-----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, Vm7zqTm6l56FcHzVRfXhuSYGSWnY4YVf4Oxzmsk7n6PS73R/ktGSTtcllKfL9ujL aecjDMzg+ldDvPw7QrM5XQ== 0000891618-01-000246.txt : 20010329 0000891618-01-000246.hdr.sgml : 20010329 ACCESSION NUMBER: 0000891618-01-000246 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REMEDY CORP CENTRAL INDEX KEY: 0000936653 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770265675 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25494 FILM NUMBER: 1582810 BUSINESS ADDRESS: STREET 1: 1505 SALADO DR CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 BUSINESS PHONE: 4159035200 MAIL ADDRESS: STREET 1: 1505 SALADO DRIVE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 10-K 1 f70472e10-k.txt FORM 10-K PERIOD ENDED DECEMBER 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 0-25494 REMEDY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0265675 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
1505 SALADO DRIVE, MOUNTAIN VIEW, CA 94043 (650) 903-5200 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE WWW.REMEDY.COM REGISTRANT'S INTERNET ADDRESS SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: COMMON STOCK, $.00005 PAR VALUE; PREFERRED SHARE PURCHASE RIGHTS, $.00005 PAR VALUE; REGISTERED ON THE NASDAQ NATIONAL MARKET(R) (TITLE OF CLASS) 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 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 the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the 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 as of March 2, 2001 was approximately $611,321,152 (based on the last reported sale price of $23.75 on March 2, 2001 on the NASDAQ Stock Market). The number of shares of Common Stock outstanding as of March 2, 2001 was 30,282,162. DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT FORM 10-K REFERENCE -------- ------------------- Proxy Statement for Registrant's Annual Part III, Items 10-13 Meeting to be held on May 24, 2001
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 REMEDY CORPORATION FISCAL YEAR 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 8 Item 3. Legal Proceedings........................................... 8 Item 4. Submission of Matters to a Vote of Security Holders......... 8 Item 4A. Executive Officers of the Registrant........................ 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 11 Item 6. Selected Financial Data..................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 14 Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................................... 24 Item 8. Financial Statements and Supplementary Data................. 25 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................. 25 PART III Item 10. Directors and Executive Officers of the Registrant.......... 26 Item 11. Executive Compensation...................................... 26 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 26 Item 13. Certain Relationships and Related Transactions.............. 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 27 Signatures............................................................ 51
2 3 PART I The discussion in this Form 10-K (10-K) contains forward-looking statements that involve risks and uncertainties. The statements contained in this 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about Remedy's operations and prospects, our competitive position and business strategies, our expectations, beliefs, intentions or other strategies regarding the future, including sources of future revenue and the demand for and customer acceptance of our products. All forward-looking statements included in this document are based on the information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. The Company's actual results could differ materially from the results discussed herein. Important factors that might cause or contribute to such material differences include risks associated with potential acquisitions, the level of demand for Remedy's products and services, expansion of international operations, dependence on new products that respond to rapid technological change, and Remedy's ability to effectively manage its growth and attract and retain key personnel. For a more detailed discussion of the risks relating to Remedy's business, investors should read the sections later in this report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 on page 14 and "Quantitative and Qualitative Disclosures about Market Risk " in Item 7A on page 24 of this Document. The risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly the quarterly reports on Form 10-Q should also be reviewed. ITEM 1. BUSINESS OVERVIEW Remedy(R) Corporation develops, markets and supports highly adaptable enterprise software solutions. Its solutions are focused on automating frequently changing, employee-intensive, everyday business processes. Remedy's two solutions families include IT Service Management (ITSM) to manage and streamline the business processes for serving and supporting internal corporate customers and for managing the full life-cycle of assets, and Customer Relationship Management (CRM) for managing external customer relationships such as the management of customer support. Important product attributes include flexible integration capabilities in a packaged solution, speed of implementation, ease of use, rapid return on investment, and on-going adaptability. Remedy is one of the largest providers of enterprise solutions with over 9,850 customer sites in more than 70 countries, including over 60% of the Fortune 100. Remedy was incorporated on November 20, 1990 in Delaware and shipped the first version of the Action Request System(R) product and foundation technology (AR System) in December of 1991. In 1998 and 1999, Remedy began providing out-of-the-box CRM and ITSM solutions that sit on top of the AR System. In 2000, Remedy continued to create more out-of-the-box solutions in these areas and is continuing a proliferation strategy to existing customers as well as introducing the solutions to new customers. Remedy maintains its executive offices and principal facilities at 1505 Salado Drive, Mountain View, California 94043. Its telephone number is (650) 903-5200. INTEGRATION WITH THIRD-PARTY SOFTWARE AND SYSTEMS. Remedy's software is designed to integrate, generally without programming, with a wide variety of computer and telecommunication technologies and products, including desktop applications, ERP applications, telephony devices, hand-held devices, network management systems and legacy systems. Its solutions integrate with many of the most prevalent Windows, MAC and UNIX desktop applications, such as e-mail, document or media browsers, spreadsheets and document editors. Its software links with automatic call distributors and interactive voice response systems to simultaneously display customer profile and historical problem resolution data for the support personnel as the call is being answered. Workflow notifications, such as incident arrivals, transfers or delegations, and incident resolution notices, are frequently sent via e-mail, pagers, facsimile systems or voice response units. Network management outage alarms are sent from leading network management systems, such as IBM Tivoli or Hewlett Packard's HP OpenView, to AR System servers, automatically creating a problem report to be 3 4 handled by the internal help desk staff. Separately installable software integrations are sold by Remedy for Oracle, SAP and the Palm computing platform. ADAPTABLE SOLUTIONS AND FAST PATH TO PRODUCTION. Remedy provides a highly scalable, ready-to-deploy eBusiness foundation and solutions that are easy to change. The majority of customer installations take place in less than 90 days. Customers use the solutions as is, out-of-the-box, or point-and-click to easily tailor them to specific company requirements. The concept is similar to spreadsheet software, which can be used as a simple tabular calculating platform or can be modified to include sophisticated formulas and style changes to create unique solutions. More importantly, Remedy's solutions are adaptable to meet most future requirements and growth without costly programming. PRODUCTS IT SERVICE MANAGEMENT (ITSM) SOLUTIONS. Remedy has a number of ITSM solutions that link together to support IT infrastructure. The suite of these products is the Remedy Strategic Service Suite(TM), an integrated set of Web-enabled software applications that together give IT organizations complete and effective control of the technology infrastructure, and allow them to effectively manage business relationships with customers and suppliers. Products within this suite can also be purchased separately. Remedy Help Desk(TM) automates support processes to help lower support costs while improving the level and quality of support. According to a survey conducted by the Aberdeen Group, Remedy is the worldwide leader in help desk software with nearly a 32% share of the internal help desk market. Remedy Service Level Agreements(TM) lets organizations manage IT service quality with proactive service level agreements, enabling them to demonstrate the IT organization's contribution to corporate success. Remedy Asset Management(TM) provides the information to better align IT assets with enterprise and business unit requirements, resulting in reduced costs and increased organizational productivity. Remedy Change Management(TM)enables organizations to analyze and understand the impact, risks, and resource availability associated with IT changes, reducing risks and increasing user satisfaction. CUSTOMER RELATIONSHIP MANAGEMENT (CRM) SOLUTIONS. Remedy's CRM solutions are developed and marketed to support web and client/server based solutions for acquisition and retention of long-term profitable customers. The CRM suite includes Remedy Customer Support(TM) for technical support, Remedy Quality Management(TM) for product quality assurance, Remedy Leads Management(TM) for opportunity and campaign management, Remedy Sales Continuum(TM) for sales force automation and Remedy Personalization for enhancing customer relationships on any corporate website. These are comprehensive applications for CRM, which are designed for fast deployment and scalability from small companies to the divisions of large enterprises. CORE PRODUCT SOLUTIONS. Each of Remedy's solutions is built upon Remedy's Core Product solution foundation. The primary core product is the AR System, a flexible foundation for automating complex business processes throughout the enterprise. Built for adaptability in a continuously changing business environment, the AR System allows for rapid prototyping and affordable applications. The AR System reduces the cost of automating many internal business processes by using simple point-and-click methods to adapt the solution's workflow and tracking capability to the unique information, process and integration requirements of the customer's department or enterprise. AR Web(R) is Remedy's Web deployment solution. It is a light client with quick access using an HTML base to leverage corporate intranets for cost-effective deployment of Remedy applications. Remedy's Distributed Server Option(TM) application expands any Remedy solution to multiple locations across the enterprise, enabling the automatic transfer of tracking data between AR System servers while maintaining consistent information throughout the environment. Remedy Approval Server(TM) provides a single web-based approval solution that streamlines approval cycles throughout an enterprise and across all Remedy solutions. 4 5 TECHNOLOGY Remedy's solutions are unique in that they are all developed and deployed on a single, open process-automation foundation -- the Remedy AR System. This foundation is the common, central element of all Remedy solutions. It is highly scalable, adaptable and can automatically share data and business rules between solutions. It is the primary integration point among Remedy solutions and the products of other vendors. AR System product upgrades have backward compatibility without requiring solutions built upon it to be reworked. BROAD INTEGRATION AND PLATFORM SUPPORT. The open design and published, multi-threaded application programming interface (API) enables a wide range of integrations and extensions, including the Internet and World Wide Web, e-mail systems, automatic call distribution systems, integrated voice response systems, pagers, report writers, knowledge databases, case-based reasoning tools, network and system management platforms, transaction processing systems, enterprise resource planning (ERP) systems, corporate information systems (CIS) and other application suites. With its extremely broad platform support, Remedy's AR System server supports UNIX (e.g., Sun, HP, IBM), Windows NT and Windows 2000 as well as the database engines from the major relational database vendors (e.g., Oracle, Microsoft, Informix, Sybase, IBM). Remedy delivers the power of the workflow server to users via a broad range of clients, including Web browsers, Microsoft Windows 95/98/NT/2000, Sun Microsystems' Java platform, OSF Motif and even leading-edge clients like 3Com's Palm and WAP wireless telephony systems. The clients were designed in conjunction with well-known and respected usability specialists to help maximize the productivity of the application users. Remedy's AR System supports a "write once, run anywhere" architecture so applications can be built in one environment and deployed to multiple operating environments. In addition, any changes to the business rules or forms are automatically distributed to the clients, thereby eliminating software distribution costs. These adaptable applications can be compared to spreadsheets, which can be used as is or modified by changing formulas, moving and deleting items, and making stylistic changes. No coding is required to customize Remedy solutions, and non-IT professionals can do so. MULTITIER ARCHITECTURE. The multi-tier architecture of Remedy's AR System delivers high performance by combining the power of the latest relational databases with a customizable workflow server to deliver power to users where they need it. The Remedy architecture balances functionality among the following elements: client, workflow server, web-based application server and database server. The client is intentionally very thin, in an optimization to favor a web-centric system. The desktop client and workflow server communicate via industry standard protocols that allow clients to access servers over local area networks (LANs), wide area networks (WANs), and dial-up phone lines, without concern about mixed hardware or software environments. WEB CLIENTS. Web-based clients communicate with the Remedy Web(TM)Application Server using a combination of industry standard HTTP and a high-performing Remedy proprietary protocol, optimized to run light over the wire. Remedy's web-based products use industry standard web-based page technologies such as HTML, Javascript, and Java to allow Remedy's workflow to be delivered through all industry-standard web browsers. POINT-AND-CLICK DEVELOPMENT ENVIRONMENT. A major benefit of Remedy's architecture is that customizations and business rules are made with point-and-click simplicity without programming. While most enterprise solutions require procedural coding by highly trained consultants, Remedy solutions can be customized and extended through point-and-click interfaces without procedural programming. The Remedy AR System acts as a development environment, and generates the necessary code and database changes automatically. This advantage has been the hallmark of Remedy's "adaptable applications" throughout its history. Since most enterprise solutions cause an organization to incur huge consulting costs for maintenance and enhancements, Remedy solutions offer a significant and easily demonstrated advantage. Organizations use this adaptability to change the customer experience or business rules frequently, thereby achieving differentiation and cost savings. Organizations with Remedy-based solutions often use these point-and-click development capabilities in the same way they use Rapid Application Development (RAD) tools like Microsoft Visual Basic(TM). Solutions are rapidly prototyped and developed for users, and there is extensive iteration in order to take into account new requirements or extensions. 5 6 CUSTOMERS As of December 31, 2000, Remedy had licensed its software to more than 5,500 customers at more than 9,850 sites, including over 60% of the Fortune 100. In 1999 and 2000, no customer accounted for more than 10% of its total revenue. Remedy serves many vertical industries, including telecom, financial services, government, and high technology. SALES AND MARKETING Remedy markets its software and services through its regionally based direct sales force, direct telesales force and through its indirect sales channels, including value-added resellers (VARs), system integrators (SIs) and independent software vendors (ISVs). It has sales professionals in 12 offices throughout North America. Outside of North America, Remedy sells its products primarily through indirect sales channels and direct sales professionals in 13 offices. Generally, the AR System and related applications and services are sold through a sales representative with help from a systems engineer. Telesales representatives generally sell standard products and services and they pass large or more complicated deals on to regionally based direct sales representatives. Remedy's sales and marketing organization is complemented by indirect sales channels (VARs, SIs and ISVs), who license its products at a discount for re-licensing, and may provide training, support and customer services to end users. Remedy increased the number of channel partners from 181 to 188 in 2000. Its indirect sales as a percentage of revenue may adversely affect its average selling prices and gross margins due to generally higher discounts that Remedy awards when selling through indirect channels. Remedy's marketing organization provides leads to members of the sales organization, and raises awareness of Remedy among target decision-makers. Leads are primarily generated through advertising, web-based seminars, trade shows, telesales and Remedy's web site (www.remedy.com). To generate awareness, Remedy conducts comprehensive marketing awareness programs that include advertising, public relations, user group meetings and ongoing customer communications programs. In the last year, the marketing organization focused on branding campaigns emphasizing Remedy's short implementation times. For a geographical explanation of sales, see Note 14 of Notes to Consolidated Financial Statements in Item 14 on page 48. PROFESSIONAL SERVICES Remedy's professional services organization provides customers with consulting, education and customer support services. It believes that providing a high level of customer service and technical support is critical to customer satisfaction and loyalty. The organization also trains the Remedy partner community for the delivery of these services. CONSULTING SERVICES. Consulting services consist of assisting customers in a wide range of activities, from application designs, implementations and re-architecting existing applications to align with company business practices and strategy. Remedy has been adding consultants focused on requirements analysis, project management and implementation for large enterprise projects. Fees for consulting services are generally charged separately from its software products. Remedy also has trained approximately 300 Remedy Approved Consultants (RACs) who work for 82 Remedy Partners in 24 countries. CUSTOMER SUPPORT SERVICES. In providing technical support to customers, Remedy uses its own products extensively. Most of Remedy's customers currently have support agreements with the Company and approximately 90% renew their contracts on a yearly basis. Remedy offers telephone, electronic mail, Web and fax support through its support services staff. Additional customer support is provided in the United States and particularly in international markets by Remedy's VARs, SIs, and ISVs. Fees for software maintenance are charged separately from Remedy software products. As part of their annual maintenance fee, customers are entitled to receive software upgrades on a when-and-if available basis, maintenance releases and support for licensed products. 6 7 EDUCATIONAL SERVICES. An important piece of Remedy's strategy is to offer comprehensive training to customers. Classes are offered through in-house facilities at its offices in Pleasanton, California, Columbia, Maryland, Schaumberg, Illinois and Bracknell, in the United Kingdom. Courses are also available from more than 20 Approved Education Partners around the world. Educational Services also provides on-site training and customized training services. In 2000, Remedy and its partners trained almost 9,300 people. Fees for educational services are charged separately from Remedy's software products. RESEARCH AND DEVELOPMENT Since its inception, Remedy has made substantial investments in research and development. It believes that its future performance will depend in large part on its ability to maintain and enhance its current product line, develop new products that achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. Remedy continues to expand its existing product offerings to introduce new products. In the development of new products and enhancements to existing products, it uses its own platform of products. Although Remedy expects that its new products will be developed internally, it may, based on timing and cost considerations, acquire technology and/or products from third parties or consultants. Remedy's total expenses for research and development for fiscal years 2000, 1999 and 1998 were $52.0 million, $40.9 million and $33.7 million. COMPETITION The market for Remedy's products is intensely competitive, diverse and subject to rapid change. New products are frequently introduced and existing products are continually enhanced. Competitors vary in size and in the scope and breadth of the products and services offered. Remedy has experienced substantial competition from new companies of all types and sizes, and these competitors include: - providers of ITSM software such as Peregrine Systems, Inc., Main Countrol and Janus Technologies (a wholly owned subsidiary of Intraware). - providers of CRM software such as Onyx Software Corp., Clarify Inc. (a wholly owned subsidiary of Nortel), Pivotal Corp., Interact Commerce Corp., Oracle Corp., Vantive (a wholly owned subsidiary of Peoplesoft), and Kana Communications. - providers of information technology and systems management companies such as IBM, Computer Associates, Network Associates, Hewlett-Packard and Microsoft. In addition, because there are relatively low barriers to entry in the software market, Remedy expects additional competition from other established and emerging companies as the software market continues to develop and expand. Increased competition could result in price reductions, reduced gross margins and loss of market share, any of which could seriously harm its business, operating results and financial condition. Some of Remedy's current, and many of its potential, competitors have significantly greater financial, technical, marketing and other resources than Remedy. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than those of Remedy. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of Remedy's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Remedy believes that the market for CRM and ITSM solutions has historically not been well served by the application software industry, particularly in the mid-tier marketplace, which has been characterized by large-scale implementations requiring long implementation times and low success rates. It believes the increasing need for customers to manage their procurement and the proliferation of web applications has opened the door to a large number of Internet start-ups. Remedy believes that the principal competitive factors affecting its market include product features, such as adaptability, scalability, quick implementation times, ability to integrate with third party products, 7 8 functionality, ease of use, product reputation, quality, performance, price, customer service and support, and effectiveness of sales and marketing efforts. Although Remedy believes that it currently competes favorably against current and potential competitors, there can be no assurance that it can maintain its competitive position against current and potential competitors, especially those with greater financial, marketing, service, support, technical and other resources than Remedy. SEASONALITY Remedy's business has experienced and is expected to continue to experience a level of seasonality, in part due to customer buying patterns. In recent years, it experienced generally weaker demand in the quarter ending in March when compared to the quarters ending in June, September and December. Remedy believes this pattern will continue, and accordingly anticipates total revenue and net income in the quarter ending March 31, 2001 will be lower than in the quarter ended December 31, 2000. EMPLOYEES As of December 31, 2000, Remedy employed 1,314 persons, including 476 in sales and marketing, 308 in professional services, 330 in research and development and 200 in general and administrative. Of Remedy's employees, 191 are located in Europe, 26 in the Pacific Rim, and the remainder in North America. Remedy's future success will depend in part on our continued ability to attract, hire and retain qualified personnel. Competition for such personnel is intense, and there can be no assurance that Remedy will be able to identify, attract and retain such personnel in the future. None of our employees are represented by a labor union (other than statutory unions required by law in certain European countries). Remedy has not experienced any work stoppages and considers its relations with its employees to be good. ITEM 2. PROPERTIES Remedy's principal administrative, sales and marketing facility is located in approximately 51,000 square feet of space in Mountain View, California, which is subleased to Remedy through June 2001. In February 2001, the Company entered into a lease agreement for a new principal administrative, sales and marketing facility in Mountain View, California, which occupies approximately 76,000 square feet. This facility is leased to Remedy from April 2001 through May 2003. Remedy also leases two other facilities of approximately 43,000 square feet each in Mountain View, California, through October 2005. Its support center is located in three facilities totaling approximately 100,000 square feet in Pleasanton, California. These facilities are leased to Remedy through 2006. In addition, Remedy also leases another facility of approximately 21,000 square feet in Pleasanton, California, which expires in October 2005. Remedy also leases office space in Maryland, New Jersey, Virginia, Colorado, Illinois, Georgia, Texas, Massachusetts, Oregon, Washington, New York, the United Kingdom, Germany, France, Spain, Italy, The Netherlands, Sweden, Singapore, Australia, Japan, Canada, Hong Kong and Ireland. It believes that the existing facilities are adequate to meet current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security-holders during the fourth quarter of the fiscal year covered by this report. 8 9 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are biographical summaries of Remedy's executive officers as of March 2, 2001:
NAME AGE POSITION ---- --- -------- Lawrence L. Garlick... 51 Chairman of the Board and Chief Executive Officer Richard P. Allocco.... 46 Executive Vice President of Worldwide Sales and Services Ron J. Fior........... 43 Vice President, Finance & Operations and Chief Financial Officer Harold Goldberg....... 40 Vice President and General Manager of Customer Relationship Management (CRM) Solutions Richard Guha.......... 52 Senior Vice President of Marketing Gary Oliver........... 38 Vice President and General Manager of IT Service Management (ITSM) Solutions
Mr. Garlick, 51, co-founded the Company in November 1990. Since that time he has served as Chairman of the Board and Chief Executive Officer of the Company. Prior to Remedy, Mr. Garlick served as Vice President of Distributed Systems at Sun Microsystems, Inc. (Sun), a manufacturer of computer workstations. Prior to joining Sun, Mr. Garlick was employed by Xerox Corporation (Xerox), a document management company, for six years. While at Xerox, Mr. Garlick helped create the industry's first commercial internetwork routers, directory services and gateways to IBM mainframe applications for Xerox workstations. Mr. Garlick holds B.S.E.E. and M.S.E.E. degrees in computer engineering from Stanford University. Mr. Allocco, 46, joined the Company in March 1998 as Vice President and General Manager of Worldwide Customer Services, and was promoted to Executive Vice President of Worldwide Sales and Services in April 2000. From January 1996 to February 1998, Mr. Allocco was employed as Senior Vice President, Marketing and Field Support by Siemens Business Communication Systems, Inc. (Siemens), a manufacturer of telecommunication and related network equipment. Prior to joining Siemens, Mr. Allocco served as Vice President and General Manager, Western Area, at Siemens ROLM Communications, a manufacturer of telecommunication and related network equipment, from May 1989 to May 1995. Mr. Allocco was employed by IBM Corporation, an information systems and applications manufacturer, for over 12 years in various sales, marketing and management positions, prior to joining Siemens ROLM Communications. Mr. Allocco holds a B.A. degree in economics from University of Notre Dame. Mr. Fior, 43, joined the Company in September 1998 as Vice President, Finance & Operations and Chief Financial Officer. From September 1985 to February 1998, Mr. Fior was employed as Senior Vice President and Chief Financial Officer by the education publishing unit of The Thomson Corporation, an information and publishing company where he managed numerous strategic and tactical acquisitions. Mr. Fior worked for over 7 years at Ernst & Young, a professional services firm, in New York and Canada, and he holds a Bachelor of Commerce degree from the University of Saskatchewan, Canada. Mr. Goldberg, 40, joined the Company in July 1999 as Director of Corporate Business Development and was promoted to Vice President and General Manager of CRM Solutions in June 2000. From February 1996 to June 1999, Mr. Goldberg was employed as the Marketing Manager at Siemens Information and Communications Networks (Siemens), responsible for its Healthcare Industry Marketing group in North America. Prior to Siemens, he was the Director of Sales and Marketing at Ring Medical where he managed the sales and marketing organizations of the healthcare and telecommunication fields. Mr. Goldberg holds a B.A. in political science and an M.A. in international affairs from New York University. Mr. Guha, 52, joined the Company in March 2000 as Senior Vice President of Marketing. Prior to joining Remedy, Mr. Guha was previously president of retail marketing at Reliant Energy from October 1997 to April 1999, where he was responsible for their energy deregulation strategy. Prior to that, he served as Senior Vice President of Marketing at US West/ MediaOne from September 1996 to September 1997, where he introduced broadband products and high-speed data services to the market. Mr. Guha holds a bachelor's degree in Math, Physics and Chemistry and a master degree in Chemical Engineering from Cambridge University in England. 9 10 Mr. Oliver, 38, joined the Company in April 1999 as Vice President and General Manager of ITSM Solutions. Mr. Oliver brings a broad base of IT Service Management expertise to Remedy from several previous positions. From June 1996 to March 1999, Mr. Oliver was employed by Visa International where he held several senior roles, most recently as Senior Vice President, Employee Productivity Division, responsible for the internal technology environment. Before joining Visa, Mr. Oliver spent the previous 11 years with IBM in roles ranging from sales management to managing the worldwide marketing and sales of IBM's data management products and solutions. Mr. Oliver holds a B.A. degree in economics from the University of California, Los Angeles. 10 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Remedy's Common Stock has been traded on the NASDAQ National Market(R) under the symbol "RMDY" since March 17, 1995. The following table sets forth, for the fiscal quarters indicated, the high and low sale prices of its Common Stock as reported by the NASDAQ National Market.
