1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended December 31, 1998 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, 1999: Class Number of Shares Outstanding ------------------------- ---------------------------- Common Stock, 10,222,693 par value $.01 per share Total number of pages 15 1
2 MERCURY COMPUTER SYSTEMS, INC. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE NUMBER ----------- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1998 and June 30, 1998 3 Consolidated Statements of Operations for the Three Months Ended December 31, 1998 and December 31, 1997 and for the Six Months Ended December 31, 1998 and December 31, 1997 4 Consolidated Statements of Cash Flows for the Six Months Ended December 31, 1998 and December 31, 1997 5 Notes to Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-11 PART II. OTHER INFORMATION Item 2. Use of Proceeds from Registered Securities 12 Item 6. Exhibits and Reports Filed on Form 8-K 13 SIGNATURE 14 EXHIBIT INDEX 15 </TABLE> 2
3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS MERCURY COMPUTER SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) <TABLE> <CAPTION> DECEMBER 31, JUNE 30, 1998 1998 ----------- ------- (UNAUDITED) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 6,898 $ 6,054 Marketable securities 6,071 10,077 Trade accounts receivable, net of allowances of $292 and $218 at December 31, 1998 and June 30, 1998, respectively 16,400 17,143 Inventory 9,257 9,125 Deferred income taxes, net 1,669 1,669 Prepaid expenses and other current assets 1,845 1,255 -------- -------- Total current assets 42,140 45,323 Marketable securities 26,510 18,889 Property and equipment, net 13,615 8,466 Capitalized software costs, net 418 104 Deferred income taxes, net 429 429 Other assets 254 358 -------- -------- Total assets $ 83,366 $ 73,569 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,501 $ 3,368 Accrued expenses 3,655 2,804 Accrued compensation 3,651 3,316 Billings in excess of revenues and customer advances 803 1,017 Income taxes payable 1,118 2,024 -------- -------- Total current liabilities 14,728 12,529 Commitments and contingencies (note E) -- -- Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized and none issued and outstanding at December 31, 1998 and June 30, 1998 respectively (liquidation preference none) -- -- Common stock, $.01 par value: 25,000,000 shares authorized; 10,168,663 and 9,973,491 shares issued and outstanding at December 31, 1998 and June 30, 1998,respectively 102 100 Additional paid-in capital 27,472 25,961 Retained earnings 41,046 35,483 Cumulative translation adjustment (8) (185) Unrealized gains/(losses) on securities 26 6 Related parties notes receivable -- (325) -------- -------- Total stockholders' equity 68,638 61,040 -------- -------- Total liabilities and stockholders' equity $ 83,366 $ 73,569 ======== ======== The accompanying notes are an integral part of the consolidated financial statements </TABLE> 3
4 MERCURY COMPUTER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 1998 1997 ---------------- ---------------- <S> <C> <C> <C> <C> Net revenue $ 25,598 $ 20,624 $ 49,660 $ 39,663 Cost of revenue 8,606 7,283 17,066 13,944 -------- -------- -------- -------- Gross profit 16,992 13,341 32,594 25,719 Operating expenses: Selling, general and administrative 8,304 6,846 15,662 13,491 Research and development 4,669 3,405 9,376 6,786 -------- -------- -------- -------- Total operating expenses 12,973 10,251 25,038 20,277 Income from operations 4,019 3,090 7,556 5,442 Interest income, net 326 219 695 450 Other income (expenses), net 261 (125) 306 (43) -------- -------- -------- -------- Income before income taxes 4,606 3,184 8,557 5,849 Provision for income taxes 1,572 1,210 2,994 2,270 -------- -------- -------- -------- Net income $ 3,034 $ 1,974 $ 5,563 $ 3,579 ======== ======== ======== ======== Net income per share: Basic $ 0.30 $ 0.37 $ 0.55 $ 0.68 ======== ======== ======== ======== Diluted $ 0.28 $ 0.24 $ 0.52 $ 0.44 ======== ======== ======== ======== Weighted average shares outstanding: Basic 10,117 5,307 10,072 5,262 ======== ======== ======== ======== Diluted 10,787 8,281 10,704 8,136 ======== ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements </TABLE> 4
5 MERCURY COMPUTER SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDED DECEMBER 31, 1998 1997 ------------------ <S> <C> <C> Cash flows provided from operating activities: Net income $ 5,563 $ 3,579 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,927 1,645 Deferred income taxes -- (331) Provision for doubtful accounts 116 -- Changes in assets and liabilities: Trade accounts receivable 833 277 Inventory (1,633) (113) Prepaid expenses and other current assets (548) (764) Other assets 86 (15) Accounts payable 2,131 (1,007) Accrued expenses and compensation 1,165 1,430 Billings in excess of revenues and customer advances (218) (263) Income taxes payable (918) (449) ------- -------- Net cash provided by operating activities 10,024 2,469 ------- -------- Cash flows from investing activities: Purchase of marketable securities (3,595) -- Purchases of property and equipment (6,787) (2,696) Capitalized software development costs (575) (51) Notes receivable from related parties 325 -- ------- -------- Net cash used in investing activities (10,632) (2,747) Cash flows from financing activities: Net proceeds from issuance of common stock -- -- Proceeds from exercise of stock options and warrants 1,513 252 ------- -------- Net cash provided by financing activities 1,513 252 ------- -------- Effect of exchange rate change on cash and cash equivalents (61) 29 ------- -------- Net change in cash and cash equivalents 844 3 Cash and cash equivalents at beginning of period 6,054 15,193 ------- -------- Cash and cash equivalents at end of period $ 6,898 $ 15,196 ======= ======== Cash paid during the period for: Interest -- -- Income taxes $ 4,109 $ 3,064 The accompanying notes are an integral part of the consolidated financial statements </TABLE> 5
