $ 40,131 $ 34,814 $ 73,480
============ ============ ============ ============
See notes to financial statements
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TERA COMPUTER COMPANY
NOTES TO FINANCIAL STATEMENTS
(unaudited)
BASIS OF PRESENTATION
The accompanying balance sheets and related interim statements of
operations and cash flows have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-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. In the opinion
of management, all adjustments considered necessary for fair presentation have
been included. Interim results are not necessarily indicative of results for a
full year. The information included in this Form 10-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, 1996 and 1997, and the period from December 7, 1987
through December 31, 1997, contained in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
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.
CHANGES IN CAPITAL
On June 30, 1998, the Company issued 6,000 shares of Series B
Convertible Preferred Stock (the "Series B Stock") for total proceeds of
$5,700,000. Holders of Series B Stock are entitled to receive cumulative
dividends at the rate of $50.00 per share of the Series B Stock, each of which
has a stated value of $1,000. Each share of the Series B Stock is convertible at
the option of the holder at a conversion price equal to the lesser of $14.52 or
the lowest sale (regular way) price during the five consecutive trading days
ending one day prior to the date on which a notice of conversion is delivered to
the Company, with the conversion price subject to adjustment in certain
conditions (all as set forth in the Statement of Rights and Preferences for the
Series B Stock). In addition, the Company issued five year warrants to purchase
100,000 shares of Common Stock with an exercise price of $15.00 per share,
subject to adjustment in certain conditions. The warrants have been valued at
$535,000 using the Black-Scholes method. The Company has the option to sell up
to another 6,000 shares of Series B Stock and warrants to purchase 100,000
shares of Common Stock on similar terms (the "Series B Option.") This Option is
exercisable from September 30, 1998 through December 31, 1998, as long as
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the Company satisfies certain obligations, including maintaining a shareholders'
equity of at least $5,000,000. See Item 2 under Part II, below, for additional
information regarding the Series B Stock.
TRANSITION FROM DEVELOPMENT STAGE ENTERPRISE
Commencing with the sale of a two-processor MTA system to the San Diego
Supercomputer Center ("SDSC") in April, 1998, the Company is no longer
classified as a "development stage enterprise."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in this Item 2 includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act, as amended, and is
subject to the safe harbor created by those sections. For a discussion of Risk
Factors that could affect the Company's future performance, please see "Business
- - - Risk Factors" contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
OVERVIEW
The Company had an accumulated net loss from operations of
approximately $52.2 million as of June 30, 1998. The Company's funding to date
has been primarily from the sale of equity, approximately $64.8 million in
proceeds, and from Defense Advanced Research Projects Agency ("DARPA") research
funding, approximately $19.1 million. The Company recorded its first significant
revenue, $ 1.5 million, in the second quarter of 1998.
The Company has experienced net losses in each year of operations and
expects to incur further substantial losses as it commences regular production,
and possibly thereafter. In April 1998 the Company recognized its first revenue
from system sales with its delivery of a two-processor MTA system to SDSC;
through June 30, 1998, the Company had not generated any earnings. The Company
plans to upgrade the SDSC system in stages to larger configurations as it
receives production printed circuit boards, integrated circuits and other
components that are integrated into a commercially acceptable system. See
"Business - Risk Factors - Development Status of the MTA System" and " -
Manufacturing Risks; Reliance On And Capacity Of Third-Party Sole Source
Suppliers" and "Business - Strategy" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
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RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Revenue. The Company recorded revenue in the first six months of 1998
of approximately $1.5 million, all but $21,000 of which was recognized in the
second quarter. Of these funds, $1.2 million was recognized upon the sale of a
two-processor MTA system to SDSC and $303,000 was recognized pursuant to a
subcontract with SDSC to evaluate multithreaded architecture for certain defense
applications. The Company expects to complete this subcontract in 1998 for an
additional $703,000, of which the Company's portion, after payments to
subcontractors, will be approximately $314,000. The Company may obtain
additional revenues in 1998 from the sale of larger configurations to SDSC
and from other sales to potential customers, although it currently has no
contracts or purchase orders for such other sales.
Operating Expenses. Cost of revenue for the first six months of 1998
was $1.4 million; costs for the initial MTA system sale were higher as a
percentage of sales due to favorable pricing terms provided to SDSC and the
inclusion of costs of system infrastructure to support a full 16-processor MTA
system.
