<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 December 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
January 31, 2000:
Class Number of Shares Outstanding
- -------------------------------------- ----------------------------
Common Stock, par value $.01 per share 21,112,103
Total number of pages 16
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MERCURY COMPUTER SYSTEMS, INC.
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and June 30, 1999 3
Consolidated Statements of Operations for the Three Months
Ended December 31, 1999 and 1998 and for the Six Months
Ended December 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
PART II. OTHER INFORMATION
Item 2. Use of Proceeds from Registered Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports Filed on Form 8-K 13
SIGNATURE 14
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share data)
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,523 $ 3,676
Marketable securities 40,261 12,762
Trade accounts receivable, net of allowances
of $352 and $376 at December 31, 1999 and June 30, 1999, respectively 24,463 28,915
Inventory 11,171 12,431
Deferred income taxes, net 2,617 2,617
Prepaid expenses and other current assets 1,024 1,392
-------- -------
Total current assets 84,059 61,793
Marketable securities 14,060 8,978
Investment in joint venture 1,059 --
Property and equipment, net 24,907 25,325
Deferred income taxes, net 668 668
Other assets 716 747
-------- -------
Total assets $125,469 $97,511
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,664 $ 5,580
Accrued expenses 2,784 3,694
Accrued compensation 4,722 4,292
Capital lease - short term 487 434
Notes payable - short term 508 --
Billings in excess of revenues and customer advances 2,069 3,169
Income taxes payable 3,049 2,312
-------- -------
Total current liabilities 17,283 19,481
Commitments and contingencies -- --
Capital lease - long term 550 590
Notes payable - long term 13,947 --
Stockholders' equity:
Common stock, $.01 par value: 40,000,000 shares authorized;
20,977,298 and 10,310,877 shares issued and outstanding
at December 31, 1999 and June 30, 1999, respectively 210 103
Additional paid-in capital 30,479 28,515
Retained earnings 63,073 48,945
Cumulative other comprehensive income (73) (123)
-------- -------
Total stockholders' equity 93,689 77,440
-------- -------
Total liabilities and stockholders' equity $125,469 $97,511
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
3
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MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue $35,405 $25,598 $73,268 $49,660
Cost of revenue 9,333 8,606 19,370 17,066
------- ------- ------- -------
Gross profit 26,072 16,992 53,898 32,594
Operating expenses:
Selling, general and administrative 10,144 8,304 19,249 15,662
Research and development 6,851 4,669 12,388 9,376
------- ------- ------- -------
Total operating expenses 16,995 12,973 31,637 25,038
------- ------- ------- -------
Income from operations 9,077 4,019 22,261 7,556
Interest income 574 326 896 695
Interest expense (106) -- (124) --
Equity loss in joint venture (926) -- (1,441) --
Other income, net 93 261 77 306
------- ------- ------- -------
Income before income taxes 8,712 4,606 21,669 8,557
Provision for income taxes 2,876 1,572 7,541 2,994
------- ------- ------- -------
Net income $ 5,836 $ 3,034 $14,128 $ 5,563
======= ======= ======= =======
Net income per share:
Basic $ .28 $ .15 $ .68 $ .28
======= ======= ======= =======
Diluted $ .26 $ .14 $ .63 $ .26
======= ======= ======= =======
Weighted average shares outstanding:
Basic 20,871 20,234 20,779 20,144
======= ======= ======= =======
Diluted 22,660 21,574 22,370 21,408
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
4
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MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
<TABLE>
<CAPTION>
Six months ended
December 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows provided from operating activities:
Net income $ 14,128 $ 5,563
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization of property and equipment 2,388 1,666
Amortization of capitalized software development costs 156 261
Equity loss in joint venture 1,441 --
Provision for inventory write-downs 1,303 1,796
Changes in assets and liabilities:
Trade accounts receivable 4,488 949
Inventory (99) (1,909)
Prepaid expenses and other current assets 376 (548)
Other assets (117) 86
Accounts payable (1,914) 2,131
Accrued expenses and compensation (489) 1,165
Billings in excess of revenues and customer advances (1,100) (218)
Income taxes payable 734 (918)
-------- --------
Net cash provided by operating activities 21,295 10,024
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (71,616) (41,723)
Sale of marketable securities 38,944 38,128
Purchases of property and equipment (1,701) (6,787)
Investment in joint venture (2,500) --
Capitalized software development costs -- (575)
Note receivable from related parties -- 325
-------- --------
Net cash used in investing activities (36,873) (10,632)
-------- --------
Cash flows from financing activities:
Proceeds from employee stock purchase plan and the exercise
of stock options 2,071 1,513
Proceeds from issuance of notes 14,500 --
Payments of debt (45)
Payments of capital lease obligations (229) --
-------- --------
Net cash provided by financing activities 16,297 1,513
-------- --------
Net increase in cash and cash equivalents 719 905
Effect of exchange rate change on cash and cash equivalents 128 (61)
Cash and cash equivalents at beginning of period 3,676 6,054
-------- --------
Cash and cash equivalents at end of period $ 4,523 $ 6,898
======== ========
Cash paid during the period for:
Interest $ 124 $ --
Income taxes 6,532 4,109
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
5
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MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS EXCEPT PER SHARE DATA)
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
10-K, filed with the Securities and Exchange Commission. In the opinion of
management, the accompanying unaudited financial statements include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the consolidated financial position, results of operations and cash flows
of Mercury Computer Systems, Inc.
