-----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, HI/sEcaxm+HK1FZ7EzrDDAnV9a1eQjA+w0lcoBmJjWe9WoO5AwG+mEWsNmCs7DhF DhccXt93B64ztP7UunbPhg== 0001012870-01-001395.txt : 20010330 0001012870-01-001395.hdr.sgml : 20010330 ACCESSION NUMBER: 0001012870-01-001395 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010329 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-K SEC ACT: SEC FILE NUMBER: 000-22350 FILM NUMBER: 1584674 BUSINESS ADDRESS: STREET 1: 1325 BORREGAS AVE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4088225200 MAIL ADDRESS: STREET 1: 1325 BORREGAS AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94089 10-K 1 0001.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2000 [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. Commission File Number: 0-22350 ---------------- MERCURY INTERACTIVE CORPORATION (Exact name of registrant as specified in its charter) Delaware 77-0224776 (I.R.S. Employer Identification No.) (State or other jurisdictionof incorporation or organization) 1325 Borregas Avenue, Sunnyvale, CA 94089 (Address of principal executive offices) (408) 822-5200 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.002 par value ---------------- 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $4,469,532,189 as of February 28, 2001, based upon the closing sale price reported for that date on the Nasdaq National Market. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes. The number of shares of Registrant's Common Stock outstanding as of February 28, 2001 was 81,530,505. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 2000 Annual Meeting of Stockholders to be held May 15, 2001 are incorporated by reference in Part III of this Annual Report on Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- PART I Item 1. Business...................................................... 3 General....................................................... 3 Web Performance Testing and Monitoring Solutions.............. 5 Research and Development...................................... 7 Marketing, Sales and Support.................................. 8 Competition................................................... 9 Patents, Trademarks and Licenses.............................. 9 Personnel..................................................... 10 Item 2. Properties.................................................... 11 Item 3. Legal Proceedings............................................. 11 Item 4. Submission of Matters to a Vote of Security Holders........... 11 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................................... 12 Item 6. Selected Consolidated Financial Data.......................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 14 Item 7a. Quantitative and Qualitative Disclosures about Market Risk.... 25 Item 8. Financial Statements and Supplementary Data................... 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 26 PART III Item 10. Directors and Executive Officers of the Registrant............ 27 Item 11. Executive Compensation........................................ 27 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................... 27 Item 13. Certain Relationships and Related Transactions................ 27 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................................... 28
2 This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. In some cases, forward-looking statements are identified by words such as "believes," "anticipates," "expects," "intends," "plans," "will," "may" and similar expressions. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Risk Factors." Our business may have changed since the date hereof, and we undertake no obligation to update the forward-looking statements in this Annual Report on Form 10-K. PART I Item 1. Business General We are the leading provider of integrated performance management solutions that enable businesses to test and monitor their Web-based applications. Our software products and hosted services help Global 2000 companies enhance the user experience by improving the performance, availability, reliability and scalability of their Web-based applications. Our hosted services provide our customers a cost-effective solution that quickly meets business needs without dedicating significant time and internal resources. By using our solutions to identify and assess performance problems, businesses can increase their ability to attract and retain customers, improve their competitive advantage and maximize overall performance with minimum investment. Our customers represent a wide range of industries including global enterprises such as Anheuser-Busch, BMW, Charles Schwab, Citibank, DaimlerChrysler, DHL Airways, Ericsson, Ford Motor Company Hewlett-Packard, MCI WorldCom, Microsoft, Motorola, Nokia, Norwich Union, Qwest Communications, Siemens, Sony (US), Verizon and Walmart; and Internet infrastructure providers such as Akamai, BEA Systems, i2 Technologies and Oracle. Our integrated performance management solutions enable customers to more quickly identify and correct problems before users experience them. Our products include load testing, functional testing and test management products that automate the testing of Internet and other applications, as well as Web performance monitoring products that monitor and measure Web site performance from the end-user's perspective, alert our customers to performance problems and quickly diagnose the root cause of these problems. Our hosted services provide outsourced load testing and Web performance monitoring services that complement our software products. Specifically, our performance management solutions include: . Load testing products that stress applications under real-world conditions to predict systems' behavior, scalability and performance and to identify and isolate problems; . Functional testing products that help ensure applications operate as expected; . Test process management products that organize and manage the testing process to determine application readiness; . Web performance monitoring products that monitor sites in real time and alert operations groups to performance problems before users experience them; . Hosted Web performance monitoring services that proactively monitor Web sites in real time; and . Hosted load testing services that identify bottlenecks and capacity constraints before a Web site goes live. 3 We collaborate with a number of enterprise software and Internet infrastructure companies, including Art Technology Group, Akamai, Allaire, Alteon Websystems, Ariba, BEA Systems, Bluestone Software (recently acquired by Hewlett-Packard), BroadVision, Cacheflow, Checkpoint, Cisco, IBM, iPlanet, i2 Technologies, Merant, Oracle, Peoplesoft, SAP, Siebel Systems and Vignette, to ensure that our performance management solutions are optimized for use with their product offerings. In addition, many of these collaborations allow us to conduct joint marketing programs and joint seminars and participate in their user conferences. In February 2000, we formed a wholly-owned subsidiary to offer our hosted Web performance monitoring service, ActiveWatch, and our hosted Web load testing service, ActiveTest. We believe our Managed Service Provider (MSP) subsidiary complements our existing offerings by providing a cost-effective solution that allows customers to quickly meet their needs without dedicating significant time and internal resources. This subsidiary currently serves more than 400 customers. 4 Web Performance Testing and Monitoring Solutions Our products and hosted solutions bring together two key aspects of application performance management ("APM"): Web performance testing and monitoring. Testing allows customers to check the scalability and reliability of applications prior to release. Customers then have the information they need to fix any problems and optimize performance before making an application available to users. After the application is released, customers can ensure continuous performance and availability through the use of Web performance monitoring products and services. Monitoring enables customers to detect, diagnose and isolate performance problems that can negatively impact the end- user experience. In particular, monitoring solutions alert customers to performance problems and provide the information needed to locate their exact source. Our software products and hosted services provide a comprehensive, integrated solution for Web performance testing and monitoring. Our current Web performance testing and monitoring solutions include:
Date of Typical Starting List Solution Name Solution Description Introduction Price* - ------------- -------------------- ------------ --------------------- Testing Solutions Load Testing ActiveTest.............. Hosted Web site stress testing January 2000 $15,000 for 100 virtual users Astra LoadTest.......... Stress testing for Web applications December 1996 $9,995 for 50 virtual users LoadRunner.............. Automated multi-user load testing November 1993 $40,000-$50,000 for for Web, client server and package simulating 50 enterprise applications users Functional Testing Astra QuickTest......... Functional testing for Web May 1998 $3,995 per copy applications WinRunner............... Automated functional application June 1993 $4,995-$10,000 per user testing for Web, client server and enterprise applications XRunner................. Automated functional application 1991 $10,000-$15,000 per testing for UNIX, X-Window user Test Management Astra FastTrack......... Web-based defect tracking tool January 2001 $595/concurrent user (limited to 10 users) Astra SiteManager....... Visual Web site management tool October 1996 No charge TestDirector............ Automated test management system November 1994 $12,000 for server and for QA workgroups 5 users Monitoring Solutions ActiveWatch............. Hosted performance monitoring October 1999 $9,375/month Topaz................... Web application performance October 1999 $5,000/month monitoring Topaz Prism............. Web site monitoring from inside the October 2000 $3,333/month firewall
- -------- * List prices vary according to system configuration and country where purchased. In addition, actual prices may vary from list prices. 5 Testing Solutions ActiveTest ActiveTest(TM) is the hosted load testing service that can conduct full- scale testing of Web sites in as little as 24 hours. Based on LoadRunner technology, ActiveTest can emulate the behavior of millions of users interacting with a Web application to identify bottlenecks and capacity constraints before the site goes live. This hosted service enables customers with minimal hardware, personnel or technical expertise to achieve rapid results. ActiveTest was initially introduced in 2000. Astra LoadTest Astra(R) LoadTest is an easy-to-use load testing tool that tests the scalability and performance of Web applications. With Astra LoadTest, users can emulate the traffic of thousands of real users to identify and isolate bottlenecks and optimize the user experience. Astra LoadTest was initially released in 1996. LoadRunner LoadRunner(R) is a load testing tool that predicts system behavior and performance. It exercises an entire enterprise infrastructure by emulating thousands of users to identify and isolate problems. LoadRunner's integrated real-time monitors enable organizations to minimize test cycles, optimize performance and accelerate application deployment. LoadRunner is available for Windows, Windows 95, Windows NT, UNIX and Linux. LoadRunner was initially released in 1993. Astra QuickTest Astra QuickTest(TM) is an icon-based tool that allows expert and novice testers to test the functionality of dynamically changing Web applications. By mirroring end user behavior, Astra QuickTest creates interactive customizable tests that simplify and shorten the testing cycle for complex Web environments. Astra QuickTest was initially released in 1998. WinRunner WinRunner(R) is an enterprise functional testing tool that verifies that applications work as expected. By capturing, verifying and replaying user interactions automatically, WinRunner identifies defects and ensures that business processes work flawlessly and remain reliable throughout the lifecycle. WinRunner is available for Windows 2000, Windows Me and Windows NT platforms. WinRunner was initially released in 1993. XRunner XRunner(R) automates functional testing to ensure X-Window-based applications work as expected. It records business processes into test scripts, supports script enhancements as the application is developed or updated, executes scripts, reports results and enables script reusability throughout an application's lifecycle. XRunner was initially released in 1991. Astra FastTrack Astra FastTrack(TM) is a fast, simple Web-based defect-tracking tool. It supports the process for end-to-end defect management, helping companies deliver higher quality applications. Astra FastTrack was initially released in 2001. Astra SiteManager Astra SiteManager(TM) is a comprehensive visual Web site management tool that is designed to meet the challenges faced by Webmasters, Internet professionals and business managers of rapidly growing Web sites. Astra SiteManager automatically schedules and performs scans of an entire Web site-- highlighting functional areas with color-coded links and URLs--to create a complete visual map of a Web site. Astra SiteManager was initially released in 1996. 6 TestDirector TestDirector(R) is a Web-based test management solution that globally coordinates testing across an organization. TestDirector integrates requirements management with test planning, test scheduling, test execution and defect tracking in a single application to accelerate the testing process. TestDirector was initially released in 1994. Monitoring Solutions ActiveWatch ActiveWatch(TM) is a hosted service that monitors Web site performance around the clock to proactively identify and pinpoint problems within complex Web sites. Based on Topaz, ActiveWatch accurately measures the Web site user experience from various points across the globe to ensure peak performance 24x7. ActiveWatch was initially introduced in 1999. Topaz and Topaz Prism Topaz(TM) is a solution for monitoring, detecting and diagnosing Web application performance problems. It measures the end-user experience and correlates any performance issues with their root cause in the Web infrastructure. The Topaz family of application performance management solutions consists of Topaz ActiveAgent and Topaz Prism. These products alert customers to performance problems and provide the information needed to isolate their root cause and minimize the impact on users. By using Topaz, customers can optimize their Web site performance to ensure a positive end-user experience anytime, anywhere. Topaz was initially released in 1999. Research and Development Since our inception in 1989, we have made substantial investments in research and product development. We believe that our success will depend in large part on our ability to maintain and enhance our current product line, develop new products, maintain technological competitiveness and meet changing customer requirements. In addition to the teams developing testing and performance monitoring products and services, we maintain an advanced research group that is responsible for exploring new directions and applications of core technologies, migrating new technologies into the existing product lines and maintaining research relationships outside Mercury both within industry and academia. The research and development group also maintains relationships with third-party software vendors and with all major hardware vendors on whose platforms our products operate. Key development engineers are rotated to assignments in customer support positions in our major markets for periods ranging from three months to two years. This improves feedback from current customers and strengthens ties between the Customer Support Organization and the research and development group. Our primary research and development group is located near Tel Aviv, Israel. Performing research and development in Israel offers a number of strategic advantages. Our Israeli engineers typically hold advanced degrees in computer- related disciplines. Operation in Israel has allowed us to enjoy tax incentives from the government of Israel. Geographic proximity to Europe, a strategic market for Mercury, offers another key advantage. As of December 31, 2000, our research and development group consisted of 316 employees. Our research and development expenses were $32.0 million in 2000, $23.5 million in 1999 and $16.9 million in 1998. We anticipate that we will continue to commit substantial resources to research and development. 7 Marketing, Sales and Support We distribute our products and offer our services both directly, through our growing sales force, and indirectly, through our relationships with systems integrators and value-added resellers. Direct Sales We sell our products primarily through our direct sales organization. We employ technically proficient salespeople and highly skilled field application engineers capable of serving the sophisticated needs of prospective customers. Our direct sales organization includes our cybersales group which is focused on selling ActiveWatch and ActiveTest hosted services. As of December 31, 2000, our direct sales organization consisted of 561 employees. We have 23 sales and support centers throughout the United States. Internationally, our subsidiaries operate 20 sales and support offices located in Canada, Brazil, Europe, Israel, South Africa and the Pacific Rim. We also market our products through international distributors in some markets. International sales represented 32% of our total revenues in 2000, 34% in 1999 and 35% in 1998, respectively. We expect that in future periods, international sales will continue to account for a significant portion of our total revenue. Indirect Distribution Channels We derive a substantial portion of our revenue from sales of our products through indirect distribution channels such as systems integrators and value- added resellers, including Accenture, Computer Sciences Corporation, Ernst & Young, IBM Global Services, IXL, Inventa, Primix Solutions, Viant and ZEFER. We also target alternative distribution channels to complement our traditional direct and indirect channels. Our Astra family of products is now offered over the Internet. We also have private-labelling arrangements with application service providers (ASPs), Internet service providers (ISPs) and independent software vendors (ISVs) who incorporate our hosted services into their offerings. Customer Support We believe that strong customer support is crucial to both the initial marketing of our products and maintenance of customer satisfaction, which in turn enhances our reputation and generates repeat orders. In addition, we believe that the customer interaction and feedback involved in our ongoing support functions provide us with information on market trends and customer requirements that is critical to future product development efforts. Pre-sales support is provided by sales personnel and post-sales support is provided by our Customer Support Organization through training and consulting engagements and renewable annual maintenance contracts. As of December 31, 2000, our Customer Support Organization consisted of 254 employees. The maintenance contracts provide for technical and emergency support as well as software upgrades, on an "if and when available" basis. When our local sales and support offices are unable to solve a problem, our engineers and product developers in Israel work with the support personnel. By taking advantage of time differences, we can provide support around the clock, ensuring prompt resolution of problems. Pricing We license our software to customers under non-exclusive license agreements that generally restrict use of the products to internal purposes at a specified site. We typically license software products to either allow up to a set number of users to access the software on a network at any one time, using any workstation attached to that network, or to allow use of the software on designated computers or workstations. In addition, our hosted services, our APM products and some of our testing products are priced based on usage, such as the number of transactions monitored, number of virtual users emulated per day, or period of usage. 8 Our products are priced to encourage customers to purchase multiple products and licenses because our cost to support a one-user configuration is almost the same as a multiple-user configuration. License fees depend on the product licensed, the number of users of the product licensed and the country in which such licenses are sold, as international prices tend to be higher than United States prices. Sales to our indirect sales channels, which are intended for resale to end users, are made at varying discounts off of our list prices, generally based on the sales volume of the indirect sales channels. Training and consulting revenues are generated on a time and expense basis. Competition The market for testing and performance monitoring products and services is extremely competitive, dynamic, and subject to frequent technological change. There are few substantial barriers of entry in our market. In addition, the use of the Internet for a growing range of Web applications is a recent and emerging phenomenon. The Internet has further reduced these barriers of entry, allowing other companies to compete with us in the testing and application performance management markets. As a result of the increased competition, our success will depend, in large part, on our ability to identify and respond to the needs of potential customers, and to new technological and market opportunities, before our competitors identify and respond to these needs and opportunities. We may fail to respond quickly enough to these needs and opportunities. In the market for solutions for testing of applications, our principal competitors include Compuware, Empirix, Radview, Rational Software and Segue Software. In the new and rapidly changing market for application performance management solutions, our competitors include providers of hosted services such as BMC Software, Keynote Systems and Service Metrics (a division of Exodus Communications), and emerging companies such as Freshwater Software. In addition, we face potential competition in this market from existing providers of testing solutions such as Segue. Finally, in both the market for testing solutions and the market for application performance management solutions, we face potential competition from established providers of systems and network management software such as Computer Associates. We believe that the principal competitive factors affecting our market are: . product functionality; . product performance, including scalability and reliability; . price and cost-effectiveness; . quality of support and service; and . company reputation. Although we believe that our products currently compete favorably with respect to these factors, the market for Web performance management applications is new and rapidly evolving. We may not be able to maintain our competitive position, and competitive pressure could seriously harm our business. Patents, Trademarks and Licenses We rely on a combination of patents, copyrights, trademarks, service marks, and trade secret laws and contractual restrictions to establish and protect proprietary rights in our products and services. The source code for our products is protected both as a trade secret and as an unpublished copyrighted work. Despite our precautions, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization. In addition, the laws of various countries in which our products may be sold may not protect our products and intellectual property rights to the same extent as the laws of the United States. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. 9 We rely on software that we license from third parties for certain components of our products. For example, we use software that we license from RealNetworks and Microsoft to support the ability of our products to test and monitor the performance of streaming media Web applications. In the future, we may license other third party technologies to enhance our products and meet evolving customer needs. The failure to license any necessary technology, or to maintain our existing licenses, could result in reduced demand for our products. Because the software industry is characterized by rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are more important to establishing and maintaining a technology leadership position than the various legal protections of our technology. We hold seven patents for elements contained in some of our products, and we have filed several other U.S. and foreign patent applications on various elements of our products. Our patent applications may not result in issued patents and, if issued, such patents may not be upheld if challenged. Although we believe that our products and other proprietary rights do not infringe upon the proprietary rights of third parties, third parties may assert intellectual property infringement claims against us in the future. Any such claims may result in costly, time-consuming litigation and may require us to enter into royalty or cross-license arrangements. Personnel As of December 31, 2000, we had a total of 1,418 employees, of which 634 were based in the Americas and 784 were based internationally. Of the total, 941 were engaged in marketing, sales and related customer support services, 316 were in research and development, and 161 were in general and administrative and operations support functions. Our success depends in significant part upon the performance of our senior management and certain key employees. Competition for highly skilled employees, including sales, technical and management personnel, is intense in the software and technology industry. We may not be able to recruit and retain key sales, technical and managerial employees. Our failure to attract, assimilate or retain highly qualified sales, technical and managerial personnel could seriously harm our business. None of our employees is represented by a labor union, and we have never experienced any work stoppages. Our executive officers as of March 1, 2001 are as follows:
Name Age Position ---- --- -------- Amnon Landan............ 42 President, Chief Executive Officer and Chairman of the Board of Directors Kenneth Klein........... 41 Chief Operating Officer and Director Sharlene Abrams......... 43 Chief Financial Officer and Vice President of Finance and Administration Moshe Egert............. 36 President of European Operations Douglas Smith........... 49 Executive Vice President of Corporate Development
Mr. Amnon Landan has served as our President and Chief Executive Officer since February 1997, has served as Chairman of the Board of Directors since July 1999, and has been a director since February 1996. From October 1995 to January 1997, he served as President, 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 our 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 with us in various technical positions. Mr. Kenneth Klein has served as our Chief Operating Officer since January 2000 and a member of the Board of Directors since July 2000. He served as President of North American Operations from July 1998 until December 1999. From April 1995 to July 1998, he served as Vice President of North American Sales. From May 1992 to March 1995, he served as our Western Area Sales Manager. From March 1990 to May 1992, he served as Regional Sales Manager for Interactive Development Environments, a CASE tool company. He has served as a director of Tumbleweed Communications Corporation since February 2000. 10 Ms. Sharlene Abrams has served as our Chief Financial Officer and Vice President of Finance and Administration since November 1993. From 1988 to November 1993, she was employed at Price Waterhouse LLP, most recently as a senior manager. Between 1978 and 1988, she held various finance and accounting positions in other public companies and in public accounting. She is a certified public accountant. Mr. Moshe Egert has served as our President of European Operations since July 1999. From July 1996 to June 1999, he served as our Vice President of European Operations. From February 1994 to June 1996, he served as our Director of European Marketing. From October 1990 through January 1994, he served with us in several management and technical positions. Mr. Douglas Smith has served as our Executive Vice President of Corporate Development since May 2000. From September 1996 to May 2000, he served in various positions with Chase H&Q, most recently as Managing Director and co- head of the Internet Group. From September 1994 to September 1996, he was the Chief Financial Officer and Executive Vice President of Strategy for ComputerVision Corporation. Item 2. Properties We are headquartered in Sunnyvale, California in two buildings that we own with a total square footage of 105,500. At the end of 2000, we purchased 26,000 and 24,000 square foot buildings in Sunnyvale, which will serve as additional headquarters, sales, and operations facilities. Our research and development activities are conducted by our subsidiary in Israel in a 78,000 square foot building that we own. During 1999, we purchased an additional parcel of land in Israel, and have since begun construction of a second research and development facility. Our field sales and support operations occupy leased facilities in 21 locations in the United States, one location in Canada, one location in Brazil, 15 locations in Europe, one location in Israel, one location in South Africa and five locations in the Pacific Rim. We believe that our existing facilities are adequate for our current needs. Item 3. Legal Proceedings There are presently no legal proceedings pending, other than routine litigation incidental to our business, to which we are a party or to which any of our properties is subject. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted during the fourth quarter of 2000 to a vote of the holders of our common stock through the solicitation of proxies or otherwise. 11 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Market for Common Stock Our common stock is traded publicly on the Nasdaq National Market under the trading symbol "MERQ." The following table presents, for the periods indicated, the high and low sales prices of our common stock as reported on the Nasdaq National Market.
High Low ------- ------ Year Ended December 31, 1999 First Quarter.............................................. $ 19.97 $10.75 Second Quarter............................................. 19.94 10.50 Third Quarter.............................................. 34.41 17.31 Fourth Quarter............................................. 55.13 30.94 Year Ended December 31, 2000 First Quarter.............................................. $134.50 $40.13 Second Quarter............................................. 110.38 45.00 Third Quarter.............................................. 159.75 81.63 Fourth Quarter............................................. 162.50 57.88
The prices shown in the table above reflect the two-for-one splits of our common stock, each of which were distributed as stock dividends to our stockholders, on February 26, 1999 and February 11, 2000. Holders of Record On February 28, 2001, there were approximately 64,500 holders of record of our common stock. Because many of these shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. Dividends We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings for use in our business and do not anticipate paying any cash dividends in the foreseeable future. 12 Item 6. Selected Consolidated Financial Data
Year ended December 31, ------------------------------------------ 2000 1999 1998 1997 1996 -------- -------- -------- ------- ------- (in thousands, except per share amounts) Consolidated Statements of Operations Data: Revenues: License........................... $216,100 $130,900 $ 84,450 $56,683 $43,270 Service........................... 90,900 56,800 36,550 20,017 11,280 -------- -------- -------- ------- ------- Total revenues.................. 307,000 187,700 121,000 76,700 54,550 -------- -------- -------- ------- ------- Cost of revenues: License........................... 17,138 7,736 6,291 4,351 3,419 Service........................... 24,679 16,957 10,500 5,849 2,968 -------- -------- -------- ------- ------- Total cost of revenues.......... 41,817 24,693 16,791 10,200 6,387 -------- -------- -------- ------- ------- Gross profit........................ 265,183 163,007 104,209 66,500 48,163 -------- -------- -------- ------- ------- Operating expenses: Research and development, net..... 32,042 23,484 16,907 11,333 9,670 Write off of in-process research and development and related expenses......................... -- -- -- 5,500 -- Marketing and selling............. 151,897 89,874 58,186 37,355 29,630 General and administrative........ 17,831 11,662 8,780 6,736 4,246 Settlement of litigation.......... -- -- -- -- 2,600 Merger related expenses........... -- 2,000 -- -- -- -------- -------- -------- ------- ------- Total operating expenses........ 201,770 127,020 83,873 60,924 46,146 -------- -------- -------- ------- ------- Income from operations.............. 63,413 35,987 20,336 5,576 2,017 Other income, net................... 17,462 6,026 4,640 3,083 3,375 -------- -------- -------- ------- ------- Income before provision for income taxes.............................. 80,875 42,013 24,976 8,659 5,392 Provision for income taxes.......... 16,175 8,869 5,451 2,927 1,157 -------- -------- -------- ------- ------- Net income.......................... $ 64,700 $ 33,144 $ 19,525 $ 5,732 $ 4,235 ======== ======== ======== ======= ======= Net income per share (basic)........ $ 0.81 $ 0.44 $ 0.28 $ 0.09 $ 0.07 ======== ======== ======== ======= ======= Net income per share (diluted)...... $ 0.70 $ 0.39 $ 0.25 $ 0.08 $ 0.06 ======== ======== ======== ======= ======= Weighted average common shares (basic)............................ 79,927 76,112 70,654 65,494 63,634 ======== ======== ======== ======= ======= Weighted average common shares and equivalents (diluted).............. 91,938 85,208 78,818 68,458 66,254 ======== ======== ======== ======= =======
December 31, -------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Consolidated Balance Sheet Data: Working capital................... $552,938 $137,066 $ 97,288 $ 87,733 $ 78,046 Total assets...................... $976,375 $297,218 $204,686 $143,663 $117,625 Stockholders' equity.............. $303,032 $199,531 $146,408 $112,120 $ 99,048
13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. In some cases, forward-looking statements are identified by words such as "believes," "anticipates," "expects," "intends," "plans," "will," "may" and similar expressions. In addition, any statements that refer to our plans, expectations, strategies or other characterizations of future events or circumstances are forward-looking statements. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors." Our business may have changed since the date hereof, and we undertake no obligation to update these forward-looking statements. Overview We were incorporated in 1989, and began shipping automated software testing products in 1991. Since 1991, we have introduced a number of new products, and new versions of existing products, including products and versions designed for Web applications. We believe that a majority of customers that licensed our products in 2000 are using these products to test and monitor their Web applications. We also offer hosted load testing and monitoring services for Web applications. Results of Operations The following table sets forth, as a percentage of total revenue, certain consolidated statements of operations data for the periods indicated. These operating results are not necessarily indicative of the results for any future period.
