-----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, DuOPSHRWdi2MlMh3KjwNIbTX9n9/7iC3Do/o8ToTVTiD8s0ooW1sPT/I4j0c7rse mZCRgyi7tn0YibyP8Ef6xw== 0000891618-97-001526.txt : 19970401 0000891618-97-001526.hdr.sgml : 19970401 ACCESSION NUMBER: 0000891618-97-001526 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-25494 FILM NUMBER: 97570586 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 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 1 ================================================================================ 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 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [ ] 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 (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION)
1505 SALADO DRIVE, MOUNTAIN VIEW, CA 94043 (415) 903-5200 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 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; REGISTERED ON THE NASDAQ NATIONAL MARKET (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 3, 1997 was approximately $864,124,605 (based on the last reported sale price of $39.625 on March 3, 1997 on the Nasdaq National Market). The number of shares outstanding of Common Stock as of March 3, 1997 was 26,989,764. 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 21, 1997 Annual Report to Stockholders for the fiscal Part II, Items 6-8 year ended December 31, 1996. Part IV, Item 14
================================================================================ 2 PART I This Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" in Item 1. ITEM 1. BUSINESS. Remedy Corporation (Remedy or the Company) develops, markets and supports highly adaptable, client/server applications software for support and business processes. The Company's Action Request System is primarily used today as an internal help desk application for tracking and resolving support requests and problems in PC, UNIX and NT computing environments. Due to its versatility, the Action Request System is also used as an application for automating and consolidating additional internal business operations related to the help desk, in a market referred to as the Consolidated Operations Management (COM) market. The Company was incorporated on November 20, 1990 in Delaware. The Company maintains its executive offices and principal facilities at 1505 Salado Drive, Mountain View, California 94043. Its telephone number is (415) 903-5200. BACKGROUND The Company believes that few organizations have fully realized the potential benefits offered by client/ server computing. In particular, the need for an adaptable internal help desk must be addressed as a prerequisite for a well-managed computing infrastructure. Moreover, to realize the full benefits of applying client/server applications to meet the demands of changing support and business processes, the Company believes that a new class of highly adaptable, client/server application software is required. The Company's technology and applications are also well suited for consolidating a variety of internal business processes in the COM market, including change management, asset management, customer and technical support, defect tracking, service level agreement tracking, project tracking, facilities management and inventory management. The Company's Action Request System employs an easy-to-use client interface over a workflow server and an incident tracking relational database. The following are the key attributes of the Remedy solution: Adaptability Without Programming. The Action Request System offers users the versatility of a spreadsheet, enabling customers to create or alter all visual, functional and process definitions without programming. End users can customize their interface to match their role in a process. Departments or lines of business can select and tailor the information to be tracked and define the workflow of a process. Information technology organizations can quickly adapt the Action Request System to any internal operational process that involves a group of people who must proactively respond to frequent incidents or requests. When a process needs to be changed, creating the database fields, process workflow and application linkages can occur rapidly. More importantly, the application is adaptable to meet most future requirements, without costly programming. Scalable, High Performance Architecture. The Company's product architecture offers users departmental to enterprise scalability with high system performance. The Action Request System is scalable across a range of sites from small department networks to multi-site, global implementations. The product has been designed to move only the required amount of information between clients and servers, thereby minimizing end user response time and maximizing utilization of an organization's computing and networking resources. Fast and Broad Deployment. The Company's product design and philosophy to user licensing practices allows for fast deployment of the Action Request System to a broad range of users. While the product is highly adaptable, solution templates for help desk, change management and asset management provide a high degree of functionality to users upon initial installation. User capabilities for self help, status query and direct problem submission are all offered at no cost to users, providing additional value to both user and help desk staff. 1 3 Integration with Third-Party Software and Systems. The Company's software is designed to integrate (generally without programming) with a wide variety of computer and telecommunication technologies and products, including desktop applications, telephony devices, network management systems and legacy systems. The Company's products 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. The Company's 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 SunNet Manager or HP OpenView, to Action Request System servers, automatically creating a problem report to be handled by the internal help desk staff. The Action Request System provides important technology for organizations implementing process improvement or re-engineering. New process solutions or modifications can be quickly prototyped for evaluation. Proactive workflow notifications can reduce delays previously caused by unaddressed requests. Information is more readily available to the people making the decisions and serving the customer. Process performance can be easily monitored, measured and displayed, identifying problems or additional opportunities for further improvement. These features represent fundamental enabling technologies critical for building successful client/server applications for support and business processes. PRODUCTS Action Request System The Action Request System is a client/server application that features versatile incident tracking used to consolidate internal operational processes. The product is primarily used as an internal help desk application for tracking and resolving support requests and problems in PC, UNIX and NT computing environments. Due to its versatility, the Action Request System is also used as an application for many other internal operations. The product includes templates that help customers start application specialization. Using simple point-and-click methods, customers specialize a template to the unique information, process and integration requirements of their department or enterprise. The Company provides numerous application templates, including internal help desk, asset management, customer and technical support, defect tracking and recruiting management. The Action Request System's client/server architecture balances functionality among three elements: desktop client, workflow server and database server. The desktop client and workflow server communicate via industry standard remote procedure calls 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. The workflow server actively manages and coordinates the progress of incidents from inception to closure. It makes all routing, escalation, access control and integration decisions prior to communicating new or updated information to the database server. The product employs a low-impact transaction model that moves only the necessary information between client and workflow server, thereby conserving bandwidth and giving users WAN and dial-up performance that is similar to LAN performance. The database server stores and maintains incident information and related information, such as detailed information about the computing configuration of the customer that submitted an incident. The contents of the database become a knowledge repository that can be consulted in resolving future incidents. The database may be co-resident with the server or on a different system, in which case it is accessed using the database vendor's communication methods. Flashboards Flashboards is an independent companion product to the Action Request System. It presents panels of graphical charts and meters that show current and historical measures of process quality and performance. Such measures are useful for organizations that want a quantitative view of their processes, whether for continual improvement or to make informed planning decisions. The product's client/server architecture is 2 4 similar to the Action Request System. Clients run on the desktops of users who are managing or participating in a process, such as a customer support hot-line, and support one or more visual panels. The Flashboard Server is designed to run on any processor and accesses the Action Request Server for statistics about the process. It optimizes access to the Action Request Server on behalf of all users, greatly reducing load compared to other report and statistics generating tools. The Flashboard Administrator Tool allows point-and-click definition of panels, which contain graphical representations of virtually any process metric accessible in the Action Request System. The product features the ability to continually view and compare the process metrics over time. Users are able to view several metrics synchronized in time for quickly correlating multiple trends. Flashboards is highly adaptable and assists organizations in meeting their quality and operational goals as they constantly change and evolve. ARWeb ARWeb is a gateway between the Action Request System and a World Wide Web server. It is designed to allow Internet browsers to be clients of any Action Request Server. The product converts the Action Request System form-like views into World-Wide Web browser forms dynamically and automatically as they are accessed. Since the Action Request System allows flexible customization of forms, World-Wide Web browser users will benefit from that customization without learning HTML, the World-Wide Web browser graphics forms language. Distributed Server Option The Distributed Server Option for the Action Request System expands the help desk solution to multiple locations and multiple applications across the corporate enterprise. The highly efficient architecture enables information transfer to specialized departments or individuals throughout the enterprise. It enables automatic data transfer between AR System servers while maintaining consistent information throughout the environment. Each site retains its autonomy for administration and operation while benefiting from sharing information with other sites. The AR System Distributed Server Option coordinates requests between independent support organizations, provides centralized dispatching of services through different operations groups, links different organizations and applications and creates a knowledge base of solutions for the entire enterprise. CUSTOMERS As of the end of December 1996, the Company had licensed its software to more than 1,850 customers at over 3,400 sites. In 1996, no customer accounted for more than 10% of the Company's total revenue. PRODUCT PRICING The domestic end user list price for the Action Request System is $6,500, which includes server software and three "write licenses." These licenses enable three individuals at a customer site to modify and manage existing information in the database. The Company has structured its pricing policies so that a customer has an unlimited number of "read-only licenses" for creating new action requests and for reading information in the database. For example, in the case of a customer using the Action Request System for an internal help desk application, the three write licenses would enable three support staff to modify and manage existing information in the database and the unlimited number of read-only licenses would enable an unlimited number of end users to submit action requests and monitor their status. If a customer needs more than three write licenses, the Company offers additional packages of five fixed or floating licenses. The Company's list price for five additional fixed licenses is $4,000, and for five additional floating licenses is $10,000. Floating licenses control the number of simultaneous users accessing a server, rather than being associated with either specific computers or specific users. License fees are subject to varying discounts depending on customer volume. The Company offers an annual maintenance program to its licensees that includes product updates and hotline support. 