B. INVENTORY
December 31, June 30,
1999 1999
------------ --------
Raw materials $ 2,592 $ 3,508
Work in process 5,676 6,841
Finished goods 2,903 2,082
------- -------
Total $11,171 $12,431
======= =======
C. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per common share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 5,836 $ 3,034 $14,128 $ 5,563
======= ======= ======= =======
Shares used in computation:
Weighted average common shares outstanding used
in computation of basic net income per share 20,871 20,234 20,779 20,144
Dilutive effect of stock options 1,789 1,340 1,591 1,264
------- ------- ------- -------
Shares used in computation of diluted net
income per share 22,660 21,574 22,370 21,408
======= ======= ======= =======
Basic net income per share $ .28 $ .15 $ .68 $ .28
======= ======= ======= =======
Dilutive net income per share $ .26 $ .14 $ .63 $ .26
======= ======= ======= =======
</TABLE>
Options to purchase 0 and 11,685 shares of common stock were outstanding during
the three months ended December 31, 1999 and 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 25,587 and 89,380 shares of common stock
were outstanding during the six months ended December 31, 1999 and 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.
D. NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which was issued
in June 1998. SFAS No. 137 defers the effective date of SFAS No. 133 to all
fiscal quarters beginning after June 15, 2000. Accordingly, the Company will
adopt the provisions of SFAS No. 133 for its fiscal year 2001, which commences
on July 1, 2000. 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 accumulated other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and the type
6
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MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABLES IN THOUSANDS EXCEPT PER SHARE DATA)
of hedge transaction. Management 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.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 summarizes the staff's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 will be required in the Company's first quarter of the
fiscal year 2001. The effects of applying this guidance will be reported as a
cumulative effect adjustment resulting from a change in accounting principle.
The Company does not expect the application to have a material effect on their
financial statements, however the final evaluation of SAB 101 is not yet
complete.
E. COMPREHENSIVE INCOME
Mercury's total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net income $5,836 $3,034 $14,128 $5,563
Other comprehensive income, net of tax:
Foreign currency translation adjustments 2 99 90 115
Unrealized gain or (loss) on securities (48) (14) (60) 13
------ ------ ------- ------
Other comprehensive income (46) 85 30 128
------ ------ ------- ------
Total comprehensive income $5,790 $3,119 $14,158 $5,691
====== ====== ======= ======
</TABLE>
F. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
As of December 31, 1999, the Company had eight principal operating segments:
North American defense and commercial, medical imaging, international defense
and commercial, shared storage, digital wireless, digital video, research and
development, and other commercial businesses. These operating segments were
determined based upon the nature of the products offered to customers, the
market characteristics of each operating segment, and the Company's management
structure. The Company has five reportable segments: North American defense and
commercial segment, medical imaging segment, shared storage segment, other
defense and commercial segment, and research and development segment. The other
defense and commercial segment is comprised of international defense and
commercial, digital wireless, digital video, and other commercial businesses
unrelated to the defense, medical imaging or shared storage businesses.
