Back to GetFilings.com
1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER - 000-23599
---------------
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
Incorporation or organization) Identification No.)
199 RIVERNECK ROAD, CHELMSFORD MASSACHUSETTS 01824
(Address of principal executive offices) (Zip code)
(978) 256-1300 NASDAQ NATIONAL MARKET
(Registrant's telephone number (Name exchange on which registered)
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE
SECURITIES EXCHANGE ACT OF 1934:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934:
Common Stock, Par Value $.01 Per Share
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 [ ]
Aggregate market value of Registrant's voting stock held by non-affiliates
of the Registrant as of August 31, 2000: $606,551,311.
Shares of Common Stock outstanding as of August 31, 2000: 21,399,637 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its special meeting
in lieu of the 2000 Annual Meeting of Stockholders to be held on November 16,
2000 (the "Proxy Statement") are incorporated by reference into Part III of this
report. Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. [ ]
Exhibits Index on Page 40
2
PART I
ITEM 1. BUSINESS
OVERVIEW
Mercury Computer Systems, Inc. (the "Company" or "Mercury") designs,
manufactures and markets high performance, real-time digital signal processing
computer systems that transform sensor generated data into information which can
be displayed as images for human interpretation or subjected to additional
computer analysis. These multicomputer systems are heterogeneous and scalable,
allowing them to accommodate several different microprocessor types and to scale
from a few to hundreds of microprocessors within a single system. Mercury's
system architecture is specifically designed for digital signal processing
("DSP") applications, which are typically, computation intensive and require I/O
capacity and interprocessor bandwidth not available on a general purpose PC or
workstation.
The two primary markets for Mercury's products are defense electronics and
medical diagnostic imaging. Both of these markets have computing needs which
benefit from the unique system architecture developed by the Company. Mercury's
computer systems are generally used on real-world signal data to enable a
military commander to "see" the battle space through natural barriers such as
clouds, darkness, water or foliage, so that the position and strength of the
enemy can be determined, or to enable a physician to "see" within the body
instead of performing invasive surgery.
During the past several years, the majority of the Company's revenues have
been generated from sales of its products to the defense electronics market,
generally for use in reconnaissance and intelligence gathering systems. The
Company's activities in this area have focused on the proof of concept,
development and deployment of advanced military applications in radar, sonar and
airborne surveillance. The Company has established relationships with many of
the major prime contractors to the worldwide defense industry, including
Lockheed Martin Corporation, Hughes Aircraft Company, Raytheon Systems Company,
Northrop Grumman Corporation, MIT/Lincoln Laboratory, GEC Marconi Limited,
Ericsson Microwave Systems AB, MATRA Systems & Information, Mitsubishi Heavy
Industries, Ltd., British Aerospace and a prime contractor owned by the Israeli
Ministry of Defense.
Medical diagnostic imaging is the other primary market currently served by
the Company. Mercury's computer systems are embedded in Magnetic Resonance
Imaging ("MRI"), Computed Tomography ("CT") and Positron Emission Tomography
("PET") machines. Mercury has supplied computer systems for use in several of GE
Medical Systems' diagnostic imaging systems since 1987, and has established
relationships with Siemens Medical Systems, Inc., and Picker International. The
major medical imaging manufacturers are currently developing the next generation
of MRI, CT and digital x-ray machines, which are expected to provide better
performance at lower cost. Mercury has secured design wins on programs with
certain of the major medical imaging manufacturers for their next generation
MRI, CT and digital x-ray machines.
Mercury's computer systems are designed to process continuous streams of
data from sensors attached to radar, sonar, medical imaging equipment and other
devices. The resulting image is transmitted to the battlefield commander, pilot,
technician or physician in order to assist in the decision making or diagnostic
process. Due to the nature of the applications in which many of Mercury's
computer systems are embedded, they are frequently confined in limited spaces
and therefore are designed to generate a minimum amount of heat. The Company
employs the RACEway Interconnect, an industry standard system area network
developed by Mercury, which allows for high interprocessor bandwidth and I/O
capacity. The Company uses its proprietary ASICs to integrate microprocessors,
memory and related components into the RACEway Interconnect to provide optimum
system performance. The Company uses industry standard processors, such as
Motorola's PowerPC, in the same system. The Company believes that the RACEway
Interconnect and its proprietary ASICs, working together with a group of mixed
microprocessors in the same system, allow the most efficient use of space and
power with an optimal price/performance ratio.
Since July 1996, Mercury has targeted the emerging shared storage market
for introduction of a new product, "Sanergy". This business unit was created to
exploit some of Mercury's innovative software developments. It has evolved into
software for use in applications and market segments that, while exciting and
potentially offering a large return, are outside of Mercury's core businesses
and strengths. Therefore, On January 18, 2000, the Company completed the sale
the SSBU to IBM. Payments are structured with an initial payment of $4.5 million
(excluding $1.0 million to be held in escrow and payable on a contingent basis),
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 $4.8 million gain on
the sale of this division, which includes cash received of $6.1 million less
legal and advisory costs of $0.6 million, costs reimbursable to IBM of $0.5
million, and the net book value of equipment and inventories sold of $0.2
million.
2
3
INDUSTRY BACKGROUND
Defense Electronics
Digital signal processing computer systems are embedded into air, sea and
land-based platforms for processing radar, sonar and signal intelligence
applications. The Company believes that an important factor underlying the
development of this market is a continuing desire by military commanders for
increased battle space information, which can be obtained through radar, sonar,
signal intelligence and image intelligence systems. Military commanders also
need more powerful computers with similar attributes in order to conduct dynamic
battle simulations and mission planning tasks utilizing today's complex weapons
systems.
Another important trend in the defense electronics marketplace is the
movement away from so-called "stove pipe" systems designed by prime contractors
with special purpose hardware specifically for a single application, largely
without regard to cost. The market is moving toward the use of systems which
incorporate selected commercial-off-the-shelf ("COTS") hardware and software
components in order to save money and development time. Recent Department of
Defense ("DOD") leaders and federal regulations have mandated widespread use of
COTS components in defense electronics applications. All of Mercury's computer
systems are eligible for use in defense electronics applications as COTS
components.
Medical Imaging
The principal modalities of medical diagnostic imaging systems include MRI,
CT, digital x-ray, PET, SPECT (single photon emission computed tomography) and
ultrasound devices. Although demand for medical imaging equipment has been
sluggish in recent years due primarily to cost containment pressures and
consolidation in the health care industry, the Company believes that demand for
medical diagnostic imaging equipment will increase modestly over the next three
years. The Company believes that this increase will be primarily due to the
introduction of next-generation devices, together with the anticipated future
development by the major medical imaging manufacturers of new international
markets for their diagnostic equipment. The Company believes medical imaging
equipment manufacturers will continue to replace in-house designed digital
signal processing systems with commercially available systems designed by the
Company and others.
This industry demand is driven in part by the need to provide physicians
with rapid, sharp and clear images of areas of a patient's body suspected to be
diseased or injured, while using the least intrusive means. These images provide
a significant diagnostic tool for the physician, who can more readily understand
the patient's malady and prescribe appropriate corrective action. In order to
provide such images, medical imaging machines must be capable of processing a
continuous stream of data on a real-time basis. A parallel concern in the health
care industry is the need to reduce costs. Hospitals, in particular, continue to
be under significant pressure to contain costs and, at the same time, maintain
quality of care. Such pressures are forcing hospitals to be as technologically
efficient as possible. Toward this end, hospitals seek to reduce the required
period of time a patient must spend in their medical imaging machines, which has
the added benefit of increasing the total number of patients who can be
diagnosed with this expensive equipment during a given period of time. One way
to reduce patient time in medical imaging machines and improve image quality is
to utilize more powerful signal processing computers, such as those supplied by
Mercury.
MARKETS AND CUSTOMERS
Defense Electronics
Mercury provides high performance embedded computer systems as standard
products to the defense electronics market by using commercial and selected
rugged components and by working closely with defense contractors to complete a
design which matches the specified requirements of military applications. The
Company engages in frequent, detailed communication with the end users of
Mercury's systems, military executives and program managers in government and
defense contractors regarding the technical capabilities of Mercury's advanced
signal processing computers and the successful incorporation of its computers in
numerous military programs.
Mercury employs industry specialist managers to monitor the defense programs
of each major branch of the United States armed services and additional managers
based in Europe and Japan to keep abreast of developments in their respective
regions. This approach provides relevant information to Mercury regarding major
military procurements worldwide. Mercury maintains sales and technical support
groups to service defense industry participants in six branch offices in the
United States, and through Mercury's subsidiary offices or distributors in 11
other countries. At Mercury's headquarters in Chelmsford, Massachusetts, a group
of systems engineers specializing in radar, sonar and surveillance problems
provides support on an as-needed basis to the remote offices to assist in
securing inclusion in targeted military programs.
3
4
Medical Imaging
Mercury strives to provide a superior combination of high performance and
competitively priced embedded computer systems to the medical imaging market.
The Company focuses on establishing strong relationships with its customers, the
medical equipment manufacturers. By maintaining frequent, in-depth
communications with its customers and working closely with their engineering
groups, the Company is able to understand their needs and provide appropriate
solutions. In addition, the Company intends to continue its efforts to install
its computer systems in place of alternative designs created by the in-house
design teams employed by the medical imaging equipment manufacturers.
The Company currently is working closely with major medical equipment
companies to design the next generation of MRI, CT and digital x-ray systems,
which the Company believes will lead to faster time-to-market and competitive
advantages for the medical equipment companies that use Mercury's computer
systems for inclusion in their imaging machines. Mercury's industrial PC class
hardware system provides the medical imaging industry with increased performance
densities at lower costs and an architecture that accommodates performance
upgrades as new technology becomes available. Integrating the high-bandwidth
RACEway Interconnect system area network within the PCI environment results in
highly scalable systems. This allows medical equipment suppliers to design
systems that can satisfy a broad range of price/performance requirements and
meet the needs of global markets, all with the same Mercury architecture.
Mercury's medical OEM customers consist of the leading manufacturers of
diagnostic imaging equipment. They include GE Medical, headquartered in
Wisconsin, GE Medical Systems Europe in France, GE Yokugawa Medical Systems in
Japan, Siemens Medical in Germany, and Picker International. These companies
have adopted Mercury's PCI or VME computer systems as part of their developments
in either MRI, CT, or digital x-ray systems and, in the case of some companies,
multiple types of systems. The Company has supplied GE Medical with computer
systems for use in three successive generations of MRI machines from 1987
through the present, as well as for use in other GE Medical equipment, such as
PET. In addition, GE Medical and Siemens Medical, the two leading global
suppliers of medical imaging equipment, have awarded contracts to Mercury to
design the signal processing system for the next generation of their CT medical
diagnostic equipment.
The Company is building systems based on Analog Devices' SHARC DSP processor
and Motorola's Power PC processor to fulfill design wins in CT. The Company also
is building a system based on the Power PC chip to fulfill a design win in
digital x-ray. The Company believes that the principal reason for its medical
imaging design wins is Mercury's experienced team of systems and applications
engineers who work closely with the medical equipment designers and with the
Company's product development engineers. This joint design effort frequently
precedes the first production orders by approximately two to three years.
However, once selected, the production contracts typically continue for the life
of the medical imaging system. In addition, the equipment manufacturers
typically offer computer system upgrades to their customers, potentially
resulting in additional sales of Mercury products.
AgileVision
On September 1, 1999, the Company formed a joint venture with the Sarnoff
Corporation incorporated as AgileVision LLC. The venture will use Mercury
technology to design, develop, and deliver products and solutions expected to
dramatically reduce the cost of digital TV infrastructure for the broadcast and
cable markets. The many business uncertainties that attend the new venture make
revenue projections at this time inappropriate. Mercury's share of losses is
reported as a separate line item in its profit and loss statement.
Wireless Communications
During the fourth quarter of fiscal 1999, the Company announced that it will
pursue the wireless communications opportunity internally, offering its
technology and expertise to manufacturers for incorporation within next
generation base stations that require substantially more flexible and powerful
signal processing capabilities. Returns on Mercury's investments in fiscal 2000
and 2001 would not begin before fiscal 2003. The market opportunity however, is
very large, amounting to several hundred millions of dollars annually, and it
represents an OEM business model, which Mercury understands well. In this past
year, Mercury has carried out extensive activities creating a business
development plan that merges its future technology with the processing
requirements of the evolving wireless infrastructure.
4
5
KEY TECHNOLOGY COMPETENCIES
Many of Mercury's customers share a common requirement: the need to process
high-volume, real-time digital data streams. Whether from an antenna in a
defense application or a medical scanner, the computer must have the ability to
process incoming data as quickly as it is received. Data rates can range from a
few to several hundreds of megabytes per second (or several billion bits per
second). The ability to process this continuous flow of high-bandwidth data is a
fundamental difference between the majority of computing systems in the world
(such as personal computers, workstations and servers) and the computers built
by Mercury.
Mercury has developed a set of core technical strengths specifically
targeted to, and defined by, the application areas of signal, image and media
processing. These technical strengths are pivotal to Mercury's success in the
real-time market segments of the defense electronics and medical imaging
industries and have resulted in the following developments and capabilities:
Heterogeneous Switched-Fabric Interconnects. Mercury connects different
microprocessor types (RISC, DSP and specialized computing devices) and I/O
devices in a bus-less, high-bandwidth manner based on multi-stage switches in
its system area network. Among the engineering developments which distinguish
Mercury's systems are the RACEway Interconnect built using the multi-port
RACEway crossbar chip which supports high bandwidth point-to-point data
transfers and fibre channel chassis-to-chassis extensions for RACEway in large
system configurations.
