8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): January 21, 2004

Mercury Interactive Corporation

(Exact name of registrant as specified in its charter)

Delaware	0-22350	77-0224776
(State or other jurisdiction of incorporation)	(Commission File No.)	(IRS Employer Identification No.)

1325 Borregas Avenue, Sunnyvale, California 94089

(Address of Principal Executive Offices)

(408) 822-5200

(Registrant’s Telephone Number, Including Area Code)

Item 7.    Exhibits

The following exhibit is furnished herewith:

99.1    Press release dated January 21, 2004

Items 12.    Results of Operations and Financial Condition

On January 21, 2004, Mercury Interactive Corporation issued a press release announcing financial results for its quarter ended and the year ended December 31, 2003. A copy of the press release is furnished as Exhibit 99.1 to this report. This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the company, whether made before or after the date of this report, regardless of any general incorporation language in the filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: January 21, 2004	MERCURY INTERACTIVE CORPORATION
	By:	/S/    SUSAN J. SKAER
	Name:	Susan J. Skaer
		Vice President, General Counsel and Secretary

EXHIBIT INDEX

Exhibit No.	Description
99.1	The following exhibit is furnished herewith: Press release dated January 21, 2004

EX-99.1

Exhibit 99.1

Investor Relations Contact

Michelle Levine, 408-822-5464

Public Relations Contact

Dave Peterson, 408-822-5231

MERCURY INTERACTIVE REPORTS FOURTH QUARTER AND 2003 RESULTS

· Record Revenue of $152.0 million for the quarter and $506.5 million for 2003

· Net Increase in Deferred Revenue: $54.6 million for the quarter and $121.2 million for 2003

· Earnings Per Share for the quarter: $0.14 GAAP; $0.27 Non-GAAP

· Earnings Per Share for the year ended 2003: $0.45 GAAP; $0.93 Non-GAAP

SUNNYVALE, CALIF. — JANUARY 21, 2004 — Mercury Interactive Corporation (NASDAQ: MERQ), the global leader in business technology optimization (BTO), today reported results for the fourth quarter and year ended December 31, 2003.

Revenue for the fourth quarter of 2003 was $152.0 million, an increase of 29 percent compared to $117.8 million reported in the fourth quarter of 2002. For the year ended December 31, 2003 revenue was $506.5 million, an increase of 27 percent compared to $400.1 million reported for the year ended December 31, 2002.

Deferred revenue for the fourth quarter of 2003 increased by $54.6 million from the third quarter of 2003 to $280.6 million. Cash generated from operations for the fourth quarter of 2003 was $66.9 million compared to $40.9 million in the fourth quarter of 2002.

GAAP RESULTS

Net income for the fourth quarter of 2003 was $13.1 million, or $0.14 per diluted share, compared to $18.8 million, or $0.21 per diluted share, for the same period a year ago. GAAP results for the fourth quarter include an executive severance charge of $6.6 million, stock-based compensation and amortization of intangible assets of $4.2 million, restructuring, integration and other related charges of $1.1 million and net loss on investments in non-consolidated companies of $2.2 million. For the year ended December 31, 2003, net income was $41.5 million, or $0.45 per diluted share compared to $65.2 million, or $0.74 per diluted share, for the year ended December 31, 2002. The results for the year ended 2003 include an executive severance charge of $6.6 million, $16.9 million of non-cash impairment

Mercury Interactive Reports Fourth Quarter and 2003 Results Page  2

charges related to real estate consolidation, stock-based compensation and amortization of intangible assets of $8.4 million, acquisition, restructuring, integration and other related charges of $15.4 million and net loss on investments in non-consolidated companies of $2.2 million.

NON-GAAP RESULTS

Net income for the fourth quarter of 2003 was $26.2 million, or $0.27 per diluted share, compared to $23.4 million, or $0.27 per diluted share, for the same period a year ago. Non-GAAP earnings per share for the fourth quarter of 2003 are calculated using fully diluted shares of 97.0 million. Net income for the year ended December 31, 2003 was $86.1 million, or $0.93 per diluted share, compared to $62.9 million, or $0.72 per diluted share, for the year ended December 31, 2002. Non-GAAP results for 2003, as presented in the attached reconciliation table, exclude the following recurring items: acquisition, restructuring, integration and other related charges, asset impairment charges related to real estate, gain on early retirement of debt, stock-based compensation and amortization of intangible assets, net loss on investments in non-consolidated companies as well as related income tax provisions or benefits. Also excluded is a non-recurring charge associated with executive severance.