3 5 The Company's indirect sales channels include value-added resellers (VARs), system integrators (SIs) and original equipment manufacturers (OEMs), who license the Company's products at a discount for relicensing. The Company expects to increase revenue from the indirect channels as a percentage of total revenue, which could adversely affect the Company's operating margins because the sale of a greater number of licenses will be required to offset the lower net license fees generated on the sale of the same products through indirect resellers. The Company believes that its products currently are priced substantially below most of its competitors' products. The market for the Company's products is highly competitive, and the Company expects that it will face increasing pricing pressures from its current competitors and new market entrants. Any material reduction in the price of the Company's products would negatively affect gross margins and could materially adversely affect the Company's business, operating results and financial condition if the Company were unable to increase unit sales. SALES AND MARKETING The Company markets its software and services through its direct headquarters-based sales organization and through its indirect sales channels (VARs, SIs and OEMs). The Company's headquarters-based direct sales force accounted for approximately 58% of the Company's total revenue for 1996, and sales through indirect channels accounted for approximately 42%. As of December 31, 1996, the Company's sales and marketing organization consisted of 139 individuals, 96 at the Company's offices in Mountain View, California, six in New Jersey, eight in Maryland, 19 in the United Kingdom, four in France, four in Germany, and two in Singapore. The Company's sales organization consists of technically proficient sales people who consummate most sales through telephone contact with existing or prospective customers. Each sales representative typically travels three to five days per month to visit existing and prospective customers, which include both direct customers and indirect channels. The Company's marketing organization provides leads to members of the sales force. Leads are primarily generated through public relations, seminars, trade shows and the Company's web site. The Company increased the size of its headquarters-based direct sales force from 42 to 100 individuals in 1996. The Company intends to substantially increase the size of its sales force in 1997 and beyond, which is required if the Company is to achieve significant revenue growth in the future. Competition for such persons is intense, and there can be no assurance that the Company will be able to attract highly qualified sales personnel. If the Company is unable to hire such people on a timely basis, the Company's business, operating results and financial condition could be adversely affected. The Company's sales and marketing organization is complemented by indirect sales channels (VARs, SIs and OEMs), who license the Company's products at a discount for relicensing, and may provide training, support and customer services to end users. The Company anticipates that the percentage of its total revenue derived from indirect sales, particularly through VARs and SIs, will increase in the future. However, there can be no assurance that the Company will be able to attract and retain VARs, SIs and OEMs that will be able to market the Company's products effectively. In addition, there can be no assurance that any existing VAR, SI or OEM will continue to represent the Company's products. The Company expects that any material increase in the Company's indirect sales as a percentage of revenue will adversely affect the Company's average selling prices and gross margins due to the lower unit prices that the Company receives when selling through indirect channels. The Company and its indirect sales channels generally sell the Action Request System and related services through a sales representative with occasional help from a pre-sales engineer. To further encourage sales, the Company conducts comprehensive marketing programs that include public relations, seminars, trade shows, user group meetings and ongoing customer communications programs. For 1994, 1995 and 1996, international sales represented 28%, 31% and 37%, respectively, of the Company's total revenue. 4 6 CUSTOMER SERVICE AND SUPPORT The Company's customer service and support organization provides customers with technical support, education and consulting services. The Company believes that providing a high level of customer service and technical support is critical to customer satisfaction and the Company's success. In providing service and support to customers, the Company uses its own products extensively. As of December 31, 1996, the Company had 89 people in its customer service and support organization. Most of the Company's customers currently have support agreements with the Company. Technical Support. The Company offers telephone, electronic mail and fax customer support through its support services staff. Additional customer support is provided by the Company's VARs, SIs and OEMs. Initial product license fees do not cover software maintenance. Customers are entitled to receive new software releases, maintenance releases and support for an annual fee. Education. The Company offers a comprehensive education and training program to customers. Training classes are offered through in-house facilities at the Company's offices in Pleasanton, California. The Company also provides on-site training services upon request by customers. Fees for education and training services are charged separately from the Company's software products. Consulting. The Company's consultants are available to work closely with customers' information systems organizations. These consulting services generally consist of assisting customers who are planning large implementations or who wish to outsource the specialization of the Company's products to their needs. Fees for consulting services are charged separately from the Company's software products. RESEARCH AND DEVELOPMENT Since its inception, the Company has made substantial investments in research and development. The Company 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. The Company intends to expand its existing product offerings and to introduce new products for the client/server application software market. In the development of new products and enhancements to existing products, the Company uses its own tools extensively. Although the Company expects that certain of its new products will be developed internally, the Company may, based on timing and cost considerations, acquire technology and/or products from third parties or consultants. As of December 31, 1996, the Company's research and development staff consisted of 96 employees. The Company's total expenses for research and development for fiscal years 1994, 1995 and 1996 were $4.2 million, $7.2 million and $13.3 million, respectively. The Company anticipates that it will continue to commit substantial resources to research and development in the future. To date, the Company's development efforts have not resulted in any capitalized software development costs. 5 7 RISK FACTORS In addition to the other information in this report on Form 10-K, the following factors should be considered carefully. Potential Fluctuations in Quarterly Results; Seasonality. The Company'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 the Company and its competitors, market acceptance of new and enhanced versions of the Company'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 rates fluctuations and general economic factors. The Company operates with no significant order backlog because its software products typically are shipped shortly after orders are received. Furthermore, the Company 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 client/server application software products is rapidly evolving, and the Company's sales cycle, from initial trial to multiple copy purchases and the provision of support services, varies substantially from customer to customer. In addition, the Company expects that sales derived through indirect channels, which are harder to predict and have lower margins than direct sales, will increase as a percentage of total revenue. The Company'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 the Company's expenses varies with its revenue. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. The Company'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, the Company has generally had weaker demand in the quarter ending in March. The Company believes this pattern will continue and accordingly anticipates total revenue and net income in the quarter ending March 31, 1997, will be higher than in the quarter ended March 31, 1996, but lower than in the quarter ended December 31, 1996. Competition. The client/server application software market is intensely competitive and subject to rapid change. Competitors vary in size and in the scope and breadth of the products and services offered. The Company encounters competition from a number of sources, including: (i) other software companies, (ii) third-party professional services organizations that develop custom software, and (iii) management information systems departments of potential customers that develop custom software. In addition, because there are relatively low barriers to entry in the software market, the Company expects additional competition from other established and emerging companies as the client/server application software market continues to develop and expand. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. Some of the Company's current, and many of the Company's potential, competitors have significantly greater financial, technical, marketing and other resources than the Company. 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 the Company can. The Company also expects that competition will increase as a result of software industry consolidations. 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 the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. There can be no assurance that 6 8 the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. Dependence on New Products and Rapid Technological Change; Risk of Product Bugs. The client/server 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 the Company's products are difficult to estimate. The Company's 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. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products that respond to technological change or evolving industry standards, that the Company 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 the Company 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, the Company's business, operating results and financial condition will be materially adversely affected. During 1996, the Company released several new products, along with significant upgrades to existing products. These products are subject to significant technical risks. If the new products do not achieve market acceptance, the Company's business, operating results and financial condition will be materially adversely affected. Software products as complex as those offered by the Company may contain undetected errors or failures when first introduced or when new versions are released. The Company has in the past discovered software errors in certain of its new products and enhancements after their introduction and has experienced delays or lost revenue during the period required to correct these errors. Although the Company has not experienced material adverse effects resulting from any such errors to date, there can be no assurance that, despite testing by the Company 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 the Company's business, operating results and financial condition. Limited Operating History; Future Operating Results Uncertain; Need to Increase Sales Force. The Company was incorporated in November 1990 and did not begin shipping products until December 1991. Although the Company has experienced significant percentage growth in revenue and net income in recent years, the Company does not believe prior growth rates are sustainable or indicative of future operating results. There can be no assurance that the Company will remain profitable on a quarterly or annual basis. In addition, the Company's limited operating history makes the prediction of future operating results difficult or impossible. Future operating results will depend on many factors, including the demand for the Company's products, the level of product and price competition, the Company's success in expanding its direct sales force and indirect distribution channels, the ability of the Company to develop and market new products and control costs, and the percentage of the Company's revenue derived from indirect channels, which have lower margins than direct sales. In particular, the Company intends to hire a significant number of additional sales personnel in 1997 and beyond, which is required if the Company is to achieve significant revenue growth in the future. Competition for such personnel is intense, and there can be no assurance that the Company can retain its existing sales personnel or that it can attract, assimilate or retain additional highly qualified sales persons in the future. The Company increased the size of its headquarters-based direct sales force from 20 to 42 in 1995 and from 42 to 100 in 1996. In the past, the Company has experienced difficulty in recruiting a sufficient number of sales persons. If the Company is unable to hire such personnel on a timely basis, the Company's business, operating results and financial condition could be adversely affected. The Company expects increased competition and intends to invest significantly in its business. As a result, the Company does not expect to sustain current operating margins in the future. 7 9 Product Concentration. The Company currently derives substantially all of its revenue from licenses of the Action Request System and related services. Broad market acceptance of the Company's products is critical to the Company's future success. As a result, a decline in demand for or failure to achieve broad market acceptance of the Action Request System as a result of competition, technological change or otherwise, would have a material adverse effect on the business, operating results and financial condition of the Company. A decline in sales of the Action Request System could also have a material adverse effect on sales of other Company products that may be sold to Action Request System customers. The Company's future financial performance will depend in part on the successful development, introduction and customer acceptance of new and enhanced versions of the Action Request System and other products. There can be no assurance that the Company will continue to be successful in marketing the Action Request System or any new or enhanced products. Management of Growth; Dependence Upon Key Personnel. The Company has recently experienced a period of significant growth in net revenue that has placed a significant strain upon its management systems and resources. The Company recently implemented a number of new financial and management controls, reporting systems and procedures. The Company's ability to compete effectively and to manage future growth, if any, will require the Company 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 the Company will be able to do so successfully. The Company's failure to do so could have a material adverse effect upon the Company's business, operating results and financial condition. The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel, none of whom is bound by an employment agreement. The loss of the services of one or more of the Company's executive officers could have a material adverse effect on the Company's business, operating results and financial condition. The Company'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 the Company 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. Expansion of Indirect Channels. An integral part of the Company's strategy is to develop the marketing channels of value added resellers (VARs), system integrators (SIs) and original equipment manufacturers (OEMs), and to increase the proportion of the Company's customers licensed through these channels. VARs, SIs and OEMs accounted for approximately 42% of the Company's total revenue in 1996. The Company is currently investing, and intends to continue to invest, significant resources to develop these channels, which could adversely affect the Company's operating margins. There can be no assurance that the Company will be able to attract VARs, SIs and OEMs that will be able to market the Company's products effectively and will be qualified to provide timely and cost-effective customer support and service. In addition, the Company's agreements with VARs, SIs and OEMs are not exclusive and in many cases may be terminated by either party without cause, and many of the Company's VARs, SIs and OEMs carry competing product lines. Therefore, there can be no assurance that any VAR, SI or OEM will continue to represent the Company's products, and the inability to recruit, or the loss of important VARs, SIs or OEMs could adversely affect the Company's results of operations. In addition, if it is successful in selling products through these channels, the Company expects that any material increase in the Company's indirect sales as a percentage of total revenue will adversely affect the Company's average selling prices and gross margins due to the lower unit prices that the Company receives when selling through indirect channels. International Operations. International sales represented approximately 37% of the Company's revenue in 1996. The Company currently has four international sales offices, which are located in the United Kingdom, France, Germany, and Singapore. The Company believes that its continued growth and profitability will require expansion of its international operations. Accordingly, the Company intends to continue to expand its international operations and enter additional international markets, which will require significant management attention and financial resources and could adversely affect the Company's operating margins. In order to successfully expand international sales in 1997 and subsequent periods, the Company must establish additional foreign operations, hire additional personnel and recruit additional international resellers. To the extent that 8 10 the Company is unable to do so in a timely manner, the Company's growth, if any, in international sales will be limited, and the Company's business, operating results and financial condition could be materially adversely affected. In addition, there can be no assurance that the Company will be able to maintain or increase international market demand for the Company's products. The Company's international sales are currently denominated in U.S. dollars. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. Additional risks inherent in the Company's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, costs of localizing products for foreign countries, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties in managing international operations, potentially adverse tax consequences including restrictions on the repatriation of earnings, and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have a material adverse effect on the Company's future international sales and, consequently, the Company's results of operations. In addition, because a substantial majority of the Company's international sales are indirect, any material increase in the Company's international sales as a percentage of total revenue will adversely affect the Company's average selling prices and gross margins due to the lower unit prices that the Company receives when selling through indirect channels. Dependence on Growth in the Client/Server Computing Market; General Economic and Market Conditions. Substantially all of the Company's revenue have been attributable to sales of the Action Request System, which is utilized in client/server computing environments. This product is currently expected to account for a significant part of the Company's future revenue. Although demand for the Action Request System has grown in recent years, the client/server computing market is still an emerging market. The Company's future financial performance will depend in large part on continued growth in the number of organizations adopting client/server computing environments and the number of applications developed for use in those environments. There can be no assurance that the market for client/server computing will continue to grow. If the client/server computing market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially adversely affected. During recent years, segments of the personal computer industry have experienced significant economic downturns characterized by decreased product demand, production overcapacity, price erosion, work slowdowns and layoffs. The Company'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 the Company's business, operating results or financial condition. Dependence on Proprietary Technology; Risks of Infringement. The Company's success is heavily dependent upon proprietary technology. The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company presently has no patents or patent applications pending. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company 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, the Company relies primarily on "shrink wrap" licenses that are not signed by licensees and, therefore, it is possible that such licenses may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. The Company is not aware that any of its products infringes the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the 9 11 number of products and competitors in the Company's 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 the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect upon the Company's business, operating results and financial condition. Product Liability. The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. In selling its products, the Company relies primarily on "shrink wrap" licenses that are not signed by licensees and, therefore, it is possible that such licenses may be unenforceable under the laws of certain jurisdictions. For these and other reasons, it is possible that the limitation of liability provisions contained in the Company's license agreements may not be effective. Although the Company has not experienced any product liability claims to date, the sale and support of products by the Company may entail the risk of such claims. A successful product liability claim brought against the Company could have a material adverse effect upon the Company's business, operating results and financial condition. ITEM 2. PROPERTIES. The Company's principal administrative, sales and marketing facility is located in approximately 51,000 square feet of space in Mountain View, California. This facility is subleased to the Company through June 1999. The Company also leases two other facilities of approximately 43,000 square feet each in Mountain View, California, through June 2003. In December 1995, the Company began to occupy one of the 43,000 square foot facilities for use primarily for product development. The Company is currently subleasing the second facility to a third party through June 1999. In addition, the Company's support facility is located in approximately 30,000 square feet of space in Pleasanton, California. This facility is leased to the Company through August 2000. The Company believes that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. ITEM 3. LEGAL PROCEEDINGS. The Company is subject to ordinary routine litigation incidental to its 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 Company's business, operating results or financial condition. 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 results of defense costs, diversion of management resources, and other factors. ITEM 4. SUBMISSION OF MATTERS TO 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. 10 12 ITEM 4A. OFFICERS OF THE REGISTRANT. The officers of the Company, and their ages as of March 1, 1997, are as follows:
NAME AGE POSITION - ------------------------- --- ---------------------------------------------------- Lawrence L. Garlick...... 47 Chairman of the Board and Chief Executive Officer David A. Mahler.......... 40 Vice President, Business Development and Director Eric S. Bergan........... 39 Vice President, Engineering Bernard R. Cote.......... 49 Vice President, Customer Support George A. de Urioste..... 41 Vice President, Finance and Chief Financial Officer Vasu S. Devan............ 45 Vice President, Sales Carajane Finn............ 36 Vice President, Employee Services Lori L. Laub............. 37 Vice President, Information Systems Matthew R. Miller........ 33 Vice President, Marketing
Mr. Garlick 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. From September 1984 to June 1990, Mr. Garlick was employed by Sun Microsystems, Inc. (Sun), a manufacturer of computer workstations, most recently as Vice President of Distributed Systems. Prior to joining Sun, Mr. Garlick was employed by Xerox Corporation, a document management company, for six years. Mr. Garlick holds B.S.E.E. and M.S.E.E. degrees in computer engineering from Stanford University. Mr. Mahler co-founded the Company in November 1990 and currently serves as Vice President, Business Development. From April 1993 to June 1995, Mr. Mahler served as Vice President, Marketing. From November 1990 to March 1993, Mr. Mahler served as Vice President, Marketing and Chief Financial Officer. From November 1978 to October 1990, Mr. Mahler was employed by Hewlett-Packard Company, a manufacturer of computers and related products, most recently as product marketing manager. Mr. Mahler holds a B.S. degree in computer science from Case Western Reserve University. Mr. Bergan joined the Company in April 1993 as Vice President, Engineering. From October 1991 to March 1993, Mr. Bergan was employed by NetLabs Inc., a network management software company, most recently as Director of Engineering, Applications. Prior to joining NetLabs, Mr. Bergan was employed by Pyramid Technology Corp., a computer manufacturer, for four years, serving as Director of Data Bases, Applications Engineering, and SW Quality Assurance. Mr. Bergan holds a B.S. degree in computer science from the University of Kansas and an M.S. degree in computer science from Johns Hopkins University. Mr. Cote joined the Company in November 1993 as Vice President, Customer Support. From March 1984 to May 1993, Mr. Cote was employed by Sun, most recently as Vice President of Worldwide Support. Prior to joining Sun, Mr. Cote was employed by Digital Equipment Corporation, a manufacturer of computers and related products, for over fifteen years in various customer support management roles. Mr. Cote holds an A.A. degree from Chabot College. Mr. de Urioste joined the Company in March 1993 as Vice President, Finance and Chief Financial Officer. From January 1991 to June 1992, Mr. de Urioste was employed by TeamOne Systems, Inc. (TeamOne), a configuration management software company, most recently as Chief Financial Officer. Prior to joining TeamOne, Mr. de Urioste served as Manager of Financial Planning and Analysis at ASK Computer Systems, Inc., a manufacturing management software company, from November 1988 to November 1990. Mr. de Urioste is a Certified Public Accountant and holds a B.S. degree in accounting from the University of Southern California and an M.B.A. degree in Finance and International Business from the University of California, Berkeley. Mr. Devan joined the Company in August 1992 as Vice President, Vertical Market Applications, and in May 1993, was promoted to Vice President, Sales. From December 1989 to August 1992, Mr. Devan was employed by Teknekron Communications Systems, Inc., a consulting firm, most recently as General Manager. Prior to that time, Mr. Devan was employed by Bell-Northern Research, Ltd., a manufacturer of telecommunications products, for two years. Mr. Devan holds a Masters degree in management information systems from 11 13 the Indian Institute of Technology and a B.S. degree in electronics and communications engineering from the University of Madras. Ms. Finn joined the Company in 1991 as Manager of Operations and Administration. In January 1995, she was promoted to Director of Employee Services and Operations, with responsibility for Human Resources, Manufacturing, Facilities and Real Estate. In January 1997, Ms. Finn was named Vice President of Employee Services and is responsible for the Human Resources, Facilities and Real Estate functions of the Company. From 1986 to 1991, Ms. Finn managed a private consulting firm specializing in start up operations for professional private practices. Ms. Laub joined the Company in October 1995 as Vice President, Information Systems. Since May 1994, Ms. Laub has also been a principal at Excellence By Design, an executive management firm. From September 1993 to April 1994, Ms. Laub was employed by Computer Library, a division of Ziff Communications, a publishing firm, as Vice President, Product and Business Development. From July 1992 to August 1993, Ms. Laub served as Vice President, Customer Satisfaction at The Vantive Corporation, a software development company. From February 1991 to July 1992, Ms. Laub was employed by Great Plains Software, Inc., a financial software company, serving most recently as Vice President, Customer Assistance and General Manager, Entry Business Unit. From July 1989 to January 1991, Ms. Laub served as Vice President, Customer Support at Intuit Corporation. Ms. Laub holds a B.S. degree in Business Administration from North Dakota State University. Mr. Miller joined the Company in July 1996 as Vice President, Marketing. From April 1993 to July 1996, Mr. Miller was employed at Gupta Corporation, a provider of client-server tools and databases, most recently as Vice President of Marketing. From June 1989 to May 1992, he was employed by Oracle Corporation, a database software provider, most recently serving as Director of Marketing for the Desktop Products Division. Mr. Miller holds a Masters degree in business from Columbia University and a B.A. degree from Cornell University. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK The Company's Common Stock has been traded on the Nasdaq National Market 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 the Company's Common Stock as reported by the Nasdaq National Market System.
HIGH LOW ------ ------ Fiscal 1996: First Quarter.................................. $28.25 $15.50 Second Quarter................................. $45.13 $26.50 Third Quarter.................................. $40.88 $21.63 Fourth Quarter................................. $55.75 $38.13 Fiscal 1995: First Quarter.................................. $14.46 $10.50 Second Quarter................................. $14.33 $11.58 Third Quarter.................................. $13.33 $10.67 Fourth Quarter................................. $23.75 $11.50
The stock prices set forth in the table above have been adjusted to reflect the three-for-two stock dividend effected March 25, 1996 and the two-for-one stock dividend effected October 25, 1996. On March 3, 1997 the closing sale price of the Common Stock was $39.625 per share. On that date, there were 135 holders of record. 12 14 DIVIDENDS The Company has never paid cash dividends on its capital stock and does not expect to pay cash dividends in the foreseeable future. In addition, the Company's bank credit agreement currently restricts the Company's ability to pay cash dividends without the bank's consent. ITEM 6. SELECTED FINANCIAL DATA. The information appearing under the caption, "Selected Financial Data" in the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information appearing under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's consolidated financial statements and supplementary data in the Company's 1996 Annual Report to Stockholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT. The information under the caption "Re-election of Directors" as set forth in the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 21, 1997 is incorporated herein by reference. Information concerning officers is included in Part I under the caption "Item 4a. Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION. The information under the caption "Executive Compensation" as set forth in the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 21, 1997 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the caption "Security Ownership of Management" and "Principal Stockholders" as set forth in the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 21, 1997 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Certain Transactions" as set forth in the Company's definitive proxy statement for its annual stockholders' meeting to be held on May 21, 1997 is incorporated herein by reference. 13 15 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. a) 1. Consolidated Financial Statements The following consolidated financial statements are incorporated herein by reference in the Company's 1996 Annual Report to Stockholders:
PAGE IN ------------- ANNUAL REPORT ------------- - Report of Ernst & Young LLP, Independent Auditors................... 31 - Consolidated Balance Sheets as of December 31, 1995 and 1996........ 18 - Consolidated Statements of Income for each of the three years ended December 31, 1994, 1995 and 1996.................................... 19 - Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 1994, 1995 and 1996.................. 20 - Consolidated Statements of Cash Flows for each of the three years ended December 31, 1994, 1995 and 1996.................................... 21 - Notes to Consolidated Financial Statements.......................... 22-30
2. Consolidated Financial Statement Schedules The following consolidated financial statement schedule for each of the three years in the period ended December 31, 1996 is submitted herewith:
PAGE ------------- - Schedule II: Valuation and Qualifying Accounts and Reserves............ 18
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 Financial Statements or Notes thereto, are incorporated herein by reference in the Company's 1996 Annual Report to Stockholders. 3. Exhibits. See Item 14(c). b) Reports on Form 8-K 1. None 14 16 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. 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* Business Loan Agreement by and between the Registrant and Silicon Valley Bank (SVB), dated January 4, 1993. 10.7* Promissory Note from Registrant to SVB, dated January 4, 1993. 10.8* Loan Modification Agreement by and between the Registrant and SVB, dated August 3, 1994. 10.9* Negative Pledge Agreement by and between the Registrant and SVB, dated August 3, 1994. 10.10** Loan Modification Agreement by and between the Registrant and SVB, dated June 5, 1995. 10.11* Lease Agreement by and between the Registrant and Charleston Properties (Charleston), dated March 11, 1994, regarding the space located at 1500 Salado Drive. 10.12* License 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. 10.13* License Agreement for use of Real Property by and between the Registrant and Sun, dated March 11, 1994, regarding the space located at 1505 Salado Drive, and related consent of Peery/Arrillaga, dated March 9, 1994. 10.14* Form of Action Request System Shrink Wrap License Agreement. 10.15* Form of Value Added Reseller Agreement. 11.1 Computation of Net Income per Common and Common Equivalent Share. 13.1 1996 Annual Report. 21.1* Subsidiary of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 17). 27.1 Financial Data Schedule.
