<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
MERCURY INTERACTIVE CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
MERCURY INTERACTIVE CORPORATION
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 30, 1997
TO THE STOCKHOLDERS OF MERCURY INTERACTIVE CORPORATION:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of MERCURY
INTERACTIVE CORPORATION (the "Company"), a Delaware corporation, will be held
at 2:00 p.m., local time, on April 30, 1997, at the Company's corporate
offices at 470 Potrero Avenue, Sunnyvale, California 94086, for the following
purposes:
1. To elect five (5) directors to serve for the ensuing year and until their
successors are elected.
2. To ratify the appointment of Price Waterhouse LLP as independent auditors
of the Company for the year ending December 31, 1997.
3. To transact such other business as may properly come before the meeting
or any postponements or adjournments thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on March 10, 1997 are
entitled to notice of and to vote at the Annual Meeting.
All stockholders are cordially invited to attend the Annual Meeting in
person; however, to ensure your representation at the meeting you are urged to
mark, sign, date and return the enclosed proxy card as promptly as possible in
the postage prepaid envelope enclosed for that purpose. YOU MAY REVOKE YOUR
PROXY IN THE MANNER DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT AT ANY TIME
BEFORE IT HAS BEEN VOTED AT THE ANNUAL MEETING. ANY STOCKHOLDER ATTENDING THE
ANNUAL MEETING MAY VOTE IN PERSON EVEN IF HE OR SHE HAS RETURNED A PROXY.
By Order of the Board of Directors,
Sharlene Abrams
Secretary
Sunnyvale, California
March 26, 1997
<PAGE>
MERCURY INTERACTIVE CORPORATION
PROXY STATEMENT FOR THE
1997 ANNUAL MEETING OF STOCKHOLDERS
----------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
The enclosed proxy is solicited on behalf of MERCURY INTERACTIVE CORPORATION
(the "Company") for use at the Annual Meeting of Stockholders to be held on
April 30, 1997 local time, or at any adjournment or postponement thereof, for
the purposes set forth herein and in the accompanying Notice of Annual Meeting
of Stockholders. The Annual Meeting will be held at the Company's corporate
offices at 470 Potrero Avenue, Sunnyvale, California 94086. The telephone
number at that location is (408) 523-9900. When proxies are properly dated,
executed, and returned, the shares they represent will be voted at the meeting
in accordance with the instructions of the stockholder. If no specific
instructions are given, the shares will be voted for the election of the
nominees for directors set forth herein, for the ratification of the
appointment of Price Waterhouse LLP as independent auditors as set forth
herein and at the discretion of the proxy holders upon such other business as
may properly come before the meeting or any adjournment or postponement
thereof.
These proxy solicitation materials and the Annual Report to Stockholders for
the year ended December 31, 1996, including financial statements, were first
mailed on or about March 26, 1997, to all stockholders entitled to vote at the
meeting.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on March 10, 1997 are
entitled to notice of and to vote at the meeting. At the record date,
16,184,347 shares of the Company's Common Stock, $0.002 par value, were issued
and outstanding. No shares of the Company's Preferred Stock were outstanding.
REVOCABILITY OF PROXIES
Any proxy given pursuant to the solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company at or before the taking of the vote at the
Annual Meeting a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of the Company at or before the taking of the
vote at the Annual Meeting or (iii) attending the Annual Meeting and voting in
person (although attendance at the Annual Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice of revocation or
subsequent proxy should be delivered to MERCURY INTERACTIVE CORPORATION at 470
Potrero Avenue, Sunnyvale, California 94086, Attention: Secretary, or hand-
delivered to the Secretary of the Company at or before the taking of the vote
at the Annual Meeting.
VOTING AND SOLICITATION
On all matters, each share has one vote.
The cost of soliciting proxies will be borne by the Company and is estimated
to be $500. The Company has retained ChaseMellon Shareholder Services, to
assist in its solicitation of proxies from brokers, nominees, institutions and
individuals. Arrangements will also be made with custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial
owners of shares held of record by such custodians, nominees and fiduciaries.
The Company will reimburse such custodians, nominees and fiduciaries for
reasonable expenses incurred in connection therewith. In addition, proxies may
be solicited by directors, officers and employees of the Company in person or
by telephone, telegram or other means of communication. No additional
compensation will be paid for such services.
