-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KsaLdqLDomMqPH0XTAvuh59d3t+Ze0MzFzhxrs6Uftvlqb3q468zYfAN/ei3oq09 o1O/NKfB1/N6C51GAY5CLg== 0000950132-96-000317.txt : 19960517 0000950132-96-000317.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950132-96-000317 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCURY INTERACTIVE CORPORATION CENTRAL INDEX KEY: 0000867058 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770224776 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22350 FILM NUMBER: 96567855 BUSINESS ADDRESS: STREET 1: 470 POTRERO AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4085239900 MAIL ADDRESS: STREET 1: 470 POTRERO AVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-Q 1 FORM 10-Q DATED 03/31/96 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. 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 PART I. FINANCIAL INFORMATION Item 1. Financial Statements MERCURY INTERACTIVE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (In thousands, except per share amounts) (unaudited)
March 31, December 31, 1996 1995 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 ======== ========
See accompanying notes to condensed consolidated financial statements. MERCURY INTERACTIVE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) (unaudited)
Three months ended March 31, ------------------- 1996 1995 ------------------- 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 ======= =======
See accompanying notes to condensed consolidated financial statements. MERCURY INTERACTIVE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (in thousands) (unaudited)
Three months ended March 31, -------------------- 1996 1995 -------- --------- 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
See accompanying notes to condensed consolidated financial statements. 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. 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. 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 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. 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. 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 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. 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. 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. 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) INDEX TO EXHIBITS -----------------
Exhibit Description Sequentially No. Numbered Page 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
EX-10.1 2 COOPERATION AND PROJECT FUNDING AGREEMENT 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; 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
------------------------------------------------ Years Following Maximum Percentage of First Commercial Conditional Grant and Transaction Other Sums to be Repaid ------------------------------------------------ 1 116 2 124 3 132 4 141 5 148 6 and more 150 ------------------------------------------------
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 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 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 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 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 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 ANNEX A APPROVED PROJECT BUDGET Synopsis Systems Ltd. (12 months duration)
Cost to Totals Project 1. DIRECT LABOR Gross Annual Salary % on (inc. Social Benefits) Project 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
9 ANNEX A APPROVED PROJECT BUDGET Mercury Interactive Corporation (12 months duration)
Cost to Totals Project 1. DIRECT LABOR Gross Annual Salary % on (inc. Social Benefits) Project 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
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
10 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 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 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 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 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 EX-11.1 3 COMPUTATION OF NET INCOME (LOSS) EXHIBIT 11.1 MERCURY INTERACTIVE CORPORATION COMPUTATION OF NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (Primary and fully diluted) (in thousands, except per share amounts)
Three months ended March 31, --------------------- 1996 1995 ---------- -------- 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 ======= =======
(1) Common equivalent shares are excluded from the computation if their effect is anti-dilutive. EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1995 JAN-01-1996 MAR-31-1996 46,576 26,728 10,739 646 567 88,617 14,240 4,755 107,316 14,902 0 0 0 31 92,383 107,316 8,600 11,000 496 1,128 11,530 0 0 (850) (163) (650) 0 0 0 (650) (0.04) (0.04)
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