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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER - 000-23599
---------------
MERCURY COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2741391
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
199 RIVERNECK ROAD, CHELMSFORD MASSACHUSETTS 01824
(Address of principal executive offices) (Zip code)
(978) 256-1300 NASDAQ NATIONAL MARKET
(Registrant's telephone number including area code) (Name of exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE
SECURITIES EXCHANGE ACT OF 1934:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g)
OF THE SECURITIES EXCHANGE ACT OF 1934:
Common Stock, Par Value $.01 Per Share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Aggregate market value of Registrant's voting stock held by non-affiliates of
the Registrant as of July 31, 1998: $145,254,519
Shares of Common Stock outstanding as of July 31, 1998: 10,017,553 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its special meeting
in lieu of the 1998 Annual Meeting of Stockholders to be held on October 27,
1998 (the " Proxy Statement") are incorporated by reference into Part III of
this Report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
Exhibits Index on Page 45
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PART I
ITEM 1. BUSINESS
OVERVIEW
Mercury designs, manufactures and markets high performance, real-time
digital signal processing computer systems that transform sensor generated data
into information which can be displayed as images for human interpretation or
subjected to additional computer analysis. These multicomputer systems are
heterogeneous and scalable, allowing them to accommodate several different
microprocessor types and to scale from a few to hundreds of microprocessors
within a single system. Mercury's system architecture is specifically designed
for digital signal processing ("DSP") applications which are typically
computation intensive and require I/O capacity and interprocessor bandwidth not
available on a general purpose PC or workstation.
The two primary markets for Mercury's products are defense electronics and
medical diagnostic imaging. Both of these markets have computing needs which
benefit from the unique system architecture developed by the Company. Mercury's
computer systems are generally used on real world signal data to enable a
military commander to "see" the battle space through natural barriers such as
clouds, darkness, water or foliage, so that the position and strength of the
enemy can be determined, or to enable a physician to "see" within the body
instead of performing invasive surgery.
During the past three fiscal years, the majority of the Company's revenues
have been generated from sales of its products to the defense electronics
market, generally for use in intelligence gathering electronic warfare systems.
The Company's activities in this area have focused on the proof of concept,
development and deployment of advanced military applications in radar, sonar and
airborne surveillance. The Company has established relationships with many of
the major prime contractors to the worldwide defense industry, including
Lockheed Martin Corporation, Hughes Aircraft Company, Raytheon/E-Systems,
Raytheon/TI Systems, Inc., Northrop Grumman Corporation, MIT/Lincoln Laboratory,
GEC Marconi Limited, Ericsson Microwave Systems AB, MATRA Systems & Information,
Mitsubishi Heavy Industries, Ltd. and a prime contractor owned by the Israeli
Ministry of Defense.
Medical diagnostic imaging is the other primary market currently served by
the Company. Mercury's computer systems are embedded in Magnetic Resonance
Imaging ("MRI"), Computed Tomography ("CT") and Positron Emission Tomography
("PET") machines. Mercury has supplied computer systems for use in several of GE
Medical Systems diagnostic imaging systems since 1987, and has established
relationships with Siemens Medical Systems, Inc., Toshiba Corp. and Elscint,
Inc. The major medical imaging manufacturers are currently developing the next
generation of MRI, CT and digital x-ray machines, which are expected to provide
better performance at lower cost. Mercury has recently secured design wins on
programs with certain of the major medical imaging manufacturers for their next
generation MRI, CT and digital x-ray machines.
Mercury's computer systems are designed to process continuous streams of
data from sensors attached to radar, sonar, medical imaging equipment and other
devices. The resulting image is transmitted to the battlefield commander, pilot,
technician or physician in order to assist in the decision making or diagnostic
process. Due to the nature of the applications in which many of Mercury's
computer systems are embedded, they are frequently confined in limited spaces
and therefore are designed to generate a minimum amount of heat. The Company
employs the RACEway Interconnect, an industry standard system area network
developed by Mercury, which allows for high interprocessor bandwidth and I/O
capacity. The Company uses its proprietary ASICs to integrate microprocessors,
memory and related components into the RACEway Interconnect to provide optimum
system performance. The Company uses industry standard processors, such as
Intel's i860, Motorola's PowerPC, and Analog Devices' SHARC, in the same system.
The Company believes that the RACEway Interconnect and its proprietary ASICs,
working together with a group of mixed microprocessors in the same system, allow
the most efficient use of space and power with an optimal price/performance
ratio.
Since July 1996, Mercury has targeted the emerging shared storage market
for introduction of a new product which draws on the Company's core competencies
in systems engineering and the development of real-time software. In fiscal
1997, Mercury introduced SuiteFusion(TM), its first shared storage product
designed to meet the needs of the broadcast and post-production industry.
SuiteFusion(TM) is an open, scalable software application that allows work
groups to share commodity, fiber channel attached disk arrays, eliminating the
need for an expensive, intermediate file server. Early end-users include Turner
Broadcasting's CNN Interactive, Nickelodeon's Blue's
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Clues television show and Hughes Aircraft (through a subsidiary) for use at the
U.S. Army National Training Center. The Company believes that the shared storage
market includes a number of distinct applications, such as digital video
editing, electronic computer aided design, webcasting, cable advertising
insertion and electronic pre-press.
INDUSTRY BACKGROUND
Defense Electronics
Digital signal processing computer systems are embedded into air, sea and
land-based platforms for processing radar, sonar and signal intelligence
applications. These applications allow 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. The Company
believes that an important factor underlying the development of this market is a
continuing desire by military commanders for increased battle space information,
which can be obtained through radar, sonar, signal intelligence and image
intelligence systems. Military commanders also need more powerful computers with
similar attributes in order to conduct battle simulations and mission planning
tasks utilizing today's complex weapons systems.
Another important trend in the defense electronics marketplace is the
movement away from so-called "stove pipe" systems designed by prime contractors
with special purpose hardware specifically for a single application, largely
without regard to cost. The market is moving toward the use of systems which
incorporate selected commercial-off-the-shelf ("COTS") hardware and software
components in order to save money and development time. Recent Department of
Defense ("DOD") leaders and federal regulations have mandated widespread use of
COTS components in defense electronics applications. All of Mercury's computer
systems are eligible for use in defense electronics applications as COTS
components.
Medical Imaging
The principal modalities of medical diagnostic imaging systems include MRI,
CT, digital x-ray, PET, SPECT (single photon emission computed tomography) and
ultrasound devices. Although demand for medical imaging equipment has been
sluggish in recent years due primarily to cost containment pressures and
consolidation in the health care industry, the Company believes that demand for
medical diagnostic imaging equipment will increase modestly over the next three
years. The Company believes that this increase will be primarily due to the
introduction of next-generation devices, together with the anticipated future
development by the major medical imaging manufacturers of new international
markets for their diagnostic equipment. The Company believes medical imaging
equipment manufacturers will continue to replace in-house designed digital
signal processing systems with commercially available systems designed by the
Company and others.
This industry's demand is driven in part by the need to provide physicians
with rapid, sharp and clear images of areas of a patient's body suspected to be
diseased or injured, while using the least intrusive means. These images provide
a significant diagnostic tool for the physician, who can more readily understand
the patient's malady and prescribe appropriate corrective action. In order to
provide such images, medical imaging machines must be capable of processing a
continuous stream of data on a real-time basis. A parallel concern in the health
care industry is the need to reduce costs. Hospitals, in particular, continue to
be under significant pressure to contain costs and, at the same time, maintain
quality of care. Such pressures are forcing hospitals to be as technologically
efficient as possible. Toward this end, hospitals seek to reduce the required
period of time a patient must spend in their medical imaging machines, which has
the added benefit of increasing the total number of patients who can be
diagnosed with this expensive equipment during a given period of time. One way
to reduce patient time in medical imaging machines and improve image quality is
to utilize more powerful signal processing computers, such as those supplied by
Mercury.
MARKETS AND CUSTOMERS
Defense Electronics
Mercury provides high performance embedded computer systems as standard
products to the defense electronics market by using commercial and selected
rugged components and by working closely with defense contractors to complete a
design which matches the specified requirements of military applications. The
Company engages in
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frequent, detailed communication with the end users of Mercury's systems,
military executives and program managers in government and defense contractors
regarding the technical capabilities of Mercury's advanced signal processing
computers and the successful incorporation of its computers in numerous military
programs.
Mercury employs industry specialist managers to monitor the defense
programs of each major branch of the United States armed services and additional
managers based in Europe and Japan to keep abreast of developments in their
respective regions. This approach provides relevant information to Mercury
regarding major military procurements worldwide. Mercury maintains sales and
technical support groups to service defense industry participants in six branch
offices in the United States, and through Mercury's subsidiary offices or
distributors in 11 other countries. At Mercury's headquarters in Chelmsford,
Massachusetts, a group of systems engineers specializing in radar, sonar and
surveillance problems provides support on an as-needed basis to the remote
offices to assist in securing inclusion in targeted military programs.
Medical Imaging
Mercury strives to provide a superior combination of high performance and
competitively priced embedded computer systems to the medical imaging market.
The Company focuses on establishing strong relationships with its customers, the
medical equipment manufacturers. By maintaining frequent, in-depth
communications with its customers and working closely with their engineering
groups, the Company is able to understand their needs and provide appropriate
solutions. In addition, the Company intends to continue its efforts to install
its computer systems in place of alternative designs created by the in-house
design teams employed by the medical imaging equipment manufacturers.
The Company currently is working closely with major medical equipment
companies to design the next generation of MRI, CT and digital x-ray systems,
which the Company believes will lead to faster time-to-market and competitive
advantages for the medical equipment companies that use Mercury's computer
systems for inclusion in their imaging machines. Mercury's industrial PC class
hardware system provides the medical imaging industry with increased performance
densities at lower costs and an architecture that accommodates performance
upgrades as new technology becomes available. Integrating the high-bandwidth
RACEway Interconnect system area network within the PCI environment results in
highly scalable systems. This allows medical equipment suppliers to design
systems that can satisfy a broad range of price/performance requirements and
meet the needs of global markets, all with the same Mercury architecture.
Mercury's medical OEM customers consist of the leading manufacturers of
diagnostic imaging equipment. They include GE Medical, headquartered in
Wisconsin, GE Medical Systems Europe in France, GE Yokugawa Medical Systems in
Japan, Toshiba in Japan, Siemens Medical in Germany and Elscint in Israel. These
companies have adopted Mercury's PCI or VME computer systems as part of their
developments in either MRI, CT, PET or digital x-ray systems and, in the case of
some companies, multiple types of systems. The Company has supplied GE Medical
with computer systems for use in three successive generations of MRI machines
from 1987 through the present, as well as for use in other GE Medical equipment,
such as PET. In addition, GE Medical and Siemens Medical, the two leading global
suppliers of medical imaging equipment, have recently awarded contracts to
Mercury to design the signal processing system for the next generation of
certain of their medical diagnostic equipment.
The Company is building a system based on Analog Devices' SHARC DSP
processor to fulfill a design win in CT. The Company also is building a system
based on the Power PC chip to fulfill a design win in digital x-ray. The Company
believes that the principal reason for its medical imaging design wins is
Mercury's experienced team of systems and applications engineers who work
closely with the medical equipment designers and with the Company's product
development engineers. This joint design effort frequently precedes the first
production orders by approximately two to three years. However, once selected,
the production contracts typically continue for the life of the medical imaging
system. In addition, the equipment manufacturers typically offer computer system
upgrades to their customers, potentially resulting in additional sales of
Mercury products.
Shared Storage
The Company believes that the shared storage market includes a number of
distinct applications, such as digital video editing, electronic computer aided
design, webcasting, cable advertising insertion and electronic pre-press. In
fiscal 1997, Mercury introduced SuiteFusion(TM), its first shared storage
software product designed to meet the digital
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video editing needs of the broadcast and post-production industry. Companies in
the broadcast and post-production industry have begun to use non-linear,
disk-based technology, and are becoming aware of the significant productivity
gains that can be achieved by networking multiple editing stations together in a
real-time, high-bandwidth, shared storage workgroup. However, these applications
produce extremely large volumes of digital data that must be transmitted,
stored, and manipulated in order to produce a high-quality finished product.
Mercury's SuiteFusion(TM) is designed to choreograph the interactions between
workstations and disks to keep files intact in such a high-performance,
shared-storage environment.
KEY TECHNOLOGY COMPETENCIES
Many of Mercury's customers share a common requirement: the need to process
high-volume, real-time data streams. Whether from an antenna in a defense
application, a medical scanner or a video camera, the computer must have the
ability to process incoming data as quickly as it is received. Data rates can
range from a few to several hundreds of megabytes per second (or several billion
bits per second). The ability to process this continuous flow of high-bandwidth
data is a fundamental difference between the majority of computing systems in
the world (such as personal computers, workstations and servers) and the
computers built by Mercury.
Mercury has developed a set of core technical strengths specifically
targeted to, and defined by, the application areas of signal, image and media
processing. These technical strengths are pivotal to Mercury's success in the
real-time market segments of the defense electronics and medical imaging
industries and have resulted in the following developments and capabilities:
Heterogeneous Switched-Fabric Interconnects. Mercury connects different
microprocessor types (RISC, DSP and specialized computing devices) and I/O
devices in a bus-less, high-bandwidth manner based on multi-stage switches in
its system area network. Among the engineering developments which distinguish
Mercury's systems are the RACEway Interconnect built using the six-port RACEway
crossbar chip which supports high bandwidth point-to-point data transfers and
fibre channel chassis-to-chassis extensions for RACEway in large system
configurations.
Heterogeneous Processor Integration. Mercury has developed several ASICs
which integrate standard microprocessors and special purpose mathematics and
graphics processors into a single heterogenous environment. Mercury develops
systems consisting of different microprocessor types with a single-system
software model. Mercury's processor independent software offers a consistent set
of software tools and interfaces, which can drive a heterogeneous mix of
microprocessor types, such as Motorola's PowerPC processor and Analog Devices'
SHARC DSP processor.