<PAGE>
QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Annual Meeting is
a majority of the votes eligible to be cast by holders of shares of Common
Stock issued and outstanding on the Record Date. Shares that are voted "FOR,"
"AGAINST," or "WITHHELD FROM" on a matter are treated as being present at the
meeting for purposes of establishing a quorum and are also treated as shares
entitled to vote at the Annual Meeting (the "Votes Cast") with respect to such
matter.
While there is no definitive statutory or case law authority in Delaware as
to the proper treatment of abstentions, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes
Cast with respect to a proposal (other than the election of directors). In the
absence of controlling precedent to the contrary, the Company intends to treat
abstentions in this manner. Accordingly, abstentions will have the same effect
as a vote against the proposal.
In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that, while broker non-votes should be counted for purpose of
determining the presence or absence of a quorum for the transaction of
business, broker non-votes should not be counted for purposes of determining
the number of Votes Cast with respect to the particular proposal on which the
broker has expressly not voted. Accordingly, the Company intends to treat
broker non-votes in this manner. Thus, a broker non-vote will not affect the
outcome of the voting on a proposal.
STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING
The Company currently intends to hold its 1998 Annual Meeting of
Stockholders in early May 1998 and to mail Proxy Statements relating to such
meeting in late-March 1998 The date by which stockholder proposals must be
received by the Company for inclusion in the Proxy Statement and form of proxy
for its 1998 Annual Meeting of Stockholders, is November 27, 1997. Such
stockholder proposals should be submitted to MERCURY INTERACTIVE CORPORATION
at 470 Potrero Avenue, Sunnyvale, California 94086, Attention: Secretary.
2
<PAGE>
PROPOSAL NO. 1
ELECTION OF DIRECTORS
NOMINEES
The Company currently has five directors. Mr. Standish O'Grady resigned from
the board of directors in October 1996. In February 1996, the Board of
Directors reduced the number of directors to five (5) directors. A board of
five (5) directors is to be elected at the Annual Meeting. Unless otherwise
instructed, the proxy holders will vote the proxies received by them for
management's five (5) nominees named below, all of whom are presently
directors of the Company. In the event that any management nominee is unable
or declines to serve as a director at the time of the Annual Meeting, the
proxies will be voted for a nominee who shall be designated by the present
Board of Directors to fill the vacancy. In the event that additional persons
are nominated for election as directors, the proxy holders intend to vote all
proxies received by them in such a manner as will assure the election of as
many of the nominees listed below as possible, and, in such event, the
specific nominees to be voted for will be determined by the proxy holders. The
Company is not aware of any nominee who will be unable or will decline to
serve as a director. The term of office for each person elected as a director
will continue until the next annual meeting of the stockholders or until such
director's successor has been duly elected and qualified.
VOTE REQUIRED
The five nominees receiving the highest number of affirmative votes of the
shares entitled to be voted shall be elected to the Board of Directors. An
abstention will have the same effect as a vote withheld for the election of
directors, and pursuant to Delaware law, a broker non-vote will not be treated
as voting in person or by proxy on the proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE NOMINEES
LISTED BELOW.
The names of the nominees and certain information about them as of March 1,
1997 are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE POSITION(S) WITH THE COMPANY SINCE
- ------------------ --- ----------------------------------------------- --------
<S> <C> <C> <C>
Aryeh Finegold.... 50 Chairman of the Board of Directors 1989
Igal Kohavi(1)(2). 57 Director 1994
Amnon Landan...... 38 President, Chief Executive Officer and Director 1996
Yair Shamir(1)(2). 51 Director 1994
Giora Yaron(1)(2). 48 Director 1996
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Aryeh Finegold, a founder of the Company, has served as Chairman of the
Board of Directors since the Company's incorporation in July 1989, served as
Chief Executive Officer from July 1989 until January 1997 and served as
President from July 1989 until October 1995. Previously, Mr. Finegold was
President, Chief Executive Officer and Chairman of the Board of Directors of
Ready Systems, Inc. He also co-founded Daisy Systems, Inc., serving as its
President and Chief Executive Officer. Previously, Mr. Finegold was a product
line architect in the microprocessor division at Intel Corporation.
Mr. Igal Kohavi has been a director of the Company since January 1994. Mr.
Kohavi is currently the President of Dovrat Shrem & Co. Limited, an investment
company, and has served in that capacity since October 1994. Prior to that,
Mr. Kohavi served as the President of Clal Electronics Industries Ltd., from
May 1993 until September 1994. From April 1986 to May 1993, Mr. Kohavi served
as President of Clal Computers and Technology Ltd., an electronics company.
