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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] 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, WASHINGTON 98104-2860
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 701-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK , $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 26, 1999 was approximately $89,982,000, based upon the
last sale price of $6.6875 reported for such date on the Nasdaq National Market
System.
As of March 26, 1999, there were 15,894,301 shares of Common Stock issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement to be delivered to shareholders in connection
with the Registrant's Annual Meeting of Shareholders to be held on May 5, 1999
are incorporated by reference into Part III.
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TERA COMPUTER COMPANY
FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
INDEX
Page
----
PART I
Item 1. Business 3
Item 2. Properties 25
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item E.O. Executive Officers of the Company 27
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters 29
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the Company 41
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners
and Management 41
Item 13. Certain Relationships and Related Transactions 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 42
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PART I
ITEM 1. BUSINESS
INTRODUCTION
The Company designs, develops and markets high performance general purpose
parallel computer systems. Tera's Multithreaded Architecture System ("MTA")
system addresses not only a wide range of scientific and engineering
applications such as simulation and visualization of complex mechanical and
biochemical systems, but also emerging commercial applications such as
computer-aided design and visualization, information-on-demand and database
mining. The Company believes that its MTA system architecture represents a
significant breakthrough in high performance computing that will enable the
Company to offer systems with several times the price/performance of currently
available commercial high performance computer systems. Typical MTA system
configurations are expected to sell for between $5 million and $40 million. The
Company installed a two-processor MTA system at the San Diego Supercomputer
Center in April 1998 and recognized its first revenue from product sales. In
December 1998, this system was upgraded to a four-processor system which was
accepted by the San Diego Supercomputer Center in January 1999. Following
receipt of purchase orders, the Company plans to upgrade this system in stages
to larger configurations as it receives production printed circuit boards,
integrated circuits and other components from its vendors which are then
integrated into a commercially acceptable system. See "--Risk Factors - Our
Reliance on Third Party Suppliers Poses Significant Risks."
The Company was incorporated under the laws of the State of Washington in
December 1987. Its principal offices are located at 411 First Avenue South,
Suite 600, Seattle, Washington, 98104-2860, and its telephone number is (206)
701-2000.
HIGH PERFORMANCE COMPUTER INDUSTRY
Historically the need for greater computing power for scientific, engineering
and commercial applications has increased significantly. This need typically has
been met by high performance computer systems for scientific and engineering
applications and by mainframes for commercial applications, with millions of
dollars invested per system.
For scientific applications, the increased need for computing power has been
driven by an increased focus on highly challenging basic and applied scientific
problems that can be met only through numerically intensive computation. For
engineering applications, high performance computers provide a method of
decreasing the time to market through the use of computational modeling to
develop and verify engineering solutions across a broad range of industries. The
U.S. Government has recognized that the continued development and use of high
performance computer systems for these technical applications is of critical
importance to the economic competitiveness of the United States.
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For commercial applications, pressures resulting from global competition,
reduced cost of communication and the proliferation of data from the enormous
number of workstations and personal computers also have increased the need for
high performance computing. For competitive reasons, many large commercial users
have concluded that enterprise-wide computing applications require immediate
interactive processing of available data. In order to process data in such a
manner, users must move away from batch processing but cannot do so because of
the limited computational capacities of their existing systems.
Computer architects have taken a variety of approaches in their efforts to
achieve higher levels of performance. Traditionally, high performance computer
systems use a few of the fastest available single processors. Improvements in
performance have been achieved through faster switching times and greater
densities and, in the case of numerically intensive applications, by employing
vector processing. This approach, employed most notably by Cray Research
Corporation (prior to its acquisition by Silicon Graphics, Inc) and NEC
Corporation, repeatedly applies the same operation to each of a sequence of data
elements. Vector multiprocessing is highly effective for many scientific and
engineering applications, but not for most commercial applications. Moreover,
these systems are limited in size and have a high cost of computation.
A number of computer companies, including IBM, Silicon Graphics, Inc.,
Hitachi, Ltd., Fujitsu, Ltd., Sun Microsystems, Inc. and Hewlett-Packard
Corporation, have turned to massively parallel processing as a way to achieve
greater computational power and improved price/performance. Massively parallel
processing enables large numbers of processors to act either concurrently on
multiple tasks, or in concert on a single computationally-intensive task. In
these systems, each processor is directly connected to its own private memory
and the programmer must manage the movement of data among memory units. As a
result, computer systems relying on this architecture are difficult to program
and have limited applicability.
While some users have developed scientific and engineering software for
certain applications on massively parallel systems, it has not been practical
for them to migrate a large number of third-party software applications to these
systems. The Company believes that the absence of an easy-to-use software
development environment has inhibited third-party application programs, which in
turn has severely restricted market acceptance of massively parallel processing
systems.
Users of high performance computer systems therefore have limited choices.
Mainframes and vector multiprocessing systems permit a conventional programming
environment, but are subject to inherent size limitations and are limited in the
number of processors used, while massively parallel processing systems are
difficult or impractical to program and perform poorly for most applications.
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THE TERA SOLUTION
The Company believes that its MTA system architecture represents a
significant breakthrough in high performance computing. The key to this
breakthrough is its scalable shared memory, which the Company believes will
enable the MTA system to overcome limitations of currently available commercial
high performance computer systems. The MTA system is designed to have all of the
following key attributes to serve the evolving needs of the high performance
computer market effectively: (i) sustainable high speed, (ii) broad
applicability, (iii) ease of software programmability and portability, (iv)
scalability, (v) balanced input/output capability and (vi) a future product
migration path. See "--Technology " and "--Products."
Scalable shared memory provides every processor with equal access to every
memory location. This greatly simplifies programming because it eliminates
concerns about the layout of data in memory. It also provides a very flexible
and efficient approach to parallelism since any available processor can operate
on any data no matter where the data are located. Applications with irregular or
unpredictable internal data flow patterns are facilitated by this capability.
The historical drawback of shared memory has been its slowness due to some
processors being physically distant from some areas of memory and the likelihood
of conflicts when two or more processors attempt to access the same memory
location. Both factors increase the latency, or delay, experienced when a
processor attempts to access a memory location. The MTA system's architecture is
designed to be latency tolerant: a processor never wastes time waiting to access
memory. Tera`s design accomplishes this by using a combination of multithreaded
architecture and a high bandwidth interconnection network.
The MTA system software supports and leverages the scalable shared memory
that the architecture provides. Programs are analyzed and parallelism is
extracted automatically, greatly simplifying the implementation of new
applications. In addition, most programs written for Cray Research's vector
multiprocessing systems are automatically translated by Tera's system software
to run at high speed on the MTA system with minimal changes. The Company intends
to further extend its compatibility with competitors' systems to increase the
attractiveness of the MTA system to both potential customers and independent
software vendors ("ISV's").
STRATEGY
Tera's objective is to be the leading provider of high performance computer
systems to the scientific, engineering and emerging commercial markets. Key
elements of the Company's strategy include:
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- Establish and Leverage a Dominant Position in the Very High Performance
Scientific Computer Market.