- --------------- * 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 10-K Annual Report for the year ended December 31, 1995. Remedy, Remedy Corporation, the Remedy logo, Action Request System, AR System, Flashboards and ARWeb are trademarks or registered 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. 15 17 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 24th day of March, 1997. 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 24, 1997 - --------------------------------------------- Chief Executive Officer Lawrence L. Garlick (Principal Executive Officer) /s/ GEORGE A. DE URIOSTE Vice President, Finance and March 24, 1997 - --------------------------------------------- Chief Financial Officer George A. de Urioste (Principal Financial and Accounting Officer) /s/ HARVEY C. JONES, JR. Director March 24, 1997 - --------------------------------------------- Harvey C. Jones, Jr. /s/ DAVID A. MAHLER Director March 24, 1997 - --------------------------------------------- David A. Mahler /s/ JOHN F. SHOCH Director March 24, 1997 - --------------------------------------------- John F. Shoch /s/ JAMES R. SWARTZ Director March 24, 1997 - --------------------------------------------- James R. Swartz
16 18 REMEDY CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Allowance for Doubtful Accounts (in thousands):
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BEGINNING COSTS AND OTHER ---------- BALANCE AT DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS END OF PERIOD - --------------------------------------- ---------- ---------- ---------- ---------- ------------- Year Ended December 31, 1994........... $ 70 $118 $0 $ 10 $ 178 Year Ended December 31, 1995........... $178 $413 $0 $ 50(1) $ 541 Year Ended December 31, 1996........... $541 $833 $0 $126(1) $ 1,248
- --------------- (1) Uncollectible accounts written off, net of recoveries. 18 19 EXHIBIT INDEX Exhibit 11.1 Computation of Net Income per Common and Common Equivalent Share. Exhibit 13.1 1996 Annual Report. Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors. Exhibit 27.1 Financial Data Schedule. EX-11.1 2 COMPUTATION OF NET INCOME 1 EXHIBIT 11.1 REMEDY CORPORATION COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------- 1994 1995 1996 ------- ------- ------- PRIMARY Weighted average number of common shares outstanding(1)......... 8,241 21,552 26,365 Convertible preferred shares, as if converted(1)................ 9,060 1,887 -- Incremental common shares attributable to shares issuable under employee stock plans(1)...................................... 3,165 4,211 3,661 Stock related to SAB No. 64 and 83(1)........................... 1,782 -- -- ------- ------- ------- Total shares(1)......................................... 22,248 27,650 30,026 ======= ======= ======= Net income: Amount.......................................................... $ 3,059 $ 7,561 $16,824 ======= ======= ======= Per share(1).................................................... $ 0.14 $ 0.27 $ 0.56 ======= ======= ======= FULLY DILUTED Weighted average number of common shares outstanding(1)......... 8,241 21,552 26,365 Convertible preferred shares, as if converted(1)................ 9,060 1,887 -- Incremental common shares attributable to shares issuable under employee stock plans(1)...................................... 3,192 4,281 3,840 Stock related to SAB No. 64 and 83(1)........................... 1,782 -- -- ------- ------- ------- Total shares(1)......................................... 22,275 27,720 30,205 ======= ======= ======= Net income: Amount.......................................................... $ 3,059 $ 7,561 $16,824 ======= ======= ======= Per share(1).................................................... $ 0.14 $ 0.27 $ 0.56 ======= ======= =======
- --------------- (1) All shares and per share amounts have been adjusted to reflect the three-for-two stock dividend effected March 25, 1996 and the two-for-one stock dividend effected October 25, 1996. 19 EX-13.1 3 1996 ANNUAL REPORT 1 Financial Review Selected Consolidated Financial Data
(in thousands, except per share amounts) Year ended December 31, 1992 1993 1994 1995 1996 - ----------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME DATA: Total revenue $ 2,547 $ 8,493 $19,750 $40,117 $80,635 Income from operations 134 2,316 4,982 10,189 23,707 Net income 136 1,720 3,059 7,561 16,824 Net income per share(1) $ 0.01 $ 0.09 $ 0.14 $ 0.27 $ 0.56 Shares used in computing per share amounts(1) 17,877 20,046 22,248 27,650 30,026 - -----------------------------------------------------------------------------------------
December 31, 1992 1993 1994 1995 1996 - ----------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments $ 152 $1,266 $ 3,007 $56,186 $ 86,757 Working capital 646 1,959 4,423 60,767 87,718 Total assets 1,406 4,487 12,006 74,733 119,434 Long-term obligations -- -- 219 324 513 Total stockholders' equity $ 852 $2,573 $ 5,882 $63,131 $ 92,497 - -----------------------------------------------------------------------------------------
(1) All shares and per-share amounts have been adjusted to reflect the three-for-two stock dividend effected March 25, 1996 and the two-for-one stock dividend effected October 25, 1996. 12 Remedy Corporation 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations This annual report contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" in the Report on Form 10-K for the fiscal year ended December 31, 1996, which was filed with the Securities and Exchange Commission in March 1997. The following table sets forth, as a percentage of total revenue, consolidated statement of income data for the periods indicated.
Year Ended December 31, 1994 1995 1996 - ------------------------------------------------------------- REVENUE: Product 82% 76% 76% Maintenance and service 18 24 24 ----------------- Total revenue 100 100 100 COSTS AND EXPENSES: Cost of product revenue 7 5 4 Cost of maintenance and service revenue 16 16 13 Research and development 21 18 16 Sales and marketing 24 27 29 General and administrative 7 9 9 ----------------- Total costs and expenses 75 75 71 Income from operations 25 25 29 Interest income, net -- 4 3 ----------------- Income before provision for income taxes 25 29 32 Provision for income taxes 10 10 12 ----------------- Net income 15% 19% 20% =================
Revenue Total revenue was $19.8 million, $40.1 million and $80.6 million in 1994, 1995 and 1996, respectively, representing increases of 103% from 1994 to 1995 and 101% from 1995 to 1996. The Company's revenue is derived from two sources, product licenses and fees for services, including maintenance and support, training and consulting. The Company's license agreements generally do not provide a right of return. However, reserves are maintained for return allowances and potential credit losses, which have not been significant to date. The Company distributes the majority of its products through its headquarters-based direct sales force which is complemented by indirect sales channels, including value added resellers (VARs), system integrators (SIs) and original equipment manufacturers (OEMs). Sales derived through indirect channels accounted for approximately 42% of the Company's total revenue in 1996 as compared to 37% in 1995. The Company expects that sales derived through indirect channels, which have lower average selling prices and gross margins than direct sales, will increase as a percentage of total revenue. As a result, the Company expects that its gross margins on product sales may decline if sales through indirect channels increase. 13 Remedy Corporation 3 International sales accounted for 28%, 31% and 37% of total revenue in 1994, 1995 and 1996, respectively. The increasing volume of international sales is primarily attributable to an increase in the Company's international marketing efforts and an increase in the number of international resellers marketing the Company's products. The majority of international sales were made in Canada and Europe, with lower amounts in Latin America, South Africa and the Pacific Rim. International sales are denominated and collected in U.S. currency. The Company intends to continue to expand its international operations and enter additional international markets. The Company currently maintains sales offices in the United Kingdom, France, Germany and Singapore and plans to open offices in Australia, Japan and Canada in 1997. The Company also expects to increase the staffing levels of its international based operations in 1997. Because a substantial majority of the Company's international sales are indirect, any material increase in the Company's international sales as a percentage of total revenue will adversely affect the Company's average selling prices and gross margins due to the lower unit prices that the Company receives when selling through indirect channels. Although the Company's international revenue is currently not at risk for currency fluctuations because such sales are currently denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those markets. The Company has not engaged in foreign currency hedging activities. PRODUCT REVENUE The Company currently derives substantially all of its product revenue from licenses of the Action Request System. Revenue from product licenses was $16.1 million, $30.4 million and $61.1 million in 1994, 1995 and 1996, respectively. This represents increases of 89% from 1994 to 1995 and 101% from 1995 to 1996. The growing acceptance of the Company's software products in both U.S. and international markets is a major factor in these increases. Substantially all of the period-to-period growth in product revenue was due to higher unit sales volumes. The prices of the Company's products have remained relatively constant from 1992 through 1996. The Company intends to continue to enhance its current software products as well as to develop new products. As a result, the Company anticipates that revenue from product licenses will continue to represent a substantial majority of its revenue in for the foreseeable future. The Company expects that both market penetration and competition will increase, and, as a result, that prior growth rates of the Company's product revenue will not be sustainable in the future. MAINTENANCE AND SERVICE