Year ended December 31, ---------------- 2000 1999 1998 ---- ---- ---- Revenues License.................................................. 70% 70% 70% Service.................................................. 30 30 30 --- --- --- Total revenues ........................................ 100 100 100 --- --- --- Cost of revenues License.................................................. 6 4 5 Service.................................................. 8 9 9 --- --- --- Total cost of revenues ................................ 14 13 14 --- --- --- Gross profit............................................... 86 87 86 --- --- --- Operating expenses: Research and development, net............................ 10 13 14 Marketing and selling.................................... 49 48 48 General and administrative............................... 6 6 7 Merger related expenses.................................. -- 1 -- --- --- --- Total operating expenses............................... 65 68 69 --- --- --- Income from operations..................................... 21 19 17 Other income, net.......................................... 5 3 4 --- --- --- Income before provision for income taxes................... 26 22 21 --- --- --- Provision for income taxes................................. 5 5 5 --- --- --- Net income................................................. 21% 17% 16% --- --- ---
14 Revenue License revenue increased to $216.1 million in 2000 from $130.9 million in 1999 and $84.5 million in 1998. Our growth in license revenue is attributable primarily to growth in license fees from our LoadRunner, WinRunner and TestDirector products, as well as revenue from our new application performance management and MSP offerings. Service revenue increased to $90.9 million in 2000 from $56.8 million in 1999 and $36.6 million in 1998. The increase in service revenue in 2000 compared to 1999 and 1998 is a result of new maintenance contracts accompanying the growth in license revenue as well as renewals of existing maintenance contracts. We expect that service revenue will continue to increase in absolute dollars as long as our customer base continues to grow. Cost of revenue License cost of revenue includes costs of materials, product packaging, equipment depreciation, production personnel, and costs associated with our MSP. License cost of revenue as a percentage of license revenue increased to 8% in 2000 from 6% in 1999 and 7% in 1998. The increase was primarily due to the investment in the headcount, capital equipment and Internet service fees for our MSP. Service cost of revenue consists primarily of costs of providing customer technical support, training and consulting. Service cost of revenue increased to $24.7 million in 2000 from $17.0 million in 1999 and $10.5 million in 1998. As a percentage of service revenue, it decreased to 27% in 2000 from 30% in 1999 and 29% in 1998. The absolute dollar increase in service cost of revenue in 2000 as compared to 1999 was primarily due to an increase in personnel- related costs of $5.0 million reflecting growth in customer support and consulting headcount from 156 at December 31, 1999 to 254 at December 31, 2000 and a $2.1 million increase in training and consulting outsourcing expense. Research and development, net Research and development expense consists primarily of costs associated with the development of new products, enhancements of existing products, and quality assurance procedures, and comprised primarily of employee salaries and related costs, consulting costs, equipment depreciation and facilities expenses. For the year ended December 31, 2000, research and development, net was $32.0 million, or 10% of total revenue, an increase from $23.5 million, or 13% of total revenue in 1999, and $16.9 million, or 14% of total revenue in 1998. The increase in absolute dollars of research and development spending in 2000 as compared to 1999 reflected primarily increased research and development headcount from 226 at December 31, 1999 to 316 at December 31, 2000 and increased salaries of research and development engineers. Research and development expense is reported net of research grants received from the government of Israel, and includes royalty expense for obligations to the government of Israel for sales of products developed under government- funded research. No grants were obtained from the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade during 2000 and 1999. Research grants received amounted to $1.6 million in 1998. We were not obligated to repay these grants; however, we 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. There was no royalty expense under these agreements for the year ended December 31, 2000. Royalty expense amounted to approximately $2.7 million for each of the years ended December 31, 1999 and 1998. As of December 31, 2000, we had no outstanding royalty obligations. We have not applied for, nor do we anticipate applying for, any future grants from the Office of the Chief Scientist. Marketing and selling Marketing and selling expense consists primarily of employee salaries and related costs, commissions, facilities expenses and marketing programs. Marketing and selling expenses were $151.9 million, or 49% of 15 total revenue, in 2000, compared to $89.9 million in 1999 and $58.2 million in 1998, both 48% of total revenue. The increase in expenses in 2000 as compared to 1999 was primarily due to an increase in personnel-related costs of $26.7 million reflecting growth in headcount from 377 at December 31, 1999 to 632 at December 31, 2000, including the increase in sales head count related to our cybersales organization and APM business. The increase in expenses in 2000 as compared to 1999 was also due to an increase in sales commissions of $17.9 million attributable to higher revenue, an increase in facilities and related costs of $2.4 million and an increase in spending on marketing programs of $7.4 million. We expect marketing and selling expenses to increase in absolute dollars as total revenue increases, but these expenses may vary as a percentage of revenue. General and administrative General and administrative expense consists primarily of employee salaries and related costs related to executive and finance personnel. General and administrative expense increased to $17.8 million, or 6% of total revenue in 2000, from $11.7 million, or 6% of total revenue in 1999 and $8.8 million, or 7% of total revenue in 1998. The increase in the absolute dollars is primarily due to increased staffing and associated costs necessary to manage and support our growing operations. Other income, net Other income, net consists primarily of interest income and expense and foreign exchange gains and losses. The increase in other income, net to $17.5 million in 2000 from $6.0 million in 1999 primarily reflected increased interest income from the proceeds of the issuance in July 2000, of convertible subordinated notes, net of interest expense on the notes. Provision for income taxes We have structured our operations in a manner designed to maximize income in Israel where tax rate incentives have been extended to encourage foreign investments. The tax holidays and rate reductions, which we will be able to realize under programs currently in effect, expire at various dates through 2010. Future provisions for taxes will depend upon the mix of worldwide income and the tax rates in effect for various tax jurisdictions. See Note 4 of Notes to Consolidated Financial Statements and "--Risk Factors--We are subject to the risk of increased taxes." Merger-related expenses In connection with the acquisition of Conduct Ltd. in 1999, we incurred merger-related expenses of approximately $2.0 million, primarily relating to legal and accounting expenses, severance and the write-off of redundant facilities and equipment. Liquidity and Capital Resources At December 31, 2000, our principal source of liquidity consisted of $782.4 million of cash and investments compared to $186.9 million at December 31, 1999 and $130.7 million at December 31, 1998. The December 31, 2000 balance included $402.4 million of short-term and $153.6 million of long-term investments in high quality financial, government, and corporate securities. In July 2000, we raised $485.4 million from the issuance of convertible subordinated notes with an aggregate principal amount of $500.0 million. The notes mature on July 1, 2007 and bear interest at a rate of 4.75% per annum, payable semiannually on January 1 and July 1 of each year. The notes are subordinated in right of payment to all of our future senior debt. The notes are convertible into shares of our common stock at any time prior to maturity at a conversion price of approximately $111.25 per share, subject to adjustment under certain conditions. We may redeem our notes, in whole or in part, at any time on or after July 1, 2003. Accrued interest to the redemption date will be paid in each redemption. 16 During 2000, we generated $130.1 million cash from operating activities, compared to $61.1 million in 1999 and $39.5 million in 1998. The increase in 2000 compared to 1999 was due primarily to an increase in net income and increases in deferred revenue and accrued liabilities. Our primary investing activities were net purchases of investments of $482.5 million in 2000 and $39.7 million in 1999 compared to net proceeds from investments of $1.3 million in 1998. We also purchased property and equipment, which totaled $45.6 million in 2000, $23.9 million in 1999 and $15.0 million in 1998. Purchases of property and equipment in 2000 included $19.2 million for the purchase of two additional headquarters buildings in Sunnyvale, California, as well as $5.7 million for the renovation of existing headquarters buildings. In addition, we spent $8.2 million in 1999 and $1.5 million in 1998 for the purchase and renovation of headquarters buildings in Sunnyvale, California. We expect to spend an additional $7.0 million to complete the renovation of our newly purchased buildings in Sunnyvale. We spent $3.5 million in 2000, $8.3 million in 1999, and $5.7 million in 1998, for the purchase and construction of research and development facilities in Israel. We expect to spend approximately $10.0 million to complete the construction in Israel. Our primary financing activity consisted of issuance of the convertible subordinated notes and issuances of common stock under our stock option and stock purchase plans. Proceeds from issuance of stock under these plans, net of notes receivable issued and collected from issuance of stock, amounted to $26.2 million in 2000, $20.4 million in 1999 and $14.4 million in 1998. Assuming there is no significant change in our business, we believe that our current cash and investment balances and cash flow from operations will be sufficient to fund our cash needs for at least the next twelve months. We also expect to satisfy our financing requirements through the incurrence of debt from time to time as we did in July 2000. New Accounting Pronouncements In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No. 133" ("SFAS 137"). SFAS 137 defers for one year the application of Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), to all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board issued SFAS No. 138 "Accounting for Derivative Instruments and Hedging Activities-An Amendment of FASB No. 133" ("SFAS 138"). SFAS 138 amends the accounting and reporting standards for certain derivatives and hedging activities such as net settlement contracts, foreign currency translations and intercompany derivatives. We will adopt SFAS 138 in our year ended December 31, 2001. The adoption as of January 1, 2001 of SFAS 133, SFAS 137 and SFAS 138 did not have a material effect on our results of operations, financial position or cash flows. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of Accounting Practice Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), regarding (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occurred after either December 15, 1998, or January 12, 2000. The Company's adoption of the provisions of FIN 44 has not had a material effect on our results of operations, financial position or cash flows. 17 Risk Factors In addition to the other information included in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating us and our business. Our future success depends on our ability to respond to rapid market and technological changes by introducing new products and services and continually improving the performance, features and reliability of our existing products and services and responding to competitive offerings. Our business will suffer if we do not successfully respond to rapid technological changes. The market for our software products is characterized by: . rapidly changing technology; . frequent introduction of new products and services and enhancements to existing products and services by our competitors; . increasing complexity and interdependence of Web-related applications; . changes in industry standards and practices; and . changes in customer requirements and demands. To maintain our competitive position, we must continue to enhance our existing software testing and application performance management products and services and to develop new products and services, functionality and technology that address the increasingly sophisticated and varied needs of our prospective customers. The development of new products and services, and enhancement of existing products and services, entail significant technical and business risks and require substantial lead-time and significant investments in product development. If we fail to anticipate new technology developments, customer requirements or industry standards, or if we are unable to develop new products and services that adequately address these new developments, requirements and standards in a timely manner, our products may become obsolete, our ability to compete may be impaired and our revenues could decline. We expect our quarterly revenues and operating results to fluctuate, and it is difficult to predict our future revenues and operating results. Our revenues and operating results have varied in the past and are likely to vary significantly from quarter to quarter in the future. These fluctuations are due to a number of factors, many of which are outside of our control, including: . fluctuations in demand for and sales of our products and services; . our success in developing and introducing new products and services and the timing of new product and service introductions; . our ability to introduce enhancements to our existing products and services in a timely manner; . the introduction of new or enhanced products and services by our competitors and changes in the pricing policies of these competitors; . the discretionary nature of our customers' purchase and budget cycles and changes in their budgets for software and Web-related purchases; . changes in economic conditions affecting our customers or our industry; . the amount and timing of operating costs and capital expenditures relating to the expansion of our business; . deferrals by our customers of orders in anticipation of new products or services or product enhancements; and . the mix of our domestic and international sales, together with fluctuations in foreign currency exchange rates. 18 In addition, the timing of our license revenues is difficult to predict because our sales cycles are typically short and can vary substantially from product to product and customer to customer. We base our operating expenses on our expectations regarding future revenue levels. As a result, if total revenues for a particular quarter are below our expectations, we could not proportionately reduce operating expenses for that quarter. We have experienced seasonality in our revenues and earnings, with the fourth quarter of the year typically having the highest revenue and earnings for the year and higher revenue and earnings than the first quarter of the following year. We believe that this seasonality results primarily from the budgeting cycles of our customers and from the structure of our sales commission program. We expect this seasonality to continue in the future. In addition, our customers' decisions to purchase our products and services are discretionary and subject to their internal budgets and purchasing processes. A slowdown in the economy may cause customers to reassess their immediate technology needs and to defer purchasing decisions, and accordingly could reduce demand for our products and services. Due to these and other factors, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. If our operating results are below the expectations of investors or securities analysts, the trading prices of our securities could decline. We expect to face increasing competition in the future, which could cause reduced sales levels and result in price reductions, reduced gross margins or loss of market share. The market for our testing and application performance management products and services is extremely competitive, dynamic and subject to frequent technological changes. There are few substantial barriers of entry in our market. In addition, the use of the Internet for a growing range of Web applications is a recent and emerging phenomenon. The Internet lowers the barriers of entry, allowing other companies to compete with us in the testing and application performance management markets. As a result of the increased competition, our success will depend, in large part, on our ability to identify and respond to the needs of potential customers, and to new technological and market opportunities, before our competitors identify and respond to these needs and opportunities. We may fail to respond quickly enough to these needs and opportunities. In the market for solutions for testing of applications, our principal competitors include Compuware, Empirix, Radview, Rational Software and Segue Software. In the new and rapidly changing market for application performance management solutions, our competitors include providers of hosted services such as BMC Software, Keynote Systems and Service Metrics (a division of Exodus Communications), and emerging companies such as Freshwater Software. In addition, we face potential competition in this market from existing providers of testing solutions such as Segue. Finally, in both the market for testing solutions and the market for application performance management solutions, we face potential competition from established providers of systems and network management software such as Computer Associates. The software industry is increasingly experiencing consolidation, and this could increase the resources available to our competitors and the scope of their product offerings. Our competitors and potential competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies or make more attractive offers to distribution partners and to employees. If we fail to maintain our existing distribution channels and develop additional channels in the future, our revenues will decline. We derive a substantial portion of our revenues from sales of our products through distribution channels such as systems integrators, value-added resellers, ASPs, ISPs or ISVs. We expect that sales of our products through these channels will continue to account for a substantial portion of our revenues for the foreseeable future. We have also entered into private labelling arrangements with ASPs and an enterprise software company who incorporate our products and services into theirs. We may not experience increased revenues from these new channels, which could harm our business. 19 The loss of one or more of our systems integrators, value-added resellers, ASPs, ISPs or ISVs, or any reduction or delay in their sales of our products and services could result in reductions in our revenue in future periods. In addition, our ability to increase our revenue in the future depends on our ability to expand our indirect distribution channels. Our dependence on indirect distribution channels presents a number of risks, including: . each of our systems integrators, value-added resellers, ASPs, ISPs or ISVs can cease marketing our products and services with limited or no notice and with little or no penalty; . our existing systems integrators, value-added resellers, ASPs, ISPs or ISVs may not be able to effectively sell any new products and services that we may introduce; . we may not be able to replace existing or recruit additional systems integrators, value-added resellers, ASPs, ISPs or ISVs if we lose any of our existing ones; . our systems integrators, value-added resellers, ASPs, ISPs or ISVs may also offer competitive products and services from third parties; . we may face conflicts between the activities of our indirect channels and our direct sales and marketing activities; and . our systems integrators, value-added resellers, ASPs, ISPs or ISVs may not give priority to the marketing of our products and services as compared to our competitors' products. In March 1999, we entered into an agreement with Tivoli Systems, a subsidiary of IBM, for the joint development and marketing of a family of products for enterprise application performance management, incorporating elements of our technology, which would be marketed and sold only by Tivoli. Under this agreement, we agreed that as long as Tivoli continued to pay minimum royalties, we would not license this technology to any other party for purposes of developing a product similar to any developed under this agreement. In addition, we agreed that we would not enter into technology relationships to create similar products with specified competitors of Tivoli as long as Tivoli continued to agree to pay minimum royalties. In October 2000, Tivoli elected not to continue paying their required minimum royalties and the exclusive provisions of this agreement terminated. Tivoli continues to have the rights to market and sell these elements of our technology on a non-exclusive basis. We depend on strategic relationships and business alliances for continued growth of our business. Our development, marketing and distribution strategies rely increasingly on our ability to form strategic relationships with software and other technology companies. These business relationships often consist of cooperative marketing programs, joint customer seminars, lead referrals and cooperation in product development. Many of these relationships are not contractual and depend on the continued voluntary cooperation of each party with us. Divergence in strategy or change in focus by, or competitive product offerings by, any of these companies may interfere with our ability to develop, market, sell or support our products, which in turn could harm our business. Further, if these companies enter into strategic alliances with other companies or are acquired, they could reduce their support of our products. Our existing relationships may be jeopardized if we enter into alliances with competitors of our strategic partners. In addition, one or more of these companies may use the information they gain from their relationship with us to develop or market competing products. If we are unable to manage our growth, our business may be harmed. Since 1991, we have experienced significant annual increases in revenue, employees and number of product and service offerings. This growth has placed and, if it continues, will place a significant strain on our management and our financial, operational, marketing and sales systems. If we cannot manage our growth effectively, our business, competitive position, operating results and financial condition could suffer. Although we are implementing a variety of new or expanded business and financial systems, procedures and controls, including the improvement of our sales and 20 customer support systems, the implementation of these systems, procedures and controls may not be completed successfully, or may disrupt our operations. Any failure by us to properly manage these transitions could impair our ability to attract and service customers and could cause us to incur higher operating costs and experience delays in the execution of our business plan. The success of our business depends on the efforts and abilities of our senior key personnel. We depend on the continued services and performance of our senior management and other key personnel. We do not have long term employment agreements with any of our key personnel. The loss of any of our executive officers or other key employees could hurt our business. If we cannot hire qualified personnel, our ability to manage our business, develop new products and increase our revenues will suffer. We believe that our ability to attract and retain qualified personnel at all levels in our organization is essential to the successful management of our growth. In particular, our ability to achieve revenue growth in the future will depend in large part on our success in expanding our direct sales force and in maintaining a high level of technical consulting, training and customer support. There is substantial competition for experienced personnel in the software and technology industry. If we are unable to retain our existing key personnel or attract and retain additional qualified individuals, we may from time to time experience inadequate levels of staffing to perform services for our customers. As a result, our growth could be limited due to our lack of capacity to develop and market our products to our customers. We depend on our international operations for a substantial portion of our revenues. Sales to customers located outside the United States have historically accounted for a significant percentage of our revenue and we anticipate that such sales will continue to be a significant percentage of our revenue. As a percentage of our total revenues, sales to customers outside the United States were approximately 32% in 2000, 34% in 1999 and 35% in 1998. In addition, we have substantial research and development operations in Israel. We face risks associated with our international operations, including: . changes in taxes and regulatory requirements; . difficulties in staffing and managing foreign operations; . reduced protection for intellectual property rights in some countries; . the need to localize products for sale in international markets; . longer payment cycles to collect accounts receivable in some countries; . seasonal reductions in business activity in other parts of the world in which we operate; . political and economic instability; and . economic downturns in international markets. Any of these risks could harm our international operations and cause lower international sales. For example, some European countries already have laws and regulations related to technologies used on the Internet that are more strict than those currently in force in the United States. Any or all of these factors could cause our business to be harmed. Because our research and development operations are primarily located in Israel, we may be affected by volatile economic, political and military conditions in that country and by restrictions imposed by that country on the transfer of technology. Our operations depend on the availability of highly skilled scientific and technical personnel in Israel. Our business also depends on trading relationships between Israel and other countries. In addition to the risks associated with international sales and operations generally, our operations could be adversely affected if major hostilities involving Israel should occur or if trade between Israel and its current trading partners were interrupted or curtailed. 21 These risks are compounded due to the restrictions on our ability to manufacture or transfer outside of Israel any technology developed under research and development grants from the government of Israel, without the prior written consent of the government of Israel. If we are unable to obtain the consent of the government of Israel, we may not be able to take advantage of strategic manufacturing and other opportunities outside of Israel. We have, in the past, obtained royalty-bearing grants from various Israeli government agencies. In addition, we participate in special Israeli government programs that provide significant tax advantages. The loss of, or any material decrease in these tax benefits, could negatively affect our financial results. We are subject to the risk of increased taxes. We have structured our operations in a manner designed to maximize income in Israel where tax rate incentives have been extended to encourage foreign investment. Our taxes could increase if these tax rate incentives are not renewed upon expiration or tax rates applicable to us are increased. Tax authorities could challenge the manner in which profits are allocated among us and our subsidiaries, and we may not prevail in any such challenge. If the profits recognized by our subsidiaries in jurisdictions where taxes are lower became subject to income taxes in other jurisdictions, our worldwide effective tax rate would increase. Our financial results may be negatively impacted by foreign currency fluctuations. Our foreign operations are generally transacted through our international sales subsidiaries. As a result, these sales and related expenses are denominated in currencies other than the U.S. Dollar. Because our financial results are reported in U.S. Dollars, our results of operations may be harmed by fluctuations in the rates of exchange between the U.S. Dollar and other currencies, including: . a decrease in the value of Pacific Rim or European currencies relative to the U.S. Dollar, which would decrease our reported U.S. Dollar revenue, as we generate revenues in these local currencies and report the related revenues in U.S. Dollars; and . an increase in the value of Pacific Rim, European or Israeli currencies relative to the U.S. Dollar, which would increase our sales and marketing costs in these countries and would increase research and development costs in Israel. We attempt to limit foreign exchange exposure through operational strategies and by using forward contracts to offset the effects of exchange rate changes on intercompany trade balances. This requires us to estimate the volume of transactions in various currencies. We may not be successful in making these estimates. If these estimates are overstated or understated during periods of currency volatility, we could experience material currency gains or losses. Our ability to successfully implement our business strategy depends on the continued growth of the Internet. In order for our business to be successful, the Internet must continue to grow as a medium for conducting business. However, as the Internet continues to experience significant growth in the number of users and the complexity of Web-based applications, the Internet infrastructure may not be able to support the demands placed on it or the performance or reliability of the Internet might be adversely affected. Security and privacy concerns may also slow the growth of the Internet. Because our revenues ultimately depend upon the Internet generally, our business may suffer as a result of limited or reduced growth. Acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value or divert the attention of our management. We may acquire or make investments in other companies with similar products and technologies. In the event of any future acquisitions or investments, we could: . issue stock that would dilute the ownership of our then-existing stockholders; . incur debt; . assume liabilities; 22 . incur expenses for the impairment of the value of investments or acquired assets; . incur amortization expense related to intangible assets; or . incur large write-offs. If we fail to achieve the financial and strategic benefits of past and future acquisitions, our operating results will suffer. Acquisitions and investments involve numerous other risks, including: . difficulties integrating the acquired operations, technologies or products with ours; . failure to achieve targeted synergies; . unanticipated costs and liabilities; . diversion of management's attention from our core business; . adverse effects on our existing business relationships with suppliers and customers or those of the acquired organization; .difficulties entering markets in which we have no or limited prior experience; and .potential loss of key employees, particularly those of the acquired organizations. The price of our common stock may fluctuate significantly, which may result in losses for investors and possible lawsuits. The market price for our common stock has been and may continue to be volatile. For example, during the 52-week period ended March 2, 2001, the closing prices of our common stock as reported on the Nasdaq National Market ranged from a high of $156.75 to a low of $48.50. We expect our stock price to be subject to fluctuations as a result of a variety of factors, including factors beyond our control. These factors include: . actual or anticipated variations in our quarterly operating results; . announcements of technological innovations or new products or services by us or our competitors; . announcements relating to strategic relationships or acquisitions; . changes in financial estimates or other statements by securities analysts; . changes in general economic conditions; . conditions or trends affecting the software industry and the Internet; and . changes in the economic performance and/or market valuations of other software and high-technology companies. Because of this volatility, we may fail to meet the expectations of our stockholders or of securities analysts at some time in the future, and the trading prices of our securities could decline as a result. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many high-technology companies. These fluctuations have often been unrelated or disproportionate to the operating performance of these companies. Any negative change in the public's perception of software or Internet software companies could depress our stock price regardless of our operating results. If we fail to adequately protect our proprietary rights and intellectual property, we may lose a valuable asset, experience reduced revenues and incur costly litigation to protect our rights. We rely on a combination of patents, copyrights, trademark, service mark and trade secret laws and contractual restrictions to establish and protect our proprietary rights in our products and services. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our products and 23 use information that we regard as proprietary to create products that compete with ours. Some license provisions protecting against unauthorized use, copying, transfer and disclosure of our licensed programs may be unenforceable under the laws of certain jurisdictions and foreign countries. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States. To the extent that we increase our international activities, our exposure to unauthorized copying and use of our products and proprietary information will increase. In many cases, we enter into confidentiality or license agreements with our employees and consultants and with the customers and corporations with whom we have strategic relationships and business alliances. No assurance can be given that these agreements will be effective in controlling access to and distribution of our products and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Litigation like this, whether successful or unsuccessful, could result in substantial costs and diversions of our management resources, either of which could seriously harm our business. Third parties could assert that our products and services infringe their intellectual property rights, which could expose us to litigation that, with or without merit, could be costly to defend. We may from time to time be subject to claims of infringement of other parties' proprietary rights. We could incur substantial costs in defending ourselves and our customers against these claims. Parties making these claims may be able to obtain injunctive or other equitable relief that could effectively block our ability to sell our products in the United States and abroad and could result in an award of substantial damages against us. In the event of a claim of infringement, we may be required to obtain licenses from third parties, develop alternative technology or to alter our products or processes or cease activities that infringe the intellectual property rights of third parties. If we are required to obtain licenses, we cannot be sure that we will be able to do so at a commercially reasonable cost, or at all. Defense of any lawsuit or failure to obtain required licenses could delay shipment of our products and increase our costs. In addition, any such lawsuit could result in our incurring significant costs or the diversion of the attention of our management. Defects in our products may subject us to product liability claims and make it more difficult for us to achieve market acceptance for these products, which could harm our operating results. Our products may contain errors or "bugs" that may be detected at any point in the life of the product. Any future product defects discovered after shipment of our products could result in loss of revenues and a delay in the market acceptance of these products that could adversely impact our future operating results. In selling our products, we frequently rely on "shrink wrap" or "click wrap" licenses that are not signed by licensees. Under the laws of various jurisdictions, the provisions in these licenses limiting our exposure to potential product liability claims may be unenforceable. We currently carry errors and omissions insurance against such claims, however, we cannot assure you that this insurance will continue to be available on commercially reasonable terms, or at all, or that this insurance will provide us with adequate protection against product liability and other claims. In the event of a product liability claim, we may be found liable and required to pay damages which would seriously harm our business. We have adopted anti-takeover defenses that could delay or prevent an acquisition of our company, including an acquisition that would be beneficial to our stockholders. Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We have no present plans to 24 issue shares of preferred stock. Furthermore, certain provisions of our Certificate of Incorporation and of Delaware law may have the effect of delaying or preventing changes in our control or management, which could adversely affect the market price of our common stock. Leverage and debt service obligations may adversely affect our cash flow. In July 2000, we completed an offering of convertible subordinated notes with a principal amount of $500.0 million. We now have a substantial amount of outstanding indebtedness, primarily the convertible subordinated notes. There is the possibility that we may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness when due. Our leverage could have significant negative consequences, including: . increasing our vulnerability to general adverse economic and industry conditions; . requiring the dedication of a substantial portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures; and . limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete. Item 7a. Quantitative and Qualitative Disclosures about Market Risk Our exposure to market rate risk for changes in interest is limited to our investment portfolio. Derivative financial instruments are not a part of our investment policy. We place our investments with high quality issuers and, by policy, limit the amount of credit exposure to any one issuer or issue. In addition, we have classified all of our investments as "held to maturity." This classification does not expose the consolidated statement of income or balance sheet to fluctuation in interest rates. Information about our investment portfolio is presented in the table below, which states notional amounts and related weighted-average interest rates by year of maturity (in thousands):
Fair 2001 2002 Thereafter Total Value -------- -------- ---------- -------- -------- Cash Equivalents Fixed Rate................. $147,699 -- -- $147,699 $147,743 Average Rate............... 6.3% -- -- 6.3% Variable Rate.............. $ 40,200 -- -- $ 40,200 $ 40,200 Average Rate............... 5.6% -- -- 5.6% Investments Fixed Rate................. $402,356 $153,623 -- $555,979 $557,573 Average Rate............... 6.5% 6.3% -- 6.4% -------- -------- --- -------- -------- Total Investments............ $590,255 $153,623 -- $743,878 $745,516 -------- -------- --- -------- -------- Average Rate................. 6.4% 6.3% -- 6.4%
Our long-term investments include $68.3 million of government agency instruments which have callable provisions and accordingly may be redeemed by the agencies should interest rates fall below the coupon rate of the investments. The fair value of the our convertible subordinated debentures fluctuates based upon changes in the price of our common stock, changes in interest rates and changes in our creditworthiness. The fair market value of the convertible subordinated debentures as of December 31, 2000 was $522.6 million. A portion of our business is conducted in currencies other than the U.S. Dollar. Our operating expenses in each of these countries are in the local currencies, which mitigates a significant portion of the exposure related to local currency revenues. 25 We have entered into forward foreign exchange contracts ("forward contracts") to hedge foreign currency denominated receivables due from certain European and Pacific Rim subsidiaries against fluctuations in exchange rates. We have not entered into forward contracts for speculative or trading purposes. Our accounting policies for these contracts are based on our designation of the contracts as hedging transactions. The criteria we use for designating a forward contract as a hedge considers it's effectiveness in reducing risk by matching hedging instruments to underlying transactions. Gains and losses on forward contracts are recognized in other income in the same period as gains and losses on the underlying transactions. The effect of an immediate 10% change in exchange rates would not have a material impact on our operating results or cash flows. We had outstanding forward contracts with notional amounts totaling approximately $13.0 million, $10.6 million and $3.4 million at December 31, 2000, 1999 and 1998, respectively. The open forward contracts at December 31, 2000 mature at various dates through December 2001 and are hedges of certain foreign currency transaction exposures in the Australian dollar, British pound, Danish Krone, French Franc, Euro, German Mark, Norwegian Kroner, Japanese Yen and Swedish Krona. The unrealized net gain on these forward contracts at December 31, 2000 totaled approximately $282,000. Item 8. Financial Statements and Supplementary Data Financial statements required pursuant to this Item are presented beginning on page F-1 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure During the 24-month period preceding December 31, 2000 we neither changed accountants nor had disagreements with our accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope and procedures. 26 PART III Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file a definitive proxy statement within 120 days after the end of our fiscal year pursuant to Regulation 14A for our annual meeting of stockholders, currently scheduled for May 15, 2001, and the information included in the proxy statement is incorporated herein by reference. Item 10. Directors and Executive Officers of the Registrant The information concerning our officers required by this Item is incorporated by reference to the section of Part I of this Annual Report on Form 10-K entitled "Item 1. Business--Personnel." The information concerning our directors required by this Item is incorporated by reference to the information under the heading "Election of Directors--Nominees" in our proxy statement. Item 11. Executive Compensation The information required by this Item is incorporated by reference to our proxy statement under the heading "Executive Compensation." Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference to our proxy statement under the heading "Security Ownership of Certain Beneficial Owners and Management." Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated by reference to our proxy statement under the heading "Certain Transactions." 27 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this report: 1. Financial Statements. The following financial statements of Mercury Interactive Corporation are filed as a part of this report:
Page ---- Report of Independent Accountants..................................... F-1 Consolidated Balance Sheets at December 31, 2000 and 1999............. F-2 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.................................................. F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998..................................... F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.................................................. F-5 Notes to Consolidated Financial Statements............................ F-6
2. Schedules Financial statement schedules not listed above have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. Exhibits
Exhibit Number Description ------- ----------- 3.1(1) Certificate of Incorporation of Mercury Interactive, as amended and restated to date. 3.2 Certificate of Amendment of the Restated Certificate of Incorporation. 3.3(3) By-laws of Mercury Interactive, as amended to date. 10.1(4),(2) Amended and Restated 1989 Stock Option Plan and forms of Incentive Stock Option Agreement and NonstatutoryStock Option Agreement 10.2(1) Form of Directors' and Officers' Indemnification Agreement. 10.3(4),(2) Form of 1998 Employee Stock Purchase Plan and form of Agreements. 10.4(1) 401(k) Plan. 10.5(5),(2) 1994 Directors' Stock Option Plan and form of Agreements. 10.6(6),(2) Form of Change of Control Agreements entered into by Mercury Interactive with the Chairman, the Chief Executive Officer, the Executive Vice President of Corporate Development, the Chief Financial Officer, Chief Operating Officer and the President of European Operations. 10.7(7),(2) Amended and Restated 2000 Supplemental Stock Option Plan. 10.8(7),(2) Amended and Restated 1999 Stock Option Plan. 10.9(9) Preferred Share Purchase Rights Agreement. 10.10(10) Amendment to Rights Agreement dated March 31, 1999. 10.11(11) Amendment No. Two to Rights Agreement, dated May 19, 2000.
28
Exhibit Number Description ------- ----------- 10.12 Purchase and Sale Agreement by and between WHSUM Real Estate Limited Partnership and Mercury Interactive. 10.13(8) Form of Note for Mercury Interactive 4.75% Convertible Subordinated Notes due July 1, 2007. 10.14(8) Indenture between Mercury Interactive, as Issuer and Chase Manhattan Bank and Trust Company, National Association, as Trustee dated July 3, 2000 related to Mercury Interactive 4.75% Convertible Subordinated Notes due July 1, 2007. 10.15(8) Registration Rights Agreement among Mercury Interactive and Goldman, Sachs & Chase Securities Inc. and Deutsche Banc Securities Inc. dated June 27, 2000 related to the Mercury Interactive 4.75% Convertible Subordinated Notes due July 1, 2007. 10.16(2) Amended and Restated Employment Agreement by and between Mercury Interactive and Douglas P. Smith effective as of August 28, 2000. 21.1 Subsidiaries of Mercury Interactive. 23.1 Consent of Independent Accountants. 24.1 Power of Attorney (see page 30).
