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, 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
April 30, 2000:
Class Number of Shares Outstanding
-------------------------------------- ----------------------------
Common Stock, par value $.01 per share 21,294,149
Total number of pages 15
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MERCURY COMPUTER SYSTEMS, INC.
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2000 and June 30, 1999 3
Consolidated Statements of Operations for the Three and Nine Months Ended
March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 2. Use of Proceeds from Registered Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports Filed on Form 8-K 14
SIGNATURE 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)
March 31,
2000 June 30,
(Unaudited) 1999
--------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,040 $ 3,676
Marketable securities 46,275 12,762
Trade accounts receivable, net of allowances
of $309 and $376 at March 31, 2000 and June 30, 1999, respectively 17,641 28,915
Inventory 13,574 12,431
Deferred income taxes, net 2,617 2,617
Prepaid expenses and other current assets 5,222 1,392
-------- -------
Total current assets 88,369 61,793
Marketable securities 19,703 8,978
Property and equipment, net 25,908 25,325
Deferred income taxes, net 668 668
Other assets 459 747
-------- -------
Total assets $135,107 $97,511
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,608 $ 5,580
Accrued expenses 3,161 3,694
Accrued compensation 4,640 4,292
Capital lease - short term 565 434
Notes payable - short term 508 --
Billings in excess of revenues and customer advances 2,267 3,169
Income taxes payable 2,811 2,312
-------- -------
Total current liabilities 18,560 19,481
Capital lease - long term 486 590
Notes payable - long term 13,813 --
Stockholders' equity:
Common stock, $.01 par value: 40,000,000 shares authorized;
21,256,299 and 10,310,877 shares issued and outstanding
at March 31, 2000 and June 30, 1999, respectively 213 103
Additional paid-in capital 33,096 28,515
Retained earnings 69,163 48,945
Accumulated other comprehensive income (224) (123)
-------- -------
Total stockholders' equity 102,248 77,440
-------- -------
Total liabilities and stockholders' equity $135,107 $97,511
======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
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MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands except per share data)
Three months ended Nine months ended
March 31, March 31,
2000 1999 2000 1999
------- ------- -------- -------
Net revenue $32,351 $27,225 $105,619 $76,885
Cost of revenue 9,388 8,229 28,758 25,295
------- ------- -------- -------
Gross profit 22,963 18,996 76,861 51,590
Operating expenses:
Selling, general and administrative 9,656 8,668 28,905 24,330
Research and development 7,849 5,373 20,237 14,749
------- ------- -------- -------
Total operating expenses 17,505 14,041 49,142 39,079
------- ------- -------- -------
Income from operations 5,458 4,955 27,719 12,511
Interest income 751 313 1,647 1,008
Interest expense (282) -- (406) --
Equity loss in joint venture (1,136) -- (2,577) --
Gain on sale of division, net 3,220 -- 3,220 --
Other income, net 53 (24) 130 282
------- ------- -------- -------
Income before income taxes 8,064 5,244 29,733 13,801
Provision for income taxes 1,974 1,835 9,515 4,829
------- ------- -------- -------
Net income $ 6,090 $ 3,409 $ 20,218 $ 8,972
======= ======= ======== =======
Net income per share:
Basic $ 0.29 $ 0.17 $ 0.97 $ 0.44
======= ======= ======== =======
Diluted $ 0.26 $ 0.16 $ 0.89 $ 0.42
======= ======= ======== =======
Weighted average shares outstanding:
Basic 21,121 20,472 20,893 20,254
======= ======= ======== =======
Diluted 23,095 21,776 22,611 21,530
======= ======= ======== =======
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
(Unaudited and in thousands)
Nine months ended
March 31,
2000 1999
--------- --------
Cash flows provided from operating activities:
Net income $ 20,218 $ 8,972
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 3,682 2,978
Gain on sale of division, net (3,220) --
Equity loss in joint venture 2,577 --
Provision for inventory write-downs 2,028 2,299
Stock option compensation expense 292 --
Changes in assets and liabilities:
Trade accounts receivable 11,282 (1,210)
Contracts in progress -- (668)
Inventory (3,510) (3,714)
Prepaid expenses and other current assets (3,830) 308
Other assets 64 70
