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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[_] 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.)
1325 Borregas Avenue, Sunnyvale, California 94089
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 822-5200
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,
1998 was 17,245,267.
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MERCURY INTERACTIVE CORPORATION
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INDEX
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page No.
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<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations -
Three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
</TABLE>
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PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited) (audited)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,135 $ 57,211
Short-term investments 39,065 31,357
Trade accounts receivable 19,960 23,782
Government grants and other receivables 5,786 3,606
Inventories 189 252
Other current assets 4,370 2,954
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Total current assets 129,505 119,162
Long-term investments 1,015 3,771
Property and equipment, net 22,947 19,292
Other assets 1,035 1,185
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$ 154,502 $ 143,410
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,049 $ 4,045
Accrued liabilities 15,456 15,411
Deferred revenue 13,941 10,967
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Total current liabilities 34,446 30,423
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Commitments and contingencies
Stockholders' equity:
Common stock 34 33
Capital in excess of par value 111,902 107,800
Cumulative translation adjustment (284) (424)
Retained earnings 8,404 5,578
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Total stockholders' equity 120,056 112,987
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$154,502 $ 143,410
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</TABLE>
See accompanying notes to condensed consolidated financial statements
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MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
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<S> <C> <C>
Revenue:
License $ 15,600 $ 11,283
Service 6,600 4,117
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Total revenue 22,200 15,400
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Cost of revenue:
License 1,329 904
Service 2,334 1,214
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Total cost of revenue 3,663 2,118
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Gross profit 18,537 13,282
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Operating expenses:
Research and development, net 3,023 2,556
Marketing and selling 10,983 7,774
General and administrative 1,849 1,430
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Total operating expenses 15,855 11,760
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Income from operations 2,682 1,522
Other income, net 850 709
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Income before provision for income
taxes 3,532 2,231
Provision for income taxes 706 446
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Net income $ 2,826 $ 1,785
======= ========
Net income per share (basic) $ 0.17 $ 0.11
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Net income per share (diluted) $ 0.15 $ 0.11
======= ========
Weighted average common shares (basic) 16,992 16,137
Weighted average common shares
and equivalents (diluted) 19,141 16,644
</TABLE>
See accompanying notes to condensed consolidated financial statements
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MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
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<S> <C> <C>
Net cash provided by operating activities $ 8,270 $ 5,714
Cash flows from investing activities:
Investment purchases, net (4,952) (2,711)
Acquisition of property and equipment (4,637) (1,407)
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Net cash used in investing activities (9,589) (4,118)
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Cash flows from financing activities:
Proceeds from issuance of common stock 4,103 1,298
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Net cash provided by financing activities 4,103 1,298
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Effect of exchange rate changes on cash 140 (262)
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Net increase (decrease) in cash and cash equivalents (2,924) 2,632
Cash and cash equivalents at beginning of period 57,211 44,337
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Cash and cash equivalents at end of period $ 60,135 $ 46,969
======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements
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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, 1997, included in the 1997 Form
10-K. The condensed consolidated statement of operations for the three
months ended March 31, 1998 is not necessarily indicative of results to be
expected for the entire fiscal year ending December 31, 1998.
2. The portfolio of short and long-term investments is carried at amortized
cost as of the balance sheet date and 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 "held to maturity" securities. The
investments, which all have contractual maturities of less than two years,
are carried at amortized cost plus accrued interest. Realized gains or
losses are determined based on the specific identification method and are
reflected in other income.
3. The effective tax rate for the three months ended March 31, 1998 differs
from statutory tax rates principally because of special reduced taxation
programs sponsored by the government of Israel.
4. 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 $802,000 and $676,000 in the first quarter ended March 31, 1998
and 1997, 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 $525,000 and $414,000 for the quarters ended March 31, 1998
and 1997, respectively. As of March 31, 1998, the Company is committed to
pay, if and when incurred, approximately $4.5 million in royalties.
5. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity classify
items of other comprehensive earnings by their nature in an annual
financial statement. Net exchange gains or losses resulting from the
translation of assets and liabilities of foreign subsidiaries, except those
in highly inflationary economies, are accumulated in a separate section of
stockholders' equity titled, "Cumulative translation adjustments." Also
included are the effects of exchange rate changes on the intercompany
transactions of a long-term investment nature.
An analysis of this account follows:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
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<S> <C> <C>
Opening balance $(424) $ (99)
Translation adjustments 140 (262)
---- ----
Ending balance $(284) $(361)
</TABLE>
6
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6. Earnings per share are calculated in accordance with the provisions of
Statement of Accounting Standards No. 128, "Earnings per Share," (SFAS
128). SFAS 128 requires the Company to report both basic earnings per
share, which is the weighted-average number of common shares outstanding,
and diluted earnings per share, which includes the weighted-average common
shares outstanding and all dilutive potential common shares outstanding.
All periods presented herein have been restated to reflect the adoption of
SFAS 128. For the quarters ended March 31, 1998 and 1997, dilutive
potential common shares outstanding reflects shares issuable under the
Company's stock option plans. The following table summarizes the Company's
earnings per share computations for the quarters ended March 31, 1997 and
1998:
<TABLE>
<CAPTION>
Net Average Earnings
income shares per share
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<S> <C> <C> <C>
March 31, 1997:
Basic earnings per share.... $1,785 16,137 $0.11
Dilutive adjustments........ 507
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Diluted earnings per share.. $1,785 16,644 $0.11
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March 31, 1998:
Basic earnings per share.... $2,826 16,992 $0.17
Dilutive adjustments........ 2,149
------ ------
Diluted earnings per share.. $2,826 19,141 $0.15
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</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains descriptions of the Company's expectations
regarding future trends affecting its business. These forward looking
statements and other forward looking statements made elsewhere in this document
are made in reliance upon the safe harbor provision of the Private Securities
Litigation Reform Act of 1995. Please read the section below titled "Factors
that may affect future results" to review conditions which the Company believes
could cause actual results to differ materially from those contemplated by the
forward looking statements. Forward looking statements include, but are not
limited to, those items identified with a footnote symbol. The Company
undertakes no obligation to update the information contained herein.
RESULTS OF OPERATIONS
REVENUE
License revenue increased 38% to $15.6 million during the first quarter of
1998 from $11.3 million in the first quarter of 1997. The Company's growth in
license revenue was primarily attributable to growth in license fees from the
LoadRunner, WinRunner and TestDirector products. License revenue in the first
quarter of 1998 also benefited from the Company's alternate distribution
channels, such as referral partners, system integrators and value added
resellers. Revenue generated through alternate channels represented
approximately 49% and 41% of license fees during the quarters ended March 31,
1998 and 1997, respectively.
Service revenue increased to $6.6 million or 30% of total revenue in the
first quarter of 1998 from $4.1 million or 27% of total revenue in the first
quarter of 1997. This increase in service revenue in 1998 compared to 1997 was
primarily due to the renewal of maintenance contracts and an increase in
training and consulting revenue. The Company expects that service revenue will
continue to increase in absolute dollars as long as the Company's customer base
continues to grow./1/
International revenue represented 35% of total revenue in the quarters
ended March 31, 1998 and 1997. The Company expects international revenue to
continue to increase in absolute dollars, however, achievement of these results
cannot be assured. /1/
COST OF REVENUE
License cost of revenue, as a percentage of license revenue, increased to
9% in the first quarter of 1998 from 8% in the first quarter of 1997. License
cost of revenue includes cost of production personnel, product packaging and
amortization of capitalized software development costs.
Service cost of revenue, as a percentage of service revenue was 35% in the
first quarter of 1998 compared to 29% in the first quarter of 1997. Service
cost of revenue consists primarily of costs of providing customer technical
support, training and consulting. The increased service cost of revenue in the
first quarter of 1998 reflects increased outsourcing of training and consulting.
RESEARCH AND DEVELOPMENT
For the quarter ended March 31, 1998, research and development, net was
$3.0 million, or 14% of total revenue, compared to $2.6 million, or 17% of total
revenue in the first quarter of 1997. The increase in spending reflects
increased personnel costs partially offset by foreign currency translation
benefit on expenses incurred in shekels in Israel.