HIGH LOW ------ ------ Fiscal 2000: Fourth Quarter........................................... $21.69 $15.69 Third Quarter............................................ $53.81 $17.94 Second Quarter........................................... $55.75 $34.50 First Quarter............................................ $64.22 $37.56 Fiscal 1999: Fourth Quarter........................................... $49.44 $26.50 Third Quarter............................................ $28.38 $19.63 Second Quarter........................................... $26.88 $10.62 First Quarter............................................ $22.94 $13.13
On March 2, 2001 the closing sale price of Remedy's Common Stock was $23.75 per share. On that date, there were 145 holders of record. DIVIDENDS Remedy has never paid cash dividends on its capital stock and does not expect to pay cash dividends in the foreseeable future. 11 12 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data is qualified in its entirety by, and should be read in conjunction with, the Consolidated Financial Statements of the Company and the Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Form 10-K. The consolidated balance sheet data and consolidated statements of income data as of and for each of the five years in the period ended December 31, 2000 have been derived from the audited Consolidated Financial Statements of the Company.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF INCOME DATA: Total revenue..................... $288,510 $228,933 $157,420 $129,184 $ 80,635 Goodwill and intangible amortization(1)................ 8,906 4,072 446 -- -- Income from operations............ 41,444 38,850 26,837 38,475 23,707 Non-recurring charges............. 2,000 -- 3,104 -- -- Net income........................ 33,569 29,523 18,977 27,290 16,824 Basic net income per share........ $ 1.09 $ 1.02 $ 0.66 $ 0.99 $ 0.64 Diluted net income per share...... $ 1.01 $ 0.95 $ 0.63 $ 0.89 $ 0.56 Shares used in computing basic per share amounts.................. 30,774 28,916 28,722 27,614 26,365 Shares used in computing diluted per share amounts.............. 33,128 31,062 29,901 30,524 30,031
AS OF DECEMBER 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments......... $207,899 $172,418 $136,637 $133,833 $ 86,757 Working capital................... 204,441 175,362 136,813 138,102 87,718 Total assets...................... 349,061 287,487 213,500 181,616 119,434 Long-term obligations............. -- 23 127 502 513 Total stockholders' equity........ $253,259 $214,540 $160,704 $148,072 $ 92,497
- --------------- (1) For an explanation of goodwill and intangible amortization, see Note 12 of Notes to Consolidated Financial Statements. 12 13 SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
2000 SUMMARY BY QUARTER ---------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL YEAR --------- -------- ------------- ------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenue................................... $61,932 $69,126 $74,979 $82,473 $288,510 Gross profit.................................... 48,493 54,171 60,501 67,105 230,270 Goodwill and intangible amortization(1)......... 1,829 2,203 2,437 2,437 8,906 Income from operations.......................... 6,367 9,579 12,829 12,669 41,444 Non-recurring charges........................... -- -- 2,000 -- 2,000 Net income...................................... 5,468 8,391 9,319 10,391 33,569 Basic net income per share...................... $ 0.18 $ 0.27 $ 0.30 $ 0.34 $ 1.09 Diluted net income per share.................... $ 0.16 $ 0.24 $ 0.28 $ 0.33 $ 1.01 Shares used in computing basic per share amounts....................................... 30,420 31,235 30,980 30,460 30,774 Shares used in computing diluted per share amounts....................................... 34,085 34,316 32,860 31,249 33,128
1999 SUMMARY BY QUARTER ---------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL YEAR --------- -------- ------------- ------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenue................................... $42,399 $53,036 $60,864 $72,634 $228,933 Gross profit.................................... 33,808 42,457 49,093 59,570 184,928 Goodwill and intangible amortization(1)......... 748 713 1,149 1,462 4,072 Income from operations.......................... 3,681 8,096 11,628 15,446 38,850 Net income...................................... 3,196 6,224 8,574 11,529 29,523 Basic net income per share...................... $ 0.11 $ 0.22 $ 0.30 $ 0.39 $ 1.02 Diluted net income per share.................... $ 0.11 $ 0.21 $ 0.27 $ 0.36 $ 0.95 Shares used in computing basic per share amounts....................................... 28,498 28,650 28,839 29,676 28,916 Shares used in computing diluted per share amounts....................................... 30,047 30,252 31,608 32,340 31,062
- --------------- (1) For an explanation of goodwill and intangible amortization, see Note 12 of Notes to Consolidated Financial Statements. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including but not limited to statements about Remedy's operations and prospects, our competitive position and business strategies, our expectations, beliefs, intentions or other strategies regarding the future, including sources of future revenue and the demand for and customer acceptance of our products. All forward-looking statements included in this document are based on the information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results may differ materially from the results discussed herein. Important factors that might cause such material differences include risks associated with potential acquisitions, the level of demand for Remedy's products and services, expansion of international operations, dependence on new products that respond to rapid technological change, and Remedy's ability to effectively manage its growth and attract and retain key personnel. For a more detailed discussion of the risks relating to Remedy's business, investors should read the section later in this report entitled "Factors That May Affect Future Operating Results" on page 19 and "Quantitative and Qualitative Disclosures about Market Risk" on page 24. The following table sets forth, as a percentage of total revenue, consolidated statements of income data for the periods indicated.
FOR THE YEARS ENDED DECEMBER 31, -------------------- 2000 1999 1998 ---- ---- ---- REVENUE: Product................................................... 58% 62% 64% Maintenance and service................................... 42% 38% 36% --- --- --- Total revenue..................................... 100% 100% 100% COSTS AND EXPENSES: Cost of product revenue................................... 4% 3% 3% Cost of maintenance and service revenue................... 16% 16% 15% Research and development.................................. 18% 18% 21% Sales and marketing....................................... 38% 39% 38% General and administrative................................ 6% 5% 6% Amortization of goodwill and other intangibles............ 3% 2% -- --- --- --- Total costs and expenses.......................... 85% 83% 83% --- --- --- Income from operations...................................... 15% 17% 17% Interest income and other, net.............................. 3% 2% 4% Non-recurring charges....................................... -1% -- -2% --- --- --- Income before provision for income taxes.................... 17% 19% 19% Provision for income taxes.................................. 5% 6% 7% --- --- --- Net income.................................................. 12% 13% 12% === === ===
REVENUE Total revenue was $288.5 million, $228.9 million and $157.4 million in 2000, 1999 and 1998, representing increases of 26% from 1999 to 2000 and 45% from 1998 to 1999. Remedy recognizes revenue in accordance with Statement of Position 97-2, "Software Revenue Recognition", as amended. It derives revenue from the sale of software licenses, post-contract support ("support") and other services. Support includes telephone technical support, bug fixes and rights to upgrades on a when-and-if available basis for a stated term of generally one year. Services range from installation, training and basic consulting to software modification to 14 15 meet specific customer needs. In software arrangements that include rights to multiple software products, support and/or other services, Remedy allocates the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined based on objective evidence specific to Remedy. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Revenue from license fees in multiple element contracts is recognized using the residual method when there is vendor specific objective evidence of the fair value of all undelivered elements in an arrangement but vendor specific objective evidence of fair value does not exist for one or more of the delivered elements in an arrangement. Under the residual method, the total fair value of the undelivered elements, as indicated by vendor specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements regardless of any separate prices stated within the contract for each element. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collection is not considered probable due to extended payment terms, revenue is recognized when the fee is collected. Revenue allocable to support is recognized on a straight-line basis over the periods in which the support is provided. Arrangements that include consulting services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenue under the arrangement is recognized in accordance with SOP 81-1, "Accounting for Performance of Construction -- Type and Certain Production-Type Contract". When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed. Remedy distributes the majority of its products through its direct sales organization, which is complemented by indirect sales channels, including value-added resellers (VARs), system integrators (SIs) and independent software vendors (ISVs). Billings derived through indirect channels accounted for approximately 47% of its total revenue in 2000 as compared to 46% in 1999 and 48% in 1998. Remedy expects that billings derived through indirect channels, while growing in absolute dollar amounts, will continue to fluctuate as a percentage of total billings. International sales accounted for 38% of total revenue in 2000, as compared to 34% in 1999 and 38% in 1998. A majority of international sales are denominated and collected in U.S. currency. However, Remedy began multi-currency invoicing of customers during the fourth quarter of 1999. The majority of international sales are in Europe with lower amounts in Canada, the Pacific Rim and Latin America. Currently Remedy maintains sales offices in the United Kingdom, Canada, Germany, France, Spain, Italy, Ireland, The Netherlands, Sweden, Singapore, Australia, Japan and Hong Kong. In October 1998, it established Remedy Software International Limited (RSIL) in Ireland. From this location, Remedy ships its products to customers in Europe, the Middle East and Africa. Remedy also expects to increase the staffing levels of its international-based operations in 2001. Because a substantial majority of Remedy's international sales are made through indirect channels, any material increase in its international sales as a percentage of total revenue may adversely affect its average selling prices and gross margins due to the lower unit prices that Remedy receives when selling through indirect channels. PRODUCT REVENUE. Remedy currently derives substantially all of its product revenue from licenses of the Action Request System and applications which are built upon the AR System foundation. Revenue from product licenses was $168.0 million, $141.5 million and $101.1 million in 2000, 1999 and 1998. This represents increases of 19% from 1999 to 2000 and 40% from 1998 to 1999. The growth of revenue in absolute dollars is largely a result of Remedy's sales and marketing efforts and the increased acceptance of its ITSM and CRM solutions in both U.S. and international markets. Remedy intends to continue to enhance its current software products as well as to develop new products. As a result, it anticipates that revenue from product licenses will continue to represent a substantial majority of its revenue in the foreseeable future. MAINTENANCE AND SERVICE REVENUE. Remedy derives its maintenance and service revenue from support, consulting and training services provided to customers. Maintenance and service revenue was $120.6 million, 15 16 $87.5 million and $56.3 million in 2000, 1999 and 1998, representing increases of 38% from 1999 to 2000 and 55% from 1998 to 1999. The growth of maintenance and service revenue in absolute dollars is primarily due to the renewal of maintenance contracts after the initial one-year term and increased licensing activity, which has resulted in increased revenue from ancillary sources such as maintenance, support, training and consulting services. COST AND EXPENSES COST OF PRODUCT REVENUE. Costs of product revenue consist primarily of the costs related to product media and duplication, manuals, packaging materials, personnel, shipping expenses and royalties paid to third-party vendors. Cost of product revenue was $10.5 million, $6.9 million and $4.5 million in 2000, 1999 and 1998, representing 6% of the related product revenue for 2000, 5% for 1999 and 4% for 1998. The increases as percentage of product revenue and in absolute dollars relates primarily to higher volumes of product shipped, increased third party royalty obligation and fixed costs associated with the release of new products. Cost of product revenue does not include amortization of capitalized software development costs, as all development costs incurred in the research and development of new software products and enhancements to existing software products have been expensed as incurred. COST OF MAINTENANCE AND SERVICE REVENUE. Costs of maintenance and service revenue consist primarily of personnel related costs incurred in providing telephone support, consulting services and training to customers. Cost of maintenance and service revenue was $47.7 million, $37.1 million and $23.2 million in 2000, 1999 and 1998, representing 40% of the related maintenance and service revenue for 2000, 42% in 1999 and 41% in 1998. Cost of maintenance and service revenue as a percentage of related maintenance and service revenue decreased primarily due to the increased use of employees resulting from the acquisition of ESQ Systems Integrators, Inc. in 2000. Cost of maintenance and service revenue in absolute dollars increased significantly, primarily due to costs from increased personnel as Remedy continued to invest in its customer support and consulting personnel. Remedy believes that cost of maintenance and service revenue will increase in absolute dollar amounts in the future. RESEARCH AND DEVELOPMENT. Research and development costs relate to the personnel and equipment costs associated with maintaining and enhancing existing product lines, as well as developing new product lines to meet the expanding range of customer requirements. Research and development expenses were $52.0 million, $40.9 million, and $33.7 million, or 18% of total revenue in 2000 and 1999, and 21% in 1998. The increases in research and development expenses in absolute dollar amounts in each successive year is primarily attributable to increased staffing, outside contractors and associated support for software engineers required to expand and enhance Remedy's product line. Remedy believes that research and development expenses will continue to increase in absolute dollar amounts in the future. SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries, commissions and bonuses for sales and marketing personnel, as well as promotional expenses. Sales and marketing expenses were $110.5 million, $88.8 million, and $59.3 million, or 38%, 39% and 38% of total revenue, in 2000, 1999 and 1998. The increases in sales and marketing expenses in absolute dollar amounts were primarily due to significant annual increases in the sales force and Remedy's increasing sales and marketing resources and marketing activities, including trade shows and promotional activities, to further promote Remedy's new and existing products. Remedy believes that sales and marketing expenses will continue to increase in absolute dollar amounts in the future as it plans to further promote the sale of its expanding product lines. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist primarily of the salaries and related expenses for executive and finance personnel, professional fees, bad debt expense and other corporate expenses. General and administrative expenses were $17.4 million, $12.3 million and $9.4 million in 2000, 1999, and 1998, or 6%, 5% and 6% of total revenue, in 2000, 1999 and 1998. The increases in absolute dollar amounts in each successive year were primarily the result of increased staffing and associated expenses necessary to manage and support the growth as well as an increase in bad debt expense in the latter part of 2000. In 2000, 1999, and 1998, bad debt expense were approximately $2.4 million, $0.2 million, and 16 17 $0.5 million. Remedy believes that its general and administrative expenses will increase in absolute dollar amounts in the future as it expands its staffing. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and other intangibles relates to the purchase of BayStone Software, Inc. in October 1998, the purchase of Pipestream Technologies, Inc. in July 1999, the purchase of Fortress Technologies, Inc. in September 1999, the purchase of Axtive Software, Inc. in February 2000, the purchase of Ostream Software, Inc. in February 2000, and the purchase of ESQ Systems Integrators, Inc. in June 2000. Goodwill and other intangibles, which consist of $36.8 million of goodwill and $2.1 million of acquired workforce are being amortized on a straight-line basis over a period of four years from the date of acquisition. Amortization expenses were $8.9 million and $4.1 million in 2000 and 1999. Amortization expense related to these acquisitions is expected to be approximately $9.7 million and $9.2 million, for each of the twelve-month periods ended December 31, 2001 and December 31, 2002. INTEREST INCOME AND OTHER, NET. Interest income and other, net, which consists primarily of interest income earned on Remedy's cash and short term investments, was $8.7 million, $5.0 million and $5.9 million in 2000, 1999 and 1998. The increase from 1999 to 2000 was due to higher cash balances and higher effective yields resulting from increasing interest rates. The decrease from 1998 to 1999 relates primarily to a foreign exchange loss in 1999 of $0.5 million compared to a foreign exchange gain of $0.3 million in 1998. NON-RECURRING CHARGES. During 1999, Remedy made a minority equity investment of $2.0 million in a privately held software company accounted for using cost method. During 2000, Remedy wrote off the $2.0 million investment after determining that the investment was permanently impaired. Remedy has no other material equity investments as of December 31, 2000. In October 1998, the Company acquired BayStone Software, Inc., a privately held provider of a suite of customer support, quality assurance and opportunity management and telesales automation applications for rapidly growing businesses. A total of $3.1 million was expensed in the Company's final fiscal quarter of 1998 related to the acquisition. This was comprised of purchased in-process research and development of $1.5 million and approximately $1.6 million in other merger related expenses, including $1.1 million for subsequent personnel severance and outplacement expenses and $0.5 million for other indirect costs of the acquisition. PROVISION FOR INCOME TAXES. The effective tax rate for the year ended December 31, 2000 was 30%, compared to effective tax rates for 1999 and 1998 of 33% and 36%. The effective tax rate differs from the federal statutory rate due primarily to state income taxes, offset by tax-exempt interest income and research and development tax credits. The decrease in the effective tax rate in both years relates primarily to increased research and development tax credits, increased amounts of tax-exempt interest and lower state taxes. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, Remedy had $43.1 million in cash and cash equivalents, $164.8 million in short-term investments and $204.4 million of working capital. Net cash provided by operating activities in 2000, 1999 and 1998 was $72.2 million, $46.9 million and $29.1 million, of which net income was a significant component in each year. In all three years, cash from operations was used to support Remedy's working capital requirements, as such requirements expanded, and in all three years Remedy experienced significant growth in receivables, accompanying its increased sales volumes, partially offset by growth in deferred revenue balances. Remedy began investing in forward and simple purchase option contracts in 1999 to hedge the risk associated with a newly implemented plan of multi-currency invoicing. No cash was used for simple purchase option contracts for the year ended December 31, 2000 and approximately $29,000 was used for the year ended December 31, 1999. Remedy may use forward and simple purchase option contracts in the future to minimize the exposures to the United States Dollar (USD) value of foreign currency denominated sales, and as non-USD denominated international revenues increase, the cash used to purchase these option contracts may increase. Net cash used in investing activities in 2000, 1999 and 1998 was $68.0 million, $70.7 million and $33.1 million. The decrease in Remedy's net cash used in investing activities for the years ended Decem- 17 18 ber 31, 2000, and 1999 is primarily due to decrease in net short-term investment purchases, while the increase for the years ended December 31, 1999 and 1998 is primarily due to increase in net short-term investment purchases, cash used to acquire businesses as well as property and equipment expenditure. Purchases of short-term investments exceeded maturities by $39.7 million, $47.5 million and $14.4 million in 2000, 1999 and 1998. Cash paid to acquire businesses in 2000, 1999 and 1998 was $15.3 million, $11.0 million and $10.4 million. The $15.3 million in 2000 was comprised of $7.5 million spent to acquire Axtive Software, Inc., $2.8 million spent to acquire Ostream Software, Inc. and $5.0 million spent to acquire ESQ Systems Integrators, Inc. The $11.0 million in 1999 relates to the acquisition of Pipestream Technologies, Inc. and Fortress Technologies, Inc. The $10.4 million in 1998 relates to the acquisition of BayStone Software, Inc. Cash used to purchase property and equipment, consist primarily of computer workstations, capitalized internal use software, leasehold improvements and file servers for Remedy's growing employee base was $13.0 million, $10.2 million and $8.3 million, in 2000, 1999 and 1998. Remedy expects that the rate of purchases of property and equipment will continue to increase as its employee base grows. Remedy's principal commitments consist primarily of leases on its facilities. As of December 31, 2000, Remedy has a total of approximately $34.8 million future minimum rental commitments under the operating leases for the next five years and hereafter. Net cash used by financing activities in 2000 was $8.3 million compared to $12.1 million provided by financing activities in 1999 and $7.5 million used by financing activities in 1998. This comparative decrease of $20.4 million from 1999 to 2000 is due to the repurchase of approximately 1.87 million shares of common stock at a cost of $37.2 million and capital lease principal payments of approximately $88,000 netted with the proceeds of $29.0 million from the issuance of common stock under the employee stock purchase and stock option plans during 2000, compared with the repurchase of approximately 900,000 shares of common stock at a cost of $17.3 million and capital lease principal payments of $0.7 million netted with the proceeds of $30.1 million from the issuance of common stock under the employee stock purchase and stock option plans during 1999. The comparative increase of $19.6 million from 1998 to 1999 is primarily due to $23.4 million additional cash generated in 1999 from the issuance of common stock under the employee stock purchase and stock option plans, the additional usage of $3.3 million to repurchase shares of common stock, as well as the additional principal payments of $0.5 million under capital lease obligations. On August 5, 1998, the Board of Directors (the Board) authorized management of Remedy to repurchase up to 3 million shares, or approximately 10 percent of its outstanding shares of common stock, over the next twelve months. On August 5, 1999, the Board authorized Remedy to continue the share repurchase program for an additional six months through February 2000. On July 26, 2000, the Board of Directors authorized management of Remedy to repurchase up to an additional 3 million shares, or approximately 10 percent of its outstanding shares of common stock, over the next twelve months. Since 1998, Remedy has repurchased the shares on the open market from time to time, depending on market conditions. The repurchases have been funded by Remedy's cash and short-term investments. As of December 31, 2000, Remedy had repurchased a total of approximately 3.87 million shares of its stock since initial Board approval in August 1998 at an average price of $17.68 for approximately $68.4 million. Remedy believes that its current cash and short-term investment balances and cash flow from operations will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. Although operating activities may provide cash, to the extent it experiences growth in the future, Remedy anticipates that its operating and investing activities may use cash. In addition, Remedy may utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines. Consequently, significant future growth may require it to obtain additional equity or debt financing which may not be available to Remedy on acceptable terms, or at all. 18 19 NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activity", which was subsequently amended by Statement No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities: Deferral of Effective Date of SFAS 133" and Statement No. 138 (SFAS 138), "Accounting for Certain Derivative Instruments and Certain Hedging Activities: an amendment of FASB Statement No. 133". SFAS 137 requires adoption of SFAS 133 in years beginning after June 15, 2000. SFAS 138 establishes accounting and reporting standards for derivative instruments and addresses a limited number of issues causing implementation difficulties for numerous entities. The Statement requires Remedy to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be recorded at fair value through earnings. If the derivative qualifies as a hedge, depending on the nature of the exposure being hedged, changes in the fair value of derivatives are either offset against the change in fair value of hedged assets, liabilities, or firm commitments through earnings or are recognized in other comprehensive income until the hedged cash flow is recognized in earnings. The ineffective portion of a derivative's change in fair value is recognized in earnings. The Statement permits early adoption as of the beginning of any fiscal quarter. Remedy adopted SFAS 133 in the quarter ended September 30, 1999 and subsequently implemented a program to hedge a portion of its forecasted foreign currency denominated revenue and expenses with foreign exchange forward contracts. SFAS 133 did not have a material effect on Remedy's financial statements as of December 31, 2000. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", as amended by SAB 101B. SAB 101 summarizes the aspects of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Remedy's adoption of SAB 101 as of October 1, 2000 did not have a material impact on its revenue recognition policies and financial statements. In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock Compensation -- an Interpretation of APB Opinion 25." This interpretation clarifies the application of APB 25 for certain issues including: (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequences 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 the conclusions in this interpretation cover specific events that occurred after either December 15, 1998 or January 12, 2000. FIN 44 did not have a significant effect on Remedy's financial position or results of operations. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS GENERAL ECONOMIC AND MARKET CONDITIONS. During recent years, segments of the personal computer industry have experienced significant economic downturns characterized by decreased product demand, production over-capacity, price erosion, work slowdowns and layoffs. The technology sector in which we operate has also experienced a dramatic slowdown in the past six months, as evidenced by the decline of stock prices on the Nasdaq National Market. The macroeconomic environment may harm our business by impacting our customers, their spending and the rate at which they accept our products. Remedy's operations may in the future experience substantial fluctuations from period to period as a consequence of such industry patterns, general economic conditions affecting the timing of orders from major customers and other factors affecting capital spending. There can be no assurance that such factors will not have a material adverse effect on its business, operating results or financial condition. MANAGEMENT OF GROWTH; DEPENDENCE UPON KEY PERSONNEL. Remedy's ability to compete effectively and to manage future growth, if any, will require it to continue to improve its financial and management controls, reporting systems and procedures on a timely basis and expand, train and manage its employee work force. There can be no assurance that Remedy will be able to do so successfully. Its failure to do so could seriously harm Remedy's business, operating results and financial condition. Remedy's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, none 19 20 of whom are bound by an employment agreement. The loss of the services of one or more of its current executive officers could have a material adverse effect on its business, operating results and financial condition. Remedy's future success also depends on its continuing ability to attract and retain highly qualified technical, sales and managerial personnel. Competition for such personnel is intense, and there can be no assurance that it can retain its key technical, sales and managerial employees or that it can attract, assimilate or retain other highly qualified technical, sales and managerial personnel in the future. EMPLOYMENT MARKET; NEED TO INCREASE SALES FORCE. Remedy's future success depends, in part, on its continuing ability to attract and retain highly qualified technical, sales, marketing and managerial personnel. As a majority of its workforce is located in the competitive employment market of the Silicon Valley in California, competition for personnel is intense, and there can be no assurance that Remedy can attract, assimilate or retain adequate levels of technical, sales, marketing and managerial personnel in the future. In particular, Remedy intends to continue hiring additional sales personnel in 2001 and beyond, which is required if it is to achieve significant revenue growth in the future. Competition for such personnel is intense, and there can be no assurance that Remedy can retain its existing sales personnel or that it can attract, assimilate or retain additional highly qualified sales persons in the future. In the past, Remedy has experienced difficulty in recruiting a sufficient number of qualified sales persons. Any failure of Remedy to attract and retain such qualified employees could have a material adverse effect on its business, operating results and financial condition. POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. Remedy's quarterly operating results have in the past and may in the future vary significantly depending on factors such as increased competition, the timing of new product announcements and changes in pricing policies by Remedy and its competitors, market acceptance of new and enhanced versions of Remedy's products, the size and timing of significant orders, the mix of direct and indirect sales, changes in operating expenses, changes in Company strategy, personnel changes, foreign currency exchange rate fluctuations and general economic factors. Remedy operates with no significant order backlog because its software products typically are shipped or electronically downloaded over the Web shortly after orders are received. Furthermore, Remedy has often recognized a substantial portion of its revenue in the last month of a quarter, with this revenue frequently concentrated in the last weeks of a quarter. As a result, product revenue in any quarter is substantially dependent on orders booked and shipped in that quarter and revenue for any future quarter is not predictable with any significant degree of certainty. Product revenue is also difficult to forecast because the market for software products is rapidly evolving, and Remedy's sales cycle, from initial trial to multiple copy purchases and the provision of support services, varies substantially from customer to customer. Remedy's expense levels are based, in part, on its expectations as to future revenue. If revenue levels are below expectations, operating results are likely to be adversely affected. Net income may be disproportionately affected by a reduction in revenue because a proportionately smaller amount of its expenses varies with its revenue. As a result, Remedy believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. It is likely that in some future quarter Remedy's operating results will be below the expectations of public market analysts and investors. In such event, the price of its Common Stock would likely be materially adversely affected. RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. From time to time Remedy may acquire or invest in companies, technologies or products that complement its business or its product offerings. Any such acquisitions may result in the use of cash, potentially dilutive issuances of equity securities, the write-off of software development costs or other assets, incurrence of severance liabilities, the amortization of expenses related to goodwill and other intangible assets and/or the incurrence of debt, any of which could have a material adverse effect on its business, financial condition, cash flows and results of operations. Acquisitions involve numerous additional risks including difficulties in the assimilation of operations, services, products and personnel, the diversion of management's attention from other business concerns, the disruption of its business, and the entry into markets in which Remedy has little or no direct prior experience. In addition, potential acquisition candidates targeted by Remedy may not have audited financial statements, detailed financial information or any degree of internal controls. There can be no assurance that an audit subsequent to any successful completion of an acquisition will not reveal matters of significance, including with respect to 20 21 revenues, expenses, liabilities, contingent or otherwise, and intellectual property. There can be no assurance that Remedy would be successful in overcoming these or any other significant risks encountered and the failure to do so could have a material adverse effect upon its business, operating results and financial condition. DEPENDENCE ON NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT BUGS. The client/server and web-based application software market is characterized by rapid technological change, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. The life cycles of Remedy's products are difficult to estimate. Its future success will depend upon its ability to enhance its current products and to develop and introduce new products on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. In 2000, Remedy invested significant resources into the research and development, sales and marketing of software applications. Remedy is continuing to invest heavily in these efforts in 2001. There can be no assurance that Remedy will be successful in developing and marketing product enhancements or new products that respond to technological change, evolving industry standards and customer requirements, or that Remedy will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or that its new products and product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. If Remedy is unable, for technological or other reasons, to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or customer requirements, its business, operating results and financial condition will be materially adversely affected. If the new products currently being developed by Remedy do not achieve market acceptance or are not released when expected, its business, operating results and financial condition will be materially adversely affected. Software products as complex as those offered by Remedy may contain undetected errors or failures when first introduced or when new versions are released. Remedy has in the past discovered software errors in its new products and enhancements after their introduction and has experienced delays or lost revenue during the period required to correct these errors. Although Remedy has not experienced material adverse effects resulting from any such errors to date, there can be no assurance that, despite testing by Remedy and by current and potential customers, errors will not be found in new products or releases after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could have a material adverse effect upon its business, operating results and financial condition. INTERNATIONAL OPERATIONS. International sales represented approximately 38% of Remedy's revenue in 2000. Remedy currently has thirteen international wholly owned subsidiaries, which are primarily sales offices, and are located in the United Kingdom, Canada, Germany, France, Spain, Italy, The Netherlands, Sweden, Singapore, Australia, Japan, Hong Kong and Ireland. One of Remedy's strategies is to continue to expand its existing international operations and enter additional international markets, which will require significant management attention and financial resources. Traditionally, international operations are characterized by higher operating expenses and lower operating margins. As a result, if international revenues increase as a percentage of total revenue, operating margins may be adversely affected. Costs associated with international expansion include the establishment of additional foreign offices, the hiring of additional personnel, the localization and marketing of its products for particular foreign markets and the development of relationships with additional international service providers. If international revenue is not adequate to offset the expense of expanding foreign operations, its business, operating results or financial condition could be materially adversely affected. Remedy's international operations are subject to other risks inherent in international business activities and generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, product acceptance in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings, the burdens of complying with a wide variety of foreign laws and general economic conditions in such countries. There can be no assurance that such factors will not have a material adverse effect on its future international sales and, consequently, its results of operations. In addition, because a substantial majority of Remedy's international sales are indirect, any material increase in its international sales as a percentage of 21 22 total revenue may adversely affect Remedy's average selling prices and gross margins due to the lower unit prices that Remedy receives when selling through indirect channels. PRODUCT CONCENTRATION. Remedy currently derives the majority of its revenue from licenses of the AR System, the applications Remedy provides, which are built upon the AR System foundation, and related services. Broad market acceptance of Remedy's products is critical to its future success. As a result, a decline in demand for or failure to achieve broad market acceptance of the AR System foundation and applications as a result of competition, technological change or otherwise, would have a material adverse effect on the business, operating results and financial condition of Remedy. Remedy's future financial performance will depend in part on the successful development, introduction and customer acceptance of new and enhanced versions of the AR System foundation and other applications, specifically CRM and ITSM applications. There can be no assurance that Remedy will continue to be successful in marketing the AR System or any new or enhanced products or applications. In 2000, Remedy invested significant resources into the research and development, and sales and marketing of new software applications. However, Remedy believes that its success in expanding its product line will depend largely on new products achieving market acceptance and technological competitiveness. In January 2001, Remedy announced the discontinuation of the MRO eProcurement application. The exit from the eProcurement solution is not expected to have a material effect on Remedy's financial position or results of operations. EXPANSION OF INDIRECT CHANNELS. An integral part of Remedy's strategy is to continue to develop the marketing channels of value-added resellers (VARs), system integrators (SIs) and independent software vendors (ISVs). VARs, SIs and ISVs accounted for approximately 47% of its total revenue in 2000. If these marketing channels increase as a percentage of sales, its operating margins may be adversely affected due to the lower unit prices that Remedy receives when selling through indirect channels. There can be no assurance that Remedy will be able to attract VARs, SIs and ISVs that will be able to market its products effectively and will be qualified to provide timely and cost-effective customer support and service. In addition, Remedy's agreements with VARs, SIs and ISVs are not exclusive and in many cases may be terminated by either party without cause, and many of its VARs, SIs and ISVs carry competing product lines. Therefore, there can be no assurance that any VAR, SI or ISV will continue to represent Remedy's products, and the inability to recruit, or the loss of important VARs, SIs or ISVs could adversely affect its results of operations. Remedy intends to rely on third-party implementation providers, including integration consulting firms and Remedy Approved Consultants (RACs), to assist with the implementation of its products in large enterprise customers and in the training of personnel within such enterprises, in order to meet the demand for implementation of its product from large enterprise customers. As it is Remedy's strategy to increase its sales to enterprise customers and to use third party service providers to service such customers, its operating margins may be lower as a result of the higher expenses associated with engaging such third party service providers. EURO CONVERSION. Remedy is aware of the issues associated with the changes in Europe aimed at forming a European Economic and Monetary Union (EMU). On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the European Union's common currency (the "Euro"). On that day, the Euro became a functional legal currency within these countries and over the next three years, business in the EMU member states will be conducted in both the existing national currency and the Euro. As a result, companies operating in or conducting business in EMU member states need to ensure that their financial and other software systems are capable of processing transactions and properly handling these currencies, including the Euro. No later than July 1, 2002, the participating countries will withdraw all bills and coins denominated in the legacy currencies, so that the legacy currencies will no longer be legal tender for any transactions, making the conversion to the Euro complete. Remedy recognizes that by January 1, 2002, all of its customers in the participating countries in Europe will need to have converted all the values in their databases to the Euro, having previously reflected all values in the appropriate local currencies. At this time, it is not possible to summarize the potential costs associated with addressing any Euro conversion issues and there can be no assurance that these issues and their related costs will not have a materially adverse effect on its business, operating results and financial position. 22 23 DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT. Remedy's success is heavily dependent upon proprietary technology. Remedy relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. It seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Remedy presently has three patent applications pending. Despite its efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of Remedy's products or to obtain and use information that Remedy regards as proprietary. Policing unauthorized use of Remedy's products is difficult, and while it is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In selling its products, Remedy relies primarily on "shrink wrap" (out-of-the-box or off-the-shelf sales) and "click wrap" (electronic sales transmitted via the internet) licenses that are not signed by licensees and, therefore, it is possible that such licenses may be unenforceable under the laws of some jurisdictions. In addition, the laws of some foreign countries do not protect its proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that Remedy's means of protecting its proprietary rights will be adequate or that its competitors will not independently develop similar technology. Remedy is not aware that any of its products infringe the proprietary rights of third parties. However, there can be no assurance that third parties will not claim infringement by Remedy with respect to current or future products. Remedy expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in its industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require Remedy to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to Remedy or at all, which could have a material adverse effect upon its business, operating results and financial condition. PRODUCT LIABILITY. Remedy's license agreements with its customers typically contain provisions designed to limit its exposure to potential product liability claims. In selling its products, Remedy relies primarily on "shrink wrap" (out-of-the-box or off-the-shelf sales) and "click wrap" (electronic sales transmitted via the internet) licenses that are not signed by licensees and, therefore, it is possible that such licenses may be unenforceable under the laws of some jurisdictions. For these and other reasons, it is possible that the limitation of liability provisions contained in its license agreements may not be effective. Although Remedy has not experienced any product liability claims to date, the sale and support of products by Remedy may entail the risk of such claims. A successful product liability claim brought against Remedy could have a material adverse effect upon its business, operating results and financial condition. RISKS ASSOCIATED WITH SELLING TO LARGE ENTERPRISE CUSTOMERS. Remedy has recently increased its efforts to sell its products to large enterprise customers, and has devoted significant management and financial resources to achieving this goal. If successful, large enterprise customers are expected to deploy its products in business critical operations which involve significant capital and management commitments by such customers. Potential large enterprise customers generally commit significant resources to an evaluation of available enterprise software and require Remedy to expend substantial time, effort and money educating them about the value of Remedy's solutions. Sales of its products to such customers require an extensive sales effort throughout a customer's organization because decisions to purchase such products generally involve the evaluation of the software by a significant number of customer personnel in various functional and geographic areas, each often having specific and conflicting requirements. A variety of factors, including factors over which Remedy has little or no control, may cause potential large enterprise customers to favor a particular supplier or to delay or forego a purchase. As a result of these or other factors, the sales cycle for Remedy's products is long, typically ranging between three and nine months. As a result of the length of the sales cycle and the significant selling expenses resulting from selling into the large enterprise, Remedy's ability to forecast the timing and amount of specific sales is limited, and the delay or failure to complete one or more large transactions to which Remedy has devoted significant resources could seriously harm its business, operating results or financial condition and could cause significant variations in its operating results from quarter to quarter. 23 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. Remedy's exposure to market risk for changes in interest rates primarily relates to its investment portfolio. As stated in its policy, Remedy is averse to principal loss and seeks to preserve its invested funds by limiting issuer risk, default risk, liquidity risk and interest rate risk. Remedy limits issuer risk by placing its investments with high credit quality issuers and, by policy, limiting the amount of credit exposure to any one issuer. It mitigates default and liquidity risks by investing in only high credit quality securities and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. Remedy mitigates interest rate risk by only allowing suitable investments to be made in taxable and non-taxable U.S. as well as foreign instruments. The tables below present the carrying value, market value and related weighted average interest rates for its investment portfolio as of December 31, 2000 and December 31, 1999. All investments in aggregate have a weighted average remaining maturity of less than one year at any given point in time.
CARRYING MARKET AVERAGE AS OF DECEMBER 31, 2000 VALUE VALUE INTEREST RATE ----------------------- -------- -------- ------------- Investment Securities (in thousands): Cash Equivalents -- fixed rate.................. $ 651 $ 651 5.27% Short-term investments -- fixed rate............ 164,780 169,181 5.01% -------- -------- Total investment securities..................... 165,431 169,832 5.01% Money market funds................................ 14,384 14,384 5.93% -------- -------- Total interest bearing instruments................ $179,815 $184,216 5.08% ======== ========
CARRYING MARKET AVERAGE AS OF DECEMBER 31, 1999 VALUE VALUE INTEREST RATE ----------------------- -------- -------- ------------- Investment Securities (in thousands): Cash Equivalents -- fixed rate.................. $ 534 $ 534 5.19% Short-term investments -- fixed rate............ 125,116 124,761 5.01% -------- -------- Total investment securities..................... 125,650 125,295 5.01% Money market funds................................ 20,417 20,417 4.79% -------- -------- Total interest bearing instruments................ $146,067 $145,712 4.98% ======== ========
FOREIGN CURRENCY RISK. Remedy transacts business in various foreign currencies, primarily in Europe. As some revenues are denominated in currencies other than U.S. dollars, it will be subject to the risks associated with foreign exchange rate fluctuations. In addition, an increase in the value of the U.S. dollar relative to foreign currencies could make its products more expensive and, therefore, potentially less competitive in those markets. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, Remedy hedges a portion of its foreign currency exposures anticipated over the ensuing twelve-month period. In the fourth quarter of 1999, Remedy began invoicing in currencies other than U.S. dollars, and as a result, Remedy has entered into hedging activities in order to minimize the exposure of the United States Dollar (USD) value of foreign currency denominated sales. The hedging program is operated pursuant to documented corporate risk management policies. Remedy does not enter into any derivative transactions for speculative purposes. Remedy's 2000 derivative financial instruments should not subject it to material risk due to exchange rate movements because gains and losses on these contracts should offset losses and gains on the transactions being hedged. In the future, more of its revenues and expenses may be denominated in currencies other than U.S. dollars and, as a result, Remedy's exposure in the future may fluctuate depending upon the nature and success of the hedging activities. Accordingly, due to the substantial volatility of foreign exchange rates, its business, operating results or financial condition could be materially adversely affected. 24 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Form 10-K. See Part IV, Item 14 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 25 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers as of March 2, 2001 are as set forth in Part I, item 4A of this document. The information under the caption "Election of Directors" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held on May 24, 2001 is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation and related information" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held on May 24, 2001 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Security Ownership of Certain Beneficial Owners and Management" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held on May 24, 2001 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Certain Relationships and Related Transactions" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held on May 24, 2001 is incorporated herein by reference. 26 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements are filed as part of this report:
PAGE ---- - - Consolidated Balance Sheets as of December 31, 2000 and 1999. .................................................... 31 - - Consolidated Statements of Income for each of the three years in the period ended December 31, 2000. ............. 32 - - Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31. ...... 33 - - Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000. ....... 34 - - Notes to Consolidated Financial Statements. .............. 35
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedule is submitted herewith:
PAGE ---- - - Schedule II: Valuation and Qualifying Accounts and Reserves.................................................. 50
Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3. EXHIBITS. See Item 14(c). (b) REPORTS ON FORM 8-K 1. None (c) EXHIBITS
EXHIBIT NO. DOCUMENT DESCRIPTION - ----------- -------------------- 3.1*** Amended and Restated Certificate of Incorporation of the Registrant. 3.2**** Amended and Restated Bylaws of the Registrant. 4.1* Reference is made to Exhibits 3.1 and 3.2. 4.2* Specimen Common Stock certificate. 4.3* Restated Investor Rights Agreement, dated May 4, 1992, among the Registrant and the investors and the founders named therein. 4.4* Amendment of Restated Investor Rights Agreement, dated April 23, 1994, among the Registrant and the investors named therein. 4.5* Second Amendment of Restated Investor Rights Agreement, dated January 18, 1995, among the Registrant and the investors named therein. 4.6** Rights Agreement dated as of July 25, 1997, between the Company and Harris Trust Savings Bank, including the Certificate of Designation of Series A Junior Participating Preferred Stock, Form of Right Certificate and Summary of Rights to Purchase Preferred Shares attached thereto as Exhibits A, B and C, respectively. 10.1* Form of Indemnification Agreement entered into between the Registrant and its directors and officers. 10.2* The Registrant's 1991 Stock Option/Stock Issuance Plan and forms of agreements thereunder. 10.3* The Registrant's 1995 Stock Option/Stock Issuance Plan and forms of agreements thereunder.