Accounts payable (972) 1,866
Accrued expenses and compensation (757) 2,926
Billings in excess of revenues and customer advances (891) (67)
Income taxes payable 499 (338)
--------- --------
Net cash provided by operating activities 27,462 13,422
--------- --------
Cash flows from investing activities:
Purchase of marketable securities (107,411) (72,204)
Sale of marketable securities 63,083 76,609
Purchases of property and equipment (3,747) (17,618)
Proceeds from sale of division net of
selling costs 3,930 --
Investment in joint venture (2,500) --
Capitalized software development costs -- (775)
Note receivable from related parties -- 325
--------- --------
Net cash used in investing activities (46,645) (13,663)
--------- --------
Cash flows from financing activities:
Proceeds from employee stock purchase plan and the exercise
of stock options 4,416 2,117
Proceeds from issuance of notes 14,500 --
Payments of debt (179) --
Payments of capital lease obligations (363) --
--------- --------
Net cash provided by financing activities 18,374 2,117
--------- --------
Net increase in cash and cash equivalents (809) 1,876
Effect of exchange rate change on cash and cash equivalents 173 25
Cash and cash equivalents at beginning of period 3,676 6,054
--------- --------
Cash and cash equivalents at end of period $ 3,040 $ 7,955
========= ========
Cash paid during the period for:
Interest $ 406 $ --
Income taxes 7,429 4,361
Supplemental disclosure of noncash investing and financing activities :
Acquisition of equipment through capital lease transactions 390 --
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
(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
March 31, June 30,
2000 1999
--------- -------
Raw materials $ 4,192 $ 3,508
Work in process 6,275 6,841
Finished goods 3,107 2,082
------- -------
Total $13,574 $12,431
======= =======
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 Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
------- ------- ------- -------
Net income $ 6,090 $ 3,409 $20,218 $ 8,972
======= ======= ======= =======
Shares used in computation:
Weighted average common shares outstanding used
in computation of basic net income per share 21,121 20,472 20,893 20,254
Dilutive effect of stock options 1,974 1,304 1,718 1,276
------- ------- ------- -------
Shares used in computation of diluted net
income per share 23,095 21,776 22,611 21,530
======= ======= ======= =======
Basic net income per share $ 0.29 $ 0.17 $ 0.97 $ 0.44
======= ======= ======= =======
Dilutive net income per share $ 0.26 $ 0.16 $ 0.89 $ 0.42
======= ======= ======= =======
Options to purchase 19,084 and 157,334 shares of common stock outstanding during
the three months ended March 31, 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. Options to purchase 14,890 and 112,032 shares of common stock
outstanding during the nine months ended March 31, 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 respective periods.
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. Accordingly, the
Company will adopt the provisions of SFAS No. 133 in the first quarter of 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 either
current earnings or accumulated other comprehensive income, depending on whether
a derivative is designated as part of
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MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABLES IN THOUSANDS EXCEPT PER SHARE DATA)
a hedge transaction and the type 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.
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 Company
does not expect the application of FIN 44 to 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 Nine Months Ended
March 31, March 31,
2000 1999 2000 1999
------ ------ ------- ------
Net income $6,090 $3,409 $20,218 $8,972
Other comprehensive income, net of tax:
Foreign currency translation adjustments (104) (38) (14) 77
Unrealized gain or (loss) on securities 1 (15) (59) (2)
------ ------ ------- ------
Other comprehensive income (103) (53) (73) 75
------ ------ ------- ------
Total comprehensive income $5,987 $3,356 $20,145 $9,047
====== ====== ======= ======
F. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
During the three and nine month periods ended March 31, 2000, 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 or medical
imaging businesses. Effective January 18, 2000 the Company sold its shared
storage division. See note H.
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.