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 $802,000 and $676,000 in the quarters ended March 31, 1998 and 1997,
respectively. These grants are accounted for using the cost reduction method,
under which research
___________________________________
/1/ Forward looking statement
8
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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 $525,000 and $414,000 for the quarters ended March 31, 1998 and
1997, respectively. As of March 31, 1998, the Company is committed to pay, if
and when incurred, $4.5 million in royalties.
During the quarter ended March 31, 1998, the Company did not capitalize any
software development costs. The Company capitalized $150,000 of software
development costs during the first quarter ended March 31, 1997, in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Amortization charges included in cost of license revenues were $150,000 in each
of the quarters ended March 31, 1998 and 1997. At March 31, 1998 and December
31, 1997, the Company had a balance in capitalized software development costs of
approximately $1.0 million and $1.2 million, respectively.
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./1/ 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 or will not be rendered obsolete by
future technology acquisitions or development./1/ 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 were $11.0 million, or 49% of total revenue
in the quarter ended March 31, 1998, compared to $7.8 million, or 50% of total
revenue in the quarter ended March 31, 1997. The increase in absolute dollars
in marketing and selling expense was primarily due to an increase in commission
expense attributable to the higher revenue level and other personnel-related
costs reflecting the growth in sales headcount. The Company expects marketing
and selling expenses to increase in absolute dollars as total revenue increases,
but such expenses may vary as a percentage of revenue./1/
GENERAL AND ADMINISTRATION
General and administrative expenses were $1.8 million or 8% of total
revenue in the quarter ended March 31, 1998, compared to $1.4 million or 9% of
total revenue in the quarter ended March 31, 1997. The increase in absolute
dollars reflected increased personnel and information systems costs.
OTHER INCOME, NET
Other income, net consists primarily of interest income and foreign
exchange gains and losses. The increase in other income, net to $850,000 in the
quarter ended March 31, 1998, from $709,000 in the quarter ended March 31,
1997, reflected increased interest income on higher average cash and investment
balances in the quarter ended March 31, 1998.
PROVISION FOR INCOME TAXES
The Company participates in special programs sponsored by the government of
Israel relating to taxation, contributing to significant lower income tax
expense than expected based on the U.S. federal income tax rate. Future
provisions for taxes will depend upon the mix of worldwide income and the tax
rates in effect for various tax jurisdictions.
NET INCOME
_________________________________
/1/ Forward looking statement
9
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The Company reported net income of $2.8 million in the quarter ended March
31, 1998, compared to net income of $1.8 million in the quarter ended March 31,
1997. 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./1/ 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some,
but not all, of those risks and uncertainties which may have a material adverse
effect on the Company's business, financial condition or results of operations.
This section should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and Notes thereto included in Part I - Item 1
of this Quarterly Report on Form 10-Q and the audited Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1997, contained in the Company's 1997 Form 10-K. The Company has identified
certain forward looking statements in the Management's Discussion and Analysis
of Financial Condition and Results of Operations with a footnote symbol. The
Company may also make oral forward looking statements from time to time. Actual
results may differ materially from those projected in any such forward looking
statements due to a number of factors, including those set forth below and
elsewhere in this Form 10-Q.
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
not well penetrated. 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 continue to expand 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./1/
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 material
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
________________________________
/1/ Forward looking statement
10
<PAGE>
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 a quarter, up to the
last few days of a 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. In addition, product orders are affected by the
buying patterns of customers. The buying trends of customers are further
impacted by internal budgetary considerations relating to Year 2000 remediation
efforts. 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 market for software products, in general, is highly competitive. The
Company continues to face direct competition from established and emerging
companies, both publicly and privately-held. In the past eighteen months, a
number of the Company's competitors have been consolidated through acquisitions
and may have significantly greater resources than the Company. There could be a
material 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./1/ Accordingly, such factors as currency fluctuations, political
and economic instability and trade restrictions could have a negative impact on
the Company's financial performance.