- -------- (1) Exhibits 3.1, 3.3, 10.2, and 10.4 are incorporated by reference to Exhibits 3.3, 3.4, 10.2, and 10.12, respectively, filed in response to Item 16(a), "Exhibits," of Mercury Interactive Registration Statement on Form S-1, as amended (File No. 33-68554), which was declared effective on October 29, 1993. (2) Designates management contract or compensatory plan arrangements required to be filed as an exhibit of this Annual Report on Form 10-K. (3) Exhibit 3.3 is incorporated by reference to Exhibit 3.2 filed with the Form 10-Q for the three month period ended September June 30, 1999 (4) Exhibits 10.1 and 10.3 are incorporated by reference to Exhibits 4.1 and 4.3 filed with the Registration Statement on Form S- 8, No. 333-62125, filed with the Securities and Exchange Commission on August 24, 1998. (5) Exhibit 10.5 is incorporated by reference to Exhibit 10.1 filed with the Form 10-Q for the quarter ended September 30, 1994. (6) Exhibit 10.6 is incorporated by reference to Exhibit 10.26 filed with the Form 10-K for the year ended December 31, 1998. (7) Exhibits 10.7 and 10.8 are incorporated by reference to Exhibits 4.1 and 4.2 filed with the Registration Statement on Form S-8, No. 333-56316, filed with the Securities and Exchange Commission on February 28, 2001. (8) Exhibits 10.13, 10.14 and 10.15 are incorporated by reference to Exhibits 4.1, 4.2 and 4.3, respectively, filed with the Form 10-Q for the quarter ended June 30, 2000. (9) Exhibit 10.9 is incorporated by reference to Exhibit 1 to Form 8-A, filed with the Securities and Exchange Commission on July 9, 1996. (10) Exhibit 10.10 is incorporated by reference to Exhibit 1 to Form 8-A, Amendment No. 1, filed with the Securities and Exchange Commission on April 2, 1999. (11) Exhibit 10.11 is incorporated by reference to Exhibit 1 to Form 8-A, Amendment No. 2, filed with the Securities and Exchange Commission on May 22, 2000. (b) Reports on Form 8-K No report on Form 8-K was filed during the fourth quarter of the year ended December 31, 2000. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Mercury Interactive (s), Mercury Interactive Corporation, a corporation organized and existing under the laws of the State of Delaware, has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 15, 2001 Mercury Interactive Corporation /s/ Sharlene Abrams, By: _________________________________ Sharlene Abrams Chief Financial Officer, Vice President of Finance and Administration and Secretary KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Amnon Landan, Susan Skaer and/or Sharlene Abrams and each one of them, his or her attorneys- in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Signature Title Date --------- ----- ---- /s/ Amnon Landan President, Chief Executive March 15, 2001 ______________________________________ Officer (Principal Amnon Landan Executive Officer) and Chairman of the Board of Directors /s/ Sharlene Abrams Chief Financial Officer March 15, 2001 ______________________________________ and Vice President, Sharlene Abrams Finance and Administration (Principal Financial and Accounting Officer) /s/ Igal Kohavi Director March 15, 2001 ______________________________________ Igal Kohavi /s/ Yair Shamir Director March 15, 2001 ______________________________________ Yair Shamir /s/ Giora Yaron Director March 15, 2001 ______________________________________ Giora Yaron /s/ Kenneth Klein Director March 15, 2001 ______________________________________ Kenneth Klein
30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Mercury Interactive Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Mercury Interactive Corporation and its subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Jose, California January 15, 2001 F-1 MERCURY INTERACTIVE CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
December 31, ------------------ 2000 1999 -------- -------- ASSETS Current assets: Cash and cash equivalents................................ $226,387 $113,346 Short-term investments................................... 402,356 57,981 Trade accounts receivable (net of allowance for doubtful accounts and sales returns of $8,229 and $5,533)........ 62,989 40,399 Other receivables........................................ 13,233 6,325 Prepaid expenses and other assets ....................... 21,316 16,702 -------- -------- Total current assets................................... 726,281 234,753 Long-term investments...................................... 153,623 15,555 Property and equipment, net ............................... 82,895 46,910 Other assets, net.......................................... 13,576 -- -------- -------- Total assets........................................... $976,375 $297,218 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................................... $ 12,931 $ 8,469 Accrued liabilities...................................... 58,942 33,433 Income taxes payable..................................... 23,797 19,945 Deferred revenue......................................... 77,673 35,840 -------- -------- Total current liabilities.............................. 173,343 97,687 Convertible subordinated notes............................. 500,000 -- -------- -------- Total liabilities...................................... 673,343 97,687 -------- -------- Commitments and contingencies (Note 5) Stockholders' equity: Common stock, par value $.002 per share, 240,000 shares authorized; 81,129 and 78,090 shares issued and outstanding............................................. 162 156 Capital in excess of par value........................... 190,232 148,826 Notes receivable from issuance of stock.................. (7,528) (5,090) Accumulated other comprehensive loss..................... (1,415) (1,242) Retained earnings........................................ 121,581 56,881 -------- -------- Total stockholders' equity............................. 303,032 199,531 -------- -------- $976,375 $297,218 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-2 MERCURY INTERACTIVE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
Year ended December 31, -------------------------- 2000 1999 1998 -------- -------- -------- Revenues: License ......................................... $216,100 $130,900 $ 84,450 Service ......................................... 90,900 56,800 36,550 -------- -------- -------- Total revenues ................................ 307,000 187,700 121,000 -------- -------- -------- Cost of revenues: License ......................................... 17,138 7,736 6,291 Service ......................................... 24,679 16,957 10,500 -------- -------- -------- Total cost of revenues ........................ 41,817 24,693 16,791 -------- -------- -------- Gross profit ...................................... 265,183 163,007 104,209 -------- -------- -------- Operating expenses: Research and development, net ................... 32,042 23,484 16,907 Marketing and selling ........................... 151,897 89,874 58,186 General and administrative ...................... 17,831 11,662 8,780 Merger related expenses ......................... -- 2,000 -- -------- -------- -------- Total operating expenses ...................... 201,770 127,020 83,873 -------- -------- -------- Income from operations ............................ 63,413 35,987 20,336 Other income, net ................................. 17,462 6,026 4,640 -------- -------- -------- Income before provision for income taxes .......... 80,875 42,013 24,976 Provision for income taxes ........................ 16,175 8,869 5,451 -------- -------- -------- Net income ........................................ $ 64,700 $ 33,144 $ 19,525 ======== ======== ======== Net income per share (basic) ...................... $ 0.81 $ 0.44 $ 0.28 ======== ======== ======== Net income per share (diluted) .................... $ 0.70 $ 0.39 $ 0.25 ======== ======== ======== Weighted average common shares (basic) ............ 79,927 76,112 70,654 ======== ======== ======== Weighted average common shares and equivalents (diluted) ........................................ 91,938 85,208 78,818 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 MERCURY INTERACTIVE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Notes Capital receivable Accumulated Common stock in excess from other ------------- of par issuance Retained comprehensive Stockholders' Comprehensive Shares Amount value of stock earnings loss equity income (loss) ------ ------ --------- ---------- -------- ------------- ------------- ------------- Balance at December 31, 1997................... 66,954 $134 $108,198 $ -- $ 4,212 $ (424) $112,120 Net income.............. -- -- -- -- 19,525 -- 19,525 $19,525 Currency translation adjustments............ -- -- -- -- -- (351) (351) (351) ------- Comprehensive income.... $19,174 ======= Stock issued under stock option and employee stock purchase plans... 6,300 12 16,266 (5,130) -- -- 11,148 Pooling of interests acquisition............ 736 2 3,964 -- -- -- 3,966 ------ ---- -------- ------- -------- ------- -------- Balance at December 31, 1998................... 73,990 148 128,428 (5,130) 23,737 (775) 146,408 Net income.............. -- -- -- -- 33,144 -- 33,144 $33,144 Currency translation adjustments............ -- -- -- -- -- (467) (467) (467) ------- Comprehensive income.... $32,677 ======= Collection of notes receivable............. -- -- -- 387 -- -- 387 Stock issued under stock option and employee stock purchase plans... 4,100 8 20,398 (347) -- -- 20,059 ------ ---- -------- ------- -------- ------- -------- Balance at December 31, 1999................... 78,090 156 148,826 (5,090) 56,881 (1,242) 199,531 Net income.............. -- -- -- -- 64,700 -- 64,700 $64,700 Currency translation adjustments............ -- -- -- -- -- (173) (173) (173) ------- Comprehensive income.... $64,527 ======= Tax benefit from stock options................ -- -- 12,805 -- -- -- 12,805 Collection of notes receivable............. -- -- -- 2,314 -- -- 2,314 Stock issued under stock option and employee stock purchase plans... 3,039 6 28,601 (4,752) -- -- 23,855 ------ ---- -------- ------- -------- ------- -------- Balance at December 31, 2000................... 81,129 $162 $190,232 $(7,528) $121,581 $(1,415) $303,032 ====== ==== ======== ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 MERCURY INTERACTIVE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year ended December 31, ----------------------------- 2000 1999 1998 --------- -------- -------- Cash flows from operating activities: Net income ................................... $ 64,700 $ 33,144 $ 19,525 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................ 9,624 6,063 4,223 Loss on retirement of property and equipment ............................................. 337 121 -- Deferred income taxes, net ................... (2,340) (2,802) (1,840) Tax benefit from exercise of stock options ... 12,805 -- -- Changes in assets and liabilities: Trade accounts receivable................... (23,841) (12,349) (4,006) Other receivables........................... (6,952) (428) (4,034) Prepaid expenses and other assets........... (2,079) (3,277) (1,879) Accounts payable............................ 4,702 4,076 803 Accrued liabilities ........................ 25,873 16,164 5,309 Income taxes payable........................ 4,654 8,688 8,373 Deferred revenue ........................... 42,634 11,718 13,030 --------- -------- -------- Net cash provided by operating activities ......................................... 130,117 61,118 39,504 --------- -------- -------- Cash flows from investing activities: Maturity of investments ...................... 275,860 28,616 35,128 Purchases of investments ..................... (758,333) (68,325) (33,826) Acquisition of property and equipment ........ (45,568) (23,897) (15,040) --------- -------- -------- Net cash used in investing activities .... (528,041) (63,606) (13,738) --------- -------- -------- Cash flows from financing activities: Proceeds from issuance of convertible subordinated notes .......................... 500,000 -- -- Proceeds from issuance of common stock, net .. 28,607 20,406 19,494 Debt issuance costs .......................... (14,620) -- -- Notes receivable from issuance of common stock........................................ (4,752) (347) (5,130) Notes receivable collected from issuance of common stock................................. 2,314 387 -- --------- -------- -------- Net cash provided by financing activities ......................................... 511,549 20,446 14,364 --------- -------- -------- Effect of exchange rate changes on cash......... (584) (1,448) (585) --------- -------- -------- Net increase in cash ........................... 113,041 16,510 39,545 Cash and cash equivalents at beginning of year ............................................... 113,346 96,836 57,291 --------- -------- -------- Cash and cash equivalents at end of year ....... $ 226,387 $113,346 $ 96,836 ========= ======== ======== Supplemental Disclosure: Cash paid during the year for income taxes ..... $ 2,008 $ 1,354 $ 1,365
The accompanying notes are an integral part of these consolidated financial statements. F-5 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES Mercury Interactive Corporation (the "Company") develops, markets and supports performance management solutions that enable businesses to test and monitor their Web site and other applications. The Company acquired Conduct Ltd. on November 30, 1999, which was accounted for as a pooling of interests. The consolidated financial statements for each of the two years ended December 31, 1999 and 1998 and the accompanying notes reflect the results of operations as if the acquired entity was a wholly-owned subsidiary since its inception (see Note 8). Basis of presentation The Company has a wholly-owned research and development and sales subsidiary incorporated in Israel and sales subsidiaries in Brazil, Canada, Europe, South Africa and the Pacific Rim for marketing, distribution and support of products and services. In February 2000, the Company formed a wholly-owned subsidiary to offer its hosted Web site performance monitoring service, ActiveWatch, and its hosted Web site load testing service, ActiveTest. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign currency translation The functional currency of the Company's subsidiary in Israel is the U.S. dollar. Assets and liabilities in Israel are translated at year-end exchange rates, except for property and equipment, which is translated at historical rates. Revenues and expenses are translated at average exchange rates in effect during the year, except for costs related to those balance sheet items, which are translated at historical rates. Foreign currency translation gains and losses, which have not been material to date for this subsidiary, are included in the consolidated statements of operations. The functional currencies of all other subsidiaries are the local currencies. Accordingly, all assets and liabilities of these subsidiaries are translated at the current exchange rate at the end of the period and revenues and costs at average exchange rates in effect during the period. The gains and losses from translation of these subsidiaries' financial statements are recorded as other accumulated comprehensive income and included as a separate component of stockholders' equity. Net gains and losses resulting from foreign exchange transactions were not significant during any of the periods presented. Derivative financial instruments The Company enters into forward foreign exchange contracts ("forward contracts") to hedge foreign currency denominated intercompany receivables against fluctuations in exchange rates. The Company does not enter into forward contracts for speculative or trading purposes. The criteria used for designating a forward contract as a hedge considers its effectiveness in reducing risk by matching hedging instruments to underlying transactions. Gains and losses on forward contracts are recognized in other income in the same period as gains F-6 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and losses on the underlying transactions. The Company had outstanding forward contracts with notional amounts totaling approximately $13.0 million, $10.6 million and $3.4 million at December 31, 2000, 1999 and 1998, respectively. The open forward contracts at December 31, 2000 mature at various dates through December 2001 and are hedges of certain foreign currency transaction exposures in the Australian Dollar, British Pound, Danish Krone, French Franc, Euro, German Mark, Norwegian Kroner, Japanese Yen and Swedish Krona. The unrealized net gain on the Company's forward contracts at December 31, 2000 was approximately $282,000. Cash and cash equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term and long-term investments The Company considers all investments with remaining maturities of less than one year to be short-term investments and all investments with remaining maturities greater than one year to be long-term investments. 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 "held to maturity" securities. The investments, which all have contractual maturities of less than two years, are carried at cost plus accrued interest. Realized gains or losses are determined based on the specific identification method and are reflected in other income. The portfolio of short-term and long-term investments (including cash and cash equivalents) consisted of the following (in thousands):
December 31, ----------------- Investment Type 2000 1999 --------------- -------- -------- Cash and interest bearing demand deposits................. $ 50,126 $ 34,275 Corporate debt securities................................. 462,108 86,593 Municipal securities...................................... 112,973 52,670 U.S. treasury and agency securities....................... 157,159 13,344 -------- -------- Total................................................... $782,366 $186,882 ======== ========
Revenue recognition Revenues are derived from product licensing fees, and from maintenance support services, training and consulting. Effective January 1, 1998, the Company adopted Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), with the exception of the provisions deferred by Statement of Position 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2" ("SOP 98-4"). Effective January 1, 1999 the Company adopted SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition" ("SOP 98-9"). In accordance with the adopted provisions of SOP 97-2 and SOP 98-9, the Company records revenues from software licenses when a license agreement is signed by both parties, the fee is fixed and determinable, collection of the fee is probable and delivery of the product has occurred. If an element of the arrangement had not been delivered, revenues for the element are deferred based on vendor-specific objective evidence of fair value. If vendor-specific objective evidence of fair value does not exist, all revenues are deferred until sufficient objective evidence exists or all elements have been delivered. Payments received in advance of revenue F-7 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) recognition are recorded as deferred revenue. Revenues from hosted services and the Company's application performance management products are recognized ratably over the term of the related agreements. Service revenues from customer maintenance fees for ongoing customer support and product updates are recognized ratably over the period of the contract. Payments for maintenance fees are generally made in advance, are nonrefundable and are classified as deferred revenue. Revenues for training and consulting services are recognized as the services are provided. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company applied the provisions of SAB 101 to all revenue transactions for fiscal 2000. SAB 101 has not had a material impact on the results of operations, financial position or cash flows of the Company. In accordance with the provisions of Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions" ("APB 29"), the Company records barter transactions at the fair value of the goods or services provided or received, whichever is more readily determinable in the circumstances. To date, revenues from barter transactions have been insignificant and represent less than 1% of net revenues. Property and equipment Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated economic lives of assets, which are five to seven years for office furniture and equipment, two to five years for computers and related equipment, four to ten years for leasehold improvements, or the term of the lease, whichever is shorter, and thirty years for buildings. Long-lived assets The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. No such impairments have been identified to date. The Company assesses the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Internal use software The Company recognizes software development costs in accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." As such, the Company capitalizes substantially all external costs related to the purchase and implementation of software projects used for business operations. Capitalized software costs primarily include purchased software and external consulting fees. The Company expenses all costs incurred that relate to the planning and post-implementation phases of the software project. Capitalized costs are amortized over the estimated useful life of the product. Research and development In accordance with Statement of Financial Accounting Standards No. 86, "Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed," all costs incurred to establish the F-8 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) technological feasibility of a computer product to be sold, leased or otherwise marketed are expensed as research and development costs. Costs incurred subsequent to the establishment of technological feasibility, and prior to the general release of the product to the public are capitalized. Amortization of capitalized software development costs is provided on a product-by-product basis using the straight-line method over the estimated economic life of the products of two years. During 2000, 1999 and 1998, no software development costs were capitalized because the costs incurred subsequent to achieving technological feasibility and before the general release of our products were not significant. There were no amortization charges included in cost of license revenues in 2000, $585,000 in 1999 and $600,000 in 1998. Research and development expense is reported net of research grants received from the government of Israel, and includes royalty expense for obligations to the government of Israel for sales of products developed under government- funded research. No grants were obtained from the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade ("the Chief Scientist") during 2000 and 1999. Research grants received amounted to $1.6 million in 1998. The Company was not obligated to repay these grants; however, the Company 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. There was no royalty expense under these agreements for the year ended December 31, 2000. Royalty expense amounted to approximately $2.7 million for each of the years ended December 31, 1999 and 1998. As of December 31, 2000, the Company had no outstanding royalty obligations. The Company has not applied for, nor does it anticipate applying for, any future Chief Scientist grants. Stock-based compensation The Company accounts for stock-based compensation using the intrinsic value method presented in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. The Company's policy is to grant options with an exercise price equal to the quoted market price of its stock on the grant date. Accordingly, no compensation cost has been recognized in the statements of operations. Additional pro forma disclosure is provided as required under Statement of Financial Accounting Standard No.123 ("SFAS 123"), "Accounting for Stock-based Compensation" (see Note 3). The Company has not issued stock options to non-employees. Concentration of credit risks Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash, cash equivalents, investments and accounts receivable. The Company invests primarily in money market accounts and marketable securities and places its investments with high quality financial, government or corporate institutions. Accounts receivables are derived from sales to customers located primarily in the United States, Brazil, Canada, Europe, Pacific Rim and Israel. The Company performs ongoing credit evaluations of its customers and to date has not experienced any material losses. No customer accounted for more than 10% of accounts receivable or revenue in 2000, 1999 or 1998. Fair value of financial instruments The carrying amount of the Company's financial instruments, including cash, cash equivalents, investments, accounts receivable and accounts payable approximates their respective fair values due to the short maturities of these financial instruments. Changes in the fair value of the Company's foreign currency forward contracts ("forward contracts") are generally offset by changes in the value of the underlying exposures being hedged. The fair value of the Company's convertible subordinated debentures was $522.6 million at December 31, 2000, based on quoted market price. F-9 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net income per share Earnings per share are calculated in accordance with the provisions of Statement of Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the reporting of both basic earnings per share, which is the weighted-average number of common shares outstanding, and diluted earnings per share, which includes the weighted-average number of common shares outstanding and all dilutive potential common shares outstanding, utilizing the treasury stock method. For the years ended December 31, 2000, 1999 and 1998, dilutive potential common shares outstanding reflects shares issuable under our stock option plans. Share and per share amounts reflect the effect of the two-for-one stock split distributed to stockholders on February 11, 2000. The following table summarizes the Company's earnings per share computations for the years ended December 31, 2000, 1999 and 1998 (in thousands, except per share amounts):
Year ended December 31, ----------------------- 2000 1999 1998 ------- ------- ------- Numerator: Net income....................................... $64,700 $33,144 $19,525 ======= ======= ======= Denominator: Denominator for basic net income per share-- weighted average shares......................... 79,927 76,112 70,654 Incremental common shares attributable to shares issuable under employee stock plans............. 12,011 9,096 8,164 ------- ------- ------- Denominator for diluted net income per share-- weighted average shares......................... 91,938 85,208 78,818 ======= ======= ======= Net income per share--basic...................... $ 0.81 $ 0.44 $ 0.28 ======= ======= ======= Net income per share--diluted.................... $ 0.70 $ 0.39 $ 0.25 ======= ======= =======
At December 31, 2000, 1999 and 1998, options to purchase a total of 314,250 shares of common stock with an exercise price of $107.37, 504,000 shares of common stock with an exercise price of $38.50, and 280,000 shares of common stock with an exercise price of $9.91, respectively, were not included in diluted earnings per share because the impact is considered anti-dilutive. The 4,494,000 shares of common stock reserved for issuance upon conversion of the outstanding convertible subordinated notes issued in 2000 were not included in diluted earnings per share because the assumed conversion would be antidilutive. Reclassifications Information technology expenses of $1.7 million in 1999 and $1.3 million in 1998 were reclassified from cost of revenues into selling and marketing and general and administrative expenses to reflect similar allocations made in the current year presentation. Comprehensive income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. Comprehensive income has been included in the Consolidated Statements of Stockholders' Equity for all periods. F-10 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Segment reporting Effective January 1998, the Company adopted Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. During each of the three years ended December 31, 2000, 1999 and 1998, the Company's management considered its business activities to be focused on the license of its products and related services to end user customers. Since management's primary form of internal reporting is aligned with the offering of products and services, the Company believes it operates in one segment. Information related to geographic segments is included in Note 7. New accounting pronouncements In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133--an amendment of FASB Statement No. 133" ("SFAS 137"). SFAS 137 defers for one year the application of Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), to all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board issued SFAS No. 138 "Accounting for Derivative Instruments and Hedging Activities-An Amendment of FASB No. 133" ("SFAS 138"). SFAS 138 amends the accounting and reporting standards for certain derivatives and hedging activities such as net settlement contracts, foreign currency translations and intercompany derivatives. The Company will adopt SFAS 138 in its year ended December 31, 2001. The adoption as of January 1, 2001, of SFAS 133, SFAS 137 and SFAS 138 did not have a material effect on the Company's results of operations, financial position or cash flows. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of Accounting Practice Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), regarding (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occured after either December 15, 1998, or January 12, 2000. The Company's adoption of the provisions of FIN 44 has not had a material effect on the Company's results of operations, financial position or cash flows. F-11 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 2--FINANCIAL STATEMENT COMPONENTS
December 31, ------------------ 2000 1999 -------- -------- (in thousands) Other receivables: Employee ............................................ $ 1,060 $ 2,625 Income taxes ........................................ 838 2,178 Interest ............................................ 9,072 1,078 Other ............................................... 2,263 444 -------- -------- $ 13,233 $ 6,325 ======== ======== Prepaid expenses and other assets Prepaid compensation ................................ $ 8,958 $ 6,579 Deferred income taxes, net .......................... 6,982 4,642 Other ............................................... 5,376 5,481 -------- -------- $ 21,316 $ 16,702 ======== ======== Property and equipment, net: Land and buildings .................................. $ 63,403 $ 35,245 Computers and equipment ............................. 36,341 23,558 Office furniture and equipment ...................... 8,299 5,829 Leasehold improvements .............................. 4,189 2,888 -------- -------- 112,232 67,520 Less: Accumulated depreciation and amortization ..... (29,337) (20,610) -------- -------- $ 82,895 $ 46,910 ======== ======== Other assets, net: Debt-related costs .................................. $ 14,620 -- Less: Accumulated amortization ...................... (1,044) -- -------- -------- $ 13,576 $ -- ======== ======== Accrued liabilities: Payroll and accrued commissions (including payroll taxes).............................................. $ 26,784 $ 16,751 Interest on notes ................................... 11,743 -- Vacation and severance .............................. 7,241 4,299 Sales tax ........................................... 4,929 3,270 Royalties ........................................... 1,050 1,596 Other ............................................... 7,195 7,517 -------- -------- $ 58,942 $ 33,433 ======== ========
Year ended December 31, -------------------------- 2000 1999 1998 -------- ------- ------- (in thousands) Other income, net: Interest income ............................. $ 30,526 $ 6,480 $ 4,741 Interest expense ............................ (11,775) -- -- Debt-related cost amortization .............. (1,044) -- -- Foreign exchange gain (losses) and other .... (245) (454) (101) -------- ------- ------- $ 17,462 $ 6,026 $ 4,640 ======== ======= ======= Allowance for doubtful accounts and sales returns: Balance at beginning of period .............. $ 5,533 $ 3,623 $ 1,878 Additions charged to costs and expenses ..... 12,959 4,485 2,943 Deductions .................................. (10,263) (2,575) (1,198) -------- ------- ------- $ 8,229 $ 5,533 $ 3,623 ======== ======= =======
F-12 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 3--COMMON STOCK In August 1989, the Company adopted a stock option plan (the "1989 Plan"). Options granted under the 1989 Plan are for periods not to exceed ten years. For holders of 10% or more of the total combined voting power of all classes of the Company's stock, options may not be granted at less than 110% of the fair value of the common stock at the date of grant and the option term may not exceed 5 years. Incentive stock option grants under the 1989 Plan must be at exercise prices no less than 100% of the fair market value and non-statutory stock option grants under the 1989 Plan must be at exercise prices no less than 85% of the fair market value of the stock on the date of grant. Options are immediately exercisable but all shares purchased upon exercise of options are subject to repurchase by the Company until vested. Options generally vest over a period of four years. In August 1998, the stockholders reserved an additional 1,200,000 shares of common stock for issuance upon exercise of stock options to be granted under this plan. The term of the 1989 Plan expired in August 1999 and options are no longer granted under this plan. In May 1996, the Company adopted a stock option plan solely for grants to employees of its subsidiaries located outside the United States (the "Supplemental Plan"). The Company reserved 2,000,000 shares of common stock for issuance upon exercise of stock options to be granted under this plan. The provisions of the Supplemental Plan regarding option term, grant price, exercise price, and vesting period is identical to those of the 1989 Plan. In August 1998, the stockholders adopted the 1999 Stock Option Plan (the "1999 Plan") to replace the 1989 Plan, effective on the expiration of the term of such plan in August 1999. The Company reserved 900,000 shares of common stock for issuance upon exercise of stock options to be granted under this plan. The provisions of the 1999 Plan regarding option term, grant price, exercise price, and vesting period are identical to those of the 1989 Plan except that all options granted under the 1999 Plan must be at exercise prices no less than 100% of the fair market value. In December 1999, the stockholders approved an automatic increase in the aggregate number of shares reserved for issuance under the 1999 Plan by 4% of the common stock and equivalents outstanding as of January 1 of each year starting in 2000 and ending in 2003. In July 2000, the Company adopted the 2000 Supplemental Stock Option Plan (the "2000 Plan") which allows for options to be granted to any employee of the Company who is not a United States citizen or resident and who is not an executive officer or director of the Company. The Company reserved 2,000,000 shares of common stock for issuance upon exercise of stock options to be granted under the 2000 Plan. In November 2000, the Board amended and restated the 2000 Plan to better address tax issues of the Company and its employees in countries other than the United States. In February 2001, the Board approved the reservation of an additional 4,000,000 shares of common stock for issuance upon exercise of stock options to be granted under the 2000 Plan. The provisions of the 2000 Plan regarding option term, grant price and exercise price are identical to those of the 1999 Plan except that all the term of options granted in certain European countries may be different and the 2000 Plan provides for the grant of stock purchase rights. F-13 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table presents the combined activity of the 1989 Plan, the 1999 Plan, the 2000 Plan and the Supplemental Plan for the years ended December 31, 1998, 1999 and 2000 (shares in thousands):
