<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999 Commission File Number 0-23599
MERCURY COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2741391
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
199 RIVERNECK ROAD 01824
CHELMSFORD, MA (Zip Code)
(Address of principal executive offices)
978-256-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Number of shares outstanding of the issuer's classes of common stock as of
April 30, 1999:
Class Number of Shares Outstanding
-------------------------------------- ----------------------------
Common Stock, par value $.01 per share 10,290,366
Total number of pages 15
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MERCURY COMPUTER SYSTEMS, INC.
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1999 and
June 30, 1998 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and March 31, 1998 and for the Nine
Months Ended March 31, 1999 and March 31, 1998 4
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1999 and March 31, 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 2. Use of Proceeds from Registered Securities 12
Item 6. Exhibits and Reports Filed on Form 8-K 13
SIGNATURE 14
EXHIBIT INDEX 15
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1998
--------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,955 $ 6,054
Marketable securities 5,980 10,077
Trade accounts receivable, net of allowances of $291 and
$218 at March 31, 1999 and June 30, 1998, respectively 18,509 17,143
Contracts in progress 668 --
Inventory 10,451 9,125
Deferred income taxes, net 1,669 1,669
Prepaid expenses and other current assets 983 1,255
------- -------
Total current assets 46,215 45,323
Marketable securities 18,577 18,889
Property and equipment, net 23,551 8,466
Capitalized software costs, net 449 104
Deferred income taxes, net 429 429
Other assets 266 358
------- -------
Total assets $89,487 $73,569
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY Current
liabilities:
Accounts payable $ 5,235 $ 3,368
Accrued expenses 4,477 2,804
Accrued compensation 4,572 3,316
Billings in excess of revenues and customer advances 942 1,017
Income taxes payable 1,692 2,024
------- -------
Total current liabilities 16,918 12,529
Commitments and contingencies (Note E) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized and
none issued and outstanding -- --
Common stock, $.01 par value; 25,000,000 shares authorized,
10,279,653 and 9,973,491 shares issued and outstanding at
March 31, 1999 and June 30, 1998, respectively 103 100
Additional paid-in capital 28,075 25,961
Retained earnings 44,455 35,483
Accumulated other comprehensive income (64) (179)
Related parties notes receivable -- (325)
------- -------
Total stockholders' equity 72,569 61,040
------- -------
Total liabilities and stockholders' equity $89,487 $73,569
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
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MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $27,225 $22,364 $76,885 $62,027
Cost of revenue 8,229 7,832 25,295 21,776
------- ------- ------- -------
Gross profit 18,996 14,532 51,590 40,251
Operating expenses:
Selling, general and administrative 8,668 7,104 24,330 20,595
Research and development 5,373 3,749 14,749 10,535
------- ------- ------- -------
Total operating expenses 14,041 10,853 39,079 31,130
Income from operations 4,955 3,679 12,511 9,121
Interest income, net 313 263 1,008 713
Other income (expenses), net (24) (7) 282 (50)
------- ------- ------- -------
Income before income taxes 5,244 3,935 13,801 9,784
Provision for income taxes 1,835 1,495 4,829 3,765
------- ------- ------- -------
Net income $ 3,409 $ 2,440 $ 8,972 $ 6,019
======= ======= ======= =======
Net income per share:
Basic $ 0.33 $ 0.29 $ 0.89 $ 0.95
======= ======= ======= =======
Diluted $ 0.31 $ 0.24 $ 0.83 $ 0.69
======= ======= ======= =======
Weighted average shares outstanding:
Basic 10,236 8,476 10,127 6,333
======= ======= ======= =======
Diluted 10,888 9,991 10,765 8,778
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
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MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
1999 1998
------------------------
<S> <C> <C>
Cash flows provided from operating activities:
Net income $ 8,972 $ 6,019
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,978 2,438
Deferred income taxes -- (332)
Provision for doubtful accounts 116 --
Changes in assets and liabilities:
Trade accounts receivable (1,326) (4,686)
Contracts in progress (668) 1,096
Inventory (1,415) (1,671)
Prepaid expenses and other current assets 308 (586)
Other assets 70 (31)
Accounts payable 1,866 72
Accrued expenses and compensation 2,926 2,580
Billings in excess of revenues and customer advances (67) (1,349)
Income taxes payable (338) (610)
-------- --------
Net cash provided by operating activities 13,422 2,940
Cash flows from investing activities:
Sale of marketable securities 76,609 --
Purchases of marketable securities (72,204) (15,858)
Purchases of property and equipment (17,618) (4,172)
Capitalized software development costs
(775) (65)
Notes receivable from related parties 325 --
-------- --------
Net cash used in investing activities (13,663) (20,095)
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 18,578
Proceeds from exercise of stock options and warrants 2,117 363
-------- --------
Net cash provided by financing activities 2,117 18,941
-------- --------
Effect of exchange rate change on cash and cash equivalents 25 209
-------- --------
Net change in cash and cash equivalents 1,901 1,995
Cash and cash equivalents at beginning of period 6,054 15,193
-------- --------
Cash and cash equivalents at end of period $ 7,955 $ 17,188
======== ========
Cash paid during the period for:
Interest -- --
Income taxes $ 4,361 $ 4,720
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
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MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
These consolidated financial statements should be read in conjunction with the
Company's financial statements and footnotes included in the Company's Form 10K
for fiscal year 1998 filed with the Securities and Exchange Commission. The
interim financial data as of March 31, 1999 and for the three and nine months
ended March 31, 1999 and March 31, 1998 are unaudited; however, in the opinion
of Mercury Computer Systems Inc, (the "Company"), the interim data includes all
adjustments, consisting only of normal recurring adjustments necessary for a
fair statement of the results for the interim periods.