Mr. Kohavi serves on the board of directors of DSP Communications, Inc., DSP
Group, Inc. and Scanvec, Ltd.
3
<PAGE>
Mr. Amnon Landan has been a director of the Company since February 1996. Mr.
Landan has served as President and Chief Executive Officer of the Company
since February 1997. From October 1995 to January 1997 he served as President
of the Company and from March 1995 to September 1995 he served as President of
North American Operations. He served as Chief Operating Officer from August
1993 until March 1995. From December 1992 to August 1993, he served as the
Company's Vice President of Operations and from June 1991 to December 1992, he
served as Vice President of Research and Development. From November 1989 to
June 1991, he served in several technical positions with the Company.
Mr. Yair Shamir has been a director of the Company since August 1994. Mr.
Shamir is currently Executive Vice President of the venture capital firm The
Challenge Fund--Etgar L.P. and has served in that position since July 1995.
From January 1994 until July 1995, he was the Chief Executive Officer of Elite
Industries Ltd., a food products company. Prior to that, Mr. Shamir was the
Executive Vice President and General Manager, Israel of Scitex Corporation, an
electronics company, from January 1988 through January 1994. Mr. Shamir serves
on the board of directors of DSP Group, Inc. and Orckit, Ltd.
Dr. Giora Yaron has been a director of the Company since February 1996. Dr.
Yaron is the President of Yaron Technologies and Investments, an Israeli-based
venture capital fund, and has served in such capacity since November 1995.
Prior to that Dr. Yaron served as the President of Indigo NV, a vendor of
digital color press products, from August 1992 to November 1995. From April
1979 to July 1992, Dr. Yaron was with National Semiconductor Corporation where
he served as General Manager of its Israeli operations and Corporate Vice
President of Office Products.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held a total of five (5) meetings
during 1996. No directors attended fewer than 75% of the total number of
meetings of the Board of Directors or committees of the Board of Directors
held in 1996 during the period in which such directors were members of the
Board of Directors. The Board of Directors has an Audit Committee and a
Compensation Committee. The Board does not have a nominating committee or any
committee performing similar functions.
In 1996, the Audit Committee consisted of Messrs. Kohavi, Shamir and Yaron
and met four (4) times. This committee is primarily responsible for approving
the services performed by the Company's independent auditors and for reviewing
and evaluating the Company's accounting principles and its system of internal
accounting controls. Messrs. Kohavi, Shamir and Yaron will continue serving as
the Audit Committee for 1997.
In 1996, the Compensation Committee consisted of Messrs. Kohavi, O'Grady,
Shamir and Yaron and met one (1) time. This committee reviews and approves the
Company's executive compensation policy and plan. Mr. O'Grady resigned from
the Compensation Committee in October 1996 when he resigned from the Board of
Directors. Messrs. Kohavi, Shamir and Yaron will continue serving as the
Compensation Committee for 1997.
BOARD COMPENSATION
Directors do not receive any cash compensation for their services as members
of the Board of Directors, although they are reimbursed for their expenses in
attending out-of-town meetings. Officers are appointed by and serve at the
discretion of the Board of Directors. There are no family relationships
between directors and executive officers of the Company. Nonemployee directors
are automatically granted an initial option to purchase 25,000 shares of the
Company's Common Stock and thereafter annual grants to purchase 5,000 shares
of the Company's Common Stock pursuant to the terms of the Company's 1994
Directors' Stock Option Plan (the "Directors' Plan"). Pursuant to the
Directors' Plan, Messrs. Kohavi, O'Grady, Shamir and Yaron were each granted
an option to purchase 5,000 shares on the date of the 1996 Annual Meeting at
an exercise price of $13.50 which vests in whole on the fifth anniversary of
the date of grant, provided that such director has continually served as a
director of the Company until the fifth anniversary of the date of grant of
such option.
4
<PAGE>
PROPOSAL NO. 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has selected Price Waterhouse LLP, independent
auditors, to audit the consolidated financial statements of the Company for
the fiscal year ending December 31, 1997, and recommends that stockholders
vote for ratification of such appointment. In the event of a negative vote on
such ratification, the Board of Directors will reconsider its selection.
