-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C1KHWgHie69JOil7XjmiVJ31VUnsjuT+bUrZTKYl/IoFDEOBcwtcF5UQdsUm6SwU Xc6k006q5gEszDKxKC1hPQ== 0001012870-97-001020.txt : 19970515 0001012870-97-001020.hdr.sgml : 19970515 ACCESSION NUMBER: 0001012870-97-001020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCURY INTERACTIVE CORPORATION CENTRAL INDEX KEY: 0000867058 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770224776 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22350 FILM NUMBER: 97605459 BUSINESS ADDRESS: STREET 1: 470 POTRERO AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4085239900 MAIL ADDRESS: STREET 1: 470 POTRERO AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1997 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. MERCURY INTERACTIVE CORPORATION ------------------------------- INDEX ----- 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. ---------------------------------------------------------------------- 2 PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Financial Statements MERCURY INTERACTIVE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except per share amounts) (unaudited)
March 31, December 31, 1997 1996 ---------- ------------ 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 ======== ========
See accompanying notes to condensed consolidated financial statements --------------------------------------------------------------------- 3 MERCURY INTERACTIVE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) (unaudited)
Three months ended March 31, 1997 1996 -------- ------- 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
See accompanying notes to condensed consolidated financial statements --------------------------------------------------------------------- 4 MERCURY INTERACTIVE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (in thousands) (unaudited)
Three months ended March 31, 1997 1996 ------- ------- 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
See accompanying notes to condensed consolidated financial statements --------------------------------------------------------------------- 5 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. 6 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 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 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 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 10 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. 11 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 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 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 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 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 EX-11.1 2 EXHIBIT 11.1 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)
Three months ended March 31, 1997 1996 ------ ------- 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) ======= =======
(1) Common equivalent shares are excluded from the computation if their effect is anti-dilutive. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 46,969 28,986 17,677 1,876 655 100,802 18,890 7,815 122,777 20,917 0 0 0 32 101,828 122,777 15,400 15,400 2,118 2,118 11,760 0 0 2,231 446 1,785 0 0 0 1,785 0.11 0.11
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