<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1998
REGISTRATION NO. 333-41139
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MERCURY COMPUTER SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MASSACHUSETTS 3670 04-2741391
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
199 RIVERNECK ROAD
CHELMSFORD, MA 01824
(978) 256-1300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES R. BERTELLI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MERCURY COMPUTER SYSTEMS, INC.
199 RIVERNECK ROAD
CHELMSFORD, MASSACHUSETTS 01824
(978) 256-1300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
ANTHONY J. MEDAGLIA, JR., ESQUIRE TIMOTHY C. MAGUIRE, ESQUIRE
HUTCHINS, WHEELER & DITTMAR TESTA, HURWITZ & THIBEAULT, LLP
A PROFESSIONAL CORPORATION 125 HIGH STREET
101 FEDERAL STREET HIGH STREET TOWER
BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02110
(617) 951-6600 (617) 248-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the earlier
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED JANUARY 23, 1998
PROSPECTUS
- --------------------------------------------------------------------------------
3,500,000 Shares
[LOGO: MERCURY COMPUTER SYSTEMS, INC.-- The Ultimate Performance Machine]
Common Stock
- --------------------------------------------------------------------------------
Of the 3,500,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby, 2,000,000 shares are being sold by Mercury Computer
Systems, Inc. ("Mercury" or the "Company") and 1,500,000 shares are being sold
by certain stockholders of the Company (the "Selling Stockholders"). The Company
will not receive any of the proceeds from the sale of shares of Common Stock by
the Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock of the Company. It is currently anticipated that the initial public
offering price of the Common Stock will be between $12.00 and $14.00 per share.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Common Stock has been
approved for inclusion in The Nasdaq Stock Market's National Market (the "Nasdaq
National Market") under the symbol "MRCY."
SEE "RISK FACTORS" ON PAGES 6 TO 14 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==========================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
- ----------------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $ $
==========================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $750,000.
(3) The Company and certain Selling Stockholders have granted to the several
Underwriters 30-day over-allotment options to purchase, in the aggregate, up
to 525,000 additional shares of the Common Stock on the same terms and
conditions as set forth above. If all such additional shares are purchased
by the Underwriters, the total Price to Public will be $ , the
total Underwriting Discounts and Commissions will be $ , the total
Proceeds to Company will be $ and the total Proceeds to Selling
Stockholders will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares of Common Stock to the
Underwriters is expected to be made through the facilities of The Depository
Trust Company, New York, New York, on or about January , 1998.
PRUDENTIAL SECURITIES INCORPORATED COWEN & COMPANY
January , 1998
<PAGE> 3
MERCURY designs, manufactures and markets high performance real-time digital
signal processing computer systems that transform sensor generated data into
information which can be displayed as images for human interpretation or
subjected to additional computer analysis. The applications served by Mercury's
products typically are computation intensive and require I/O capacity and
interprocessor bandwidth which are not available on a general purpose PC or
workstation.
DEFENSE ELECTRONICS
MEDICAL IMAGING
SHARED STORAGE
[Photos of Mercury products, applications and
users thereof and output generated thereby.]
[LOGO: MERCURY COMPUTER SYSTEMS, INC.-- The Ultimate Performance Machine]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
DEFENSE ELECTRONICS
- -----------------------------
- -----------------------------
[PICTURE OF AIRPLANE]
MERCURY'S systems are embedded
into air, sea and land-based
platforms for processing radar,
sonar and signal intelligence
applications. These applications
allow a military commander to
"see" the battle space through
natural barriers such as clouds,
darkness, water or foliage, so
that the position and strength
of the enemy can be determined.
[PICTURE OF MERCURY
Due to the environmental COMPUTER SYSTEM]
constraints of these
applications, MERCURY'S
systems are frequently
confined in limited spaces,
and they are designed to
generate a minimum amount of
heat.
MERCURY provides high performance embedded
computer systems to the defense electronics
market, and works closely with defense
contractors to complete a design which matches
[AERIAL the specified requirements of a military
PHOTOGRAPH] application.
<PAGE> 5
MEDICAL IMAGING
-----------------------------
-----------------------------
MERCURY'S systems are embedded within several [DRAWING OF
modalities of diagnostic medical imaging devices, MRI MACHINE]
including magnetic resonance imaging, computed
tomography and positron emission tomography. These
machines are used to allow a physician to "see"
within the human body instead of performing
invasive surgery.
MERCURY'S systems provide the
medical imaging industry with a
[PICTURE OF MERCURY customized solution using an
COMPUTER SYSTEM] architecture that accommodates
upgrades as new technology becomes
available. Medical imaging machine
suppliers are able to design
systems that satisfy a broad range
of price/performance requirements
and meet the needs of global
markets, all with the same Mercury
architecture.
MERCURY'S experienced team of
system and application engineers
works closely with its customers to
meet their design requirements. The [MEDICAL DIAGNOSTIC
Company believes that this IMAGES]
collaboration leads to faster
time-to-market and competitive
advantages for Mercury's customers.
<PAGE> 6
================================================================================
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the financial statements and notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that (i) the Underwriters' over-allotment options will
not be exercised, (ii) all outstanding shares of Series A Convertible Preferred
Stock, par value $.01 per share, will be converted into Common Stock upon the
closing of this Offering and (iii) the Company's Restated Articles of
Organization will be amended upon the closing of this Offering to reduce the
number of authorized shares of Preferred Stock, par value $.01 per share, from
2,000,000 to 1,000,000 shares and to eliminate all shares of Series A
Convertible Preferred Stock. The Company's fiscal year begins on July 1 and ends
on June 30 of each year. See "Description of Capital Stock" and "Underwriting."
Mercury designs, manufactures and markets high performance, real-time
digital signal processing computer systems that transform sensor generated data
into information which can be displayed as images for human interpretation or
subjected to additional computer analysis. These multicomputer systems are
heterogeneous and scalable, allowing them to accommodate several microprocessor
types and to scale from a few to hundreds of microprocessors within a single
system. Mercury's system architecture is specifically designed for digital
signal processing applications which are typically computation intensive and
require I/O capacity and interprocessor bandwidth not available on a general
purpose PC or workstation. The two primary markets for Mercury's products are
defense electronics and medical diagnostic imaging. Both of these markets have
computing needs which benefit from the unique system architecture developed by
the Company. Mercury's computer systems are generally used on real world signal
data to enable a military commander to "see" the battle space through natural
barriers such as clouds, darkness, water or foliage, so that the position and
strength of the enemy can be determined, or to enable a physician to "see"
within the body instead of performing invasive surgery.
During the past three fiscal years, the majority of the Company's revenues
has been generated from sales of its products to the defense electronics market,
generally for use in intelligence gathering electronic warfare systems. The
Company's activities in this area have focused on the proof of concept,
development and deployment of advanced military applications in radar, sonar and
airborne surveillance. The Company has established relationships with many of
the major prime contractors to the worldwide defense industry, including
Lockheed Martin Corporation, Hughes Aircraft Company, Raytheon/E-Systems, Inc.,
Raytheon/TI Systems, Inc., Northrop Grumman Corporation, MIT/Lincoln Laboratory,
GEC Marconi Limited, Ericsson Microwave Systems AB, MATRA Systemes &
Information, Mitsubishi Heavy Industries, Ltd. and a prime contractor owned by
the Israeli Ministry of Defense.
Medical diagnostic imaging is the other primary market currently served by
the Company. Mercury's computer systems are embedded in magnetic resonance
imaging ("MRI"), computed tomography ("CT") and positron emission tomography
("PET") machines. Mercury has supplied computer systems for use in several of
General Electric Medical Systems, Inc.'s medical diagnostic imaging systems
since 1987, and has established relationships with Siemens Medical Systems,
Inc., Toshiba Corp. and Elscint, Inc. The major medical imaging manufacturers
are currently developing the next generation of MRI, CT and digital x-ray
machines, which are expected to provide better performance at lower cost.
Mercury has recently secured design wins on programs with certain of the major
medical imaging manufacturers for their next generation MRI, CT and digital
x-ray machines. The Company believes that the available market in 1998 for
digital signal processing systems and upgrades for the MRI, CT and digital x-ray
markets is expected to be an aggregate of approximately $123 million.
Mercury's computer systems are designed to process continuous streams of
data from sensors attached to radar, sonar, medical imaging equipment and other
devices. The resulting image is transmitted to the battlefield commander, pilot,
technician or physician in order to assist in the decision making or diagnostic
process. Due to the nature of the applications in which many of Mercury's
computer systems are embedded, they are frequently confined in limited spaces
and therefore are designed to generate a minimum amount of heat. The Company
employs the RACEway Interconnect, an industry standard system area network
================================================================================
3
<PAGE> 7
developed by Mercury which allows for high interprocessor bandwidth and I/O
capacity. The Company uses its proprietary application specific integrated
circuits ("ASICs") to integrate microprocessors, memory and related components
into the RACEway Interconnect to provide optimum system performance. The Company
uses industry standard microprocessors, such as Intel Corporation's i860,
Motorola, Inc.'s PowerPC, Texas Instruments Incorporated's C80 and Analog
Devices, Inc.'s SHARC, in the same system. The Company believes that the RACEway
Interconnect and its proprietary ASICs, working together with a group of mixed
microprocessors in the same system, allow the most efficient use of space and
power with an optimal price/performance ratio.
Since July 1996, Mercury has targeted the shared storage market for
introduction of a new product which draws on the Company's core competencies in
systems engineering and the development of real-time software. In fiscal 1997,
Mercury introduced SuiteFusion, its first shared storage product designed to
meet the needs of the broadcast and post-production industry. SuiteFusion is an
open, scalable software application that allows work groups to share commodity,
fibre channel attached disk arrays, eliminating the need for an expensive,
intermediate file server. Early end users include Turner Broadcasting Systems
Inc.'s CNN Interactive, Nickelodeon's Blue's Clues television show and Hughes
Aircraft (through a subsidiary) for use at the U.S. Army National Training
Center. The Company believes that the shared storage market includes a number of
distinct applications, such as digital video editing, electronic computer aided
design, webcasting, cable advertising insertion and pre-press.
The Company's executive offices are located at 199 Riverneck Road,
Chelmsford, Massachusetts 01824, and its telephone number is (978) 256-1300. The
Company was incorporated in Massachusetts in 1981.
THE OFFERING
Common Stock Offered by the Company..... 2,000,000 shares
Common Stock Offered by the Selling
Stockholders............................ 1,500,000 shares
Common Stock to be Outstanding after the
Offering................................ 9,864,023 shares(1)
Use of Proceeds by the Company.......... For working capital and other
general corporate purposes,
including construction of
additional office space. See "Use
of Proceeds."
Proposed Nasdaq National Market
Symbol.................................. MRCY
- ---------------
(1) Excludes 1,096,373 shares of Common Stock issuable upon exercise of
outstanding stock options under the Company's stock option plans at October
31, 1997, with a weighted average exercise price of $4.85 per share, of
which 463,517 shares were exercisable as of such date at a weighted average
exercise price of $3.37 per share. See "Management -- Stock Option and Stock
Purchase Plans."
RISK FACTORS
Investors should consider the risk factors involved in connection with an
investment in the Common Stock and the impact to investors from various events
that could adversely affect the Company's business. See "Risk Factors."
RECENT DEVELOPMENTS
The Company's operations generated revenues, net income and diluted net
income per common share of $20.6 million, $2.0 million and $0.23 during the
three months ended December 31, 1997, compared to revenues, net income and
diluted net income per common share of $15.1 million, $688,000 and $0.08 during
the three months ended December 31, 1996. Diluted net income per common share
for both periods has been calculated in accordance with Statement of Financial
Accounting Standards number 128, "Earnings per Share".
4
<PAGE> 8
================================================================================
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $38,632 $41,727 $54,323 $58,300 $64,574 $13,038 $19,039
Cost of revenues................. 11,972 16,285 21,221 24,688 22,034 4,538 6,661
------- ------- ------- ------- ------- ------- -------
Gross profit................... 26,660 25,442 33,102 33,612 42,540 8,500 12,378
Operating expenses:
Selling, general and
administrative.............. 10,785 12,911 15,798 16,927 22,631 4,726 6,645
Research and development....... 5,619 7,254 8,586 9,776 12,837 2,405 3,381
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 16,404 20,165 24,384 26,703 35,468 7,131 10,026
------- ------- ------- ------- ------- ------- -------
Income from operations........... 10,256 5,277 8,718 6,909 7,072 1,369 2,352
Interest income (expense), net... (94) 55 240 548 560 136 231
Other income (expense), net...... (44) (64) 22 (77) (88) (23) 83
------- ------- ------- ------- ------- ------- -------
Income before income taxes....... 10,118 5,268 8,980 7,380 7,544 1,482 2,666
Provision for income taxes....... 2,487 1,153 2,636 2,952 2,933 576 1,060
------- ------- ------- ------- ------- ------- -------
Net income....................... $ 7,631 $ 4,115 $ 6,344 $ 4,428 $ 4,611 $ 906 $ 1,606
======= ======= ======= ======= ======= ======= =======
Net income per common share...... $ 1.02 $ 0.50 $ 0.77 $ 0.54 $ 0.57 $ 0.11 $ 0.20
======= ======= ======= ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding(1)................. 7,492 8,295 8,256 8,264 8,157 8,191 8,174
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital....................................................... $28,653 $ 52,083
Total assets.......................................................... 47,905 71,335
Convertible preferred stock........................................... 1,200 --
Total stockholders' equity............................................ 35,111 58,541
</TABLE>
- ---------------
(1) See Note B of Notes to Consolidated Financial Statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute net income per common share.
(2) Reflects (i) the conversion of all outstanding shares of the Company's
Series A Convertible Preferred Stock into 2,556,792 shares of Common Stock
upon completion of this Offering and (ii) the sale by the Company of
2,000,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses.
================================================================================
5
<PAGE> 9
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the following risk
factors, in addition to the other information set forth in this Prospectus, in
connection with an investment in the shares of Common Stock offered hereby.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors. Factors
that could cause or contribute to such differences include, but are not limited
to, those described below, under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Prospectus.
DEPENDENCE ON DEFENSE ELECTRONICS BUSINESS; UNCERTAINTY ASSOCIATED WITH
GOVERNMENT CONTRACTS. Sales of the Company's computer systems to the defense
electronics market accounted for approximately 81% of the Company's revenues in
fiscal 1997, compared to approximately 72% of the Company's revenues in fiscal
1996. Reductions in government spending on programs that incorporate the
Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, the Company's
government contracts and subcontracts are subject to special risks, such as:
delays in funding; ability of the government agency to unilaterally terminate
the prime contract; reduction or modification in the event of changes in
government policies or as the result of budgetary constraints or political
changes; increased or unexpected costs under fixed price contracts; and other
factors that are not under the control of the Company. In addition,
consolidation among defense industry contractors has resulted in fewer
contractors with increased bargaining power relative to the Company. No
assurance can be given that such increased bargaining power will not adversely
affect the Company's business, financial condition or results of operations in
the future.
The Company's contracts with the U.S. and foreign governments and their
prime and subcontractors are subject to termination either upon default by the
Company or at the convenience of the government. Termination for convenience
provisions generally entitle the Company to recover costs incurred, settlement
expenses and profit on work completed prior to termination. In addition to the
right of the government to terminate, government contracts are generally
conditioned upon the continuing availability of legislative appropriations.
Funds are usually appropriated for a given program each fiscal year even though
contract performance may take more than one fiscal year. Consequently, at the
outset of a major program, the contract is usually partially funded, and
additional monies normally are incrementally committed to the contract by the
procuring agency from appropriations made for future fiscal years. No assurance
can be given that the Company will realize the revenue expected from performing
under such contracts. Because the Company contracts to supply goods and services
to U.S. and foreign governments it is also subject to other risks, including
contract suspensions, protests by disappointed bidders of contract awards which
can result in the reopening of the bidding process, changes in governmental
policies or regulations or other political factors.
DEPENDENCE ON KEY CUSTOMERS. The Company is dependent on a small number of
customers for a large portion of its revenues. In fiscal 1997, Lockheed Martin
and Hughes Aircraft accounted for 22% and 10%, respectively, of the Company's
revenues, and sales to 20 customers accounted for more than 80% of the Company's
fiscal 1997 revenues. In fiscal 1996, Lockheed Martin, GE Medical and Hughes
Aircraft accounted for 19%, 16% and 12%, respectively, of the Company's
revenues, and sales to 20 customers accounted for more than 80% of the Company's
fiscal 1996 revenues. The Company's largest customer in the medical imaging
market is GE Medical, which accounted for 72% of the Company's aggregate sales
to the medical imaging market in fiscal 1997, compared to 69% of sales to the
medical imaging market in fiscal 1996. Customers in the defense electronics
market generally purchase the Company's products in connection with government
programs that have a limited duration, leading to fluctuating sales to any
particular customer in the defense electronics market from year to year. By
contrast, many customers in the medical imaging market
6
<PAGE> 10
historically have purchased the Company's products over a number of years for
use in successive generations of medical imaging devices, although there can be
no assurance that such past behavior will continue in the future. A significant
diminution in the sales to or loss of any of the Company's major customers would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company's revenues are largely
dependent upon the ability of its customers to develop and sell products that
incorporate the Company's products. No assurance can be given that the Company's
customers will not experience financial or other difficulties that could
adversely affect their operations and, in turn, the results of operations of the
Company. See "Business -- Markets and Customers."
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced
fluctuations in its results of operations in large part due to the sale by the
Company of its computer systems in relatively large dollar amounts to a
relatively small number of customers. Operating results also have fluctuated due
to competitive pricing programs and volume discounts, the loss of customers,
market acceptance of the Company's products, product obsolescence and general
economic conditions. In addition, the Company, from time to time, has entered
into contracts to engineer a specific solution based on modifications to the
Company's standard products (a "development contract"). The Company's gross
margins from development contract revenues are typically lower than the
Company's gross margins from standard product revenues. The Company intends to
continue to enter into development contracts and anticipates that the gross
margins associated with development contract revenues will continue to be lower
than its gross margins on standard product revenues. The Company expects
research and development expenses to continue to increase as the Company
continues to develop products to serve its markets, all of which are subject to
rapidly changing technology, frequent product performance improvements and
evolving industry standards. The ability to deliver superior technological
performance on a timely and cost effective basis is a critical factor in
securing design wins for future generations of defense electronics and medical
imaging systems. Significant research and development spending by the Company
does not ensure that the Company's computer systems will be designed into a
customer's system. Because future production orders are usually contingent upon
securing a design win, the Company's operating results may fluctuate due to
either obtaining or failing to obtain design wins for significant customer
systems.
The Company's quarterly results may be subject to fluctuations resulting
from the foregoing factors, as well as a number of other factors, including the
timing of significant orders, delays in completion of internal product
development projects, delays in shipping the Company's computer systems and
software programs, delays in acceptance testing by customers, a change in the
mix of products sold to the defense electronics and medical imaging markets,
production delays due to quality problems with outsourced components, shortages
of components, the timing of product line transitions and declines in quarterly
revenues from old generations of products following announcement of replacement
products containing more advanced technology. Another factor contributing to
fluctuations in quarterly results is the fixed nature of the Company's
expenditures on personnel, facilities and marketing programs. The Company's
expense levels for personnel, facilities and marketing programs are based, in
significant part, on the Company's expectations of future revenues on a
quarterly basis. If actual quarterly revenues are below management's
expectations, results of operations likely will be adversely affected. As a
result of the foregoing factors, the Company's operating results, from time to
time, may be below the expectations of public market analysts and investors,
which could have a material adverse effect on the price of the Company's Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEPENDENCE ON SUPPLIERS. Several components used in the Company's products
are currently obtained from sole source suppliers. Mercury is dependent on LSI
Logic Corporation for four custom designed ASICs, on Analog Devices for its
SHARC processors, on International Business Machines Corporation for ball grid
array packaging, on Motorola for its PowerPC processors and on Intel for its
i860 processors. IBM may terminate its contract with the Company without cause
upon thirty days notice and may cease offering products to the Company upon
sixty days notice. Analog Devices may discontinue or modify any product upon 180
days notice and LSI Logic may discontinue any product upon 180 days notice. If
LSI Logic, Analog Devices, IBM, Motorola or Intel were to limit or reduce the
sale of such components to the Company, or if these or other suppliers to the
Company were to experience financial difficulties or other problems which
7
<PAGE> 11
prevented them from supplying the Company with the necessary components, such
events could have a material adverse effect on the Company's business, financial
condition and results of operations. These sole source suppliers are subject to
quality and performance issues, materials shortages, excess demand, reduction in
capacity and other factors that may disrupt the flow of goods to the Company or
its customers and thereby adversely affect the Company's business and customer
relationships. The Company has no guaranteed supply arrangements with its
suppliers and there can be no assurance that its suppliers will continue to meet
the Company's requirements. If the Company's supply arrangements are
interrupted, there can be no assurance that the Company would be able to find
another supplier on a timely or satisfactory basis. Any shortage or interruption
in the supply of any of the components used in the Company's products, or the
inability of the Company to procure these components from alternate sources on
acceptable terms could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
severe shortages of components will not occur in the future. Such shortages
could increase the cost or delay the shipment of the Company's products, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Significant increases in the prices of
these components would also materially adversely affect the Company's financial
performance since the Company may not be able to adjust product pricing to
reflect the increase in component costs. The Company could incur set-up costs
and delays in manufacturing should it become necessary to replace any key
vendors due to work stoppages, shipping delays, financial difficulties or other
factors and, under certain circumstances, these costs and delays could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Manufacturing and Testing."
DEPENDENCE UPON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company is
largely dependent upon the skills and efforts of its senior management,
particularly James R. Bertelli, its President and Chief Executive Officer, as
well as its managerial, sales and technical employees. None of the senior
management or other key employees of the Company is subject to any employment
contract or noncompetition agreement. The Company maintains key-man life
insurance on Mr. Bertelli and certain other senior managers. The loss of
services of any of its executives or other key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's future success will depend to a significant extent on
its ability to attract, train, motivate and retain highly skilled technical
professionals, particularly project managers, engineers and other senior
technical personnel. The Company believes that there is a shortage of, and
significant competition for, technical development professionals with the skills
and experience necessary to perform the services offered by the Company. The
Company's ability to maintain and renew existing engagements and obtain new
business depends, in large part, on its ability to hire and retain technical
personnel with the skills that keep pace with continuing changes in industry
standards, technologies and client preferences. The inability to hire additional
qualified personnel could impair the Company's ability to satisfy its growing
client base, requiring an increase in the level of responsibility for both
existing and new personnel. There can be no assurance that the Company will be
successful in retaining current or future employees.
DEPENDENCE ON MEDICAL IMAGING MARKET; POTENTIAL ADVERSE EFFECT OF HEALTH
CARE REFORM. Sales of the Company's computer systems to the medical imaging
market accounted for approximately 11% of the Company's revenues in fiscal 1997,
compared to approximately 23% of revenues in fiscal 1996. These customers are
original equipment manufacturers ("OEMs") of medical imaging devices and, as a
result, any change in the demand for such devices which renders any of the
Company's products unnecessary or obsolete, or any change in the technology in
such devices, could have a material adverse effect on the Company's business,
financial condition and results of operations. Such OEM customers, the end-users
of their products and the health care industry generally are subject to
extensive federal, state and local regulation in the U.S. as well as in other
countries. Changes in applicable health care laws and regulations or new
interpretations of existing laws and regulations could have a material adverse
effect on such customers or end-users. There can be no assurance that future
health care or budgetary legislation or other changes in the administration or
interpretation of governmental health care programs both in the U.S. and abroad
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
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<PAGE> 12
RISK OF ENTRY INTO NEW MARKETS. The Company's expansion strategy includes
developing new products and entering new markets. The Company's ability to
compete in new markets will depend upon a number of factors including, without
limitation, the Company's ability to create demand for its products in such
markets, its ability to manage its growth effectively, the quality of its
products, its ability to respond to changes in its customers' businesses by
updating existing products and introducing, in a timely fashion, products which
meet the needs of its customers and the ability of the Company to respond
rapidly to technological change. The failure of the Company to do any of the
foregoing could result in a material adverse effect on its business, financial
condition and results of operations. In addition, the Company may face
competition in these new markets from various companies which may have
substantially greater research and development resources, marketing and
financial resources, manufacturing capability and customer support organizations
than those of the Company.
The Company has recently expanded into the shared storage market and has
invested, and continues to invest, significant resources in the development of
products geared towards that market. The Company has initially focused on
providing software products tailored for the post-production and broadcast
segments of the entertainment industry, introducing in fiscal 1997 SuiteFusion,
a middleware application that enables workgroups to share files. The market for
providing digital and other products to the entertainment industry includes
competitors with greater financial and other resources than the Company. No
assurance can be given that the Company will be able to successfully compete in
this market, or that it will be able to meet the technical specifications
imposed by its customers or potential customers. In addition, the success of the
Company's shared storage software product depends, in large part, on the
post-production and broadcast industry shifting from traditional linear,
tape-based technologies toward newer non-linear, disk-based digital
technologies. Linear, tape-based technologies remain pervasive in this industry
and there can be no assurance that its participants will adopt non-linear,
disk-based digital technologies, or that, if adopted, the Company's products
will not be obsolete, uncompetitive or incompatible. The occurrence of any of
the foregoing could adversely affect the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company markets and
sells its products in certain international markets, and the Company has
established offices in the United Kingdom, the Netherlands, Japan and France.
The Company's international revenues, which are comprised of export sales to
foreign markets from the United States and sales by foreign subsidiaries, were
approximately 12% of the Company's revenues in fiscal 1997, as compared to
approximately 20% in fiscal 1996. If revenues generated by foreign activities
are not adequate to offset the expense of establishing and maintaining these
foreign subsidiaries and activities, the Company's business, financial condition
and results of operations could be materially adversely affected. In addition,
there are certain risks inherent in transacting business internationally, such
as changes in applicable laws and regulatory requirements, export and import
restrictions, export controls relating to technology, tariffs and other trade
barriers, less favorable intellectual property laws, difficulties in staffing
and managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates, expatriation controls and potential adverse tax consequences, any of
which could adversely impact the success of the Company's international
activities. In the recent past, the financial markets in Asia have experienced
significant turmoil. There can be no assurance that such turmoil in the Asian
financial markets will not negatively affect the sales by the Company to that
region. A portion of the Company's revenues from sales to foreign entities,
including foreign governments, is in the form of foreign currencies. The Company
has no hedging or similar foreign currency contracts, and fluctuations in the
value of foreign currencies could adversely impact the profitability of the
Company's foreign operations. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's future
international activities and, consequently, on the Company's business, financial
condition or results of operations.
TECHNOLOGICAL CHANGES; RISK OF DESIGN-IN PROCESS. The Company's future
success will depend in part on its ability to enhance its current products and
to develop new products on a timely and cost-effective basis in order to respond
to technological developments and changing customer needs. The defense
electronics market, in particular, demands constant technological improvements
as a means of gaining military advantage.
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<PAGE> 13
Military planners historically have funded significantly more design projects
than actual deployments of new equipment, and those systems which are deployed
tend to contain the components of the subcontractors selected to participate in
the design process. In order to participate in the design of new defense
electronics systems, the Company must be able to demonstrate its ability to
deliver superior technological performance on a timely and cost-effective basis.
There can be no assurance that the Company will be able to secure an adequate
number of defense electronics design wins in the future, that the equipment in
which the Company's products are intended to function eventually will be
deployed in the field, or that the Company's products will be included in such
equipment if it eventually is deployed.
Customers in the medical imaging market also seek technological
improvements through product enhancements and new generations of products. The
Company believes that medical imaging machines in which the Company's computers
are installed have a long product life cycle. Medical equipment OEMs
historically have selected certain suppliers whose products have been included
in the OEMs' machines for a significant portion of the products' life cycle.
There can be no assurance that the Company will be selected to participate in
the future design of any medical imaging equipment, or that, if selected, the
Company will generate any revenues for such design work. Failure to participate
in future designs of medical imaging equipment could have a material adverse
effect on the Company's business, financial condition and results of operations.
The design-in process is typically lengthy and expensive, and there can be
no assurance that the Company will be able to continue to meet the product
specifications of its customers in a timely and adequate manner. In addition,
any failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, or any significant delay in product
developments or introductions, could have a material adverse effect on the
Company's business, financial condition and results of operations. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing products on a timely basis. If the Company is unable to
design, develop or introduce competitive new products on a timely basis, its
future operating results would be adversely affected. There can be no assurance
that the Company will be successful in developing new products or enhancing its
existing products on a timely or cost-effective basis, or that such new products
or product enhancements will achieve market acceptance.
COMPETITION. The markets for the Company's products are highly competitive
and are characterized by rapidly changing technology, frequent product
performance improvements and evolving industry standards. Competition typically
occurs at the design stage, where the customer evaluates alternative design
approaches, including those from internal development organizations. A design
win usually ensures a customer will purchase the product until their next
generation system is developed. Occasionally, the Company's computer systems
compete with computer systems from workstation vendors, all of whom have
substantially greater research and development resources, long term guaranteed
supply capacity, marketing and financial resources, manufacturing capability and
customer support organizations than those of the Company. The Company believes
that its future ability to compete effectively will depend, in part, upon its
ability to continue to improve product and process technologies and develop new
technologies in order to maintain the performance advantages of products and
processes relative to competitors, to adapt products and processes to
technological changes, to identify and adopt emerging industry standards and to
adapt to customer needs.
The principal bases for selection in sales of digital signal processing
systems to the defense electronics industry are performance (measured primarily
in terms of processing speed, I/O capacity and interprocessor bandwidth,
processing density per cubic foot, power consumption and heat dissipation),
systems engineering support, overall quality of products and associated
services, use of industry standards, ease of use and price. Competitors in the
defense electronics industry include a relatively small number of companies that
design, manufacture and market digital signal processor ("DSP") board level
products and in-house design teams employed by prime defense contractors.
In-house design efforts historically have provided a significant amount of
competition to the Company. However, competition from in-house design teams has
diminished in significance in recent years due to the increasing use of
commercial off-the-shelf ("COTS") products and the trend toward greater use of
outsourcing. Despite this recent change, there can be no assurance that in-house
developments will not re-emerge as a major competitive force in the future.
Prime contractors are much larger than Mercury and have substantially more
resources to invest in research and development. Increased use of
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<PAGE> 14
in-house design teams by defense contractors in the future may have a material
adverse effect on the Company's business, financial condition and results of
operations.
In the medical imaging industry the principal bases for selection are
performance (measured primarily in terms of processing speed, I/O capacity and
interprocessor bandwidth and power consumption), price, systems engineering
support, overall quality of products and associated services, use of industry
standards and ease of use. Competitors in the medical imaging market include
in-house design teams, a small number of companies that design, manufacture and
market DSP board level products and workstation manufacturers. Workstations have
become a competitive factor primarily in the market for low-end MRI and CT
machines and, to date, have not been a significant factor in the
high-performance market, Mercury's primary focus. There can be no assurance that
workstation manufacturers will not attempt to penetrate the high-performance
market for medical imaging machines. Workstation manufacturers typically have
greater resources than Mercury and their entry into markets historically
targeted by Mercury may have a material adverse effect on the Company's
business, financial condition and results of operations.
Due to the emerging nature of the markets for the Company's shared storage
technology, its competitive factors are not yet clearly defined. The Company
currently is focusing its efforts in this area on the broadcast and
post-production industry, where the Company believes there is currently only one
directly competitive product. As this market develops, the Company anticipates
that other companies will begin offering additional competitive products. New
competitors may have significantly greater marketing and financial resources,
better access to individuals making purchasing decisions, superior products and
superior services than those offered by the Company. The Company believes that
the primary impediment to future sales of shared storage products to the
post-production and broadcast industry is the need to transform entrenched
operating modes, such as those associated with linear tape based technologies,
to accommodate new modes of operation such as those associated with non-linear,
disk-based digital technology. However, there can be no assurance that industry
participants will adopt such new technologies or that, if adopted, the Company's
products will not be obsolete, uncompetitive or incompatible.
Some of the Company's competitors have greater financial and other
resources than the Company, and the Company may be operating at a cost
disadvantage compared to manufacturers who have greater direct buying power from
component suppliers or who have lower cost structures. There can be no assurance
that the Company will be able to compete successfully in the future with any of
these sources of competition. In addition, there can be no assurance that
competitive pressures will not result in price erosion, reduced margins, loss of
market share or other factors, any of which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Competition."
LIMITED PROTECTION OF PROPRIETARY RIGHTS; POTENTIAL INFRINGEMENT OF THIRD
PARTY RIGHTS. The Company relies on a combination of patent, copyright,
trademark and trade secret laws to establish and protect its rights in its
products and proprietary technology. In addition, the Company currently requires
its employees and consultants to enter into nondisclosure and assignment of
invention agreements to limit use of, access to and distribution of its
proprietary information. There can be no assurance that the Company's means of
protecting its proprietary rights in the U.S. or abroad will be adequate. The
laws of some foreign countries may not protect the Company's proprietary rights
as fully or in the same manner as do the laws of the U.S. Also, despite the
steps taken by the Company to protect its proprietary rights, it may be possible
for unauthorized third parties to copy aspects of the Company's products,
reverse engineer, develop similar technology independently or otherwise obtain
and use information that the Company regards as proprietary. There can be no
assurance that others will not develop technologies similar or superior to the
Company's technology or design around the proprietary rights owned by the
Company. In addition, there can be no assurance that others will not assert
claims of infringement in the future or that, if made, such claims will not be
successful. Litigation to determine the validity of any claims, whether or not
such litigation is determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from daily operations. In the event of any
adverse ruling in any litigation regarding intellectual property, the Company
may be required to pay substantial damages, discontinue the sale of infringing
products, expend significant resources to develop non-infringing technology or
obtain licenses to infringing or substituted technology. The failure to develop,
or license on acceptable
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<PAGE> 15
terms, a substitute technology could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Intellectual Property."
POTENTIAL ACQUISITIONS. In the normal course of its business, the Company
evaluates potential acquisitions of businesses, products and technologies that
could complement or expand the Company's business. In the event the Company were
to identify an appropriate acquisition candidate, there is no assurance that the
Company would be able to successfully negotiate the terms of any such
acquisition, finance such acquisition and integrate such acquired business,
products or technologies into the Company's existing business and operations.
Furthermore, the integration of an acquired business could cause a diversion of
management time and resources. In addition, there can be no assurance that any
acquisition of new technology will lead to the successful development of new
products, or that any such new products, if developed, will achieve market
acceptance or prove to be profitable. There can be no assurance that a given
acquisition, when consummated, would not materially adversely affect the
Company's business, financial condition or results of operations. If the Company
proceeds with one or more significant acquisitions in which the consideration
consists of cash, a substantial portion of the Company's available cash
(including the net proceeds of the Offering) could be used to consummate the
acquisitions. If the Company consummates one or more significant acquisitions in
which the consideration consists of stock, or is financed with the net proceeds
of the issuance of stock, stockholders of the Company could suffer a significant
dilution of their interests in the Company. See "Use of Proceeds."
TAX AUDIT. On December 12, 1997, the Internal Revenue Service ("IRS")
concluded an audit of the Company's tax returns for the years ended June 30,
1992 through June 30, 1995, and issued a formal report reflecting proposed
adjustments with respect to the years under audit. The proposed IRS adjustments
primarily relate to the disallowance of research and experimental tax credits
claimed by the Company, as well as the treatment of certain other items. The
total deficiency attributable to the proposed adjustments is $4.2 million,
including penalties and interest of $1.6 million through the date of the report.
The Company is in the process of responding to this report by appealing the
proposed adjustments to the Appeals Division of the IRS. While the Company does
not believe that the final outcome of the IRS audit will have a material adverse
effect on the Company's financial condition or results of operations, no
assurance can be given as to the final outcome of the audit, the amount of any
final adjustments or the potential impact of such adjustments on the Company's
financial condition or results of operations.
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications used in manufacturing, product development, financial business
systems and various administrative functions. To the extent that these software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year "2000," some level of modification or even possibly
replacement of such source code or applications will be necessary. The Company
is still in the preliminary stages of analyzing its software applications and,
to the extent they are not fully "Year 2000" compliant, there can be no
assurance that the costs necessary to update software, or potential systems
interruptions, would not have a material adverse effect on the Company's
business, financial condition or results of operations.
SIGNIFICANT INFLUENCE BY EXISTING STOCKHOLDERS. Upon completion of the
Offering, the current officers, directors and their affiliates and five percent
beneficial owners will beneficially own approximately 32.3% of the outstanding
shares of the Common Stock of the Company (30.9% if the Underwriters'
over-allotment options are exercised in full). Accordingly, such persons, if
they act together, likely will have significant influence over the Company
through their ability to control the election of directors and all other matters
that require action by the Company's stockholders, irrespective of how other
stockholders may vote. Such persons will have the ability to exert significant
influence over the business, policies and affairs of the Company and could
prevent or delay a change in control of the Company, which may be favored by a
majority of the remaining stockholders. The ability to prevent or delay a change
in control of the Company also may have an adverse effect on the market price of
the Common Stock. Under the Massachusetts General Laws, the current officers,
directors and their affiliates and five percent beneficial owners will not have
the ability to block a business combination. More specifically, such persons
will not have the requisite percentage of shares of the Company, acting alone as
a group, to (i) give a bidder the power to vote its shares at any stockholders'
meeting, including a meeting
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to consider a bid, in accordance with Chapter 110D of the Massachusetts General
Laws, or (ii) to approve or ratify a business combination with an interested
stockholder in accordance with Chapter 110F of the Massachusetts General Laws
(as such terms are defined therein). See "Management -- Executive Officers and
Directors," "Principal and Selling Stockholders" and "Description of Capital
Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market for the Common Stock will develop or,
if developed, be sustained upon completion of the Offering. The initial public
offering price will be determined by negotiations between the Company and the
representatives of the Underwriters based on a number of factors, including
prevailing market conditions, market valuations of other companies engaged in
activities similar to those of the Company, estimates of the business potential
and prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products by the Company or its competitors, developments or
disputes with respect to proprietary rights, general trends in the industry,
overall market conditions, changes in earnings estimates by analysts and other
factors. In addition, the stock market historically has experienced extreme
price and volume fluctuations, which have particularly affected the market price
of securities of many high technology companies and which at times have been
unrelated or disproportionate to the operating performance of such companies.
These market fluctuations may adversely affect the market price of the Common
Stock. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have a total of 9,864,023 shares of Common Stock outstanding. Of
these shares, the 3,500,000 shares of Common Stock offered hereby (4,025,000
shares if the Underwriters' over-allotment options are exercised in full) will
be freely tradeable without restriction or registration under the Securities Act
by persons other than "affiliates" of the Company, as defined under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining shares
of Common stock outstanding will be "restricted securities" as defined by Rule
144 promulgated under the Securities Act. Upon completion of the Offering, the
Company will have options outstanding to purchase 1,102,124 shares of Common
Stock. In addition, options for the purchase of 244,166 shares will remain
available for issuance under the Company's Stock Option Plans, assuming no
exercise of options after October 31, 1997. See "Management -- Stock Option
Plans" and "Shares Eligible for Future Sale."
Under Rule 144 (and subject to the conditions thereof, including volume
limitations) all 6,364,023 restricted shares (6,069,673 restricted shares if the
Underwriters' over-allotment options are exercised in full) will become eligible
for sale after the Offering. The Company, its executive officers and directors,
the Selling Stockholders and certain other stockholders have agreed that,
subject to certain exceptions, they will not, without the prior written consent
of Prudential Securities Incorporated, on behalf of the Underwriters, directly
or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any other securities
convertible into, or exercisable or exchangeable for, shares of Common Stock or
other similar securities of the Company for a period of 180 days from the date
of this Prospectus. After such 180-day period, this restriction will expire and
shares permitted to be sold under Rule 144 would be eligible for sale, provided
that the Company shall have been subject to the reporting requirements of the
Exchange Act for at least 90 days and the relevant holding period under Rule 144
shall have expired. Prudential Securities Incorporated may, in its sole
discretion, at any time and without prior notice, release all or any portion of
the shares of Common Stock subject to such agreements. No predictions can be
made of the effect, if any, that the sale or availability for sale of additional
shares of Common Stock will have on the market price of the Common Stock.
Nevertheless, sales of substantial amounts of such shares in the public market,
or the perception that such sales could occur, could materially and adversely
affect the market price of the Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity securities.
