SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 2001 Commission File Number 0-23599
MERCURY COMPUTER SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2741391
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
199 RIVERNECK ROAD 01824
CHELMSFORD, MA (Zip Code)
(Address of principal executive offices)
978-256-1300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ------
Number of shares outstanding of the issuer's classes of common stock as of
January 31, 2002:
Class Number of Shares Outstanding
- -------------------------------------- ----------------------------
Common Stock, par value $.01 per share 22,087,534
Total number of pages 14
MERCURY COMPUTER SYSTEMS, INC.
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2001 and
June 30, 2001 3
Consolidated Statements of Operations for the Three
Months Ended December 31, 2001 and 2000 and for the
Six Months Ended December 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports Filed on Form 8-K 13
SIGNATURE 14
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, June 30,
2001 2001
----------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,757 $ 13,307
Marketable securities 81,036 54,135
Trade accounts receivable, net of allowances
of $797 and $600 at December 31, 2001 and
June 30, 2001, respectively 27,117 34,928
Inventory 13,433 12,840
Deferred income taxes, net 3,206 3,206
Prepaid expenses and other current assets 5,397 5,341
Prepaid income taxes 6,903 --
-------- --------
Total current assets 147,849 123,757
Marketable securities 14,329 28,166
Property and equipment, net 28,120 28,793
Deferred income taxes, net 2,207 2,207
Other assets 33 661
-------- --------
Total assets $192,538 $183,584
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,431 $ 6,638
Accrued expenses 3,501 4,263
Accrued compensation 6,419 7,427
Capital lease - short term 183 292
Notes payable - short term 621 621
Billings in excess of revenues and customer advances 966 1,060
Income taxes payable -- 2,065
-------- --------
Total current liabilities 19,121 22,366
Deferred compensation - long term 471 337
Capital lease - long term 23 108
Notes payable - long term 12,678 12,985
Commitments and contingencies (Note H)
Stockholders' equity:
Common stock, $.01 par value; 65,000,000 shares
authorized; 22,057,594 and 21,811,738 shares issued
and outstanding at December 31, 2001 and
June 30, 2001, respectively 221 218
Additional paid-in capital 47,085 42,575
Retained earnings 112,312 104,525
Accumulated other comprehensive income 627 470
-------- --------
Total stockholders' equity 160,245 147,788
-------- --------
Total liabilities and stockholders' equity $192,538 $183,584
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
3
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share data)
Three months ended Six months ended
December 31, December 31,
2001 2000 2001 2000
-------- -------- -------- --------
Net revenue $ 37,435 $ 43,325 $ 72,296 $ 84,794
Cost of revenue 12,607 14,189 23,489 27,313
-------- -------- -------- --------
Gross profit 24,828 29,136 48,807 57,481
Operating expenses:
Selling, general and administrative 12,423 12,779 24,373 24,902
Research and development 8,462 7,954 16,317 14,697
-------- -------- -------- --------
Total operating expenses 20,885 20,733 40,690 39,599
-------- -------- -------- --------
Income from operations 3,943 8,403 8,117 17,882
Interest income 1,068 1,004 2,247 1,932
Interest expense (330) (268) (501) (543)
Gain on sale of division 1,600 1,600 3,200 3,200
Equity loss in joint venture (872) (476) (1,752) (1,711)
Other expenses, net (174) (104) (186) (147)
-------- -------- -------- --------
Income before income taxes 5,235 10,159 11,125 20,613
Provision for income taxes 1,453 3,251 3,338 6,596
-------- -------- -------- --------
Net income $ 3,782 $ 6,908 $ 7,787 $ 14,017
======== ======== ======== ========
Net income per share:
Basic $ 0.17 $ 0.32 $ 0.36 $ 0.65
======== ======== ======== ========
Diluted $ 0.16 $ 0.30 $ 0.33 $ 0.61
======== ======== ======== ========
Weighted average shares outstanding:
Basic 21,985 21,484 21,924 21,445
======== ======== ======== ========
Diluted 23,424 23,006 23,327 22,876
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
MERCURY COMPUTER SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
Six months ended
December 31,
2001 2000
-------- --------
Cash flows provided from operating activities:
Net income $ 7,787 $ 14,017
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,305 2,949
Gain on sale of division (3,200) (3,200)
Equity loss in joint venture 1,752 1,733
Provision for doubtful accounts 200 --
Tax benefit from disqualified dispositions 1,173 1,137
Stock compensation expense 420 --
Changes in operating assets and liabilities:
Trade accounts receivable 7,649 (3,419)
Inventory (592) (490)
Prepaid expenses and other current assets (46) (1,344)
Other assets (312) (991)