Price Waterhouse LLP has audited the Company's financial statements since
inception of the Company. Its representatives are expected to be present at
the Annual Meeting with the opportunity to make a statement if they desire to
do so and are expected to be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR RATIFICATION OF
THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
5
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation earned in each of the three
years in the period ended December 31, 1996 by the Chief Executive Officer and
each of the other three most highly compensated executive officers of the
Company (the "Named Executive Officers"), who are the only executive officers
who earned greater than $100,000 in salary and bonus during the year ended
December 31, 1996:
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION
- ------------------------ ---- ---------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Aryeh Finegold..........
Chief Executive Officer 1996 200,000(1) -- -- 30,000 --
and Chairman of the 1995 180,000(2) 120,000(3) -- 50,000 --
Board 1994 120,000(2) 75,000(3) -- -- --
Sharlene Abrams......... 1996 115,000 -- -- 35,000(5) --
Vice President of 1995 96,250 62,500(4) -- -- --
Finance and 1994 85,000 -- -- 50,000 --
Administration, Chief
Financial Officer and
Secretary
Kenneth Klein........... 1996 112,300 -- 208,923(6) 124,166(5) --
Vice President of North 1995 80,000 -- 179,084(6) 23,334 --
American Sales 1994 54,583 -- 252,929(6) 25,000 --
Amnon Landan(7)......... 1996 185,000 60,000 45,200(9) 170,000(5) --
President 1995 155,000 110,000(8) -- 40,000 --
1994 140,000 62,500 -- 35,000 --
</TABLE>
- --------
(1) Includes $100,000 in compensation paid to Mr. Finegold by the Company's
wholly-owned subsidiary in Israel.
(2) Includes $80,000 and $25,439 in salary that had been accrued but not yet
paid to Mr. Finegold as of the end of the years 1995 and 1994,
respectively.
(3) Includes bonuses of $60,000 and $75,000 awarded to Mr. Finegold which had
been accrued, but not yet paid to Mr. Finegold as of the end of the years
1995 and 1994, respectively.
(4) Includes a bonus of $18,000 awarded to Ms. Abrams which had been accrued
but not yet paid to Ms. Abrams as of the end of 1993.
(5) Includes replacement options granted in connection with an option repricing
in May 1996 of 20,000 shares for Ms. Abrams, 29,166 shares for Mr. Klein
and 25,000 shares for Mr. Landan. Options to purchase the same number of
shares originally granted in March 1995 were cancelled.
(6) Reflects the amounts paid as sales commission and/or a car allowance.
(7) Mr. Landan was appointed Chief Executive Officer effective February 10,
1997.
(8) Includes a bonus of $60,000 awarded to Mr. Landan which had been accrued,
but not yet paid to Mr. Landan as of the end of 1995.
(9) Includes $33,000 in housing costs, as well as a school and car allowance.
6
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
year ended December 31, 1996 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF EXERCISE ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS OR BASE PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE FOR OPTION TERM (4)
OPTIONS EMPLOYEES IN ($/SH) EXPIRATION ---------------------
NAME GRANTED(#)(1) FISCAL YEAR (2) (3) DATE 5% ($) 10% ($)
- ------------------------ ------------- --------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Aryeh Finegold(5)....... 30,000 1.60% $12.75 5/2/06 $ 240,669 $ 992,106
Sharlene Abrams(5)...... 15,000 0.80 12.75 5/2/06 120,276 496,053
Kenneth Klein(5)........ 95,000 5.06 12.75 5/2/06 761,749 3,141,671
Amnon Landan(5)......... 170,000 9.05 12.75 5/2/06 1,363,129 5,621,937
</TABLE>
- --------
(1) Under the terms of the Company's 1989 Stock Option Plan, the Board of
Directors retains discretion, subject to plan limits, to modify the terms
of outstanding options and to reprice the options.
(2) An aggregate of 1,878,033 options to purchase shares of Common Stock of
the Company were granted to employees during 1996.
(3) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of shares that are already owned or by offset of the
underlying shares, subject to certain conditions.
(4) This column shows the hypothetical gains or "options spreads" of the
options granted based on assumed annual compound stock appreciation rates
of 5% and 10% over the full ten year term of the option. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Commission
and do not represent the Company's estimate or projection of future Common
Stock prices.
(5) Messrs. Finegold, Klein and Landan and Ms. Abrams were granted options on
May 2, 1996. Each option vests at the rate of 1/4th of the shares subject
to the option at the end of twelve months and 1/36th of the remaining
shares subject to the option at the end of each monthly period thereafter
as long as such optionee's employment with the Company has not terminated.
