<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______.
Commission File Number : 0-22350
MERCURY INTERACTIVE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0224776
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
470 Potrero Avenue, Sunnyvale, California 94086
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 523-9900
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 a 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 [_]
The number of shares of Registrant's Common Stock outstanding as of July
31, 1996 was 15,976,188.
<PAGE>
MERCURY INTERACTIVE CORPORATION
-------------------------------
INDEX
-----
PART 1. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet
June 30, 1996 and December 31, 1995.......................... 3
Condensed Consolidated Statement of
Operations Six months ended June 30, 1996 and 1995........... 4
Condensed Consolidated Statement of Cash Flows
Six months ended June 30, 1996 and 1995...................... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders................. 15
Item 6. Exhibits and Reports on Form 8-K................................ 15
SIGNATURES...................................................... 16
EXHIBITS INDEX.................................................. 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
June 31, December 31,
ASSETS 1996 1995
- ------ -------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 41,334 $ 45,850
Short-term investments (Note 2)................... 34,891 31,996
Trade accounts receivable (net of allowances
of $841 and $705).............................. 11,986 12,158
Government grant and other receivables............ 3,075 2,621
Inventories....................................... 878 510
Prepaid expenses and other assets................. 3,223 2,544
-------- --------
Total current assets.............................. 95,387 95,679
-------- --------
Long-term investments (Note 2)...................... 3,327 7,819
Property and equipment, net......................... 9,885 8,762
Deposits and other assets........................... 1,024 560
-------- --------
$109,623 $112,820
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 2,864 $ 1,272
Accrued liabilities 7,439 13,846
Deferred revenue 5,038 5,086
-------- --------
Total current liabilities 15,341 20,204
======== ========
Commitments and contingencies (Notes 5, 6 and 7)
Stockholders' equity:
Common stock, par value $.002 per share,
25,000 shares authorized; 15,976 and
15,728 shares issued and outstanding........... 32 31
Capital in excess of par value.................... 99,924 98,309
Cumulative translation adjustment................. (49) 31
Accumulated deficit............................... (5,625) (5,755)
-------- --------
Total stockholders' equity.................... 94,282 92,616
-------- --------
$109,623 $112,820
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
----------------------------------------------------------------------
3
<PAGE>
MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
License............................. $ 9,350 $ 7,470 $ 17,950 $ 13,953
Service............................. 2,750 1,530 5,150 2,747
--------- --------- --------- ---------
Total revenue................... 12,100 9,000 23,100 16,700
--------- --------- --------- ---------
Cost of revenue:
License............................. 709 588 1,205 1,170
Service............................. 786 472 1,418 769
--------- --------- --------- ---------
Total cost of revenue........... 1,495 1,060 2,623 1,939
--------- --------- --------- ---------
Gross profit......................... 10,605 7,940 20,477 14,761
--------- --------- --------- ---------
Operating expenses:
Research and development............ 2,682 4,135 4,852 5,611
Less: grants........................ (611) --- (1,248) (328)
--------- --------- --------- ---------
Research and development, net....... 2,071 4,135 3,604 5,283
Marketing, selling, and general and
administrative.................. 8,332 6,096 15,729 10,917
Settlement of litigation............ --- --- 2,600 ---
--------- --------- --------- ---------
Total operating expenses........ 10,403 10,231 21,933 16,200
--------- --------- --------- ---------
Income (loss) from operations......... 202 (2,291) (1,456) (1,439)
Other income, net..................... 776 446 1,621 890
--------- --------- --------- ---------
Income (loss) before provision for
income taxes......................... 978 (1,845) 165 (549)
Provision for income taxes........... 198 0 35 259
--------- --------- --------- ---------
Net income (loss)..................... $ 780 $ (1,845) $ 130 $ (808)
========= ========= ========= =========
Net income (loss) per share........... $ 0.05 $ (0.14) $ 0.01 $ (0.06)
========= ========= ========= =========
Weighted average common
shares and equivalents............. 16,564 12,983 16,568 12,899
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
----------------------------------------------------------------------
4
<PAGE>
MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 130 $ (808)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization...................... 1,368 932
Non-cash acquisition and other
non-recurring charges............................. -- 1,885
Net changes in assets and liabilities:
Trade accounts receivable........................ 172 667
Government grant and other
receivables..................................... (454) (508)
Inventories...................................... (368) (143)
Prepaid expenses and other assets................ (1,143) (321)
Accounts payable................................. 1,592 (217)
Accrued liabilities (including in 1996 the
payment of litigation-related accruals of
$2,778 and acquisition and restructuring
accruals of $3,889).............................. (6,407) 1,449
Deferred Revenue..................................... (48) (1,813)
--------- ---------
Net cash provided by (used in)
operating activities.......................... (5,158) 1,123
--------- ---------
Cash flows from investing activities:
Investment proceeds, net........................... 1,597 9,271
Acquisition of property and equipment (2,491) (2,092)
--------- ---------
Net cash provided by (used in)
investing activities............................ (894) 7,179
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock............. 1,616 1,006
--------- ---------
Net cash provided by
financing activities............................ 1,616 1,006
--------- ---------
Effect of exchange rate changes on cash.............. (80) 195
--------- ---------
Net increase (decrease) in cash and
cash equivalents.................................... (4,516) 9,503
Cash and cash equivalents at beginning
of period........................................... 45,850 10,465
--------- ---------
Cash and cash equivalents at end of
period.............................................. $ 41,334 $ 19,968
========= =========
Cash paid during the period for
income taxes:..................................... $ -- $ 561
</TABLE>
See accompanying notes to condensed consolidated financial statements.