Accounts payable 789 (3,488)
Accrued expenses and compensation (1,595) 2,099
Deferred compensation 135 222
Billings in excess of revenues and customer advances (90) 930
Income taxes (8,967) (763)
-------- --------
Net cash provided by operating activities 8,408 9,392
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (42,723) (50,301)
Maturities of marketable securities 29,783 50,093
Purchases of property and equipment (2,615) (3,875)
Proceeds from sale of division 3,200 3,200
Investments in joint venture (1,000) (60)
-------- --------
Net cash used in investing activities (13,355) (943)
-------- --------
Cash flows from financing activities:
Proceeds from employee stock purchase plan and
the exercise of stock options 2,919 2,017
Payments of long-term debt (307) (308)
Principal payments under capital lease obligations (194) (285)
-------- --------
Net cash provided by financing activities 2,418 1,424
-------- --------
Net increase (decrease) in cash and cash equivalents (2,529) 9,873
Effect of exchange rate change on cash and cash equivalents (21) (77)
Cash and cash equivalents at beginning of period 13,307 5,850
-------- --------
Cash and cash equivalents at end of period $ 10,757 $ 15,646
======== ========
Cash paid during the period for:
Interest $ 501 $ 543
Income taxes $ 10,978 $ 7,839
The accompanying notes are an integral part of the consolidated financial
statements.
5
MERCURY COMPUTER SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLES IN THOUSANDS, EXCEPT PER SHARE DATA)
A. BASIS OF PRESENTATION
These consolidated financial statements should be read in conjunction with the
Company's financial statements and footnotes included in the Company's Form
10-K, filed with the Securities and Exchange Commission. In the opinion of
management, the accompanying unaudited financial statements include all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the consolidated financial position, results of operations and cash flows
of Mercury Computer Systems, Inc.
B. INVENTORY
December 31, June 30,
2001 2001
------------ --------
Raw materials $ 5,393 $ 6,109
Work in process 4,403 4,301
Finished goods 3,637 2,430
------- -------
Total $13,433 $12,840
======= =======
C. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
------- ------- ------- -------
Net income $ 3,782 $ 6,908 $ 7,787 $14,017
======= ======= ======= =======
Shares used in computation:
Weighted average common shares outstanding used
in computation of basic net income per share 21,985 21,484 21,924 21,445
Dilutive effect of stock options 1,439 1,522 1,403 1,431
------- ------- ------- -------
Shares used in computation of diluted net
income per share 23,424 23,006 23,327 22,876
======= ======= ======= =======
Basic net income per share $ 0.17 $ 0.32 $ 0.36 $ 0.65
======= ======= ======= =======
Diluted net income per share $ 0.16 $ 0.30 $ 0.33 $ 0.61
======= ======= ======= =======
Options to purchase 283,200 and 158,250 shares of common stock outstanding
during the three months ended December 31, 2001 and 2000, respectively, were not
included in the calculation of diluted net income per share because the option
exercise prices were greater than the average market price of the common stock
during the period. Options to purchase 357,335 and 274,915 shares of common
stock outstanding during the six months ended December 31, 2001 and 2000,
respectively, were not included in the calculation of diluted net income per
share because the option exercise prices were greater than the average market
price of the common stock during the period.
D. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No.142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations
6
accounted for by the purchase method for which the date of acquisition is after
June 30, 2001. The provisions of SFAS No. 142 are required to be adopted for
fiscal years beginning after December 15, 2001, however, the Company has, as
permitted, adopted SFAS No. 142 early, as of July 1, 2001. The adoption of SFAS
No. 142 had no impact on the Company's financial position or results of
operations.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Obligations Associated with the Retirement of Long-Lived Assets." SFAS 143
provides the accounting requirements for retirement obligations associated with
tangible long-lived assets. SFAS 143 is effective for financial statements for
fiscal years beginning after June 15, 2002. Management is currently assessing
but has not yet determined the impact, if any, of SFAS 143 on its financial
position and results of operations.
In October 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS 144 requires one
method of accounting for long-lived assets disposed of by sale. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. Management is currently assessing but has not yet determined
the impact, if any, of SFAS 144 on its financial position and results of
operations.