Initially the Company intends to target the very high performance scientific
computer market. Sales targets in this market include government agencies,
supercomputer centers and research laboratories in the United States and
Western Europe. These users generally are easily identifiable and well
established, possess significant resources, develop their own application
software, and are reliant upon, and are early customers for, innovative high
performance computer systems. The Company's delivery of its MTA system to the
San Diego Supercomputer Center is in an example of its progress in
implementing this strategy.
The Company believes that establishing a dominant position in the very high
performance scientific market should provide it with the necessary foundation
and credibility, financial and otherwise, to attract ISV's to port their
application software to the MTA system. The Company believes that the
availability of such third-party software should enable it to address
effectively the worldwide high performance engineering computer market for
applications such as computational fluid dynamics and molecular modeling. For
example, the Company is porting LS-DYNA, a car-crash simulation code owned by
Livermore Software Technology Corporation; Gaussian, a leading molecular
modeling code owned by Gaussian, Inc., and, MSC/NASTRAN, a leading structural
analysis code used in a wide variety of engineering applications, which is
owned by MacNeal-Schwendler Corporation.
In addition, the Company intends to develop and support, both internally and
in cooperation with ISV's, application software to enable the Company to
address certain segments of the emerging commercial computer market. See
"--Risk Factors--Significant Sales Depends Upon the Porting of Third Party
Application Software."
- Establish and Leverage Strategic Relationships.
The Company is establishing strategic relationships with leading participants
in various segments of the high performance computer market. The Company
believes these relationships should enable it to take advantage of the
superior resources, technological capabilities and proprietary positions of
these entities in advancing Tera's position in the high performance computer
market.
Over its history, the Company has received approximately $19.3 million from
the Department of Defense Advanced Research Projects Agency ("DARPA") to
assist in funding the development of the MTA system. Pursuant to its
agreements with DARPA, the Company has exclusive commercial rights to the
technical data and computer software developed with this funding. The
Company's obligation under this funding has been to use its best efforts to
develop the technology, and it is not subject to any penalty
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or repayment provision if it were unsuccessful. The Company currently has one
contract with DARPA to develop certain components of its next generation MTA
system, and is also engaged as a subcontractor to the University of
California, San Diego, which is the prime contractor under a contract with
DARPA to evaluate certain defense-related software programs on multi-threaded
architecture. See "--Risk Factors--Continued Government Funding is
Uncertain."
The Company intends to emphasize the development of relationships with large
scale high performance computer users, such as Fortune 200 companies and
major financial institutions, in tandem with the ISV's supplying software to
these organizations to port that software to the MTA system.
TECHNOLOGY
The MTA system is designed to incorporate the following technological
characteristics:
Sustained High Speed. The MTA system's high speed is due to a combination of a
high clock rate and multithreaded scalar pipelines. Presently, each processor
has an execution rate of about 800 million operations per second with peak
64-bit floating point performance also about 800 million floating point
operations per second. Each input/output processor has a peak transfer rate of
up to four hundred million bytes per second. Sustained performance is expected
to be up to 50% of these figures.
Scalability. The MTA system is designed to use a large number of processors in a
single system effectively. The current design supports systems of up to 256
processors, although at this time the Company does not plan on building a system
in the current gallium arsenide or CMOS implementations larger than 64
processors. The next generation MTA system is expected to accommodate several
thousand processors.
Multithreaded Architecture. The MTA system architecture supports up to 128
separate threads of execution per processor (over 8,000 threads in a
64-processor system). When a processor dispatches an instruction for the current
thread, it instantly switches to the next thread which is ready to continue. The
hardware handles this switching automatically, with no intervening machine
cycles, resulting in zero switching overhead.
Threads may come from totally separate programs or from a single program. Tera's
compilers automatically extract parallelism from software programs and create
multiple threads to maximize performance. The MTA operating system is designed
to execute multiple user programs simultaneously, even within a single
processor. The input/output processors are latency tolerant and address data
anywhere in the system.
High Bandwidth Interconnection Network. All hardware resources in the MTA
system, namely computational processors, input/output processors and memory
units, are
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interconnected via a three-dimensional pipelined network. This network is a key
factor in the ability of MTA systems to scale up to thousands of processors
without compromising system performance or programmability.
Compilers and Runtime System. The MTA system software exploits the speed
potential of the hardware without burdening the programmer with the details of
how this is accomplished. The MTA system's parallelizing compilers analyze
programs written in conventional languages, such as FORTRAN, C or C++, and
determine the parts of a program's computations that can be executed
simultaneously. The compiler then generates the machine instructions to create
separate execution threads for these parallel parts. Tera's runtime system, in
conjunction with its compilers, automatically distributes and balances the
threads in a parallel program to the available processors, and adapts to
changing parallelism as the application runs by acquiring and releasing
processors. The Tera debugger allows programmers to find mistakes in their
applications by displaying and monitoring the instructions and variables in an
application program. The debugger is tightly integrated with the compiler and
runtime system to allow users to debug parallel programs.
Software Portability. Tera's compilers are designed to compile most programs
written for Cray Research's vector multiprocessing systems into parallel
programs automatically. Typical scientific applications contain between 10,000
and 1,000,000 lines of source code. It can take years to rewrite a program to
run on new hardware, and additional years of testing and use before the code is
considered trustworthy enough for actual production work. This portability
problem is a major deterrent to the acceptance of any new computer system. To
overcome this problem, Tera has designed its language compilers and libraries to
be compatible with those from Cray Research, with the goal that most Cray
Research applications can be ready for production use in a few weeks to a few
months.
Operating System. The dominant operating system in high performance computing is
UNIX. Tera's operating system, MTX, a fully distributed and symmetric
implementation of UNIX, provides high performance network connections and a
highly concurrent file system. Both batch processing and interactive processing
are supported. Tera has delivered MTX to SDSC, and is integrating more standard
UNIX utilities and high performance I/O peripherals and increasing system
stability. The Company anticipates that MTX will become commercially stable with
sufficient features for the commercial market prior to the end of 1999.
PRODUCTS
The Company has designed a number of configurations of the MTA system. Each
system will be constructed from resource modules with the model number
indicating the number of these resource modules, e.g., the MTA-16 model has 16
resource modules. Each resource module contains the following resources:
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- a computational processor ("CP")
- an input/output processor ("IOP"); and
- two memory units.
Each resource is individually connected to a separate routing node in the MTA
system's interconnection network. Each resource connection is designed to be
capable of supporting data transfers to and from memory at full processor rate
in both directions, as are all of the connections between the network routing
nodes themselves.
The Company built a prototype from production components in late 1996, which
was used to verify and debug mechanical components and assembly procedures. In
1997, the Company began construction of its initial production MTA system. In
December 1997, the Company installed a single processor MTA system at SDSC. In
April 1998, the Company installed a two-processor system at SDSC, which it
upgraded to a four-processor system in December 1998 and which was accepted by
SDSC in January 1999. The Company plans to upgrade this system in stages to
larger configurations as it receives production printed circuit boards.
integrated circuits and other components from its vendors which are then
integrated into a commercially acceptable system, assuming receipt of additional
purchase orders.
The Company is working on successive product implementations and generations.
