<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10 Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______.
Commission File Number : 0-22350
MERCURY INTERACTIVE CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
------------------------------------------------------
Delaware 77-0224776
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
470 Potrero Avenue, Sunnyvale, California 94086
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 523-9900
_____________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such a shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
The number of shares of Registrant's Common Stock outstanding as of April
30, 1996 was 15,785,082.
<PAGE>
MERCURY INTERACTIVE CORPORATION
-------------------------------
INDEX
-----
PART 1. FINANCIAL INFORMATION
- ------- ---------------------
Page No.
--------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet -
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statement of Operations
Three months ended March 31, 1996 and 1995 4
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBITS INDEX 16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 46,576 $ 45,850
Short-term investments (Note 2) 26,728 31,996
Trade accounts receivable (net of allowances
of $646 and $705) 10,093 12,158
Government grant and other receivables 2,193 2,621
Inventories 567 510
Prepaid expenses and other assets 2,460 2,544
-------- --------
Total current assets 88,617 95,679
Long-term investments (Note 2) 8,418 7,819
Property and equipment, net 9,485 8,762
Deposits and other assets 796 560
-------- --------
$107,316 $112,820
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 2,000 $ 1,272
Accrued liabilities 8,041 13,846
Deferred revenue 4,861 5,086
Total current liabilities 14,902 20,204
Commitments and contingencies (Notes 5, 6 and 7)
Stockholders' equity:
Common stock, par value $.002 per share, 25,000 shares
authorized; 15,781 and 15,728 shares issued and outstanding 31 31
Capital in excess of par value 98,793 98,309
Cumulative translation adjustment (5) 31
Accumulated deficit (6,405) (5,755)
Total stockholders' equity 92,414 92,616
-------- --------
$107,316 $112,820
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1996 1995
-------------------
<S> <C> <C>
Revenue:
License $ 8,600 $ 6,483
Service 2,400 1,217
Total revenue 11,000 7,700
------- -------
Cost of revenue:
License 496 582
Service 632 297
------- -------
Total cost of revenue 1,128 879
------- -------
Gross profit 9,872 6,821
------- -------
Operating expenses:
Research and development 2,170 1,476
Less: grants (637) (328)
------- -------
Research and development, net 1,533 1,148
Marketing, selling and general and
administrative 7,397 4,821
Settlement of litigation 2,600 -
------- -------
Total operating expenses 11,530 5,969
------- -------
Income (loss) from operations (1,658) 852
Other income, net 845 444
------- -------
Income (loss) before provision
(benefit) for income taxes (813) 1,296
Provision (benefit) for income taxes (163) 259
------- -------
Net income (loss) $ (650) $ 1,037
======= =======
Net income (loss) per share $ (0.04) $ 0.08
======= =======
Weighted average common shares and
equivalents 15,759 13,670
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MERCURY INTERACTIVE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------
1996 1995
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (650) $ 1,037
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 653 443
Net changes in assets and liabilities:
Trade accounts receivable 2,065 2,598
Government grant and other receivables 428 (739)
Inventories (57) (41)
Prepaid expenses and other assets (152) (131)
Accounts payable 728 (179)
Accrued liabilities (including the payment of litigation-
related accruals of $2,000 and acquisition and
restructuring accruals of $3,672) (5,805) 474
Deferred revenue (225) (2,755)
------- -------
Net cash provided by (used in) operating activities (3,015) 707
Cash flows from investing activities:
Investment proceeds, net 4,669 12,412
Acquisition of property and equipment (1,376) (902)
------- -------
Net cash provided by investing activities 3,293 11,510
------- -------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 484 109
------- -------
Net cash provided by financing activities 484 109
------- -------
Effect of exchange rate changes on cash (36) 209
------- -------
Net increase in cash and cash equivalents 726 12,535
Cash and cash equivalents, beginning of period 45,850 10,465
------- -------
Cash and cash equivalents, end of period $46,576 $23,000
======= =======
Supplemental Disclosure:
Cash paid during the period for income taxes: $ 627 $ 274
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
MERCURY INTERACTIVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, that in the
opinion of management are necessary to fairly state the Company's and its
subsidiaries' consolidated financial position, the results of their
operations, and their cash flows for the periods presented. This Quarterly
Report on Form 10-Q should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1995, included in the
1995 Annual Report and Form 10-K. The condensed consolidated statement of
operations for the three months ended March 31, 1996 is not necessarily
indicative of results to be expected for the entire fiscal year ending
December 31, 1996. Certain items have been reclassified to conform to the
current period presentation.
2. The portfolio of short and long-term investments is carried at cost (which
approximates market) as of the balance sheet date which consist of
investments in high quality financial, government and corporate securities.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", the
Company has categorized its marketable securities as "available-for-sale"
securities. Realized gains or losses are determined based on the specific
identification method and are reflected in income.
3. The effective tax rate for the three months ended March 31, 1996 differs from
statutory tax rates principally because of special reduced taxation programs
sponsored by the government of Israel.
4. Net income (loss) per common share has been computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of common stock
issuable upon exercise of stock options (using the treasury stock method).
5. The Company obtained grants for research and development from the Office of
the Chief Scientist in the Israeli Ministry of Industry and Trade in the
amounts of $407,000 and $328,000 in the first quarter ended March 31, 1996
and 1995, 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
3% of product sales resulting from the research, up to the amount of the
grants obtained and for certain grants up to 150% of the grants obtained.
Royalty expense under these agreements amounted to approximately $230,000 and
$162,000 for the quarter ended March 31, 1996 and 1995, respectively. As of
March 31, 1996, the Company is committed to pay, if and when earned,
approximately $2.7 million in royalties.
During the first quarter of 1996, the Company obtained a grant in the amount
of $230,000 for research and development projects from the Israel-U.S.
Binational Industrial Research and Development Foundation ("BIRD-F"). The
grant is 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 this grant; 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, 1996 and 1995. As of March 31, 1996, the Company
is committed to pay, if and when earned, $1.1 million in royalties.
6. The Israeli Government, through the Fund for the Encouragement of Marketing
Activities, has, in prior periods, awarded the Company grants for
participation in marketing expenses incurred to increase export sales from
Israel. The grants were received from the government of Israel for approved
programs for marketing activities and were recognized on the cost reduction
basis as a reduction of marketing expenses as such expenses were incurred.
Under the terms of the marketing grants, if and when export sales from Israel
to certain countries exceed historical export sales from Israel in the base
year for such grants, a royalty of 3% of the increase in export sales from
Israel must generally be paid, up to the amount of the grant obtained.