Options outstanding ------------------------ Options Weighted available Number of average for grant Shares exercise price --------- --------- -------------- Balance outstanding at December 31, 1997.................................. 32 13,392 $2.92 Additional shares authorized........... 4,466 -- -- Options granted........................ (5,320) 5,320 6.49 Options canceled....................... 930 (930) 4.41 Options exercised...................... -- (6,080) 2.72 ------ ------ Balance outstanding at December 31, 1998.................................. 108 11,702 4.49 Additional shares authorized........... 7,857 -- -- Options granted........................ (4,871) 4,871 16.02 Options canceled....................... 945 (945) 6.38 Options exercised...................... -- (3,612) 4.42 ------ ------ Balance outstanding at December 31, 1999.................................. 4,039 12,016 9.07 Additional shares authorized........... 5,637 -- -- Options granted........................ (8,315) 8,315 55.40 Options canceled....................... 256 (652) 25.61 Options exercised...................... -- (2,714) 7.78 ------ ------ Balance outstanding at December 31, 2000.................................. 1,617 16,965 31.39 ====== ====== =====
The following table presents weighted average price and remaining contractual life information about significant option groups outstanding under the above plans at December 31, 2000 (shares in thousands):
Options outstanding Options exercisable --------------------------------------------------- ---------------------------- Weighted average Number Range of Number remaining Weighted average exercisable Weighted average exercise prices outstanding contractual life (yrs) exercise price at 12/31/00 exercise price - --------------- ----------- ---------------------- ---------------- ----------- ---------------- $ .075-- 6.32........ 4,804 6.46 $ 4.58 3,450 $ 4.15 $ 8.10 -- 0.72........ 7,554 8.71 26.98 1,303 15.16 $ 41.34 -- 89.00........ 4,293 9.45 63.57 125 55.57 $103.44 --125.44........ 314 9.66 107.46 3 107.37 ------ ----- 16,965 8.28 31.39 4,881 8.47 ====== =====
The Company holds notes receivable with balances totaling $7.5 million from its officers and certain employees in connection with the purchase of common stock. The notes bear interest at the market rate on the date of issuance and are secured by the shares purchased and require quarterly interest payments. The full amount of the notes and the final interest payment become due over the next five years until November, 2004. Directors' Stock Option Plan On August 3, 1994, the Board of Directors adopted the 1994 Directors' Stock Option Plan (the "Directors' Plan"). The Company reserved 2,000,000 shares of Common Stock for issuance upon exercise of stock options to be granted during the ten year term of the Directors' Plan. Only outside directors may be granted options under the Directors' Plan. The Plan provided for an initial option grant of 25,000 shares to the F-14 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Company's outside directors as of August 3, 1994 or upon initial election to the Board of Directors after August 3, 1994. In addition, the plan provided for automatic annual grants of 5,000 shares upon re-election of the individual to the Board of Directors. In August 1998, the stockholders agreed to amend the Directors' Plan to increase the number of shares granted to 50,000 shares as an initial grant to new non-employee directors, 10,000 shares as the annual grant to continuing non-employee directors of the Company, and to provide for a one- time grant of 25,000 shares to the non-employee directors of the Company who were serving as directors of the Company as of August 14, 1998. The option term is ten years, and options are exercisable while such person remains a director. The exercise price is no less than 100% of fair market value on the date of grant. The initial option grants and the one-time grants vest 20% annually for each director on the date of each Annual Meeting of Stockholders of the Company after the date of grant of such option. The annual option grants shall vest in full on the fifth anniversary following each individual's re-election to the Board of Directors. The following table presents the activity for the Directors' Plan for the years ended December 31, 1998, 1999 and 2000 (shares in thousands):
Options outstanding Options ----------------------- available Number of Weighted for grant shares average price --------- --------- ------------- Balance outstanding at December 31, 1997................................... 1,460 380 $ 3.33 Options granted......................... (360) 360 9.70 Options canceled........................ -- -- -- Options exercised....................... -- (160) 3.81 ----- ---- Balance outstanding at December 31, 1998................................... 1,100 580 7.14 Options granted......................... (60) 60 15.50 Options canceled........................ -- -- -- Options exercised....................... -- (140) 7.96 ----- ---- Balance outstanding at December 31, 1999................................... 1,040 500 7.91 Options granted......................... (30) 30 15.50 Options canceled........................ -- -- Options exercised....................... -- (100) 6.27 ----- ---- Balance outstanding at December 31, 2000................................... 1,010 430 7.91 ===== ====
The following table presents weighted average price and remaining contractual life information about significant option groups outstanding under the Directors' Plan at December 31, 2000 (shares in thousands):
Options outstanding Options exercisable -------------------------------------------------- ---------------------------- Weighted average Number Range of Number Remaining Weighted average exercisable Weighted average exercise prices outstanding contractual life(yrs) exercise price At 12/31/00 exercise price - --------------- ----------- --------------------- ---------------- ----------- ---------------- $ 3.07--$ 3.38.......... 120 5.83 $3.22 -- -- $ 5.28--$ 8.66.......... 80 6.62 7.81 20 $5.28 $ 9.91--$ 9.91.......... 140 7.62 9.91 20 9.91 $15.50--$67.88.......... 90 8.73 32.96 -- -- --- --- 430 7.17 12.48 40 7.59 === ===
F-15 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Employee Stock Purchase Plans In October 1993, the Board of Directors and stockholders adopted the Employee Stock Purchase Plan (the "1993 ESPP") and reserved 2,000,000 shares for issuance. Under the plan, employees were granted the right to purchase shares of common stock at a price per share that was the lesser of: (i) 85% of the fair market value of the shares at the participant's entry date into the two-year offering period, or (ii) the fair market value at the end of each six- month segment within such offering period. The 1993 ESPP was terminated in February 1998. In August 1998, the stockholders adopted the 1998 Employee Stock Purchase Plan (the "1998 ESPP") to replace the 1993 ESPP and the reservation of 1,300,000 shares for issuance thereunder. Under the 1998 ESPP, employees are granted the right to purchase shares of common stock at a price per share that is the lesser of (i) 85% of the fair market value of the shares at the participant's entry date into the six month offering period, or (ii) 85% of the fair market value of the shares at the end of the six month offering period. In May 2000, the stockholders approved the reservation of an additional 500,000 shares of common stock for issuance under the 1998 ESPP. During 2000, 1999 and 1998, approximately 189,000, 345,000 and 84,000 shares, respectively, were purchased under our Employee Stock Purchase Plans (the "ESPPs"). Pro Forma Disclosure The Company has adopted the disclosure provisions only of SFAS 123 and will continue to account for its stock option plans in accordance with the provisions of APB 25. Accordingly, no compensation cost has been recognized for the option plans or the ESPPs. Pursuant to the requirements of SFAS 123, the following are pro forma net income (loss) and net income (loss) per share for 2000, 1999, and 1998, as if the compensation costs for the option plans and the ESPPs had been determined based on the fair value at the grant date for grants in 2000, 1999, and 1998, consistent with the provisions of SFAS 123:
2000 1999 1998 ------ ------- ------ Pro forma net income (loss) (in thousands)............ $1,097 $13,895 $7,882 Pro forma net income (loss) per share (basic)......... 0.01 0.18 0.11 Pro forma net income (loss) per share (diluted)....... 0.01 0.16 0.10
The fair value of options and shares issued pursuant to the option plans and the ESPPs at the grant date were estimated using the Black-Scholes model with the following weighted average assumptions:
Option plans ESPP ---------------- ---------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- Expected life (years)....................... 4.00 4.00 4.00 0.50 0.50 0.50 Risk-free interest rate..................... 6.26% 5.01% 5.22% 6.49% 5.06% 4.90% Volatility.................................. 88% 83% 83% 88% 83% 83% Dividend yield.............................. None None None None None None
The weighted fair value per share of options granted under the 1989 Plan, the 1999 Plan, the 2000 Plan and Supplemental Plan during the years ended December 31, 2000, 1999 and 1998 were $37.02, $10.12 and $4.13, respectively. The weighted fair value per share of options granted under the Directors' Plan during the years ended December 31, 2000, 1999 and 1998 were $45.51, $9.84, and $6.13, respectively. F-16 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 4--INCOME TAXES Income before provision for income taxes consists of the following (in thousands):
Year ended December 31, ----------------------- 2000 1999 1998 ------- ------- ------- Domestic............................................. $22,655 $ 9,357 $ 6,239 Foreign.............................................. 58,220 32,656 18,737 ------- ------- ------- $80,875 $42,013 $24,976 ======= ======= =======
The provision for income taxes consists of the following (in thousands):
Year ended December 31, ------------------------- 2000 1999 1998 ------- ------- ------- Current: Federal......................................... $ 8,388 $ 5,375 $ 5,322 State........................................... 2,362 931 350 Foreign......................................... 7,765 5,365 1,619 ------- ------- ------- Total current................................. 18,515 11,671 7,291 ------- ------- ------- Deferred: Federal......................................... (1,708) (2,681) (1,756) State........................................... (452) (121) (84) Foreign......................................... (180) -- -- ------- ------- ------- Total deferred................................ (2,340) (2,802) (1,840) ------- ------- ------- Total provision for income taxes.................. $16,175 $ 8,869 $ 5,451 ======= ======= =======
Deferred income taxes consists of the following (in thousands):
December 31, ---------------- 2000 1999 ------- ------- Accruals and reserves...................................... $ 5,406 $ 3,644 Net operating loss carryforwards........................... 1,705 1,856 Other...................................................... 1,576 998 ------- ------- 8,687 6,498 Valuation allowance........................................ (1,705) (1,856) ------- ------- Deferred income taxes, net............................... $ 6,982 $ 4,642 ======= =======
The Company has provided a valuation allowance of $1.7 million and $1.9 million for the years ended December 31, 2000 and 1999, respectively. The valuation allowance is for deferred income taxes due to foreign net operating losses for which realization of future benefit is uncertain. As of December 31, 2000, the Company had net operating loss carryforwards for federal and state purposes of approximately $119.2 million and $24.6 million, respectively. The federal and state carryforwards will expire in various years through 2020 for the federal, and through 2005, for the state carryforwards. The net operating losses are attributable to stock option compensation deductions. Accordingly, the tax benefit realized upon utilization of the net operating loss carryforwards will be credited directly to equity. F-17 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The provision for income taxes differs from the amount obtained by applying the statutory federal income tax rate to income before taxes as follows (in thousands):
December 31, -------------------------- 2000 1999 1998 -------- ------- ------- Provision at federal statutory rate ........... $ 28,306 $14,705 $ 8,492 State tax, net of federal tax benefit ......... 1,146 527 350 Foreign rate differentials from U.S. statutory rate ......................................... (14,173) (8,234) (5,288) Non-utilized net operating losses and credits .............................................. 522 3,625 2,826 Tax-exempt interest ........................... (992) (640) (409) Other ......................................... 1,366 (1,114) (520) -------- ------- ------- $ 16,175 $ 8,869 $ 5,451 ======== ======= =======
Income taxes are not provided for the undistributed earnings of the Company's foreign subsidiaries because it is management's intention to reinvest such earnings in its foreign operations. The Company's Israeli operation has been granted the status of an "Approved Enterprise" under the Israeli law for the Encouragement of Capital Investments, 1959, as amended. An Approved Enterprise is eligible for significant tax benefits for 10 years starting the first year in which the Company has Israeli taxable income (after consideration of tax losses carried forward). The benefits include a corporate tax rate of 10% on income from certain approved enterprises and a tax exemption on income from approved enterprises in respect of which the Company has elected the "alternative benefits". The exemption period is 2 years, after which the income from these enterprises is taxable at the rate of 10% for 8 years, and the regular rate thereafter. While the Company will continue to apply for "Approved Enterprise" status in future years, there is no assurance that the benefits available under the current law will remain unchanged. The Company's Israeli operation has six overlapping Approved Enterprises plans. The Company expects to be able to realize the tax holidays and rate of the current plans through the year 2010. The entitlement to the "Approved Enterprise" benefits is conditional upon the Company fulfilling the conditions stipulated by the law, regulations published thereunder and the instruments of approval for the specific investments in approved enterprises or approved assets. In the event of failure to comply with these conditions, the benefits may be cancelled and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of interest. The 1999 tax provision was calculated without the benefit of Conduct's pre- acquisition losses because the realization of any future tax benefit is uncertain. NOTE 5--COMMITMENTS Royalty Commitments Research and development expense is reported net of research grants received from the government of Israel, and includes royalty expense for obligations to the government of Israel for sales of products developed under government- funded research. No grants were obtained from the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade ("the Chief Scientist") during 2000 and 1999. Research grants received amounted to $1.6 million in 1998. The Company was not obligated to repay these grants; however, the Company 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. There was no F-18 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) royalty expense under these agreements for the year ended December 31, 2000. Royalty expense amounted to approximately $2.7 million for each of the years ended December 31, 1999 and 1998. As of December 31, 2000, the Company had no outstanding royalty obligations. The Company has not applied for, nor does it anticipate applying for, any future Chief Scientist grants. Lease commitments The Company leases facilities for sales offices in the U.S. and foreign locations under non-cancelable operating leases that expire from 2001 through 2005. Certain of these leases contain renewal options. The Company leases certain equipment under various leases with lease terms ranging from month-to- month up to one year. Future minimum payments under the facilities and equipment leases with non-cancelable terms in excess of one year are as follows as of December 31, 2000 (in thousands): 2001.............................................................. $ 4,422 2002.............................................................. 3,421 2003.............................................................. 1,911 2004.............................................................. 522 2005.............................................................. 137 ------- Total............................................................. $10,413 =======
Total rent expense under operating leases amounted to $4.1 million, $2.8 million and $2.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. NOTE 6--RELATED PARTIES At December 31, 2000, the Company held notes receivable with balances totaling $7.5 million from its officers and certain employees. These notes were issued over the last 3 years to purchase shares of the Company's common stock at the then fair market value. The remaining notes, which bear interest at the market rate on the date of issuance, mature over the next five years until November, 2004. Interest on the notes is due quarterly, with the principal amount and final interest payment being payable in full no later than the maturity date. If the officer or key employee's employment is terminated prior to the respective notes maturity date, the unpaid portion of the note would become payable in full. These notes are full recourse loans collateralized by the shares purchased. The receivable is shown on the balance sheets as a reduction in equity. NOTE 7--GEOGRAPHIC REPORTING
Year ended December 31, -------------------------- 2000 1999 1998 -------- -------- -------- (in thousands) Net revenue to third parties: North America.................................. $208,200 $123,900 $ 78,797 Europe......................................... 73,000 49,700 33,140 Rest of the World.............................. 25,800 14,100 9,063 -------- -------- -------- Consolidated................................. $307,000 $187,700 $121,000 ======== ======== ======== Identifiable assets: North America.................................. $808,583 $200,854 $161,751 Europe......................................... 21,538 25,389 14,388 Rest of the World.............................. 146,254 70,975 28,547 -------- -------- -------- Consolidated................................. $976,375 $297,218 $204,686 ======== ======== ========
F-19 MERCURY INTERACTIVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The subsidiary located in the United Kingdom accounted for 10%, 12% and 11% of the consolidated net revenue to unaffiliated customers for the years ended December 31, 2000, 1999 and 1998 respectively. Operations located in Israel accounted for 13%, 23% and 19% of the consolidated identifiable assets at December 31, 2000, 1999 and 1998 respectively. NOTE 8--ACQUISITIONS On November 30, 1999, the Company acquired Conduct Ltd. Under terms of the agreement, approximately 408,000 shares of the Company's common stock were issued in exchange for all issued and outstanding convertible preferred and common shares of Conduct, and assumption of all outstanding Conduct stock options, warrants and other securities. The transaction was accounted for as a pooling of interests in the year ended December 31, 1999; therefore, all prior periods presented have been restated to include Conduct in operations since its inception. Since its inception, Conduct Ltd. has not recorded any revenues. The net income for the separate companies and the combined amounts presented in the consolidated financial statements follow (in thousands).
Year ended December 31, ----------------------- 2000 1999 1998 ------- ------- ------- (in thousands) Net income (loss): Mercury Interactive Corporation................... $64,700 $33,144 $21,805 Conduct Ltd....................................... -- -- (2,280) ------- ------- ------- $64,700 $33,144 $19,525 ======= ======= =======
NOTE 9--LONG-TERM DEBT In July 2000, the Company issued $500.0 million in convertible subordinated notes. The notes mature on July 1, 2007 and bear interest at a rate of 4.75% per annum, payable semiannually on January 1 and July 1 of each year. The notes are subordinated in right of payment to all of Mercury's future senior debt. The notes are convertible into shares of the Company's common stock at any time prior to maturity at a conversion price of approximately $111.25 per share, subject to adjustment under certain conditions. The notes may be redeemed, in whole or in part, by the Company at any time on or after July 1, 2003. Accrued interest to the redemption date will be paid by the Company in each redemption. In connection with the issuance of convertible subordinated notes, the Company incurred $14.6 million of issuance costs, which primarily consisted of investment banker fees, legal, and other professional fees. The costs are being amortized using a straight-line method over the seven-year term of the notes. Amortization expense related to the issuance costs was $1.0 million in 2000. NOTE 10--EMPLOYEE BENEFIT PLAN The Company has a qualified 401(k) plan available to eligible employees. Participants may contribute up to 15% of their annual compensation to the plan, limited to a maximum annual amount set by the Internal Revenue Service. The Company matches employee contributions dollar for dollar up to a maximum of $1,000 per year per person. Matching contributions vest according to the number of years of employee service. The Company contributed approximately $415,000 to the 401(k) plan during 2000. F-20 UNAUDITED QUARTERLY FINANCIAL DATA
Quarter ended ------------------------------------------------------------------------- Dec. 31. Sept. 30, June 30, March 31, Dec 31, Sept. 30, June 30, March 31, 2000, 2000 2000 2000 1999 1999 1999 1999 ------- --------- -------- --------- ------- --------- -------- --------- (in thousands, except per share amounts) Revenues: License............... $71,400 $54,200 $48,500 $42,000 $43,500 $33,500 $29,300 $24,600 Service............... 26,100 25,300 21,100 18,400 16,600 14,000 13,200 13,000 ------- ------- ------- ------- ------- ------- ------- ------- Total revenues....... 97,500 79,500 69,600 60,400 60,100 47,500 42,500 37,600 ------- ------- ------- ------- ------- ------- ------- ------- Cost of revenues: License............... 5,350 5,152 3,730 2,906 2,190 2,040 1,870 1,636 Service............... 7,199 6,942 5,710 4,828 4,536 4,548 4,121 3,752 ------- ------- ------- ------- ------- ------- ------- ------- Total cost of revenues............ 12,549 12,094 9,440 7,734 6,726 6,588 5,991 5,388 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit............ 84,951 67,406 60,160 52,666 53,374 40,912 36,509 32,212 ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses: Research and development, net....... 8,350 8,132 8,460 7,100 5,828 6,554 5,866 5,236 Marketing and selling... 45,030 38,995 35,334 32,538 27,608 22,275 20,620 19,371 General and administrative......... 5,608 4,766 4,060 3,397 3,193 3,182 2,877 2,410 Merger-related expenses............... -- -- -- -- 2,000 -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- Total operating Expenses............ 58,988 51,893 47,854 43,035 38,629 32,011 29,363 27,017 ------- ------- ------- ------- ------- ------- ------- ------- Income from operations.. 25,963 15,513 12,306 9,631 14,745 8,901 7,146 5,195 Other income, net....... 6,294 5,332 3,228 2,608 1,925 1,542 1,406 1,153 ------- ------- ------- ------- ------- ------- ------- ------- Income before provision for income taxes....... 32,257 20,845 15,534 12,239 16,670 10,443 8,552 6,348 Provision for income Taxes.................. 6,451 4,169 3,107 2,448 3,334 2,297 1,840 1,398 ------- ------- ------- ------- ------- ------- ------- ------- Net income.............. $25,806 $16,676 $12,427 $ 9,791 $13,336 $ 8,146 $ 6,712 $ 4,950 ======= ======= ======= ======= ======= ======= ======= ======= Net income per share (basic)................ $ 0.32 $ 0.21 $ 0.16 $ 0.12 $ 0.17 $ 0.11 $ 0.09 $ 0.07 ======= ======= ======= ======= ======= ======= ======= ======= Net income per share (diluted).............. $ 0.28 $ 0.18 $ 0.14 $ 0.11 $ 0.15 $ 0.09 $ 0.08 $ 0.06 ======= ======= ======= ======= ======= ======= ======= ======= Weighted average common shares (basic)......... 80,996 80,263 79,507 78,943 77,824 76,796 75,394 74,434 ======= ======= ======= ======= ======= ======= ======= ======= Weighted average common shares (diluted)....... 92,728 92,533 91,282 91,208 87,974 85,920 83,804 83,310 ======= ======= ======= ======= ======= ======= ======= =======
F-21 EX-3.2 2 0002.txt CERTIFICATE OF AMENDMENT Exhibit 3.2 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION Mercury Interactive Corporation, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of Mercury Interactive Corporation, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED: that the Restated Certificate of Incorporation of this corporation by amended by changing the first paragraph of the Article thereof numbered III so that, as amended said first paragraph of said Article shall be and read as follows: "This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock". The total number of shares which the corporation is authorized to issue is Two Hundred and Forty Five Million (245,000,000) shares. Two Hundred and Forty Million (240,000,000) shares shall be Common Stock and Five Million (5,000,000) shares shall be Preferred Stock, each with a par value of $.002 per share." SECOND: That thereafter, pursuant to resolution of its Board of Directors, a meeting of the stockholders of said corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the state of Delaware at which meeting the necessary number of share as required by statue were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Mercury Interactive Corporation has caused this certificate to be signed by Amnon Landan, its Chief Executive Officer, and Susan J. Skaer, its Assistant Secretary, this 24th day of May, 2000. By: /s/ Amnon Landan ------------------------------------- Chief Executive Officer Attest: /s/ Susan J. Skaer --------------------------------- Assistant Secretary EX-10.12 3 0003.txt PURCHASE AND SALE AGREEMENT Exhibit 10.12 PURCHASE AND SALE AGREEMENT by and between WHSUM Real Estate Limited Partnership, a Delaware limited partnership "Seller" and Mercury Interactive Corporation, a Delaware corporation "Buyer" TABLE OF CONTENTS
Section Page No. ------- -------- 1. Sale of the Property.......................................... 1 2. Deposits...................................................... 1 3. Purchase Price................................................ 2 4. Conditions to Parties' Obligations............................ 2 5. Remedies/Liquidated Damages................................... 10 6. Closing and Escrow............................................ 12 7. Interim Operation of the Property............................. 13 8. Tenant Improvement Costs and Leasing Commissions.............. 14 9. Seller's Maintenance of the Property.......................... 14 10. Casualty and Condemnation..................................... 15 11. Limited Liability............................................. 16 12. Release....................................................... 16 13. AS-IS Condition of Property................................... 18 14. Prorations and Rent Arrearages................................ 19 15. Closing Costs................................................. 20 16. Brokers....................................................... 21 17. Notices....................................................... 21 18. Entire Agreement.............................................. 22 19. Assignment.................................................... 22 20. Severability.................................................. 23 21. California Law................................................ 23 22. Modifications/Survival........................................ 23 23. Confidentiality............................................... 23 24. Counterparts.................................................. 24
i 25. Dispute Costs................................................. 24 26. Seller's Representations...................................... 24 27. Buyer's Representations....................................... 27 28. Time of the Essence; and Business Days........................ 28 29. Agreement Date................................................ 28 30. No Third Party Beneficiaries.................................. 28 31. Discharge of Seller's Bonds................................... 28 32. Drafts not an Offer to Enter into a Legally Binding Contract.. 28 33. Disclosure Items.............................................. 29
EXHIBITS: EXHIBIT A LEGAL DESCRIPTION OF THE REAL PROPERTY EXHIBIT B ASSIGNMENT AND ASSUMPTION OF LEASES EXHIBIT C ASSIGNMENT AND ASSUMPTION OF CONTRACTS, WARRANTIES AND PERMITS EXHIBIT D GRANT DEED EXHIBIT E BILL OF SALE EXHIBIT F TENANT ESTOPPEL CERTIFICATE EXHIBIT G NOTICE TO TENANTS EXHIBIT H LEASING COSTS EXHIBIT I NATURAL HAZARD DISCLOSURE STATEMENT EXHIBIT J DISCLOSURE ITEMS EXHIBIT K LIST OF REPORTS ii PURCHASE AND SALE AGREEMENT --------------------------- THIS PURCHASE AND SALE AGREEMENT (the "Agreement") is made and entered into as of December 1, 2000 (the "Agreement Date"), by and between WHSUM Real Estate Limited Partnership, a Delaware limited partnership ("Seller"), and Mercury Interactive Corporation, a Delaware corporation ("Buyer"), with reference to the following facts. RECITALS A. Seller is the owner of that certain improved real property located at 242- 252 Humboldt Court, Sunnyvale, California, as legally described in Exhibit A --------- attached hereto and made a part hereof (the "Real Property") together with all (i) improvements, structures and fixtures (other than trade fixtures) (collectively, the "Improvements") and personal property (the "Personal Property") actually owned by Seller (if any) located in, on or about the Real Property or the Improvements and actually used in the operation of the Improvements, (ii) easements, appurtenances, rights and privileges actually belonging thereto (collectively, the "Appurtenances"), and (iii) the "Permits" and "Warranties", as defined in Exhibit C attached hereto. The Real Property, --------- the Improvements, the Personal Property, the Appurtenances, the Permits and the Warranties are collectively referred to herein as the "Property." B. Seller desires to sell to Buyer and Buyer desires to purchase from Seller the Property, in accordance with the terms and provisions hereinafter contained in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Sale of the Property. Seller shall sell to Buyer and Buyer shall purchase from Seller the Property at the Closing (defined in Section 6 below), subject to and on the terms and conditions contained herein. 2. Deposits. 2.1 Initial Deposit. Within one (1) business day after the Agreement Date, --------------- Buyer shall place on deposit into the escrow account (the "Escrow Account") to be opened with Fidelity National Title Insurance Company located at 50 California Street, Suite 3145, San Francisco, California 94111 (Attention: Mr. Bill Waite) ("Title Company" or "Escrow Holder") the amount of Three Hundred Fifty Thousand Dollars ($350,000) as an initial deposit (the "Initial Deposit"). The Title Company shall cause the Initial Deposit to be placed into an interest bearing bank account reasonably acceptable to Buyer and Seller. Any interest earned on the Initial Deposit shall be included as part of the Initial Deposit. The Initial Deposit and interest earned thereon, shall be fully refundable to Buyer during the period commencing on the Agreement Date and ending at 5:00 p.m. (Pacific Time) on December 22, 2000, which date may be extended at Buyer's sole option to December 27, 2000 (the "Conditions Period"). For purposes hereof, the last day of the Conditions Period shall mean and be referred to herein as the "Approval Date". If Buyer fails to deliver the Initial Deposit into the Escrow Account strictly as and when contemplated herein, Seller shall have the right to terminate this Agreement by delivering written notice thereof to Buyer at any time and thereafter neither party shall 1 have any further rights or obligations hereunder except for the indemnities contained in Sections 4.4 and 16 below, Buyer's covenants made herein which are expressly intended to survive any such termination and Buyer's obligations under Section 4.3 below to deliver to Seller the Due Diligence Materials (defined below) (collectively, "Buyer's Surviving Obligations"). 2.2 Additional Deposit. Unless Buyer notifies Seller prior to 5:00 ------------------ p.m. (Pacific Time) on the Approval Date that there are Pre-Closing Conditions (defined below) remaining unsatisfied and that Buyer will not waive such conditions (any such notice shall serve as a termination of this Agreement), (i) at the end of the Conditions Period the Initial Deposit shall become non- refundable to Buyer, and (ii) within one (1) business day after the Approval Date Buyer shall place on deposit into the Escrow Account, the amount of Five Hundred Thousand Dollars ($500,000) as the additional deposit (the "Additional Deposit"). The Escrow Holder shall cause the Additional Deposit to be placed into an interest bearing bank account acceptable to Buyer and Seller. Any interest earned on the Additional Deposit shall be included as part of the Additional Deposit. The Additional Deposit shall be retained in the Escrow Account until the Closing (defined below), and the Additional Deposit shall be non-refundable to Buyer; provided, however, the Initial Deposit and the -------- ------- Additional Deposit (including any interest earned thereon) shall be refundable to Buyer if all of the Buyer's Closing Conditions (defined below) are not satisfied or otherwise waived by Buyer in accordance with the provisions of Section 4.3 of this Agreement, or, at Buyer's election, if Seller fails to complete the sale of the Property by reason of any default of Seller pursuant to Section 5.2. If Buyer fails to deliver the Additional Deposit into the Escrow Account strictly as and when contemplated herein, Seller shall have the right to terminate this Agreement by delivering written notice thereof to Buyer at any time and thereafter neither party shall have any further rights or obligations hereunder except for Buyer's Surviving Obligations. The Initial Deposit and the Additional Deposit shall be applied to the Purchase Price at the Closing. The Initial Deposit and the Additional Deposit, together with any interest thereon, are collectively referred to herein as the "Deposits." 3. Purchase Price. The purchase price for the Property is Nineteen Million Two Hundred Thousand Dollars ($19,200,000) (the "Purchase Price"), as such amount may be adjusted for prorations in accordance with the provisions of Section 14 below. At the Closing, the balance of the Purchase Price remaining after deduction for the Deposits, shall be paid by Buyer to Seller in cash, in immediately available funds via wire transfer. 4. Conditions to Parties' Obligations. 4.1 Buyer's Pre-Closing Conditions. Buyer's obligations under this ------------------------------ Agreement shall be subject to the satisfaction of or waiver by Buyer of the following described matters (collectively, the "Pre-Closing Conditions") on or before the earlier of (i) the time periods specified in each subsection below, or (ii) 5:00 p.m. (Pacific Time) on the Approval Date: 4.1.1 Title; Survey. ------------- 4.1.1.1 If not already delivered prior to the Agreement Date, within five (5) business days after the Agreement Date, Seller will cause to be issued and delivered to Buyer a preliminary title report for the Property, together with all documents evidencing exceptions to title referred to therein issued by the Title Company (collectively, the "Title Report"). Buyer shall have a period of twenty-five (25) days after the Agreement Date to either 2 approve of any ALTA Survey (whether received from Seller or contracted for by Buyer at Buyer's sole cost and expense) and the exceptions (if any) contained in the Title Report, or to notify Seller in writing, specifying any exceptions to which Buyer objects in either the ALTA Survey or the Title Report ("Title Objection Notice"). Seller shall have a period of three (3) business days after Seller's receipt of the Title Objection Notice (a) to remove, or agree to remove prior to the Closing, some or all of those exceptions to which Buyer has objected in the Title Objection Notice, and to inform Buyer of the same, or (b) to advise Buyer, in writing, that Seller will not agree to remove some or all of those exceptions to which Buyer has objected in the Title Objection Notice; the foregoing election by Seller being at Seller's sole option and discretion ("Title Response Notice"). If Seller fails to timely deliver to Buyer the Title Response Notice, it shall be conclusively deemed that Seller has elected not to remove any of those exceptions to which Buyer has objected as specified in the Title Objection Notice. If Seller advises Buyer in its Title Response Notice that it will not remove or agree to remove some or all of those exceptions to which Buyer has objected in the Title Objection Notice (or Seller is deemed to have so advised Buyer), then Buyer shall have until 5:00 p.m. (Pacific Time) on the Approval Date to advise Seller, in writing, whether Buyer elects to waive such objections and proceed with the acquisition of the Property or to terminate this Agreement. Failure by Seller to remove those specified exceptions which Seller has expressly agreed to remove in either this Agreement or in the Title Response Notice within the specified period shall be deemed to be a failure of this condition, in which event the Agreement shall terminate, and the Deposits (to the extent made) shall be returned to Buyer, and the parties shall have no further obligations hereunder except for the Buyer's Surviving Obligations unless Buyer withdraws its objections in writing. Notwithstanding the foregoing, on or prior to Closing Seller shall remove or cause to be removed those certain monetary liens or encumbrances affecting the Property which Seller has created or expressly permitted to exist other than current taxes and assessments. 