27 28
EXHIBIT NO. DOCUMENT DESCRIPTION - ----------- -------------------- 10.4* The Registrant's Employee Stock Purchase Plan and forms of agreements thereunder. 10.5* The Registrant's 1995 Non-Employee Directors Stock Option Plan and forms of agreements thereunder. 10.6* Lease Agreement by and between the Registrant and Charleston Properties (Charleston), dated March 11, 1994, regarding the space located at 1500 Salado Drive. 10.7* Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc. (Sun), dated March 11, 1994, regarding the space located at 1500 Salado Drive, and related consent of Charleston, dated March 10, 1994. 10.8* Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc., dated March 11, 1994, regarding the space located at 1505 Salado Drive, and related consent of Peery/Arrillaga, dated March 9, 1994. 10.9* Form of Action Request System Shrink Wrap License Agreement. 10.10* Form of Value Added Reseller Agreement. 10.11**** Amended and Restated Business Loan Agreement by and between the Registrant and SVB, dated June 15, 1997. 10.12**** Amended and Restated Promissory Note by and between the Registrant and SVB, dated June 15, 1997. 10.13**** Lease Agreement by and between the Registrant and Greiner, Inc. Pacific, dated March 29, 1996, regarding the space located at 5890 Stoneridge Drive. 10.14**** Lease Agreement by and between the Registrant and Viacom International Inc., dated March 17, 1997, regarding the space located at 5924 Stoneridge Drive. 10.15***** Business Loan Agreement by and between the Registrant and Silicon Valley Bank (SVB), dated July 20, 1998. 10.16****** First Amendment to Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc., dated June 23, 1994, regarding the space located at 1505 Salado Drive. 10.17****** Second Amendment to Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc., dated September 30, 1996, regarding the space located at 1505 Salado Drive. 10.18****** Third Amendment to Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc., dated June 30, 1999, regarding the space located at 1505 Salado Drive. 10.19****** Lease Agreement by and between the Registrant and LSI Logic Europe, Limited, dated August 20, 1999, regarding the first floor leased space located at Greenwood House, 5 London Road, Bracknell, Berkshire. 10.20****** Lease Agreement by and between the Registrant and LSI Logic Europe, Limited, dated August 20, 1999, regarding the ground floor and other leased space located at Greenwood House, 5 London Road, Bracknell, Berkshire. 10.21 Lease Agreement by and between the Registrant and Ariba, Inc., dated February 15, 2001, regarding the space located at 1565 and 1585 Charleston Road. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors.
- --------------- * Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-89026). ** Incorporated by reference from the Exhibits to Remedy Corporation's Form 8-A, dated July 29, 1997. *** Incorporated by reference from the Exhibits to Remedy Corporation's Definitive Proxy Statement for Annual Meeting of Stockholders, dated April 16, 1997. **** Incorporated by reference from the Exhibits to Remedy Corporation's Form 10-K Annual Report for the year ended December 31, 1997. ***** Incorporated by reference from the Exhibits to Remedy Corporation's Form 10-K Annual Report for the year ended December 31, 1998. 28 29 ****** Incorporated by reference from the Exhibits to Remedy Corporation's Form 10-K Annual Report for the year ended December 31, 1999. Remedy, Remedy Corporation and design, Action Request System, AR System, AR Web, Flashboards, Distributed Server Option, Remedy Help Desk, Remedy Asset Management, Remedy Change Management, Remedy Service Level Agreements, Remedy Approved Server, Remedy Strategic Service Suite, Remedy Web, Multi-Processing Server Option, Full Text Search Option, BayStone, Remedy Quality Management, Remedy Year 2000 Compliance Manager, Remedy Customer Support and Remedy Leads Management are all registered or other trademarks of Remedy Corporation. All other trademarks and registered trademarks mentioned in this Report on Form 10-K may be trademarks, registered trademarks or service marks of the companies with which they are associated. 29 30 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders of Remedy Corporation We have audited the accompanying consolidated balance sheets of Remedy Corporation as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Remedy Corporation at December 31, 2000 and 1999, and the consolidated results of its operations and its 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. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Palo Alto, California January 18, 2001 30 31 REMEDY CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS
AS OF DECEMBER 31, ---------------------- 2000 1999 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) Current assets: Cash and cash equivalents................................. $ 43,119 $ 47,302 Short-term investments.................................... 164,780 125,116 Accounts receivable, net of allowance for doubtful accounts of $1,374 and $1,499, respectively............ 79,326 64,105 Prepaid expenses and other current assets................. 5,861 7,383 Deferred tax asset........................................ 7,157 4,380 -------- -------- Total current assets.............................. 300,243 248,286 Property and equipment, net................................. 19,418 14,945 Goodwill and other intangible assets, net................... 25,439 18,809 Other non-current assets.................................... 524 2,996 Deferred tax asset -- non-current portion................... 3,437 2,451 -------- -------- $349,061 $287,487 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 4,036 $ 1,861 Accrued compensation and related liabilities.............. 10,293 15,432 Income taxes payable...................................... 3,616 1,341 Other accrued liabilities................................. 20,942 15,395 Deferred revenue.......................................... 56,915 38,828 Current portion of obligations under capital leases....... -- 67 -------- -------- Total current liabilities......................... 95,802 72,924 Noncurrent portion of obligations under capital leases...... -- 23 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.00005 per share; authorized 20,000,000 shares; issued and outstanding: none........ -- -- Common stock, par value $.00005 per share; authorized: 240,000,000 shares; issued and outstanding: 30,314,320 and 30,064,817 shares, respectively.................... 2 2 Additional paid-in capital................................ 184,228 141,544 Treasury stock (3,872,000 and 2,002,300 shares, respectively).......................................... (68,441) (31,267) Notes receivable from stockholders........................ -- (45) Accumulated other comprehensive (loss)/income............. (396) 9 Retained earnings......................................... 137,866 104,297 -------- -------- Total stockholders' equity........................ 253,259 214,540 -------- -------- $349,061 $287,487 ======== ========
See accompanying notes. 31 32 REMEDY CORPORATION CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenue: Product.................................................. $167,958 $141,451 $101,132 Maintenance and service.................................. 120,552 87,482 56,288 -------- -------- -------- Total revenue.................................... 288,510 228,933 157,420 Costs and expenses: Cost of product revenue.................................. 10,531 6,869 4,475 Cost of maintenance and service revenue.................. 47,709 37,136 23,196 Research and development................................. 52,038 40,948 33,734 Sales and marketing...................................... 110,477 88,787 59,295 General and administrative............................... 17,405 12,271 9,437 Amortization of goodwill and other intangibles........... 8,906 4,072 446 -------- -------- -------- Total costs and expenses......................... 247,066 190,083 130,583 -------- -------- -------- Income from operations..................................... 41,444 38,850 26,837 Interest income and other, net............................. 8,742 4,961 5,918 Non-recurring charges...................................... (2,000) -- (3,104) -------- -------- -------- Income before provision for income taxes................... 48,186 43,811 29,651 Provision for income taxes................................. 14,617 14,288 10,674 -------- -------- -------- Net income................................................. $ 33,569 $ 29,523 $ 18,977 ======== ======== ======== Net income per share: Basic.................................................... $ 1.09 $ 1.02 $ 0.66 ======== ======== ======== Diluted.................................................. $ 1.01 $ 0.95 $ 0.63 ======== ======== ======== Shares used in computing per share amounts: Basic.................................................... 30,774 28,916 28,722 ======== ======== ======== Diluted.................................................. 33,128 31,062 29,901 ======== ======== ========
See accompanying notes. 32 33 REMEDY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES ACCUMULATED COMMON STOCK ADDITIONAL RECEIVABLE OTHER --------------- PAID-IN TREASURY FROM DEFERRED COMPREHENSIVE SHARES AMOUNT CAPITAL STOCK STOCKHOLDERS COMPENSATION INCOME/(LOSS) ------ ------ ---------- -------- ------------ ------------ ------------- (IN THOUSANDS) Balance at December 31, 1997..... 28,619 $-- $ 92,397 $ -- $(47) $(75) $ -- Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan............ 986 -- 6,594 -- -- -- -- Tax benefit from employee stock transactions................... -- -- 961 -- -- -- -- Amortization of deferred compensation................... -- -- -- -- -- 75 -- Repayment of note receivable..... -- -- -- -- 2 -- -- Treasury stock purchased......... (1,117) -- -- (13,977) -- -- -- Net income....................... -- -- -- -- -- -- -- ------ -- -------- -------- ---- ---- ----- Balance at December 31, 1998..... 28,488 -- 99,952 (13,977) (45) -- -- Components of comprehensive income: Net income..................... -- -- -- -- -- -- -- Unrealized hedging gains....... -- -- -- -- -- -- 23 Translation adjustment......... -- -- -- -- -- -- (14) Comprehensive income............. Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan............ 2,463 2 30,064 -- -- -- -- Tax benefit from employee stock transactions................... -- -- 11,528 -- -- -- -- Treasury stock purchased......... (886) -- -- (17,290) -- -- -- ------ -- -------- -------- ---- ---- ----- Balance at December 31, 1999..... 30,065 2 141,544 (31,267) (45) -- 9 Components of comprehensive income: Net income..................... -- -- -- -- -- -- -- Unrealized hedging gains....... -- -- -- -- -- -- 9 Translation adjustment......... -- -- -- -- -- -- (414) Comprehensive income............. Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan............ 2,119 -- 28,967 -- -- -- -- Tax benefit from employee stock transactions................... -- -- 13,717 -- -- -- -- Repayment of note receivable..... -- -- -- -- 45 -- -- Treasury stock purchased......... (1,870) -- -- (37,174) -- -- -- ------ -- -------- -------- ---- ---- ----- Balance at December 31, 2000..... 30,314 $2 $184,228 $(68,441) $ -- $ -- $(396) ====== == ======== ======== ==== ==== ===== TOTAL RETAINED STOCKHOLDERS' EARNINGS EQUITY -------- ------------- (IN THOUSANDS) Balance at December 31, 1997..... $ 55,797 $148,072 Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan............ -- 6,594 Tax benefit from employee stock transactions................... -- 961 Amortization of deferred compensation................... -- 75 Repayment of note receivable..... -- 2 Treasury stock purchased......... -- (13,977) Net income....................... 18,977 18,977 -------- -------- Balance at December 31, 1998..... 74,774 160,704 Components of comprehensive income: Net income..................... 29,523 29,523 Unrealized hedging gains....... -- 23 Translation adjustment......... -- (14) -------- Comprehensive income............. 29,532 Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan............ -- 30,066 Tax benefit from employee stock transactions................... -- 11,528 Treasury stock purchased......... -- (17,290) -------- -------- Balance at December 31, 1999..... 104,297 214,540 Components of comprehensive income: Net income..................... 33,569 33,569 Unrealized hedging gains....... -- 9 Translation adjustment......... -- (414) -------- Comprehensive income............. 33,164 Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan............ -- 28,967 Tax benefit from employee stock transactions................... -- 13,717 Repayment of note receivable..... -- 45 Treasury stock purchased......... -- (37,174) -------- -------- Balance at December 31, 2000..... $137,866 $253,259 ======== ========
See accompanying notes. 33 34 REMEDY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 33,569 $ 29,523 $ 18,977 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation............................................ 8,924 7,844 6,117 Amortization of goodwill and other intangibles.......... 8,906 4,072 446 Amortization of deferred compensation................... -- -- 75 Non-recurring charges................................... 2,000 -- -- Changes in assets and liabilities: Accounts receivable....................................... (15,221) (21,827) (9,432) Prepaid expenses and other current assets................. 1,522 (1,367) (3,113) Deferred tax asset........................................ (3,763) (2,300) (1,430) Accounts payable.......................................... 2,175 9 622 Accrued compensation and related liabilities.............. (5,139) 7,589 2,280 Income taxes payable...................................... 15,990 9,305 3,720 Other accrued liabilities................................. 4,637 5,219 1,266 Other non-current assets.................................. 472 (996) -- Deferred revenue.......................................... 18,087 9,873 9,531 --------- --------- --------- Net cash provided by operating activities.......... 72,159 46,944 29,059 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments......................... (504,511) (291,582) (185,858) Maturities of short-term investments........................ 464,846 244,127 171,462 Cash paid for businesses acquired, net of cash assumed...... (15,339) (11,028) (10,427) Purchase of investments..................................... -- (2,000) -- Capital expenditures........................................ (13,043) (10,218) (8,281) --------- --------- --------- Net cash used in investing activities.............. (68,047) (70,701) (33,104) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital lease obligations.......... (88) (693) (165) Proceeds from issuance of common stock...................... 28,967 30,066 6,595 Purchase of treasury stock.................................. (37,174) (17,290) (13,977) --------- --------- --------- Net cash provided by (used in) financing activities....................................... (8,295) 12,083 (7,547) --------- --------- --------- Net decrease in cash and cash equivalents................... (4,183) (11,674) (11,592) Cash and cash equivalents at beginning of year.............. 47,302 58,976 70,568 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 43,119 $ 47,302 $ 58,976 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid during the year............................. $ 12 $ 30 $ 132 Income taxes paid during the year......................... $ 2,260 $ 7,443 $ 8,242 Supplemental schedule of noncash financing activities: Equipment acquired under capital lease arrangements....... $ -- $ 86 $ 76
See accompanying notes. 34 35 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION OF THE COMPANY THE COMPANY. Remedy Corporation (the "Company") develops, markets and supports rapidly deployable and highly adaptable software products and solutions that simplify service-intensive business processes. Remedy offers adaptable applications for IT Service Management (ITSM) and Customer Relationship Management (CRM). The Company was incorporated in Delaware on November 20, 1990. The Company has wholly owned subsidiaries in the United Kingdom, Canada, Germany, France, Spain, Italy, The Netherlands, Sweden, Singapore, Australia, Japan, Hong Kong and Ireland. These subsidiaries serve primarily as sales offices. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all significant intercompany accounts and transactions. FOREIGN CURRENCY TRANSLATION. The functional currency of all of the Company's foreign subsidiaries is the local currency. Assets and liabilities of our foreign subsidiaries are translated at period-end exchange rates, and revenues and expenses are translated at average monthly exchange rates. The resulting cumulative translation adjustments are recorded as a component of accumulated other comprehensive income/(loss). Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and, to date, have not been significant. REVENUE RECOGNITION. The Company recognizes revenue in accordance with Statement of Position 97-2, "Software Revenue Recognition", as amended. The Company derives revenue from the sale of software licenses, post-contract support ("support") and other services. Support includes telephone technical support, bug fixes and rights to upgrades on a when-and-if available basis for a stated term of generally one year. Services range from installation, training and basic consulting to software modification to meet specific customer needs. In software arrangements that include rights to multiple software products, support and/or other services, the Company allocates the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined based on objective evidence which is specific to the Company. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. Revenue from license fees in multiple element contracts is recognized using the residual method when there is vendor specific objective evidence of the fair value of all undelivered elements in an arrangement but vendor specific objective evidence of fair value does not exist for one or more of the delivered elements in an arrangement. Under the residual method, the total fair value of the undelivered elements, as indicated by vendor specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements regardless of any separate prices stated within the contract for each element. If the fee due from the customer is not fixed or determinable due to extended payment terms, revenue is recognized as payments become due from the customer. If collection is not considered probable, revenue is recognized when the fee is collected. Revenue allocable to support is recognized on a straight-line basis over the periods in which the support is provided. Arrangements that include consulting services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenue under the arrangement is recognized in accordance with SOP 81-1, "Accounting for Performance of Construction -- Type and Certain Production-Type Contract". When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed. 35 36 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in financial statements and accompanying notes. Actual results could differ from these estimates. RECLASSIFICATIONS. Certain amounts for prior years have been reclassified to conform to current year presentation. CASH, CASH EQUIVALENTS SHORT-TERM AND OTHER INVESTMENTS. The Company accounts for its cash, cash equivalents and investments in accordance with Statement of Financial Accounting Standards No. 95 "Statement of Cash Flows" and Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". The Company considers all highly liquid investments with a maturity from date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist primarily of cash on deposit with banks and high quality money market instruments. All other liquid investments with a maturity of less than one year are classified as short-term investments. Short-term investments consist of municipal bonds, auction market preferred stock, corporate bonds, floating rate securities and government securities. Management determines the appropriate classification of investment securities at the time of purchase and re-evaluates such designation as of each balance sheet date. At December 31, 2000, all investment securities were designated as available-for-sale. Available-for-sale securities are carried at fair value, using available market information and appropriate valuation methodologies, with unrealized gains and losses reported in stockholders' equity. As of December 31, 2000 and 1999, the difference between the fair value and the amortized cost of cash equivalents and short-term available-for-sale securities was insignificant; therefore, no unrealized gains or losses were recorded in stockholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in the statements of income. The cost of securities sold is based on the specific identification method. Interest and dividends on short-term investments classified as short-term available-for-sale are included in interest income. During 1999, the Company made a minority equity investment of $2.0 million in a privately held software company accounted for using the cost method. During 2000, Remedy wrote off the $2.0 million investment after determining that the investment was permanently impaired. Remedy has no other material equity investments as of December 31, 2000. At December 31, the Company's cash equivalents and short-term available-for-sale investments consisted of the following:
DESCRIPTION 2000 1999 ----------- -------- -------- (IN THOUSANDS) Municipal Bonds........................................ $101,582 $ 60,653 Auction rate securities................................ 31,050 22,949 Corporate bonds/Floating rate securities............... 31,824 32,514 Government securities.................................. -- 9,000 Certificate of Deposits/Marketable securities.......... 975 534 -------- -------- $165,431 $125,650 ======== ========
As of December 31, 2000, $0.6 million and $164.8 million of the above securities were classified as cash equivalents and short-term investments, respectively. As of December 31, 1999, $0.5 million and $125.1 million of the above securities were classified as cash equivalents and short-term investments, respectively. As of December 31, 2000 and 1999, the weighted average remaining maturity of the investments did not exceed one year. 36 37 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LONG-LIVED ASSETS. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of", the Company identifies and records impairment losses, as circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. No such events have occurred with respect to the Company's long-lived assets, which consist primarily of goodwill, acquired intangible assets, computer equipment, purchased software, furniture and leasehold improvements. DEPRECIATION AND AMORTIZATION. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally three years. Leasehold improvements are amortized over the lesser of the term of the lease or the estimated useful life of the asset. CONCENTRATION OF CREDIT RISK. The Company sells its products primarily to end users, value-added resellers (VARs), system integrators (SIs), independent software vendors (ISVs) and original equipment manufacturers. The Company performs on-going credit evaluations of its customers' financial condition, and generally no collateral is required. The Company maintains reserves for credit losses, and such losses have been within management's expectations. PRODUCT CONCENTRATION. The Company currently derives the majority of its revenue from the licensing of products in its AR System, applications built upon the AR System foundation and fees from related services. These products and services are expected to account for the majority of the Company's revenue for the foreseeable future. Consequently, a reduction in demand for these products and services, or a decline in sales of these products and services, will adversely affect operating results. RESEARCH AND DEVELOPMENT. Research and development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release has been insignificant. Through December 31, 2000, all research and development costs have been expensed. ADVERTISING COSTS. The Company accounts for advertising costs as expense in the period in which they are incurred. Advertising expense for the years ended December 31, 2000, 1999 and 1998 was $16.3 million, $10.7 million and $8.2 million, respectively. STOCK-BASED COMPENSATION. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which encourages, but does not require, companies to record compensation expense for stock-based employee compensation plans at fair value. The Company has chosen to continue to apply Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation plans and, accordingly, does not recognize compensation expense related to its employees under its stock option plans or employee stock purchase plans. Note 8 contains a summary of the pro-forma effects to reported net income and net income per share for 2000, 1999 and 1998 as if the Company had elected to recognize compensation expense based on the fair value of the options granted as prescribed by SFAS 123. EARNINGS PER SHARE. Basic earnings per share is computed using the weighted-average number of common shares outstanding. Diluted earnings per share is computed using the weighted average number of common shares and common share equivalents outstanding during the period. Dilutive common share equivalents consist of employee stock options and are calculated using the treasury stock method. 37 38 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth the computation of basic and diluted earnings per share:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) NUMERATOR: Net Income.......................................... $33,569 $29,523 $18,977 ======= ======= ======= DENOMINATOR: Denominator for basic earnings per share-weighted-average shares.................... 30,774 28,916 28,722 Effect of dilutive securities: Employee stock options........................... 2,354 2,146 1,179 ------- ------- ------- Denominator for diluted earnings per share-weighted- average shares and dilutive securities........... 33,128 31,062 29,901 ======= ======= ======= Basic earnings per share............................ $ 1.09 $ 1.02 $ 0.66 ======= ======= ======= Diluted earnings per share.......................... $ 1.01 $ 0.95 $ 0.63 ======= ======= =======