Performance Density. The Company has been using high performance packaging
technology such as multi-chip modules and ball grid arrays in its systems since
the early 1990's. The Company's thermal analysis expertise allows it to design
products that optimize the dissipation of heat from the system in order to meet
the environmental constraints imposed by many of its customers' applications.
The Company's modular hardware and software building blocks allow it to design
systems that best meet the application's specific data profiles. All together,
these attributes combine to deliver the maximum performance in processing,
reliability and bandwidth in the smallest possible space.
Scalable Software. Mercury's software has been designed to scale to more
than one thousand processors in real-time environments while maintaining a
high-bandwidth capability. Regardless of the number of processors, the Company's
software provides the same programming environment for a software developer
working with Mercury's computer systems, allowing faster time-to-market and
lower life cycle maintenance costs for its customers.
Optimized Algorithm Development. Mercury specializes in algorithm
development for single and multi-processor implementations. The Company believes
that using the mathematical algorithms in Mercury's scientific algorithm library
significantly increases the performance of customers' applications, reduces
development time and minimizes life cycle support costs.
System Engineering Expertise. Mercury has established a core competency in
providing total system solutions to its customers. The Company has the knowledge
and technical staff to act as an extension of the customer's engineering
organization in order to fashion solutions to some of the world's most demanding
real-time, signal processing applications. Mercury has partnered with its
customers to understand and resolve the challenging problems encountered in
applications as diverse as radar, sonar and signal intelligence for the
military, and
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diagnostic imaging for MRI, CT, PET and digital x-ray in the medical imaging
market. The Company also provides an integration and development service to meet
the demands of its customers with advanced applications that cannot be satisfied
with standard products. This service combines the variety of standard products
with custom hardware and software to meet the specific configuration demands of
an application.
Leverage and Create Standards. Mercury uses existing standards where
applicable and has been successful in developing new standards. For example,
Mercury adheres to VME and PCI standard bus interfaces and form factors. The
RACEway Interconnect system area network that Mercury developed was adopted as
an ANSI/VITA standard in 1995, and since then has been adopted by several
companies offering products and services for embedded real-time applications.
PRODUCTS
HARDWARE PRODUCTS
Mercury offers three classes of systems for the Company's target markets.
Each class of product is scalable to meet the full range of requirements in
signal processing applications.
High Performance Class. For the highest-performance applications, Mercury
offers a family of high performance systems for the most compute intensive and
I/O capacity and interprocessor bandwidth demanding applications in the defense
electronics market. These applications include space time adaptive processing,
ground-penetrating and foliage-penetrating radar and synthetic aperture radar.
These high-performance systems, known as MultiPort(TM), can scale to over a
thousand processors and today include compute modules based on the SHARC and
PowerPC processors.
VME Class. The VME bus has been the traditional standard for many embedded
applications. Mercury's VME systems each support RACEway Interconnect. Systems
contain modules based on the SHARC, PowerPC and i860 processors and can scale to
several hundred processors. The VME-based systems and components are primarily
used in the defense market where backward and forward compatibility is required
for the long system life cycles of military equipment. This class of RACE Series
systems meets the computing speed, bandwidth and scaleability requirements of
many of today's medium performance radar, sonar and signal intelligence
applications. Advanced and future radar systems are more likely to use the high
performance class systems.
Industrial PC Class. Based on the PCI bus standard, these systems use the
RACEway Interconnect to provide the extended bandwidth required for real-time
applications. Currently Mercury provides compute modules based on the SHARC
PowerPC processors. These systems scale to hundreds of processors and are
primarily directed to the medical imaging market, which is moving from VME to
PCI based designs.
SOFTWARE PRODUCTS
Mercury has developed a comprehensive line of signal processing software
products for the defense and medical imaging markets. Certain of Mercury's
software products are included in a heterogeneous development software package
that enables customers to develop application software that will run on Mercury
hardware. The development software package includes the MC/OS operating system,
scientific algorithm libraries, debugging tools and compilers. License fees
range from $10,000 to $50,000 based on the number of seats chosen by the user
for its application, ranging from a single user license to a project license.
Set forth below are certain signal processing software products offered by
the Company.
MC/OS Version 4. The MC/OS runtime operating environment allows maximum use
of the RACE heterogeneous multi-computer architecture in a single-system model
incorporating a consistent set of system and application programming interfaces,
and a common development environment. MC/OS is supported on the high
performance, VME and industrial PC classes of Mercury hardware systems. MC/OS is
included in Mercury's development software package.
Scientific Algorithm Library (SAL). Mercury's scientific algorithm library
consists of more than 400 assembly language routines developed by Mercury's
programmers and optimized for execution on Mercury's RACE architecture,
permitting extensive code reusability. The library encompasses a comprehensive
selection of functions
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including vector processing and data conversion commonly performed by digital
signal processing applications. SAL is included in Mercury's development
software package.
Parallel Application System (PAS). PAS is a set of high performance
libraries which form a complete programming environment for developing parallel
applications in a distributed memory multicomputer system. The libraries speed
the development of advanced applications using many processors in parallel. PAS
is included in Mercury's development software package.
SuperVision(TM). SuperVision(TM) is a state-of-the-art debugging tool for
observation and control of embedded, real-time multicomputing systems.
SuperVision(TM) speeds application development by selectively monitoring
individual and large groups of processors, while simultaneously performing
detailed process-level debugging. SuperVision(TM) is sold separately.
PeakWare(R) for RACE. PeakWare(R) for RACE is a visual component
programming tool, jointly developed with MATRA, that allows the developer to use
diagrams to express the interconnection of software components. Jointly mapping
the application and the RACE system configuration accelerates the overall
development process. From the graphical input, PeakWare(R) for RACE generates
the C code for interprocessor communication and builds executable and
ready-to-deploy application code. PeakWare(R) for RACE is sold separately.
Mercury also has developed software products for specific shared storage
applications in the broadcast and post-production industry. Set forth below is
the first such software product commercially introduced by the Company.
SuiteFusion(TM). SuiteFusion(TM) is an open, scalable software application
that allows various desktop computer systems to simultaneously access large
shared files. Written in JAVA, this highly portable code is supported on both
Macintosh and Windows-based PC desktops. While SuiteFusion(TM) is directed
initially to the creative and design departments within the broadcast and
post-production industry, the Company believes it has potential applicability in
several shared storage markets.
ENGINEERING, RESEARCH AND DEVELOPMENT
The Company's engineering, research and development efforts are focused on
developing new products as well as enhancing existing products. Mercury's
research and development goal is to fully exploit and maintain the Company's
technological lead in the high performance, real-time, signal processing
industry. In addition to the central engineering organization which focuses on
Mercury's two principal markets, the Company has an engineering team developing
SuiteFusion(TM) and its derivatives for the shared storage market and another
engineering team developing systems for the digital television requirements of
the future.
Mercury is involved with researchers from other companies and government
organizations to develop new signaling technologies using fiber optics. This has
the potential for providing more bandwidth per line than conventional techniques
and is directed at the 21(st) century challenges of the next generation of
advanced signal processing systems. Similar cooperative developments are
underway to develop open software solutions for code portability. This research
is focused on developing generic applications which can be targeted to Mercury's
products through the use of industry standard tools with Mercury-specific
libraries. Some of these research areas benefit from cost sharing through DARPA
grants in those areas where the DoD will obtain benefit from the development.
As of June 30, 1998, the Company had 109 people primarily engaged in
engineering, research and development, including hardware and software
architects, design engineers and engineers with expertise in developing medical,
defense and shared storage software systems. During fiscal years 1998, 1997 and
1996, the Company's total research and development costs were approximately
$14.5 million, $12.8 million, and $9.8 million, respectively.
CUSTOMER SUPPORT AND INTEGRATION
As of June 30,1998, Mercury's Customer Services Group included 46 people
engaged in a full range of support functions, including training, technical
program management, integration and design services, host porting services and
the traditional maintenance and support services. The Company has invested in
the range of tools, analyzers, simulators, instruments and workstations to
provide a rapid response to both development and customer support requirements.
Within the Customer Services Group, the solutions systems department has
developed many custom interfaces, reviewed customers' designs, developed special
hardware and software components and provided
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program management on behalf of defense and medical customers. The capabilities
of this group enable the Company to respond to the demanding individuality of
many programs and have resulted in Mercury being selected for both development,
high volume production and deployed programs.
MANUFACTURING AND TESTING
Mercury's strengths include the design, development and testing of products
which meet the exacting technology and quality expectations of the Company's
defense electronics and medical imaging customers. Board assembly is outsourced
to a number of electronic contract manufacturers. The supplier typically inserts
most of the components into a printed circuit board, solders the connections,
conducts preliminary testing and returns the boards to Mercury. The Company
conducts final assembly, burn-in and system level testing.
Mercury utilizes Optimal Supply Chain Management to provide highly flexible
manufacturing solutions which can be tailored to the specific needs of the
Company's customers, while maintaining the highest level of quality and control
of product assembly. This standard is maintained through demanding Quality
Assurance and Reliability Programs, such as Statistical Process Control, which
are integrated throughout the manufacturing process.
The Company's outsourcing strategy provides maximum flexibility to respond
to customer requirements and schedule adjustments, with minimal asset investment
by Mercury. This outsourcing strategy also provides multiple sources of supply,
both to support the breadth and complexity of Mercury's product lines, as well
as to ensure continuity of supply. By outsourcing assembly to electronic
contract manufacturers, Mercury is able to focus its manufacturing efforts on
designing more reliable products, designing more efficient methods of building
its products, systems integration, testing and supply chain management.
Mercury's manufacturing approach is based on a highly integrated process
that takes a product from concept through production. All products are required
to meet specified standards of performance, quality, reliability and safety. The
Company manufactures both commercial and ruggedized versions of its computer
systems. Extensive testing is a fundamental part of the Company's process.
Computer Integrated Manufacturing, Concurrent Engineering, Material Requirements
Planning and Just-In-Time techniques are also integrated into manufacturing
operations as part of an on-time delivery philosophy. Mercury has been ISO 9001
certified since 1995.
COMPETITION
The markets for the Company's products are highly competitive and are
characterized by rapidly changing technology, frequent product performance
improvements and evolving industry standards. Competition typically occurs at
the design stage, where the customer evaluates alternative design approaches,
including those from internal development organizations. A design win usually
ensures a customer will purchase the product until their next generation system
is developed. Occasionally, the Company's computer systems compete with computer
systems from workstation vendors, all of whom have substantially greater
research and development resources, long term guaranteed supply capacity,
marketing and financial resources, manufacturing capability and customer support
organizations than those of the Company. The Company believes that its future
ability to compete effectively will depend, in part, upon its ability to
continue to improve product and process technologies and develop new
technologies in order to maintain the performance advantages of products and
processes relative to competitors, to adapt products and processes to
technological changes, to identify and adopt emerging industry standards and to
adapt to customer needs.
The principal bases for selection in sales of digital signal processing
systems to the defense electronics industry are performance (measured primarily
in terms of processing speed, I/O capacity and interprocessor bandwidth,
processing density per cubic foot, power consumption and heat dissipation),
systems engineering support, overall quality of products and associated
services, use of industry standards, ease of use and price. Competitors in the
defense electronics industry include a relatively small number of companies that
design, manufacture and market DSP board level products and in-house design
teams employed by prime defense contractors. In-house design efforts
historically have provided a significant amount of competition to the Company.
However, competition from in-house design teams has diminished in significance
in recent years due to the increasing use of COTS products and the trend toward
greater use of outsourcing. Despite this recent change, there can be no
assurance that in-house developments will not re-emerge as a major competitive
force in the future. Prime contractors are much larger than Mercury and have
substantially more resources to invest in research and development. Increased
use of in-house design teams by defense contractors in the future may have a
material adverse effect on the Company's business,
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financial condition and results of operations.
In the medical imaging industry the principal bases for selection are
performance (measured primarily in terms of processing speed, I/O capacity and
interprocessor bandwidth and power consumption), price, systems engineering
support, overall quality of products and associated services, use of industry
standards and ease of use. Competitors in the medical imaging market include
in-house design teams, a small number of companies that design, manufacture and
market DSP board level products and workstation manufacturers. Workstations have
become a competitive factor primarily in the market for low-end MRI and CT
machines and, to date, have not been a significant factor in the
high-performance market, Mercury's primary focus. There can be no assurance that
workstation manufacturers will not attempt to penetrate the high-performance
market for medical imaging machines. Workstation manufacturers typically have
greater resources than Mercury and their entry into markets historically
targeted by Mercury may have a material adverse effect on the Company's
business, financial condition and results of operations.
Due to the emerging nature of the markets for the Company's shared storage
technology, its competitive factors are not yet clearly defined. The Company
currently is focusing its efforts in this area on the broadcast and
post-production industry, where the Company believes there is currently only one
directly competitive product. As this market develops, the Company anticipates
that other companies will begin offering additional competitive products. New
competitors may have significantly greater marketing and financial resources,
better access to individuals making purchasing decisions, superior products and
services than those offered by the Company. The Company believes that the
primary impediment to future sales of shared storage products to the
post-production and broadcast industry is the need to transform entrenched
operating modes, such as those associated with linear tape based technologies,
to accommodate new modes of operation such as those associated with non-linear,
disk-based digital technology. However, there can be no assurance that industry
participants will adopt such new technologies or that, if adopted, the Company's
products will not be obsolete, uncompetitive or incompatible.
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 three issued United States patents covering aspects of
the RACE architecture and the
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SuperVision(TM) debugging tool. In addition, the Company has two pending United
States patent applications covering additional aspects of the RACE architecture
and the Company's Parallel Application System, and shared storage area network
technology. The Company may file additional patent applications seeking
protection for other proprietary aspects of its technology in the future. Patent
positions frequently are uncertain and involve complex and evolving legal and
factual questions. The coverage sought in a patent application either can be
denied or significantly reduced before or after the patent is issued.