The Company is currently engaged in a project to move from gallium arsenide
integrated circuits to CMOS (complementary metal-oxide silicon) integrated
circuits, which will enable the Company to improve system performance and
price/performance and lower the cost of entry level systems. The Company is also
working on network configurations for very large system sizes. These future
products will be designed to enhance the Company's technological position while
potentially broadening its market acceptance. The Company believes that denser
integrated circuit technology should enable the scaling up of systems to
thousands of processors while preserving its uniform shared memory programming
model. Finally, the Company may take advantage of the ability of the MTA system
to scale down to compete with workstation and other microprocessor-based
products either directly or through a relationship with a current participant in
that market. See "--Risk Factors -- "Completing the Development of the MTA
System Poses Ongoing Technical Challenges" and "--CMOS Implementation Will
Require Significant Resources and May Not Be Successful."
MARKETS AND APPLICATIONS
The MTA system has been designed for prospective customers with demanding
science, engineering and commercial applications. Because of its general purpose
characteristics, the Company believes that the MTA system may be employed across
a broad range of mainstream and emerging high performance computer applications,
and should find early acceptance in industries with key "time-to-market" issues.
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While funding for certain defense programs has decreased in recent years,
total U.S. government expenditures for high performance computer systems have
been augmented by funding under various high performance computing programs. In
addition, important areas of civilian research, such as energy and environmental
studies, climate modeling and toxic mitigation, are receiving federal funding,
and the formerly defense-oriented national research laboratories are in many
cases reorganizing for non-military projects. See "--Risk Factors--Continued
Government Funding is Uncertain."
Government agencies, supercomputer centers and research laboratories are
particularly attractive prospective customers for Tera because they generally
have a higher tolerance for risks inherent in a complex, innovative product.
This market has a limited number of customers that are well known to each other
and to their existing and potential suppliers, including Tera. The Company
maintains relationships with many of the management and staff of these potential
customers. Addressing this market initially will help the Company avoid the
costs of assembling a large sales organization and developing a broad range of
application software. With a sales cycle for its intended products of two years
or longer, the Company will add sales, service, training and support personnel
as needs arise.
As third-party application software becomes available on the MTA system, the
Company has begun to increase its marketing efforts to the high performance
engineering and commercial computer market, where it believes major growth
opportunities may exist. This market is more risk-averse than its initial market
and the Company does not expect significant sales in this market until the MTA
system is well established.
Scientific and Engineering Applications. The Company expects that its
prospective customers running scientific and engineering applications will
purchase MTA systems largely for numerically intensive computations and will
increasingly make use of the MTA system's input/output capabilities to handle
the large amounts of data associated with such computations. The Company's
prospective customers include government agencies, supercomputer centers and
research laboratories that are expected to use the MTA system for a variety of
applications, including basic research in the fields of biology, chemistry,
environmental science, materials science and physics.
Prospective customers within the United States government include such
organizations as the National Science Foundation, the Department of Defense, the
National Security Agency, the Department of Energy, the National Aeronautics and
Space Administration and the National Institutes of Health. These prospective
customers have a number of computationally-intensive applications, including the
following:
- National security - Human genome sequencing
- Severe storm modeling - Military battlefield simulation
- Earth observation - Groundwater pollutant transport
- Climate modeling - Computational biology
- Computational fluid dynamics - Computational chemistry
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The Company intends to market its MTA systems to a wide range of prospective
industrial customers with major computationally-intensive, technical computing
requirements, including the following:
- Automobile crash simulation - Petroleum reservoir modeling
- Structural analysis - Electromagnetic simulation
- Nuclear reactor design - Multidisciplinary optimization
- Drug and chemical design - Animations, computer graphics
Emerging Commercial Applications. The Company expects that prospective
commercial customers may purchase MTA systems either to implement strategic new
applications or to improve their processing capabilities for traditional
commercial applications. These applications include:
- - Interactive Simulation and Visualization -- allowing users the ability to
design and develop products such as automobiles, aircraft and buildings.
- - Information-on-Demand -- the management, storage and distribution of
multimedia data for instantaneous access by thousands of interactive,
simultaneous users.
- - Database Mining -- access and examination of databases to identify
significant data patterns relevant to consumer preferences, insurance claims
and fraud.
RESEARCH AND DEVELOPMENT
The Company's primary research and development activities have included the
design of the hardware components and software required for its MTA system. The
Company's research and development expenses were approximately $10.5 million in
1996, $13.5 million in 1997, and $16.4 million in 1998. The Company believes
that its future performance will depend in large part on its ability to design,
develop, contract for the manufacture of, and market for, its MTA system.
Additionally, the Company must develop ongoing enhancements to its MTA system
and its MTX operating system and develop new product generations. Consequently,
the Company will be required to continue to devote a substantial portion of its
resources to research and development activities.
MANUFACTURING
While the Company has designed all of the MTA system hardware components, it
subcontracts the manufacture of these components, including integrated circuits,
printed circuit boards, flex circuits and power supplies, on a sole or limited
source basis to third-party suppliers. The Company's strategy is to avoid the
large capital commitment and overhead associated with establishing manufacturing
facilities and to maintain the flexibility
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to adopt new technologies if and when they become available without the risk of
equipment obsolescence. The Company performs final system integration and
testing, and designs and maintains its MTA system software internally.
Hardware. The Company's general strategy is to capitalize on state-of-the-art
commercial technology available from third-party suppliers. The Company
contracts with Vitesse Semiconductor Corporation and TriQuint Semiconductor,
Inc., for the supply of gallium arsenide wafers and with a limited number of
vendors for various printed circuit boards, flex circuits, power supplies, and
test and packaging services and purchases other components and services on an
as-needed basis. The Company has contracted with Taiwan Semiconductor
Manufacturing Company Ltd. as its CMOS foundry. In general, the Company has
designed hardware components using such suppliers' tools and procedures. The
Company has designed at-speed testers to be used for diagnosis and repair both
in assembly and in the field. Component failures are analyzed in cooperation
with the supplier of the component to determine the cause and to take corrective
action. See "--Risk Factors--Our Suppliers May Not Deliver Acceptable Hardware
Components" and "--Our Reliance on Third Party Suppliers Poses Significant
Risks."
Quality Assurance. The MTA system uses the test and simulation programs
developed during product design for both manufacturing testing and field
maintenance. A large amount of built-in test support has been incorporated in
the design of the MTA system to minimize both the time and effort required to
integrate a complete system and the time needed to diagnose and repair it
on-site. Quality assurance is performed at the component, board, modular
subsystem and complete system level. The Company has designed the MTA system to
incorporate a high degree of manufacturability and serviceability, including
completely scannable logic and lithographic interconnection techniques.
Software. Most of the MTA system software has been designed, and all of it
will be maintained, by the Company. Although the Company's MTX operating system
is based on UNIX, the kernel and the file system were implemented by the Company
to allow much greater parallelism. UNIX utilities are being ported to the MTA
system. The Company has licensed certain mathematical library routines from IBM.
COMPETITION
The high performance computer market is intensely competitive. The barriers
to entry and the cost of remaining competitive are high. The Company's
competitors can be divided into two general categories: established companies
that are well-known in the high performance computer market and new entrants
capitalizing on developments in massively parallel processing and increased
computer performance through clusters or networks of workstations.