Royalty expense under these agreements amounted to approximately $187,000 and
$60,000 for the quarters ended March 31, 1996 and 1995, respectively. As of
March 31, 1996, the Company is committed to pay, if and when earned, $783,000
in royalties.
<PAGE>
MERCURY INTERACTIVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. On August 21, 1995, the Company was served with a complaint filed in the
United States District Court for the Eastern District of Virginia by
Performix, Inc., a software company located in McLean, Virginia. The
complaint alleged that an employee of the Company attempted to copy without
authorization one of the plaintiff's software programs. On March 7, 1996, the
Company settled this matter.
On February 13, 1995, the Company's UK subsidiary, Mercury Interactive (UK)
Limited, was served with a complaint brought by Mercury Communications
Limited ("Mercury Communications") a subsidiary of Cable and Wireless plc.
The complaint alleged that use by the Company's subsidiary of "Mercury" and
"Mercury Interactive" in the UK infringed upon Mercury Communications' UK
trademark rights. On March 13, 1996, the Company settled this matter.
During the quarter ended March 31, 1996, the Company recorded a charge of
$2.1 million (net of taxes of $500,000), which reflects settlement costs for
all outstanding litigation as well as related legal fees.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Revenues
License revenue increased to $8.6 million in the first quarter of 1996 from
$6.5 million in the first quarter of 1995. The Company's growth in license
revenue is attributable primarily to continuing growth in license fees from the
WinRunner and LoadRunner products, as well as sales of TestSuite, the Company's
complete automated software quality solution for the enterprise, which was
released in June 1995. License revenue included in the first quarter of 1996
also benefited from the Company's ongoing expansion into alternate distribution
channels. License revenue included approximately 35% of license revenue from
alternate sales and distribution channels during the quarter ended March 31,
1996. Revenue received from alternate channels was not significant in the first
quarter of 1995.
Service revenue increased to $2.4 million or 22% of total revenue in the first
quarter of 1996 from $1.2 million or 16% of total revenue in the first quarter
of 1995. This increase in service revenue in 1996 compared to 1995 is primarily
due to increases in the Company's base of installed users and the associated
increase in maintenance, customer training and support revenue. The increase is
also attributable to the introduction in June 1995 of the Company's LoadRunner
Quickstart training program which accounted for more than 10% of the increase in
service revenue. The Company expects that service revenues will continue to
increase in absolute dollars as long as the Company's customer base continues to
grow.
European revenues represented approximately 20% of total revenues in the first
quarter of 1996 compared to approximately 30% in the first quarter of 1995. In
an effort to improve Europe's contribution to revenue, the Company restructured
European operations in December 1995 and is currently in the process of
rebuilding the operations, including recruiting new sales management and other
personnel. However, achievement of these results cannot be assured.
Cost of revenue
License cost of revenue, as a percentage of license revenue, decreased to 6%
in the first quarter of 1996 from 9% in the first quarter of 1995. The
percentage decrease relates to the faster growth in revenue relative to the
increase in costs, which are primarily related to headcount and are relatively
fixed on a short-term basis.
Service cost of revenue, as a percentage of service revenue was 26% in the
first quarter of 1996 compared to 24% in the first quarter of 1995. 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 $2.2 million or 20% of total revenue in the first quarter of 1996 from $1.5
million or 19% of total revenue in the first quarter of 1995. The increase in
research and development expense is attributable to increases in research and
development headcount, which grew to 149 people at March 31, 1996 from 95 people
at March 31, 1995. The increase in research and development personnel-related
costs, including depreciation of equipment purchased in support of the growth in
research and development staff, accounted for approximately $600,000 of the
increase in the first quarter of 1996.
The Company capitalized $250,000 and $165,000 of software development costs
during the first quarter ended March 31, 1996 and 1995, respectively, in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
No amortization was recorded by the Company through the first quarter of 1996.
At March 31, 1996 and December 31, 1995, the
<PAGE>
Company had a balance of capitalized software development costs of approximately
$745,000 and $495,000, respectively.
The Company obtained grants for research and development from the Office of
the Chief Scientist in the Israeli Ministry of Industry and Trade in the amounts
of $407,000 and $328,000 in the first quarter of 1996 and the first quarter of
1995, 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 $230,000 and $162,000
for the quarters ended March 31, 1996 and 1995, respectively. As of March 31,
1996, the Company is committed to pay, if and when earned, $2.7 million in
royalties.
During the first quarter of 1996, the Company obtained a grant in the amount
of $230,000 for research and development projects from the Israel-U.S.
Binational Industrial Research and Development Foundation ("BIRD-F"). The grant
is 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 this grant; however, it has agreed to pay
BIRD-F royalties at the rate of up to 5% of sales of any product or development
resulting from such research, but not in excess of 150% of the grant. Royalty
expense under BIRD-F grants amounted to less than $5,000 for the quarters ended
March 31, 1996 and 1995. As of March 31, 1996, the Company is committed to pay,
if and when earned, $1.1 million in royalties.
The Company intends to continue making significant expenditures on research
and development to develop new products and expand the platforms and operating
systems on which its products are offered. While the Company believes that
these current research and development expenditures will be beneficial in the
long term development of its business, there can be no assurances that the
development of products will be successful. Research and development
expenditures are incurred substantially in advance of related revenue and in
some cases do not result in the generation of revenue.
Marketing, selling and general and administrative
Marketing, selling and general and administrative expenses, before reduction
for grants, increased to $7.4 million, or 67% of revenue, in the first quarter
of 1996 from $4.8 million, or 63% of revenue, in the first quarter of 1995.
Approximately $500,000 of the increase during the first quarter of 1996 resulted
from increased worldwide sales and marketing activities including increased
advertising and marketing communications, increased participation in seminars
and trade shows and expansion into alternate distribution channels. The
Company has also expanded its operations into the Far East, which accounted for
approximately $450,000 of the increase in the first quarter of 1996 compared to
the first quarter of 1995. In addition, the increase in expenses relate to
increases in personnel in the marketing, sales and administrative departments to
123 employees at March 31, 1996 from 86 employees at March 31, 1995. Excluding
costs related to expansion into the Far East, personnel-related expenses,
including commissions and travel, resulted in approximately $1.1 million of the
increase in marketing, selling and general and administrative expense during the
first quarter of 1996 compared to the same quarter in 1995. The Company expects
marketing, selling and general and administrative expenses to increase in
absolute dollars as total revenues increase, but such expenses may vary as a
percentage of revenue.