4.1.1.2 New Exceptions. If this Agreement is not terminated -------------- pursuant to Section 4.3 below, and after the Approval Date but prior to Closing the Title Company informs Buyer that it has or intends to schedule as title exceptions to the ALTA Title Policy (as defined below) any additional matters not previously included in the Title Report (other than the permitted exceptions approved by Buyer and such matters, if any, that are created or caused by Buyer) which are either monetary liens or which, in Buyer's reasonable judgment, would have a material adverse effect on the Property or on Buyer's intended development of the Property (any such matters being referred to herein as the "New Exceptions"), then Buyer may by written notice to Seller request that the New Exceptions be removed. Seller shall be under no obligation to cause the New Exceptions to be removed; provided, however, that if Seller is unable or unwilling to remove the New Exceptions on or before the Closing, and Buyer does not withdraw its objections in writing, then Buyer may terminate this Agreement for a failure of condition, in which event the Agreement shall terminate, and the Deposits (to the extent made) shall be returned to Buyer, and the parties shall have no further obligations hereunder except for the Buyer's Surviving Obligations. 4.1.2 Physical Inspections. Within five (5) business days after -------------------- the Agreement Date, but only to the extent (a) the same is actually in Seller's or Seller's property manager's possession, or, to the extent Seller has the legal right to obtain a copy of same, in the possession of Seller's consultant previously hired to prepare such report(s), and (b) said report(s) has not already been delivered to Buyer by Seller prior to the Agreement Date, Seller will either deliver to Buyer, or, at absolutely no cost or liability to Seller, will use 3 commercially reasonable efforts to assist Buyer to obtain from Seller's consultant, in either event without any warranty or representation as to the accuracy or thoroughness thereof or to the ability of Buyer to rely thereon, a true and complete copy of all environmental site assessment report(s) with respect to an evaluation of Hazardous Materials (defined below) in, on or under the Property. After Buyer has provided to Seller a certificate of insurance(s) evidencing Buyer's or Buyer's agents', consultants' and/or contractors' (as the case may be) procurement of a commercial general liability insurance policy as required herein, Seller shall permit Buyer and its authorized agents, consultants and contractors to enter upon the Property during reasonable business hours (provided, Buyer shall not interfere with or disturb any tenants' operations therein or Seller's operation of the Property) to make and perform such environmental evaluations, and other inspections and investigations of the physical condition of the Property. Buyer shall maintain for itself and on behalf of its consultants and contractors, or Buyer shall maintain and shall ensure that its agents, consultants and contractors maintain, public liability and property damage insurance insuring against any liability arising out of any entry, tests or investigations of the Property pursuant to the provisions hereof. Such insurance maintained by Buyer and/or its consultants, agents and contractors (as applicable) shall be in the amount of Two Million Dollars ($2,000,000.00) combined single limit for injury to or death of one or more persons in an occurrence, and for damage to tangible property (including loss of use) in an occurrence. The policy maintained by Buyer shall insure the contractual liability of Buyer covering the indemnities herein and shall (i) name the Seller and its manager (and their successors, assigns and affiliates) as additional insureds, (ii) contain a cross-liability provision, and (iii) contain a provision that "the insurance provided by Buyer hereunder shall be primary and non-contributing with any other insurance available to Seller." Buyer shall provide Seller with evidence of such insurance coverage prior to any entry, tests or investigations of the Property. The aforementioned insurance coverage may be obtained under a blanket policy carried by Buyer or its agents, consultants or contractors, as the case may be. Notwithstanding the foregoing, Buyer shall not be permitted to undertake any intrusive or destructive testing of the Property, including without limitation a "Phase II" environmental assessment, without in each instance first obtaining Seller's written consent thereto, which consent Seller may give or withhold in Seller's sole and absolute discretion. Prior to entering the Property (and on each and every occasion), Buyer shall deliver to Seller prior written notice thereof [or verbal notice wherein Buyer actually speaks with a representative of Seller (not a voicemail message) with written notice delivered immediately thereafter, if requested at such time], and shall afford Seller a reasonable opportunity to have a representative of Seller present to accompany Buyer while Buyer performs its evaluations, inspections, tests and other investigations of the physical condition, including without limitation, the environmental condition of the Property. Buyer also shall have the right to contact any governmental agency with respect to any Hazardous Materials on, or the environmental condition of, the Property, including, without limitation, in connection with a "Phase I" environmental report. Prior to any such contact, Buyer shall give Seller written notice thereof [or verbal notice wherein Buyer actually speaks with a representative of Seller (not a voicemail message) with written notice delivered immediately thereafter, if requested at such time], and shall afford Seller a reasonable opportunity to have a representative of Seller present to accompany Buyer while Buyer contacts any such governmental agency. In addition, prior to any entry to perform any necessary on-site inspections, tests or investigations with respect to the physical condition of the Property, Buyer shall give Seller written notice thereof [or verbal notice wherein Buyer actually speaks with a representative of Seller (not a voicemail message) with written notice delivered immediately thereafter, if requested at such time], including the identity of the company or party(s) who will perform such inspections, tests or investigations and the proposed scope of the inspections, tests 4 or investigations, including, without limitation, the soil, drainage and seismic condition of the Property, its compliance with applicable laws, codes, regulations and governmental approvals, and the zoning, availability of utilities and feasibility of the Property for the use intended by Buyer. Seller shall approve or disapprove any proposed inspections, tests or investigations and the party(s) performing the same within two (2) business days after receipt of such notice. Seller's failure to advise Buyer of its disapproval of any proposed inspections, tests or investigations and the party(s) performing the same within such two (2) business day period shall be deemed Seller's approval thereof, except to the extent said proposed inspections, tests or investigations relate to "Phase II" environmental matters, in which event Seller's failure to advise Buyer of its approval or disapproval of any proposed environmental inspections, tests or investigations and the party(s) performing the same within such two (2) business day period shall be deemed Seller's disapproval thereof. Upon termination of this Agreement for any reason other than due to a default by Seller, Buyer shall promptly deliver to Seller copies of any reports relating to any inspections, tests or investigations of the Property performed by or on behalf of Buyer, provided, however, that any such delivery shall be made without representation or warranty of any kind as to the thoroughness or accuracy of any information contained therein or Seller's ability to rely thereon. Prior to Buyer contacting the tenants, Buyer shall give Seller written notice thereof, including the identity of the company or persons who will perform any tenant interview or contacts. Seller or its representative(s) may be present at any such interview or meeting with the tenants and Buyer will reasonably cooperate and coordinate with Seller to effectuate same. Buyer shall have until 5:00 p.m. (Pacific Time) on the Approval Date to notify Seller in writing of its approval or disapproval of any such evaluations, inspections and investigations. 4.1.3 Plans, Permits, Reports and Related Information. Within ----------------------------------------------- five (5) business days after the Agreement Date, but only to the extent (a) the same is actually in Seller's or Seller's property manager's possession, or, to the extent Seller has the legal right to obtain a copy of same, in the possession of Seller's consultant previously hired to prepare such report(s), and (b) said report(s) has not already been delivered to Buyer by Seller prior to the Agreement Date, Seller will either deliver to Buyer, or, at absolutely no cost or liability to Seller, will use commercially reasonable efforts to assist Buyer to obtain from Seller's consultant, in either event, Seller will deliver to Buyer a true and complete copy of (a) property tax bills for the two (2) most recent tax fiscal years; (b) without any warranty or representation as to the accuracy thereof or to the ability of Buyer to rely thereon, soils reports, ADA reports, as-built plans and specifications, drawings, and structural or engineering studies or reports; and (c) without any warranty or representation as to the accuracy thereof or to the ability of Buyer to rely thereon, a copy of any existing survey(s) of the Property. Buyer shall have until 5:00 p.m. (Pacific Time) on the Approval Date to notify Seller in writing of its disapproval of any such matters. In no event shall Seller be required to prepare or obtain any information, report, document or survey not presently in Seller's possession. 4.1.4 Leases and Other Information. Within five (5) business ---------------------------- days after the Agreement Date, but only to the extent (a) the same is actually in Seller's or Seller's property manager's possession, or, to the extent Seller has the legal right to obtain a copy of same, in the possession of Seller's consultant previously hired to prepare such report(s), and (b) said report(s) has not already been delivered to Buyer by Seller prior to the Agreement Date, Seller will either deliver to Buyer, or, at absolutely no cost or liability to Seller, will use commercially reasonable efforts to assist Buyer to obtain from Seller's consultant, in either event, Seller will deliver to Buyer or otherwise make available to Buyer at Seller's property 5 management company's offices during normal business hours for inspection by Buyer, the following described documents and information: (i) a copy of all existing and pending leases and subleases together with any amendments or modifications thereof affecting any portion of the Property (collectively, the "Leases"), and any correspondence with the tenants of the Property of a material nature; (ii) a current rent roll for the Property, in the format customarily used by Seller, with the information contained therein made as of the date specified therein; (iii) a copy of project operating reports, in the format and for the time periods customarily prepared by Seller; and (iv) a copy of CAM reconciliations for the most recent full calendar year prior to the Closing and to the extent available, a summary of expenses for the current year. Buyer shall until 5:00 p.m. (Pacific Time) on the Approval Date to notify Seller in writing, of its approval or disapproval of the Leases and other information; provided, however, in no event shall -------- ------- Seller be required to modify, terminate or otherwise supplement any of the Leases. At the Closing Seller shall assign to Buyer its rights and interests in and to the Leases and all security deposits then being held by Seller pursuant to the Assignment and Assumption of Leases in substantially the form attached hereto as Exhibit B, and made a part hereof. --------- 4.1.5 Contracts. Within five (5) business days after the --------- Agreement Date, but only to the extent (a) the same is actually in Seller's or Seller's property manager's possession, or, to the extent Seller has the legal right to obtain a copy of same, in the possession of Seller's consultant previously hired to prepare such report(s), and (b) said report(s) has not already been delivered to Buyer by Seller prior to the Agreement Date, Seller will either deliver to Buyer, or, at absolutely no cost or liability to Seller, will use commercially reasonable efforts to assist Buyer to obtain from Seller's consultant, in either event, Seller will deliver to Buyer a copy of all service agreements, commission agreements, maintenance agreements, easement agreements, improvement agreements, license agreements, and other agreements related to or affecting the Property and not included as part of the title documents delivered pursuant to Section 4.1.1 hereof (collectively, the "Contracts"). Buyer shall have a period of twenty-five (25) days after the Agreement Date to either approve of any such Contracts, or to notify Seller in writing, specifying any Contracts which Buyer desires be terminated on or before the Closing, and which, by their express terms, may be terminated on or before the Closing (the "Disapproved Contracts"); provided, however, in no event -------- ------- shall Seller be required to terminate any Contracts which by their terms are not terminable prior to the Closing unless Buyer agrees, in writing, to pay the prorated charges or costs thereunder as of the Closing Date. Seller shall have until one (1) business day prior to the Approval Date to notify Buyer, in writing, of its agreement to lawfully terminate such Disapproved Contracts prior to the Closing, with such Disapproved Contracts being terminated effective on or before the Closing. Those Contracts not expressly disapproved by Buyer and those Disapproved Contracts which Seller has advised Buyer it will not terminate at or prior to the Closing (collectively, the "Approved Contracts") shall be assigned by Seller to Buyer at the Closing. Seller shall assign its rights and interests under the Approved Contracts to Buyer at the Closing pursuant to the Assignment and Assumption of Contracts, Warranties and Permits in substantially the form attached hereto as Exhibit C, and made a part hereof. Failure by --------- Seller to agree to so terminate some or all of the Disapproved Contracts within the specified period shall be deemed to be a failure of this condition, unless Buyer withdraws its disapproval or rejection, in writing, prior to the 5:00 p.m. (Pacific Time) on the Approval Date. 4.1.6 Economic Feasibility. Buyer's determination, in its sole -------------------- and absolute discretion, of the economic feasibility of the Property for Buyer's intended ownership. 6 4.1.7 Natural Hazard Disclosure Statement. By the date which is ----------------------------------- seven (7) business days after the Agreement Date, Seller shall have executed and delivered to Buyer, a Natural Hazard Disclosure Statement, as and to the extent prescribed by California law, in substantially the form of Exhibit I attached hereto and made a part hereof (the "NHDS"). On or --------- prior to the Approval Date, Buyer shall execute and deliver to Seller one (1) counterpart original of the NHDS which signature shall, among other things, serve to acknowledge Buyer's receipt from Seller of such NHDS and Buyer's understanding and acceptance thereof. 4.1.8 Other Matters. Buyer shall have reviewed and approved any ------------- other matters Buyer deems relevant to the Property prior to 5:00 p.m. (Pacific Time) on the Approval Date. 4.2 Closing Conditions. ------------------ 4.2.1 Buyer's Closing Conditions. Following the Approval Date, -------------------------- Buyer's obligation to consummate the purchase of the Property shall be subject to the satisfaction or waiver by Buyer of the following conditions (collectively, the "Buyer's Closing Conditions"): 4.2.1.1 Seller's Delivery of Estoppel Certificates. Seller will ------------------------------------------ obtain and deliver to Buyer by no later than five (5) business days prior to the Closing (the "Estoppel Delivery Date"), estoppel certificates from all of the tenants of the Property. Said certificates shall be substantially in the form (i) prescribed in such tenants' leases, or (ii) of the Tenant Estoppel Certificate attached hereto as Exhibit F, and made a part hereof, as applicable (provided, --------- however, that in the event that a tenant returns its estoppel certificate with Section 12 altered, deleted, or marked out, the same shall still qualify as having been properly delivered by Buyer) (the "Estoppel Certificates"). Buyer shall be deemed to have approved each of the Estoppel Certificates so long as, in Buyer's reasonable judgment, there are no material defaults specified therein and no material deviations between the information specified in said estoppel certificates and the leases to which such estoppel certificates relate. If Seller is unable to provide Buyer with Estoppel Certificates from all of the tenants of the Property, Seller may elect to extend the Estoppel Delivery Date and the Closing Date for a period of up to an additional thirty (30) days in order to obtain said missing Estoppel Certificates. Seller shall notify Buyer, in writing, of its election by the Estoppel Delivery Date and shall specify therein the extended estoppel delivery date (the "Extended Estoppel Delivery Date") and the extended Closing Date. If Seller is unable to provide Buyer with Estoppel Certificates from all of the tenants of the Property by the Estoppel Delivery Date or the Extended Estoppel Delivery Date, as applicable, Buyer may either elect to (a) terminate this Agreement in which case the Deposits (to the extent then made) shall be returned to Buyer, or (b) consummate the transaction in accordance with the provisions hereof without Seller being required to obtain the missing Estoppel Certificates. Buyer shall notify Seller of its disapproval or approval of the Estoppel Certificates and, if applicable, of its election under clauses (a) or (b) hereof, in writing, by the earlier of the date which is two (2) business days after Seller's delivery to Buyer of the required number of Estoppel Certificates or the Estoppel Delivery Date or the Extended Estoppel Delivery Date, as the case may be. 4.2.1.2 Seller's Delivery of Closing Documents. Seller shall -------------------------------------- have delivered to Escrow Holder or Buyer, as appropriate, all of the documents referred to in Section 7 6.4.1 below, and Seller otherwise shall not be in material default of its obligations hereunder. 4.2.1.3 Delivery of Title Policy. At the Closing, if Buyer has ------------------------ timely delivered to the Title Company an ALTA Survey in insurable form reasonably acceptable to the Title Company, the Title Company shall be irrevocably committed to issue to Buyer the ALTA Policy (defined below). Alternatively, if Buyer has not timely delivered to the Title Company an ALTA Survey in insurable form reasonably acceptable to the Title Company, the Title Company shall be irrevocably committed to issue to Buyer the CLTA Title Policy (defined below). The ALTA Policy or the CLTA Title Policy, as the case may be, shall be subject only to (i) a lien for real property taxes and assessments not then delinquent; (ii) matters of title respecting the Real Property approved or deemed approved by Buyer pursuant to the provisions of this Agreement; and (iii) matters affecting the condition of title to the Real Property created or permitted by, or with the written consent of, Buyer or its agents, representatives, consultants or contractors (collectively, the "Permitted Exceptions"). 4.2.1.4 Representations. Except as Seller otherwise discloses to --------------- Buyer, in writing, prior to the Approval Date, Seller's representations contained in Section 26 of this Agreement shall have been true and correct in all material respects when made and, except as otherwise disclosed to Buyer in writing prior to the Closing Date, shall be true and correct in all material respects as of the Closing Date. 4.2.1.5 Termination of Disapproved Instruments. Seller lawfully -------------------------------------- terminating, or causing the lawful termination of, the Disapproved Contracts which Seller has agreed to terminate in accordance with the provisions of Section 4.1.5 hereof, all of which having an effective date of termination being on or before the Closing. Additionally, effective as of the Closing Date, Seller shall terminate any property management agreement made with its property management company with respect to the Property. 4.2.1.6 Lease Terms. As of the Closing Date, no tenant under any ----------- of the Leases shall have any legal right by option or otherwise either to extend any lease term beyond April 15, 2001, or to otherwise occupy all or any portion of the Real Property or Improvements after April 15, 2001. 4.2.2 Seller's Closing Conditions. Seller's obligation to --------------------------- consummate the sale of the Property is conditioned upon the approval or Seller's written waiver on or prior to the Closing Date of the following conditions (collectively, the "Seller's Closing Conditions"): 4.2.2.1 Not later than one (1) business day prior to Closing, Buyer shall deliver into the Escrow Account (for payment to Seller), in immediately available funds, cash in an amount of the balance of the Purchase Price remaining after deduction for the Deposits plus the ---- costs, expenses and prorations required to be paid by Buyer hereunder. 4.2.2.2 Buyer shall not be in material default of its obligations hereunder. 8 4.2.2.3 Each of the documents required to be delivered by Buyer pursuant to Section 6.4.2 shall have been timely delivered as provided therein. 4.2.2.4 All of Buyer's representations and warranties contained herein shall be true and correct in all material respects when made and shall be true and correct in all material respects as of the Closing Date. 4.3 Failure of Conditions. If any or all of the Pre-Closing --------------------- Conditions are not satisfied or waived within the applicable time periods specified in Section 4.1 above, then Buyer may terminate this Agreement by delivering written notice thereof to Seller on or before the expiration of said time periods. If Buyer so elects to terminate this Agreement, the Initial Deposit shall be returned to Buyer and neither Buyer nor Seller shall have any further liability or obligation to each other, except for Buyer's Surviving Obligations. Notwithstanding anything to the contrary contained herein, if Buyer terminates this Agreement for failure of a Pre-Closing Condition or for any other reason other than a termination due to a default by Seller, within ten (10) days after such termination Buyer shall deliver to Seller a copy of all materials, tests, audits, surveys, reports, studies and the results of any and all investigations and inspections conducted by Buyer (excluding any proprietary materials) (collectively, the "Buyer's Documents") and Buyer shall also return to Seller any and all documents, leases, agreements, reports and other materials given to Buyer by or on behalf of Seller (collectively, the "Seller's Documents") (the Buyer's Documents and the Seller's Documents are collectively referred to herein as the "Due Diligence Materials"). Notwithstanding anything to the contrary contained in this Agreement, if Buyer terminates this Agreement as a result of a default by Seller, Buyer shall not be obligated to deliver the Buyer's Documents to Seller upon or after such termination. The foregoing covenants of Buyer shall survive any such termination of this Agreement. If Buyer fails to terminate this Agreement by delivering written notice thereof to Seller prior to 5:00 p.m. (Pacific Time) on the Approval Date, (i) the Initial Deposit shall become non-refundable to Buyer, and (ii) within one (1) business day after the Approval Date, Buyer shall deposit into the Escrow Account, the Additional Deposit which shall also become non-refundable to Buyer subject to the satisfaction or waiver of the Buyer's Closing Conditions. The funding by Buyer of the Additional Deposit shall conclusively constitute Buyer's approval of the Pre-Closing Conditions. If the Pre-Closing Conditions are satisfied or waived by Buyer but any or all of the Buyer's Closing Conditions are not satisfied or waived by Buyer on or before the date established for the Closing, then Buyer shall notify Seller in writing of those Buyer's Closing Conditions which have not been satisfied or otherwise waived by Buyer (the "Buyer's Closing Conditions Failure Notice"). Seller shall have three (3) business days after Buyer has delivered to Seller the Buyer's Closing Conditions Failure Notice (and the Closing shall be extended, if necessary to give Seller such three (3) business day period) to notify Buyer in writing of Seller's election either to (a) take such actions as may be necessary to cure such matters to Buyer's reasonable satisfaction prior to the date of Closing (as same may be extended), or (b) advise Buyer that Seller will not cure such matters (the "Seller's Conditions Notice"). If Seller elects not to cure such matters, then within two (2) business days after Buyer's receipt of the Seller's Conditions Notice (and the Closing shall be extended, if necessary to give Buyer such two (2) business day period), Buyer, at its sole option, may elect to do any of the following: (1) Buyer may elect to terminate this Agreement by delivering written notice thereof to Seller, in which event Seller shall promptly cause the return to Buyer of the Deposits, and the parties shall have no further obligations hereunder except for Buyer's Surviving Obligations; (2) if the Buyer's Closing Condition in question is any of those conditions specified in Sections 4.2.1.1, 4.2.1.3, 4.2.1.4 or 4.2.1.6 and Seller is not in any material manner responsible for the deviation or failure of such Buyer's Closing Condition, then Buyer may elect to terminate this Agreement by delivering written notice thereof to Seller, in which event Seller shall promptly cause the return to Buyer of the Deposits, and the parties shall have no further obligations 9 hereunder except for Buyer's Surviving Obligations; (3) if the Buyer's Closing Condition in question is any of those conditions specified in Sections 4.2.1.2 or 4.2.1.5, or if the Buyer's Closing Condition in question is any of those conditions specified in Sections 4.2.1.1, 4.2.1.3 or 4.2.1.4 and Seller is actually responsible for the deviation or failure of such Closing Condition, then Buyer may pursue the remedies available to it pursuant to Section 5.2 below; or (4) Buyer may elect to waive the Buyer's Closing Condition(s) in question and proceed with the purchase of the Property. If Buyer elects to terminate the Agreement, neither party shall have any further liability or obligation hereunder except for Buyer's Surviving Obligations. If Seller elects to cure such matters as set forth in the Buyer's Closing Conditions Failure Notice, Seller shall promptly take any and all actions as may be necessary to cure same and the date of the Closing may be extended for a period of time reasonably acceptable to both Seller and Buyer to enable Seller to accomplish same. Failure by Buyer to notify Seller within the specified time periods set forth herein, shall be deemed an approval by Buyer of each such matter, in which event all such conditions and contingencies shall be conclusively deemed to be satisfied and approved. If any of the Seller's Closing Conditions are not satisfied or otherwise waived by Seller prior to the Closing Date, Seller may elect, in its sole and absolute discretion, to terminate this Agreement and pursue the remedy available to it pursuant to Section 5.1 below. 4.4 Investigations Indemnity. Buyer shall keep the Property free from ------------------------ all liens and shall indemnify, defend (with counsel reasonably satisfactory to Seller), protect, and hold Seller and each of the parties comprising Seller and each of their members, officers, trustees, employees, representatives, agents, lenders, related and affiliated entities, successors and assigns harmless from and against any and all claims, demands, liabilities, judgments, penalties, losses, costs, damages, and expenses (including, without limitation, reasonable attorneys' and experts' fees and costs) relating to or arising in any manner whatsoever from any studies, evaluations, inspections, investigations or tests made by Buyer or Buyer's agents or representatives relating to or in connection with the Property or entries by Buyer or its agents or representatives in, on or about the Property; provided, Buyer shall not be liable to Seller under the foregoing indemnity solely as a result of the discovery by Buyer of a pre- existing condition in or on the Property. Notwithstanding any provision to the contrary in this Agreement, the indemnity obligations of Buyer under this Agreement shall survive any termination of this Agreement or, if the delivery of the Grant Deed and the transfer of title occurs, the indemnity obligations of Buyer pursuant to this Section 4.4 shall survive for a period of twelve (12) months from the Closing Date. In addition to the foregoing indemnity, if there is any damage to the Property caused by Buyer's and/or its agents' or representatives' entry in or on the Property, Buyer shall immediately restore the Property substantially to the same condition existing prior to Buyer's and its agents' or representatives' entry in, on or about the Property. The term "Hazardous Materials" as used in this Agreement shall mean and refer to (a) any hazardous or toxic wastes, materials or substances, or chemicals, and other pollutants or contaminants, which are or become regulated by applicable local, state, regional and/or federal orders, ordinances, statutes, rules, regulations (as interpreted by judicial and administrative decisions) and laws; (b) asbestos, asbestos-containing materials or urea formaldehyde; (c) polychlorinated biphenyls; (d) flammables, explosive, corrosive or radioactive materials; (e) medical waste and biochemicals; and (f) gasoline, diesel, petroleum or petroleum by-products. 5. Remedies/Liquidated Damages. 5.1 Buyer's Default. If Buyer fails to complete the purchase of the --------------- Property as provided in this Agreement solely by reason of any material default of Buyer (and not due to a failure of a condition precedent), Seller shall be released from its obligation to sell the Property to Buyer. Buyer and Seller hereby 10 Acknowledge And Agree That It Would Be Impractical And/or Extremely Difficult To Fix Or Establish The Actual Damage Sustained By Seller As A Result Of Such Default By Buyer, And Agree That The Deposits (Including All Interest) And The Delivery To Seller By Buyer Of The Due Diligence Materials Is A Reasonable Approximation Thereof. Accordingly, In The Event That Buyer Breaches This Agreement By Defaulting In The Completion Of The Purchase, The Deposits (Including All Interest) And The Delivery To Seller By Buyer Of The Due Diligence Materials Shall Constitute And Be Deemed To Be The Agreed And Liquidated Damages Of Seller, And Shall Be Paid By Buyer To Seller And The Title Company As Seller's Sole And Exclusive Remedy. Seller Agrees To Waive All Other Remedies Against Buyer Which Seller Might Otherwise Have At Law Or In Equity, Including, Without Limitation, Specific Performance, Which Remedy Seller Hereby Expressly Waives, By Reason Of Such Default By Buyer; Provided, However, The Foregoing Shall Not Limit (I) Buyer's Obligations To Pay To Seller All Attorneys' Fees And Costs Of Seller To Enforce The Provisions Of This Section 5.1 And/or Buyer's Indemnity Obligations Under Sections 4.4 And 16 Hereof, (Ii) Buyer's Indemnity Obligations Under Sections 4.4 And 16 Hereof, Or (Iii) The Ability And Right Of Seller To Enforce Such Indemnities. Each Of The Payment Of The Deposits (Including All Interest), The Payment By Buyer Of All Escrow Cancellation Charges And Fees, And The Delivery To Seller By Buyer Of The Due Diligence Materials As Liquidated Damages Is Not Intended To Be A Forfeiture Or Penalty, But Is Intended To Constitute Liquidated Damages To Seller Pursuant To California Civil Code Sections 1671, 1676 And 1677. Seller's Initials: ___________ Buyer's Initials: ____________ 5.2 Seller's Default. If Seller Fails To Complete The Sale Of The ---------------- Property As Provided In This Agreement Solely By Reason Of Any Material Default Of Seller (And Not Due To A Failure Of A Condition Precedent), Buyer Shall Be Released From Its Obligation To Purchase The Property From Seller, And Buyer May Either (I) Proceed Against Seller By Bringing An Action For Specific Performance Under This Agreement Without Any Right To Seek Damages Of Any Kind Or Nature, Or (Ii) Terminate This Agreement In Which Event The Deposits Shall Be Returned To Buyer, Together With Buyer's Reasonable Out-of-pocket Expenses Incurred In Connection With Buyer's Due Diligence Up To (But Not Exceeding) Twenty-five Thousand Dollars ($25,000.00), Seller Shall Be Responsible For Payment Of All Escrow Cancellation Charges And Fees, And Buyer Shall Promptly Return To Seller The Seller's Documents. Buyer And Seller Hereby Acknowledge And Agree That It Would Be Impractical And/or Extremely Difficult To Fix Or Establish The Actual Damage Sustained By Buyer As A Result Of Such Material Default By Seller, And Agree That The Remedy Set Forth In Clause (Ii) Above Is A Reasonable Approximation Thereof. Accordingly, In The Event That Seller Breaches This Agreement By Materially Defaulting In The Completion Of The Sale, And Buyer Elects Not To Exercise The Remedy Set Forth In Clause (I) Above But Instead Elects The Remedy Set Forth In Clause (Ii) Above, Such Sums Shall Constitute And Be Deemed To Be The Agreed And Liquidated Damages Of Buyer Which Is Not Intended To Be A Forfeiture Or Penalty, But Is Intended To Constitute Liquidated Damages To Buyer Pursuant To California Civil Code Sections 1671, 1676 And 1677. Buyer Agrees To, And Does Hereby, Waive All Other Remedies Against Seller Which Buyer Might Otherwise Have At Law Or In Equity By Reason Of Such Default By Seller In Failing To Complete The Sale Of The Property. 11 Nothing Herein Shall Be Deemed A Waiver Of Buyer's Right To Sue Seller For Damages For A Breach Or Default By Seller Of Its Obligations Under This Agreement, To The Extent Such Damages Do Not Arise Out Of Seller's Default In Failing To Complete The Sale Of The Property, So Long As Such Damages Do Not Exceed One Hundred Fifty Thousand Dollars ($150,000.00), And Provided That Any Claim, Action, Suit Or Proceeding With Respect To Any Such Alleged Breach Or Default By Seller Hereunder Shall Be Commenced, If At All, On Or Before The Date Which Is Six (6) Months After The Closing Date And, If Not So Commenced On Or Before Such Date, Thereafter Buyer Shall Be Forever Barred From Making Or Bringing Any Such Claim, Action, Suit Or Proceeding. Seller's Initials: ____________ Buyer's Initials: ____________ 6. Closing and Escrow. 6.1 Escrow Instructions. Upon execution of this Agreement, the parties ------------------- hereto shall deposit a copy of an executed counterpart of this Agreement with Escrow Holder and this instrument shall serve as the instructions to Escrow Holder for consummation of the purchase and sale contemplated hereby. Seller and Buyer agree to execute such additional and supplementary escrow instructions as may be appropriate to enable the Escrow Holder to comply with the terms of this Agreement; provided, however, that in the event of any conflict between the provisions of this Agreement and any supplementary escrow instructions, the terms of this Agreement shall control. 