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The high performance computer market has been dominated by Cray Research (now
owned by Silicon Graphics, Inc.). Other participants in the market include IBM
and Japanese companies such as Fujitsu, Ltd., Hitachi, Ltd., and NEC
Corporation. To date, the Japanese suppliers, as a group, have been largely
unsuccessful in the U.S. high performance computer market but have been enjoying
increasing success in foreign markets. Tera competes with these companies by
offering MTA systems with superior performance, together with software
compatibility with the installed Cray computer base. See "--Technology--Software
Portability." To the extent that all of these companies continue to use vector
multiprocessing systems, they remain subject to inherent limitations of vector
multiprocessing system performance and on system scalability. See "--High
Performance Computer Industry." Each of these competitors, however, has broader
product lines and substantially greater engineering, manufacturing, marketing
and financial resources than the Company.
A number of companies, including IBM, Silicon Graphics, Inc., Hitachi, Ltd.,
Fujitsu, Ltd., Sun Microsystems, Inc., Hewlett-Packard Corporation and Compaq
Computer Corporation, have developed or plan to develop massively parallel
systems for the high performance market. Massively parallel systems have been
limited in applicability and difficult to program, although a breakthrough in
architecture or software technology could change this situation. See "--High
Performance Computer Industry" and "--Risk Factors--Competition in the High
Performance Computer Market is Intense."
INTELLECTUAL PROPERTY. The Company attempts to protect its trade secrets and
other proprietary rights through formal agreements with its employees,
customers, suppliers and consultants, and through patent protection. Although
the Company intends to protect its rights vigorously, there can be no assurance
that its contractual and other security arrangements will be successful. There
can be no assurance that such arrangements will not be terminated or that the
Company will be able to enter into similar arrangements on favorable terms if
required in the future. Although the Company has not been a party to any
material intellectual property litigation, third parties may assert proprietary
rights claims covering certain of the Company's products and technologies. See
"--Risk Factors--We May Not Be Able To Protect Our Proprietary Information and
Rights Adequately."
Due to the abundance of prior art in the computer sciences, Tera does not
expect to acquire broad-based patent protection of its MTA system architecture,
although the Company will attempt to obtain patent protection for significant
aspects of its MTA system architecture. The Company has one software patent
covering certain aspects of compiler optimization, and in 1998 the Company filed
another 15 patent applications covering a variety of hardware and software
inventions.
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EMPLOYEES
As of December 31, 1998, the Company employed 109 employees (up from 84 at
the end of 1997) on a full-time basis, of whom 70 were in engineering, 19 were
in manufacturing, nine were in sales and marketing, and 11 were in
administration. The Company also employed nine individuals on a part-time or
temporary basis or as interns. The Company has no collective bargaining
agreement with its employees. The Company has never experienced a work stoppage
and believes that its employee relations are excellent.
RISK FACTORS
The following factors should be considered in evaluating our business,
operations and prospects:
WE HAVE NOT COMPLETED DEVELOPMENT OF A COMMERCIALLY ACCEPTABLE MTA SYSTEM. The
development of a new very high performance computer system is a lengthy and
technically challenging process and requires a significant investment of capital
and other resources. Several companies in this market 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, and have not yet built the MTA
system to meet stringent commercial reliability standards. To date, we have sold
one MTA system to the National Science Foundation, which is installed at the San
Diego Supercomputer Center, and have no purchase orders for additional systems.
We may not be able to meet all of the technical challenges required to integrate
and complete MTA systems that satisfy internal performance specifications and
that are commercially acceptable.
COMPLETING THE DEVELOPMENT OF THE MTA SYSTEM POSES ONGOING TECHNICAL CHALLENGES.
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 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 MTX 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. Additional delays in completing
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the various hardware components or software, or in integrating the full system,
would materially and adversely affect our business and results of operations.
OUR SUPPLIERS MAY NOT DELIVER ACCEPTABLE HARDWARE COMPONENTS. The manufacture of
components for the MTA system is a difficult and complex process, and few
companies can meet our design requirements. 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, there
can be no assurance that they will be able to manufacture the components to our
design and quality specifications. Future manufacturing difficulties or
limitations of the suppliers could result in:
- - 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.
WE WILL NEED ADDITIONAL CAPITAL TO CONTINUE 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 at least $12 million in 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; we have raised approximately $7 million from financings in the
first quarter of 1999. If we do not receive revenues from system sales when
anticipated, then we will need additional capital. The Company is seeking a
lease line of credit for capital goods for up to $1.5 million. Even if we raise
all $12 million, receive revenue from product sales, and obtain the lease line
of credit, we may raise additional equity 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
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to significantly reduce our current operations, including inventory purchases,
research and design expenditures and numbers of employees.
WE HAVE HAD LIMITED REVENUES AND NO EARNINGS; THIS MAY CONTINUE. We have
experienced net losses in each year of our operations, and had an accumulated
net loss of approximately $62.6 million as of December 31, 1998. We incurred net
losses of $12.1 million in 1996, $15.8 million in 1997, and $19.8 million in
1998. 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
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;
- - the MTA system model or models sold; and
- - our expense levels and manufacturing costs.
There can be no assurance 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.
OUR RELIANCE ON THIRD PARTY SUPPLIERS POSES SIGNIFICANT RISKS. 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 CMOS
implementation. We are exposed to substantial risks because of our reliance on
these and other limited or sole source suppliers. For example:
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- - 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;
- - if we were ever unable to locate a supplier for a component, 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
- - 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.
CMOS IMPLEMENTATION 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 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 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. Sale 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 December 31, 1998,
we had outstanding:
- - 14,235,085 shares of common stock, of which 800,000 shares have certain
"adjustment rights" that may require us to issue additional shares;
- - 6,000 shares of Series B Convertible Preferred Stock convertible into an
indeterminate number of shares of common stock; and
- - privately placed warrants to purchase another 1,072,936 shares of common
stock.
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Almost all of our outstanding shares of common stock may be sold without
substantial restrictions. In addition, as of December 31,1998, we had
outstanding options under our option plans to purchase an aggregate of 2,583,036
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 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 $6,000,000 of Series B Convertible Preferred Stock outstanding
as of December 31, 1998 (excluding any issuance of common stock in payment of 5%
per annum accrued dividends on the Series B Convertible Preferred Stock) is
illustrated below:
Conversion Number of Shares of
Price Common Stock Issuable
- ---------- ---------------------
$ 10.00 600,000
$ 8.00 750,000
$ 6.00 1,000,000
$ 4.00 1,500,000
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 March 8, 1999,
$285,000 of the Series B Convertible Preferred Stock had been converted into an
aggregate of 50,716 shares of common stock.
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 (or to their permitted assigns) 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
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holders that the first measurement date would be on February 22, 1999, as of
which 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 below:
Market Price
of Number of Additional Shares
Common Stock of Common Stock Issuable
- ------------ --------------------------
$12.00+ - 0 -
$10.00 80,000
$ 8.00 200,000
$ 6.00 478,048
$ 4.00 1,385,365
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 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:
Market Price Number of Additional
of Shares of Common Stock
Common Stock Issuable
- ---------------- ---------------------
$12.00+ - 0 -
$10.00 - 0 -
$ 8.00 - 0 -
$ 6.00 300,731
$ 4.00 1,219,390
The existence of the Series B Convertible Preferred Stock and the
possibility of the issuance of 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
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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.