Consequently, there can be no assurance that any patents from pending patent
applications or from any future patent application will be issued, that the
scope of any patent protection will exclude competitors or provide competitive
advantages to the Company, that any of the Company's patents will be held valid
if subsequently challenged or that others will not claim rights in or ownership
of the patents and other proprietary rights held by the Company. Since patent
applications are secret until patents are issued in the United States or
corresponding applications are published in international countries, and since
publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, the Company cannot be certain that it was the first
to make the inventions covered by each of its pending patent applications or
that it was the first to file patent applications for such inventions. In
addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its products
either in the United States or in international markets.
BACKLOG
As of June 30, 1998, the Company had a backlog of orders aggregating
approximately $26.5 million. The Company includes in its backlog customer orders
for products and services for which it has accepted signed purchase orders with
assigned delivery dates within twelve months. Orders included in backlog may be
canceled or rescheduled by customers without penalty. A variety of conditions,
both specific to the individual customer and generally affecting the customer's
industry, may cause customers to cancel, reduce or delay orders that were
previously made or anticipated. The Company cannot assure the timely replacement
of canceled, delayed or reduced orders. Significant or numerous cancellations,
reductions or delays in orders by a customer or group of customers could
materially adversely affect the Company's business, financial condition and
results of operations. Backlog should not be relied upon as indicative of the
Company's revenues for any future period.
EMPLOYEES
At June 30, 1998, the Company employed a total of 378 persons, including
109 in research and development, 158 in sales, marketing and customer support,
50 in manufacturing and 61 in finance and administration. Seven of the Company's
employees are located in Europe, six in Japan and the remainder in the U.S. None
of the Company's employees are represented by a labor organization and the
Company believes that its relations with employees are good. Competition for
qualified personnel in the engineering fields is intense and the Company is
aware that much of its future success will depend on its continued ability to
attract and retain qualified personnel. The Company seeks to attract new
employees by offering competitive compensation packages, including salary,
bonus, stock options and employee benefits. There can be no assurance, however,
that the Company will be successful in retaining its key employees or that it
will be able to attract skilled personnel for the development of its business.
ITEM 2. PROPERTIES
The Company's headquarters consist of approximately 96,000 square feet of
leased office space in Chelmsford, Massachusetts. The Company is currently
engaged in the construction of additional 91,000 square feet of office space on
vacant land adjacent to its headquarters. The Company anticipates that
construction and development of the additional office space will cost
approximately $9.0 million and that it will be completed by early calendar year
1999. Once the new office space is completed, the Company plans to transfer the
building and the underlying real estate to an unaffiliated third party pursuant
to a sale and leaseback transaction. The Company has not yet identified a
counterparty for this sale and leaseback transaction. While the Company believes
it should be able to identify such a party within a reasonably limited period of
time, there can be no assurance that the Company will be able to successfully
consummate such transaction on commercially acceptable terms, if at all. If the
Company is not able to successfully consummate a sale and leaseback transaction,
the Company would retain this property and would not have use of the money
invested therein.
The Company also maintains offices near Los Angeles and San Jose,
California, and in Lowell, Massachusetts, Dallas, Texas, Chanhassen, Minnesota,
Madison, Wisconsin, Port St Lucie, Florida, Bellevue, Washington and
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Vienna, Virginia and has international offices in the United Kingdom, France and
Japan.
ITEM 3. LEGAL PROCEEDINGS
To the Company's knowledge, other than the IRS audit described below, there
are no pending legal proceedings which are material to the Company or its
business to which it is a party or to which any of its properties is subject.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of 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, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol MRCY. The following table
sets forth, for the periods indicated since the Company's initial public
offering on January 29, 1998, the high and low transactions per share during
such periods. Such over-the-counter market quotations reflect inter-dealer
prices without retail markup, markdown or commission.
1998
----
High Low
---- ---
Third quarter (from January 29, 1998) 19 1/8 9 3/8
Fourth quarter 19 12 1/4
As of August 28, 1998 the Company had approximately 3,250 shareholders
including record and nominee holders.
The Company has never declared or paid cash dividends on shares of its
Common Stock and does not expect to declare or pay cash dividends on its Common
Stock in the foreseeable future. The Company currently intends to retain any
earnings for future growth. In addition, the Company's credit facility limits
the payment of cash dividends without the consent of its lender to fifty percent
of the Company's year-to-date net income in any fiscal year.
During the three months of April, May and June, 1998 the Company issued the
following securities, none of which has been registered under the Securities Act
of 1933:
In transactions exempt from registration pursuant to Rule 701 under the
Securities Act, the Company has issued the following securities:
1. On April 2, 1998, the Company issued 1,320 shares of Common Stock
at a price of $4.00 per share upon exercise of a stock option.
2. On April 20, 1998, the Company issued 1,040 shares of Common
Stock at a price of $4.00 per share upon exercise of a stock
option.
3. On April 28, 1998, the Company issued 11,100 shares of Common
Stock at a price of $4.00 per share upon exercise of three stock
options.
4. On May 18, 1998, the Company issued 375 shares of Common Stock at
a price of $4.00 per share upon exercise of a stock option.
5. On May 19, 1998, the Company issued 3,150 shares of Common Stock
at a price of $2.00 per
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share upon the exercise of two stock options.
6. On May 20, 1998, the Company issued 2,000 shares of Common Stock
at a price of $2.00 per share upon exercise of a stock option.
During the three months of April, May, and June 1998, the Company used
approximately $1,402,000 of proceeds received pursuant to the initial public
offering on January 29, 1998, in connection with construction of the Company's
additional facility as described below. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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):
Fiscal Year Ended June 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Revenues $85,544 $64,574 $58,300 $54,323 $41,727
Cost of revenues 30,084 22,034 24,688 21,221 16,285
------- ------- ------- ------- -------
Gross profit 55,460 42,540 33,612 33,102 25,442
Operating expenses:
Selling, general and administrative 27,879 22,631 16,927 15,798 12,911
Research and development 14,476 12,837 9,776 8,586 7,254
------- ------- ------- ------- -------
Total operating expenses 42,355 35,468 26,703 24,384 20,165
------- ------- ------- ------- -------
Income from operations 13,105 7,072 6,909 8,718 5,277
Interest income, net 1,084 560 548 240 55
Other income (expense), net (30) (88) (77) 22 (64)
------- ------- ------- ------- -------
Income before income taxes 14,159 7,544 7,380 8,980 5,268
Provision for income taxes 5,428 2,933 2,952 2,636 1,153
------- ------- ------- ------- -------
Net income $ 8,731 $ 4,611 $ 4,428 $ 6,344 $ 4,115
======= ======= ======= ======= =======
Net income per common share:
Basic $ 1.21 $ 0.90 $ 0.88 $ 1.27 $ 0.83
Diluted $ 0.94 $ 0.58 $ 0.55 $ 0.80 $ 0.51
Weighted average number of common and
common equivalent shares outstanding (1):
Basic 7,235 5,141 5,050 4,992 4,943
Diluted 9,270 7,897 7,983 7,977 8,016
Year Ended June 30,
-----------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital $32,794 $27,547 $23,554 $20,156 $14,454
Total assets 73,569 44,848 33,264 33,543 22,926
Convertible preferred stock (2) -- 1,200 1,200 1,200 1,200
Total stockholders' equity 61,040 33,322 28,529 24,003 16,690
(1) See Note B of Notes to Consolidated Financial Statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute basic and diluted net income per common share.
(2) Upon completion of the Company's initial public offering on January
29,1998, the Company's Series A Convertible Preferred Stock was converted
into 2,556,792 shares of Common Stock.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Mercury designs, manufactures and markets high performance, real-time
digital signal processing computer systems that transform sensor generated data
into information which can be displayed as images for human interpretation or
subjected to additional computer analysis. These multicomputer systems are
heterogeneous and scalable, allowing them to accommodate several microprocessor
types and to scale from a few to hundreds of microprocessors within a single
system.
During the past several years, the majority of the Company's revenues 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 diagnostic imaging is the other primary market
currently served by the Company. Mercury's computer systems are embedded in MRI,
CT and PET machines. The remaining component of revenues is derived from
computer systems used in such commercial applications as baggage scanning,
seismic analysis and automatic testing equipment, and from sales of the
Company's shared storage products, SuiteFusion software and related products and
services.
Mercury uses a direct sales force to sell its computer systems to the
defense electronics markets in the U.S., Japan, the United Kingdom and France.
Defense electronics sales to other countries are achieved through distributors.
The Company also uses a direct sales force to sell its computer systems to the
U.S. and international medical imaging markets. The Company uses various
distribution channels for sales of shared storage products to the broadcast and
post-production industry. The Company sells these products to OEMs, value added
re-sellers and end-users. Over the past three fiscal years, the Company has
expanded its sales force to support growing revenues and has made significant
expenditures to recruit additional technical and professional staff, to invest
in information technology and to improve the Company's financial, administrative
and management infrastructure.
Revenues include both hardware and software products, which include
development contracts, services such as maintenance, training, engineering
consulting and system integration of Mercury software with third party hardware.
Revenues from maintenance, training, engineering consulting services and system
integration historically have not constituted a material portion of total
revenues. The Company generally records product revenues upon shipment to the
customer, provided that no significant vendor obligation exists, and accrues for
associated warranty costs at the same time. For certain development contracts,
revenues are recognized using the percentage-of-completion accounting method.
Revenues from maintenance, training and engineering consulting services are
recognized ratably over the applicable contract period or as the services are
performed. Revenues from systems integration in the shared storage business are
recognized upon completion of the service and acceptance by the customer.
Cost of revenues includes the cost of materials, component assembly,
internal labor and related overhead. Cost of revenues also can include
engineering and other technical labor and related overhead incurred in
development and engineering consulting contracts.
Gross profit as a percentage of revenues ("gross margin") varies from
period to period depending upon numerous variables including the mix of revenues
from hardware, software, development and engineering consulting contracts; the
mix of revenues among the markets served by the Company; the cost of raw
materials; the cost of outsourced services and labor costs; 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 processing and to
create new software products for the shared storage market. Mercury invested
$9.8 million, $12.8 million and $14.5 million in fiscal years 1996, 1997 and
1998, respectively, in
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development activities associated with the Company's key technology competencies
as well as in activities that are targeted at developing new technologies and
products. The Company expects research and development expenses to continue to
increase as the Company continues to develop products to serve its markets, all
of which are subject to rapidly changing technology, frequent product
performance improvements and evolving industry standards. The ability to deliver
superior technological performance on a timely and cost effective basis is a
critical factor in securing design wins for future generations of defense
electronics and medical imaging systems. Significant research and development
spending by the Company does not ensure that the Company's computer systems will
be designed into a customer's system. Because future production orders are
usually contingent upon securing a design win, the Company's operating results
may fluctuate due to either obtaining or failing to obtain design wins for
significant customer systems.
On December 12, 1997, the IRS concluded an audit of the Company's tax
returns for the years ended June 30, 1992 through June 30, 1995, and issued a
formal report reflecting proposed adjustments with respect to the years under
audit. The proposed IRS adjustments primarily relate to the disallowance of
research and experimental tax credits claimed by the Company, as well as the
treatment of certain other items. As of December 12, 1997, the total deficiency
attributable to the proposed adjustments was $4.2 million, including penalties
and interest of $1.6 million. The Company is in the process of responding to
this report by appealing the proposed adjustments to the Appeals Division of the
IRS. While the Company does not believe that the final outcome of the IRS audit
will have a material adverse effect on the Company's financial condition or
results of operations, no assurance can be given as to the final outcome of the
audit, the amount of any final adjustments or the potential impact of such
adjustments on the Company's financial condition or 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,
--------------------------------
1998 1997 1996
----- ----- ------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 35.2 34.1 42.3
----- ----- -----
Gross profit 64.8 65.9 57.7
Operating expenses:
Selling, general and administrative 32.6 35.0 29.0
Research and development 16.9 19.9 16.8
----- ----- -----
Total operating expenses 49.5 54.9 45.8
----- ----- -----
Income from operations 15.3 11.0 11.9
Other income, net 1.3 0.7 0.8
----- ----- -----
Income before income taxes 16.6 11.7 12.7
Provision for income taxes 6.4 4.6 5.1
----- ----- -----
Net income 10.2% 7.1% 7.6%
===== ===== =====
Fiscal 1997 vs. Fiscal 1998
Revenues
Total revenues increased 32% from $64.6 million during the year ended June
30, 1997 to $85.5 million during the year ended June 30, 1998. Revenues from
defense electronics, medical imaging and other commercial markets increased, as
described below.
Defense electronics revenues increased 29% from $52.3 million or 80.9% of
total revenues during the year ended June 30, 1997 to $67.2 million or 78.6% of
total revenues during the year ended June 30, 1998. The increase in revenues was
due primarily to increased unit demand for defense electronics products.
Medical imaging revenues increased 62% from $6.9 million or 10.7% of total
revenues during the year ended
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June 30, 1997 to $11.2 million or 13.1% of total revenues during the year ended
June 30, 1998. The increase in revenues was due primarily to increased unit
demand for medical imaging products.
Other revenues increased 31% from $5.4 million or 8.4% of total revenues
during the year ended June 30, 1997 to $7.1 million or 8.3% of total revenues
during the year ended June 30, 1998. This increase in other revenues was due
primarily to an increase in unit demand from new and existing commercial
customers, partially offset by a decrease in revenues from the shared storage
business.
Cost of Revenues
Cost of revenues increased 37% from $22.0 million during the year ended
June 30, 1997 to $30.1 million during the year ended June 30, 1998. Cost of
revenues as a percentage of total revenues increased from 34.1% during the year
ended June 30, 1997 to 35.2% during the year ended June 30, 1998. This increase
in costs relative to revenue was due to a price reduction put in place during
1998 and increased manufacturing operating costs. These increases were offset,
partially, by a decline in material costs.