Research and development expenses include costs associated with the
development of the MTA system, including personnel expense, depreciation and
lease expense on facilities and equipment, nonrecurring engineering, software
and hardware costs and preproduction expenses. Research and development expenses
for the three and six months ended June 30, 1998 were $3.6 million and $7.9
million, respectively, representing approximately 83% of net operating expenses
in each period, compared to $3.1 million and $5.1 million for the same
respective periods in 1997, which represented approximately 86% of such periods'
net operating expenses. During the second quarter, approximately $1.2 million of
the $3.6 million were related to the completion and testing of the initial MTA
system, preproduction costs and expense related to inventory revaluation and
obsolescence due to redesign and optimization of components in inventory,
compared to $1.3 million for such items in the second quarter of 1997. The
corresponding figures for the first six months of 1998 were $3.1 million
compared to $1.8 million for the first six months of 1997; this difference
primarily arose from inventory obsolescence recognized in the first quarter of
1998. Although non-recurring hardware engineering expenses for the current MTA
implementation should continue to decrease, research and development expenses
will continue to be a major expense as the Company devotes greater effort to
future system development.
Marketing and sales expenses for the three and six months ended June
30, 1998 were $374,000 and $784,000, respectively, compared to $208,000 and
$373,000 for the same periods in 1997, representing an increase of 80% over the
second quarter of 1997 and 110% over the first six month period of 1997. General
and administrative expenses for the first three and six months of 1998 were
$505,000 and $980,000, respectively, compared to $393,000 and $700,000 for the
same periods in 1997,
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representing an increase of 28% in the second quarter and 40% for the six month
period. The increase in marketing and sales expenses was due to additional sales
and applications staff, increased marketing efforts and higher wages, while the
increase in general and administrative expenses was due largely to additional
staff, operating costs associated with being a publicly owned company and higher
wages. These expenses are expected to increase commensurate with any growth in
the Company's operations.
Research Funding. The Company currently is billing DARPA under a
research contract awarded in September 1995. Billings under this contract were
approximately $76,000 in the first six months of 1998, with $48,000 billed in
the second quarter, with $388,000 left to be billed under this contract.
Other Income (Expense). Other income increased to $100,000 in the first
six months of 1998, largely due to interest received on the Company's increased
cash balances. Other expense in the second quarter of 1998, however, was about
$4,000, as compared to $10,000 for the second quarter of 1997.
Taxes. There was no provision for federal income taxes in any period as
the Company has continued to incur net operating losses.
Preferred Stock. The Company recorded a $224,000 charge for dividends
on the Company's Series A Convertible Preferred Stock in the first six months of
1998, all of which has been paid by the issuance of 18,964 shares of the
Company's Common Stock.
Year 2000. Although it has not completed a formal inquiry of its
suppliers and customers, the Company does not expect that issues relating to the
Year 2000 problem will be significant to its financial condition or results of
operations. No significant modifications to its internal computer system are
necessary to address Year 2000 issues, and it does not anticipate that any
issues affecting its suppliers and customers will substantially affect the
Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through June 30, 1998, the Company's principal
sources of liquidity have been net proceeds from the sale of equity totaling
$64.8 million, DARPA research funding of approximately $19.1 million and sales
receipts of approximately $1.3 million . At June 30, 1998, the Company had $8.9
million in cash, $483,000 in receivables and no bank line of credit.
During the remainder of 1998, the Company's working capital needs will
depend primarily upon its personnel costs and the cost of inventory, as well as
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manufacturing startup costs and research and development expenses related to
future implementations of the MTA system. In the first six months of 1998,
overall wages and benefits increased by about 52% over the first six months of
1997 to approximately $4.4 million, reflecting both additional personnel (which
increased from 65 to 100 from the end of June 1997 to the end of June 1998) and
higher wages, while total expenditures related to inventory increased to
approximately $5.1 million in the first six months of 1998, a $3.5 million
increase over the first six months of 1997. Personnel costs are expected to
increase further as additional employees are added; the level of inventory
expenditures will depend upon further purchase orders. The Company has
experienced delays in the receipt of particular components of the MTA system
that have increased the need for working capital, and the Company could
experience significant additional delays in the manufacturing process that could
further substantially increase the Company's need for working capital.
