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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, 2002
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
(Registrant's telephone number 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 [ ]
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. [ ]
Aggregate market value of Registrant's voting stock held by non-affiliates of
the Registrant as of August 30, 2002: $487,854,273.
Shares of Common Stock outstanding as of August 30, 2002: 21,133,227 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its special meeting
in lieu of the 2002 Annual Meeting of Stockholders are incorporated by reference
into Part III of this report.
Exhibits Index on Page 49
1
PART I
ITEM 1. BUSINESS
OVERVIEW
Mercury Computer Systems, Inc. (the "Company" or "Mercury") designs,
manufactures and markets high-performance, real-time digital signal and image
processing computer systems. These multicomputer systems are heterogeneous,
meaning they can be comprised of multiple types of microprocessors, and scalable
from a few to hundreds of microprocessors within a single system. Mercury's
system architecture is primarily designed for digital signal processing ("DSP")
and image processing applications, which are typically computation-intensive and
require input/output ("I/O") capacity and interprocessor communication bandwidth
not available on a general-purpose Personal Computer ("PC") or workstation.
Mercury's primary markets are defense electronics, medical imaging and OEM
solutions, the latter of which is comprised mainly of the semiconductor imaging
equipment market and the high-end airport baggage scanning market. Each of these
markets has applications with computing needs that benefit from the unique
system architecture developed by the Company. Mercury's computer systems are
generally used to transform the tremendous, unrelenting stream of real-world,
sensor-generated data produced in these applications into usable information in
real time. Product application examples include a radar system 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; a magnetic resonance imaging ("MRI") machine in a
hospital to enable a physician to "see" within the body instead of performing
invasive surgery; or a semiconductor wafer inspection system to enable the
machine to detect a minute defect in a wafer's surface, increasing the yield of
the production line.
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. The
products are embedded in intelligence, surveillance and reconnaissance gathering
systems for radar, sonar and signals intelligence ("SIGINT") applications. The
Company's activities in this area have focused on selling its products into the
proof of concept, development and deployment phases of these advanced military
applications. The Company has established relationships with many of the major
prime contractors in the worldwide defense industry, including Lockheed Martin
Corporation, Raytheon Company, Northrop Grumman Corporation, L3 Communications,
Boeing Company, Alenia Marconi Systems, Ericsson Microwave Systems AB,
Mitsubishi Electronics, BAE Systems and NEC. In addition, the Company sells its
systems directly to leading organizations in the advanced technology research
and development community including MIT Lincoln Laboratory.
Medical imaging is another primary market currently served by the Company.
Mercury's computer systems are embedded in MRI, computed tomography ("CT"),
positron emission tomography ("PET"), and digital x-ray machines. Mercury has
supplied computer systems for use in several of GE Medical Systems' imaging
systems since 1987 and has established relationships with Siemens Medical
Systems, Inc. and Philips Medical Systems Nederland BV.
Mercury's systems are currently embedded within semiconductor photomask
generation systems manufactured by Micronic Laser Systems AB of Sweden. In
addition, Mercury has secured multiple design wins in next-generation
semiconductor imaging applications including wafer inspection and reticle
inspection systems. The Company is also currently designed into the high-end
airport baggage scanning system, the CTX 9000 Dsi, (TM) from InVision
Technologies.
Over the last two years, the Company has invested in both product and market
development in an attempt to penetrate the wireless communications
infrastructure market. Initially targeting the next-generation, or "3G,"
wireless base station market, the Company has expanded its focus to adjacent
applications within the telecommunications infrastructure market and into highly
related applications within the defense market for applications within Signals
Intelligence ("SIGINT"), Communications Intelligence ("COMINT") and Software
Defined Radio ("SDR").
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 communication, data processing
bandwidth and I/O capacity. The Company uses its proprietary
Application-Specific Integrated Circuits ("ASICs") to integrate microprocessors,
memory and related components into the RACEway Interconnect fabric to provide
optimum system performance. The Company uses multiple industry standard
processors, such as Motorola's PowerPC(R) microprocessor, 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
for the most efficient use of space and power with an optimal price/performance
ratio.
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INDUSTRY BACKGROUND
Defense Electronics
Digital signal and image processing computer systems are embedded into air,
sea and land-based platforms for processing radar, sonar and SIGINT data. The
Company believes that an important factor underlying the development of the
defense electronic market is a continuing desire by military commanders for
increased real-time battle space information, which can be obtained through
radar, sonar, SIGINT 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 move
toward the use of systems which incorporate selected commercial off-the-shelf
("COTS") hardware and software components to save money and development time.
The U.S. 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 imaging systems include MRI, CT, digital
x-ray, PET, single photon emission computed tomography ("SPECT") and ultrasound
devices. The Company believes demand for medical imaging equipment will increase
modestly over the next few years, fueled by the introduction of next-generation
devices, together with the anticipated future development by the major medical
imaging manufacturers of new international markets for their imaging equipment.
The Company believes medical imaging equipment manufacturers will continue to
replace in-house designed digital signal and image processing systems with
commercially available systems designed by the Company and others.
Demand in the medical imaging market is driven in part by the need to
provide physicians with rapid, sharp and clear images of a patient's body
suspected to be diseased or injured. 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 time
patients must spend in medical imaging machines, increasing the 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.
OEM Solutions
The principal applications within the OEM solutions area are in the
semiconductor imaging equipment market, including photomask generation, reticle
inspection and wafer inspection systems, as well as in the high end airport
baggage scanning market. The requirements of the semiconductor equipment market
can best be looked at from the perspective of the demands of customers for
imaging equipment. Semiconductor manufacturers are under constant pressure to
produce chips that are faster and smaller. This demand drives the need for new
semiconductor imaging equipment that can create chips with reduced line widths
and that can perform critical inspections at each development step to provide
the yield necessary to meet financial objectives. As line widths shrink,
previous imaging techniques become obsolete and new technology and techniques
are required. This places constant demands on the imaging system OEMs to
increase system performance. The new geometries and the industry drive for
greater sensitivity is causing an increase in the amount of data systems must
process. This is the result of pixel sizes getting smaller (image sizes are
getting bigger) and algorithms getting more complex to compensate for the
artifacts caused by dealing with smaller features.
Increasing competition among semiconductor imaging OEMs is driving an
increased focus on time-to-market of higher performance and new processing
algorithms. To meet time-to-market demands and have the ability to deploy more
complex algorithms efficiently, the industry is moving away from traditional
hard-coded solutions and adopting off-the-shelf programmable solutions.
Checked baggage screening at airports has been mandated by the U.S.
Congress, and since the tragedy of 9/11/01, has been a concern in airports
around the world. As a result of the need to improve efficiency of scanning to
avoid passenger delays, and reduce the number of false-positives and missed
contraband items, algorithms are likely to continue to be improved. The demand
for higher-performance scanning systems that will be designed directly into the
baggage-handling systems in major and regional airports could be expected to
increase as the necessary redesign and construction required is completed.
Wireless Communications
The telecommunications infrastructure market has many entry points for
computer systems products. The Company has focused primarily on the 3G wireless
base station market. The application requirements are similar to those in our
traditional markets, demanding high-performance embedded computer systems and
system design and algorithm expertise. Since the spectrum available for wireless
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communications is a finite resource, increasing demand resulting from more
subscriptions to wireless operators will eventually require new technological
approaches. However, the current downturn within the wireless industry has
resulted in significant reductions in infrastructure investments. Therefore,
while the Company continues to pursue business in the wireless base station
market, it has begun to refocus some of its resources into adjacent
telecommunications infrastructure application areas where investments continue
to be made and there is a greater potential for revenue in the near-term. In
addition, some resources from the wireless team are focusing on highly related
applications within the defense market, including SIGINT, COMINT and SDR
applications.
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 that matches the specified requirements of military applications. The
Company engages in frequent, detailed communication with the system end users,
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 application specialists to monitor the defense
programs and emerging applications in each major branch of the United States
armed services and 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 regional
offices in the United States, and through Mercury's subsidiary offices or
distributors in at least 11 other countries. At Mercury's headquarters in
Chelmsford, Massachusetts, a group of systems engineers specializing in radar,
sonar and surveillance applications provides support on an as-needed basis to
the remote offices to assist in securing program wins in targeted military
programs.
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. The
products are embedded in intelligence, surveillance and reconnaissance gathering
systems, such as radar, sonar and SIGINT applications. The Company's activities
in this area have focused on selling its products into the proof of concept,
development and deployment phases of these advanced military applications. The
Company has established relationships with many of the major prime contractors
in the worldwide defense industry, including Lockheed Martin Corporation,
Raytheon Company, Northrop Grumman Corporation, L3 Communications, Boeing,
Alenia Marconi Systems, Ericsson Microwave Systems AB, Mitsubishi Electronics,
BAE Systems and NEC. In addition, the Company sells its systems directly to
leading organizations in the advanced technology research and development
community including MIT Lincoln Laboratory.
On April 1, 2002, the Company completed its acquisition of Myriad Logic,
Inc. ("Myriad"). Myriad is a developer of I/O technology based in Silver Spring,
Maryland. The acquisition of Myriad expands Mercury's capability to provide more
of a total system solution and more system integration services. The total
purchase price of $7.9 million consisted of $7.5 million in cash plus $0.4
million of transaction costs directly related to the acquisition.
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 and other
competitors within the market.
The Company has recently begun to experience erosion in revenues derived
from sales of systems to its three CT OEM customers due to introductions by
these customers of CT systems that do not contain Mercury products. At the time
of the last design phase, each of these customers stipulated a choice of
processor for their systems. The Company did not offer products based on the
customers' processor choices, and based on its business analysis, decided
against building custom systems. Therefore, these customers made alternative
design choices, and in two of the cases, the customer chose to build the
solution internally. The Company is preparing to compete for the next design
cycle of CT systems.
The Company currently is working closely with a major medical equipment
company to design the next generation of its MRI product line, another medical
equipment company on a next-generation PET system, and an OEM in the development
of a new digital x-ray product line. The Company believes these developments
will lead to faster time-to-market and competitive advantages for the medical
equipment companies that use Mercury's systems in their imaging machines.
Mercury's industrial-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 architecture 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.
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Mercury's medical OEM customers consist of the leading manufacturers of
medical imaging equipment. They include GE Medical, headquartered in Wisconsin,
GE Medical Systems Europe in France, Siemens Medical in Germany, and Philips
Medical Systems in the Netherlands and Israel. These companies have adopted
Mercury's PCI or VME computer systems as part of their developments in either
MRI, PET, 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 its MRI machines from 1987
through the present, as well as for use in other GE Medical equipment, such as
PET and digital x-ray.
The Company believes the principal reason for its medical imaging design
wins is its 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's products.
OEM Solutions
Within the broadly defined OEM solutions market, Mercury is currently
working with multiple semiconductor imaging OEMs, having achieved design wins in
each of the primary application areas of photomask generation, reticle
inspection and wafer inspection. Mercury's current customers range from
relatively new start-up companies to top-tier OEMs. The Company's business
approach is to provide a compelling combination of high-performance and
competitively priced embedded computer systems with application engineering
expertise. The Company focuses on establishing strong relationships with its OEM
customers by maintaining frequent, in-depth communications and working closely
with their engineering groups. The Company intends to continue its efforts to
earn new design wins for its computer systems in place of alternative designs
employed by the semiconductor imaging equipment manufacturers and other
competitors within the market.
In addition, the Company has been supplying systems to InVision Technologies
for use in their high-end airport checked-baggage system for a number of years.
Mercury's systems are currently designed into their high-end CTX 9000 DSi(TM)
system.
The Company believes it is one of a very few suppliers of off-the-self
embedded computers that has products capable of meeting the demanding processing
and I/O bandwidth requirements of the OEM marketplace. Mercury's OEM business
and support model fits well with the OEM's needs for faster time-to-market. The
Company believes the principal reason for its semiconductor imaging design wins
is Mercury's experienced team of systems and applications engineers who work
closely with the OEMs and with the Company's product development engineers to
ensure the optimum configuration for the customer. This joint design effort
frequently precedes the first production orders by approximately one to three
years. However, once selected, the production contracts are anticipated to
continue for the life of the semiconductor imaging system. In addition, the
equipment manufacturers typically offer computer system upgrades to their
customers, potentially resulting in additional sales of Mercury products.
Wireless Communications
During the fourth quarter of fiscal 1999, the Company announced it would
pursue wireless communications opportunities 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. The Company does not expect that shipments of products
incorporating wireless communications technology will commence before fiscal
2005.
The Company remains optimistic on the long-term potential of this market
because fundamentally, spectrum is a finite resource and ultimately new
technology will be required to maximize the revenue-generating capacity of this
valuable resource. The Company believes its unique products and competencies
provide a compelling business case for embedding its technologies in future
infrastructure designs. However, the downturn in the telecommunications industry
has resulted in significant reductions in infrastructure investments. Therefore,
while the Company's wireless team continues to pursue business within the
commercial wireless base station market, the Company has begun to refocus some
of its wireless communications resources into adjacent telecom application areas
where investments continue to be made and there is a greater potential for
revenue in the nearer-term. Also, within the defense communications area, there
are significant opportunities in SIGINT and COMINT applications, and in
software-defined radio ("SDR"), to leverage Mercury's investments in wireless
product developments and the competencies within the wireless team. There is
increased focus in these application areas since 9/11, and Mercury plans to
capture a significant share of the opportunities anticipated over the coming
years.