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MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABLES IN THOUSANDS EXCEPT PER SHARE DATA)
The following table provides operating segment information for the three and
nine-month periods ended March 31, 2000 and 1999:
North
American Other Defense
Defense and Medical Shared and Research and
Commercial Imaging Storage Commercial Development
Segment (2) Segment Segment Segment Segment Corporate Consolidated
----------- ------- ------- ------------- ------------ --------- ------------
THREE MONTHS ENDED MARCH 31, 2000:
Sales to unaffiliated customers 18,733 7,549 241 5,828 -- -- 32,351
Income (loss) before taxes (1) 11,940 2,805 (109) 3,270 (7,311) (2,531) 8,064
Depreciation/amort. expense 107 10 15 29 311 666 1,138
THREE MONTHS ENDED MARCH 31, 1999:
Sales to unaffiliated customers 20,673 3,762 424 2,366 -- -- 27,225
Income (loss) before taxes (1) 13,272 1,348 (516) 215 (5,043) (4,032) 5,244
Depreciation/amort. expense 82 16 21 23 278 631 1,051
NINE MONTHS ENDED MARCH 31, 2000:
Sales to unaffiliated customers 72,805 19,385 1,841 11,588 -- -- 105,619
Income (loss) before taxes (1) 50,516 7,630 (581) 4,068 (18,953) (12,947) 29,733
Depreciation/amort. expense 175 32 59 103 884 2,429 3,682
NINE MONTHS ENDED MARCH 31, 1999:
Sales to unaffiliated customers 56,882 11,176 1,676 7,151 -- -- 76,885
Income (loss) before taxes (1) 36,022 4,366 (1,284) 1,788 (13,939) (13,152) 13,801
Depreciation/amort. expense 155 51 60 121 825 1,766 2,978
(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. SALE OF DIVISION
On January 18, 2000, the Company completed the sale of its Shared Storage
Business Unit ("SSBU") to International Business Machines Corporation ("IBM").
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 contingent 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. The
Company has recorded a $3.2 million gain on the sale of this division which
includes cash received of $4.5 million less legal and advisory costs of $0.6
million, compensation costs of $0.5 million, and the net book value of
equipment and inventories sold of $0.2 million.
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MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABLES IN THOUSANDS EXCEPT PER SHARE DATA)
I. EQUITY LOSS IN JOINT VENTURE
In September, 1999, the Company formed a new joint venture company, AgileVision,
LLC, ("AgileVision") 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 initial
contribution to AgileVision was $2.5 million in cash. During the three months
and nine months ended March 31, 2000, the Company recognized $1.1 and $2.6
million, respectively, in expenses related to the operation of AgileVision. No
expenses were recognized during the three months or nine months ended March 31,
1999 since AgileVision was not formed until fiscal 2000. On May 1, 2000, the
Company contributed an additional $1.0 million to AgileVision in accordance with
the joint venture agreement.
Summarized Income Statement results for AgileVision are as follows:
Three Months Nine Months
Ended March 31, Ended March 31,
2000 2000
------- -------
Expenses $(1,136) $(2,577)
------- -------
Loss from continuing operations (1,136) (2,577)
------- -------
Net loss $(1,136) $(2,577)
======= =======
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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 19% from $27.2 million during the three
months ended March 31, 1999 to $32.4 million during the three months ended March
31, 2000. The Company's total revenues increased 37% from $76.9 million during
the nine months ended March 31, 1999 to $105.6 million during the nine months
ended March 31, 2000.
Defense electronics revenues decreased 7% from $21.7 million or 80% of total
revenues during the three months ended March 31, 1999 to $20.3 million or 63% of
total revenues during the three months ended March 31, 2000. This decline in
revenue was due to the delay in fulfilling customer orders for the delivery of
next-generation technology. There is a slight possibility these delays could
affect delivery of product in the fourth quarter. However, management does not
anticipate this will have a significant impact on fourth quarter revenues.
Defense electronics revenues increased 30% from $58.7 million or 76% of total
revenues during the nine months ended March 31, 1999 to $76.1 million or 72% of
total revenues during the nine months ended March 31, 2000. The increase in
revenues during the nine month period was due primarily to strong unit demand
for defense electronics products, largely comprised of, advanced military
applications in radar, sonar and airborne surveillance.
Medical imaging revenues increased 101% from $3.8 million or 14% of total
revenues during the three months ended March 31, 1999 to $7.6 million or 23% of
total revenues during the three months ended March 31, 2000. Medical imaging
revenues increased 73% from $11.2 million or 15% of total revenues during the
nine months ended March 31, 1999 to $19.4 million or 18% of total revenues
during the nine months ended March 31, 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 166% from $1.7 million or 6% of total revenues during
the three months ended March 31, 1999 to $4.5 million or 14% of total revenues
during the three months ended March 31, 2000. Other revenues increased 43% from
$7.0 million or 9% of total revenues during the nine months ended March 31, 1999
to $10.2 million or 10% of total revenues during the nine months ended March 31,
2000. The increase in other revenues was due primarily to the addition of a new
commercial customer.