Although the Company believes its current cash resources, together with
funds anticipated from future sales of MTA systems and the Series B Option, to
be sufficient to continue anticipated levels of business operations through 1998
and the first half of 1999, the Company may require further additional working
capital if sales of the MTA system, including additional deliveries to SDSC, are
substantially delayed. The Company may raise additional capital in 1998, through
equity or debt financing transactions, even if revenues are received from the
sale of MTA systems when anticipated, in order to enhance its financial position
for future operations. There can be no assurance that any additional financing
will be available on acceptable terms when needed or that such financings will
not be dilutive to the Company's shareholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inapplicable.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Board of Directors authorized the issuance of 12,000 shares of
Series B Convertible Preferred Stock (the "Series B Stock"), of which 6,000
shares have been issued and are outstanding. The Series B Stock has certain
rights, privileges and preferences that limit and qualify the rights of the
Common Stock of the Company. Holders of the Series B Stock are entitled to
receive cumulative dividends at the rate of $50.00 per annum per share of the
Series B Stock, which are payable in cash or Common Stock, at the Company's
option, quarterly on January 1, April 1, July 1 and October 1 of each year,
commencing October 1, 1998. The Statement of Rights and Preferences of the
Series B Stock provides that no dividends or other distributions,
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other than dividends payable solely in shares of Common Stock or other capital
stock of the Company, shall be paid or set apart on any share of Common Stock,
that no purchase, redemption or acquisition shall be made by the Company of any
shares of Common Stock unless and until all accrued and unpaid dividends on the
Series B Stock and interest on dividends in arrears shall have been paid or
declared and set apart for payment, and that the Company may not make any tender
offer or exchange offer for outstanding shares of its Common Stock unless a
similar offer is made with respect to the Series B Stock. The Series B Stock is
redeemable at the option of the Company; in certain situations, primarily in
certain defaults by the Company, the Company may be required to redeem certain
shares of the Series B Stock and, in other circumstances, the Series B Stock is
redeemable at the option of holders. Further, holders of the Series B Stock have
certain preferential distribution rights in the event of any liquidation,
dissolution or winding-up of the Company. Although holders of the Series B Stock
have no voting rights, the Company must obtain the consent of the holders of
record of a majority of the outstanding shares of Series B Stock in order to
authorize or issue any shares of any new class of stock having preferences
greater than or equal to the Series B Stock as to dividends or assets upon
liquidation, to change the designation of the rights, preferences or privileges
of the Series B Stock so as to materially and adversely affect the Series B
Stock, and to waive any preference, right or privilege of the Series B Stock.
The Series B Stock ranks pari passu as to dividend and liquidation preferences
with the Company's Series A Convertible Preferred Stock.
On June 30, 1998, the Company raised $5,700,000 in cash through the
negotiated private sale of 6,000 shares of the Series B Stock and 100,000 five
year warrants to purchase 100,000 shares of Common Stock to two accredited
investors, Advantage Fund II Ltd., and Genesee Fund Limited - Portfolio B.
Further information regarding the Series B Stock and the warrants is contained
under "Changes in Capital" in the Notes to Financial Statements, above. There
were no sales agents or underwriters involved in this placement. These sales
were exempt from the registration provisions of the Securities Act of 1933
pursuant to Section 4(2) thereof, based on the nature of the offering and status
of the offerees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 6, 1998.
Daniel J. Evans and David N. Cutler were each elected as directors for
three-year terms expiring in 2001, each receiving at least 10,470,373 votes (or
99.7%) of the votes cast. Kenneth W. Kennedy, James E. Rottsolk, Burton J. Smith
and John W. Titcomb, Jr. continue to serve as directors.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Statement of Rights and Preferences of the Series B
Convertible Preferred Stock of the Registrant, as filed with
the Secretary of State of the State of Washington on June 30,
1998*
11. Computation of Per Share Earnings (Loss)
27. Financial Data Schedule
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* Incorporated by reference to the Company's Form S-3 Registration
Statement, Registration No. 333-60167, as filed on July 30, 1998.
(b) Reports on Form 8-K
None
ITEMS 1, 3, AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERA COMPUTER COMPANY
August 14, 1998 By: /s/ JAMES E. ROTTSOLK
James E. Rottsolk
Chief Executive Officer
/s/ KENNETH W. JOHNSON
Kenneth W. Johnson
Chief Financial Officer
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