RECENT PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activity", which was subsequently amended by Statement No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging Activities: Deferral of Effective Date of SFAS 133" and Statement No. 138 (SFAS 138), "Accounting for Certain Derivative Instruments and Certain Hedging Activities: an amendment of FASB Statement No. 133". SFAS 137 requires adoption of SFAS 133 in fiscal years beginning after June 15, 2000. SFAS 138 establishes accounting and reporting standards for derivative instruments and addresses a limited number of issues causing implementation difficulties for numerous entities. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be recorded at fair value through earnings. If the derivative qualifies as a hedge, depending on the nature of the exposure being hedged, changes in the fair value of derivatives are either offset against the change in fair value of hedged assets, liabilities, or firm commitments through earnings or are recognized in other comprehensive income until the hedged cash flow is recognized in earnings. The ineffective portion of a derivative's change in fair value is recognized in earnings. The Statement permits early adoption as of the beginning of any fiscal quarter. The Company adopted SFAS 133 during the quarter ended September 30, 1999 and subsequently implemented a program to hedge a portion of its forecasted foreign currency denominated revenue and expenses with foreign exchange forward contracts. SFAS 133 did not have a material effect on the Company's financial statements as of December 31, 2000. See Note 6 of Notes to Consolidated Financial Statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", as amended by SAB 101B. SAB 101 summarizes certain aspects of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company's adoption of SAB 101 as of October 1, 2000 did not have a material impact on the Company's revenue recognition policies and financial statements. In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving Stock Compensation -- An Interpretation of APB Opinion 25." This interpretation clarifies the application of APB 25 for certain issues including: (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequences 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 38 39 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) either December 15, 1998 or January 12, 2000. FIN 44 did not have a significant effect on the Company's financial position or results of operations. 3. PROPERTY AND EQUIPMENT Property and equipment, at cost, consist of the following:
AS OF DECEMBER 31, -------------------- 2000 1999 -------- -------- (IN THOUSANDS) Machinery and equipment................................ $ 31,408 $ 25,437 Furniture and fixtures................................. 4,089 2,444 Purchased software..................................... 9,821 5,340 Automobile............................................. 298 -- Leasehold Improvements................................. 3,613 2,612 -------- -------- 49,229 35,833 Less: accumulated depreciation......................... (29,811) (20,888) -------- -------- $ 19,418 $ 14,945 ======== ========
4. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets (See Note 12) consist of the following:
AS OF DECEMBER 31, ------------------ 2000 1999 -------- ------- (IN THOUSANDS) Goodwill.................................................. $ 36,790 $22,528 Less: accumulated amortization.......................... (12,923) (4,437) -------- ------- Goodwill, net........................................... 23,867 18,091 -------- ------- Acquired Workforce........................................ 2,073 798 Less: accumulated amortization.......................... (501) (80) -------- ------- Acquired Workforce, net................................. 1,572 718 -------- ------- Total Goodwill and other intangible assets, net........................................... $ 25,439 $18,809 ======== =======
5. COMMITMENTS LEASE COMMITMENTS. The Company leases its facilities under operating lease arrangements. Certain of the leases provide for annual rent increases of approximately 3%. Additionally, the Company leased certain equipment under capital leases. The Company had capitalized property and equipment totaling $1.5 million and $1.5 million with associated accumulated amortization of $1.4 million and $1.3 million at December 31, 2000 and 1999, respectively. There is no annual minimum commitments for the capital leases as of 39 40 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 2000, and the approximate annual minimum rental commitments under the operating leases are as follows:
OPERATING LEASES ---------------- (IN THOUSANDS) 2001........................................................ $ 8,787 2002........................................................ 7,418 2003........................................................ 5,919 2004........................................................ 5,559 2005........................................................ 4,011 Thereafter.................................................. 3,095 ------- Total minimum lease payments................................ $34,789 =======
Total rent expense for the years ended December 31, 2000, 1999 and 1998 was $10.6 million, $7.8 million and $4.9 million, respectively. 6. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses derivative financial instruments principally to minimize the exposures to the United States Dollar (USD) value of sales and expenses denominated in a foreign currency. The Company began pricing its products in multiple currencies during the fourth quarter of 1999, and in preparation, foreign exchange forward and simple purchase option contracts were entered beginning in the quarter ended September 30, 1999 to hedge the risk that the USD value of the foreign currency denominated sales and expenses may be adversely affected by changes in foreign currency exchange rates. As part of its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, the Company hedges a portion of its foreign currency exposures anticipated over the ensuing twelve-month period. However, the Company may be impacted by foreign currency exchange rates related to the unhedged portion. The success of the hedging program depends, in part, on forecasts of transaction activity in various currencies (currently the Pound Sterling and the Euro). The Company may experience unanticipated foreign currency exchange gains or losses to the extent that there are timing differences between forecasted and actual activity during periods of currency volatility. At December 31, 2000, the Company had hedged transactions via Pound Sterling and Euro denominated cash flow hedges, using forwards contracts that generally have maturities of six months or less. The Company records these foreign exchange contracts at fair value in its consolidated balance sheet and the related gains or losses on these contracts are reflected, net of the related tax effect in stockholders' equity as a component of other comprehensive income. These gains and losses are reclassified into earnings in the period in which the underlying sales and expenses being hedged are recognized as revenue. However, if any of these contracts were considered to be ineffective in offsetting the change in the forecasted cash flows relating to the sales or expenses being hedged, any changes in fair value relating to the ineffective portion of these contracts would be immediately recognized in earnings. In the event the underlying forecasted cash flow does not occur, or it becomes probable that it will not occur, the gain or loss on the related cash flow hedge would be reclassified from other comprehensive income to earnings at that time. Since the critical terms of the hedging instruments are the same as the underlying forecasted cash flows, the changes in the fair value of the foreign exchange contracts are highly effective in offsetting changes in the expected cash flows from the forecasted transaction. The Company did not recognize any gains or losses resulting from hedge ineffectiveness and recognized a loss of $49,000 resulting from a change in forecast probability during the year ended December 31, 2000. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The Company 40 41 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Changes in the time value of option contracts are excluded from this effectiveness assessment and recorded directly in earnings. During the year ended December 31, 2000, no charge, representing the change in option time values, was recorded in earnings. As of December 31, 2000, the Company included the fair value of forward contracts of $244,000 in other current assets in its consolidated balance sheet. The company has no simple purchase option contracts at December 31, 2000. As of December 31, 1999, the Company included the fair value of simple purchase option contracts of $34,000 and the fair value of forward contracts of $108,000 in other current assets in its consolidated balance sheet. At December 31, 2000, the Company had $18,000 of other comprehensive income related to future revenue transactions and the balance is expected to be recognized into earnings within the next twelve months. A gain of $237,000 was reclassified into revenue and a loss of $152,000 was reclassified into expense from other comprehensive income for the year ended December 31, 2000 upon recognition of the related revenue and expenses. At December 31, 1999, the Company had $23,000 of other comprehensive income related to future revenue transactions and the balance is expected to be recognized into earnings within the next twelve months. A gain of $76,000 was reclassed into earnings from other comprehensive income for the year ended December 31, 1999 upon recognition of the related revenue. 7. SHARE REPURCHASE On August 5, 1998, the Board of Directors (the Board) authorized management of the Company to repurchase up to 3 million shares or approximately 10 percent of the Company's outstanding shares of common stock over the next twelve months. On August 5, 1999, the Board authorized the Company to continue the share repurchase program for an additional six months through February 2000. On July 26, 2000, the Board of Directors authorized management of the Company to repurchase up to an additional 3 million shares or approximately 10 percent of the Company's outstanding shares of common stock over the next twelve months. Since 1998, the Company has repurchased shares on the open market from time to time, depending on market conditions. The repurchases have been funded by the Company's cash and short-term investments. As of December 31, 2000, the Company had repurchased a total of approximately 3.87 million shares of the Company's stock since initial Board approval in August 1998 at an average price of $17.68 totaling approximately $68.4 million. 8. COMPENSATION AND BENEFIT PLANS 401(K) RETIREMENT SAVINGS PLAN. The Company maintains a 401(K) retirement savings plan to provide retirement benefits for substantially all of its employees. Participants in the plan may elect to contribute from 2% to 15% of their annual compensation to the plan, limited to the maximum amount allowed by the Internal Revenue Code. The Company, at its discretion, may make annual contributions to the plan. The Company has made no contributions to the plan through December 31, 2000. 1995 STOCK OPTION/STOCK ISSUANCE PLAN. In January 1995, the Board adopted the 1995 Stock Option/ Stock Issuance Plan (the 1995 Plan), as the successor to the 1991 Stock Option/Stock Issuance Plan. Under the 1995 Plan, 15,718,426 shares of common stock, plus an additional number of shares equal to the lesser of 4,000,000 shares or 6% of the number of shares of Common Stock and Common Stock equivalents outstanding on the first day of each of 1999 and 2000 are authorized for issuance. Under the 1995 Plan, options to purchase common stock may be granted and common stock may be granted at prices not less than 85% of the fair market value at the date of grant/issuance. Options issued to 41 42 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) new employees under the plan become exercisable according to a vesting schedule, which typically provides for the first 25% of the option shares to become available after one year with the remaining shares and options vesting on a pro-rata basis over the following 36 months. Options issued to existing employees typically vest in equal monthly installments over 4 years. 1995 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN. During 1995, the Company adopted the 1995 Non-Employee Directors Stock Option Plan (the Directors Plan), and reserved 412,500 shares for issuance, plus an additional 37,500 shares on the first day of 1999 and 2000. Under the Directors Plan, each non-employee member of the Board is automatically granted an option to purchase 20,000 shares of the Company's stock upon initial appointment or election to the Board, and 10,000 shares of the Company's stock upon reelection to the Board. An additional 5,000 shares are granted to each non-employee director serving on a Board committee, up to a maximum of 10,000 shares each year for committee assignments. Stock options to non-employee directors are granted at no less than 100% of the Fair Market Value on the grant date. Stock options granted upon reelection to the Board vest in 48 equal monthly installments. 2000 SUPPLEMENTAL STOCK OPTION PLAN. In February 2000, the Board adopted the 2000 Supplemental Stock Option Plan (the 2000 Plan). Under the 2000 Plan, 3,000,000 shares of common stock are authorized for issuance. Shares of common stock issued under the plan can be (i) unissued common stock, (ii) treasury shares of common stock, or (iii) re-acquired shares of common stock. Options that are forfeited or terminated before being exercised are returned to pool of authorized shares to be issued. Under the 2000 Plan, employees and consultants can be granted either non-qualified stock options or restricted shares of common stock. Outside Directors and Executive Officers are not eligible for awards under the 2000 Plan. The 2000 Plan prohibits options from being granted at less than 25% of the fair market value on the date of grant. A summary of activity under all option plans is as follows:
OPTIONS OUTSTANDING SHARES ------------------------------------------------ AVAILABLE WEIGHTED-AVERAGE FOR NUMBER EXERCISE GRANT OF SHARES PRICE PER SHARE PRICE PER SHARE --------- --------- --------------- ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Balance at December 31, 1997........... 1,059 6,297 $ 0.01 - $53.75 $24.85 Additional shares reserved............. 3,106 -- -- -- Options granted........................ (7,450) 7,450 $ 8.75 - $22.13 $15.49 Options exercised...................... -- (579) $ 0.03 - $19.19 $ 3.37 Options canceled or expired............ 4,892 (4,892) $ 0.04 - $53.75 $31.20 ------ ------ --------------- ------ Balance at December 31, 1998........... 1,607 8,276 $ 0.01 - $42.50 $14.17 Additional shares reserved............. 1,790 -- -- -- Options granted........................ (3,312) 3,312 $13.88 - $47.38 $20.36 Options exercised...................... -- (1,897) $10.63 - $50.06 $12.63 Options canceled or expired............ 1,584 (1,584) $ 6.33 - $40.00 $15.80 ------ ------ --------------- ------ Balance at December 31, 1999........... 1,669 8,107 $ 0.13 - $47.38 $16.74 Additional shares reserved............. 4,931 -- -- -- Option granted......................... (5,552) 5,552 $16.13 - $56.69 $30.53 Options exercised...................... -- (1,411) $ 0.13 - $47.38 $14.39 Options canceled or expired............ 2,158 (2,158) $ 8.43 - $56.69 $23.55 ------ ------ --------------- ------ Balance at December 31, 2000........... 3,206 10,090 $ 0.13 - $56.69 $23.22 ====== ======
42 43 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The options outstanding under all option plans at December 31, 2000 have been segregated into ranges for additional disclosure as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ----------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE SHARES AVERAGE RANGE OF SHARES CONTRACTUAL EXERCISE CURRENTLY EXERCISE EXERCISE PRICES OUTSTANDING LIFE/YEARS PRICE EXERCISABLE PRICE - --------------- ----------- ----------- -------------- ----------- --------- $0.13 - $14.13.. 2,078,138 7.13 $10.42 1,119,553 $ 8.74 $14.17 - $16.13.. 210,453 8.65 $15.48 77,448 $15.03 $16.16 - $16.75.. 2,065,254 8.77 $16.74 596,162 $16.73 $17.00 - $20.56.. 2,156,464 8.41 $18.35 752,394 $18.40 $21.06 - $56.69.. 3,579,480 9.06 $37.77 727,686 $36.86 ---------- ---- ------ --------- ------ $0.13 - $56.69.. 10,089,789 8.46 $23.22 3,273,243 $18.82 ========== =========
1995 EMPLOYEE STOCK PURCHASE PLAN. In January 1995, the Board and stockholders adopted the Employee Stock Purchase Plan (the Purchase Plan) and reserved 1,200,000 shares for issuance. In May 1998 and May 1999, the Board and stockholders approved amendments to increase by 920,593 and 1,359,269, respectively, the number of shares issuable under the Purchase Plan. Under the Purchase Plan, employees are granted the right to purchase shares of common stock at a price per share that is 85% of the lesser of the fair market value of the shares at: (i) the participant's entry date into the two-year offering period, or (ii) the end of each six-month segment within such offering period. During fiscal 2000, shares totaling 706,591 were issued under the Purchase Plan at an average price of $12.21 per share. ACCOUNTING FOR STOCK OPTIONS AND STOCK PURCHASE RIGHTS. The Company has elected to continue to follow APB 25 and related interpretations in accounting for its employee stock options and employee stock purchase plan because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options and employee stock purchase plans. Under APB 25, as the exercise price of the Company's employee stock options has been equal to the market price of the underlying stock on the date of grant, no compensation expense has been recognized. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and expected option life. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's employee stock options. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options granted and stock purchase rights issued subsequent to December 31, 1994 under the fair value method of SFAS 123. The fair value for 43 44 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) the options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Volatility factor................ 86% 81% 65% Risk-free interest rate.......... 6.03% - 7.86% 4.79% - 6.50% 4.18% - 7.06% Dividend yield................... 0% 0% 0% Expected term.................... 4 - 5 years 4 - 5 years 4 - 5 years
The weighted-average fair values of options granted in 2000, 1999 and 1998 were $26.46, $10.55 and $8.33, respectively. The fair value of the employee's purchase right was also estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Volatility factor................ 86% 81% 65% Risk-free interest rate.......... 7.42% - 8.07% 4.95% - 5.66% 4.38% - 6.19% Dividend yield................... 0% 0% 0% Expected term.................... 6 months 6 months 6 months
The weighted-average fair values for purchase rights issued under the employee stock purchase plan for 2000, 1999 and 1998 were $23.30, $8.16 and $6.19, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to pro forma net income over the options' vesting periods. The Company's historical and pro forma information follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income As reported................................. $33,569 $29,523 $18,977 Pro Forma................................... $18,625 $ 8,322 $ 2,586 Net income per share As reported: Basic.................................... $ 1.09 $ 1.02 $ 0.66 Diluted.................................. $ 1.01 $ 0.95 $ 0.63 Pro Forma: Basic.................................... $ 0.61 $ 0.29 $ 0.09 Diluted.................................. $ 0.73 $ 0.29 $ 0.09
The effects of applying SFAS 123 for recognizing compensation expense and providing pro forma disclosures in 2000, 1999 and 1998 are not likely to be representative of the effect on reported net income in future years. 9. STOCKHOLDER RIGHTS PLAN In July 1997, the Company's Board of Directors (Board) adopted a Stockholder Rights Plan, effective July 25, 1997, and declared a dividend distribution of one Preferred Share Purchase Right (a Right) on each outstanding share of Remedy's common stock. The Rights will not become exercisable, and will continue to trade with the common stock, unless a person or group acquires 20 percent or more of Remedy's common 44 45 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20 percent or more of the Company's common stock. Each Right will entitle a stockholder to buy one one-thousandth of a share of a newly created Series A Junior Participating Preferred Stock of the Company at an exercise price of $230 per one one-thousandth of a share. If a person or group acquires 20 percent or more of Remedy's outstanding common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20 percent or more of the Company's common stock, each Right will entitle its holder (other than the acquiring person or group) to purchase, at the Rights then current exercise price, a number of Remedy's common stock shares having a market value of twice that price. In addition, if Remedy is acquired in a merger or other business combination transaction after a person has acquired 20 percent or more of Remedy's outstanding common stock, each Right will entitle its holder to purchase, at the Right's then current exercise price, a number of the acquiring Company's common shares having a market value of twice that price. Following the acquisition by a person or group of 20 percent or more of Remedy's common stock and prior to an acquisition of 50 percent or more of the common stock, the Board may exchange the Rights (other than Rights owned by such person or group), in whole or in part, for consideration per Right consisting of one-half of the common stock that would be issuable upon exercise of one Right. Alternatively, the Rights may be redeemed for 1/10th of a cent per Right, at the option of the Board, prior to the acquisition by a person or group of beneficial ownership of 20 percent or more of Remedy's common stock or if a person or group announces a tender offer, the consummation of which would result in ownership by a person or group of 20 percent or more of the Company's common stock. The non-taxable dividend distribution was made on August 29, 1997, payable to Stockholders of record on that date. The Rights will expire on July 24, 2007. 10. INCOME TAXES The provision for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Federal: Current..................................... $ 1,531 $ 3,512 $ 8,746 Deferred.................................... (2,763) (1,927) (1,730) ------- ------- ------- (1,232) 1,585 7,016 State: Current..................................... 368 124 1,263 Deferred.................................... (1,000) (373) 300 ------- ------- ------- (632) (249) 1,563 Foreign: Current..................................... 2,764 1,424 1,133 Income tax benefits attributable to employee stock plan activity allocated to stockholders' equity........................ 13,717 11,528 962 ------- ------- ------- Provision for income taxes.................... $14,617 $14,288 $10,674 ======= ======= =======
Pre-tax income from foreign operations was $17.9 million, $4.5 million and $4.6 million for 2000, 1999 and 1998, respectively. 45 46 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The difference between the provision for income taxes and the amount computed by applying the federal statutory income tax rate to income before provision for income taxes is explained below:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Tax at federal statutory rate................. $16,865 $15,334 $10,378 State tax, net of federal benefit............. 1,038 943 1,305 Research and development credit............... (1,121) (1,605) (563) Tax exempt interest income.................... (2,011) (1,119) (1,137) Other......................................... (154) 735 691 ------- ------- ------- Provision for income taxes.................... $14,617 $14,288 $10,674 ======= ======= =======
Significant components of the Company's deferred tax assets:
AS OF DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------ ------ (IN THOUSANDS) Reserves and accruals not yet deductible for tax........................................... $12,690 $6,847 $4,049 Tax credit carryforward......................... 1,488 -- -- Deferred revenue................................ 622 699 729 Unremitted foreign earnings..................... (4,212) (723) (514) Other........................................... 6 8 267 ------- ------ ------ Total deferred tax assets............. $10,594 $6,831 $4,531 ======= ====== ======