6.2 Date of Closing. Unless otherwise agreed to in writing by the --------------- parties, escrow shall close on or before 8:00 a.m. (Pacific Time) on the date which is fifteen (15) business days following the expiration of the Conditions Period, but in no event later than December 28, 2000 (the "Closing Date"), with time being of the essence. Such Closing Date may not be extended without the prior written approval of both Seller and Buyer, except as otherwise expressly provided in this Agreement and, in particular, in Section 4.2.1.1 hereof. In the event the Closing does not occur on or before the Closing Date (as same may be extended) the Escrow Holder shall, unless it is notified by both parties to the contrary within three (3) days prior to the actual date on which the Closing occurs, return to the depositor thereof items which may have been deposited hereunder. Any such return shall not, however, relieve either party hereto of any liability it may have for its wrongful failure to close. 6.3 Conveyance. At Closing, Seller shall convey to Buyer fee simple ---------- title to the Property (excluding the Personal Property), by means of a grant deed in substantially the form of Exhibit D attached hereto and made a part --------- hereof ("Grant Deed"), subject to all applicable laws, rules, regulations, codes, ordinances and orders, and the Permitted Exceptions. The Closing shall mean the date that the Grant Deed is recorded in the official records of Santa Clara County, possession of the Property is delivered to Buyer, and Buyer fulfills all of its obligations hereunder. If Seller cannot so deliver title to the Property to Buyer, Buyer may, at its option, take title to the Property in such condition as Seller can then convey, without abatement of the Purchase Price or, at Buyer's option, Buyer may exercise its remedies in accordance with the provisions of Section 5.2 above. 6.4 Closing Documents. ----------------- 6.4.1 Seller's Closing Documents. At Closing, in addition to the -------------------------- Grant Deed (with the amount of the documentary transfer taxes affixed on a separate sheet to be attached to the Grant Deed after recordation), Seller shall deliver to Buyer, or Escrow Holder for delivery 12 to Buyer, all of the following documents: (i) originals or true and complete copies of the Approved Contracts, if any; (ii) two (2) counterparts of the Assignment and Assumption of Leases in substantially the form attached hereto as Exhibit B, duly executed by Seller; (iii) two --------- (2) counterparts of the Assignment and Assumption of Contracts, Warranties and Permits in substantially the form attached hereto as Exhibit C, duly --------- executed by Seller; (iv) two (2) counterparts of a bill of sale (the "Bill of Sale") for the Personal Property, if any, in substantially the form attached hereto as Exhibit E and made a part hereof, duly executed by --------- Seller; (v) a certificate of non-foreign status in accordance with the requirements of Internal Revenue Code Section 1445, as amended ("FIRPTA Certificate") and a California Form 597-W with respect to the Property, duly executed by Seller; (vi) notices to the tenants with respect to the Leases, in substantially the form attached hereto as Exhibit G and made a --------- part hereof, duly executed by Seller or Seller's property manager; and (vi) such other documents and instruments as may be reasonably required by the Title Company to consummate the transaction contemplated herein. Seller's timely making and delivery of the aforesaid documents and information shall be a condition precedent to Buyer's obligations under this Agreement. Time is of the essence with respect hereto. 6.4.2 Buyer's Closing Payments and Documents. At Closing, in -------------------------------------- addition to Buyer's payment to Seller of the Purchase Price, Buyer shall deliver to Seller or Escrow Holder for delivery to Seller, as applicable, the following: (i) two (2) counterparts of the Assignment and Assumption of Leases in substantially the form attached hereto as Exhibit B, duly --------- executed by Buyer; (ii) two (2) counterparts of the Assignment and Assumption of Contracts, Warranties and Permits in substantially the form attached hereto as Exhibit C, duly executed by Buyer; (iii) two (2) --------- counterparts of the Bill of Sale in substantially the form attached hereto as Exhibit E, duly executed by Buyer; and (iv) such other documents and --------- instruments as may be reasonably required by Seller or the Title Company to consummate the transaction contemplated herein. Buyer's timely making and delivery of the aforesaid funds, documents and information shall be a condition precedent to Seller's obligations under this Agreement. Time is of the essence with respect hereto. 7. Interim Operation of the Property. 7.1 Except as otherwise contemplated or permitted by this Agreement or approved by Buyer in writing, from the Agreement Date to the Closing Date, Seller agrees that it will operate, maintain, repair and lease the Property in the ordinary course and consistent with such Seller's past practices and will not dispose of or encumber its Property, except for dispositions of personal property in the ordinary course of business or as otherwise permitted hereunder. Without limiting the foregoing, Seller shall, in the ordinary course, enforce the terms of the Leases in all material respects and perform in all material respects all of landlord's obligations under the Leases (other than Leases that are or that are in process of being terminated due to the tenant's default thereunder). In no event shall Seller extend the term of any Lease. 7.2 From and after the Agreement Date, in no event shall Seller enter any new lease or other use agreement for the Property, nor modify or amend any existing Lease, without the prior written consent of Buyer, which may be withheld in Buyer's sole and absolute discretion. 7.3 Seller shall not enter into any agreement after the Agreement Date to create a lien or encumbrance on the Property which will survive the Closing without Buyer's prior written consent, which may be withheld in Buyer's sole and absolute discretion; provided, however, that such -------- 13 consent shall not be unreasonably withheld, conditioned or delayed with respect to any utility or similar easement necessary for the operation of the Property. Seller also shall not enter into any modification, amendment or renewal of any Approved Contract from and after the Agreement Date without Buyer's prior written consent, which may be withheld in Buyer's sole and absolute discretion; provided, however, that without Buyer's consent, Seller for cause may (i) terminate any Approved Contract for any material default thereunder or enter a new contract which replaces an existing Approved Contract, provided that such new Approved Contract is on substantially the same terms as the Approved Contract being replaced with the same or shorter period for termination thereto (but in any event any replacement Approved Contract shall permit termination by the then owner of the Property without penalty on not more than thirty (30) days' notice), and provided further that Seller promptly notifies Buyer upon terminating any such Approved Contract or entering into any replacement Approved Contract. Buyer's consent shall be deemed withheld if Buyer does not respond in writing to Seller's request for said consent within three (3) business days thereafter. In addition, during the period from the Agreement Date through Closing, Seller promptly shall give notice to Buyer in writing of all actions or decisions by Seller materially affecting the Property, including without limitation creation of any liens or encumbrances or entering into of any Contracts that would survive Closing, and Seller shall give notice to Buyer in writing of any damage to the Real Property (including damage resulting from the use, storage, disposal or release of Hazardous Materials on, in or under the Property by any tenant under the Leases) or destruction of any improvement thereon or condemnation of any portion of the Property of which Seller shall have actual knowledge within one (1) business day of Seller's receipt of such actual knowledge. If Buyer is entitled to withhold its consent under this Section 7.3 to any action by Seller and does so withhold its consent, Seller shall not take the action not consented to. 8. Intentionally Omitted. 9. Seller's Maintenance of the Property. Between the Agreement Date and the Closing Date, Seller, at its expense, shall (i) maintain the Property in substantially the same condition as it was on the date of full execution hereof and in accordance with Seller's normal course of business, including making all routine repairs and replacements arising after the date hereof, subject to reasonable wear and tear and further subject to the occurrence of any damage or destruction to the Property by casualty or other causes or events beyond the control of such Seller; provided, however, that such -------- Seller's maintenance obligations under this Section 9 shall not include any obligation to make capital expenditures or any other expenditures not incurred in Seller's normal course of business, except that Seller shall not be relieved from any maintenance or repair obligation imposed by the Leases; and (ii) continue to maintain its existing insurance coverage. Notwithstanding the foregoing, in the event Seller makes emergency capital expenditures after the Agreement Date to the Property, Seller shall deliver to Buyer promptly following the occurrence of an event that would require Seller to make such emergency capital expenditure, a written notice describing in reasonable detail the nature and cost of such emergency capital expenditure, and Buyer shall be obligated to reimburse Seller for such emergency capital expenditures to the extent tenants are required to pay such costs under the terms of the Leases and shall have confirmed in writing their obligation and the amount that they will so pay, and the Purchase Price payable at the Closing shall be increased by an amount equal to the amount spent by Seller in respect of such emergency capital expenditure. For purposes of this Agreement, "emergency capital expenditures" shall mean any emergency capital expenditures performed by Seller that are reasonably necessary to prevent an immediate threat to the health or safety of any person. Prior to the Closing Date, Seller shall have the right, but not the obligation (except to the extent that Seller's failure to act shall constitute a waiver of such rights or remedies), to apply all or any portion of any security deposits then held by Seller toward 14 any loss or damage incurred by Seller by reason of any defaults by any tenant, provided, that with respect to any application by Seller of tenant security deposits held by Seller, the Seller will deliver, in connection with any such application, written notice to the affected tenant(s) indicating that their security deposits have been or are being so applied. Seller shall provide Buyer with written notice of any action taken by Seller pursuant to the foregoing provisions. 10. Casualty and Condemnation. In the event there is any damage to the Real Property (including damage resulting from the use, storage, disposal or release of Hazardous Materials on, in or under the Property by any tenant under the Leases) or destruction of any improvement thereon or condemnation of any portion of the Property, after the Approval Date, and the estimated cost of repairs is (i) Five Hundred Thousand Dollars ($500,000.00) or less for structural repairs, and One Million Dollars ($1,000,000,00) or less for all repairs other than structural repairs, Buyer shall be required to purchase the Property with a credit against the Purchase Price otherwise due hereunder equal to the amount of any insurance proceeds or condemnation awards actually collected by Seller prior to the Closing as a result of any such damage or destruction or condemnation, plus the amount of any ---- insurance deductible or any uninsured amount or retention, less any sums ---- expended by Seller prior to the Closing for the restoration or repair of the Property and/or in collecting such insurance proceeds or condemnation awards. Seller agrees that it will maintain its present casualty insurance policy with respect to the Property in full force and effect until the Closing. If the insurance proceeds or condemnation awards have not been collected as of the Closing, then such proceeds or awards shall be assigned to Buyer, except to the extent needed to reimburse Seller for sums it expended prior to the Closing for the restoration or repair of the Property or in collecting such insurance proceeds or condemnation awards, and Seller shall cooperate with Buyer and use diligent, good faith efforts to obtain such proceeds or awards. The foregoing obligation of Seller shall survive the Closing. Notwithstanding the foregoing, if (i) the Property is damaged (including damage resulting from the use, storage, disposal or release of Hazardous Materials on, in or under the Property by any tenant under the Leases) or destroyed by a casualty, to the extent that the cost of repair or restoration to substantially the same condition existing prior to such casualty would exceed Five Hundred Thousand Dollars ($500,000.00) for structural repairs or One Million Dollars ($1,000,000.00) for all repairs other than structural repairs, or (ii) in the case of a condemnation, the value of the Property or portion thereof so condemned is in excess of Five Hundred Thousand Dollars ($500,000.00), then Seller shall give Buyer prompt notice thereof and the Buyer may, at its option to be exercised by delivery of written notice to Seller within five (5) business days of Seller's notice to the Buyer of the occurrence of such casualty or condemnation, elect not to purchase the Property under this Agreement. If Buyer so duly elects not to purchase the Property, this Agreement shall terminate, the Deposits (to the extent made) shall be returned to Buyer and neither party shall have any further rights or obligations under this Agreement other than Buyer's Surviving Obligations. Any dispute as to the costs of such repair or restoration or value of a condemned portion of the Property shall be referred to a licensed architect jointly selected by Buyer and Seller for resolution, and the determination of such architect, which shall be made within a period of twenty (20) days after such submittal by the parties, shall be final, conclusive and binding on the parties. If the parties fail to agree upon the identity of such architect within five (5) business days after either party has notified the other of its choice of architect, then either party may at any time thereafter apply to a court of competent jurisdiction to appoint immediately such architect. The fees and expenses of such architect shall be paid equally by Buyer and Seller, and the parties shall cooperate with such architect by providing such information as such architect may reasonably require to resolve the dispute. If Buyer does not elect, in writing, not to purchase the 15 Property, Buyer shall be obligated to consummate the purchase of the Property as required by the terms hereof, with a credit against the Purchase Price otherwise due hereunder equal to the amount of any insurance proceeds or condemnation awards actually collected by Seller prior to the Closing as a result of any such damage or destruction or condemnation, plus the amount of any insurance ---- deductible or any uninsured amount or retention, less any sums expended by ---- Seller prior to the Closing for the restoration or repair of the Property and/or in collecting such insurance proceeds or condemnation awards. If the insurance proceeds or condemnation awards have not been collected as of the Closing, then such proceeds or awards shall be assigned to Buyer, except to the extent needed to reimburse Seller for sums it expended prior to the Closing for the restoration or repair of the Property or in collecting such insurance proceeds or condemnation awards, and Seller shall cooperate with Buyer and use diligent good faith efforts to obtain such proceeds or awards. The foregoing obligation of Seller shall survive the Closing. 11. Limited Liability. Buyer on its own behalf and on behalf of its agents, members, partners, employees, representatives, related and affiliated entities, successors and assigns (collectively, the "Buyer Parties") hereby agrees that in no event or circumstance shall any of the members, partners, employees, representatives, officers, directors, agents, property management company, affiliated or related entities of Seller or Seller's property management company, namely Legacy Partners Commercial, Inc. (formerly known as Lincoln Property Company Management Services, Inc. and LPC MS, Inc.), have any personal liability under this Agreement, or to any of Buyer's creditors, or to any other party in connection with the Property. 12. Release. Buyer on its own behalf and on behalf of each of the Buyer Parties hereby agrees that each of Seller, Seller's partners or members, as the case may be, and each of their partners, members, trustees, directors, officers, employees, representatives, property managers, asset managers, agents, attorneys, affiliated and related entities, heirs, successors and assigns (collectively, the "Releasees") shall be, and are hereby, fully and forever released and discharged from any and all liabilities, losses, claims (including third party claims), demands, damages (of any nature whatsoever), causes of action, costs, penalties, fines, judgments, attorneys' fees, consultants' fees and costs and experts' fees (collectively, the "Claims") with respect to any and all Claims, whether direct or indirect, known or unknown, foreseen or unforeseen, that may arise on account of or in any way be connected with the Property including, without limitation, the physical, environmental and structural condition of the related Real Property or any law or regulation applicable thereto, including, without limitation, any Claim or matter (regardless of when it first appeared) relating to or arising from (i) the presence of any environmental problems, or the use, presence, storage, release, discharge, or migration of Hazardous Materials on, in, under or around the Property regardless of when such Hazardous Materials were first introduced in, on or about the Property, (ii) any patent or latent defects or deficiencies with respect to the Property, (iii) any and all matters related to the Property or any portion thereof, including without limitation, the condition and/or operation of the Property and each part thereof, and (iv) the presence, release and/or remediation of asbestos and asbestos containing materials in, on or about the Property regardless of when such asbestos and asbestos containing materials were first introduced in, on or about the Property. Buyer hereby waives and agrees not to commence any action, legal proceeding, cause of action or suits in law or equity, of whatever kind or nature, including, but not limited to, a private right of action under the federal superfund laws, 42 U.S.C. Sections 9601 et seq. and California Health and Safety Code Sections 25300 et seq. (as such laws and statutes may be amended, supplemented or replaced 16 from time to time), directly or indirectly, against the Releasees or their agents in connection with Claims described above and expressly waives the provisions of Section 1542 of the California Civil Code which provides: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR and all similar provisions or rules of law. Buyer elects to and does assume all risk for such Claims heretofore and hereafter arising, whether now known or unknown by Buyer. The aforementioned release shall not include or be applicable to any Claims arising out of the entry into or performance of this Agreement by Seller nor any Claims directly resulting from or relating to a breach by Seller of any of the representations made in Section 26 hereof so long as any such Claim (in each instance) is made by Buyer within the six (6) month survival period specified in Section 26 below. After the expiration of said six (6) month period the aforementioned release will also include all Claims resulting from or relating to any breach by Seller of the representations made in Section 26 of this Agreement. In this connection and to the greatest extent permitted by law, Buyer hereby agrees, represents and warrants that Buyer realizes and acknowledges that factual matters now unknown to it may have given or may hereafter give rise to causes of action, claims, demands, debts, controversies, damages, costs, losses and expenses which are presently unknown, unanticipated and unsuspected, and Buyer further agrees, represents and warrants that the waivers and releases herein have been negotiated and agreed upon in light of that realization and that Buyer nevertheless hereby intends to release, discharge and acquit Seller from any such unknown Claims, debts, and controversies which might in any way be included as a material portion of the consideration given to Seller by Buyer in exchange for Seller's performance hereunder. Without limiting the foregoing, if Buyer has actual knowledge of (a) a default in any of the covenants, agreements or obligations to be performed by Seller under this Agreement and/or (b) any breach or inaccuracy in any representation of Seller made in this Agreement, and Buyer nonetheless elects to proceed to Closing, then, upon the consummation of the Closing, Buyer shall be conclusively deemed to have waived any such default and/or breach or inaccuracy and shall have no Claim against Seller or hereunder with respect thereto. Notwithstanding anything to the contrary contained herein, if Buyer obtains actual knowledge of any material default by Seller or any breach or inaccuracy in any such representation of Seller which, in Buyer's reasonable judgment, would have a material adverse effect on the Property or on Buyer's intended development of the Property, Buyer may terminate this Agreement and receive a return of the Deposits upon written notice to Seller within five (5) days after Buyer learns of such default or breach if, within five (5) days after Buyer's notice to Seller, Seller notifies Buyer in writing that Seller elects not to cure or remedy any such default or breach. Failure by Seller to so notify Buyer shall be deemed Seller's election not to cure or remedy any such default or breach. Upon such termination, the parties shall have no further obligations hereunder except for Buyer's Surviving Obligations. Notwithstanding anything to the contrary herein, subject to Buyer's termination right, Seller shall not have any liability whatsoever to Buyer with respect to any matter disclosed to or discovered by Buyer or its agents or representatives prior to the Closing Date. Seller has given Buyer material concessions regarding this transaction in exchange for Buyer agreeing to the provisions of this Section 12. Seller and Buyer have each initialed this Section 12 to further indicate their awareness and acceptance of each and every provision hereof. The provisions of 17 this Section 12 shall survive the Closing and shall not be deemed merged into any instrument or conveyance delivered at the Closing. Seller's Initials: _______________ Buyer's Initials: ______________ 13. AS-IS Condition of Property. 13.1 Buyer specifically acknowledges, represents and warrants that prior to Closing, it and its agents and representatives will have thoroughly inspected the Property and observed the physical characteristics and condition of the Property. By Buyer purchasing the Property and upon the occurrence of the Closing, Buyer waives any and all right or ability to make a claim of any kind or nature against any of the Releasees for any and all deficiencies or defects in the physical characteristics and condition of the Property which would be disclosed by such inspection and expressly agrees to acquire the Property with any and all of such deficiencies and defects and subject to all matters disclosed by Seller herein or in any separate writing with respect to the Property and/or disclosed in and set forth in the NHDS for the Property. Buyer further acknowledges and agrees that except for any representations expressly made by Seller in Section 26 of this Agreement neither Seller or any of Seller's employees, agents or representatives have made any representations, warranties or agreements by or on behalf of Seller of any kind whatsoever, whether oral or written, express or implied, statutory or otherwise, as to any matters concerning the Property, the condition of the Property, the size of the Real Property, the size of the Improvements (including without limitation, any discrepancies in the actual rentable square footage of any leased premises within the Improvements), the present use of the Property or the suitability of Buyer's intended use of the Property. Buyer hereby acknowledges, agrees and represents that the Property is to be purchased, conveyed and accepted by Buyer in its present condition, "AS IS", "WHERE IS" AND WITH ALL FAULTS, and that no patent or latent defect or deficiency in the condition of the Property whether or not known or discovered, shall affect the rights of either Seller or Buyer hereunder nor shall the Purchase Price be reduced as a consequence thereof. Any and all information and documents furnished to Buyer by or on behalf of Seller relating to the Property shall be deemed furnished as a courtesy to Buyer but without any warranty of any kind from or on behalf of Seller. Buyer hereby represents and warrants to Seller that Buyer has performed an independent inspection and investigation of the Property and has also investigated and has knowledge of operative or proposed governmental laws and regulations including without limitation, land use laws and regulations to which the Property may be subject. Buyer further represents that, except for any representations expressly made by Seller in Section 26 of this Agreement, it shall acquire the Property solely upon the basis of its independent inspection and investigation of the Property, including without limitation, (i) the quality, nature, habitability, merchantability, use, operation, value, marketability, adequacy or physical condition of the Property or any aspect or portion thereof, including, without limitation, structural elements, foundation, roof, appurtenances, access, landscaping, parking facilities, electrical, mechanical, HVAC, plumbing, sewage, and utility systems, facilities and appliances, soils, geology and groundwater, or whether the Real Property lies within a special flood hazard area, an area of potential flooding, a very high fire hazard severity zone, a wildland fire area, an earthquake fault zone or a seismic hazard zone, (ii) the dimensions or lot size of the Real Property or the square footage of the Improvements thereon or of any tenant space therein, (iii) the development or income potential, or rights of or relating to, the Real Property or its use, habitability, merchantability, or fitness, or the suitability, value or adequacy of such Real Property for any particular purpose, (iv) the zoning or other legal status of the Real Property or any other public or private restrictions on the use of the Real Property, (v) the compliance of the Real Property or its operation with any applicable codes, laws, regulations, statutes, ordinances, covenants, conditions and restrictions of any governmental or regulatory agency or authority or of any other person or entity (including, without limitation, the 18 American with Disabilities Act), (vi) the ability of Buyer to obtain any necessary governmental approvals, licenses or permits for Buyer's intended use or development of the Real Property, (vii) the presence or absence of Hazardous Materials on, in, under, above or about the Real Property or any adjoining or neighboring property, (viii) the quality of any labor and materials used in any Improvements, (ix) the condition of title to the Real Property, (x) the Leases, Contracts or any other agreements affecting the Real Property or the intentions of any party with respect to the negotiation and/or execution of any lease or contract with respect to the Property, (xi) Seller's ownership of the Property or any portion thereof, or (xii) the economics of, or the income and expenses, revenue or expense projections or other financial matters, relating to the operation of the Property. Without limiting the generality of the foregoing, Buyer expressly acknowledges and agrees that Buyer is not relying on any representation or warranty of Seller, nor any member partner, officer, employee, attorney, property manager, agent or broker of Seller, whether implied, presumed or expressly provided at law or otherwise, arising by virtue of any statute, common law or other legally binding right or remedy in favor of Buyer except as expressly provided in Section 26 below. Buyer further acknowledges and agrees that Seller is not under any duty to make any inquiry regarding any matter that may or may not be known to the Seller or any member, partner, officer, employee, attorney, property manager, agent or broker of Seller. Seller's Initials: _____________ Buyer's Initials: _____________ 13.2 Except as may otherwise be required to be performed by Seller under the provisions of Section 9 hereof, any reports, repairs or work required by Buyer are the sole responsibility of Buyer, and Buyer agrees that there is no obligation on the part of Seller to make any changes, alterations or repairs to the Property or to cure any violations of law or to comply with the requirements of any insurer. Buyer is solely responsible for obtaining any certificate of occupancy or any other approval or permit necessary for transfer or occupancy of the Property and for any repairs or alterations necessary to obtain the same, all at Buyer's sole cost and expense. The provisions of this Section 13 shall survive the Closing and shall not be deemed merged into any instrument or conveyance delivered at the Closing. 14. Prorations and Rent Arrearages. 14.1 At Closing, all rents actually paid and collected, and any other charges owing and which have been collected by Seller for or in respect of the month in which the Closing occurs shall be prorated as of and through the Closing Date on the basis of a 365-day year, and the prorated amount attributable to the period following the Closing shall either be paid to Buyer at the Closing or credited against the Purchase Price, at Seller's option. Any CAM and other charges and expenses payable by the tenants under the Leases (collectively, the "Tenant Charges") on an estimated basis shall be reconciled against actual charges and expenses as of and at the Closing, to the extent then possible, and Seller shall provide a proposed reconciliation for Buyer's approval. Seller shall have a period of ninety (90) days following the actual Closing Date to provide Buyer with a final reconciliation of Tenant Charges. Buyer shall have the right to review and give or withhold its approval, such approval not to be unreasonably withheld, the final reconciliation within five (5) business days after receipt from Seller. If the approved final reconciliation shows that Seller owes Buyer additional sums, Seller shall deliver such amount to Buyer together with the delivery of the final reconciliation of the Tenant Charges. If the approved final reconciliation shows that Buyer owes Seller additional sums, Buyer shall pay such amount to Seller within ten (10) days after Buyer's receipt of the final reconciliation. Other than as set forth above, there shall not be any further reconciliation of such Tenant Charges after the approved final 19 reconciliation thereof, the proration of such Tenant Charges pursuant to the approved final reconciliation being conclusively presumed to be accurate. After the approved final reconciliation of the Tenant Charges is made by and between the parties, Buyer shall be solely liable and responsible to the tenants for such reconciliation of Tenant Charges under the Leases. The foregoing covenants made by the parties with respect to the final reconciliation of the Tenant Charges shall survive the Closing. 14.2 In addition, to the extent not paid directly by any tenants of the Property, real property taxes and assessments, water, sewer and utility charges and amounts payable under the Approved Contracts (calculated on the basis of the period covered), and other expenses normal to the operation and maintenance of the Property shall be prorated as of and through the Closing Date on the basis of a 365-day year. 14.3 At the Closing Seller shall credit against the Purchase Price the amount equal to the aggregate of all security deposits paid by the tenants under the Leases and received by Seller in connection with the Leases, to the extent Seller has not already returned or applied any of such security deposits in accordance with the terms of the applicable Leases; provided, however, that Seller shall use commercially reasonable efforts to compel any tenant who has failed to restore its security deposit after any application thereof by Seller to restore such amount prior to Closing. Buyer and Seller shall execute an assignment in a form reasonably acceptable to Buyer and Seller for any and all letters of credit posted by any of the tenants and Seller shall use all diligent efforts to cause the issuers of such letters of credit to consent thereto; provided, the receipt of such consents shall not be a condition precedent to - -------- Buyer's obligations under this Agreement. Notwithstanding the foregoing, if Seller is unable to obtain the issuers' consents to said assignments prior to the Closing Date, Seller shall use commercially reasonable efforts to cooperate with Buyer and assist Buyer to obtain said consents after the Closing Date. Buyer shall use commercially reasonable efforts after the Closing to attempt to collect any delinquent or other rental and reimbursable Tenant Charges and other expense arrearages attributable to the period prior to the Closing. After deduction of Buyer's out-of-pocket costs to collect same, Buyer shall promptly account to Seller and shall immediately reimburse Seller for all rents, expense reimbursements, Tenant Charges and other charges received by Buyer after the Closing which apply to any period prior to the Closing to the extent Seller has not already been paid for or credited with such sums. With respect to any rent or Tenant Charges arrears arising under any of the Leases, Seller shall have the right to attempt to collect such pre-closing delinquent rental obligations (including without limitation, all Tenant Charges) and Buyer will cooperate with Seller in such regard, at no cost to Buyer, provided that Buyer shall not be required to declare a default against such tenants under such Leases for such pre-closing delinquent rental obligations (including without limitation, all taxes and Tenant Charges). Notwithstanding the foregoing, after the Closing Seller shall not bring an action against any tenant under any of the Leases while such tenants are tenants of any portion of the Property which would seek to terminate any such tenant's lease. The provisions of this Section 14 shall survive the Closing. 15. Closing Costs. Except as expressly set forth herein, all costs associated with the transfer of title and the associated escrow shall be in accordance with the customary practices in Santa Clara County. Seller shall pay the documentary county transfer taxes, the premium charged by the Title Company for the CLTA Title Policy (excluding any endorsements thereto), and any escrow fees. At Closing, Buyer shall obtain from the Title Company a CLTA Owner's Policy of Title Insurance in the amount of the Purchase Price insuring fee simple title to the Property in Buyer (the "CLTA Title Policy"). Buyer may elect to cause the Title Company to issue an ALTA Owner's Policy of Title Insurance and if Buyer so elects in writing, Buyer shall timely provide the Title Company with an insurable ALTA Survey of 20 the Property (and as is reasonably acceptable to the Title Company), at Buyer's sole cost and expense (the "ALTA Policy"). At Closing, Buyer shall pay any and all costs and incremental premiums or other charges related to the ALTA Policy (including all endorsements thereto) and the recording fees. Each party shall be solely responsible for its own legal fees and costs. 16. Brokers. 