Heterogeneous Processor Integration. Mercury has developed several ASICs
which integrate standard microprocessors and special purpose mathematics and
graphics processors into a single heterogenous environment. Mercury develops
systems consisting of different microprocessor types with a single-system
software model. Mercury's processor independent software offers a consistent set
of software tools and interfaces, which can drive a heterogeneous mix of
microprocessor types, such as Motorola's PowerPC processor and Analog Devices'
SHARC DSP processor.
Performance Density. The Company has been using high performance packaging
technology such as multi-chip modules and ball grid arrays in its systems since
the early 1990's. The Company's thermal analysis expertise allows it to design
products that optimize the dissipation of heat from the system in order to meet
the environmental constraints imposed by many of its customers' applications.
The Company's modular hardware and software building blocks allow it to design
systems that best meet the application's specific data profiles. All together,
these attributes combine to deliver the maximum performance in processing,
reliability and bandwidth in the smallest possible space.
Scalable Software. Mercury's software has been designed to scale to nearly
one thousand processors in real-time environments while maintaining a
high-bandwidth capability. Regardless of the number of processors, the Company's
software provides the same programming environment for a software developer
working with Mercury's computer systems, allowing faster time-to-market and
lower life cycle maintenance costs for its customers.
Optimized Algorithm Development. Mercury specializes in algorithm
development for single and multi-processor implementations. The Company believes
that using the mathematical algorithms in Mercury's scientific algorithm library
significantly increases the performance of customers' applications, reduces
development time and minimizes life cycle support costs.
System Engineering Expertise. Mercury has established a core competency in
providing total system solutions to its customers. The Company has the knowledge
and technical staff to act as an extension of the customer's engineering
organization in order to fashion solutions to some of the world's most demanding
real-time, signal processing applications. Mercury has partnered with its
customers to understand and resolve the challenging problems encountered in
applications as diverse as radar, sonar and signal intelligence for the
military, and diagnostic imaging for MRI, CT, PET and digital x-ray in the
medical imaging market. The Company also provides an integration and development
service to meet the demands of its customers with advanced applications that
cannot be satisfied with standard products. This service combines the variety of
standard products with custom hardware and software to meet the specific
configuration demands of an application.
Leverage and Create Standards. Mercury uses existing standards where
applicable and has been successful in developing new standards. For example,
Mercury adheres to VME and PCI standard bus interfaces and form factors. The
RACEway Interconnect system area network that Mercury developed was adopted as
an ANSI/VITA standard in 1995, and since then has been adopted by several
companies offering products and services for embedded real-time applications.
5
6
PRODUCTS
HARDWARE PRODUCTS
Mercury offers three classes of systems for the Company's target markets.
Each class of product is scalable to meet the full range of requirements in
signal processing applications.
High Performance Class. For the highest-performance applications, Mercury
offers a family of high performance systems for the most compute intensive, I/O
capacity and interprocessor bandwidth demanding applications in the defense
electronics market. These applications include space time adaptive processing,
ground-penetrating and foliage-penetrating radar and synthetic aperture radar.
These high-performance systems, known as MultiPort(TM), can scale to a thousand
processors and today include compute modules based on the PowerPC processors.
VME Class. The VME bus has been the traditional standard for many embedded
applications. Mercury's VME systems each support RACEway Interconnect. Systems
contain modules based on the PowerPC and i860 processors and can scale to
several hundred processors. The VME-based systems and components are primarily
used in the defense market where backward and forward compatibility is required
for the long system life cycles of military equipment. This class of RACE Series
systems meets the computing speed, bandwidth and scaleability requirements of
many of today's medium performance radar, sonar and signal intelligence
applications. Advanced and future radar systems are more likely to use the high
performance class systems.
Industrial PC Class. Based on the PCI bus standard, these systems use the
RACEway Interconnect to provide the extended bandwidth required for real-time
applications. Currently, Mercury provides compute modules based on the SHARC and
PowerPC processors. These systems scale to hundreds of processors and are
primarily directed to the medical imaging market, which is moving from VME to
PCI based designs.
SOFTWARE PRODUCTS
Mercury has developed a comprehensive line of signal processing software
products for the defense, medical imaging, and other commercial markets. Certain
of Mercury's software products are included in a heterogeneous development
software package that enables customers to develop application software that
will run on Mercury hardware. The development software package includes the
MC/OS operating system, scientific algorithm libraries, debugging tools and
compilers. License fees range from $10,000 to $50,000 based on the number of
seats chosen by the user for its application, ranging from a single user license
to a project license.
Set forth below are certain signal processing software products offered by
the Company.
MC/OS Version 5.X. The MC/OS runtime operating environment allows maximum
use of the RACE heterogeneous multi-computer architecture in a single-system
model incorporating a consistent set of system and application programming
interfaces, and a common development environment. MC/OS is supported on the high
performance, VME and industrial PC classes of Mercury hardware systems. MC/OS is
included in Mercury's development software package.
Scientific Algorithm Library (SAL). Mercury's scientific algorithm library
consists of more than 400 assembly language routines developed by Mercury's
programmers and optimized for execution on Mercury's RACE architecture,
permitting extensive code reusability. The library encompasses a comprehensive
selection of functions including vector processing and data conversion commonly
performed by digital signal processing applications. SAL is included in
Mercury's development software package.
Parallel Application System (PAS). PAS is a set of high performance
libraries which form a complete programming environment for developing parallel
applications in a distributed memory multicomputer system. The libraries speed
the development of advanced applications using many processors in parallel. PAS
is included in Mercury's development software package.
SuperVision(TM). SuperVision(TM) is a state-of-the-art debugging tool for
observation and control of embedded, real-time multicomputing systems.
SuperVision(TM) speeds application development by selectively monitoring
individual and large groups of processors, while simultaneously performing
detailed process-level debugging. SuperVision(TM) is sold separately.
6
7
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company's engineering, research and development efforts are focused on
developing new products as well as enhancing existing products. Mercury's
research and development goal is to fully exploit and maintain the Company's
technological lead in the high performance, real-time, signal processing
industry.
Mercury is involved with researchers from other companies and government
organizations to develop new signaling technologies using fiber optics. This has
the potential for providing more bandwidth per line than conventional techniques
and is directed at the 21(st) century challenges of the next generation of
advanced signal processing systems. Similar cooperative developments are
underway to develop open software solutions for code portability. This research
is focused on developing generic applications, which can be targeted to
Mercury's products through the use of industry standard tools with
Mercury-specific libraries. Some of these research areas benefit from cost
sharing through DARPA grants in those areas where the DOD will obtain benefit
from the development.
As of June 30, 2000, the Company had 183 people primarily engaged in
engineering, research and development, including hardware and software
architects, design engineers and engineers with expertise in developing medical,
defense and other commercial software systems. During fiscal years 2000, 1999
and 1998, the Company's total research and development costs were approximately
$28.9 million, $20.7 million, and $14.5 million, respectively.
CUSTOMER SUPPORT AND INTEGRATION
Mercury's Customer Services Group is engaged in a full range of support
functions, including training, technical program management, integration and
design services, host porting services and the traditional maintenance and
support services. The Company has invested in the range of tools, analyzers,
simulators, instruments and workstations to provide a rapid response to both
development and customer support requirements. Within the Customer Services
Group, the solutions systems department has developed many custom interfaces,
reviewed customers' designs, developed special hardware and software components
and provided program management on behalf of defense and medical customers. The
capabilities of this group enable the Company to respond to the demanding
individuality of many programs and have resulted in Mercury being selected for
both development, high volume production and deployed programs.
MANUFACTURING AND TESTING
Mercury's strengths include the design, development and testing of products
which meet the exacting technology and quality expectations of the Company's
defense electronics and medical imaging customers. Board assembly is outsourced
to a number of electronic contract manufacturers. The supplier typically inserts
most of the components into a printed circuit board, solders the connections,
conducts preliminary testing and returns the boards to Mercury. The Company
conducts final assembly, burn-in and system level testing.
Mercury utilizes Optimal Supply Chain Management to provide highly flexible
manufacturing solutions which can be tailored to the specific needs of the
Company's customers, while maintaining the highest level of quality and control
of product assembly. This standard is maintained through demanding Quality
Assurance and Reliability Programs, such as Statistical Process Control, which
are integrated throughout the manufacturing process.
The Company's outsourcing strategy provides maximum flexibility to respond
to customer requirements and schedule adjustments, with minimal asset investment
by Mercury. This outsourcing strategy also provides multiple sources of supply,
both to support the breadth and complexity of Mercury's product lines, as well
as to ensure continuity of supply. By outsourcing assembly to electronic
contract manufacturers, Mercury is able to focus its manufacturing efforts on
designing more reliable products, designing more efficient methods of building
its products, systems integration, testing and supply chain management.
Mercury's manufacturing approach is based on a highly integrated process
that takes a product from concept through production. All products are required
to meet specified standards of performance, quality, reliability and safety. The
Company manufactures both commercial and ruggedized versions of its computer
systems. Extensive testing is a fundamental part of the Company's process.
Computer Integrated Manufacturing, Concurrent Engineering, Material Requirements
Planning and Just-In-Time techniques are also integrated into manufacturing
operations as part of an on-time delivery philosophy. Mercury has been ISO 9001
certified since 1995.
7
8
COMPETITION
The markets for the Company's products are highly competitive and are
characterized by rapidly changing technology, frequent product performance
improvements and evolving industry standards. Competition typically occurs at
the design stage, where the customer evaluates alternative design approaches,
including those from internal development organizations. A design win usually
ensures a customer will purchase the product until their next generation system
is developed. Occasionally, the Company's computer systems compete with computer
systems from workstation vendors, all of whom have substantially greater
research and development resources, long term guaranteed supply capacity,
marketing and financial resources, manufacturing capability and customer support
organizations than those of the Company. The Company believes that its future
ability to compete effectively will depend, in part, upon its ability to
continue to improve product and process technologies and develop new
technologies in order to maintain the performance advantages of products and
processes relative to competitors, to adapt products and processes to
technological changes, to identify and adopt emerging industry standards and to
adapt to customer needs.
The principal bases for selection in sales of digital signal processing
systems to the defense electronics industry are performance (measured primarily
in terms of processing speed, I/O capacity and interprocessor bandwidth,
processing density per cubic foot, power consumption and heat dissipation),
systems engineering support, overall quality of products and associated
services, use of industry standards, ease of use and price. Competitors in the
defense electronics industry include a relatively small number of companies that
design, manufacture and market DSP board level products and in-house design
teams employed by prime defense contractors. In-house design efforts
historically have provided a significant amount of competition to the Company.
However, competition from in-house design teams has diminished in significance
in recent years due to the increasing use of COTS products and the trend toward
greater use of outsourcing. Despite this recent change, there can be no
assurance that in-house developments will not re-emerge as a major competitive
force in the future. Prime contractors are much larger than Mercury and have
substantially more resources to invest in research and development. Increased
use of in-house design teams by defense contractors in the future may have a
material adverse effect on the Company's business, financial condition and
results of operations.
In the medical imaging industry the principal bases for selection are
performance (measured primarily in terms of processing speed, I/O capacity and
interprocessor bandwidth and power consumption), price, systems engineering
support, overall quality of products and associated services, use of industry
standards and ease of use. Competitors in the medical imaging market include
in-house design teams, a small number of companies that design, manufacture and
market DSP board level products and workstation manufacturers. Workstations have
become a competitive factor primarily in the market for low-end MRI and CT
machines and, to date, have not been a significant factor in the
high-performance market, Mercury's primary focus. There can be no assurance that
workstation manufacturers will not attempt to penetrate the high-performance
market for medical imaging machines. Workstation manufacturers typically have
greater resources than Mercury and their entry into markets historically
targeted by Mercury may have a material adverse effect on the Company's
business, financial condition and results of operations.
Some of the Company's competitors have greater financial and other resources
than the Company, and the Company may be operating at a cost disadvantage
compared to manufacturers who have greater direct buying power from component
suppliers or who have lower cost structures. There can be no assurance that the
Company will be able to compete successfully in the future with any of these
sources of competition. In addition, there can be no assurance that competitive
pressures will not result in price erosion, reduced margins, loss of market
share or other factors, that could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws to establish and protect its rights in its products and
proprietary technology. In addition, the Company currently requires its
employees and consultants to enter into nondisclosure and assignment of
invention agreements to limit use of, access to and distribution of, proprietary
information. There can be no assurance that the Company's means of protecting
its proprietary rights in the U.S. or abroad will be adequate. The laws of some
foreign countries may not protect the Company's proprietary rights as fully or
in the same manner as do the laws of the U.S. Also, despite the steps taken by
the Company to protect its proprietary rights, it may be possible for
unauthorized third parties to copy or reverse engineer aspects of the Company's
products, develop similar technology independently or otherwise obtain and use
information that the Company regards as proprietary. There can be no assurance
that others will not develop technologies similar or superior to the Company's
technology or design around the proprietary rights owned by the Company.
Although the Company is not aware that its products infringe on the proprietary
rights of third parties, there can be no assurance that others will not assert
claims of infringement in the future or that, if made, such claims will not be
successful. Litigation to determine the validity of any claims, whether or not
such litigation is determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from daily operations. In the event of any
adverse ruling in any litigation regarding intellectual property, the Company
may be required to pay substantial damages, discontinue the sale of infringing
8
9
products, expend significant resources to develop non-infringing technology or
obtain licenses to use infringing or substituted technology. The failure to
develop, or license on acceptable terms, a substitute technology could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company holds three issued United States patents covering aspects of
the RACE architecture and the SuperVision (debugging tool). In addition, the
Company has one pending United States patent application covering additional
aspects of the RACE architecture and the Company's Parallel Application System.