E. COMPREHENSIVE INCOME
Mercury's total comprehensive income was as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
------- ------- ------ --------
Net income $ 3,782 $ 6,908 $7,787 $ 14,017
Other comprehensive income, net of tax:
Foreign currency translation adjustments (7) (158) 24 (124)
Unrealized gain (loss) on marketable securities (98) 148 87 203
------- ------- ------ --------
Other comprehensive income (105) (10) 111 79
------- ------- ------ --------
Total comprehensive income $ 3,677 $ 6,898 $7,898 $ 14,096
======= ======= ====== ========
F. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
Operating segments are defined as components of an enterprise evaluated
regularly by the Company's senior management in deciding how to allocate
resources and in assessing performance. The Company has six principal operating
segments: North American Defense, Medical Imaging, Commercial, International
Defense, Wireless Communications, and Research and Development. These operating
segments were determined based upon the nature of the products offered to
customers, the market characteristics of each operating segment, and the
Company's management structure. The Company has five reportable segments: North
American Defense segment, Medical Imaging segment, Commercial segment, Other
Defense and Commercial segment, and Research and Development segment. The Other
Defense and Commercial segment is comprised of International Defense, Wireless
Communications, and Other Commercial businesses unrelated to the defense or
medical businesses. These operating segments are not separately reported, as
they do not meet any of SFAS No. 131's quantitative thresholds.
7
The accounting policies of the reportable segments are the same as those
described in "Note B: Summary of Significant Accounting Policies" in the
Company's Annual Report on Form 10-K for the year ended June 30, 2001. The
following table provides reportable segment information for the three-month and
six-month periods ended December 31, 2001 and 2000:
North Other Research
American Medical Defense and and
Defense Imaging Commercial Commercial Development
Segment Segment Segment Segment Segment Corporate Consolidated
-------- ------- ---------- ----------- ----------- --------- ------------
THREE MONTHS ENDED DECEMBER 31, 2001:
Sales to unaffiliated customers $22,037 $10,610 $1,956 $ 2,832 -- -- $ 37,435
Income (loss) before taxes (1) 14,296 4,571 178 (1,472) (6,876) (5,462) 5,235
Depreciation/amort. Expense 76 27 11 21 517 1,010 1,662
THREE MONTHS ENDED DECEMBER 31, 2000:
Sales to unaffiliated customers $24,276 $10,439 $4,661 $ 3,949 -- -- $ 43,325
Income (loss) before taxes (1) 16,245 3,546 2,694 749 (7,344) (5,731) 10,159
Depreciation/amort. Expense 196 13 3 75 434 811 1,532
SIX MONTHS ENDED DECEMBER 31, 2001:
Sales to unaffiliated customers $39,580 $20,538 $4,960 $ 7,218 -- -- $ 72,296
Income (loss) before taxes (1) 25,809 8,915 1,177 (1,182) (13,470) (10,124) 11,125
Depreciation/amort. Expense 150 59 21 122 992 1,961 3,305
SIX MONTHS ENDED DECEMBER 31, 2000:
Sales to unaffiliated customers $52,005 $19,317 $7,996 $ 5,476 -- -- $ 84,794
Income (loss) before taxes (1) 34,641 6,259 4,360 (57) (13,307) (11,283) 20,613
Depreciation/amort. expense 384 21 4 142 813 1,585 2,949
(1) Interest income, interest expense and foreign exchange gain/(loss) are
reported in Corporate and not allocated to the principal operating
segments. Only expenses directly related to an operating segment are
charged to the appropriate operating segment. All other expenses for
marketing and administrative support activities that cannot be specifically
identified with a principal operating segment are allocated to Corporate.
(2) The North American Defense and the Other Defense and Commercial segments
differ in definition from the defense market segment described in the
Company's management discussion and analysis ("MD&A"). The Defense market
segment in the MD&A refers to the worldwide defense market. The North
American Defense and Other Defense and Commercial are operating segments as
defined by Statement No. 131, and are subsets of the worldwide defense
market discussed in the MD&A.