Selling, General and Administrative
Selling, general and administrative expenses increased 23% from $22.6
million during the year ended June 30, 1997 to $27.9 million during the year
ended June 30, 1998. Selling, general and administrative expenses as a
percentage of total revenues were 35.0% during the year ended June 30, 1997 and
32.6% during the year ended June 30, 1998. The increase, in expense dollars,
reflects the hiring of additional sales and administrative personnel, increased
commissions and the development of the Company's financial, administrative and
management systems to support the Company's growth.
Research and Development
Research and development expenses, excluding capitalized software
expenditures, increased 13% from $12.8 million during the year ended June 30,
1997 to $14.5 million during the year ended June 30, 1998. Research and
development expenses as a percentage of total revenues were 19.9% during the
year ended June 30,1997 and 16.9% during the year ended June 30, 1998. The
increase in research and development expenses reflects increased investments in
the Company's core technological competencies, as well as in new medical, shared
storage and other technologies and products.
Income from Operations
Income from operations increased 85% from $7.1 million during the year
ended June 30, 1997 to $13.1 million during the year ended June 30, 1998.
Included in income from operations during the year ended June 30, 1998 were
$885,000 in hardware and software revenues and $4.0 million in direct expenses
related to the shared storage business. The expenses include direct expenses
from marketing and engineering activities, primarily related to compensation,
trade shows, prototype development and direct costs related to the sale of the
product. Included in income from operations during the year ended June 30, 1997
were $2.1 million in hardware and software revenues and $3.6 million in direct
expenses related to the shared storage business. Revenues from the shared
storage business declined year over year due primarily to the inclusion in 1997
revenue of one large non-recurring order and the unavailability of fiber channel
interconnect technology on a full commercial basis.
Interest Income, Net
The Company earned $560,000 in interest income, net, during the year ended
June 30, 1997 and $1.1 million during the year ended June 30, 1998. This
increase reflects an increase in the Company's average cash balances primarily
as a result of cash received from the Company's initial public offering.
Offsetting the effect of higher average cash balances were lower yields achieved
on the Company's cash. These lower yields were the result of a shift in
investment strategy from taxable money market instruments to non-taxable
securities.
Provision for Income Taxes
The Company's provision for income taxes was $2.9 million during the year
ended June 30, 1997 and $5.4 million during the year ended June 30, 1998. The
Company's effective tax rate was 39% during the year ended June
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30, 1997 and 38% during the year ended June 30, 1998.
Fiscal 1996 vs. Fiscal 1997
Revenues
Total revenues increased 11% from $58.3 million during the year ended June
30, 1996 to $64.6 million during the year ended June 30, 1997. The increase was
due primarily to increased unit demand in the defense electronics business and
the introduction of shared storage hardware and software during the year ended
June 30, 1997.
Defense electronics revenues increased 25% from $41.8 million or 71.7% of
total revenues during the year ended June 30, 1996 to $52.3 million or 80.9% of
total revenues during the year ended June 30, 1997. The increase was due
primarily to increased unit demand for defense electronics products.
Medical imaging revenues decreased 48% from $13.3 million or 22.7% of total
revenues during the year ended June 30, 1996 to $6.9 million or 10.7% of total
revenues during the year ended June 30, 1997. The decrease in revenues was due
primarily to a reduction in product prices, discontinuation of certain products
by one customer and the acceleration of purchasing at the end of the year ended
June 30, 1996 by two of the Company's medical imaging customers.
Other revenues increased 67% from $3.2 million or 5.6% of total revenues
during the year ended June 30, 1996 to $5.4 million or 8.4% of total revenues
during the year ended June 30, 1997. The increase in revenues was due primarily
to the introduction of shared storage hardware and software during the year
ended June 30, 1997.
Cost of Revenues
Cost of revenues declined 11% from $24.7 million during the year ended
June 30, 1996 to $22.0 million during the year ended June 30, 1997. Cost of
revenues as a percentage of total revenues decreased from 42.3% during the year
ended June 30, 1996 to 34.1% during the year ended June 30, 1997. This decrease
was due primarily to the inclusion in the year ended June 30, 1996, of a
domestic defense electronics development contract which yielded significantly
lower gross margins than the gross margins historically achieved by the Company.
Selling, General and Administrative
Selling, general and administrative expenses increased 34% from
$16.9 million during the year ended June 30, 1996 to $22.6 million during the
year ended June 30, 1997. Selling, general and administrative expenses as a
percentage of total revenues were 29.0% during the year ended June 30, 1996 and
35.0% during the year ended June 30, 1997. The increase in expenses reflects the
hiring of additional sales and administrative personnel, increased commissions
and the development of the Company's financial and administrative systems to
support the Company's growth.
Research and Development
Research and development expenses, excluding capitalized software
expenditures, increased 31% from $9.8 million during the year ended June 30,
1996 to $12.8 million during the year ended June 30, 1997. Research and
development expenses as a percentage of total revenues were 16.8% during the
year ended June 30, 1996 and 19.9% during the year ended June 30, 1997. The
increase reflects greater investment in the Company's core competencies, as well
as in new medical and shared storage technologies and products.
Income from Operations
Income from operations increased 2% from $6.9 million during the year ended
June 30, 1996 to $7.1 million during the year ended June 30, 1997. Included in
income from operations during the year ended June 30, 1997 were $2.1 million in
hardware and software revenues and $3.6 million in direct expenses related to
the shared storage business. The expenses include direct expenses from marketing
and engineering activities, primarily related to compensation, trade shows and
prototype development and direct costs related to the sale of the product,
including certain hardware costs. There were no revenues or expenses related to
the shared storage business during the year ended June 30, 1996.
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Interest Income, Net
The Company earned $548,000 in interest income, net, during the year ended
June 30, 1996 and $560,000 during the year ended June 30, 1997. This increase in
interest income, net, was due to the increase in average balances of cash and
investments, partially offset by a decrease in average interest rates.
Provision for Income Taxes
The Company's provision for income taxes was $3.0 million during the year
ended June 30, 1996 and $2.9 million during the year ended June 30, 1997. The
Company's effective tax rate was 40% during the year ended June 30, 1996 and 39%
during the year ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998 the Company had cash and marketable securities of
approximately $35.0 million. During the year ended June 30, 1998 the Company
generated approximately $7.1 million in cash from operations compared to
$9.2 million generated during the year ended June 30, 1997. The decrease in cash
generated from operations is attributable primarily to increase in trade
accounts receivable and decrease in billings in excess of revenues and customer
advances. These items were offset by the company's improved profitability and
increases in accounts payable and accrued expenses. The Company's days sales,
based on revenues of each calendar quarter, increased from 60 days at the end of
1997 to 66 days at the end of 1998. This increase in days sales was due to a
disproportionate amount of revenue being recorded at the end of the accounting
period.
The Company has a line of credit agreement with a commercial bank on which
the Company can borrow up to $5.0 million at an interest rate equal to the prime
rate or, at the election of the Company, two and one quarter percentage points
above the London InterBank Offered Rate. As of June 30, 1998 there was no
outstanding borrowing on this line of credit.
The Company used approximately $35.4 million in investing activities during
the year ended June 30, 1998 compared to $4.0 million during the year ended
June 30, 1997. This increase was due primarily to the net purchase of marketable
securities amounting to $29.0 million and $2.6 million associated with the
construction of an additional facility. During the year ended June 30, 1998, the
Company invested approximately $111,000 in capitalized software as compared to
$550,000 in capitalized software during the year ended June 30, 1997.
The Company generated approximately $19.1 million in cash from financing
activities during the year ended June 30, 1998 compared to $270,000 during the
year ended June 30, 1997. The increase in cash from financing activities was due
primarily to the completion of the Company's initial public offering in January,
1998, which resulted in net proceeds amounting to $18.6 million.
The Company is in the process of constructing an additional 91,000 square
feet of office space on vacant land adjacent to its headquarters. The Company
used internally generated funds to acquire this parcel in November, 1997 and
broke ground in April, 1998. The Company anticipates that construction and
development of the additional office space will cost approximately $9.0 million
and that it will complete construction and development in early calendar year
1999. Once the new office space is completed, the Company plans to transfer this
parcel to an unaffiliated third party pursuant to a sale and leaseback
transaction. No assurances can be made that the cost of construction will not
exceed such estimate, or that the Company will be able to consummate a sale and
leaseback transaction with respect to such property. The Company does not expect
to realize a profit from the sale of the finished building. See "Item 2.
Properties."
Management believes that the Company's available cash, cash generated from
operations, and the Company's line of credit, will be sufficient to provide for
the Company's working capital, capital expenditure requirements and the
construction of the new facility for the foreseeable future and any final
adjustments resulting from the IRS audit described above. 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.
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YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements.
State of Readiness. The Company is in the process of evaluating the year
2000 readiness of the hardware and software products sold by the Company
("Products"), the information technology systems used in its operations ("IT
Systems"), and its non-IT Systems, such as building security, voice mail and
other systems. The Company currently anticipates that the Project will cover the
following phases: (i) identification of all Products, IT Systems, and non-IT
Systems; (ii) assessment of repair or replacement requirements; (iii) repair or
replacement; (iv) testing; (v) implementation; and (vi) creation of contingency
plans in the event of year 2000 failures.
The Company has completed its assessment of all current versions of its
Products and believes they are year 2000 compliant. Even so, the assessment of
whether a complete system or device in which a Product is embedded will operate
correctly for an end-user depends in large part on the year 2000 compliance of
the system's other components, most of which are supplied by parties other than
the Company. The supplier of the Company's current financial and accounting
software has informed the Company that such software is not year 2000 compliant.
The Company is currently evaluating whether to accelerate the acquisition of a
replacement financial and accounting software package that is year 2000
compliant, and has retained an outside consultant to assist with this
evaluation. As a precautionary measure, the Company intends to use its own
employees to reprogram the source code underlying its current financial and
accounting software to make it year 2000 compliant. The Company anticipates
completing the reprogramming effort no later than mid-calendar year 1999.
Further, the Company relies, both domestically and internationally, upon various
vendors, governmental agencies, utility companies, telecommunications service
companies, delivery service companies and other service providers who are
outside of Mercury's control. There is no assurance that such parties will not
suffer a year 2000 business disruption, which could have a material adverse
effect on the Company's financial condition and results of operations.
Prior to the end of fiscal 1999, the Company intends to (i) conduct an
internal review of the year 2000 compliance of all prior versions of its
Products, (ii) circulate a questionnaire to vendors and customers with whom the
Company has material relationships to obtain information about their year 2000
compliance, and (iii) retain an outside consultant to assist in compiling a
comprehensive list of all IT-Systems and non-IT Systems. Until such information
is obtained, the Company will not be able to effectively evaluate whether any
remediation efforts will be required with respect to its IT Systems (except as
described above), non-IT Systems or prior versions of its Products.
Costs. To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating year 2000 compliance issues. Most of
its expenses have related to the retention of an outside consultant to evaluate
the Company's financial and accounting software, and the opportunity cost of
time spent by employees of the Company evaluating this software, the current
versions of the Products, and year 2000 compliance matters generally. Management
estimates that the cost of acquiring and installing a new financial and
accounting software system would be approximately $1,000,000, which amount would
be capitalized and amortized over future periods. The Company believes that
internally generated funds or available cash would be sufficient to cover the
projected costs associated with a new financial and accounting software system.
The Company does not believe that the costs associated with reprogramming its
current financial and accounting software will be material in amount. However,
no assurances can be given that such software can be reprogrammed in a timely
and cost effective manner. Failure to timely reprogram or replace the Company's
financial and accounting software could, in a worse case scenario, result in the
inability to process accounting and financial data and could have a material
adverse effect on the Company. At this time, the Company does not possess the
information necessary to estimate the potential impact of year 2000 compliance
issues relating to its other IT-Systems, non-IT Systems, prior versions of its
Products, its vendors, its customers, and other parties. Such impact, including
the effect of a year 2000 business disruption, could have a material adverse
effect on the Company's financial condition and results of operations.
Contingency Plan. The Company has not yet developed a year 2000-specific
contingency plan. The Company intends to prepare a contingency plan with respect
to its financial and accounting software no later than mid-1999. In addition, if
further year 2000 compliance issues are discovered, the Company then will
evaluate the need for one or more contingency plans relating to such issues.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
In this report, as well as oral statements made by the Company, that are
prefaced with the words "may," "will," "expect," "anticipate," "continue,"
"estimate," "project," "intend," "designed" and similar expressions, are
intended to identify forward-looking statements regarding events, conditions and
financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial position. These
statements are based on the Company's current expectations and estimates as to
prospective events and circumstances about which the Company can give no firm
assurance. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made. As it is not possible to predict every new
factor that may emerge, forward-looking statements should not be relied upon as
a prediction of actual future financial condition or results. These
forward-looking statements, like any forward-looking statements, involve risks
and uncertainties that could cause actual results to differ materially from
those projected or unanticipated. Such risks and uncertainties include the
factors set forth below in addition to the other information set forth in this
Form 10-K.
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 79%, 81%, and 72% of the
Company's revenues in fiscal 1998, 1997, and 1996, respectively. Reductions in
government spending on programs that incorporate the Company's products could
have a material adverse effect on the Company's business, financial condition
and results of operations. Moreover, the Company's government contracts and
subcontracts are subject to special risks, such as: delays in funding; ability
of the government agency to unilaterally terminate the prime contract; reduction
or modification in the event of changes in government policies or as the result
of budgetary constraints or political changes; increased or unexpected costs
under fixed price contracts; and other factors that are not under the control of
the Company. In addition, consolidation among defense industry contractors has
resulted in fewer contractors with increased bargaining power relative to the
Company. No assurance can be given that such increased bargaining power will not
adversely affect the Company's business, financial condition or results of
operations in the future.
The Company's contracts with the U.S. and foreign governments and their
prime and subcontractors are subject to termination either upon default by the
Company or at the convenience of the government. Termination for convenience
provisions generally entitle the Company to recover costs incurred, settlement
expenses and profit on work completed prior to termination. In addition to the
right of the government to terminate, government contracts are generally
conditioned upon the continuing availability of legislative appropriations.
