<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 September 30, 2000 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
October 31, 2000:
Class Number of Shares Outstanding
-------------------------------------- ----------------------------
Common Stock, par value $.01 per share 21,487,117
Total number of pages 14
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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 September 30, 2000 and
June 30, 2000 3
Consolidated Statements of Operations for the Three
Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 12
PART II. OTHER INFORMATION
Item 2. Use of Proceeds from Registered Securities 12
Item 4. Submission of Matters to a Vote of Security
Holders 12
Item 6. Exhibits and Reports Filed on Form 8-K 12
SIGNATURE 13
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
(Unaudited)
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,755 $ 5,850
Marketable securities 33,434 36,784
Trade accounts receivable, net of allowances of $307 and
$308 at September 30, 2000 and June 30, 2000, 26,776 25,046
respectively
Inventory 17,838 15,975
Deferred income taxes, net 1,909 1,909
Income tax receivable -- 722
Prepaid expenses and other current assets 3,727 3,496
--------- ---------
Total current assets 94,439 89,782
Marketable securities 28,286 25,705
Property and equipment, net 28,606 27,574
Deferred income taxes, net 787 787
Other assets 339 369
--------- ---------
Total assets $ 152,457 $ 144,217
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,159 $ 9,231
Accrued expenses 3,980 2,486
Accrued compensation 5,154 6,143
Capital lease - short term 553 580
Notes payable - short term 577
577
Billings in excess of revenues and customer advances 3,810 2,788
Income taxes payable 2,588 --
--------- ---------
Total current liabilities 22,821 21,805
Commitments and -- --
contingencies
Capital lease - long term 322 447
Notes payable - long term 13,464 13,605
Stockholders' equity:
Common stock, $.01 par value: 40,000,000 shares authorized;
21,425,437 and 21,395,137 shares issued and outstanding
at September 30, 2000 and June 30, 2000, respectively 214 214
Additional paid-in capital 34,698 34,446
Retained earnings 80,950 73,841
Accumulated other comprehensive income (12) (141)
--------- ---------
Total stockholders' equity 115,850 108,360
--------- ---------
Total liabilities and stockholders' equity $ 152,457 $ 144,217
========= =========
</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
September 30,
2000 1999
-------- --------
<S> <C> <C>
Net revenue $ 41,469 $ 37,863
Cost of revenue 13,124 10,037
-------- --------
Gross profit 28,345 27,826
Operating expenses:
Selling, general and administrative 12,123 9,105
Research and development 6,743 5,537
-------- --------
Total operating expenses 18,866 14,642
-------- --------
Income from operations 9,479 13,184
Interest income 928 322
Interest expense (275) (18)
Equity loss in joint venture (1,235) (515)
Gain on sale of division, net 1,600 --
Other expenses (43) (16)
-------- --------
Income before income taxes 10,454 12,957
Provision for income taxes 3,345 4,665
-------- --------
Net income $ 7,109 $ 8,292
======== ========
Net income per share:
Basic $ 0.33 $ 0.40
======== ========
Diluted $ 0.31 $ 0.37
======== ========
Weighted average shares outstanding:
Basic 21,405 20,688
======== ========
Diluted 22,747 22,166
======== ========
</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>
Three Months Ended
September 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows provided from operating activities:
Net income $ 7,109 $ 8,292
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 1,408
1,257
Gain on sale of division, net (1,600) --
Provision for inventory write-downs 1,378 1,247
Equity loss in joint venture 1,235 515
Changes in assets and liabilities:
Trade accounts receivable (1,739) 4,671
Inventory (3,273) (2,117)
Prepaid expenses and other current assets (479)
408
Other assets (971) 41
Accounts payable (3,069) (2,510)
Accrued expenses and compensation 520 126
Billings in excess of revenues and customer advances 1,048 (2,011)
Income taxes payable 3,315 4,334
-------- --------
Net cash provided by operating activities 4,882 14,253
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (20,388) (17,482)
Sale of marketable securities 21,236 11,263
Purchases of property and equipment (2,448) (755)
Proceeds from sale of division net of selling costs 1,600 --
Investment in joint venture -- (2,500)
-------- --------
Net cash used in investing activities -- (9,474)
-------- --------
Cash flows from financing activities:
Proceeds from employee stock purchase plan and
the exercise of stock options 252 344
Payments of debt (141) --
Principal payments under capital lease obligations (152) (110)
-------- --------
Net cash (used in) provided by financing activities (41) 234
-------- --------
Net increase in cash and cash equivalents 4,841 5,013
Effect of exchange rate change on cash and cash equivalents 64 70
Cash and cash equivalents at beginning of period 5,850 3,676
-------- --------
Cash and cash equivalents at end of period $ 10,755 $ 8,759
======== ========
Cash paid during the period for:
Interest $ 275 $ 19
Income taxes 631 265
</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
September 30, June 30,
2000 2000
------------- --------
Raw materials $ 7,138 $ 4,252
Work in process 5,801 7,415
Finished goods 4,899 4,308
------- -------
Total $17,838 $15,975
======= =======
C. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per common share:
Three Months Ended
September 30,
2000 1999
------- -------
Net income $ 7,109 $ 8,292
======= =======
Shares used in computation:
Weighted average common shares outstanding used
in computation of basic net income per share 21,405 20,688
Dilutive effect of stock options 1,342 1,478
-------- -------
Shares used in computation of diluted net
income per share 22,747 22,166
======== =======
Basic net income per share $ 0.33 $ 0.40
======== =======
Dilutive net income per share $ 0.31 $ 0.37
======== =======
Options to purchase 350,293 and 25,587 shares of common stock outstanding during
the three months ended September 30, 2000 and 1999, 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 the
first quarter of fiscal years beginning after June 15, 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 either current earnings or accumulated other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and the type of hedge transaction. The adoption of SFAS No. 133 did not have a
material impact on the Company's financial position or results of operations.