Under the Company's 1989 Stock Option Plan all options are immediately
exercisable whether or not vested. Shares purchased upon exercise of
unvested options are subject to repurchase by the Company, at its option,
upon the optionee's termination of employment.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES.
The following table provides certain information concerning the exercises of
options by each of the Named Executive Officers during the year ended December
31, 1996, including the aggregate value of gains on the date of exercise:
<TABLE>
<CAPTION>
NO. OF NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT FY-END(#)(2): OPTIONS AT FY-END($)(1):
ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ---------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Aryeh Finegold.......... -- -- 140,000 -- 290,750 --
Sharlene Abrams......... -- -- 85,000 -- 202,500 --
Kenneth Klein........... -- -- 171,667 -- 177,971 --
Amnon Landan............ -- -- 310,000 -- 818,125 --
</TABLE>
- --------
(1) Calculated by determining the difference between the closing price of the
Company's Common Stock on the Nasdaq National Market at year-end ($13.00)
and the exercise price of the in-the-money options. Such numbers do not
reflect amounts actually realized upon sale of the shares by such
officers.
(2) Under the Company's 1989 Stock Option Plan all options are immediately
exercisable whether or not vested. Shares purchased upon exercise of
unvested options are subject to repurchase by the Company, at its option,
upon the optionee's termination of employment.
7
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
The following is the Report of the Compensation Committee of the Company,
describing the compensation policies and rationale applicable to the Company's
executive officers with respect to the compensation paid to such executive
officers for the year ended December 31, 1996. The information contained in
the report shall not be deemed to be "soliciting material" or to be "filed"
with the Securities and Exchange Commission nor shall such information be
incorporated by reference into any future filing under the Securities Act of
1933, as amended (the "Securities Act") or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), except to the extent that the Company
specifically incorporates it by reference into such filing.
TO: Board of Directors
The Compensation Committee of the Board of Directors of Mercury
Interactive Corporation is charged with the responsibility of administering
all aspects of the Company's executive compensation programs. The members
of the Committee for the year ended December 31, 1996 were Messrs. Kohavi,
O'Grady, Shamir and Yaron, who were all nonemployee Directors of the
Company. Mr. O'Grady resigned from the Committee when he resigned from the
Board of Directors in October 1996.
COMPENSATION OBJECTIVES
The objectives of the compensation program are: (1) to provide a means
for the Company to attract and retain high-quality executives; (2) to tie
executive compensation directly to the Company's business and performance
objectives; and (3) to reward outstanding individual performance that
contributes to the long-term success of the Company.
COMPENSATION VEHICLES
The Company uses a simple total compensation program that consists of
cash and equity compensation. Having a compensation program that allows the
Company to successfully attract and retain key employees permits it to
provide useful products and services to customers, enhance stockholder
value, stimulate technological innovation, foster Company values and
adequately reward employees. The vehicles are:
CASH COMPENSATION
Salary
The Committee considers specifically the following factors in determining
base compensation: (1) a comparison of the Company's growth and financial
performance relative to the performance of competitors; (2) salary levels
for comparable positions in companies in the software industry; and (3)
each executive's responsibility level and financial and strategic
objectives for the subsequent year.
Bonus
Annual and other bonuses for officers other than Mr. Finegold are based
on the Company's financial performance as well as individual executive
officer performance compared to goals. Other qualitative factors are also
included in determining the bonuses, including achievements within the
organization for which an executive is responsible and bonuses given by
other similarly situated companies.
EQUITY PARTICIPATION
The Company has adopted a stock option plan to provide employees with
additional incentives to work to maximize stockholder value. The stock
option plan utilizes vesting periods to encourage key employees to continue
in the employ of the Company. Stock options have been awarded to the
majority of the Company's employees. The Company believes that options
align the interests of executive officers closely with the interests of
other stockholders because of the direct benefits executive officers
receive through improved stock performance.
8
<PAGE>
OPTION REPLACEMENT
One of the Company's officers was granted an option to purchase shares
with an exercise price of $19.00 in June 1995 and two of the Company's
officers were granted options to purchase shares with exercise prices of
$16.75 in March 1995. During the second quarter of 1996, the share price of
the Company's Common Stock as reported on the Nasdaq National Market fell
to as low as $12.75 and in May 1996 the Board of Directors believed that it
was in the Company's best interests to cancel the earlier options and to
grant new options to all employees, including these officers with exercise
prices equal to the fair market value of the Common Stock at the time of
the new grant.