See "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK. Certain
provisions of the Company's Restated Articles of Organization (the "Charter")
and Amended and Restated Bylaws (the "Bylaws") and certain provisions of
Massachusetts law could have the effect of making it more difficult for a third
party to
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acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that investors might be
willing to pay in the future for the Company's Common Stock. These provisions
permit the issuance of "blank check" preferred stock by the Board of Directors
without stockholder approval, require super-majority approval to amend certain
provisions in the Charter and Bylaws and impose various procedural and other
requirements that could make it more difficult for Stockholders to effect
certain corporate actions. In addition, the Company is subject to Chapters 110D
and 110F of the Massachusetts General Laws, which prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder unless either (i) the interested stockholder
obtains the approval of the board of directors prior to becoming an interested
stockholder, (ii) the interested stockholder acquires 90% of the outstanding
voting stock of the Company at the time he becomes an interested stockholder or
(iii) the business combination is approved by both the Company's board of
directors and two-thirds of the outstanding voting stock of the Company
(excluding shares held by the interested stockholder) at an annual or special
meeting of stockholders, and not by written consent. The application of such
provisions also could have the effect of delaying or preventing a change of
control in the Company. The Board of Directors is divided into three "staggered"
classes, with each class serving for a term of three years. Dividing the Board
of Directors in this manner increases the difficulty of removing incumbent
members and could discourage a proxy contest or the acquisition of a substantial
block of the Company's Common Stock. See "Description of Capital Stock --
Certain Articles of Organization, Bylaws and Statutory Provisions Affecting
Stockholders" and "Management."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in the
Offering will experience an immediate and substantial dilution in the net
tangible book value of the Common Stock of $7.20 per share based upon an assumed
initial public offering price of $13.00, the mid-point of the filing range. To
the extent outstanding options to purchase shares of the Company's Common Stock
are exercised, there will be further dilution. See "Dilution."
NO PRESENT INTENTION TO PAY DIVIDENDS; RESTRICTION ON PAYMENT OF
DIVIDENDS. The Company has never declared or paid cash dividends on its Common
Stock and intends to retain any earnings for future growth. The Company
therefore does not anticipate that any cash dividends will be declared or paid
in the foreseeable future. In addition, the Company's credit facility limits the
payment of cash dividends without the consent of the lender to fifty percent of
the Company's year-to-date net income during any fiscal year. See "Dividend
Policy."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $23,430,000,
assuming an initial public offering price of $13.00 per share, the mid-point of
the filing range, and after deducting the underwriting discounts and commissions
and estimated offering expenses. The Company intends to use a portion of the net
proceeds of the Offering to fund construction of an additional 91,000 square
feet of office space on vacant land adjacent to its headquarters. The Company
used internally generated funds to acquire this parcel in November 1997. The
Company anticipates that construction and development of the additional office
space will cost approximately $9.0 million, that it will break ground in April
1998 and that it will complete construction in approximately 12 months after
construction begins. Once the new office space is completed, the Company plans
to transfer the building and the underlying real estate to an unaffiliated third
party pursuant to a sale and leaseback transaction. No assurance can be made
that the cost of construction and development will not exceed such estimate, or
that the Company will be able to consummate a sale and leaseback transaction
with respect to such property. Mercury intends to use the balance of the net
proceeds for working capital and general corporate purposes. A portion of the
proceeds of the Offering may be used to pay amounts arising out of an audit by
the IRS of the Company's tax returns for the years ended June 30, 1992 through
June 30, 1995. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview." In addition, the Company may use a
portion of the net proceeds of this Offering for acquisitions of complementary
businesses, technologies or products, although there are currently no
commitments or agreements with respect to any material acquisition. Pending such
uses, the Company intends to invest the net proceeds in short term, investment
grade, interest-bearing securities. The Company will not receive any proceeds
from the sale of shares of Common Stock by the Selling Stockholders. See
"Business -- Facilities" and "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on shares of its
Common Stock and does not expect to declare or pay cash dividends on its Common
Stock in the foreseeable future. The Company currently intends to retain any
earnings for future growth. In addition, the Company's credit facility limits
the payment of cash dividends without the consent of its lender to fifty percent
of the Company's year-to-date net income in any fiscal year. See "Risk
Factors -- No Present Intention to Pay Dividends; Restriction on Payment of
Dividends," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," and Note E of Notes
to Consolidated Financial Statements.
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CAPITALIZATION
The following table sets forth as of September 30, 1997: (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
reflecting the conversion of all outstanding shares of Series A Convertible
Preferred Stock into 2,556,792 shares of Common Stock and (iii) the pro forma
capitalization of the Company as adjusted to give effect to the sale of the
2,000,000 shares of Common Stock offered by the Company hereby at the assumed
initial public offering price of $13.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000,000 shares
authorized actual, 1,000,000 shares authorized pro
forma and as adjusted; 1,000,000 shares designated
Series A Convertible Preferred Stock actual, no shares
designated pro forma and as adjusted; 852,264 shares
of Series A Convertible Preferred Stock issued and
outstanding actual, no shares issued or outstanding
pro forma and as adjusted............................. $ 1,200 -- --
Common Stock, $.01 par value; 25,000,000 shares
authorized; 5,269,181 shares issued and outstanding
actual, 7,825,973 shares issued and outstanding pro
forma and 9,825,973 shares issued and outstanding as
adjusted(1)........................................... 53 $ 78 $ 98
Additional paid-in capital............................... 5,846 7,021 30,431
Retained earnings........................................ 28,358 28,358 28,358
Cumulative translation adjustment........................ (21) (21) (21)
Subscriptions and related parties notes receivable....... (325) (325) (325)
------- ------- -------
Total stockholders' equity.......................... 35,111 35,111 58,541
------- ------- -------
Total capitalization............................. $35,111 $35,111 $58,541
======= ======= =======
</TABLE>
- ---------------
(1) Excludes 1,096,373 shares of Common Stock issuable upon exercise of
outstanding stock options under the Company's stock option plans at October
31, 1997, with a weighted average exercise price of $4.85 per share, of
which 463,517 shares were exercisable as of such date at a weighted average
exercise price of $3.37 per share. See "Management -- Stock Option and Stock
Purchase Plans."
16
<PAGE> 20
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of the Common
Stock from the assumed initial public offering price. The pro forma net tangible
book value of the Company as of September 30, 1997 was $36.3 million or $4.37
per share. Pro forma net tangible book value per share is determined by dividing
the net tangible book value of the Company (tangible assets less liabilities) by
the pro forma number of shares of the Company's Common Stock outstanding and
adjusting for stock options exercisable as of September 30, 1997. Without taking
into account any changes in net tangible book value subsequent to September 30,
1997, other than to give effect to the receipt of the estimated net proceeds of
the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $13.00 per share, the mid-point of the filing
range, after deducting the underwriting discounts and commissions and estimated
offering expenses, and the application of the estimated net proceeds therefrom,
the pro forma net tangible book value of the Common Stock as of September 30,
1997 would have been $59.7 million, or $5.80 per share. This represents an
immediate and substantial dilution in pro forma net tangible book value of $7.20
per share to new investors purchasing shares in the Offering. The following
table illustrates the per share dilution as of September 30, 1997:
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................... $13.00
Pro forma net tangible book value at September 30, 1997..... $4.37
Increase attributable to new investors...................... 1.43
-----
Pro forma net tangible book value after the Offering.......... 5.80
------
Dilution per share to new investors........................... $ 7.20
======
</TABLE>
The following table sets forth, on an as adjusted basis as of September 30,
1997, after giving effect to the conversion of all outstanding shares of Series
A Convertible Preferred Stock into Common Stock, the differences between
existing Stockholders and purchasers of Common Stock in the Offering at an
assumed initial public offering price of $13.00 per share, the mid-point of the
filing range, and before the deduction of underwriting discounts and commissions
and estimated offering expenses with respect to the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2)........ 8,292,877 80.6% $ 7,611,769 22.6% $ 0.92
New investors(1)................... 2,000,000 19.4 26,000,000 77.4 13.00
---------- ----- ----------- -----
Total......................... 10,292,877 100.0% $33,611,769 100.0%
========== ===== =========== =====
</TABLE>
- ---------------
(1) Does not reflect the sale of 1,500,000 shares of Common Stock by the Selling
Stockholders in the Offering. Assumes the exercise of options to purchase
466,904 shares of Common Stock which were exercisable as of September 30,
1997 at a weighted average exercise price of $3.24 per share. See
"Management -- Stock Option and Stock Purchase Plans."
(2) The total consideration excludes a $1,000,000 contingent liability
associated with the Series B Convertible Preferred Stock which was
reclassified to additional paid-in capital when the obligation expired
during the fiscal year ended June 30, 1995. See Note G to Notes to
Consolidated Financial Statements.
The foregoing tables assume no exercise of the Underwriters' over-allotment
options or stock options outstanding at October 31, 1997. At October 31, 1997,
there were 1,096,373 shares of Common Stock issuable upon exercise of
outstanding stock options at a weighted average exercise price of $4.85 per
share. To the extent that outstanding options are exercised in the future, there
will be further dilution to new investors. See "Management-Stock Option and
Stock Purchase Plans" and Note G of Notes to Consolidated Financial Statements.
17
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
years ended June 30, 1995, 1996 and 1997 are derived from the consolidated
financial statements of the Company included elsewhere in this Prospectus which
have been audited by Coopers & Lybrand L.L.P., independent accountants. The
selected consolidated financial data as of and for the years ended June 30, 1993
and 1994 are derived from financial statements of the Company, also audited by
Coopers & Lybrand L.L.P., not included in this prospectus. The selected
consolidated financial data as of and for the three months ended September 30,
1996 and September 30, 1997, are derived from unaudited financial statements
that have been prepared on the same basis as the audited financial statements
and which, in the opinion of management, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
Company's financial position and results of operations. The financial data for
the three months ended September 30, 1997, are not necessarily indicative of the
results for the full year. The historical results are not necessarily indicative
of the results of operations to be expected in the future. The following
financial data is qualified in its entirety by, and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------------------------- ------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $38,632 $41,727 $54,323 $58,300 $64,574 $13,038 $19,039
Cost of revenues................ 11,972 16,285 21,221 24,688 22,034 4,538 6,661
------- ------- ------- ------- ------- ------- -------
Gross profit.................. 26,660 25,442 33,102 33,612 42,540 8,500 12,378
Operating expenses:
Selling, general and
administrative............. 10,785 12,911 15,798 16,927 22,631 4,726 6,645
Research and development...... 5,619 7,254 8,586 9,776 12,837 2,405 3,381
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 16,404 20,165 24,384 26,703 35,468 7,131 10,026
------- ------- ------- ------- ------- ------- -------
Income from operations.......... 10,256 5,277 8,718 6,909 7,072 1,369 2,352
Interest income................. 105 69 278 561 582 136 233
Interest expense................ (199) (14) (38) (13) (22) -- (2)
Other income (expense), net..... (44) (64) 22 (77) (88) (23) 83
------- ------- ------- ------- ------- ------- -------
Income before income taxes...... 10,118 5,268 8,980 7,380 7,544 1,482 2,666
Provision for income taxes...... 2,487 1,153 2,636 2,952 2,933 576 1,060
------- ------- ------- ------- ------- ------- -------
Net income...................... $ 7,631 $ 4,115 $ 6,344 $ 4,428 $ 4,611 $ 906 $ 1,606
======= ======= ======= ======= ======= ======= =======
Net income per common share..... $ 1.02 $ 0.50 $ 0.77 $ 0.54 $ 0.57 $ 0.11 $ 0.20
======= ======= ======= ======= ======= ======= =======
Weighted average number of
common and common
equivalent shares
outstanding................ 7,492 8,295 8,256 8,264 8,157 8,191 8,174
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $11,258 $14,454 $20,156 $23,554 $27,547 $28,653
Total assets.................... 17,185 22,926 33,543 33,264 44,848 47,905
Convertible preferred stock..... 1,200 1,200 1,200 1,200 1,200 1,200
Total stockholders' equity...... 12,682 16,690 24,003 28,529 33,322 35,111
</TABLE>
- ---------------
(1) See Note B of Notes to Consolidated Financial Statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute net income per common share.
(2) Gives effect to the conversion of all outstanding shares of the Company's
Series A Convertible Preferred Stock into 2,556,792 shares of Common Stock
upon completion of this Offering.
18
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. Except for
the historical information contained herein, the discussions in this Prospectus
contain forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and in the section entitled "Risk Factors" as
well as those discussed elsewhere in this Prospectus.
OVERVIEW
Mercury designs, manufactures and markets high performance, real-time
digital signal processing computer systems that transform sensor generated data
into information which can be displayed as images for human interpretation or
subjected to additional computer analysis. These multicomputer systems are
heterogeneous and scalable, allowing them to accommodate several microprocessor
types and to scale from a few to hundreds of microprocessors within a single
system.
During the past three fiscal years, the majority of the Company's revenues
has been generated from sales of its products to the defense electronics market,
generally for use in intelligence gathering electronic warfare systems. The
Company's activities in this area have focused on the proof of concept,
development and deployment of advanced military applications in radar, sonar and
airborne surveillance. Medical diagnostic imaging is the other primary market
currently served by the Company. Mercury's computer systems are embedded in MRI,
CT and PET machines. The remaining component of revenues is derived from
computer systems used in such commercial applications as baggage scanning,
seismic analysis and automatic testing equipment, and from sales of Mercury's
recently introduced SuiteFusion shared storage product and related products and
services.
Mercury uses a direct sales force to sell its computer systems to the
defense electronics markets in the U.S., Japan, the United Kingdom and France.
Defense electronics sales to other countries are achieved through distributors.
The Company also uses a direct sales force to sell its computer systems to the
U.S. and international medical imaging markets. The Company uses various
distribution channels for sales of shared storage products to the broadcast and
post-production industry. The Company sells these products to OEMs, value added
re-sellers and end-users. Over the past three fiscal years, the Company has
expanded its sales force to support growing revenues and has made significant
expenditures to recruit additional technical and professional staff, to invest
in information technology and to improve the Company's financial, administrative
and management infrastructure.
Revenues include amounts attributable to both products, which include
development contracts, and services such as maintenance, training and
engineering consulting. Revenues from maintenance, training and engineering
consulting services generally have not constituted a material portion of total
revenues. The Company generally records product revenues upon shipment to the
customer, provided that no significant vendor obligation exists, and accrues for
associated warranty costs at the same time. For certain development contracts,
revenues are recognized using the percentage-of-completion accounting method.
Revenues from maintenance, training and engineering consulting services are
recognized ratably over the applicable contract period or as the services are
performed.
Cost of revenues includes the cost of materials, component assembly,
internal labor and related overhead. Cost of revenues also can include
engineering and other technical labor and related overhead incurred in
development and engineering consulting contracts.
Gross profit as a percentage of revenues ("gross margin") varies from
period to period depending upon numerous variables including the mix of revenues
from hardware, software, development and engineering consulting contracts; the
mix of revenues among the markets served by the Company; the cost of raw
materials; the cost of outsourced services and labor costs; operational
efficiencies; actual production volume
19
<PAGE> 23
compared to planned volume; and the mix of applications for which the Company's
computer systems are sold. Historically, the Company's gross margins on service
revenues have been lower than on product revenues. In addition, the Company's
gross margins from development contract revenues are typically lower than the
Company's gross margins from standard product revenues. The Company intends to
continue to enter into development contracts and anticipates that the gross
margins associated with development contract revenues will continue to be lower
than its gross margins on standard product revenues.
Mercury has made significant investments in research and development in an
effort to maintain its technology leadership in digital signal processing and to
create new software products for the shared storage market. Mercury invested
$8.6 million, $9.8 million and $12.8 million in fiscal years 1995, 1996 and
1997, respectively, in development activities associated with the Company's key
technology competencies as well as in activities that are targeted at developing
new technologies and products. The Company expects research and development
expenses to continue to increase as the Company continues to develop products to
serve its markets, all of which are subject to rapidly changing technology,
frequent product performance improvements and evolving industry standards. The
ability to deliver superior technological performance on a timely and cost
effective basis is a critical factor in securing design wins for future
generations of defense electronics and medical imaging systems. Significant
research and development spending by the Company does not ensure that the
Company's computer systems will be designed into a customer's system. Because
future production orders are usually contingent upon securing a design win, the
Company's operating results may fluctuate due to either obtaining or failing to
obtain design wins for significant customer systems.
On December 12, 1997, the IRS concluded an audit of the Company's tax
returns for the years ended June 30, 1992 through June 30, 1995, and issued a
formal report reflecting proposed adjustments with respect to the years under
audit. The proposed IRS adjustments primarily relate to the disallowance of
research and experimental tax credits claimed by the Company, as well as the
treatment of certain other items. The total deficiency attributable to the
proposed adjustments is $4.2 million, including penalties and interest of $1.6
million through the date of the report. The Company is in the process of
responding to this report by appealing the proposed adjustments to the Appeals
Division of the IRS. While the Company does not believe that the final outcome
of the IRS audit will have a material adverse effect on the Company's financial
condition or results of operations, no assurance can be given as to the final
outcome of the audit, the amount of any final adjustments or the potential
impact of such adjustments on the Company's financial condition or results of
operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenues.
<TABLE>
<CAPTION>
THREE
YEAR ENDED MONTHS ENDED
JUNE 30, SEPTEMBER 30,
------------------------- ---------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................... 39.1 42.3 34.1 34.8 35.0
----- ----- ----- ----- -----
Gross profit....................................... 60.9 57.7 65.9 65.2 65.0
Operating expenses:
Selling, general and administrative.............. 29.1 29.0 35.0 36.3 34.8
Research and development......................... 15.8 16.8 19.9 18.4 17.8
----- ----- ----- ----- -----
Total operating expenses................. 44.9 45.8 54.9 54.7 52.6
----- ----- ----- ----- -----
Income from operations............................. 16.0 11.9 11.0 10.5 12.4
Other income (expense), net........................ 0.5 0.8 0.7 0.9 1.6
----- ----- ----- ----- -----
Income before income taxes......................... 16.5 12.7 11.7 11.4 14.0
Provision for income taxes......................... 4.8 5.1 4.6 4.5 5.6
----- ----- ----- ----- -----
Net income......................................... 11.7% 7.6% 7.1% 6.9% 8.4%
===== ===== ===== ===== =====
</TABLE>
20
<PAGE> 24
Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996
Revenues
Total revenues increased 46% from $13.0 million during the three months
ended September 30, 1996 to $19.0 million during the three months ended
September 30, 1997. Revenues from defense electronics, medical imaging and other
commercial markets increased, as described below.
Defense electronics revenues increased 37% from $11.0 million or 84.9% of
total revenues during the three months ended September 30, 1996 to $15.1 million
or 79.6% of total revenues during the three months ended September 30, 1997. The
increase in revenues was due primarily to increased unit demand for defense
electronics products.
Medical imaging revenues increased 58% from $1.4 million or 10.8% of total
revenues during the three months ended September 30, 1996 to $2.2 million or
11.7% of total revenues during the three months ended September 30, 1997. The
increase in revenues was due primarily to the doubling of sales to the largest
medical imaging customer.
Other revenues increased 190% from $569,000 or 4.4% of total revenues
during the three months ended September 30, 1996 to $1.7 million or 8.7% of
total revenues during the three months ended September 30, 1997. This increase
in other revenues was due primarily to an increase in unit demand from new and
existing customers.
Cost of Revenues
Cost of revenues increased 47% from $4.5 million during the three months
ended September 30, 1996 to $6.7 million during the three months ended September
30, 1997 but was consistent as a percentage of total revenues at approximately
35.0%. A decline in material costs was offset by increases in manufacturing
quality costs and costs related to development contracts.
Selling, General and Administrative
Selling, general and administrative expenses increased 41% from $4.7
million during the three months ended September 30, 1996 to $6.6 million during
the three months ended September 30, 1997. Selling, general and administrative
expenses as a percentage of total revenues were 36.3% during the three months
ended September 30, 1996 and 34.8% during the three months ended September 30,
1997. The increase reflects the hiring of additional sales and administrative
personnel, increased commissions and the development of the Company's financial,
administrative and management systems to support the Company's growth.
Research and Development
Research and development expenses, excluding capitalized software
expenditures, increased 41% from $2.4 million during the three months ended
September 30, 1996 to $3.4 million during the three months ended September 30,
1997. Research and development expenses as a percentage of total revenues were
18.4% during the three months ended September 30, 1996 and 17.8% during the
three months ended September 30, 1997. The increase in research and development
expenses reflects increased investments in the Company's core technological
competencies, as well as in new medical and shared storage technologies and
products.
Income from Operations
Income from operations increased 72% from $1.4 million during the three
months ended September 30, 1996 to $2.4 million during the three months ended
September 30, 1997. Included in income from operations during the three months
ended September 30, 1997 were $38,000 in revenues and approximately $700,000 in
direct expenses related to the shared storage business. These include direct
expenses from marketing and engineering activities primarily related to
compensation, trade shows and prototype development. There were no revenues or
expenses related to the shared storage business during the three months ended
September 30, 1996.
21
<PAGE> 25
Interest Income
The Company earned $136,000 in interest income during the three months
ended September 30, 1996 and $233,000 during the three months ended September
30, 1997. The increase was due primarily to the significant increase in average
balances of cash and investments.
Provision for Income Taxes
The Company's provision for income taxes was $576,000 during the three
months ended September 30, 1996 and $1.1 million during the three months ended
September 30, 1997. The Company's effective tax rate increased slightly from 39%
during the three months ended September 30, 1996 to 40% during the three months
ended September 30, 1997.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Revenues
Total revenues increased 11% from $58.3 million during the year ended June
30, 1996 to $64.6 million during the year ended June 30, 1997. The increase was
due primarily to increased unit demand in the defense electronics business and
the introduction of shared storage hardware and software during the year ended
June 30, 1997.
Defense electronics revenues increased 25% from $41.8 million or 71.7% of
total revenues during the year ended June 30, 1996 to $52.2 million or 80.9% of
total revenues during the year ended June 30, 1997. The increase was due
primarily to increased unit demand for defense electronics products.
Medical imaging revenues decreased 48% from $13.3 million or 22.7% of total
revenues during the year ended June 30, 1996 to $6.9 million or 10.7% of total
revenues during the year ended June 30, 1997. The decrease in revenues was due
primarily to a reduction in product prices, discontinuation of certain products
by one customer and the acceleration of purchasing at the end of the year ended
June 30, 1996 by two of the Company's medical imaging customers.
Other revenues increased 67% from $3.2 million or 5.6% of total revenues
during the year ended June 30, 1996 to $5.4 million or 8.4% of total revenues
during the year ended June 30, 1997. The increase in revenues was due primarily
to the introduction of shared storage hardware and software during the year
ended June 30, 1997.
Cost of Revenues
Cost of revenues declined 11% from $24.7 million during the year ended June
30, 1996 to $22.0 million during the year ended June 30, 1997. Cost of revenues
as a percentage of total revenues decreased from 42.3% during the year ended
June 30, 1996 to 34.1% during the year ended June 30, 1997. This decrease was
due primarily to the inclusion in the year ended June 30, 1996, of a domestic
defense electronics development contract which yielded significantly lower gross
margins than the gross margins historically achieved by the Company.
Selling, General and Administrative
Selling, general and administrative expenses increased 34% from $16.9
million during the year ended June 30, 1996 to $22.6 million during the year
ended June 30, 1997. Selling, general and administrative expenses as a
percentage of total revenues were 29.0% during the year ended June 30, 1996 and
35.0% during the year ended June 30, 1997. The increase reflects the hiring of
additional sales and administrative personnel, increased commissions and the
development of the Company's financial and administrative systems to support the
Company's growth.
Research and Development
Research and development expenses, excluding capitalized software
expenditures, increased 31% from $9.8 million during the year ended June 30,
1996 to $12.8 million during the year ended June 30, 1997. Research and
development expenses as a percentage of total revenues were 16.8% during the
year ended
22
<PAGE> 26
June 30, 1996 and 19.9% during the year ended June 30, 1997. The increase
reflects greater investment in the Company's core competencies, as well as in
new medical and shared storage technologies and products.
Income from Operations
Income from operations increased 2% from $6.9 million during the year ended
June 30, 1996 to $7.1 million during the year ended June 30, 1997. Included in
income from operations during the year ended June 30, 1997 were $2.1 million in
hardware and software revenues and $3.6 million in direct expenses related to
the shared storage business. These include direct expenses from marketing and
engineering activities, primarily related to compensation, trade shows and
prototype development and direct costs related to the sale of the product,
including certain hardware costs. There were no revenues or expenses related to
the shared storage business during the year ended June 30, 1996.
Interest Income
The Company earned $561,000 in interest income during the year ended June
30, 1996 and $582,000 during the year ended June 30, 1997. This increase in
interest income was due to the increase in average balances of cash and
investments, partially offset by a decrease in average interest rates.
Provision for Income Taxes
The Company's provision for income taxes was $3.0 million during the year
ended June 30, 1996 and $2.9 million during the year ended June 30, 1997. The
Company's effective tax rate was 40% during the year ended June 30, 1996 and 39%
during the year ended June 30, 1997.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
Revenues
Total revenues increased 7% from $54.3 million during the year ended June
30, 1995 to $58.3 million during the year ended June 30, 1996. The increase in
revenues was due primarily to the increase in unit demand for both the defense
electronics and medical imaging products.
Defense electronics revenues increased 2% from $40.9 million or 75.3% of
total revenues during the year ended June 30, 1995 to $41.8 million or 71.7% of
total revenues during the year ended June 30, 1996. The relatively modest
increase in defense electronics revenues was due primarily to a large
international contract fulfilled in 1995.
Medical imaging revenues increased 41% from $9.4 million or 17.3% of total
revenues during the year ended June 30, 1995 to $13.3 million or 22.7% of total
revenues during the year ended June 30, 1996. The increase was primarily due to
the acceleration of purchasing at the end of the year ended June 30, 1996 by two
of the Company's medical imaging customers.
Other revenues decreased 20% from $4.0 million or 7.4% of total revenues
during the year ended June 30, 1995 to $3.2 million or 5.6% of total revenues
during the year ended June 30, 1996. The decrease was primarily due to lower
demand associated with the Company's other commercial products and services.
Cost of Revenues
Cost of revenues increased 16% from $21.2 million during the year ended
June 30, 1995 to $24.7 million during the year ended June 30, 1996. Cost of
revenues as a percentage of total revenues, increased from 39.1% during the year
ended June 30, 1995 to 42.3% during the year ended June 30, 1996. The increase
was due primarily to the inclusion in the year ended June 30, 1996 of a domestic
defense electronics development contract which yielded significantly lower gross
margins than the gross margins historically achieved by the Company.
Selling, General and Administrative
Selling, general and administrative expenses increased 7% from $15.8
million during the year ended June 30, 1995 to $16.9 million during the year
ended June 30, 1996. Selling, general and administrative expenses as a
percentage of total revenues were 29.1% during the year ended June 30, 1995 and
29.0% during the year ended June 30, 1996. The increase was due primarily to the
hiring of additional sales and administrative personnel to support the Company's
growth.
23
<PAGE> 27
Research and Development
Research and development expenses, excluding capitalized software
expenditures, increased 14% from $8.6 million during the year ended June 30,
1995 to $9.8 million during the year ended June 30, 1996. Research and
development expenses as a percentage of total revenues were 15.8% during the
year ended June 30, 1995 and 16.8% during the year ended June 30, 1996. The
increase was due primarily to the hiring of additional software and hardware
engineers to develop and enhance the features and functionality of the Company's
products.
Income from Operations
Income from operations decreased 21% from $8.7 million during the year
ended June 30, 1995 to $6.9 million during the year ended June 30, 1996.
Interest Income
The Company earned $278,000 in interest income during the year ended June
30, 1995 and $561,000 during the year ended June 30, 1996. The increase was
primarily due to the significant increase in average balances of cash and
investments.
Provision for Income Taxes
The Company's provision for income taxes was $2.6 million during the year
ended June 30, 1995 and $3.0 million during the year ended June 30, 1996. The
Company's effective tax rate was 29% during the year ended June 30, 1995 and 40%
during the year ended June 30, 1996. The significantly lower tax rate during the
year ended June 30, 1995 was due primarily to the utilization of tax credits
during that year.
24
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected consolidated financial information
for each of the Company's last nine fiscal quarters. However, in the opinion of
the Company's management, this information reflects all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present this
information when read in conjunction with the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1996 1996 1996 1996 1997 1997 1997
--------- -------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $13,501 $14,521 $15,175 $15,103 $13,038 $15,106 $17,154 $19,276 $19,039
Cost of revenues............ 5,723 7,117 5,991 5,857 4,538 5,128 5,356 7,012 6,661
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................ 7,778 7,404 9,184 9,246 8,500 9,978 11,798 12,264 12,378
Operating expenses:
Selling, general and
administrative........... 3,776 4,249 4,191 4,711 4,726 5,577 5,737 6,591 6,645
Research and development... 2,143 2,352 2,473 2,808 2,405 3,420 3,759 3,253 3,381
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 5,919 6,601 6,664 7,519 7,131 8,997 9,496 9,844 10,026
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from operations...... 1,859 803 2,520 1,727 1,369 981 2,302 2,420 2,352
Other income (expense),
net........................ 137 145 68 121 113 144 23 192 314
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes...................... 1,996 948 2,588 1,848 1,482 1,125 2,325 2,612 2,666
Provision for income
taxes...................... 798 379 1,035 740 576 437 904 1,016 1,060
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.................. $ 1,198 $ 569 $ 1,553 $ 1,108 $ 906 $ 688 $ 1,421 $ 1,596 $ 1,606
======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per common
share...................... $ 0.15 $ 0.07 $ 0.19 $ 0.13 $ 0.11 $ 0.08 $ 0.17 $ 0.20 $ 0.20
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of
common and common
equivalent shares
outstanding................ 8,257 8,261 8,263 8,266 8,191 8,140 8,148 8,162 8,174
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth selected consolidated financial information
as a percentage of total revenues for each of the Company's last nine fiscal
quarters.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1996 1996 1996 1996 1997 1997 1997
--------- -------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............ 42.4 49.0 39.5 38.8 34.8 33.9 31.2 36.4 35.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit................ 57.6 51.0 60.5 61.2 65.2 66.1 68.8 63.6 65.0
Operating expenses:
Selling, general and
administrative........... 28.0 29.3 27.6 31.2 36.3 37.0 33.5 34.1 34.8
Research and development... 15.8 16.2 16.3 18.6 18.4 22.6 21.9 16.9 17.8
----- ----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............ 43.8 45.5 43.9 49.8 54.7 59.6 55.4 51.0 52.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Income from operations...... 13.8 5.5 16.6 11.4 10.5 6.5 13.4 12.6 12.4
Other income (expense),
net........................ 1.0 1.0 0.4 0.8 0.9 0.9 0.2 1.0 1.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Income before income
taxes...................... 14.8 6.5 17.0 12.2 11.4 7.4 13.6 13.6 14.0
Provision for income
taxes...................... 5.9 2.6 6.8 4.9 4.5 2.8 5.3 5.3 5.6
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income.................. 8.9% 3.9% 10.2% 7.3% 6.9% 4.6% 8.3% 8.3% 8.4%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company has experienced fluctuations in its results of operations in
large part due to the sale by the Company of its computer systems in relatively
large dollar amounts to a relatively small number of customers. Operating
results also have fluctuated due to competitive pricing programs and volume
discounts, the loss of customers, market acceptance of the Company's products,
product obsolescence and general economic conditions. In addition, the Company,
from time to time, has entered into development contracts. The Company's gross
margins from development contract revenues are typically lower than the
Company's gross margins from standard product revenues. The Company intends to
continue to enter into development
25
<PAGE> 29
contracts and anticipates that its gross margins associated with development
contract revenues will continue to be lower than its gross margins on standard
product revenues.
The Company's quarterly results may be subject to fluctuations resulting
from the foregoing factors, as well as a number of other factors, including the
timing of significant orders, delays in completion of internal product
development projects, delays in shipping the Company's computer systems and
software programs, delays in acceptance testing by customers, a change in the
mix of products sold to the defense electronics and medical imaging markets,
production delays due to quality problems with outsourced components, shortages
of components, the timing of product line transitions and declines in quarterly
revenues from old generations of products following announcement of replacement
products containing more advanced technology. Another factor contributing to
fluctuations in quarterly results is the fixed nature of the Company's
expenditures on personnel, facilities and marketing programs. The Company's
expense levels for personnel, facilities and marketing programs are based, in
significant part, on the Company's expectations of future revenues on a
quarterly basis. If actual quarterly revenues are below management's
expectations, results of operations likely will be adversely affected. As a
result of the foregoing factors, the Company's operating results, from time to
time, may be below the expectations of public market analysts and investors,
which could have a material adverse effect on the price of the Company's Common
Stock.
LIQUIDITY AND CAPITAL RESOURCES
During the past five fiscal years, the Company has funded its operations to
date primarily from cash generated from operations. As of September 30, 1997,
the Company had cash and cash equivalents of approximately $16.0 million and
working capital of $28.7 million. During the three months ended September 30,
1996, the Company generated approximately $843,000 in cash from operations
compared to $2.0 million generated during the three months ended September 30,
1997. During the year ended June 30, 1996, the Company generated approximately
$4.3 million in cash from operations compared to $9.2 million generated during
the year ended June 30, 1997. The increases in cash generated from operations
were due to improved operating results, higher percentage of non-cash expenses
within total expenses and better management of the Company's inventory and
receivables. The Company's days sales outstanding was 71 days and 58 days at
June 30, 1997 and September 30, 1997, respectively.
The Company has a line of credit agreement with a commercial bank on which
the Company can borrow up to $6.0 million at an interest rate equal to the prime
rate or, at the election of the Company, two and one quarter percentage points
above the London InterBank Offered Rate. As of September 30, 1997, there was no
outstanding borrowing on this line of credit.
The Company used approximately $1.4 million in investing activities for
computers, furniture and equipment during the three months ended September 30,
1997, compared to $567,000 during the three months ended September 30, 1996.
During the year ended June 30, 1997, the Company invested approximately $4.0
million, which consisted primarily of $3.5 million for the investment in
computers, furniture and equipment and $550,000 for capitalized software,
compared to $3.3 million during the year ended June 30, 1996, which consisted of
$2.9 million for computers, furniture and equipment and $371,000 for capitalized
software. No software development costs were capitalized during the three months
ended September 30, 1997.
The Company intends to use a portion of the net proceeds of the Offering to
fund construction of additional 91,000 square feet of office space on vacant
land adjacent to its headquarters. The Company used internally generated funds
to acquire this parcel in November, 1997. The Company anticipates that
construction and development of the additional office space will cost
approximately $9.0 million, that it will break ground in April 1998 and that it
will complete construction and development in approximately 12 months after
construction begins. Once the new office space is completed, the Company plans
to transfer this parcel to an unaffiliated third party pursuant to a sale
leaseback transaction. No assurances can be made that the cost of construction
will not exceed such estimate, or that the Company will be able to consummate a
sale and leaseback transaction with respect to such property. The Company does
not expect to realize a profit or loss from the sale of the finished building.
See "Use of Proceeds" and "Business -- Facilities."
A portion of the proceeds of the Offering may be used to pay amounts
arising out of an audit by the IRS of the Company's tax returns for the years
ended June 30, 1992 through June 30, 1995. Mercury believes that the net
proceeds of the Offering, together with available cash, cash generated from
operations and the
26
<PAGE> 30
Company's line of credit, will be sufficient to provide for the Company's
working capital and capital expenditure requirements for the foreseeable future
and any final adjustments resulting from the IRS audit described above. If the
Company acquires one or more businesses or products, the Company's capital
requirements could increase substantially. In the event of such an acquisition
or in the event that any unanticipated circumstances arise which significantly
increase the Company's capital requirements, there can be no assurance that
necessary additional capital will be available on terms acceptable to the
Company, if at all.
RECENT ACCOUNTING PRONOUNCEMENTS
See Notes B and G to the Company's Consolidated Financial Statements for a
description of the impact on the Company of recent accounting pronouncements.
27
<PAGE> 31
BUSINESS
OVERVIEW
Mercury designs, manufactures and markets high performance, real-time
digital signal processing computer systems that transform sensor generated data
into information which can be displayed as images for human interpretation or
subjected to additional computer analysis. These multicomputer systems are
heterogeneous and scalable, allowing them to accommodate several different
microprocessor types and to scale from a few to hundreds of microprocessors
within a single system. Mercury's system architecture is specifically designed
for digital signal processing applications which are typically computation
intensive and require I/O capacity and interprocessor bandwidth not available on
a general purpose PC or workstation. The two primary markets for Mercury's
products are defense electronics and medical diagnostic imaging. Both of these
markets have computing needs which benefit from the unique system architecture
developed by the Company. Mercury's computer systems are generally used on real
world signal data to enable a military commander to "see" the battle space
through natural barriers such as clouds, darkness, water or foliage, so that the
position and strength of the enemy can be determined, or to enable a physician
to "see" within the body instead of performing invasive surgery.
During the past three fiscal years, the majority of the Company's revenues
have been generated from sales of its products to the defense electronics
market, generally for use in intelligence gathering electronic warfare systems.
The Company's activities in this area have focused on the proof of concept,
development and deployment of advanced military applications in radar, sonar and
airborne surveillance. The Company has established relationships with many of
the major prime contractors to the worldwide defense industry, including
Lockheed Martin, Hughes Aircraft, Raytheon/E-Systems, Raytheon/TI Systems,
Northrop Grumman, MIT/Lincoln Laboratory, GEC Marconi, Ericcson, MATRA,
Mitsubishi and a prime contractor owned by the Israeli Ministry of Defense.
Medical diagnostic imaging is the other primary market currently served by
the Company. Mercury's computer systems are embedded in MRI, CT and PET
machines. Mercury has supplied computer systems for use in several of GE
Medical's medical diagnostic imaging systems since 1987, and has established
relationships with Siemens Medical, Toshiba and Elscint. The major medical
imaging manufacturers are currently developing the next generation of MRI, CT
and digital x-ray machines, which are expected to provide better performance at
lower cost. Mercury has recently secured design wins on programs with certain of
the major medical imaging manufacturers for their next generation MRI, CT and
digital x-ray machines.
Mercury's computer systems are designed to process continuous streams of
data from sensors attached to radar, sonar, medical imaging equipment and other
devices. The resulting image is transmitted to the battlefield commander, pilot,
technician or physician in order to assist in the decision making or diagnostic
process. Due to the nature of the applications in which many of Mercury's
computer systems are embedded, they are frequently confined in limited spaces
and therefore are designed to generate a minimum amount of heat. The Company
employs the RACEway Interconnect, an industry standard system area network
developed by Mercury, which allows for high interprocessor bandwidth and I/O
capacity. The Company uses its proprietary ASICs to integrate microprocessors,
memory and related components into the RACEway Interconnect to provide optimum
system performance. The Company uses industry standard processors, such as
Intel's i860, Motorola's PowerPC, Texas Instruments' C80 and Analog Devices'
SHARC, in the same system. The Company believes that the RACEway Interconnect
and its proprietary ASICs, working together with a group of mixed
microprocessors in the same system, allow the most efficient use of space and
power with an optimal price/performance ratio.
Since July 1996, Mercury has targeted the emerging shared storage market
for introduction of a new product which draws on the Company's core competencies
in systems engineering and the development of real-time software. In fiscal
1997, Mercury introduced SuiteFusion, its first shared storage product designed
to meet the needs of the broadcast and post-production industry. SuiteFusion is
an open, scalable software application that allows work groups to share
commodity, fibre channel attached disk arrays, eliminating the need for an
expensive, intermediate file server. Early end-users include Turner
Broadcasting's CNN
28
<PAGE> 32
Interactive, Nickelodeon's Blue's Clues television show and Hughes Aircraft
(through a subsidiary) for use at the U.S. Army National Training Center. The
Company believes that the shared storage market includes a number of distinct
applications, such as digital video editing, electronic computer aided design,
webcasting, cable advertising insertion and pre-press.
INDUSTRY BACKGROUND
Defense Electronics
Digital signal processing computer systems are embedded into air, sea and
land-based platforms for processing radar, sonar and signal intelligence
applications. These applications allow a military commander to "see" the battle
space through natural barriers such as clouds, darkness, water or foliage, so
that the position and strength of the enemy can be determined. The Electronic
Industry Association (the "EIA") in its October 1997 annual forecast of the
defense electronics market predicted an increase in military electronics
purchases over the next ten years, while predicting a decline in total defense
spending over the same period. The EIA also predicted that, beginning in 1998,
United States military spending on electronics and information systems will
increase by $7.4 billion from $51.5 billion to $58.9 billion over the next ten
years. The Company believes that an important factor underlying this anticipated
growth is a continuing desire by military commanders for increased battle space
information, which can be obtained through radar, sonar, signal intelligence and
image intelligence systems. Military commanders also need more powerful
computers with similar attributes in order to conduct battle simulations and
mission planning tasks utilizing today's complex weapons systems.