The accounting policies of the business segments are the same as those described
in "Note B: Summary of Significant Accounting Policies" in the Company's Annual
Report on Form 10-K for the year ended June 30, 1999. The following table
provides operating segment information for the three-month and six-month periods
ended December 31, 1999 and 1998:
7
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MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABLES IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
North
American Other Defense
Defense and Medical Shared and Research and
Commercial Imaging Storage Commercial Development
Segment (2) Segment Segment Segment Segment Corporate Consolidated
----------- ------- ------- ------------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31, 1999:
Sales to unaffiliated customers $23,819 $ 6,875 $ 1,228 $3,483 -- -- $35,405
Income (loss) before taxes (1) 16,637 2,807 77 399 (6,417) (4,791) 8,712
Depreciation/amort. expense 34 11 23 40 301 878 1,287
THREE MONTHS ENDED DECEMBER 31, 1998:
Sales to unaffiliated customers $17,814 $ 4,282 $ 689 $2,813 -- -- $25,598
Income (loss) before taxes (1) 11,245 1,740 (379) 912 (4,421) (4,491) 4,606
Depreciation/amort. expense 37 15 20 63 281 560 976
SIX MONTHS ENDED DECEMBER 31, 1999:
Sales to unaffiliated customers $54,072 $11,836 $ 1,600 $5,760 -- -- $73,268
Income (loss) before taxes (1) 38,576 4,825 (472) 798 (11,642) 10,416) 21,669
Depreciation/amort. expense 68 22 44 74 573 1,763 2,544
SIX MONTHS ENDED DECEMBER 31, 1998:
Sales to unaffiliated customers $36,209 $ 7,414 $ 1,252 $4,785 -- -- $49,660
Income (loss) before taxes (1) 22,750 3,018 (768) 1,573 (8,896) (9,120) 8,557
Depreciation/amort. expense 73 35 39 98 547 1,135 1,927
</TABLE>
(1) Interest income, interest expense and foreign exchange gain/(loss) are
reported in Corporate and not allocated to the principal operating
segments. Only expenses directly related to an operating segment were
charged to the appropriate operating segment. All other expenses for
marketing and administrative support activities that could not be
specifically identified with a principal operating segment were allocated
to Corporate.
(2) The North American defense and commercial segment differs in definition
from the defense market segment described in the Company's management
discussion and analysis ("MD&A"). The defense market segment in the MD&A
refers to the worldwide defense market. The North American defense and
commercial segment is an operating segment as defined by Statement No. 131
and includes (i) the defense business in North America and (ii) a portion
of the Company's North American commercial business.
G. LENDING AGREEMENT
On November 3, 1999, the Company completed a lending agreement with a commercial
financing company, issuing two 7.30% senior secured financing notes ("the
Notes"), due November 2014. The original principal value of the Notes amounted
to $14,500,000. The Company's corporate headquarters and an adjacent building
with a combined cost basis of $17,670,000, secure the Notes.
H. SUBSEQUENT EVENT
On January 18, 2000, the Company completed the sale of its Shared Storage
Business Unit ("SSBU") to International Business Machines Corporation ("IBM").
Anticipated proceeds from the sale total $23.5 million. Payments are structured
with an initial payment of $5.5 million (including $1.0 million to be held in
escrow until the final payment), followed by 12 quarterly payments of $1.5
million plus interest. The quarterly payments are contingent upon IBM's
continued use of the technology. If IBM defaults, Mercury has the right to
recover the assets, including the patent and other intellectual property.
8
<PAGE> 9
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" which 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 10-K filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS :
REVENUES
The Company's total revenues increased 38% from $25.6 million during the three
months ended December 31, 1998 to $35.4 million during the three months ended
December 31, 1999. The Company's total revenues increased 48% from $49.7 million
during the six months ended December 31, 1998 to $73.3 million during the six
months ended December 31, 1999.
Defense electronics revenues increased 31% from $19.2 million or 75% of total
revenues during the three months ended December 31, 1998 to $25.2 million or 71%
of total revenues during the three months ended December 31, 1999. Defense
electronics revenues increased 51% from $37.0 million or 74% of total revenues
during the six months ended December 31, 1998 to $55.8 million or 76% of total
revenues during the six months ended December 31, 1999. The increase in revenues
was 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 61% from $4.3 million or 17% of total
revenues during the three months ended December 31, 1998 to $6.9 million or 19%
of total revenues during the three months ended December 31, 1999. Medical
imaging revenues increased 59% from $7.4 million or 15% of total revenues during
the six months ended December 31, 1998 to $11.8 million or 16% of total revenues
during the six months ended December 31, 1999. The increase in medical imaging
revenues reflects the Company's ongoing investment in this business, expansion
of our customer's computed tomography ("CT") business, and the resulting
increased unit demand.