----------------------------------------------------------------------
5
<PAGE>
MERCURY INTERACTIVE CORPORATION
-------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, that in the
opinion of management are necessary to fairly state the Company's
consolidated financial position, the results of its operations, and its
cash flows for the periods presented. This Quarterly Report on Form 10-Q
should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1995, included in the 1995
Annual Report and Form 10-K. The condensed consolidated statement of
operations for the six months ended June 30, 1996 is not necessarily
indicative of results to be expected for the entire fiscal year ending
December 31, 1996. Certain items have been reclassified to conform to the
current period presentation.
2. The portfolio of short and long-term investments is carried at cost (which
approximates market) as of the balance sheet date which consist of
investments in high quality financial, government and corporate securities.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
Company has categorized its marketable securities as "available-for-sale"
securities. Realized gains or losses are determined based on the specific
identification method and are reflected in income.
3. The effective tax rate for the six months ended June 30, 1996 differs from
statutory tax rates principally because of special reduced taxation
programs sponsored by the government of Israel.
4. Net income (loss) per common share has been computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of common
stock issuable upon exercise of stock options (using the treasury stock
method).
5. The Company obtained grants for research and development from the Office of
the Chief Scientist in the Israeli Ministry of Industry and Trade in the
amounts of $450,000 and $857,000 in the quarter and six months ended June
30, 1996, respectively, and $328,000 in the six months ended June 30, 1995.
No grants were recorded in the quarter ended June 30, 1995. These grants
are accounted for using the cost reduction method, under which research and
development expenses are decreased by the amounts of the grants. The
Company is not obligated to repay these grants; however, it has agreed to
pay royalties at rates ranging from 2% to 3% of product sales resulting
from the research, up to the amount of the grants obtained and for certain
grants up to 150% of the grants obtained. Royalty expense under these
agreements amounted to approximately $300,000 and $530,000 for the quarter
and six months ended June 30, 1996, respectively, and $230,000 and $400,000
for the quarter and six months ended June 30, 1995, respectively. As of
June 30, 1996, the Company is committed to pay, if and when earned,
approximately $2.9 million in royalties.
6
<PAGE>
During the second quarter and the six months ended June 30, 1996, the
Company obtained grants in the amounts of $161,000 and $391,000,
respectively, for research and development projects from the Israel-U.S.
Binational Industrial Research and Development Foundation ("BIRD-F"). The
grants are accounted for using the cost reduction method, under which
research and development expenses are decreased by the amount of the grants
obtained. The Company is not obligated to repay these grants; however, it
has agreed to pay BIRD-F royalties at the rate of up to 5% of sales of any
product or development resulting from such research, but not in excess of
150% of the grant. Royalty expense under BIRD-F grants amounted to less
than $5,000 for the quarters and six months ended June 30, 1996 and 1995.
As of June 30, 1996, the Company is committed to pay, if and when earned,
approximately $1.3 million in royalties.