Another important trend in the defense electronics marketplace is the
movement away from so-called "stove pipe" systems designed by prime contractors
with special purpose hardware specifically for a single application, largely
without regard to cost. The market is moving toward the use of systems which
incorporate selected COTS hardware and software components in order to save
money and development time. Recent Department of Defense ("DoD") leaders and
federal regulations have mandated widespread use of COTS components in defense
electronics applications. All of Mercury's computer systems are eligible for use
in defense electronics applications as COTS components.
Medical Imaging
The principal modalities of medical diagnostic imaging systems include MRI,
CT, digital x-ray, PET, SPECT (single photon emission computed tomography) and
ultrasound devices. The Company believes that the available market in 1998 for
digital signal processing computer systems in the aggregate for the MRI, CT and
digital x-ray markets is expected to be an aggregate of approximately $123.0
million. Although demand for medical imaging equipment has been sluggish in
recent years due primarily to cost containment pressures and consolidation in
the health care industry, the Company believes that demand for medical
diagnostic imaging equipment will increase modestly over the next three years.
The Company believes that this increase will be primarily due to the
introduction of next generation devices, together with the anticipated future
development by the major medical imaging manufacturers of new markets for their
diagnostic equipment in countries located in Asia, South America and Eastern
Europe. The Company believes medical imaging equipment manufacturers will
continue to replace in-house designed digital signal processing systems with
commercially available systems designed by the Company and others.
This industry's demand is driven in part by the need to provide physicians
with rapid, sharp and clear images of areas of a patient's body suspected to be
diseased or injured, while using the least intrusive means. These images provide
a significant diagnostic tool for the physician, who can more readily understand
the patient's malady and prescribe appropriate corrective action. In order to
provide such images, medical imaging machines must be capable of processing a
continuous stream of data on a real-time basis. A parallel concern in the health
care industry is the need to reduce costs. Hospitals, in particular, continue to
be under significant pressure to contain costs and, at the same time, maintain
quality of care. Such pressures are forcing hospitals to be as technologically
efficient as possible. Toward this end, hospitals seek to reduce the required
period of time a patient must spend in its medical imaging machines, which has
the added benefit of increasing the total number of patients who can be
diagnosed with this expensive equipment during a given period of time. One
29
<PAGE> 33
way to reduce patient time in medical imaging machines and improve image quality
is to utilize more powerful signal processing computers, such as those supplied
by Mercury.
STRATEGY
Mercury's objective is to be the leader in each of its markets by
developing and delivering architecturally superior systems, developing and
maintaining close working relationships with its customers, adopting and
deploying total quality management and extending key technology competencies to
new markets where Mercury can provide solutions based on its core competencies.
Develop and Deliver Architecturally Superior Systems. Mercury intends to
continue to develop architecturally superior systems comprised of both hardware
and software commercially available off-the-shelf components, which minimize
recurring and non-recurring costs, as well as proprietary components, which
enable production of standards-based, highly scalable systems. The Company's
growth and leadership in its primary markets has been due in part to investments
in a sustainable architecture that can rapidly evolve to take advantage of the
latest developments in semiconductor technology. Rapid evolution is accomplished
by defining a set of building blocks that can evolve separately. In this way the
architecture can be refreshed by upgrading one hardware and/or software building
block (such as a new microprocessor) with only minimal effect, if any, to the
other building blocks.
Develop and Maintain Close Working Relationships with Customers. By
developing close working relationships with its customers, the Company intends
to continue to identify and pursue new product opportunities. To fulfill these
opportunities, the Company frequently develops variations of its standard
products pursuant to contracts with particular customers in order to satisfy the
customers' needs on a cost effective basis.
Adopt and Deploy Total Quality Management. The Company is deploying Total
Quality Management ("TQM") as an overarching managerial approach to improve and
enhance business processes within the Company. An integral part of TQM is
increasing the Company's ability to discover and understand customers' unique
needs in the context of their environments and to set benchmarked performance
targets for each customer. By implementing TQM, the Company expects to be able
to enhance its development process and deliver better value by responding to
customer specific needs. When fully deployed, the Company believes that TQM will
significantly enhance its business processes and competitiveness.
Extend Key Technology Competencies to New Markets. The Company is
constantly seeking new markets where solutions can be provided based on its core
competencies. The Company's entry into the shared storage market evolved from
Mercury's work in real time operating systems, and its systems engineering skill
set in solving bandwidth limitations for applications requiring extremely high
data throughput. The Company initially targeted its new software product,
SuiteFusion, to meet the shared storage needs of the broadcast and
post-production industry. Mercury is currently evaluating other opportunities in
the shared storage market, such as electronic computer aided design, webcasting,
cable advertising insertion and pre-press.
MARKETS AND CUSTOMERS
Defense Electronics
Mercury provides high performance embedded computer systems as standard
products to the defense electronics market by using commercial and selected
rugged components and by working closely with defense contractors to complete a
design which matches the specified requirements of military applications. The
Company engages in frequent, detailed communication with the end-users of
Mercury's systems, military executives and program managers in government and
defense contractors regarding the technical capabilities of Mercury's advanced
signal processing computers and the successful incorporation of its computers in
numerous military programs.
30
<PAGE> 34
The chart set forth below lists certain of Mercury's customers in the
defense electronics industry, including government contractors and government
research laboratories and the type of applications for which Mercury believes
its customers are using its products.
- --------------------------------------------------------------------------------
SELECTED DEFENSE CUSTOMERS AND APPLICATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUSTOMER LOCATION APPLICATION
------------------------------------ ------------ ----------------------------------------
<S> <C> <C>
U.S. BASED PRIME CONTRACTORS AND GOVERNMENT LABS
HUGHES
- Hughes Danbury Optical.......... CA & MA Electro-Optics, Infrared
- Missile Systems Co.............. AZ Radar, Simulation
- Sensor & Communication
Systems........................ CA Radar, Electro-Optics, Infrared
LOCKHEED MARTIN
- Advanced Development Co......... CA Mission Planning
- Electronic & Missile Co......... FL Infrared, Electro-Optics, Radar
- Federal Systems, Manassas....... VA Sonar
- Government Electronic Systems... NJ Radar
- Missiles & Space................ CA Image Intelligence
- Ocean Radar & Sonar............. NY Radar, Sonar
- Sanders......................... NH Electronic Warfare, Signal Intelligence
- Tactical Defense Systems........ AZ Radar
NORTHROP GRUMMAN
- ESID............................ NY Radar
- ESSD............................ MD Radar
- Melbourne....................... FL Radar
- Norden Systems.................. NY & CT Radar, Sonar
RAYTHEON
- Electronic Systems.............. MA & RI Radar, Sonar, Infrared
- E-Systems....................... TX Signal Intelligence, Ground Stations
- TI Systems...................... TX Radar, Electro-Optics
GOVERNMENT LABS
- Air Force Defense Lab........... NY Radar
- Army Research Lab............... MD Ground Penetrating Radar
- MIT/Lincoln Labs................ MA Radar
- National Severe Storms Labs..... OK Weather Radar
- Naval Research Labs............. DC Radar, Sonar
- Naval Undersea Warfare
Command........................ RI & WA Sonar
- Sandia Labs..................... NM Radar
INTERNATIONAL AGENCIES AND PRIME CONTRACTORS
Chun San Institute................ Taiwan Radar
Department of National Defense.... Canada Radar, Sonar
Elbit............................. Israel Radar, Sonar
Ericsson.......................... Sweden Radar
FOA............................... Sweden Foliage Penetrating Radar
GEC Marconi....................... U.K. Radar
Israeli Ministry of Defense....... Israel SAR
MATRA............................. France Radar, Sonar
Mitsubishi Heavy Industries....... Japan Radar, Simulation
Nippon Avionics................... Japan Radar
Thomson SINTRA.................... France Sonar
TNO -- Physics and Electronics
Laboratory..................... Netherlands Acoustic Signal Processing
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE> 35
Mercury's computer systems have been or are being integrated into various
programs in the defense electronics market. For example, Mercury is under
contract to supply, or has supplied, computer systems to the following
contractors:
- Northrop Grumman for use in the tactical endurance synthetic aperture
radar ("SAR") systems aboard the Predator, a medium-altitude unmanned
aerial vehicle ("UAV") which has been deployed in Bosnia.
- Northrop Grumman for the SAR systems on board the Dark Star high
altitude UAV, which is currently under development.
- Hughes Aircraft for the SAR systems on the Global Hawk high altitude
endurance UAV, which is currently under development.
- Raytheon/E-Systems for the delivery of computer systems (including
development systems) for use in an electronic signal intelligence
application on board the RC-135 aircraft as part of an upgrade program.
- Raytheon/TI Systems for the delivery of computer systems (including
development systems) for use in the SAR on board the P3 Orion
anti-submarine surveillance aircraft as part of an upgrade program.
- Lockheed Martin, the U.S. Army Research Laboratory and FOA, the Swedish
defense research institute, for proof of concept in foliage and/or
ground penetrating radars.
- Lockheed Martin for use in the development, integration and testing of
the sonar subsystem for the New Attack Submarine and Atlantic Aerospace
Electronics Corporation for the combat sonar system used in the Los
Angeles Class submarine, which are currently under development.
- Northrop Grumman/ESSD and MIT/Lincoln Laboratory for use in developing
algorithms for space time adaptive processing, a type of advanced radar
system. The prototype computer system for this application uses
approximately 1,000 microprocessors, and Mercury believes it is the most
powerful commercial real-time embedded computer ever built, with peak
performance in excess of 100 gigaflops.
- Ericsson for the use of Mercury's standard commercial processors in
radar systems on board surveillance aircraft and to build MILSPEC
versions for the radar system on the SAAB Gripen fighter aircraft.
Mercury employs industry specialist managers to monitor the defense
programs of each major branch of the United States armed services and additional
managers based in Europe and Japan to keep abreast of developments in their
respective regions. This approach provides relevant information to Mercury
regarding major military procurements worldwide. Mercury maintains sales and
technical support groups to service defense industry participants in six branch
offices in the United States, and through Mercury's subsidiary offices or
distributors in 12 other countries. At Mercury's headquarters in Chelmsford,
Massachusetts, a group of systems engineers specializing in radar, sonar and
surveillance problems provides support on an as-needed basis to the remote
offices to assist in securing inclusion in targeted military programs.
Medical Imaging
Mercury strives to provide a superior combination of high performance and
competitively priced embedded computer systems to the medical imaging market.
The Company focuses on establishing strong relationships with its customers, the
medical equipment manufacturers. By maintaining frequent, in-depth
communications with its customers and working closely with their engineering
groups, the Company is able to understand their needs and provide appropriate
solutions. In addition, the Company intends to continue its efforts to install
its computer systems in place of alternative designs created by the in-house
design teams employed by the medical imaging equipment manufacturers.
The Company currently is working closely with major medical equipment
companies to design the next generation of MRI, CT and digital x-ray systems,
which the Company believes will lead to faster time-to-market and competitive
advantages for the medical equipment companies that use Mercury's computer
32
<PAGE> 36
systems for inclusion in their imaging machines. Mercury's industrial PC class
hardware system provides the medical imaging industry with increased performance
densities at lower costs and an architecture that accommodates performance
upgrades as new technology becomes available. Integrating the high-bandwidth
RACEway Interconnect system area network within the PCI environment results in
highly scalable systems. This allows medical equipment suppliers to design
systems that can satisfy a broad range of price/performance requirements and
meet the needs of global markets, all with the same Mercury architecture.
Mercury's medical OEM customers consist of the leading manufacturers of
diagnostic imaging equipment. They include GE Medical, headquartered in
Wisconsin, GE Medical Systems Europe in France, GE Yokugawa Medical Systems in
Japan, Toshiba in Japan, Siemens Medical in Germany and Elscint in Israel. These
companies have adopted Mercury's PCI or VME computer systems as part of their
developments in either MRI, CT, PET or digital x-ray systems and, in the case of
some companies, multiple types of systems. The Company has supplied GE Medical
with computer systems for use in three successive generations of MRI machines
from 1987 through the present, as well as for use in other GE Medical equipment,
such as PET. In addition, GE Medical and Siemens Medical, the two leading global
suppliers of medical imaging equipment, have recently awarded contracts to
Mercury to design the signal processing system for the next generations of
certain of their medical diagnostic equipment.
The Company is building a system based on Analog Devices' SHARC DSP
processor to fulfill a design win in CT. The Company also is building a system
based on the Texas Instruments' C80 signal processing chip to fulfill a design
win in digital x-ray. The Company believes that the principal reason for its
medical imaging design wins is Mercury's experienced team of systems and
applications engineers who work closely with the medical equipment designers and
with the Company's product development engineers. This joint design effort
frequently precedes the first production orders by approximately two to three
years. However, once selected, the production contracts typically continue for
the life of the medical imaging system. In addition, the equipment manufacturers
typically offer computer system upgrades to their customers, potentially
resulting in additional sales of Mercury products.
Shared Storage
The Company believes that the shared storage market includes a number of
distinct applications, such as digital video editing, electronic computer aided
design, webcasting, cable advertising insertion and pre-press. In fiscal 1997,
Mercury introduced SuiteFusion, its first shared storage software product
designed to meet the digital video editing needs of the broadcast and
post-production industry. Companies in the broadcast and post-production
industry have begun to use non-linear, disk-based technology, and are becoming
aware of the significant productivity gains that can be achieved by networking
multiple editing stations together in a real-time, high-bandwidth, shared
storage workgroup. However, these applications produce extremely large volumes
of digital data that must be transmitted, stored, and manipulated in order to
produce a high-quality finished product. Mercury's SuiteFusion is designed to
choreograph the interactions between workstations and disks to keep files intact
in such a high-performance, shared-storage environment.
Early end-users of SuiteFusion include Turner Broadcasting's CNN
Interactive in Atlanta, Georgia, Hughes Aircraft (through a subsidiary), for use
at the U.S. Army National Training Center in Fort Irwin, California, and
Nickelodeon's Blue's Clues television show in New York, New York. CNN is using
Mercury's software to improve efficiency in editing and producing features for
Internet broadcasts; the U.S. Army uses SuiteFusion to help capture, edit and
play back live simultaneous training exercises; and Nickelodeon's creative
design artists are able to share animation and graphics files.
In addition, Mercury has signed OEM distribution agreements with several
industry leaders, including Avid Technology, Inc., the worldwide leader in
digital non-linear editing systems, PathLight in the serial storage architecture
networking environment, and MountainGate Data Systems, Inc. in the fiber channel
storage market. The Company also has approximately 10 non-exclusive distributor
agreements with video-editing resellers in the United States and Canada.
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KEY TECHNOLOGY COMPETENCIES
Many of Mercury's customers share a common requirement: the need to process
high-volume, real-time data streams. Whether from an antenna in a defense
application, a medical scanner or a video camera, the computer must have the
ability to process incoming data as quickly as it is received. Data rates can
range from a few to several hundreds of megabytes per second (or several billion
bits per second). The ability to process this continuous flow of high-bandwidth
data is a fundamental difference between the majority of computing systems in
the world (such as personal computers, workstations and servers) and the
computers built by Mercury.
Mercury has developed a set of core technical strengths specifically
targeted to, and defined by, the application areas of signal, image and media
processing. These technical strengths are pivotal to Mercury's success in the
real-time market segments of the defense electronics and medical imaging
industries and have resulted in the following developments and capabilities:
Heterogeneous Switched-Fabric Interconnects. Mercury connects different
microprocessor types (RISC, DSP and specialized computing devices) and I/O
devices in a bus-less, high-bandwidth manner based on multi-stage switches in
its system area network. Among the engineering developments which distinguish
Mercury's systems are the RACEway Interconnect built using the six-port RACEway
crossbar chip which supports high bandwidth point-to-point data transfers and
fibre channel chassis-to-chassis extensions for RACEway in large system
configurations.
Heterogeneous Processor Integration. Mercury has developed several ASICs
which integrate standard microprocessors and special purpose mathematics and
graphics processors into a single heterogenous environment. Mercury develops
systems consisting of different microprocessor types with a single-system
software model. Mercury's processor independent software offers a consistent set
of software tools and interfaces, which can drive a heterogeneous mix of
microprocessor types, such as Motorola's PowerPC processor, Analog Devices'
SHARC DSP processor and Texas Instruments' C80 processor.
Performance Density. The Company has been using high performance packaging
technology such as multi-chip modules and ball grid arrays in its systems since
the early 1990's. The Company's thermal analysis expertise allows it to design
products that optimize the dissipation of heat from the system in order to meet
the environmental constraints imposed by many of its customers' applications.
The Company's modular hardware and software building blocks allow it to design
systems that best meet the application's specific data profiles. All together,
these attributes combine to deliver the maximum performance in processing,
reliability and bandwidth in the smallest possible space.
Scalable Software. Mercury's software has been designed to scale to more
than one thousand processors in real-time environments while maintaining a
high-bandwidth capability. Regardless of the number of processors, the Company's
software provides the same programming environment for a software developer
working with Mercury's computer systems, allowing faster time-to-market and
lower life cycle maintenance costs for its customers.
Optimized Algorithm Development. Mercury specializes in algorithm
development for single and multi-processor implementations. The Company believes
that using the mathematical algorithms in Mercury's scientific algorithm library
significantly increases the performance of customers' applications, reduces
development time and minimizes life cycle support costs.
System Engineering Expertise. Mercury has established a core competency in
providing total system solutions to its customers. The Company has the knowledge
and technical staff to act as an extension of the customer's engineering
organization in order to fashion solutions to some of the world's most demanding
real-time, signal processing applications. Mercury has partnered with its
customers to understand and resolve the challenging problems encountered in
applications as diverse as radar, sonar and signal intelligence for the
military, and diagnostic imaging for MRI, CT, PET and digital x-ray in the
medical imaging market. The Company also provides an integration and development
service to meet the demands of its customers with advanced applications which
cannot be satisfied with standard products. This service combines the variety of
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standard products with custom hardware and software to meet the specific
configuration demands of an application.
Leverage and Create Standards. Mercury uses existing standards where
applicable and has been successful in developing new standards. For example,
Mercury adheres to VME and PCI standard bus interfaces and form factors. The
RACEway Interconnect system area network that Mercury developed was adopted as
an ANSI/VITA standard in 1995, and since then has been adopted by several
companies offering products and services for embedded real-time applications.
PRODUCTS
HARDWARE PRODUCTS
Mercury offers three classes of systems for the Company's target markets.
Each class of products is scalable to meet the full range of requirements in
signal processing applications.
High Performance Class. For the highest-performance applications, Mercury
offers a family of high performance systems for the most compute intensive and
I/O capacity and interprocessor bandwidth demanding applications in the defense
electronics market. These applications include space time adaptive processing,
ground-penetrating and foliage-penetrating radar and synthetic aperture radar.
These high-performance systems, known as MultiPort, can scale to over a thousand
processors and today include compute modules based on the SHARC and PowerPC
processors.
VME Class. The VME bus has been the traditional standard for many embedded
applications. Mercury's VME systems each have a RACEway Interconnect port.
Systems contain modules based on the SHARC, PowerPC and i860 processors and can
scale to several hundred processors. The VME-based systems and components are
primarily used in the defense market where backward and forward compatibility is
required for the long system life cycles of military equipment. This class of
RACE Series systems meets the computing speed, bandwidth and scaleability
requirements of many of today's medium performance radar, sonar and signal
intelligence applications. Advanced and future radar systems are more likely to
use the high performance class systems.
Industrial PC Class. Based on the PCI bus standard, these systems use the
RACEway Interconnect to provide the extended bandwidth required for real-time
applications. Currently Mercury provides compute modules based on the SHARC and
TI C80 processors. These systems scale to hundreds of processors and are
primarily directed to the medical imaging market, which is moving from VME to
PCI based designs.
SOFTWARE PRODUCTS
Mercury has developed a comprehensive line of signal processing software
products for the defense and medical imaging markets. Certain of Mercury's
software products are included in a heterogeneous development software package
that enables customers to develop application software that will run on Mercury
hardware. The development software package includes the MC/OS operating system,
scientific algorithm libraries, debugging tools and compilers. License fees
range from $10,000 to $50,000 based on the number of seats chosen by the user
for its application, ranging from a single user license to a project license.
Set forth below are certain signal processing software products offered by
the Company.
MC/OS Version 4. The MC/OS runtime operating environment allows maximum
use of the RACE heterogeneous multi-computer architecture in a single-system
model incorporating a consistent set of system and application programming
interfaces, and a common development environment. MC/OS is supported on the high
performance, VME and industrial PC classes of Mercury hardware systems. MC/OS is
included in Mercury's development software package.
Scientific Algorithm Library (SAL). Mercury's scientific algorithm library
consists of more than 400 assembly language routines developed by Mercury's
programmers and optimized for execution on Mercury's RACE architecture,
permitting extensive code reusability. The library encompasses a comprehensive
selection
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of functions including vector processing and data conversion commonly performed
by digital signal processing applications. SAL is included in Mercury's
development software package.
Parallel Application System (PAS). PAS is a set of high performance
libraries which form a complete programming environment for developing parallel
applications in a distributed memory multicomputer system. The libraries speed
the development of advanced applications using many processors in parallel. PAS
is included in Mercury's development software package.
SuperVision. SuperVision is a state-of-the-art debugging tool for
observation and control of embedded, real-time multicomputing systems.
SuperVision speeds application development by selectively monitoring individual
and large groups of processors, while simultaneously performing detailed
process-level debugging. SuperVision is sold separately.
PeakWare for RACE. PeakWare for RACE is a visual component programming
tool, jointly developed with MATRA, that allows the developer to use diagrams to
express the interconnection of software components. Jointly mapping the
application and the RACE system configuration accelerates the overall
development process. From the graphical input, PeakWare for RACE generates the C
code for interprocessor communication and builds executable and ready-to-deploy
application code. PeakWare for RACE is sold separately.
Mercury also has developed software products for specific shared storage
applications in the broadcast and post-production industry. Set forth below is
the first such software product commercially introduced by the Company.
SuiteFusion. SuiteFusion is an open, scalable software application that
allows various desktop computer systems to simultaneously access large shared
files. Written in JAVA, this highly portable code is supported on both Macintosh
and Windows-based PC desktops. While SuiteFusion is directed initially to the
creative and design departments within the broadcast and post-production
industry, the Company believes it has potential applicability in several shared
storage markets.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company's engineering, research and development efforts are focused on
developing new products as well as enhancing existing products. Mercury's
research and development goal is to fully exploit and maintain the Company's
technological lead in the high performance, real-time, signal processing
industry. In addition to the central engineering organization which focuses on
Mercury's two principal markets, the Company has an engineering team developing
SuiteFusion and its derivatives for the shared storage market and another
engineering team developing systems for the digital television requirements of
the future.
Mercury is involved with researchers from other companies and government
organizations to develop new signaling technologies using fiber optics. This has
the potential for providing more bandwidth per line than conventional techniques
and is directed at the 21(st) century challenges of the next generation of
advanced signal processing systems. Similar cooperative developments are
underway to develop open software solutions for code portability. This research
is focused on developing generic applications which can be targeted to Mercury's
products through the use of industry standard tools with Mercury-specific
libraries. Some of these research areas benefit from cost sharing through DARPA
grants in those areas where the DoD will obtain benefit from the development.
As of September 30, 1997, the Company had 32% of all its employees, or 104
people, primarily engaged in engineering, research and development, including
hardware and software architects, design engineers and engineers with expertise
in developing medical, defense and shared storage software systems. During
fiscal years 1995, 1996 and 1997, the Company's total research and development
costs were approximately $8.6 million, $9.8 million, and $12.8 million,
respectively.
CUSTOMER SUPPORT AND INTEGRATION
As of September 30, 1997, Mercury's Customer Services Group included 37
people engaged in a full range of support functions, including training,
technical program management, integration and design services,
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host porting services and the traditional maintenance and support services. The
Company has invested in the range of tools, analyzers, simulators, instruments
and workstations to provide a rapid response to both development and customer
support requirements. Within the Customer Services Group, the solutions systems
department has developed many custom interfaces, reviewed customers' designs,
developed special hardware and software components and provided program
management on behalf of defense and medical customers. The capabilities of this
group enable the Company to respond to the demanding individuality of many
programs and have resulted in Mercury being selected for both development, high
volume production and deployed programs.
MANUFACTURING AND TESTING
Mercury's strengths include the design, development and testing of products
which meet the exacting technology and quality expectations of the Company's
defense electronics and medical imaging customers. Board assembly is outsourced
to a number of electronic contract manufacturers. The supplier typically inserts
most of the components into a printed circuit board, solders the connections,
conducts preliminary testing and returns the boards to Mercury. The Company
conducts final assembly, burn-in and system level testing.
Mercury utilizes Optimal Supply Chain Management to provide highly flexible
manufacturing solutions which can be tailored to the specific needs of the
Company's customers, while maintaining the highest level of quality and control
of product assembly. This standard is maintained through demanding Quality
Assurance and Reliability Programs, such as Statistical Process Control, which
are integrated throughout the manufacturing process.
The Company's outsourcing strategy provides maximum flexibility to respond
to customer requirements and schedule adjustments, with minimal asset investment
by Mercury. This outsourcing strategy also provides multiple sources of supply,
both to support the breadth and complexity of Mercury's product lines, as well
as to ensure continuity of supply. By outsourcing assembly to electronic
contract manufacturers, Mercury is able to focus its manufacturing efforts on
designing more reliable products, designing more efficient methods of building
its products, systems integration, testing and supply chain management.
Mercury's manufacturing approach is based on a highly integrated process
that takes a product from concept through production. All products are required
to meet specified standards of performance, quality, reliability and safety. The
Company manufactures both commercial and ruggedized versions of its computer
systems. Extensive testing is a fundamental part of the Company's process.
Computer Integrated Manufacturing, Concurrent Engineering, Material Requirements
Planning and Just-In-Time techniques are also integrated into manufacturing
operations as part of an on-time delivery philosophy. Mercury has been ISO 9001
certified since 1995.
Several components used in the Company's products are currently obtained
from sole source suppliers. Mercury is dependent on LSI Logic for four custom
designed ASICs, on Analog Devices for its SHARC processors, on IBM for ball grid
array packaging, on Motorola for its PowerPC processors and on Intel for its
i860 processors. IBM may terminate its contract with the Company without cause
upon thirty days notice and may cease offering products to the Company upon
sixty days notice. In addition, Analog Devices may discontinue or modify any
product upon 180 days notice and LSI Logic may discontinue any product upon 180
days notice. If LSI Logic, Analog Devices, IBM, Motorola or Intel were to limit
or reduce the sale of such components to the Company, or if these or other
suppliers to the Company were to experience financial difficulties or other
problems which prevented them from supplying the Company with the necessary
components, such events could have a material adverse effect on the Company's
business, financial condition and results of operations. These sole source
suppliers are subject to quality and performance issues, materials shortages,
excess demand, reduction in capacity and other factors that may disrupt the flow
of goods to the Company or its customers and thereby adversely affect the
Company's business and customer relationships. The Company has no guaranteed
supply arrangements with its suppliers and there can be no assurance that its
suppliers will continue to meet the Company's requirements. If the Company's
supply arrangements are interrupted, there can be no assurance that the Company
would be able to find another supplier on a timely or satisfactory basis. Any
shortage or interruption in the supply of any of the components used in the
Company's
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products, or the inability of the Company to procure these components from
alternate sources on acceptable terms could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that severe shortages of components will not occur in the
future. Such shortages could increase the cost or delay the shipment of the
Company's products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Significant increases
in the prices of these components would also materially adversely affect the
Company's financial performance since the Company may not be able to adjust
product pricing to reflect the increase in component costs. The Company could
incur set-up costs and delays in manufacturing should it become necessary to
replace any key vendors due to work stoppages, shipping delays, financial
difficulties or other factors and, under certain circumstances, these costs and
delays could have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION
The markets for the Company's products are highly competitive and are
characterized by rapidly changing technology, frequent product performance
improvements and evolving industry standards. Competition typically occurs at
the design stage, where the customer evaluates alternative design approaches,
including those from internal development organizations. A design win usually
ensures a customer will purchase the product until their next generation system
is developed. Occasionally, the Company's computer systems compete with computer
systems from workstation vendors, all of whom have substantially greater
research and development resources, long term guaranteed supply capacity,
marketing and financial resources, manufacturing capability and customer support
organizations than those of the Company. The Company believes that its future
ability to compete effectively will depend, in part, upon its ability to
continue to improve product and process technologies and develop new
technologies in order to maintain the performance advantages of products and
processes relative to competitors, to adapt products and processes to
technological changes, to identify and adopt emerging industry standards and to
adapt to customer needs.
The principal bases for selection in sales of digital signal processing
systems to the defense electronics industry are performance (measured primarily
in terms of processing speed, I/O capacity and interprocessor bandwidth,
processing density per cubic foot, power consumption and heat dissipation),
systems engineering support, overall quality of products and associated
services, use of industry standards, ease of use and price. Competitors in the
defense electronics industry include a relatively small number of companies that
design, manufacture and market DSP board level products and in-house design
teams employed by prime defense contractors. In-house design efforts
historically have provided a significant amount of competition to the Company.
However, competition from in-house design teams has diminished in significance
in recent years due to the increasing use of COTS products and the trend toward
greater use of outsourcing. Despite this recent change, there can be no
assurance that in-house developments will not re-emerge as a major competitive
force in the future. Prime contractors are much larger than Mercury and have
substantially more resources to invest in research and development. Increased
use of in-house design teams by defense contractors in the future may have a
material adverse effect on the Company's business, financial condition and
results of operations.
In the medical imaging industry the principal bases for selection are
performance (measured primarily in terms of processing speed, I/O capacity and
interprocessor bandwidth and power consumption), price, systems engineering
support, overall quality of products and associated services, use of industry
standards and ease of use. Competitors in the medical imaging market include
in-house design teams, a small number of companies that design, manufacture and
market DSP board level products and workstation manufacturers. Workstations have
become a competitive factor primarily in the market for low-end MRI and CT
machines and, to date, have not been a significant factor in the
high-performance market, Mercury's primary focus. There can be no assurance that
workstation manufacturers will not attempt to penetrate the high-performance
market for medical imaging machines. Workstation manufacturers typically have
greater resources than Mercury and their entry into markets historically
targeted by Mercury may have a material adverse effect on the Company's
business, financial condition and results of operations.
Due to the emerging nature of the markets for the Company's shared storage
technology, its competitive factors are not yet clearly defined. The Company
currently is focusing its efforts in this area on the broadcast
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and post-production industry, where the Company believes there is currently only
one directly competitive product. As this market develops, the Company
anticipates that other companies will begin offering additional competitive
products. New competitors may have significantly greater marketing and financial
resources, better access to individuals making purchasing decisions, superior
products and services than those offered by the Company. The Company believes
that the primary impediment to future sales of shared storage products to the
post-production and broadcast industry is the need to transform entrenched
operating modes, such as those associated with linear tape based technologies,
to accommodate new modes of operation such as those associated with non-linear,
disk-based digital technology. However, there can be no assurance that industry
participants will adopt such new technologies or that, if adopted, the Company's
products will not be obsolete, uncompetitive or incompatible.
Some of the Company's competitors have greater financial and other
resources than the Company, and the Company may be operating at a cost
disadvantage compared to manufacturers who have greater direct buying power from
component suppliers or who have lower cost structures. There can be no assurance
that the Company will be able to compete successfully in the future with any of
these sources of competition. In addition, there can be no assurance that
competitive pressures will not result in price erosion, reduced margins, loss of
market share or other factors, that could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws to establish and protect its rights in its products and
proprietary technology. In addition, the Company currently requires its
employees and consultants to enter into nondisclosure and assignment of
invention agreements to limit use of, access to and distribution of, proprietary
information. There can be no assurance that the Company's means of protecting
its proprietary rights in the U.S. or abroad will be adequate. The laws of some
foreign countries may not protect the Company's proprietary rights as fully or
in the same manner as do the laws of the U.S. Also, despite the steps taken by
the Company to protect its proprietary rights, it may be possible for
unauthorized third parties to copy or reverse engineer aspects of the Company's
products, develop similar technology independently or otherwise obtain and use
information that the Company regards as proprietary. There can be no assurance
that others will not develop technologies similar or superior to the Company's
technology or design around the proprietary rights owned by the Company.
Although the Company is not aware that its products infringe on the proprietary
rights of third parties, there can be no assurance that others will not assert
claims of infringement in the future or that, if made, such claims will not be
successful. Litigation to determine the validity of any claims, whether or not
such litigation is determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from daily operations. In the event of any
adverse ruling in any litigation regarding intellectual property, the Company
may be required to pay substantial damages, discontinue the sale of infringing
products, expend significant resources to develop non-infringing technology or
obtain licenses to use infringing or substituted technology. The failure to
develop, or license on acceptable terms, a substitute technology could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company holds two issued United States patents covering aspects of the
RACE architecture and the SuperVision debugging tool. In addition, the Company
has two pending United States patent applications covering additional aspects of
the RACE architecture and the Company's Parallel Application System. The Company
may file additional patent applications seeking protection for other proprietary
aspects of its technology in the future. Patent positions frequently are
uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patents from pending patent applications or from any future
patent application will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. Since patent applications are secret
until patents are issued in the United States or corresponding applications are
published in international countries, and
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since publication of discoveries in the scientific or patent literature often
lags behind actual discoveries, the Company cannot be certain that it was the
first to make the inventions covered by each of its pending patent applications
or that it was the first to file patent applications for such inventions. In
addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its products
either in the United States or in international markets.
BACKLOG
As of September 30, 1997, the Company had a backlog of orders aggregating
approximately $25.7 million. The Company includes in its backlog customer orders
for products and services for which it has accepted signed purchase orders with
assigned delivery dates within twelve months. Orders included in backlog may be
canceled or rescheduled by customers without penalty. A variety of conditions,
both specific to the individual customer and generally affecting the customer's
industry, may cause customers to cancel, reduce or delay orders that were
previously made or anticipated. The Company cannot assure the timely replacement
of canceled, delayed or reduced orders. Significant or numerous cancellations,
reductions or delays in orders by a customer or group of customers could
materially adversely affect the Company's business, financial condition and
results of operations. Backlog should not be relied upon as indicative of the
Company's revenues for any future period.
EMPLOYEES
At September 30, 1997, the Company employed a total of 323 persons,
including 104 in research and development, 120 in sales, marketing and customer
support, 51 in manufacturing and 48 in finance and administration. Eight of the
Company's employees are located in Europe, four in Japan and the remainder in
the U.S. None of the Company's employees are represented by a labor organization
and the Company believes that its relations with employees are good. Competition
for qualified personnel in the engineering fields is intense and the Company is
aware that much of its future success will depend on its continued ability to
attract and retain qualified personnel. The Company seeks to attract new
employees by offering competitive compensation packages, including salary,
bonus, stock options and employee benefits. There can be no assurance, however,
that the Company will be successful in retaining its key employees or that it
will be able to attract skilled personnel for the development of its business.
FACILITIES
The Company's headquarters consist of approximately 96,000 square feet of
office space under lease in Chelmsford, Massachusetts. The Company intends to
use a portion of the net proceeds of the Offering to fund construction of
additional 91,000 square feet of office space on vacant land adjacent to its
headquarters. The Company used internally generated funds to acquire this parcel
in November 1997. The Company anticipates that construction and development of
the additional office space will cost approximately $9.0 million, that it will
break ground in April 1998 and that it will complete construction in
approximately 12 months after construction begins. Once the new office space is
completed, the Company plans to transfer the building and the underlying real
estate to an unaffiliated third party pursuant to a sale and leaseback
transaction. The Company has not yet identified a counterparty for this sale and
leaseback transaction. While the Company believes it should be able to identify
such a party within a reasonably limited period of time, there can be no
assurance that the Company will be able to successfully consummate such
transaction on commercially acceptable terms, if at all. If the Company is not
able to successfully consummate a sale and leaseback transaction, the Company
would retain this property and would not have use of the money invested therein.
See "Use of Proceeds."
The Company also maintains offices near Los Angeles and San Jose,
California, and in Dallas, Texas, Chanhassen, Minnesota, Madison, Wisconsin and
Vienna, Virginia and has international offices in the United Kingdom, France and
Japan.
LEGAL PROCEEDINGS
To the Company's knowledge, there are no pending legal proceedings which
are material to the Company or its business to which it is a party or to which
any of its properties is subject.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- -------------------------------------------------------
<S> <C> <C>
James R. Bertelli........... 57 President, Chief Executive Officer, Director and
Co-Founder
Donald Barry................ 52 Vice President and Director of Medical Business Group
Vincent A. Mancuso.......... 50 Vice President and Director of Government Electronics
Group
G. Mead Wyman............... 57 Vice President, Chief Financial Officer and Treasurer
Gordon B. Baty(1)(2)........ 58 Director
Albert P. Belle Isle(2)..... 53 Director
R. Schorr Berman(1)(2)...... 49 Director
Sherman N. Mullin........... 62 Director
Melvin Sallen(1)............ 69 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
MR. BERTELLI co-founded the Company in 1981, and has served as the
Company's President, Chief Executive Officer and a Director since that time.
Prior to founding the Company, Mr. Bertelli founded a manufacturer's
representative organization after a brief period at Analogic Corporation in
sales management positions. Prior to that, Mr. Bertelli served as a marketing
manager for Digital Equipment Corporation's telephone industry products group.
After a tour of duty in the Army Signal Corps, he began his high-tech career
with RCA Corporation as a computer systems analyst, and later moved into
computer sales with RCA and Univac.
DR. BARRY has been Vice President and Director of Medical Business Group of
the Company since 1992. Prior to that he served as General Manager at Picker
International, Inc., Chief Operating Officer at ESA, Inc. and Director of
International Marketing at American Motors Corp.
MR. MANCUSO joined the Company in January 1997 as Vice President and
Director of Government Electronics Group. Before joining Mercury, Mr. Mancuso
was Director of Federal Sales at Siemens Pyramid Information Systems, Inc., a
computer hardware firm formerly known as Pyramid Technology Corporation from
1995 to 1996. From 1993 to 1995, he was Vice President of consulting at Federal
Sources, Inc., an information services company. From 1991 to 1992, he was Vice
President and General Manager at Government Technology Services, Inc., Advanced
Systems Division. Mr. Mancuso served nineteen years at Hewlett Packard in
various sales and marketing positions.
MR. WYMAN has been Vice President, Treasurer and Chief Financial Officer of
the Company since November 1996. Prior to joining Mercury, Mr. Wyman was Chief
Financial Officer at Dataware Technologies, Inc., a software design firm, from
1992 to 1996. Previously, he was a general partner at Hambrecht and Quist
Venture Partners, and was the first Chief Financial Officer at Lotus Development
Corporation. Mr. Wyman has also held senior financial management positions at
Prime Computer Inc. and Millipore Corporation.
DR. BATY has been a Director of the Company since 1983. Dr. Baty has been a
partner of First Stage Capital, Limited Partnership, a venture capital firm,
since 1986. Dr. Baty was the founder and Chief Executive Officer of Icon
Corporation, Context Corporation and Wormser Engineering, Inc. Dr. Baty is also
a Director of Novitron International, Inc. and numerous private companies.
DR. BELLE ISLE has been a Director of the Company since 1986. Dr. Belle
Isle, who is an independent investor in technology based companies, was
President of Custom Silicon, Inc., a semiconductor company, has
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also served as a Vice President of Wang Laboratories, Inc. and in various
technical and business management positions during fifteen years with the
General Electric Company.
MR. BERMAN has been a Director of the Company since 1993. Mr. Berman is
President and Chief Executive Officer of MDT Advisers, Inc., a venture capital
firm. Mr. Berman is also a director of Arch Communications Group, Inc. and
numerous private companies.
MR. MULLIN has been a Director of the Company since 1994. Mr. Mullin served
as President of Lockheed Advanced Development Co., a defense contractor, from
1990 through 1994. Mr. Mullin currently serves as an ad-hoc adviser to the U.S.
Air Force Scientific Advisory Board.
MR. SALLEN has been a Director of the Company since 1990 and since 1991 has
served as a consultant to the Company in the area of Japanese Strategies and
Sales. Mr. Sallen served as Senior Vice President of Analog Devices, Inc. from
1966 through 1992. Since 1992, Mr. Sallen has served as President of Komon
International, Inc., an international consulting company. Mr. Sallen is also a
director of Tech On Line, Inc. and Copley Controls Corporation.