“The fourth quarter capped off an impressive year of growth for Mercury with record revenues, record deferred revenue growth, and record cash flow from operations,” said Amnon Landan, chairman and CEO at Mercury Interactive Corporation. “Our customers are adopting the new Mercury Optimization Centers as they take an enterprise approach to Business Technology Optimization.”

Q4 2003 HIGHLIGHTS

· Record 19 transactions greater than $1.0 million in the fourth quarter

· Record 51% of new product orders as term licenses

· Record net increase in deferred revenue of $54.6 million, principally from term licenses

· Record results in Application Management and Application Delivery new orders and revenue

· IT governance (formerly Kintana) orders exceeded management expectations

Mercury Interactive Reports Fourth Quarter and 2003 Results Page  3

FINANCIAL OUTLOOK

The following financial outlook is provided based on information as of January 21, 2004. Management provides the following guidance for the quarter ending March 31, 2004:

· New order growth is expected to be in the range of 22 percent to 27 percent

· Term licenses are expected to be in the range of 45 percent to 50 percent of new product orders

· Revenue is expected to be in the range of $145.0 million to $155.0 million

· Net increase in deferred revenue is expected to be in the range of $10.0 million to $20.0 million

· GAAP diluted earnings per share is expected to be in a range of $0.12 to $0.18

· Non-GAAP diluted earnings per share is expected to be in the range of $0.17 to $0.23

· Cash flow from operations is expected to be in the range of $50.0 million to $60.0 million

Non-GAAP guidance is adjusted from GAAP guidance by excluding recurring acquisition, restructuring, integration and other related charges and stock-based compensation and amortization of intangible assets of approximately $5.1 million.

QUARTERLY CONFERENCE CALL

Mercury will host a conference call to discuss fourth quarter and year-end results at 2:00 p.m. Pacific Time today. A live Webcast of the conference call, together with supplemental financial information, can be accessed through the company’s Investor Relations Web site at http://www.mercuryinteractive.com/ir. In addition, an archive of the Webcast can be accessed through the same link. An audio replay of the call will be available until midnight on January 27, 2004. The audio replay can be accessed by calling 888-203-1112 or 719-457-0820, conference call code: 708793.

ABOUT MERCURY

Mercury Interactive, the global leader in business technology optimization (BTO), is committed to helping customers optimize the business value of information technology. Founded in 1989, Mercury conducts business worldwide and is one of the fastest growing enterprise software companies today. Mercury provides software and services to govern the priorities, people and practices of IT; deliver and manage applications; and integrate IT strategy and execution.

Customers worldwide rely on Mercury Optimization Centers to improve quality and performance of applications and manage IT costs, risk and compliance. Mercury BTO offerings are complemented by

Mercury Interactive Reports Fourth Quarter and 2003 Results Page  4

technologies and services from global business partners. For more information, visit www.mercuryinteractive.com.

FORWARD LOOKING STATEMENTS

This press release contains “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties concerning Mercury Interactive’s expected financial performance, as well Mercury Interactive’s future business prospects and product and service offerings. Mercury Interactive’s actual results may differ materially from the results predicted or from any other forward-looking statements made by, or on behalf of, Mercury Interactive and reported results should not be considered as an indication of future performance. The potential risks and uncertainties include, among other things: 1) the mix of perpetual and term licenses and the effect of the timing of the recognition of revenue from products sold under term licenses; 2) Mercury Interactive has historically received a substantial portion of its orders at the end of the quarter and if an order shortfall occurs at the end of a quarter it could negatively impact the company’s operating results for that quarter; 3) the dependence of Mercury Interactive’s financial growth on the continued success and acceptance of its existing and new software products and services, and the success of its BTO strategy; 4) uncertainties related to the integration of Kintana’s products and services, employees and operations; 5) the ability to attract and retain key personnel; 6) intense competition for Mercury Interactive’s products and services; and 7) the additional risks and important factors described in Mercury Interactive’s SEC reports, including the Annual Report to Stockholders on Form 10-K for the fiscal year ended December 31, 2002 and the Form 10-Q for the quarter ended September 30, 2003, which are available at the SEC’s website at www.sec.gov. All of the information in this press release is as of January 21, 2004, and Mercury Interactive undertakes no duty to update this information.