6. The Israeli Government, through the Fund for the Encouragement of
Marketing Activities, has, in prior periods, awarded the Company grants for
participation in marketing expenses incurred to increase export sales from
Israel. The grants were received from the government of Israel for
approved programs for marketing activities and were recognized on the cost
reduction basis as a reduction of marketing expenses as such expenses were
incurred. Under the terms of the marketing grants, if and when export
sales from Israel to certain countries exceed historical export sales from
Israel in the base year for such grants, a royalty of 3% of the increase in
export sales from Israel must generally be paid, up to the amount of the
grant obtained. Royalty expense under these agreements amounted to
approximately $40,000 and $227,000 for the quarter and six months ended
June 30, 1996, respectively, and $77,000 and $137,000 for the quarter and
six months ended June 30, 1995, respectively. As of June 30, 1996, the
Company is committed to pay, if and when earned, approximately $743,000 in
royalties.
7. On February 13, 1995, the Company's UK subsidiary, Mercury Interactive (UK)
Limited, was served with a complaint brought by Mercury Communications
Limited ("Mercury Communications"), a subsidiary of Cable and Wireless plc.
The complaint alleged that use by the Company's subsidiary of "Mercury" and
"Mercury Interactive" in the UK infringed upon Mercury Communications' UK
trademark rights. On March 13, 1996, the Company settled this matter.
On August 21, 1995, the Company was served with a complaint filed in the
United States District Court for the Eastern District of Virginia by
Performix, Inc., a software company located in McLean, Virginia. The
complaint alleged that an employee of the Company attempted to copy without
authorization one of the plaintiff's software programs. On March 7, 1996,
the Company settled this matter and recorded a charge of $2.1
million (net of taxes of $500,000), which reflected settlement costs for
all outstanding litigation as well as related legal fees.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
REVENUES
License revenue increased 62% to $9.4 million during the second quarter of
1996 from $5.8 million in the second quarter of 1995, excluding a one time
payment in April 1995 of $1.7 million from Compuware, in exchange for the right
to OEM the Company's products. License revenue increased 46% to $18.0 million
during the six months ended June 30, 1996 from $12.3 million during the six
months ended June 30, 1995, also excluding the one time payment from Compuware.
The Compuware payment is excluded as it is not representative of normal ongoing
revenue transactions. This contract was terminated in March 1996, and no further
material revenue was recorded by the Company since the initial one time payment
in April 1995. The Company's growth in license revenue is due to continuing
growth in license fees from the WinRunner and LoadRunner products, as well as
sales of TestSuite, the Company's complete automated software quality solution
for the enterprise, which was released in June 1995. License revenue in the
second quarter of 1996 also benefitted from the Company's ongoing expansion into
alternate distribution channels, such as referral partners, system integrators
and value added resellers. Revenue generated through alternate channels
represented approximately 45% and 40% of the license fees during the quarter and
six months ended June 30, 1996, respectively. Revenue generated through
alternate channels represented approximately 11% and 9% of the license fees
during the quarter and the six months ended June 30, 1995, respectively.
Service revenue increased to $2.8 million or 23% of total revenue in the
second quarter of 1996 from $1.5 million or 17% of total revenue in the second
quarter of 1995 and increased to $5.1 million, or 22% of total revenue in the
six months ended June 30, 1996, from $2.7 million or 16% of total revenue in the
six months ended June 30, 1995. This increase in service revenue in 1996
compared to 1995 is primarily due to increases in the Company's base of
installed users and the associated increase in maintenance, customer training
and support revenue. The increase is also attributable to the introduction in
June 1995 of the Company's LoadRunner Quickstart training program which
accounted for more than 10% of the increase in service revenue. The Company
expects that service revenues will continue to increase in absolute dollars as
long as the Company's customer base continues to grow.
International revenue in the quarter and the six months ended June 30, 1996
represented 33% and 38%, respectively, of total revenue. International revenue
was approximately 30% and 33% in the quarter and the six months ended June 30,
1995, respectively, excluding the $1.7 million in revenue from Compuware
discussed above. In an effort to improve Europe's contribution to revenue, the
Company restructured European operations in December 1995 and is currently in
the process of rebuilding the operations, including recruiting new sales
management and other personnel. However, there can be no assurance that the
Company will be able to increase revenue from Europe.
COST OF REVENUE
License cost of revenue, as a percentage of license revenue, was 8% and 7%
in the second quarter and six months ended June 30, 1996, respectively,
relatively unchanged from 8% in the quarter and six months ended June 30,
1995. License cost of revenue consists primarily of employee-related costs
including salaries, travel and depreciation.
Service cost of revenue, as a percentage of service revenue was 29% and 28%
in the quarter and six months ended June 30, 1996, respectively, compared to 31%
and 28% in the quarter and six months ended June 30, 1995, respectively. Service
cost of revenue consists primarily of costs of customer technical support,
education and consulting.