KEY TECHNOLOGY COMPETENCIES
Many of Mercury's customers share a common requirement: the need to process
high-volume, real-time digital data streams. The computer must have the ability
to process incoming data as quickly as it is received, whether from an antenna
in a defense application or from a medical scanner. 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.
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Mercury has developed a set of core technical strengths specifically
targeted to, and defined by, the application areas of signal, image and digital
media processing. These technical strengths are pivotal to Mercury's success in
the real-time market segments of defense electronics, medical imaging, OEM
solutions (including semiconductor imaging), and the developing markets within
wireless communications and have resulted in the following developments and
capabilities:
Switch Fabric Interconnects. Mercury connects different microprocessor types
(reduced instruction set computers ["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
that 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 that can drive a heterogeneous mix of
microprocessor types, such as Motorola's PowerPC processor and Analog Devices'
SHARC DSP processor.
Performance Density. The Company's thermal analysis expertise allows it to
design products that optimize the dissipation of heat from the system 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. Altogether,
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 hundreds
of processors used 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 (SAL) significantly increases the performance of customers'
applications, reduces development time and minimizes life-cycle support costs.
Systems 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 to develop solutions for 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 SIGINT for the military and medical
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 Creation of 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. RACEway
Interconnect system area network that Mercury developed was adopted as an
ANSI/VITA standard in 1995, and since then has been adopted by numerous
companies offering products and services for embedded real-time applications.
Together with Motorola, Mercury created the RapidIO Interconnect as a
next-generation, switch fabric standard. Now governed by the RapidIO Trade
Association, the RapidIO standard is being widely adopted in embedded computer
applications that extend beyond the Company's traditional markets. Participation
in the RapidIO Trade Association currently includes the major microprocessor
developers and the major telecom OEMs - some 90 companies in all.
PRODUCTS
HARDWARE PRODUCTS
Mercury offers three classes of systems to meet the full range of
requirements in signal and image processing applications.
High-Performance Class. Mercury offers a family of high-performance systems
for demanding defense electronics applications that are compute-intensive and
require a high I/O capacity and interprocessor bandwidth. These applications
include space time adaptive processing ("STAP"), ground-penetrating and
foliage-penetrating radar ("GPEN") and synthetic aperture radar ("SAR"). These
high-performance systems, known as MultiPort(TM) and PowerStream(TM), can scale
to hundreds of 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 primarily on the PowerPC processors and can scale to
several hundred processors. Mercury's 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(R) Series and RACE++(R) Series systems meets the
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computing speed, bandwidth and scalability requirements of many of today's
medium-performance radar, sonar and SIGINT applications. Advanced and future
radar systems are more likely to use the high performance class systems.
Industrial Class. Based on the PCI bus standard and the CompactPCI ("cPCI")
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 PowerPC processors. The VantageRT(TM) PCI-based
systems scale to 64 processors and are directed to the medical imaging and OEM
solutions markets, which are moving from VME- to PCI- based designs. Mercury
offers the motherboard ("MB") ImpactRT(TM) cPCI-based systems: the ImpactRT MB
uses the same daughtercards as Mercury's VME-based products, both processor
daughtercards and I/O daughtercards, scaling up to 12 microprocessors and
offering high performance and flexibility. The ImpactRT S500 is a complete
multiprocessor system that can operate as a single-board solution or scale up to
a 24-processor configuration, delivering a level of performance that is unique
in the 6U cPCI form factor.
SOFTWARE PRODUCTS
Mercury has developed a comprehensive line of software products that enable
accelerated development and running of digital signal and image processing
applications on Mercury hardware. The MC/OS Multicomputing run-time environment
is bundled with each system. The Company separately licenses software products,
and licenses a development software package that includes a development version
of the MC/OS operating environment, scientific algorithm libraries, debugging
tools and compilers.
Following are certain software products offered by the Company.
MC/OS Multicomputing Environment. The MC/OS operating environment allows
maximum use of the RACE heterogeneous multicomputer 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 classes of Mercury hardware systems.
Scientific Algorithm Library (SAL). SAL comprises more than 400 assembly
language routines optimized for specific target processors including Motorola's
PowerPC processor with AltiVec technology. These SAL routines include functions
for vector processing, FFTs and data conversion.
Vector Signal and Image Processing Library (VSIPL). A subset of the SAL
library has been restructured to conform to the VSIPL Standard. VSIPL-Lite
implements the VSIPL Core Lite function profile of the standard, which contains
the 125 most common functions for real-time signal processing. With a
performance that nearly equals SAL, VSIPL-Lite is a prime example of how Mercury
maintains a focus on performance while achieving portability through standards.
PixL(TM) Image Processing Algorithm Library (PixL). Image processing
applications must frequently perform intensive integer-based mathematics as part
of inner-loop processing. The PixL(TM) library addresses this need with
high-performance integer routines, optimized for the AltiVec family of
microprocessors. Applications coded with PixL library routines frequently
operate from 8 to 16 times faster than traditional scalar operations.
Parallel Acceleration System (PAS(TM)). PAS is a set of high-performance
libraries that 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.
MULTI(R) Integrated Development Environment (IDE). The RACE++ Series MULTI
IDE brings mainstream software development tools to the challenge of developing
real-time multicomputing solutions. With the MULTI IDE, developers can create
real-time multiprocessing routines using familiar, industry-leading, graphical
tools from Green Hills Software, the leader in embedded mainstream software
development tools and languages. The MULTI IDE features integrated tools
including the Language-Sensitive Text Editor, Project Builder, and Source-Level
Debugger, and supports open standards including ELF/DWARF, ANSI C and C++, and
PowerPC EABI.
TATL(TM) Trace Analysis Tool and Library. TATL is a system-level performance
analyzer and debugger that provides insight into complex multiprocessor
interactions in real-time systems. TATL works through the use of a low-overhead
event logging library during runtime and a powerful visualization tool for
off-line analysis of the dynamic communications, control and dependencies in the
system. Because TATL is both powerful and easy to use, there is a very short
"time to insight."
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 its technological
lead in the high-performance, real-time, signal processing industry.
Mercury is involved with researchers from other companies and government
organizations to contribute to the definition, standardization and
implementation of a software framework for use inside programmable radios.
Similar cooperative developments are underway to develop
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technology to optimize software code portability and reusability. This latter
research is focused on developing generic software components that 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 Defense Advanced Research Projects Agency ("DARPA") grants in
those areas where the DoD will obtain benefit from the development.
As of June 30, 2002, the Company had 222 people primarily engaged in
engineering, research and development, including hardware and software
architects and design engineers. During fiscal years 2002, 2001 and 2000, the
Company's total research and development costs were approximately $34.4 million,
$30.5 million, and $28.9 million, respectively.
CUSTOMER SUPPORT AND INTEGRATION
Mercury's Customer Services organization is engaged in a full range of
support functions, including training, technical program management, integration
and design services, custom software code application work, host porting
services and 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 organization, the Solution
Alliance team has developed many custom interfaces, reviewed customers' designs,
developed special hardware and software components and provided program
management on behalf of defense, medical and OEM customers. The capabilities of
this team 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
The Company has received the International Standard Organization ("ISO")
9001 certification for quality. The Company's manufacturing operations consist
primarily of materials planning and procurement, final assembly, burn-in, final
system testing and quality control. The Company designs all of the hardware
sub-assemblies for its products and uses the services of contract manufacturers
in the U.S. to build these sub-assemblies and certain of its products to the
Company's specifications. The Company uses automated testing equipment and
burn-in procedures, as well as comprehensive inspection and testing by
technicians, to assure the quality and reliability of its products.
Although the Company generally uses standard parts and components for its
products, certain components including custom designed ASICs, SRAM, and PowerPC
processors are presently available only from a single source or from limited
sources. The Company has no supply commitments from its vendors and generally
purchases components on a purchase order basis as opposed to entering into
long-term procurement agreements with vendors. The Company has generally been
able to obtain adequate supplies of components in a timely manner from current
vendors or, when necessary to meet production needs, from alternate vendors. The
Company believes that, in most cases, alternate vendors can be identified if
current vendors are unable to fulfill needs. However, delays or failure to
identify alternate vendors, if required, or a reduction or interruption in
supply or a significant increase in the price of components could adversely
affect the Company's revenues and financial results and could impact customer
relations.
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 of a prospective customer's product, where the customer
evaluates alternative design approaches. The principal competition within the
non-defense markets comes from internal development organizations, though from
time to time the Company does compete with other commercial companies for the
design win. A design win usually ensures, but does not always guarantee, that a
customer will purchase the Company's product until the next-generation system is
developed. 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, develop new technologies 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 embedded digital signal processing 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 significantly 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 would have a material adverse effect on the Company's business,
financial condition and results of operations. Within the defense electronics
market, occasionally, the Company competes with 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.
8
In the medical imaging industry, the principal basis for selection is
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 and 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. There can be no assurance that workstation manufacturers and other
low-end single-board computer, and merchant board computer companies will not
attempt to penetrate the high-performance market for medical imaging machines.
The evolution of microprocessor technology makes it possible to run the same
algorithm on smaller configurations creating more alternatives for designing an
embedded solution. Workstation manufacturers typically have greater resources
than does 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.
In other commercial and industrial markets, the primary basis for selection
are performance (measured in terms of processing performance, I/O speed, and
interprocessor communications bandwidth), price, systems engineering support,
quality of products and service, and on-time delivery.
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
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 five United States patents covering aspects of the RACE
architecture, and has several additional patents pending and applications
submitted. 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 other 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, 2002, the Company had a backlog of orders aggregating
approximately $60.9 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 12 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
9
business, financial condition and results of operations or its ability to
predict future revenues. Backlog should not be relied upon as indicative of the
Company's revenues for any future period.
EMPLOYEES
At June 30, 2002, the Company employed a total of 593 persons, including 222
in research and development, 213 in sales, marketing and customer support, 70 in
manufacturing and 88 in general and administration. Twenty-two of the Company's
employees are located in Europe, seven are located in Japan, and the remainder
are located 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
Statements in this report, as well as in oral comments 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 anticipated. Such risks and uncertainties include the factors
set forth below.
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 65%, 67%, and 71% of the
Company's revenues in fiscal 2002, 2001, and 2000, 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.
Changes in government administration, as well as changes in the
geo-political environment such as the current "War on Terrorism," can have
significant impact on defense spending priorities and the efficient handling of
routine contractual matters. Such changes could have a negative impact on 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 or customer. Termination for
convenience provisions generally entitle the Company to recover costs incurred,
settlement expenses and profit on work completed prior to termination. 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 that 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 2002, GE Medical,
Lockheed Martin and Raytheon Company accounted for 16%, 12% and 12%,
respectively, of the Company's revenues. In fiscal 2001, Lockheed Martin,
Raytheon Company and GE Medical accounted for 18%, 14% and 13%, respectively, of
the Company's revenues. In fiscal 2000, Raytheon Company, Lockheed Martin,
Northrop Grumman Corporation and GE Medical accounted for 19%, 14%, 12% and 12%,
respectively, of the Company's revenues. The Company's largest customer in the
medical imaging market, GE Medical, accounted for 57%, 52%, and 59% of the
Company's aggregate sales to the medical imaging market in fiscal 2002, 2001,
and 2000, 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. 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.
10
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 28%, 24% and 19% of the Company's revenues in
fiscal 2002, 2001 and 2000, respectively. These customers are original equipment
manufacturers ("OEMs") of medical imaging devices and, as a result, any change
in the demand for such devices that 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 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.
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." Due to the rapidly changing nature of technology, new
competitors may emerge of which the Company has no current awareness. Such
competitors could have a negative impact on the Company's ability to win future
business opportunities. There can be no assurance that workstation
manufacturers, other low-end single-board computer, and merchant board computer
companies, or a new competitor will not attempt to penetrate the
high-performance market for defense electronics systems. With continued
microprocessor evolution, low-end systems could become adequate to meet the
requirements of an increased number of the lesser-demanding applications within
the Company's target markets. 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
SLOWDOWN IN THE ECONOMY. The Company's business has been negatively impacted
by the slowdown in the economies of the United States, Asia and elsewhere that
began during fiscal 2001. The uncertainty regarding the growth rate of the
worldwide economies has caused companies to reduce capital investment and may
cause further reduction of such investments. These reductions have been
particularly severe in the electronics and semiconductor industry, which Mercury
serves. While Mercury's business may be performing better than some companies in
periods of economic decline, the effects of the economic decline are being felt
across all of the Company's business segments and is a contributor to the slower
than normal customer orders. The Company cannot predict if or when the growth
rate of worldwide economies will rebound, whether the growth rate of its
business will rebound when the worldwide economies begin to grow, or if or when
the Company's growth rate will return to historical numbers.
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 that may have
substantially greater research and development resources, marketing and
financial resources, manufacturing capability and customer support organizations
than those 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 from standard
product sales. 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 its 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.
The Company's quarterly results may be subject to fluctuations resulting
from the foregoing factors as well as from 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, medical imaging and other
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 previous 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. If
actual
11
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 key
vendors like LSI Logic, Atmel and Toshiba for custom-designed ASICs, as well as
Motorola for many of its PowerPC line of processors and IBM for a specific SRAM.