<TABLE>
<CAPTION>
TEN-YEAR OPTION/SAR REPRICINGS
------------------------------------------------------------
LENGTH OF
ORIGINAL
OPTION
NUMBER OF TERM
SECURITIES MARKET PRICE EXERCISE REMAINING
UNDERLYING OF STOCK AT PRICE AT AT DATE
OPTIONS TIME OF TIME OF NEW OF
REPRICED OR REPRICING OR REPRICING EXERCISE REPRICING
AMENDED AMENDMENT OR PRICE OR
NAME DATE (#) ($) AMENDMENT ($) AMENDMENT
- ------------------------ ------ ----------- ------------ --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Amnon Landan............ 5/2/96 25,000 $12.75 $19.00 $12.75 9 years,
President, Chief 2 months
Executive Officer
and Director
Sharlene Abrams......... 5/2/96 20,000 $12.75 $16.75 $12.75 8 years,
Vice President of 10 months
Finance and
Administration, Chief
Financial Officer and
Secretary
Kenneth Klein........... 5/2/96 29,166 $12.75 $16.75 $12.75 8 years,
Vice President of North 10 months
American
Sales
</TABLE>
9
<PAGE>
CHIEF EXECUTIVE OFFICER'S COMPENSATION
Compensation for the Chief Executive Officer is determined by a process
similar to that discussed above for executive officers. Mr. Finegold's base
compensation for fiscal 1996 was established by the Compensation Committee
in May 1996.
The Committee also established Mr. Finegold's individual bonus plan for
the fiscal year according to the bonus structure described above and based
on 1996 Company performance objectives for Mr. Finegold established in May
1996.
Mr. Finegold did not receive a bonus in 1996. Mr. Finegold may be
eligible for a 1996 performance bonus, but the amount of such bonus has not
been determined.
The foregoing report has been furnished by the Compensation Committee of the
Board of Directors of Mercury Interactive Corporation.
Compensation Committee
Igal Kohavi
Yair Shamir
Giora Yaron
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Please see "Certain Transactions With Management" below for information
regarding reportable transactions between the Company and members of the
Compensation Committee. Mr. O'Grady is a principal of Hambrecht & Quist Group
which is affiliated with several investors in the Company.
10
<PAGE>
COMPANY PERFORMANCE
The following line graph compares the cumulative total return to
stockholders on the Company's Common Stock since October 29, 1993 (the date
the Company first became subject to the reporting requirements of the Exchange
Act). The graph compares stockholder return on the Company's Common Stock with
the same cumulative total return on (i) The Nasdaq Stock Market (U.S.
companies only) Index and (ii) the Hambrecht & Quist Growth Index. The
information contained in the Performance Graph shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act or the Exchange Act, except to the
extent that the Company specifically incorporates it by reference into such
filing.
The graph assumes that $100 was invested on October 29, 1993 in the
Company's Common Stock at the initial public offering price of $13.00 per
share and in the index, and that all dividends were reinvested. No dividends
have been declared or paid on the Company's Common Stock. Stockholder returns
over the period indicated should not be considered indicative of future
stockholder returns.
MERCURY INTERACTIVE
H&Q GROWTH INDEX
NASDAQ STOCK MARKET--U.S. INDEX
MERCURY H&Q NASDAQ STOCK MARKET
DATES INTERACTIVE GROWTH U.S. INDEX
=============================================================================
10/29/93 100 100 100
Nov-93 159.62 97.89 97.02
Dec-93 132.69 100.41 99.72
Jan-94 137.50 107.70 102.75
Feb-94 134.62 104.66 101.79
Mar-94 132.69 94.18 95.53
Apr-94 112.50 92.46 94.29
May-94 94.23 87.83 94.52
Jun-94 78.85 79.90 91.06
Jul-94 73.08 82.23 92.93
Aug-94 79.81 94.60 98.85
Sep-94 76.45 97.18 98.60
Oct-94 113.46 100.39 100.54
Nov-94 90.38 100.20 97.20
Dec-94 101.92 103.89 97.48
Jan-95 98.08 103.56 98.02
Feb-95 100.00 110.90 103.21
Mar-95 129.81 116.30 106.27
Apr-95 165.38 117.28 109.61
May-95 171.15 116.44 112.44
Jun-95 154.81 131.18 121.55
Jul-95 192.31 149.74 130.48
Aug-96 107.69 174.66 150.13
Sep-96 106.73 196.47 161.62
Oct-96 98.08 184.12 159.85
Nov-96 76.92 183.82 169.76
Dec-96 100.00 186.42 169.57
11
<PAGE>
CERTAIN TRANSACTIONS WITH MANAGEMENT
Aryeh Finegold, the Company's Chairman of the Board of Directors, was named
as a co-defendant in a suit by a former employee of the Company, which was
settled in February 1996. Mr. Finegold and the Company are parties to the
Company's standard form of indemnification agreement for officers and
directors pursuant to which the Company had indemnified Mr. Finegold for the
legal fees and expenses incurred by Mr. Finegold in defense and settlement of
this lawsuit.