G. EQUITY LOSS IN JOINT VENTURE
In September 1999, the Company formed AgileVision as a joint venture with
Sarnoff Corporation, the developer of color television and a pioneer in the
creation of digital television ("DTV"). AgileVision provides broadcasters and
cable providers equipment to optimize their DTV investment and develop new
broadband media commerce revenue streams, including master control systems that
permit broadcasters to perform multiple functions on a single platform that
previously would have required the engineering and integration of numerous
discrete products and systems. During the three months ended December 31, 2001,
the Company did not invest any additional funds in AgileVision. During the
three-month periods ended December 31, 2001 and 2000, the Company recognized
$0.9 million and $0.5 million, respectively, in losses related to the operations
of AgileVision. During the six-month periods ended December 31, 2001 and 2000,
the Company recognized $1.8 million and $1.7 million, respectively, in losses
related to the operations of AgileVision.
8
Summarized income statements for AgileVision during the periods ended December
31, 2001 and 2000 are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
------ ---- ------ ------
Expenses $1,415 $476 $2,448 $1,711
------ ---- ------ ------
Loss from continuing operations 1,415 476 2,448 1,711
------ ---- ------ ------
Net loss $1,415 $476 $2,448 $1,711
====== ==== ====== ======
Summarized Statements of Financial Position of AgileVision:
December 31, June 30,
2001 2001
------------ --------
Current assets $ 366 $ 471
Non-current assets 33 37
------- -------
Total assets 399 508
======= =======
Current liabilities 9,195 6,864
Shareholders' equity (8,796) (6,356)
------- -------
Total liabilities and equity $ 399 $ 508
======= =======
H. COMMITMENTS AND CONTINGENCIES
In July 1999, a former employee brought a wrongful termination action against
the Company and certain officers of the Company. The plaintiff seeks severance
pay, the right to purchase 60,000 shares of the Company's common stock at a
price of $2.00 per share, the right to exercise 96,000 stock options at an
exercise price of $2.00 per share, and other financial consideration. Binding
arbitration has commenced but no ruling has been decided. The position of the
Company's management after consultation with external counsel is that a loss
from this action is not probable. Accordingly, no loss accrual has been
recorded. If the plaintiff were to prevail on its claims, depending on the price
of the Company's common stock, a judgement for a material amount could be
awarded against the Company. The Company has objected to the claims and is
aggressively defending the matter.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission may contain statements which are not historical facts but
which are "forward-looking statements" which involve risks and uncertainties.
The words "may," "will," "expect," "anticipate," "continue", "estimate",
"project," "intend" and similar expressions are intended to identify
forward-looking statements regarding events, conditions and financial trends
that may affect the Company's future plans of operations, business strategy,
results of operations and financial position. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances about which there can be no firm assurances given. Further, any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made. As it is not possible to predict every new factor that may
emerge, forward-looking statements should not be relied upon as a prediction of
actual future financial condition or results. Important factors that may cause
the Company's actual results to differ from forward-looking statements are
referenced in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission.
RESULTS OF OPERATIONS
REVENUES
The Company's total revenues decreased 14% from $43.3 million during the three
months ended December 31, 2000 to $37.4 million during the three months ended
December 31, 2001. Revenue decreased 15% from $84.8 million during the six
months ended December 31, 2000 to $72.3 million during the six months ended
December 31, 2001.
Defense electronics revenues decreased 12% from $28.2 million or 65% of total
revenues during the three months ended December 31, 2000 to $24.8 million or 67%
of total revenues during the three months ended December 31, 2001. Defense
electronics revenues decreased 19% from $57.3 million or 67% of total revenues
during the six months ended December 31, 2000 to $46.5 million or 65% of total
revenues during the six months ended December 31, 2001. The decrease in revenues
was due primarily to an elongated planning and budgeting cycle of the new
federal administration and the subsequent re-focusing of the priorities to the
operational necessities of the war on terrorism.
Medical imaging revenues increased 2% from $10.4 million or 24% of total
revenues during the three months ended December 31, 2000 to $10.6 million or 28%
of total revenues during the three months ended December 31, 2001. Medical
imaging revenues for the six months ended December 31, 2001 increased 6% to
$20.5 million or 28% of total revenues from $19.4 million or 23% of total
revenues for the six months ended December 31, 2000. The increase in medical
imaging revenues is primarily due to strong growth in sales of both magnetic
resonance imaging ("MRI") and positron emission tomography ("PET") systems,
offset partially by the decline in sales of our more mature computed tomography
("CT") systems.
Other revenues decreased 59% from $4.7 million or 11% of total revenues during
the three months ended December 31, 2000 to $2.0 million or 5% of total revenues
during the three months ended December 31, 2001. Other revenues for the six
months ended December 31, 2001 decreased 34% to $5.3 million or 7% of total
revenues from $8.1 million or 10% of total revenues for the six months ended
December 31, 2000. The decrease in other revenues was due primarily to the
continued economic downturn in the overall semiconductor-manufacturing sector.