Funds are usually appropriated for a given program each fiscal year even though
contract performance may take more than one fiscal year. Consequently, at the
outset of a major program, the contract is usually partially funded, and
additional monies normally are incrementally committed to the contract by the
procuring agency from appropriations made for future fiscal years. No assurance
can be given that the Company will realize the revenue expected from performing
under such contracts. Because the Company contracts to supply goods and services
to U.S. and foreign governments it is also subject to other risks, including
contract suspensions, protests by disappointed bidders of contract awards which
can result in the reopening of the bidding process, changes in governmental
policies or regulations or other political factors.
DEPENDENCE ON KEY CUSTOMERS. The Company is dependent on a small number of
customers for a large portion of its revenues. In fiscal 1998, three customers
accounted for 40% of the Company's revenues, in fiscal 1997, two customers
accounted for 32% of the Company's revenues and in fiscal 1996 two customers
accounted for 47% of the Company's total revenues. The Company's largest
customer in the medical imaging market, accounted for 76%, 72%, and 69% of the
Company's aggregate sales to the medical imaging market in fiscal 1998, 1997,
and 1996, respectively. Customers in the defense electronics market generally
purchase the Company's products in connection with government programs that have
a limited duration, leading to fluctuating sales to any particular customer in
the defense electronics market from year to year. By contrast, many customers in
the medical imaging market historically have purchased the Company's products
over a number of years for use in successive generations of medical imaging
devices, although there can be no assurance that such past behavior will
continue in the future. A significant diminution in the sales to or loss of any
of the Company's major customers would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company's revenues are largely dependent upon the ability of its customers
to develop and sell products that incorporate the Company's products. No
assurance can be given that the Company's customers will not experience
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financial or other difficulties that could adversely affect their operations
and, in turn, the results of operations of the Company.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced fluctuations
in its results of operations in large part due to the sale by the Company of its
computer systems in relatively large dollar amounts to a relatively small number
of customers. Operating results also have fluctuated due to competitive pricing
programs and volume discounts, the loss of customers, market acceptance of the
Company's products, product obsolescence and general economic conditions. In
addition, the Company, from time to time, has entered into contracts to engineer
a specific solution based on modifications to the Company's standard products (a
"development contract"). The Company's gross margins from development contract
revenues are typically lower than the Company's gross margins from standard
product revenues. The Company intends to continue to enter into development
contracts and anticipates that the gross margins associated with development
contract revenues will continue to be lower than its gross margins on standard
product revenues. The Company expects research and development expenses to
continue to increase as the Company continues to develop products to serve its
markets, all of which are subject to rapidly changing technology, frequent
product performance improvements and evolving industry standards. The ability to
deliver superior technological performance on a timely and cost effective basis
is a critical factor in securing design wins for future generations of defense
electronics and medical imaging systems. Significant research and development
spending by the Company does not ensure that the Company's computer systems will
be designed into a customer's system. Because future production orders are
usually contingent upon securing a design win, the Company's operating results
may fluctuate due to either obtaining or failing to obtain design wins for
significant customer systems.
The Company's quarterly results may be subject to fluctuations resulting
from the foregoing factors, as well as a number of other factors, including the
timing of significant orders, delays in completion of internal product
development projects, delays in shipping the Company's computer systems and
software programs, delays in acceptance testing by customers, a change in the
mix of products sold to the defense electronics and medical imaging markets,
production delays due to quality problems with outsourced components, shortages
of components, the timing of product line transitions and declines in quarterly
revenues from old generations of products following announcement of replacement
products containing more advanced technology. Another factor contributing to
fluctuations in quarterly results is the fixed nature of the Company's
expenditures on personnel, facilities and marketing programs. The Company's
expense levels for personnel, facilities and marketing programs are based, in
significant part, on the Company's expectations of future revenues on a
quarterly basis. If actual quarterly revenues are below management's
expectations, results of operations likely will be adversely affected. As a
result of the foregoing factors, the Company's operating results, from time to
time, may be below the expectations of public market analysts and investors,
which could have a material adverse effect on the price of the Company's Common
Stock.
DEPENDENCE ON SUPPLIERS. Several components used in the Company's products
are currently obtained from sole source suppliers. Mercury is dependent on LSI
Logic Corporation for four custom designed ASICs, on Analog Devices for its
SHARC processors, on International Business Machines Corporation for ball grid
array packaging, on Motorola for its PowerPC processors and on Intel for its
i860 processors. IBM may terminate its contract with the Company without cause
upon thirty days notice and may cease offering products to the Company upon
sixty days notice. Analog Devices may discontinue or modify any product upon 180
days notice and LSI Logic may discontinue any product upon 180 days notice. If
LSI Logic, Analog Devices, IBM, Motorola or Intel were to limit or reduce the
sale of such components to the Company, or if these or other suppliers to the
Company were to experience financial difficulties or other problems which
prevented them from supplying the Company with the necessary components, such
events could have a material adverse effect on the Company's business, financial
condition and results of operations. These sole source suppliers are subject to
quality and performance issues, materials shortages, excess demand, reduction in
capacity and other factors that may disrupt the flow of goods to the Company or
its customers and thereby adversely affect the Company's business and customer
relationships. The Company has no guaranteed supply arrangements with its
suppliers and there can be no assurance that its suppliers will continue to meet
the Company's requirements. If the Company's supply arrangements are
interrupted, there can be no assurance that the Company would be able to find
another supplier on a timely or satisfactory basis. Any shortage or interruption
in the supply of any of the components used in the Company's products, or the
inability of the Company to procure these components from alternate sources on
acceptable terms could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
severe shortages of components will not occur in the future. Such shortages
could increase the cost or delay the shipment of the Company's products, which
could have a material adverse effect on the Company's business,
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financial condition and results of operations. Significant increases in the
prices of these components would also materially adversely affect the Company's
financial performance since the Company may not be able to adjust product
pricing to reflect the increase in component costs. The Company could incur
set-up costs and delays in manufacturing should it become necessary to replace
any key vendors due to work stoppages, shipping delays, financial difficulties
or other factors and, under certain circumstances, these costs and delays could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE UPON KEY PERSONNEL AND SKILLED EMPLOYEES. The Company is largely
dependent upon the skills and efforts of its senior management, particularly
James R. Bertelli, its President and Chief Executive Officer, as well as its
managerial, sales and technical employees. None of the senior management or
other key employees of the Company is subject to any employment contract or
noncompetition agreement. The Company maintains key-man life insurance on Mr.
Bertelli and certain other senior managers. The loss of services of any of its
executives or other key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success will depend to a significant extent on its ability to attract,
train, motivate and retain highly skilled technical professionals, particularly
project managers, engineers and other senior technical personnel. The Company
believes that there is a shortage of, and significant competition for, technical
development professionals with the skills and experience necessary to perform
the services offered by the Company. The Company's ability to maintain and renew
existing engagements and obtain new business depends, in large part, on its
ability to hire and retain technical personnel with the skills that keep pace
with continuing changes in industry standards, technologies and client
preferences. The inability to hire additional qualified personnel could impair
the Company's ability to satisfy its growing client base, requiring an increase
in the level of responsibility for both existing and new personnel. There can be
no assurance that the Company will be successful in retaining current or future
employees.
DEPENDENCE ON MEDICAL IMAGING MARKET; POTENTIAL ADVERSE EFFECT OF HEALTH
CARE REFORM. Sales of the Company's computer systems to the medical imaging
market accounted for approximately 13%, 11%, and 23% of the Company's revenues
in fiscal 1998, 1997, and 1996, respectively. These customers are original
equipment manufacturers ("OEMs") of medical imaging devices and, as a result,
any change in the demand for such devices which renders any of the Company's
products unnecessary or obsolete, or any change in the technology in such
devices, could have a material adverse effect on the Company's business,
financial condition and results of operations. Such OEM customers, the end-users
of their products and the health care industry generally are subject to
extensive federal, state and local regulation in the U.S. as well as in other
countries. Changes in applicable health care laws and regulations or new
interpretations of existing laws and regulations could have a material adverse
effect on such customers or end-users. There can be no assurance that future
health care or budgetary legislation or other changes in the administration or
interpretation of governmental health care programs both in the U.S. and abroad
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
RISK OF ENTRY INTO NEW MARKETS. The Company's expansion strategy includes
developing new products and entering new markets. The Company's ability to
compete in new markets will depend upon a number of factors including, without
limitation, the Company's ability to create demand for its products in such
markets, its ability to manage its growth effectively, the quality of its
products, its ability to respond to changes in its customers' businesses by
updating existing products and introducing, in a timely fashion, products which
meet the needs of its customers and the ability of the Company to respond
rapidly to technological change. The failure of the Company to do any of the
foregoing could result in a material adverse effect on its business, financial
condition and results of operations. In addition, the Company may face
competition in these new markets from various companies which may have
substantially greater research and development resources, marketing and
financial resources, manufacturing capability and customer support organizations
than those of the Company.
The Company has recently expanded into the shared storage market and has
invested, and continues to invest, significant resources in the development of
products geared towards that market. The Company has initially focused on
providing software products tailored for the post-production and broadcast
segments of the entertainment industry, introducing in fiscal 1997
SuiteFusion(TM), a middleware application that enables workgroups to share
files. The market for providing products to the entertainment industry includes
competitors with greater financial and other resources than the Company. No
assurance can be given that the Company will be able to successfully compete in
this market, or that it will be able to meet the technical specifications
imposed by its customers or potential customers. In addition, the success of the
Company's shared storage software product depends, in large part, on the
post-production and broadcast industry shifting from traditional linear,
tape-based technologies toward newer non-linear, disk-based digital
technologies. Linear, tape-based technologies remain pervasive in this industry
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and there can be no assurance that its participants will adopt non-linear,
disk-based digital technologies, or that, if adopted, the Company's products
will not be obsolete, uncompetitive or incompatible. The occurrence of any of
the foregoing could adversely affect the Company's business, financial condition
and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company markets and
sells its products in certain international markets, and the Company has
established offices in the United Kingdom, Japan and France. The Company's
international revenues, which are comprised of export sales to foreign markets
from the United States and sales by foreign subsidiaries, were approximately
14%, 12%, and 20% of the Company's revenues in fiscal 1998, 1997, and 1996,
respectively. If revenues generated by foreign activities are not adequate to
offset the expense of establishing and maintaining these foreign subsidiaries
and activities, the Company's business, financial condition and results of
operations could be materially adversely affected. In addition, there are
certain risks inherent in transacting business internationally, such as changes
in applicable laws and regulatory requirements, export and import restrictions,
export controls relating to technology, tariffs and other trade barriers, less
favorable intellectual property laws, difficulties in staffing and managing
foreign operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
expatriation controls and potential adverse tax consequences, any of which could
adversely impact the success of the Company's international activities. In the
recent past, the financial markets in Asia have experienced significant turmoil.
There can be no assurance that such turmoil in the Asian financial markets will
not negatively affect the sales by the Company to that region. A portion of the
Company's revenues from sales to foreign entities, including foreign
governments, is in the form of foreign currencies. There can be no assurance
that one or more of such factors will not have a material adverse effect on the
Company's future international activities and, consequently, on the Company's
business, financial condition or results of operations.
TECHNOLOGICAL CHANGES; RISK OF DESIGN-IN PROCESS. The Company's future
success will depend in part on its ability to enhance its current products and
to develop new products on a timely and cost-effective basis in order to respond
to technological developments and changing customer needs. The defense
electronics market, in particular, demands constant technological improvements
as a means of gaining military advantage. Military planners historically have
funded significantly more design projects than actual deployments of new
equipment, and those systems which are deployed tend to contain the components
of the subcontractors selected to participate in the design process. In order to
participate in the design of new defense electronics systems, the Company must
be able to demonstrate its ability to deliver superior technological performance
on a timely and cost-effective basis. There can be no assurance that the Company
will be able to secure an adequate number of defense electronics design wins in
the future, that the equipment in which the Company's products are intended to
function eventually will be deployed in the field, or that the Company's
products will be included in such equipment if it eventually is deployed.
Customers in the medical imaging market also seek technological
improvements through product enhancements and new generations of products. The
Company believes that medical imaging machines in which the Company's computers
are installed have a long product life cycle. Medical equipment OEMs
historically have selected certain suppliers whose products have been included
in the OEMs' machines for a significant portion of the products' life cycle.
There can be no assurance that the Company will be selected to participate in
the future design of any medical imaging equipment, or that, if selected, the
Company will generate any revenues for such design work. Failure to participate
in future designs of medical imaging equipment could have a material adverse
effect on the Company's business, financial condition and results of operations.
The design-in process is typically lengthy and expensive, and there can be
no assurance that the Company will be able to continue to meet the product
specifications of its customers in a timely and adequate manner. In addition,
any failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, or any significant delay in product
developments or introductions, could have a material adverse effect on the
Company's business, financial condition and results of operations. Because of
the complexity of its products, the Company has experienced delays from time to
time in completing products on a timely basis. If the Company is unable to
design, develop or introduce competitive new products on a timely basis, its
future operating results would be adversely affected. There can be no assurance
that the Company will be successful in developing new products or enhancing its
existing products on a timely or cost-effective basis, or that such new products
or product enhancements will achieve market acceptance.
COMPETITION. The markets for the Company's products are highly competitive
and are characterized by rapidly changing technology, frequent product
performance improvements and evolving industry standards. See "Item 1. Business
- - Competition."
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LIMITED PROTECTION OF PROPRIETARY RIGHTS; POTENTIAL INFRINGEMENT OF THIRD
PARTY RIGHTS There can be no assurance that the Company's means of protecting
its proprietary rights in the U.S. or abroad will be adequate, or that others
will not develop technologies similar or superior to the Company's technology or
design around the proprietary rights owned by the Company. In addition, there
can be no assurance that others will not assert claims of infringement in the
future or that, if made, such claims will not be successful. See "Item 1.
Business - Intellectual Property and Proprietary Rights."