The Company may file additional patent applications seeking protection for other
proprietary aspects of its technology in the future. Patent positions frequently
are uncertain and involve complex and evolving legal and factual questions. The
coverage sought in a patent application either can be denied or significantly
reduced before or after the patent is issued. Consequently, there can be no
assurance that any patents from pending patent applications or from any future
patent application will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. Since patent applications are secret
until patents are issued in the United States or corresponding applications are
published in international countries, and since publication of discoveries in
the scientific or patent literature often lags behind actual discoveries, the
Company cannot be certain that it was the first to make the inventions covered
by each of its pending patent applications or that it was the first to file
patent applications for such inventions. In addition, there can be no assurance
that competitors, many of which have substantial resources and have made
substantial investments in competing technologies, will not seek to apply for
and obtain patents that will prevent, limit or interfere with the Company's
ability to make, use or sell its products either in the United States or in
international markets.
BACKLOG
As of June 30, 2000, the Company had a backlog of orders aggregating
approximately $60.2 million. The Company includes in its backlog, customer
orders for products and services for which it has accepted signed purchase
orders with assigned delivery dates within twelve months. Orders included in
backlog may be canceled or rescheduled by customers without penalty. A variety
of conditions, both specific to the individual customer and generally affecting
the customer's industry, may cause customers to cancel, reduce or delay orders
that were previously made or anticipated. The Company cannot assure the timely
replacement of canceled, delayed or reduced orders. Significant or numerous
cancellations, reductions or delays in orders by a customer or group of
customers could materially adversely affect the Company's business, financial
condition and results of operations. Backlog should not be relied upon as
indicative of the Company's revenues for any future period.
EMPLOYEES
At June 30, 2000, the Company employed a total of 490 persons, including 183
in research and development, 166 in sales, marketing and customer support, 56 in
manufacturing and 85 in general and administration. Fourteen of the Company's
employees are located in Europe, six in Japan and the remainder in the U.S. None
of the Company's employees are represented by a labor organization and the
Company believes that its relations with employees are good. Competition for
qualified personnel in the engineering fields is intense and the Company is
aware that much of its future success will depend on its continued ability to
attract and retain qualified personnel. The Company seeks to attract new
employees by offering competitive compensation packages, including salary,
bonus, stock options and employee benefits. There can be no assurance, however,
that the Company will be successful in retaining its key employees or that it
will be able to attract skilled personnel for the development of its business.
RISK FACTORS
In this report, as well as oral statements made by the Company, that are
prefaced with the words "may," "will," "expect," "anticipate," "continue,"
"estimate," "project," "intend," "designed" 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 the Company can give no firm
assurance. 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. These
forward-looking statements, like any forward-looking statements, involve risks
and uncertainties that could cause actual results to differ materially from
those projected or unanticipated. Such risks and uncertainties include the
factors set forth below.
9
10
DEPENDENCE ON DEFENSE ELECTRONICS BUSINESS; UNCERTAINTY ASSOCIATED WITH
GOVERNMENT CONTRACTS. Sales of the Company's computer systems to the defense
electronics market accounted for approximately 71%, 77%, and 79% of the
Company's revenues in fiscal 2000, 1999, and 1998, respectively. Reductions in
government spending on programs that incorporate the Company's products could
have a material adverse effect on the Company's business, financial condition
and results of operations. Moreover, the Company's government contracts and
subcontracts are subject to special risks, such as: delays in funding; ability
of the government agency to unilaterally terminate the prime contract; reduction
or modification in the event of changes in government policies or as the result
of budgetary constraints or political changes; increased or unexpected costs
under fixed price contracts; and other factors that are not under the control of
the Company. In addition, consolidation among defense industry contractors has
resulted in fewer contractors with increased bargaining power relative to the
Company. No assurance can be given that such increased bargaining power will not
adversely affect the Company's business, financial condition or results of
operations in the future.
The Company's contracts with the U.S. and foreign governments and their
prime and subcontractors are subject to termination either upon default by the
Company or at the convenience of the government. Termination for convenience
provisions generally entitle the Company to recover costs incurred, settlement
expenses and profit on work completed prior to termination. In addition to the
right of the government to terminate, government contracts are generally
conditioned upon the continuing availability of legislative appropriations.
Funds are usually appropriated for a given program each fiscal year even though
contract performance may take more than one fiscal year. Consequently, at the
outset of a major program, the contract is usually partially funded, and
additional monies normally are incrementally committed to the contract by the
procuring agency from appropriations made for future fiscal years. No assurance
can be given that the Company will realize the revenue expected from performing
under such contracts. Because the Company contracts to supply goods and services
to U.S. and foreign governments it is also subject to other risks, including
contract suspensions, protests by disappointed bidders of contract awards which
can result in the reopening of the bidding process, changes in governmental
policies or regulations or other political factors.
DEPENDENCE ON KEY CUSTOMERS. The Company is dependent on a small number of
customers for a large portion of its revenues. In fiscal 2000, Raytheon Systems
Company, Lockheed Martin, Northrop Grumman Corporation and GE Medical accounted
for 19%, 14%, 12% and 12%, respectively, of the Company's revenues. In fiscal
1999, Raytheon Systems Company, Lockheed Martin, and GE Medical accounted for
22%, 16%, and 12%, respectively, of the Company's revenues. In fiscal 1998,
Raytheon Systems Company, Northrop Grumman Corporation, and GE Medical accounted
for 20%, 10%, and 10%, respectively, of the Company's revenues. The Company's
largest customer in the medical imaging market, GE Medical, accounted for 59%,
85%, and 76% of the Company's aggregate sales to the medical imaging market in
fiscal 2000, 1999, and 1998, respectively. Customers in the defense electronics
market generally purchase the Company's products in connection with government
programs that have a limited duration, leading to fluctuating sales to any
particular customer in the defense electronics market from year to year. By
contrast, many customers in the medical imaging market historically have
purchased the Company's products over a number of years for use in successive
generations of medical imaging devices, although there can be no assurance that
such past behavior will continue in the future. A significant diminution in the
sales to or loss of any of the Company's major customers would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's revenues are largely dependent upon the
ability of its customers to develop and sell products that incorporate the
Company's products. No assurance can be given that the Company's customers will
not experience financial or other difficulties that could adversely affect their
operations and, in turn, the results of operations of the Company.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced fluctuations
in its results of operations in large part due to the sale by the Company of its
computer systems in relatively large dollar amounts to a relatively small number
of customers. Operating results also have fluctuated due to competitive pricing
programs and volume discounts, the loss of customers, market acceptance of the
Company's products, product obsolescence and general economic conditions. In
addition, the Company, from time to time, has entered into contracts to engineer
a specific solution based on modifications to the Company's standard products (a
"development contract"). The Company's gross margins from development contract
revenues are typically lower than the Company's gross margins from standard
product revenues. The Company intends to continue to enter into development
contracts and anticipates that the gross margins associated with development
contract revenues will continue to be lower than its gross margins on standard
product revenues. The Company expects research and development expenses to
continue to increase as the Company continues to develop products to serve its
markets, all of which are subject to rapidly changing technology, frequent
product performance improvements and evolving industry standards. The ability to
deliver superior technological performance on a timely and cost effective basis
is a critical factor in securing design wins for future generations of defense
electronics and medical imaging systems. Significant research and development
spending by the Company does not ensure that the Company's computer systems will
be designed into a customer's system. Because future production orders are
usually contingent upon securing a design win, the Company's operating results
may fluctuate due to either obtaining or failing to obtain design wins for
significant customer systems.
10
11
The Company's quarterly results may be subject to fluctuations resulting
from the foregoing factors, as well as a number of other factors, including the
timing of significant orders, delays in completion of internal product
development projects, delays in shipping the Company's computer systems and
software programs, delays in acceptance testing by customers, a change in the
mix of products sold to the defense electronics and medical imaging markets,
production delays due to quality problems with outsourced components, shortages
of components, the timing of product line transitions and declines in quarterly
revenues from old generations of products following announcement of replacement
products containing more advanced technology. Another factor contributing to
fluctuations in quarterly results is the fixed nature of the Company's
expenditures on personnel, facilities and marketing programs. The Company's
expense levels for personnel, facilities and marketing programs are based, in
significant part, on the Company's expectations of future revenues on a
quarterly basis. If actual quarterly revenues are below management's
expectations, results of operations likely will be adversely affected. As a
result of the foregoing factors, the Company's operating results, from time to
time, may be below the expectations of public market analysts and investors,
which could have a material adverse effect on the price of the Company's Common
Stock.
DEPENDENCE ON SUPPLIERS. Several components used in the Company's products
are currently obtained from sole source suppliers. Mercury is dependent on LSI
Logic Corporation for four custom designed ASICs, on Analog Devices for its
SHARC processors, on International Business Machines Corporation for ball grid
array packaging, on Motorola for some of its PowerPC processors and on Intel for
its i860 processors. IBM may terminate its contract with the Company without
cause upon thirty days notice and may cease offering products to the Company
upon sixty days notice. Analog Devices may discontinue or modify any product
upon 180 days notice and LSI Logic may discontinue any product upon 180 days
notice. If LSI Logic, Analog Devices, IBM, Motorola or Intel were to limit or
reduce the sale of such components to the Company, or if these or other
suppliers to the Company were to experience financial difficulties or other
problems which prevented them from supplying the Company with the necessary
components, such events could have a material adverse effect on the Company's
business, financial condition and results of operations. These sole source
suppliers are subject to quality and performance issues, materials shortages,
excess demand, reduction in capacity and other factors that may disrupt the flow
of goods to the Company or its customers and thereby adversely affect the
Company's business and customer relationships. The Company has no guaranteed
supply arrangements with its suppliers and there can be no assurance that its
suppliers will continue to meet the Company's requirements. If the Company's
supply arrangements are interrupted, there can be no assurance that the Company
would be able to find another supplier on a timely or satisfactory basis. Any
shortage or interruption in the supply of any of the components used in the
Company's products, or the inability of the Company to procure these components
from alternate sources on acceptable terms could have a material adverse effect
on the Company's business, financial condition and results of operations. There
can be no assurance that severe shortages of components will not occur in the
future. Such shortages could increase the cost or delay the shipment of the
Company's products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Significant increases
in the prices of these components would also materially adversely affect the
Company's financial performance since the Company may not be able to adjust
product pricing to reflect the increase in component costs. The Company could
incur set-up costs and delays in manufacturing should it become necessary to
replace any key vendors due to work stoppages, shipping delays, financial
difficulties or other factors and, under certain circumstances, these costs and
delays could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company is largely
dependent upon the skills and efforts of its senior management, particularly
James R. Bertelli, its President and Chief Executive Officer, as well as its
managerial, sales and technical employees. None of the senior management or
other key employees of the Company is subject to any employment contract or
noncompetition agreement. The Company maintains key-man life insurance on Mr.
Bertelli and certain other senior managers. The loss of services of any of its
executives or other key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success will depend to a significant extent on its ability to attract,
train, motivate and retain highly skilled technical professionals, particularly
project managers, engineers and other senior technical personnel. The Company
believes that there is a shortage of, and significant competition for, technical
development professionals with the skills and experience necessary to perform
the services offered by the Company. The Company's ability to maintain and renew
existing engagements and obtain new business depends, in large part, on its
ability to hire and retain technical personnel with the skills that keep pace
with continuing changes in industry standards, technologies and client
preferences. The inability to hire additional qualified personnel could impair
the Company's ability to satisfy its growing client base, requiring an increase
in the level of responsibility for both existing and new personnel. There can be
no assurance that the Company will be successful in retaining current or future
employees.
DEPENDENCE ON MEDICAL IMAGING MARKET; POTENTIAL ADVERSE EFFECT OF HEALTH
CARE REFORM. Sales of the Company's computer systems to the medical imaging
market accounted for approximately 19%, 14%, and 13% of the Company's revenues
in fiscal 2000, 1999, and 1998, respectively. These customers are original
equipment manufacturers ("OEMs") of medical imaging devices and, as a result,
any change in the demand for such devices which renders any of the Company's
products unnecessary or obsolete, or any change in the technology in such
devices, could have a material adverse effect on the Company's
11
12
business, financial condition and results of operations. Such OEM
customers, the end-users of their products and the health care industry
generally are subject to extensive federal, state and local regulation in the
U.S. as well as in other countries. Changes in applicable health care laws and
regulations or new interpretations of existing laws and regulations could have a
material adverse effect on such customers or end-users. There can be no
assurance that future health care or budgetary legislation or other changes in
the administration or interpretation of governmental health care programs both
in the U.S. and abroad will not have a material adverse effect on the Company's
business, financial condition or results of operations.
RISK OF ENTRY INTO NEW MARKETS. The Company's expansion strategy includes
developing new products and entering new markets. The Company's ability to
compete in new markets will depend upon a number of factors including, without
limitation, the Company's ability to create demand for its products in such
markets, its ability to manage its growth effectively, the quality of its
products, its ability to respond to changes in its customers' businesses by
updating existing products and introducing, in a timely fashion, products which
meet the needs of its customers and the ability of the Company to respond
rapidly to technological change. The failure of the Company to do any of the
foregoing could result in a material adverse effect on its business, financial
condition and results of operations. In addition, the Company may face
competition in these new markets from various companies which may have
substantially greater research and development resources, marketing and
financial resources, manufacturing capability and customer support organizations
than those of the Company.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company markets and
sells its products in certain international markets, and the Company has
established offices in the United Kingdom, Japan and France. Foreign revenue is
based on the country in which the legal subsidiary is domiciled. Foreign revenue
accounted for approximately 10%, 8%, and 8% of total consolidated revenues in
fiscal 2000, 1999, and 1998, respectively. Long-lived assets represent less than
10% of the Company's total long-lived assets for the fiscal years ended June 30,
2000, 1999, and 1998, respectively. If revenues generated by foreign activities
are not adequate to offset the expense of establishing and maintaining these
foreign subsidiaries and activities, the Company's business, financial condition
and results of operations could be materially adversely affected. In addition,
there are certain risks inherent in transacting business internationally, such
as changes in applicable laws and regulatory requirements, export and import
restrictions, export controls relating to technology, tariffs and other trade
barriers, less favorable intellectual property laws, difficulties in staffing
and managing foreign operations, longer payment cycles, problems in collecting
accounts receivable, political instability, fluctuations in currency exchange
rates, expatriation controls and potential adverse tax consequences, any of
which could adversely impact the success of the Company's international
activities. In the recent past, the financial markets in Asia have experienced
significant turmoil. There can be no assurance that such turmoil in the Asian
financial markets will not negatively affect the sales by the Company to that
region. A portion of the Company's revenues from sales to foreign entities,
including foreign governments, is in the form of foreign currencies. There can
be no assurance that one or more of such factors will not have a material
adverse effect on the Company's future international activities and,
consequently, on the Company's business, financial condition or results of
operations.
