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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 MARCH 31, 1997
[_] 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 April 30,
1997 was 16,234,945.
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MERCURY INTERACTIVE CORPORATION
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INDEX
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PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statement of Operations -
Three months ended March 31, 1997 and 1996 4
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 1997 and 1996 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 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBITS INDEX 16
See accompanying notes to condensed consolidated financial statements.
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 46,969 $ 44,337
Short-term investments (Note 2) 28,986 26,686
Trade accounts receivable (net of allowances
of $1,876 and $1,136) 15,801 18,503
Government grant and other receivables 5,031 3,139
Inventories 655 560
Prepaid expenses and other assets 3,360 3,307
-------- --------
Total current assets 100,802 96,532
Long-term investments (Note 2) 9,365 8,954
Property and equipment, net 11,075 10,413
Deposits and other assets 1,535 1,590
-------- --------
$122,777 $117,489
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,238 1,859
Accrued liabilities 9,301 8,782
Deferred revenue 8,378 7,809
-------- --------
Total current liabilities 20,917 18,450
-------- --------
Commitments and contingencies (Notes 5 and 6)
Stockholders' equity:
Common stock, par value $.002 per share, 25,000 shares
authorized; 16,234 and 16,056 shares issued and outstanding 32 32
Capital in excess of par value 101,533 100,235
Cumulative translation adjustment (361) (99)
Retained earnings (accumulated deficit) 656 (1,129)
-------- --------
Total stockholders' equity 101,860 99,039
-------- --------
$122,777 $117,489
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
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MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
-------- -------
<S> <C> <C>
Revenue:
License $11,283 $8,600
Service 4,117 2,400
------- ------
Total revenue 15,400 11,000
------- ------
Cost of revenue:
License 904 496
Service 1,214 632
------- ------
Total cost of revenue 2,118 1,128
------- ------
Gross profit 13,282 9,872
------- ------
Operating expenses:
Research and development 2,818 2,170
Less: grants (676) (637)
------- ------
Research and development, net 2,142 1,533
Marketing and selling 8,188 6,590
General and administrative 1,430 807
Settlement of litigation --- 2,600
------- ------
Total operating expenses 11,760 11,530
Income (loss) from operations 1,522 (1,658)
Other income, net 709 845
------- ------
Income before provision for income taxes 2,231 (813)
Provision (benefit) for income taxes 446 (163)
------- ------
Net income (loss) $ 1,785 $ (650)
======= ======
Net income (loss) per share $ 0.11 $(0.04)
======= ======
Weighted average common shares and equivalents 16,644 15,759
</TABLE>
See accompanying notes to condensed consolidated financial statements
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MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,785 $ (650)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 895 903
Net changes in assets and liabilities:
Trade accounts receivable 2,702 2,065
Government grant and other receivables (1,892) 428
Inventories (95) (57)
Prepaid expenses, deposits and other assets (148) (402)
Accounts payable 1,379 728
Accrued liabilities (including in 1996 the payment of litigation-related 519 (5,805)
accruals of $2,000 and acquisition and restructuring accruals of $3,672)
Deferred revenue 569 (225)
------- -------
Net cash provided by (used in) operating activities 5,714 (3,015)
------- -------
Cash flows from investing activities:
Investment (purchases) proceeds, net (2,711) 4,669
Acquisition of property and equipment (1,407) (1,376)
------- -------
Net cash (used in) provided by investing activities (4,118) 3,293
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,298 484
------- -------
Net cash provided by financing activities 1,298 484
------- -------
Effect of exchange rate changes on cash (262) (36)
------- -------
Net increase in cash and cash equivalents 2,632 726
Cash and cash equivalents at beginning of period 44,337 45,850
------- -------
Cash and cash equivalents at end of period $46,969 $46,576
======= =======
Cash paid during the period for income taxes: $ 63 $ 627
</TABLE>
See accompanying notes to condensed consolidated financial statements
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5
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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, 1996, included in the 1996
Annual Report and Form 10-K. The condensed consolidated statement of
operations for the three months ended March 31, 1997 is not necessarily
indicative of results to be expected for the entire fiscal year ending
December 31, 1997. 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 consists 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 three months ended March 31, 1997 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 $676,000 and $407,000 in the first quarter ended March 31, 1997
and 1996, respectively. 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 $414,000 and $230,000 for the quarters ended March 31, 1997
and 1996, respectively. As of March 31, 1997, the Company is committed to
pay, if and when earned, approximately $3.6 million in royalties.
During the first quarter ended March 31, 1996, the Company received grants
totaling $230,000 for research and development projects from the Israel-
U.S. Binational Industrial Research and Development Foundation ("BIRD-F").
The Company did not receive any grants from "BIRD-F" during the first
quarter of 1997. 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. The Company did not record any royalty
expense under BIRD-F projects for the quarters ended March 31, 1997 and
1996. As of March 31, 1997, the Company is committed to pay, if and when
earned, approximately $1.3 million in royalties.