POTENTIAL ACQUISITIONS. In the normal course of its business, the Company
evaluates potential acquisitions of businesses, products and technologies that
could complement or expand the Company's business. In the event the Company were
to identify an appropriate acquisition candidate, there is no assurance that the
Company would be able to successfully negotiate the terms of any such
acquisition, finance such acquisition and integrate such acquired business,
products or technologies into the Company's existing business and operations.
Furthermore, the integration of an acquired business could cause a diversion of
management time and resources. In addition, there can be no assurance that any
acquisition of new technology will lead to the successful development of new
products, or that any such new products, if developed, will achieve market
acceptance or prove to be profitable. There can be no assurance that a given
acquisition, when consummated, would not materially adversely affect the
Company's business, financial condition or results of operations. If the Company
proceeds with one or more significant acquisitions in which the consideration
consists of cash, a substantial portion of the Company's available cash could be
used to consummate the acquisitions. If the Company consummates one or more
significant acquisitions in which the consideration consists of stock, or is
financed with the net proceeds of the issuance of stock, stockholders of the
Company could suffer a significant dilution of their interests in the Company.
TAX AUDIT. On December 12, 1997, the Internal Revenue Service ("IRS")
concluded an audit of the Company's tax returns for the years ended June 30,
1992 through June 30, 1995, and issued a formal report reflecting proposed
adjustments with respect to the years under audit. See "- Overview."
YEAR 2000 COMPLIANCE. The Company uses a significant number of computer
software programs and operating systems in its internal operations, including
applications used in manufacturing, product development, financial business
systems and various administrative functions. To the extent that these software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year "2000," some level of modification or even possibly
replacement of such source code or applications will be necessary. The Company
is still in the preliminary stages of analyzing its software applications and,
to the extent they are not fully "Year 2000" compliant, there can be no
assurance that the costs necessary to update software, or potential systems
interruptions, would not have a material adverse effect on the Company's
business, financial condition or results of operations. See "- Year 2000
Compliance."
RECENT ACCOUNTING PRONOUNCEMENTS
See Note B to the Company's Consolidated Financial Statements for a
description of the impact on the Company of recent accounting pronouncements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
Year Ended June 30,
-------------------
1998 1997
------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 6,054 $15,193
Marketable securities 10,077 --
Trade accounts receivable, net of allowance
for doubtful accounts of $218 and $119 at
June 30, 1998 and 1997, respectively 17,143 12,816
Contracts in progress -- 1,096
Inventory 9,125 8,314
Deferred income taxes, net 1,669 926
Prepaid expenses and other current assets 1,255 728
------- -------
Total current assets 45,323 39,073
Marketable securities 18,889 --
Property and equipment, net 8,466 4,984
Capitalized software development costs, net 104 483
Deferred income taxes, net 429 39
Other assets 358 269
------- -------
Total assets $73,569 $44,848
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,368 $ 2,801
Accrued expenses 2,804 1,903
Accrued compensation 3,316 2,316
Billings in excess of revenues and customer advances 1,017 2,877
Income taxes payable 2,024 1,629
------- -------
Total current liabilities 12,529 11,526
Commitments and contingencies (Note G) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares and
2,000,000 shares authorized, none and 1,000,000
shares designated as series A convertible preferred
stock, none and 852,264 shares issued and outstanding
at June 30, 1998 and 1997, respectively (liquidation
preference of none and $1,200,000 at June 30, 1998
and 1997, respectively) -- 1,200
Common stock, $.01 par value; 25,000,000 shares
authorized; 9,973,491 and 5,202,231 shares issued
and outstanding at June 30, 1998 and 1997, respectively 100 52
Additional paid-in capital 25,961 5,703
Retained earnings 35,483 26,752
Cumulative translation adjustment (179) (60)
Subscriptions and related parties notes receivable (325) (325)
------- -------
Total stockholders' equity 61,040 33,322
Total liabilities and stockholders' equity $73,569 $44,848
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
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MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended June 30,
-----------------------------
1998 1997 1996
------- ------- -------
Revenues $85,544 $64,574 $58,300
Cost of revenues 30,084 22,034 24,688
------- ------- -------
Gross profit 55,460 42,540 33,612
Operating expenses:
Selling, general and administrative 27,879 22,631 16,927
Research and development 14,476 12,837 9,776
------- ------- -------
Total operating expenses 42,355 35,468 26,703
Income from operations 13,105 7,072 6,909
Interest income, net 1,084 560 548
Other income (expense), net (30) (88) (77)
------- ------- -------
Income before income tax provision 14,159 7,544 7,380
Income tax provision 5,428 2,933 2,952
------- ------- -------
Net income $ 8,731 $ 4,611 $ 4,428
======= ======= =======
Net income per common share:
Basic $ 1.21 $ 0.90 $ 0.88
======= ======= =======
Diluted $ 0.94 $ 0.58 $ 0.55
======= ======= =======
Weighted average number of common and
common equivalent shares outstanding:
Basic 7,235 5,141 5,050
======= ======= =======
Diluted 9,270 7,897 7,983
======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
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MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(IN THOUSANDS)
Series A Convertible Subscriptions Total
Preferred Stock Common Stock Additional Cumulative And Related Stock-
-------------------- -------------- Paid-in Retained Translation Parties Notes holder's
Shares Amount Shares Amount Capital Earnings Adjustment Receivable Equity
------ -------- ------ ------ ------- -------- ----------- ------------- --------
Balance, June 30, 1995 852 $ 1,200 5,012 $ 50 $ 5,282 $17,713 $ 58 $(300) $24,003
Exercise of Common Stock options 71 1 152 153
Net in come 4,428 4,428
Foreign currency translation (55) (55)
---- ------- ----- ---- ------- ------- ----- ----- -------
Balance, June 30, 1996 852 1,200 5,083 51 5,434 22,141 3 (300) 28,529
Issuance of notes receivable
to related parties (25) (25)
Exercise of Common Stock options 86 1 137 138
Issuance of Common Stock 33 132 132
Net income 4,611 4,611
Foreign currency translation (63) (63)
---- ------- ----- ---- ------- ------- ----- ----- -------
Balance, June 30, 1997 852 1,200 5,202 52 5,703 26,752 (60) (325) 33,322
Exercise of Common Stock options 204 2 506 508
Issuance of Common Stock
pursuant to initial public
offering, net of issuance
costs of $952 2,000 20 18,558 18,578
Conversion of Series A
Convertible Preferred Stock
into Common Stock (852) (1,200) 2,557 26 1,174
Exercise of Common Stock warrants 10 20 20
Net income 8,731 8,731
Foreign currency translation (119) (119)
---- ------- ----- ---- ------- ------- ----- ----- -------
Balance June 30, 1998 -- -- 9,973 $100 $25,961 $35,483 $(179) $(325) $61,040
==== ======= ===== ==== ======= ======= ===== ===== =======
The accompanying notes are an integral part of the consolidated
financial statements.
26
27
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended June 30,
--------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income $ 8,731 $ 4,611 $ 4,428
Adjustments to reconcile net income
to net Cash provided by operating activities:
Depreciation and amortization of
property and equipment 2,829 2,855 2,020
Amortization of capitalized software 490 438 --
development costs
Provision for doubtful accounts 99 40 --
Deferred income taxes (1,133) (596) 242
Other noncash items -- 87 88
Changes in assets and liabilities:
Trade accounts receivable (4,596) (2,710) (2,235)
Trade notes receivable -- 296 (312)
Contracts in progress 1,096 (1,096) --
Inventory (815) (1,158) 5,231
Prepaid expenses and other current assets (560) (246) (103)
Other assets (69) (101) (158)
Accounts payable 570 1,081 (16)
Accrued expenses and compensation 1,908 1,846 503
Billings in excess of revenues and
customer advances (1,847) 2,472 (5,090)
Income taxes payable 411 1,403 (291)
-------- -------- -------
Net cash provided by operating activities 7,114 9,222 4,307
-------- -------- -------
Cash flows from investing activities:
Purchase of marketable securities (73,571) -- --
Sale of marketable securities 44,605 -- --
Purchases of property and equipment (6,336) (3,457) (2,924)
Capitalized software development costs (111) (550) (371)
Notes receivable from related parties -- (25) --
-------- -------- -------
Net cash used in investing activities (35,413) (4,032) (3,295)
-------- -------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options 508 -- --
Proceeds from issuance of Common Stock 18,578 270 153
Proceeds from exercise of stock warrants 20 -- --
-------- -------- -------
Net cash provided by financing activities 19,106 270 153
-------- -------- -------
Net increase in cash and cash equivalents (9,193) 5,460 1,165
Effect of exchange rate changes on
cash and cash equivalents 54 29 (52)
Cash and cash equivalents at beginning of year 15,193 9,704 8,591
-------- -------- -------
Cash and cash equivalents at end of period $ 6,054 $ 15,193 $ 9,704
======== ======== =======
Cash paid during the period for:
Interest -- $ 22 $ 13
Income taxes $ 6,166 $ 2,133 $ 2,901
Noncash transactions:
Series A Convertible Preferred Stock
converted to Common Stock $ 1,200 -- --
The accompanying notes are an integral part of the consolidated
financial statements.
27
28
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
A. DESCRIPTION OF BUSINESS:
Mercury Computer Systems, Inc. (the "Company") designs, manufactures and
markets high performance real-time digital signal processing computer systems
which transform sensor generated data into information which can be displayed as
images for human interpretation or subjected to additional computer analysis.
These multicomputer systems are heterogeneous and scalable, allowing them to
accommodate several different microprocessor types and to scale from a few to
hundreds of microprocessors within a single system. The two primary markets for
the Company's products are defense electronics and medical diagnostic imaging.
Both of these markets have computing needs which benefit from the unique system
architecture developed by the Company.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is generally recorded upon shipment to the
customer provided that no significant vendor obligations remain outstanding and
collection of the related receivable is deemed probable by management. If
insignificant vendor obligations remain after shipment of the product, the
Company accrues for the estimated costs of such obligations. Additionally, the
Company accrues for warranty costs upon shipment. Service revenue is recognized
ratably over applicable contract periods or as the services are performed.
Revenue from contracts involving significant product modification or
customization is recognized using the percentage-of-completion accounting method
on an efforts-expended basis. Changes to total estimated costs and anticipated
losses, if any, are recognized in the period in which determined. Approximately
$3,835,000 and $2,102,000 of revenue was recognized under the
percentage-of-completion method for the fiscal year ended June 30, 1998, and
1997 respectively. No revenue was recognized under the percentage-of-completion
method for the fiscal year ended 1996.
There were no retainages at June 30, 1998, 1997 and 1996.
Contracts in Progress
Contracts in progress include costs and estimated profits under uncompleted
contracts accounted for using the percentage-of-completion method, net of
amounts billed. Amounts billed at June 30, 1998 and 1997, which were netted
against costs and estimated profits, were $0 and $1,096,000 respectively.
Billings in Excess of Revenues and Customer Advances
Billings in excess of revenues and customer advances include amounts billed
on uncompleted contracts accounted for using the percentage-of-completion method
net of costs and estimated profits recognized.
28
29
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
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 cost, which approximates fair value.
Marketable Securities
The Company classifies investments in marketable securities as trading,
available-for-sale or held-to-maturity at the time of purchase and periodically
re-evaluates such classification. There were no securities classified as trading
or held-to-maturity as of June 30, 1998 and 1997. 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 shareholders' equity until disposition. Realized
gains and loses and declines in value judged to be other than temporary on
available-for-sale securities are included in other income. The cost of
securities sold is based on the specific identification method.
The fair market value of cash equivalents and short-term and long-term
investments in marketable securities represents the quoted market prices at the
balance sheet dates. The short-term marketable securities have original
maturities greater than 90 days and less than one year. Long-term marketable
securities have original maturities greater than one year. At June 30, 1998,
these marketable securities are reported as follows (in thousands):
1998 1997
---------- ----------
Available- Available-
For-Sale For-Sale
Short-term marketable securities:
Municipal/tax free bonds & money market instruments $10,077 --
Long-term marketable securities:
Municipal/tax free bonds $18,889 --
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk consist principally of cash, marketable securities and trade
accounts receivable. The Company places its cash and cash equivalents with
financial institutions which management believes are of high credit quality. At
June 30, 1998, the Company had approximately $5,552,000 on deposit or invested
with its primary financial and lending institution.
One customer accounted for approximately 32% and 57% of the accounts
receivable balances at June 30, 1998 and 1997, respectively. Two customers
accounted for approximately 15% and 13%, respectively, of the accounts
receivable balance at June 30, 1998. There were no other customers who accounted
for more than 10% of the accounts receivable balance at June 30, 1997. The
Company performs ongoing credit evaluations of its customers and maintains
reserves for potential credit losses. Such losses have historically been within
management's expectations.
Inventory
Inventory is stated at the lower of cost, determined on the first-in,
first-out (FIFO) basis, or market.
29
30
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
Property and Equipment
Property and equipment are recorded at cost. Depreciation is based on the
following estimated useful lives of the assets using the straight-line method:
Computer equipment 1-3 years
Machinery and equipment 5 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of the lease
term or economic life
Expenditures for additions, renewals and betterments of property and
equipment are capitalized. Expenditures for repairs and maintenance are charged
to expense as incurred. As assets are retired or sold, the related cost and
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in the results of operations.
Capitalized Software Development Costs
The Company capitalizes software development costs incurred after a
product's technological feasibility has been established and before it is
available for general release to customers. Amortization of capitalized software
costs is computed on an individual product basis and is the greater of a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or b) the straight-line
method over the estimated economic life of the product. Currently, the Company
uses an estimated economic life of 36 months for all capitalized software costs.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the Company's
consolidated financial statements. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax basis of assets and liabilities using currently enacted tax
rates for the year in which the differences are expected to reverse. The Company
records a valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
Net Income Per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". SFAS No. 128 replaced the calculation of primary and fully diluted net
income per share with basic and diluted net income per share. Unlike primary net
income per share, basic net income per share excludes any dilutive effect of
options, warrants and convertible securities. Diluted net income per share is
very similar to the previously reported fully diluted net income per share,
except that the new treasury stock method used in determining the dilutive
effect of options uses the average market price for the period rather than the
higher of the average market price or the ending market price. All net income
per common share amounts have been restated to conform to the SFAS No. 128
requirements.