Set forth below are certain of the Company's additional key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ---- -------------------------------------------------------
<S> <C> <C>
Robert C. Frisch............ 43 Vice President, Chief Technical Officer and Co-Founder
John K. Nitzsche............ 62 Vice President, Special Products Development and
Co-Founder
Bruce A. Beck............... 47 Vice President and Director of Digital Video Products
David L. Bertelli........... 53 Vice President, Organization Development
Steven M. Chasen............ 42 Vice President, Customer Services
Barry S. Isenstein.......... 41 Vice President, Advanced Technologies Group
Mark R. LaForest............ 38 Vice President and Director of Engineering
Robert Perry................ 51 Vice President of Manufacturing Operations
Gary Olin................... 48 Director of Strategic Marketing
Steven Patterson............ 39 Director of Systems Engineering
Graham Smith................ 57 Director of International Sales
</TABLE>
MR. FRISCH co-founded the Company in 1981 and serves as the Company's Vice
President and Chief Technical Officer. Mr. Frisch served as the principal
hardware architect and designer for the Company's core hardware products and is
also working on enhancing the current RACE architecture.
MR. NITZSCHE co-founded the Company in 1981 and serves part time as the
Company's Vice President of Special Products Development.
MR. BECK joined the Company in 1994 as Vice President and Director of
Digital Video Products. Prior to joining the Company, Mr. Beck was the Vice
President of World Wide Sales at BBN Communications, a telecommunications
consulting firm, from 1993 until 1994 and the Managing Director of DMR
Consulting Group Inc., a technology consulting company, from 1989 through 1993.
MR. DAVID BERTELLI joined the Company in 1987 as Vice President of
Organization Development.
MR. CHASEN joined the Company in 1990 as Vice President of Customer
Services when the Company acquired Numerix Corporation where Mr. Chasen was the
Director of Service and Support.
MR. ISENSTEIN joined the Company in 1984 and serves as Vice President of
the Advanced Technologies Group.
MR. LAFOREST joined the Company in 1992 and serves as the Company's Vice
President and Director of Engineering.
MR. PERRY joined the Company in October 1997 as the head of the Company's
manufacturing operations. From April 1995 through October 1997, Mr. Perry was
Program Manager for SCI Systems, a contract manufacturing company. Prior to
that, he held a managerial position at Digital Equipment Corporation, a computer
equipment supplier, from 1976 through March 1995.
42
<PAGE> 46
MR. OLIN joined the Company in July 1995 as Director of Strategic
Marketing. Prior to joining the Company, he worked from February 1995 until July
1995 at Wang Laboratories, a network and desktop services company, as World Wide
Marketing Director. Previously, Mr. Olin was employed at Bull World Wide
Information Systems, an information technology company, from 1987 through 1994.
MR. PATTERSON joined the Company in 1990 as Director of Systems Engineering
when the Company acquired Numerix Corporation where he had been the Director of
Hardware Engineering and Product Marketing Manager.
MR. SMITH joined the Company in 1988 and serves as the Vice President of
International Sales.
ELECTION AND COMPENSATION OF DIRECTORS
Each director of the Company holds office until his successor has been duly
elected and qualified. Officers of the Company are elected by the Board of
Directors of the Company at each annual meeting of the Board of Directors and
serve at its discretion. The Company's Board of Directors is divided into three
classes, with three-year staggered terms. Dr. Belle Isle and Mr. Sallen are
Class I directors, Dr. Baty and Mr. Mullin are Class II directors and Messrs.
Bertelli and Berman are Class III directors. The terms of the Class I, Class II
and Class III directors expire in 1998, 1999 and 2000, respectively.
The Company's non-employee directors currently receive $2,500 annually plus
$500 per meeting attended as compensation for service on the Board of Directors,
plus reimbursement for reasonable expenses incurred in connection with
attendance at Board and committee meetings. Committee members receive $300 for
attending a meeting not held on the same day as a meeting of the Board of
Directors.
The Company has in effect its 1993 Stock Option Plan for Non-employee
Directors, pursuant to which the Company's non-employee directors are eligible
to receive options to purchase shares of the Company's Common Stock if and when
granted by the Compensation Committee. See "-- Stock Options and Stock Purchase
Plans."
COMMITTEES OF THE BOARD
The Board of Directors has a standing Audit Committee and Compensation
Committee. The members of the Audit Committee are Dr. Baty, Dr. Belle Isle and
Mr. Berman. The Audit Committee reviews the scope of the Company's engagement of
its independent public accountant and their reports. The Audit Committee also
meets with the financial staff of the Company to review accounting procedures
and reports. The Compensation Committee is composed of Dr. Baty and Messrs.
Berman and Sallen. The Compensation Committee is authorized to review and make
recommendations to the Board of Directors regarding the salaries and bonuses to
be paid executive officers and to administer the Stock Option Plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During fiscal 1997, Dr. Baty and Messrs. Berman and Sallen served as the
Compensation Committee of the Company's Board of Directors. During fiscal 1997,
no interlocking relationship existed between any member of the Company's
Compensation Committee and any other member of the Company's Board of Directors.
See "Certain Transactions."
43
<PAGE> 47
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the
compensation earned by the Company's Chief Executive Officer and each of the
Company's three other most highly compensated executive officers (collectively,
the "Named Executive Officers") during the year ended June 30, 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------
ANNUAL COMPENSATION SECURITIES
----------------------------------------------- UNDERLYING ALL OTHER
OTHER ANNUAL OPTIONS/ COMPEN-
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) SARS (#) SATION ($)
- ------------------------------------- ---------- --------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
James R. Bertelli, President and
Chief Executive Officer............ $260,000 $112,300 $6,000(1) 12,290 $32,869(2)(3)
G. Mead Wyman, Vice President,
Treasurer and Chief Financial
Officer(4)......................... 100,000 56,434 -- 80,000 3,529(2)(3)
Donald Barry, Vice President and
Director of Medical Business
Group.............................. 111,000 64,020 -- 1,500 2,160(2)
Vincent A. Mancuso, Vice President,
Government Electronics Group(5).... 55,000 75,000 -- 25,000 1,400(2)
</TABLE>
- ---------------
(1) Represents automobile allowance.
(2) Represents $3,150 and $2,519 matching contributions by the Company into the
participant's 401(k) plan for the benefit of Messrs. Bertelli and Wyman,
respectively.
(3) Represents $29,719 and $1,010 premiums paid by the Company for split dollar
life insurance policies for the benefit of Messrs. Bertelli and Wyman,
respectively.
(4) Reflects salary earned from November 1996, when the Company hired Mr. Wyman,
through June 30, 1997.
(5) Reflects salary earned from January 1997, when the Company hired Mr.
Mancuso, through June 30, 1997.
44
<PAGE> 48
OPTION GRANTS, EXERCISES AND HOLDINGS
Option Grants. The following table sets forth certain information regarding
options granted to the Named Executive Officers during the year ended June 30,
1997. The Company issued no SARs during the year ended June 30, 1997.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
--------------------------------------------------------- ASSUMED ANNUAL
NUMBER OF PERCENT OF TOTAL RATES OF STOCK
SECURITIES OPTION/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTION/SARS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED (#) FISCAL YEAR (%) ($/SHARE) DATE 5% ($) 10% ($)
- ---------------------------- ----------- ---------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
James R. Bertelli(2)........ 17,129 4.3% $4.00 07/30/06 $ 43,089 $109,197
5,161 1.3 4.00 12/02/06 12,983 32,908
G. Mead Wyman(3)............ 80,000 19.8 4.00 01/27/07 201,247 569,997
Donald Barry(4)............. 1,500 0.4 4.00 07/30/06 3,774 9,163
500 0.1 4.00 09/19/06 1,258 3,188
Vincent A. Mancuso(5)....... 25,000 6.2 4.00 01/27/07 62,890 159,675
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), shown are the gains or "option spreads" that would exist for
the respective options granted. These gains are based on the assumed rates
of annual compound stock price appreciation of 5% and 10% from the date the
option was granted over the full option term. These assumed annual compound
rates of stock price appreciation are mandated by the rules of the
Commission and do not represent the Company's estimate or projection of
future Common Stock prices.
(2) Options to purchase 10,144 of these shares were exercisable at June 30,
1997. The remaining options vest as to 2,581 shares on December 2, 1998, as
to 3,565 shares on July 31, 1998 and as to 6,000 shares in increments of
2,000 shares on July 30 in each of 1998, 1999 and 2000, as long as Mr.
Bertelli's employment has not been terminated.
(3) Options with respect to 40,000 of these shares vest in equal 20% increments
on December 2, 1997, and the four succeeding anniversaries thereof, as long
as Mr. Wyman's employment has not been terminated. Options with respect to
the remaining 40,000 shares vest based on the achievement of certain
performance criteria, and in all events on the seventh anniversary of the
option grant date, as long as Mr. Wyman's employment has not been
terminated.
(4) Options to purchase 1,030 shares were exercisable at June 30, 1997. The
remaining options vest as to 250 shares on September 19, 1998 and as to 720
shares on July 30, 1998, as long as Mr. Barry's employment has not been
terminated.
(5) This option vests in equal 20% increments on the first five anniversaries of
January 27, 1997, as long as Mr. Mancuso's employment has not been
terminated.
45
<PAGE> 49
Option Exercises and Holdings. The Named Executive Officers did not
exercise any options during the year ended June 30, 1997. The following table
sets forth certain information regarding exercise of options held at June 30,
1997, by each of the Named Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END($)(1)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James R. Bertelli.................... 10,144 12,146 $91,296 $ 109,314
G. Mead Wyman........................ -- 80,000 -- 720,000
Donald Barry......................... 9,750 2,250 87,750 20,250
Vincent A. Mancuso................... -- 25,000 -- 225,000
</TABLE>
- ---------------
(1) Value is based on the difference between the option exercise price and the
assumed initial public offering price of $13.00 per share, the mid-point of
the filing range, multiplied by the number of shares of Common Stock
underlying the option. No market existed for the Common Stock prior to this
offering.
STOCK OPTION AND STOCK PURCHASE PLANS
Stock Option Plans
The Company has in effect its 1997 Stock Option Plan (the "1997 Plan"),
1993 Stock Option Plan for Non-Employee Directors (the "1993 Plan"), 1991 Stock
Option Plan (the "1991 Plan") and 1982 Stock Option Plan (the "1982 Plan," and
with the 1997 Plan, the 1993 Plan and the 1991 Plan, the "Stock Option Plans").
The Company's stock option plans are designed to attract, retain and motivate
key employees and directors. The Compensation Committee of the Board of
Directors (the "Compensation Committee") is responsible for the administration
and interpretation of the Stock Option Plans and is authorized to grant options
thereunder to all eligible employees and directors of the Company, except that
no director who is not also an employee of the Company is eligible to receive
incentive stock options (as defined in Section 422 of the Internal Revenue Code)
("Incentive Options") and only directors who are not employees of the Company
are eligible to receive options under the 1993 Plan. The Compensation Committee
has full power to select, from among the persons eligible for awards under the
1982 Plan, the 1991 Plan and the 1997 Plan, the individuals to whom awards will
be granted, to make any combination of awards to participants, and to determine
the specific terms of each award, subject to the provisions of the Stock Option
Plans. Under the 1993 Plan, each non-employee director of the Company received
on or about September 30 in each of 1994, 1995, 1996 and 1997, and will receive
on or about September 30, 1998, that number of shares of Common Stock equal to
one percent of the net income of the Company for the most recent fiscal year
ending prior to the grant divided by the per share fair market value of the
Company Stock on the first day of such fiscal year divided by the number of
non-employee directors in office at the time of the grant. Options granted under
the Stock Option Plans vest and become exercisable in accordance with option
agreements evidencing such grants. Incentive Options may be granted only to
officers or other employees of the Company, including members of the Board of
Directors who are also employees of the Company or its subsidiaries. Options
which do not qualify as Incentive Options, "Non-Qualified Options" may be
granted or issued to officers or other employees of the Company, directors and
to consultants and other key persons who provide services to the Company
(regardless of whether they are also employees).
The exercise price of each option granted under the Stock Option Plans is
determined by the Compensation Committee but, in the case of Incentive Options,
may not be less than 100% of the fair market value of the underlying shares on
the date of grant. No Incentive Option may be granted under the Stock Option
Plans to any employee of the Company or any subsidiary who owns at the date of
grant shares of stock representing in excess of 10% of the combined voting power
of all classes of stock of the Company or a parent or a subsidiary unless the
exercise price for stock subject to such option is at least 110% of the fair
market value of such stock at the time of grant and the option term does not
exceed five years.
46
<PAGE> 50
Options may be made exercisable in installments, and the exercisability of
options may be accelerated by the Compensation Committee. Upon exercise of
options, the option exercise price must be paid in full (i) in cash or by
certified or bank check or other instrument acceptable to the Compensation
Committee, (ii) if the applicable option agreement permits, by delivery of
shares of Common Stock of the Company owned by the optionee having a fair market
value equal in amount to the exercise price of the options being exercised or
(iii) any combination of (i) and (ii), provided, however that payment of the
exercise price by delivery of shares of Common Stock of the Company owned by
such optionee may be made only to the extent such payment, in whole or in part,
would not result in a charge to earnings for financial accounting purposes.
As of October 31, 1997, options to purchase 342,601 shares of Common Stock
were outstanding under the 1997 Plan, of which 19,175 were then exercisable. As
of October 31, 1997, options to purchase 32,482 shares of Common Stock were
outstanding under the 1993 Plan, all of which were then exercisable. As of
October 31, 1997 options to purchase 579,090 shares of Common Stock were
outstanding under the 1991 Plan, of which options to purchase 267,910 shares
were then exercisable. As of October 31, 1997, options to purchase 142,200
shares of Common Stock were outstanding under the 1982 Plan, all of which were
then exercisable.
Options granted under the Company's stock option plans are not transferable
by the optionee except by will, by the laws of descent and distribution or
pursuant to a qualified domestic relations order. Options are exercisable only
while the optionee remains in the employ of the Company or for a short period of
time thereafter. Options which are exercisable following termination of
employment are exercisable only to the extent that the optionee was entitled to
exercise such options on the date of termination of his or her employment.
Under the 1997 Plan, 575,000 shares were reserved for issuance upon
exercise of stock options as of October 31, 1997. Under the Company's 1993 Plan,
50,000 shares of Common Stock were reserved for exercise upon exercise of stock
options as of October 31, 1997. Under the 1991 Plan, 700,000 shares of Common
Stock were reserved for exercise upon exercise of stock options as of October
31, 1997. Under the Company's 1982 Stock Option Plan, 144,700 shares were
reserved for issuance upon exercise of stock options as of October 31, 1997.
Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
for employees of the Company was adopted by the Board of Directors on November
6, 1997 and will be submitted by the Stockholders of the Company for approval at
a Special Meeting of Stockholders to be held on December 18, 1997. The 1997
Purchase Plan authorizes the issuance of a maximum of 250,000 shares of Common
Stock pursuant to the exercise of nontransferable options granted to
participating employees.
The 1997 Purchase Plan is administered by the Compensation Committee. All
employees of the Company whose customary employment is 20 hours or more per week
and have been employed by the Company for at least six months are eligible to
participate in the 1997 Purchase Plan. Employees who own 5% or more of the
Company's stock and directors who are not employees of the Company may not
participate in the 1997 Purchase Plan. To participate in the 1997 Purchase Plan
an employee must authorize the Company in writing to deduct an amount (not less
than 1% nor more than 10% of a participant's base compensation not to exceed
$25,000 per year) from his or her pay commencing on January 1 and July 1, of
each year (each a "Purchase Period"). On the first day of each Purchase Period,
the Company grants to each participating employee an option to purchase up to
that number of shares of Common Stock, the fair market value of which on the
date of grant is equal to $25,000. The exercise price for the option for each
Purchase Period is the lesser of 85% of the fair market value of the Common
Stock on the first or last business day of the Purchase Period. The fair market
value will be the closing selling price of the Common Stock as quoted on the
Nasdaq National Market. If an employee is not a participant on the last day of
the Purchase Period, such employee is not entitled to exercise his or her
option, and the amount of his or her accumulated payroll deduction will be
refunded to the employee. Shares acquired by employees pursuant to the Purchase
Plan may not be transferred for three months following the date of acquisition.
An employee's rights under the 1997 Purchase
47
<PAGE> 51
Plan terminate upon his or her voluntary withdrawal from the Plan at any time or
upon termination of employment.
Common Stock for the 1997 Purchase Plan will be made available either from
authorized but unissued shares of Common Stock or from shares of Common Stock
reacquired by the Company, including shares repurchased in the open market.
LIMITATION OF LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Massachusetts General Laws, the Company has included in
its Charter a provision to eliminate the personal liability of its directors for
monetary damages for breach or alleged breach of their fiduciary duties as
directors, subject to certain exceptions. In addition, the Bylaws of the Company
provide that the Company is required to indemnify its officers and directors
under certain circumstances, including those circumstances in which
indemnification would otherwise be discretionary, and the Company is required to
advance expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. At present, the
Company is not aware of any pending or threatened litigation or proceeding
involving a director, officer, employee or agent of the Company in which
indemnification would be required or permitted. The Company believes that its
Charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
CERTAIN TRANSACTIONS
The Company has loaned James R. Bertelli, President of the Company, an
aggregate of $200,000, of which $150,000 accrues interest at an annual rate of
9.75% and $50,000 accrues interest at an annual rate of 10.5%. In addition, the
Company has loaned Albert Belle Isle, a Director of the Company, an aggregate of
$125,000, of which $100,000 accrues interest at an annual interest rate of 8%
and $25,000 accrues interest at 9.25%. The notes evidencing such obligations of
Mr. Bertelli and Dr. Belle Isle are payable in full on the earlier of December
31, 1999, or 181 days following the consummation of an initial public offering
of the Company's Common Stock.
The Company has granted Memorial Drive Trust, Mr. Bertelli, President and
Chief Executive Officer of the Company, and certain other stockholders certain
rights with respect to the registration of the Company's securities. See
"Description of Capital Stock -- Registration Rights of Certain Holders."
48
<PAGE> 52
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of October 31, 1997 and as adjusted
to reflect the sale of the Common Stock offered hereby by, for (i) each person
who is known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each of the Company's directors, (iii) each of the
Selling Stockholders, (iv) each Named Executive Officer and (v) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
------------------- SHARES TO BE SOLD -------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT IN OFFERING NUMBER PERCENT
- ------------------------------------------- --------- ------- ----------------- --------- -------
<S> <C> <C> <C> <C> <C>
Memorial Drive Trust(2).................... 2,879,786 36.6% 425,000 2,454,786 24.9%
Massachusetts Mutual Life Insurance
Company(3)............................... 1,000,000 12.7 212,500 787,500 8.0
Data General Corporation(4)................ 655,067 8.3 280,500 374,567 3.8
First Stage Capital Limited
Partnership(5)........................... 375,000 4.8 318,750 56,250 *
James R. Bertelli(6)....................... 437,119 5.5 -- 437,119 4.4
Donald Barry(7)............................ 11,030 * -- 11,030 *
Vincent A. Mancuso......................... -- * -- -- *
G. Mead Wyman(8)........................... 44,000 * -- 44,000 *
Gordon Baty(9)............................. 490,653 6.2 318,750 171,903 1.7
Albert P. Belle Isle(10)................... 48,228 * -- 48,228 *
R. Schorr Berman(11)....................... 2,889,514 36.7 425,000 2,464,514 25.0
Sherman N. Mullin(12)...................... 6,649 * -- 6,649 *
Melvin Sallen(13).......................... 23,649 * -- 23,649 *
All directors and executive officers as a
group (nine persons)(16)................. 3,950,842 49.8 743,750 3,207,092 32.3
OTHER SELLING STOCKHOLDERS
Robert Frisch(14).......................... 176,000 2.2 21,250 154,750 1.6
John Nitzsche.............................. 291,000 3.7 85,000 206,000 2.1
Kathryn Bertelli(15)....................... 301,500 3.8 10,200 291,300 3.0
Susan L. Ansin............................. 140,000 1.8 29,750 110,250 1.1
Patrick B. Maraghy, Trustee(17)............ 360,000 4.6 91,800 268,200 2.7
Other Selling Stockholders each owning less
than 1% of the Common Stock before the
Offering (18 parties)(18)................ 314,629 4.0 25,250 289,379 2.9
</TABLE>
- ---------------
* Less than one percent
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission (the "Commission") and includes general
voting power or investment power with respect to securities. Shares of
Common Stock subject to options and warrants currently exercisable or
exercisable within sixty (60) days of October 31, 1997 are deemed
outstanding for computing the percentage of the person holding such
options, but are not deemed outstanding for computing the percentage of any
other person. Except as otherwise specified below, the persons named in the
table above have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them. Unless
otherwise indicated, the address of each of the beneficial owners
identified is 199 Riverneck Road, Chelmsford, MA 01824.
(2) The address of this beneficial owner is MDT Advisers, Inc., 125 Cambridge
Park Drive, Cambridge, MA, attention R. Schorr Berman. Includes 2,036,910
shares issuable upon conversion of Series A Convertible Preferred Stock of
the Company. Shares are held of record by MD Co., a partnership organized
by Memorial Drive Trust to hold securities on behalf of Memorial Drive
Trust.
49
<PAGE> 53
(3) Includes 500,000 shares held of record by MassMutual Corporate Investors.
The address of these beneficial owners is 1295 State Street, Springfield,
MA 01111.
(4) The address of this beneficial owner is 4400 Computer Drive, Westborough,
MA 01580. Includes 306,816 shares issuable upon conversion of Series A
Convertible Preferred Stock of the Company.
(5) The address of this beneficial owner is c/o First Stage Capital Limited
Partnership, 101 Main Street, Cambridge, MA 02142.
(6) Includes options to purchase 17,319 shares exercisable within sixty days of
October 31, 1997.
(7) Consists of options to purchase 11,030 shares exercisable within sixty days
of October 31, 1997.
(8) Includes options to purchase 8,000 shares exercisable within sixty days of
October 31, 1997.
(9) Includes 375,000 shares owned by First Stage Capital Limited Partnership,
as to which Mr. Baty may be deemed beneficial owner and as to which Mr.
Baty disclaims beneficial ownership except to the extent of his direct
pecuniary interest. Includes options to purchase 7,228 shares exercisable
within sixty days of October 31, 1997. Mr. Baty is a general partner of
First Stage Capital Limited Partnership.
(10) Includes options to purchase 7,228 shares exercisable within sixty days of
October 31, 1997.
(11) Includes options to purchase 7,228 shares exercisable within sixty days of
October 31, 1997. Includes 2,879,786 shares owned by MD Co., as to which
Mr. Berman may be deemed beneficial owner and as to which Mr. Berman
disclaims beneficial ownership except to the extent of his direct pecuniary
interest. Mr. Berman is President of MDT Advisors, Inc., which manages the
investments of MD Co. See note (2) above.
(12) Includes options to purchase 5,399 shares exercisable within sixty days of
October 31, 1997.
(13) Includes options to purchase 5,399 shares exercisable within sixty days of
October 31, 1997.
(14) Includes options to purchase 20,000 shares exercisable within sixty days of
October 31, 1997.
(15) Includes 270,000 shares held of record by Kathryn Bertelli 1995 Irrevocable
Trust, of which Ms. Bertelli serves as a trustee, 1,500 shares held as
custodian for Heidi Bertelli and 30,000 shares held of record by Kathryn
Bertelli.
(16) Includes options to purchase 68,831 shares exercisable within sixty days of
October 31, 1997.
(17) Includes 210,000 shares held as a Trustee of Lawrence J. Ansin 1990
Revocable Trust -- Trust A-2, 75,000 shares held as a Trustee of Gregory
David Ansin 1992 Irrevocable Trust and 75,000 shares held as a Trustee of
Lisa Ansin 1988 Irrevocable Trust.
(18) Includes options to purchase 22,504 shares exercisable within sixty days of
October 31, 1997.
50
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of the Offering, the Company's authorized
capital stock will consist of 25,000,000 shares of Common Stock and 1,000,000
shares of Preferred Stock, par value $.01 per share and will have 9,864,023
shares of Common Stock outstanding, assuming no exercise of options after
October 31, 1997. As of October 31, 1997, an aggregate of 5,307,231 shares of
Common Stock were held of record by 148 stockholders, and 852,264 shares of
Preferred Stock were outstanding and held of record by three stockholders. All
shares of Preferred Stock will be converted into Common Stock upon the
completion of this offering at the rate of three shares of Common Stock for each
share of Preferred Stock. Copies of the Charter and Bylaws have been filed as
exhibits to the Registration Statement and are incorporated by reference herein.
COMMON STOCK
All outstanding shares of Common Stock are, and the Common Stock offered
hereby will be, fully paid and nonassessable. The holders of Common Stock are
entitled to one vote for each share held of record on all matters voted upon by
Stockholders and may not cumulate votes. Subject to the rights of holders of any
future series of undesignated preferred stock which may be designated, each
share of the outstanding Common Stock is entitled to participate equally in any
distribution of net assets made to the Stockholders in the liquidation,
dissolution or winding up of the Company and is entitled to participate equally
in dividends as and when declared by the Board of Directors. There are no
redemption, sinking fund, conversion or preemptive rights with respect to the
shares of Common Stock. All shares of Common Stock have equal rights and
preferences.
PREFERRED STOCK
Upon the completion of this Offering, all of the outstanding Preferred
Stock will be converted into Common Stock. After the completion of this
Offering, the Board of Directors will have the authority, without further
stockholder approval, to issue 1,000,000 shares of preferred stock where defined
in one or more series and to fix the relative rights, preferences, privileges,
qualifications, limitations and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series. The issuance of preferred stock,
while potentially providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of, and the voting and other rights of the
holders of the Common Stock. No shares of preferred stock will be outstanding
immediately following the completion of this Offering. The Company has no
present plans to issue any shares of Preferred Stock. See "Risk
Factors -- Anti-takeover Provisions; Possible Issuance of Preferred Stock."
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 6,505,264 shares of Common Stock (the "Registrable
Securities") or their transferees are entitled to certain rights with respect to
the registration of such shares under the Securities Act. These rights are
provided under the terms of certain agreements, by and among the Company and the
holders of the Registrable Securities. No shares being registered for the
account of Selling Stockholders are being registered pursuant to these
registration rights. Upon consummation of the Offering and subject to certain
limitations in the applicable agreements, holders of 5,078,794 shares of
Registrable Securities may request registration under the Securities Act of all
or part of their Registrable Securities, six months after the effective date of
the Offering. If the Company registers any of its Common Stock either for its
own account or for the account of other security holders, the holders of
5,078,794 shares of Registerable Securities are entitled to include their shares
of Common Stock in the registration, subject to pro rata cutback. All
registration expenses must be borne by the Company and all selling expenses
relating to Registrable Securities must be borne by the holders of the
securities being registered. In addition, certain holders of Registrable
Securities may request registration under the Securities Act of all or part of
their Registrable Securities on Form S-3 if use of such form becomes available
to the Company.
51
<PAGE> 55
Pursuant to a Stock Purchase Agreement, dated as of January 20, 1984, among
the Company and certain of its stockholders, (i) Memorial Drive Trust and other
investors (together, the "Investors") purchased an aggregate of 852,264 shares
of the Company's Series A Convertible Preferred Stock for an aggregate
consideration of $1,200,000; and (ii) the Investors received so-called "demand"
registration rights, and the Investors, James R. Bertelli, a director and
President of the Company, Gordon Baty, a director of the Company, and certain
other stockholders of the Company received so-called "piggyback" registration
rights.
Pursuant to a Debenture Agreements, dated December 21, 1987, between the
Company and each of Massachusetts Mutual Life Insurance Company and MassMutual
Corporate Investors (together "Massachusetts Mutual"), Massachusetts Mutual
received so-called "demand" and "piggyback" registration rights. Under these
Debenture Agreements, the Company sold to Massachusetts Mutual $3,000,000 in
principal amount of convertible debentures. On March 1, 1993, these debentures
were converted into 1,000,000 shares of Common Stock which are covered by the
registration rights described above.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sales, will have on the
prevailing market price for the Common Stock. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock and could impair the
Company's future ability to obtain capital through an offering of equity
securities. See "Risk Factors -- Shares Eligible for Future Sale."
CERTAIN ARTICLES OF ORGANIZATION, BYLAWS AND STATUTORY PROVISIONS AFFECTING
STOCKHOLDERS
Classified Board and Other Matters. The Board of Directors will be divided
into three classes, each of which, after a transitional period, will serve until
the third annual meeting of stockholders after their election, with one class
being elected each year. Since the classification of directors has already been
established, investors purchasing Common Stock in the Offering will not have an
opportunity to vote on the classification. Under the Massachusetts General Laws,
in the case of a corporation having a classified Board, Stockholders may remove
a director only for cause. The Bylaws require that stockholders provide the
Clerk of the Company 60 days advance notice prior to the date set forth in the
Bylaws for an annual meeting of Stockholders or special meeting in lieu thereof
for the purpose of any director nominations or within ten (10) days notice after
notice of a special meeting not in lieu of annual meeting. The Bylaws provide
that special meetings of stockholders of the Company may be called only by the
Board of Directors, the President or 30% in interest of the stockholders. The
Bylaws as well as applicable provisions of the Massachusetts General Laws,
provide that no action required or permitted to be taken at any annual or
special meeting of the stockholders of the Company may be taken without a
meeting, unless the unanimous consent of stockholders entitled to vote thereon
is obtained. The affirmative vote of the holders of at least 80% of the combined
voting power of then outstanding voting stock of the Company will be required to
alter, amend or repeal the foregoing provisions; provided, however, that if any
proposal to alter any of the foregoing provisions receives the affirmative vote
of a majority of the directors, then such proposal shall require only the
affirmative vote of the holders of a majority of the outstanding voting stock of
the Company. Such supermajority voting provisions diminish the likelihood that a
potential acquiror would make an offer for the Common Stock, impede a
transaction favorable to the interest of the stockholders or increase the
difficulty of removing a number of Board of Directors or management. See "Risk
Factors -- Anti-Takeover Provisions; Possible Issuance of Preferred Stock."
Chapters 110D and 110F of Massachusetts General Laws. The Company is
subject to the provisions of Chapter 110F of the Massachusetts General Laws, an
anti-takeover law. In general, this statute prohibits a publicly held
Massachusetts corporation with sufficient ties to Massachusetts from engaging in
a "business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person becomes an
interested stockholder, unless either (i) the interested stockholder obtains the
approval of the board of directors prior to becoming an interested stockholder,
(ii) the interested stockholder acquires 90% of the outstanding voting stock of
the corporation (excluding shares held by certain affiliates of the corporation)
at the time he becomes an interested stockholder or (iii) the business
combination is approved by both the board of directors and two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at an annual or special meeting of stockholders, not by
written consent. An interested stockholder is a person who, together with
affiliates and associates, owns 5% or
52
<PAGE> 56
more of the Corporation's outstanding voting stock or who is an affiliate at any
time within the prior three years did own 5% or more of the corporation's voting
stock. Voting control obtained by means of a revocable proxy will not trigger
the implications of Chapter 110F of the Massachusetts General Laws. A "business
combination" includes mergers, stock and asset sales and other transactions
resulting in a financial benefit to the stockholder. The Company may at any time
amend its Articles of Organization or Bylaws to elect not to be governed by
Chapter 110F, by vote of the holders of a majority of its voting stock, but such
an amendment would not be effective for twelve months and would not apply to a
business combination with any person who became an interested stockholder prior
to the date of the amendment.
The Company is also subject to the provisions of Chapter 110D of the
Massachusetts General Laws, entitled "Regulation of Control Share Acquisitions."
This statute provides, in general, that any stockholder who acquires 20% or more
of the outstanding voting stock of a corporation subject to this statute may not
vote that stock unless the stockholders of the corporation so authorize. Voting
control obtained by means of a revocable proxy will not trigger the implications
of Chapter 110D of the Massachusetts General Laws. In addition, Chapter 110D
permits a corporation to provide in its articles of organization or bylaws that
the corporation may redeem (for fair value) all the shares thereafter acquired
in a control share acquisition if voting rights for those shares were not
authorized by the stockholders or if no control share acquisition statement was
delivered. The Charter includes a provision which permits the Company to effect
such redemptions. See "Risk Factors."
Directors Liability. The Charter provides that no director shall be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for (i) any breach of the
directors's duty of loyalty to the Company or its Stockholders; (ii) acts or
omissions which has been adjudicated not to be in good faith or to have involved
intentional misconduct; (iii) acts covered by Massachusetts General Laws,
Chapter 156B, Section 61, which imposes personal liability upon directors voting
for distributions to stockholders which are prohibited by a company's Articles
of Organization or for which a company has insufficient funds to make legally;
(iv) acts covered by Massachusetts General Laws, Chapter 156B, Section 62, which
imposes personal liability for directors in the event Company loans to its
officers and directors are not repaid; or (v) any transaction from which such
director derives improper personal benefit. The effect of this provision is to
eliminate the rights of the Company and its stockholders (through stockholders'
derivative suits on behalf of the Company) to recover monetary damages against a
director for breach of the fiduciary duty of care as a director (including
breaches resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. The limitations
summarized above, however, do not affect the ability of the Company or its
stockholders to seek non-monetary based remedies, such as an injunction or
rescission, against a director for breach of his fiduciary duty nor would such
limitations limit liability under the federal securities laws. The Bylaws
provide that the Company shall, to the full extent permitted by the
Massachusetts General Laws as currently in effect, indemnify and advance
expenses to each of its currently acting and former directors, officers,
employees and agents arising in connection with their acting in such capacities.
TRANSFER AGENT AND REGISTRAR
Boston EquiServe Limited Partnership will serve as the transfer agent and
registrar for the Common Stock.
53
<PAGE> 57
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
9,864,023 shares of Common Stock, assuming no exercise of options after October
31, 1997. Of these shares, the 3,500,000 shares offered hereby (4,025,000 shares
if the Underwriters' over-allotment options are exercised in full) will be
freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 described below. The remaining 6,364,023 shares of Common
Stock (6,069,673 shares if the Underwriters' over-allotment options are
exercised in full) outstanding upon closing of the Offering are "restricted
securities" as that term is defined in Rule 144. Of the remaining 6,364,023
shares (6,069,673 shares if the Underwriters' over-allotment options are
exercised in full), 6,024,578 shares are subject to lock-up agreements
(described below).
Upon completion of the Offering, 2,231,063 shares, including shares subject
to the lock-up restrictions described below, will become eligible for immediate
sale pursuant to Rule 144(k) and, beginning 90 days after commencement of the
Offering, an additional 4,107,809 shares, including shares subject to the
lock-up restrictions described below, will become eligible for sale pursuant to
Rule 144 or Rule 701 under the Securities Act ("Rule 701"). The 25,250 remaining
shares held by existing stockholders will become eligible for sale at various
times over a period of less than one year. In addition, 463,517 shares of Common
Stock subject to outstanding vested stock options could also be sold, subject in
some cases to compliance with certain volume limitations as described below.
Upon expiration of the lock-up agreements, an aggregate of 2,127,266 shares will
become immediately eligible for sale without restriction pursuant to Rule 144(k)
or Rule 701 (described below), and approximately 3,924,311 additional shares
will be eligible for sale subject to the timing, volume, and manner of sale
restrictions of Rule 144.
In general, under Rule 144, as recently amended, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an affiliate from whom
such shares were purchased) is entitled to sell in "brokers' transactions" or to
market makers, within any three-month period commencing 90 days after the date
of this Prospectus, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding
(approximately 98,640 shares immediately after the completion of the Offering)
or (ii) generally, the average weekly trading volume in the Common Stock during
the four calendar weeks preceding the required filing of a Form 144 with respect
to such sale. Sales under Rule 144 are subject to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner other
than an affiliate from whom such shares were purchased), is entitled to sell
such shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Under Rule 701,
persons who purchase shares upon exercise of options granted prior to the
effective date of the Offering are entitled to sell such shares 90 days after
the effective date of the Offering in reliance on the resale provisions of Rule
701, which are similar to the resale provisions of Rule 144, except such persons
do not have to comply with the holding period requirements of Rule 144 and, in
the case of non-affiliates, such persons do not have to comply with the public
information, volume limitation or notice provisions of Rule 144.
Pursuant to the lock-up agreements, the Company, its executive officers and
directors, the Selling Stockholders and certain other stockholders have agreed
that, subject to certain limited exceptions, they will not, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or any securities convertible into, or exercisable or exchangeable for, any
shares of Common Stock, or other similar securities of the Company for a period
of 180 days from the date of this Prospectus, except that such agreements do not
prevent the Company from granting additional options under the Stock Option
Plans or from issuing shares pursuant to the 1997 Purchase Plan. After such 180
day period, this restriction will expire and shares permitted to be sold under
Rule 144 will be eligible for sale. Prudential Securities Incorporated may, in
its sole discretion, at any time and
54
<PAGE> 58
without prior notice, release all or any portion of the shares of Common Stock
subject to such lock-up agreements.
The holders of an aggregate of 6,505,264 shares of Common Stock or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights of Certain Holders."
The Company currently intends to file one or more registration statements
on Form S-8 with the Commission in order to register the 1,719,700 shares of
Common Stock subject to the Stock Option Plans and the 1997 Purchase Plan.
Prior to the Offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.
55
<PAGE> 59
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Cowen & Company are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth opposite
their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Prudential Securities Incorporated........................................
Cowen & Company...........................................................
---------
Total........................................................... 3,500,000
=========
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the shares of Common
Stock initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may reallow to selected dealers a concession
of $ per share; and that such dealers may reallow a concession of
$ per share to certain other dealers. After the initial public
offering, the offering price and the concessions may be changed by the
Representatives.
The Company and certain Selling Stockholders have granted to the
Underwriters over-allotment options, exercisable for 30 days from the date of
this Prospectus, to purchase, in the aggregate, up to 525,000 additional shares
of Common Stock at the initial public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such options solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such options to purchase are exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional shares as the number set forth next to
such Underwriter's name in the preceding table bears to 3,500,000.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters and contribute to any losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company, its executive officers and directors and certain Stockholders,
including the Selling Stockholders, have agreed that, subject to certain limited
exceptions, they will not, for a period of 180 days subsequent to the date of
this Prospectus, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or securities substantially similar thereto, or any securities convertible into
or exercisable or exchangeable for,
56
<PAGE> 60
any shares of Common Stock or securities substantially similar thereto of the
Company without the prior written consent of Prudential Securities Incorporated,
on behalf of the Underwriters, except that such agreements do not prevent the
Company from granting additional options under the Stock Option Plan. Further,
certain holders of outstanding vested stock options are subject to 180 day
lock-up agreements with the Company and/or Prudential Securities Incorporated.
Prudential Securities Incorporated may in its sole discretion at any time and
without notice, release all or any portion of the securities subject to such
lock-up agreements.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in making such determination will be the
prevailing market conditions, the Company's financial and operating history and
condition, its prospects and the prospects for its industry in general, the
management of the Company and the market prices of securities for companies in
businesses similar to that of the Company.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Stockholders,
and in such case may purchase Common Stock in the open market following the
closing of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
525,000 shares of Common Stock, by exercising the Underwriters' over-allotment
options referred to above. In addition, Prudential Securities Incorporated, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of the other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Hutchins, Wheeler &
Dittmar, A Professional Corporation, Boston, Massachusetts. Anthony J. Medaglia,
Jr., a Stockholder of Hutchins, Wheeler & Dittmar and the Clerk of the Company,
owns 17,250 shares directly, 8,000 shares indirectly as Trustee and options to
purchase 5,000 shares of Common Stock, of which options to purchase 2,500 shares
are currently exercisable. James Westra, a Stockholder of Hutchins, Wheeler &
Dittmar and a Selling Stockholder, owns 6,000 shares of Common Stock. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated balance sheets of Mercury Computer Systems, Inc. as of
June 30, 1996 and 1997 and the consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 1997, included in this Prospectus, have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants, on
the authority of that firm as experts in accounting and auditing.
57
<PAGE> 61
ADDITIONAL INFORMATION
The Company has filed with the Commission, Washington, D.C. 20549 a
Registration Statement on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is hereby made to such Registration Statement and to the
exhibits and schedules filed therewith. Statements contained in this Prospectus
as to the contents of any contract or any other document referred to are not
necessarily complete, and in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected by anyone
without charge at the Commission's principal office in Washington, D.C., and
copies of all or any part of the Registration Statement may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W. Washington,
D.C. 20549, upon payment of certain fees prescribed by the Commission. The
Commission maintains a World Wide Website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the website is
http://www.sec.gov.