In prior years, the Company received grants from the Government of Israel
through the Fund for the Encouragement of Marketing Activities ("the Marketing
Fund") which were used to offset marketing expenses in the years received.
Under the terms of the marketing grants, if and when export sales from Israel to
certain countries exceed a predetermined base of historical export sales from
Israel, a royalty of 3% of the increase in export sales from Israel must
generally be paid, up to the amount of the grants obtained. Royalty expense
under these agreements amounted to approximately $187,000 and $60,000 for the
quarters ended March 31, 1996 and 1995, respectively. As of March 31, 1996, the
Company is committed to pay, if and when earned, approximately $783,000 in
additional royalties.
<PAGE>
Settlement of litigation
During the quarter ended March 31, 1996, the Company recorded a charge of $2.1
million (net of taxes of $500,000), which reflects settlement costs for all
outstanding litigation as well as related legal fees (See Note 7 of Notes to
Condensed Consolidated Financial Statements).
Other income, net
Other income, net consists primarily of interest income and foreign exchange
gains and losses. In the first quarter of 1996 and 1995, the Company earned
interest income primarily on its investments in money market accounts and
marketable securities, which consist of investments in high quality financial,
government and corporate institutions. The significant increase in other income,
net to $845,000 in the first quarter of 1996 from $444,000 in the first quarter
of 1995 resulted primarily from a higher average investment balance during the
quarter due to the investment of the proceeds from the Company's secondary
offering of Common Stock in August 1995.
Provision (benefit) 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 benefit of $163,000 in the first quarter of
1996 compared to an expense of $259,000 in the first quarter of 1995.
The Company participates in special programs sponsored by the government of
Israel relating to taxation. Provisions in the future will depend upon the mix
of worldwide income and the tax rates in effect for various tax jurisdictions.
Net income (loss)
The Company reported a net loss of $650,000 in the first quarter of 1996,
including the charge for the settlement of litigation of $2.1 million (net of
taxes) compared to net income of $1.0 million in the first quarter of 1995. The
Company's operating expenses are based in part on its expectations of future
revenues, and expenses are generally incurred in advance of revenues. The
Company plans to continue to expand and increase its operating expenses to
support anticipated revenue growth. If revenues do not materialize in a quarter
as expected, the Company's results from operations for that quarter are likely
to be materially adversely affected. Net income may be disproportionately
affected by a reduction in revenues because only a small portion of the
Company's expenses varies with its revenues.
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 in 1996.
Factors that May Affect Future Results
The statements in this Item 2 in the last sentence of the second paragraph
under caption "Revenue", the first sentence of the fifth paragraph under the
caption "Research and Development," the sentence under the caption "Inflation"
and the third sentence in the paragraph under the caption "Net income (loss)"
are forward looking statements. In addition, the Company may from time to time
make oral forward looking statements. The factors set forth under the captions
"Research and Development" and "Net income (loss)", 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.
<PAGE>
The market for software products is generally characterized by rapidly
changing technology and frequent new product introductions, which can render
existing products obsolete or unmarketable. The Company believes that a major
factor in its future success will be its ability to develop and introduce in a
timely and cost-effective manner enhancements to its existing products and new
products that will gain market acceptance. There can be no assurance that the
Company will be able to identify, develop, manufacture, market or support new
products or enhancements successfully, that any such new products or
enhancements will gain market acceptance, or that the Company will be able to
respond effectively to technological changes. There can be no assurance that the
Company will not encounter technical or other difficulties that could delay
introduction of new products in the future. If the Company is unable to
introduce new products or enhancements and respond to industry changes on a
timely basis, its business could be materially adversely affected.
The Company's current products and products under development are limited in
number and concentrated exclusively in the ASQ 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 to
product enhancements and competition. Price reductions of declines in demand for
the Company's ASQ 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 operation 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 operation results
depend primarily on the volume and timing of orders received during the quarter,
which are difficult to forecast. A significant portion of the Company's
operation expenses are relatively fixed, and planned expenditures are based on
sales forecasts. All of the foregoing may result in unanticipated quarterly
earning shortfalls of losses. Due to all of the foregoing, the Company believes
that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance.
Sales to customers located outside the United States have historically
accounted for a significant percentage of revenue and the Company anticipates
that such sales will continue to be a significant percentage of the Company's
total revenue. Risks related to currency fluctuations, political and economic
instability and trade restrictions could have a negative impact on the Company's
financial performance.
As part of its growth strategy, the Company may from time to time acquire or
invest in complementary businesses, products or technologies. For example,
during 1995, the Company acquired Blue Lagoon Software and EBY Semantica. 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.
Certain of the Company's sales are made in currencies other than the U.S.
Dollar and its financial results are reported in U.S. Dollars. Fluctuations in
the rates of exchange between the U.S. Dollar and other currencies may have a
materially adverse effect on the Company's results of operations or financial
position. To date, the Company has not hedged against currency translation
risks.
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 could have a materially adverse effect on
the Company. The terms of certain grants prohibit the manufacture of products
developed under these grants
<PAGE>
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.
The Company began shipping products in 1991 and has since experienced
continuing annual increases in revenue. This growth has placed and, if it
continues, will place a significant strain on the Company's management,
resources and operations. To accommodate its recent growth, the Company is
implementing a variety of new or expanded business and financial systems,
procedures and controls, including the improvement of its accounting and other
internal management systems. There can be no assurance that the implementation
of such systems, procedures and controls can be completed successfully, or
without disruption of the Company's operations. If the Company's growth
continues, the Company will be required to hire and integrate substantial
numbers of new employees. The market has become increasingly competitive both in
the United States and Israel and may require the Company to pay higher salaries.
The Company's failure to manage growth effectively could have a materially
adverse effect on the Company's results of operations or financial position.
The trading price of the Company's Common Stock has been subject to wide
fluctuations in response to actual or anticipated quarter-to-quarter variations
in operating results, timing and amount of sales of stock in the market by
stockholders of blocks of shares, announcements of technological innovations or
new products by the Company or its competitors and other events or factors.
These broad market fluctuations may adversely affect the market price of the
Company' Common Stock. There can be no assurance that the trading price of the
Company's stock will remain at or near its current level.
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.