NON-GAAP FINANCIAL INFORMATION

Mercury Interactive provides non-GAAP net income and earnings per share data as additional information for its operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. Mercury Interactive’s management believes these non-GAAP measures are useful to investors because this supplemental information facilitates comparisons to prior periods. Management uses these non-GAAP measures to evaluate its financial results, develop budgets and manage

Mercury Interactive Reports Fourth Quarter and 2003 Results Page  5

expenditures. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which is attached to this press release.

# # #

Editor’s Note

Tables Attached: Condensed Consolidated Statements of Operations, Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Cash Flows, Table of Reconciliations from GAAP to Non-GAAP.

Mercury Interactive and Kintana are trademarks or registered trademarks of Mercury Interactive Corporation or its subsidiaries in the United States and/or other countries. Other product and company names are used herein for identification purposes only, and may be trademarks of their respective companies.

MERCURY INTERACTIVE

1325 Borregas Avenue, Sunnyvale, CA 94089 Tel: (408) 822-5200 Fax: (408) 822-5300

Mercury Interactive Reports Fourth Quarter and 2003 Results Page  6

MERCURY INTERACTIVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three months ended December 31,					Twelve months ended December 31,
	2003		2002			2003		2002
Revenues:
License fees	$	61,049	$	58,573		$	201,047	$	192,212
Subscription fees		30,496		15,346			98,858		53,024
Total product revenues		91,545		73,919			299,905		245,236
Maintenance fees		43,490		33,742			159,030		122,343
Professional service fees		16,941		10,109			47,538		32,543
Total revenues		151,976		117,770			506,473		400,122
Costs and expenses:
Cost of license and subscription		8,080		6,174			29,056		24,804
Cost of maintenance		3,286		3,033			11,880		11,662
Cost of professional services		12,869		7,405			36,889		24,334
Marketing and selling		71,377		53,609			237,299		193,775
Research and development		16,440		10,931			55,608		42,246
General and administrative		11,360		9,625			40,000		32,407
Stock-based compensation		224		245			907		1,163
Acquisition related charges		—		—			11,968		—
Restructuring, integration and other related charges		1,092		—			3,389		(537	)
Amortization of intangible assets		3,946		458			7,470		2,375
Executive severance		6,551		—			6,551		—
Facilities impairment		—		—			16,882		—
Total costs and expenses		135,225		91,480			457,899		332,229
Income from operations		16,751		26,290			48,574		67,893
Other income (loss), net		1,398		(2,673	)		9,121		14,496
Income before provision for income taxes		18,149		23,617			57,695		82,389
Provision for income taxes		5,051		4,864			16,182		17,185
Net income	$	13,098	$	18,753		$	41,513	$	65,204
Net income per share (basic)	$	0.15	$	0.22		$	0.48	$	0.78
Net income per share (diluted)	$	0.14	$	0.21		$	0.45	$	0.74
Weighted average common shares (basic)		90,077		84,545			87,124		83,938
Weighted average common shares and equivalents (diluted)		97,030		87,707			92,728		87,640