The Company has entered into indemnification agreements with each of its
directors and executive officers. Such agreements require the Company to
indemnify such individuals to the fullest extent permitted by Delaware law.
12
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 1, 1997 (except as noted in the
footnotes) certain information with respect to the beneficial ownership of the
Company's Common Stock by (i) each person known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (ii) each
director of the Company, (iii) each of the Named Executive Officers and (iv)
all directors and executive officers as a group. Except as indicated in the
footnotes to this table the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY
OWNED
--------------------
PERCENTAGE
NAME OF BENEFICIAL OWNER NUMBER OWNERSHIP
------------------------ --------- ----------
<S> <C> <C>
Entities affiliated with Mellon Bank Corporation(1)....... 1,937,000 11.97%
One Mellon Bank Center
500 Grant Street
Pittsburg, PA 15258-0001
Wellington Management Company, LLP(2)..................... 1,561,000 9.65%
75 State Street
Boston, Massachusetts 02109
Pioneering Management Corporation(3)...................... 1,293,000 7.99%
60 State Street
Boston, MA 02109
Entities affiliated with The Hartford Investment
Management Company(4).................................... 809,700 5.00%
200 Hopmeadow Street
Simsbury, CT 06070
Aryeh Finegold(5)(6)...................................... 681,979 4.18%
Mercury Interactive Corporation
470 Potrero Avenue
Sunnyvale, CA 94086
Amnon Landan(6)(7)........................................ 329,722 2.00%
Igal Kohavi(8)............................................ 10,000 *
Yair Shamir(9)............................................ 33,000 *
Giora Yaron(8)............................................ 10,000 *
Sharlene Abrams(6)(10).................................... 85,000 *
Kenneth Klein(6)(11)...................................... 167,331 1.02%
All directors and officers as a group
(7 persons)(5)(6)(7)(8)(9)(10)(11)....................... 1,371,032 7.72%
</TABLE>
- --------
* Less than 1%.
(1) Number of shares beneficially owned or of record is determined solely
from information reported on a Schedule 13G as of December 31, 1996.
Includes shares held of record by Mellon Bank Corporation (1,937,000
shares), of which the following entities are beneficial owners in various
fiduciary capacities: Mellon Bank N.A. (1,508,000 shares), The Dreyfus
Corporation (1,440,000 shares) and Premier Aggressive Growth Fund Inc.
(875,000 shares).
(2) Number of shares beneficially owned of record is determined solely from
information reported on a Schedule 13G as of December 31, 1996. Such
shares are owned of record by clients of Wellington Management Committee
which is reporting such shares in its capacity as an investment advisor.
13
<PAGE>
(3) Number of shares beneficially owned is determined solely from information
reported on a Schedule 13G as of December 31, 1996.
(4) Number of shares beneficially owned of record is determined solely from
information reported on a Schedule 13G as of December 31, 1996. Includes
shares held of record by the Hartford Investment Management Company
(809,700 shares), which are beneficially owned by Hartford Capital
Appreciation Fund, Inc. (785,000 shares), Hartford Small Company Fund,
Inc. (22,300 shares) and ITT Hartford Small Company Fund (2,400 shares).
(5) Includes 156,484 shares held in trust for the Finegold family; 96,373
shares held in trust for Gad Finegold, 96,374 shares held in trust for
Michal Finegold, 96,374 shares held in trust for Tamar Finegold and
96,374 shares held in trust for Yonatan Finegold; Mr. Finegold is a co-
trustee of the above trusts. Also includes 140,000 shares subject to
stock options held by Mr. Finegold that are exercisable within 60 days of
March 1, 1997.