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents increased to $46.6 million at March 31, 1996 from
$45.9 million at December 31, 1995. During the quarter, the Company paid $6.4
million related to litigation and costs related to the acquisition of Semantica
of which $5.7 million had been accrued at December 31, 1995. In addition, the
Company received $484,000 from the issuance of Common Stock under employee stock
option and purchase plans. At March 31, 1996, the Company held approximately
$26.7 million in short-term investments and $8.4 million in long-term
investments, which consist of investments in high quality financial, government
and corporate securities.
Assuming there is no significant change in the Company's business, the Company
believes that its current cash and investment balances and cash flow from
operations, will be sufficient to fund the Company's cash needs for at least the
next twelve months.
<PAGE>
MERCURY INTERACTIVE CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 21, 1995, the Company was served with a complaint filed in the
United States District Court for the Eastern District of Virginia by
Performix, Inc., a software company located in McLean, Virginia. The
complaint alleged that an employee of the Company attempted to copy without
authorization one of the plaintiff's software programs. On March 7, 1996, the
Company settled this matter.
On February 13, 1995, the Company's UK subsidiary, Mercury Interactive (UK)
Limited, was served with a complaint brought by Mercury Communications
Limited ("Mercury Communications") a subsidiary of Cable and Wireless plc.
The complaint alleged that use by the Company's subsidiary of "Mercury" and
"Mercury Interactive" in the UK infringed upon Mercury Communications' UK
trademark rights. On March 13, 1996, the Company settled this matter.
During the quarter ended March 31, 1996, the Company recorded a charge of $2.1
million (net of taxes of $500,000), which reflects settlement costs for all
outstanding litigation as well as related legal fees (See Note 7 of Notes to
Condensed Consolidated Financial Statements).
Item 6. Exhibits & Reports on Form 8-K
(a) 10.1 - Co-operation and Project Funding Agreement by and among
the Company, the Israel-United States Binational
Industrial Research and Development Foundation and
Synopsis Systems Ltd. dated March 6, 1996.
11.1 - Computation of net income (loss) per common share for the
three months ended March 31, 1996 and 1995.
27 - Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 1996.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1996 MERCURY INTERACTIVE CORPORATION
(Registrant)
/s/ SHARLENE ABRAMS
--------------------------------
Sharlene Abrams
Vice-President of Finance and Administration,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit Description Sequentially
No. Numbered Page
<S> <C> <C>
10.1 Cooperation and Project Funding
Agreement by and among the Company,
the Israel-United States Binational
Industrial Research and Development
Foundation and Synopsis Systems
Ltd. dated March 6, 1996
11.1 Computation of net income (loss)
per common share
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.1
COOPERATION AND PROJECT FUNDING AGREEMENT
PREAMBLE
Agreement made this 6 day of March 1996, by and
BETWEEN
The ISRAEL-UNITED STATES BINATIONAL INDUSTRIAL RESEARCH AND DEVELOPMENT
FOUNDATION, a legal entity created by Agreement between the Government of the
State of Israel and the Government of the United States of America, and
promulgated into law by the Israeli Knesset in 1978 under the title of the Law
of the BINATIONAL INDUSTRIAL RESEARCH AND DEVELOPMENT FOUNDATION, effective
May 18th, 1977, (hereinafter referred to as the "Foundation"),
AND
Synopsis Systems Ltd.
AND
Mercury Interactive Corporation
severally and jointly (hereinafter collectively referred to as the "Proposer"
and separately as the "Participants").
WHEREAS the Foundation has been established under an Agreement between the
Government of the State of Israel and the Government of the United States of
America to promote and support joint nondefense industrial research and
development activities of mutual benefit to Israel and the United States, and
WHEREAS the Proposer has heretofore submitted to the Foundation a proposal
(hereinafter the "Proposal"), entitled "UTRunner - Unit Testing Runner" and on
the basis of said Proposal has applied to the Foundation for certain funding
assistance for the development of the products therein described (and
hereinafter referred to collectively as the "Innovation"), and
WHEREAS the Foundation has examined and duly approved the Proposal and is
willing to provide certain funding for the implementation of the Proposal on the
terms and conditions hereinafter set forth;
<PAGE>
Now therefore the parties hereto agree as follows:
A. GENERAL
A.1. The preamble to this Agreement shall be deemed an integral part hereof.
A.2. The Participants shall be bound and obliged jointly and severally, as
herein provided.
A.3. The Executive Director of the Foundation is empowered by its Board of
Governors to execute this Agreement and to perform all acts under the
terms hereof on behalf of the Foundation.
A.4. The following document is incorporated by reference and made a part of
this Agreement:
The Proposal, dated the 28th day of September, 1995, as stamped with
the Foundation's approval of the 21st day of December, 1995.
Nonetheless, should any provision of said Proposal be inconsistent
with any other provision of this Agreement, the provisions otherwise
set forth in this document shall control.
A.5. The following document is referenced, and is incorporated by reference
only as portions may be specifically referred to and incorporated
hereafter:
BIRD Foundation Procedures Handbook 1994.
B. PROJECT FINANCING
B.1 The Foundation hereby agrees to fund, by Conditional Grant, the
implementation of the Proposal in the maximum sum of $603,850 or 50% of
the actual expenditures on the project, as contemplated in the Approved
Project Budget set forth in Annex A hereto, whichever is less, and at
the times and as may otherwise be set forth in Annex B hereto.
B.1.1. The percentage of the actual expenditures on the project which the
Foundation provides shall hereinafter be described as the "Foundation's
pro rata share".
B.2. The Proposer shall provide in timely fashion all budgetary funds in
excess of those provided hereunder by the Foundation.
B.3. Proposer shall make payments to the Foundation based on Gross Sales
derived from the sale, leasing or other marketing or commercial
exploitation of the Innovation, including service or maintenance
contracts, commencing with the first such commercial transaction. Such
payments shall be made on the following basis: a) The Conditional Grant
referred to in Sub.Sec.B.1. above (plus any other sums actually awarded
to the Proposer by the Foundation in connection with the subject matter
of the Proposal ("Other Sums")) shall be repaid in U.S. Dollars at the
rate of 5% of the Gross Sales, such repayments to be in equivalent
dollars valued at time of repayment. The rate of change of value shall
be that designated in Annex C hereto. b) When the Proposer shall have
repaid the following maximum percentages in equivalent dollars valued at
the time of repayment (Annex C) of the Conditional Grant and Other Sums
in any of the following years following the first commercial
transaction, no additional payments to the Foundation on account of the
Conditional Grant and Other Sums shall be required.