TECHNOLOGICAL CHANGES; RISK OF DESIGN-IN PROCESS. The Company's future
success will depend in part on its ability to enhance its current products and
to develop new products on a timely and cost-effective basis in order to respond
to technological developments and changing customer needs. The defense
electronics market, in particular, demands constant technological improvements
as a means of gaining military advantage. Military planners historically have
funded significantly more design projects than actual deployments of new
equipment, and those systems which are deployed tend to contain the components
of the subcontractors selected to participate in the design process. In order to
participate in the design of new defense electronics systems, the Company must
be able to demonstrate its ability to deliver superior technological performance
on a timely and cost-effective basis. There can be no assurance that the Company
will be able to secure an adequate number of defense electronics design wins in
the future, that the equipment in which the Company's products are intended to
function eventually will be deployed in the field, or that the Company's
products will be included in such equipment if it eventually is deployed.
Customers in the medical imaging market also seek technological improvements
through product enhancements and new generations of products. The Company
believes that medical imaging machines in which the Company's computers are
installed have a long product life cycle. Medical equipment OEMs historically
have selected certain suppliers whose products have been included in the OEMs'
machines for a significant portion of the products' life cycle. There can be no
assurance that the Company will be selected to participate in the future design
of any medical imaging equipment, or that, if selected, the Company will
generate any revenues for such design work. Failure to participate in future
designs of medical imaging equipment could have a material adverse effect on the
Company's business, financial condition and results of operations.
The design-in process is typically lengthy and expensive, and there can be
no assurance that the Company will be able to continue to meet the product
specifications of its customers in a timely and adequate manner. In addition,
any failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, or any significant delay in product
developments or introductions, could have a material adverse effect on the
Company's business, financial condition and results of operations. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing products on a timely
12
13
basis. If the Company is unable to design, develop or introduce competitive
new products on a timely basis, its future operating results would be adversely
affected. There can be no assurance that the Company will be successful in
developing new products or enhancing its existing products on a timely or
cost-effective basis, or that such new products or product enhancements will
achieve market acceptance.
COMPETITION. The markets for the Company's products are highly competitive
and are characterized by rapidly changing technology, frequent product
performance improvements and evolving industry standards. See "Item 1. Business
- - Competition."
LIMITED PROTECTION OF PROPRIETARY RIGHTS; POTENTIAL INFRINGEMENT OF THIRD
PARTY RIGHTS. There can be no assurance that the Company's means of protecting
its proprietary rights in the U.S. or abroad will be adequate, or that others
will not develop technologies similar or superior to the Company's technology or
design around the proprietary rights owned by the Company. In addition, there
can be no assurance that others will not assert claims of infringement in the
future or that, if made, such claims will not be successful. See "Item 1.
Business - Intellectual Property and Proprietary Rights."
POTENTIAL ACQUISITIONS. In the normal course of its business, the Company
evaluates potential acquisitions of businesses, products and technologies that
could complement or expand the Company's business. In the event the Company were
to identify an appropriate acquisition candidate, there is no assurance that the
Company would be able to successfully negotiate the terms of any such
acquisition, finance such acquisition and integrate such acquired business,
products or technologies into the Company's existing business and operations.
Furthermore, the integration of an acquired business could cause a diversion of
management time and resources. In addition, there can be no assurance that any
acquisition of new technology will lead to the successful development of new
products, or that any such new products, if developed, will achieve market
acceptance or prove to be profitable. There can be no assurance that a given
acquisition, when consummated, would not materially adversely affect the
Company's business, financial condition or results of operations. If the Company
proceeds with one or more significant acquisitions in which the consideration
consists of cash, a substantial portion of the Company's available cash could be
used to consummate the acquisitions. If the Company consummates one or more
significant acquisitions in which the consideration consists of stock, or is
financed with the net proceeds of the issuance of stock, stockholders of the
Company could suffer a significant dilution of their interests in the Company.
YEAR 2000 COMPLIANCE. As of the date of this report, the Company has not
experienced nor does it expect to experience any business disruption resulting
from any Year 2000 failures from either its Products, IT Systems, or non-It
Systems.
ITEM 2. PROPERTIES
The Company's headquarters consist of two buildings approximating 187,000
square feet of space in Chelmsford, Massachusetts. These two buildings were
purchased by the Company during fiscal 1999. In fiscal 2000, the Company
purchased approximately 179,000 square feet of land adjacent to the two existing
lots. The Company also maintains offices near Los Angeles and San Jose,
California, and in Dallas, Texas, Chanhassen, Minnesota, Madison, Wisconsin,
Port St Lucie, Florida, Bellevue, Washington and Vienna, Virginia and has
international offices in the United Kingdom, France, the Netherlands and Japan.
ITEM 3. LEGAL PROCEEDINGS
To the Company's knowledge, there are no pending legal proceedings, which
are, material to the Company or its business to which it is a party or to which
any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year ended June 30, 2000.
13
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol MRCY. The following table
sets forth, for the periods indicated, the high and low transactions per share
during such periods. Such over-the-counter market quotations reflect
inter-dealer prices without retail markup, markdown or commission.
1999 First quarter 17 3/8 9 3/4
Second quarter 28 5/8 12 1/2
Third quarter 28 1/4 17 1/8
Fourth quarter 33 3/8 15 1/16
2000 First quarter 17 1/4 11 3/8
Second quarter 35 16
Third quarter 27 7/8
68 1/8
Fourth quarter 48 7/8 24 1/4
As of August 31, 2000 the Company had approximately 15,000 shareholders
including record and nominee holders.
The Company has never declared or paid cash dividends on shares of its Common
Stock and does not expect to declare or pay cash dividends on its Common Stock
in the foreseeable future. The Company currently intends to retain any earnings
for future growth.
14
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain historical consolidated financial
data, which should be read in conjunction with the Company's financial
statements and related notes included elsewhere herein (in thousands except
per share data):
YEAR ENDED JUNE 30, 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues $ 140,944 $ 106,571 $ 85,544 $ 64,574 $ 58,300
Cost of revenues 39,146 34,237 30,084 22,034 24,688
--------- --------- --------- --------- ---------
Gross profit 101,798 72,334 55,460 42,540 33,612
Operating expenses:
Selling, general and administrative 39,475 33,002 27,879 22,631 16,927
Research and development 28,862 20,709 14,476 12,837 9,776
--------- --------- --------- --------- ---------
Total operating expenses 68,337 53,711 42,355 35,468 26,703
--------- --------- --------- --------- ---------
Income from operations 33,461 18,623 13,105 7,072 6,909
Interest income, net 1,699 1,285 1,084 560 548
Equity loss in joint venture (3,721) -- -- -- --
Gain on sale of division, net 4,820 -- -- -- --
Other income (expense), net 86 185 (30) (88) (77)
--------- --------- --------- --------- ---------
Income before income taxes 36,345 20,093 14,159 7,544 7,380
Provision for income taxes 11,449 6,631 5,428 2,933 2,952
--------- --------- --------- --------- ---------
Net income $ 24,896 $ 13,462 $ 8,731 $ 4,611 $ 4,428
========= ========= ========= ========= =========
Net income per common share (1)
Basic $ 1.19 $ 0.66 $ 0.60 $ 0.45 $ 0.44
Diluted $ 1.10 $ 0.62 $ 0.47 $ 0.29 $ 0.28
Weighted average number of common and common
equivalent shares outstanding (1,3)
Basic 21,000 20,336 14,470 10,282 10,100
Diluted 22,703 21,600 18,540 15,794 15,966
JUNE 30, 2000 1999 1998 1997 1996
BALANCE SHEET DATA:
Working capital $ 68,198 $ 42,312 $ 32,794 $ 27,547 $ 23,554
Total assets 144,217 97,511 73,569 44,848 33,264
Long term obligations 14,052 590 -- -- --
Convertible preferred stock (2) -- -- -- 1,200 1,200
Total stockholders' equity 108,360 77,440 61,040 33,322 28,529
(1) Note: Previously published financial data have restated to give effect to
the two-for-one stock split effected in the form of a 100% stock dividend
distributed on December 21, 1999.
(2) Upon completion of the Company's initial public offering on January 29,
1998, the Company's series A convertible preferred stock was converted into
2,556,792 shares of common stock.
(3) See Note B of Notes to Consolidated Financial Statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute basic and diluted net income per common share.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS. In this report, as well as
oral statements made by the Company, phrases that are prefaced with the words
"may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"intend," "designed" 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 the Company can give no firm assurance. 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. These forward-looking statements,
like any forward-looking statements, involve risks and uncertainties that could
cause actual results to differ materially from those projected or anticipated.
Such risks and uncertainties include certain factors identified in the following
discussion as well as the risk factors reported in the Company's Form 10-K filed
with the Securities and Exchange Commission.
OVERVIEW. Mercury designs, manufactures and markets high performance,
real-time digital signal processing computer systems that transform
sensor-generated data into information which can be displayed as images for
human interpretation or subjected to additional computer analysis. These
multicomputer systems are heterogeneous and scalable, allowing them to
accommodate several microprocessor types and to scale from several to hundreds
of microprocessors within a single system.
During the past several years, the majority of the Company's revenues have
been generated from sales of its products to the defense electronics market,
generally for use in intelligence gathering electronic warfare systems. The
Company's activities in this area have focused on the proof of concept,
development and deployment of advanced military applications in radar, sonar and
airborne surveillance. Medical diagnostic imaging is the other primary market
currently served by the Company. Mercury's computer systems are embedded
principally in Magnetic Resonance Imaging ("MRI"), and Computed Tomography
("CT") machines. The remaining revenues are derived from computer systems used
in such commercial applications as baggage scanning, seismic analysis and
automatic testing equipment, and, until the sale of the Company's shared storage
business unit ("SSBU") in January, 2000, shared storage products, SANergy(R)
software and related products and services.
Mercury uses a direct sales force to sell its computer systems to the
defense electronics markets in the U.S., Japan, the United Kingdom and France.
Defense electronics sales to other countries are achieved through distributors.
The Company also uses a direct sales force to sell its computer systems to the
U.S. and international medical imaging markets. The Company sells its products
to OEMs, value added re-sellers and end-users. Over the past three fiscal years,
the Company has expanded its sales force to support growing revenues and has
made significant expenditures to recruit additional technical and professional
staff, to invest in information technology and to improve the Company's
financial, administrative and management infrastructure.
Revenues are generated from the sale of hardware and software products,
development contracts, services such as maintenance, training, engineering
consulting and system integration of Mercury software with third-party hardware.
Revenues from maintenance, training, engineering consulting services and system
integration historically have not constituted a material portion of total
revenues. Revenue from product sales is recorded upon receipt of customer
purchase order or where applicable, a signed contract executed by both parties
provided that delivery has occurred, customer acceptance is not uncertain and
collectability is deemed probable. The Company accrues anticipated warranty
costs upon shipment. Service revenue is recognized ratably over applicable
contract periods or as the services are performed. Revenue from contracts
involving significant product modification or customizations that are eligible
for the percentage-of-completion accounting method are recognized on an efforts
expended basis. Changes to total estimated costs and anticipated losses, if any,
are recognized in the period in which they are determined.
Cost of revenues includes the cost of materials, component assembly,
internal labor and related overhead. Cost of revenues also can include
engineering and other technical labor and related overhead incurred in
development and engineering consulting contracts.
Gross profit as a percentage of revenues ("gross margin") varies from period
to period depending upon numerous variables, including the mix of revenues from
hardware, software, development and engineering consulting contracts; the mix of
revenues among the markets served by the Company; the cost of raw materials; the
cost of outsourced services and labor; operational efficiencies; actual
production volume compared to planned volume; and the mix of applications for
which the Company's computer systems are sold. Historically, the Company's gross
margins on service revenues have been lower than on product revenues. In
addition, the Company's gross margins from development contract revenues are
typically lower than the Company's gross margins from standard product revenues.
The Company intends to continue to enter into development contracts and
anticipates that the gross margins associated with development contract revenues
will continue to be lower than its gross margins on standard product revenues.
16
17
Mercury has made significant investments in research and development in an
effort to maintain its technology leadership in digital signal processing.
Mercury invested $14.5 million, $20.7 million and $28.9 million in fiscal years
1998, 1999 and 2000, respectively, in development activities associated with the
Company's key technology competencies as well as in activities that are targeted
at developing new technologies and products. The Company expects research and
development expenses to continue to increase as the Company continues to develop
products to serve its markets, all of which are subject to rapidly changing
technology, frequent product performance improvements and evolving industry
standards. The ability to deliver superior technological performance on a timely
and cost-effective basis is a critical factor in securing design wins for future
generations of defense electronics and medical imaging systems. Significant
research and development spending by the Company does not ensure that the
Company's computer systems will be designed into a customer's system. Because
future production orders are usually contingent upon securing a design win, the
Company's operating results may fluctuate due to either obtaining or failing to
obtain design wins for significant customer systems.