Upon completion of the Offering, the Company will be subject to the
information reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and, in accordance therewith, will file reports,
proxy statements and other information with the Commission.
The Company intends to furnish its Stockholders with annual reports
containing financial statements audited by the Company's independent public
accountants and quarterly reports for the first three fiscal quarters of each
fiscal year containing unaudited interim financial information.
RACE(R) is a registered trademark of the Company. Mercury, Mercury Computer
Systems, the Mercury logo, SuiteFusion, MC/OS, PAS, SuperVision and PeakWare are
trademarks of the Company. SHARC is a trademark of Analog Devices, Inc. and
PowerPC(R) is a registered trademark of Motorola, Inc. Trademarks of others are
also referred to in this Prospectus.
58
<PAGE> 62
MERCURY COMPUTER SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997 and September 30, 1997
(Unaudited)....................................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1995, 1996 and
1997 and
for the three months ended September 30, 1996 and 1997 (Unaudited)................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended June
30, 1995, 1996 and 1997 and for the three months ended September 30, 1997
(Unaudited)....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and
1997 and for the three months ended September 30, 1996 and 1997 (Unaudited)....... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Mercury Computer Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Mercury
Computer Systems, Inc. as of June 30, 1996 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mercury
Computer Systems, Inc. as of June 30, 1996 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
August 28, 1997, except for
the information in the final
paragraph of Note F,
as to which the date is
December 12, 1997
F-2
<PAGE> 64
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------------- SEPTEMBER 30,
1996 1997 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 9,704 $15,193 $16,035
Trade accounts receivable, net of allowance for doubtful
accounts of $80, $119 and $119 at June 30, 1996 and
1997, and September 30, 1997, respectively............ 10,236 12,816 12,370
Trade notes receivable................................... 312 -- --
Contracts in progress.................................... -- 1,096 1,997
Inventory................................................ 7,188 8,314 8,905
Deferred income taxes, net............................... 328 926 1,152
Prepaid expenses and other current assets................ 521 728 988
------- ------- -------
Total current assets............................. 28,289 39,073 41,447
Property and equipment, net................................ 4,394 4,984 5,650
Capitalized software development costs, net................ 371 483 363
Deferred income taxes, net................................. 40 39 145
Other assets............................................... 170 269 300
------- ------- -------
Total assets..................................... $33,264 $44,848 $47,905
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 1,710 $ 2,801 $ 2,316
Accrued expenses......................................... 760 1,903 2,679
Accrued compensation..................................... 1,639 2,316 2,351
Billings in excess of revenues and customer advances..... 393 2,877 3,366
Income taxes payable..................................... 233 1,629 2,082
------- ------- -------
Total current liabilities........................ 4,735 11,526 12,794
Commitments and contingencies (Note F)
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000,000 shares
authorized:
1,000,000 shares designated as Series A Convertible
Preferred Stock, 852,264 shares issued and outstanding
(liquidation preference of $1,200,000)................ 1,200 1,200 1,200
Common Stock, $.01 par value; 25,000,000 shares
authorized, 5,083,231, 5,202,231 and 5,269,181 shares
issued and outstanding at June 30, 1996 and 1997, and
September 30, 1997, respectively...................... 51 52 53
Additional paid-in capital............................... 5,434 5,703 5,846
Retained earnings........................................ 22,141 26,752 28,358
Cumulative translation adjustment........................ 3 (60) (21)
Subscriptions and related parties notes receivable....... (300) (325) (325)
------- ------- -------
Total stockholders' equity............................ 28,529 33,322 35,111
------- ------- -------
Total liabilities and stockholders' equity....... $33,264 $44,848 $47,905
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 65
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
------------------------------- -------------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $54,323 $58,300 $64,574 $13,038 $19,039
Cost of revenues......................... 21,221 24,688 22,034 4,538 6,661
------- ------- ------- ------- -------
Gross profit................... 33,102 33,612 42,540 8,500 12,378
------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative.... 15,798 16,927 22,631 4,726 6,645
Research and development............... 8,586 9,776 12,837 2,405 3,381
------- ------- ------- ------- -------
Total operating expenses....... 24,384 26,703 35,468 7,131 10,026
------- ------- ------- ------- -------
Income from operations................... 8,718 6,909 7,072 1,369 2,352
------- ------- ------- ------- -------
Interest income.......................... 278 561 582 136 233
Interest expense......................... (38) (13) (22) -- (2)
Other income (expense), net.............. 22 (77) (88) (23) 83
------- ------- ------- ------- -------
Income before income tax provision....... 8,980 7,380 7,544 1,482 2,666
Income tax provision..................... 2,636 2,952 2,933 576 1,060
------- ------- ------- ------- -------
Net income............................... $ 6,344 $ 4,428 $ 4,611 $ 906 $ 1,606
======= ======= ======= ======= =======
Net income per common share.............. $0.77 $0.54 $0.57 $0.11 $0.20
===== ===== ===== ===== =====
Weighted average number of common and
common equivalent shares outstanding... 8,256 8,264 8,157 8,191 8,174
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 66
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997 AND
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE SUBSCRIPTIONS
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE AND RELATED TOTAL
--------------- --------------- PAID-IN RETAINED TRANSLATION PARTIES NOTES STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT RECEIVABLE EQUITY
------ ------ ------ ------ ---------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1994... 852 $1,200 4,963 $ 50 $4,242 $11,369 $ 17 $(188) $16,690
Issuance of Notes
Receivable to Related
Parties................ (120) (120)
Exercise of Common Stock
options and
subscription
repayment.............. 49 -- 40 8 48
Conversion of Series B
Convertible Redeemable
Preferred Stock........ 1,000 1,000
Net income............... 6,344 6,344
Foreign currency
translation............ 41 41
--- ------ ----- --- ------ ------- ---- ----- -------
Balance, June 30, 1995... 852 1,200 5,012 50 5,282 17,713 58 (300) 24,003
Exercise of Common Stock
options................ 71 1 152 153
Net income............... 4,428 4,428
Foreign currency
translation............ (55) (55)
--- ------ ----- --- ------ ------- ---- ----- -------
Balance, June 30, 1996... 852 1,200 5,083 51 5,434 22,141 3 (300) 28,529
--- ------ ----- --- ------ ------- ---- ----- -------
Issuance of Notes
Receivable to Related
Parties................ (25) (25)
Exercise of Common Stock
options................ 86 1 137 138
Issuance of Common
Stock.................. 33 -- 132 132
Net income............... 4,611 4,611
Foreign currency
translation............ (63) (63)
--- ------ ----- --- ------ ------- ---- ----- -------
Balance, June 30, 1997... 852 1,200 5,202 52 5,703 26,752 (60) (325) 33,322
--- ------ ----- --- ------ ------- ---- ----- -------
Exercise of Common Stock
options and warrants... 67 1 143 144
Net income............... 1,606 1,606
Foreign currency
translation............ 39 39
--- ------ ----- --- ------ ------- ---- ----- -------
Balance, September 30,
1997 (Unaudited)....... 852 $1,200 5,269 $ 53 $5,846 $28,358 $(21) $(325) $35,111
=== ====== ===== === ====== ======= ==== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 67
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
----------------------------- ------------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $ 6,344 $ 4,428 $ 4,611 $ 906 $ 1,606
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of
property and equipment................ 1,594 2,020 2,855 518 685
Amortization of capitalized software
development costs..................... -- -- 438 136 120
Provision for doubtful accounts......... -- -- 40 -- --
Deferred income taxes................... 79 242 (596) (117) (332)
Other noncash items..................... -- 88 87 14 27
Changes in assets and liabilities:
Trade accounts receivable............. 996 (2,235) (2,710) (53) 446
Trade notes receivable................ -- (312) 296 (1,163) --
Contracts in progress................. -- -- (1,096) -- (901)
Inventory............................. (4,302) 5,231 (1,158) 135 (591)
Prepaid expenses and other current
assets............................. (5) (103) (246) (22) (260)
Income taxes receivable............... 959 -- -- -- --
Other assets.......................... (46) (158) (101) (238) (31)
Accounts payable...................... (148) (16) 1,081 (199) (485)
Accrued expenses and compensation..... (46) 503 1,846 312 812
Billings in excess of revenues and
customer advances.................. 4,137 (5,090) 2,472 (79) 489
Income taxes payable.................. 525 (291) 1,403 693 453
------- ------- ------- ------- -------
Net cash provided by operating activities.... 10,087 4,307 9,222 843 2,038
======= ======= ======= ======= =======
Cash flows from investing activities:
Purchases of property and equipment........ (2,101) (2,924) (3,457) (567) (1,358)
Capitalized software development costs..... -- (371) (550) (324) --
Notes receivable from related parties...... (120) -- (25) -- --
------- ------- ------- ------- -------
Net cash used in investing activities........ (2,221) (3,295) (4,032) (891) (1,358)
------- ------- ------- ------- -------
Cash flows from financing activities:
Principal payments under capital lease
obligations............................. (73) -- -- -- --
Proceeds from issuance of Common Stock..... 40 153 270 2 144
Subscription repayment..................... 8 -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities................................. (25) 153 270 2 144
------- ------- ------- ------- -------
Net increase in cash and cash equivalents.... 7,841 1,165 5,460 (46) 824
------- ------- ------- ------- -------
Effect of exchange rate changes on cash and
cash equivalents........................... 38 (52) 29 (8) 18
Cash and cash equivalents at beginning of
period..................................... 712 8,591 9,704 9,704 15,193
======= ======= ======= ======= =======
Cash and cash equivalents at end of period... $ 8,591 $ 9,704 $15,193 $ 9,650 $16,035
------- ------- ------- ------- -------
Cash paid during the period for:
Interest................................... $ 38 $ 13 $ 22 -- $ 2
Income taxes............................... 2,177 2,901 2,133 -- 939
Noncash transactions:
Series B Convertible Redeemable Preferred
Stock converted to additional paid-in
capital................................. $ 1,000 -- -- -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 68
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
A. DESCRIPTION OF BUSINESS:
Mercury Computer Systems, Inc. (the "Company") designs, manufactures and
markets high performance real-time digital signal processing computer systems
which transform sensor generated data into information which can be displayed as
images for human interpretation or subjected to additional computer analysis.
These multicomputer systems are heterogeneous and scalable, allowing them to
accommodate several different microprocessor types and to scale from a few to
hundreds of microprocessors within a single system. The two primary markets for
the Company's products are defense electronics and medical diagnostic imaging.
Both of these markets have computing needs which benefit from the unique system
architecture developed by the Company.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated.
Interim Financial Information
The consolidated financial statements of the Company as of September 30,
1997 and for the three months ended September 30, 1996 and 1997 are unaudited.
All adjustments (consisting only of normal recurring adjustments) have been made
which, in the opinion of management, are necessary for a fair presentation.
Results of operations for the three months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for any future
period.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is generally recorded upon shipment to the
customer provided that no significant vendor obligations remain outstanding and
collection of the related receivable is deemed probable by management. If
insignificant vendor obligations remain after shipment of the product, the
Company accrues for the estimated costs of such obligations. Additionally, the
Company accrues for warranty costs upon shipment. Service revenue is recognized
ratably over applicable contract periods or as the services are performed.
Revenue from contracts involving significant product modification or
customization is recognized using the percentage-of-completion accounting method
on an efforts-expended basis. Changes to total estimated costs and anticipated
losses, if any, are recognized in the period in which determined. No revenue was
recognized under the percentage of completion method for the fiscal years ended
June 30, 1995 and 1996, and the three months ended September 30, 1996.
Approximately $2,102,000 and $901,000 of revenue was recognized under the
percentage-of-completion method for the fiscal year ended June 30, 1997, and the
three months ended September 30, 1997, respectively. There were no retainages at
June 30, 1996 and 1997 and September 30, 1997.
F-7
<PAGE> 69
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
Contracts in Progress
Contracts in progress include costs and estimated profits under uncompleted
contracts accounted for using the percentage-of-completion method, net of
amounts billed. Amounts billed at June 30, 1996 and 1997 and September 30, 1997,
which were netted against costs and estimated profits, were $0, $1,016,000 and
$1,091,000, respectively. Amounts billed at September 30, 1997 are expected to
be collected within the next twelve months.
Billings in Excess of Revenues and Customer Advances
Billings in excess of revenues and customer advances include amounts billed
on uncompleted contracts accounted for using the percentage-of-completion method
net of costs and estimated profits recognized.
Cash and Cash Equivalents
Cash equivalents, consisting of money market funds and U.S. government and
U.S. government agency issues with original maturities of 90 days or less, are
carried at cost which approximates fair value.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash and cash equivalents with financial
institutions which management believes are of high credit quality. At September
30, 1997, the Company had approximately $15,489,000 on deposit or invested with
its primary financial and lending institution.
One customer accounted for approximately 19% and 57% of the accounts
receivable balances at June 30, 1996 and 1997, respectively. Two other customers
accounted for approximately 15% and 12% of the accounts receivable balance at
June 30, 1996, respectively. Three customers accounted for approximately 17%,
16% and 10%, respectively, of the accounts receivable balance at September 30,
1997. The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses. Such losses have historically
been within management's expectations.
Inventory
Inventory is stated at the lower of cost, determined on the first-in,
first-out (FIFO) basis, or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is based on the
following estimated useful lives of the assets using the straight-line method:
<TABLE>
<S> <C>
Computer equipment.................................... 1-3 years
Machinery and equipment............................... 5 years
Furniture and fixtures................................ 5 years
Leasehold improvements................................ Shorter of the lease
term or economic life
</TABLE>
Expenditures for additions, renewals and betterments of property and
equipment are capitalized. Expenditures for repairs and maintenance are charged
to expense as incurred. As assets are retired or sold, the
F-8
<PAGE> 70
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
related cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations.
Capitalized Software Development Costs
The Company capitalizes software development costs incurred after a
product's technological feasibility has been established and before it is
available for general release to customers. Amortization of capitalized software
costs is computed on an individual product basis and is the greater of a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or b) the straight-line
method over the estimated economic life of the product. Currently, the Company
uses an estimated economic life of 36 months for all capitalized software costs.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the Company's
consolidated financial statements. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using currently enacted tax
rates for the year in which the differences are expected to reverse. The Company
records a valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
Net Income Per Common Share
Net income per common share is based upon the weighted average number of
common and common equivalent shares (using the treasury stock method)
outstanding after certain adjustments described below. Common equivalent shares
are included in the per share calculations where the effect of their inclusion
would be dilutive. Common equivalent shares consist of outstanding stock
options, stock warrants, and the Series A convertible preferred stock. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
common and common equivalent shares issued at prices less than the mid-point of
the estimated initial public offering price range during the twelve-month period
prior to the initial filing of the Registration Statement for the initial public
offering have been included in the calculation as if they were outstanding for
all periods using the treasury stock method and an assumed mid-point of the
estimated initial public offering price range of $13.00 per common share. Fully
diluted earnings per share is not presented, as the difference between primary
and fully diluted earnings per share is immaterial.
Foreign Currency
The accounts of foreign subsidiaries are translated using exchange rates in
effect at period-end for assets and liabilities and at average exchange rates
during the period for results of operations. The local currency for all foreign
subsidiaries is the functional currency. The related translation adjustments are
reported as a separate component of stockholders' equity. Gains (losses)
resulting from foreign currency transactions are included in other income
(expense) and are immaterial for all period presented.
Reclassification
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
F-9
<PAGE> 71
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share," which is effective for both interim and annual periods ending after
December 31, 1997. Earlier adoption is not permitted. The statement requires
restatement of all prior period earnings per share data presented after the
effective date. SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share and is substantially similar to
the standards recently issued by the International Accounting Standards
Committee entitled "International Accounting Standards, Earnings Per Share." The
Company will adopt SFAS No. 128 in the interim period ending December 31, 1997.
The impact of SFAS No. 128 will be immaterial to reported net income per common
share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement will be effective for annual periods
beginning after December 15, 1997 and the Company will adopt its provisions in
fiscal 1999. Reclassification for earlier periods is required for comparative
purposes. The Company is currently evaluating the impact this statement will
have on its financial statements; however, because the statement requires only
additional disclosure, the Company does not expect the statement to have a
material impact on its financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for annual periods beginning after December 15, 1997
and the Company will adopt its provisions in fiscal 1999. Reclassification for
earlier periods is required, unless impracticable, for comparative purposes. The
Company is currently evaluating the impact this statement will have on its
financial statements; however, because the statement requires only additional
disclosure, the Company does not expect the statement to have a material impact
on its financial position or results of operations.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued the statement of position ("SOP") 97-2 "Software Revenue
Recognition," which will supersede SOP 91-1. SOP 97-2 has not changed the basic
rules of revenue recognition but does provide more guidance particularly with
respect to multiple deliverables and "when and if available" products. SOP 97-2
is effective for transactions entered into for annual periods beginning after
December 15, 1997. The Company will adopt SOP 97-2 in fiscal 1999 and has not
yet determined its impact.
F-10
<PAGE> 72
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
C. INVENTORY:
Inventory consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------- SEPTEMBER 30,
1996 1997 1997
------ ------ -------------
<S> <C> <C> <C>
Raw materials................................ $2,107 $2,925 $ 2,548
Work in process.............................. 2,355 3,084 4,477
Finished goods............................... 2,726 2,305 1,880
------ ------ -------
$7,188 $8,314 $ 8,905
====== ====== =======
</TABLE>
D. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------- SEPTEMBER 30,
1996 1997 1997
-------- ------- -------------
<S> <C> <C> <C>
Computer equipment........................ $ 11,651 $11,253 $ 12,437
Machinery and equipment................... 982 337 268
Furniture and fixtures.................... 1,481 1,697 1,880
Leasehold improvements.................... 934 1,050 1,098
-------- ------- ---------
15,048 14,337 15,683
Less: accumulated depreciation and
amortization............................ (10,654) (9,353) (10,033)
-------- ------- ---------
$ 4,394 $ 4,984 $ 5,650
======== ======= =========
</TABLE>
The decrease in accumulated depreciation as of June 30, 1997 occurred when
the Company disposed of a significant amount of fully depreciated assets without
receiving any proceeds.
E. FINANCING ARRANGEMENT:
Under a credit agreement with a commercial bank, the Company may borrow up
to $6,000,000 at an interest rate equal to the prime rate or, at the election of
the Company, two and one-quarter percentage points above the London InterBank
Offered Rate, payable monthly. The credit agreement contains certain covenants,
including restrictions on incurrence of additional indebtedness and liens on its
assets, capital expenditures, disposition of assets, investments and
acquisitions, limitations on distributions, and requires the Company to meet
certain financial tests pertaining to current and debt ratios and income before
tax provision. There were no borrowings outstanding at June 30, 1996 and 1997
and September 30, 1997.
F. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company has an operating lease agreement for its main facility which
expires on September 30, 2002, with an option to extend the lease for an
additional five-year period.
Additionally, the Company leases branch office space. The leases expire at
various dates through 2003 and contain various renewal options. Rental charges
are subject to escalation for increases in certain operating costs of the
lessor.
F-11
<PAGE> 73
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
Future minimum lease payments under noncancelable operating leases with
initial or remaining terms of one year or more consisted of the following at
September 30, 1997:
<TABLE>
<S> <C>
October 1, 1997 through June 30, 1998............................. $ 701
Year ending June 30, 1999......................................... 904
Year ending June 30, 2000......................................... 827
Year ending June 30, 2001......................................... 820
Year ending June 30, 2002......................................... 804
Thereafter........................................................ 197
------
Total future minimum lease payments............................... $4,253
======
</TABLE>
Rental expense during the fiscal years ended June 30, 1995, 1996 and 1997
and the three months ended September 30, 1996 and 1997 was approximately
$674,000, $670,000, $642,000, $140,000 and $203,000, respectively.
Internal Revenue Service Audit
On December 12, 1997, the Internal Revenue Service ("IRS") concluded an
audit of the Company's tax returns for the years ended June 30, 1992 through
June 30, 1995, and issued a formal report reflecting proposed adjustments with
respect to the years under audit. The proposed IRS adjustments primarily relate
to the disallowance of research and experimental tax credits claimed by the
Company, as well as the treatment of certain other items. The total deficiency
attributable to the proposed adjustments is $4,181,000, including penalties and
interest of $1,591,000 through the date of the report. The Company is in the
process of responding to this report by appealing the proposed adjustments to
the Appeals Division of the IRS. While the Company does not believe that the
final outcome of the IRS audit will have a material adverse effect on the
Company's financial condition or results of operations, no assurance can be
given as to the final outcome of the audit, the amount of any final adjustments
or the potential impact of such adjustments on the Company's financial condition
or results of operations.
G. STOCKHOLDERS' EQUITY:
Preferred Stock
General
The Company is authorized to issue 2,000,000 shares of preferred stock with
a par value of $.01 per share. Under the terms of the various agreements related
to the sale and/or issuance of the preferred stock, restrictions are placed on
the Company pertaining to dividends, mergers, incurrence of indebtedness and
reorganizations. These agreements also grant certain preferred stockholders'
representation on the Company's Board of Directors ("the Board"), demand
registration rights, piggyback registration rights and certain antidilutive
rights.
Series A Convertible Preferred Stock
The Series A Convertible Preferred Stock has a liquidation preference of
$1.41 per share and has voting rights similar to the common stock. Each of the
preferred stockholders has one vote for each share of Common Stock into which
the Series A Convertible Preferred Stock is convertible. The Series A
Convertible Preferred Stock is convertible, at the option of the holder, into
shares of the Company's Common Stock in accordance with a conversion formula
which would currently result in a three-for-one exchange with
F-12
<PAGE> 74
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
mandatory conversion required in the event of a sale of the Company's Common
Stock in a public offering meeting a specified aggregate valuation.
Series B Convertible Redeemable Preferred Stock
On April 26, 1993, the Company redeemed all of the outstanding shares of
Series B Convertible Redeemable Preferred Stock for $3.00 per share resulting in
a $1,500,000 redemption and a $1,000,000 payment contingent on a qualified
public offering on or before April 26, 1995. During the fiscal year ended June
30, 1995, the contingent obligation expired and the remaining obligation was
reclassified to additional paid-in capital.
Stock Options
The Company has four stock option plans. The 1982, 1991 and 1993 Stock
Option Plans (the "Plans") provide for the granting of options to purchase an
aggregate of not more than 1,950,000 shares of the Company's Common Stock to
employees and directors. Under these plans, options are granted at not less than
the fair value of the stock on the date of grant as determined by the Board. The
terms of the options are established by the Board on an individual basis. The
options generally vest over five years and have a maximum term of ten years.
The 1997 Stock Option Plan (the "1997 Plan"), which the Board approved in
June 1997, provides for the granting of options to purchase an aggregate of not
more than 575,000 shares of the Company's Common Stock. Under the 1997 Plan,
options are granted at not less than 50% of the fair value of the stock on the
date of grant as determined by the Board. The options vest over five years and
have a maximum term of ten years. With the implementation of the 1997 Plan, no
further stock options were granted under the 1982, 1991 and 1993 Stock Option
Plans. No options were granted under the 1997 Plan during the fiscal year ended
June 30, 1997. Options granted under the 1997 Plan during the three months ended
September 30, 1997 were granted at the fair value of the common stock on the
date of grant.
In determining the fair value of the Stock at the date of grant under each
plan, the Board considered a broad range of factors including the illiquid
nature of an investment in the Company's Common Stock, transactions in the
Company's Common Stock with third parties, consultations with financial advisors
(as appropriate), the Company's historical financial performance relative to
that of comparable companies and its future prospects.
F-13
<PAGE> 75
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
In fiscal year 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires that companies either recognize
compensation expense for grants of stock, stock options and other equity
instruments based on fair value or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions of SFAS No. 123 in fiscal 1997 and has applied
APB Opinion No. 25 and related Interpretations in accounting for all of its
stock option plans. Accordingly, no compensation cost has been recognized for
its stock option plans as compensation cost is measured as the excess, if any,
of the fair market value of the Company's stock at the date of grant over the
amount an individual must pay to acquire the stock.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at June 30, 1994.................................... 849,367 $ 3.23
--------
Granted......................................................... 90,251 7.25
Exercised....................................................... (49,067) 0.82
Canceled........................................................ (96,900) 3.88
--------
Outstanding at June 30, 1995.................................... 793,651 3.76
--------
Granted......................................................... 47,675 6.16
Exercised....................................................... (71,250) 2.17
Canceled........................................................ (60,700) 5.51
--------
Outstanding at June 30, 1996.................................... 709,376 4.02
--------
Granted......................................................... 526,292 4.00
Exercised....................................................... (85,850) 1.61
Canceled........................................................ (305,226) 6.15
--------
Outstanding at June 30, 1997.................................... 844,592 3.41
--------
Granted......................................................... 41,101 4.00
Exercised....................................................... (56,950) 2.19
Canceled........................................................ (600) 5.00
--------
Outstanding at September 30, 1997............................... 828,143 $ 3.60
========
</TABLE>
Information related to the stock options outstanding as of September 30,
1997, is as follows:
<TABLE>
<CAPTION>
EXERCISABLE
WEIGHTED -------------------------
RANGE OF NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE OF REMAINING AVERAGE OF AVERAGE
PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
-------------------------- ------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$1.50 - $3.50............. 309,250 3.42 $ 2.48 303,450 $ 2.46
$4.00 ............... 475,293 9.06 4.00 127,604 4.00
$5.00 - $7.50............. 43,600 6.60 7.10 35,850 7.10
------- ---- ------ ------- ------
Total........... 828,143 6.83 $ 3.60 466,904 $ 3.24
======= ==== ====== ======= ======
</TABLE>
There were 527,791 and 473,890 options exercisable at June 30, 1996 and
1997, respectively. The weighted average fair value at date of grant for stock
options granted during the fiscal years ended June 30, 1996 and 1997 and the
three months ended September 30, 1997 was $3.82, $1.64 and $1.64, respectively.
The
F-14
<PAGE> 76
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
fair value of each option granted during the fiscal years ended June 30, 1996
and 1997 is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions: an expected life of eight years, a
dividend yield of 0%, a risk free interest rate of 6.8% and zero expected
volatility.
Had compensation cost for the Company's stock option grants been determined
based on the fair value at the grant dates, as calculated in accordance with
SFAS No. 123, the Company's net income and net income per common share for the
fiscal years ended June 30, 1996 and 1997 and the three months ended September
30, 1997, would approximate the following pro forma amounts as compared to the
amounts reported:
<TABLE>
<CAPTION>
NET INCOME PER
NET INCOME COMMON SHARE
---------- --------------
<S> <C> <C>
As reported:
1996........................................... $4,428 $ 0.54
1997........................................... 4,611 0.57
Three months ended September 30, 1997.......... 1,606 0.20
Pro Forma:
1996........................................... $4,330 $ 0.53
1997........................................... 4,345 0.53
Three months ended September 30, 1997.......... 1,542 0.19
</TABLE>
The effects of applying SFAS No. 123 in this disclosure are not indicative
of future amounts. SFAS No. 123 does not apply to awards prior to 1995 and
additional awards in future years are anticipated.
Repricing Stock Options
On July 30, 1996, the Board approved a plan (the "repricing plan") to
reprice employee stock options under the Plans to restore the long-term employee
retention and performance incentives of the stock options outstanding. In
accordance with the repricing plan, all stock options with exercise prices above
$4.00 per share and approved by the individual optionholder were canceled and
replaced by the same number of options exercisable at $4.00 per share, the fair
value of the Company's common stock as determined by the Board on the date of
the repricing. In reaching this determination, the Board considered a broad
range of factors including the illiquid nature of an investment in the Company's
Common Stock, transactions of the Company's Common Stock with third parties, the
Company's historical financial performance relative to that of comparable
companies and its future prospects. Fifty percent of those options which were
vested prior to the repricing vested immediately under the repricing plan. All
remaining previously vested and unvested options will vest in accordance with
the current option plan.
Warrants
At June 30, 1996 and 1997, a warrant to purchase 10,000 shares of the
Company's Common Stock was outstanding with an exercise price of $2.00 per share
and exercisable through June 30, 2000. In September 1997, the warrants were
exercised.
F-15
<PAGE> 77
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
H. INCOME TAXES:
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------- ----------------
1995 1996 1997 1996 1997
------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C>
Federal:
Current.............................. $2,295 $2,437 $3,088 $ 606 $1,168
Deferred............................. 214 115 (592) (116) (290)
------ ------ ------ ----- ------
2,509 2,552 2,496 490 878
------ ------ ------ ----- ------
State:
Current.............................. 208 101 301 60 162
Deferred............................. (135) 127 (4) (1) (42)
------ ------ ------ ----- ------
73 228 297 59 120
------ ------ ------ ----- ------
Foreign -- current..................... 54 172 140 27 62
------ ------ ------ ----- ------
$2,636 $2,952 $2,933 $ 576 $1,060
------ ------ ------ ----- ------
</TABLE>
The following is a reconciliation between the statutory provision for
federal income taxes and the effective income tax expense:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
-------------------------- -----------------
1995 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income taxes at federal statutory 34.0% 34.0% 34.0% 34.0% 34.0%
rates...............................
State income tax, net of federal tax 0.5 2.0 3.9 3.9 3.9
benefit and credits.................
Research and development credits (5.9) -- (3.5) (3.5) (2.9)
utilized............................
Other................................. 0.8 4.0 4.5 4.5 4.8
---- ---- ---- ---- ----
29.4% 40.0% 38.9% 38.9% 39.8%
---- ---- ---- ---- ----
</TABLE>
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------ SEPTEMBER 30,
1995 1996 1997 1997
---- ----- ----- -------------
<S> <C> <C> <C> <C>
Receivables, allowances and inventory
reserves.................................... $162 $ 377 $ 614 $ 851
Deferred revenue.............................. 188 -- -- --
Accrued vacation.............................. -- -- 213 202
Property and equipment........................ (54) 1 232 290
Research and development credits.............. 260 100 -- --
Capitalized software development costs........ -- (148) (193) (145)
Other temporary differences................... 54 38 99 99
---- ----- ----- -------
Total deferred tax asset, net................. $610 $ 368 $ 965 $ 1,297
---- ----- ----- -------
</TABLE>
Property and equipment temporary differences as of September 30, 1997
result from a shorter estimated useful life related to certain computer
equipment for financial reporting versus tax reporting.
F-16
<PAGE> 78
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
No valuation allowance was deemed necessary for the deferred tax asset.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
I. MAJOR CUSTOMERS AND INTERNATIONAL DATA:
Customers comprising 10% or more of the Company's revenues for the periods
shown below are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JUNE 30, SEPTEMBER 30,
---------------------------------- ---------------------
1995 1996 1997 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Customer A.................. 18% -- -- -- --
Customer B.................. 12% 16% -- -- 11%
Customer C.................. -- 12% 10% 10% --
Customer D.................. -- 19% 22% -- 11%
Customer E.................. -- -- -- 19% 11%
Customer F.................. -- -- -- -- 16%
</TABLE>
Export sales to unaffiliated customers were approximately $20,987,000,
$5,521,000, $5,351,000, $1,000,714 and $1,130,280 for the fiscal years ended
June 30, 1995, 1996 and 1997 and September 30, 1996 and 1997, respectively.
The Company has operations in the United Kingdom, the Netherlands, Japan
and France. For each of the fiscal years ended June 30, 1995, 1996 and 1997 and
each of the three months ended September 30, 1996 and 1997, revenues and
operating income from foreign operations represented less than 10% of the
Company's total revenues and operating income. At June 30, 1996 and 1997 and
September 30, 1997, identifiable assets of foreign operations were not material
to total assets.
J. EMPLOYEE BENEFIT PLANS:
The Company maintains a qualified 401(a) Plan and a qualified Profit
Sharing and 401(k) Plan. The plans cover substantially all full-time employees
who have three months of service and have attained the age of 21. Employee
contributions to the Profit Sharing and 401(k) Plan may range from 1% to 15% of
compensation with a discretionary matching Company contribution. The Company
will match up to 2% of compensation. The Company may also make optional
contributions to both plans for any plan year at its discretion.
Expense recognized by the Company under the Profit Sharing and 401(k) Plan
was approximately $245,000, $232,000, $287,000, $40,000 and $101,000 for the
fiscal years ended June 30, 1995, 1996 and 1997 and the three months ended
September 30, 1996 and 1997, respectively.
The Company maintains a bonus plan which provides cash awards to employees,
at the discretion of the Board of Directors, based upon operating results and
employee performance. Bonus expense to employees was approximately $943,000,
$1,150,000, $1,245,000, $245,000 and $454,000 for the years ended June 30, 1995,
1996, and 1997, and for the three months ended September 30, 1996 and 1997,
respectively.
F-17
<PAGE> 79
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997, IS UNAUDITED
K. RELATED PARTY TRANSACTIONS:
Notes receivable from related parties are from members of the Board of
Directors and management and are due 181 days subsequent to an initial public
offering or December 31, 1999, whichever occurs first. The notes receivable are
without recourse and bear interest at two percentage points above the prime rate
per annum.
L. VALUATION AND QUALIFYING ACCOUNTS:
The following table sets forth activity in the Company's reserve accounts:
ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended:
June 30, 1995......................... $124 17 $107
June 30, 1996......................... $107 27 $ 80
June 30, 1997......................... $ 80 40 1 $119
Three months ended September 30, 1997... $119 -- -- $119
</TABLE>
INVENTORY
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended:
June 30, 1995......................... $1,000 896 1,623 $ 273
June 30, 1996......................... $ 273 1,047 74 $1,246
June 30, 1997......................... $1,246 504 27 $1,723
Three months ended September 30, 1997... $1,723 561 -- $2,284
</TABLE>
Charges to expenses for inventory are due to program cancellations,
engineering change orders and obsolescence. Deductions are recorded when the
inventory is written-off. During the year ended June 30, 1995, the Company
wrote-off $1,623,000 in inventory relating primarily to engineering change
orders, program cancellations and obsolescence.
F-18
<PAGE> 80
SHARED STORAGE
- -----------------------------
- -----------------------------
[DRAWING OF TELEVISION MERCURY's application software and system
VCR, SPEAKER AND VIDEO integration services are used in shared storage,
CAMERA] work group environments within video post-
production, broadcasting and webcasting applications.
The software allows work groups to share commodity,
network-attached disk arrays, eliminating the need
for an expensive, intermediate file server.
MERCURY'S SuiteFusion(TM)
is supported on several [PICTURE OF PACKAGING
desktop environments, and WITH THE WORDS "SUITEFUSION
supports multiple network THE SHARED STORAGE SOLUTION"
technologies including AND THE MERCURY LOGO]
fibrechannel.
MERCURY'S SuiteFusion(TM)
[PICTURE OF PEOPLE choreographs the interactions
SITTING AT DESKS IN between workstations and disks
FRONT OF COMPUTERS] to keep files protected and
allow work to proceed
efficiently.
[MERCURY COMPUTER SYSTEMS, INC. LOGO]
<PAGE> 81
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 82
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 83
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 6
Use of Proceeds............................. 15
Dividend Policy............................. 15
Capitalization.............................. 16
Dilution.................................... 17
Selected Consolidated Financial Data........ 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 19
Business.................................... 28
Management.................................. 41
Certain Transactions........................ 48
Principal and Selling Stockholders.......... 49
Description of Capital Stock................ 51
Shares Eligible for Future Sale............. 54
Underwriting................................ 56
Legal Matters............................... 57
Experts..................................... 57
Additional Information...................... 58
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
================================================================================
================================================================================
3,500,000 Shares
[LOGO: MERCURY COMPUTER SYSTEMS, INC.-- The Ultimate Performance Machine]
Common Stock
---------------------
PROSPECTUS
---------------------
PRUDENTIAL SECURITIES INCORPORATED
COWEN & COMPANY
January , 1998
================================================================================
<PAGE> 84
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses (other than underwriting discount and commissions) payable in
connection with the sale of the Common Stock offered hereby (including the
Common Stock which may be sold pursuant to the Underwriters' over-allotment
option) are as follows, all of which will be paid by the Company:
<TABLE>
<CAPTION>
AMOUNTS(1)
--------
<S> <C>
SEC Registration fee...................................................... $ 17,076
NASD filing fee........................................................... 6,135
Nasdaq National Market fee................................................ 42,195
Printing Expenses......................................................... 150,000
Legal fees and expenses................................................... 290,000
Accounting Fees and expenses.............................................. 210,000
Blue sky fees and expenses (including legal fees and expenses)............ 10,000
Transfer agent and registrar fees and expenses............................ 20,000
Miscellaneous............................................................. 4,594
--------
Total........................................................... $750,000
</TABLE>
- ---------------
(1) All amounts are estimated, except SEC Registration, NASD and Nasdaq National
Market Fees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 67 of Chapter 156B of the Massachusetts Business Corporation Law,
which is applicable to the Company, provides as follows:
Indemnification of directors, officers, employees and other agents of a
corporation, and persons who serve at its request as directors, officers,
employees or other agents of another organization, or who serve at its request
in any capacity with respect to any employee benefit plan, may be provided by it
to whatever extent shall be specified in or authorized by (i) the articles of
organization or (ii) a by-law adopted by the Stockholders or (iii) a vote
adopted by the holders of a majority of the shares of stock entitled to vote on
the election of directors. Except as the articles of organization or by-laws
otherwise require, indemnification of any persons referred to in the preceding
sentence who are not directors of the corporation may be provided by it to the
extent authorized by the directors. Such indemnification may include payment by
the corporation of expenses incurred in defending a civil or criminal action or
proceeding in advance of the final disposition of such action or proceeding,
upon receipt of an undertaking by the person indemnified to repay such payment
if he shall be adjudicated to be not entitled to indemnification under this
Section which undertaking may be accepted without reference to the financial
ability of such person to make repayment. Any such indemnification may be
provided although the person to be indemnified is no longer an officer,
director, employee or agent of the corporation or of such other organization or
no longer serves with respect to any such employee benefit plan.
No indemnification shall be provided for any person with respect to any
matter as to which he shall have been adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that his action was in the best
interest of the corporation or to the extent that such matter relates to service
with respect to an employee benefit plan, in the best interests of the
participants or beneficiaries of such employee benefit plan.
The absence of any express provision for indemnification shall not limit
any right of indemnification existing independently of this section.
A corporation shall have power to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or other agent of another organization or with
respect to any
II-1
<PAGE> 85
employee benefit plan, against any liability incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability.
In addition, pursuant to its Articles of Organization and Bylaws, the
Company shall indemnify its directors and officers against expenses (including
judgments or amounts paid in settlement) incurred in any action, civil or
criminal, to which any such person is a party by reason of any alleged act or
failure to act in his capacity as such, except as to a matter as to which such
director or officer shall have been finally adjudged not to have acted in good
faith in the reasonable belief that his action was in the best interest of the
corporation.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act. Reference is made to the form of Underwriting Agreement
filed as Exhibit 1.1 hereto.
The Company maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers and has entered into
indemnification agreements with its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued the following
securities, none of which has been registered under the Securities Act:
(1) In transactions exempt from registration pursuant to Rule 701 under the
Securities Act the Company has issued the following securities:
(a) On October 28, 1997, the Company issued 8,000 shares of Common
Stock at a price of $2.00 per share upon the exercise of two stock options.
(b) On October 17, 1997, the Company issued 200 shares of Common Stock
at a price of $4.00 per share upon the exercise of a stock option.
(c) On October 16, 1997, the Company issued 3,000 shares of Common
Stock at a price of $3.50 per share upon the exercise of two stock options.
(d) On October 9, 1997, the Company issued 800 shares of Common Stock
at a price of $5.00 per share upon the exercise of a stock option.
(e) On October 3, 1997, the Company issued 17,000 shares of Common
Stock at a price of $2.00 per share upon the exercise of three stock
options.
(f) On September 26, 1997, the Company issued 10,000 shares of Common
Stock at a price of $2.00 per share upon the exercise of a warrant.
(g) On September 23, 1997, the Company issued 500 shares of Common
Stock at a price of $4.00 per share and 1,000 shares of Common Stock at a
price of $3.50 per share upon the exercise of three stock options.
(h) On September 22, 1997, the Company issued 1,500 shares of Common
Stock at a price of $2.00 per share and 4,000 shares of Common Stock at a
price of $3.50 per share upon the exercise of three stock options.