16.1 Brokerage Commission. Seller and Buyer respectively represent -------------------- that there are no brokers or other intermediaries entitled to receive brokerage commissions or fees or other compensation out of or with respect to the sale of the Property except for Colliers International (the "Broker"). Buyer is solely responsible for payment of a brokerage commission to the Broker, the amount of which shall be as specified in the separate agreement between Buyer and the Broker. Seller and Buyer shall indemnify and save and hold each other harmless from and against all claims, suits, damages and costs incurred or resulting from the claim of any person, except the Broker (payment of the Broker being Buyer's responsibility), that a commission, fee or remuneration is due in connection with this transaction pursuant to a written agreement made with said claimant. The provisions of this Section 16.1 shall survive the Closing or any termination of this Agreement. 16.2 Separate Representation. Seller and Buyer hereby acknowledge ----------------------- and agree that the Broker is the broker representing only the Buyer in connection with this transaction. 17. Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered by U.S. mail, registered or certified, return receipt requested, postage prepaid, or by overnight delivery service showing receipt of delivery, or by personal delivery, or by facsimile transmission. Such notices shall be sent to the parties at the following addresses, or such other address as may otherwise be indicated by any such party in writing. If to Seller: c/o Legacy Partners Commercial, Inc. 4000 East Third Avenue, Sixth Floor Foster City, California 94404 Attention: Mr. Robert Phipps, Mr. Todd Hedrick and Ms. Darleen Barnes Phone number: 650-571-2200 Facsimile number: 650-235-2589 (Mr. Phipps), 650-573-8624 (Mr. Hedrick) and 650-572-9527 (Ms. Barnes) with a copy to: c/o Goldman, Sachs & Company 85 Broad Street New York, New York 10004 Attention: Mr. Adam Brooks Facsimile number: 212-357-5505 21 and a copy to: c/o Goldman, Sachs & Company 100 Crescent Court, Suite 1000 Dallas, Texas 75201 Attention: Mr. Paul Milosevich Phone number: 214-855-6364 Facsimile number: 214-855-6305 and a copy to: Real Estate Law Group, LLP 2330 Marinship Way, Suite 211 Sausalito, California 94965 Attention: Bonnie Frank, Esquire Phone number: 415-331-2555 Facsimile number: 415-331-7272 If to Buyer: Mercury Interactive 1325 Borregas Avenue Sunnyvale, California 94089 Attention: Mr. Adony Beniares Phone number: 408-822-5200 Facsimile number: 408-822-5506 with a copy to: General Counsel Associates LLP 1891 Landings Drive Mountain View, California 94043 Attention: Deborah C. Aikins, Esquire Phone number: 650-428-3900 Facsimile number: 650-428-3901 Notices as aforesaid shall be effective upon the earlier of actual receipt, or twenty-four (24) hours after deposit with the messenger or delivery service, or the next business day after delivery to an overnight delivery service, or within three (3) days after the deposit in the U.S. mail, or upon confirmation of transmission by facsimile, or when receipt is refused. 18. Entire Agreement. This Agreement constitutes the entire understanding of the parties and all prior agreements, representations, and understandings between the parties, whether oral or written, are deemed null and void, all of the foregoing having been merged into this Agreement. The parties acknowledge that each party and/or its counsel have reviewed and revised this Agreement and that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation or enforcement of this Agreement or any amendments or exhibits to this Agreement or any document executed and delivered by either party in connection with this Agreement. 19. Assignment. Buyer may not assign its rights, obligations and interest in this Agreement to any other person or entity, without first obtaining Seller's prior written consent thereto, which consent shall not be unreasonably withheld or delayed, except that Buyer, without the prior written consent of Seller, may assign its interest in and to this Agreement and the Property so long as (i) the assignee of Buyer is an 22 affiliated entity of Buyer (i.e., an entity that controls, is controlled by or is under common control with Buyer), (ii) the assignee of Buyer assumes all of Buyer's obligations under this Agreement and agrees to timely perform same pursuant to an assignment agreement in form reasonably acceptable to Seller, (iii) Buyer delivers to Seller at least ten (10) business days prior to the Closing (a) written notice of said proposed assignment and (b) a copy of the draft of the assignment agreement for Seller's reasonable approval, and (iv) the assignee of Buyer unconditionally ratifies and remakes all covenants, indemnities, representations and warranties of Buyer made in or in connection with this Agreement, all of the foregoing for the express benefit and reliance of Seller. No assignment shall relieve Buyer from any liability or its obligations under or in connection with this Agreement. Any attempted assignment not in compliance with the provisions of this Section 19 shall be null and void. This Agreement shall inure to the benefit of and be binding upon the parties to this Agreement and their respective successors and permitted assigns. 20. Severability. If for any reason, any provision of this Agreement shall be held to be unenforceable, it shall not affect the validity or enforceability of any other provision of this Agreement and to the extent any provision of this Agreement is not determined to be unenforceable, such provision, or portion thereof, shall be, and remain, in full force and effect. 21. California Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 22. Modifications/Survival. Any and all exhibits attached hereto shall be deemed a part hereof. This Agreement, including exhibits, if any, expresses the entire agreement of the parties and supersedes any and all previous agreements between the parties with regard to the Property, including without limitation, that certain letter of intent, dated October 23, 2000. There are no other understandings, oral or written, which in any way alter or enlarge its terms, and there are no warranties or representations of any nature whatsoever, either expressed or implied, except as may expressly be set forth herein. After the expiration of the six (6) month survival period specified in Sections 26 and 27 hereof with respect to Buyer's and Seller's representations made herein, all of Seller's representations in Section 26 and Buyer's representations in Section 27 made herein shall be deemed merged into the Grant Deed and shall be of no further force or effect. Any and all future modifications of this Agreement will be effective only if it is in writing and signed by the parties hereto. The terms and conditions of such future modifications of this Agreement shall supersede and replace any inconsistent provisions in this Agreement. 23. Confidentiality. Buyer agrees that, (a) except as otherwise provided or required by valid law, (b) except to the extent Buyer considers such documents or information reasonably necessary to prosecute and/or defend any claim made with respect to the Property or this Agreement, (c) except to the extent reasonably necessary to deliver such documents or information to Buyer's employees, paralegals, attorneys and/or consultants in connection with Buyer's evaluation of this transaction, and (d) except to the extent necessary to contact any governmental authority or regulatory agency regarding any Hazardous 23 Material on or environmental condition of the Property, including, without limitation, in connection with Buyer's performance of a "Phase I" environmental site assessment, (i) Buyer and Buyer's agents, consultants, representatives, attorneys, employees, successors and assigns (collectively, the "Buyer's Representatives"), shall use all diligent efforts to keep the contents of any materials, reports, documents, data, test results, and other information related to the transaction contemplated hereby, including without limitation, the Due Diligence Materials and all information regarding Buyer's acquisition or ownership of the Property strictly confidential, (ii) Buyer and Buyer's Representatives shall keep and maintain the contents of this Agreement, including without limitation, the amount of consideration being paid by Buyer for the Property strictly confidential, and (iii) prior to the Closing Buyer and Buyer's Representatives shall refrain from generating or participating in any publicity or press release regarding this transaction without the prior written consent of Seller. Buyer acknowledges that significant portions of the Due Diligence Materials are proprietary in nature and that Seller would suffer significant and irreparable harm in the event of the misuse or disclosure of the Due Diligence Materials. Without affecting any other rights or remedies that either party may have, Buyer acknowledges and agrees that Seller shall be entitled to seek the remedies of injunction, specific performance and other equitable relief for any breach, threatened breach or anticipatory breach of the provisions of this Section 23 by Buyer or any of Buyer's Representatives. The provisions of this Section 23 shall survive any termination of this Agreement for a period of twelve (12) months but shall not survive the Closing except for Buyer's covenants in clause (ii) hereof, which covenant shall survive the Closing for a period of twelve (12)months. Upon execution of this Agreement by Buyer and Seller the terms and conditions of that certain Confidentiality, Access and Indemnity Agreement executed by Buyer and Seller as of November 14, 2000 shall be superceded by any inconsistent provisions of this Agreement. 24. Counterparts. This Agreement may be executed in counterparts. All executed counterparts shall constitute one agreement, and each counterpart shall be deemed an original. Buyer and Seller agree that the delivery of an executed copy of this Agreement by facsimile shall be legal and binding and shall have the same full force and effect as if an original executed copy of this Agreement had been delivered. 25. Dispute Costs. In the event any dispute between the parties with respect to this Agreement result in litigation or other proceeding, the prevailing party shall be reimbursed by the party not prevailing in such proceeding for all reasonable costs and expenses, including, without limitation, reasonable attorneys' and experts' fees and costs incurred by the prevailing party in connection with such litigation or other proceeding and any appeal thereof. Such costs, expenses and fees shall be included in and made a part of the judgment recovered by the prevailing party, if any. The provisions of this Section 25 shall survive any termination of this Agreement or the Closing. 26. Seller's Representations. Seller hereby represents to Buyer that the following matters are true and correct as of the date of execution of this Agreement, are material and are being relied upon by Buyer and shall, except as otherwise disclosed in writing by Seller to Buyer, be true and correct as of the Closing: 26.1 Seller is a limited partnership, duly formed, validly existing and in good standing under the laws of the State of Delaware. 24 26.2 This Agreement and all documents executed by Seller that are to be delivered to Buyer at Closing (i) are, or at the time of Closing will be, duly authorized, executed and delivered by Seller, (ii) do not, and at the time of Closing will not, violate any provision of any judicial order to which Seller is a party or to which Seller or the Property is subject and (iii) constitute (or in the case of closing documents will constitute) a valid and legally binding obligation of Seller. Seller has full and complete power and authority to enter into this Agreement and, subject to obtaining any consents or waivers required to be obtained prior to Closing, to perform its obligations hereunder. 26.3 Except as set forth in the materials delivered to Buyer or made available to Buyer pursuant to Section 4 above, or as otherwise disclosed in writing by Seller to Buyer prior to Closing, to Seller's actual knowledge, (i) there are no pending or threatened legal proceedings, including, without limitation, condemnation proceedings, or administrative actions of any kind or character materially and adversely affecting the Property or Seller's interest therein, and (ii) Seller has not received written notice of any special assessment proceedings affecting the Property. 26.4 Except as set forth in the materials delivered to Buyer or made available to Buyer pursuant to Section 4 above, or as otherwise disclosed in writing by Seller to Buyer prior to Closing, Seller has received no written notice from any city, county, state or other government authority of any violation of any statute, ordinance, regulation, or administrative or judicial order or holding, including, without limitation, any laws regarding environmental matters, including, without limitation, laws with respect to a release of Hazardous Materials on or under the Property, whether or not appearing in public records, with respect to the Property, which violation has not been corrected. 26.5 Except as set forth in the materials delivered to Buyer or made available to Buyer pursuant to Section 4 above, or as otherwise disclosed in writing by Seller to Buyer prior to Closing, Seller has received no written notice from any city, county, state or other government authority (i) of any order or directive requiring any work of repair, maintenance or improvement be performed on the Property, or (ii) relating to defects in the Improvements or relating to noncompliance with any applicable building code or restriction, including, without limitation, the Americans with Disabilities Act of 1990 ("ADA"), Title 24 of the California Administrative Code and other federal, state and local laws (including laws or codes regulating fire, safety, handicapped access or seismic design), that has not been corrected, or relating to any threat of impending condemnation. 26.6 Except as set forth in the materials delivered to Buyer or made available to Buyer pursuant to Section 4 above, or as set forth in the tenant estoppel certificates delivered to Buyer pursuant to Section 4.2.1.1 above, or as otherwise specifically disclosed in writing to Buyer prior to Closing, (i) the Leases are in full force and effect and have not been modified in any material manner, and (ii) to Seller's actual knowledge, there are no current defaults in the performance of the obligations of any party under the Leases. Additionally, (a) there are no outstanding assignments by Seller of Seller's interest in the Leases, and (b) there are no other leases, service contracts, maintenance agreements or other agreements with respect to the Property other than those delivered to or made available to Buyer pursuant to the provisions hereof. 26.7 The materials delivered to Buyer or made available to Buyer pursuant to Section 4 above contain true, correct and complete copies of all Leases, all material Contracts and all material environmental and structural reports to the extent in the actual possession of Seller and, to Seller's actual knowledge, said materials delivered to or otherwise made available to Buyer under this Agreement by Seller contain complete copies of the documents in Seller's possession. Notwithstanding 25 anything contained herein to the contrary, Seller is only delivering and making available said materials to the extent currently in Seller's possession and Seller shall not be required to prepare or obtain any information, document, report or survey. Seller is not making any express or implied representation as to the accuracy or thoroughness of the contents of any of said materials or of the ability of Buyer to rely on any of said materials. This representation shall not be deemed breached by virtue of any new leases or new agreements entered into after the Agreement Date in accordance with the provisions of Section 7 hereof. 26.8 Foreign Person. Seller is not a "foreign person" within the -------------- meaning of Section 1445(f)(3) of the Internal Revenue Code, as amended. 26.9 No Bankruptcy. Seller has not (i) made a general assignment for the benefit of creditors, (ii) filed any voluntary petition in bankruptcy or suffered the filing of any involuntary petition by Seller's creditors, (iii) suffered the appointment of a receiver to take possession of all, or substantially all, of Seller's assets, (iv) suffered the attachment or other judicial seizure of all, or substantially all, of Seller's assets, (v) admitted in writing its inability to pay its debts as they come due, or (vi) make an offer of settlement, extension or composition to its creditors generally. Buyer and Seller each specifically acknowledge and agree that all references in this Agreement, in any of the exhibits attached hereto and in any document, certificate or statement to be delivered by Seller to Buyer hereunder to the phrases "to Seller's actual knowledge," or "known to Seller" (whether used in the phrase "to the actual knowledge of Seller," "actually known to Seller," "Seller's knowledge," or in similar or other contexts) (1) shall mean the actual (not constructive or imputed) personal knowledge of Robert Phipps, Hanna Eyal and Jami Shaw Atkinson (collectively, the "Seller's Personnel"); (2) shall in no case mean or refer to the actual or constructive knowledge of any other employee, partner, member, officer, director, agent, trustee or member, partner, representative or employee of a partner, member, officer, director, agent or other representative of Seller or any investment advisor, attorney, management company, contractor or representative of Seller (together with Seller's Personnel, the "Seller Representatives"); and (3) shall in no event or circumstance impose upon Seller or any of the Seller Representatives any duty or obligation to verify, inquire or make any independent inquiry or investigation of any such representation, warranty or statement, or to otherwise investigate the facts or circumstances relating or otherwise pertinent thereto. Buyer further acknowledges and agrees that none of the Seller Representatives shall be personally liable, or otherwise have any personal liability, under or in connection with this Agreement, including without limitation, in connection with any of the representations, warranties or statements made in connection with, or pursuant to, this Agreement. The foregoing representations of Seller made hereinabove shall survive the Closing for a period of six (6) months after the Closing Date; provided, however, that any claim, action, suit or proceeding with respect to the truth, accuracy or completeness of any representations made by Seller herein shall be commenced, if at all, on or before the date which is six (6) months after the Closing Date and, if not so commenced on or before such date, thereafter Buyer shall be forever barred from making or bringing any such claim, action, suit or proceeding as though said representations are then void and of no further force or effect. Notwithstanding any provision contained herein to the contrary, Buyer shall have no right to rely on, and Seller shall have no liability with respect to, any representation or warranty (including any future certification or statement, actually or deemed made, as to representations or warranties) which Buyer actually knows to be inaccurate or untrue at the time such representation or warranty is given. 26 27. Buyer's Representations. Buyer hereby represents and warrants to Seller that the following matters are true and correct as of the date of execution of this Agreement, are material and are being relied upon by Seller, and shall, except as otherwise disclosed in writing by Buyer to Seller, be true and correct as of the Closing: (i) Buyer is a corporation, duly formed, validly existing and in good standing under the laws of the State of Delaware; (ii) this Agreement and all documents executed by Buyer that are to be delivered to Seller at Closing (a) are, or at the time of Closing will be, duly authorized, executed and delivered by Buyer, (b) do not, and at the time of Closing will not, violate any provision of any judicial order to which Buyer is a party or to which Buyer is subject and (c) constitute (or in the case of closing documents will constitute) a valid and legally binding obligation of Buyer; (iii)Buyer has full and complete power and authority to enter into this Agreement and, subject to obtaining any consents or waivers required to be obtained prior to Closing, to perform its obligations hereunder; and (iv) (a) Buyer is not presently the subject of a bankruptcy, insolvency or probate proceedings and Buyer does not anticipate nor intend to file or cause to be filed any bankruptcy or insolvency proceeding involving Buyer or Buyer's assets during the pendency of this Agreement, (b) Buyer has such knowledge and experience in financial and business matters that Buyer is capable of evaluating the merits and risks of an investment in the Property, (c) Buyer is represented by competent counsel, (d) Buyer shall furnish all of the funds for the purchase of the Property (other than funds supplied by institutional lenders which will hold valid mortgage liens against the Property) and such funds will not be from sources of funds or properties derived from any unlawful activity, (e) prior to Closing, Buyer and its agents will have thoroughly inspected the Property, fully observed the physical characteristics and condition of the Property, and performed a thorough investigation of the suitability of Buyer's intended use of the Property, including without limitation, the suitability of the topography; the availability of water rights or utilities; any natural hazard of any kind or nature, including without limitation, flood hazard, earthquake fault or seismic hazard, or forest fire risk or hazard; the present and future zoning, subdivision and any and all other land use matters; the condition of the soil, subsoil or groundwater of the Property and any and all other environmental matters; the purpose(s) to which the Property is suited; drainage; flooding; access to public roads; and proposed routes or roads or extensions relative to the Property, (f) Buyer acknowledges and confirms that, as of the date of Buyer's receipt of the NHDS, Buyer has received, read and understood the NHDS for the Property and agrees to accept the Property with all matters reflected, disclosed and set forth in the NHDS for the Property, and (g) Buyer understands it will have no recourse whatsoever against Seller or any of the other Releasees except as otherwise expressly set forth in this Agreement. Seller acknowledges and agrees that no employee, partner, member, officer, director, agent, trustee or member, partner, representative or employee of a partner, member, officer, director, agent or other representative of Buyer or any investment advisor, attorney, management company, contractor or representative of Buyer ("Buyer's Representatives"), shall be personally liable, or otherwise have any personal liability, under or in connection with this Agreement, including, without limitation, in connection with any of the representations, warranties or statements made in connection with, or pursuant to, this Agreement. The foregoing representations of Buyer made hereinabove shall survive the Closing for a period of six (6) months after the Closing Date; provided, however, that any claim, action, suit or proceeding with respect to the truth, accuracy or completeness of any representations made by Buyer herein shall be commenced, if at all, on or before the date which is six (6) months after the Closing Date and, if not so commenced on or before such date, thereafter Seller shall be forever barred from making or bringing any such claim, action, suit or proceeding as though said representations are then void and of no further force or effect. Notwithstanding any provision contained herein to the contrary, Seller shall have no right to rely on, and Buyer shall have no liability 27 with respect to, any representation or warranty (including any future certification or statement, actually or deemed made, as to representations or warranties) which Seller actually knows to be inaccurate or untrue at the time such representation or warranty is given. 28. Time of the Essence; and Business Days. Time is of the essence in the performance of each of the parties' respective obligations contained herein. Unless the context otherwise requires, all periods terminating on a given day, period of days, or date shall terminate at 5:00 p.m. (Pacific Time) on such date or dates and references to "days" shall refer to calendar days except if such references are to "business days" which shall refer to days which are not a Saturday, Sunday or legal holiday. Notwithstanding the foregoing, if any period terminates on a Saturday, Sunday or legal holiday, under the laws of the State of California, the termination of such period shall be on the next succeeding business day. The time in which any act provided under this Agreement is to be done, shall be computed by excluding the first day and including the last day, unless the last day is a Saturday, Sunday or legal holiday under the laws of the State of California, and then it is also so excluded. 29. Agreement Date. The parties hereby covenant and agree that the "Agreement Date" shall be the date on which the Escrow Holder confirms in writing to both Seller and Buyer that the Escrow Holder has actually received from both parties two (2) signed and initialed original counterparts of this Agreement and the Escrow Holder is in a position to release to each of the parties a fully executed original of this Agreement signed and initialed in counterparts. The Escrow Holder shall insert such date in each original counterpart of this Agreement on Page 1 hereof. If either party fails to submit two (2) signed and initialed original counterparts of this Agreement to Escrow Holder within five (5) business days after the delivery to Escrow Holder by the other party of two (2) signed and initialed original counterparts of this Agreement, then the party which delivered to Escrow Holder said signed and initialed counterparts of this Agreement may, at its option, withdraw such signed and initialed counterparts therefrom without any obligation to resubmit same to Escrow Holder thereafter. 30. No Third Party Beneficiaries. Except as otherwise expressly set forth herein, Seller and Buyer do not intend, and this Agreement shall not be construed, to create a third-party beneficiary status or interest in, nor give any third-party beneficiary rights or remedies to, any other person or entity not a party to this Agreement. 31. Discharge of Seller's Bonds - Intentionally Omitted. 32. Drafts not an Offer to Enter into a Legally Binding Contract The parties hereto agree that the submission of a draft of this Agreement by one party to another is not intended by either party to be an offer to enter into a legally binding contract with respect to the purchase and sale of the Property. The parties shall be legally bound with respect to the purchase and sale of the Property pursuant to the terms of this Agreement only if and when the parties have been able to negotiate all of the terms and provisions of this Agreement in a manner acceptable to each of the parties in their respective sole discretion, including without limitation, all of the exhibits hereto, and each of Seller and Buyer have fully executed and delivered (or caused the delivery) to each other a counterpart of this Agreement, including without limitation, all exhibits hereto. 28 33. Disclosure Items. In addition to the provisions of Sections 4, 11, 12 and 13 hereof, Buyer acknowledges that prior to the date hereof all of the following information and matters have been disclosed to Buyer by virtue of either the delivery to Buyer of a copy of reports with respect to said matters or a brief summary of Seller's understanding and knowledge of the matters set forth in Exhibit J attached --------- hereto and made a part hereof. Prior to the date hereof, Seller has delivered to Buyer a copy of the reports listed in Exhibit K attached hereto --------- (collectively, the "Reports"). Buyer hereby expressly acknowledges and unequivocally agrees that if it elects to proceed with the Closing (or is deemed to have approved its contingencies), then it is acquiring the Property subject to any and all deficiencies, defects and other matters referred to or otherwise set forth in the Reports and the Due Diligence Materials delivered to Buyer or otherwise made available to Buyer pursuant to Section 4 hereof. Notwithstanding anything to the contrary contained herein, Seller makes no representations or warranties with respect to (i) the adequacy or accuracy of any report, study or other information prepared by a third party for or on behalf of Seller and included as part of the Due Diligence Materials, including without limitation, the Reports, or (ii) the matters set forth in Exhibit J attached hereto and made --------- a part hereof (collectively, the "Disclosure Items"). Except for any breach of the representations made by Seller herein as specified in Section 26 above, Seller shall have no liability with respect to any matters disclosed or contained in the Due Diligence Materials or the Disclosure. IN WITNESS WHEREOF the parties have caused this Agreement to be executed as of the day and year first above written. BUYER: Mercury Interactive Corporation, a Delaware corporation By: /s/ Sharlene Abrams ------------------------------------- Name: Sharlene Abrams ------------------------------------- Title: Chief Financial Officer ------------------------------------- By: /s/ Susan J. Skaer ------------------------------------- Name: Susan J. Skaer ------------------------------------- Title: Vice President & General Counsel ------------------------------------- 29 ////signatures continued on next page//// 30 ////signatures continued from prior page//// SELLER: WHSUM Real Estate Limited Partnership, a Delaware limited partnership By: WHSUM Gen-Par, Inc., a Delaware corporation General Partner By: /s/ Paul Milosevich --------------------------------------- Name: ____________________________________ Title: V.P. ------------------------------------ 31 EXHIBIT A TO PURCHASE AND SALE AGREEMENT ---------------------------------------- LEGAL DESCRIPTION OF THE REAL PROPERTY All that certain real property situated in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: Parcel A, as shown on that certain map entitled, "Parcel Map lying within the City of Sunnyvale, being a resubdivision of Parcel 5 as shown upon that certain Parcel Map recorded in Book 383 of Maps at Page 19, Santa Clara County Records", which map was filed in the office of the Recorder of the County of Santa Clara, State of California on February 13, 1979, in Book 435 of Maps at page 28. A-1 EXHIBIT B TO PURCHASE AND SALE AGREEMENT ---------------------------------------- ASSIGNMENT AND ASSUMPTION OF LEASES This Assignment and Assumption of Leases (the "Assignment") is made and entered into as of this ____ day of ________, 2000 ("Assignment Date"), by and between WHSUM Real Estate Limited Partnership, a Delaware limited partnership ("Assignor"), and Mercury Interactive Corporation, a Delaware corporation ("Assignee"), with reference to the following facts. RECITALS -------- A. Assignor and Assignee are parties to that certain Purchase and Sale Agreement, made and entered into as of December __, 2000 (the "Purchase Agreement"), pursuant to which Assignor agreed to sell to Assignee, and Assignee agreed to purchase from Assignor that certain improved real property located at 242-252 Humboldt Court, Sunnyvale, California, as legally described in Exhibit A --------- attached hereto and made a part hereof (the "Real Property") together with all (i) improvements, structures and fixtures (other than trade fixtures) (collectively, the "Improvements") and personal property (the "Personal Property") actually owned by Assignor (if any) located in, on or about the Real Property or the Improvements and actually used in the operation of the Improvements, and (ii) easements, appurtenances, rights and privileges actually belonging thereto (collectively, the "Appurtenances"). The Real Property, the Improvements, the Personal Property and the Appurtenances are collectively referred to herein as the "Property." B. Assignor has previously entered into certain leases of the Property, as more particularly described in Schedule 1 attached hereto and made a part ---------- hereof (collectively, the "Leases"). C. Assignor presently has security deposits from the tenants under the Leases in the amounts set forth in Schedule 2 attached hereto and made a part ---------- hereof (collectively, the "Security Deposits"). D. Assignee has acquired fee title to the Property from Assignor on the Assignment Date. Assignor now desires to assign and transfer to Assignee all of Assignor's rights and interests in and to, and obligations under, the Leases and the Security Deposits, and Assignee desires to assume all of Assignor's rights, title, interests and obligations in, to and under the Leases and the Security Deposits, as set forth herein. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Assignment and Assumption. Effective as of the Assignment Date, ------------------------- Assignor hereby grants, transfers, conveys, assigns and delegates to Assignee all of the rights, interests and obligations of Assignor in, to and under the Leases and the Security Deposits. Assignee hereby accepts such assignment and delegation by Assignor and expressly and unconditionally assumes and covenants to keep, perform, fulfill and discharge (i) all of the terms, covenants, conditions and obligations required to be kept, performed, fulfilled and discharged by Assignor as landlord in and under the Leases and with respect to the Security Deposits, and (ii) all of the covenants, terms and obligations required to be B-1 kept, performed, fulfilled and discharged by Assignor with respect to the payment and/or provision of those certain tenant improvement costs, tenant improvement allowances and leasing commissions in the amounts and as more particularly set forth in Schedule 3 attached hereto (collectively, the "Leasing ---------- Costs"). Notwithstanding the foregoing or anything to the contrary contained herein, Assignor shall retain all rights, title and interest in and to all rentals and other amounts payable by the tenants under the Leases for the period of time prior to the Assignment Date. 2. Intentionally Omitted. 3. Dispute Costs. In the event of any dispute between Assignor and ------------- Assignee arising out of the obligations of the parties under this Assignment or concerning the meaning or interpretation of any provision contained herein, the losing party shall pay the prevailing party's costs and expenses of such dispute, including without limitation, reasonably attorneys' fees and costs. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Assignment shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Assignment and to survive and not be merged into any such judgment. 4. Counterparts. This Assignment may be executed in counterparts, each ------------ of which shall be deemed an original, and all of which shall taken together be deemed one document. Assignor and Assignee agree that the delivery of an executed copy of this Assignment by facsimile shall be legal and binding and shall have the same full force and effect as if an original executed copy of this Assignment had been delivered. 5. Survival. This Assignment and the provisions hereof shall inure to -------- the benefit of and be binding upon the parties to this Assignment and their respective successors, heirs and permitted assigns. 6. Limited Liability. This Assignment is made without recourse and ----------------- without any express or implied representation or warranty of any kind or nature, except as expressly set forth in the Purchase Agreement. Assignee and Assignor, on its own behalf and on behalf of its agents, members, partners, employees, representatives, successors and assigns each hereby agrees that in no event or circumstance shall any of the members, partners, employees, representatives, officers, directors, agents, property management company, affiliated or related entities of (i) Assignor or Assignor's property management company, namely Legacy Partners Commercial, Inc. (formerly known as Lincoln Property Company Management Services, Inc. and LPC MS, Inc.), or of (ii) Assignee have any personal liability under this Assignment, or to any of the other's creditors, or to any other party in connection with the Property. 