6 MERCURY COMPUTER SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 <TABLE> <CAPTION> DECEMBER 31, 1998 JUNE 30, 1998 IN THOUSANDS) (IN THOUSANDS) ------------ ------------ <S> <C> <C> Raw materials $ 3,783 $ 4,707 Work in process 4,625 2,814 Finished goods 849 1,604 ------- ------- Total $ 9,257 $ 9,125 ======= ======= </TABLE> C. NET INCOME PER COMMON SHARE The Company has adopted Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share," which specifies the computation, presentation and disclosure requirements for net income per common share. Basic net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share gives effect to all diluted potential common shares outstanding during the period. Under SFAS No. 128, the computation of diluted earnings per share does not assume the issuance of common shares that have an antidilutive effect on net income per common share. Prior to the 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 related guidance set out in Securities and Exchange Commission Staff Accounting Bulletin No. 98, has eliminated the inclusion of cheap stock from the calculation of basic and diluted earnings per share prior to issuance of the securities. <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, 1998 1997 1998 1997 (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS) ------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Net income $ 3,034 $ 1,974 $ 5,563 $ 3,579 Shares used in computation: Weighted average common shares Outstanding used in computation of basic net income per share 10,117 5,307 10,072 5,262 Dilutive effect of convertible preferred stock -- 2,557 -- 2,557 Dilutive effect of stock options 670 632 417 317 ------- ------- ------- ------- Shares used in computation of diluted net income per share 10,787 8,281 10,704 8,136 ======= ======= ======= ======= Basic net income per share $ 0.30 $ 0.37 $ 0.55 $ 0.68 ======= ======= ======= ======= Dilutive net income per share $ 0.28 $ 0.24 $ 0.52 $ 0.44 ======= ======= ======= ======= </TABLE> Options to purchase 5,842 and 249,692 shares of common stock were outstanding during the three months ended December 31, 1998 and December 31, 1997, respectively, but were not included in the calculation of diluted net income per common share because the option price was greater than the average market price of the common shares during the period. Options to purchase 44,690 and 141,810 shares of common stock were outstanding during the six months ended December 31, 1998 and December 31, 1997, respectively, but were not included in the calculation of diluted net income per common share because the option price was greater than the average market price of the common shares during the period. 6
7 D. COMPREHENSIVE INCOME Mercury's total comprehensive income was as follows (in thousands) <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED DECEMBER 31, ENDED DECEMBER 31, 1998 1997 1998 1997 -------------------------------------------- <S> <C> <C> <C> <C> Net income $ 3,034 $ 1,974 $ 5,563 $ 3,579 Other comprehensive income, net of tax: Foreign currency translation adjustments 99 (25) 115 -- Unrealized gains on securities (14) -- 13 -- ------- ------- ------- ------- Other comprehensive income 85 (25) 128 -- ------- ------- ------- ------- Total comprehensive income $ 3,119 $ 1,949 $ 5,691 $ 3,579 ======= ======= ======= ======= </TABLE> E. 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 in the amount of $1,591,000. The Company has appealed 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. F. NEW ACCOUNTING PRONOUNCEMENTS In June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement supercedes 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. The Company is currently evaluating the impact this statement will have on its financial statements. In March 1998, the American Institute of Certified Public Accountants 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. 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 for 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 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. 7