Other revenues increased 61% from $2.1 million or 8% of total revenues during
the three months ended December 31, 1998 to $3.3 million or 9% of total revenues
during the three months ended December 31, 1999. This increase in other revenues
was due primarily to the increased unit demand for our commercial products,
particularly Shared Storage software products. Other revenues increased slightly
from $5.3 million or 11% of total revenues during the six months ended December
31, 1998 to $5.7 million or 8% of total revenues during the six months ended
December 31, 1999.
COST OF REVENUES
Cost of revenues increased 8% from $8.6 million during the three months ended
December 31,1998 to $9.3 million during the three months ended December 31,
1999. Cost of revenues increased 14% from $17.1 million during the six months
ended December 31,1998 to $19.4 million during the six months ended December 31,
1999. As a percent of total revenues, cost of revenues decreased from 34% for
the three months and six months ended December 31, 1998 to 26% for the three
months and six months ended December 31, 1999, respectively. This decrease in
cost as a percentage of revenue was primarily due to a decline in component
costs and the relationship of fixed manufacturing costs to the higher level of
sales.
9
<PAGE> 10
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general, and administrative expenses increased 22% from $8.3 million
during the three months ended December 31, 1998 to $10.1 million during the
three months ended December 31, 1999. Selling, general, and administrative
expenses increased 23% from $15.7 million during the six months ended December
31, 1998 to $19.2 million during the six months ended December 31, 1999. These
increases reflect the hiring of additional sales and administrative personnel,
increased commissions associated with higher sales volume, and the ongoing
development of the Company's financial, administrative and management
infrastructure to support the Company's growth.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 47% from $4.7 million during the
three months ended December 31, 1998 to $6.9 million during the three months
ended December 31, 1999. Research and development expenses increased 32% from
$9.4 million during the six months ended December 31, 1998 to $12.4 million
during the six months ended December 31, 1999. These increases were due
primarily to the hiring of additional software and hardware engineers to develop
and enhance the features and functionality of the Company's products in response
to increased demand for next generation products.
INCOME FROM OPERATIONS
Income from operations more than doubled from $4.0 million during the three
months ended December 31, 1998 to $9.1 million during the three months ended
December 31, 1999. Income from operations nearly tripled from $7.6 million
during the six months ended December 31, 1998 to $22.3 million during the six
months ended December 31, 1999. This increase is associated with higher sales
volume coupled with improved operating efficiency.
Included in income from operations during the three months ended December 31,
1999 were $1.2 million in software revenues and $1.2 million in direct expenses
related to the shared storage business. Included in income from operations
during the three months ended December 31, 1998 were $689,000 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 six months ended
December 31, 1999 were $1.6 million in hardware and software revenues and $2.1
million in direct expenses related to the shared storage business. Included in
income from operations during the six months ended December 31, 1998 were $1.3
million in hardware and software revenues and $2.0 million in direct expenses
related to the shared storage business. The direct expenses include expenses
from marketing and engineering activities, primarily related to compensation,
trade shows, prototype development and direct costs related to the sale of the
product, including certain hardware costs.
EQUITY LOSS IN JOINT VENTURE
In September, 1999, the Company formed a new joint venture company
("AgileVision") with Sarnoff Corporation, the developer of color television and
a pioneer in the creation of digital television ("DTV"). AgileVision 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. The Company's initial contribution to
AgileVision was $2.5 million in cash. During the three months and six months
ended December 31, 1999, the Company recognized $926,000 and $1.4 million,
respectively, in expenses related to the operation of AgileVision. No expenses
were recognized during the three months or six months ended December 31, 1998.