RESEARCH AND DEVELOPMENT
Research and development expenditures, before reductions for grants,
increased to $2.7 million or 22% of total revenue in the second quarter of 1996
from $1.5 million or 17% of total revenue in the second quarter of 1995,
excluding charges of $2.6 million related to the acquisition of Blue Lagoon
Software discussed below, and increased to $4.9 million or 21% of total revenue
in the six months ended June 30, 1996 from $3.0 million or 18% in the six months
ended June 30, 1995, excluding the aforementioned charges related to the
acquisition of Blue Lagoon Software. Research and development expenses for the
quarter and six months ended June 30, 1995 included the write-off of in-process
research and development, and the write-off of obsolete technology, each
8
<PAGE>
related to the acquisition of Blue Lagoon Software, which totaled approximately
$2.4 million, as well as approximately $200,000 of incentive compensation
payments related to the acquisition. The increase in research and development
expenses was due to an increase in research and development personnel from 108
employees at June 30, 1995 to 148 employees at June 30, 1996. The increase in
research and development personnel-related costs, including depreciation of
equipment purchased to support the expanded research and development staff,
accounted for approximately $600,000 of the increase in the second quarter of
1996, and $1.2 million of the increase in the six months ended June 30, 1996.
The Company capitalized $300,000 and $550,000 of software development costs
during the second quarter and six months ended June 30, 1996, respectively, and
$190,000 and $350,000 in the quarter and six months ended June 30, 1995,
respectively, in accordance with Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." The Company began amortizing captitalized costs and
recorded $60,000 of amortization in the second quarter of 1996. At June 30, 1996
and December 31, 1995, the Company had a balance of capitalized software
development costs of approximately $985,000 and $495,000, respectively.
The Company obtained grants for research and development from the Office of
the Chief Scientist in the Israeli Ministry of Industry and Trade in the amounts
of $450,000 and $857,000 in the quarter and six months ended June 30, 1996,
respectively, and $328,000 in the six months ended June 30, 1995. No grants were
recorded in the quarter ended June 30, 1995. These grants are accounted for
using the cost reduction method, under which research and development expenses
are decreased by the amounts of the grants. The Company is not obligated to
repay these grants; however, it has agreed to pay royalties at rates ranging
from 2% to 5% of product sales resulting from the research, up to the amount of
the grants obtained and for certain grants up to 150% of the grants obtained.
Royalty expense under these agreements amounted to approximately $300,000 and
$530,000 for the quarter and six months ended June 31, 1996, respectively, and
$230,000 and $400,000 for the quarter and six months ended June 30, 1995,
respectively. As of March 31, 1996, the Company is committed to pay, if and when
earned, $2.9 million in royalties.
The Company also obtained grants in the amounts of $161,000 and $391,000 in
the second quarter and six months ended June 30, 1996, respectively, for
research and development projects from the Israel-U.S. Binational Industrial
Research and Development Foundation ("BIRD-F"). The grants are accounted for
using the cost reduction method, under which research and development expenses
are decreased by the amount of the grant obtained. The Company is not obligated
to repay these grants; however, it has agreed to pay BIRD-F royalties at the
rate of up to 5% of sales of any product or development resulting from such
research, but not in excess of 150% of the grant. Royalty expense under BIRD-F
grants amounted to less than $5,000 for the quarters and six months ended
June 30, 1996 and 1995. As of June 30, 1996, the Company is committed to pay, if
and when earned, approximately $1.3 million in royalties.
The Company intends to continue making significant expenditures on research
and development to develop new products and expand the platforms and operating
systems on which its products are offered. While the Company believes that
these current research and development expenditures will be beneficial in the
long term development of its business, there can be no assurances that the
development of products will be successful. Research and development
expenditures are incurred substantially in advance of related revenue and in
some cases do not result in the generation of revenue.