7. No Third Party Beneficiaries. Except as otherwise expressly set forth ---------------------------- herein, Assignor and Assignee do not intend, and this Assignment shall not be construed, to create a third-party beneficiary status or interest in, nor give any third-party beneficiary rights or remedies to, any other person or entity not a party to this Assignment. \\\\\ continued on next page B-2 IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the Assignment Date. ASSIGNOR: WHSUM Real Estate Limited Partnership, a Delaware limited partnership By: WHSUM Gen-Par, Inc., a Delaware corporation General Partner By: _________________________ Name: ______________________ Title: _____________________ ASSIGNEE: Mercury Interactive Corporation, a Delaware corporation By: __________________________ Name: __________________________ Title: __________________________ By: __________________________ Name: __________________________ Title: __________________________ B-3 EXHIBIT C TO PURCHASE AND SALE AGREEMENT ---------------------------------------- ASSIGNMENT AND ASSUMPTION OF CONTRACTS, WARRANTIES AND PERMITS This Assignment and Assumption of Contracts, Warranties and Permits (the "Assignment") is made and entered into as of this ____ day of ________, 2000 ("Assignment Date"), by and between WHSUM Real Estate Limited Partnership, a Delaware limited partnership ("Assignor"), and Mercury Interactive Corporation, a Delaware corporation ("Assignee"), with reference to the following facts. RECITALS -------- A. Assignor and Assignee are parties to that certain Purchase and Sale Agreement, made and entered into as of December __, 2000 (the "Purchase Agreement"), pursuant to which Assignor agreed to sell to Assignee, and Assignee agreed to purchase from Assignor that certain improved real property located at 242-252 Humboldt Court, Sunnyvale, California, as legally described in Exhibit A --------- attached hereto and made a part hereof (the "Real Property") together with all (i) improvements, structures and fixtures (other than trade fixtures) (collectively, the "Improvements") and personal property (the "Personal Property") actually owned by Assignor (if any) located in, on or about the Real Property or the Improvements and actually used in the operation of the Improvements, and (ii) easements, appurtenances, rights and privileges actually belonging thereto (collectively, the "Appurtenances"). The Real Property, the Improvements, the Personal Property and the Appurtenances are collectively referred to herein as the "Property." B. Assignee has acquired fee title to the Property from Assignor on the Assignment Date. Assignor now desires to assign and transfer to Assignee all of Assignor's rights and interests in, to and under the Contracts, Warranties and Permits, as hereinafter defined. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Assignment and Assumption. Effective as of the Assignment Date, ------------------------- Assignor hereby grants, transfers, conveys, assigns and delegates to Assignee all of its rights and interests of Assignor in, to and under (i) those warranties and guaranties that are set forth in Schedule 1 attached hereto and ---------- made a part hereof (collectively, the "Warranties"); (ii) all intangible property (other than any tradenames of Seller or any affiliated or related entities of Seller) now owned by Assignor in connection with any portion of the Property, including without limitation, all governmental permits, approvals and licenses (to the extent assignable) (collectively, the "Permits"); and (iii) those agreements, utility contracts, service contracts, maintenance contracts, operating contracts and other rights relating to the ownership, use or operation of the Property that are set forth in Schedule 2 attached hereto and made a part ---------- hereof (collectively, the "Contracts"). Effective as of the Assignment Date, Assignee hereby accepts such assignment and delegation by Assignor and agrees to fully perform and assume all the obligations of Assignor under the Warranties, Permits and Contracts. 2. No Warranties. Assignee does hereby covenant with Assignor, and ------------- represents and warrants to Assignor, that Assignor is transferring each of the Warranties, Permits and Contracts to Assignee (to the extent the terms of any of the Contracts do not limit or restrict such right) without any C-1 warranty of any kind or nature. This Assignment shall not be construed as a representation or warranty by Assignor as to the transferability or enforceability of the Warranties, the Contracts, the Permits or the intangible property (collectively, the "Interests"), and Assignor shall have no liability to Assignee in the event that any or all of the Interests (a) are not transferable to Assignee or (b) are cancelled or terminated by reason of this Assignment or any acts of Assignee. 3. Dispute Costs. In the event of any dispute between Assignor and ------------- Assignee arising out of the obligations of the parties under this Assignment or concerning the meaning or interpretation of any provision contained herein, the losing party shall pay the prevailing party's costs and expenses of such dispute, including without limitation, reasonably attorneys' fees and costs. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Assignment shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Assignment and to survive and not be merged into any such judgment. 4. Counterparts. This Assignment may be executed in counterparts, each ------------ of which shall be deemed an original, and all of which shall taken together be deemed one document. Assignor and Assignee agree that the delivery of an executed copy of this Assignment by facsimile shall be legal and binding and shall have the same full force and effect as if an original executed copy of this Assignment had been delivered. 5. Survival. This Assignment and the provisions hereof shall inure to -------- the benefit of and be binding upon the parties to this Assignment and their respective successors, heirs and permitted assigns. 6. Limited Liability. This Assignment is made without recourse and ----------------- without any express or implied representation or warranty of any kind or nature, except as expressly set forth in the Purchase Agreement. Assignee and Assignor on its own behalf and on behalf of its agents, members, partners, employees, representatives, successors and assigns each hereby agrees that in no event or circumstance shall any of the members, partners, employees, representatives, officers, directors, agents, property management company, affiliated or related entities of (i) Assignor or Assignor's property management company, namely Legacy Partners Commercial, Inc. (formerly known as Lincoln Property Company Management Services, Inc. and LPC MS, Inc.) or (ii) of Assignee, have any personal liability under this Assignment, or to any of the other's creditors, or to any other party in connection with the Property. 7. No Third Party Beneficiaries. Except as otherwise expressly set forth ---------------------------- herein, Assignor and Assignee do not intend, and this Assignment shall not be construed, to create a third-party beneficiary status or interest in, nor give any third-party beneficiary rights or remedies to, any other person or entity not a party to this Assignment. \\\\\ continued on next page C-2 IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the Assignment Date. ASSIGNOR: WHSUM Real Estate Limited Partnership, a Delaware limited partnership By: WHSUM Gen-Par, Inc., a Delaware corporation General Partner By: _________________________ Name: ______________________ Title: _____________________ ASSIGNEE: Mercury Interactive Corporation, a Delaware corporation By: __________________________ Name: __________________________ Title: __________________________ By: __________________________ Name: __________________________ Title: __________________________ C-3 EXHIBIT D TO PURCHASE AND SALE AGREEMENT ---------------------------------------- GRANT DEED Recording Requested by and When Recorded Mail to, and Mail Tax Statements to: ___________________________________ ___________________________________ ___________________________________ ___________________________________ Attention: _______________________ ________________________________________________________________________________ Space Above This Line for Recorder's Use GRANT DEED ---------- The undersigned Grantor declares that Documentary Transfer Tax is not part of the public records. For valuable consideration, receipt of which is acknowledged, WHSUM Real Estate Limited Partnership, a Delaware limited partnership ("Grantor"), hereby grants to Mercury Interactive Corporation, a Delaware corporation ("Grantee"), that certain real property located in the City of Sunnyvale, County of Santa Clara, State of California, as legally described in Exhibit A attached hereto --------- and made a part hereof (the "Property") together with all of Grantor's right, title and interest in and to all improvements and structures located thereon and all easements, appurtenances, rights and privileges of Grantor appertaining to the Property. The Property is conveyed subject to: (a) The lien of supplemental taxes, if any, assessed pursuant to the provisions of Chapter 3.5 (commencing with Section 75) of the Revenue and Taxation Code of the State of California; (b) The liens for real property taxes for the fiscal year 2000-2001 not yet due and payable; (c) All liens, encumbrances, easements, leases, covenants, conditions and restrictions of record; (d) All matters which would be disclosed by an inspection of the Property; and D-1 (e) Zoning ordinances and regulations and any other laws, ordinances, regulations or orders of any governmental agency having or claiming jurisdiction over the use, occupancy or enjoyment of the Property. IN WITNESS WHEREOF, Grantor has caused its duly authorized representative to execute this instrument as of the date hereinafter written. DATED: ______________, 2000 GRANTOR: WHSUM Real Estate Limited Partnership, a Delaware limited partnership By: WHSUM Gen-Par, Inc., a Delaware corporation General Partner By: _________________________ Name: ______________________ Title: _____________________ D-2 EXHIBIT E TO PURCHASE AND SALE AGREEMENT ---------------------------------------- BILL OF SALE For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, WHSUM Real Estate Limited Partnership, a Delaware limited partnership ("Seller"), does hereby GRANT, SELL, CONVEY, TRANSFER AND DELIVER to Mercury Interactive Corporation, a Delaware corporation ("Buyer"), without any warranty of any kind, any and all of Seller's rights, title and interests in and to the personal property (the "Personal Property") owned by Seller and utilized by Seller in connection with the operation and management of the realty described in Exhibit A attached hereto and made a part hereof (the "Property"). --------- Notwithstanding anything to the contrary contained herein, Seller represents and warrants for the benefit of Buyer that Seller is conveying title to the Personal Property free and clear of all liens and encumbrances, except as may have been previously disclosed to Buyer in writing. From and after the date of this Bill of Sale, it is intended by the parties that Buyer and its successors and assigns shall have the right to use, have, hold and own the Personal Property forever. This Bill of Sale may be executed in counterparts, each of which shall be deemed an original, and all of which shall taken together be deemed one document. Seller and Buyer agree that the delivery of an executed copy of this Bill of Sale by facsimile shall be legal and binding and shall have the same full force and effect as if an original executed copy of this Bill of Sale had been delivered. Buyer hereby acknowledges, covenants, represents and warrants that Seller has made absolutely no warranties or representations of any kind or nature regarding title to the Personal Property, except as expressly set forth herein, or the condition of the Personal Property. Buyer on behalf of itself and its officers, directors, employees, partners, agents, representatives, successors and assigns hereby agrees that in no event or circumstance shall Seller or its partners, members, trustees, employees, representatives, officers, related or affiliated entities, successors or assigns have any personal liability under this Bill of Sale, or to any of Buyer's creditors, or to any other party in connection with the Personal Property or the Property. In the event of any dispute between Seller and Buyer arising out of the obligations of the parties under this Bill of Sale or concerning the meaning or interpretation of any provision contained herein, the losing party shall pay the prevailing party's costs and expenses of such dispute, including without limitation, reasonably attorneys' fees and costs. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Bill of Sale shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Bill of Sale and to survive and not be merged into any such judgment. \\\\\ continued on next page E-1 IN WITNESS WHEREOF, the parties have executed this Bill of Sale as of this ___ day of __________, 2000. SELLER: WHSUM Real Estate Limited Partnership, a Delaware limited partnership By: WHSUM Gen-Par, Inc., a Delaware corporation General Partner By: _________________________ Name: ______________________ Title: _____________________ BUYER: Mercury Interactive Corporation, a Delaware corporation By: __________________________ Name: __________________________ Title: __________________________ E-2 EXHIBIT F TO PURCHASE AND SALE AGREEMENT ---------------------------------------- TENANT'S ESTOPPEL CERTIFICATE TO: _____________________________ _____________________________ _____________________________ RE: 242-252 Humboldt Court, Sunnyvale, California (the "Premises") The undersigned (the "Tenant") hereby certifies to WHSUM Real Estate Limited Partnership, a Delaware limited partnership (the "Buyer"), the Buyer's lender, and to _____________________, a ______________________ (the "Landlord"), the following information with respect to that certain lease agreement, dated _______________, ____ (the "Lease," including any amendments to or modifications of the same) under which the Tenant is a tenant, and Tenant agrees that the Landlord, Buyer and Buyer's lender, successors and assigns may rely upon the same: 1. The Lease is in full force and effect and has not been modified or amended except as follows: ________________________. The Term of the Lease commenced on __________ and will expire on _______, including any presently exercised option or renewal term. Attached hereto as Exhibit A is a true and complete copy of the Lease and all amendments thereto, and the Lease sets forth the entire agreement of the parties. 2. The Tenant has unconditionally accepted the Premises and asserts no claim of default or offset or defense against the payment of rent or other charges payable by the Tenant and asserts no claim against the Landlord under the Lease in regard to the premises occupied by Tenant. To the best of Tenant's knowledge and belief, there is no default by Landlord under the Lease and no event has occurred that, with the passage of time or the giving of notice, or both, would constitute a default by Landlord under the Lease. 3. All fixed base rental has been paid to the end of the current calendar month, which is _____________, and no rent under the Lease had been paid more than one month in advance of its due date except for any security deposit referenced herein. Current monthly fixed base rental for the Premises is $_________________. 4. The Lease provides for an option to renew the Lease term as follows: ____________________. The Lease contains no first right of refusal to lease or purchase, option to expand, option to terminate, or option to purchase except as follows: _____________________________________________________________. 5. Landlord currently holds a security deposit in the amount of $_______, which is to be applied by Landlord or returned to Tenant in accordance with Paragraph __ of the Lease. Tenant acknowledges and agrees that any successor in interest to Landlord shall have no responsibility or liability for any security deposit except to the extent actually received by such successor. F-1 6. To the best of the Tenant's knowledge, neither Landlord nor Tenant is in default under the Lease nor has any event occurred which, with the passage of time or the giving of notice, or both, would constitute a default or breach by the Tenant. The Tenant is current in the payment of any taxes, utilities, common area maintenance payments, or other charges required to be paid by the undersigned. 7. The Tenant certifies that it is required to pay a pro rata share of real property taxes, common area expenses and operating expenses. The Tenant presently pays to Landlord $__________ per month for its pro rata share of real property taxes, common area expenses and operating expenses. All such expenses have been paid by the Tenant to the end of the current calendar month. All insurance required to be carried by Tenant under the Lease has been provided by Tenant, and all premiums have been paid. 8. The Tenant has not entered into any sublease, assignment or any other agreement transferring any of its interest in the Lease or the Premises leased by the Tenant under the Lease. 9. The Tenant recognizes and acknowledges it is making these representations to you with the intent that the Landlord, the Buyer and Buyer's lenders, successors and assigns may rely hereon and as a material inducement to the Buyer's transaction with the Landlord, as the seller, and that each of the representations contained herein is true, correct and complete as of the date hereof. 10. All contributions required to be paid by Landlord to date for improvements in the Premises have been paid in full, and all of Landlord's obligations with respect to tenant improvements have been fully performed. Tenant has accepted the Premises, subject to no conditions other than those set forth in the Lease. 11. Tenant is not the subject of any bankruptcy or other voluntary or involuntary proceeding, in or out of court, for the adjustment of debtor- creditor relationships. 12. Tenant represents and warrants that it has not used, generated, released, discharged, stored or disposed of any Hazardous Materials (as defined in the Lease) on, under, in or about the Premises, the Building or the real property on which the Premises is constructed, other than _____________________________, which have been used in compliance with all applicable law. Except for its use of the foregoing materials, Tenant has no actual knowledge that any Hazardous Material is present, or has been used, generated, released, discharged, stored or disposed of by any party on, under, in or about the Premises, the Building or the real property. 13. The undersigned signatory hereto hereby warrants that he/she has full and valid legal power and authority to make and deliver this certificate and to bind the Tenant to the statements and certifications made herein, and that Landlord and any and all of Landlord's successors in interest may rely upon such statements and certifications. Dated: _________________, 2000 Very truly yours, ______________________________________, ______________________________________ F-2 By:__________________________________ Its:_________________________________ F-3 EXHIBIT G TO PURCHASE AND SALE AGREEMENT ---------------------------------------- NOTICE TO TENANTS [SELLER'S PROPERTY MANAGER'S LETTERHEAD] VIA CERTIFIED MAIL - ------------------ [TENANT'S NAME] [TENANT'S ADDRESS] CITY, STATE ZIP ATTN: __________________ Re: 242-252 Humboldt Court, Sunnyvale, California Dear _______________: Please be advised that on [CLOSING DATE], ownership of the above-referenced real property was transferred to Mercury Interactive Corporation, a Delaware corporation (the "Buyer"). In connection with the sale of the property, and in conformance with the laws of the State of California, the obligations under the tenant security deposits were transferred to the Buyer, whose address is ________________________, __________________________, ______________, California 9_____; Attention: _________________, without deduction or offset. Hereafter, please make rent payable to "______________," and mail your payments to: _________________________________________________ _________________________________________________ _________________________________________________ This Notice is given in accordance with the requirements of California Civil Code Section 1950.7(d). From and after ____________, 2000, your sole recourse for the return of your security deposit upon the termination of your tenancy will be against the Buyer. If you have any questions, please call [Mr./Ms.] ______________ at ________________. Thank you. Very truly yours, __________________________________, a_________________________________ By: ___________________________ Name: ___________________________ Title: ___________________________ cc: [name of Buyer's property manager] Ms. Darleen Barnes Bonnie Frank, Esquire G-1 EXHIBIT H TO PURCHASE AND SALE AGREEMENT ---------------------------------------- LEASING COSTS None H-1 EXHIBIT I TO PURCHASE AND SALE AGREEMENT ---------------------------------------- NATURAL HAZARD DISCLOSURE STATEMENT This statement applies to the following described real property: 242-252 Humboldt Court, Sunnyvale, California. The undersigned Seller discloses the following information with the knowledge that even though this is not a warranty, the undersigned prospective Buyer may rely on this information in deciding whether and on what terms to purchase the subject real property. The following disclosures are made by the Seller based solely upon the information contained in the report attached hereto and made a part hereof. This information is merely a disclosure and shall not be deemed to be part of any contract between the Buyer and Seller. THIS REAL PROPERTY LIES WITHIN THE FOLLOWING HAZARDOUS AREA(S): A VERY HIGH FIRE HAZARD SEVERITY ZONE pursuant to Section 51178 or 51179 of the Government Code. The owner of this property is subject to the maintenance requirements of Section 51182 of the Government Code. [_] Yes [_] No A WILDLAND AREA THAT MAY CONTAIN SUBSTANTIAL FOREST FIRE RISKS AND HAZARDS pursuant to Section 4125 of the Public Resources Code. The owner of this property is subject to the maintenance requirements of Section 4291 of the Public Resources Code. Additionally, it is not the state's responsibility to provide fire protection services to any building or structure located within the wildlands unless the Department of Forestry and Fire Protection has entered into a cooperative agreement with a local agency for those purposes pursuant to Section 4142 of the Public Resources Code. [_] Yes [_] No THESE HAZARDS MAY LIMIT YOUR ABILITY TO DEVELOP THE REAL PROPERTY, TO OBTAIN INSURANCE, OR TO RECEIVE ASSISTANCE AFTER A DISASTER. THE ATTACHED REPORT ON WHICH THESE DISCLOSURES ARE BASED ESTIMATE WHERE NATURAL HAZARDS EXIST. THEY ARE NOT DEFINITIVE INDICATORS OF WHETHER OR NOT A PROPERTY WILL BE AFFECTED BY A NATURAL DISASTER. BUYER IS HEREBY ADVISED TO OBTAIN INDEPENDENT PROFESSIONAL ADVICE REGARDING THOSE HAZARDS AND OTHER HAZARDS THAT MAY AFFECT THE SUBJECT PROPERTY. This statement may be signed in one or more counterparts. \\\\\ continued on next page I-1 Seller hereby states that the information set forth herein is true and correct to the best of the Seller's knowledge based solely upon the information contained in the attached report, and such knowledge is limited to be as of the date specified below. Seller has not independently verified the information contained in this statement and the attached report, and Seller is not personally aware of any errors or inaccuracies in the information contained in this statement. SELLER: WHSUM Real Estate Limited Partnership, a Delaware limited partnership By: WHSUM Gen-Par, Inc., a Delaware corporation General Partner By: _________________________ Name: ______________________ Title: _____________________ Buyer hereby represents and warrants that it has read and understands the information contained in this disclosure statement and in the attached report and will rely upon the information contained in the report as though the report were addressed directly to Buyer. BUYER: Mercury Interactive Corporation, a Delaware corporation By: ___________________________ Name: ___________________________ Title: ___________________________ Date: ____________________________ I-2 EXHIBIT J TO PURCHASE AND SALE AGREEMENT ---------------------------------------- DISCLOSURE ITEMS None J-1 EXHIBIT K TO PURCHASE AND SALE AGREEMENT ---------------------------------------- LIST OF REPORTS None K-1 EX-10.16 4 0004.txt AMENDED AND RESTATED EMPLOYMENT AGREEMENT EXHIBIT 10.16 Amended and Restated Employment Agreement This Agreement is entered into effective as of August 28, 2000, by and between Douglas P. Smith (the "Employee") and Mercury Interactive Corporation, a Delaware corporation (the "Company"). 1. Duties and Scope of Employment. (a) Position. For the term of his employment under this Agreement (the "Employment"), the Company agrees to employ the Employee in the position of Executive Vice President of Corporate Development and Strategy. The Employee shall report only to the Company's Chief Executive Officer and his duties shall include strategic business development, mergers and acquisitions, other investments activities and such other duties as shall be determined by the Chief Executive Officer. (b) Other Obligations. The Employee represents and warrants that he will not use or disclose, in connection with his Employment, any trade secrets or other proprietary information or intellectual property in which the Employee or any other person has any right, title or interest and that his Employment as contemplated by this Agreement will not infringe or violate the rights of any other person. The Employee represents and warrants to the Company that he has returned all property and confidential information belonging to any prior employer. The Company recognizes that the Employee will (i) assist his former employer, Chase H&Q, with the transition of his responsibilities and client relationships, (ii) will serve Chase H&Q as an Advisory Director and (iii) continue to serve on the boards of directors of four other corporations. (c) Commencement Date. The Employee commenced part time employment effective as of May 23, 2000 and shall commence full-time Employment as soon as reasonably practicable and in no event later than August 28, 2000. 2. Cash and Incentive Compensation. (a) Salary. The Company shall pay the Employee as compensation for his services a base salary at a gross annual rate of not less than $350,000. Such salary shall be payable in accordance with the Company's standard payroll procedures. (The annual compensation specified in this Subsection (a), together with any increases in such compensation that the Company may grant from time to time, is referred to in this Agreement as "Base Compensation.") (b) Incentive Bonuses. The Employee shall be eligible to be considered for an annual incentive bonus (the "Incentive Bonus") with a target amount equal to not less than $250,000 for the fiscal year ended December 31, 2000. The Incentive Bonuses shall be awarded based on objective or subjective criteria established in advance by the Board or its Compensation Committee. The foregoing notwithstanding, the prorated Incentive Bonus for the year ended December 31, 2000 shall in no event be less than $150,000. (c) Special 2001 Bonus. The Employee shall be eligible to receive a special one time bonus of approximately $1,150,000 with the final amount of such bonus to be determined by the Compensation Committee of the Board of Directors. Such bonus shall be in cash (or such other form of consideration as shall be agreed upon in good faith by the Company and Employee) and shall be paid by the Company as soon as is reasonably practicable but in no event later than April 15, 2001 or such other date as the Employee and Company shall agree. (d) Stock Option. The Company on May 23, 2000, granted the Employee a non-statutory stock option covering 450,000 shares of the Company's Common Stock under the Company's Amended and Restated 1999 Stock Option Plan. The exercise price of such option is equal to the fair market value of such stock on May 23, 2000, or $65.2031 per share. The term of such option is 10 years. Such option becomes exercisable in equal monthly installments beginning on May 23, 2000 and continuing during Employee's continuous Employment with the Company. 3. Vacation and Employee Benefits. During his Employment, the Employee shall be eligible for paid vacations in accordance with the Company's standard policy for its executive officers, as it may be amended from time to time. During his Employment, the Employee shall be eligible to participate in all employee benefit plans maintained by the Company for its executive officers, including (without limitation) health insurance and an Employee Stock Purchase Plan. 4. Business Expenses. During his Employment, the Employee shall be authorized to incur necessary and reasonable travel, entertainment and other business expenses in connection with his duties hereunder in accordance with the Company's policies. The Company recognizes that the Employee will establish a home office and install appropriate computer and communications equipment as well as high-speed Internet access. The Company shall reimburse the Employee for such expenses and the cost of such equipment and access upon presentation of an itemized account and appropriate supporting documentation. 5. Term of Employment. (a) the Employee agrees to remain in Employment with the Company, from the commencement date set forth in Section 1(c) until the date when the Employee's Employment terminates pursuant to Subsection (b) below. The Employee's Employment with the Company shall be "at will," meaning that either the Employee or the Company shall be entitled to terminate the Employee's Employment at any time and for any reason, with or without Cause. Any contrary representations that may have been made to the Employee shall be superseded by this Agreement. This Agreement shall constitute the full and complete agreement between the Employee and the Company on the "at will" nature of the Employee's Employment, which may only be changed in an express written agreement signed by the Employee and a duly authorized officer of the Company. (b) Termination. The Company may terminate the Employee's Employment at any time and for any reason (or no reason), and with or without Cause, by giving the Employee notice in writing. The Employee may terminate his Employment by giving the Company notice in writing. The Employee's Employment shall terminate automatically in the event of his death. In the event of a termination of (full time) Employee's Employment other 2 than the Employee's death, the Company agrees that the Employee shall have the right to remain a part time employee of the Company for up to one year from the date of termination of full time employment. The part time salary shall be at least $1000 per month and vesting of stock options shall be adjusted in accordance with the company's standard stock option agreement. 6. Change-in-Control Termination Benefits. The Company agrees to enter into a Change of Control Agreement with Employee in the form attached to this Agreement as Exhibit A (the "Change of Control Agreement"). 7. Successors. (a) Company's Successors. This Agreement shall be binding upon any successor (whether direct or indirect and whether by purchase, lease, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company's business and/or assets. For all purposes under this Agreement, the term "Company" shall include any successor to the Company's business and/or assets that becomes bound by this Agreement. (b) Employee's Successors. This Agreement and all rights of the Employee hereunder shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 8. Miscellaneous Provisions. (a) Notice. Notices and all other communications contemplated by this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid. In the case of the Employee, mailed notices shall be addressed to him at the home address that he most recently communicated to the Company in writing. In the case of the Company, mailed notices shall be addressed to its corporate headquarters, and all notices shall be directed to the attention of its Secretary. (b) Modifications and Waivers. No provision of this Agreement shall be modified, waived or discharged unless the modification, waiver or discharge is agreed to in writing and signed by the Employee and by an authorized officer of the Company (other than the Employee). No waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party shall be considered a waiver of any other condition or provision or of the same condition or provision at another time. (c) Whole Agreement. No other agreements, representations or understandings (whether oral or written and whether express or implied) that are not expressly set forth in this Agreement have been made or entered into by either party with respect to the subject matter hereof. This Agreement, the Change of Control Agreement and the agreement evidencing the stock option described in Section 2(f) contain the entire understanding of the parties with respect to the subject matter hereof. This Agreement supersedes the Company's offer letter dated May 23, 2000, to the Employee. (d) Withholding Taxes. All payments made under this Agreement shall be subject to reduction to reflect taxes or other charges required to be withheld by law. 3 (e) Choice of Law and Severability. This Agreement is executed by the parties in the State of California and shall be interpreted in accordance with the laws of such State (except their provisions governing the choice of law). If any provision of this Agreement becomes or is deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision shall be stricken and the remainder of this Agreement shall continue in full force and effect. Should there ever occur any conflict between any provision contained in this Agreement and any present or future statue, law, ordinance or regulation contrary to which the parties have no legal right to contract, then the latter shall prevail but the provision of this Agreement affected thereby shall be curtailed and limited only to the extent necessary to bring it into compliance with applicable law. All the other terms and provisions of this Agreement shall continue in full force and effect without impairment or limitation. (f) No Assignment. This Agreement and all rights and obligations of the Employee hereunder are personal to the Employee and may not be transferred or assigned by the Employee at any time. The Company may assign its rights under this Agreement to any entity that assumes the Company's obligations hereunder in connection with any sale or transfer of all or a substantial portion of the Company's assets to such entity. (g) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (h) Legal Fees. Upon execution of this Agreement, the Company shall pay or reimburse the reasonable legal fees incurred by the Employee in connection with the negotiation and preparation of this Agreement. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. ___________________________________ Douglas P. Smith Mercury Interactive Corporation By_________________________________ Chief Executive Officer 4 EX-21.1 5 0005.txt SUBSIDIARIES OF MERCURY INTERACTIVE EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF MERCURY INTERACTIVE CORPORATION Mercury Interactive (Australia) Pty Ltd., organized under laws of Australia Mercury Interactive Belgium, organized under the laws of Belgium Mercury Interactive Brasil Limitada, organized under the laws of Brazil Conduct Software Technologies, Inc., incorporated under the laws of California Mercury Interactive Canada Inc., organized under the laws of Canada M2SP - Mercury MSP Corporation, incorporated under the laws of Delaware Mercury Interactive Aps, organized under the laws of Denmark Mercury Interactive Oy, organized under the laws of Finland Mercury Interactive France SARL, organized under the laws of France Mercury Interactive Germany GmbH, organized under the laws of Germany Mercury Interactive (China) Limited, organized under the laws of Hong Kong Mercury Interactive (Israel) Limited, organized under the laws of Israel Mercury Interactive Srl, organized under the laws of Italy Mercury Interactive Japan K.K., organized under the laws of Japan Mercury Interactive B.V., organized under the laws of the Netherlands Mercury Interactive (Europe) B.V., organized under the laws of the Netherlands Mercury Interactive Norway, organized under the laws of Norway Mercury Interactive Asia Pte Ltd., organized under the laws of Singapore Mercury Interactive SA (Pty) Ltd., organized under the laws of South Africa Mercury Interactive Spain, organized under the laws of Spain Mercury Interactive Nordic AB, organized under the laws of Sweden Mercury Interactive Switzerland, organized under the laws of Switzerland Mercury Interactive (UK) Limited, organized under the laws of the United Kingdom EX-23.1 6 0006.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-71018, 33-74728, 33-95178, 333-09913, 333-27951, 333-62125, 333-81401, 333-94837, 333-47140 and 333-56316) and the Registration Statements on Form S-3 (Nos. 333-95097 and 333-47150) of Mercury Interactive Corporation of our report dated January 15, 2001, relating to the financial statements which appears in this Form 10-K. PricewaterhouseCoopers LLP San Jose, California March 29, 2001 -----END PRIVACY-ENHANCED MESSAGE-----