REVENUE Maintenance and service revenue was $3.6 million, $9.7 million and $19.5 million in 1994, 1995 and 1996, respectively, representing increases of 169% from 1994 to 1995 and 101% from 1995 to 1996. This growth is primarily due to increased licensing activity, which has resulted in increases in revenue from services related to maintenance and support, training and consulting. Renewal of maintenance contracts after the initial one-year term also contributes to the growth rate. The Company expects that as market penetration and competition increase, prior growth rates of the Company's installed base and, consequently, in the Company's service revenue, may not be sustainable in the future. Cost of Revenue COST OF PRODUCT REVENUE Cost of product revenue consists primarily of the costs of royalties paid to third-party vendors, product media and duplication, manuals, packaging materials, personnel-related costs and shipping expenses. Cost of product revenue was $1.4 million, $1.9 million and 14 Remedy Corporation 4 $2.9 million in 1994, 1995 and 1996, respectively, representing 9%, 6% and 5% of the related product revenue for each year, respectively. The increases in the dollar amount of cost of product revenue in each successive year reflect the higher volumes of product shipped in each year. The decrease in costs as a percentage of the related product revenue from 1994 to 1995 and 1996 is primarily due to economies of scale realized as a result of shipping greater quantities of product in 1995 and 1996. Because all development costs incurred in the research and development of software products and enhancements to existing software products have been expensed as incurred, cost of product revenue includes no amortization of capitalized software development costs. See Note 2 of Notes to Consolidated Financial Statements. COST OF MAINTENANCE AND SERVICE REVENUE Cost of maintenance and service revenue consists primarily of personnel-related costs incurred in providing telephone support, consulting services and training to customers. Cost of maintenance and service revenue was $3.3 million, $6.2 million and $10.4 million in 1994, 1995 and 1996, respectively, representing 90%, 64% and 53% of the related maintenance and service revenue for each year, respectively. Cost of maintenance and service revenue increased significantly from 1994 to 1995 and from 1995 to 1996 as a result of increased personnel-related costs, as the Company continued to build its customer support and training organizations. In addition, from 1995 to 1996 such costs increased, due to the Company's increased partnering with third-party service providers to deliver consulting services to its customers. The Company believes that cost of maintenance and service revenue will increase in dollar amounts and may increase as a percentage of total revenue in the future. Operating Expenses RESEARCH AND DEVELOPMENT Research and development expenses were $4.2 million, $7.2 million and $13.3 million, or 21%, 18% and 16% as a percentage of total revenue, in 1994, 1995 and 1996, respectively. The increases in dollar amounts in research and development expenses since 1994 were primarily attributable to increased staffing and associated support for software engineers required to expand and enhance the Company's product line. The Company believes that research and development expenses will continue to increase in dollar amounts in the future. 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 have been insignificant. Through December 31, 1996, all research and development costs have been expensed. SALES AND MARKETING Sales and marketing expenses consist primarily of salaries, commissions and bonuses of sales and marketing personnel and promotional expenses. Sales and marketing expenses were $4.7 million, $11.0 million and $23.3 million, or 24%, 27% and 29% of total revenue, in 1994, 1995 and 1996, respectively. The increases in dollar amounts in sales and marketing expenses were primarily due to the expansion of sales and marketing resources and increased marketing activities, including trade shows and promotional expenses. The Company believes that such expenses will increase in dollar amounts in the future as the Company expands its sales and marketing staff. 15 Remedy Corporation 5 GENERAL AND ADMINISTRATIVE General and administrative expenses were $1.3 million, $3.7 million and $7.1 million, or 7%, 9% and 9% as a percentage of total revenue, in 1994, 1995 and 1996, respectively. The increases in dollar amounts were primarily the result of increased staffing and associated expenses necessary to manage and support the Company's growth. The Company believes that its general and administrative expenses will increase in dollar amounts in the future as the Company expands its staffing. INTEREST INCOME Interest income was $32,000, $1.4 million and $2.7 million in 1994, 1995 and 1996, respectively. The increase in 1996 is primarily due to a full year of invested proceeds following the Company's March 1995 initial public offering and investment of cash provided by operating activities. Provision for Income Taxes The effective tax rates for the years ended December 31, 1994, 1995 and 1996 were 39%, 35% and 36%, respectively. The 1994 effective tax rate of 39% differs from the federal statutory rate primarily due to state income taxes, partly offset by certain research and development credits. The 1995 and 1996 effective tax rates of 35% and 36%, respectively, differ from the federal statutory rate primarily due to state income taxes, offset by tax-exempt interest income and research and development credits. See Note 8 of Notes to Consolidated Financial Statements. Variability of Results The Company'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 the Company and its competitors, market acceptance of new and enhanced versions of the Company'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. The Company operates with virtually no significant order backlog because its software products typically are shipped shortly after orders are received. Furthermore, the Company has often recognized a substantial portion of its revenue in the last month of a quarter, frequently concentrated in the last weeks of the month. 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 degree of certainty. Product revenue is also difficult to forecast because the market for client/server application software products is rapidly evolving, and the Company's sales cycle, from initial trial to multiple-copy purchases and support services, varies substantially from customer to customer. In addition, the Company expects that sales derived through indirect channels, which are harder to predict and have lower margins than direct sales, will increase as a percentage of total revenue. The Company'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 the Company's expenses varies with its revenue. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Considering the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the 16 Remedy Corporation 6 expectations of public market analysts and investors. In such event, the price of the Company's common stock would likely be materially adversely affected. The Company'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, the Company has generally had weaker demand in the quarter ending in March. The Company believes this pattern will continue and accordingly anticipates total revenue and net income in the quarter ending March 31, 1997, will be higher than in the quarter ended March 31, 1996, but lower than in the quarter ended December 31, 1996. Liquidity and Capital Resources Cash provided by operating activities in 1994, 1995 and 1996 was $3.0 million, $10.7 million and $30.9 million, respectively, of which net income was a significant component in each year. In all three years, cash from operations was used to support the Company's working capital requirements, as such requirements expanded. In all three years, the Company experienced significant growth in receivables, accompanying the Company's increased sales volumes, which was partially offset by increases in accounts payable and other current liabilities. In 1995 and 1996, the Company's investing activities consisted entirely of purchases of property and equipment and of short-term investments. In those years, the Company used $1.8 million and $3.9 million, respectively, of cash to purchase property and equipment, primarily computer workstations and file servers for the Company's growing employee base. In 1994, purchase of property and equipment comprised the total investing activity. The Company expects that the rate of purchases of property and equipment will remain constant or increase as the Company's employee base grows. The Company's principal commitments consist primarily of leases on its headquarters facilities and its telephone system. See Note 4 of Notes to Consolidated Financial Statements. To date, the Company has not invested in derivative securities or any other financial instruments that involve a high level of complexity or risk. Management expects that, in the future, cash in excess of current requirements will be invested in investment grade, interest-bearing securities. On March 24, 1995, the Company completed the initial public offering of its common stock. A total of 6,210,000 shares of common stock were sold for net proceeds to the Company of approximately $43.5 million, after deducting expense of the offering of approximately $750,000. The Company also has available a $10.0 million unsecured bank line of credit which expires in June 1997. There were no borrowings outstanding under the line of credit as of December 31, 1996. At December 31, 1996, the Company had $86.8 million in cash, cash equivalents and short-term investments and $87.7 million of working capital. Cash flows from financing activity of $44.4 million and $3.6 million in 1995 and 1996, respectively, consist primarily of proceeds from the issuance of common stock. The Company believes that its current cash, cash equivalents short-term investment balances, cash available under its line of credit 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 in certain periods, to the extent the Company experiences growth in the future, the Company anticipates that its operating and investing activities may use cash. Consequently, significant future growth may require the Company to obtain additional equity or debt financing.) Therefore, the Company may find it necessary to obtain additional equity or debt financing. There can be no assurance that, in the event that additional financing is required, the Company will be able to raise such additional financing on acceptable terms or at all. 17 Remedy Corporation 7 Consolidated Balance Sheets