MARKETING, SELLING AND GENERAL AND ADMINISTRATIVE
Marketing, selling and general and administrative expenses, increased to
$8.3 million, or 69% of total revenue, and $15.7 million, or 68% of total
revenue, in the quarter and six months ended June 30, 1996, respectively, from
$5.6 million, or 62% of total revenue, and $10.4 million, or 62% of total
revenue, in the quarter and six months ended June 30, 1995, respectively,
excluding charges of $550,000 related to the acquisition of Blue Lagoon
Software. During the second quarter of 1995, the Company recorded non-recurring
charges totaling $550,000 primarily related to the write-off of approximately
$250,000 of fixed assets, as well as special incentive payments to management
and certain other employees totaling approximately $300,000 in conjunction with
integrating the operations and technology of Blue Lagoon Software into the
Company's operations. Approximately $540,000 and $1.0 million of the increase
during the quarter and six months ended June 30, 1996, respectively, resulted
from increased worldwide sales and marketing activities including increased
advertising and marketing communications, increased participation in seminars
and trade shows and expansion into alternate distribution channels. The Company
has also expanded its operations into the Far East, which accounted for
approximately $280,000 and $730,000 of the increase in the quarter and six
months ended June 30, 1996, respectively, compared to the quarter and six months
ended June 30, 1995. In addition, the increase in expenses relate to increases
in personnel in the marketing, sales and
9
<PAGE>
administrative departments to 148 employees at June 30, 1996 from 107 employees
at June 30, 1995. Excluding costs related to expansion into the Far East,
personnel-related expenses, including commissions and travel, resulted in
approximately $1.4 million and $2.5 million of the increase in marketing,
selling and general and administrative expense during the quarter and six months
ended June 30, 1996, respectively, compared to the quarter and six months ended
June 30, 1995. The Company expects marketing, selling and general and
administrative expenses to increase in absolute dollars as total revenues
increase, but such expenses may vary as a percentage of revenue.
In prior years, the Company received grants from the Government of Israel
through the Fund for the Encouragement of Marketing Activities ("the Marketing
Fund") which were used to offset marketing expenses in the years received.
Under the terms of the marketing grants, if and when export sales from Israel to
certain countries exceed a predetermined base of historical export sales from
Israel, a royalty of 3% of the increase in export sales from Israel must
generally be paid, up to the amount of the grants obtained. Royalty expense
under these agreements amounted to approximately $40,000 and $227,000 for the
quarter and six months ended June 30, 1996, respectively, and $77,000 and
$137,000 in the quarter and six months ended June 30, 1995, respectively. As of
June 30, 1996, the Company is committed to pay, if and when earned,
approximately $743,000 in royalties.
OTHER INCOME, NET
Other income, net consists primarily of interest income and foreign
exchange gains and losses. In the second quarter and six months ended June 30 of
1996 and 1995, the Company earned interest income primarily on its investments
in money market accounts and marketable securities, which consist of investments
in high quality financial, government and corporate institutions. The
significant increase in other income, net to $776,000 and $1.6 million in the
quarter and six months ended June 30, 1996, respectively, from $446,000 and
$890,000 in the quarter and six months ended June 30, 1995, respectively,
resulted primarily from a higher average investment balance during the 1996
periods due to the investment of the proceeds from the Company's offering of
Common Stock in August 1995.
PROVISION FOR INCOME TAXES
The Company has accounted for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". The Company recorded a tax expense of $198,000 and $35,000
in the quarter and six months ended June 30, 1996, respectively, compared to
$259,000 in the six months ended June 30, 1995. No income tax expense was
recorded in the quarter ended June 30, 1996.
The Company participates in special programs sponsored by the government of
Israel relating to taxation. Future provisions for taxes will depend upon the
mix of worldwide income and the tax rates in effect for various tax
jurisdictions.
NET INCOME (LOSS)
The Company reported net income of $780,000 and $130,000 in the quarter and
six months ended June 30, 1996, respectively, compared to a net loss of $1.8
million and $808,000 in the quarter and six months ended June 30, 1995,
respectively. The results of operations for the six months ended June 30, 1996
included the first quarter charge for the settlement of litigation of $2.1
million (net of taxes). The results of operations for the quarter and six months
ended June 30, 1995 were impacted by the acquisition of Blue Lagoon and other
related non-recurring charges. The Company's operating expenses are based in
part on its expectations of future revenues, and expenses are generally incurred
in advance of revenues. The Company plans to continue to expand and increase its
operating expenses to support anticipated revenue growth. If revenues do not
materialize in a quarter as expected, the Company's results from operations for
that quarter are likely to be materially adversely affected. Net income may be
disproportionately affected by a reduction in revenues because only a small
portion of the Company's expenses varies with its revenues.