B. INVENTORY
MARCH 31, 1999 JUNE 30, 1998
(IN THOUSANDS) (IN THOUSANDS)
-------------- --------------
Raw materials $ 3,499 $4,707
Work in process 4,013 2,814
Finished goods 2,939 1,604
------- ------
Total $10,451 $9,125
======= ======
C. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per common share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1999 1998 1999 1998
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net income $ 3,409 $2,440 $ 8,972 $6,019
Shares used in computation:
Weighted average common shares
outstanding used in computation of basic net income per share 10,236 8,476 10,127 6,333
Dilutive effect of convertible preferred stock -- 852 -- 1,989
Dilutive effect of stock options 652 663 638 456
------- ------ ------- ------
Shares used in computation of diluted net income per share 10,888 9,991 10,765 8,778
======= ====== ======= ======
Basic net income per share $ 0.33 $ 0.29 $ 0.89 $ 0.95
======= ====== ======= ======
Diluted net income per share $ 0.31 $ 0.24 $ 0.83 $ 0.69
======= ====== ======= ======
</TABLE>
Options to purchase 78,667 and 0 shares of common stock outstanding during the
three months ended March 31, 1999 and March 31, 1998, respectively, were not
included in the calculation of diluted net income per common share because the
option price was greater than the average market price of the common shares
during the period. Options to purchase 56,016 and 5,980 shares of common stock
were outstanding during the nine months ended March 31, 1999 and March 31, 1998,
respectively, but were not included in the calculation of diluted net income per
common share because the option price was greater than the average market price
of the common shares during the period.
D. COMPREHENSIVE INCOME
Mercury's total comprehensive income was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $3,409 $2,440 $8,972 $6,019
Other comprehensive income, net of tax:
Foreign currency translation adjustments (38) (40) 77 (41)
Unrealized gains/(losses) on securities (15) -- (2) --
------ ------ ------ ------
Other comprehensive income (53) (40) 75 (41)
Total comprehensive income $3,356 $2,400 $9,047 $5,978
====== ====== ====== ======
</TABLE>
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E. 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. As of December 12, 1997 the total
deficiency attributable to the proposed adjustments was $4,181,000, including
penalties and interest in the amount of $1,591,000. The Company has appealed 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.
F. NEW ACCOUNTING PRONOUNCEMENTS
In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement supercedes 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.
In March 1998, the American Institute of Certified Public Accountants issued SOP
98-1, "Internal Use Software," which provides guidance on the accounting for the
costs of software developed or obtained for internal use. SOP 98-1 is effective
for fiscal years beginning after December 15, 1998. The Company will adopt this
statement's provisions for its 2000 fiscal year which commences on July 1, 1999.
Management does not expect the statement to have a material impact on its
financial position or results of operations.
On June 15, 1998 the FASB issued SFAS No. 133 " Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for all fiscal
years beginning after June 15, 1999. Accordingly, the Company will adopt this
statement's provisions for its 2000 fiscal year which commences on July 1, 1999.
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and the type
of hedge transaction. Management of the Company anticipates that, due to its
limited use of derivative instruments, the adoption of SFAS No. 133 will not
have a material impact on its financial position or results of operations.
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MERCURY COMPUTER SYSTEMS, INC.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission may contain statements which are not historical facts but
which are "forward-looking statements" that involve risks and uncertainties. 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. These statements are based on the Company's current
expectations and estimates as to prospective events and circumstances about
which there can be no firm assurances given. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made.