Generally, suppliers may terminate their contract with the Company without cause
upon 30-days notice and may cease offering products to the Company upon 180-days
notice. If LSI Logic, Atmel, Toshiba, IBM or Motorola were to limit or reduce
the sale of such components to the Company, or if these or other component
suppliers to the Company, some of which are small companies, 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 and other suppliers are each 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; 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 ON CONTRACT MANUFACTURERS. The Company relies on contract
manufacturers to build hardware sub-assemblies for the Company's products in
accordance with the Company's specifications. During the normal course of
business, the Company may provide demand forecasts to our contract manufacturers
up to five months prior to scheduled delivery of products to its customers. If
the Company overestimates its requirements, the contract manufacturers may
assess cancellation penalties or may result in excess inventory, which may
negatively impact earnings. If the Company underestimates its requirements, the
contract manufacturers may have inadequate inventory, which could interrupt
manufacturing of its products and result in delays in shipment to customers and
revenue recognition. The Company may not be able to effectively manage the
relationship with its contract manufacturers, and such contract manufacturers
may not meet our future requirements for timely delivery. The Company's contract
manufacturers also build products for other companies, and cannot assure the
Company that they will always have sufficient quantities of inventory available
to fill the Company's orders or that they will allocate their internal resources
to fill these orders on a timely basis. The contract manufacturing industry is a
highly competitive, capital-intensive business with relatively low profit
margins. In addition, there have been a number of major acquisitions within the
contract manufacturing industry in recent periods. While to date there has been
no significant impact on the Company's contract manufacturers, future
acquisitions could potentially have an adverse effect on its working
relationship with its contract manufacturers.
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 are subject to any employment contract or
non-competition 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.
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, the Netherlands and France.
Foreign-based revenue is determined based on the country in which the legal
subsidiary is domiciled, and represented less than 10% of the Company's total
revenue for the fiscal years ended June 30, 2002, 2001 and 2000, 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,
12
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. 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.
ACQUISITIONS. Acquisitions may be costly and difficult to integrate, divert
management resources or dilute shareholder value. The Company has considered and
completed strategic acquisitions in the past, including the acquisition in 2002
of Myriad. In addition, in the future the Company may acquire or make
investments in complementary companies, products or technologies. The Company
may not be able to fully integrate Myriad or any acquired companies, products or
technologies successfully. In connection with any acquisitions or investments it
could: issue stock that would dilute the Company's existing shareholders'
percentage ownership; incur debt and assume liabilities; obtain financing on
unfavorable terms; incur amortization expenses related to acquired intangible
assets or incur large and immediate write-offs; incur large and immediate
write-offs related to office closures of the acquired companies, including costs
relating to termination of employees and facility and leasehold improvement
charges relating to vacating the acquired companies' premises; and reduce the
cash that would otherwise be available to fund the Company's operations or to
use for other purposes. The Myriad acquisition and future potential acquisitions
may pose additional risks to the Company's operations, including: problems and
increased costs in connection with integration of the personnel, operations,
technologies or products of the acquired companies; unanticipated costs;
diversion of management's attention from its core business; adverse effects on
business relationships with the Company's suppliers and customers and those of
the acquired company; acquired assets becoming impaired as a result of technical
advancements or worse-than-expected performance by the acquired company;
entering markets in which the Company has no, or limited, prior experience; and
potential loss of key employees, particularly those of the acquired
organization. Failure to successfully integrate any future acquisition may harm
the Company's business.
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 that 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 and OEM solutions markets, including the
semiconductor imaging market, also seek technological improvements through
product enhancements and new generations of products. 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 or semiconductor imaging equipment, or that, if selected, the
Company will generate any revenues for such design work. Failure to participate
in future designs of medical or semiconductor 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 OEM 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, including
the risk of inventory obsolescence. Because of the complexity of its products,
the Company has experienced delays from time to time in completing products on a
timely 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.
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."
RESEARCH AND DEVELOPMENT. The Company's industry is characterized by the
need for continued investment in research and development. If the Company failed
to invest sufficiently in research and development, the Company's products could
become less attractive to potential customers, and its business and financial
condition could be materially adversely affected. As a result of the Company's
need to maintain or increase its spending levels in this area and the difficulty
in reducing costs associated with research and development, the Company's
operating results could be materially harmed if its revenues fall below
expectations. In addition, as a result of Mercury's commitment to invest in
research and development, spending as a percent of revenues may fluctuate in the
future.
13
STOCK PRICE VOLATILITY. The Company's stock price, like that of other
technology companies, has been extremely volatile. When the market price of a
stock has been volatile, holders of that stock have sometimes instituted
securities class action litigation against the company that issued the stock. If
any of Mercury's stockholders were to bring a lawsuit against us, we could incur
substantial costs defending the lawsuit. In addition, the lawsuit could divert
the time and attention of our management. The stock market in general, and
technology companies like Mercury in particular, may continue to experience
volatility in their stock prices. Such volatility may or may not be related to
the operating performance of the Company. The continued threat of terrorism in
the United States and abroad, the resulting military action and heightened
security measures undertaken in response to that threat can be expected to cause
continued volatility in securities markets.
ITEM 2. PROPERTIES
The Company's headquarters consist of two buildings approximating 187,000
square feet of space in Chelmsford, Massachusetts. The Company purchased these
two buildings 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;
Dallas, Texas; Chanhassen, Minnesota; Vienna, Virginia; and Silver Spring,
Maryland. The Company has international offices in the United Kingdom, France,
the Netherlands and Japan.
ITEM 3. LEGAL PROCEEDINGS
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 stock options to purchase 96,000
shares of common stock at an exercise price of $2.00 per share, and other
financial consideration. The Company has objected to the claims and is
aggressively defending the matter. The testimony and final argument phases of
binding arbitration have been completed and a final ruling is anticipated before
calendar year-end 2002. The position of the Company's management, after
consultation with external counsel, is that a loss from this action is not
probable. Accordingly, no loss accrual has been recorded. If the plaintiff were
to prevail on his claims, depending on the price of the Company's common stock,
a judgment against the Company could be awarded for a material amount.
In addition, The Company is subject to legal proceedings and claims that arise
in the ordinary course of business. The Company does not believe these actions
will have a material adverse effect on its financial position or results of its
operations.
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, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed and traded on the Nasdaq National Market
under the symbol MRCY. The following table sets forth, for the periods
indicated, the high and low sale prices per share for the Company's common stock
during such periods. Such market quotations reflect inter-dealer prices without
retail markup, markdown or commission.
High Low
---- ---
2002 First quarter $56.11 $25.00
Second quarter 50.17 35.00
Third quarter 40.11 30.00
Fourth quarter 32.00 19.89
2001 First quarter 31.81 19.81
Second quarter 50.00 26.13
Third quarter 54.13 34.94
Fourth quarter 54.56 30.25
As of August 30, 2002, the Company had approximately 12,000 shareholders
including record and nominee holders.
The Company has never declared or paid cash dividends on shares of its Common
Stock. The Company currently intends to retain any earnings for future growth.
In addition, the Company has certain debt agreements that prohibit the payment
of cash dividends to its stockholders. Accordingly, the Company does not
anticipate that any cash dividends will be declared or paid on the Common Stock
in the foreseeable future.
14
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, 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues $150,115 $180,492 $140,944 $106,571 $ 85,544
Income from operations 14,578 39,557 33,461 18,623 13,105
Net income 15,828 30,684 24,896 13,462 8,731
Net income per share:
Basic $ 0.73 $ 1.42 $ 1.19 $ 0.66 $ 0.60
Diluted $ 0.69 $ 1.33 $ 1.10 $ 0.62 $ 0.47
JUNE 30, 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital $ 96,051 $101,391 $ 67,977 $ 42,312 $ 32,794
Total assets 167,111 183,584 144,217 97,511 73,569
Long-term obligations 12,899 13,430 14,052 590 --
Total stockholders' equity $135,725 $147,788 $108,360 $ 77,440 $ 61,040
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
appearing in Item 1 in this report on Form 10-K.
OVERVIEW
Mercury designs, manufactures and markets high-performance, real-time digital
signal and image 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 a few to hundreds of microprocessors within a single
system.
During the past several years, the majority of the Company's revenue has 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 imaging is another primary market currently
served by the Company. Mercury's computer systems are embedded in magnetic
resonance imaging ("MRI"), computed tomography ("CT"), positron emission
tomography ("PET"), and digital cardiology imaging machines. The remaining
revenues are derived from computer systems used in such commercial OEM solutions
as semiconductor photomask generation, wafer inspection, baggage scanning,
seismic analysis and development of new reticle inspection and wafer inspection
systems.
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 in 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 resellers and end-users. Over the past three fiscal years, the
Company has expanded its sales force to support growing revenues, made
significant expenditures to recruit additional technical and professional staff,
invested in information technology, and improved the Company's financial,
administrative and management infrastructure.
Revenue is recognized upon shipment provided that title and risk of loss have
passed to the customer, there is persuasive evidence of an arrangement, the
sales price is fixed or determinable, collection of the related receivable is
reasonably assured, and customer acceptance criteria, if any, have been
successfully demonstrated. For products with acceptance criteria that are not
successfully demonstrated prior to shipment, revenue is recognized upon customer
acceptance. The Company accrues for anticipated warranty costs upon shipment.
For long-term contracts to design, develop, manufacture or modify complex
equipment, revenue is recognized using the percentage of completion
15
accounting method based on contract costs incurred to date compared with total
estimated contract costs. Revisions in contract cost estimates have the effect
of adjusting earnings applicable to performance in prior periods in the current
period. Anticipated losses, if any, are recognized in the period in which
determined. Service revenue is recognized ratably over applicable contract
periods or as the services are performed.
Cost of revenues includes the cost of materials, component assembly, internal
labor and related overhead. Cost of revenues also may include engineering and
other technical labor and related overhead incurred in development and
engineering consulting contracts and provisions for inventory and warranty.
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.
Mercury has made significant investments in research and development in an
effort to maintain its technology leadership in digital signal and image
processing. Mercury invested $34.4 million, $30.5 million and $28.9 million in
fiscal years 2002, 2001 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,
medical imaging systems, and other commercial applications. 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.
On April 1, 2002, the Company completed its acquisition of Myriad Logic, Inc.
("Myriad"). Myriad is a leading developer of I/O technology based in Silver
Spring, Maryland. The acquisition of Myriad expands Mercury's capability to
provide more of a total system solution and provide more system integration
services. The total purchase price of $7.9 million consisted of $7.5 million in
cash plus $0.4 million of transaction costs directly related to the acquisition.
As a result of the acquisition, the Company recorded approximately $4.2 million
of goodwill and $3.4 million of acquired intangible assets.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGEMENTS AND ESTIMATES
The Company has identified the policies discussed below as critical to
understanding its business and its results of operations. The impact and any
associated risks related to these policies on its business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such polices affect its reported and expected
financial results.
The preparation of consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to inventories, bad debts, income taxes, warranties,
contingencies and litigation. The Company bases its estimates on historical
experience and on appropriate and customary assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue is recognized upon shipment provided that title and risk of loss have
passed to the customer, there is persuasive evidence of an arrangement, the
sales price is fixed or determinable, collection of the related receivable is
reasonably assured, and customer acceptance criteria, if any, have been
successfully demonstrated. For products with acceptance criteria that are not
successfully demonstrated prior to shipment, revenue is recognized upon customer
acceptance. The Company accrues for anticipated warranty costs upon shipment.
For long-term contracts to design, develop, manufacture or modify complex
equipment, revenue is recognized using the percentage of completion accounting
method based on contract costs incurred to date compared with total estimated
contract costs. Revisions in contract cost estimates have the effect of
adjusting earnings applicable to performance in prior periods in the current
period. Anticipated losses, if any, are recognized in the period in which
determined.
Service revenue is recognized ratably over applicable contract periods or as the
services are performed.
The Company assesses collectibility of trade receivables based on a number of
factors, including past transaction and collection history with a customer and
the credit-worthiness of the customer. If the Company determines that
collectibility of a particular sale is not reasonably
16
assured, revenue is deferred until such time as collection becomes reasonably
assured, which generally occurs upon receipt of payment from the customer.
Inventories, which include materials, labor and manufacturing overhead, are
stated at the lower of cost (first-in, first-out basis) or net realizable value.
On a quarterly basis, the Company uses consistent methodologies to evaluate
inventories for net-realizable value. The Company records a provision for excess
and obsolete inventory, consisting of on-hand and non-cancelable on-order
inventory in excess of estimated usage. The excess and obsolete inventory
evaluation is based upon assumptions about future demand, product mix and
possible alternative uses. If actual demand, product mix or possible alternative
uses are less favorable than those projected by management, additional inventory
write-downs may be required.
The Company assesses the impairment of acquired intangible assets, property and
equipment and goodwill whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors the Company considers
important that could indicate impairment include significant underperformance
relative to prior operating results projections, significant changes in the
manner of the Company's use of the asset or the strategy for the Company's
overall business and significant negative industry or economic trends. When the
Company determines that the carrying value of acquired intangible assets,
property and equipment and goodwill may not be recoverable based upon the
existence of one of more of the above indicators of impairment, the Company
measures any impairment based on a projected discounted cash flow method using a
discount rate determined by its management to be commensurate with the risk
inherent in its current business model.
The Company evaluates the realizability of its deferred tax assets on a
quarterly basis and assesses the need for a valuation allowance. Realization of
the Company's net deferred tax assets is dependent on its ability to generate
sufficient future taxable income. The Company believes that it is more likely
than not that its net deferred tax assets will be realized based on forecasted
income, however, there can be no assurance that the Company will be able to meet
its expectations of future income.