Mercury Interactive Reports Fourth Quarter and 2003 Results Page  7

MERCURY INTERACTIVE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	December 31, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	549,278		$	349,123
Short-term investments		157,082			178,123
Trade accounts receivable, net		142,908			93,095
Deferred tax assets		—			9,407
Prepaid expenses and other assets		64,043			36,690
Total current assets		913,311			666,438
Long-term investments		527,348			137,954
Property and equipment, net		73,203			88,516
Investments in non-consolidated companies		13,928			15,952
Debt issuance costs, net		14,965			6,037
Goodwill		347,616			113,327
Intangible assets, net		45,126			2,548
Restricted cash		6,000			6,000
Interest rate swap		11,557			17,378
Other assets		17,456			21,133
Total assets	$	1,970,510		$	1,075,283
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	17,584		$	12,292
Accrued liabilities		96,637			71,414
Deferred tax liabilities		27,925			—
Income taxes payable		35,404			70,051
Short-term deferred revenue		212,716			135,338
Total current liabilities		390,266			289,095
Convertible notes		811,159			316,972
Long-term deferred tax liabilities		266			—
Long-term deferred revenue		67,909			24,048
Other long-term payable		541			—
Total liabilities		1,270,141			630,115
Stockholders’ equity:
Common stock		181			169
Additional paid-in capital		468,150			254,218
Treasury stock		(16,082	)		(16,082	)
Notes receivable from issuance of common stock		(6,580	)		(11,055	)
Unearned stock-based compensation		(1,533	)		(1,296	)
Accumulated other comprehensive loss		(6,219	)		(1,725	)
Retained earnings		262,452			220,939
Total stockholders’ equity		700,369			445,168
Total liabilities and stockholders’ equity	$	1,970,510		$	1,075,283

Mercury Interactive Reports Fourth Quarter and 2003 Results Page  8

MERCURY INTERACTIVE CORPORATION

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Three Months Ended December 31,						Twelve Months Ended December 31,
	2003			2002			2003			2002
Cash flows from operating activities:
Net income	$	13,098		$	18,753		$	41,513		$	65,204
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,342			3,098			17,869			14,704
Sales reserve		833			1,325			1,193			3,342
Unrealized loss (gain) on interest rate swap		44			(20	)		8			(406	)
Amortization of intangible assets		3,946			458			7,470			2,375
Stock-based compensation		5,309			245			5,992			1,163
Gain on early retirement of debt		—			—			—			(11,610	)
Unrealized gain on warrants		(198	)		—			(435	)		—
Gain on sale of investments		—			(362	)		—			(362	)
Loss on investments in non-consolidated companies		2,443			4,885			3,959			5,296
Write-off of in-process research and development		—			—			11,968			—
Facilities impairment		—			—			16,882			—
Tax benefit from employee stock options		6,367			—			6,367			—
Deferred income taxes		45,823			(6,595	)		35,653			(6,595	)
Changes in assets and liabilities:
Trade accounts receivable		(26,193	)		(29,690	)		(40,878	)		(28,288	)
Prepaid expenses and other assets		(9,214	)		(22,959	)		(20,808	)		(27,498	)
Accounts payable		5,857			(658	)		3,167			(451	)
Accrued liabilities		13,623			12,647			12,927			11,443
Income taxes payable		(50,766	)		27,646			(34,817	)		38,492
Deferred revenue		50,006			32,096			111,944			65,002
Other liabilities		541			—			541			—
Net cash provided by operating activities		66,861			40,869			180,515			131,811
Cash flows from investing activities:
Maturities of investments		353,544			156,448			1,857,656			462,316
Purchases of investments		(500,389	)		(193,393	)		(2,225,649	)		(437,456	)
Restricted cash		—			—			—			(6,000	)
Purchases of investments in non-consolidated companies		(375	)		—			(1,500	)		(2,244	)
Cash paid in conjunction with the acquisition of Performant, net		(10	)		—			(22,028	)		—
Cash paid in conjunction with the acquisition of Kintana, net		(5,261	)		—			(136,653	)		—
Cash paid in conjunction with a technology purchase of Allerez		—			—			(1,270	)		—
Cash paid in conjunction with a domain name purchase		(650	)		—			(650	)		—
Acquisition of property and equipment, net		(4,746	)		(1,703	)		(17,093	)		(8,164	)
Net cash provided by (used in) investing activities		(157,887	)		(38,648	)		(547,187	)		8,452
Cash flows from financing activities:
Proceeds (costs) from issuance of convertible notes		(76	)		—			488,056			—
Issuance of common stock, net		19,375			3,387			74,779			23,038
Collection of notes receivable from issuance of common stock		431			5			4,186			878
Repayment of convertible notes		—			—			—			(64,640	)
Net cash provided by (used in) financing activities		19,730			3,392			567,021			(40,724	)
Effect of exchange rate changes on cash		(826	)		186			(194	)		1,287
Net increase (decrease) in cash and cash equivalents		(72,122	)		5,799			200,155			100,826
Cash and cash equivalents at beginning of period		621,400			343,324			349,123			248,297
Cash and cash equivalents at end of period	$	549,278		$	349,123		$	549,278		$	349,123