(in thousands) December 31, 1995 1996 - ---------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 31,452 $ 39,770 Short-term investments 24,734 46,987 Accounts receivable, net of allowance for doubtful accounts of $541 and $1,248, respectively 11,590 24,189 Income tax receivable 2,669 -- Prepaid expenses and other current assets 561 1,161 Deferred tax asset 1,039 2,035 ---------------------- Total current assets 72,045 114,142 Property and equipment, net 2,688 5,292 ---------------------- $ 74,733 $ 119,434 ====================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,168 $ 1,639 Accrued compensation and related liabilities 3,550 6,636 Income taxes payable -- 1,837 Other accrued liabilities 1,734 5,652 Deferred revenue 4,732 10,430 Current portion of obligations under capital leases 94 230 ---------------------- Total current liabilities 11,278 26,424 Noncurrent portion of obligations under capital leases 324 513 Commitments Stockholders' equity: Preferred stock, par value $.00005 per share; authorized: 2,000,000 and 10,000,000 shares, respectively; issued and outstanding: none -- -- Common stock, par value $.00005 per share; authorized: 20,000,000 and 60,000,000 shares, respectively; issued and outstanding: 25,670,880 and 26,893,699 shares, respectively -- -- Additional paid-in capital 51,942 64,305 Notes receivable from stockholders (60) (60) Deferred compensation (434) (255) Retained earnings 11,683 28,507 ---------------------- Total stockholders' equity 63,131 92,497 ---------------------- $ 74,733 $ 119,434 ======================
See accompanying notes. 18 Remedy Corporation 8 Consolidated Statements of Income
(in thousands, except per share amounts) Year Ended December 31, 1994 1995 1996 - ------------------------------------------------------------------------------------------------ Revenue: Product $16,112 $30,390 $61,133 Maintenance and service 3,638 9,727 19,502 ------------------------------------------- Total revenue 19,750 40,117 80,635 Costs and expenses: Cost of product revenue 1,371 1,866 2,926 Cost of maintenance and service revenue 3,262 6,188 10,364 Research and development 4,173 7,160 13,266 Sales and marketing 4,673 10,980 23,318 General and administrative 1,289 3,734 7,054 ------- ------- ------- Total costs and expenses 14,768 29,928 56,928 Income from operations 4,982 10,189 23,707 Interest income 32 1,442 2,662 Interest expense 3 25 79 ------- ------- ------- Income before provision for income taxes 5,011 11,606 26,290 Provision for income taxes 1,952 4,045 9,466 ------- ------- ------- Net income $ 3,059 $ 7,561 $16,824 ------- ------- ------- Net income per share $ 0.14 $ 0.27 $ 0.56 ------- ------- ------- Shares used in computing per share amounts 22,248 27,650 30,026 ===========================================
See accompanying notes. 19 Remedy Corporation 9 Consolidated Statements of Stockholders' Equity (in thousands)
Notes Common Stock Additional Receivable Deferred Total ------------------- Paid-In from Stock- Compensa- Retained Stockholders' Shares Amount Capital holders sation Earnings Equity - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 7,662 $-- $ 1,570 $(60) $ -- $ 1,063 $ 2,573 Issuance of common stock upon exercise of options 1,146 -- 56 -- -- -- 56 Deferred compensation related to grant of stock options -- -- 805 -- (805) -- -- Amortization of deferred compensation -- -- -- -- 194 -- 194 Net income -- -- -- -- -- 3,059 3,059 - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 8,808 -- 2,431 (60) (611) 4,122 5,882 Common stock issued upon initial public offering, net of issuance costs of approximately $750 6,210 -- 43,528 -- -- -- 43,528 Preferred stock converted into common stock 9,060 -- -- -- -- -- -- Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan 1,593 -- 875 -- -- -- 875 Tax benefit from employee stock transactions -- -- 5,108 -- -- -- 5,108 Amortization of deferred compensation -- -- -- -- 177 -- 177 Net income -- -- -- -- -- 7,561 7,561 - ------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 25,671 -- 51,942 (60) (434) 11,683 63,131 Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan 1,223 -- 3,756 -- -- -- 3,756 Tax benefit from employee stock transactions -- -- 8,607 -- -- -- 8,607 Amortization of deferred compensation -- -- -- -- 179 -- 179 Net income -- -- -- -- -- 16,824 16,824 - ------------------------------------------------------------------------------------------------------------------- December 31, 1996 26,894 $-- $64,305 $(60) $(255) $28,507 $92,497 ==================================================================================
See accompanying notes. 20 Remedy Corporation 10 Consolidated Statements of Cash Flows
(in thousands) Year Ended December 31, 1994 1995 1996 - ---------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 3,059 $ 7,561 $ 16,824 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 494 1,016 1,810 Amortization of deferred compensation 194 177 179 Change in assets and liabilities: Accounts receivable (3,641) (5,547) (12,599) Prepaid expenses and other current assets (269) (264) (600) Deferred tax assets (804) (58) (996) Accounts payable 706 90 471 Accrued compensation and related liabilities 789 2,366 3,086 Income taxes 379 1,742 13,113 Other accrued liabilities 651 967 3,918 Deferred revenue 1,418 2,601 5,698 --------------------------------------- Net cash provided by operating activities 2,976 10,651 30,904 --------------------------------------- Cash flows from investing activities: Purchases of short-term investments -- (57,684) (106,562) Maturities of short-term investments -- 32,950 84,309 Capital expenditures (1,280) (1,822) (3,942) --------------------------------------- Net cash used in investing activities (1,280) (26,556) (26,195) --------------------------------------- Cash flows from financing activities: Principal payments under capital lease obligations (12) (53) (147) Proceeds from issuance of common stock 57 44,403 3,756 --------------------------------------- Net cash provided by financing activities 45 44,350 3,609 --------------------------------------- Net increase in cash and cash equivalents 1,741 28,445 8,318 Cash and cash equivalents at beginning of year 1,266 3,007 $ 31,452 --------------------------------------- Cash and cash equivalents at end of year $ 3,007 $ 31,452 $ 39,770 ======================================= Supplemental disclosure of cash flow information: Interest paid during the year $ 4 $ 15 $ 47 Income taxes paid/(refunded) during the year $ 2,315 $ 2,361 $ (2,647) Supplemental schedule of noncash financing activities: Equipment acquired under capital lease arrangements $ 278 $ 204 $ 472 Deferred compensation related to grant of stock options $ 805 $ -- $ --
See accompanying notes. 21 Remedy Corporation 11 Notes To Consolidated Financial Statements 1. Organization of the Company THE COMPANY Remedy Corporation (the Company) develops, markets and supports highly adaptable, client/server applications software for support and business processes. The Company was incorporated in Delaware in November 1990. The Company has subsidiaries in the following countries: United Kingdom, France, Germany and Singapore. 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. REVENUE RECOGNITION Product revenue is derived from product licensing fees, while maintenance and service revenue is derived from maintenance support services, training and consulting. Product revenue is recognized upon delivery only if no significant vendor obligations remain and collection of the resulting receivables is deemed probable. Delivery is further defined in certain contracts as delivery of the product master or first copy for noncancelable product licensing arrangements under which the customer has certain software reproduction rights. Product returns and sales allowances (which have not been significant through December 31, 1996) are estimated and provided for at the time of sale. Service revenue from customer maintenance fees for ongoing customer support and product updates is recognized ratably over the term of the maintenance agreement, which is typically twelve months. Payments for maintenance fees are generally made in advance and are nonrefundable. Service revenue from training and consulting is recognized when the services are performed. 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 with current year presentation. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 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 are classified as short-term investments. Short-term investments consist of auction market preferred stock and municipal bonds. Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designation as of each balance sheet date. At December 31, 1995 and 1996, 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. 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. There have been no such transactions in December 31, 1995 and 1996. The cost of securities sold is based on specific identification. Interest and dividends on securities classified as available-for-sale are included in interest income. 22 Remedy Corporation 12 At December 31, 1995, the Company's available-for-sale securities consisted of the following: municipal obligations $31,630,000; municipal auction rate preferred stock $14,950,000; and money market funds $2,581,000. Of these securities, $24,427,000 and $24,734,000 are classified as cash equivalents and short-term investments, respectively. At December 31, 1996, the Company's available-for-sale securities consisted of the following: municipal obligations $48,787,000; municipal auction rate preferred stock $14,250,000; and money market funds $481,000. Of these securities, $16,531,000 and $46,987,000 are classified as cash equivalents and short-term investments, respectively. As of December 31, 1995 and 1996, the difference between the fair value and the amortized cost of available-for-sale securities was insignificant; therefore, no valuation allowance was recorded in stockholders' equity. During the year ended December 31, 1995 and 1996, realized gains and losses were not material. As of December 31, 1995 and 1996, the contractual maturity of the investments did not exceed one year. 