About EDGAR Online | Login
 
Enter your Email for a Free Trial:
The following is an excerpt from a 10-K SEC Filing, filed by MERCURY INTERACTIVE CORPORATION on 3/29/2001.
Next Section Next Section Previous Section Previous Section
MERCURY INTERACTIVE CORP - 10-K - 20010329 - PART_I

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

BROKERAGE PARTNERS