As it is not possible to predict every new factor that may emerge,
forward-looking statements should not be relied upon as a prediction of actual
future financial condition or results. Important factors that may cause the
Company's actual results to differ from forward-looking statements are
referenced in the Company's Form 10K filed annually with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS:
REVENUES
The Company's total revenues increased 22% from $22.4 million during the three
months ended March 31, 1998 to $27.2 million during the three months ended March
31, 1999. The Company's total revenues increased 24% from $62.0 million during
the nine months ended March 31, 1998 to $76.9 million during the nine months
ended March 31, 1999.
Defense electronics revenues increased 24% from $17.6 million or 79% of total
revenues during the three months ended March 31, 1998 to $21.7 million or 80% of
total revenues during the three months ended March 31, 1999. Defense electronics
revenues increased 22% from $48.4 million or 78% of total revenues during the
nine months ended March 31, 1998 to $58.7 million or 76% of total revenues
during the nine months ended March 31, 1999. Increases in defense electronic
revenues were due primarily to continued strong unit demand for defense
electronics products, largely comprised of advanced military applications in
radar, sonar and airborne surveillance.
Medical imaging revenues increased 45% from $2.6 million or 11% of total
revenues during the three months ended March 31, 1998 to $3.8 million or 14% of
total revenues during the three months ended March 31, 1999. Medical imaging
revenues increased 46% from $7.7 million or 12 % of total revenues during the
nine months ended March 31, 1998 to $11.2 million or 15% of total revenues
during the nine months ended March 31, 1999. Increases in medical imaging
revenues are reflective of the Company's ongoing investment in this business,
expansion into new modalities and the resulting increased unit demand.
Other revenues, which include the Shared Storage and other commercial
businesses, decreased 23% from $2.2 million or 10% of total revenues during the
three months ended March 31, 1998 to $1.7 million or 6% of total revenues during
the three months ended March 31, 1999. Other revenues increased 17% from $5.9
million or 10% of total revenues during the nine months ended March 31, 1998 to
$7.0 million or 9% of total revenues during the nine months ended March 31,
1999. The decrease in other revenues, third quarter versus third quarter, are
due primarily to a decline in unit demand in the Company's other commercial
businesses, offset in part by an increase in unit demand in the Shared Storage
business. The increase in other revenues during the nine month period, year over
year, are attributable to a sharp increase in the Shared Storage business while
the Company's commercial business has decreased slightly over the same period.
COST OF REVENUES
Cost of revenues increased 5% from $7.8 million or 35% of total revenues during
the three months ended March 31, 1998 to $8.2 million or 30% of total revenues
during the three months ended March 31, 1999. Cost of revenues increased 16%
from $21.8 million or 35% of total revenues during the nine months ended March
31, 1998 to $25.3 million or 33% of total revenues during the nine months ended
March 31, 1999. Cost increases, in absolute terms, are the result of increased
sales volume. Cost as a percent of revenues, particularly during the third
quarter, reflects favorable product mix, component cost reductions and modest
efficiency gains.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general, and administrative expenses increased 22% from $7.1 million or
32% of total revenues during the three months ended March 31 1998 to $8.7
million or 32% of total revenues during the three months ended March 31, 1999.
Selling, general and administrative expenses increased 18% from $20.6 million or
33% of total revenues during the nine months ended March 31, 1998 to $24.3
million or 32% of total revenues during the nine months ended March 31, 1999.
These increases reflect the hiring of additional sales and administrative
personnel, information system investments, increased commissions and marketing
related costs, all of which are associated with higher sales volume.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 43% from $3.7 million or 17% of
total revenues during the three months ended March 31, 1998 to $5.4 million or
20% of total revenues during the three months ended March 31, 1999. Research and
development expenses increased 40% from $10.5 million or 17% of total revenues
during the nine months ended March 31, 1998 to $14.7 million or 19% of total
revenues during the nine months ended March 31, 1999. The increase was primarily
due to the hiring of additional engineers required to enhance the features and
functionality of current products as well as to develop next generation
products. Expenses are running higher than management's initial target levels as
the Company is working on strategic development programs to deliver important
new technologies in support of market requirements.
INCOME FROM OPERATIONS
Income from operations increased 35% from $3.7 million or 16% of total revenues
during the three months ended March 31, 1998 to $5.0 million or 18% of total
revenues during the three months ended March 31, 1999. Income from operations
increased 37% from $9.1 million or 15% of total revenues during the nine months
ended March 31, 1998 to $12.5 million or 16% of total revenues during the nine
months ended March 31, 1999.