The Company and certain officers of the Company have been named as defendants in
a former employee litigation matter. The Company's assumption and estimate with
regard to this litigation matter is that a loss is not probable and no loss
accrual has been recorded. If the plaintiff was to prevail on his claims and
this assumption proves incorrect, the litigation could have a material effect on
the Company's financial position and results of operations.
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, 2002 2001 2000
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 34.8 33.1 27.8
------ ------ ------
Gross profit 65.2 66.9 72.2
Operating expenses:
Selling, general and administrative 32.6 28.1 28.0
Research and development 22.9 16.9 20.5
------ ------ ------
Total operating expenses 55.5 45.0 48.5
------ ------ ------
Income from operations 9.7 21.9 23.7
Other income, net 4.9 3.1 2.1
------ ------ ------
Income before income taxes 14.6 25.0 25.8
Provision for income taxes 4.1 8.0 8.1
------ ------ ------
Net income 10.5% 17.0% 17.7%
====== ====== ======
FISCAL 2002 VS. FISCAL 2001
REVENUES
Total revenues decreased 17% from $180.5 million during the year ended June 30,
2001 to $150.1 million during the year ended June 30, 2002. International
revenues represented 9% of total revenues for the year ended June 30, 2002
compared with 7% of total revenue for the year ended June 30, 2001
Defense electronics revenues decreased 18% from $120.4 million or 67% of total
revenues during the year ended June 30, 2001 to $98.2 million or 65% of total
revenues during the year ended June 30, 2002. The decrease in revenues was due
primarily to delays in the U.S. Defense Department programs resulting from
re-planning processes and shifting of priorities to the operational necessities
of the war on terrorism and airborne surveillance, partially offset by
approximately $3 million in revenues from the acquisition of Myriad, which
occurred in April 2002. The Company expects defense electronics revenues to
increase in future periods as the result of the Myriad acquisition and an
expected increase in U.S. Defense spending related to the Company's products.
Medical imaging revenues decreased by 5% from $43.5 million or 24% of total
revenues during the year ended June 30, 2001 to $41.4 million or 28% of total
revenues during the year ended June 30, 2002. Medical imaging revenues declined
in the fourth quarter due primarily
17
to lower sales of CT systems, resulting in a year-over-year decline in medical
imaging revenues. The reduction in revenues derived from sales of systems to the
Company's three CT OEM customers was due to introductions by these customers of
CT systems that do not contain Mercury products and a reduction in average
revenue per system in other modalities. As a result, medical imaging revenues
are expected to decrease in fiscal 2003.
OEM solutions revenues decreased 37% from $16.6 million or 9% of total revenues
during the year ended June 30, 2001 to $10.5 million or 7% of total revenues
during the year ended June 30, 2002. The decrease in OEM solutions revenues was
due primarily to the economic downturn in the semiconductor manufacturing
sector. The Company expects OEM Solutions revenues to increase in future periods
due to new semiconductor system design wins currently in development.
COST OF REVENUES
Cost of revenues decreased 13% from $59.8 million during the year ended June 30,
2001 to $52.2 million during the year ended June 30, 2002. The decrease in cost
of revenues was primarily related to lower sales volumes in fiscal 2002. Cost of
revenues as a percentage of total revenues increased from 33% during the year
ended June 30, 2001 to 35% during the year ended June 30, 2002. The increase in
costs as a percentage of total revenues was primarily due to an increase in
outside manufacturing and component costs, a shift in product mix from higher
margin defense products to lower margin medical and commercial products, and
higher inventory provisions.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased 3% from $50.6 million
during the year ended June 30, 2001 to $48.9 million during the year ended June
30, 2002. Selling, general and administrative expenses as a percentage of total
revenues were 28% and 33% for the years ended June 30, 2001 and 2002,
respectively. The decrease in expenses year over year was primarily due to the
reduction in expenses associated with the implementation of a new financial,
manufacturing and administrative computer system, reduced commissions associated
with lower sales volume, slightly offset by amortization of acquired intangible
assets related to the acquisition of Myriad.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses increased 13% from $30.5 million
during the year ended June 30, 2001 to $34.4 million during the year ended June
30, 2002. R&D expenses as a percentage of total revenues were 17% during the
year ended June 30, 2001 and 23% during the year ended June 30, 2002. The
increase in research and development expenses was primarily related to increased
personnel and the addition of a new medical development program in fiscal 2002.
The increase in R&D expenses as a percentage of revenue was primarily due to the
lower sales volume and higher R&D expenditures in fiscal 2002 than in fiscal
2001.
INTEREST INCOME, NET
The Company earned $2.9 million in interest income, net, during the year ended
June 30, 2001 and $2.8 million during the year ended June 30, 2002. This
decrease is primarily due to lower average balances of invested cash as well as
lower interest rates in fiscal 2002 than in fiscal 2001.
GAIN ON SALES OF DIVISION AND JOINT VENTURE
On January 18, 2000, the Company completed the sale of its shared storage
business unit ("SSBU") to IBM. Payments were 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 $1.6 million,
including principal and 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 a patent and other intellectual property. The
Company recorded a $6.4 million gain during each of the fiscal years ended June
30, 2002 and 2001 related to the receipt of such contingent payments. The last
payment by IBM is scheduled for the third quarter of fiscal 2003 in the amount
$2.6 million, which consists of the regular $1.6 million quarterly payment plus
$1.0 million held in escrow. Future payments by IBM will be similarly recorded
as gains when collected.
On February 8, 2002, the Company sold its entire interest in the AgileVision
joint venture to Leitch Technology Corporation. The Company received no proceeds
and recorded a $78,000 gain related to the sale of the joint venture in fiscal
2002.
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 provided broadcasters and
cable providers with 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 recognized $3.3 million and $1.8
million of losses related to the operations of AgileVision during the years
ended June 30, 2001 and 2002, respectively. On February 8, 2002, the Company
sold its entire interest in the AgileVision joint venture to Leitch Technology
Corporation.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes was $14.4 million during the year ended
June 30, 2001 and $6.2 million during the year ended June 30, 2002. The
Company's effective tax rate was 32% during the year ended June 30, 2001 and 28%
during the year ended June 30, 2002. The tax rates for both years ended June 30,
2002 and 2001 were lower than the federal statutory rate of 35% primarily due to
the utilization of R&D credits and tax-exempt interest income, offset partially
by state income tax. The reduction in the tax rate from 32% to 28% year over
year was primarily the result of the Company earning less taxable income during
the year ended June 30, 2002 as compared
18
with the prior year, as the amounts of certain tax benefit items declined less
significantly than did the amount of profit before taxes.
FISCAL 2001 VS. FISCAL 2000
REVENUES
Total revenues increased 28% from $140.9 million during the year ended June 30,
2000 to $180.5 million during the year ended June 30, 2001.
Defense electronics revenues increased 20% from $100.3 million or 71% of total
revenues during the year ended June 30, 2000 to $120.4 million or 67% of total
revenues during the year ended June 30, 2001. This increase in revenue was
primarily due to the increased unit demand for defense electronics products,
largely comprised of advanced military applications in radar and airborne
surveillance.
Medical imaging revenues increased 61% from $27.1 million or 19% of total
revenues during the year ended June 30, 2000 to $43.5 million or 24% of total
revenues during the year ended June 30, 2001. The increase in medical imaging
revenues reflects the increase in production volume of product for both MRI and
CT imaging systems, along with the first production shipments of product for
digital cardiology imaging systems.
OEM solution and other revenues increased 23% from $13.5 million or 10% of total
revenues during the year ended June 30, 2000 to $16.6 million or 9% of total
revenues during the year ended June 30, 2001. The increase in OEM solution and
other revenues was due primarily to the expansion into existing markets,
particularly semiconductor photomask generation, offset in part by the loss of
the SSBU revenues.
COST OF REVENUES
Cost of revenues increased 53% from $39.1 million during the year ended June 30,
2000 to $59.8 million during the year ended June 30, 2001. Cost of revenues as a
percentage of total revenues increased from 28% during the year ended June 30,
2000 to 33% during the year ended June 30, 2001. The increase in costs as a
percentage of total revenues was primarily due to an increase in external
processing and component costs, a shift from higher margin defense products to
lower margin commercial products, and costs associated with re-establishing
certain discontinued standard parts.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased 28% from $39.5 million
during the year ended June 30, 2000 to $50.6 million during the year ended June
30, 2001. Selling, general and administrative expenses as a percentage of total
revenues were 28% for the years ended June 30, 2000 and 2001. The increase in
expenses year over year was primarily due to expenses associated with the
ongoing cost of implementing a new financial, manufacturing, and administrative
computer system. Additionally, commissions associated with higher sales volume
and the ongoing development of the Company's sales and management infrastructure
to support the Company's growth contributed to the increased expenses.
RESEARCH AND DEVELOPMENT
R&D expenses increased 6% from $28.9 million during the year ended June 30, 2000
to $30.5 million during the year ended June 30, 2001. R&D expenses as a
percentage of total revenues were 20% during the year ended June 30, 2000 and
17% during the year ended June 30, 2001. The increase in R&D 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 core products and a
significant investment in the R&D activities of the Wireless Communications
Group.
INTEREST INCOME, NET
The Company earned $1.7 million in interest income, net, during the year ended
June 30, 2000 and $2.9 million during the year ended June 30, 2001. This
increase is primarily due to higher average cash balances offset in part by
lower interest rates.
GAIN ON SALE OF DIVISION
On January 18, 2000, the Company completed the sale of SSBU to IBM. Payments
were 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 $1.6 million including principal and 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 recorded $6.4
million and $4.8 million of gains during the years ended June 30, 2001 and 2000,
respectively. During the year ended June 30, 2000, the $4.8 million gain
consisted of $6.1 million of cash received (initial $4.5 million plus the first
quarterly payment of $1.6 million) less legal and advisory costs of $581,000,
compensation costs of $499,000, and 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 investment in AgileVision during
the year ended June 30, 2000 and 2001 amounted to $3.5 million and $3.4 million,
respectively. The Company recognized $3.7 million and $3.3 million of losses on
the equity-basis of accounting related to
19
the operations of AgileVision during the years ended June 30, 2000 and 2001,
respectively. On July 13, 2001, the Company's board of directors approved an
additional investment of up to $1 million for the purpose of continuing to fund
the AgileVision operations.
PROVISION FOR INCOME TAXES
The Company's provision for income taxes was $11.4 million during the year ended
June 30, 2000 and $14.4 million during the year ended June 30, 2001. The
Company's effective tax rate was 31.5% during the year ended June 30, 2000 and
32.0% during the year ended June 30, 2001. The tax rates for both years ended
June 30, 2000 and 2001 were lower than the federal statutory rate of 35%
primarily due to the utilization of R&D credits and tax-exempt interest income,
offset partially by state income tax.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, the Company had cash and marketable securities of
approximately $71.4 million. During the year ended June 30, 2002, the Company
generated approximately $15.9 million in cash from operations compared to $26.1
million generated during the year ended June 30, 2001. The decrease in cash
generated from operations is attributable primarily to the Company's decrease in
net income, slightly offset by a decrease in accounts receivable.
The Company generated approximately $19.7 million from investing activities
during the year ended June 30, 2002 compared to $21.8 million used during the
year ended June 30, 2001. During the year ended June 30, 2002, the Company's
investing activities consisted of $7.9 million for the acquisition of Myriad
Logic, Inc., $1.0 million of cash investments in AgileVision and $5.8 million
for purchases of computers, furniture and equipment. These payments were offset
by the receipt of $6.4 million from the sale of a division, which was sold in
fiscal 2000 and $28.1 million, net from the sale of marketable securities.
During the year ended June 30, 2001, the Company's investing activities
consisted of $19.1 million for the purchase of marketable securities (net of
sales), $1.7 million of cash investments in AgileVision, and $7.4 million for
the purchases of computers, furniture and equipment. These payments were
partially offset by the receipt of $6.4 million from the sale of a division.
The Company used approximately $31.5 million in cash from financing activities
during the year ended June 30, 2002 compared to generating $3.1 million during
the year ended June 30, 2001. During the year ended June 30, 2002, the Company's
financing activities consisted of payments of $35.0 million for the acquisition
of treasury stock and $0.9 million for the payment of debt and capital lease
obligations. These cash outflows were partially offset by $4.4 million in cash
generated from sales of common stock under the employee stock purchase plan and
upon the exercise of stock options. During the year ended June 30, 2001, the
Company's financing activities consisted primarily of $4.3 million of cash
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 $1.2 million.
In January 2002, the Company initiated a stock repurchase program. The stock
repurchase program was approved by the Board of Directors and authorized the
Company to purchase up to $35.0 million in Company stock from time to time
through September 4, 2002. During the year ended June 30, 2002, the Company
purchased approximately 1.1 million shares of common stock for $35.0 million,
completing the program.
The terms of the Company's mortgage note agreements contain certain covenants,
which, among other provisions, require the Company to maintain a minimum net
worth and prohibit the payment of cash dividends. The Company was in compliance
with all covenants of the note agreements as of June 30, 2002.