RESULTS OF OPERATIONS. The following table sets forth, for the periods
indicated, certain financial data as a percentage of total revenues.
YEAR ENDED JUNE 30, 2000 1999 1998
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 27.8 32.1 35.2
----- ----- -----
Gross profit 72.2 67.9 64.8
Operating expenses:
Selling, general and administrative 28.0 31.0 32.6
Research and development 20.5 19.4 16.9
----- ----- -----
Total operating expenses 48.5 50.4 49.5
----- ----- -----
Income from operations 23.7 17.5 15.3
Other income, net 2.1 1.4 1.3
----- ----- -----
Income before income taxes 25.8 18.9 16.6
Provision for income taxes 8.1 6.3 6.4
----- ----- -----
Net income 17.7% 12.6% 10.2%
===== ===== =====
FISCAL 1999 VS. FISCAL 2000
REVENUES. Total revenues increased 32% from $106.6 million during the year
ended June 30, 1999 to $140.9 million during the year ended June 30, 2000.
Defense electronics revenues increased 21% from $82.6 million or 77% of
total revenues during the year ended June 30, 1999 to $100.3 million or 71% of
total revenues during the year ended June 30, 2000. This increase in revenue was
primarily due to the increased unit demand for defense electronics products,
largely comprised of advanced military applications in radar, sonar, and
airborne surveillance.
Medical imaging revenues increased 77% from $15.3 million or 14% of total
revenues during the year ended June 30, 1999 to $27.1 million or 19% of total
revenues during the year ended June 30, 2000. The increase in medical imaging
revenues reflects the increase in production volume of products in the CT
application.
Other revenues increased 55% from $8.7 million or 8% of total revenues
during the year ended June 30, 1999 to $13.5 million or 10% of total revenues
during the year ended June 30, 2000. The increase in other revenues was due
primarily to the addition of a new commercial customer, offset in part by the
sale of the SSBU in January, 2000.
COST OF REVENUES. Cost of revenues increased 14% from $34.2 million during
the year ended June 30, 1999 to $39.1 million during the year ended June 30,
2000. Cost of revenues as a percentage of total revenues decreased from 32%
during the year ended June 30, 1999 to 31% during the year ended June 30, 2000.
The decrease in costs as a percentage of total revenues was primarily due to a
decline in component costs and tighter control over manufacturing spending.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 20% from $33.0 million during the year ended June 30, 1999 to
$39.5 million during the year ended June 30, 2000. Selling, general and
administrative expenses as a percentage of total revenues were 28% during the
year ended June 30, 1999 and 28% during the year ended June 30, 2000. The
increase in expense dollars reflects the hiring of additional sales and
administrative personnel, increased commissions related to increased revenues,
investment in an enterprise resource planning system, as well as the ongoing
development of the Company's financial, administrative and management
infrastructure to support the Company's growth.
17
18
RESEARCH AND DEVELOPMENT. Research and development expenses increased 39%
from $20.7 million during the year ended June 30, 1999 to $28.9 million during
the year ended June 30, 2000. Research and development expenses as a percentage
of total revenues were 19% during the year ended June 30, 1999 and 20% during
the year ended June 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
an increased level of introduction of new products in response to a high demand
for next generation products. Engineering expenses currently are running higher
than management's target levels as the Company is working on several major
development programs to deliver important new technology to its customers.
Management believes that higher engineering spending will continue through
fiscal 2001.
The Company's future success and ability to make the appropriate engineering
investments, will depend to a significant extent on its ability to attract,
train, motivate and retain highly skilled technical professionals, particularly
project managers, engineers and other senior technical personnel. The Company
believes that there is a shortage of, and significant competition for, technical
development professionals with the skills and experience necessary to perform
the services offered by the Company. The Company's ability to maintain and renew
existing engagements and obtain new business depends, in large part, on its
ability to hire and retain technical personnel with the skills that keep pace
with continuing changes in industry standards, technologies and client
preferences. The inability to hire additional qualified personnel could impair
the Company's ability to satisfy its growing client base, requiring an increase
in the level of responsibility for both existing and new personnel. There can be
no assurance that the Company will be successful in retaining current or future
employees and therefore able to continue to make the investments in engineering
at the projected higher expenditure levels. Furthermore, the Company's inability
to retain or hire technical personnel may require contracting or outsourcing
engineering activities. This factor could result in higher than planned
engineering expenses and therefore, a possible fluctuation in the Company's
operating results.
INCOME FROM OPERATIONS. Income from operations increased 80% from $18.6
million during the year ended June 30, 1999 to $33.5 million during the year
ended June 30, 2000. This increase is primarily associated with higher sales
volume and lower cost of goods sold.
Included in income from operations during the year ended June 30, 2000 were
$1.8 million in hardware and software revenues and $2.4 million in direct
expenses related to activities of the SSBU. Included in income from operations
during the year ended June 30, 1999 were $2.2 million in hardware and software
revenues and $4.0 million in direct expenses related to 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.
GAIN ON SALE OF BUSINESS UNIT. On January 18, 2000, the Company completed
the sale of the SSBU to IBM. Payments are structured with an initial payment of
$4,500,000 (excluding $1,000,000 to be held in escrow and payable on a
contingent basis), followed by 12 quarterly contingent payments of $1,500,000
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
$4,820,000 gain on the sale of this division which includes cash received of
$6,100,000 less legal and advisory costs of $581,000, costs reimbursable to IBM
of $499,000, and the net book value of equipment and inventories sold of
$200,000.
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 $3.5 million in cash. During the year
ended June 30, 2000, the Company recognized $3.7 million in expenses related to
the operation of AgileVision. No expenses were recognized during the year ended
June 30, 1999.
INTEREST INCOME, NET. The Company earned $1.3 million in interest income,
net, during the year ended June 30, 1999 and $1.7 million during the year ended
June 30, 2000. This increase primarily reflects higher average cash balances.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
$6.6 million during the year ended June 30, 1999 and $11.4 million during the
year ended June 30, 2000. The Company's effective tax rate was 33.0% during the
year ended June 30, 1999 and 31.5% during the year ended June 30, 2000. During
fiscal 2000, the tax rate was reduced primarily due to a reduction in state
taxes.
18
19
FISCAL 1998 VS. FISCAL 1999
REVENUES. Total revenues increased 25% from $85.5 million during the year
ended June 30, 1998 to $106.6 million during the year ended June 30, 1999.
Defense electronics revenues increased 23% from $67.2 million or 79% of
total revenues during the year ended June 30, 1998 to $82.6 million or 77% of
total revenues during the year ended June 30, 1999. The increase in revenues was
due primarily to increased unit demand for defense electronics products.
Medical imaging revenues increased 36% from $11.2 million or 13% of total
revenues during the year ended June 30, 1998 to $15.3 million or 14% of total
revenues during the year ended June 30, 1999. The increase in revenues was due
primarily to the expansion of the business into new applications.
Other revenues increased 22% from $7.1 million or 8% of total revenues during
the year ended June 30, 1998 to $8.7 million or 8% of total revenues during the
year ended June 30, 1999. The increase was due to the shared storage business
unit revenue increasing by 152% while the other commercial businesses remained
relatively flat over the year.
COST OF REVENUES. Cost of revenues increased 14% from $30.1 million during
the year ended June 30, 1998 to $34.2 million during the year ended June 30,
1999. Cost of revenues as a percentage of total revenues decreased from 35%
during the year ended June 30, 1998 to 32% during the year ended June 30, 1999.
The decrease in costs as a percentage of total revenues was primarily due to a
decline in component costs and tighter control over manufacturing spending.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 18% from $27.9 million during the year ended June 30, 1998 to
$33.0 million during the year ended June 30, 1999. Selling, general and
administrative expenses as a percentage of total revenues were 33% during the
year ended June 30, 1998 and 31% during the year ended June 30, 1999. The
increase in expense dollars reflects the hiring of additional sales and
administrative personnel, increased commissions and marketing communication
related to increased revenues, as well as 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, excluding
capitalized software expenditures, increased 43% from $14.5 million during the
year ended June 30, 1998 to $20.7 million during the year ended June 30, 1999.
Research and development expenses as a percentage of total revenues were 17%
during the year ended June 30, 1998 and 19% during the year ended June 30, 1999.
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 in response to increased
demand for next generation products. Engineering expenses currently are running
higher than management's target levels as the Company is working on some major
development programs to deliver important new technology to its customers.
INCOME FROM OPERATIONS. Income from operations increased 42% from $13.1
million during the year ended June 30, 1998 to $18.6 million during the year
ended June 30, 1999. Included in income from operations during the year ended
June 30, 1999 were $2.2 million in hardware and software revenues and $4.0
million in direct expenses related to the shared storage business. The expenses
include direct expenses from marketing and engineering activities, primarily
relate to compensation, trade shows, prototype development and direct costs
related to the sale of the product. Included in income from operations during
the year ended June 30, 1998 were $885,000 in hardware and software revenues and
$4.3 million in direct expenses related to the shared storage business. Revenues
from the shared storage business increased substantially year over year due
primarily to the expanding distribution base and the availability of fiber
channel interconnect technology.
INTEREST INCOME, NET. The Company earned $1.1 million in interest income,
net, during the year ended June 30, 1998 and $1.3 million during the year ended
June 30, 1999. This increase reflects higher average cash balances primarily as
a result of proceeds received from the Company's initial public offering in mid
fiscal 1998. Offsetting the effect of higher average cash balances were lower
yields achieved on the Company's cash. These lower yields were the result of a
shift in investment strategy from taxable money market instruments to
non-taxable securities.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes was
$5.4 million during the year ended June 30, 1998 and $6.6 million during the
year ended June 30, 1999. The Company's effective tax rate was 38% during the
year ended June 30, 1998 and 33% during the year ended June 30, 1999. During
fiscal 1999, the tax rate was reduced primarily due to a one-time state
investment tax credit ("ITC") benefit resulting from the purchase of two
facilities during the year, increase in research and development credits, and a
shift in investment strategy from taxable to non-taxable securities.
19
20
LIQUIDITY AND CAPITAL RESOURCES. As of June 30, 2000 the Company had cash
and marketable securities of approximately $68.3 million. During the year ended
June 30, 2000 the Company generated approximately $29.9 million in cash from
operations compared to $9.1 million generated during the year ended June 30,
1999. The increase in cash generated from operations is attributable primarily
to the Company's improved profitability. The Company's days sales, based on
revenues of each calendar quarter, decreased from 88 days at the end of 1999 to
70 days at the end of 2000. This decrease in days sales was due to the
resolution of a supplier issue at the end of fiscal year 1999, which had delayed
shipments until the last few weeks of the fourth quarter. Consequently, the
accounts receivable balance at June 30, 1999 was inflated.
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 total contribution to AgileVision
was $3.5 million in cash. During the year ended June 30, 2000, the Company
recognized $3.7 million in expenses related to the operation of AgileVision. The
Company has funded the losses of AgileVision to date and as of June 30, 2000
intends to continue to fund this venture. No expenses were recognized during the
year ended June 30, 1999.
On January 18, 2000, the Company completed the sale of the SSBU to IBM.
Payments are structured with an initial payment of $4.5 million (excluding $1.0
million to be held in escrow and payable on a contingent basis), 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 used approximately $45.9 million in investing activities during
the year ended June 30, 2000 compared to $12.7 million during the year ended
June 30, 1999. During the year ended June 30, 2000, the Company's investing
activities consisted of $40.8 million for the purchase of marketable securities
(net of sales), $3.5 million for investment in AgileVision, $1.1 million for the
purchase of land adjacent to its existing headquarters and $5.5 million for
computers, furniture and equipment. These payments were partially offset by the
receipt of $5.0 million, net of selling costs from sale of a division. During
the year June 30, 1999, the Company's investing activities consisted of $15.1
million for the purchase of an existing office building and construction of an
adjacent building, $4.3 million for computers, furniture, equipment and
leasehold improvements, and $810,000 for capitalized software. These cash
outflows were partially offset by the net sale of marketable securities of $7.2
million and a repayment of notes receivable from related parties amounting to
$325,000.
The Company generated approximately $17.4 million in cash from financing
activities during the year ended June 30, 2000 compared to $1.4 million during
the year ended June 30, 1999. During the year ended June 30, 2000 the Company's
financing activities 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, $3.7 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 $828,000. During the year ended June 30,
1999, $1.7 million in cash was generated from the employee stock purchase plan
and the exercise of stock options and $303,000 was used for the payment of
capital lease obligations.
Management believes that the Company's available cash, marketable
securities, cash generated from operations, and from the arrangement related to
the sale of the SSBU, will be sufficient to provide for the Company's working
capital and capital expenditure requirements for at lease the next twenty four
months. 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 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. As of the date of this report, the Company has not
experienced nor does it expect to experience any business disruption resulting
from any Year 2000 failures from either its Products, IT Systems, or non-IT
Systems.
RECENT ACCOUNTING PRONOUNCEMENTS. See Note B to the Company's Consolidated
Financial Statements for a description of the impact on the Company of recent
accounting pronouncements.
ITEM 7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK MANAGEMENT. Due to the short-term duration, the fair
value of the Company's cash and investment portfolio at June 30, 2000
approximated carrying value. Interest rate risk is estimated as the potential
decrease in fair value resulting from a hypothetical 10% increase in interest
rates for issues contained in the investment portfolio. The resulting
hypothetical fair value was not materially different from the year-end carrying
value.