(6) Includes shares subject to outstanding options that are currently
exercisable or exercisable within 60 days of March 1, 1997. Because all
options granted by the Company pursuant to the Amended and Restated 1989
Stock Option Plan (the "Option Plan") are immediately exercisable whether
or not vested, all options granted pursuant to the Option Plan, held by
parties named in the table have been treated as currently exercisable.
However, the Company has a right to repurchase, upon the optionee's
termination of employment, any shares acquired by the optionee through
the exercise of any unvested options. This repurchase right lapses over
time.
(7) Includes 310,000 shares subject to stock options held by Mr. Landan that
are exercisable within 60 days of March 1, 1997.
(8) Includes options exercisable within 60 days of March 1, 1997 for 10,000
shares of Common Stock pursuant to the Company's 1994 Directors' Stock
Option Plan.
(9) Includes options exercisable within 60 days of March 1, 1997 for 10,000
shares of Common Stock pursuant to the Company's 1994 Directors' Stock
Option Plan. Includes 23,000 shares registered in the name of Goldfarb &
Levy and held on behalf of Mr. Shamir.
(10) Includes 85,000 shares subject to stock options held by Ms. Abrams that
are exercisable within 60 days of March 1, 1997.
(11) Includes 166,249 shares subject to stock options held by Mr. Klein that
are exercisable within 60 days of March 1, 1997.
14
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act and regulations of the Securities and
Exchange Commission (the "SEC") thereunder require the Company's executive
officers and directors, and persons who own more than 10% of a registered
class of the Company's equity securities, to file reports of initial ownership
and changes in ownership with the SEC. Based solely on its review of copies of
such forms received by the Company, or on written representations from certain
reporting persons that no other reports were required for such persons, the
Company believes that, during or with respect to the period from January 1,
1996 to December 31, 1996, all of the Section 16(a) filing requirements
applicable to its executive officers, directors and 10% stockholders were
complied with.
OTHER MATTERS
The Company knows of no other matters to be brought before the meeting. If
any other matters properly come before the meeting, it is the intention of the
persons named in the accompanying proxy to vote the shares represented as the
Board of Directors may recommend.
THE BOARD OF DIRECTORS
Sharlene Abrams
Secretary
Dated: March 26, 1997
15
<PAGE>
- --------------------------------------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
MERCURY INTERACTIVE CORPORATION
1997 ANNUAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Mercury Interactive Corporation, a Delaware
corporation (the "Company"), hereby acknowledges receipt of the Notice of
Annual Meeting of Stockholders and Proxy Statement, each dated March 26, 1997,
and hereby appoints Aryeh Finegold and Sharlene Abrams, or either of them,
proxies and attorneys-in-fact, with full power to each of substitution, on
behalf and in the name of the undersigned, to represent the undersigned at the
1997 Annual Meeting of Stockholders of Mercury Interactive Corporation to be
held on April 30, 1997, at 2:00 p.m. local time, at the Company's corporate
offices at 470 Potrero Avenue, Sunnyvale, California, and at any
adjournment(s) thereof, and to vote all shares of Common Stock which the
undersigned would be entitled to vote if then and there personally present, on
the matters set forth below.
THIS PROXY WILL BE VOTED AS DIRECTED, OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE ELECTION OF DIRECTORS, FOR THE RATIFICATION
--- ---
OF THE APPOINTMENT OF PRICE WATERHOUSE LLP AS INDEPENDENT AUDITORS, AND AS
SAID PROXIES DEEM ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING.
(Continued and to be signed on reverse side)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Please mark [X]
votes as in
this example
<S> <C> <C>
1. To elect five (5) directors of the 2. To ratify the appointment of Price 3. To transact such other business as may
Company for the ensuing year and until Waterhouse LLP as independent auditors properly come before the meeting or any
their successors are elected: of the Company for the year ending postponements or adjournments thereof.
December 31, 1997.
NOMINEES:
Aryeh Finegold,
Amnon Landan,
Igal Kohavi,
Yair Shamir and FOR WITHHELD FOR WITHHELD ABSTAIN FOR WITHHELD
Giora Yaron.
[_] [_] [_] [_] [_] [_] [_]
- ----------------------------------------
FOR all nominees except as noted above
[_] Mark here for address
change and note at left.
</TABLE>
Signature(s): Date:
---------------------------------------------- ---------------
NOTE: (This proxy should be marked, dated, signed by the stockholder(s) exactly
as his or her name appears hereon, and returned promptly in the enclosed
envelope. Persons in a fiduciary capacity should so indicate. If shares
are held by joint tenants or as community property, both should sign. )
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