The following is a schedule of the Company's contractual obligations outstanding
at June 30, 2002:
LESS THAN 2-3 4-5
(IN THOUSANDS) TOTAL 1 YEAR YEARS YEARS THEREAFTER
- -------------- ----- ------ ----- ----- ----------
NOTES PAYABLE $12,985 $ 667 $ 1,490 $ 1,723 $ 9,105
CAPITAL LEASES 96 96 -- -- --
INTEREST DUE ON NOTES PAYABLE 6,683 922 1,651 1,453 2,657
UNCONDITIONAL PURCHASE OBLIGATIONS 6,787 6,787 -- -- --
OPERATING LEASES 1,673 561 854 258 --
------- ------- ------- ------- -------
TOTAL $28,224 $ 9,033 $ 3,995 $ 3,434 $11,762
======= ======= ======= ======= =======
Management believes the Company's available cash, marketable securities, and
cash generated from operations, will be sufficient to provide for the Company's
working capital and capital expenditure requirements for the next 12 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.
20
RELATED PARTY TRANSACTIONS
In 1996, the Company entered into a contract with NDC Development Associates,
Inc. ("Northland") to perform design, development, permitting and management
activities related to the construction of new corporate facilities. An officer
and principal of Northland is an immediate family member of the Company's chief
executive officer. The Company paid Northland fees of $83,008, $29,453 and
$285,613 for the fiscal years ended June 30, 2002, 2001 and 2000, respectively.
The Company believes that these fees paid to Northland were made in the ordinary
course of business on terms that were no less favorable to the Company than
could have been obtained from unaffiliated parties. No amounts were owed to
Northland as of June 30, 2002 or 2001.
In conjunction with the development and construction of an additional facility,
the Company is negotiating a similar arrangement with Northland to assist with
the design, permitting activities and oversight of the construction of a new
facility. This arrangement is subject to a competitive pricing analysis and
review by the Audit Committee of the Board of Directors to ensure that the terms
of the arrangement are fair and no less favorable to the Company than could be
obtained from unaffiliated parties.
The Company has arrangements with other parties that do not meet the technical
disclosure requirements of related parties and are not material in the
aggregate. These individual arrangements either fall under reporting thresholds
or are with non-immediate family members of executive officers of the Company.
The Company believes that the terms of these arrangements, which are based upon
hourly rates for services performed, were fair and no less favorable to the
Company than could have been obtained from unaffiliated parties.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Obligations Associated with the Retirement of Long-Lived Assets." SFAS 143
provides the accounting requirements for retirement obligations associated with
tangible long-lived assets. SFAS 143 is effective for financial statements for
fiscal years beginning after June 15, 2002. The Company adopted SFAS 143 on July
1, 2002, and the adoption of SFAS 143 did not have a material impact on the
Company's financial position or results of operations.
In October 2001, FASB issued Statement of Financial Accounting Standards No. 144
("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS 144 requires one method of accounting for long-lived assets to be disposed
of by sale. SFAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company adopted SFAS 144 on July 1,
2002. The adoption of SFAS 144 did not have a material impact on the Company's
financial position or results of operations.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002." Adoption of the standard is generally required in the fiscal
year beginning after May 15, 2002, with certain provisions becoming effective
for financial statements issued on or after May 15, 2002. Under the standard,
transactions currently classified by the Company as extraordinary items will no
longer be treated as such but instead will be reported as other non-operating
income or expenses. The Company adopted SFAS 145 on July 1, 2002, and the
adoption of SFAS 145 did not have a material impact on the Company's financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which supercedes EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are required to be adopted for exit or disposal activities
that are initiated after December 31, 2002. Under this standard, a liability for
a cost associated with an exit or disposal activity formerly recognized upon the
entity's commitment to an exit plan is now recognized when the liability is
incurred. Management does not expect SFAS 146 will have a material impact on the
Company's financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The fair value of the Company's cash and investment portfolio at June 30, 2002
approximated carrying value due to the short-term duration. 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 would not be
materially different from the year-end carrying value.
The Company's mortgage note agreements have fixed interest rates. A hypothetical
change in interest rates impacts the fair value of the mortgage notes payable
but has no impact on interest incurred or cash flows. Interest rate risk was
estimated as the potential change in fair value from a hypothetical 10% increase
and decrease in interest rates. The hypothetical fair value would not be
materially different from the year-end carrying value.
FOREIGN CURRENCY RISK
The Company operates primarily in the United States. To date, greater than 90%
of the Company's revenues has been billed and collected in U.S. dollars.
However, a portion of the Company's business is conducted outside the United
States through its foreign subsidiaries in the United Kingdom, Japan, the
Netherlands and France, where business is transacted in non -U.S. dollar
currencies. Accordingly, the Company is subject to exposure from adverse
movements in the exchange rates of these currencies. The Euro is used as the
functional currency for the
21
Company's subsidiaries in France and the Netherlands, while the local currency
is used as the functional currency for the Company's subsidiaries in the United
Kingdom and Japan. Consequently, changes in the exchange rates of these
currencies may impact the translation of the foreign subsidiaries' statements of
operations into U.S. dollars, which may in turn affect the Company's
consolidated statements of operations. The impact of the movements in foreign
currency exchange rates has been immaterial for all periods.
The Company has not entered into any financial derivatives instruments that
expose it to material market risk, including any instruments designed to hedge
the impact of foreign currency exposures.
22
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MERCURY COMPUTER SYSTEMS, INC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA) JUNE 30, 2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 17,513 $ 13,307
Marketable securities 37,997 54,135
Accounts receivable, net of allowances of $792 and $600
at June 30, 2002 and 2001, respectively 31,797 34,928
Inventory 14,540 12,840
Deferred tax assets, net 5,621 3,206
Prepaid income taxes 3,120 --
Prepaid expenses and other current assets 3,950 5,341
--------- ---------
Total current assets 114,538 123,757
Marketable securities 15,870 28,166
Property and equipment, net 27,961 28,793
Goodwill 4,225 --
Acquired intangible assets, net 3,188 --
Deferred tax assets, net 435 2,207
Other assets 894 661
--------- ---------
Total assets $ 167,111 $ 183,584
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,673 $ 6,638
Accrued expenses 5,291 4,263
Accrued compensation 6,277 7,427
Capital lease obligations 92 292
Notes payable 667 621
Billings in excess of revenues and customer advances 1,487 1,060
Income taxes payable -- 2,065
--------- ---------
Total current liabilities 18,487 22,366
Notes payable 12,318 12,985
Deferred compensation 581 337
Capital lease obligations -- 108
--------- ---------
Total liabilities 31,386 35,796
Commitments and contingencies (Note H)
Stockholders' Equity:
Common stock, $.01 par value; 65,000,000 shares authorized; 22,268,427 and
21,811,738 shares issued at June 30, 2002 and 2001, respectively;
21,124,627 and 21,811,738 shares outstanding at June 30, 2002 and 2001,
respectively 222 218
Additional paid-in capital 49,863 42,575
Treasury stock, at cost, 1,143,800 shares at June 30, 2002 (34,993) --
Retained earnings 120,353 104,525
Accumulated other comprehensive income 280 470
--------- ---------
Total stockholders' equity 135,725 147,788
--------- ---------
Total liabilities and stockholders' equity $ 167,111 $ 183,584
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
23
MERCURY COMPUTER SYSTEMS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED JUNE 30, 2002 2001 2000
---- ---- ----
Net revenues $ 150,115 $ 180,492 $ 140,944
Cost of revenues 52,244 59,815 39,146
--------- --------- ---------
Gross profit 97,871 120,677 101,798
Operating expenses:
Selling, general and administrative 48,939 50,636 39,475
Research and development 34,354 30,484 28,862
--------- --------- ---------
Total operating expenses 83,293 81,120 68,337
--------- --------- ---------
Income from operations 14,578 39,557 33,461
Interest income 3,752 3,977 2,430
Interest expense (987) (1,065) (731)
Equity loss in joint venture (1,752) (3,310) (3,721)
Gain on sales of division and joint venture 6,478 6,400 4,820
Other income (expense), net (86) (435) 86
--------- --------- ---------
Income before income tax provision 21,983 45,124 36,345
Income tax provision 6,155 14,440 11,449
--------- --------- ---------
Net income $ 15,828 $ 30,684 $ 24,896
========= ========= =========
Net income per share:
Basic $ 0.73 $ 1.42 $ 1.19
========= ========= =========
Diluted $ 0.69 $ 1.33 $ 1.10
========= ========= =========
Weighted average shares outstanding:
Basic 21,731 21,576 21,000
========= ========= =========
Diluted 22,918 23,104 22,703
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
24
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS) FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
Accumulated
Other
Additional Compre- Compre- Total
Common Stock Paid-In Treasury Retained hensive hensive Stockholders'
Shares Amount Capital Stock Earnings Income Income Equity
------ ------ ------- ----- -------- ------ ------ ------
Balance June 30, 1999 20,622 $ 206 $ 28,412 $ 48,945 $ (123) $ 77,440
Exercise of common stock
options 734 7 2,997 3,004
Issuance of common stock under
employee stock purchase plan 39 1 736 737
Tax benefit from stock options 1,877 1,877
Stock-based compensation 424 424
Comprehensive income:
Net income 24,896 $ 24,896 24,896
Unrealized loss on
securities (41) (41) (41)
Foreign currency
translation 23 23 23
--------
Comprehensive income $ 24,878
========
------ ----- -------- --------- --------- ----- ---------
Balance June 30, 2000 21,395 214 34,446 73,841 (141) 108,360
Exercise of common stock
options 386 4 3,366 3,370
Issuance of common stock under
employee stock purchase plan 31 950 950
Tax benefit from stock options 3,402 3,402
Stock-based compensation 411 411
Comprehensive income:
Net income 30,684 $ 30,684 30,684
Unrealized gain on
securities 705 705 705
Foreign currency
translation (94) (94) (94)
--------
Comprehensive income $ 31,295
========
------ ----- -------- --------- --------- ----- ---------
Balance June 30, 2001 21,812 218 42,575 104,525 470 147,788
Exercise of common stock
options 405 4 3,251 3,255
Issuance of common stock
under employee stock 51 1,174 1,174
purchase plan
Tax benefit from stock options 1,711 1,711
Stock-based compensation 1,152 1,152
Purchase of treasury stock $ (34,993) (34,993)
Comprehensive income:
Net income 15,828 $ 15,828 15,828
Unrealized loss on
securities (384) (384) (384)
Foreign currency
translation 194 194 194
--------
Comprehensive income $ 15,638
========
------ ----- -------- --------- --------- ----- ---------
Balance June 30, 2002 22,268 $ 222 $ 49,863 $ (34,993) $ 120,353 $ 280 $ 135,725
====== ===== ======== ========= ========= ===== =========
The accompanying notes are an integral part of the
consolidated financial statements.
25
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS) FOR THE YEARS ENDED JUNE 30, 2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income $ 15,828 $ 30,684 $ 24,896
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,086 6,128 5,099
Gain on sales of division and joint venture (6,478) (6,400) (4,820)
Equity loss in joint venture 1,752 3,310 3,721
Stock-based compensation 1,152 411 424
Tax benefit from stock options 1,711 3,402 1,877
Provision for doubtful accounts 200 324 --
Changes in deferred income taxes (1,901) (2,717) 590
Changes in operating assets and liabilities,
net of effects of business acquired:
Accounts receivable 4,319 (11,560) 3,866
Inventory (871) 3,060 (3,661)
Prepaid expenses and other current assets 1,528 (1,678) (2,831)
Other assets (333) (297) (150)
Accounts payable (2,148) (2,585) 3,654
Accrued expenses and compensation (1,344) 2,565 674
Deferred compensation 244 337 --
Billings in excess of revenues and customer advances 413 (1,693) (366)
Income taxes (5,216) 2,787 (2,311)
--------- --------- ---------
Net cash provided by operating activities 15,942 26,078 30,662
--------- --------- ---------
Cash flows from investing activities:
Purchases of marketable securities (71,074) (113,652) (127,019)
Sales of marketable securities 99,124 94,544 86,230
Acquisition of business (7,948) -- --
Purchases of property and equipment (5,786) (7,387) (6,637)
Investments in joint venture (1,000) (1,700) (3,500)
Proceeds from sale of division, net of selling costs 6,400 6,400 5,032
--------- --------- ---------
Net cash provided by (used in) investing activities 19,716 (21,795) (45,894)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from employee stock purchase plan 1,174 950 737
Proceeds from exercise of stock options 3,255 3,370 3,004
Purchases of treasury stock (34,993) -- --
Proceeds from issuance of notes -- -- 14,500
Payments of principal under notes payable (621) (577) (318)
Principal payments under capital lease obligations (308) (627) (510)
--------- --------- ---------
Net cash provided by (used in) financing activities (31,493) 3,116 17,413
--------- --------- ---------
Net increase in cash and cash equivalents 4,165 7,399 2,181
Effect of exchange rate changes on cash and cash equivalents 41 58 (7)
Cash and cash equivalents at beginning of year 13,307 5,850 3,676
========= ========= =========
Cash and cash equivalents at end of year $ 17,513 $ 13,307 $ 5,850
========= ========= =========
Cash paid during the period for:
Interest $ 991 $ 1,068 $ 685
Income taxes $ 11,492 $ 13,389 $ 12,692
Non-cash transactions:
Investment in joint venture from conversion
of account receivable $ -- $ 1,700 $ --
Equipment acquired under capital leases $ -- $ -- $ 513
The accompanying notes are an integral part of the
consolidated financial statements.