Included in income from operations during the three months ended March 31, 1998
were $300,000 in hardware and software revenues and $1.1 million in direct
expenses related to the Shared Storage business. Included in income from
operations during the three months ended March 31, 1999 were $424,000 in
hardware and software revenues and $937,000 in direct expenses related to the
Shared Storage business. Included in income from operations during the nine
months ended March 31, 1998 were $385,000 in hardware and software revenues and
$2.6 million in direct expenses related to the Shared Storage business. Included
in income from operations during the nine months ended March 31, 1999 were $1.7
million in hardware and software revenues and $3.0 million in direct expenses
related to the Shared Storage business. Direct expenses include product cost,
selling and marketing, service and integration as well as development costs.
INTEREST INCOME, NET
Interest income, net, increased 19% from $263,000 during the three months ended
March 31, 1998 to $313,000 during the three months ended March 31, 1999.
Interest income, net, increased 41% from $713,000 during the nine months ended
March 31, 1998 to $1.0 million during the nine months ended March 31, 1999.
These increases reflect higher average cash balances attributable, primarily, to
the Company's initial public offering. Lower yields achieved on investments
offset these higher average balances. These lower yields reflect a shift in
investment strategy from taxable instruments to non-taxable instruments.
PROVISION FOR INCOME TAX
The Company recorded a tax provision of $1.5 million during the three months
ended March 31, 1998 reflecting a 38% tax rate as compared to a $1.8 million tax
provision during the three months ended March 31, 1999, reflecting a 35% tax
rate. The Company recorded a tax provision of $3.8 million during the nine
months ended March 31, 1998 reflecting a 38% tax rate as compared to a $4.8
million tax provision during the nine months ended March 31, 1999 reflecting a
35% tax rate. The reduced tax rate was due, in part, to a one-time tax provision
adjustment during the previous quarter to reflect Congressional extension of the
research and experimentation tax credit through June, 1999. Additionally, the
aforementioned shift in investment strategy from taxable money market
instruments to non-taxable securities has contributed to the reduced tax rate.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash and marketable investments of
approximately $32.5 million. During the nine months ended March 31, 1999, the
Company generated $13.4 million in cash from operations compared to $2.9 million
generated during the nine months ended March 31, 1998. The increase in cash
generated from operations was due primarily to increased profitability and
effective management of working capital. Days sales outstanding (DSO) decreased
from 70 days at March 31, 1998 to 61 days at March 31, 1999.
During the nine months ended March 31, 1999, the Company's investing activities
used cash of $13.7 million which consisted of $8.4 million for the purchase of
an existing office building, $6.2 million related to the development of
additional office space, $3.0 million for computers, furniture, equipment and
leasehold improvements and $775,000 for capitalized software. These outflows
were offset by the sale of marketable securities of $4.4 million and a reduction
in notes receivable from related parties amounting to $325,000. During the nine
months ended March 31, 1998, the Company's investing activities used cash of
$20.1 million, consisting of $15.9 for the purchase of marketable securities,
$2.9 million for computers, furniture, equipment and leasehold improvements and
$1.2 million related to the development of additional office space.
During the nine months ended March 31, 1999, the Company's financing activities
provided $2.1 million in cash, all related to the issuance of stock options.
During the nine months ended March 31, 1998, the Company's financing activities
generated proceeds of $18.6 million from the Company's initial public offering
and $363,000 in cash from the issuance of stock options.
The Company believes that its available cash and cash generated from operations
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 in the notes to the financial statements.
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.
SHARED STORAGE BUSINESS UNIT
On March 1st, 1999, the company issued a Confidential Information Memorandum
seeking alternative ways to fund the continuing development of the Shared
Storage business unit. This business unit was created to exploit some of
Mercury's innovative software developments. It has evolved into software for use
in applications and market segments that, while exciting and potentially offer a
large return, are outside of Mercury's core businesses and strengths. There can
be no assurances that the Company will obtain such funding.
CORPORATE DEVELOPMENT
On April 13th, 1999, Mercury announced it had signed a Letter of Intent to form
a new joint venture company with Sarnoff Corporation, the developer of color
television and a pioneer in the creation of high-definition digital TV.
Combining the intellectual property of both companies, this new venture will
provide the broadcast and cable industries with products and solutions that will
significantly increase the flexibility of a digital TV infrastructure. The new
company will provide products and services that allow an economical entry point
to DTV services, with the option of expanding performance and features to meet
the demands of the evolving DTV audience. It is expected that the new
corporation, to be owned 50% by each of the Company and Sarnoff, will be in
place by June 30, 1999.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
company's software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" ("Y2K") requirements. Generally, on a
stand-alone basis Mercury's products are not date dependent and therefore are
not susceptible to Y2K issues like other general purpose computer companies.