20
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, 2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5,850 $ 3,676
Marketable securities 36,784 12,762
Trade accounts receivable, net of allowance for
doubtful accounts of $308 and $376 at June 30, 2000
and 1999, respectively 27,408 28,915
Inventory 15,975 12,431
Deferred income taxes, net 1,909 2,617
Income tax receivable 722 --
Prepaid expenses and other current assets 1,355 1,392
--------- ---------
Total current assets 90,003 61,793
Marketable securities 25,705 8,978
Property and equipment, net 27,574 25,325
Deferred income taxes, net 787 668
Other assets 148 747
--------- ---------
Total assets $ 144,217 $ 97,511
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,231 $ 5,580
Accrued expenses 2,486 3,694
Accrued compensation 6,143 4,292
Capital lease - short term 580 434
Notes payable-short term 577 --
Billings in excess of revenues and customer advances 2,788 3,169
Income taxes payable -- 2,312
--------- ---------
Total current liabilities 21,805 19,481
Commitments and Contingencies (Note F) -- --
Capital lease - long term 447 590
Notes payable-long term 13,605 --
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 40,000,000 shares authorized;
21,395,137 and 10,310,877 shares issued and outstanding at
June 30, 2000 and 1999, respectively 214 103
Additional paid-in capital 34,446 28,515
Retained earnings 73,841 48,945
Accumulated other comprehensive income
(141) (123)
--------- ---------
Total stockholders' equity 108,360 77,440
--------- ---------
Total liabilities and stockholders' equity $ 144,217 $ 97,511
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
21
22
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30, 2000 1999 1998
--------- --------- ---------
Net revenues $ 140,944 $ 106,571 $ 85,544
Cost of revenues 39,146 34,237 30,084
--------- --------- ---------
Gross profit 101,798 72,334 55,460
Operating expenses:
Selling, general and administrative 39,475 33,002 27,879
Research and development 28,862 20,709 14,476
--------- --------- ---------
Total operating expenses 68,337 53,711 42,355
--------- --------- ---------
Income from operations 33,461 18,623 13,105
Interest income 2,430 1,336 1,084
Interest expense (731) (51) --
Equity loss in joint venture (3,721) -- --
Gain on sale of division, net 4,820 -- --
Other income (expense), net 86 185 (30)
--------- --------- ---------
Income before income tax provision 36,345 20,093 14,159
Income tax provision 11,449 6,631 5,428
--------- --------- ---------
Net income $ 24,896 $ 13,462 $ 8,731
========= ========= =========
Net income per common share:
Basic $ 1.19 $ 0.66 $ 0.60
========= ========= =========
Diluted $ 1.10 $ 0.62 $ 0.47
========= ========= =========
Weighted average number of common and common
equivalent shares outstanding:
Basic 21,000 20,336 14,470
========= ========= =========
Diluted 22,703 21,600 18,540
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
22
23
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE
30, 2000, 1999, AND 1998
(IN THOUSANDS)
Series A Accumulated Subscriptions
Convertible Other and Related Total
Preferred Stock Common Stock Add'l Compre- Compre- Parties Stock-
--------------- -------------- Paid-In Retained hensive hensive Notes holder's
Shares Amount Shares Amount Capital Earnings Income Income Receivable Equity
------ ------ ------ ------ ------- -------- ----------- -------- -------------- --------
Balance, June 30, 1997 $852 $1,200 5,202 $ 52 $ 5,703 $26,752 $ (60) $(325) $33,322
Exercise of common stock
options 204 2 506 508
Issuance of common stock
pursuant to initial public
offering, net of
issuance costs of $952 2,000 20 18,558 18,578
Conversion of series A
convertible Preferred stock
into common stock (852) (1,200) 2,557 26 1,174 --
Exercise of common stock
warrants 10 20 20
Comprehensive income:
Net income 8,731 8,731
8,731
Foreign currency
translation (119) (119) (119)
-------
Comprehensive income $ 8,612
----- ------ ------ ---- ------- ------- ----- ======= ------- -------
Balance June 30, 1998 -- -- 9,973 100 25,961 35,483 (179) (325) 61,040
----- ------ ------ ---- ------- ------- ------ ------- -------
Exercise of common stock
options 309 3 1,213 1,216
Issuance of common stock in
Conjunction with
employee Stock
purchase plan 29 469 469
Tax benefit from
disqualified
Dispositions 826 826
Stock compensation 46 46
Payment of notes by related 325 325
parties
Comprehensive income:
Net income 13,462 13,462 13,462
Unrealized loss on
securities (30) (30) (30)
Foreign currency
translation 86 86 86
-------
Comprehensive income $13,518
----- ------ ------ ---- ------- ------- ----- ======= ------- -------
Balance June 30, 1999 -- -- 10,311 $103 $28,515 $48,945 $(123) -- $77,440
----- ------ ------ ---- ------- ------- ------ ------- -------
Exercise of common stock
options 169 1 1,148 1,149
Two-for-one stock split 10,480 105 (105) --
Exercise of common stock
options 396 4 1,851 1,855
Issuance of common stock in
Conjunction with
employee stock purchase
plan 39 1 736 737
Tax benefit from
disqualified
Dispositions 1,877 1,877
Stock compensation 424 424
Comprehensive income:
Net income 24,896 24,896 24,896
Unrealized loss on (41) (41) (41)
securities
Foreign currency 23 23 23
translation
-------
Comprehensive income $24,878
----- ------ ------ ---- ------- ------- ----- ======= ------- --------
Balance June 30, 2000 -- -- 21,395 $214 $34,446 $73,841 $(141) -- $108,360
====== ====== ====== ==== ======= ======= ===== ======= ========
The accompanying notes are an integral part of the
consolidated financial statements.
23
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) YEAR ENDED JUNE 30, 2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income $ 24,896 $ 13,462 $ 8,731
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization of property and equipment 4,786 3,916 2,829
Gain on sale of division, net (4,820) -- --
Amortization of capitalized software development costs 313 602 490
Equity loss in joint venture 3,721 -- --
Provision for inventory write-downs 1,012 2,786 1,583
Stock option compensation expense 424 46 --
Provision for doubtful accounts -- 249 99
Deferred income taxes 590 (1,187) (1,133)
Tax benefit from disqualified dispositions 1,877 826 --
Changes in assets and liabilities:
Trade accounts receivable 1,504 (11,871) (4,596)
Contracts in progress -- -- 1,096
Inventory (4,673) (6,048) (2,398)
Prepaid expenses and other current assets (690) (108) (560)
Other assets 71 (98) (69)
Accounts payable 3,654 2,216 570
Accrued expenses and compensation 674 1,874 1,908
Billings in excess of revenues and customer advances (366) 2,151 (1,847)
Income taxes payable (2,311) 284 411
--------- --------- ---------
Net cash provided by operating activities 30,662 9,100 7,114
--------- --------- ---------
Cash flows from investing activities:
Purchase of marketable securities (127,019) (114,574) (73,571)
Sale of marketable securities 86,230 121,768 44,605
Purchases of property and equipment (6,637) (19,440) (6,336)
Investment in joint venture (3,500) -- --
Proceeds from sale of division, net of selling costs 5,032 -- --
Capitalized software development costs -- (810) (111)
Note receivable from related parties -- 325 --
--------- --------- ---------
Net cash used in investing activities (45,894) (12,731) (35,413)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from employee stock purchase program 737 469 --
Proceeds from exercise of stock options 3,004 1,216 508
Proceeds from issuance of common stock -- -- 18,578
Proceeds from exercise of stock warrants -- -- 20
Proceeds from issuance of notes 14,500 -- --
Payments of debt (318) -- --
Principal payments under capital lease obligations (510) (303) --
--------- --------- ---------
Net cash provided by financing activities 17,413 1,382 19,106
--------- --------- ---------
Net decrease in cash and cash equivalents 2,181 (2,249) (9,193)
Effect of exchange rate changes on cash and cash equivalents (7) (129) 54
Cash and cash equivalents at beginning of year 3,676 6,054 15,193
--------- --------- ---------
Cash and cash equivalents at end of year $ 5,850 $ 3,676 $ 6,054
========= ========= =========
Cash paid during the year for:
Interest $ 685 $ 51 $ --
Income taxes 12,692 7,155 6,166
Non-cash transactions:
Equipment acquired under capital leases $ 513 $ 1,327 $ --
Series A convertible preferred stock converted to common stock -- -- 1,200
The accompanying notes are an integral part of the
consolidated financial statements.
24
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
A. DESCRIPTION OF BUSINESS:
Mercury Computer Systems, Inc. (the "Company") designs, manufactures and markets
high-performance real-time digital signal processing computer systems, which
transform sensor-generated data into information that can be displayed as images
for human interpretation or subjected to additional computer analysis. These
multicomputer systems are heterogeneous and scalable, allowing them to
accommodate several different microprocessor types and to scale from a few to
hundreds of microprocessors within a single system. The two primary markets for
the Company's products are defense electronics and medical diagnostic imaging.
Both of these markets have computing needs, which benefit from the unique system
architecture developed by the Company.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION. Revenue from product sales is recorded upon receipt of
a customer purchase order or where applicable, a signed contract executed by
both parties, provided that delivery has occurred and customer acceptance is not
uncertain and collectability is deemed probable. The Company accrues for
anticipated warranty costs upon shipment. Service revenue is recognized ratably
over applicable contract periods or as the services are performed. Revenue from
contracts involving significant product modification or customization that are
eligible for the percentage-of-completion accounting method are recognized on an
efforts-expended basis. Changes to total estimated costs and anticipated losses,
if any, are recognized in the period in which determined. There was no revenue
recognized for year ended June 30, 2000 and 1999 under the
percentage-of-completion method while $3,835,000 of revenue was recognized under
the percentage-of-completion method for the fiscal year ended June 30, 1998.
There were no retainages at June 30, 2000, 1999, or 1998.
BILLINGS IN EXCESS OF REVENUES AND CUSTOMER ADVANCES. Billings in excess of
revenues and customer advances include amounts billed on uncompleted contracts
and amounts billed on annual maintenance contracts.
CASH AND CASH EQUIVALENTS. Cash equivalents, consisting of money market
funds and U.S. government and U.S. government agency issues with original
maturities of 90 days or less, are carried at fair value.
MARKETABLE SECURITIES. The Company classifies investments in marketable
securities as either trading, available-for-sale or held-to-maturity at the time
of purchase and periodically re-evaluates such classification. There were no
securities classified as trading or held-to-maturity as of June 30, 2000 and
1999. Securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at cost with corresponding premiums or discounts amortized
over the life of the investment to interest income. Securities classified as
available-for-sale are reported at fair market value. Unrealized gains or losses
on available-for-sale securities are included, net of tax, in accumulated other
comprehensive income in shareholder's equity until disposition. Realized gains
and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income. The cost of
securities sold is based on the specific identification method.
25
26
The fair market value of cash equivalents and short-term and long-term
investments in marketable securities represents the quoted market prices at the
balance sheet dates. The short-term marketable securities have original
maturities greater than 90 days and remaining maturities less than one year.
Long-term marketable securities have remaining maturities greater than one year.
Long-term marketable securities have maturities of one to three years. At June
30, 2000 and 1999, marketable securities were classified as follows:
2000 1999
Available- Available-
For-Sale For-Sale
Short-term marketable securities:
Municipal/tax free bonds & money
market instruments $36,784 $12,762
Long-term marketable securities:
Municipal/tax free bonds $25,705 $8,978
CONCENTRATION OF CREDIT RISK . Financial instruments that potentially
expose the Company to concentrations of credit risk consist principally of cash,
marketable securities and trade accounts receivable. The Company places its cash
and cash equivalents with financial institutions which management believes are
of high credit quality. At June 30, 2000 and 1999, the Company had approximately
$3,088,000 and $2,904,000, respectively, on deposit or invested with its primary
financial and lending institution
Customers comprising 10% or more of the Company's receivables for the periods
shown below are as follows:
YEAR ENDED JUNE 30, 2000 1999
Customer A 25% 3%
Customer B 6% 27%
Customer C 5% 17%
Customer D 8% 11%
INVENTORY. Inventory is stated at the lower of cost, determined on the
first-in, first-out (FIFO) basis, or market.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost.
Equipment under capital lease is recorded at the present value of the minimum
lease payments required during the lease period. Depreciation is based on the
following estimated useful lives of the assets using the straight-line method:
Computer equipment 3 years
Machinery and equipment 5 years
Furniture and fixtures 5 years
Buildings 15 - 30 years
Building improvements 10 years
Leasehold improvements Shorter of the lease
term or economic life
Expenditures for additions, renewals and betterment of property and
equipment are capitalized. Expenditures for repairs and maintenance are charged
to expense as incurred. As assets are retired or sold, the related cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS. The Company capitalizes software
development costs incurred after a product's technological feasibility has been
established and before it is available for general release to customers.
Amortization of capitalized software costs is computed on an individual product
basis and is the greater of a) the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues for
that product or b) the straight-line method over the estimated economic life of
the product. The Company uses an estimated economic life of two years or less
for all capitalized software costs. No costs were eligible for capitalization
during the year ended June 30, 2000.
26
27
RESEARCH AND DEVELOPMENT COSTS. Research and development costs are expensed
as incurred.
INCOME TAXES. The Company recognizes deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the Company's consolidated financial statements. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using currently
enacted tax rates for the year in which the differences are expected to reverse.
The Company records a valuation allowance against net deferred tax assets if,
based upon the available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized.