26
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
A. DESCRIPTION OF BUSINESS:
Mercury Computer Systems, Inc. (the "Company"or "Mercury") designs,
manufactures and markets high-performance, real-time digital signal and image
processing computer systems that 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 primary markets for the Company's products are
defense electronics, medical imaging, and other OEM solutions. These markets
have computing needs that 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 accounting
principles generally accepted in the United States 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 is recognized upon shipment provided that title and risk of loss have
passed to the customer, there is persuasive evidence of an arrangement, the
sales price is fixed or determinable, collection of the related receivable is
reasonably assured, and customer acceptance criteria, if any, has been
successfully demonstrated. For products with acceptance criteria that are
not successfully demonstrated prior to shipment, revenue is recognized upon
customer acceptance. The Company accrues for anticipated warranty costs upon
shipment.
For long-term contracts to design, develop, manufacture or modify complex
equipment, revenue is recognized using the percentage-of-completion accounting
method based on contract costs incurred to date compared with total estimated
contract costs. Revisions in contract cost estimates have the effect of
adjusting earnings applicable to performance in prior periods in the current
period. Anticipated losses, if any, are recognized in the period in which
determined.
Service revenue is recognized ratably over applicable contract periods or as
the services are performed.
BILLINGS IN EXCESS OF REVENUES AND CUSTOMER ADVANCES
Billings in excess of revenues and customer advances include amounts billed
and collected 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 market value.
MARKETABLE SECURITIES
The Company classifies investments in marketable securities as
available-for-sale 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, 2002 and 2001. 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 until disposition of the security. Realized gains and
losses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income or loss. For
determinations of gain or loss, the cost of securities sold is based on the
specific identification method. For the years ended June 30, 2002, 2001 and
2000, realized gains and losses from the sale of marketable securities were
immaterial.
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. Securities with original maturities greater than 90 days
and remaining maturities less than one year are classified as short-term
marketable securities. Securities that have remaining maturities greater than
one year are classified as long-term marketable securities. The Company's
investment in long-term marketable securities has maturities of one-to-three
years. At June 30, 2002
27
and 2001, marketable securities consisted of the following:
Fair
June 30, 2002 Amortized Market Unrealized
Cost Value Gain (Loss)
--------- ------ -----------
Short-term marketable securities:
Tax-exempt municipal notes and bonds and money market instruments $29,828 $29,901 $ 73
Corporate debt securities 7,995 8,096 101
------- ------- ----
$37,823 $37,997 $174
Long-term marketable securities:
Tax exempt municipal notes and bonds, taxable corporate bonds
and government agencies $15,856 $15,870 $ 14
======= ======= ====
June 30, 2001
Short-term marketable securities:
Tax-exempt municipal notes and bonds and money market instruments $48,830 $49,001 $171
Corporate debt securities 5,009 5,134 125
------- ------- ----
$53,839 $54,135 $296
======= ======= ====
Long-term marketable securities:
Tax exempt municipal notes and bonds, taxable corporate bonds
and government agencies $27,890 $28,166 $276
======= ======= ====
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially expose the Company to concentrations
of credit risk consist principally of cash, marketable securities and
accounts receivable.
The Company places its cash and cash equivalents with financial institutions
which management believes are of high credit quality. There are no significant
concentrations of investments in corporate debt securities with any single
issuer of debt securities. At June 30, 2002 and 2001, the Company had
approximately $6,191 and $5,613 respectively, on deposit or invested with its
primary financial and lending institution.
The Company provides credit to clients in the normal course of business.
Collateral is not required for accounts receivable, but ongoing credit
evaluations of clients' financial condition are performed. At June 30, 2002
customers "A," "B" and "C" comprised 18%, 17% and 11% of the Company's
receivables, respectively. Customer "A" represented 25% of the Company's
receivables at June 30, 2001. No other customers accounted for greater than 10%
of the company's receivables at June 30, 2002 or 2001.
INVENTORY
Inventory is stated at the lower of cost, determined on the first-in,
first-out (FIFO) basis, or market value.
GOODWILL AND ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets result from the Company's acquisition of Myriad
Logic, Inc. (see Note F) and consist of identifiable intangible assets,
including completed technology and a licensing agreement. Acquired intangible
assets are reported at cost, net of accumulated amortization and are
amortized on a straight-line basis over their estimated useful lives of four
years. Goodwill is the amount by which the cost of acquired net assets in a
business acquisition exceeded the fair values of net identifiable assets on
the date of purchase. Goodwill from the Myriad acquisition is not being
amortized in accordance with the requirements of SFAS No. 142, Goodwill and
Other Intangible Assets.
28
LONG-LIVED ASSETS
The Company periodically evaluates its long-lived assets for events and
circumstances that indicate a potential impairment. Long-lived assets
primarily include property and equipment, goodwill and acquired intangible
assets. For property and equipment and acquired intangible assets,
recoverability is assessed based on undiscounted expected cash flows from
these assets, considering a number of factors, including past operating
results, budgets and economic projections, market trends and product
development cycles. Impairment in the carrying value of each asset is
assessed when the undiscounted expected cash flows derived from the asset are
less than its carrying value. The amount of the impairment would equal the
difference between the estimated fair value of the asset and its carrying
value. A goodwill impairment loss occurs when the carrying amount of a
reporting unit's goodwill exceeds the fair value of the reporting unit's
goodwill. Through June 30, 2002, the Company has not recognized an impairment
loss on any of its long-lived assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash equivalents, accounts
receivable, employee life insurance policies, capital lease obligations and
notes payable. The carrying amount of cash equivalents, accounts receivable
and capital lease obligations approximate their fair value due to their short
maturities. The carrying amount of Company owned life insurance policies
approximates fair value. Also, based on borrowing rates currently available
to the Company for notes payable, the carrying value of notes payable
approximates fair value.
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
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
commences once the product is available for general release and is computed
on an individual product basis based on the greater of a) the ratio that
current gross revenues for a product bear to total anticipated gross revenues
for that product or b) the straight-line method over the estimated economic
life of the product. Software development costs qualifying for capitalization
were not material for the years ended June 30, 2002, 2001 and 2000,
respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During the years ended
June 30, 2002, 2001 and 2000, advertising expenses totaled $313, $367 and
$334, respectively, and were included in selling, general and administrative
expense in the consolidated statement of operations.
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 assets and
liabilities 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.
29
NET INCOME PER SHARE
Basic net income per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted net income per share is calculated by dividing net income by the sum
of the weighted-average number of common shares outstanding plus additional
common shares that would have been outstanding if potential dilutive common
shares had been issued for granted stock options.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to its employees using the
intrinsic value as prescribed in Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Accordingly, no compensation expense is recorded for options
issued to employees and directors with fixed amounts and fixed exercise
prices at least equal to the fair market value of the Company's common stock
at the date of grant. When the exercise price of stock options granted to
employees and directors is less than the fair value of common stock at the
date of grant, the Company records that difference as deferred compensation,
included in stockholders' equity. Deferred compensation is amortized to
compensation expense over the vesting period of the underlying stock options.
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
through disclosure only (see Note J). Stock-based awards to non-employees are
accounted for at their fair value in accordance with SFAS No. 123 and related
interpretations.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss), which includes foreign currency translation
adjustments and unrealized gains and losses on investments in marketable
securities. For purposes of comprehensive income (loss) disclosures, the
Company does not record tax provisions or benefits for the net changes in the
foreign currency translation adjustment, as the Company intends to
permanently reinvest undistributed earnings of its foreign subsidiaries.
FOREIGN CURRENCY
Euros are used as the functional currency for the Company's subsidiaries in
France and the Netherlands, while local currency is used as the functional
currency for the Company's subsidiaries in the United Kingdom and Japan. 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 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Obligations Associated with the Retirement of Long-Lived Assets." SFAS
143 provides the accounting requirements for retirement obligations
associated with tangible long-lived assets. SFAS 143 is effective for
financial statements for fiscal years beginning after June 15, 2002. The
Company adopted SFAS 143 on July 1, 2002, and the adoption of SFAS 143 did
not have a material impact on the Company's financial position or results of
operations.
In October 2001, FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS 144 requires one method of accounting for long-lived assets to
be disposed of by sale. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. The Company adopted SFAS
144 on July 1, 2002. The adoption of SFAS 144 did not have a material impact
on the Company's financial position or results of operations.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002." Adoption of the standard is generally required
in the fiscal year beginning after May 15, 2002, with certain provisions
becoming effective for financial statements issued on or after May 15, 2002.
Under the standard, transactions currently classified by the Company as
extraordinary items will no longer be treated as such but instead will be
reported as other non-operating income or expenses. The Company adopted SFAS
145 on July 1, 2002, and the adoption of SFAS 145 did not have a material
impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which supercedes EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of this Statement are required to be adopted for exit or disposal
activities that are initiated after December 31, 2002. Under this standard,
a liability for a cost associated with an exit or disposal activity formerly
recognized upon the entity's commitment to an exit plan is now recognized
when the liability is incurred. Management does not expect SFAS 146 will have
a material impact on the Company's financial position or results of
operations.
C. NET INCOME PER SHARE:
The following table sets forth the computation of basic and diluted net
income per share (in thousands, except per share data):
30
FOR THE YEARS ENDED JUNE 30, 2002 2001 2000
------- ------- -------
Net income $15,828 $30,684 $24,896
======= ======= =======
Shares used in computation of net income per 21,731 21,576 21,000
share - basic
Potential dilutive common shares:
Stock options 1,187 1,528 1,703
------- ------- -------
Shares used in computation of diluted net
income per share 22,918 23,104 22,703
======= ======= =======
Net income per share - basic $ 0.73 $ 1.42 $ 1.19
======= ======= =======
Net income per share - diluted $ 0.69 $ 1.33 $ 1.10
======= ======= =======
Options to purchase 714,912, 110,538 and 141,000 shares of common stock
outstanding during the years ended June 30, 2002, 2001 and 2000,
respectively, were not included in the calculation of diluted net income per
share because the option exercise prices were greater than the average market
price of the Company's common stock during those periods.
D. INVENTORY:
Inventory consisted of the following:
JUNE 30, 2002 2001
------- -------
Raw materials $ 7,601 $ 6,109
Work in process 2,363 4,301
Finished goods 4,576 2,430
------- -------
$14,540 $12,840
======= =======
E. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
JUNE 30, 2002 2001
-------- --------
Computer equipment and software $ 28,085 $ 28,599
Buildings 15,917 15,832
Land 2,997 2,985
Machinery and equipment 649 661
Furniture and fixtures 5,290 4,462
Building and leasehold improvements 1,343 1,865
-------- --------
54,281 54,404
Less: accumulated depreciation and amortization (26,320) (25,611)
-------- --------
$ 27,961 $ 28,793
======== ========
Depreciation and amortization expense related to property and equipment for
the fiscal years ended June 30, 2002, 2001 and 2000 was $6,874, $6,128 and
$4,786, respectively.
F. ACQUISITION
On April 1, 2002, the Company completed its acquisition of Myriad Logic, Inc.
("Myriad"). Myriad is a developer of I/O technology based in Silver Spring,
Maryland. The acquisition of Myriad expands Mercury's capability to provide
more of a total system solution and more system integration services. The
total purchase price of $7,948 consisted of $7,500 in cash plus $448 of
transaction costs directly related to the acquisition. Myriad's operating
results are included in the consolidated statement of operations from April
1, 2002.
31
The purchase price was allocated based on the fair value of the acquired assets
and liabilities assumed as follows:
Accounts receivable $ 1,260
Inventory 806
Other assets 290
Completed technology 3,100
Licensing agreement 300
Goodwill 4,225
Current liabilities (775)
Deferred tax liabilities (1,258)
-------
$ 7,948
=======
The amortization period for the acquired intangible assets subject to
amortization, which include the completed technology and the licensing
agreement, is four years. The goodwill associated with the acquisition is not
deductible for tax purposes.
The following unaudited pro forma results of operations of the Company give
effect to the Myriad acquisition made in fiscal 2002 as if the acquisition
had occurred at the beginning of fiscal year 2001.
2002 2001
----------- -----------
Net revenues $ 155,570 $ 191,025
Net income $ 15,313 $ 30,062
Net income per share:
Basic $ 0.70 $ 1.39
Diluted $ 0.67 $ 1.30
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations that
actually would have resulted had the acquisition occurred at the beginning of
the period, or which may result in the future.
G. GOODWILL AND ACQUIRED INTANGIBLE ASSETS:
In July 2001, FASB issued SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization and includes provisions for the reclassification of certain
existing recognized intangibles as goodwill, reassessment of the useful lives
of existing recognized intangibles, and reclassification of certain
intangibles out of previously reported goodwill. Mercury adopted SFAS 142 as
of July 1, 2001.
At June 30, 2002, acquired intangible assets consisted of the following:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount Useful Life
------ ------------ ------ -----------
Completed technology $3,100 ($194) $2,906 4 years
Licensing agreement 300 (18) 282 4 years
------ ----- ------
Total acquired intangible assets $3,400 ($212) $3,188
====== ====== ======
Aggregate amortization expense related to acquired intangible assets for the
fiscal year ended June 30, 2002 was $212. Estimated amortization expense for
each of the five succeeding fiscal years is as follows:
Year Amount
---- ------
2003 $ 850
2004 850
2005 850
2006 638
2007 --
------
$3,188
======
The changes in the carrying amount of goodwill by reportable segment during
the fiscal year ended June 30, 2002 are as follows:
32
North
American
Defense
-------
Balance at June 30, 2001 $ --
Goodwill acquired during the year 4,225
------
Balance at June 30, 2002 $4,225
======
H. COMMITMENTS AND CONTINGENCIES:
LEGAL CLAIMS
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 stock options to
purchase 96,000 shares of common stock at an exercise price of $2.00 per
share, and other financial consideration. The Company has objected to the
claims and is aggressively defending the matter. The testimony and final
argument phases of binding arbitration have been completed and a final ruling
is anticipated before calendar year-end 2002. The position of the Company's
management, after consultation with external counsel, is that a loss from
this action is not probable. Accordingly, no loss accrual has been recorded.