COST OF REVENUES
Cost of revenues increased 14% from $8.2 million during the three months ended
March 31,1999 to $9.4 million during the three months ended March 31, 2000. Cost
of revenues increased 14% from $25.3 million during the nine months ended March
31,1999 to $28.8 million during the nine months ended March 31, 2000. As a
percent of total revenues, cost of revenues decreased from 30% and 33% for the
three and nine months ended March 31, 1999, respectively to 29% and 27% for the
three and nine months ended March 31, 2000, 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.
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SELLING, GENERAL AND ADMINISTRATIVE
Selling, general, and administrative expenses increased 11% from $8.7 million
during the three months ended March 31, 1999 to $9.7 million during the three
months ended March 31, 2000. Selling, general, and administrative expenses
increased 19% from $24.3 million during the nine months ended March 31, 1999 to
$28.9 million during the nine months ended March 31, 2000. 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 46% from $5.4 million during the
three months ended March 31, 1999 to $7.8 million during the three months ended
March 31, 2000. Research and development expenses increased 37% from $14.7
million during the nine months ended March 31, 1999 to $20.2 million during the
nine months ended March 31, 2000. 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.
INCOME FROM OPERATIONS
Income from operations increased 10% from $5.0 million during the three months
ended March 31, 1999 to $5.5 million during the three months ended March 31,
2000. Income from operations nearly doubled from $12.5 million during the nine
months ended March 31, 1999 to $27.7 million during the nine months ended March
31, 2000. This increase is associated with higher sales volume coupled with
improved operating efficiency.
Included in income from operations during the three months ended March 31, 2000
were $241,000 in software revenues and $350,000 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
approximately $940,000 in direct expenses related to the shared storage
business. Included in income from operations during the nine months ended March
31, 2000 were $1.8 million in hardware and software revenues and $2.4 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. 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 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 initial contribution to AgileVision
was $2.5 million in cash. During the three months and nine months ended March
31, 2000, the Company recognized $1.1 million and $2.6 million, respectively, in
expenses related to the operation of AgileVision. No expenses were recognized
during the three months or nine months ended March 31, 1999. On May 1, 2000, the
Company contributed an additional $1.0 million to AgileVision in accordance with
the joint venture agreement.
PROVISION FOR INCOME TAX
The Company recorded a tax provision of $2.0 million during the three months
ended March 31, 2000 reflecting a 24% 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 $9.5 million during the nine
months ended March 31, 2000 reflecting a 32% 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 decrease in the tax rate was primarily due to a reduction in
state taxes.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had cash and marketable investments of
approximately $69.0 million. During the nine months ended March 31, 2000, the
Company generated approximately $27.5 million in cash from operations compared
to $13.4 million generated during the nine months ended March 31, 1999. The
increase in cash generated from operations was primarily due to increased
profitability. Days sales outstanding was 49 days and 61 days at March 31, 2000
and 1999, respectively.
During the nine months ended March 31, 2000, the Company's investing activities
used cash of $46.6 million which consisted of $44.3 million for the purchase of
marketable securities (net of sales), $2.5 million for the investment in Agile
Vision, and $3.7 million for computers, furniture and equipment. These payments
were offset by the receipt of $3.9 million, net of selling costs for the sale of
a division. During the nine months ended March 31, 1999, the Company's investing
activities used cash of $13.7 million, consisting 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 cash
outflows were partially offset by the net 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, 2000 the Company's financing activities
generated cash of $18.4 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, $4.4 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 approximately $542,000. During the nine
months ended March 31, 1999, the Company's financing activities provided
approximately $2.1 million in cash, all related to the employee stock purchase
plan and the exercise 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 contingent 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 the 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. 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 of 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, 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
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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 the Company'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, were
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.
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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, 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
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.
On February 2, 2000, the Company filed Form 8-K disclosing the sale of
its Shared Storage Business Unit to IBM.
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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: May 12, 2000 By: /s/ G. MEAD WYMAN
-------------------------
G. Mead Wyman
Senior Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
15
5
1
US DOLLARS
3-MOS
JUN-30-2000
JAN-01-2000
MAR-31-2000
1
3,040
65,978
17,950
309
13,574
88,369
44,116
18,208
135,107
18,560
14,299
0
0
213
102,035
135,107
32,351
32,351
9,388
9,388
15,368
0
(469)
8,064
1,974
6,090
0
0
0
6,090
.29
.26