10
<PAGE>
INFLATION
Inflation has not had a significant impact on the Company's operating
results to date, nor does the Company expect it to have a significant impact
during the year.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The statements in this Item 2 in the last sentence of the second paragraph
under caption "Revenue", the first sentence of the fifth paragraph under the
caption "Research and Development," the sentence under the caption "Inflation",
the fifth sentence in the paragraph under the caption "Net income (loss)"
and the second paragraph under the caption "Liquidity and Capital Resources" are
forward looking statements. In addition, the Company may from time to time make
oral forward looking statements. The factors set forth under the captions
"Research and Development", "Net income (loss)" and "Liquidity and Capital
Resources" as well as the following, are important factors that could cause
actual results to differ materially from those projected in any such forward
looking statements.
The market for software products is generally characterized by rapidly
changing technology, frequent new product introductions and changes in customer
requirements, which can render existing products obsolete or unmarketable. The
Company believes that a major factor in its future success will be its ability
to develop and introduce in a timely and cost-effective manner enhancements to
its existing products and new products that will gain market acceptance. There
can be no assurance that the Company will be able to identify, develop,
manufacture, market or support new products or enhancements successfully, that
any such new products or enhancements will gain market acceptance, or that the
Company will be able to respond effectively to technological changes. There can
be no assurance that the Company will not encounter technical or other
difficulties that could delay introduction of new products in the future. If the
Company is unable to introduce new products or enhancements and respond to
industry changes on a timely basis, its business could be materially adversely
affected.
The market for automated software testing products is relatively new and
undeveloped. Marketing and sales techniques in the automated software testing
marketplace, as well as the bases for competition, are not well established.
There can be no assurance that a significant market for automated software
testing products will be developed or that the Company's products will be
accepted in any expanded market. Although the Company believes that the current
trend toward increased use of automated software testing will continue, a
majority of software testing is still carried out manually, and there can be no
assurance that the automated software market will enjoy continued growth.
The Company's current products and products under development are limited
in number and concentrated exclusively in the software testing market. The life
cycles of the Company's products are difficult to estimate due in large measure
to the recent emergence of the Company's market as well as the unknown future
effect of product enhancements and competition. Price reductions or declines in
demand for the Company's software testing products, whether as a result of
competition, technological change or otherwise, would have a materially adverse
effect on the Company's results of operations or financial position.
The Company faces direct competition from a few public and several
privately-held companies in the United States and Europe. The market for
software products in general is highly competitive and the Company faces
competition from established and emerging companies. There could be a materially
adverse effect on the Company's results of operations or financial position if
any of the major software manufacturers, which have significantly greater
resources than the Company, decided to devote substantial resources to entering
the software testing market or if there is an increase in developing testing
utilities internally by the Company's customers or potential customers. A
variety of external and internal factors could materially adversely affect the
Company's ability to compete. These include the relative functionality,
price/performance and reliability of the products offered by the Company and its
competitors, the timing and success of new product development or enhancement
efforts of the Company and its competitors and the effectiveness of the
marketing efforts of the Company and its competitors. There can be no assurance
that the Company will be able to compete successfully in the future or that
competitive pressures will not materially adversely affect the Company's
business.
The Company may from time to time experience significant fluctuation in
quarterly operating results due to a variety of factors. Such fluctuations in
quarterly operating results may occur in the future due to many factors, some of
which are outside the Company's control. Products are generally shipped as
orders are received, and, consequently, quarterly sales and operating results
depend primarily on the volume and the timing of orders received during the
quarter, which are difficult to forecast. If revenues do not materialize in a
quarter as expected, the Company's results from operations for that quarter are
likely to be materially adversely affected. A significant portion of the
Company's operating expenses are relatively fixed, and planned expenditures are
based on sales forecasts. All of the foregoing may result in unanticipated
quarterly earning shortfalls or losses. Accordingly, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
Sales to customers located outside the United States have historically
accounted for a significant percentage of revenue and the Company anticipates
that such sales will continue to be a significant percentage of the Company's
total revenue. Accordingly, such factors as currency fluctuations, political and
economic instability and trade restrictions could have a negative impact on the
Company's financial performance. The Company is in the process of strengthening
its European sales organization to enhance that organization's contribution to
revenues. However, the success of these efforts is not assured and depends in
part on the Company's ability to attract, develop and retain successful sales
personnel in that region. If European revenues do not materialize in a quarter
as expected, the Company's results from operations for that quarter are likely
to be materially adversely affected. A significant portion of the Company's
operating expenses are relatively fixed, and planned expenditures are based on
sales forecasts. All of the foregoing may result in unanticipated quarterly
earning shortfalls or losses.