Prior to adoption of this statement, all common and common equivalent shares
issued during the twelve month period prior to the filing of the initial public
offering ("cheap stock") were included in the calculation of basic and diluted
earnings per share as if they were outstanding for all periods presented.
Adoption of this statement and the
30
31
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
related guidance set out in Securities and Exchange Commission Staff Accounting
Bulletin No. 98 ("SAB 98") has eliminated the inclusion of cheap stock from the
calculation of diluted earnings per share. Accordingly, diluted earnings per
share for the years ended June 30,1997 and 1996 have been restated to comply
with SAB 98 from $.57 and $.54, respectively.
Foreign Currency
The accounts of foreign subsidiaries are translated using exchange rates in
effect at period-end for assets and liabilities and at average exchange rates
during the period for results of operations. The local currency for all foreign
subsidiaries is the functional currency. The related translation adjustments are
reported as a separate component of stockholders' equity. Gains (losses)
resulting from foreign currency transactions are included in other income
(expense) and are immaterial for all periods presented.
Reclassification
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year's presentation.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement will be effective for annual periods
beginning after December 15, 1997 and the Company will adopt its provisions in
fiscal 1999. Reclassification for earlier periods is required for comparative
purposes. Because the statement requires only additional disclosure, the Company
does not expect the statement to have a material impact on it financial position
or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." This statement
includes requirements to report selected segment information quarterly and
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues. The
statement will be effective for annual periods beginning after December 15, 1997
and the Company will adopt its provisions in fiscal 1999. Reclassification for
earlier periods is required, unless impracticable, for comparative purposes.
However, because the statement requires only additional disclosure, the Company
does not expect the statement to have a material impact on its financial
statements or results of operations.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued the statement of position ("SOP") 97-2 "Software Revenue
Recognition," which will supersede SOP 91-1. SOP 97-2 has not changed the basic
rules of revenue recognition but does provide more guidance particularly with
respect to multiple deliverables and "when and if available" products. SOP 97-2
is effective for transactions entered into for annual periods beginning after
December 15, 1997. The Company will adopt SOP 97-2 in fiscal 1999. Management
does not expect the statement to have a material impact on its financial
position or results of operations.
In March 1998, the AICPA issued SOP 98-1, "Internal Use Software," which
provides guidance on the accounting for the costs of software developed or
obtained for internal use. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. Management does not expect the statement to have a
material impact on its financial position or results of operations.
31
32
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Management of the Company anticipates that, due to its
limited use of derivative instruments, the adoption of SFAS No. 133 will not
have a material impact on its financial position or results of operations.
C. NET INCOME PER COMMON SHARE:
The following table sets forth the computation of basic and diluted net
income per common share:
For the Years Ended June 30,
----------------------------
1998 1997 1996
------ ------ ------
Net Income $8,731 $4,611 $4,428
====== ====== ======
Shares used in net income per common share-basic 7,235 5,141 5,050
Effect of dilutive securities:
Convertible Preferred Stock 1,492 2,557 2,557
Stock options 542 194 366
Warrants 1 5 10
------ ------ ------
Dilutive potential common shares 2,035 2,756 2,933
------ ------ ------
Shares used in net income per common share - diluted 9,270 7,897 7,983
====== ====== ======
Net income per common share - basic $ 1.21 $ 0.90 $ 0.88
====== ====== ======
Net income per common share - diluted $ 0.94 $ 0.58 $ 0.55
====== ====== ======
Options to purchase 29,000 shares of common stock in 1998, 36,000 shares in
1997, and none in 1996 were outstanding during the years there ended, but were
not included in the year to date calculation of diluted net income per share
because the options' exercise price was greater than the average market price of
the common shares during those periods.
D. INVENTORY:
Inventory consists of the following:
June 30,
--------------------
1998 1997
------ ------
Raw materials $4,707 $2,925
Work in process 2,814 3,084
Finished goods 1,604 2,305
------ ------
$9,125 $8,314
====== ======
32
33
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
E. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
June 30,
----------------------
1998 1997
-------- --------
Computer equipment $14,027 $11,253
Machinery and equipment 310 337
Furniture and fixtures 2,391 1,697
Leasehold improvements 1,159 1,050
Construction in progress 2,737 --
-------- -------
20,624 14,337
Less: accumulated depreciation and amortization (12,158) (9,353)
-------- -------
$ 8,466 $ 4,984
======== =======
F. FINANCING ARRANGEMENT:
Under a credit agreement with a commercial bank, the Company may borrow up
to $5,000,000 at an interest rate equal to the prime rate or, at the election of
the Company, two and one-quarter percentage points above the London InterBank
Offered Rate, payable monthly. The credit agreement contains certain covenants,
including restrictions on incurrence of additional indebtedness and liens on its
assets, capital expenditures, disposition of assets, investments and
acquisitions, limitations on distributions, and requires the Company to meet
certain financial tests pertaining to current and debt ratios and income before
tax provision. There were no borrowings outstanding at June 30, 1998 or June 30,
1997.
G. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company has an operating lease agreement for its main facility which
expires on September 30, 2002, with an option to extend the lease for an
additional five-year period. Also, the Company leases branch office space. The
leases expire at various dates through 2003 and contain various renewal options.
Rental charges are subject to escalation for increases in certain operating
costs of the lessor.
Additionally, in October 1997 the Company entered into an equipment leasing
arrangement for a term of 36 months with a maximum asset value of $1.0 million.
In June 1998, the maximum was increased to $2.5 million. During the years ended
June 30, 1998 and 1997, the Company leased equipment with asset values of $1.0
million and none, respectively.
Future minimum lease payments under non-cancelable operating leases with
initial or remaining terms of one year or more consisted of the following at
June 30, 1998:
Year ending June 30, 1999 $1,610
Year ending June 30, 2000 1,387
Year ending June 30, 2001 1,081
Year ending June 30, 2002 805
Year ending June 30, 2003 198
Thereafter --
------
Total future minimum lease payments $5,081
======
33
34
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
Rental expense during the fiscal years ended June 30, 1998, 1997 and 1996
was approximately $1,029,000, $642,000 and $670,000, respectively.
Internal Revenue Service Audit
On December 12, 1997, the Internal Revenue Service ("IRS") concluded an
audit of the Company's tax returns for the years ended June 30, 1992 through
June 30, 1995, and issued a formal report reflecting proposed adjustments with
respect to the years under audit. The proposed IRS adjustments primarily relate
to the disallowance of research and experimental tax credits claimed by the
Company, as well as the treatment of certain other items. As of December 12,
1997, the total deficiency attributable to the proposed adjustments was
$4,181,000, including penalties and interest of $1,591,000. The Company is in
the process of responding to this report by appealing the proposed adjustments
to the Appeals Division of the IRS. While the Company does not believe that the
final outcome of the IRS audit will have a material adverse effect on the
Company's financial condition or results of operations, no assurance can be
given as to the final outcome of the audit, the amount of any final adjustments
or the potential impact of such adjustments on the Company's financial condition
or results of operations.
H. STOCKHOLDERS' EQUITY:
Common Stock
On January 29, 1998, 3,500,000 shares of the Company's common stock were
sold in the Company's initial public offering ("IPO") of which 2,000,000 shares
were sold by the Company and 1,500,000 shares were sold by certain stockholders
of the Company. The Company received $18,578,000 in net proceeds from the IPO
after deducting underwriting discounts and commissions of $1,470,000 and
$952,000 in offering expenses.
Preferred Stock
General
The Company is authorized to issue 1,000,000 shares of preferred stock with
a par value of $.01 per share.
Series A Convertible Preferred Stock
The Series A Convertible Preferred Stock had a liquidation preference of
$1.41 per share and voting rights similar to the Common Stock. Each of the
preferred stockholders had one vote for each share of Common Stock into which
the Series A Convertible Preferred Stock was convertible. On January 29, 1998,
the Series A Convertible Preferred Stock was converted into Common Stock on a
three-for-one basis. Persons who formerly owned shares of Series A Convertible
Preferred Stock, as well as certain other persons, have demand and piggyback
registration rights pursuant to a written agreement with the Company.
Stock Options
The Company has four 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 five years and have a maximum term of ten years.
34
35
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
The 1997 Stock Option Plan (the "1997 Plan"), which the Board approved in
June 1997, provides for the granting of options to purchase an aggregate of not
more than 1,325,000 shares of the Company's Common Stock. The Plan provides for
the grant of non-qualified and incentive stock options to employees. Incentive
stock options are granted at a price set by the Board of Directors not to be
less than 100% of the fair value at the date of the grant. Non-qualified stock
options are granted at not less than 50% of the fair value of the stock on the
date of grant as determined by the Board. The options vest over five years and
have a maximum term of ten years. With the implementation of the 1997 Plan, no
further stock options were granted under the 1982 and 1991 Stock Option Plans.
Prior to the initial public offering, the Board considered a broad range of
factors in determining the fair value of the Stock at the date of grant under
each plan, including the illiquid nature of an investment in the Company's
Common Stock, transactions in the Company's Common Stock with third parties,
consultations with financial advisors (as appropriate), the Company's historical
financial performance relative to that of comparable companies and its future
prospects.
In fiscal year 1997, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 requires that companies either recognize
compensation expense for grants of stock, stock options and other equity
instruments based on fair value or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions of SFAS No. 123 in fiscal 1997 and has applied
APB Opinion No. 25 and related Interpretations in accounting for all of its
stock option plans. Accordingly, no compensation cost has been recognized for
its stock option plans as compensation cost is measured as the excess, if any,
of the fair market value of the Company's stock at the date of grant over the
amount an individual must pay to acquire the stock.
Weighted Average
Weighted Average Fair Value of
Number of Shares Exercise Price Options Granted
---------------- ---------------- ----------------
Outstanding at June 30, 1995 793,651 $3.76
---------
Granted 47,675 6.16 $3.82
Exercised (71,250) 2.17
Canceled ( 60,700) 5.51
---------
Outstanding at June 30, 1996 709,376 4.02
---------
Granted 526,292 4.00 $1.64
Exercised ( 85,850) 1.61
Canceled (305,226) 6.15
---------
Outstanding at June 30, 1997 844,592 3.41
---------
Granted 471,131 9.41 $5.27
Exercised (204,468) 2.48
Canceled (16,693) 7.11
---------
Outstanding at June 30, 1998 1,094,562 6.11
=========
Information related to the stock options outstanding as of June 30, 1998, is
as follows:
Weighted Average Exercisable
Range of Exercise Number Remaining Weighted Average Exercisable Weighted Average
Prices of Options Contractual Life Exercise Price Number of Options Exercise Price
----------------- ---------- ---------------- ---------------- ----------------- ----------------
$ 2.00 - $ 3.50 209,200 3.35 $ 2.69 206,600 $2.69
$ 4.00 439,732 8.29 4.00 140,010 4.00
$ 5.00 - $ 7.50 20,600 5.57 7.29 18,600 7.27
$ 8.00 313,530 9.31 8.00 12,030 8.00
$10.00 - $16.50 51,500 9.72 12.55 -- --
$17.69 60,000 9.78 17.69 -- --
--------- -------
Total 1,094,562 7.74 6.11 377,240 3.57
========= =======
35
36
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
There were 473,890 and 527,791 options exercisable at June 30, 1997 and
1996, respectively, with weighted average exercise prices of $2.89 and $3.26.
The fair value of each option granted during fiscal years ended June 30, 1998,
1997 and 1996, is estimated on the date of grant using the Black-Scholes
option-pricing model utilizing the following weighted-average assumptions: (1)
expected risk-free interest rate of 6.25% in 1998 and 6.80% in 1997 and 1996;
(2) expected option life of 6 years in 1998 and 8 years in 1997 and 1996; (3)
expected stock volatility of 50% for June 30, 1998 and none for June 30, 1997
and 1996; and (4) expected dividend yield of 0.0.%.
Had compensation cost for the Company's stock option grants been determined
based on the fair value at the grant dates, as calculated in accordance with
SFAS No. 123, the Company's net income and net income per common share for the
fiscal years ended June 30, 1998, 1997 and 1996, would approximate the following
pro forma amounts as compared to the amounts reported:
Net Income per Net Income per
Common Share Common Share
Net Income - Basic - Diluted
--------- ------------- --------------
As reported:
1998 $8,731 $1.21 $0.94
1997 4,611 0.90 0.58
1996 4,428 0.88 0.55
Pro Forma:
1998 $8,244 $1.14 $0.89
1997 4,345 0.85 0.55
1996 4,330 0.86 0.54
The effects of applying SFAS No. 123 in this disclosure are not indicative
of future amounts. SFAS No. 123 does not apply to awards prior to 1995 and
additional awards in future years are anticipated.
Repricing Stock Options
On July 30, 1996, the Board approved a plan (the "Repricing Plan") to
reprice employee stock options under the Plans to restore the long-term employee
retention and performance incentives of the stock options outstanding. In
accordance with the Repricing Plan, all stock options with exercise prices above
$4.00 per share and approved by the individual optionholder were canceled and
replaced by the same number of options exercisable at $4.00 per share, the fair
value of the Company's common stock as determined by the Board on the date of
the repricing. In reaching this determination, the Board considered a broad
range of factors including the illiquid nature of an investment in the Company's
Common Stock, transactions of the Company's Common Stock with third parties, the
Company's historical financial performance relative to that of comparable
companies and its future prospects. Fifty percent of those options which were
vested prior to the repricing vested immediately under the Repricing Plan. All
remaining previously vested and unvested options will vest in accordance with
the current option plan.