2
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------
Years Following Maximum Percentage of
First Commercial Conditional Grant and
Transaction Other Sums to be Repaid
------------------------------------------------
<S> <C>
1 116
2 124
3 132
4 141
5 148
6 and more 150
------------------------------------------------
</TABLE>
B.3.1. The term "Gross Sales" shall include all specific export incentives or
bonuses paid the Proposer on account of sale of the Innovation for
export, but shall not include sums paid for commissions, brokerage,
value added and sales taxes on the sale of the finished product, or
transportation and associated insurance costs, if same have been
included in the gross sales price.
B.3.2. The Innovation shall be deemed to have been sold, marketed or otherwise
commercially exploited if the Innovation, or any improvement,
modification or extension of it is put to the benefit of a third party,
whether directly or indirectly, and whether standing alone or
incorporated into or cojoined with other hardware or processes, and for
which benefit the said third party gives something of value. This
provision shall not apply to transactions between the Participants or
between the Participants and their parents or subsidiaries. Should such
parent or subsidiary resell the Innovation separately identified or
incorporated in a system, the sales price shall be the price to third
parties from the parent or subsidiary making the sale, such sales price
being defined by the same criteria as sales are defined for purposes of
"Gross Sales" in Sub.Sec.B 3.1. above.
If the Innovation is a part of a product sold, marketed or otherwise
commercially exploited, the sales price for purposes of payments
according to Sub.Sec.B.3. shall be the sales price of that product
multiplied by a factor whose numerator is the manufacturing cost of the
Innovation and whose denominator is the manufacturing cost of the
product. If there shall have been established a market price for the
Innovation, such price shall be the basis for payments according to
Sub.Sec.B.3., notwithstanding the incorporation of the Innovation in
another product.
B.4. All payments due the Foundation shall be calculated on a semiannual
calendar basis, and statements, consistent with generally accepted
accounting procedures and with the standard accounting procedures of the
Participant and signed by an officer of the Participant, rendered with
payment in and within 90 calendar days following the end of each
semiannual period. Payments to the Foundation per Sub.Sec.B.3. shall
commence at the end of the semiannual period during which the first sale
was made. All late payments shall bear interest at 1% more than the
average prime rate prevailing at the Chase Manhattan Bank, N.Y.C. during
the period from the date payment was due until actually made.
B.5. Should any portion of the technology or innovation developed in whole or
in part under this Agreement be sold outright to a third party, one-half
of all proceeds of the sale shall be applied as received until there has
been full repayment to the Foundation of a sum equal to the percentage
indicated in Sub.Sec.B.3.b) hereto of the Conditional Grant and Other
Sums actually received by Proposer hereunder, in equivalent dollars
valued at time of repayment (Annex C). Payments due and not made
following receipt
3
<PAGE>
of proceeds shall bear interest at 1% more than the average prime rate
prevailing at Chase Manhattan Bank, N.Y.C.
B.6. License agreements involving patented invention(s) or technology
developed in whole or in part during this Foundation-supported project
shall be subject to Annex F.
C. CONDUCT OF THE PROJECT
C.1. The Proposer agrees to do the work set out in the Proposal in accordance
with good standards relevant to such undertakings, and shall expend
funds received hereunder only in accordance with such Proposal and the
requirements of this Agreement
C.2. The Proposer agrees to comply with the Program Plan for the Innovation
as set forth in Annex D hereto.
C.3. The Proposer hereby appoints Zvika Diamant as Israel Project Manager and
Boaz Chalamish as U.S. Project Manager for the implementation of the
project during the period of this Agreement and in accordance with the
Program Plan, Annex D.
C.4. The Proposer shall not make substantial transfers of funds from one
budget item to another, change key personnel or their duties and
responsibilities or diminish their time allocated to the proposed work
hereunder without prior written approval by the Foundation, which
approval shall not be unreasonably withheld.
C.4.1. Should any key person be absent from his work or should such absence be
expected, for 90 days or more, or should there be any significant
reduction in the total personnel force assigned the project under the
Proposal, the Proposer shall forthwith notify the Foundation.
D. REPORTING REQUIREMENTS
D.1. The Proposer shall submit to the Foundation, in writing, the following
reports:
a. semiannual fiscal and technical reports within 30 days
following the expiration of the first six-month period;
b. final fiscal and technical reports within 60 days following
termination of this Agreement.
D.1.1. Such reports shall be in form and substance as provided in Formats for
Technical and Fiscal Reports, BIRD Foundation Procedures Handbook 1994,
Sections IV.A. and B.
D.2. Proposer shall provide, at its expense, briefings on the progress of the
work hereunder within 45 days following request by the Foundation. Such
briefings shall accord with the form and depth as the Foundation may
reasonably request.
E. PUBLICATIONS
E.1. In any publication in scientific or technical journals of data or other
information derived from the work hereunder, or any publication related
to the work, but not including product literature or manuals, the
support of the Foundation shall be acknowledged.
E.2. To the extent so required to permit the Foundation free dissemination of
such publications or information which the Foundation is privileged to
disseminate subject to the limitation of Sec. F. below, the Proposer
shall be deemed hereby to waive any claim with respect to such
dissemination for infringement of any Copyright it may have or may
obtain.
4
<PAGE>
E.3. The Proposer shall furnish to the Foundation two (2) copies of all
publications resulting from Foundation-supported work as soon as
possible after publication.
F. PROPRIETARY INFORMATION
Proprietary information, clearly identified as such, submitted to the
Foundation in the Proposal, in any report or verbally, or obtained by
Foundation personnel observation pursuant to any request or briefing,
shall be treated by the Foundation as confidential. At the request of
Proposer or either Participant a confidential disclosure agreement may
separately be entered into by the parties.
Nothing contained in the foregoing shall restrict the right of the
Foundation to make public the fact of the Foundation's support for the
project, and the identification of the Participants therein. The details
of any such publication, however, shall be subject to approval by the
Participants.
G. PATENTS AND ROYALTIES
G.1 If Proposer or either of the Participants elects to apply for letters
patent on any or all inventions resulting in whole or in part from
performance of Foundation-supported activity, such applicant shall, at
his own expense, so apply in the United States and in Israel, and in
such other countries and at such times as he may deem appropriate.
G.2. Unless Proposer or either Participant is making payments to the
Foundation under Sec. B or Annex F hereto, a Participant who retains
rights in an invention and who obtains a patent thereon in accordance
with Sub.Sec.G.1, shall pay to the Foundation a royalty as set forth in
Annex E hereto, on sales of any product embodying the invention or any
product made by practicing the invention. The Foundation's rights
hereunder shall apply whenever such patents are obtained and shall
survive termination of this Agreement.