EXPECTED SALES PRICES MAY NOT BE REALIZABLE. 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.
CONTINUED GOVERNMENT FUNDING IS UNCERTAIN. 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. The inability of U.S. and foreign government agencies to
procure additional very 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.
SIGNIFICANT SALES DEPENDS UPON THE PORTING OF THIRD-PARTY APPLICATION SOFTWARE.
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 port their software application programs so that they will run on the
MTA system. We also plan to modify and port third-party software applications to
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 port their applications, or that we will successfully port
third-party applications to the 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:
- - to continue to improve our operational and financial systems;
- - to motivate and effectively manage our employees;
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- - 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.
OUR SUCCESS DEPENDS ON KEY PERSONNEL. Our success also will depend in large part
upon our ability:
- - to attract and retain highly skilled technical and marketing and sales
personnel;
- - to provide technological depth and support;
- - to complete and enhance the MTA system hardware and software; and
- - to develop implementations of the MTA system.
Competition for highly skilled management, technical, marketing and sales
personnel is intense. We may not succeed 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. 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;
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- - 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.
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 acceptance. In addition, products
or technologies developed by others may render our products or technologies
noncompetitive or obsolete.
COMPETITION IN THE HIGH PERFORMANCE COMPUTER MARKET IS INTENSE. 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.
The performance of the 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.
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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.
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, there can be no assurance that these efforts will
succeed.
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:
- - variations in quarterly operating results;
- - 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. Continued stock price volatility could result in the
issuance of additional shares of common stock. See "--Risk Factors--Additional
Shares Issuable By Us Would Dilute Existing Shareholdings and Could Hinder Our
Ability to Obtain Additional Financing."
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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, the Company 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 the 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 the 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, the 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
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:
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- - a staggered Board of Directors, so that only two of six new 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.
ITEM 2. PROPERTIES
In December 1998, we moved to Merrill Place in downtown Seattle, Washington,
which we occupy pursuant to a ten-year lease. We are now leasing approximately
85,000 square feet and in three years we are committed to lease approximately
132,000 square feet. The initial base rental, fully serviced but excluding
parking, is approximately $145,000 per month. We will have an option to extend
the lease for another five years after the initial ten-year term. We expect this
space to be adequate for our needs for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the fourth
quarter of 1998.
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ITEM E.O. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of March 20, 1999 were as follows:
NAME AGE POSITION
Burton J. Smith 58 Chairman of the Board and
Chief Scientist
James E. Rottsolk 54 Chief Executive Officer and
President
Kenneth W. Johnson 56 Vice President - Finance, Chief
Financial Officer, and
Secretary
Brian D. Koblenz 38 Vice President - Software
Gerald E. Loe 49 Vice President - Hardware
Engineering
Katherine L. Rowe 42 Vice President - Manufacturing
Richard M. Russell 54 Vice President - Marketing
Burton J. Smith has been the Chairman of the Board and Chief Scientist since
the Company's inception in 1987. He is a recognized authority on high
performance computer architecture and programming languages for parallel
computers, and is the principal architect of the MTA system. Prior to
co-founding Tera, Mr. Smith was a Fellow of the Supercomputing Research Center
(now Center for Computing Sciences), a division of the Institute for Defense
Analyses, from 1985 to 1988. He was honored in 1990 with the Eckert-Mauchly
Award given jointly by the Institute for Electrical and Electronic Engineers and
the Association for Computing Machinery, and was elected a Fellow of both
organizations in 1994. Mr. Smith received his S.M., E.E. and Sc.D. degrees from
the Massachusetts Institute of Technology.
James E. Rottsolk is a co-founder of the Company and has served as its Chief
Executive Officer and President since its inception. Prior to co-founding Tera
in 1987, Mr. Rottsolk served as an executive officer with several high
technology start-up companies. Mr. Rottsolk received his A.M. and J.D. degrees
from the University of Chicago.
Kenneth W. Johnson joined the Company in September 1997 as Vice President -
Finance, Chief Financial Officer and Secretary. Prior to joining the Company,
Mr. Johnson practiced law in Seattle for twenty years with Stoel Rives LLP and
predecessor firms, where his practice emphasized corporate finance. Mr. Johnson
received his A.B. degree from Stanford University and his J.D. degree from
Columbia University Law School.
Brian D. Koblenz served as Tera's Group Leader, Languages and Compilers, from
1990 until May 1994, when he assumed his present position as Vice President -
Software. Prior
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to joining the Company, Mr. Koblenz was Principal Software Engineer at Digital
Equipment Corporation ("Digital"), from 1986 to 1989. He was lead designer of
Digital's high performance vector FORTRAN compiler and participated in the Alpha
architecture and VAX vectorization efforts. He received his B.S. from the
University of Vermont and his M.S. from the University of Washington.
Gerald E. Loe joined the Company in 1992 as Vice President - Hardware
Engineering and Manufacturing. He was named Vice President - Hardware
Engineering in 1996. Prior to joining the Company, he was Vice President of
Operations at Siemens Quantum Inc., a high-end radiology ultrasound company,
from 1989 to 1992. Mr. Loe received his B.S.M.E. from the Massachusetts
Institute of Technology and his M.B.A. from Harvard Business School.
Katherine L. Rowe joined the Company as Director of Manufacturing in 1994 and
was named Vice President - Manufacturing in 1996. From April 1998 to September
1998, she was on leave and was reelected to her position upon her return. Prior
to joining the Company, Ms. Rowe was an Engineering Manager at ELDEC
Corporation, an aerospace electronics company, and was Manufacturing Manager and
Project Manager in new product development at Physio-Control Corporation, a
medical electronics company. She received her S.M. from Massachusetts Institute
of Technology and her B.S.M.E. from Purdue University.
Richard M. Russell joined the Company as Director of New Business Development
in 1995 and was named Vice President- - Marketing in March 1998. Prior to
joining the Company, he worked in a variety of sales and marketing positions at
several high technology companies, including Cray Research, Inc. from 1976
through 1990 and Kendall Square Research Corporation from 1991 through 1994. Mr.
Russell was educated in England.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY and RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol TERA; prior to January 20, 1998, the Company's stock was traded on the
Nasdaq SmallCap Market. On March 8, 1999, the Company had 14,328,701 shares of
common stock outstanding which were held by 407 holders of record. The Company
has not paid cash dividends on its common stock. The Company currently
anticipates that it will retain all available funds for use in its business and
does not anticipate paying any cash dividends on its common stock in the
foreseeable future.