8 MERCURY COMPUTER SYSTEMS, INC. ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company, statements made by its employees or information included in its filings with the Securities and Exchange Commission may contain statements which are not historical facts but which are "forward-looking statements" that involve risks and uncertainties. The words "may," "will," "expect," "anticipate," "continue", "estimate", "project," "intend" and similar expressions are intended to identify forward-looking statements regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, results of operations and financial position. These statements are based on the Company's current expectations and estimates as to prospective events and circumstances about which there can be no firm assurances given. Further, any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made. As it is not possible to predict every new factor that may emerge, forward-looking statements should not be relied upon as a prediction of actual future financial condition or results. Important factors that may cause the Company's actual results to differ from forward-looking statements are referenced in the Company's Form 10K filed annually with the Securities and Exchange Commission. RESULTS OF OPERATIONS: REVENUES The Company's total revenues increased 24% from $20.6 million during the three months ended December 31, 1997 to $25.6 million during the three months ended December 31, 1998. The Company's total revenues increased 25% from $39.7 million during the six months ended December 31, 1997 to $49.7 million during the six months ended December 31, 1998. Defense electronics revenues increased 23% from $15.7 million or 76% of total revenues during the three months ended December 31, 1997 to $19.2 million or 75% of total revenues during the three months ended December 31, 1998. Defense electronics revenues increased 20% from $30.8 million or 78% of total revenues during the six months ended December 31, 1997 to $36.9 million or 74% of total revenues during the six months ended December 31, 1998. Increases in defense electronic revenues were due primarily to continued strong unit demand for defense electronics products, largely comprised of advanced military applications in radar, sonar and airborne surveillance. Medical imaging revenues increased 49% from $2.9 million or 14% of total revenues during the three months ended December 31, 1997 to $4.3 million or 17% of total revenues during the three months ended December 31, 1998. Medical imaging revenues increased 45% from $5.1 million or 13% of total revenues during the six months ended December 31, 1997 to $7.4 million or 15% of total revenues during the six months ended December 31, 1998. Increases in medical imaging revenues are reflective of the Company's ongoing investment in this business, expansion into new modalities and the resulting increased unit demand. Other revenues, which include the Shared Storage and other commercial businesses, remained essentially flat at $2.1 million during the three months ended December 31, 1997 and 1998. In terms of percentage to total revenues, other revenues declined from 10% during the three months ended December 31, 1997 to 8% during the three months ended December 31, 1998. Other revenues increased 39% from $3.8 million or 10% of total revenues during the six months ended December 31, 1997 to $5.3 million or 11% of total revenues during the six months ended December 31, 1998. The increase in other revenues during the six month period, year over year, was primarily due to a sharp rise in the Company's commercial business, and resulting increased unit demand, during the first quarter of fiscal 1999. COST OF REVENUES Cost of revenues increased 18% from $7.3 million or 35% of total revenues during the three months ended December 31, 1997 to $8.6 million or 34% of total revenues during the three months ended December 31, 1998. Cost of revenues increased 22% from $13.9 million or 35% of total revenues during the six months ended December 31, 1997 to $17.1 million or 34% of total revenues during the six months ended December 31, 1998. The cost increases correlate with the corresponding revenue increases and the reductions as a percentage of revenues reflect component cost reductions and modest efficiency gains. 8
9 SELLING, GENERAL AND ADMINISTRATIVE Selling, general, and administrative expenses increased 21% from $6.8 million or 33% of total revenues during the three months ended December 31 1997 to $8.3 million or 32% of total revenues during the three months ended December 31, 1998. Selling, general and administrative expenses increased 16% from $13.5 million or 34% of total revenues during the six months ended December 31, 1997 to $15.7 million or 32% of total revenues during the six months ended December 31, 1998. These increases reflect the hiring of additional sales and administrative personnel, information system investments, increased commissions and marketing related costs, all of which are associated with higher sales volume. RESEARCH AND DEVELOPMENT Research and development expenses increased 37% from $3.4 million or 17% of total revenues during the three months ended December 31, 1997 to $4.7 million or 18% of total revenues during the three months ended December 31, 1998. Research and development expenses increased 38% from $6.8 million or 17% of total revenues during the six months ended December 31, 1997 to $9.4 million or 19% of total revenues during the six months ended December 31, 1998. This increase was due primarily to the hiring of additional engineers to develop and enhance the features and