H. RIGHTS OF THE GOVERNMENTS OF ISRAEL AND THE UNITED STATES
H.1. Regardless of the patent rights acquired by Participants by mutual
agreement or pursuant to Sub Sec.G.1., the Governments of Israel and of
the United States shall each have a nonexclusive, irrevocable, royalty-
free license to make or have made, to use or have used, and to sell or
have sold any such invention specified, throughout the world for all
governmental purposes; provided, however, that in any contracting
situation involving an invention made under this Agreement, the
Government of Israel shall give preference to the Participant retaining
the entire right, title, and interest in the invention in Israel, and
provided that "governmental purposes" shall not include manufacturing of
such invention where it is commercially available at reasonable prices.
Notwithstanding the foregoing, except for military purposes or in
emergency situations, neither the Government of Israel nor the
Government of the United States, nor the Foundation, shall have the
right to sell or otherwise dispose of in any third country any product
incorporating an invention or made by practicing an invention without
the prior written permission of the Participant which has acquired the
entire right and interest in the invention in third countries. Such
Participant shall not withhold permission where appropriate royalties
are paid by the Foundation or government(s) concerned.
H.2. In addition to the patent rights specified in Sub.Sec.H.1., the
Foundation reserves for itself and the Governments of Israel and the
United States the right to use the Innovation, technical information,
data and know-how arising out of, or developed under, this Agreement for
any noncommercial purpose, and without charge.
H.3. In order that the rights of the Foundation and the Governments of Israel
and the United States described herein shall be exercisable, the
Participants agree that any component, element or other part of the
system described as the "Innovation" in the
5
<PAGE>
Preamble to this Agreement, whose use is necessary to the full enjoyment
of the Innovation, will be made available, at reasonable prices, by the
Participants either as a commercially purchasable item, or by special
arrangement, and will be sold to the Foundation and/or the Government of
Israel and/or the Government of the United States, also at reasonable
prices.
H.4. Notwithstanding the above provisions of this Sec.H., it is understood
and agreed that, so long as any software that comprises part or all of
the Innovation is marketed by Proposer, by either Participant, or by
others with the rights to market such software, neither the Government
of Israel nor the Government of the United States shall have the right
to obtain a license to use such software unless the license fee normally
imposed in the ordinary course of business by either the Participants or
by others with the rights to market such software is paid, and the
standard license agreement is executed.
I. REVOCATION OF AGREEMENT
I.1. The Foundation may revoke any award, in whole or in part, for
fundamental breach as defined in the laws of the State of Israel.
I.2. Upon receipt of notice of revocation for fundamental breach, the
Proposer may cure the default in and within thirty calendar days after
the date of receipt of the notice.
I.3. Notwithstanding any other provision in this Agreement to the contrary,
the Foundation shall not be obliged to provide any further funding after
notice until and unless the said default is cured and so demonstrated to
the reasonable satisfaction of the Foundation.
I.4. Should the Agreement terminate for reason of fundamental breach, in
addition to the Foundation's rights under Sub.Sec.I.5., the Foundation
and the Governments of Israel and the United States shall be entitled to
all its rights pursuant to Sec.H. as may have vested on the date when
all sums due the Foundation under Sub.Sec.I.5. are fully paid.
I.5. If the Foundation shall revoke as aforesaid, all funds given Proposer
per Sub Sec.B.1. above shall become due immediately without need for
demand. Such funds which do not, by terms of this Agreement, bear
interest, shall be repaid with interest at 1% more than the average
prime rate prevailing at Chase Manhattan Bank, N.Y.C., from date of
notice of revocation.
I.6. The Proposer may not terminate this Agreement or abandon the project
without the prior written consent of the Foundation, which consent shall
not be unreasonably withheld.
I.7. If upon termination of this Agreement for any reason, the entire
budgeted sum has not been expended, the Proposer shall forthwith return
to the Foundation its pro rata share of such unexpended portion. If not
repaid forthwith, such sum shall bear interest as per Sec.I.5.
J. SURVIVAL OF PROVISIONS
Notwithstanding revocation or other termination of this Agreement, the
following provisions shall survive termination of this Agreement;
Sections B., D., E., F., G., H., I.4., I.5., I.7., K., L., N., Annex C,
Annex E and Annex F.
6
<PAGE>
K. FINANCIAL RECORDS
K.1. The Proposer shall maintain business and financial records and books of
account for the work hereunder separate and apart from other business
records of the Proposer. Such books and records shall be in usual and
accepted form.
K.2. Books and records of the work hereunder shall show Proposer's
contribution. Upon request by the Foundation, the Proposer shall provide
evidence of his compliance hereunder.
K 3. The Foundation may examine, or cause to be examined, the financial books,
vouchers, records and any other documents of the Proposer relating to this
Agreement at reasonable times and intervals during the term of this
Agreement and for a period of one (1) year following termination, or for
so long as payments per Sub.Sec.B.3., Sub.Sec.B.5., or Annex F, or of
patent royalties are due, or may become due the Foundation, whichever
shall be the later.
L. SUITS AGAINST THE FOUNDATION
L.1. The Proposer shall defend all suits brought against the Foundation, its
officers or personnel, indemnify them for all liabilities and costs and
otherwise hold them harmless on account of any and all claims, actions,
suits, proceedings and the like arising out of, or connected with or
resulting from the performance of this Agreement by the Proposer, or from
the manufacture, sales, distribution or use by the Proposer of the
Innovation, whether brought by Proposer or its personnel or by third
parties.
L.2. The Proposer agrees that persons employed by it in connection with the
research project shall be deemed to be solely its own employees and that
no relationship of master and servant shall be created between such
employees and the Foundation, either for purposes of tort liability,
social benefits, or for any other purpose. The Proposer shall indemnify
the Foundation and hold it harmless from court costs and legal fees, and
for any payment which the Foundation may be obliged to make on a cause of
action based upon an employee-employer relationship as aforesaid.
M. MISCELLANEOUS CONDITIONS
M.1. The Foundation makes no representation, by virtue of its funding the work
hereunder, or receiving any payments or royalties as a result of this
Agreement, as to the safety, value or utility of the Innovation or the
work undertaken, nor shall the fact of participation of the Foundation,
its funding or exercise of its rights hereunder be deemed an endorsement
of the Innovation or of the Proposer, nor shall the name of the Foundation
be used for any commercial purpose or be publicized in any way by the
Proposer except within the strict limits of this Agreement.