The quarterly high, low and closing sales prices of the common stock for the
periods indicated are as follows:
1997 1998
----------------------------------- -------------------------------
High Low Close High Low Close
--------- --------- ---------- --------- ---------- ---------
First Quarter 6 1/4 3 5/16 5 5/8 15 10/32 10 1/4 12 3/4
Second Quarter 6 3/8 3 7/8 5 1/2 14 1/2 9 5/8 12
Third Quarter 18 3/16 4 7/16 12 7/8 12 1/4 6 1/4 7 3/4
Fourth Quarter 17 3/4 9 3/4 15 1/4 8 15/16 5 1/2 6 1/4
On March 26, 1999, the closing sale price for the common stock was $6 11/16.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
SALES OF UNREGISTERED SECURITIES
On February 18, 1998, the Company issued 2,500 shares to a consultant for
services rendered. The issuance was exempt from the registration provisions of
the Securities Act of
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1933 under Section 4(2) thereof, based on the nature of the offering and status
of the recipient.
On June 30, 1998, the Company raised $5,674,406, net of issuance costs of
$325,596, in cash through the negotiated private sale of 6,000 shares of its
Series B Convertible Preferred Stock (the "Series B Stock") and 100,000 common
stock purchase warrants to two accredited investors, Advantage Fund II Ltd. and
Genesee Fund Limited - Portfolio B. The Series B Stock is convertible from
time to time into shares of common stock at a conversion price equal to the
lower of $14.52 per share or the lowest sale (regular way) price during the
five consecutive trading days ending one day prior to the date on which a
notice of conversion is delivered to the Company, with the conversion price
subject to adjustment in certain conditions. The warrants are exercisable at a
price of $6.00 per share, subject to adjustment pursuant to common antidilution
provisions. Further information regarding these securities is contained in
Note 9 of the Notes to Financial Statements. See "Business--Risk Factors--
Additional Shares Issuable By Us Would Dilute Existing Shareholders and Could
Hinder Our Ability to Obtain Additional Financing." There were no sales agents
or underwriters involved in this placement. The sale was exempt from the
registration provisions of the Securities Act of 1933 under Section 4(2)
thereof, based on the nature of the offering and status of the investors.
On September 30, 1998, the Company raised $6,000,000 in cash through the
negotiated private sale of 600,000 shares of common stock and 121,008 common
stock purchase warrants to two accredited investors, Advantage Fund II Ltd. and
Koch Industries, Inc. On December 16, 1998, the Company raised another
$2,000,000 in cash through the negotiated private sale of 200,000 shares of
common stock and 40,336 common stock purchase warrants to two accredited
investors, Genesee Fund Limited - Portfolio B and Koch Industries, Inc. The
Company has agreed to issue additional shares of common stock to these investors
if the market price of the common stock does not meet certain target levels at
specified times during the next two years. The warrants are exercisable at a
price of $6.00 per share, subject to adjustment pursuant to common antidilution
provisions. See "Business--Risk Factors--Additional Shares Issuable By Us Would
Dilute Existing Shareholders and Could Hinder Our Ability to Obtain Additional
Financing.". Further information regarding these securities is contained in Note
9 of the Notes to Financial Statements. There were no sales agents or
underwriters involved in this placement. The sale was exempt from the
registration provisions of the Securities Act of 1933 under Section 4(2)
thereof, based on the nature of the offering and status of the investors.
On December 21, 1998, the Company issued 175,975 shares of common stock to
the owners of Merrill Place, where our new Seattle offices are located, in
payment of certain tenant improvements. On the same date the Company also
issued 12,982 shares of common stock as a prepaid lease deposit. These sales
were exempt from the registration provisions of the Securities Act of 1933
under Section 4(2) thereof, based on the nature of the offering and the status
of the recipients.
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31
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts and Statistical Data)
Years Ended December 31, 1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Operating Data:
Revenue $ -- $ -- $ -- $ 74 $ 1,988
Research and Development 5,575 6,679 10,504 13,547 16,446
Research Funding 4,410 2,196 185 349 253
Net Loss 2,123 5,646 12,077 15,755 19,804
Loss for Common Stock 2,123 5,646 18,806 18,672 20,737
Loss per Common Share $ 1.00 $ 2.13 $ 3.53 $ 2.13 $ 1.70
Weighted Average
Shares Outstanding 2,119 2,646 5,321 8,785 12,212
Balance Sheet Data:
Cash and cash equivalents $ 21 $ 4,285 $ 929 $ 13,329 $ 3,162
Working capital (3,850) 2,642 (22) 14,342 7,269
Capital leases, long-term
portion 168 419 114 532 573
Total Assets 1,168 7,269 4,617 20,859 20,288
Redeemable Securities -- -- -- 9,478 --
Shareholders' Equity (3,219) 4,092 1,128 6,368 11,889
Statistical Data:
Number of Full-Time Employees 56 66 61 84 109
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below includes "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, and is subject to the safe harbor created by that Section. Factors that
realistically could cause results to differ materially from those projected in
the forward looking statements are set forth in this section and under "Business
- --Risk Factors." The following discussion should also be read in conjunction
with the Financial Statements and accompanying Notes thereto.
OVERVIEW
We had an accumulated net loss of approximately $62.6 million as of December
31, 1998. Our funding through the end of 1998 has been primarily from the sale
of approximately $73.1 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.
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. 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"). We upgraded the MTA system at SDSC in December 1998 to four
processors. This larger system was accepted by SDSC in January 1999 and we will
recognize the revenue from that delivery in the first quarter of 1999. 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. See "Business--Risk Factors--Development Status of the MTA
System" and "Business--Strategy."
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
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998.
REVENUE. We had revenue in 1998 of approximately $2.0 million, up from
$73,500 in 1997. 1998 revenues included $1.3 million from the sale of the
two-processor MTA
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system to SDSC, our first revenue from product sales. We had $714,000 of service
revenue in 1998, up from $73,500 in 1997. Service revenue in both years was
pursuant to a subcontract with SDSC to evaluate multithreaded architecture for
certain defense applications. We expect to complete this subcontract for another
$283,000 in 1999, of which our portion, after payments to our subcontractors,
will be approximately $54,000; this contract expires on June 30, 1999. 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 "Business--Risk Factors."
OPERATING EXPENSES. Cost of revenue from product sales was high in 1997 and
1998 as a percentage of the revenue due to favorable pricing terms provided to
SDSC and the inclusion of costs of system infrastructure to support a full 16
proocessor MTA system. The cost of service revenue in 1998 was 82% of
service revenue, an increase from 71% in 1997, due to increased billings from
our subcontractors.
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 expense, depreciation and lease expense on
facilities and equipment, nonrecurring engineering, software and hardware costs
and preproduction expenses. Research and development expenses increased from
$10.5 million in 1996 to $13.5 million in 1997, a 29% increase, and to $16.4
million in 1998, a further 21% increase.
Research and development expenses for 1997 included a $832,000 charge as
compensation expense related to certain performance-based stock options; without
that charge, 1997 research and development expenditures would have been
approximately $12.8 million.
Salaries, benefits and allocated overhead for research and development
increased from $5 million in 1996, to $7.3 million in 1997 (excluding the
compensation expense for performance-based stock options) and to $8.1 million in
1998, largely reflecting additional personnel and higher wages in both 1997 and
1998.