functionality of the Company's current products and to develop the Company's next generation products. Engineering expenses currently are running higher than management's target levels as the Company is working on major development programs to deliver important new technology to its customers. INCOME FROM OPERATIONS Income from operations increased 30% from $3.1 million or 15% of total revenues during the three months ended December 31, 1997 to $4.0 million or 16% of total revenues during the three months ended December 31, 1998. Income from operations increased 39% from $5.4 million or 14% of total revenues during the six months ended December 31, 1997 to $7.6 million or 15% of total revenues during the six months ended December 31, 1998. Included in income from operations during the three months ended December 31, 1998 were $689,000 in hardware and software revenues and $1.1 million in direct expenses related to the Shared Storage business. Included in income from operations during the three months ended December 31, 1997 were $47,000 in hardware and software revenues and $820,000 in direct expenses related to the Shared Storage business. Included in income from operations during the six months ended December 31, 1998 were $1.3 million in hardware and software revenues and $2.0 million in direct expenses related to the Shared Storage business. Included in income from operations during the six months ended December 31, 1997 were $84,000 in hardware and software revenues and $1.5 million in direct expenses related to the Shared Storage business. The direct expenses include expenses from marketing and engineering activities, primarily related to compensation, trade shows, prototype development and direct costs related to the sale of the product, including certain hardware costs. INTEREST INCOME, NET Interest income, net, increased 49% from $219,000 during the three months ended December 31, 1997 to $326,000 during the three months ended December 31, 1998. Interest income, net, increased 54% from $450,000 during the six months ended December 31, 1997 to $695,000 during the six months ended December 31, 1998. This increase reflects an increase in the Company's average cash and cash equivalent 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. Additionally, $50,000 of interest expense was accrued during the quarter ended December 31, 1998 related to the Internal Revenue Service audit as described in the notes to the financial statements. PROVISION FOR INCOME TAX The Company recorded a tax provision of $1.6 million during the three months ended December 31, 1998 reflecting a 34% tax rate as compared to a $1.2 million tax provision during the three months ended December 31, 1997, reflecting a 38% tax rate. The Company recorded a tax provision of $3.0 million during the six months ended December 31, 1998 reflecting a 35% tax rate as compared to a $2.3 million tax provision during the six months ended December 31, 1997 reflecting a 39% tax rate. The reduced tax rate was primarily due to a one-time tax provision adjustment during the current quarter to reflect Congressional extension of the research and experimentation tax credit through June, 1999. 9
10 LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1998, the Company had cash and marketable investments of approximately $39.5 million. During the six months ended December 31, 1998, the Company generated approximately $10.0 million in cash from operations compared to $2.5 million generated during the six months ended December 30, 1997. The increase in cash generated from operations was due primarily to increased profitability, accounts payable increases and improved management of accounts receivable. Days sales outstanding (DSO) increased from 45 days at December 31, 1997 to 58 days at December 31, 1998. This DSO increase is primarily due to a disproportionate amount of revenue being recognized early in the quarter ended December 31, 1997. However, DSO during the quarter ended December 31, 1998 reflected significant improvement over the previous quarter's DSO of 75. 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 December 31, 1998, there was no outstanding borrowing on this line of credit. During the six months ended December 31, 1998, the Company's investing activities used cash of $10.6 million which consisted of $4.8 million related to the development of additional office space, $3.6 million for the purchase of marketable securities (net), $2.0 million for computers, furniture, equipment and leasehold improvements and $575,000 for capitalized software. These outflows were offset by a reduction in notes receivable from related parties amounting to $325,000. During the six months ended December 31, 1997, the Company's investing activities used cash of $2.7 million, consisting of $1.8 million for computers, furniture, equipment and leasehold improvements and $913,000 related to the development of additional office space. During the six months ended December 31, 1998, the Company's financing activities provided approximately $1.5 million in cash, all related to the issuance of stock options. During the six months ended December 31, 1997, the Company's financing activities provided $252,000 in cash from the issuance of