(i) On September 18, 1997, the Company issued 12,500 shares of Common
Stock at a price of $1.50 upon the exercise of a stock option.
(j) On September 12, 1997, the Company issued 2,400 shares of Common
Stock at a price of $5.00 per share upon the exercise of a stock option.
(k) On September 11, 1997, the Company issued 3,000 shares of Common
Stock at a price of $2.00 per share upon the exercise of two stock options.
II-2
<PAGE> 86
(l) On September 7, 1997, the Company issued 20,000 shares of Common
Stock at a price of $4.00 per share upon the exercise of a stock option.
(m) On September 5, 1997, the Company issued 10,300 shares of Common
Stock at a price of $2.00 per share upon the exercise of two stock options.
(n) On September 4, 1997, the Company issued 5,000 shares of Common
Stock at a price of $1.50 per share upon the exercise of a stock option.
(o) On August 29, 1997, the Company issued 3,000 shares of Common
Stock at a price of $1.00 per share upon the exercise of a stock option.
(p) On August 11, 1997, the Company issued 3,000 shares of Common
Stock at a price of $1.00 per share upon the exercise of a stock option.
(q) On June 3, 1997, the Company issued 5,000 shares of Common Stock
at a price of $2.00 per share and 3,000 shares of Common Stock at a price
of $3.50 per share upon the exercise of two stock options.
(r) On June 2, 1997, the Company issued 7,500 shares of Common Stock
at a price of $1.50 per share upon the exercise of a stock option.
(s) On May 23, 1997, the Company issued 200 shares of Common Stock at
a price of $4.00 per share upon the exercise of a stock option.
(t) On May 5, 1997, the Company issued 2,500 shares of Common Stock at
a price of $1.00 per share upon the exercise of a stock option.
(u) On April 17, 1997, the Company issued 13,000 shares of Common
Stock at a price of $1.00 per share upon the exercise of a stock option.
(v) On April 14, 1997, the Company issued 18,000 shares of Common
Stock at a price of $4.00 per share and 100 shares of Common Stock at a
price of $4.00 per share upon the exercise of three stock options.
(w) On February 19, 1997, the Company issued 5,500 shares of Common
Stock at a price of $2.00 per share and 50 shares of Common Stock at a
price of $3.50 per share upon the exercise of three stock options.
(x) On February 13, 1997, the Company issued 3,000 shares of Common
Stock at a price of $1.50 per share upon the exercise of a stock option.
(y) On February 12, 1997, the Company issued 4,000 shares of Common
Stock at a price of $3.50 per share and 3,000 shares at a price of $2.00
per share upon the exercise of two stock options.
(z) On February 11, 1997, the Company issued 12,500 shares of Common
Stock at a price of $1.50 per share and 5,000 shares of Common Stock of a
price of $2.00 per share upon the exercise of three stock options.
(aa) On February 7, 1997, the Company issued 4,000 shares of Common
Stock at a price of $3.50 per share upon the exercise of a stock option.
(bb) On December 26, 1996, the Company sold 33,000 shares of Common
Stock at a price of $4.00 per share.
(cc) On December 2, 1996, the Company issued 3,000 shares of Common
Stock at a price of $2.00 per share upon the exercise of a stock option.
(dd) On October 15, 1996, the Company issued 6,000 shares of Common
Stock at a price of $1.00 per share upon the exercise of a stock option.
II-3
<PAGE> 87
(ee) On October 11, 1996, the Company sold 30,000 shares of Common
Stock at a price of $4.00 per share and issued 500 shares of Common Stock
at a price of $1.00 per share upon the exercise of a stock option.
(ff) On October 10, 1996, the Company issued 5,000 shares of Common
Stock at a price of $1.00 per share upon the exercise of a stock option.
(gg) On September 9, 1996, the Company issued 1,000 shares of Common
Stock at a price of $2.00 per share upon the exercise of a stock option.
(hh) On June 12, 1996, the Company issued 800 shares of Common Stock
at a price of $7.50 per share upon the exercise of a stock option.
(ii) On June 1, 1996, the Company issued 1,000 shares of Common Stock
at a price of $3.00 per share upon the exercise of a stock option.
(jj) On May 15, 1996, the Company issued 1,000 shares of Common Stock
at a price of $3.50 per share upon the exercise of a stock option.
(kk) On April 12, 1996, the Company issued 5,000 shares of Common
Stock at a price of $1.00 per share and 200 shares of Common Stock at a
price of $2.00 per share upon the exercise of two stock options.
(ll) On March 25, 1996, the Company issued 1,000 shares of Common
Stock at a price of $3.50 per share upon the exercise of a stock option.
(mm) On March 1, 1996, the Company issued 2,000 shares of Common Stock
at a price of $2.00 per share and 600 shares of Common Stock at a price of
$3.50 per share upon the exercise of two stock options.
(nn) On February 6, 1996, the Company issued 12,000 shares of Common
Stock at a price of $2.00 per share and 4,400 shares of Common Stock at a
price of $3.50 per share upon the exercise of five stock options.
(oo) On January 6, 1996, the Company issued 5,200 shares of Common
Stock at a price of $2.00 per share and 400 shares of Common Stock at a
price of $3.50 per share upon the exercise of three stock options.
(pp) On December 29, 1995, the Company issued 5,750 shares of Common
Stock at a price of $2.00 per share and 2,500 shares of Common Stock at a
price of $1.50 per share upon the exercise of three stock options.
(qq) On December 19, 1995, the Company issued 4,000 shares of Common
Stock at a price of $1.00 per share and 2,000 shares of Common Stock at a
price of $2.00 per share upon the exercise of three stock options.
(rr) On December 12, 1995, the Company issued 2,000 shares of Common
Stock at a price of $2.00 per share upon the exercise of a stock option.
(ss) On December 5, 1995, the Company issued 1,500 shares of Common
Stock at a price of $1.00 per share upon the exercise of a stock option.
(tt) On October 25, 1995, the Company issued 1,500 shares of Common
Stock at a price of $2.00 per share upon the exercise of a stock option.
(uu) On October 24, 1995, the Company issued 1,600 shares of Common
Stock at a price of $3.50 per share and 5,000 shares of Common Stock at a
price of $2.00 per share upon the exercise of two stock options.
II-4
<PAGE> 88
(vv) On September 25, 1995, the Company issued 5,000 shares of Common
Stock at a price of $2.00 per share and 200 shares of Common Stock at a
price of $3.50 per share upon the exercise of four stock options.
(ww) On August 11, 1995, the Company issued 600 shares of Common Stock
at a price of $3.50 per share upon the exercise of a stock option.
(xx) On July 21, 1995, the Company issued 5,000 shares of Common Stock
at a price of $1.50 per share upon the exercise of a stock option.
(yy) On January 11, 1995, the Company issued 17,967 shares of Common
Stock at a price of $.50 per share upon the exercise of a stock option.
(zz) On January 3, 1995, the Company issued 1,200 shares of Common
Stock at a price of $.50 per share upon the exercise of a stock option.
(aaa) On December 27, 1994, the Company issued 3,700 shares of Common
Stock at a price of $.50 per share upon the exercise of a stock option.
(bbb) On December 20, 1994, the Company issued 4,000 shares of Common
Stock at a price of $.50 per share upon the exercise of a stock option.
(ccc) On December 15, 1994, the Company issued 1,500 shares of Common
Stock at a price of $1.00 per share upon the exercise of a stock option.
(ddd) On December 2, 1994, the Company issued 100 shares of Common
Stock at a price of $2.00 per share upon the exercise of a stock option.
(2) In transactions exempt from registration pursuant to Section 4(2) of
the Securities Act, the Company sold an aggregate of 33,000 shares of Common
Stock for an aggregate consideration of $252,000.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS:
ITEM #
<S> <C>
1.1* Form of Underwriting Agreement
3.1 Restated Articles of Organization of the Registrant
3.2 Bylaws of the Registrant
3.3 Articles of Amendment to Articles of Organization of the Registrant (to be effective
concurrently with the closing of the Offering)
4.1 Form of Stock Certificate
5.1 Form of Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation
10.1 1982 Stock Option Plan, as amended
10.2 1991 Stock Option Plan, as amended
10.3 1993 Stock Option Plan for Non-Employee Directors
10.4 1997 Stock Option Plan
10.5 1997 Employee Stock Purchase Plan
10.6 Lease Agreement, dated July 24, 1992, by and between the Company and Equitable
Variable Life Insurance Company, as amended and extended
10.7 Purchase and Sale Agreement, dated November 8, 1996 between Corcoran Chelmsford &
Associates and Northland Development Corporation
10.8+* Term Purchase Agreement, dated July 25, 1995 between the Company and Analog Devices,
Inc.
10.9+* Risk Reproduction Agreement, dated March 20, 1996, between the Company and LSI Logic
Corporation
10.10+* Purchase Offer Agreement for OEM Manufacturer, dated February 16, 1995, between the
Company & IBM Microelectronics Division
10.11 $100,000 Promissory Note, dated December 22, 1993 and amended January 27, 1997,
issued by Albert P. Belle Isle to the Company
</TABLE>
II-5
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBITS:
ITEM #
<C> <S>
10.12 $25,000 Promissory Note, dated July 13, 1994 and amended January 27, 1997, issued by
Albert P. Belle Isle to the Company
10.13 $150,000 Promissory Note, dated March 26, 1994 and amended August 26, 1997, issued
by James R. Bertelli to the Company
10.14 $50,000 Promissory Note, dated June 24, 1995 and amended August 26, 1997, issued by
James R. Bertelli to the Company
10.15 Quitclaim Deed, dated October 1, 1997, executed by Corcoran Chelmsford & Associates
Limited Partnership
11.1 Statement of Computation at Earnings Per Share
21.1 Subsidiaries of the Registrant
23.1* Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included in
Exhibit 5.1)
24.1 Power of Attorney (included on page II-7)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Filed with this Amendment No. 2 to Registration Statement.
+ Confidential treatment requested.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of his registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in Chelmsford,
Massachusetts, on January 22, 1998.
MERCURY COMPUTER SYSTEMS, INC.
By: /s/ JAMES R. BERTELLI
------------------------------------
NAME: JAMES R. BERTELLI
TITLE: PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ ---------------------------- ----------------
<C> <S> <C>
/s/ JAMES R. BERTELLI President, Chief Executive January 22, 1998
- ------------------------------------------ Officer and Director
JAMES R. BERTELLI (principal executive
officer)
/s/ G. MEAD WYMAN Vice President, Chief January 22, 1998
- ------------------------------------------ Financial Officer and
G. MEAD WYMAN Treasurer (principal
financial and accounting
officer)
* Director January 22, 1998
- ------------------------------------------
GORDON B. BATY
* Director January 22, 1998
- ------------------------------------------
R. SCHORR BERMAN
* Director January 22, 1998
- ------------------------------------------
ALBERT P. BELLE ISLE
* Director January 22, 1998
- ------------------------------------------
SHERMAN N. MULLIN
* Director January 22, 1998
- ------------------------------------------
MELVIN SALLEN
*By /s/ JAMES R. BERTELLI
- ------------------------------------------
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS:
ITEM # PAGE
- -------- ----
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1 Restated Articles of Organization of the Registrant
3.2 Bylaws of the Registrant
3.3 Articles of Amendment to Articles of Organization of the Registrant (to be
effective concurrently with the closing of the Offering)
4.1 Form of Stock Certificate
5.1 Form of Opinion of Hutchins, Wheeler & Dittmar, A Professional Corporation
10.1 1982 Stock Option Plan, as amended
10.2 1991 Stock Option Plan, as amended
10.3 1993 Stock Option Plan for Non-Employee Directors
10.4 1997 Stock Option Plan
10.5 1997 Employee Stock Purchase Plan
10.6 Lease Agreement, dated July 24, 1992, by and between the Company and Equitable
Variable Life Insurance Company, as amended and extended
10.7 Purchase and Sale Agreement, dated November 8, 1996 between Corcoran
Chelmsford & Associates and Northland Development Corporation
10.8+* Term Purchase Agreement, dated July 25, 1995 between the Company and Analog
Devices, Inc.
10.9+* Risk Reproduction Agreement, dated March 20, 1996, between the Company and LSI
Logic Corporation
10.10+* Purchase Offer Agreement for OEM Manufacturer, dated February 16, 1995,
between the Company & IBM Microelectronics Division
10.11 $100,000 Promissory Note, dated December 22, 1993 and amended January 27,
1997, issued by Albert P. Belle Isle to the Company
10.12 $25,000 Promissory Note, dated July 13, 1994 and amended January 27, 1997,
issued by Albert P. Belle Isle to the Company
10.13 $150,000 Promissory Note, dated March 26, 1994 and amended August 26, 1997,
issued by James R. Bertelli to the Company
10.14 $50,000 Promissory Note, dated June 24, 1995 and amended August 26, 1997,
issued by James R. Bertelli to the Company
10.15 Quitclaim Deed, dated October 1, 1997, executed by Corcoran Chelmsford &
Associates Limited Partnership
11.1 Statement of Computation at Earnings Per Share
21.1 Subsidiaries of the Registrant
23.1* Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Hutchins, Wheeler & Dittmar, A Professional Corporation (included
in Exhibit 5.1)
24.1 Power of Attorney (included on page II-7)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Filed with this Amendment No. 1 to Registration Statement.
+ Confidential treatment requested.
<PAGE> 1
DRAFT OF JANUARY 20, 1998
[Form of Underwriting Agreement]
MERCURY COMPUTER SYSTEMS, INC.
3,500,000 Shares(1)
Common Stock
UNDERWRITING AGREEMENT
January __, 1998
PRUDENTIAL SECURITIES INCORPORATED
COWEN & COMPANY
___ As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
Mercury Computer Systems, Inc., a Massachusetts corporation (the
"Company"), each of the selling stockholders of the Company named in SCHEDULE I
hereto (the "Principal Selling Stockholders") and each of the selling
stockholders of the Company named in SCHEDULE II hereto (the "Additional Selling
Stockholders") (the Principal Selling Stockholders and the Additional Selling
Stockholders being referred to herein collectively as the "Selling
Stockholders") severally confirm their respective agreements with the several
underwriters named in SCHEDULE III hereto (the "Underwriters"), for whom you
have been duly authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
1. SECURITIES. Subject to the terms and conditions herein contained,
the Company proposes to issue and sell, and the Selling Stockholders propose to
sell, severally, to the several
- ----------
(1) Plus options to purchase (i) from the Selling Stockholders up to 295,350
additional shares to cover over-allotments and (ii) from the Company up to
229,650 additional shares to cover over-allotments. The options shall be
exercised FIRST with respect to the shares subject to such options offered
by the Selling Stockholders ON A PRO RATA basis until all of the 295,350
shares have been exercised and SECOND with respect to the shares subject to
such options offered by the Company.
<PAGE> 2
Underwriters an aggregate of 2,000,000 shares and 1,500,000 shares, respectively
(the "Firm Securities") of the Company's Common Stock, par value $.01 per share
("Common Stock"). The Selling Stockholders propose to sell, severally, to the
several Underwriters not more than 295,350 additional shares of Common Stock, in
the aggregate, if requested by the Representatives as provided in Section 3 of
this Agreement, in the respective amounts set forth opposite the names of the
Selling Stockholders in Column (b) of SCHEDULE I and SCHEDULE II hereto, as the
case may be. The Company proposes to sell to the several Underwriters not more
than 229,650 additional shares of Common Stock if requested by the
Representatives and if the Representatives have already exercised in full their
options with respect to the shares identified in the previous sentence, all as
provided in Section 3 of this Agreement. Any and all shares of Common Stock to
be purchased by the Underwriters pursuant to such options are referred to herein
as the "Option Securities", and the Firm Securities and any Option Securities
are collectively referred to herein as the "Securities".
2(A). REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with, each of the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-41139) with respect
to the Securities, including a prospectus subject to completion, has been filed
by the Company with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (A) if the
Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Securities, that shall identify the Preliminary Prospectus (as
hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the
Company does not rely on Rule 434 under the Act, a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of
this sentence as have been provided to and approved by the Representatives prior
to the execution of this Agreement, or (ii) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration statement, including
a form of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this Agreement. The
Company may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering certain
additional Securities, which registration shall be effective upon filing with
the Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus
2
<PAGE> 3
or Prospectus incorporated therein at the time such Registration Statement
becomes effective); the term "Registration Statement" includes both the Original
Registration Statement and any Rule 462(b) Registration Statement; the term
"Preliminary Prospectus" means each prospectus subject to completion filed with
such registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed pursuant to Rule 424(b)(7)
under the Act, together with the Preliminary Prospectus identified therein
that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the prospectus
first filed with the Commission pursuant to Rule 424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the Act,
the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending use of
any Preliminary Prospectus. When any Preliminary Prospectus was filed with the
Commission it (i) contained all statements required to be stated therein in
accordance with, and complied in all material respects with the requirements of,
the Act and the rules and regulations of the Commission thereunder and (ii) did
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. When the
Registration Statement or any amendment thereto was or is declared effective, it
(i) contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any Term Sheet that is
a part thereof or any amendment or supplement to the Prospectus is filed with
the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or
such amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the Firm
Closing Date and any Option Closing Date (both as hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (i) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements of, the
Act and the rules and regulations of the Commission thereunder and (ii) did not
or will not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The foregoing
3
<PAGE> 4
provisions of this paragraph (b) do not apply to statements or omissions made in
any Preliminary Prospectus, the Registration Statement or any amendment thereto
or the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein.
(c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b)
Registration Statement has not been declared effective (i) the Company has filed
a Rule 462(b) Registration Statement in compliance with, and that is effective
upon filing pursuant to, Rule 462(b) and has received confirmation of its
receipt and (ii) the Company has given irrevocable instructions for transmission
of the applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the Act or
the Commission has received payment of such filing fee.
(d) The Company has no subsidiaries other than those listed in SCHEDULE IV
hereto. The Company and each of its subsidiaries have been duly organized and
are validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to transact
business as foreign corporations and are in good standing under the laws of all
other jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the Company and its subsidiaries, taken as a whole.
(e) The Company and each of its subsidiaries have full power (corporate or
limited liability company) to own or lease their respective properties and
conduct their respective businesses as described in the Registration Statement
and the Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full corporate or limited liability
company power to enter into this Agreement and to carry out all the terms and
provisions hereof to be carried out by it.
(f) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and, except as otherwise set forth in the Prospectus or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus, are
owned beneficially by the Company free and clear of any security interests,
liens, encumbrances, equities or claims.
(g) The Company's authorized, issued and outstanding capitalization is set
forth in the Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus. All of the issued and outstanding shares of
capital stock of the Company have been duly authorized and validly issued and
are fully paid and nonassessable. The Firm Securities and the Option Securities
have been duly authorized and at the Firm Closing Date or the related Option
Closing Date (as the case may be), after payment therefor in accordance
herewith, will be validly issued, fully paid and nonassessable. No holders of
outstanding shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Securities, and no holder
of securities of the Company has any right which has not been fully exercised or
waived to require
4
<PAGE> 5
the Company to register the offer or sale of any securities owned by such holder
under the Act in the public offering contemplated by this Agreement.
(h) After giving effect to the amendment to the Company's Articles of
Organization described in the Prospectus, the capital stock of the Company
conforms to the description thereof contained in the Prospectus or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus.
(i) Except as disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there are no outstanding (A)
securities or obligations of the Company or any of its subsidiaries convertible
into or exchangeable for any capital stock of the Company or any such
subsidiary, (B) warrants, rights or options to subscribe for or purchase from
the Company or any such subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or (C) obligations of the
Company or any such subsidiary to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(j) The consolidated financial statements and schedules of the Company and
its consolidated subsidiaries included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present the financial position of the Company and
its consolidated subsidiaries and the results of operations and changes in
financial condition as of the dates and periods therein specified. Such
financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein). The selected financial
data set forth under the caption "Selected Consolidated Financial Data" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present, on the basis stated in the Prospectus
(or such Preliminary Prospectus), the information included therein.
(k) Coopers & Lybrand L.L.P., who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered their
report with respect to the audited consolidated financial statements and
schedules included in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), are
independent public accountants as required by the Act and the applicable rules
and regulations thereunder.
(l) The execution and delivery of this Agreement have been duly authorized
by the Company, and this Agreement has been duly executed and delivered by the
Company, and is the valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms.
(m) No legal or governmental proceedings are pending to which the Company
or any of its subsidiaries is a party or to which the property of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein (or, if
the Prospectus is not in existence, the most recent Preliminary
5
<PAGE> 6
Prospectus), and no such proceedings have been threatened against the Company or
any of its subsidiaries or with respect to any of their respective properties;
and no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) or filed as required.
(n) The issuance, offering and sale of the Securities to the Underwriters
by the Company pursuant to this Agreement, the compliance by the Company with
the other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be required under
state securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (ii) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the Company or any
of its subsidiaries, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to the Company or any of its subsidiaries.
(o) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus, neither the Company nor any
of its subsidiaries has sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding and there has not been any material
adverse change, or any development involving a prospective material adverse
change, in the condition (financial or otherwise), management, business
prospects, net worth, or results of the operations of the Company or any of its
subsidiaries, except in each case as described in or contemplated by the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus.
(p) The Company has not, directly or indirectly, (i) taken any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Selling Stockholders under this Agreement).
(q) The Company has not distributed and, prior to the later of (i) the
Closing Date and (ii) the completion of the distribution of the Securities, will
not distribute any offering material in connection with the offering and sale of
the Securities other than the Registration Statement or
6
<PAGE> 7
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or other materials, if any permitted by the
Act.
(r) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), (1) the Company and its
subsidiaries have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business; (2) the Company has not purchased any of its outstanding capital
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(s) The Company and each of its subsidiaries have good and marketable title
in fee simple to all items of real property and marketable title to all personal
property owned by each of them, in each case free and clear of any security
interests, liens, encumbrances, equities, claims and other defects, except such
as do not materially and adversely affect the value of such property and do not
interfere with the use made of such property by the Company or such subsidiary,
and any real property and buildings held under lease by the Company or any such
subsidiary are held under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use made of such
property and buildings by the Company or such subsidiary, in each case except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(t) No labor dispute with the employees of the Company or any of its
subsidiaries exists or is threatened that could result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company and its subsidiaries, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(u) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent applications, trademarks, service
marks, trade names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of infringement of or conflict with asserted rights of any third party
with respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(v) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged.
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<PAGE> 8
(w) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(x) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses (except
those the nonpossession of which would not have a material adverse effect on the
business, operations or condition (financial or otherwise) of the Company and
its subsidiaries, taken as a whole), and neither the Company nor any such
subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(y) The Company has filed all foreign, federal, state and local tax returns
that are required to be filed or has requested extensions thereof (except in any
case in which the failure so to file would not have a material adverse effect on
the Company and its subsidiaries) and has paid all taxes required to be paid by
it and any other assessment, fine or penalty levied against it, to the extent
that any of the foregoing is due and payable, except for any such assessment,
fine or penalty that is currently being contested in good faith or as described
in or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(z) Neither the Company nor any of its subsidiaries is in violation of any
federal or state law or regulation relating to occupational safety and health or
to the storage, handling or transportation of hazardous or toxic materials and
the Company and its subsidiaries have received all permits, licenses or other
approvals required of them under applicable federal and state occupational
safety and health and environmental laws and regulations to conduct their
respective businesses, and the Company and each such subsidiary is in compliance
with all terms and conditions of any such permit, license or approval, except
any such violation of law or regulation, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals which would not, singly or in the
aggregate, result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(aa) Each certificate signed by any officer of the Company and delivered to
the Representatives or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
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<PAGE> 9
(bb) Except for the shares of capital stock of each of the subsidiaries
owned by the Company and such subsidiaries, neither the Company nor any such
subsidiary owns any shares of stock or any other equity securities of any
corporation or has any equity interest in any firm, partnership, association or
other entity, except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus).
(cc) The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(dd) The Company has complied with, and is and will be in compliance with,
the provisions of that certain Florida act relating to disclosure of doing
business with Cuba, codified as Section 517.075 of the Florida statutes, and the
rules and regulations thereunder or is exempt therefrom.
(ee) The Company is not, and upon the issuance and sale of the Securities
as herein contemplated and the application of the net proceeds therefrom as
described in the Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
(ff) No default exists, and no event has occurred which, with notice or
lapse of time or both, would constitute a default in the due performance and
observance of any term, covenant or condition of any indenture, mortgage, deed
of trust, lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties is bound or may be affected in any
material adverse respect with regard to property, business or operations of the
Company and its subsidiaries, taken as a whole.
2(B). REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder represents and warrants to, and agrees with, each of the
several Underwriters, severally and not jointly, that:
(a) Such Selling Stockholder has full power to enter into this Agreement
and to sell, assign, transfer and deliver to the Underwriters the Securities to
be sold by such Selling Stockholder hereunder in accordance with the terms of
this Agreement; and this Agreement has been duly executed and delivered by such
Selling Stockholder, and is the valid and binding agreement of such Selling
Stockholder, enforceable against each such Selling Stockholder in accordance
with its terms.
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<PAGE> 10
(b) Such Selling Stockholder has duly executed and delivered a power of
attorney and custody agreement (with respect to such Selling Stockholder, the
"Power-of-Attorney" and the "Custody Agreement", respectively), each in the form
heretofore delivered to the Representatives, appointing James R. Bertelli and R.
Schorr Berman as such Selling Stockholder's attorney-in-fact (the
"Attorney-in-Fact") with authority to execute, deliver and perform this
Agreement on behalf of such Selling Stockholder and appointing Hutchins, Wheeler
& Dittmar, A Professional Corporation, as custodian thereunder (the
"Custodian"). Certificates in negotiable form, endorsed in blank or accompanied
by blank stock powers duly executed, with signatures appropriately guaranteed,
representing the Securities to be sold by such Selling Stockholder hereunder
have been deposited with the Custodian pursuant to the Custody Agreement for the
purpose of delivery pursuant to this Agreement. Such Selling Stockholder has
full power to enter into the Custody Agreement and the Power-of-Attorney and to
perform its obligations under the Custody Agreement. If such Selling Stockholder
is a corporation, the execution and delivery of the Custody Agreement and the
Power-of-Attorney have been duly authorized by all necessary corporate action of
such Selling Stockholder; the Custody Agreement and the Power-of-Attorney have
been duly executed and delivered by such Selling Stockholder and, assuming due
authorization, execution and delivery by the Custodian, are the legal, valid,
binding and enforceable instruments of such Selling Stockholder. Such Selling
Stockholder agrees that each of the Securities represented by the certificates
on deposit with the Custodian is subject to the interests of the Underwriters
hereunder, that the arrangements made for such custody, the appointment of the
Attorney-in-Fact and the right, power and authority of the Attorney-in-Fact to
execute and deliver this Agreement, to agree on the price at which the
Securities (including such Selling Stockholder's Securities) are to be sold to
the Underwriters, and to carry out the terms of this Agreement, are to that
extent irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated, except as provided in this Agreement or the
Custody Agreement, by any act of such Selling Stockholder, by operation of law
or otherwise, whether in the case of any individual Selling Stockholder by the
death or incapacity of such Selling Stockholder, in the case of a trust or
estate by the death of the trustee or trustees or the executor or executors or
the termination of such trust or estate, or in the case of a corporate or
partnership Selling Stockholder by its liquidation or dissolution or by the
occurrence of any other event. If any individual Selling Stockholder, trustee or
executor should die or become incapacitated or any such trust should be
terminated, or if any corporate or partnership Selling Stockholder shall
liquidate or dissolve, or if any other event should occur, before the delivery
of such Securities hereunder, the certificates for such Securities deposited
with the Custodian shall be delivered by the Custodian in accordance with the
respective terms and conditions of this Agreement as if such death, incapacity,
termination, liquidation or dissolution or other event had not occurred,
regardless of whether or not the Custodian or the Attorney-in-Fact shall have
received notice thereof.
(c) Such Selling Stockholder is the lawful owner of the Securities to be
sold by such Selling Stockholder hereunder and upon sale and delivery of, and
payment for, such Securities, as provided herein, such Selling Stockholder will
convey good and marketable title to such Securities, free and clear of any
security interests, liens, encumbrances, equities, claims or other defects. Such
Selling Stockholder has obtained all authorizations and approvals required by
law and under its charter or bylaws, partnership agreement, trust agreement or
other organizational
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<PAGE> 11
documents, as the case may be, to enter this Agreement, such Selling
Stockholder's Power of Attorney and Custody Agreement, to sell, transfer and
deliver all of the shares of Common Stock which may be sold by such Selling
stockholder pursuant to this Agreement; and to comply with other obligations
hereunder and thereunder.
(d) Such Selling Stockholder has not, directly or indirectly, (i) taken any
action designed to cause or result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement (A) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (B) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Selling Stockholders under this Agreement).
(e) To the extent that any statements or omissions are made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by such Selling Stockholder specifically
for use therein, such Preliminary Prospectus did, and the Registration Statement
and the Prospectus and any amendments or supplements thereto, when they become
effective or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act and the respective rules
and regulations of the Commission thereunder and will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading. Such Selling
Stockholder has reviewed the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and the Registration
Statement, and the information regarding such Selling Stockholder set forth
therein under the caption "Principal and Selling Stockholders" is complete and
accurate.
(f) The sale by such Selling Stockholder of Securities pursuant hereto is
not prompted by any adverse information known to such Selling Stockholder
concerning the Company that is not set forth in the Registration Statement or
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(g) The sale of the Securities to the Underwriters by such Selling
Stockholder pursuant to this Agreement, the compliance by such Selling
Stockholder with the other provisions of this Agreement, the Power of Attorney,
the Custody Agreement and the consummation of the other transactions herein
contemplated do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except such
as have been obtained, such as may be required under state securities or blue
sky laws and, if the registration statement filed with respect to the Securities
(as amended) is not effective under the Act as of the time of execution hereof,
such as may be required (and shall be obtained as provided in this Agreement)
under the Act, or (ii) conflict with or result in a breach or violation of any
of the terms and provisions of, or constitute a default under any indenture,
mortgage, deed of trust, lease or other agreement or instrument to which such
Selling Stockholder or, if applicable, to which
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such Selling Stockholder or any of its subsidiaries is a party or by which such
Selling Stockholder or, if applicable, by which such Selling Stockholder or any
of its subsidiaries or any of such Selling Stockholder's properties are bound,
or the charter documents or by-laws of such Selling Stockholder or any statute
or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to such Selling Stockholder
or, if applicable, to such Selling Stockholder or any of its subsidiaries.
(h) Each certificate signed by such Selling Stockholder or any officer of
such Selling Stockholder and delivered to the Representatives or counsel for the
Underwriters shall be deemed to be a representation and warranty by such Selling
Stockholder to each Underwriter as to the matters covered thereby.
2(C). ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL SELLING
STOCKHOLDERS. Each Principal Selling Stockholder represents and warrants to, and
agrees with, each of the several Underwriters, severally and not jointly, that
nothing has come to the attention of such Principal Selling Stockholder that
would cause such Principal Selling Stockholder to believe that:
(a) any of the Company's representations and warranties set forth in
Section 2(A) hereof was untrue as of the date any such representation or
warranty was made; or
(b) (1) when any Preliminary Prospectus was filed with the Commission it
(i) did not contain all statements required to be stated therein in accordance
with, or did not comply in all material respects with the requirements of, the
Act and the rules and regulations of the Commission thereunder or (ii) included
any untrue statement of a material fact or omitted to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(2) when the Registration Statement or any amendment thereto was or is
declared effective, it (i) did not contain or will not contain all statements
required to be stated therein in accordance with, or did not comply or will not
comply in all material respects with the requirements of, the Act and the rules
and regulations of the Commission thereunder or (ii) included or will include
any untrue statement of a material fact or omitted or will omit to state any
material fact necessary to make the statements therein not misleading;
(3) when the Prospectus or any Term Sheet that is a part thereof or
any amendment or supplement to the Prospectus is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment
or supplement is not required to be so filed, when the Registration Statement or
the amendment thereto containing such amendment or supplement to the Prospectus
was or is declared effective) and on the Firm Closing Date and any Option
Closing Date, the Prospectus, as amended or supplemented at any such time, (i)
did not or will not contain all statements required to be stated therein in
accordance with, or did not or will not comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder or (ii) included or will include any untrue statement of a material
fact or omitted or will omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading;
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unless, in the case of (b) above, any such statements or omissions made in any
Preliminary Prospectus, the Registration Statement or any amendment thereto or
the Prospectus or any amendment or supplement thereto were made in reliance upon
and in conformity with written information furnished to the Company or any
Principal Selling Stockholder by any Underwriter through the Representatives
specifically for use therein.
3. PURCHASE, SALE AND DELIVERY OF THE SECURITIES. (a) On the basis of the
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, (A) the Company agrees to
issue and sell to each of the Underwriters, severally and not jointly, and each
of the Underwriters, severally and not jointly, agrees to purchase from the
Company, at a purchase price of $________ per share, the number of Firm
Securities set forth opposite the name of such Underwriter in Column (a) of
SCHEDULE III hereto and (B) each of the Selling Stockholders, severally and not
jointly, agrees to sell to the Underwriters, severally and not jointly, the
number of Firm Securities set forth opposite the name of such Selling
Stockholder in Column (a) of SCHEDULE I or SCHEDULE II hereto, as the case may
be, and each of the Underwriters, severally and not jointly, agrees to purchase
from the Selling Stockholders, severally and not jointly, the number of Firm
Securities set forth opposite the name of such Underwriter in Column (b) of
SCHEDULE III hereto. One or more certificates in definitive form for the Firm
Securities that the several Underwriters have agreed to purchase hereunder, and
in such denomination or denominations and registered in such name or names as
the Representatives request upon notice to the Company at least 48 hours prior
to the Firm Closing Date, shall be delivered by or on behalf of the Company and
the Selling Stockholders to the Representatives for the respective accounts of
the Underwriters, against payment by or on behalf of the Underwriters of the
purchase price therefor by wire transfer in same-day funds (the "Wired Funds")
to the respective accounts of the Company and the Selling Stockholders. Such
delivery of and payment for the Firm Securities shall be made at the offices of
Testa, Hurwitz & Thibeault, LLP, High Street Tower, 125 High Street, Boston,
Massachusetts 02110 at 9:30 A.M., New York time, on February ___, 1998, or at
such other place, time or date as the Representatives, the Company and the
Selling Stockholders may agree upon or as the Representatives may determine
pursuant to Section 9 hereof, such time and date of delivery against payment
being herein referred to as the "Firm Closing Date". The Company and the Selling
Stockholders will make such certificate or certificates for the Firm Securities
available for checking and packaging by the Representatives at the offices in
New York, New York of the Company's transfer agent or registrar or of Prudential
Securities Incorporated at least 24 hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Securities as contemplated by the Prospectus,
the Company and each Selling Stockholder, severally and not jointly, hereby
grant to the several Underwriters options to purchase, severally and not
jointly, the number of Option Securities set forth opposite the name of such
Underwriter in Column (c) of SCHEDULE III hereto with respect to the Selling
Stockholders and in Column (d) of SCHEDULE III hereto with respect to the
Company. The options granted hereby (i) shall be exercised FIRST as to the
shares subject to such options which are offered by the Selling Stockholders as
set forth opposite the name of such Selling Stockholder in Column (b) of
SCHEDULE I or SCHEDULE II hereto, as the case may be, PRO RATA among the Selling
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<PAGE> 14
Stockholders based upon the percentage obtained for each Selling Stockholder by
computing a fraction the numerator of which is the number of shares so offered
by a Selling Stockholder as set forth opposite the name of such Selling
Stockholder in Column (b) of SCHEDULE I or SCHEDULE II hereto, as the case may
be, and the denominator of which is the total number of shares so offered by all
Selling Stockholders (calculated by figuring the sum of the "total" rows of
Column (b) in each of SCHEDULE I and SCHEDULE II hereto) and SECOND as to the
shares subject to such options which are offered by the Company and (ii) subject
to the preceding clause (i), may be exercised as to all or any part of the
Option Securities from time to time within thirty days after the date of the
Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on
the next business day thereafter when the New York Stock Exchange is open for
trading). The Underwriters shall not be under any obligation to purchase any of
the Option Securities prior to the exercise of such options. The Representatives
may from time to time exercise the options granted hereby by giving notice in
writing or by telephone (confirmed in writing) to the Selling Stockholder from
whom such option is being exercised (and the Attorneys-in-Fact) and/or the
Company, as the case may be, setting forth the aggregate number of Option
Securities as to which the several Underwriters are then exercising such option
and the date and time for delivery of and payment for such Option Securities.
Any such date of delivery shall be determined by the Representatives but shall
not be earlier than two business days or later than five business days after
such exercise of such option and, in any event, shall not be earlier than the
Firm Closing Date. The time and date set forth in such notice, or such other
time on such other date as the Representatives and the Selling Stockholders (and
the Attorneys-in-Fact) and/or the Company, as the case may be, may agree upon or
as the Representatives may determine pursuant to Section 9 hereof, is herein
called the "Option Closing Date" with respect to such Option Securities. Upon
exercise of such option as provided herein, such Selling Stockholder and/or the
Company, as the case may be, shall become obligated to sell to each of the
several Underwriters, and, subject to the terms and conditions herein set forth,
each of the Underwriters (severally and not jointly) shall become obligated to
purchase from such Selling Stockholder and/or the Company, as the case may be,
the number of Option Securities set forth opposite the name of Underwriter in
Column (c) of SCHEDULE III hereto with respect to the Selling Stockholders and
Column (d) of SCHEDULE III hereto with respect to the Company, in the same
percentage of the total number of the Option Securities as to which the several
Underwriters are then exercising such option as such Underwriter is obligated to
purchase of the aggregate number of Firm Securities, as adjusted by the
Representatives in such manner as they deem advisable to avoid fractional
shares. If such option is exercised as to all or any portion of the Option
Securities, one or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the related Option
Closing Date in the manner, and upon the terms and conditions, set forth in
paragraph (a) of this Section 3, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (b), to refer to such Option Securities and Option Closing Date,
respectively.
(c) The Company and each Selling Stockholder hereby acknowledge that the
wire transfer by or on behalf of the Underwriters of the purchase price for any
Securities does not constitute closing of a purchase and sale of the Securities.
Only execution and delivery of a receipt for Securities by the Underwriters
indicates completion of the closing of a purchase of the Securities from the
Company or any Selling Stockholder. Furthermore, in the event that the
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<PAGE> 15
Underwriters wire funds to the Company or any Selling Stockholder prior to the
completion of the closing of a purchase of Securities, the Company and each
Selling Stockholder hereby acknowledge that until the Underwriters execute and
deliver a receipt for the Securities, by facsimile or otherwise, the Company and
each Selling Stockholder will not be entitled to the wired funds and shall
return the wired funds to the Underwriters as soon as practicable (by wire
transfer of same-day funds) upon demand. In the event that the closing of a
purchase of Securities is not completed and the wire funds are not returned by
the Company or any Selling Stockholder to the Underwriters on the same day the
wired funds were received by the Company or any Selling Stockholder, the Company
and each Selling Stockholder agrees to pay to the Underwriters in respect of
each day the wire funds are not returned by it, in same-day funds, interest on
the amount of such wire funds in an amount representing the Underwriters' cost
of financing as reasonably determined by Prudential Securities Incorporated.
(d) It is understood that any of you, individually and not as one of the
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
4. OFFERING BY THE UNDERWRITERS. Upon your authorization of the release of
the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.
(A) The Company covenants and agrees with each of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto, to become effective as promptly as possible. If required,
the Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required to
be delivered under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission the prospectus, Term Sheet or the amendment referred to in the second
sentence of Section 2(A)(a) hereof, any amendment or supplement to such
Prospectus, Term Sheet or any amendment to the Registration Statement or any
Rule 462(b) Registration Statement of which the Representatives previously have
been advised and furnished with a copy for a reasonable period of time prior to
the proposed filing and as to which filing the Representatives shall not have
given their consent. The Company will prepare and file with the Commission, in
accordance with the rules and regulations of the Commission, promptly upon
request by the Representatives or counsel for the Underwriters, any amendments
to the Registration Statement or amendments or supplements to the Prospectus
that may be necessary or advisable in connection with the
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<PAGE> 16
distribution of the Securities by the several Underwriters, and will use its
best efforts to cause any such amendment to the Registration Statement to be
declared effective by the Commission as promptly as possible. The Company will
advise the Representatives, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will provide evidence satisfactory to the Representatives of each
such filing or effectiveness.