11
<PAGE>
Certain of the Company's sales are made in currencies other than the U.S.
Dollar and its financial results are reported in U.S. Dollars. Fluctuations in
the rates of exchange between the U.S. Dollar and other currencies may have a
materially adverse effect on the Company's results of operations or financial
position. To date, the Company has not hedged against currency translation
risks.
As part of its growth strategy, the Company may from time to time acquire
or invest in complementary businesses, products or technologies. For example,
during 1995, the Company acquired Blue Lagoon Software and EBY Semantica. While
there are currently no commitments with respect to any particular acquisition,
Company management frequently evaluates the strategic opportunity available
related to complimentary products, technologies or businesses. The process of
integrating an acquired company's business into the Company's operations may
result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for the
ongoing development of the Company's business. Moreover, there can be no
assurance that the anticipated benefits of any acquisition will be realized.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's operating
results and financial condition.
Since its inception, the Company has obtained royalty-bearing grants from
various Israeli government agencies. While the Company expects to receive
additional grants in the future, any such grants will likely decline as a
percentage of gross research and development spending and there can be no
assurance that the Company will receive any such grants. Termination or
substantial reduction of such grants or changes in revenue classification could
have a materially adverse effect on the Company. The terms of certain grants
prohibit the manufacture of products developed under these grants outside of
Israel, and the transfer of technology developed pursuant to the terms of these
grants to any person, without the prior written consent of the government of
Israel. As a result, if the Company is unable to obtain the consent of the
government of Israel, the Company may not be able to take advantage of strategic
manufacturing and other opportunities outside of Israel.
For each of the last four years, the Company has experienced continuing
annual increases in revenue. This growth has placed and, if it continues, will
place a significant strain on the Company's management, resources and
operations. To accommodate its recent growth, the Company is implementing a
variety of new or expanded business and financial systems, procedures
and controls, including the improvement of its accounting and other internal
management systems. There can be no assurance that the implementation of such
systems, procedures and controls can be completed successfully, or without
disruption of the Company's operations. If the Company's growth continues, the
company will be required to hire and integrate substantial numbers of new
employees. The market has become increasingly competitive both in the United
States and Israel and may require the Company to pay higher salaries. The
Company's failure to manage growth effectively could have a materially adverse
affect on the Company's results of operations or financial position.
12
<PAGE>
The Company's success depends to a significant extent on the performance of
its senior management and certain key employees. Competition for highly skilled
employees with technical, management and other specialized training is intense
in the computer industry. The Company's failure to attract additional qualified
employees or to retain the services of key personnel could materially adversely
affect the Company's business.
The Company currently relies on a combination of trademark, copyright and
trade secret laws and contractual provisions to protect its proprietary rights
in its products. The Company presently has no registered copyrights. The
Company has filed applications for patents, but there can be no assurance that
any of the Company's patent applications will result in an issued patent or
that, if issued, such patent would be upheld if challenged. There can be no
assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. There can also be no assurance that the measures taken by the
Company to protect its propriety rights will be adequate to prevent
misappropriation for the technology or independent development by others of
similar technology. In addition, the laws of various countries in which the
Company's products may be sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that third parties will not assert
intellectual property infringement claims against the Company or that any such
claims will not require the Company to enter into royalty or cross-license
arrangements or result in costly litigation.
In selling its products, the Company relies primarily on "shrink wrap"
licenses that are not signed by licensees. The provisions in such licenses
limiting the Company's exposure to potential product liability claims may
therefore be unenforceable under the laws of certain jurisdictions. Although
the Company has carried errors and omissions insurance against such
claims, there can be no assurance that such insurance will continue to be
available on acceptable terms, if at all, or that such insurance will provide
the Company with adequate protection against any such claims. Although the
Company has not experienced any product liability claims to date, the sale and
support of products by the Company may entail the risks of such claims. A
significant product liability claim against the Company could have a material
adverse affect upon the Company's business, financial condition and results of
operations.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. Past financial performance should not be
considered a reliable indicator of future performance, and investors should not
use historical trends to anticipate results or trends in future periods. If
revenues or earnings in any quarter fail to meet expectations of the investment
community, there could be an immediate and significant impact on the Company's
stock price. In addition, the company's stock price may be affected by broader
market trends that may be unrelated to the company's performance.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts of assets and liabilities,
disclosure of those assets and liabilities at the date of the financial
statements and the recorded amounts of expenses during the reporting period. A
change in the facts and circumstances surrounding these estimates could result
in a change to the estimates and impact future operating results.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments decreased to $79.6 million at
June 30, 1996 from $85.7 million at December 31, 1995. During the six months
ended June 30, 1996, the Company paid $7.3 million related to litigation and
costs related to the acquisition of Semantica of which $5.7 million had been
accrued at December 31, 1995. In addition, the Company received $1.6 million
from the issuance of Common Stock under employee stock option and purchase
plans. The Company used $2.5 million in cash for purchases of computers and
related equipment. The Company's short-term and long-term investments consist of
investments in high quality financial, government and corporate securities.