If the plaintiff were to prevail on his claims, depending on the price of the
Company's common stock, a judgment against the Company could be awarded for a
material amount.
In addition, the Company is subject to legal proceedings and claims that
arise in the ordinary course of business. The Company does not believe these
actions will have a material adverse effect on its financial position or
results of its operations.
PURCHASE COMMITMENTS
As of June 30, 2002, the Company has entered into non-cancelable purchase
commitments for certain components used in its normal operations. The
purchase commitments covered by these agreements are less than one year and
aggregate approximately $6.8 million.
LEASE COMMITMENTS
The Company leases certain facilities, machinery and equipment under capital
and operating leases expiring in various years through 2007. 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:
YEAR ENDING JUNE 30, Operating Capital
Leases Leases
2003 $ 561 $ 96
2004 493
2005 361
2006 178
2007 80
------ ----
Total minimum lease payments $1,673 $ 96
Less: amounts representing interest 4
Present value of minimum lease payments 92
Less: current portion 92
----
Long-term portion $ --
=====
Rental expense during the fiscal years ended June 30, 2002, 2001 and 2000
was $609, $506 and $524, respectively.
I. NOTES PAYABLE
Notes payable at June 30, 2002 and 2001 consisted of the following:
2002 2001
------- -------
Notes payable $12,985 $13,606
Less: current portion 667 621
------- -------
$12,318 $12,985
======= =======
33
On November 3, 1999, the Company completed a lending agreement with a
commercial financing company, issuing two 7.30% senior secured financing
notes ("the Notes") due November 2014. The original principal amount of the
Notes totaled $14,500. 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 net worth and prohibit the payment of dividends. As of
June 30, 2002, the Company was in compliance with the covenants of the Notes
agreements. Principal payments under the Notes are required as follows:
Fiscal Year Ending June 30,
2003 $ 667
2004 718
2005 772
2006 830
2007 893
Thereafter 9,105
-------
$12,985
=======
J. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
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 split of common stock, which was effected in the form of a stock
dividend distributed on December 21, 1999 to shareholders of record as of
December 6, 1999. All share and per share amounts have been restated to
reflect the effect of the stock split as of that date.
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 over periods of three to five years and
have a term of 10 years.
The 1997 Stock Option Plan (the "1997 Plan") provides for the granting of
options to purchase an aggregate of not more than 5,650,000 shares of the
Company's common stock. The Plan provides for the grant of non-qualified and
incentive stock options to employees and non-employees. Incentive and
performance based non-qualified 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. The board of directors determines the price of all other
options. The options vest over periods of four to five years and have a
maximum term of 10 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) provides for the granting of
options to purchase an aggregate of not more than 100,000 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. The options vest
over three years and have a maximum term of 10 years. With the implementation
of the 1998 Plan, no further stock options were granted under the 1993 Stock
Option Plan.
34
The following table summarizes activity of the Company's stock plans
since June 30, 1999:
Weighted Average Weighted Average
Number of Exercise Fair Value of
Options Price Options Granted
------- ----- ---------------
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
Granted 920,870 34.07 $24.49
Exercised (386,032) 8.79
Canceled (192,647) 17.35
---------
Outstanding at June 30, 2001 3,044,039 20.10
Granted 1,150,960 32.87 $23.75
Exercised (405,000) 8.12
Canceled (126,360) 19.16
---------
Outstanding at June 30, 2002 3,663,639 $ 25.46
=========
Information related to the stock options outstanding as of June 30, 2002 is
as follows:
Weighted- Exercisable
Average Weighted- Weighted
Remaining Average Exercisable Average
Number Contractual Exercise Number of Exercise
Range of Exercise Prices Of Options Life (years) Price Options Price
- ------------------------ ---------- ------------ ----- ------- -----
$ 2.00 - $ 8.62 592,687 5.61 $ 5.63 402,127 $ 4.71
$ 8.84 - $17.25 558,560 6.81 12.93 243,416 12.78
$ 23.44 - $27.50 569,443 7.94 24.96 172,968 24.42
$ 27.94 - $29.80 542,882 9.28 29.11 53,357 28.37
$ 30.96 - $34.06 523,500 8.89 31.68 75,750 31.55
$ 34.08 - $40.85 553,867 9.01 38.07 57,275 37.72
$ 42.00 - $52.00 322,700 8.39 46.56 99,925 46.84
--------- ---------
$ 2.00 - $52.00 3,663,639 7.93 25.46 1,104,818 18.08
========= =========
Options for the purchase of 664,662 and 409,029 shares were exercisable at
June 30, 2001 and 2000, respectively, with weighted-average exercise prices
of $11.19 and $5.32.
The fair value of each option granted during the fiscal years ended June 30,
2002, 2001 and 2000 was estimated on the date of grant using the
Black-Scholes option-pricing model utilizing the following weighted-average
assumptions:
2002 2001 2000
Risk-free interest rate 4.68% 4.97% 6.34%
Option life 6 years 6 years 6 years
Stock volatility 81% 80% 77%
Dividend rate 0% 0% 0%
EMPLOYEE STOCK PURCHASE PLAN
During 1997, the Company adopted the 1997 Employee Stock Purchase Plan
("ESPP") and authorized 500,000 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 2002,
the Company issued 18,053 and 32,626 shares of common stock to employees who
participated in the plan at prices of $33.24 and $17.59, respectively. During
the two offerings in fiscal 2001, the Company issued 16,949 and 14,115 shares
of common stock at prices of $27.04 and $34.85, respectively. During the two
offerings in fiscal 2000, the Company issued 22,923 and 15,868 shares of
common stock at prices of $13.39 and
35
$27.47, respectively. Shares available for future purchase under the ESPP
totaled 323,018 at June 30, 2002.
The weighted-average fair value of purchase rights granted in fiscal 2002,
2001 and 2000 was $16.74, $13.52 and $8.40, respectively. The fair value of
the employees' purchase rights was estimated using the Black-Scholes
option-pricing model with the following assumptions: (1) dividend yield of
0.0%, (2) an expected life of six months, (3) expected volatility of 81% for
fiscal 2002, 80% for fiscal 2001, and 77% for fiscal 2000; and, (4) risk-free
interest rate of 1.75% for fiscal 2002, 3.63% for fiscal 2001 and 5.25% for
fiscal 2000.
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 share for the fiscal years ended June 30, 2002,
2001 and 2000 would approximate the following pro forma amounts as compared
to the amounts reported:
Net income per Net income per
Net income share - basic share - diluted
---------- --------------- ----------------
As reported:
2002 $ 15,828 $ .73 $ 0.69
2001 $ 30,684 $ 1.42 $ 1.33
2000 $ 24,896 $ 1.19 $ 1.10
Pro forma:
2002 $ 2,646 $ 0.12 $ 0.12
2001 $ 22,214 $ 1.03 $ 0.96
2000 $ 20,791 $ 0.99 $ 0.92
The effects of applying SFAS No. 123 in this disclosure are not indicative of
future amounts.
During the year ended June 30, 2002, the stock option agreements of certain
employees were modified to provide accelerated vesting and extended exercise
periods, which resulted in the recognition of $1,073 of stock-based
compensation expense in that period. In addition, the Company recorded
stock-based compensation expense of $79, $411 and $424 during the years
ended June 30, 2002, 2001 and 2000, respectively, for stock options granted
to non-employees. Such amounts reflect the fair value of options upon their
final vesting dates as well as adjustments for the revaluation of a portion
of the unvested options at each period-end. The fair value of these
non-employee stock option grants was calculated using the Black-Scholes
option-pricing model.
STOCK REPURCHASE PROGRAM
In January 2002, the Company initiated a stock repurchase program. The stock
repurchase program, as approved by the Board of Directors, authorized the
Company to purchase up to $35,000 in Company stock from time to time through
September 4, 2002. During the year ended June 30, 2002, the Company purchased
approximately 1,144,000 shares of common stock for $34,993.
K. INCOME TAXES:
The components of income before income taxes and income tax expense (benefit)
consisted of the following:
2002 2001 2000
-------- -------- -------
Income before income taxes
United States $ 20,638 $ 44,695 $36,302
Foreign 1,345 429 43
-------- -------- -------
$ 21,983 $ 45,124 $36,345
Income tax expense (benefit)
Federal:
Current $ 5,848 $ 15,642 $10,081
Deferred (418) (2,382) 544
-------- -------- -------
5,430 13,260 10,625
36
State:
Current 547 1,374 755
Deferred (302) (335) 46
-------- -------- -------
245 1,039 801
Foreign - current 480 141 23
-------- -------- -------
$ 6,155 $ 14,440 $11,449
======== ======== =======
The following is the reconciliation between the statutory provision for
federal income taxes and the effective income tax expense:
YEAR ENDED JUNE 30, 2002 2001 2000
------ ------ ------
Income taxes at federal statutory rates 35.0% 35.0% 35.0%
State income tax, net of federal tax benefit 0.3 1.5 1.3
Research and development credits (3.6) (2.1) (3.4)
Tax-exempt interest income (3.6) (1.9) (1.6)
Other (0.1) (0.5) 0.2
------ ------ ------
28.0% 32.0% 31.5%
====== ====== ======
The components of the Company's net deferred tax asset were as follows:
JUNE 30,
2002 2001
------- ------
Deferred tax assets:
Receivable allowances and inventory valuations $ 2,171 $1,698
Accrued compensation 1,136 1,126
Property and equipment 309 112
State tax credit carryforwards 1,079 811
Deferred compensation 251 126
Joint venture loss allocation 1,723 1,157
Other temporary differences 590 383
------- ------
7,259 5,413
Deferred tax liabilities:
Acquired intangible assets (1,203) --
------- ------
Net deferred tax assets $ 6,056 $5,413
======= ======
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, 2002, the Company had state R&D tax
credit carryforwards of $1,661, which begin to expire in 2014. The
cumulative amount of undistributed earnings of subsidiaries, which is
intended to be permanently reinvested and for which U.S. income taxes have
not been provided, totaled approximately $1,600 at June 30, 2002.
L. 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 401 (k) plan
covers employees who have attained the age of 21. Employee contributions to
the 401(k) Plan may range from 1% to 15% of eligible compensation. The
Company matches employee contributions up to 3% of eligible 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 of December
31, 1999.
Expense recognized by the Company under the 401(a) and 401(k) plans was
$1,206, $1,048 and $788 during the years ended June 30, 2002, 2001 and 2000,
respectively.
The Company maintains a bonus plan, which provides cash awards to employees
based upon operating results and employee performance. Bonus expense related
to payments to employees was $4,894, $6,416 and $4,499 during the years
ended June 30, 2002, 2001 and 2000, respectively.
37
M. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION:
Operating segments are defined as components of an enterprise evaluated
regularly by the Company's senior management in deciding how to allocate
resources and assessing performance. The Company has five principal operating
segments: Worldwide Defense, Medical Imaging, OEM Solutions, Wireless
Communications, and Research and Development. These operating segments were
determined based upon the nature of the products offered to customers, the
market characteristics of each operating segment, and the Company's management
structure. The Company has five reportable segments: Worldwide Defense segment,
Medical Imaging segment, OEM Solutions segment, Wireless Communications and
Other segment, and Research and Development segment. The Wireless Communications
and Other segment includes in 2000 the Shared Storage Business Unit and other
commercial businesses.
The accounting policies of the business segments are the same as those
described in "Note B: Summary of Significant Accounting Policies". Asset
information by reportable segment is not reported since the Company does not
produce such information internally. The following is a summary of the
Company's operations by reportable segment:
Wireless Research
Worldwide Medical OEM Communications and
Defense Imaging Solutions and Other Development
Segment Segment Segment Segment Segment Corporate Total
-------- ------- ------- -------------- ------------ --------- --------
YEAR ENDED JUNE 30, 2002
Sales to unaffiliated customers $ 98,182 $41,449 $10,484 $ -- $ -- $ -- $150,115
Income before taxes (1) 55,818 17,082 2,405 (6,503) (28,244) (18,575) 21,983
Depreciation/amortization expense 317 115 47 267 2,141 4,199 7,086
YEAR ENDED JUNE 30, 2001
Sales to unaffiliated customers $120,453 $43,456 $16,583 $ -- $ -- $ -- $180,492
Income before taxes (1) 79,771 14,208 8,410 (5,728) (27,605) (23,932) 45,124
Depreciation/amortization expense 891 66 13 202 1,733 3,223 6,128
YEAR ENDED JUNE 30, 2000
Sales to unaffiliated customers $100,300 $27,093 $10,927 $ 2,624 $ -- $ -- $140,944
Income before taxes (1) 69,235 10,510 7,334 306 (27,740) (17,459) 36,345
Depreciation/amortization expense 442 41 11 (5,535) 1,218 3,081 5,099
(1) Interest income, interest expense, foreign exchange gain/(loss), equity
loss in joint venture and gain on sales of division and joint venture 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.
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 revenue and total long-lived assets as of or for the
fiscal years ended June 30, 2002, 2001 and 2000, respectively.