As of December 31, 2000, the Company has a federal and state tax credit carryforwards of approximately $1.2 million and $0.4 million respectively, which expires beginning 2018, if not utilized. 11. LITIGATION The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management currently believes that the ultimate amount of liability, if any, with respect to any pending actions, either individually or in the aggregate, will not materially affect the financial position, results of operations or liquidity of the Company. However, the ultimate outcome of any litigation is uncertain. If an unfavorable outcome were to occur, the impact could be material. Furthermore, any litigation, regardless of the outcome, can have an adverse impact on the Company's results of operations as a result of defense costs, diversion of management resources, and other factors. 12. BUSINESS COMBINATIONS In February 2000, the Company acquired Axtive Software, Inc. (Axtive), a privately held provider of web personalization software and Ostream Software, Inc. (Ostream), a privately held software company specializing in the development and marketing of business process automation solutions that are companion to Remedy products. The combined purchase price for the two acquisitions was approximately $10.3 million in cash. Approximately $0.5 million of the purchase price was allocated to acquired workforce, $0.4 million was allocated to the fair value of fixed assets and the remainder, $9.4 million, was categorized as goodwill. The acquired workforce valuation was recorded representing the cost to locate, hire and train qualified replacement employees. All intangibles are being amortized on a straight-line basis over a period of four years from the date of acquisition. The fixed assets are being amortized on a straight-line basis over a period of three years. Approximately $2.2 million of intangibles have been amortized as of December 31, 2000. Total costs related to the Ostream and Axtive acquisitions are expected to be approximately $11.2 million, which consists of the 46 47 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $10.3 million combined purchase prices as well as employee related costs of $0.9 million. Employee related costs comprised primarily of retention bonuses will be expensed as earned over the appropriate service period. The acquisitions were accounted for under the purchase method and accordingly, operating results of Axtive and Ostream have been included in the Company's consolidated financial statements since the date of acquisition. Pro forma results of operations have not been presented since the effect of these acquisitions was not material to the Company's consolidated financial position or results of operations. In June 2000, the Company acquired ESQ System Integrators, Inc. consulting practice (ESQ), a privately held professional service firm specializing in implementation services for Remedy's customer relationship management (CRM) and ITSM solutions. The purchase price for the acquisition was approximately $5.6 million, consisting of $5.0 million cash and $0.6 million of accrued liabilities. Approximately $0.8 million of the purchase price was allocated to acquired workforce and the remainder, $4.8 million, was categorized as goodwill. The acquired workforce valuation was recorded representing the cost to locate, hire and train qualified replacement employees. All intangibles are being amortized on a straight-line basis over a period of four years from the date of acquisition. Approximately $0.8 million of intangibles have been amortized as of December 31, 2000. The total cost of the ESQ acquisition is expected to be approximately $7.3 million, which consists of the $5.6 million purchase price as well as employee related costs of $1.7 million. Employee related costs comprised primarily of retention bonuses, which will be expensed as earned over the appropriate service period. The acquisition was accounted for under the purchase method and accordingly, ESQ's operating results have been included in the Company's consolidated financial statements since the date of acquisition. Pro forma results of operations have not been presented since the effect of this acquisition was not material to the Company's consolidated financial position or results of operations. In September 1999 and July 1999, the Company acquired Fortress Technologies, Inc. (Fortress), a privately held enterprise asset management process consulting firm, and Pipestream Technologies, Inc. (Pipestream), a privately held provider of sales force automation solutions, respectively. The combined purchase price for the two acquisitions was approximately $11.5 million, which consisted of $11.0 million cash, $0.4 million of relocation expenses and $0.1 million assumption of net liabilities. Approximately $0.8 million was allocated to acquired workforce and the remainder, $10.7 million, was categorized as goodwill. The acquired workforce valuation was recorded representing the cost to locate, hire and train qualified replacement employees. All intangibles are being amortized on a straight-line basis over a period of four years from the date of acquisition. A total of $4 million has been amortized as of December 31, 2000. Total costs related to the Fortress and Pipestream acquisitions are expected to be approximately $13.1 million, which consists of the combined purchase prices of $11.5 million accounted for in the third quarter of 1999 as well as employee related costs of approximately $1.6 million, comprised of retention bonuses and forgivable loans that will be expensed over the appropriate service period. The acquisitions were accounted for under the purchase method and accordingly, their operating results have been included in the Company's consolidated financial statements since the date of acquisition. Pro forma results of operations have not been presented since the effect of these acquisitions was not material to the Company's consolidated financial position or results of operations. 13. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners and is to include unrealized gains and losses that have historically been excluded from net income and reflected instead in equity. While the primary component of the Company's comprehensive income is reported net income, the other components of 47 48 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) comprehensive income relate to foreign currency translation adjustments and unrealized hedging gains. Tax effects of comprehensive income/ (loss) are not considered material. 14. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information". SFAS 131 superseded Statement No. 14 (SFAS 14), "Financial Reporting for Segments of a Business Enterprise." SFAS 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates solely in one segment, the development and marketing of rapidly deployable and highly adaptable, software products and solutions that simplify service-intensive business processes. No customer accounted for more than 10% of revenue in 2000, 1999 or 1998. Net revenue from international customers accounted for 38%, 34% and 38% of total net revenue in 2000, 1999 and 1998, respectively. The majority of export sales were made to Canada and Europe. Effective October 1, 1998, the Company began shipping its product from Remedy Software International Limited (RSIL) in Ireland to its customers in Europe, the Middle East and Africa. There were no significant long-lived assets held outside the United States. The following table presents revenue by geographic area (in thousands):
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- Revenues: Domestic operations...................... $179,417 $150,995 $ 97,924 International operations: Europe, Middle East and Africa operations................... 79,526 60,382 44,396 Others................................ 29,566 17,556 15,100 -------- -------- -------- 109,092 77,938 59,496 -------- -------- -------- Consolidated Revenue..................... $288,509 $228,933 $157,420 ======== ======== ========
15. SUBSEQUENT EVENTS (UNAUDITED) In January 2001, the Company entered into an agreement to acquire privately held Deodis SA, a European Asset Management and CRM integrator based in Paris, France. Under the terms of the agreement, Remedy will pay approximately $3.4 million cash in exchange for the share capital of Deodis SA. The acquisition will be accounted for as a purchase, and no material one-time charges are expected. The acquisition is not expected to have a material effect on the Company's financial position or results of operations. In January 2001, the Company approved a plan to discontinue its MRO eProcurement solution product. MRO means maintenance, repair, and operations, or items other than manufacturing material. As part of this restructuring, the Company will terminate two employees and reassign all others. For customers who have already purchased the MRO eProcurement solution, Remedy will continue to provide certain support services for up to one year. The Company will record a restructuring charge of approximately $2.5 million to $3.5 million in the first quarter of 2001 for employee separation costs, write-off of prepaid expenses, and future customer support costs. 48 49 REMEDY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In February 2001, the Company entered into a two year lease agreement in Mountain View, California covering approximately 76,000 square feet of space at approximately $4.8 million annually to which it intends to relocate its principal administrative, sales and marketing facility in Mountain View on or about June 2001 at which time the lease of the existing facility expires. 49 50 REMEDY CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Allowance for Doubtful Accounts (in thousands):
ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER DEDUCTIONS BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS WRITE-OFFS END OF YEAR ----------- ---------- ---------- ---------- ---------- ----------- Year Ended December 31, 2000....... $1,499 $2,397 $0 $2,522(1) $1,374 Year Ended December 31, 1999....... $2,392 $ 156 $0 $1,049(1) $1,499 Year Ended December 31, 1998....... $1,974 $ 526 $0 $ 108(1) $2,392
- --------------- (1) Uncollectible accounts written off, net of recoveries. 50 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 28th day of March, 2001. REMEDY CORPORATION By: /s/ LAWRENCE L. GARLICK ------------------------------------ Lawrence L. Garlick Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ LAWRENCE L. GARLICK Chairman of the Board and March 28, 2001 - -------------------------------------------------------- Chief Executive Officer Lawrence L. Garlick (Principal Executive Officer) /s/ RON J. FIOR Vice President, March 28, 2001 - -------------------------------------------------------- Finance & Operations, Ron J. Fior Chief Financial Officer (Principal Financial and Accounting Officer) /s/ HARVEY C. JONES, JR. Director March 28, 2001 - -------------------------------------------------------- Harvey C. Jones, Jr. /s/ SHERI ANDERSON Director March 28, 2001 - -------------------------------------------------------- Sheri Anderson /s/ JOHN F. SHOCH Director March 28, 2001 - -------------------------------------------------------- John F. Shoch /s/ DAVID A. MAHLER Director March 28, 2001 - -------------------------------------------------------- David A. Mahler /s/ JOHN OLSEN Director March 28, 2001 - -------------------------------------------------------- John Olsen
51 52 EXHIBIT INDEX
EXHIBIT NO. DOCUMENT DESCRIPTION - ----------- -------------------- 3.1*** Amended and Restated Certificate of Incorporation of the Registrant. 3.2**** Amended and Restated Bylaws of the Registrant. 4.1* Reference is made to Exhibits 3.1 and 3.2. 4.2* Specimen Common Stock certificate. 4.3* Restated Investor Rights Agreement, dated May 4, 1992, among the Registrant and the investors and the founders named therein. 4.4* Amendment of Restated Investor Rights Agreement, dated April 23, 1994, among the Registrant and the investors named therein. 4.5* Second Amendment of Restated Investor Rights Agreement, dated January 18, 1995, among the Registrant and the investors named therein. 4.6** Rights Agreement dated as of July 25, 1997, between the Company and Harris Trust Savings Bank, including the Certificate of Designation of Series A Junior Participating Preferred Stock, Form of Right Certificate and Summary of Rights to Purchase Preferred Shares attached thereto as Exhibits A, B and C, respectively. 10.1* Form of Indemnification Agreement entered into between the Registrant and its directors and officers. 10.2* The Registrant's 1991 Stock Option/Stock Issuance Plan and forms of agreements thereunder. 10.3* The Registrant's 1995 Stock Option/Stock Issuance Plan and forms of agreements thereunder. 10.4* The Registrant's Employee Stock Purchase Plan and forms of agreements thereunder. 10.5* The Registrant's 1995 Non-Employee Directors Stock Option Plan and forms of agreements thereunder. 10.6* Lease Agreement by and between the Registrant and Charleston Properties (Charleston), dated March 11, 1994, regarding the space located at 1500 Salado Drive. 10.7* Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc. (Sun), dated March 11, 1994, regarding the space located at 1500 Salado Drive, and related consent of Charleston, dated March 10, 1994. 10.8* Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc., dated March 11, 1994, regarding the space located at 1505 Salado Drive, and related consent of Peery/Arrillaga, dated March 9, 1994. 10.9* Form of Action Request System Shrink Wrap License Agreement. 10.10* Form of Value Added Reseller Agreement. 10.11**** Amended and Restated Business Loan Agreement by and between the Registrant and SVB, dated June 15, 1997. 10.12**** Amended and Restated Promissory Note by and between the Registrant and SVB, dated June 15, 1997. 10.13**** Lease Agreement by and between the Registrant and Greiner, Inc. Pacific, dated March 29, 1996, regarding the space located at 5890 Stoneridge Drive. 10.14**** Lease Agreement by and between the Registrant and Viacom International Inc., dated March 17, 1997, regarding the space located at 5924 Stoneridge Drive. 10.15***** Business Loan Agreement by and between the Registrant and Silicon Valley Bank (SVB), dated July 20, 1998. 10.16****** First Amendment to Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc., dated June 23, 1994, regarding the space located at 1505 Salado Drive. 10.17****** Second Amendment to Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc., dated September 30, 1996, regarding the space located at 1505 Salado Drive. 10.18****** Third Amendment to Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc., dated June 30, 1999, regarding the space located at 1505 Salado Drive.
53
EXHIBIT NO. DOCUMENT DESCRIPTION - ----------- -------------------- 10.19****** Lease Agreement by and between the Registrant and LSI Logic Europe, Limited, dated August 20, 1999, regarding the first floor leased space located at Greenwood House, 5 London Road, Bracknell, Berkshire. 10.20****** Lease Agreement by and between the Registrant and LSI Logic Europe, Limited, dated August 20, 1999, regarding the ground floor and other leased space located at Greenwood House, 5 London Road, Bracknell, Berkshire. 10.21 Lease Agreement by and between the Registrant and Ariba, Inc., dated February 15, 2001, regarding the space located at 1565 and 1585 Charleston Road. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors.
- --------------- * Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-89026). ** Incorporated by reference from the Exhibits to Remedy Corporation's Form 8-A, dated July 29, 1997. *** Incorporated by reference from the Exhibits to Remedy Corporation's Definitive Proxy Statement for Annual Meeting of Stockholders, dated April 16, 1997. **** Incorporated by reference from the Exhibits to Remedy Corporation's Form 10-K Annual Report for the year ended December 31, 1997. ***** Incorporated by reference from the Exhibits to Remedy Corporation's Form 10-K Annual Report for the year ended December 31, 1998. ****** Incorporated by reference from the Exhibits to Remedy Corporation's Form 10-K Annual Report for the year ended December 31, 1999. Remedy, Remedy Corporation and design, Action Request System, AR System, AR Web, Flashboards, Distributed Server Option, Remedy Help Desk, Remedy Asset Management, Remedy Change Management, Remedy Service Level Agreements, Remedy Approved Server, Remedy Strategic Service Suite, Remedy Web, Multi-Processing Server Option, Full Text Search Option, BayStone, Remedy Quality Management, Remedy Year 2000 Compliance Manager, Remedy Customer Support and Remedy Leads Management are all registered or other trademarks of Remedy Corporation. All other trademarks and registered trademarks mentioned in this Report on Form 10-K may be trademarks, registered trademarks or service marks of the companies with which they are associated. 54 R-CRP-10US00-01 EX-10.21 2 f70472ex10-21.txt EXHIBIT 10.21 1 EXHIBIT 10.21 SUB-SUBLEASE AGREEMENT This SUB-SUBLEASE AGREEMENT (the "Sublease") is made and entered into this ___ day of February, 2001, by and between Ariba, Inc., a Delaware corporation ("Sublandlord") and Remedy Corporation, a Delaware corporation ("Subtenant"), with reference to the following facts: RECITALS A. Sublandlord is the subtenant under that certain sublease dated February 15, 1999, by and between Sublandlord, as subtenant, and 3Com Corporation, a Delaware corporation, as successor-in-interest to U.S. Robotics Access Corporation, a Delaware corporation ("Master Sublandlord"), as sublandlord, a copy of which is attached hereto as Exhibit A (the "Master Sublease"), under which Sublandlord subleases the premises commonly described as 1565 and 1585 Charleston Road, Mountain View, California consisting of one hundred thirty-one thousand five hundred eighty (131,580) rentable square feet (the "Premises"). B. The Master Sublease is a sublease under and is subordinate to that certain lease dated June 12, 1996 by and between Charleston Place Associates, a California general partnership (the "Master Landlord"), as landlord, and U.S. Robotics Access Corporation, a Delaware corporation, as tenant, a copy of which is attached hereto as Exhibit B (the "Master Lease"), under which Master Landlord leases to Master Sublandlord the Premises. Master Landlord has consented to the Master Sublease in a written Consent to Sublease, a copy of which is included in Exhibit B. All references herein to the Master Lease shall also include the Consent to Sublease. C. Subtenant now desires to sublease from Sublandlord, and Sublandlord now desires to sublease to Subtenant, a portion of the Premises consisting of seventy-five thousand seven hundred eighty (75,780) rentable square feet more commonly known as 1585 Charleston Road, Mountain View, California, as more particularly described on Exhibit C attached hereto and incorporated herein (the "Sublease Premises"). D. Any capitalized terms not otherwise defined herein shall have the meaning ascribed thereto in the Master Sublease and Master Lease. In the event of a conflict between a definition in this Sublease and in the Master Sublease or Master Lease, the Sublease definition shall control. AGREEMENT NOW THEREFORE, Sublandlord and Subtenant agree as follows: 1 2 1. SUBLEASE. Sublandlord hereby subleases to Subtenant, and Subtenant hereby subleases from Sublandlord, the Sublease Premises on the terms and conditions contained herein. 2. TERM. 2.1 TERM. Subject to the other provisions of this Article 2 and receipt of the consents referenced in Article 29, the term of this Sublease (hereinafter "Term") shall commence on April 23, 2001 (the "Commencement Date") and shall expire on May 31, 2003 (the "Expiration Date"), unless earlier terminated pursuant to the terms of this Sublease or the termination of the Master Sublease. 2.2 DELAY IN DELIVERY OF POSSESSION. Notwithstanding the provisions of Section 2.1 above, if for any reason Sublandlord fails to deliver possession of the Sublease Premises to Subtenant on the Commencement Date, Sublandlord shall not be subject to any liability on account of said failure to deliver, nor shall such failure affect the validity of this Sublease or the obligations of Subtenant hereunder or extend the term hereof, but in such event Subtenant shall have a right to abatement of Base Rent (other than the amounts due at execution of this Sublease) until possession of the Sublease Premises is tendered to Subtenant. If Sublandlord has not delivered possession of the Sublease Premises on or before June 23, 2001, then Subtenant, as its sole remedy, shall have the option of terminating this Sublease and, upon notice of such termination to Sublandlord, Sublandlord shall promptly refund any monies previously tendered by Subtenant, this Sublease shall immediately terminate and neither party shall have any further rights or obligations under this Sublease. Notwithstanding the foregoing, to the extent delivery of possession of the Sublease Premises is delayed as a result of any act or omission of Subtenant or its agents, Sublandlord shall be deemed to have delivered possession of the Sublease Premises as of Commencement Date or such later date as Sublandlord could have tendered possession if no such act or omission had occurred. 3. RIGHT TO EXTEND TERM. Subtenant shall have the right to extend the Term of this Sublease for one (1) additional period of up to six (6) months (the "Extension Period") if: A. Sublandlord receives notice of exercise ("Renewal Notice") not later than November 30, 2002; and B. Subtenant is not in default hereunder beyond any applicable cure periods at the time that Tenant delivers its Renewal Notice; and C. This Sublease has not been assigned (other than to an Affiliate or pursuant to a Permitted Transfer referenced in Article 11 below), and not more than 20% of the Sublease Premises has been further sublet by Subtenant (other than to an Affiliate or pursuant to a Permitted Transfer referenced in Article 11 below), prior to the date on which Tenant delivers its Renewal Notice. 2 3 Base Rent for the Extension Period shall be Four Hundred Thirty-Five Thousand Seven Hundred Thirty-Five ($435,735) per month. The Renewal Notice shall specify the expiration date of the Extension Period, which shall be the last day of a calendar month. Base Rent and Additional Rent for the Extension Period shall be payable on the same terms as such items are payable hereunder during the initial Term. 4. RENT. 4.1 BASE RENT. Commencing on the later of (i) May 15, 2001, or (ii) fourteen (14) days following the date that possession of the Sublease Premises are delivered to Subtenant by Sublandlord ("Rent Commencement Date"), Subtenant shall pay to Sublandlord, as monthly base rent, the following (the "Base Rent"): A. for the first twelve (12) months of this Sublease beginning with the Commencement Date, Base Rent shall be Three Hundred Ninety Seven Thousand Eight Hundred Forty Five ($397,845) per month. B. for the balance of the initial Term, Base Rent shall be Four Hundred Sixteen Thousand Seven Hundred Ninety ($416,790) per month. For purposes of determining the Rent Commencement Date, to the extent delivery of possession of the Sublease Premises is delayed as a result of any act or omission of Subtenant or its agents, Sublandlord shall be deemed to have delivered possession of the Sublease Premises as of the Commencement Date or such later date as Sublandlord could have tendered possession if no such act or omission had occurred. Base Rent shall be paid in equal monthly installments in advance on the first day of each calendar month of the Term; provided, that Three Hundred Ninety Seven Thousand Eight Hundred Forty Five (397,845) ("First Month's Pre-Paid Rent"), to be credited against the first full month of Base Rent, shall be paid by Subtenant to Sublandlord within two (2) business days following receipt of Master Landlord's and Master Sublandlord's consent to this Sublease; and an amount sufficient to pay Base Rent for the remainder of any calendar month which is partially paid by the First Month's Pre-Paid Rent, also to be credited against Base Rent, shall be paid by Subtenant to Sublandlord on the first day of such calendar month. For example, if the Rent Commencement Date is May 15, 2001, then the First Installment of Pre-paid Rent shall cover the period May 15 through June 14, 2001, and Subtenant will pay Base Rent of $212,184 (for the 16 day period June 15 - 30, 2001) on June 1, 2001. If the Rent Commencement Date is June 4, 2001, then the First Installment of Pre-paid Rent shall cover the period June 4 through July 3, 2001, and Subtenant will pay Base Rent of $346,510.16 (for the 27 day period July 4 - 31, 2001) on July 1, 2001. 4.2 ADDITIONAL RENT. If and to the extent that Sublandlord is obligated to pay Operating Expenses and/or Additional Rent under the Master Sublease, Subtenant shall pay to Sublandlord, fifty-eight percent (58%) of all such amounts payable during the term of this Sublease (the "Sublease Share"). Notwithstanding the foregoing, the Sublease Share shall be equitably adjusted by the parties for any item of Operating Expenses or Additional 3 4 Rent that relates to or benefits the Sublease Premises disproportionately as compared to the balance of the Premises, or that arises as the result of the negligence or willful misconduct of Sublandlord or Subtenant or any of their employees, agents or invitees or a breach of this Sublease by Sublandlord or Subtenant. As an example but not in limitation of the generality of the foregoing, the Sublease Share payable by Subtenant would be 100% with respect to any cost to repair the building located on the Sublease Premises that is payable as an Operating Expense or Additional Rent under the Master Sublease. Similarly, and again as an example only, the Sublease Share payable by Subtenant would be 0% with respect to any cost to repair the building at 1565 Charleston so long as such building is a part of the Premises but not part of the Sublease Premises. Any reasonably adjustment in the Sublease Share by Sublandlord shall be rebuttably presumed to be correct. In addition, Subtenant shall pay additional rent payable under the Master Sublease to the extent payable as a result of services requested or consumed by Subtenant on the Sublease Premises. The Sublease Share is calculated by dividing the rentable area of the Sublease Premises by the rentable area of the Premises leased by Master Sublandlord to Sublandlord pursuant to the Master Sublease. In the event the rentable area of the Premises or the area of the premises leased pursuant to the Master Sublease shall be changed during the Term, then the Sublease Share shall be recalculated. All payments under this Section 4.2 shall be due from Subtenant to Sublandlord no fewer than five (5) days prior to the date upon which Sublandlord's payment of Operating Expenses and/or Additional Rent is due to the Master Sublandlord, provided that Subtenant shall have been billed therefor at least ten (10) days prior to such due date (which bill shall be accompanied by a copy of Master Sublandlord's bill and other material furnished to Sublandlord in connection therewith). Sublandlord shall refund to Subtenant any overpayment by Subtenant of Operating Expenses and/or Additional Rent to the extent of the Sublease Share of reimbursement received by Sublandlord under the Master Sublease. 