6
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MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABLES IN THOUSANDS EXCEPT PER SHARE DATA)
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 fourth quarter of
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 has not completed its evaluation of SAB101 and therefore is unable
to determine its impact.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on the Company's financial
position or results of operations.
E. COMPREHENSIVE INCOME
Mercury's total comprehensive income was as follows:
Three Months Ended
September 30,
2000 1999
------- ------
Net income $7,109 $8,292
Other comprehensive income, net of tax:
Foreign currency translation adjustments (27) 88
Unrealized gain or (loss) on securities 15 (12)
------ ------
Other comprehensive income (12) 76
------ ------
Total comprehensive income $7,097 $8,368
====== ======
F. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
During the three month period ended September 30, 2000, the Company had six
principal operating segments: North American defense, international defense,
medical imaging, commercial businesses, wireless communications, and research
and development. 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 segment, medical imaging segment,
commercial segment, other defense and commercial segment, and research and
development segment. The other commercial segment is comprised of international
defense, wireless communications, and other commercial businesses unrelated to
the defense or medical businesses. A new commercial operating segment was
established during the first quarter of fiscal 2000. Previously, most commercial
businesses were included with the North American and international operating
segments. Historical information was not restated to reflect this business
reorganization because it is impractical to obtain the necessary information.
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, 2000. The following table
provides operating segment information for the three-month periods ended
September 30, 2000 and 1999:
7
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<TABLE>
<CAPTION>
North Research
American Medical Other and
Defense Imaging Commercial Commercial Development
Segment Segment Segment Segment Segment Corporate Consolidated
------- ------- ---------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 2000:
Sales to unaffiliated customers 27,729 8,878 3,335 1,527 -- -- 41,469
Income (loss) before taxes(1) 18,396 2,713 1,666 (26) (6,743) (5,552) 10,454
Depreciation/amort. expense 187 9 2 66 378 766 1,408
THREE MONTHS ENDED SEPTEMBER 30, 1999:
Sales to unaffiliated customers 30,253 4,961 -- 2,649 -- -- 37,863
Income (loss) before taxes(1) 21,939 2,018 -- (150) (5,225) (5,625) 12,957
Depreciation/amort. expense 34 11 -- 55 272 885 1,257
</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.
G. EQUITY LOSS IN JOINT VENTURE
In September, 1999, the Company formed AgileVision as a joint venture with
Sarnoff Corporation, the developer of color television and a pioneer in the
creation of digital television ("DTV"). AgileVision provides broadcasters and
cable providers equipment to optimize their DTV investment and develop new
broadband media commerce revenue streams, including master control systems that
permit broadcasters to perform multiple functions on a single platform that
previously would have required the engineering and integration of numerous
discrete products and systems. As of September 30, 2000, the Company's
investment in AgileVision amounted to $4,500,000. During the three month periods
ended September 30, 2000 and 1999, the Company recognized $1,235,000 and
$515,000, respectively, in expenses related to the operation of Agilevision. The
Company has funded the losses of Agilevision to date and as of September 30,
2000, intends to continue to fund this venture.
Summarized Income Statements for AgileVision during the periods ended September
30, 2000 and 1999 are as follows:
Three Months Ended
September 30,
2000 1999
------ -----
Expenses $1,235 $ 515
------ -----
Loss from continuing operations 1,235 $ 515
------ -----
Net loss $1,235 $ 515
====== =====
Summarized Statements of Financial Position of AgileVision:
September 30, June 30,
2000 2000
------------- --------
Current assets $ 511 $ 1,009
Non-current assets 20 12
------- -------
Total assets 531 1,021
======= =======
Current liabilities 3,599 2,744
Shareholders' equity (3,068) (1,723)
------- -------
Total liabilities and equity $ 531 $ 1,021
======= =======
8
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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 10% from $37.9 million during the three
months ended September 30, 1999 to $41.5 million during the three months ended
September 30, 2000.
Defense electronics revenues decreased 4% from $30.6 million or 81% of total
revenues during the three months ended September 30, 1999 to $29.2 million or
71% of total revenues during the three months ended September 30, 2000. The
decline in defense revenues was due to the delay in fulfilling customer orders
for the deliver of next- generation technology.