COST OF REVENUES
Cost of revenues decreased 11% from $14.2 million during the three months ended
December 31, 2000 to $12.6 million during the three months ended December 31,
2001. As a percent of total revenues, cost of revenues increased from 33% during
the three months ended December 31, 2000 to 34% for the three months ended
December 31, 2001. For the six months ended December 31, 2001, cost of revenues
decreased by 14% to $23.5 million from $27.3 million during the six months ended
December 31, 2000. As a percent of total revenues, cost of revenues remained
relatively flat at 32%, year over year.
10
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general, and administrative expenses decreased 3% from $12.8 million
during the three months ended December 31, 2000 to $12.4 million during the
three months ended December 31, 2001. Selling, general and administrative
expenses decreased 2% from $24.9 million during the six months ended December
31, 2000 to $24.4 million during the six months ended December 31, 2001. The
decrease was primarily due to the reduction of expenses associated with the
implementation of a new financial, manufacturing, and administrative computer
system that was installed at the end of the first fiscal quarter this year.
Additionally, commissions associated with lower sales volume contributed to the
decreased expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 6% from $8.0 million during the
three months ended December 31, 2000 to $8.5 million during the three months
ended December 31, 2001. Research and development expenses increased by 11% from
$14.7 million during the six months ended December 31, 2000 to $16.3 million
during the six months ended December 31, 2001. The increase in research and
development expenses was due primarily to the hiring of additional software and
hardware engineers to develop and enhance the features and functionality of the
Company's products and the introduction of new products in response to demand
for next generation products.
GAIN ON SALE OF DIVISION
On January 18, 2000, the Company completed the sale of its shared storage
division ("SSBU") to IBM. Payments were structured with an initial payment of
$4.5 million (excluding $1.0 million to be held in escrow and payable on a
contingent basis), followed by 12 quarterly contingent payments of $1.6 million,
including principal and interest. The quarterly payments are contingent upon
IBM's continued use of the technology. If IBM defaults, Mercury has the right to
recover the assets, including the patent and other intellectual property. The
Company recorded a $1.6 million gain during the three months ended December 31,
2001 and 2000, respectively and recorded a $3.2 million gain during the six
months ended December 31, 2001 and 2000, respectively.
EQUITY LOSS IN JOINT VENTURE
In September 1999, the Company formed AgileVision as a joint venture with
Sarnoff Corporation, the developer of color television and a pioneer in the
creation of digital television ("DTV"). AgileVision provides broadcasters and
cable providers equipment to optimize their DTV investment and develop new
broadband media commerce revenue streams, including master control systems that
permit broadcasters to perform multiple functions on a single platform that
previously would have required the engineering and integration of numerous
discrete products and systems. During the three-month periods ended December 31,
2001 and 2000, the Company recognized $872,000 and $476,000, respectively in
losses related to the operations of AgileVision. During the six-month periods
ended December 31, 2001 and 2000, the Company recognized $1.8 million and $1.7
million, respectively, in losses related to the operations of AgileVision. The
Company does not expect to recognize any material gains or losses related to its
investment in AgileVision going forward.
PROVISION FOR INCOME TAX
The Company recorded a tax provision of $1.5 million during the three months
ended December 31, 2001 reflecting a 28% tax rate as compared to a $3.3 million
tax provision during the three months ended December 31, 2000, reflecting a 32%
tax rate. The Company recorded a tax provision of $3.3 million during the six
months ended December 31, 2001 reflecting a 30% tax rate as compared to a $6.6
million tax provision during the six months ended December 31, 2000, reflecting
a 32% tax rate. The decrease in the tax rate was due to the re-estimation of the
Company's annual rate and an adjustment during the fiscal second quarter to
reduce the annual rate from 32% to 30%. The reduction in the annual rate was the
result of a reduction in the Company's overall profit forecast for the year
while amounts for certain tax preference items such as the research and
experimentation credit and tax exempt interest income, are expected to remain
constant or increase.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, the Company had cash and marketable investments of
approximately $106.1 million. During the six months ended December 31, 2001, the
Company generated approximately $8.4 million in cash from operations compared to
$9.4 million generated during the six months ended December 31, 2000. The cash
generated
11
from operations during the six-month period ended December 31, 2001 was
primarily the result of net income, a reduction in the Company's trade
receivables offset by an increase in current liabilities and prepayment of
income taxes. Days sales outstanding was 65 days and 59 days at December 31,
2001 and 2000, respectively.