PROVISION FOR INCOME TAX
The Company recorded a tax provision of $2.9 million during the three months
ended December 31, 1999 reflecting a 33% tax rate as compared to a $1.6 million
tax provision during the three months ended December 31, 1998, reflecting a 34%
tax rate. The Company recorded a tax provision of $7.5 million during the six
months ended December 31, 1999 reflecting a 35% tax rate as compared to a $3.0
million tax provision during the six months ended December 31, 1998 reflecting a
35% tax rate. Though the tax rate remained fairly constant year over year and
quarter over quarter, the tax rate decreased significantly from 36% during the
first quarter of the current fiscal year to 33% during the second quarter. This
decrease in the rate was due to a one-time tax provision adjustment during the
current quarter to reflect congressional extension of the research and
experimentation tax credit.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash and marketable investments of
approximately $58.8 million. During the six months ended December 31, 1999, the
Company generated approximately $21.3 million in cash from operations compared
to $10.0 million generated during the six months ended December 31, 1998. The
increase in cash generated from operations was primarily due to increased
profitability. Days sales outstanding was 62 days and 58 days at December 31,
1999 and 1998, respectively.
During the six months ended December 31, 1999, the Company's investing
activities used cash of $36.9 million which consisted of $32.7 million for the
purchase of marketable securities (net of sales), $2.5 million for the
investment in a joint venture, and $1.7 million for computers, furniture and
equipment. During the six months ended December 31, 1998, the Company's
investing activities used cash of $10.6 million, consisting of $3.6 million for
the purchase of marketable securities (net of sales) $4.8 million for the
development of additional office space, $2.0 million for computers, furniture
and equipment, and $575,000 for capitalized software. These cash outflows were
partially offset by a reduction in notes receivable from related parties
amounting to $325,000.
During the six months ended December 31, 1999 the Company's financing activities
generated cash of $16.3 million, which consisted primarily of $14.5 million in
proceeds received upon the issuance of two 7.30% senior secured financing notes.
These notes are due November 2014. In addition, $2.1 million in cash was
generated from the employee stock purchase plan and the exercise of stock
options. These cash inflows were partially offset by the payment of debt and
capital lease obligations amounting to $274,000. During the six months ended
December 31, 1998, the Company's financing activities provided approximately
$1.5 million in cash, all related to the employee stock purchase plan and the
issuance of stock options.
On January 18, 2000, the Company completed the sale of its Shared Storage
Business Unit ("SSBU") to International Business Machines Corporation ("IBM").
Anticipated proceeds from the sale total $23.5 million. Payments are structured
with an initial payment of $5.5 million (including $1.0 million to be held in
escrow until the final payment), followed by 12 quarterly payments of $1.5
million plus interest. The quarterly payments are contingent upon IBM's
continued use of the technology. If IBM defaults, Mercury has the right to
recover the assets, including the patent and other intellectual property.
Management believes that the Company's available cash, cash generated from
operations, and the cash generated from the sale of SSBU as described above,
will be sufficient to provide for the Company's working capital and capital
expenditure requirements for the foreseeable future. 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.
YEAR 2000 COMPLIANCE
The Company is aware of the potential for industry wide business
disruption which could be caused by computer systems, software products and
embedded micro-processing chips which may be coded to accept only two-digit
entries in the date code field and may not be able to distinguish 20th century
dates from 21st century dates as The Company believes it has implemented a
prudent plan to address these issues within our Company and our supply chain.
State of Readiness. The Company has completed the process of evaluating
the Year 2000 readiness of hardware and software products sold by the Company
("Products"), information technology systems used in its operations ("IT
Systems"), and its non-IT Systems such as building security, voice mail and
other systems. This evaluation has covered a number of phases: (i)
identification of all Products, IT Systems, and non-IT Systems; (ii) assessment
of repair or replacement requirements; (iii) repair or replacement; (iv)
testing; (v) implementation; and (vi) creation of contingency plans in the event
of Year 2000 failures. As the date of this report, the Company has not
experienced any business disruption resulting from any Year 2000 failures from
either its Products, IT Systems, or non-It Systems.
Products. The Company has completed a review of the source code for all
versions of its Products sold after January 1, 1997. Based on such review the
Company believes that such Products are "Year 2000 Compliant," meaning that when
used properly and in conformity with the product information provided by the
Company, the product furnished by the Company will accurately store, display,
process, provide, and/or receive data from, into,
11
<PAGE> 12
and between 1999 and 2000, including leap year calculations, provided that all
technology used in combination with the Company product properly exchanges date
data with the Company product. In general, software provided by the Company does
not require the user to input date fields and depends instead on date
information supplied by host operating systems not manufactured by the Company.