Customers comprising 10% or more of the Company's revenues for the
periods shown below are as follows:
YEAR ENDED JUNE 30, 2002 2001 2000
Customer A 16% 13% 12%
Customer B 12% 18% 14%
Customer C 12% 14% 19%
Customer D -- -- 12%
N. GAIN ON SALES OF DIVISION AND JOINT VENTURE:
On January 18, 2000, the Company completed the sale of its Shared Storage
Business Unit to IBM. Payments were structured with an initial payment of
$4,500 (excluding $1,000 to be held in escrow and payable on a contingent
basis), followed by 12 quarterly contingent payments of $1,600, including
principal and 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 a patent and other intellectual property. The
Company is recording contingent payments as gains when received. The Company
recognized gains of $6,400, $6,400 and $4,820 for the fiscal years ended June
30, 2002, 2001 and 2000, respectively. The last payment by IBM is scheduled
for the third quarter of fiscal 2003 in the amount $2,600 which consists of
the regular $1,600 quarterly payment plus $1,000 held in escrow. Future
payments by IBM will be similarly recorded as collected.
38
On February 8, 2002, the Company sold its entire interest in the AgileVision
joint venture to Leitch Technology Corporation. The Company received no
proceeds and recorded a $78 gain related to the sale of the joint venture
interest during the three-month period ended March 31, 2002.
O. EQUITY LOSS IN JOINT VENTURE:
On September 1, 1999, the Company formed AgileVision LLC, a joint venture
with the Sarnoff Corporation. The intent of the venture was to use Mercury
technology in the design, development and delivery of products and solutions
expected to reduce the cost of digital TV infrastructure for the broadcast
and cable markets. During each of the years ended June 30, 2002, 2001 and
2000, the Company recognized losses of $1,752, $3,310 and $3,721 related to
the operations of AgileVision. On February 8, 2002, the Company sold its
entire interest in the AgileVision joint venture to Leitch Technology
Corporation.
Summarized income statement results for AgileVision LLC during the years
ended June 30, 2002, 2001 and 2000 are as follows:
Year ended June 30, 2002 2001 2000
--------- --------- ---------
Expenses $ (2,448) $ (4,733) $ (6,723)
Loss from operations (2,448) (4,733) (6,723)
Net loss (2,448) (4,733) (6,723)
Summarized information about the financial position of AgileVision LLC as of
June 30, 2001 is as follows:
Current assets $ 471
Non-current assets 37
---------
Total assets $ 508
=========
Current liabilities $ 6,864
Shareholders' equity (6,356)
---------
Total liabilities and equity $ 508
=========
P. RELATED PARTY TRANSACTIONS:
In 1996, the Company entered into a contract with NDC Development Associates,
Inc. ("Northland") to perform design, development, permitting and management
activities related to the construction of new corporate facilities. An
officer and principal of Northland is an immediate family member of the
Company's chief executive officer. The Company paid Northland fees of
$83,008, $29,453 and $285,613 for the fiscal years ended June 30, 2002, 2001
and 2000, respectively. The Company believes that these fees paid to
Northland were made in the ordinary course of business on terms that were no
less favorable to the Company than could have been obtained from unaffiliated
parties. No amounts were owed to Northland as of June 30, 2002 or 2001.
In conjunction with the development and construction of an additional
facility, the Company is negotiating a similar arrangement with Northland to
assist with the design, permitting activities and oversight of the
construction of a new facility. This arrangement is subject to a competitive
pricing analysis and review by the Audit Committee of the Board of Directors
to ensure that the terms of the arrangement are fair and no less favorable to
the Company than could be obtained from unaffiliated parties.
The Company has arrangements with other parties that do not meet the
technical disclosure requirements of related parties and are not material in
the aggregate. These individual arrangements either fall under reporting
thresholds or are with non-immediate family members of executive officers of
the Company. The Company believes that the terms of these arrangements, which
are based upon hourly rates for services performed, were fair and no less
favorable to the Company than could have been obtained from unaffiliated
parties.
39
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) present fairly, in all material respects, the
financial position of Mercury Computer Systems, Inc. and its subsidiaries at
June 30, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2002 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) presents 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.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
July 31, 2002
40
SUPPLEMENTARY INFORMATION (UNAUDITED)
The following sets forth certain unaudited consolidated quarterly statements
of operations data for each of the Company's last eight quarters. In
management's opinion, this quarterly information reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation for the periods presented. Such quarterly results are not
necessarily indicative of future results of operations and should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto included elsewhere herein.
2002 (in thousands, except per share data) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ------------------------------------------ ----------- ----------- ----------- -----------
Revenues $ 34,861 $ 37,435 $ 34,864 $ 42,955
Cost of revenues 10,882 12,607 13,448 15,307
-------- -------- -------- --------
Gross profit 23,979 24,828 21,416 27,648
-------- -------- -------- --------
Operating expenses:
Selling, general and administrative 11,950 12,423 11,654 12,912
Research and development 7,855 8,462 8,752 9,285
-------- -------- -------- --------
Total operating expenses 19,805 20,885 20,406 22,197
-------- -------- -------- --------
Income from operations 4,174 3,943 1,010 5,451
Interest income 1,179 1,068 917 588
Interest expense (171) (330) (244) (242)
Equity loss in joint venture (880) (872) -- --
Gain on sale of division and joint venture 1,600 1,600 1,678 1,600
Other income (expense), net (12) (174) 10 90
-------- -------- -------- --------
Income before taxes 5,890 5,235 3,371 7,487
Provision for income taxes 1,885 1,453 721 2,096
-------- -------- -------- --------
Net income $ 4,005 $ 3,782 $ 2,650 $ 5,391
======== ======== ======== ========
Net income per common share:
Basic $ 0.18 $ 0.17 $ 0.12 $ 0.25
======== ======== ======== ========
Diluted $ 0.17 $ 0.16 $ 0.12 $ 0.24
======== ======== ======== ========
2001 (in thousands, except per share data) 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ------------------------------------------ ----------- ----------- ----------- -----------
Revenues $ 41,469 $ 43,325 $ 46,953 $ 48,745
Cost of revenues 13,124 14,189 15,274 17,228
-------- -------- -------- --------
Gross profit 28,345 29,136 31,679 31,517
Operating expenses:
Selling, general and administrative 12,123 12,779 12,607 13,127
Research and development 6,743 7,954 8,047 7,740
-------- -------- -------- --------
Total operating expenses 18,866 20,733 20,654 20,867
-------- -------- -------- --------
Income from operations 9,479 8,403 11,025 10,650
Interest income 928 1,004 995 1,050
Interest expense (275) (268) (263) (259)
Equity loss in joint venture (1,235) (476) (1,356) (243)
Gain on sale of division, net 1,600 1,600 1,600 1,600
Other income (expense), net (43) (104) (323) 35
-------- -------- -------- --------
Income before taxes 10,454 10,159 11,678 12,833
Provision for income taxes 3,345 3,251 3,737 4,107
-------- -------- -------- --------
Net income $ 7,109 $ 6,908 $ 7,941 $ 8,726
======== ======== ======== ========
Net income per common share:
Basic $ 0.33 $ 0.32 $ 0.37 $ 0.40
======== ======== ======== ========
Diluted $ 0.31 $ 0.30 $ 0.34 $ 0.37
======== ======== ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
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 for its 2002 Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the Company's Proxy Statement for its 2002 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference
to the Company's Proxy Statement for its 2002 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement for its 2002 Annual Meeting.
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:
Report of Independent Accountants
Consolidated Balance Sheets as of June 30, 2002 and 2001
Consolidated Statements of Operations for the years ended June 30, 2002,
2001, and 2000
Consolidated Statements of Stockholders' Equity for the years ended June 30,
2002, 2001, and 2000
Consolidated Statements of Cash Flows for the years ended June 30, 2002,
2001, and 2000
Notes to Consolidated Financial Statements
42
2. Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts
MERCURY COMPUTER SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2002, 2001, AND 2000
(IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING CHARGES TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- -------- ---------- ---------
Allowance for Doubtful Accounts
2002 $600 $200 $ 8 $792
2001 $308 $324 $32 $600
2000 $376 -- $68 $308
BALANCE AT BALANCE
BEGINNING CHARGES TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- -------- ---------- ---------
Inventory Valuation
2002 $3,920 $3,115 $2,074 $4,961
2001 $2,795 $4,760 $3,635 $3,920
2000 $3,039 $1,012 $1,256 $2,795
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 $2,074,000, $3,635,000, and
$1,256,000 in inventory during the years ended June 30, 2002, 2001 and 2000,
respectively, 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 49, which is incorporated herein by reference.
(b) Reports on Form 8-K
None.
43
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 26, 2002.
MERCURY COMPUTER SYSTEMS, INC.
By: /s/ John F. Alexander II
----------------------------------
JOHN F. ALEXANDER II
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 September 26, 2002.
- ---------------------------- Officer and Director (principal
JAMES R. BERTELLI executive officer)
/S/ JOHN F. ALEXANDER II Senior Vice President, Chief September 26, 2002.
- ---------------------------- Financial Officer and Treasurer
JOHN F. ALEXANDER II (principal financial and
accounting officer)
/S/ GORDON B. BATY Director SEPTEMBER 26, 2002
- ----------------------------
GORDON B. BATY
/S/ ALBERT P. BELLE ISLE Director SEPTEMBER 26, 2002
- ----------------------------
ALBERT P. BELLE ISLE
/S/ JAMES A. DWYER Director SEPTEMBER 26, 2002
- ----------------------------
JAMES A. DWYER
/S/ RUSSELL K. JOHNSEN Director SEPTEMBER 26, 2002
- ----------------------------
RUSSELL K. JOHNSEN
/S/ SHERMAN N. MULLIN Director SEPTEMBER 26, 2002
- ----------------------------
SHERMAN N. MULLIN
/S/ MELVIN SALLEN Director SEPTEMBER 26, 2002
- ----------------------------
MELVIN SALLEN
/S/ RICHARD P, WALLACE Director SEPTEMBER 26, 2002
- ----------------------------
RICHARD P. WALLACE
44
Mercury Computer Systems, Inc.
Certification Pursuant To
Rule 13a-14
Promulgated Under the Securities Exchange Act of 1934
I, James R. Bertelli, President and Chief Executive Officer (principal
executive officer) of Mercury Computer Systems, Inc., certify that:
I have reviewed this annual report on Form 10-K of Mercury Computer Systems,
Inc.;
Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 26, 2002
/s/ James R. Bertelli
------------------------------
James R. Bertelli
President/Chief Executive Officer
(principal executive officer)
45
Mercury Computer Systems, Inc.
Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 of the Sarbanes/Oxley Act of 2002
In connection with the Annual Report of Mercury Computer Systems, Inc.
(the "Company") on Form 10-K for the period ended June 30, 2002 as filed with
the Securities and Exchange Commission (the "Report"), I, John F. Alexander
II, Senior Vice President, Chief Financial Officer and Treasurer of the
Company, certify, pursuant to Section 1350 of Chapter 63 of Title 18, United
States Code, that this Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 and that the
information contained in this report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: September 26, 2002
/s/ John F. Alexander II
- ---------------------------------------
John F. Alexander II
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial officer)
46
Mercury Computer Systems, Inc.
Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 of the Sarbanes/Oxley Act of 2002
In connection with the Annual Report of Mercury Computer Systems, Inc.
(the "Company") on Form 10-K for the period ended June 30, 2002 as filed with
the Securities and Exchange Commission (the "Report"), I, James R. Bertelli,
President and Chief Executive Officer of the Company, certify, pursuant to
Section 1350 of Chapter 63 of Title 18, United States Code, that this Report
fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that the information contained in this
report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: September 26, 2002
/s/ James R. Bertelli
- ----------------------------------
James R. Bertelli
President/Chief Executive Officer
(principal executive officer)
47
Mercury Computer Systems, Inc.
Certification Pursuant To
Rule 13a-14
Promulgated Under the Securities Exchange Act of 1934
I, John F. Alexander II Senior Vice President, Chief Financial Officer and
Treasurer (principal financial officer) of Mercury Computer Systems, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Mercury Computer
Systems, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 26, 2002
/s/ John F. Alexander II
- ----------------------------------------
John F. Alexander II
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial officer)
48
EXHIBIT INDEX
ITEM
NO. DESCRIPTION OF EXHIBIT
- ---- ----------------------
3.1* Articles of Organization, as amended.
3.2* Bylaws, as amended.
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, as amended
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 (incorporated herein by reference to Exhibit
10.11 of fiscal 1999 Form 10-K)
10.12 Purchase and Sale agreement for 199 Riverneck Road, Chelmsford,
Massachusetts ( incorporated by reference to exhibit 10.1 filed with
the Company's quarterly report on Form 10-Q for the quarter ended
December 31, 1998).
10.13 Quitclaim Deed for 199 Riverneck Road, Chelmsford, Massachusetts (
incorporated by reference to exhibit 10.2 filed with the Company's
quarterly report on Form 10-Q for the quarter ended December 31,
1998).
10.14 199 Riverneck LLC $6,850,000 7.30% Note Purchase Agreement
(incorporated by reference to exhibit 10.1 filed with the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
1999)
10.15 199 Riverneck LLC $7,650,000 7.30% Note Purchase Agreement
(incorporated by reference to exhibit 10.2 filed with the Company's
quarterly report on Form 10-Q for the quarter ended September 30,
1999)
21.1* Subsidiaries of the Registrant
23.1* Consent of PricewaterhouseCoopers LLP
* Filed with this Form 10-K. # Confidential treatment granted.
49