4.3 GENERALLY. Base Rent shall be payable to Sublandlord at 1565 Charleston Road, Mountain View, California; Attention: Real Estate Manager, or to such other payee or at such other address as may be designated by notice in writing from Sublandlord to Subtenant, in lawful money of the United States without prior demand therefor and without any setoff, deduction, abatement, or offset whatsoever, except as provided herein. Base Rent shall be pro-rated for partial months at the beginning and end of the Term. All charges, costs and sums required to be paid by Subtenant to Sublandlord under this Sublease in addition to Base Rent shall be deemed "Additional Rent," and Base Rent and Additional Rent shall hereinafter collectively be referred to as "Rent." Subtenant's covenant to pay Rent shall be independent of every other covenant in this Sublease. If Rent is not paid when due, Subtenant shall pay, relative to the delinquent payment, an amount equal to the sum which would be payable by Sublandlord to Master Sublandlord for late payment of the same dollar amount under the Master Sublease. With respect to the first late payment in any 12 month period, the foregoing late fee shall not be payable if Subtenant pays the full delinquent amount within ten (10) days following written notice from Sublandlord that such amount has not been paid. 5. SECURITY DEPOSIT. To secure the faithful performance by Subtenant of all the covenants, conditions and agreements in this Sublease set forth and contained on the part of 4 5 Subtenant to be fulfilled, kept, observed and performed including, but not by way of limitation, such covenants and agreements in this Sublease which become applicable upon the termination of the same by re-entry or otherwise, Subtenant shall deposit with Sublandlord, within five (5) business days following receipt of Master Landlord's and Master Sublandlord's consent to this Sublease, a security deposit in the amount of Four Hundred Seventy Three Thousand Six Hundred Twenty Five Dollars ($473,625) (the "Security Deposit"). The Security Deposit may be in the form of cash or an irrevocable standby letter of credit, as described below. Subtenant agrees that: (a) the Security Deposit or any portion thereof may be applied to the curing of any default that may then exist, without prejudice to any other remedy or remedies which Sublandlord may have on account thereof, and upon such application Subtenant shall pay Sublandlord on demand the amount so applied which shall be added to the Security Deposit so the same may be restored to its original amount; (b) should the Master Sublease be assigned by Sublandlord, the Security Deposit or any portion thereof not previously applied shall be turned over to Sublandlord's assignee, and upon express assumption of Sublandlord's obligations under this Sublease Subtenant shall release Sublandlord from any and all liability with respect to the Security Deposit and/or its application or return; (c) Sublandlord or its successor shall not be obligated to hold the Security Deposit as a separate fund, but on the contrary may commingle the same with its other funds; (d) the sum deposited or the portion thereof not previously applied, shall be returned to Subtenant without interest following the expiration of the Term of this Sublease or any renewal or extension thereof, except to the extent reasonably required to cure any breach by Subtenant of any of its obligations hereunder and provided that Subtenant has vacated the Sublease Premises and surrendered possession thereof to Sublandlord at the expiration of the Term or any extension or renewal thereof as provided herein; (e) in the event that Sublandlord terminates this Sublease or Subtenant's right to possession by reason of an Event of Default by Subtenant, Sublandlord may apply the Security Deposit against damages suffered to the date of such termination and/or may retain the Security Deposit to apply against such damages as may be suffered or shall accrue thereafter by reason of Subtenant's default; (f) in the event any bankruptcy, insolvency, reorganization or other creditor-debtor proceedings shall be instituted by or against Subtenant, or its successors or assigns, the Security Deposit shall be deemed to be applied first to the payment of any Rent due Sublandlord for all periods prior to the institution of such proceedings, and the balance, if any, of the Security Deposit may be retained or paid to Sublandlord in partial liquidation of Sublandlord's damages. If Subtenant elects to deposit the Security Deposit by a letter of credit, such letter of credit shall be an irrevocable, unconditional, standby letter of credit in a form substantially similar to the form attached hereto as Exhibit D and incorporated herein (such letter of credit, together with any renewal or replacement letters of credit delivered or to be delivered by Subtenant under this Section, shall be referred to herein collectively as the "Letter of Credit"). The Letter of Credit shall be issued by a national money center bank with an office in San Francisco, California (the "Issuer"). The final form of the Letter of Credit, the identity of the Issuer, and the form of any replacement Letter of Credit shall be acceptable to Sublandlord in its sole discretion. The Letter of Credit shall be for an initial term of not less than twelve (12) months and shall be maintained in force at all times from issuance through sixty (60) days following the expiration or earlier termination of this Sublease. If Subtenant 5 6 fails to deliver to Sublandlord either a replacement Letter of Credit or cash in the full amount of the Security Deposit required hereunder at least forty-five (45) days prior to the expiration date of an outstanding Letter of Credit, such failure shall be a default under this Sublease (without the requirement of notice) entitling Sublandlord, in addition to its other remedies, to draw down all or part of the current Letter of Credit. Sublandlord shall have the right, upon a transfer or assignment of its rights as landlord under this Sublease, to require Subtenant to deliver a replacement Letter of Credit designating Sublandlord's successor as the beneficiary, at Subtenant's sole cost and expense. No draw under the Letter of Credit shall be deemed a waiver of, or be deemed to have cured, any default by Subtenant under any provision of this Sublease except to the extent directly applied to cure such default(s). 6. USE. The Sublease Premises shall be used and occupied only for general office, administration, research and development, and for no other purpose. Subtenant's use of the Sublease Premises shall comply with all restrictions and regulations on use contained in either the Master Lease or the Master Sublease, or both, the Declaration of Covenants, Conditions and Restrictions for Charleston Place dated July 16, 1991, and all other restrictions of record. 7. CONDITION OF SUBLEASE PREMISES. Sublandlord shall deliver the Sublease Premises to Subtenant with the heating, ventilation, air conditioning, plumbing, and electrical systems of the Sublease Premises in good working condition and repair. To the best knowledge of Sublandlord, the roof, landscaping, structural components and parking areas of the Sublease Premises are in good working condition and repair. Subtenant acknowledges and agrees that Sublandlord shall have the right, but not the obligation, to remove or disable the existing security system in the Sublease Premises prior to delivering possession of the Sublease Premises to Subtenant. The taking of possession of the Sublease Premises by Subtenant shall constitute an acknowledgment by Subtenant that the Sublease Premises are in good working condition and repair, and that all work and materials provided by Sublandlord, Master Sublandlord and Master Landlord are satisfactory, except as to any defect agreed to in writing by Sublandlord and Subtenant at a walk through to be conducted prior to transfer of possession, and any latent defects that are described in written notice given by Subtenant to Sublandlord not later than sixty (60) days after delivery of possession to Subtenant. Any damage to the Sublease Premises caused by Subtenant's move-in shall be repaired or corrected by Subtenant at its expense. Subtenant acknowledges that neither Sublandlord nor its agents have made any representations or warranties as to the suitability or fitness of the sublease Premises for the conduct of Subtenant's business or for any other purposes. Except as otherwise expressly set forth herein, the Sublease Premises shall be delivered by Sublandlord to Subtenant AS IS and Subtenant agrees that it takes possession of the Sublease Premises without relying on any representation or warranty by Sublandlord as to the condition of the Sublease Premises other than as expressly specified herein. 8. SUBTENANT'S OBLIGATIONS. Subtenant shall directly contract for all utilities and telecommunications services to serve the Sublease Premises, and shall pay all utility consumption costs, including without limitation, electric and other charges incurred in connection with lighting, and providing electrical power to the Sublease Premises. Subject to the provisions of this Sublease, Subtenant shall hold Sublandlord harmless from all cost or expenses Sublandlord may incur from Subtenant's failure to pay utility bills or to perform any 6 7 of its obligations with respect to the purchase of utilities and all maintenance, repairs and replacements with respect to the Sublease Premises to the extent Sublandlord is obligated to perform the same under the Master Sublease after the Commencement Date. Except as otherwise provided herein, Subtenant shall be responsible for all maintenance, repair and replacement obligations with respect to the Sublease Premises that are the responsibility of Sublandlord under the Master Sublease. If any such maintenance, repair or replacement requires an expenditure which is required to be capitalized under generally accepted accounting principles, Subtenant shall perform such obligation, the expenditure required to be capitalized shall be allocated between Sublandlord and Subtenant in accordance with the following formula, and Sublandlord shall reimburse Subtenant for Sublandlord's share of such cost. Sublandlord's reimbursement obligation shall be equal to the total amount of the capitalized expenditure times a fraction, the numerator of which is the number of months remaining of the term of the Master Sublease following expiration of the term of this Sublease, and the denominator is the total number of months remaining of the term of the Master Sublease. By way of example, if there are 12 months remaining in the term of this Sublease, and 48 month remaining in the term of the Master Sublease, Sublandlord's reimbursement obligation would be 3/4 of the amount of the capitalized expenditure (numerator = 48 - 12; denominator = 48). 9. QUIET ENJOYMENT. Sublandlord represents that is has full power and authority to enter into this Sublease, subject to the consent of the Master Sublandlord and Master Landlord. So long as Subtenant is not in default in the performance of its covenants and agreements in this Sublease, Subtenant's quiet and peaceable enjoyment of the Sublease Premises shall not be disturbed or interfered with by Sublandlord, or by any person claiming by, through, or under Sublandlord. 10. SUBTENANT'S INSURANCE. Subtenant shall procure and maintain, at its own cost and expense, (i) such liability insurance as is required to be carried by Sublandlord under the Master Sublease, naming Sublandlord, Master Sublandlord and Master Landlord in the manner required therein, and (ii) such property insurance as is required to be carried by Sublandlord under the Master Sublease to the extent such property insurance pertains to the Sublease Premises. If the Master Sublease requires Sublandlord to insure leasehold improvements or alterations, then Subtenant shall insure such leasehold improvements which are located in the Sublease Premises, as well as alterations in the Sublease Premises made by Subtenant. Subtenant shall furnish to Sublandlord a certificate of Subtenant's insurance required hereunder not later than ten (10) days prior to Subtenant's taking possession of the Sublease Premises. Each party hereby waives claims against the other for property damage to the extent the cost to restore such damage in insured under applicable insurance policies payable to the waiving party and provided such waiver shall not invalidate the waiving party's property insurance; each party shall attempt to obtain from its insurance carrier a waiver of its right of subrogation. Subtenant hereby waives claims against Sublandlord, Master Landlord and Master Sublandlord for property damage to the Sublease Premises or its contents if and to the extent that Sublandlord waives such claims under the Master Sublease or the Master Lease. Subtenant agrees to obtain, for the benefit of Master Sublandlord, Master Landlord and Sublandlord, such waivers of subrogation rights from its insurer as are required of Sublandlord under the Master Sublease or the Master Lease. Sublandlord agrees 7 8 to use reasonable efforts in good faith to obtain from Master Sublandlord and Master Landlord a waiver of claims for insurable property damage losses and an agreement from Master Sublandlord and Master Landlord to obtain a waiver of subrogation rights in Master Sublandlord's and Master Landlord's property insurance, if and to the extent that Master Sublandlord and Master Landlord waives such claims against Sublandlord under the Master Sublease or Master Lease or is required under the Master Sublease or Master Lease to obtain such waiver of subrogation rights. 11. ASSIGNMENT AND SUBLETTING. Without the prior written consent of Sublandlord, Master Landlord and Master Sublandlord, Subtenant shall not (i) assign, convey or mortgage this Sublease or any interest under it; (ii) allow any transfer thereof or any lien upon Subtenant's interest by operation of law; (iii) further sublet the Sublease Premises or any part thereof, or (iv) permit the occupancy of the Sublease Premises or any part thereof by anyone other than Subtenant. Sublandlord's consent to an assignment of this Sublease or a further sublease of the Sublease Premises shall not be unreasonably withheld or conditioned and shall be delivered or withheld within fifteen (15) business days after Subtenant's request for such consent. If Sublandlord consents thereto, Sublandlord shall use reasonable efforts to obtain as quickly as reasonably possible the consent of Master Sublandlord and Master Landlord; but Sublandlord shall have no liability to Subtenant if Master Landlord or Master Sublandlord fails to consent. Any cost of obtaining the consent of Master Landlord and Master Sublandlord shall be borne by Subtenant. No permitted assignment shall be effective and no permitted sublease shall commence unless and until any default by Subtenant hereunder shall have been cured. No permitted assignment or subletting shall relieve Subtenant from Subtenant's obligations and agreements hereunder and Subtenant shall continue to be liable as a principal and not as a guarantor or surety to the same extent as though no assignment or subletting had been made. If expressly approved by Master Sublandlord and Master Landlord in their respective consents to this Sublease, Subtenant shall have the right to consummate Permitted Transfers, without the consent of Sublandlord, Master Sublandlord or Master Landlord and transfers to Subtenant's "affiliates" (as defined in Paragraph 9(g) of the Master Lease) subject only to the conditions referenced in 9(e) and (g) of the Master Lease, as if Subtenant were the tenant thereunder. 12. RESERVED. 13. RESERVED. 14. SIGNAGE. Subtenant and Sublandlord shall share monument signage rights and proportionate costs for such signage on Charleston Road and Huff Street as shown on Exhibit E attached hereto and incorporated herein (the "Signage Specifications"). All such signage shall be subject to Master Sublandlord's approval, Master Landlord's approval and the approval of all applicable governing entities, including, but not limited to the City of Mountain View and the Declaration of Covenants, Conditions and Restrictions for Charleston Place dated July 16, 1991. 15. PARKING. Subtenant shall be entitled to use its Sublease Share of the parking spaces made available to Sublandlord under the Master Sublease. 8 9 16. RULES. Subtenant agrees to comply with all rules and regulations currently in place or hereafter promulgated under the Master Sublease or Master Lease in connection with the Sublease Premises, including but not limited to the Rules and Regulations attached as Exhibit C to the Master Lease and incorporated by reference into the Master Sublease. Sublandlord shall not be liable in any way for damage caused by the non-observance of such rules and regulations by any other occupants of the Premises. 17. REPAIRS AND COMPLIANCE. Subtenant shall promptly pay for the repairs set forth in Section 8 hereof and Subtenant shall, at Subtenant's own expense, comply with all laws and ordinances, and all orders, rules and regulations of all governmental authorities and of all insurance bodies and their fire prevention engineers at any time in force, applicable to the Sublease Premises or to Subtenant's use or manner of use thereof required to be performed by Sublandlord under the Master Lease, except that Subtenant shall not hereby be under any obligation to comply with any law, ordinance, rule or regulation requiring any expenditure required to be capitalized under generally accepted accounting principles or structural alteration of or in connection with the Sublease Premises, unless such alteration is required by reason of Subtenant's particular use or manner of use of the Sublease Premises, or is required by reason of a breach of any of Subtenant's covenants and agreements hereunder. As used herein "structure" or "structural" shall have the definition ascribed to it in the Master Sublease or if no specific definition is given therein then "structure" or "structural" shall mean that portion of the Building which is integral to the integrity of the Building as an existing enclosed unit and shall, in any event, include footings, foundation, outside walls, skeleton, bearing columns and interior bearing walls, floor slabs, roof and roofing system. Capital expenditures required of Subtenant under this Section shall be performed by Subtenant and the cost thereof shall be allocated between the Sublandlord and Subtenant in accordance with the procedure described in Article 8 above. 18. FIRE OR CASUALTY OR EMINENT DOMAIN. In the event of a fire or other casualty affecting the Sublease Premises, or of a taking of all or a part of the Sublease Premises under the power of eminent domain, Sublandlord shall not exercise any right which may have the effect of terminating the Master Sublease without first obtaining the prior written consent of Subtenant. In the event Sublandlord is entitled, under the Master Sublease, to a rent abatement as a result of a fire or other casualty or as a result of a taking under the power of eminent domain, then Subtenant shall be entitled to the Sublease Share of such rent abatement unless the effect on the Sublease Premises of such fire or other casualty or such taking shall be substantially disproportionate to the amount of the abatement, in which event the parties shall equitably adjust the abatement as between themselves, based on the relative impact of the fire or other casualty, or the taking, as the case may be. If the Master Sublease imposes on Sublandlord or Master Sublandlord, or the Master Lease imposes on Master Landlord, the obligation to repair or restore leasehold improvements or alterations, Subtenant shall make any insurance proceeds resulting from the loss which Sublandlord, Master Sublandlord or Master Landlord or Master Landlord is obligated to repair or restore available to such party and shall permit such party to enter the Sublease Premises to perform the same. Subtenant shall have the right to terminate the Sublease as a result of a casualty or condemnation only to the extent Sublandlord has the right to terminate the Master Sublease as a result of such event. 9 10 19. ALTERATIONS. Subject to obtaining all applicable governmental permits and approvals, and the consents of Master Sublandlord and Master Landlord, Subtenant shall have the right, at Subtenant's sole cost and expense, to upgrade to the primary building lobby and an upgrade the first floor "break area" by constructing a kitchen according to the preliminary plans attached hereto as Exhibit F (the "Initial Alterations"). Prior to beginning the Initial Alterations, Subtenant shall submit detailed, final plans to Sublandlord for Sublandlord's review and approval. Sublandlord's approval of such plans shall not be unreasonably withheld, and if Sublandlord consents thereto, Sublandlord shall use reasonable efforts to obtain the consent of Master Sublandlord and Master Landlord. If the Initial Alterations by Subtenant are permitted or consented to as aforesaid, Subtenant shall comply with all of the covenants of Sublandlord contained in the Master Sublease pertaining to the performance of such alterations. In addition, Subtenant shall indemnify, defend and hold harmless Sublandlord against liability, loss, cost, damage, liens and expense imposed on Sublandlord arising out of the performance of Alterations by Subtenant. Notwithstanding the foregoing, Subtenant shall not make any alterations in or additions to the Sublease Premises if to do so would constitute a default under the Master Sublease or the Master Lease. Subtenant shall make no other alterations or improvements to the Sublease Premises ("Alterations") without the prior written approval of Sublandlord, which shall not be unreasonably withheld, conditioned or delayed (and shall be delivered or withheld within fifteen (15) days after request therefor), and the approval of Master Landlord and Master Sublandlord. 20. SURRENDER. Upon the expiration of this Sublease, or upon the termination of the Sublease or of the Subtenant's right to possession of the Sublease Premises, Subtenant will at once surrender and deliver up the Sublease Premises, together with all improvements thereon, to Sublandlord in good condition and repair, reasonable wear and tear excepted; conditions existing because of Subtenant's failure to perform maintenance, repairs or replacements are required of Subtenant under this Sublease shall not be deemed "reasonable wear and tear." Said improvements shall include all plumbing, lighting, electrical, heating, cooling and ventilating fixtures and equipment and other articles of personal property used in the operation of the Sublease Premises (as distinguished from operations incident to the business of Subtenant). Subtenant shall surrender to Sublandlord all keys to the Sublease Premises and make known to Sublandlord the combination of all combination locks which Subtenant is permitted to leave on the Sublease Premises. All Alterations in or upon the Premises made by Subtenant shall become a part of and shall remain upon the Sublease Premises upon such termination without compensation, allowance or credit to Subtenant; provided, however, that Sublandlord shall have the right to require Subtenant to remove any Alterations (other than the Initial Alterations) made by Subtenant, or portion thereof. Said right shall be exercisable by Sublandlord's giving written notice thereof to Subtenant concurrently with Sublandlord's consent to such Alterations. Subtenant shall also remove any Alterations made by Subtenant, or portion thereof, including the Initial Alterations, which the Master Landlord or Master Sublandlord require to be removed. In connection with any removal of Alterations (including the Initial Alterations) by Subtenant, Subtenant shall restore the Sublease Premises to their condition prior to the making of such Alteration, repairing any damage occasioned by such removal or restoration. If Master Landlord or Master 10 11 Sublandlord requires removal of any Alteration made by Subtenant, or a portion thereof, and Subtenant does not make such removal in accordance with this Section, Sublandlord may remove the same (and repair any damage occasioned thereby), and dispose thereof, or at its election, deliver the same to any other place of business of Subtenant, or warehouse the same. Subtenant shall pay the costs of such removal, repair, delivery and warehousing on demand. Subtenant shall not be required to remove any alterations performed by Landlord prior to the Commencement Date or to restore the Sublease Premises to their condition prior to the making of such alterations. 21. REMOVAL OF SUBTENANT'S PROPERTY. Upon the expiration of this Sublease, Subtenant shall remove Subtenant's articles of personal property incident to Subtenant's business ("Trade Fixtures"); provided, however, that Subtenant shall repair any injury or damage to the Sublease Premises which may result from such removal, and shall restore the Sublease Premises to the same condition as prior to the installation thereof. If Subtenant does not remove Subtenant's Trade Fixtures from the Sublease Premises prior to the expiration or earlier termination of the Term, Sublandlord may, at its option, remove the same (and repair any damage occasioned thereby and restore the Sublease Premises as aforesaid) and dispose thereof or deliver the same to any other place of business of Subtenant, or warehouse the same, and Subtenant shall pay the cost of such removal, repair, restoration, delivery or warehousing to Sublandlord on demand, or Sublandlord may treat said Trade Fixtures as having been conveyed to Sublandlord with this Lease as a bill of sale, without further payment or credit by Sublandlord to Subtenant. 22. HOLDING OVER. Subtenant shall have no right to occupy the Sublease Premises or any portion thereof after the expiration of this Sublease or after termination of this Sublease or of Subtenant's right to possession in consequence of an Event of Default hereunder. In the event Subtenant or any party claiming by, through or under Subtenant holds over, Sublandlord may exercise any and all remedies available to it at law or in equity to recover possession of the Sublease Premises, and to recover damages, including without limitation, damages payable by Sublandlord to Master Sublandlord by reason of such holdover. For each and every month or partial month that Subtenant or any party claiming by, through or under Subtenant remains in occupancy of all or any portion of the Sublease Premises after the expiration of this Sublease or after termination of this Sublease or Subtenant's right to possession, Subtenant shall pay, as minimum damages and not as a penalty, monthly rental at a rate equal to 150% of the rate of Base Rent payable by Subtenant hereunder immediately prior to the expiration or other termination of this Sublease or of Subtenant's right to possession. The acceptance by Sublandlord of any lesser sum shall be construed as payment on account and not in satisfaction of damages for such holding over. 23. ENCUMBERING TITLE. Subtenant shall not do any act which shall in any way encumber the title of Master Landlord in and to the Building or the Premises, nor shall the interest of Master Sublandlord or Sublandlord be in any way subject to any claim by way of lien or encumbrance, whether by operation of law by virtue of any express or implied contract by Subtenant, or by reason of any other act or omission of Subtenant. Any claim to, or lien upon, the Sublease Premises, the Building or the Premises arising from any act or omission of Subtenant shall accrue only against the subleasehold estate of Subtenant and shall 11 12 be subject and subordinate to the paramount title and rights of Master Landlord in and to the Building and the Premises and the interests of Master Sublandlord and Sublandlord in the Premises leased pursuant to the Master Lease and Master Sublease. Without limiting the generality of the foregoing, Subtenant shall not permit the Sublease Premises, the Building or the Premises to become subject to any mechanics', laborers' or materialmen's lien on account of labor or material furnished to Subtenant or claimed to have been furnished to Subtenant in connection with work of any character performed or claimed to have been performed on the Sublease Premises by, or at the direction or sufferance of, Subtenant, provided, however, that if so permitted under the Master Sublease, Subtenant shall have the right to contest in good faith and with reasonable diligence, the validity of any such lien or claimed lien if Subtenant shall give to Master Sublandlord and Sublandlord such security as may be deemed satisfactory to them to assure payment thereof and to prevent any sale, foreclosure, or forfeiture of the Sublease Premises, the Building or the Premises by reason of nonpayment thereof, provided further, however, that on final determination of the lien or claim or lien, Subtenant shall immediately pay any judgment rendered, with all proper costs and charges, and shall have the lien released and any judgment satisfied. 24. INDEMNITY. Subtenant agrees to indemnify Sublandlord and hold Sublandlord harmless from all losses, damages, liabilities and expenses which Sublandlord may incur, or for which Sublandlord may be liable to Master Sublandlord, to the extent arising from the acts or omissions of Subtenant which are the subject matter of any indemnity or hold harmless of Sublandlord to Master Sublandlord under the Master Sublease or arising out of or resulting from a breach of Subtenant's obligations under this Sublease or to the extent arising out of or resulting from the negligence or willful misconduct of Subtenant and/or Subtenant's agents or contractors. Sublandlord agrees to indemnify Subtenant and hold Subtenant harmless from all losses, damages, liabilities and expenses which Subtenant may incur, or for which Subtenant may be liable to the extent arising out of or resulting from a breach of Sublandlord's obligations under this Sublease or to the extent arising out of or resulting from the negligence or willful misconduct of Sublandlord and/or Sublandlord's agents or contractors. Notwithstanding any other provisions herein to the contrary, under no circumstances shall Subtenant or Sublandlord be liable for any indirect, special, incidental or consequential damages (including lost profits) sustained or incurred by the other party in connection with this Sublease, regardless of the form of action or legal or equitable theory and whether or not such damages were foreseeable. 