M.2. The Proposer may not assign this Agreement or any of the work undertaken
pursuant to it without the prior written consent of the Foundation, which
consent shall not be unreasonably withheld.
M.3. This Agreement shall be construed under the laws of the State of Israel.
The forum for the resolution of any dispute arising from this Agreement
shall be the State of Israel or Washington D.C. in the U.S., as the moving
party may elect. Execution of this Agreement shall be taken as submission
to the forum selected pursuant to this Section.
M.4 Unless the parties to a dispute shall agree otherwise, the dispute shall
be referred to arbitration under rules of the Israel Arbitration Law if
the forum is Israel, and under the rules of the American Arbitration
Association if the forum is the U.S.
7
<PAGE>
M.5. Proposer undertakes to comply with all applicable laws, rules and
regulations of the State of Israel and the United States of America, and
will apply for and obtain all necessary licenses and permits for the
carrying out of its obligations hereunder.
M.6. Under Israeli law, no stamp duty is required on BIRD Foundation
Cooperation and Project Funding Agreements.
M.7. Notices, communications and reports shall be hand-delivered or mailed by
prepaid first-class mail (airmail if transmitted internationally)
addressed to:
a. The Israel-U.S. Binational Industrial Research and
Development Foundation
P.O. Box 39104
Tel Aviv 61390
Israel
b. Synopsis Systems Ltd.
5 Yoni Netanyahu Street
New Industrial Zone
Or Yehuda
Israel
c. Mercury Interactive Corporation
470 Portrero Avenue
Sunnyvale, CA 94086
U.S.A
N. LIMITATION ON PAYMENTS
Notwithstanding any other interpretation of this Agreement or the Annexes
hereto to the contrary, Proposer's total obligation hereunder for payments
to the Foundation shall not exceed the percentages indicated in Sub.
Sec.B.3.b) hereto of the total funds actually provided by the Foundation
hereunder, in equivalent dollars valued at time of repayment (Annex C).
O. EFFECTIVE DATE
The effective date of this Agreement shall be the 1st day of September,
1995. Unless sooner terminated by the Foundation per Sec.I., this
Agreement shall terminate twelve (12) months following the effective date.
Signed the day and date above first given
/s/ Dan Vilenski
- -------------------------------------
Dan Vilenski
(for the BIRD Foundation)
/s/ Gal Nachum
- -------------------------------------
(for Synopsis Systems Ltd.)
/s/ Sharlene Abrams, CFO
- -------------------------------------
(for Mercury Interactive Corporation)
8
<PAGE>
ANNEX A
APPROVED PROJECT BUDGET
Synopsis Systems Ltd.
(12 months duration)
<TABLE>
<CAPTION>
Cost to Totals
Project
1. DIRECT LABOR
Gross Annual Salary % on
(inc. Social Benefits) Project
<S> <C> <C> <C> <C>
Project Manager $80,000 100 80,000
Engineer 67,000 100 67,000
Engineer 67,000 100 67,000
Engineer 50,000 80 40,000
Engineer 50,000 70 35,000
------
Total, Direct Labor 289,000
Overhead (O/H) @ 25% 72.250
-------
Total, Direct Labor + O/H 361,250
11. EQUIPMENT -- 20% depreciation, 100% utilization
5 Unix computers, $30,000 6,000
5 Pentium computers $20,000 4,000 10,000
-------
111. TRAVEL
Foreign--
4 trips, 2 people to Mercury (CA), @ $2,500 each 20,000
--------
SUBTOTAL $391,250
General & Administrative Expense (G&A) @ 5% 19,563
--------
SYNOPSIS TOTAL PROJECT BUDGET $410,813
Projected expenditure, first 6 months $205,406
Projected expenditure, second 6 months $205,407
</TABLE>
9
<PAGE>
ANNEX A
APPROVED PROJECT BUDGET
Mercury Interactive Corporation
(12 months duration)
<TABLE>
<CAPTION>
Cost to Totals
Project
1. DIRECT LABOR
Gross Annual Salary % on
(inc. Social Benefits) Project
<S> <C> <C> <C> <C>
Project Manager $90,000 100 90,000
Documentation 86,600 40 34,640
Documentation 83,750 40 33,500
Marketing 84,000 70 58,800
QA 79,200 85 67,320
QA 74,160 85 63,036
QA 57,360 85 48,756
Technical 98,750 90 88,875
Marketing 110,000 65 72,000
-------
Total, Direct Labor 556,927
Overhead (O/H) @ 25% 139,232
-------
Total, Direct Labor + O/H 696,159
</TABLE>
<TABLE>
<S> <C> <C> <C>
11. EQUIPMENT -- depreciation 20%
3 Pentium computers, $12,000, @ 100% utilization 2,400
3 Unix computers, $18,000, @ 100% utilization 3,600
2 Laser printers, $8,000, @ 50% utilization 800
3 Modems, $600, @ 100% utilization 120
2 Hard drives, $4,000, @ 100% utilization 800
Backup Tape, S3,400, @ 100% utilization 680
Software, $11,900, @ 100% utilization 2,380
------
- SUN C++ and Debugger 4 @ $2,000
- Pure Memory Checker 3 @ $1,300 10,780
III. TRAVEL
Domestic
3 exhibitions, 2 people each 6,000
5 trips to beta sites 5,000 11,000
------
IV. OTHER EXPENSES
3 exhibitions 10,000
Marketing material - White Paper (2); Product brochures;
and PR Launch 31,000 41,000
------ -------
SUBTOTAL $758,939
General & Administrative Expense (G&A) @ 5% 37,947
-------
MERCURY TOTAL PROJECT BUDGET $796,886
Projected expenditure, first 6 months $371,609
Projected expenditure, second 6 months $425,277
</TABLE>
10
<PAGE>
ANNEX B
PAYMENT OF CONDITIONAL GRANT
1. First Payment - On signing - $192,339
2. Second Payment - After receipt and approval of the semiannual technical
and fiscal reports for the first six-month period or after actual
expenditures on the project have equalled or exceeded $577,015, whichever
is later - $210,228.
However, if at the required time of submission of the semiannual technical
and fiscal reports, work on the project or expenditures thereon prove to
be materially behind plan, per Annex D and Annex A, respectively, the
Foundation will review the project with Proposer and determine a suitable
course of action with respect to further payments against the Conditional
Grant, if any.
3. Final Payment - After receipt and approval of the final technical and
fiscal reports - the balance due Proposer up to the total sum of the
Conditional Grant per Sub.Sec.B.1.