NET INCOME PER COMMON SHARE. The Company previously adopted SFAS No. 128,
"Earnings per Share" (Statement 128). Statement 128 specifies the calculation
and presentation of basic and diluted net income per share. Basic net income per
common share is calculated by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted net income per common
share is calculated by dividing net income by the sum of the weighted average
number of common shares plus additional common shares that would have been
outstanding if potential dilutive common shares had been issued for granted
stock options.
FOREIGN CURRENCY. The accounts of foreign subsidiaries are translated using
exchange rates in effect at period-end for assets and liabilities and at average
exchange rates during the period for results of operations. The local currency
for all foreign subsidiaries is the functional currency. The related translation
adjustments are reported in accumulated other comprehensive income in
stockholders' equity. Gains (losses) resulting from foreign currency
transactions are included in other income (expense) and are immaterial for all
periods presented.
RECLASSIFICATION. Certain reclassifications have been made to the prior
years' financial statements to conform to the current year's presentation.
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. As of July 1,
2000, The Company did not hold any derivative instruments.
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 SAB 101 and therefore is unable
to determine its impact.
C. NET INCOME PER COMMON SHARE:
The following table sets forth the computation of basic and diluted net income
per common share:
FOR THE YEARS ENDED JUNE, 30 2000 1999 1998
Net income $24,896 $ 13,462 $ 8,731
======= ======== =======
Shares used in computation of net income per share - basic 21,000 20,336 14,470
effect of dilutive securities:
Convertible preferred stock -- -- 2,984
Stock options 1,703 1,264 1,084
Warrants -- -- 2
------ ------ ------
Dilutive potential common shares 1,703 1,264 4,070
------ ------ ------
Shares used in computation of diluted net income per share 22,703 21,600 18,540
====== ====== ======
Net income per share - basic $ 1.19 $ 0.66 $ 0.60
====== ====== ======
Net income per share - dilutive $ 1.10 $ 0.62 $ 0.47
====== ====== ======
27
28
Options to purchase 141,000 shares of common stock in 2000, 222,000 shares
in 1999, and 58,000 in 1998 were outstanding during the years then ended but
were not included in the year-to-date calculation of diluted net income per
share because the options' exercise price was greater than the average market
price of the common shares during those periods.
D. INVENTORY:
Inventory consists of the following:
JUNE 30, 2000 1999
Raw materials $ 4,252 $ 3,508
Work in process 7,415 6,841
Finished goods 4,308 2,082
-------- --------
Total $ 15,975 $ 12,431
======== ========
E. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
JUNE 30, 2000 1999
Computer equipment and software $ 22,406 $ 17,280
Buildings 15,819 15,819
Land 2,985 1,852
Machinery and equipment 605 404
Furniture and fixtures 3,709 3,365
Building and leasehold improvements 1,585 1,334
-------- --------
47,109 40,054
Less: accumulated depreciation and amortization (19,535) (14,729)
-------- --------
$ 27,574 $ 25,325
======== ========
During the fiscal year ended June 30, 1999, the Company purchased its
existing headquarters building and an adjacent newly constructed facility,
including land for $15,058,000. In addition, during the fiscal year ended June
30, 1999, $1,289,000 of property and equipment was retired of which $1,260,000
was fully depreciated.
During the fiscal year ended June 30, 2000 the Company invested $1.1
million for the purchase of land adjacent to its existing headquarters.
F. COMMITMENTS AND CONTINGENCIES:
LONG TERM DEBT FINANCING ARRANGEMENT. Long-term debt at June 30, 2000
and 1999 consisted of the following:
2000 1999
Notes payable $14,182 --
Less current maturities 577 --
------- ------
$13,605 --
======= ======
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 principle value of the Notes
amounted to $14,500,000. The Notes are collateralized by the Company's corporate
headquarters, which consists of two buildings. The Notes' agreements contain
certain covenants, which, among other provisions, require the Company to
maintain a minimum tangible net worth. As of June 30, 2000, the Company was in
compliance with the covenants of the Notes' agreements.
28
29
Maturities of long term debt are as follows:
Year ending June 30,
2001 $ 577
2002 621
2003 667
2004 718
2005 772
Thereafter 10,827
-------
$14,182
=======
During the fiscal year ended June 30, 1999, the Company had a credit
agreement with a commercial bank to borrow up to $5,000,000 at an interest rate
equal to the prime rate or, at the election of the Company, two and one-quarter
percentage points above the London InterBank Offered Rate, payable monthly. The
credit agreement contained certain covenants, including restrictions on
incurrence of additional indebtedness and liens on its assets, capital
expenditures, disposition of assets, investments and acquisitions, limitations
on distributions, and required the Company to meet certain financial tests
pertaining to current and debt ratios and income before tax provision. During
the fiscal year ended June 30, 1999, the Company terminated this financing
arrangement. Accordingly, there were no borrowings outstanding at June 30, 2000
or 1999.
LEGAL. In July 1999, a former employee brought a wrongful termination
action against the Company and certain officers of the Company. The plaintiff
seeks severance pay, the right to purchase 60,000 shares of the Company's common
stock at a price of $2.00 per share, the right to exercise 96,000 stock options
at an exercise price of $2.00 per share, and other financial consideration.
Discovery has commenced and the action has been referred to binding arbitration.
The position of the Company's management after consultation with external
counsel, is that it is not possible to estimate the amount of a probable loss,
if any, to the Company that might result from this action. Accordingly, no loss
accrual has been recorded. If the plaintiff were to prevail on its claims,
depending on the price of the Company's common stock, a judgement for a material
amount could be awarded against the Company. The Company has objected to the
claims and is aggressively defending the matter.
LEASE COMMITMENTS. The Company leases certain of its facilities and
machinery and equipment under capital and operating leases expiring in various
years through 2000. The leases contain various renewal options. Rental charges
are subject to escalation for increases in certain operating costs of the
lessor.
Minimum lease payments under operating and capital leases are as follows:
Operating lease Capital Lease
YEAR ENDING JUNE 30, Real Estate Equipment Equipment
2001 191 264 679
2002 175 --- 325
2003 40 --- 100
---- ---- ------
Total minimum lease payments $406 $264 $1,104
==== ==== ======
Less: amounts representing interest 77
------
Present value of minimum lease payments 1,027
Less: current portion 580
------
Long-term portion $ 447
======
Rental expense during the fiscal years ended June 30, 2000, 1999 and 1998
was approximately $524,000, $1,116,000 and $1,029,000, respectively.
29
30
G. STOCKHOLDERS' EQUITY:
The Company is authorized to issue 1,000,000 shares of preferred stock with
a par value of $.01 per share.
COMMON STOCK. On November 18, 1999, the Company's Board of Directors
authorized a two-for-one stock split effected in the form of a 100% stock
dividend distributed on December 21, 1999 to shareholders of record as of
December 6, 1999. As a result of the stock split, the accompanying consolidated
financial statements reflect an increase in the number of outstanding shares of
common stock and the transfer of the par value of these additional shares from
paid-in capital. All share and per share amounts have been restated to reflect
the retroactive effect of the stock split, except the capitalization of the
Company.
SERIES A CONVERTIBLE PREFERRED STOCK. The series A convertible preferred
stock had a liquidation preference of $1.41 per share and voting rights similar
to the common stock. Each of the preferred stockholders had one vote for each
share of common stock into which the series A convertible preferred stock was
convertible. On January 29, 1998, the series A convertible preferred stock was
converted into common stock on a three-for-one basis.
H. STOCK BASED COMPENSATION
At June 30, 2000, the Company had both stock option plans and a stock
purchase plan. In fiscal year 1997, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation" SFAS No. 123 requires that companies
either recognize compensation expense for grants of stock, stock options and
other equity instruments based on fair value or provide pro forma disclosure of
net income and earnings per share in the notes to the financial statements. The
Company adopted the disclosure provisions of SFAS No. 123 in fiscal 1997 and has
applied APB Opinion No. 25 and related interpretations in accounting for all of
its stock option and employee stock purchase plans. Compensation cost is
measured as the excess, if any, of the fair market value of the Company's stock
at the date of grant over the amount an individual must pay to acquire the
stock. Compensation expense recognized for stock based compensation amounted to
$424,000, $46,000, and $0 for the fiscal years ended June 30, 2000, 1999, and
1998, respectively.
STOCK OPTION PLANS. The Company has five stock option plans. The 1982,
1991, and 1993 Stock Option Plans (the "Plans") provide for the granting of
options to purchase an aggregate of not more than 1,950,000 shares of the
Company's common stock to employees and directors. Under these plans, options
are granted at not less than the fair value of the stock on the date of grant as
determined by the Board. The terms of the options are established by the Board
on an individual basis. The options generally vest between three and five years
and have a maximum term of ten years.
The 1997 Stock Option Plan (the "1997 Plan"), which the Board approved in
June 1997, provides for the granting of options to purchase an aggregate of not
more than 1,325,000 shares of the Company's common stock. The Plan provides for
the grant of non-qualified and incentive stock options to employees. Incentive
stock options are granted at a price set by the Board of Directors not to be
less than 100% of the fair value at the date of the grant. Non-qualified stock
options are granted at not less than 50% of the fair value of the stock on the
date of grant as determined by the Board. The options vest over five years and
have a maximum term of ten years. In 1999, an amendment to the plan was adopted
by the Board of Directors of the Corporation, which provided for an increase in
the number of shares reserved for issuance under the Plan from 1,325,000 shares
of common Stock to 2,325,000 and a reduction in the vesting period for future
options from five to four years. With the implementation of the 1997 Plan, no
further stock options were granted under the 1982 and 1991 Stock Option Plans.
The 1998 Stock Option Plan (the "1998 Plan"), which the Board approved in
September 1998, provides for the granting of options to purchase an aggregate of
not more than 50,000 shares of the Company's common stock. The Plan provides for
the grant of non-qualified stock options to non-employee directors.
Non-qualified stock options are granted at fair value of the stock at the date
of the grant as determined by the Board of Directors. The options vest over
three years and have a maximum term of ten years. With the implementation of the
1998 Plan, no further stock options were granted under the 1993 Stock Option
Plan.
30
31
Weighted
Weighted Average Fair
Average Value of
Number of Exercise Options Granted
Shares Price
Outstanding at June 30, 1997 1,689,184 1.71
Granted 942,262 4.71 $ 2.64
Exercised (408,936) 1.24
Canceled (33,386) 3.56
---------
Outstanding at June 30, 1998 2,189,124 3.06
---------
Granted 1,271,410 9.65 $ 6.04
Exercised (618,324) 1.97
Canceled (76,454) 5.18
---------
Outstanding at June 30, 1999 2,765,756 6.27
---------
Granted 928,684 26.42 $19.03
Exercised (734,592) 4.09
Canceled (258,000) 8.67
---------
Outstanding at June 30, 2000 2,701,848 13.56
=========
Information related to the stock options outstanding as of June 30, 2000, is as
follows:
Weighted
Average Exercisable
Remaining Weighted Exercisable Weighted
Number Contractual Average Number of Average
Range of Exercise Prices of Options Life Exercise Price Options Exercise Price
$ 1.25 - $ 4.00 701,578 6.73 $2.99 253,778 $2.72
$ 5.00 - $ 8.625 462,686 8.21 7.73 60,961 7.64
$ 8.844 - $ 9.563 139,400 8.04 9.03 32,030 8.96
$ 11.688 - $ 11.688 473,900 8.63 11.69 57,900 11.69
$ 12.00 - $ 23.438 604,684 9.28 20.13 4,360 12.66
$ 24.25 - $ 48.00 319,600 9.65 37.50 -- --
--------- -------
$ 1.25 - $ 48.00 2,701,848 8.30 13.56 409,029 5.32
========= =======
There were 605,612 and 754,480 options exercisable at June 30, 1999 and
1998, respectively, with weighted average exercise prices of $2.77 and $1.79.
The fair value of each option granted during fiscal years ended June 30, 2000,
1999 and 1998, is estimated on the date of grant using the Black-Scholes
option-pricing model utilizing the following weighted-average assumptions: (1)
expected risk-free interest rate of 6.34% in 2000, 4.90% in 1999 and 6.25% in
1998; (2) expected option life of 6 years; (3) expected stock volatility of 77%
for June 30, 2000, 63% for June 30, 1999 and 50% for June 30, 1998; and (4)
expected dividend yield of 0.0.%.
EMPLOYEE STOCK PURCHASE PLAN. During 1997, the Company adopted the 1997
Employee Stock Purchase Plan ("ESPP") and authorized 250,000 shares for future
issuance under which rights are granted to purchase shares of common stock at
85% of the lesser of the market value of such shares at either the beginning or
the end of each six-month offering period. The plan permits employees to
purchase common stock through payroll deductions, which may not exceed 10% of an
employee's compensation as defined in the plan. During the two offerings in
fiscal 2000, the Company issued 22,923 and 15,868 shares of common stock to
employees who participated in the plan at prices of $13.39 and $27.47,
respectively. Shares available for future purchase under the ESPP totaled
404,761 at June 30, 2000.
The weighted-average fair value of purchase rights granted in fiscal 2000
and 1999 was $8.40 and $3.23, respectively. The fair value of the employees'
purchase rights was estimated using the Black-Scholes model with the following
assumptions; dividend yield of 0.0%, an expected life of 6 months, expected
volatility of 77% for June 30, 2000 and 63% for June 30, 1999, and risk-free
interest rate of 5.25% for June 30, 2000 and 4.9% for June 30, 1999.