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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
$80,000 and $187,000 for the quarters ended March 31, 1997 and 1996,
respectively. As of March 31, 1997, the Company is committed to pay, if and
when earned, approximately $470,000 in royalties.
7. In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (FAS 128), "Earnings Per Share." The statement simplifies the
standards for computing earnings per share (EPS) previously found in APB
Opinion No. 15, "Earnings Per Share," and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the financial statements for all
entities with complex capital structures. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS is computed similarly to fully diluted EPS under APB Opinion
No. 15. FAS 128 becomes effective for all periods, including interim
periods, ending on or after December 15, 1997. FAS 128 would not have had
an impact on the Company's EPS computation for the periods ended March 31,
1997 and 1996.
7
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
REVENUE
License revenue increased 31% to $11.3 million during the first quarter of
1997 from $8.6 million in the first quarter of 1996. The Company's growth in
license revenue is due to the continuing growth in sales of Windows and NT based
products. During the quarter ended March 31, 1997, the Company released new
Web-related products as well as new versions of its WinRunner and LoadRunner
products for SAP's R/3 environment which also contributed to the growth in
license revenue. License revenue in the first quarter of 1997 benefited 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 41% and 30% of
license fees during the quarters ended March 31, 1997 and 1996, respectively.
Service revenue increased to $4.1 million or 27% of total revenue in the
first quarter of 1997 from $2.4 million or 22% of total revenue in the first
quarter of 1996. This increase in service revenue in 1997 compared to 1996 is
primarily attributable to the growth of the Company's installed customer base,
the renewal of maintenance contracts and an increase in training and consulting
revenue. The Company expects that support services as a source of revenue will
continue to increase as long as the Company's customer base continues to grow.
International revenue for each of the quarters ended March 31, 1997 and
1996, represented approximately 37% of total revenue. The increase in
international revenue results primarily from additional revenue in Europe.
COST OF REVENUE
License cost of revenue, as a percentage of license revenue, increased to
8% in the first quarter of 1997 from 6% in the first quarter of 1996. The
increase in the first quarter of 1997 is partially due to amortization of
capitalized software development costs. License cost of revenue consists
primarily of employee-related costs including salaries, travel and equipment
depreciation.
Service cost of revenue, as a percentage of service revenue was 29% in the
first quarter of 1997 compared to 26% in the first quarter of 1996. The
increased service cost of revenue in the first quarter of 1997 reflects
increases in technical support headcount to support the growth in the customer
base. 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 $2.8 million or 18% of total revenue in the first quarter of 1997
from $2.2 million or 20% of total revenue in the first quarter of 1996. The
increase in research and development expenses is attributable to increases in
personnel related expenses, including depreciation of equipment purchased to
support the expanded research and development staff.
The Company capitalized $150,000 and $250,000 of software development costs
during the first quarter ended March 31, 1997 and 1996, 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 capitalized costs in the second quarter of 1996. During the quarter
ended March 31, 1997, the Company recorded $150,000 of amortization expense. At
March 31, 1997 and December 31, 1996, the Company had a balance in capitalized
software development costs of approximately $1.5 million.
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 $676,000 and $407,000 in the quarters ended March 31, 1997 and 1996,
respectively. 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
8
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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 $414,000 and $230,000
for the quarters ended March 31, 1997 and 1996, respectively. As of March 31,
1997, the Company is committed to pay, if and when earned, $3.6 million in
royalties.
During the first quarter ended March 31, 1996, the Company received grants
totaling $230,000 for research and development projects from the Israel-U.S.
Binational Industrial Research and Development Foundation ("BIRD-F"). The
Company did not receive any grants from "BIRD-F" during the first quarter of
1997. 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
quarter ended March 31, 1997 and 1996. As of March 31, 1997, 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 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 AND SELLING
Marketing and selling expenses increased to $8.2 million, or 53% of total
revenue in the quarter ended March 31, 1997, from $6.6 million, or 60% of total
revenue in the quarter ended March 31, 1996. The increase in expenses relates
to increases in personnel in the marketing and sales departments to 136
employees at March 31, 1997 from 98 employees at March 31, 1996. The Company
expects marketing and selling expenses to increase in absolute dollars as total
revenue increases.
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 $80,000 and $187,000 for the
quarters ended March 31, 1997 and 1996, respectively. As of March 31, 1997, the
Company is committed to pay, if and when earned, approximately $470,000 in
royalties.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to $1.4 million or 9.3% of
total revenue in the quarter ended March 31, 1997, from $807,000 or 7.3% of
total revenue in the quarter ended March 31, 1996. This increase reflects
infrastructure investments to support the growth of the Company, including
increases in personnel related costs of approximately $250,000 and increased
costs related to worldwide information systems, telecommunications and insurance
of approximately $270,000.