stock options. The Company believes that its available cash, cash generated from operations, and the Company's line of credit, will be sufficient to provide for the Company's working capital and capital expenditure requirements for the foreseeable future and any final adjustments resulting from the IRS audit described in the notes to the financial statements. If the Company acquires one or more businesses or products, the Company's capital requirements could increase substantially. In the event of such an acquisition or in the event that any unanticipated circumstances arise which significantly increase the Company's capital requirements, there can be no assurance that necessary additional capital will be available on terms acceptable to the Company, if at all. YEAR 2000 COMPLIANCE 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 company's software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" ("Y2K") requirements. Generally, on a stand-alone basis Mercury's products are not date dependent and therefore are not susceptible to Y2K issues like other general purpose computer companies. However, it should be understood that the majority of Mercury's product performance is dependent upon third party host computing environments. Mercury's Y2K Initiative: In the Company's Annual Report on Form 10K for the fiscal year ended June 30, 1998, the Company made disclosures regarding the following matters: (i) the Company's state of Y2K 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, (ii) the expenditures expected to be incurred in connection with identifying, evaluating and settling any Y2K compliance issues, (iii) the risks associated with identified Y2K issues, and (iv) the Company's intention to develop a contingency plan to address identified Y2K compliance issues. State of Readiness: Since the Company's original Y2K disclosure, the Company has reprogrammed the source code underlying its current financial and accounting software to make it Y2K compliant. Testing of the reprogrammed software is on schedule and is expected to be completed by May, 1999. The Company also plans to upgrade certain other business systems supporting human resources and sales information data bases. These upgrades are expected to be completed by June 30, 1999. The Company has evaluated IT systems and has concluded that the majority of such systems are compliant. Plans are in place to upgrade the remaining IT system components with an objective of bringing the entire infrastructure into compliance by June 30, 1999. 10
11 The Company continues its assessment of all current versions of its Products and believes they are Y2K compliant. The Company has determined that it is not feasible to test all prior versions of its Products. To assess whether material third parties with whom the Company conducts business are Y2K compliant, the Company is engaged in activities to examine their state of readiness, primarily through the use of third party questionnaires. This examination includes professional service providers. Costs: Based on its investigation to date, the Company does not expect the total cost of its Y2K Project to have a material adverse effect on the Company's business or financial results. It is estimated that the cost related to Y2K will fall between $100,000 and $500,000. Contingency Plan: To minimize potential disruptions, the Company intends to adopt a contingency plan as necessary to address any material issues raised during the completion of the assessment and testing phases of the Project, or any material issues raised in connection with the response by material third parties to the Company's questionnaires. 11
12 MERCURY COMPUTER SYSTEMS, INC. PART II. OTHER INFORMATION (d) Use of Proceeds from Registered Securities. During the three months of October, November and December 1998, the Company used approximately $4.8 million of proceeds received from the sale of 2,000,000 shares in the Company's initial public offering which closed on February 4, 1998 for the construction of an additional facility as discussed in the Company's Form 10K filed with the Securities and Exchange Commission. The Company intends to own and occupy this newly constructed building, which consists of 91,000 square feet. A portion of the building will be leased to an unaffiliated third party. The Company has also purchased its current headquarters building, which consists of 96,000 square feet. The Company is currently exploring financing alternatives for both of these properties. 12
13 ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K (a) Exhibits. See as listed Exhibit Item # ------ 10.1 Purchase and Sale Agreement for 199 Riverneck Road, Chelmsford, MA. 10.2 Quitclaim Deed for 199 Riverneck Road, Chelmsford, MA. 27.1 Financial Data Schedule (b) Reports on Form 8-K. None. 13
14 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 12, 1999 By: /s/ G. MEAD WYMAN ---------------------------------------- G. Mead Wyman Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 14
15 MERCURY COMPUTER SYSTEMS, INC. EXHIBIT INDEX Exhibit Item # - ------ 10.1 Purchase and Sale Agreement for 199 Riverneck Road, Chelmsford, MA. 10.2 Quitclaim Deed for 199 Riverneck Road, Chelmsford, MA. 27.1 Financial Data Schedule 15