(b) The Company will advise the Representatives, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Original Registration
Statement or any Rule 462(b) Registration Statement or any amendment thereto or
any order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, (iii)
the institution, threatening or contemplation of any proceeding for any such
purpose or (iv) any request made by the Commission for amending the Original
Registration Statement or any Rule 462(b) Registration Statement, for amending
or supplementing the Prospectus or for additional information. The Company will
use its best efforts to prevent the issuance of any such stop order and, if any
such stop order is issued, to obtain the withdrawal thereof as promptly as
possible.
(c) The Company will arrange for the qualification of the Securities for
offering and sale under the securities or blue sky laws of such jurisdictions as
the Representatives may designate and will continue such qualifications in
effect for as long as may be necessary to complete the distribution of the
Securities; PROVIDED, HOWEVER, that in connection therewith, the Company shall
not be required to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 5(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the Representatives
and to counsel for the Underwriters a conformed copy of the registration
statement originally filed with respect to the Securities and each amendment
thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, certified by the Secretary or an Assistant Secretary of
the Company to be true and complete copies thereof as filed with the Commission
by electronic transmission, (ii) to each other Underwriter, a conformed copy of
such registration statement or
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any Rule 462(b) Registration Statement and each amendment thereto (in each case
without exhibits thereto) and (iii) so long as a prospectus relating to the
Securities is required to be delivered under the Act, as many copies of each
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto
as the Representatives may reasonably request; without limiting the application
of clause (iii) of this sentence, the Company, not later than (A) 6:00 PM, New
York City time, on the date of determination of the public offering price, if
such determination occurred at or prior to 10:00 A.M., New York City time, on
such date or (B) 2:00 PM, New York City time, on the business day following the
date of determination of the public offering price, if such determination
occurred after 10:00 A.M., New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus and any amendment
or supplement thereto as the Representatives may reasonably request for purposes
of confirming orders that are expected to settle on the Firm Closing Date.
(f) The Company, as soon as practicable, will make generally available to
its Stockholders and to the Representatives a consolidated earnings statement of
the Company and its subsidiaries that satisfies the provisions of Section 11(a)
of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from the sale of the Securities
as set forth under "Use of Proceeds" in the Prospectus.
(h) The Company will not, directly or indirectly, without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock for a period of 180
days after the date hereof, and except for issuances pursuant to the exercise of
employee stock options pursuant to the Company's stock option plans and its
employee stock purchase plan in effect as of the date hereof. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
prior notice, release all or any portion of the shares of Common Stock subject
to such agreement.
(i) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Selling Stockholders
under this Agreement).
(j) The Company will use all commercially reasonable efforts to obtain the
agreements described in Section 7(g) hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of
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the Common Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after notice from you advising
the Company to the effect set forth above and with our consent (which consent
shall not be unreasonably withheld or delayed), forthwith prepare, consult with
you concerning the substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company shall both
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated
under the Act by the earlier of (i) 10:00 P.M. Eastern time on the date of this
Agreement and (ii) the time confirmations are sent or given, as specified by
Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included for quotation
on The Nasdaq Stock Market's National Market (the "Nasdaq National Market")
prior to the Firm Closing Date. The Company will use its best efforts to ensure
that the Securities remain included for quotation on the Nasdaq National Market
or are included for quotation on another national quotation system or listed on
a national securities exchange following the Firm Closing Date.
(n) The Company will conduct its operations in a manner that will not
subject it to registration as an investment company under the Investment Company
Act of 1940, as amended, and this transaction will not cause the Company to
become an investment company subject to registration under such Act.
(B) Each of the Selling Stockholders covenants and agrees with each of
the Underwriters that:
(a) such Selling Stockholder will not, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated, offer, sell, offer
to sell, contract to sell, pledge, grant any option to purchase or otherwise
sell or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
Securities legally or beneficially owned by such Selling Stockholder or any
securities convertible into, or exchangeable or exercisable for, Securities for
a period of 180 days after the date hereof. Prudential Securities Incorporated
may, in its sole discretion, at any time and without prior notice, release all
or any portion of the shares of Common Stock subject to such agreements;
PROVIDED, HOWEVER, that notwithstanding the foregoing restrictions on transfer
(collectively, the "Restrictions"), such Selling Stockholder shall be permitted
to make the following transfers: (i) transfers of shares of Common Stock made by
gift, provided the donee thereof agrees in writing to be bound by the
Restrictions; (ii) transfers of shares of Common Stock to members of such
Selling Stockholder's immediate family or to a trust or similar estate planning
entity established for the benefit of such Selling Stockholder or a member of
such Selling Stockholder's immediate family, provided that each transferee
agrees in writing to be bound by the Restrictions; (iii) transfers of shares of
Common Stock to the transferor's affiliates, as such term is defined in Rule 405
under the Act, provided that each transferee agrees in writing to be bound by
the
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<PAGE> 19
Restrictions; (iv) transfers of shares of Common Stock made with the prior
written consent of Prudential Securities Incorporated on behalf of the
Underwriters; and (v) transfers of shares of Common Stock pursuant to the
Registration Statement.
(b) such Selling Stockholder will not, directly or indirectly, (i) take any
action designed to cause or result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company (except for the sale of Securities by the Selling Stockholders
under this Agreement).
(c) in order to document the Underwriters' compliance with the reporting
and withholding provisions of the Internal Revenue Code of 1986, as amended,
with respect to the transactions herein contemplated, such Selling Stockholder
agrees to deliver to you prior to or on the Firm Closing Date, as hereinafter
defined, a properly completed and executed United States Treasury Department
Form W-8 or W-9 (or other applicable form of statement specified by Treasury
Department regulations in lieu thereof).
6. EXPENSES. The Company will pay all costs and expenses incident to the
performance of the obligations of the Company and the Selling Stockholders under
this Agreement, whether or not the transactions contemplated herein are
consummated or this Agreement is terminated pursuant to Section 11 hereof,
including all costs and expenses incident to (i) the printing or other
production of documents with respect to the transactions, including any costs of
printing the registration statement originally filed with respect to the
Securities and any amendment thereto, any Rule 462(b) Registration Statement,
any Preliminary Prospectus and the Prospectus and any amendment or supplement
thereto, this Agreement and any blue sky memoranda, (ii) all arrangements
relating to the delivery to the Underwriters of copies of the foregoing
documents, (iii) the fees and disbursements of the counsel, the accountants and
any other experts or advisors retained by the Company and, in accordance with
applicable agreements, the Selling Stockholders, (iv) preparation, issuance and
delivery to the Underwriters of any certificates evidencing the Securities,
including transfer agent's and registrar's fees, (v) the qualification of the
Securities under state securities and blue sky laws, including filing fees and
fees and disbursements of counsel for the Underwriters relating thereto, (vi)
the filing fees of the Commission and the National Association of Securities
Dealers, Inc. relating to the Securities, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (vii) any
quotation of the Securities on the Nasdaq National Market, (viii) all expenses
of the Company's officers in connection with any meetings with prospective
investors in the Securities and (ix) advertising relating to the offering of the
Securities which has been specifically requested by the Company and not the
Underwriters. If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11(a)(i) and (ii) hereof or because of any failure, refusal
or inability on the
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<PAGE> 20
part of the Company to perform all obligations and satisfy all conditions on its
part to be performed or satisfied hereunder other than by reason of a default by
any of the Underwriters, the Company will reimburse the Underwriters severally
upon demand for all out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company shall not in any event
be liable to any of the Underwriters for the loss of anticipated profits from
the transactions covered by this Agreement.
Each Selling Stockholder will pay any transfer taxes attributable to the
sale by such Selling Stockholder of the Securities it sells hereunder.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
contained herein as of the date hereof and as of the Firm Closing Date, as if
made on and as of the Firm Closing Date, to the accuracy of the statements of
the Company's officers made pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholders of their respective
covenants and agreements hereunder and to the following additional conditions:
(a) If the Original Registration Statement or any amendment thereto filed
prior to the Firm Closing Date has not been declared effective as of the time of
execution hereof, the Original Registration Statement or such amendment and, if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have been declared effective not later than the earlier of (i)
11:00 A.M., New York time, on the date on which the amendment to the
registration statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission in
the manner and within the time period required by Rules 434 and 424(b) under the
Act; no stop order suspending the effectiveness of the Registration Statement or
any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company, the Selling Stockholders or the Representatives, shall be contemplated
by the Commission; and the Company and each Selling Stockholder shall have
complied with any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise).
(b)(1) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Hutchins, Wheeler & Dittmar, A Professional Corporation,
counsel for the Company, to the effect that:
(i) the Company and each of its subsidiaries which is organized in the
United
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States (the "U.S. Subsidiaries") have been duly organized and are validly
existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation;
(ii) the Company and each of the U.S. Subsidiaries have the corporate
power and authority to own or lease their respective properties and conduct
their respective businesses as described in the Registration Statement and
the Prospectus, and the Company has the corporate power and authority to
enter into this Agreement and to carry out all the terms and provisions
hereof to be carried out by it;
(iii) the issued shares of capital stock of each of the U.S.
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and, except as otherwise set forth in the Prospectus, are
owned beneficially by the Company free and clear of any perfected security
interests or, to the knowledge of such counsel, any other security
interests, liens, encumbrances, equities or claims;
(iv) after giving effect to the amendment to the Company's Articles of
Organization described in the Prospectus, the Company's authorized, issued
and outstanding capitalization is as set forth in the Prospectus; all of
the issued shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable, have been issued
in compliance with all applicable federal and state securities laws and
were not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase securities; the Securities to be
issued by the Company pursuant to this Agreement have been duly authorized
by all necessary corporate action of the Company and, when issued and
delivered to and paid for by the Underwriters pursuant to this Agreement,
will be validly issued, fully paid and nonassessable; the Securities have
been duly included for trading on the Nasdaq National Market; no holders of
outstanding shares of capital stock of the Company are entitled as such to
any preemptive or other rights to subscribe for any of the Securities under
the Articles of Organization or By-Laws, as in effect on the date of this
opinion, of the Company, or under any statute, rule or regulation, or under
any agreement known to such counsel; and no holders of securities of the
Company are entitled to have such securities registered under the
Registration Statement pursuant to any agreement known to such counsel,
other than those holders whose Securities are included in the Registration
Statement or who have waived such rights;
(v) the statements set forth under the heading "Description of Capital
Stock" in the Prospectus, insofar as such statements purport to summarize
certain provisions of the capital stock of the Company, provide a fair
summary of such provisions; and the statements set forth under the heading
"Management -- Stock Option and Stock Purchase Plans";
(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company;
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(vii) (A) to the knowledge of such counsel after due inquiry
consisting solely of inquiry of the executive officers of the Company and a
docket search in state courts in Massachusetts and federal courts sitting
in Massachusetts, no legal or governmental proceedings are pending to which
the Company or any of the U.S. Subsidiaries is a party or to which the
property of the Company or any of the U.S. Subsidiaries is subject that are
required to be described in the Registration Statement or the Prospectus
and are not described therein, and, to the knowledge of such counsel, no
such proceedings have been threatened against the Company or any of the
U.S. Subsidiaries or with respect to any of their respective properties and
(B) no contract or other document known to such counsel is required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement that is not described therein or
filed as required;
(viii) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or qualification
of or with any governmental authority, except such as have been obtained
and such as may be required under state securities or blue sky laws, or (B)
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, lease or other agreement or instrument, known to such counsel all
of which may be listed in an exhibit to such counsel's opinion, to which
the Company or any of the U.S. Subsidiaries is a party or by which the
Company or any of the U.S. Subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the Company or
any of the U.S. Subsidiaries, or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental authority or
any arbitrator known to such counsel and applicable to the Company or U.S.
Subsidiaries;
(ix) such counsel has been informed by the Commission that the
Registration Statement is effective under the Act; any required filing of
the Prospectus, or any Term Sheet that constitutes a part thereof, pursuant
to Rules 434 and 424(b) has been made in the manner and within the time
period required by Rules 434 and 424(b); such counsel has been informed by
the Commission that no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and, to
such counsel's knowledge, no proceedings for that purpose have been
instituted or threatened or, are contemplated by the Commission;
(x) the Registration Statement originally filed with respect to the
Securities and each amendment thereto, any Rule 462(b) Registration
Statement and the Prospectus (in each case, other than the financial
statements and other financial information contained therein, as to which
such counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the rules and
regulations of the Commission thereunder; and
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(xi) if the Company elects to rely on Rule 434, the Prospectus is not
"materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A).
Such counsel shall also state that they have no reason to believe that the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b)(2) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Hutchins, Wheeler & Dittmar, counsel for the Selling
Stockholders, to the effect that:
(i) each Selling Stockholder has full corporate, partnership or trust
power, as applicable, to enter into this Agreement, the Custody Agreement
and the Power-of-Attorney and to sell, transfer and deliver the Securities
being sold by such Selling Stockholder hereunder in the manner provided in
this Agreement and to perform its obligations under the Custody Agreement;
if such Selling Stockholder is a corporation, the execution and delivery of
this Agreement, the Custody Agreement and the Power-of-Attorney have been
duly authorized by all necessary corporate action of each Selling
Stockholder; this Agreement, the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by each Selling
Stockholder; the Custody Agreement and the Power-of-Attorney are the legal,
valid, binding and enforceable instruments of each Selling Stockholder,
subject to applicable bankruptcy, insolvency and similar laws affecting
creditors' rights generally and subject, as to enforceability, to general
principles of equity (regardless of whether enforcement is sought in a
proceeding in equity or at law);
(ii) when the Underwriters obtain control of the Securities to be sold
by the Selling Stockholders, assuming that the Underwriters purchased such
Securities for value and without notice of any adverse claim to such
Securities within the meaning of Section 8-102 of the Uniform Commercial
Code as in effect in the Commonwealth of Massachusetts, the Underwriters
will have acquired all rights of the Selling Stockholders in such
Securities free of any adverse claim;
(iii) the sale of the Securities to the Underwriters by each Selling
Stockholder pursuant to this Agreement, the compliance by such Selling
Stockholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein
contemplated do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except
such as have been obtained and such as may be required under state
securities or blue sky laws, or (ii)
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<PAGE> 24
conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under any indenture, mortgage, deed
of trust, lease or other agreement or instrument to which such Selling
Stockholder is a party or by which such Selling Stockholder or any of such
Selling Stockholder's properties are bound, or the charter documents or
by-laws of such Selling Stockholder or any of its subsidiaries or any
statute or any judgment, decree, order, rule or regulation of any court or
other governmental authority or any arbitrator applicable to such Selling
Stockholder.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials, the Selling Stockholders and
representations and warranties of the Company and the Selling Stockholders
contained herein, in the Custody Agreements and in the Powers of Attorney.
(b)(3) The Representatives shall have received opinions of counsel, dated
the Firm Closing Date, from local counsel to each of the Company's subsidiaries
organized outside of the United States in form and substance satisfactory to the
Representatives and counsel to the Representatives.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(d) The Representatives shall have received from Coopers & Lybrand L.L.P. a
letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the effect
that:
(i) they are independent accountants with respect to the Company and
its consolidated subsidiaries within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial statements
and schedules examined by them and included in the Registration Statement
and the Prospectus comply in form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations;
(iii) on the basis of a reading of the latest available interim
unaudited consolidated financial statements of the Company, a reading of
the unaudited amounts for revenues, cost of revenues, net income before
income taxes and total and per share amounts of
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<PAGE> 25
net income as of and for the three months ended September 30, 1997 and of
the unaudited consolidated financial statements of the Company and its
consolidated subsidiaries for the periods from which such amounts are
derived, carrying out certain specified procedures (which do not constitute
an examination made in accordance with generally accepted auditing
standards) that would not necessarily reveal matters of significance with
respect to the comments set forth in this paragraph (iii), a reading of the
minute books of the stockholders, the board of directors and any committees
thereof of the Company and each of its consolidated subsidiaries, and
inquiries of certain officials of the Company and its consolidated
subsidiaries who have responsibility for financial and accounting matters,
nothing came to their attention that caused them to believe that:
(A) the unaudited consolidated financial statements of the Company
included in the Registration Statement and the Prospectus do not
comply in form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations thereunder or are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited consolidated financial statements
included in the Registration Statement and the Prospectus;
(B) the unaudited amounts for revenues, cost of revenues, net income
before income taxes and total and per share amounts of net income
included in the Registration Statement and the Prospectus do not agree
with the amounts set forth in any unaudited consolidated financial
statements for those same periods or are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the corresponding amounts in the
audited consolidated financial statements included in the Registration
Statement and the Prospectus; and
(C) at a specific date not more than five business days prior to the
date of such letter, there were any changes in the capital stock or
long-term debt of the Company and its consolidated subsidiaries or any
decreases in net current assets or stockholders' equity of the Company
and its consolidated subsidiaries, in each case compared with amounts
shown on the September 30, 1997 unaudited consolidated balance sheet
included in the Registration Statement and the Prospectus, or for the
period from November 1, 1997 to such specified date there were any
decreases, as compared with the corresponding period in the preceding
year, in revenues, cost of revenues, net income before income taxes or
total or per share amounts of net income of the Company and its
consolidated subsidiaries, except in all instances for changes,
decreases or increases set forth in such letter; and
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records of
the Company and its consolidated subsidiaries and are included in the
Registration Statement and the Prospectus under the captions Prospectus Summary,
Risk Factors, Use of Proceeds, Capitalization, Selected Financial Data,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Business and Description of Capital Stock, and in Exhibit 11 to the
Registration Statement, and have compared such amounts, percentages and
financial information with such records of the Company and its consolidated
subsidiaries and with information derived from such records and have found them
to be in
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agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such changes,
decreases or increases, it shall be a further condition to the obligations of
the Underwriters that (A) such letters shall be accompanied by a written
explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(e) The Representatives shall have received a certificate, dated the Firm
Closing Date, of the principal executive officer and the principal financial or
accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
the Company has performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Firm
Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings for
that purpose have been instituted or threatened or, to the best of the
Company's knowledge, are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, neither the Company
nor any of its subsidiaries has sustained any material loss or interference
with their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or
otherwise), management, business prospects, net worth or results of
operations of the Company or any of its subsidiaries, except in each case
as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto).
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(f) The Representatives shall have received a certificate, dated the
Firm Closing Date, from each Selling Stockholder, signed by one of the
Attorneys-in-Fact, to the effect that:
(i) the representations and warranties of such Selling
Stockholder in this Agreement are true and correct as if made on and
as of the Firm Closing Date;
(ii) to the extent that any statements or omissions are made in
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by such
Selling Stockholder specifically for use therein, the Registration
Statement, as amended as of the Firm Closing Date, does not include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and
(iii) such Selling Stockholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior to the
Firm Closing Date.
(g) The Representatives shall have received (subject to certain limited
exceptions to be agreed upon by the Underwriters) from each person who is a
director or executive officer of the Company or who owns 5,000 shares of Common
Stock or more an agreement to the effect that such person will not, directly or
indirectly, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of an option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for a period of 180 days after the date of this
Agreement; PROVIDED, HOWEVER, that notwithstanding the Restrictions, such person
shall be permitted to make the following transfers: (i) transfers of shares of
Common Stock made by gift, provided the donee thereof agrees in writing to be
bound by the Restrictions; (ii) transfers of shares of Common Stock to members
of such person's immediate family or to a trust or similar estate planning
entity established for the benefit of such person or a member of such person's
immediate family, provided that each transferee agrees in writing to be bound by
the Restrictions; (iii) transfers of shares of Common Stock to the transferor's
affiliates, as such term is defined in Rule 405 under the Act, provided that
each transferee agrees in writing to be bound by the Restrictions; (iv)
transfers of shares of Common Stock made with the prior written consent of
Prudential Securities Incorporated on behalf of the Underwriters; and (v)
transfers of shares of Common Stock pursuant to the Registration Statement.
Prudential Securities Incorporated may, in its sole discretion, at any time and
without prior notice, release all or any portion of the shares of Common Stock
subject to such agreements.
(h) On or before the Firm Closing Date, the Representatives and counsel for
the Underwriters shall have received such further certificates, documents or
other information as they
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may have reasonably requested from the Company and the Selling Stockholders.
(i) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company and the Selling Stockholders shall
furnish to the Representatives such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Representatives
and counsel for the Underwriters shall reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934 (the "Exchange Act"), against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become subject under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the
Securities under the securities or blue sky laws thereof or filed with
the Commission or any securities association or securities exchange
(each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto,
or any Application, a material fact required to be stated therein or
necessary to make the statements therein not misleading, or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films, and tape recordings,
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<PAGE> 29
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or any Application in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein; and PROVIDED, FURTHER,
that the Company will not be liable to any Underwriter or any person controlling
such Underwriter with respect to any such untrue statement or omission made in
any Preliminary Prospectus that is corrected in the Prospectus (or any amendment
or supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Securities from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented) at or prior to the written
confirmation of the sale of such Securities to such person in any case where
such delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or supplemented)
was a result of noncompliance by the Company with Section 5A(d) and (e) of this
Agreement. This indemnity agreement will be in addition to any liability which
the Company may otherwise have. The Company will not, without the prior written
consent of the Underwriters purchasing, in the aggregate, more than fifty
percent (50%) of the Securities, settle or compromise or consent to the entry of
any judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not any
such Underwriter or any person who controls any such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of all of the Underwriters and such
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
(b) Each Principal Selling Stockholder, severally and not jointly, agrees
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or such controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement made by such Principal
Selling Stockholder in Section 2(B) or (C) of this Agreement, and will
reimburse, as incurred, each Underwriter and each such controlling person for
any legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that such Principal Selling
Stockholder will not be liable to any Underwriter or any person controlling such
Underwriter with respect to any such untrue statement or omission made in any
Preliminary Prospectus that is corrected in the Prospectus (or any amendment or
supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Securities from such
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<PAGE> 30
Underwriter but was not sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the Prospectus (as
amended or supplemented) is required by the Act, unless such failure to deliver
the Prospectus (as amended or supplemented) was a result of noncompliance by the
Company with Section 5A(d) and (e) of this Agreement. This indemnity agreement
will be in addition to any liability which such Principal Selling Stockholder
may otherwise have. No Principal Selling Stockholder will, without the prior
written consent of the Underwriters purchasing, in the aggregate, more than
fifty percent (50%) of the Securities, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
(c) Each Additional Selling Stockholder, severally, and not jointly, agrees
to indemnify and hold harmless the Company, each of its directors, each of its
officers who signs the Registration Statement, each Underwriter and each person
who controls the Company or any Underwriter within the meaning of the Act or the
Exchange Act and each other Additional Selling Stockholder against any losses,
claims, damages or liabilities to which the Company, any such director, officer,
such Underwriter or any such controlling person may become subject under the
Act, the Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any Application or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Additional Selling Stockholder for use therein;
PROVIDED, HOWEVER, that such Additional Selling Stockholder will not be liable
to any Underwriter or any person controlling such Underwriter with respect to
any such untrue statement or omission made in any Preliminary Prospectus that is
corrected in the Prospectus (or any amendment or supplement thereto) if the
person asserting any such loss, claim, damage or liability purchased Securities
from such
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<PAGE> 31
Underwriter but was not sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale of such
Securities to such person in any case where such delivery of the Prospectus (as
amended or supplemented) is required by the Act, unless such failure to deliver
the Prospectus (as amended or supplemented) was a result of noncompliance by the
Company with Section 5A(d) and (e) of this Agreement; and, subject to the
limitation set forth immediately preceding this clause, will reimburse, as
incurred, any legal or other expenses reasonably incurred by the Company, any
such director, officer, such Underwriter or any such controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or any action in respect thereof. This indemnity agreement will be in
addition to any liability which any other Additional Selling Stockholder may
otherwise have. Each Additional Selling Stockholder will not, without the prior
written consent of the Underwriter or Underwriters purchasing, in the aggregate,
more than fifty percent (50%) of the Securities, settle or comprise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
(d) Each Underwriter will, severally and not jointly, indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement, each Selling Stockholder and each person, if any, who
controls the Company or such Selling Stockholder within the meaning of Section
15 of the Act or Section 20 of the Exchange Act against any losses, claims,
damages or liabilities to which the Company, any such director or officer of the
Company, such Selling Stockholder or any such controlling person of the Company
or such Selling Stockholder may become subject under the Act, the Exchange Act
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application, or (ii) the omission
or the alleged omission to state therein a material fact required to be stated
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company, any such director, officer or controlling person or such Selling
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or any action in respect thereof. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise have.
No Underwriter will, without the prior written consent of the Company, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought
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<PAGE> 32
hereunder (whether or not the Company is a party to such claim, action,
suit or proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Company from all liability arising out of such
claim, action, suit or proceeding.
(e) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party; PROVIDED, HOWEVER, that if the defendants in any such action include both
the indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel reasonably satisfactory to
the indemnified party or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party.
(f) In circumstances in which the indemnity agreement provided for in the
preceding paragraphs of this Section 8 is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and
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the indemnified party on the other from the offering of the Securities or (ii)
if the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (after
discounts but before deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and commissions received
by the Underwriters. The relative fault of the parties shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Stockholders or the
Underwriters, the parties' relative intents, knowledge, access to information
and opportunity to correct or prevent such statement or omission, and any other
equitable considerations appropriate in the circumstances. The Company, the
Selling Stockholders and the Underwriters agree that it would not be equitable
if the amount of such contribution were determined by pro rata or per capita
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take into account
the equitable considerations referred to above in this paragraph (e).
Notwithstanding any other provision of this paragraph (e), no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (e), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company or any
Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, shall have the same rights to contribution as the Company or
such Selling Stockholder, as the case may be.
(g) Notwithstanding anything in this Agreement to the contrary, the
liability of each Principal Selling Stockholder under this Agreement shall not
exceed the LESSER of (i) that percentage of the total amount of such losses,
claims, damages or liabilities for which the Underwriters or any persons
controlling such Underwriters are entitled to indemnity hereunder equal to the
percentage obtained by dividing the total number of Securities sold by the
Principal Selling Stockholder hereunder by the total number of Securities sold
hereunder or (ii) an amount equal to the initial public offering price of the
Securities (less underwriting discounts and commissions but not expenses) sold
by the Principal Selling Stockholder to the Underwriters.
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<PAGE> 34
9. DEFAULT OF UNDERWRITERS. If one or more Underwriters default in their
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters as
described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. SURVIVAL. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, the
Selling Stockholders and the several Underwriters set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation made by or
on behalf of the Company, any of its officers or directors, the Selling
Stockholders, any Underwriter or any controlling person referred to in Section 8
hereof and (ii) delivery of and payment for the Securities. The respective
agreements, covenants, indemnities and other statements set forth in Sections 6
and 8 hereof shall remain in full force and effect, regardless of any
termination or cancellation of this Agreement.
11. TERMINATION. (a) This Agreement may be terminated with respect to the
Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company and the Selling Stockholders given
prior to the Firm Closing Date or the related Option Closing Date, respectively,
in the event that the Company or any of the Selling Stockholders shall have
failed, refused or been unable to perform all obligations and satisfy all
conditions on their respective parts to be performed or satisfied hereunder at
or prior thereto or, if at or prior to the Firm Closing Date or such Option
Closing Date, respectively,
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<PAGE> 35
(i) the Company or any of its subsidiaries shall have, in the
sole judgment of the Representatives, sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change, or
any development involving a prospective material adverse change
(including without limitation a change in management or control of the
Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, except in each case as described in or contemplated by
the Prospectus (exclusive of any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by the
Commission or the New York Stock Exchange or the Nasdaq National
Market;
(iii) trading in securities generally on the New York Stock
Exchange or Nasdaq National Market shall have been suspended or
minimum or maximum prices shall have been established on either such
exchange or market system; or a banking moratorium shall have been
declared by New York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended
as of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
12. INFORMATION SUPPLIED BY UNDERWRITERS. The statements set forth in
the last paragraph on the front cover page and under the heading "Underwriting"
in any Preliminary Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company or any Selling
Stockholder for the purposes of Sections 2(A)(b) and 8 hereof. The Underwriters
confirm that such statements (to such extent) are correct.
13. DEFAULT BY SELLING STOCKHOLDERS. If on the Firm Closing Date or
the Option Closing Date any Selling Stockholder fails to sell the Firm
Securities or Option Securities which such Selling Stockholder has agreed to
sell on such date as set forth in SCHEDULE III hereto or Section 3(b) hereof,
the Company agrees that it will sell or arrange for the sale of at least 10% of
that number of shares of Common Stock to the Underwriters which represents Firm
Securities or Option Securities which such Selling Stockholder has failed to so
sell, as set forth in SCHEDULE III
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hereto or Section 3(b) hereof, or such lesser number as may be requested by the
Representatives.
14. NOTICES. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group (telecopier: (212) 778-3621) with a copy to Testa, Hurwitz &
Thibeault, LLP, High Street Tower, 125 High Street, Boston, MA 02110, Attention:
Timothy C. Maguire, Esq. (telecopier: (617) 248-7100); if sent to the Company,
shall be delivered or sent by mail, telex or facsimile transmission and
confirmed in writing to the Company at 199 Riverneck Road, Chelmsford, MA 01824,
Attention: James R. Bertelli, President (telecopier: (978) 256-0013) with a copy
to Hutchins, Wheeler & Dittmar, A Professional Corporation, 101 Federal Street,
Boston, MA 02110, Attention: Anthony J. Medaglia, Jr., Esq. (telecopier: (617)
951-1295); and if sent to any Selling Stockholder, shall be delivered or sent by
mail at its address on the register of the Company.
15. SUCCESSORS. This Agreement shall inure to the benefit of and shall
be binding upon the several Underwriters, the Company and the Selling
Stockholders and their respective successors and legal representatives, and
nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement, or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company and the Selling
Stockholders contained in Section 8 of this Agreement shall also be for the
benefit of any person or persons who control any Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the
indemnities of the Underwriters contained in Section 8 of this Agreement shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement and any person or persons who
control the Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act and the Selling Stockholders. No purchaser of Securities from
any Underwriter shall be deemed a successor because of such purchase.
16. APPLICABLE LAW. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
17. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, the Selling Stockholders accepts
for itself and in connection with its properties, generally and unconditionally,
the nonexclusive jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any judgment rendered
thereby in connection with this Agreement.
18. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
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If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company, the
Selling Stockholders and each of the several Underwriters.
Very truly yours,
MERCURY COMPUTER SYSTEMS, INC.
By:_____________________________________
Name:
Title:
MD CO.
MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
MASSMUTUAL CORPORATE INVESTORS
DATA GENERAL CORPORATION
FIRST STAGE CAPITAL LIMITED
PARTNERSHIP
ROBERT FRISCH
JOHN NITZSCHE
KATHRYN BERTELLI
KATHRYN BERTELLI 1995 IRREVOCABLE
TRUST, KATHRYN BERTELLI TRUSTEE
KATHRYN BERTELLI, AS CUSTODIAN FOR
HEIDI BERTELLI
SUSAN L. ANSIN
LAWRENCE J. ANSIN 1990 REVOCABLE
TRUST -- TRUST A-2, PATRICK B.
MARAGHY, TRUSTEE
GREGORY DAVID ANSIN 1992 REVOCABLE
TRUST, PATRICK B.
MARAGHY, TRUSTEE
LISA ANSIN 1988 REVOCABLE TRUST,
PATRICK B. MARAGHY, TRUSTEE
BRUCE BECK
DAVID BERTELLI
PAUL BERTELLI
MARY CACCIATORE
DIMENSION ENTERPRISES
JOHN FREEBURN, JR.
BARRY ISENSTEIN
SCOTT ISRAEL
38
<PAGE> 39
CRAIG LUND
CRAIG MAXEY
STEPHEN PATTERSON
ARLAN POOL
DENNIS RAKOCY
GRAHAM SMITH
MARIAN SONNENFELD
SEYMOUR STEIN
MARK TURNER
JAMES WESTRA
By:____________________________________
as Attorney-in-Fact, acting on behalf of each of
the above-named Selling Stockholders
39
<PAGE> 40
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
COWEN & COMPANY
By: PRUDENTIAL SECURITIES INCORPORATED
By:___________________________________________
Jean-Claude Canfin
Managing Director
For itself and on behalf of the Representatives.
40
<PAGE> 41
SCHEDULE I
PRINCIPAL SELLING STOCKHOLDERS
(a) (b)
Number of Number of
Firm Securities Option Securities
to be sold to to be sold to
Underwriters Underwriters
------------ ------------
MD Co.
First Stage Capital
Limited Partnership
Totals _________ __________
<PAGE> 42
SCHEDULE II
ADDITIONAL SELLING STOCKHOLDERS
(a) (b)
Number of Firm Number of Option
Securities to be Securities to be
Sold to Underwriters Sold to Underwriters
-------------------- --------------------
Massachusetts Mutual Life
Insurance Company
MassMutual Corporate
Investors
Data General Corporation
Robert Frisch
John Nitzsche
Kathryn Bertelli
Kathryn Bertelli 1995
Irrevocable Trust, Kathryn
Bertelli Trustee
Kathryn Bertelli, As Custodian
For Heidi Bertelli
Susan L. Ansin
Lawrence J. Ansin 1990
Revocable Trust -- Trust
A-2, Patrick B. Maraghy,
Trustee
Gregory David Ansin 1992
Revocable Trust,
Patrick B. Maraghy,
Trustee
Lisa Ansin 1988 Revocable
Trust, Patrick B. Maraghy,
Trustee
Bruce Beck
David Bertelli
Paul Bertelli
Mary Cacciatore
Dimension Enterprises
John Freeburn, Jr.
Barry Isenstein
Scott Israel
Craig Lund
Craig Maxey
Stephen Patterson
<PAGE> 43
Arlan Pool
Dennis Rakocy
Graham Smith
Marian Sonnenfeld
Seymour Stein
Mark Turner
James Westra
Totals _________ __________
<PAGE> 44
SCHEDULE III
UNDERWRITERS
<TABLE>
<CAPTION>
(a) (b) (c) (d)
Number of
Number of Firm Option
Number of Firm Securities to be Number of Option Securities to
Securities to be Purchased from Securities to be be Purchased
Purchased From the Selling Purchased From The from The
Underwriter the Company Stockholders Selling Stockholders Company
- ----------- ---------------- ---------------- -------------------- -------------
<S> <C> <C> <C> <C>
Prudential
Securities
Incorporated....
Cowen &
Company......
[insert names of
other Underwriters
alphabetically by
bracket or in
other order
determined by
Prudential
Securities
Incorporated -
Equity
Transactions
Group]
Total 2,000,000 1,500,000 295,350 229,650
--------- --------- ------- -------
</TABLE>
<PAGE> 45
SCHEDULE IV
SUBSIDIARIES
Name Jurisdiction of Organization
- ---- ----------------------------
Mercury Computer Securities Corporation Massachusetts
Riverneck Road LLC Massachusetts
Mercury Computer International Sales Corp. Delaware
Mercury Computer Systems B.V. The Netherlands
Nihon Mercury Computer Systems K.K. Japan
Mercury Computer Systems S.A.R.L. France
Mercury Systems Ltd. United Kingdom
Mercury Computer Systems Export, Inc. Barbados
<PAGE> 1
Exhibit 10.8
Seller TPA No.__________
Buyer TPA No.__________
TERM PURCHASE AGREEMENT
AGREEMENT made this 7/25/95 between ANALOG DEVICES, INC. having a principal
place of business at Norwood, MA (hereinafter Seller) and MERCURY COMPUTER
SYSTEMS, INC., Chelmsford, MA (herein-after Buyer).
1. TERM
Unless earlier terminated as provided herein, this Agreement shall commence on
the effective date hereof and continue thereafter for a period of three (3)
years. During the term, Buyer will exert its best efforts to purchase and Seller
agrees to sell the quantity of semiconductor devices set forth on the attached
Schedule. Purchases credited against this Agreement will be only those entered
during the effective term with shipment scheduled according to the acknowledged
Market Leadtime.
2. PRICES
The prices for the applicable quantity of all devices purchased hereunder shall
be set forth on the Schedule attached hereto and made a part hereof Said prices
shall remain firm for the term of three years. Seller reserves the right to
renegotiate pricing should Buyer fail to meet the scheduled shipments as
detailed in Section 4.
If this Agreement is renewed beyond three (3) years, the devices, quantities and
prices on the attached Schedule shall be subject to review, adjustment or
renegotiation for each succeeding period. Any changes shall be negotiated within
thirty (30) days before or after the expiration of each period.
3. CANCELLATION/TERMINATION
Buyer may cancel orders placed in accordance with the provisions of this
Agreement subject to the following restrictions and the SHIPMENT SCHEDULE
detailed in Item 4.
STANDARD PRODUCT
Cancellation of standard product (resalable in its original condition)
without charge back requires written notice to Seller sixty (60) days
or more prior to the scheduled ship date.
If Buyer terminated individual orders in whole or in part because of
Seller's failure to deliver acceptable units in accordance with the
requirements and terms of this Agreement,
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
<PAGE> 2
STANDARD PRODUCT (Continued)
the undelivered quantity shall be applied against the total quantities
of this Agreement in the same manner as if the purchase transaction had
actually been completed.
4. SCHEDULED SHIPMENTS
Buyer agrees to place orders and accept shipments, contingent upon Buyer's
written acceptance of the semiconductor devices to Seller's production design
specifications, for a minimum of the following, as further described in the
attached Schedule of Pricing:
1. * units within one (1) year of Buyer's written acceptance.
2. * additional units (or * cumulative units) within two (2) years of
Buyer's written acceptance.
3. * additional units (or * cumulative units) within three (3) years of
Buyer's written acceptance.
Written notice shall be given sixty (60) days or more prior to rescheduling
orders. Seller will accommodate pull-ins on a best effort basis
5. MINIMUM ORDER
The minimum order or release hereunder shall be * units per purchase order.
Preproduction quantities may be released in smaller increments based on Buyer's
needs.
6. MARKET LEADTIME
Leadtimes for product covered in the Schedule will be eight (8) weeks.
7. FORECAST
Buyer will provide Seller each month with a forecast of unit demand, on a best
effort basis, for a rolling six month window.
8. ADDITIONS
By mutual agreement of Buyer and Seller, additional quantities, devices and
schedules may be added during the term of this Agreement.
*Information omitted for confidential treatment.
- 2 -
<PAGE> 3
9. AUTHORIZED PURCHASES
Only bonafide divisions, wholly-owned or majority owned subsidiaries of Buyer,
may enter purchase orders with Seller under the terms of this Agreement. Such
purchases shall be credited against this Agreement.
10. CONDITION OF SALE OR PURCHASE
Conditions governing purchases hereunder shall be this Agreement, together with
Analog's standard terms of sale modified herein as follows:
Item IA: Price adjustment, is nullified by the Purchase
Agreement since prices will remain fixed for 3 years.
Item 2. Delete the requirement for a finance charge on
overdue payments.
Item 3B: Delete the requirement that the Buyer grants to
Analog Devices security interest.
Item 3E: Second sentence is deleted. Buyer shall have the
right to terminate the contract should shipments be
delayed by more than 30 days.
Item 7b: Table I modified as follows:
0-30 days *% charge
31-60 days *% charge
61 and over *%
Item 7d. Restocking fee modified to *%
Other applicable conditions shall be those mutually agreed upon as they relate
to specific orders at the time of entry and acknowledgment. Additional or
superseding conditions to this Agreement shall be incorporated only be amendment
or a separate agreement duly executed.
11. TERMS OF SALE
All deliveries will be made F.O.B. Seller's point of shipment. Each such
delivery will be separately invoiced and payment shall be due and payable
without regard to other deliveries.
12. EXPORT/REEXPORT
Buyer agrees that it will not in any form export, re-export, resell, ship or
divert or cause to be exported, re-exported, resold, shipped or diverted,
directly or indirectly, any product or technical data or software furnished
hereunder or the direct product of such technical data or software to any
country for which the United States Government or any agency thereof at the time
of export or re-export requires an export license or other governmental approval
without first obtaining such license or approval.
*Information omitted for confidential treatment.
- 3 -
<PAGE> 4
13. DISTRIBUTOR PARTICIPATION
When the Buyer has critical and urgent need and Seller unable to accept Buyer's
purchase order(s) for standard product incorporated within this Agreement, Buyer
will have the option of placing required order(s) through Seller's authorized
distributor outlet(s) at prices negotiated with such outlet(s) to cover service
rendered. Such quantities so purchased shall be accrued against this Agreement.
This provision shall apply to Buyer's domestic divisions and subsidiaries only.
Non-USA distributor participation shall be subject to negotiation and mutual
agreement of the respective international buying and selling locations.