Medical imaging revenues increased 80% from $5.0 million or 13% of total
revenues during the three months ended September 30, 1999 to $8.9 million or 21%
of total revenues during the three months ended September 30, 2000. The increase
in medical imaging revenues reflects the ramp-up to production volume of product
for our customer's computed tomography ("CT") imaging systems.
Other revenues increased 43% from $2.3 million or 6% of total revenues during
the three months ended September 30, 1999 to $3.4 million or 8% of total
revenues during the three months ended September 30, 2000. The increase in other
revenues was due primarily to the addition of a new commercial customer.
COST OF REVENUES
Cost of revenues increased 31% from $10.0 million during the three months ended
September 30,1999 to $13.1 million during the three months ended September 30,
2000. As a percent of total revenues, cost of revenues increased from 26.5%
during the three month period ended September 30, 1999 to 31.6% for the three
months ended September 30, 2000. This increase in cost as a percentage of
revenue was primarily due to an increase in the Company's inventory reserves.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general, and administrative expenses increased 33% from $9.1 million
during the three months ended September 30, 1999 to $12.1 million during the
three months ended September 30, 2000. The increase was primarily due to
expenses associated with the implementation of a new financial, manufacturing,
and administrative computer system. Additionally, commissions associated with
higher sales volume and the ongoing development of the Company's sales and
management infrastructure to support the Company's growth contributed to the
increased expenses.
9
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RESEARCH AND DEVELOPMENT
Research and development expenses increased 22% from $5.5 million during the
three months ended September 30, 1999 to $6.7 million during the three months
ended September 30, 2000. The increase in research and development expenses 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 and
the introduction of new products in response to a high demand for next
generation products. Even with the increase in research and development expenses
as compared with a year ago, expenses are running somewhat lower than
management's expectations due to the delay in certain prototyping activities.
Management anticipates that in the near term, research and development expenses
will increase somewhat as certain projects enter into the prototyping phase.
INCOME FROM OPERATIONS
Income from operations decreased 28% from $13.2 million during the three months
ended September 30, 1999 to $9.5 million during the three months ended September
30, 2000. This decrease is associated with lower gross margins coupled with
increased operating expenses.
Included in income from operations during the three months ended September 30,
1999 were $372,000 in hardware and software revenues and approximately $921,000
in direct expenses related to the shared storage business (the "SSBU"). 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. The
SSBU was sold during January, 2000 and therefore, the company did not record any
income from this business unit during the three months ended September 30, 2000.
EQUITY LOSS IN JOINT VENTURE
In September, 1999, the Company formed AgileVision as a joint venture with
Sarnoff Corporation, the developer of color television and a pioneer in the
creation of digital television ("DTV"). AgileVision provides broadcasters and
cable providers equipment to optimize their DTV investment and develop new
broadband media commerce revenue streams, including master control systems that
permit broadcasters to perform multiple functions on a single platform that
previously would have required the engineering and integration of numerous
discrete products and systems. The Company's contribution to AgileVision was
$4.5 million. During the three month periods ended September 30, 1999 and 2000
the Company recognized $515,000 and $1,235,000, respectively in expenses related
to the operation of AgileVision.
PROVISION FOR INCOME TAX
The Company recorded a tax provision of $3.3 million during the three months
ended September 30, 2000 reflecting a 32% tax rate as compared to a $4.7 million
tax provision during the three months ended September 30, 1999, reflecting a 36%
tax rate. The decrease in the tax rate was due primarily to the expiration of
the research and experimentation tax credit last year. Congress reinstated the
tax credit during fiscal 2000 thus, favorably affecting the Company's current
tax rate.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash and marketable investments of
approximately $72.5 million. During the three months ended September 30, 2000,
the Company generated approximately $4.9 million in cash from operations
compared to $14.3 million generated during the three months ended September 30,
1999. This decrease in cash generated from operations was primarily due to
decreased profitability. Days sales outstanding was 58 days at September 30,
2000 and 1999.
During the three months ended September 30, 2000, the Company's investing
activities use of cash netted to $0. During the period, investing activities
consisted of $2.4 million for the purchase of computers, furniture and
equipment. These cash outflows were partially offset by the net sale of $848,000
in securities and the receipt of $1.6 million net of selling costs from the sale
of a division. During the three months ended September 30, 1999, the Company's
investing activities used cash of $9.5 million, which consisted of $6.2 million
for the purchase of marketable securities (net of sales), $2.5 million for the
investment in a joint venture, and $755,000 for the purchase of computers,
furniture equipment and leasehold improvements.
During the three months ended September 30, 2000 and 1999, the Company's
financing activities used approximately $41,000 and provided approximately
$234,000, respectively. These financing activities consisted primarily of
inflows from the exercise of stock options and proceeds received from the
employee stock purchase plan, offset by outflows from payment under capital
lease obligations and debt.
Management believes that the Company's available cash, cash generated from
operations, 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.
11
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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, 2000.
PART II. OTHER INFORMATION
ITEM 2. Use of Proceeds from Registered Securities:
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits.
Financial Data Schedule filed as attached in exhibit 27.1.
(b) Reports on Form 8-K.
None
12
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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: November 14, 2000
By: /S/ G. MEAD WYMAN
--------------------------------------
G. Mead Wyman
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
13