11
<PAGE>
ANNEX C
LINKAGE OF CONDITIONAL GRANT REPAYMENTS
The monies given as a Conditional Grant shall be linked in value until repayment
to the U.S. Consumer Price Index, CPI-U, hereinafter "index".
As each increment of the grant is given, it shall thereafter be linked to the
base index last published prior to the date of payment. Upon payment of the last
increment of the Conditional Grant due, all prior payments shall be brought to
the same base index as the last payment.
Just prior to each occasion of payment of a portion of Proposer's obligations
under Sub.Sec.B.3., B.5, B.6, G.2., Annex E and F, the unpaid balance due the
Foundation shall be brought from the prior base to the index last published
before such payment, which index shall then be the base. This procedure shall be
repeated on the occasion of each payment until Proposer's obligations for
payments shall have been discharged.
12
<PAGE>
ANNEX D
APPROVED PROGRAM PLAN
Mercury Synopsis
Functional Specification Result Analyser Coding
Synopsis Mercury & Synopsis
Technical Design System Integration
Mercury Synopsis Mercury & Synopsis
Tools Selection QA & Bug Fixes
Synopsis Mercury
Database Design & Coding Documentation
Synopsis Mercury
Parsor and Interpreter Coding Technical Marketing
Mercury Mercury
User Interface Design Product Marketing
Synopsis Mercury
Test Bed Setup Coding Alpha Testing
Synopsis Mercury
Process Control Implementation Usability
Synopsis Mercury
Test Development Environment Coding Beta Testing
13
<PAGE>
ANNEX E
ROYALTY PAYMENTS ON PATENTS
1. ROYALTY RATE: The Royalty Rate in accordance with Sub.Sec.G.2. shall be
1 1/2%
2. ROYALTY BASE:
a) Where the product sold consists of the Innovation and such Innovation
consists essentially of, or depends primarily on, a patented
invention or inventions made in whole or in part during the
performance of Foundation-supported work on the project, the Royalty
Base shall be the selling price of the product as defined in
Sub.Sec.B.3.2.
b) Where the product sold consists of an assemblage of subsystems or
entities, the Royalty Base shall be the selling price of the product
multiplied by a fraction the numerator of which shall be the
manufacturing cost of those subsystems or entities which incorporate
a patented invention or inventions made in whole or in part under
this Project, and the denominator of which shall be the manufacturing
cost of the product sold.
c) If, however, a market price shall have been established for any
subsystem or entity which incorporates a patented invention or
inventions made in whole or in part under this project and which is
sold separately, sold as part of the Innovation, or sold as part of
any other product, such market price shall be the Royalty Base.
3. ROYALTY: The Royalty due shall be the Royalty Rate multiplied by the
appropriate Royalty Base.
4. ROYALTY PAYMENTS:
a) No royalty payments shall be made on sales between Participants.
b) Royalty payments shall commence only when 1 1/2% of royalties
received by Proposer as computed according to paragraphs 1., 2. and
3. of this Annex E, shall equal or exceed the outstanding amount of
Proposer's obligation with respect to payments indicated in
Sub.Sec.B.3 of this Agreement. However, in no event shall Proposer's
obligation with respect to payments be greater than the amounts
indicated in Sub.Sec.B.3.b) of this Agreement. Should Proposer's
obligations for payment to the Foundation per Sub.Sec.B.3. not be
fully discharged, any such deficiency shall be made up from royalty
payments on products other than the Innovation, if any, which were
forgiven in accordance with the first sentence of this paragraph
4.b).
5. TERMS OF ROYALTY PAYMENTS;
The obligation to make royalty payments in the full amount under this
Agreement shall continue for the life of the last-to-expire patent issued
on any invention made in whole or in part under this Foundation-supported
project.
6. Royalty payments shall be made on a semiannual calendar basis, commencing
at the end of the semiannual period during which any royalty first becomes
due.
14
<PAGE>
ANNEX F
LICENSE AGREEMENTS
1. If any patented invention or inventions made in whole or in part during
this Foundation-supported project becomes the subject of any license
agreement between Proposer, or either Participant, and a third party, the
licensor shall pay to the Foundation 30% of all payments received by him
under such license agreement.
2. If any technology developed, but not including any patented invention or
inventions made in whole or in part during this Foundation-supported
project, becomes the subject of any license agreement between Proposer, or
either Participant, and a third party, the licensor shall pay to the
Foundation 30% of all payments received by him under such license
agreements, as and when received. Payments under Annex F.1. and this Annex
F.2. shall be deemed payments against Proposer's obligations under
Sub.Sec.B.3. In no event shall this Annex F be construed as requiring
payments of any amount greater than those indicated in Sub.Sec.B.3.b) of
this Agreement.
3. "License Agreement" as defined in paragraphs 1. and 2. of this Annex F
shall comprise only license agreements under which Proposer, or either
Participant, cedes to third parties the rights to use any patents or
technology arising from this Foundation-supported project for purposes of
using said patents or technology for engendering sales of products
developed hereunder. "License Agreements" shall not include any license
agreements which Proposer, or either Participant, enters into as a
necessary, common or convenient means by which said products are sold to
end-users in the ordinary course of business.
15
<PAGE>
EXHIBIT 11.1
MERCURY INTERACTIVE CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
(Primary and fully diluted)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1996 1995
---------- --------
<S> <C> <C>
Weighted average common shares 15,759 12,815
outstanding
Weighted average common equivalent
shares from dilutive options (1) -- 855
------- -------
Weighted average common shares and 15,759 13,670
equivalents
======= =======
Net income (loss) $ (650) $ 1,037
======= =======
Net income (loss) per share $ (.04) $ 0.08
======= =======
</TABLE>
(1) Common equivalent shares are excluded from the computation if their effect
is anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 46,576
<SECURITIES> 26,728
<RECEIVABLES> 10,739
<ALLOWANCES> 646
<INVENTORY> 567
<CURRENT-ASSETS> 88,617
<PP&E> 14,240
<DEPRECIATION> 4,755
<TOTAL-ASSETS> 107,316
<CURRENT-LIABILITIES> 14,902
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 92,383
<TOTAL-LIABILITY-AND-EQUITY> 107,316
<SALES> 8,600
<TOTAL-REVENUES> 11,000
<CGS> 496
<TOTAL-COSTS> 1,128
<OTHER-EXPENSES> 11,530
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (850)
<INCOME-TAX> (163)
<INCOME-CONTINUING> (650)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (650)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