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
material adverse effect on the Company's results of operations and financial
position. The Company attempts to limit these exposures through operational
strategies and generally has not hedged currency exposures.
As part of its growth strategy, the Company may, from time to time, acquire
or invest in complementary businesses, products or technologies. For example, in
the third quarter of 1997, the Company purchased certain technologies which the
Company plans to integrate into the next version of the Company's products.
While there are currently no commitments with respect to any particular
acquisition or investment, the Company's management frequently evaluates the
strategic opportunity available related to complimentary businesses, products or
technologies. 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 or investment will be realized. Future acquisitions or investments
by the Company could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, amortization
expenses related to goodwill and other intangible assets, any of which could
materially adversely affect the Company's operating results and financial
condition.
_________________
/1/ Forward looking statement
11
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Since its inception, the Company has obtained royalty-bearing grants from
various Israeli government agencies. The Company expects to receive additional
grants in the future./1/ 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 material 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 material 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 three patents for elements 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 of 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 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
____________________
/1/ Forward looking statement
12
<PAGE>
stock price may be affected by broader market trends that may be unrelated to
the Company's performance.
The approach of Year 2000 presents significant issues for many computer
systems, since much of the software in use today may not accurately process data
beyond 1999. The Company has recently implemented new information systems and
accordingly does not anticipate any internal Year 2000 issues from its own
information systems, databases or programs./1/ However, the Company could be
adversely impacted by Year 2000 issues faced by major distributors, suppliers,
customers, vendors and financial service organizations with which the Company
interacts. The Company is currently taking steps to address the impact, if any,
of the Year 2000 issue on the operations of the Company. There can be no
assurances that the Company will be able to detect all potential failures of the
Company's and/or third parties' computer systems. A significant failure of the
Company's or a third party's computer system could have a material adverse
effect on the Company's business, financial condition and result of operations.
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
At March 31, 1998, the Company's short-term and long-term investments
consisted of investments in high-quality financial, government and corporate
securities. Cash, cash equivalents and investments increased to $100.2 million
at March 31, 1998, from $92.3 million at December 31, 1997. During the quarter
ended March 31, 1998, the Company generated approximately $8.3 million from
operations due primarily to profits from operations, collection of trade
receivables and an increase in deferred revenue. In addition, during the
quarter ended March 31, 1998, the Company received $4.1 million from the
issuance of Common Stock under the employee stock option and purchase plans.
During the quarter ended March 31, 1998, the Company's primary investing
activities were purchases of property and equipment totaling $4.6 million. This
included $2.0 million for improvements to the Company's new headquarters
building in Sunnyvale, California and $850,000 for construction of a new
research and development facility in Israel. The Company expects to spend an
additional $7.2 million to complete construction of the Israel facility before
relocating its Israel subsidiary there in 1999.
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./1/
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has an investment portfolio of fixed income securities that are
classified as "held to maturity" securities. These securities, like all fixed
income instruments, are subject to interest rate risk and will fall in value if
market interest rates increase. The Company attempts to limit this exposure by
investing primarily in short-term securities.
________________________
/1/ Forward looking statement
13
<PAGE>
MERCURY INTERACTIVE CORPORATION
PART II. OTHER INFORMATION
- --------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1998.
14
<PAGE>
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.
Date: May 15, 1998 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
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 60,135,000
<SECURITIES> 40,080,000
<RECEIVABLES> 21,979,000
<ALLOWANCES> 2,019,000
<INVENTORY> 189,000
<CURRENT-ASSETS> 129,505,000
<PP&E> 34,539,000
<DEPRECIATION> 11,592,000
<TOTAL-ASSETS> 154,502,000
<CURRENT-LIABILITIES> 34,446,000
<BONDS> 0
0
0
<COMMON> 34,000
<OTHER-SE> 111,618,000
<TOTAL-LIABILITY-AND-EQUITY> 154,502,000
<SALES> 0
<TOTAL-REVENUES> 22,200,00
<CGS> 3,663,000
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<INTEREST-EXPENSE> 850,000
<INCOME-PRETAX> 3,532,000
<INCOME-TAX> 706,000
<INCOME-CONTINUING> 2,826,000
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