Assuming there is no significant change in the Company's business, the
Company believes that its current cash and investment balances and cash flow
from operations, will be sufficient to fund the Company's cash needs for at
least the next twelve months.
<PAGE>
MERCURY INTERACTIVE CORPORATION
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders
(a) The 1996 Annual Meeting of the Stockholders of Mercury Interactive
Corporation was held at the Company's offices at 470 Potrero
Avenue, Sunnyvale, California 94086 on May 1, 1996 at 2:00 p.m.
(b) At the Annual Meeting the following six persons were elected
to the Company's Board of Directors, constituting all members of
the Board of Directors
<TABLE>
<CAPTION>
Nominee Votes Broker Non-Votes
- ------------------- ---------- ----------------
<S> <C> <C>
Aryeh Finegold 12,185,011 10,875
Igal Kohavi 12,180,552 15,334
Amnon Landan 12,185,211 10,675
Standish O'Grady 11,782,925 412,961
Yair Shamir 12,185,211 10,675
Giora Yaron 12,179,958 15,928
</TABLE>
(c) The following additional proposals were considered at the Annual
Meeting and were approved according to the respective vote of the
stockholders.
(1) Ratification and approval of the appointment of Price
Waterhouse LLP as independent accountants of the Company for
the year ending December 31, 1996.
Cast For Against Abstentions Broker Non-Votes
---------- ------- ----------- ----------------
12,179,693 7,400 8,893 0
Item 6. Exhibits and Reports on Form 8-K
(a) 11.1 - Computation of net income (loss) per common share for the
three and six months ended June 30, 1996 and 1995.
27 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended June
30, 1996.
<PAGE>
SIGNATURES
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.
Date: August 14, 1996 MERCURY INTERACTIVE CORPORATION
(Registrant)
/s/ SHARLENE ABRAMS
-------------------
Sharlene Abrams
Vice-President of Finance and Administration,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
- -----------------
<TABLE>
<CAPTION>
Exhibit Description Sequentially
No. Numbered Page
<S> <C> <C>
11.1 Computation of net income (loss) per common share
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 11.1
MERCURY INTERACTIVE CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
(PRIMARY AND FULLY DILUTED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-----------------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding............................ 15,837 12,983 15,798 12,899
Weighted average common equivalent
shares from dilutive options(1)........ 727 0 770 0
------ ------ ------ -------
Weighted average common shares and
equivalents............................ 16,564 12,983 16,568 12,899
====== ====== ====== ======
Net income (loss)....................... 780 (1,845) 130 (808)
====== ====== ====== ======
Net income (loss) per share............. 0.05 (0.14) 0.01 (0.06)
====== ====== ====== ======
</TABLE>
(1) Common equivalent shares are excluded from the computation if their effect
is anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 41,334 0
<SECURITIES> 34,891 0
<RECEIVABLES> 12,827 0
<ALLOWANCES> 841 0
<INVENTORY> 878 0
<CURRENT-ASSETS> 95,387 0
<PP&E> 15,355 0
<DEPRECIATION> 5,470 0
<TOTAL-ASSETS> 109,623 0
<CURRENT-LIABILITIES> 15,341 0
<BONDS> 0 0
0 0
0 0
<COMMON> 32 0
<OTHER-SE> 94,250 0
<TOTAL-LIABILITY-AND-EQUITY> 109,623 0
<SALES> 9,350 17,950
<TOTAL-REVENUES> 12,100 23,100
<CGS> 709 1,205
<TOTAL-COSTS> 1,495 2,623
<OTHER-EXPENSES> 10,403 21,933
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 978 165
<INCOME-TAX> 198 35
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 780 130
<EPS-PRIMARY> 0.05 0.01
<EPS-DILUTED> 0.05 0.01
</TABLE>