During the six months ended December 31, 2001, the Company's investing
activities used cash of $13.4 million. During the period, investing activities
consisted of purchases of $12.9 million of marketable securities (net of
maturities), $2.6 million for the purchase of computers, furniture and
equipment; and a $1.0 million investment in AgileVision. These cash outflows
were partially offset by the receipt of $3.2 million from proceeds received on
the sale of the SSBU division. During the six months ended December 31, 2000,
the Company's investing activities used cash of $0.9 million, which consisted of
$0.2 million for the purchase of marketable securities (net of maturities) and
$3.9 million for the purchase of computers, furniture and equipment and
leasehold improvements. These cash outflows were partially offset by the receipt
of $3.2 million from proceeds received on the sale of the SSBU division.
During the six months ended December 31, 2001 and 2000, the Company's financing
activities provided cash of approximately $2.4 million and $1.4 million,
respectively. These financing activities consisted primarily of inflows from the
exercise of stock options and proceeds received from the employee stock purchase
plan, offset by outflows from payment under capital lease obligations and debt.
Management believes that the Company's available cash, plus cash generated from
operations, will be sufficient to provide for the Company's working capital and
capital expenditure requirements for the foreseeable future. If the Company
acquires one or more businesses or products, the Company's capital requirements
could increase substantially. In the event of such an acquisition or in the
event that any unanticipated circumstances arise which significantly increase
the Company's capital requirements, there can be no assurance that necessary
additional capital will be available on terms acceptable to the Company, if at
all.
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ITEM 3 Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE RISK MANAGEMENT
There were no material changes in the Company's exposure to market risk from
June 30, 2001.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings:
In July 1999, a former employee brought a wrongful termination action against
the Company and certain officers of the Company. The plaintiff seeks severance
pay, the right to purchase 60,000 shares of the Company's common stock at a
price of $2.00 per share, the right to exercise 96,000 stock options at an
exercise price of $2.00 per share, and other financial consideration. Binding
arbitration has commenced but no ruling has been decided. The position of the
Company's management after consultation with external counsel is that a loss
from this action is not probable. Accordingly, no loss accrual has been
recorded. If the plaintiff were to prevail on its claims, depending on the price
of the Company's common stock, a judgement for a material amount could be
awarded against the Company. The Company has objected to the claims and is
aggressively defending the matter.
ITEM 4. Submission of Matters to a Vote of Security Holders
On November 15, 2001, the Company held a Special Meeting in lieu of the 2001
Annual Meeting of Stockholders (the "Meeting"). At the Meeting, Dr. Albert P.
Belle Isle, James A. Dwyer, and Melvin Sallen were reelected as directors for
terms ending in 2004. The voting results were as follows:
Dr. Albert P. Belle Isle For 19,569,169 Withheld 164,560
James A. Dwyer For 18,928,910 Withheld 804,819
Melvin Sallen For 19,558,224 Withheld 175,505
The terms of the following Directors continued after the meeting:
James Bertelli
Russell K. Johnsen
Dr. Gordon B. Baty
Sherman N. Mullin
At the Meeting, the stockholders adopted an amendment to the Company's Articles
of Organization to increase the number of authorized shares of common stock from
40,000,000 shares to 65,000,000 shares. The voting results were as follows:
For 18,556,267 Against 1,155,591 Abstain 21,871
The stockholders also approved an increase in the number of shares issuable
pursuant to the Company's 1997 Stock Option Plan from 4,650,000 shares to
5,650,000 shares. The voting results were as follows:
For 8,648,387 Against 7,009,771 Abstain 52,862
The stockholders defeated a proposal to amend the Company's 1997 Stock Option
Plan to increase automatically on an annual basis the number of shares of Common
Stock reserved for issuance under such plan. The voting results were as follows:
For 7,173,554 Against 8,488,533 Abstain 48,933
ITEM 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits. None
(b) Reports on Form 8-K. None
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MERCURY COMPUTER SYSTEMS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERCURY COMPUTER SYSTEMS, INC.
Date: February 14, 2002 By: /s/ G. MEAD WYMAN
---------------------------------
G. Mead Wyman
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
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