31
32
Had compensation cost for the Company's stock option grants and stock
issued in conjunction with the ESPP been determined based on the fair value at
the grant dates, as calculated in accordance with SFAS No. 123, the Company's
net income and net income per common share for the fiscal years ended June 30,
2000, 1999 and 1998, would approximate the following pro forma amounts as
compared to the amounts reported:
Net Income per Net Income per
Common Share Common Share
Net Income - Basic - Diluted
As reported:
2000 $24,896 $ 1.19 $ 1.10
1999 $13,462 $ 0.66 $ 0.62
1998 $ 8,731 $ 0.60 $ 0.47
Pro forma:
2000 $20,791 $ 0.99 $ 0.92
1999 $11,950 $ 0.59 $ 0.55
1998 $ 8,244 $ 0.57 $ 0.44
The effects of applying SFAS No. 123 in this disclosure are not indicative
of future amounts. SFAS No. 123 does not apply to awards prior to 1995 and
additional awards in future years are anticipated.
I. INCOME TAXES:
Income tax expense consisted of the following:
YEAR ENDED JUNE 30, 2000 1999 1998
Federal:
Current $10,081 $6,377 $ 5,680
Deferred 544 (479) (1,172)
------- ------ -------
10,625 5,898 4,508
State:
Current 755 1,295 925
Deferred 46 (708) (111)
------- ------ -------
801 587 814
Foreign - current 23 146 106
------- ------ -------
$11,449 $6,631 $ 5,428
======= ====== =======
The following is a reconciliation between the statutory provision for
federal income taxes and the effective income tax expense:
YEAR ENDED JUNE 30, 2000 1999 1998
Income taxes at federal statutory rates 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit
and credits 1.3 1.9 3.7
Research and development credits utilized (3.4) (3.8) (2.2)
Tax-exempt interest income (1.6) (1.8) --
Other 0.2 1.7 1.8
---- ---- ----
31.5 33.0 38.3
==== ==== ====
32
33
The components of the net deferred tax asset are as follows:
JUNE 30, 2000 1999
Receivables, allowances and inventory reserves $1,083 $1,654
Accrued vacation 402 368
Property and equipment 167 301
Capitalized software development costs -- (125)
State tax credit carryforwards 620 491
Other temporary differences 424 596
------ ------
Total deferred tax asset, net $2,696 $3,285
====== ======
No valuation allowance was deemed necessary for the deferred tax asset.
Management believes it is more likely than not that all of the deferred tax
asset will be realized.
At June 30, 2000, the Company had state research and development tax credit
carryforwards of approximately $954,000 which begin to expire in 2014.
J. EMPLOYEE BENEFIT PLANS:
The Company maintains a qualified 401(k) Plan and up until December 31,
1999, maintained a qualified profit sharing 401(a) plan. The plan covers
employees who have attained the age of 21. Employee contributions to the 401(k)
Plan may range from 1% to 15% of compensation with a discretionary matching
Company contribution. Effective January 1, 2000, the Company began matching up
to 3% of compensation. Previously, the company matched up to 2% of compensation.
The Company may also make optional contributions to the plan for any plan year
at its discretion. The Company terminated its 401(a) plan as December 31, 1999.
Expense recognized by the Company under the 401(a) and 401(k) plans was
approximately $788,000, $1,000,000 and $710,000 during the years ended June 30,
2000, 1999 and 1998, respectively.
The Company maintains a bonus plan, which provides cash awards to employees
based upon operating results and employee performance. Bonus expense to
employees was approximately $4,499,000, $2,753,000, and $1,988,000 during the
years ended June 30, 2000, 1999 and 1998, respectively.
K. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION:
The Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (Statement No. 131), in fiscal 1999. This
Statement supersedes SFAS No. 14 "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. This statement establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services and geographic areas.
Operating segments are defined as components of an enterprise evaluated
regularly by the Company's senior management in deciding how to allocate
resources and in assessing performance. The Company has eight principal
operating segments; North American defense and commercial, international defense
and commercial, medical imaging, shared storage, wireless communications,
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 six reportable segments; North
American defense and commercial segment, international defense and commercial
segment, medical imaging segment, shared storage segment, other defense and
commercial segment, and research and development segment. The other commercial
segment is comprised of wireless communications, digital video and other
commercial businesses unrelated to the defense, medical imaging or shared
storage businesses. These operating segments are not separately reported, as
they do not meet any of Statement No. 131's quantitative thresholds. Effective
January 18, 2000 the Company sold it's shared storage division, see note L.
The accounting policies of the business segments are the same as those
described in "Note B: Summary of Significant Accounting Policies".
33
34
North
American International
Defense Defense and Medical Shared Other Research
and Commercial Imaging Storage Commercial and
Commercial Segment(2) Segment Segment Segment Development Corporate Consolidated
Segment (2) Segment
2000
Sales to unaffiliated
customers $96,901 $14,326 $27,093 $ 1,841 $ 783 $ -- $ -- $140,944
Income (loss)
before taxes (1) 66,889 8,016 10,510 (582) (3,289) (27,740) (17,459) 36,345
Depreciation/
amortization expense 427 170 41 59 103 1,218 3,081 5,099
1999
Sales to unaffiliated
customers $79,906 $ 8,894 $15,295 $ 2,232 $ 244 $ -- $ -- $106,571
Income (loss)
before taxes(1) 53,174 (1,090) 6,353 (1,775) 3,837 (19,639) (20,767) 20,093
Depreciation/
amortization expense 191 11 70 102 -- 1,263 2,881 4,518
1998
Sales to unaffiliated
customers $66,074 $ 7,096 $11,232 $ 885 $ 257 $ -- $ -- $ 85,544
Income (loss)
before taxes(1) 40,399 (635) 4,499 (3,423) 2,177 (12,917) (15,941) 14,159
Depreciation/
amortization expense 155 15 68 52 -- 924 2,105 3,319
(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 are
charged to the appropriate operating segment. All other expenses for
marketing and administrative support activities that cannot be specifically
identified with a principal operating segment are allocated to Corporate.
(2) The North American defense and commercial segment and the International
defense and commercial segment differ 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 and the
International defense and commercial are operating segments as defined by
Statement No. 131 and are subsets of the worldwide defense market discussed
in the MD&A.
Foreign revenue is based on the country in which the legal subsidiary is
domiciled. Foreign revenue and long-lived assets represent less than 10% of the
Company's total long-lived assets for the fiscal years ended June 30, 2000,
1999, and 1998 respectively.
Customers comprising 10% or more of the Company's revenues for the periods
shown below are as follows:
YEAR ENDED JUNE 30, 2000 1999 1998
Customer D 12% 12% 10%
Customer E 14% 16% --
Customer B 19% 22% 20%
Customer A 12% -- 10%
L. SALE OF DIVISION:
On January 18, 2000, the Company completed the sale of the SSBU to IBM.
Payments are structured with an initial payment of $4,500,000 (excluding
$1,000,000 to be held in escrow and payable on a contingent basis), followed by
12 quarterly contingent payments of $1,500,000 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 contingency payments of $1,500,000 are
recognized when collected. The Company has recorded a $4,820,000 gain on the
sale of this division which includes cash received of $6,100,000 less legal and
advisory costs of $581,000, costs reimbursable to IBM of $499,000, and the net
book value of equipment and inventories sold of $200,000.
34
35
M. 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
$3,500,000 in cash. During the year ended June 30, 2000, the Company recognized
$3,721,000 in expenses related to the operation of AgileVision. The Company has
funded the losses of Agilevision to date and as of June 30, 2000, intends to
continue to fund this venture. No expenses were recognized during the year ended
June 30, 1999.
Summarized Income Statement results for AgileVision during the year ended June
30, 2000 are as follows:
Expenses $(3,721)
-------
Loss from continuing operations (3,721)
-------
Net loss $(3,721)
=======
Summarized Statement of Financial Position of AgileVision as of June 30, 2000:
Current assets $ 1,009
Non-current assets 12
-------
Total assets $ 1,021
=======
Current liabilities $ 2,744
Shareholders' equity (1,723)
-------
Total liabilities and equity $ 1,021
=======
35
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Mercury Computer Systems, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 37 present fairly, in all material
respects, the financial position of Mercury Computer Systems, Inc. and its
subsidiaries at June 30, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2000
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 14(a)(2) on page 38 present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
August 17, 2000
36
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company had loaned James R. Bertelli, President of the Company, an
aggregate of $200,000, of which $150,000 accrued interest at an annual rate of
9.75% and $50,000 accrued interest at an annual rate of 10.5%. In addition, the
Company had loaned Albert Belle Isle, a Director of the Company, an aggregate of
$125,000, of which $100,000 accrued interest at an annual interest rate of 8%
and $25,000 accrued interest at 9.25%. The notes evidencing such obligations of
Mr. Bertelli and Dr. Belle Isle were paid in full in October, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
The financial statements, schedule, and exhibits listed below are included
in or incorporated by reference as part of this report:
1. Financial statements:
Consolidated Balance Sheets as of June 30, 2000 and 1999
Consolidated Statements of Operations for the years ended June 30, 2000,
1999, and 1998
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the years ended June 30, 2000,
1999, and 1998 Notes to Consolidated Financial Statements
37
38
2. Financial Statement Schedule:
II. Valuation and Qualifying Accounts
MERCURY COMPUTER SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
(IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING CHARGES TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------
Allowance for Doubtful Accounts
2000 $376 -- $68 $308
1999 218 249 91 376
1998 119 99 -- 218
BALANCE AT BALANCE
BEGINNING CHARGES TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------
Inventory Reserve
2000 $3,039 $1,012 $1,256 $2,795
1999 1,857 2,786 1,604 3,039
1998 1,723 1,583 1,449 1,857
Charges to expenses for inventory are due to program cancellations,
engineering change orders and obsolescence. Deductions are recorded when the
inventory is written off. The Company wrote off $1,256,000, $1,604,000,
$1,449,000 during the years ended June 30, 2000, 1999, and 1998 respectively, in
inventory relating primarily to engineering change orders and obsolescence.
3. Exhibits:
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index on page 40, which is incorporated herein by reference.
(b) Reports on Form 8-K
None.
38
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Chelmsford,
Massachusetts, on September 18, 2000.
MERCURY COMPUTER SYSTEMS, INC.
BY: /s/ G. MEAD WYMAN
----------------------------------
G. MEAD WYMAN
SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/s/ JAMES R. BERTELLI President, Chief Executive Officer and September 18, 2000
- --------------------------------- Director (principal executive officer)
James R. Bertelli
/s/ G. MEAD WYMAN Senior Vice President, Chief Financial Officer September 18, 2000
- --------------------------------- and Treasurer (principal financial and
G. Mead Wyman accounting officer)
/s/ GORDON B. BATY Director September 18, 2000
- ---------------------------------
Gordon B. Baty
/s/ R. SCHORR BERMAN Director September 18, 2000
- ---------------------------------
R. Schorr Berman
/s/ ALBERT P. BELLE ISLE Director September 18, 2000
- ---------------------------------
Albert P. Belle Isle
/s/ SHERMAN N. MULLIN Director September 18, 2000
- ---------------------------------
Sherman N. Mullin
/s/ MELVIN SALLEN Director September 18, 2000
- ---------------------------------
Melvin Sallen
39
40
EXHIBIT INDEX
ITEM NO. DESCRIPTION OF EXHIBIT
3.1 Organization. (incorporated herein by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1 (File No. 333-41139))
3.2 Bylaws. (incorporated herein by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1 (File No. 333-41139))
3.3 Articles of Amendment to Articles of Organization. (incorporated herein
by reference to Exhibit 3.3 of the Company's Registration Statement on
Form S-1 (File No. 333-41139))
4.1 Form of Stock Certificate. (incorporated herein by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-1 (File No.
333-41139))
10.1 1982 Stock Option Plan, as amended. (incorporated herein by reference
to Exhibit 10.1 of the Company's Registration Statement on Form S-1
(File No. 333-41139))
10.2 1991 Stock Option Plan, as amended. (incorporated herein by reference
to Exhibit 10.2 of the Company's Registration Statement on Form S-1
(File No. 333-41139))
10.3 1993 Stock Option Plan for Non-Employee Directors. (incorporated herein
by reference to Exhibit 10.3 of the Company's Registration Statement on
Form S-1 (File No. 333-41139))
10.4 1997 Stock Option Plan. (incorporated herein by reference to Exhibit
10.4 of the Company's Registration Statement on Form S-1 (File No.
333-41139))
10.5 1997 Stock Purchase Plan. (incorporated herein by reference to Exhibit
10.5 of the Company's Registration Statement on Form S-1 (File No.
333-41139))
10.6 Purchase and Sale Agreement, dated November 8, 1996 between Corcoran
Chelmsford & Associates and Northland Development Corporation.
(incorporated herein by reference to Exhibit 10.7 of the Company's
Registration Statement on Form S-1 (File No. 333-41139))
10.7# Term Purchase Agreement, dated July 25, 1995 between the Company and
Analog Devices, Inc. (incorporated herein by reference to Exhibit 10.8
of the Company's Registration Statement on Form S-1 (File No.
333-41139))
10.8# Risk Reproduction Agreement, dated March 20, 1996, between the Company
and LSI Logic Corporation. (incorporated herein by reference to Exhibit
10.9 of the Company's Registration Statement on Form S-1 (File No.
333-41139))
10.9# Purchase Offer Agreement for OEM Manufacturer, dated February 16, 1995,
between the Company & IBM Microelectronics Division. (incorporated
herein by reference to Exhibit 10.10 of the Company's Registration
Statement on Form S-1 (File No. 333-41139))
10.10 Quitclaim Deed, dated October 1, 1997, executed by Corcoran Chelmsford
& Associates Limited Partnership. (incorporated herein by reference to
Exhibit 10.15 of the Company's Registration Statement on Form S-1 (File
No. 333-41139))
10.11 1998 Stock Option Plan
21.1* Subsidiaries of the Registrant
23.1* Consent of PricewaterhouseCoopers L.L.P.
27.1* Financial Data Schedule.
* Filed with this Form 10-K.
# Confidential treatment granted.
40