Mercury Interactive Reports Fourth Quarter and 2003 Results Page  9

MERCURY INTERACTIVE CORPORATION

TABLE OF RECONCILIATIONS FROM GAAP TO NON-GAAP

(in thousands, except per share data)

(unaudited)

	Three Months Ended December 31,						Twelve Months Ended December 31,
	2003			2002			2003			2002
GAAP Net Income to Non-GAAP Net Income:
GAAP net income	$	13,098		$	18,753		$	41,513		$	65,204
In-process research and development (Performant)		—			—			1,280			—
In-process research and development (Kintana)		—			—			10,688			—
Bonus program (Performant)		936			—			2,834			—
Gain on reversal of restructuring charge		—			—			—			(537	)
Integration costs (Kintana)		156			—			555			—
Facilities impairment		—			—			16,882			—
Net loss on investments in non-consolidated companies and warrant		2,245			4,885			2,245			4,885
Stock-based compensation and amortization of intangible assets (Freshwater)		544			703			2,397			3,538
Stock-based compensation and amortization of intangible assets (Performant)		299			—			884			—
Stock-based compensation and amortization of intangible assets (Kintana)		3,190			—			4,848			—
Stock-based compensation and amortization of intangible assets (other)		137			—			248			—
Gain on early retirement of debt		—			—			—			(11,610	)
Executive severance		6,551			—			6,551			—
(Provision) benefit for income taxes		(952	)		(977	)		(4,801	)		1,452
Non-GAAP Net Income	$	26,204		$	23,364		$	86,124		$	62,932
GAAP Diluted EPS to Non-GAAP Diluted EPS:
GAAP net income per share-diluted	$	0.14		$	0.21		$	0.45		$	0.74
In-process research and development (Performant)		—			—			0.01			—
In-process research and development (Kintana)		—			—			0.12			—
Bonus program (Performant)		0.01			—			0.03			—
Gain on reversal of restructuring charge		—			—			—			(0.01	)
Integration costs (Kintana)		0.00	(1)		—			0.01			—
Facilities impairment		—			—			0.18			—
Loss on investments in non-consolidated companies		0.02			0.06			0.02			0.06
Stock-based compensation and amortization of intangible assets (Freshwater)		0.01			0.01			0.03			0.04
Stock-based compensation and amortization of intangible assets (Performant)		0.00	(1)		—			0.01			—
Stock-based compensation and amortization of intangible assets (Kintana)		0.03			—			0.05			—
Stock-based compensation and amortization of intangible assets (other)		0.00	(1)		—			0.00	(1)		—
Gain on early retirement of debt		—			—			—			(0.13	)
Executive severance		0.07			—			0.07			—
(Provision) benefit for income taxes		(0.01	)		(0.01	)		(0.05	)		0.02
Non-GAAP net income per share-diluted	$	0.27		$	0.27		$	0.93		$	0.72
(1) Amount is less than $0.005
GAAP Operating Margin to Non-GAAP Operating Margin:
GAAP operating margin		11.0	%		22.3	%		9.6	%		17.0	%
In-process research and development (Performant)		—			—			0.3	%		—
In-process research and development (Kintana)		—			—			2.1	%		—
Bonus program (Performant )		0.6	%		—			0.6	%		—
Gain on reversal of restructuring charge		—			—			—			-0.1	%
Integration costs (Kintana)		0.1	%		—			0.1	%		—
Facilities impairment		—			—			3.3	%		—
Stock-based compensation and amortization of intangible assets (Freshwater)		0.4	%		0.6	%		0.5	%		0.9	%
Stock-based compensation and amortization of intangible assets (Performant)		0.2	%		—			0.2	%		—
Stock-based compensation and amortization of intangible assets (Kintana)		2.1	%		—			1.0	%		—
Stock-based compensation and amortization of intangible assets (other)		0.1	%		—			0.0	% (1)		—
Executive severance		4.3	%		—			1.3	%		—
Non-GAAP operating margin		18.8	%		22.9	%		18.9	% (2)		17.7	% (2)

(1) Amount is less than 0.05%

(2) Amounts do not foot due to rounding