Therefore, the assessment of whether a complete system or device in which a
Product is embedded will operate correctly for an end-user depends in large part
on the Year 2000 Compliance of the system's other components, most of which are
supplied by parties other than the Company. For this reason, end-users must
consult with the manufacturers of host operating systems and test such systems
in their entirety for Year 2000 Compliance. The Company has determined that it
is not feasible to test versions of its Products sold prior to January 1, 1997.
However, based on similarities in source code between prior and current Product
versions, the Company believes that versions of its Products sold prior to
January 1, 1997 are Year 2000 Compliant.
IT and Non-IT Systems. The Company has compiled a comprehensive list of
the Company's IT and non IT systems. Based on the Company's internal assessment,
the Company believes that most of these systems are Year 2000 compliant. The
source code underlying the Company's financial and accounting software has been
reprogrammed and tested using the Company's internal technical resources. The
Company has determined to its satisfaction that its financial and accounting
system is Year 2000 Compliant.
Third Parties. The Company relies, both domestically and internationally,
upon various vendors, governmental agencies, utility companies,
telecommunications service companies, delivery service companies and other
service providers who are outside of Mercury's control. The Company has
completed a questionnaire-based assessment of its primary vendors to assess
their ability to continue to provide goods and services to the Company from,
into and between 1999 and 2000. While the Company has received assurances from
vendors regarding their Year 2000 compliance status, the Company may never be
able to know with certainty whether its vendors are compliant. Failure of
critical vendors to achieve Year 2000 compliance could result in delayed
deliveries of products and services to the Company. If such delays are
extensive, they could have a material adverse effect on the Company's business.
Costs. Most of the Company's effort toward Year 2000 readiness is funded
as ongoing operating expense. Expenditures directly related to the Year 2000
readiness program, consisting of dedicated staff and consulting services, are
estimated at less than $1,000,000.
Risks. The failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent with the Year 2000 issue, resulting in large part from the uncertainty
of the Year 2000 readiness of third-parties outside of the Company's control,
the Company is unable to determine at this time whether the consequences of a
Year 2000 failure will have a material impact on the Company's results of
operations, liquidity, or financial position. The Year 2000 compliance project
is expected to reduce, but not eliminate, the Company's level of uncertainty
about the Year 2000 issue and in particular, about the Year 2000 compliance and
readiness of its critical vendors. The Company believes that, with the
completion of the Year 2000-compliance project, the possibility of significant
interruptions to normal operations has been significantly reduced.
Contingency Plan. The Company has developed a contingency plan for its
information technology infrastructure as well as non-IT elements. This plan
includes provisions for additional customer and facility support.
12
<PAGE> 13
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE RISK MANAGEMENT
There were no material changes in the Company's exposure to market risk from
June 30, 1999.
PART II. OTHER INFORMATION
ITEM 2. Use of Proceeds from Registered Securities: None
ITEM 4. Submission of Matters to a Vote of Security Holders
On November 18, 1999, the Company held a Special Meeting of Stockholders
in lieu of the 1999 Annual Meeting. At the meeting, Dr. Gordon Baty and Sherman
Mullen were reelected as directors for terms ending in 2002. The voting results
were as follows:
Dr. Gordon Baty For 9,465,131 Withheld 12,881
Sherman Mullen For 9,459,974 Withheld 18,038
The other members of the Board of Directors whose terms continued after
the meeting were: Serving a term ending in 2000, James R. Bertelli and R. Schorr
Berman; and Serving a term ending in 2001, Dr. Albert P. Belle Isle and Melvin
Sallen.
At the meeting, the stockholders adopted an amendment to the Company's
Articles of Organization to increase the number of shares of common stock which
the Company has authority to issue from 25,000,000 shares to 40,000,000 shares.
The vote was as follows:
For 9,239,014 Against 223,627 Abstain 15,371
The stockholders also increased the number of shares issuable pursuant to
the Company's 1997 Stock Option Plan from 1,325,000 shares to 2,325,000 shares.
The vote was as follows:
For 5,342,519 Against 2,213,526 Abstain 16,306
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. On February 2, 2000, the Company filed Form 8-K
disclosing the sale of its Shared Storage Business Unit to IBM.
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: February 11, 2000 By: /s/ G. MEAD WYMAN
----------------------------------------------
G. Mead Wyman
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
14
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