Engineering expenses, consisting of payments to third parties for services
and products, were $ 4.8 million in 1996, $3.2 million in 1997 and $3.1 million
in 1998. The decline of approximately $1.6 million in engineering expenses from
1996 to 1997 was largely due to lower expenditures on the MTA prototype, which
decreased from $1.3 million in 1996 to $402,000 in 1997 and essentially ceased
after the third quarter of 1997. In 1997, we spent nearly $2.0 million on
further engineering expenses on the current MTA implementation, compared to $1.6
million in 1998. We also spent approximately $1.2 million in 1997 and $1.7
million in 1998 on the conversion from gallium arsenide integrated circuits to
CMOS integrated circuits, primarily for design services from Cadence Design
Services, Inc.
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34
Our preproduction costs and expense related to adjustments in inventory
valuation and reserves have increased from practically nothing in 1996 to $2.3
million in 1997 and $5.2 million in 1998, reflecting our acquisition of
inventory and transition to a production company. From time to time during the
development process of the MTA system, we have been required to redesign certain
components because of previously unforeseen design flaws. For example, various
processor and network chip technologies 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. This has led to significant downward
inventory adjustments, including approximately $1.6 million in 1997 and $3.6
million in 1998. Preproduction costs also include variances from our standard
costs, including expense from revaluating our inventory because of increased
production yields, which were $168,000 in 1997 and $244,000 in 1998, and costs
of purchasing various materials which are not capitalized as inventory, which
were $530,000 in 1997 and $1.2 million in 1998.
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 continuing
engineering of the MTA system, research and development related to the next
generation MTA system and related software development, including personnel
expense, depreciation and lease expense on facilities and equipment.
Marketing and sales expense has increased from $665,000 in 1996 to $1.1
million in 1997 and to over $1.8 million in 1998, as we have continued to
increase sales and customer support staff and expenditures in connection with
sales and marketing, benchmarks and development of third party applications
software. In 1997, marketing and sales expenses increased to 6.9% of total
operating expenses, up from 5.4% in 1996, with a significant increase in the
fourth quarter as we then opened a two-person, branch sales office in Japan and
added a third U.S. salesperson. With the impact of these expenses for all of
1998 plus additional sales support personnel during the year, marketing and
sales expenses increased by over $720,000, constituting 8.2% of total 1998
operating expense. 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.
Our general and administrative expenses have increased each year consistent
with expansion of our infrastructure. These expenses were nearly $1.1 million in
1996, nearly $1.6 million in 1997 and over $2.1 million in 1998, an increase of
48% in 1997 over 1996 and a further 36% increase in 1998 over 1997. The increase
in expenditures in 1997 over 1996 was primarily due to additional staff and
further increases in legal, investor relations, stock transfer and other costs
associated with being a publicly owned company. The increase in these expenses
for 1998 over 1997 was due largely to higher wages and operating costs
associated with being a publicly owned company. General and administrative
expenses are expected to increase commensurate with any growth in our
operations.
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35
RESEARCH FUNDING. We have been billing DARPA under a $1 million research
contract awarded in September 1995. Billings increased in 1997 to $349,000 over
$185,000 in 1996, and then declined to $253,000 in 1998. There remains
approximately $205,000 to be billed under this contract, which expires in
September 1999.
OTHER INCOME (EXPENSE). Other income increased by $138,000 in 1997 to
$101,000 as interest income increased from $106,000 to $140,000 while interest
expense declined from $118,000 to $100,000, reflecting the Company's increased
cash position due to the sales of equity securities throughout the year. We
increased other income by another $76,000 in 1998 primarily due to increasing
interest income to $365,000, due to our increased cash position after completion
of a $10 million financing in December 1997 and other financings in 1998, which
was offset in part by interest expense of $188,000, largely due to a fully
utilized lease line of credit.
TAXES. We made no provision for federal income taxes in 1996, 1997 or 1998 as
we have continued to incur net operating losses. As of December 31, 1998, the
Company had net operating loss carry-forwards of approximately $60.7 million
which expire in years 2003 through 2018, if not utilized. Our net operating loss
carry-forwards and certain other tax attributes (including its research credit
of approximately $2.5 million at December 31, 1998) would be limited to an
annual utilization for losses and credits for periods prior to 1996 of
approximately $700,000. This limitation may result in the expiration of net
operating losses and credits before utilization.
PREFERRED STOCK. We amortized a total of $2.0 million related to the
conversions of our Series B and Series C Convertible Preferred Stock during 1997
into common stock at a discount from the fair market value of the common stock,
and recorded dividends of $90,000 on these securities, almost all of which were
paid in shares of our common stock, based on the market price at the time of
payment. In December 1997, we issued $10,000,000 of its Series A Convertible
Preferred Stock, and recorded a preferred stock discount of approximately
$800,000 from the allocation of proceeds to warrants issued with the Series A
Convertible Preferred Stock.
In 1998, we paid all of the $468,000 of dividends on our outstanding shares
of Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock, issued in June 1998, in shares of common stock, based on the market price
at the time of payment. In addition we amortized in the third quarter the
preferred stock discount resulting from the allocation of proceeds to warrants
issued in connection with the Series B Convertible Preferred Stock, which
resulted in another $465,000 non-cash charge to the Loss for Common 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
35
36
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. 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 Year
2000 compliant, except for one system that our landlord has agreed to remedy.
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. The
Company does not separately track the internal costs for its 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.
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception in 1987 through December 31, 1998, our principal sources
of liquidity have been net proceeds from the sale of equity totaling $73.1
million, DARPA research funding and subcontracts totaling $19.3 million and
sales receipts of approximately $2.0 million. At December 31, 1998, we had $3.2
million in cash and had no bank line of credit.
During 1998, we spent almost $22.9 million of cash on operating activities,
up from $17.7 million in 1997. 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 to CMOS technology. Our overall wages and benefits
increased from $6.2 million in 1997 to $9.2 million in 1998, while total
expenses related to inventory, including inventory additions and scrap,
increased in 1998 to approximately $12.7 million, a $7 million increase over
1997. We expect that personnel costs will continue to increase in 1999, although
not as rapidly as in 1997 and 1998 as we have slowed the growth of personnel
pending the receipt of additional sales orders. Similarly, we expect inventory
costs to decrease in 1999, since we plan only modest inventory additions pending
receipt of purchase orders. In 1998, we incurred third party engineering
expenses related to the CMOS implementation of the MTA system of $1.7 million
and we expect those expenditures to increase in 1999.
In 1998, our investing activity consisted of additional property, plant and
equipment of over $2 million, of which $1.2 million was spent on computer and
electronic test equipment, $400,000 on leasehold improvements and $373,000 on
computer software.
In 1998, we raised approximately $14.8 million through the sale of
securities, primarily through sales of $14.0 million preferred stock and common
stock in private placements and stock option and warrant exercises for the
balance. We believe that in addition to our current funds and revenue from
anticipated sales of MTA systems, we will need to raise at least $12 million in
equity and debt financings in 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. See "Business--Risk Factors--Additional Shares Issuable By Us Would
Dilute Existing Shareholdings and Could Hinder Our Ability To Obtain Additional
Financing." The Company is seeking a lease line of credit for capital goods for
up to $1.5 million. 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 Perferred
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 change of control and an inability by us, as a
result of applicable Nasdaq rules, to issue all 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 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. See Note 9 of the Notes to
Financial Statements for further information regarding these obligations.