14. PRODUCT CHANGE NOTIFICATION
If during the term of this Agreement, Seller proposes to change any product
covered by this Agreement which would materially affect form, fit or function or
supersede the current die revision, Seller shall notify Buyer in writing sixty
(60) days prior to implementation of such change. Further, Seller shall not ship
such product until authorized by Buyer in writing. In the event that it is
determined that the change is not acceptable to Buyer, then the item will be
dispositioned in accordance with Item 15, Product Discontinuance.
15. PRODUCT DISCONTINUANCE
If, during the term of this Agreement, Seller deems it necessary to withdraw on
a product offering, any of the products specified in this Agreement, Seller
shall notify Buyer in writing a minimum of one hundred and eighty (I 80) days
prior to such withdrawal. Buyer, within such one hundred and eighty (I 80) day
period, shall then have the option to place additional noncancelable orders for
such products with delivery up to one (1) year from date of order.
16. NOTICES
Written notices hereunder are deemed to be given when telexed, faxed or air
mailed first class, postage prepaid to the addresses of the parties set forth
herein, or such other addresses shall be furnished in writing, by either party.
This Agreement supersedes any previous agreements, either oral or written,
relating to the subject matter herein. No alterations or modifications to this
Agreement shall be binding upon either Buyer or Seller unless made in writing
and signed by an authorized representative of each.
IN WITNESS WHEREOF, the parties hereto have cause this Agreement to be executed
by their duly authorized representatives as of the day and year first written
herein.
SELLER: BUYER:
- 4 -
<PAGE> 5
ANALOG DEVICES, INC. MERCURY COMPUTER SYSTEMS, INC.
By /s/ By /s/
------------------------------- ------------------------------------
(authorized signature (authorized signature
TITLE: Senior Sales Engr. TITLE: Vice President & CFO
--------------------------- ---------------------------------
DATE: 7/25/95 DATE: 7/25/95
---------------------------- ----------------------------------
- 5 -
<PAGE> 6
SCHEDULE OF PRICING
Quantity Item Unit Price
- -------- ---- ----------
[*] [*] [*]
[*] [*] [*]
[*] [*] [*]
[*] [*]
*Information omitted for confidential treatment
- 6 -
<PAGE> 7
ANALOG DEVICES
TERMS AND CONDITIONS
1. PRICES
A. All prices are subject to adjustment on account of specifications,
quantities, shipment arrangements or other terms and conditions which
are not a part of the original price quotation.
B. Prices are exclusive of all federal, state, municipal or other
government excise, sales use, occupational or like taxes, tariffs,
customs, duties and importing fees. Prices are consequently subject to
increase by the amount of any such tax, tariff, duty or fee which Analog
Devices pays or is required to pay or collect upon same or delivery of
the products. Any certificate of exemption or similar document or
proceeding required to exempt the sale of products from sales or use for
liability shall be obtained by Buyer at its expense.
2. TERMS OF PAYMENT
Terms are cash upon delivery, except where satisfactory open account
credit established in which case terms of payment are net thirty (30)
days from the date of invoice. Analog Devices reserves the right at any
time to revoke any credit extended to the Buyer for any risk deemed good
and sufficient by Analog Devices. Analog Devices will issue invoices on
delivery in the case of all products and if delivers are authorized in
installments each shipment shall be invoiced and paid when due without
regard to other scheduled deliveries. Overdue payments shall be subject
to finance charges computed at a periodic rate to the extent permitted
by law of 15% per month (18% per year). Amounts owed by the Buyer with
respect to which there is no dispute shall be paid without set off for
any amounts which the Buyer may claim are owed by Analog Devices and
regardless of any other controversies which may exist.
3. DELIVERY
A. All products will be shipped FOB Point of Origin.
B. Ownership of and risk of loss with respect to the products shall
pass to Buyer upon delivery thereof by Analog Devices to Buyer
or to a carrier for shipment to Buyer, whichever is earlier,
regardless of whether Analog Devices will install or supervise
the installment of the products Buyer does hereby grant to
Analog Devices a security interest in the products as security
for the performance by Buyer of its obligations hereunder.
<PAGE> 8
C. Products held or stored by Analog Devices for the Buyer shall be
at the sole risk of Buyer, and Buyer shall be liable for the
expense to Analog Devices of holding or storing products at
Buyer's request.
D. Analog Devices shall make deliveries in installments and shall
bill partial shipments as made.
E. All products will be scheduled for shipment in accordance with
Analog Devices applicable shipment sequence and Analog Devices
will confirm in writing and amend as appropriate, the shipment
schedule. Under no circumstances shall Analog Devices be liable
to Buyer for any delay either in shipment or in delivery.
4. SOURCE INSPECTION
Source Inspection by Buyer or Buyer's customer must be stipulated in
writing at the time of ordering and is subject to reasonable charges and
safety and security conditions. Buyer shall have no right of access to
Analog Device's plant except as specifically authorized in advance by
Analog Devices. Buyer or Buyer's agent shall indemnify and hold Analog
Devices harmless from any and all suits, damages and expenses of Buyer,
his agent or his customer resulting from personal injury including death
or loss or damage of property occurring during or in connection with any
visit to Analog Devices' plant.
5. SHIPMENT
Unless specific instructions to the contrary are supplied by the Buyer,
Analog Devices will select the carrier and ship the products to the
Buyer's address indicated on the Buyer's purchase order. Analog Devices
will not assume any liability in connection with the shipment nor
constitute any carrier as its agent. Buyer shall be responsible for
making all claims with carriers, insurers, warehouses and others for
non-delivery, loss damage or delay. All claims for damage to the product
or shortages must be made within thirty (30) days of shipment.
6. OFFER/ACCEPTANCE
Analog Devices offers to sell and deliver the products and services
specified hereunder in accordance with the terms and conditions hereof.
THIS OFFER EXPRESSLY LIMITS ACCEPTANCE TO THE TERMS HEREOF AND ANY
ADDITIONAL OR DIFFERENT TERMS PROPOSED BY THE BUYER ARE HEREBY OBJECTED
TO AND REJECTED UNLESS EXPRESSLY ASSENTED TO IN WRITING BY ANALOG
DEVICES.
-2-
<PAGE> 9
7. CANCELLATION, RESCHEDULING, RETURNS AND MODIFICATIONS
Any request for order cancellation, rescheduling, return or modification
must be made in writing and such action must be approved in writing by
an authorized agent of Analog Devices at its principal office in
Massachusetts. Such requests are subject to processing charges as
outlined below. Payment of charges applied by Analog Devices as a result
of such request shall be made within thirty (30) days of receipt an
invoice for charges. Overdue payments shall be subject to finance
charges as set forth herein.
7a. Cancellation Charges
If the Buyer cancels the delivery of any products, the Buyer shall pay
to Analog Devices the cancellation charges as set forth in Table 1 in
addition to any charges for unearned discounts (billbacks). For
non-standard products built to Buyer's specifications or pursuant to
Analog Devices design Buyer shall have no right to cancel or reschedule
the delivery of any such non-standard products.
7b. Rescheduling Charges
Delivery reschedules requested by Buyer are subject to the charges set
forth in Table 1.
The charges listed below relate to standard products:
Table 1
<TABLE>
<CAPTION>
Intervals in Days Between Charges Expressed as
Receipt of Notice of Percentage of Invoice
Cancellation or Reschedule Prices of Standard Products
and Schedule Shipment Date Schedule for Delivery
- -------------------------- ---------------------------
<S> <C>
0-30 50%
31-60 25%
61-90 20%
91 and over 0%
</TABLE>
7c. Returns
Buyer shall not return any products for any reason without the prior
authorization of Analog Devices and issuance of a Material Return
Authorization (MRA) number. This MRA number shall specify the terms and
conditions upon which return may be made. Returns made without obtaining
prior authorization shall be returned to sender at Buyer's expense.
-3-
<PAGE> 10
7d. Returns for Credit
Analog Devices, at its option, may accept or reject any request by Buyer
to return products for credit If authorization is granted, Buyer shall
pay to Analog Devices a restocking fee equal to 35% of the current list
price for standard products for each product(s) returned in addition to
charges for unearned discounts and any other reasonable charges. Buyer
guarantees that any product returned is in original condition and
packaging and is free from any liens. Buyer shall not return materials
without first obtaining an MRA number as stated herein.
8. INSTALLATION
Analog Devices assumes no obligation to install the products or to place
them in operation at the Buyer's premises unless specifically agreed in
writing by an authorized agent of Analog Devices.
9. WARRANTY
Analog Devices warrants that each product will be free of defects in
materials and workmanship for the period set forth in its published user
manual for its system products and for a period of one (1) year for its
component products. The warranty commences on the date the product is
shipped by Analog Devices. Analog Devices' sole liability and
responsibility under this warranty as to repair or replace any product
which is returned to it by Buyer and which Analog Devices determines
does not conform to the warranty. Products returned to Analog Devices
for warranty service will be shipped to Analog Devices at BUYER's
expense and will be returned to BUYER at Analog Devices' expense. In no
event shall Analog Devices be responsible under this warranty for any
defect with is caused by the negligence, misuse or mistreatment of a
product or for any unit which has been altered or modified in any way.
The warranty of replacement products shall terminate with the warranty
of the product.
10. WARRANTY DISCLAIMER
ANALOG DEVICES EXPRESS WARRANTY TO BUYER CONSTITUTES ANALOG DEVICES'
SOLE LIABILITY AND THE BUYERS SOLE REMEDY WITH RESPECT TO THE PRODUCTS
AND IS IN LIEU OF ALL OTHER WARRANTIES, LIABILITIES AND REMEDIES EXCEPT
AS THUS PROVIDED. ANALOG DEVICES DISCLAIMS ALL WARRANTIES EXPRESS OR
IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
-4-
<PAGE> 11
11. INTELLECTUAL PROPERTY RIGHTS INDEMNITY
Analog Devices agrees to indemnify and defend Buyer against any claim
that a product as delivered infringes United States Patent, United
States covenant, United States trademark or other United States
intellectual property right provided Analog Devices is promptly advised
of any such claim or action and has such control of the defense of any
such actions and has sole control of the defense of any such actions and
all negotiations for its settlement or compromise. If at any time use of
the product is expired or is discontinued because of a settlement,
Analog Devices shall have the right but not the obligation at its sole
option and expense to enter procedure for Buyer the right to continue
using the product, replace or modify the product so that it becomes
non-infringing or grant Buyer a credit for the product as depreciated
and accept its return. Analog Devices shall not have any liability to
BUYER at the infringement of other violation of a third party right as
based in any way upon (i) the use of a product in combination with other
components, equipment or software not furnished by Analog Devices; (ii)
use of a product in performing any process (iii) any product which has
been modified or altered (iv) the manner in which the product is used
even if Analog Devices has been advised of such use; or (v) Analog
Devices compliance with Buyer's design specifications or instructions in
no event shall Analog Devices' total liability to Buyer under this
section exceed the aggregate sum paid to Analog Devices by Buyer for the
products hereunder.
12. INDEMNIFICATION
Unless otherwise expressly provided in a writing signed by both parties,
Analog Devices does not indemnify, nor does it hold Buyer harmless
against any liabilities, losses, charges and expenses including
attorneys fees relating to any claims whatsoever, including without
limitation claims for personal injuries, death or property damage
relating to the products sold hereunder.
13. SUBSTITUTIONS AND MODIFICATIONS OF SPECIFICATIONS
Analog Devices assumes the right to make substitutions and modifications
in the specifications of any of the products or parts thereof described
by Analog Devices provided such substitutions or modifications will not
materially affect the performance of such products.
14. ASSIGNMENT
This Contract is not assignable by Buyer and any attempt to assign any
rights, duties or obligations arising hereunder shall be void.
-5-
<PAGE> 12
15. FORCE MAJEURE FORCE OF NATURE??
Analog Devices shall not be liable for any loss or damage resulting from
any delay in delivery or failure to give notices of delay when such
delay is due to any cause or event beyond Analog Devices' control,
including without limitation, act of nature, unavailability of supplies
or source of energy, riots, wars, fires, strikes, labor difficulties,
delays in transportation, delays in delivery or defaults by Analog
Devices' vendors or acts or omissions of the Buyer. In the event of
delay due to any such causes, time for delivery shall be extended for a
period of time equal to the duration of such delay and the Buyer shall
not be entitled to refuse delivery or otherwise be relieved of any
obligations as a result of the delay. If as a result of any such cause,
any scheduled delivery is delayed for a period in excess of one hundred
twenty (120) days, Analog Devices or BUYER shall have the right by
written notice to the other to cancel the order for the products subject
to the delayed delivery without further liability of any kind.
16. LIMITATIONS OF LIABILITY
IN NO EVENT SHALL ANALOG DEVICES BE LIABLE FOR SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES DUES TO ANY CAUSE WHATSOEVER. NO SUIT OR ACTION
SHALL BE BROUGHT AGAINST ANALOG DEVICES MORE THAN ONE YEAR AFTER THE
RELATED CAUSE OF ACTION HAS ACCRUED. IN NO EVENT SHALL THE ACCRUED TOTAL
LIABILITY OF ANALOG DEVICES FROM ANY LAWSUIT, CLAIM, WARRANTY OR
INDEMNITY EXCEED THE AGGREGATE SUM PAID TO ANALOG BY BUYER UNDER THE
ORDER THAT GIVES RISE TO SUCH LAWSUIT, CLAIM, WARRANTY OR INDEMNITY.
17. WAIVERS
All rights and remedies of Analog Devices hereunder shall be cumulative
and may be exercised singularly or concurrently. In the event that
either party shall on any occasion fail to perform any term herein and
the other party shall not enforce that term, failure to enforce on that
occasion shall not prevent enforcement on any other occasion.
18. GOVERNING LAW
This Contract is made, governed by and shall be construed in accordance
with the laws of the Commonwealth of Massachusetts without resort to the
Commonwealth a conflict of issues statutes. If the products purchased
hereunder are purchased by a Buyer residing in a country other than the
United States, then the parties agree that the United Nations Convention
on Contracts for the International Sale of Goods is hereby excluded in
its entirety from the Contract.
-6-
<PAGE> 13
19. EXPORT
Buyer certifies that it will not export or re-export the products
furnished hereunder unless it complies fully with all laws and
regulations of the United States relating to such export or re-export.
Including but not limited to applicable U.S. Export Administration rules
and regulations.
20. ENTIRE AGREEMENT AND AMENDMENTS
The terms and conditions herein constitute the entire Contract between
the parties and supersede all previous communications whether oral or
written. Any change to the Contract may be made only upon mutual
agreement of the parties in writing.
21. FEDERAL CONTRACT TERMS
FEDERAL CONTRACT TERMS
In any Contract entered into with the federal government or in any
Contract entered into with any other party which is a subcontractor at
any party of one entered into with the federal government (a) only those
clauses of the federal acquisition regulations which the regulations
themselves manage for a party in Analog Devices position given all
relevant limitations including Analog Devices' status as a customer or a
subcontractor and the size and type of Contract apply; and (b) Analog
Devices retains proprietary rights in all technical data and computer
software provided under such Contract. Only limited rights or restricted
rights are provided to the federal government under the narrowest
provision of these rights that the regulations allow and no rights
including rights of audit of Seller's cost or pricing data are provided
to any other party including the prime contractor or any higher tier
subcontractor.
22. USE IN LIFE SUPPORT APPLICATIONS
Products sold by Analog Devices are not designed for use in the support
equipment where malfunction of the product can reasonably be expected to
result in personal injury or death. Buyer uses or sells such products
for use in the support applications at Buyer's own risk, and agrees to
indemnify and hold harmless Analog Devices from any and all damages,
claims, suits or expense resulting from such use.
-7-
<PAGE> 1
Exhibit 10.9
RISK PREPRODUCTION PURCHASE AGREEMENT
TERMS AND CONDITIONS
CUSTOMER understands that LSI Logic Corporation's recommended procedure
is to manufacture product only after the design has been successfully prototyped
and approved in writing by CUSTOMER. For this Risk Preproduction order, LSI
Logic, agrees to manufacture product without such approval at the CUSTOMER'S
request subject to the terms and conditions below as modified by the attached
Addendum. This form will process product through to plant clearance. LSI Logic
cannot ship product until a signed customer purchase order is received by
Customer Order management and reconciled against backlog. However, CUSTOMER'S
obligation under Item B below shall not be affected by an failure to furnish a
signed purchase order.
A. RSK/PRE must be on order 48 hours prior to CDR signoff and
WFR 2 weeks prior to CDR signoff. PRE line item will be booked unreleased unless
customer indicates product is released by initialing the CUSTOMER RELEASE column
of the form. WFR and RSK is always considered released. To release product
previously ordered as unreleased the original form can be changed and initialed
to indicate the change to release status. Upon receipt of the updated form, LSI
Logic Customer Order Management will change the release status as indicated.
B. CUSTOMER agrees to pay for work-in-process, as outlined below
("Qty" refers to quantity ordered by customer, "Unit ASP" refers to Risk
Preproduction Unit ASP):
================================================================================
[*] [*]
------------ --------------
- --------------------------------------------------------------------------------
[*] [*]
- --------------------------------------------------------------------------------
[*] [*]
- --------------------------------------------------------------------------------
[*] [*]
================================================================================
C. CUSTOMER requests LSI Logic to manufacture enough Risk
Preproduction to support the quantity of finished product indicated on the
attached Order Form. Upon successful wafer sort, LSI Logic will hold die (RSK)
or wafers (WFR) in inventory until CUSTOMER authorizes LSI Logic in writing to
release product and ship as finished goods.
D. CUSTOMER agrees to provide written instruction for the
disposition of the "Risk die" ("RSK") or "Risk wafers" ("WFR") within six (6)
months after receipt of the "Risk Service Charge" Invoice. LSI Logic reserves
the right to dispose of the material after this 6 month period.
* Information omitted for confidential treatment.
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
<PAGE> 2
E. CUSTOMER accepts that yields for the Risk Preproduction build
of a design is difficult to predict. If this build does not provide sufficient
product to deliver the quantity shown on this form and the balance is less than
20% of the order quantity, CUSTOMER agrees to, if requested by LSI Logic:
(a) Cancel the balance of this quantity; or
(b) Allow LSI Logic to reschedule this balance to ship
with future production orders.
F. CUSTOMER acknowledges the inherent risk in building products
prior to prototype approval. CUSTOMER acknowledges financial responsibility for
risk product as described in Section B (above) on a design which passes design
test and is free of manufacturing defects, but does not function in the customer
system. LSI Logic Corporation's standard terms (attached) are incorporated by
this agreement in full. Any additional or inconsistent terms of any purchase
order are void.
2
<PAGE> 3
MERCURY COMPUTER SYSTEMS, INC. (Customer) has read this agreement and
understands and accepts LSI Logic Corporation's Risk Preproduction Policy. LSI
Logic Corporation will consider this document as Authorization to Proceed and
build the product as specified above.
/s/
- ---------------------------------- ----------------------------------
AUTHORIZED SIGNATURE PURCHASE ORDER/REQUISITION NO.
- ---------------------------------- ----------------------------------
NAME AND TITLE (Please Print) DATED
ACCEPTED BY LSI LOGIC CORPORATION:
/s/
- ----------------------------------
LSI LOGIC AUTHORIZED SIGNATURE
- ---------------------------------- ----------------------------------
NAME AND TITLE (Please Print) DATED
ACCEPTED BY HAMILTON HALLMARK:
/s/
- ----------------------------------
HAMILTON HALLMARK
AUTHORIZED SIGNATURE
- ---------------------------------- ----------------------------------
NAME AND TITLE (Please Print) DATED
3
<PAGE> 4
ADDENDUM TO RISK PREPRODUCTION PURCHASE AGREEMENT
SECTION B
Before Metal Start - [*]
Before Assembly Start - [*]
After Assembly - [*]
SECTION C
Quantity of RISK-PRE Units is indicated on RISK-PREPRODUCTION PURCHASE AGREEMENT
Order Form.
SECTION E
a) Cancel the balance of this quantity without any further payment for
units not received.
b) Allow LSI Logic to reschedule this balance to ship with future
production orders at RSK/PRE prices and best available lead time.
* Information omitted for confidential treatment.
4
<PAGE> 1
Exhibit 10.10
PURCHASE OFFER AGREEMENT FOR OEM MANUFACTURER
Customer: Agreement #: JV1201
Mercury Computer Systems, Inc. Date: February 16, 1995
199 Riverneck Road
Chelmsford, MA 01824-2820
Thank you for doing business with IBM Microelectronics Division. This is a
master purchase offer agreement between you, the buyer, and us, International
Business Machines Corporation. You sign this Agreement only once after that,
this Agreement will govern your purchases of eligible IBM products (Products)
from us on an ongoing basis. Your IBM sales representative can give you a list
of the eligible IBM Products. You may order Products under this Agreement by
sending us a written request or by fax. If we can fill your order, we will send
you an acknowledgment, referencing this Agreement, for the Products IBM will
ship to you. We will provide Products under IBM's then current prices, charges,
and warranty periods, unless otherwise negotiated between us. Your IBM sales
representative can also give you information about IBM's prices, charges, and
warranty periods.
This Agreement, its front and back, and any acknowledgment IBM issues under it,
together called POA, are the complete agreement on this subject and replace all
prior oral or written communications between us about it. The POA cannot be
changed unless each of us signs a written modification.
Agreed to: for and on behalf of
MERCURY COMPUTER SYSTEM INC.
Signed: /s/ Rebecca M. Dowse
----------------------------
Print Name: Rebecca M. Dowse
Manager of Contracts
Agreed to:
INTERNATIONAL BUSINESS
MACHINES CORPORATION
Microelectronics Division
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
<PAGE> 2
Signed: /s/ Frederick J. Glasgow
----------------------------
Print Name: Frederick J. Glasgow
Director of Marketing
and Sales Operations
1. USE OF PRODUCTS
You represent that Products will be: A) integrated or incorporated in your
systems or Subsystems or as specified by IBM in an acknowledgment: or B)
distributed in incidental additional quantities for integration or incorporation
in systems or subsystems you have sold. You may also use up to 10% of the
Products internally.
2. SHIPMENT, TITLE, AND RISK OF LOSS
IBM Will Schedule each Product under IBM's applicable shipment schedule. We may
not ship Product if you cannot give us satisfactory assurances that you have
complied and can comply with any of the POA terms, including payment and use of
Products. Title to and risk of loss for a Product Pass to you when we deliver
the Product to the carrier. IBM keeps title to any software or other code under
the POA.
3. PRICES, INVOICING, PAYMENT TERMS AND TAXES
The prices Shown in Exhibit A hereto will apply to the Products.[*] We will
invoice you for the Products, including related taxes and any other charges
under this POA. Terms of payment are [*]. You will also pay a late charge
of [*] of the balance due for each month you are
late in paying IBM.
4. CANCELLATION
You may cancel an order before we ship it. If you do so at your convenience, for
standard Product you shall pay the following charges unless otherwise mutually
negotiated.
Days before
Acknowledged Shipment Dates Percent of Purchase Price
90 days or more [*]
60-89 days [*]
30-59 days [*]
0-29 days [*]
* Information omitted for confidential treatment.
- 2 -
<PAGE> 3
Charges for the cancellation of customized Product will be mutually negotiated
and set forth in Exhibit A hereto.
5. CHANGES
It is our objective to fill an order acknowledged by us. In situations such as
supply constraints, we may not be able to fill your order; we will inform you of
this, and you may cancel the order without charge. We may withdraw a Product
from the list on 60 days' notice. We may change a Product's specifications at
any time. Customer's prior approval is required for any change which affects the
form, fit, function, or reliability of a Product.
6. MANUALS AND DISKETTES
You can modify manuals and diskettes we provide under this POA as needed to
support your use of Products. Distributed manuals and diskettes must not include
anything that suggests we are the source of the manuals or diskettes or
Products. You can distribute modified manuals and diskettes only for use with
Products. You must make diskettes available subject to a license agreement
acceptable to us. You must include a copyright notice in distributed manuals and
diskettes. The copyright notice must comply with the copyright law and must
identify the owner as you "and others". You must also include a U.S. Government
user Restricted Rights notice.
7. PATENTS AND COPYRIGHTS
If a third party claims that a Product we provide under this POA infringes that
party's patent or copyright, we will defend you against that claim at our
expense and pay all costs, damages, and attorney's fees that a court finally
awards, provided that you: 1) promptly notify us in writing of the claim: and 2)
allow us to control, and cooperate with us in, the defense and any related
settlement negotiations. If such a claim is made or appears likely to be made,
about a Product in your inventory, you agree to permit us to either enable you
to continue to market and use the Product, or to modify and replace it. If IBM
determines that none of these alternatives is reasonably available, you will
return the Product to us on our written request for an appropriate credit or
refund as IBM decides. This is IBM's entire obligation to you regarding any
claim of infringement.
IBM has no obligation regarding any claim based on any of the following: A)
modification of a Product by you or at your direction or its use in other than
its specified operating environment; B) the combination, operation, or use of a
Product with any product, data, or apparatus that IBM did not provide; or C)
infringement by a non-IBM Product alone, as opposed to its combination as part
of a system of Products that IBM provides.
8. LIMITED WARRANTIES
- 3 -
<PAGE> 4
IBM warrants a Product to be free from defects in material and workmanship, in
the U.S.A., for one year from the date of shipment.
Products shipped outside of the U.S.A., samples, prototypes, and test vehicles,
and any IBM services provided under this POA are AS IS. IBM manufactures
Products from new or serviceable used parts. Exchanged parts become the property
of IBM.
If you believe that a Product is not as warranted, you will: A) promptly notify
us in writing; B) at our request, return the Product freight prepaid to our
designated location. If IBM decides the Product does not meet its warranty, we
will, at our option, repair or replace the Product, or issue a credit or refund
of the purchase price. This warranty will not include credit, repair, or
replacement of a Product which has a defect due to your, or another's, actions
or omissions.
THE FOREGOING WARRANTIES REPLACE ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS OR USE FOR A
PARTICULAR PURPOSE.
9. LIABILITIES
Circumstances may arise where, because of a default or other liability, you are
entitled to recover damages from us. In each such instance, regardless of the
basis on which damages can be claimed, the following terms apply. IBM is
responsible for: 1) payments referred to in our patent and copyright terms
described above; and 2) bodily injury (including death), and damage to real
property and tangible personal property caused by the Product; and 3) the amount
of any other actual loss or damage, up to the greater of $100,000 or the charge
for the Product subject to the claim.
Under no circumstances is IBM liable for any of the following: A) third-party
claims against you for losses or damages other than those in items 1) and 2), in
this Section 9; B) loss of, or damage to your or another's records or data; or
C) economic consequential damages (including lost profits or savings) or
incidental damages, even if we are informed of their possibility.
10. SOFTWARE
If IBM provides you software or other code ("software") under this POA, the
software will be subject to this POA and any license agreement provided with the
software. If you object to a license agreement, you must return the software
within 10 days of when you receive it. If IBM does not provide a license
agreement, the software will be subject to this POA and all copyright laws.
- 4 -
<PAGE> 5
11. ENGINEERING CHANGES
We may issue mandatory engineering changes, such as those required for safety.
You will install those engineering changes as directed by us, subject to the
provisions of Section 5 of this Agreement.
12. ENDING THE AGREEMENT
Either of us may end this POA by a 30 day written notice. All clauses and
acknowledgments which by their nature extend beyond the end of this POA remain
in effect until they have been fulfilled, and they apply to respective
successors and assigns.
13. GENERAL
All information exchanged under this POA is nonconfidential. Any exchange of
confidential information must be made under a separate signed confidentiality
agreement.
Except for your obligation to pay, neither of us will be responsible for failing
to perform under this POA for acts of God, natural disasters, embargoes and
similar causes beyond its reasonable control.
Neither this POA, nor the sale of Products under it, will be deemed to give
either of us any licenses, immunities or other rights, directly or by
implication, under the trademarks, trade names, patents, copyrights or any other
intellectual property rights of the other.
You will keep suitable records to show you have complied with the terms of this
POA. At IBM's request, you will demonstrate to us that you have fully complied
with the terms of this POA.
Neither of us will bring a legal action against the other more than two years
after the cause of action arose, except for actions for nonpayment and
enforcement of intellectual property rights. Each of us waives the right to a
jury trial in a dispute under this POA.
Failure by either of us to demand performance or to exercise a right, when
entitled, does not prevent us from doing so later for that default or any other
one.
Each of us will comply with all applicable United States, European Economic
Commission, and other country or country group laws and regulations, including
those relating to exports. You represent that you do not intend now, or in the
future, to ship, directly or indirectly, any IBM Product, data, or information,
to a prohibited country or country group or its nationals.
- 5 -
<PAGE> 6
The headings in this POA are for reference only. They will not affect the
meaning or interpretation of the POA.
You will not assign your rights or delegate your duties under this POA without
our written consent.
The substantive laws of the Commonwealth of Massachusetts govern this Agreement.
14. Exhibit A hereto sets forth the part numbers of Products under this
Agreement, and applicable prices, volume commitments, cancellation and
reschedule schedule, and requirements for good die.
- 6 -
<PAGE> 7
EXHIBIT A
1. SCOPE OF WORK
1.1 IBM will provide assembly services for Mercury's printed circuit cards.
These require Surface Mount Technology (SMT) or wave solder assembly processes.
Mercury will order the assembly services from IBM by issuing its Purchase Order
for up to [*] cards of any one particular part number.
These services also include soldering in accordance with Mercury's Drawings and
BOMs.
IBM will perform these assembly and solder services in accordance with the
schedule in Section 2 below. There will be no electrical costing provided by
IBM. Assembled and soldered cards will be shipped to Mercury. Technical
requirements are set forth in Section 3.3 below. Mercury will provide all
components and printed circuit cards ("Items").
Mercury is responsible for the quality of the cards and components which IBM
will assemble. IBM will not perform services which include incorporating any
items which have obvious or readily ascertainable defects. In the event IBM
identifies any such items, they will be returned freight collect to Mercury
for repair or replacement. The delivery schedule will be offset by the amount
of time between the date the items are returned to Mercury to the date the
items are received by IBM.
1.2 The Deliverables are:
From Mercury to IBM:
A. Hardware:
Selected quantity of printed circuit cards (up to *)
Components required for assembly
B. Data and Setup Drawings:
Bill of Materials (BOMs)
Assembly prints and drawings sufficient for solder stencil
fabrication and placement machine programing
Component placement (centroid) data
Gerber data
From IBM to Mercury:
The selected quantity of completed card assemblies (up to *)
1.3 Changes to Statement of Work
Mercury may, at any time and from time to time, by written notice to IBM,
request changes to the part numbers, specifications, or work scope. IBM shall
submit a written report to Mercury setting forth the probable effect, if any, of
the requested change in regard to the work and the effort on any change in
prices or delivery. IBM shall not proceed with any change until authorized in
writing by Mercury. The parties shall promptly amend this Agreement to
incorporate any agreed changes.
2. DELIVERY
Attach 1 Page 1 0519
*Information omitted for confidential treatment.
<PAGE> 8
2.1 To order the assembly services, Mercury will notify IBM at least 2 weeks
prior to its required shipment date by issuing its Purchase Order for a
particular part number or part numbers. This Purchase Order will contain
selected quantity of circuit cards to be assembled and the shipment
date. For new part numbers, Mercury will furnish its Data and Setup Drawing and
Deliverables at least 3 weeks prior to the shipment date. Mercury will furnish
the Hardware Deliverables at least two weeks prior to the shipment date.
2.2 All completed assemblies will be shipped to Mercury FOB Collect, using
Mercury's specified carrier, from Endicott, New York. Any risk of loss shall
pass to Mercury upon delivery to the carrier for shipment.
3. SPECIAL ITEMS
3.1 Damage to Items
IBM shall be liable to Mercury for any loss or damage to Mercury's consigned
parts or components due to the negligence of IBM while in IBM's custody.
Excluded from this responsibility is reasonable wear and tear, or loss,
damage, or destruction caused by circumstances beyond IBM's control while in
IBM's care, custody and control. All replacement parts or components shall
become Mercury's property and shall be subject to all the terms and conditions
of this Agreement. In such event, IBM's maximum liability shall be the lesser
of the actual cost of the part or component damaged (substantiation to be
provided by Mercury) or the price charged IBM for the service performed
(associated with that part) hereunder.
3.2 Acceptance and Rejection
3.2.1 Acceptance
Acceptance or rejection of Product shall be determined by Mercury comparing
the output produced by IBM for conformance to the Specifications attached as
Attachment 2 to the Supplement (dated May 5, 1995) to POA No. JV1201, Section 1
above. Mercury will notify IBM whether the Product is accepted or rejected
within thirty (30) calendar days from the date of shipment. Any Product not
expressly rejected by Mercury within this time period shall be deemed accepted.
3.2.2 Rejection
In the case of rejection Mercury shall: (i) promptly notify IBM in writing of
the basis for such rejection, (ii) follow IBM's instructions for the return of
the Product, and (iii) return such Product freight collect to IBM's designated
facility. If IBM agrees the Product is defective, IBM will repair the rejected
Product or issue a credit for the purchase price applicable to the rejected
Product.
If IBM uses Items and these Items fail to meet specifications, Mercury will
waive its right of rejection.
3.3 Technical Requirements
a. The following are technical requirements for Mercury:
[*]
* Information omitted for confidential treatment.
Attach 1 Page 2 0519
<PAGE> 9
b. The following are IBM practices to be followed:
1) IBM will build assemblies to IPC 610 workmanship standards.
<PAGE> 10
ATTACHMENT 1 - STATEMENT OF WORK
SCOPE OF WORK
1 IBM will perform manufacturing services as follows:
RFS 3916001
IBM will provide prototype assembly services for Customer's [*][*][*].
Customer will order the assembly services from IBM by issuing its Purchase
Order for up to [*] boards.
These services will include soldering in accordance with Customer's assembly
prints and drawings for [*][*][*], which are now in IBM's possession.
These assembly services will require a first order NRE (Non Recurring Expense)
set-up and tooling charge.
The purchase of one NRE will cover assembly of the first three Part Numbers
stated above. The purchase of another NRE will cover assembly of the next four
Part Numbers stated above. The purchase of another NRE will cover the assembly
of the next two Part Numbers stated above. The purchase of another NRE will
cover the assembly of the last four Part Numbers stated above.
IBM will perform these prototype assembly and soldering services in accordance
with the schedule below. There will be no electrical testing provided by IBM.
Assembled and soldered prototype boards will be shipped to Customer. Customer
will provide all components and printed circuit boards.
A. Hardware:
Set-up hardware of two printed circuit boards and their components which
need only be mechanically good
Selected quantities of printed circuit boards (up to 400 per Part Number)
Components required for assembly
B. Data and Set-up Drawings
RFS 3916001 SCHEDULES
To order the assembly services, Customer will notify IBM at least 1 week prior
the Build Date by issuing its Purchase Order for a requested quantity [*][*][*].
Customer will furnish the Data, Set-up Drawings, and Set-up hardware at least 1
week prior to the Build Date.
Customer will furnish its Build Hardware Deliverables at least 2 working
Attachment 1 Page 1 3916001
* Information omitted for confidential treatment.
<PAGE> 11
days prior to the Build Date.
Estimated Board Assembly ship date will be scheduled for 10 Business Days
following the Build Start Date for 5 - 199 boards, and 15 Business days
following the Build Start Date for 200 - 400 boards.
RFS 3916001 TECHNICAL EXCEPTIONS/ASSUMPTIONS
Parts will be supplied on tape and reel, or in tubes or trays.
1.2 The Deliverables are:
a. Items from Customer to IBM:
A. Hardware:
Set-up hardware of two printed circuit boards and their components which
need only be mechanically good
Selected quantities of printed circuit boards (up to [*] per Part Number)
Components required for assembly
B. Data and Set-up Drawings
Bill of Materials
Assembly prints and drawings sufficient for solder stencil fabrication
and placement machine programming
Component placement (centroid) data
Gerber data
b. Products from IBM to Customer:
The selected quantity of completed board assemblies (up to 400 per Part
Number)
1.3 Changes to Statement of Work
Customer may, at any time and from time to time, by written notice to IBM,
request changes to the part numbers, specifications, or work scope. IBM shall
submit a written report to Customer setting forth the probable effect, if
any, of the requested change in regard to the work and the effect on any
change in prices, payments or delivery. IBM shall not proceed with any change
until authorized in writing by Customer. The parties shall promptly amend
this Agreement to incorporate any agreed changes.
2. DELIVERY
2.1 Customer requests IBM to turnaround this work in 10 business days after
IBM's receipt of all Items.
2.2 All Product will be shipped to Customer FOB Collect from Endicott, New
York. Title to and risk of loss for products shall pass to Customer upon
delivery to Customer's carrier except if product is given to Customer's
carrier in Bromont, Canada, this will not be deemed to alter the passage of
title in the United States. In the event of a dispute regarding passage of
title to products, the parties agree title will be deemed to have passed in
the United States as this is a transaction between two United States
companies which title and sale takes place in the United States.
3. SPECIAL ITEMS.
3.1 Damage to Items
In case of damage to or deterioration, destruction or loss of any Items
during the processing such that completion of the processing is rendered
impracticable, IBM will repeat or continue the processing without charge
provided Customer provides a replacement Item without cost to IBM. IBM shall
have no other liability with respect to damaged or lost Items and shall not
be responsible for the value of such Items.
3.2 Acceptance and Rejection
3.2.1 Acceptance
Acceptance or rejection of Product shall be determined by Customer comparing
the output produced by IBM for conformance to Attachment A, Quality and/or
Engineering Specifications or the requirements specified in
Attachment 1 Page 2 3916001
* Information omitted for confidential treatment.
<PAGE> 12
the Scope of Work above in Section 1.1 Customer will notify IBM whether the
Product is accepted or rejected within ten (10) calendar days from the date of
shipment. Any Product not expressly rejected by Customer within this time period
shall be deemed accepted.
2.2 Rejection
In the case of rejection Customer shall:
1. promptly notify IBM in writing of the basis for such rejection,
2. follow IBM's instructions for the return of the Product, and
3. return such Product freight collect to IBM's designated facility.
If IBM agrees the Product is defective, IBM will repair the rejected Product or
issue a credit for the purchase price of the service performed by IBM applicable
to the rejected Product.
If IBM uses Items and these Items fail to meet specifications, Customer will
waive its right of rejection.
3.3 Warranties
IBM warrants that all Services performed or Products delivered hereunder to be
free from defects in material and workmanship for a period thirty (30) days
from the date of shipment by IBM to Customer. IBM shall, at its option, repair
any defective Product, or issue a credit equal to the purchase price of the
Service performed by IBM, provided that Customer complies with Section 3.2.2
above.
IBM makes no warranty or representation regarding the infringement of the
intellectual property rights of third parties.
THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
3.4 Used Parts
Each IBM product is manufactured from new parts, or new and used parts. In some
cases, the product may not be new and may have been previously installed.
Regardless of the product's production status, our warranty terms apply. Where a
type of services involves the exchange of a product or part, the item IBM or
your reseller replaces becomes yours. The replacement may not be new, but will
be in good working order.
4. NOTICES
Note to Customer - please insert the name and address of the individual who
will be your contact for this agreement:
Customer Contact: IBM Contact:
_____________________________ Wade Hooker
IBM Microelectronics
_____________________________ D/U 13G
1701 North Street
_____________________________ Endicott, NY 13760
_____________________________
_____________________________
Please supply the name and addresses for the following:
Ship To Name and Address: Bill To Name and Address:
Mark Badeley ______________________________________
Mercury Customer Systems, Inc.
199 Riverneck Road ______________________________________
Chelmsford, MA 01824
______________________________________
______________________________________
5. Term of Agreement
This Agreement shall begin on the date signed by IBM, and shall expire on
04/30/98.
Attachment 1 Page 4 3916001
<PAGE> 13
Attachments to Attachment 1:
If Terms and Conditions of this IBM Quotation 3916001 are in conflict with
those of the existing Supplement to the Purchase Offer Agreement V1201, as
amended, then Terms and Conditions of the Supplement to the Purchase Offer
Agreement take precedence.
page 5 3916001
<PAGE> 14
Attachment 2
*
* Information omitted for confidential treatment.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-41139) of our report dated August 28, 1997, except for the
information in the final paragraph of Note F, as to which the date is December
12, 1997, on our audits of the consolidated financial statements of Mercury
Computer Systems, Inc. We also consent to the reference to our firm under the
captions "Experts" and "Selected Consolidated Financial Data."
COOPERS & LYBRAND L.L.P.
BOSTON, MASSACHUSETTS
JANUARY 22, 1998