Warrants
At June 30, 1997 and 1996, a warrant to purchase 10,000 shares of the
Company's Common Stock was outstanding with an exercise price of $2.00 per share
and exercisable through June 30, 2000. In September 1997, the warrants were
exercised.
36
37
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
Employee Stock Purchase Plan
The Company established an employee stock purchase plan ("Stock Purchase
Plan") in 1998 entitling employees to purchase up to 250,000 shares of the
Company's stock at 85% of fair market value. Since the Stock Purchase Plan was
not implemented until July 1, 1998, no shares have been issued to date.
I. INCOME TAXES:
Income tax expense consisted of the following:
Year Ended June 30,
--------------------------------------
1998 1997 1996
------- ------ ------
Federal:
Current $ 5,680 $3,088 $2,437
Deferred (1,172) (592) 115
------- ------ ------
4,508 2,496 2,552
State:
Current 925 301 101
Deferred (111) (4) 127
------- ------ ------
814 297 228
Foreign - current 106 140 172
------- ------ ------
$ 5,428 $2,933 $2,952
======= ====== ======
The following is a reconciliation between the statutory provision for
federal income taxes and the effective income tax expense:
Year Ended June 30,
--------------------------
1998 1997 1996
---- ---- ----
Income taxes at federal statutory rates 35.0% 34.0% 34.0%
State income tax, net of federal tax
benefit and credits 3.7 3.9 2.0
Research and development credits utilized (2.2) (3.5) --
Other 1.8 4.5 4.0
---- ---- ----
38.3% 38.9% 40.0%
==== ==== ====
37
38
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
The components of the net deferred tax asset are as follows:
June 30,
-----------------------
1998 1997
------ ------
Receivables, allowances and
inventory reserves $ 810 $ 614
Accrued vacation 620 213
Property and equipment 429 232
Capitalized software development costs (42) (193)
Other temporary differences 281 99
------ ------
Total deferred tax asset, net $2,098 $ 965
====== ======
No valuation allowance was deemed necessary for the deferred tax asset.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
J. MAJOR CUSTOMERS AND INTERNATIONAL DATA:
Customers comprising 10% or more of the Company's revenues for the periods
shown below are as follows:
Year Ended June 30,
----------------------
1998 1997 1996
---- ---- ----
Customer A 10% -- 16%
Customer B -- 10% 12%
Customer C -- 22% 19%
Customer D 20% -- --
Customer E 10% -- --
During FY98 customer B was acquired by Customer D. During FY98 revenues to
Customer B, on a stand alone basis, were approximately 5%.
Export sales to unaffiliated customers were approximately $7,503,000,
$5,351,000 and $5,521,000 for the fiscal years ended June 30, 1998, 1997 and
1996, respectively.
The Company has operations in the United Kingdom, Japan and France. For each
of the fiscal years ended June 30, 1998, 1997 and 1996, revenues and operating
income from foreign operations represented less than 10% of the Company's total
revenues and operating income. At June 30, 1998, 1997 and 1996, identifiable
assets of foreign operations were not material to total assets.
K. EMPLOYEE BENEFIT PLANS:
The Company maintains a qualified profit sharing 401(a) Plan and 401(k)
Plan. The plans cover employees who have attained the age of 21. Employee
contributions to the 401(k) Plan may range from 1% to 15% of compensation with a
discretionary matching Company contribution. The Company will match up to 2% of
compensation. The Company may also make optional contributions to both plans for
any plan year at its discretion.
38
39
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(TABLES IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA)
Expense recognized by the Company under the Profit Sharing and 401(k) plans
was approximately $445,000, $287,000 and $232,000 during the years ended
June 30, 1998, 1997 and 1996, respectively.
The Company maintains a bonus plan which provides cash awards to employees,
at the discretion of the Board of Directors, based upon operating results and
employee performance. Bonus expense to employees was approximately $1,988,000,
$1,245,000 and $1,150,000 during the years ended June 30, 1998, 1997 and 1996,
respectively.
L. RELATED PARTY TRANSACTIONS:
Notes receivable from related parties are from members of the Board of
Directors and management and are due September 30, 1998, having recently been
extended from July 31, 1998, as approved by the Board of Directors. The notes
receivable are without recourse and bear interest at two percentage points above
the prime rate per annum.
39
40
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, 1998 and 1997, and the results of their operations and their cash flows
for each of the three years in the period ended June 30, 1998, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule 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 generally accepted
auditing standards, 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 the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
August 7, 1998
40
41
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.
1998
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Revenues $ 19,039 $ 20,624 $ 22,364 $23,517
Cost of revenues 6,661 7,283 7,832 8,308
-------- -------- -------- -------
Gross profit 12,378 13,341 14,532 15,209
Operating expenses:
Selling, general and administrative 6,645 6,846 7,104 7,284
Research and development 3,381 3,405 3,749 3,941
-------- -------- -------- -------
Total operating expenses 10,026 10,251 10,853 11,225
-------- -------- -------- -------
Income from operations 2,352 3,090 3,679 3,984
Interest income, net 231 219 266 368
Other income (expense), net 83 (125) (10) 22
-------- -------- -------- -------
Income before taxes 2,666 3,184 3,935 4,374
Provision for income taxes 1,060 1,210 1,496 1,662
-------- -------- -------- -------
Net income $ 1,606 $ 1,974 $ 2,439 $ 2,712
======== ======== ======== =======
Net income per common share:
Basic $ 0.31 $ 0.37 $ 0.29 $ 0.27
======== ======== ======== =======
Diluted $ 0.20 $ 0.24 $ 0.24 $ 0.25
======== ======== ======== =======
1997
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Revenues $ 13,038 $ 15,106 $ 17,154 $19,276
Cost of revenues 4,538 5,128 5,356 7,012
-------- -------- -------- -------
Gross profit 8,500 9,978 11,798 12,264
Operating expenses:
Selling, general and administrative 4,726 5,577 5,737 6,591
Research and development 2,405 3,420 3,759 3,253
-------- -------- -------- -------
Total operating expenses 7,131 8,997 9,496 9,844
-------- -------- -------- -------
Income from operations 1,369 981 2,302 2,420
Interest income, net 136 142 148 134
Other income (expense), net (23) 2 (125) 58
-------- -------- -------- -------
Income before taxes 1,482 1,125 2,325 2,612
Provision for income taxes 576 437 904 1,016
-------- -------- -------- -------
Net income $ 906 $ 688 $ 1,421 $ 1,596
======== ======== ======== =======
Net income per common share:
Basic $ 0.18 $ 0.13 $ 0.28 $ 0.31
======== ======== ======== =======
Diluted $ 0.11 $ 0.09 $ 0.18 $ 0.20
======== ======== ======== =======
41
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has loaned James R. Bertelli, President of the Company, an
aggregate of $200,000, of which $150,000 accrues interest at an annual rate of
9.75% and $50,000 accrues interest at an annual rate of 10.5%. In addition, the
Company has loaned Albert Belle Isle, a Director of the Company, an aggregate of
$125,000, of which $100,000 accrues interest at an annual interest rate of 8%
and $25,000 accrues interest at 9.25%. The notes evidencing such obligations of
Mr. Bertelli and Dr. Belle Isle are payable in full on September 30, 1998,
having been extended from July 31, 1998, as approved by the Board of Directors.
Pursuant to a Stock Purchase Agreement, dated as of January 20, 1984, among
the Company and certain of its stockholders, (i) Memorial Drive Trust and other
investors (together, the "Investors") purchased shares of the Company's Series A
Convertible Preferred Stock, which converted into 2,556,792 shares of Common
Stock in connection with the Company's initial public offering on January 29,
1998, (ii) the Investors received so-called "demand" registration rights, and
(iii) the Investors, James R. Bertelli, a director and President of the Company,
Gordon Baty, a director of the Company, and certain other stockholders of the
Company received so-called "piggyback" registration rights.
Pursuant to Debenture Agreements, dated December 21, 1987, between the
Company and each of Massachusetts Mutual Life Insurance Company and MassMutual
Corporate Investors, Massachusetts Mutual received so-called "demand" and
"piggyback" registration rights with respect to the 1,000,000 shares of Common
Stock issued to them upon conversion of the convertible debentures issued
pursuant to such agreements.
All registration expenses incurred in connection with a registration of
securities covered by the foregoing rights must be borne by the Company and all
selling expenses relating to the securities sold thereby must be borne by the
holders of the securities being registered.
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:
42
43
1. Financial statements:
Report of Independent Accountants
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Operations for the years ended June 30, 1998,
1997, and 1996 Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1998, 1997, and 1996 Consolidated Statements of Cash Flows
for the years ended June 30, 1998, 1997, and 1996 Notes to Consolidated
Financial Statements
2. Financial Statement Schedules:
II. Valuation and Qualifying Accounts
MERCURY COMPUTER SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
(IN THOUSANDS)
BALANCE AT BALANCE
BEGINNING CHARGES TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------------------------------------------------------------------------
Allowance for Doubtful Accounts
1998 $ 119 $ 99 -- $ 218
1997 80 40 $ 1 119
1996 107 -- 27 80
BALANCE AT BALANCE
BEGINNING CHARGES TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------------------------------------------------------------------------
Inventory Reserve
1998 $1,723 $1,583 $ 1,449 $1,857
1997 1,246 504 27 1,723
1996 273 1,047 74 1,246
Charges to expenses for inventory are due to program cancellations,
engineering change orders and obsolescence. Deductions are recorded when the
inventory is written off. During the year ended June 30, 1998, the Company wrote
off $1,449,000 in inventory relating primarily to engineering change orders and
OBSOLESCENCE.
3. Exhibits:
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index
on page 45, which is incorporated herein by reference.
(b) Reports on Form 8-K
None.
43
44
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 14, 1998.
MERCURY COMPUTER SYSTEMS, INC.
By: /s/ G. MEAD WYMAN
-------------------------------
G. MEAD WYMAN
SENIOR VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
--------- -------- ----
/s/ JAMES R. BERTELLI President, Chief Executive Officer and September 14, 1998
- ---------------------------- Director (principal executive officer)
JAMES R. BERTELLI
/s/ G. MEAD WYMAN Senior Vice President, Chief Financial Officer September 14, 1998
- ---------------------------- and Treasurer (principal financial and
G. MEAD WYMAN accounting officer)
/s/ GORDON B. BATY Director September 14, 1998
- ----------------------------
GORDON B. BATY
/s/ R. SCHORR BERMAN Director September 14, 1998
- -----------------------
R. SCHORR BERMAN
/s/ ALBERT P. BELLE ISLE Director September 14, 1998
- ----------------------------
ALBERT P. BELLE ISLE
/s/ SHERMAN N. MULLIN Director September 14, 1998
- ----------------------------
SHERMAN N. MULLIN
/s/ MELVIN SALLEN Director September 14, 1998
- ----------------------------
MELVIN SALLEN
44
45
EXHIBIT INDEX
ITEM NO. DESCRIPTION OF EXHIBIT
3.1 Restated Articles of Organization. (incorporated herein by reference
to Exhibit 3.1 of the Company's Registration Statement on Form S-1
(File No. 333-41139))
3.2 Bylaws. (incorporated herein by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1 (File No. 333-41139))
3.3 Articles of Amendment to Articles of Organization. (incorporated
herein by reference to Exhibit 3.3 of the Company's Registration
Statement on Form S-1 (File No. 333-41139))
4.1 Form of Stock Certificate. (incorporated herein by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1
(File No. 333-41139))
10.1 1982 Stock Option Plan, as amended. (incorporated herein by reference
to Exhibit 10.1 of the Company's Registration Statement on Form S-1
(File No. 333-41139))
10.2 1991 Stock Option Plan, as amended. (incorporated herein by reference
to Exhibit 10.2 of the Company's Registration Statement on Form S-1
(File No. 333-41139))
10.3 1993 Stock Option Plan for Non-Employee Directors. (incorporated
herein by reference to Exhibit 10.3 of the Company's Registration
Statement on Form S-1 (File No. 333-41139))
1997 Stock Option Plan. (incorporated herein by reference to Exhibit 10.4
of the Company's Registration Statement on Form S-1 (File No.
333-41139))
10.5 1997 Stock Purchase Plan. (incorporated herein by reference to
Exhibit 10.5 of the Company's Registration Statement on Form S-1
(File No. 333-41139))
10.6 Lease Agreement, dated July 24, 1992, by and between the Company and
Equitable Variable Life Insurance Company, as amended and extended.
(incorporated herein by reference to Exhibit 10.6 of the Company's
Registration Statement on Form S-1 (File No. 333-41139))
10.7 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))
10.8# 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))
10.9# 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))
10.10# 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))
10.11 $100,000 Promissory Note, dated December 22, 1993 and amended
January 27, 1997, issued by Albert P. Belle Isle to the Company.
(incorporated herein by reference to Exhibit 10.11 of the Company's
Registration Statement on Form S-1 (File No. 333-41139))
10.12 $25,000 Promissory Note, dated July 13, 1994 and amended January 27,
1997, issued by Albert p. Belle Isle to the Company. (incorporated
herein by reference to Exhibit 10.12 of the Company's Registration
Statement on Form S-1 (File No. 333-41139))
10.13 $150,000 Promissory Note, dated March 26, 1994 and amended August 26,
1997, issued by James R. Bertelli to the Company. (incorporated
herein by reference to Exhibit 10.13 of the Company's Registration
Statement on Form S-1 (File No. 333-41139))
10.14 $50,000 Promissory Note, dated June 24, 1995 and amended August 26,
1997, issued by James R. Bertelli to the Company. (incorporated
herein by reference to Exhibit 10.14 of the Company's Registration
Statement on Form S-1 (File No. 333-41139))
10.15 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))
21.1 Subsidiaries of the Registrant. (incorporated herein by reference to
exhibit 21.1 of the Company's Registration Statement on Form S-1
(file No. 333-41139))
23.1* Consent of PricewaterhouseCoopers L.L.P.
27.1* Financial Data Schedule.
* Filed with this Form 10-K. # Confidential treatment granted.
45