In the first quarter of 1999, we raised over $7 million in equity and debt
financings, and an investor has an option to invest another $5 million later
this year. We will require further
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38
additional working capital if anticipated sales of the MTA system are
substantially delayed. We plan to raise additional equity capital 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 "Business--Risk
Factors--Additional Shares Issuable By Us Would Dilute Existing Shareholdings
and Could Hinder Our Ability To Obtain Additional Financing."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Inapplicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Balance Sheets at December 31, 1997 and December 31, 1998............................F1
Statements of Operations for each of the three years in the period ended
December 31, 1998................................................................F2
Statements of Shareholders' Equity for each of the three years in the period ended
December 31, 1998................................................................F3
Statements of Cash Flows for each of the three years in the period ended
December 31, 1998................................................................F4
Notes to Financial Statements........................................................F5
Independent Auditors' Report........................................................F19
QUARTERLY FINANCIAL DATA
(In thousands, except per share data)
The following table presents unaudited quarterly financial information for
the two years ended December 31, 1998. In the opinion of management, this
information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation thereof. The operating results
are not necessarily indicative of results for any future periods.
1997 1998
------------------------------------------- -------------------------------------------
For the Quarter Ended: 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
------- ------- ------- ------- ------- ------- ------- -------
Revenue $ $ $ $ 74 $ 21 $ 1,527 $ 232 $ 208
Gross Profit 21 5 98 23 47
Net Operating Expense 2,401 3,555 4,380 5,520 5,166 4,295 4,217 6,304
Net Loss (2,415) (3,565) (4,275) (5,500) (5,061) (4,299) (4,154) (6,290)
Amortization of Preferred
Stock Discount (26) (337) (484) (1,980) (465)
Loss for Common Stock (2,441) (3,940) (4,775) (7,516) (5,191) (4,393) (4,760) (6,392)
Loss Per Common Share,
Basic and diluted $ (0.37) $ (0.55) $ (0.46) $ (0.69) $ (0.46) $ (0.37) $ (0.39) $ (0.47)
The Company's future operating results may be subject to quarterly
fluctuations as a result of a number of factors, including the timing of
deliveries of the Company's products.
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40
See "Business--Risk Factors." Quarter-to-quarter comparisons should not be
relied upon as indicators of future performance.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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TERA COMPUTER COMPANY
- --------------------------------------------------------------------------------
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1998
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 13,329,115 $ 3,161,867
Accounts receivable 99,696 378,933
Related party receivable 368,008 306,819
Inventory 4,290,873 10,246,029
Advances to suppliers 325,385 415,834
Prepaid expenses and other assets 410,754 585,008
----------- -----------
Total current assets 18,823,831 15,094,490
Property and equipment, net 1,914,925 4,501,613
Lease deposits 120,629 537,101
Other long-term assets 155,033
----------- -----------
Total assets $ 20,859,385 $ 20,288,237
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,138,343 $ 5,470,617
Accrued payroll and related expenses 1,713,553 1,544,056
Deferred revenue 19,178
Contract adjustment reserve 250,000 250,000
Current portion of obligations under capital leases 379,597 542,045
----------- -----------
Total current liabilities 4,481,493 7,825,896
Obligations under capital leases
less current portion 532,321 573,054
Commitments and contingencies
Redeemable Securities:
Preferred Stock, par $.01 - Authorized 5,000,000 shares;
issued and outstanding, 10,000 and 0 shares of Series A Convertible 9,477,709
Shareholders' equity:
Preferred Stock, par $.01 - Authorized, 5,000,000 shares;
issued and outstanding, 0 and 6,000 shares of Series B Convertible 5,674,406
Common Stock, par $.01 - Authorized, 25,000,000 shares;
issued and outstanding, 11,248,096 and 14,204,430 shares 49,168,180 68,744,437
Preferred stock dividend distributable 75,000
Accumulated deficit (42,800,318) (62,604,556)
----------- -----------
Total shareholders' equity 6,367,862 11,889,287
----------- -----------
Total liabilities and shareholders' equity $ 20,859,385 $20,288,237
=========== ===========
See accompanying notes
F-1
42
TERA COMPUTER COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 1997 1998
----------- ----------- -----------
Revenue:
Product and other revenue $ $ $ 1,274,323
Service revenue 73,531 713,670
----------- ----------- -----------
73,531 1,987,993
----------- ----------- -----------
Operating expenses:
Cost of product and other revenue 1,231,494
Cost of service revenue 51,891 584,045
Research and development 10,503,747 13,546,785 16,445,820
Marketing and sales 664,911 1,119,431 1,830,457
General and administrative 1,057,168 1,561,145 2,131,261
----------- ----------- -----------
12,225,826 16,279,252 22,223,077
----------- ----------- -----------
Research funding 185,236 349,407 253,469
----------- ----------- -----------
Loss from operations (12,040,590) (15,856,314) (19,981,615)
Other income/(expense) (36,748) 101,085 177,377
----------- ----------- -----------
Net loss (12,077,338) (15,755,229) (19,804,238)
Preferred stock dividend (89,964) (467,657)
Amortization of preferred stock discount (6,728,603) (2,827,242) (464,733)
----------- ----------- -----------
Loss for common stock $ (18,805,941) $ (18,672,435) $ (20,736,628)
=========== =========== ===========
Loss per common share, basic and diluted $ (3.53) $ (2.13) $ (1.70)
=========== =========== ===========
Weighted average shares outstanding, basic
and diluted 5,320,785 8,784,943 12,211,875
=========== =========== ===========
See accompanying notes
F-2
43
TERA COMPUTER COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
Series B Convertible
Preferred Stock Common Stock
------------------------ ---------------------------------
Number of Number of
Shares Amount Shares Amount
-------- ----------- ------------ ------------
BALANCE, January 1, 1996 3,889,455 $ 19,059,818
Exercise of stock options 33,414 75,143
Exercise of warrants 213,946 2,149,995
Conversion of Series A preferred shares 2,360,000 6,888,194
Net loss
-------- ----------- ------------ ------------
BALANCE, December 31, 1996 6,496,815 28,173,150
Exercise of stock options 151,026 1,244,136
Exercise of warrants 198,729 118,125
Private placement, net of
issuance costs of $62,135 299,333 1,060,405
Issuance of shares under Employee
Stock Purchase Plan 40,736 192,661
Exercise of redeemable stock purchase
warrants net of issuance costs of $66,989 2,838,665 10,585,646
Conversion of Series B preferred shares 740,266 2,814,386
Issuance of common stock for services 4,000 17,500
Conversion of Series C preferred shares 478,526 4,962,171
Net loss
-------- ----------- ------------ ------------
BALANCE, December 31, 1997 11,248,096 49,168,180
Exercise of stock options 153,234 219,629
Exercise of warrants 433,376 124,946
Issuance of shares under Employee
Stock Purchase Plan 29,820 271,085
Issuance of common stock for
leasehold improvements 175,975 1,313,653
Issuance of common stock for services 2,500 27,265
Common stock issued in
private placement