25. SUBLANDLORD'S RIGHTS. Sublandlord reserves the right, on reasonable prior notice, to inspect the Sublease Premises, or to exhibit the Sublease Premises to persons having a legitimate interest at any time during the Sublease term. 26. DEFAULTS. Subtenant further agrees that any one or more of the following events shall be considered Events of Default as said term is used herein. (a) Subtenant shall be adjudged an involuntary bankrupt, or a decree or order approving, as properly filed, a petition or answer filed against Subtenant asking reorganization of Subtenant under the federal bankruptcy laws as now or hereafter amended, or under the laws of any State, shall be entered, and any such decree or judgment or order 12 13 shall not have been vacated or stayed or set aside within sixty (60) days from the date of entry or granting thereof; or (b) Subtenant shall file, or admit the jurisdiction of the court and the material allegations contained in, any petition in bankruptcy, or any petition pursuant or purporting to be pursuant to the federal laws now or hereafter amended, or Subtenant shall institute any proceedings for relief of Subtenant under any bankruptcy or insolvency laws or any laws relating to the relief of debtors, readjustment of indebtedness, reorganization, arrangements, composition or extension; or (c) Subtenant shall make any assignment for the benefit of creditors or shall apply for or consent to the appointment of a receiver for Subtenant or any of the property of Subtenant; or (d) Subtenant shall admit in writing its inability to pay its debts as they become due; or (e) The Sublease Premises are levied on by any revenue officer or similar officer; or (f) A decree or order appointing a receiver of the property of Subtenant shall be made and such decree or order shall not have been vacated, stayed or set aside within sixty (60) days from the date of entry or granting thereof; or (g) Subtenant shall abandon the Sublease Premises during the Term or the renewal Term hereof for a period of two (2) months; or (h) Subtenant shall default in any payment of Rent required to be made by Subtenant hereunder when due as herein provided and such default shall continue for five (5) days after notice thereof in writing to Subtenant; or (i) Subtenant shall default in securing insurance or in providing evidence of insurance as set forth in Section 11 of this Sublease or shall default with respect to lien claims as set forth in Section 24 of this Sublease and either such default shall continue for five (5) days after notice thereof in writing to Subtenant; or (j) Subtenant shall, by its act or omission to act, cause a default under the Master Sublease and such default shall not be cured within the time, if any, permitted for such cure under the Master Sublease; or (k) Subtenant shall default in any of the other covenants and agreements herein contained to be kept, observed and performed by Subtenant, and such default shall continue for thirty (30) days after notice thereof in writing to Subtenant, provided however if the nature of such default requires longer than 30 days to cure Subtenant shall not be deemed to be in default if Subtenant commences such cure within said 30 day period and diligently pursues such cure to completion as soon as reasonably practicable. 13 14 27. REMEDIES. Upon the occurrence of any one or more Events of Default, Sublandlord may exercise any remedy against Subtenant which Master Sublandlord may exercise for default by Sublandlord under the Master Sublease. 28. MASTER SUBLEASE. Sublandlord is the subtenant under the Master Sublease. Sublandlord represents and warrants to Subtenant that, (a) Sublandlord has delivered to Subtenant a full and complete copy of the Master Sublease and all other agreements between Master Sublandlord and Sublandlord relating to the leasing, use, and occupancy of the Sublease Premises, (b) the Master Sublease is, as of the date hereof, in full force and effect, (c) Sublandlord has performed all of Sublandlord's obligations under the Master Sublease and (d) to Sublandlord's knowledge no event of default by Master Sublandlord has occurred under the Master Sublease and, to Sublandlord's knowledge, no event has occurred and is continuing which would constitute an event of default but for the requirement of the giving of notice and/or the expiration of the period of time to cure. 28.1 SUBLEASE SUBORDINATE. This Sublease and all the rights of parties hereunder are subject and subordinate to the Master Sublease and the Master Lease. Each party agrees that it will not, by its act or omission to act, cause a default under the Master Sublease or the Master Lease. In furtherance of the foregoing, the parties hereby confirm, each to the other, that it is not practical in this Sublease agreement to enumerate all of the rights and obligations of the various parties under the Master Sublease and Master Lease and specifically to allocate those rights and obligations in this Sublease agreement. Accordingly, in order to afford to Subtenant the benefits of this Sublease and of those provisions of the Master Sublease which by their nature are intended to benefit the party in possession of the Sublease Premises, and in order to protect Sublandlord against a default by Subtenant which might cause a default or event of default by Sublandlord under the Master Sublease: (a) Provided Subtenant shall timely pay all Rent when and as due under this Sublease, Sublandlord shall pay, when and as due, all base rent, additional rent and other charges payable by Sublandlord to Master Sublandlord under the Master Sublease; (b) Except as otherwise expressly provided herein, Sublandlord shall perform its covenants and obligations under the Master Sublease which do not require for their performance possession of the Sublease Premises and which are not otherwise to be performed hereunder by Subtenant on behalf of Sublandlord. For example, Sublandlord shall at all times keep in full force and effect all insurance required of Sublandlord as Subtenant under the Master Sublease. (c) Except as otherwise expressly provided herein, Subtenant shall perform all affirmative covenants and shall refrain from performing any act which is prohibited by the negative covenants of the Master Sublease, where the obligation to perform or refrain from performing is by its nature imposed upon the party in possession of the Sublease Premises and such performance is not required as a result of a breach or default by Sublandlord under this Sublease and/or the Master Sublease. If practicable, Subtenant shall perform affirmative covenants which are also covenants of Sublandlord under the Master Sublease at least five (5) days prior to the date when Sublandlord's performance is required 14 15 under the Master Sublease. Sublandlord shall have the right to enter the Sublease Premises to cure any default by Subtenant under this section. (d) Sublandlord shall not agree to terminate or amend the Master Sublease in a manner which might have a material adverse effect on Subtenant's occupancy of the Sublease Premises or its use of the Sublease Premises for their intended purpose, unless Sublandlord shall first obtain Subtenant's prior written approval thereof, which shall not be unreasonably withheld, conditioned or delayed. (e) Sublandlord hereby grants to Subtenant the right to receive all of the services and benefits with respect to the Sublease Premises which are to be provided by Master Sublandlord under the Master Sublease or by Master Landlord under the Master Lease. Sublandlord shall have no duty to perform any obligations of Master Sublandlord or Master Landlord which are, by their nature, the obligation of an owner or manager of real property. For example, Sublandlord shall not be required to provide the services or repairs which the Master Landlord is required to provide under the Master Lease. Sublandlord shall have no responsibility for or be liable to Subtenant for any default, failure or delay on the part of Master Sublandlord or Master Landlord in the performance or observance by such parties of any of their obligations under the Master Sublease or the Master Lease, nor shall such default by Master Sublandlord or Master Landlord affect this Sublease or waive or defer the performance of any of the Subtenant's obligations hereunder except to the extent that such default excuses performance by Sublandlord. Notwithstanding the foregoing, the parties contemplate that Master Sublandlord shall, in fact, perform its obligations under the Master Sublease and in the event of any default or failure of such performance by Master Sublandlord, Sublandlord agrees that it will, upon notice from Subtenant, make demand upon Master Sublandlord to perform its obligations under the Master Sublease and, provided that Subtenant specifically agrees to pay Subtenant's equitable share of the costs and expenses of Sublandlord and provides Sublandlord with security reasonably satisfactory to Landlord to pay such costs and expenses, Sublandlord will take appropriate legal action to enforce the Master Sublease. 29. MASTER SUBLANDLORD'S AND MASTER LANDLORD'S CONSENT. This Sublease and the obligations of the parties hereunder are expressly conditioned upon Sublandlord's obtaining prior written consent hereto by Master Sublandlord and Master Landlord. Subtenant shall promptly deliver to Sublandlord any non confidential information reasonably requested by Master Sublandlord or Master Landlord with respect to the nature and operation of Subtenant's business and/or the financial condition of Subtenant. Sublandlord and Subtenant hereby agree, for the benefit of Master Sublandlord and Master Landlord, that this Sublease and the consent hereto of Master Sublandlord and Master Landlord shall not (a) create privity of contract between Master Sublandlord and Subtenant or Master Landlord and Subtenant; (b) be deemed to have amended the Master Sublease or the Master Lease in any regard; or (c) be construed as a waiver by Master Sublandlord or Master Landlord of any right to consent to any assignment of the Master Sublease by Sublandlord or any further subletting of premises leased pursuant to the Master Sublease, or as a waiver of Master Sublandlord's or Master Landlord's right to consent to any assignment by Subtenant of this Sublease or any sub-subletting of the Sublease Premises or any part thereof. Master Sublandlord's consent shall 15 16 be deemed to evidence Master Sublandlord's agreement that Subtenant may use the Sublease Premises for the purpose set forth herein and that Subtenant shall be entitled to any waiver of claims and of the right of subrogation for damage to Master Sublandlord's property if and to the extent that the Master Sublease provides such waivers for the benefit of Sublandlord; and Master Landlord's consent shall be deemed to evidence Master Landlord's agreement that Subtenant may use the Sublease Premises for the purpose set forth herein and that Subtenant shall be entitled to any waiver of claims and of the right of subrogation for damage to Master Landlord's property if and to the extent that the Master Lease provides such waivers for the benefit of Master Sublandlord. If Master Sublandlord or Master Landlord fails to consent to this Sublease within twenty-eight (28) days after the execution and delivery of this Sublease, either party shall have the right to terminate this Sublease by giving written notice thereof to the other at any time thereafter, but before Master Sublandlord and Master Landlord have each granted such consent. 30. ADDITIONAL SERVICES. Sublandlord shall cooperate with Subtenant to cause Master Sublandlord and Master Landlord to provide services required by Subtenant in addition to those otherwise required to be provided under the Master Sublease and the Master Lease. Subtenant shall pay any charge for such services promptly after having been billed therefor. If at any time a charge for such additional services is attributable to the use of such services both by Sublandlord and by Subtenant, the cost thereof shall be equitably divided between Sublandlord and Subtenant. 31. FORCE MAJEURE. Neither party shall be deemed in default with respect to any of the terms, covenants and conditions of this Sublease on such party's part to be performed, if such party's failure to timely perform same is due in whole or in part to any strike, lockout, labor trouble (whether legal or illegal), civil disorder, failure of power, restrictive governmental laws and regulations, riots, insurrections, war, shortages, accidents, casualties, acts of God, acts caused directly by the other party or the other party's agents, employees and invitees or any other cause beyond the reasonable control of such party. The foregoing shall not extend the time limits referenced in Section 2.2, and shall not apply to the payment of any amounts payable hereunder. 32. BROKERS. Each party warrants to the other that it has had no dealings with any broker or agent in connection with this Sublease other than Cushman Realty Corporation as broker for Subtenant and Colliers International as broker for Sublandlord. The commissions due each broker named herein shall be paid by Sublandlord pursuant to a separate written agreement with Colliers International. Each party covenants to pay, hold harmless and indemnify the other party from and against any and all costs (including reasonable attorneys' fees), expense or liability for any compensation, commissions and charges claimed by any other broker or other agent with respect to this Sublease or the negotiation thereof on behalf of such party. 33. MISCELLANEOUS. 34. NOTICES AND CONSENTS. All notices and other communications authorized or required hereunder shall be given in writing by personal delivery, or by facsimile (with copy 16 17 of such notice sent on the same day by mail or overnight private courier in accordance with the provisions herein) or by overnight mail or overnight private courier. Personally delivered notices shall be deemed received on the date of delivery. Facsimile notices shall be deemed received on the day sent if sent prior to 5:00 p.m. P.S.T. or if sent after 5:00 p.m. P.S.T., then deemed received on the next day. Overnight mail or couriered notices shall be deemed received the business day following deposit into the U.S. mail or delivery to the private courier. Mailed or couriered notices shall be addressed as set forth below, but either party may change its address by giving written notice thereof to the other in accordance with the provisions of this Article. If to Sublandlord: Ariba, Inc. 1565 Charleston Road Mountain View, CA 94043 Attn: Real Estate Manager Fax: (650) 461-5499 With a copy to: Ariba, Inc. 1565 Charleston Road Mountain View, CA 94043 Attn: General Counsel Fax: (650) 930-8193 And a copy to: Thomas B. Jacob, Esq. Thoits, Love, Hershberger & McLean 245 Lytton Avenue, Suite 300 Palo Alto, California 94301 Fax: (650) 325-5572 If to Subtenant: Remedy Corporation 1585 Charleston Road Mountain View, CA 94043 Attn: Ed Palma Fax: (650) 903-9001 Each party agrees promptly to deliver a copy of each notice, demand, request, consent or approval from such party to Master Sublandlord and Master Landlord and promptly to deliver to the other party a copy of any notice, demand, request, consent or approval received from Master Sublandlord and Master Landlord. 33.2 INCORPORATION OF PRIOR AGREEMENTS. This Sublease incorporates all agreements of Sublandlord and Subtenant with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, whether oral or written, pertaining to the subject matter hereof. 17 18 33.3 MODIFICATIONS. This Sublease may be modified or amended only by an instrument in writing executed by Sublandlord and Subtenant, stating that such instrument is an amendment to this Sublease. 33.4 SEVERABILITY. This Sublease shall be governed by and construed in accordance with the laws of the State of California. If any term or provision of this Sublease is found by a court of competent jurisdiction to be void or unenforeceable, such term or provision shall be deemed severed from the remainder of the terms and provisions of this Sublease, and said remainder shall remain in full force and effect, according to its terms and provisions, to the extent permitted by law. 33.5 ATTORNEYS' FEES. In the event of any action at law or in equity (including but not limited to specific performance) between Sublandlord and Subtenant arising out of this Sublease or to enforce any of the provisions or rights hereunder, the unsuccessful party to such litigation covenants and agrees to pay to the successful party all costs, including investigation costs and similar expenses and including attorneys' fees, incurred therein by such successful party, and if such successful party shall recover judgment in any such action or proceeding, such costs, expenses and attorneys' fees shall be included in and as part of such judgment. If either party to this Sublease becomes a party to any litigation concerning this Sublease or the Sublease Premises by reason of any act or omission of the other party or its authorized representatives, and not by any act or omission of the party that becomes a party to that litigation or any act or omission of its authorized representatives, the party whose act or omission causes the other party to become involved in the litigation shall be liable to that party for reasonable attorneys' fees and court costs incurred by it in the litigation. 33.6 SUCCESSORS AND ASSIGNS. The terms, covenants and conditions contained in this Sublease shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators and assigns of the parties to this Sublease. 33.7 COUNTERPARTS. This Sublease may be executed in several counterparts, each of which shall be an original but all of which shall constitute but one and the same instrument. 34. RIGHT OF FIRST OFFER. Throughout the Term of this Sublease (and the Extension Period, if applicable), Subtenant shall have a first right to offer to sublease the approximately fifty-five thousand eight hundred (55,800) rentable square feet of space located at 1565 Charleston Road, Mountain View, California (the "Additional Premises"), to the extent the Additional Premises become available for sublease. 34.1 NOTICE OF AVAILABILITY; OFFER NOTICE. At any time Sublandlord anticipates that the Additional Premises may become available, Sublandlord shall give Subtenant written notice of the availability of the Additional Premises. The notice shall set forth the date that Sublandlord is expected to vacate the Additional Premises, the term of sublease being offered, and other required terms and conditions of the proposed sublease, and shall offer to sub-sublease the Additional Premises on such terms and conditions for the 18 19 Fair Market Rental Rate (as determined below). If Subtenant desires to sublease the Additional Premises for the term of the proposed sublease on the specified terms and conditions, Subtenant shall, within ten (10) business days after Subtenant's receipt of Sublandlord's notice, give Sublandlord written notice setting forth Subtenant's determination of the fair market rental rate for the Additional Premises (the "Offer Notice"). Sublandlord shall have ten (10) business days from receipt of the Offer Notice to either accept such fair market rental rate or to reasonably object thereto in writing. Failure of Sublandlord to accept or object to Subtenant's Offer Notice within the time period shall conclusively be deemed Sublandlord's objection to the fair market rental rate set forth in the Offer Notice. 34.2 FAIR MARKET RENTAL RATE. If Sublandlord objects to the fair market rental rate submitted by Subtenant, Sublandlord and Subtenant shall attempt in good faith to agree upon such fair market rental rate, which shall be defined as the prevailing fair market rental rate for similar space in a comparable building taking into account what a willing, comparable tenant will pay for such space and what a landlord of a comparable building would accept, at arm's length for space of comparable size, quality and floor height as the Additional Premises taking into account the age, quality and layout of the existing improvements in the Additional Premises and taking into account items that professional real estate brokers customarily consider, including, but not limited to, rental rates, office space availability, tenant size, operating expenses, parking, and lease concessions, if any, then being charged or granted by lessors of comparable buildings (the "Fair Market Rental Rate"). 34.3 DETERMINATION OF FAIR MARKET RENTAL RATE. If Sublandlord and Subtenant fail to reach agreement on the Fair Market Rental Rate within thirty (30) days from Sublandlord's written or deemed objection to the Offer Notice then, at Subtenant's election, Subtenant may either retract its Offer Notice or require that each party's determination of the Fair Market Rental Rate for the Additional Premises be submitted to appraisal in accordance with subparagraphs (i) through (vii) below. (i) Sublandlord and Subtenant shall each appoint one (1) appraiser who shall by profession be a real estate appraiser who shall have been active over the five (5) year period ending on the date of such appointment in the appraisal of commercial properties in the Santa Clara County area. The determination of the appraisers shall be limited solely to the issue of whether Sublandlord's or Subtenant's Fair Market Rental Rate for the Additional Premises is the closer to the actual Fair Market Rental Rate for the Additional Premises as determined by the appraisers, taking into account the requirements with respect thereto set forth in this Section. Each such appraiser shall be appointed within fifteen (15) days of the expiration of the thirty-day period provided above for the parties' good faith negotiations. (ii) The two (2) appraisers so appointed shall, within fifteen (15) days of the date of the appointment of the last appointed appraiser, agree upon and appoint a third appraiser who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two appraisers. 19 20 (iii) The three appraisers shall, within thirty (30) days of the appointment of the third appraiser, reach a decision as to whether the parties shall use Sublandlord's or Subtenant's submitted Fair Market Rental Rate to establish the new Base Rent, and shall notify Sublandlord and Subtenant thereof. Such decision shall be based upon the projected fair market rentals being paid under comparable leases for similar office space in comparable buildings. (iv) The decision of the majority of the three appraisers shall be binding upon Sublandlord and Subtenant. (v) If either Sublandlord or Subtenant fails to appoint an appraiser within the time period specified in subparagraph (i) hereinabove, the appraiser appointed by one of them shall reach a decision, notify Sublandlord and Subtenant thereof, and such appraiser shall be binding upon Sublandlord and Subtenant. (vi) If the two appraisers fail to agree upon and appoint a third appraiser, a third appraiser shall be appointed by the Superior Court of Santa Clara County, California. (vii) Each party shall pay the fees and expenses of the appraiser appointed by or on behalf of it, and each party shall pay one-half (1/2) of the fees and expenses of the third appraiser, if any. 34.4 CONDITIONS PRECEDENT. Subtenant's right of offer to sublease the Additional Premises is subject to each of the following: (i) Subtenant shall have already delivered to Sublandlord, or will deliver to Sublandlord concurrently with Subtenant's Offer Notice, Subtenant's election to extend the Sublease Term for the Extension Period provided in Section 3.2 of this Sublease; (ii) at the time of Subtenant's Offer Notice to Sublandlord, Subtenant shall be in not less than 80% occupancy of the Sublease Premises; and (iii) Subtenant shall be prohibited from subletting or assigning the Additional Premises for a period of six (6) months from the commencement date of Subtenant's sublease of the Additional Premises (except pursuant to a Permitted Transfer or to an affiliate). 34.5 MASTER SUBLANDLORD'S AND MASTER LANDLORD'S CONSENT. Subtenant's right of first offer for the Additional Premises as set forth in this Article 34 shall be subject to receipt of any consents necessary under the Master Sublease and Master Lease. If Sublandlord is unable to obtain any necessary consents to Subtenant's right of first offer for the Additional Premises, Subtenant's right of first offer shall immediately terminate and neither party shall have any further rights or obligations under this Article. 34.6 TERMS OF SUBLEASE FOR ADDITIONAL PREMISES. Subtenant's sublease of the Additional Premises shall be on all of the terms and conditions of this Sublease, except for those terms and conditions stated in Sublandlord's notice, Base Rent for the Additional Premises which shall be determined as provided in Sections 34.2 and 34.3 above, and Subtenant's Sublease Share which shall be recalculated to account for the square footage of 20 21 the Additional Premises and all figures in this Sublease affected by the addition of the square footage of the Additional Premises shall be adjusted accordingly. IN WITNESS WHEREOF, the parties have executed this Sublease on the day and year first above written. SUBLANDLORD: ARIBA, INC., a Delaware corporation By: /s/ ALLISON CHAO ------------------------------ Name: Allison Chao ---------------------------- Its: VP & Corporate Controller ----------------------------- SUBTENANT: REMEDY CORPORATION, a Delaware corporation By: /s/ RON J. FIOR ------------------------------ Name: Ron J. Fior ---------------------------- Its: CFO, V.P. Finance/Ops ----------------------------- 21 22 EXHIBIT A MASTER SUBLEASE EX-21.1 3 f70472ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT REMEDY GmbH REMEDY CANADA, LTD. REMEDY KK, LTD. REMEDY PTE, LTD. REMEDY PTY., LTD. REMEDY INTERNATIONAL, LTD. REMEDY SOFTWARE IRELAND, LTD. REMBAY ACQUISITION CORPORATION REMEDY ACQUISITION CORPORATION REMEDY CAYMAN, LTD. REMEDY SARL REMEDY Srl REMEDY SOFTWARE SOLUTIONS BV REMEDY SPAIN S.L. REMEDY SOFTWARE AB REMEDY UK, LTD. REMEDY HK, LTD. REMEDY FSC, LTD., A BARBADOS CORPORATION 49 EX-23.1 4 f70472ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 File Nos. 33-91560, 333-4148, 333-29191, 333-56931, 333-35554 and 333-49054) pertaining to the Employee Stock Purchase Plan and the 1995 Stock Option/Stock Issuance Plan, 1995 Non-Employee Directors Stock Option Plan and 2000 Supplemental Stock Option Plan of Remedy Corporation of our report dated January 18, 2001 with respect to the consolidated financial statements and schedule of Remedy Corporation included in this Annual Report on Form 10-K for the year ended December 31, 2000. /s/ ERNST & YOUNG LLP Palo Alto, California March 28, 2001 50 -----END PRIVACY-ENHANCED MESSAGE-----