However, it should be understood that the majority of Mercury's product
performance is dependent upon third party host computing environments.
Mercury's Y2K Initiative: In the Company's Annual Report on Form 10K for the
fiscal year ended June 30, 1998, the Company made disclosures regarding the
following matters: (i) the Company's state of Y2K readiness of the hardware and
software products sold by the Company ("Products"), the information technology
systems used in its operations ("IT Systems"), and its non-IT Systems, such as
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building security, voice mail and other systems, (ii) the expenditures expected
to be incurred in connection with identifying, evaluating and settling any Y2K
compliance issues, (iii) the risks associated with identified Y2K issues, and
(iv) the Company's intention to develop a contingency plan to address identified
Y2K compliance issues.
State of Readiness: Since the Company's original Y2K disclosure, the Company has
reprogrammed the source code underlying its current financial and accounting
software to make it Y2K compliant. Testing of the reprogrammed software is on
schedule and is expected to be completed by May 31, 1999. The Company also plans
to upgrade certain other business systems supporting human resources and sales
information data bases. These upgrades are expected to be completed by June 30,
1999. The Company has evaluated IT systems and has concluded that the majority
of such systems are compliant. Plans are in place to upgrade the remaining IT
system components with an objective of bringing the entire infrastructure into
compliance by June 30, 1999.
The Company continues its assessment of all current versions of its Products and
believes they are Y2K compliant. The Company has determined that it is not
feasible to test all prior versions of its Products. To assess whether material
third parties with whom the Company conducts business (including professional
service providers) are Y2K compliant, the Company is engaged in activities to
examine their state of readiness, primarily through the use of third party
questionnaires.
Costs: Based on its investigation to date, the Company does not expect the total
cost of its Y2K readiness initiative to have a material adverse effect on the
Company's business or financial results. It is estimated that the cost related
to Y2K will fall between $100,000 and $500,000.
Contingency Plan: To minimize potential disruptions, the Company intends to
adopt a contingency plan as necessary to address any material issues raised
during the completion of the assessment and testing phases of the Project, or
any material issues raised in connection with the response by material third
parties to the Company's questionnaires.
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MERCURY COMPUTER SYSTEMS, INC.
PART II. OTHER INFORMATION
(d) Use of Proceeds from Registered Securities.
During the three months of January, February and March 1999, the Company used
approximately $1.4 million of proceeds received from the sale of 2,000,000
shares in the Company's initial public offering which closed on February 4, 1998
for the construction of an additional facility as discussed in the Company's
Form 10K for fiscal year 1998 filed with the Securities and Exchange Commission.
The Company intends to own and occupy the majority of this newly constructed
building, which consists of 91,000 square feet. A portion of the building will
be leased to an unaffiliated third party. The Company has also purchased its
current headquarters building for $8.4 million which consists of 96,000 square
feet. The Company is currently exploring financing alternatives for both of
these properties.
12
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits. See as listed
Exhibit
Item #
-------
27.1 Financial Data Schedule
(b) Reports on Form 8-K. None.
13
<PAGE> 14
MERCURY COMPUTER SYSTEMS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCURY COMPUTER SYSTEMS, INC.
Date: May 12, 1999 By: /s/ G. MEAD WYMAN
--------------------------------------------
G. Mead Wyman
Senior Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
<PAGE> 15
MERCURY COMPUTER SYSTEMS, INC.
EXHIBIT INDEX
Exhibit
Item #
- -------
27.1 Financial Data Schedule
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 7,955
<SECURITIES> 24,557
<RECEIVABLES> 18,509
<ALLOWANCES> 291
<INVENTORY> 10,451
<CURRENT-ASSETS> 46,215
<PP&E> 38,278
<DEPRECIATION> 14,727
<TOTAL-ASSETS> 89,487
<CURRENT-LIABILITIES> 16,918
<BONDS> 0
0
0
<COMMON> 103
<OTHER-SE> 72,466
<TOTAL-LIABILITY-AND-EQUITY> 89,487
<SALES> 27,225
<TOTAL-REVENUES> 27,225
<CGS> 8,229
<TOTAL-COSTS> 8,229
<OTHER-EXPENSES> 13,752
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,244
<INCOME-TAX> 1,835
<INCOME-CONTINUING> 3,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,409
<EPS-PRIMARY> .33
<EPS-DILUTED> .31
</TABLE>