OTHER INCOME, NET
Other income, net consists primarily of interest income and foreign
exchange gains and losses. In the quarters ended March 31, 1997 and 1996, the
Company earned interest income on its investments in money market accounts and
marketable securities, which consist of investments in high-quality financial,
government and corporate
9
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securities. The decrease in other income, net to $709,000 in the quarter ended
March 31, 1997, from $845,000 in the quarter ended March 31, 1996, reflects
higher interest income on higher average cash and investment balances in the
quarter ended March 31, 1996.
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 $446,000 in the
quarter ended March, 31, 1997, compared to a benefit of $163,000 in the quarter
ended March 31, 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 $1.8 million in the quarter ended March
31, 1997, compared to a net loss of $650,000 in the quarter ended March 31,
1996. The loss in the first quarter of 1996 included a charge for a litigation
settlement of $2.1 million (net of taxes). 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 revenue does 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
revenue because only a small portion of the Company's expenses varies with its
revenue.
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 the caption "Revenue," the first sentence of the fifth paragraph under the
caption "Research and development," the last sentence of the first paragraph
under the caption "Marketing and selling," the sentence under the caption
"Inflation," the fourth sentence in the paragraph under the caption "Net income
(loss)" and the last sentence of the second paragraph and the third 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 "Revenue,"
"Research and development," "Marketing and selling," "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 continue 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
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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 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 of 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 timing of orders received during the quarter,
which are difficult to forecast. In particular, the Company has historically
received a substantial portion of its orders at the end of the quarter. If an
unanticipated order shortfall occurs at the end of a quarter, the Company's
operating results for the quarter could 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.
The Company faces direct competition from several public and privately-held
companies. 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.
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 continuing to strengthen
its European sales organization in order to enhance that organization's
contribution to revenue. However, the success of these efforts is not assured
and depends, in part, on the Company's ability to develop and retain successful
sales personnel in that region. If European revenue does 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.
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 and financial
position. To date, the Company has not hedged against currency translation
risks.
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As part of its growth strategy, the Company may from time to time acquire
or invest in complementary businesses, products or technologies. 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.
Since 1991, the Company has experienced significant 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 effect on the Company's results of
operations or financial position.
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, including sales, technical and management personnel, 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 holds one patent for an element contained in certain of its products,
and it has filed several other U.S. and foreign patent applications on various
elements of its products. 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 frequently relies 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
12
<PAGE>
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 risk of such claims. A significant
product liability claim against the Company could have a material adverse effect
upon the Company's business, financial condition and results of operations.
The Company's stock price has been and will continue to be 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments increased to $85.3 million at March
31, 1997, from $80.0 million at December 31, 1996. The Company generated
approximately $5.7 million from operations due primarily to profits from
operations and collection of trade receivables. In addition, the Company
received $1.3 million from the issuance of Common Stock under employee stock
option and purchase plans. The Company used $1.4 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.
During the quarter ended March 31, 1997, the Company began plans for the
construction of a research and development facility on land previously purchased
in Israel. As of March 31, 1997, the Company had commitments of approximately
$600,000 related to preliminary work on the facility. The Company expects to
make additional capital expenditures for the facility over the next eighteen
months.
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.
13
<PAGE>
MERCURY INTERACTIVE CORPORATION
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) 11.1 - Computation of net income (loss) per common share for the
three months ended March 31, 1997.
27 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1997.
14
<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: May 14, 1997 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)
15
<PAGE>
INDEX TO EXHIBITS
- -----------------
Exhibit Sequentially
No. Description Numbered Page
11.1 Computation of net income (loss) per common share 17
27. Financial Data Schedule 18
16
<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
March 31,
1997 1996
------ -------
<S> <C> <C>
Weighted average common shares outstanding 16,137 15,759
Weighted average common equivalent shares from dilutive
options (1) 507 ---
------- -------
Weighted average common shares and equivalents $16,644 $15,759
======= =======
Net income (loss) $ 1,785 $ (650)
======= =======
Net income (loss) per share $ 0.11 $ (0.04)
======= =======
</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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 46,969
<SECURITIES> 28,986
<RECEIVABLES> 17,677
<ALLOWANCES> 1,876
<INVENTORY> 655
<CURRENT-ASSETS> 100,802
<PP&E> 18,890
<DEPRECIATION> 7,815
<TOTAL-ASSETS> 122,777
<CURRENT-LIABILITIES> 20,917
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 101,828
<TOTAL-LIABILITY-AND-EQUITY> 122,777
<SALES> 15,400
<TOTAL-REVENUES> 15,400
<CGS> 2,118
<TOTAL-COSTS> 2,118
<OTHER-EXPENSES> 11,760
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,231
<INCOME-TAX> 446
<INCOME-CONTINUING> 1,785
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,785
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