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, system integrators and original equipment manufacturers. The Company performs ongoing 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 Action Request System 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 or a decline in sales of these products, 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 have been insignificant. Through December 31, 1996, all research and development costs have been expensed. STOCK-BASED COMPENSATION In October 1995, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 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 (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock based plans and, accordingly, does not recognize compensation expense related to its employees under its stock option plans or employee stock purchase plans. Note 7 contains a summary of the pro-forma effects to reported net income and net income per share for 1995 and 1996 if the Company had elected to recognize compensation expense based on the fair value of the options granted as described by SFAS 123. 23 Remedy Corporation 13 PER SHARE AMOUNTS Net income per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of shares issuable upon the exercise of stock options, using the treasury stock method. STOCK SPLIT All shares and per share amounts have been adjusted to reflect the three-for-two stock dividend effected March 25, 1996 and the two-for-one stock dividend effected October 25, 1996. 3. Property and Equipment Property and equipment, at cost, consists of the following:
(in thousands) December 31, 1995 1996 - --------------------------------------------------------- Machinery and equipment $ 3,845 $ 7,567 Furniture and fixtures 248 303 Purchased software 310 476 Leasehold improvements 30 501 --------------------- 4,433 8,847 Less accumulated depreciation (1,745) (3,555) --------------------- $ 2,688 $ 5,292 =====================
4. Commitments LEASE AGREEMENTS The Company leases its facilities under operating lease arrangements. Certain of the leases provide for annual rent increases of approximately 3%. Additionally, the Company leases certain equipment under capital leases. The Company capitalized property and equipment totaling $482,000 and $954,000, with associated accumulated amortization of $78,000 and $244,000, at December 31, 1995 and 1996, respectively. All of these assets were acquired in fiscal 1994, 1995 and 1996. Approximate annual minimum rental commitments/future minimum lease payments under these leases are as follows:
(in thousands) Operating Leases Capital Leases - --------------------------------------------------------------------------- 1997 $ 2,772 $277 1998 2,746 277 1999 2,477 264 2000 2,361 15 2001 1,948 -- Thereafter 5,086 ------------------------- Total minimum lease payments $17,390 833 ========================= Less amount representing interest (90) ---- Present value of future minimum lease payments 743 Less current portion (230) ---- Noncurrent obligations under capital leases $513 ====
Total rent expense for the years ended December 31, 1994, 1995 and 1996 was $496,000, $754,000 and $2,285,000, respectively. 24 Remedy Corporation 14 5. Bank Line of Credit The Company has available a bank line of credit expiring June 1997, under which $10.0 million is available. The agreement contains covenants that require the Company to maintain certain financial ratios and to maintain quarterly profitability. In addition, the Company's bank credit agreement currently restricts the Company's ability to pay cash dividends without the bank's consent. At December 31, 1996, the Company had no outstanding balance under this line of credit and was in compliance with the required covenants. 6. Stockholders' Equity In March, 1995, the Company completed the initial public offering (IPO) of its common stock. The Company sold approximately 6,210,000 shares for net proceeds of $43.5 million. PREFERRED STOCK In 1996, the Board of Directors approved the authorization of an additional 8,000,000 shares of preferred stock. COMMON STOCK In 1996, the Board of Directors approved the authorization of an additional 40,000,000 shares of common stock. Certain shares of common stock issued by the Company at December 31, 1996 are subject to stock repurchase agreements whereby the Company has the option to repurchase the unvested shares upon termination of employment for any reason, with or without cause, at the original price paid for the shares. The stock generally vests 25% one year after issuance and continues to vest on a pro-rata basis over the following 36 months. At December 31, 1996, 58,628 shares were subject to repurchase. The Company has recorded deferred compensation expense of $805,000 for the difference between the grant price and the deemed fair value of certain of the Company's common stock options granted in 1994. This amount is being amortized over the vesting period of the individual options, generally four years. Compensation expense recognized in 1995 and 1996 was $177,000 and $179,000, respectively, and at December 31, 1996 deferred compensation totaled $255,000. 7. 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, 1996. 1995 STOCK OPTION/STOCK ISSUANCE PLAN In January, 1995, the Board of Directors 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, 7,902,864 shares of common stock, plus an additional number of shares equal to the lesser of 1,500,000 shares or 5% of the number of shares of Common Stock and Common Stock equivalents outstanding on the first day of 1997 are authorized for issuance. Under the 1995 plan, options to purchase common stock may be granted and common stock may be sold at prices not less than 85% of the fair market value at the date of grant/issuance. Options issued 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. 25 Remedy Corporation 15 1995 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN During 1995, the Company additionally adopted the 1995 Non-Employee Directors Stock Option Plan (the Directors Plan), and reserved 300,000 shares for issuance, plus an additional 37,500 shares on the first day of each calendar year 1996 and 1997. Under the Directors' Plan, each non-employee member of the Board of Directors (the Board) is automatically granted an option to purchase 30,000 shares of the Company's stock upon initial appointment or election to the Board, and 7,500 shares of the Company's stock upon re-election to the Board, at not less than 100% of the fair market value of those shares at the grant date. Stock options granted upon appointment or election to the Board vest 25% annually. Stock options granted upon reelection to the Board vest 100% after the fourth year of continuous service. 1995 EMPLOYEE STOCK PURCHASE PLAN In January, 1995, the Board of Directors and stockholders adopted the Employee Stock Purchase Plan (the Purchase Plan) and reserved 1,200,000 shares for issuance. 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: (i) the fair market value of the shares at 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 1996, shares totaling 221,000 were issued under the Purchase Plan at an average of $9.32 per share. 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, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 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 subsequent to December 31, 1994 under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996, respectively; risk-free interest rate in the range of 5.38% to 7.06%; dividend yields of zero; an expected volatility factor of the expected market price of the Company's common stock of .65 and an expected life of the option of 5 years. The effects of applying SFAS 123 for recognizing compensation expense and providing pro forma disclosures in 1995 and 1996 are not likely to be representative of the effects on reported net income in future years. 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. The fair value of the employee's purchase right was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996; risk-free interest rate in the range of 5.37% to 6.19%; dividend yields of zero; expected volatility factor of 26 Remedy Corporation 16 the market price of the Company's common stock of .65; and an expected life of six months. The weighted-average fair value for shares issued under the employee stock purchase plan for 1995 and 1996 were $3.12 and $4.86, 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 period. The Company's historical and pro forma information follows:
(in thousands, except per share amounts) 1995 1996 - ------------------------------------------------------------------------- Net income Historical $7,561 $16,824 Pro Forma $6,364 $10,368 Net income per share Historical $ .27 $ .56 Pro Forma $ .23 $ .36 - -------------------------------------------------------------------------
Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully realized until 1998. A summary of the Company's stock options activity for the years ended December 31 follows:
(in thousands, except per share amounts) Options Outstanding ------------------------------------------- Weighted Options Average Available Number Price Per Exercise for Grant of Shares Share Price - ------------------------------------------------------------------------------------------------ Balance at December 31, 1993 719 4,077 $ 0.01-$ 0.17 $ 0.05 Additional shares reserved 2,493 Options granted (2,087) 2,087 $ 0.17-$ 3.08 $ 0.86 Options exercised -- (1,146) $ 0.01-$ 0.42 $ 0.05 Options canceled or expired 127 (127) $ 0.03-$ 1.17 $ 0.26 ------------------------------------------------------- Balance at December 31, 1994 1,252 4,891 $ 0.01-$ 3.08 $ 0.39 Additional shares reserved 600 Options granted (1,576) 1,576 $ 3.83-$20.33 $ 9.93 Options exercised -- (1,491) $ 0.01-$ 2.50 $ 0.15 Options canceled or expired 343 (343) $ 0.01-$11.96 $ 1.79 ------------------------------------------------------- Balance at December 31, 1995 619 4,633 $ 0.01-$20.33 $ 3.64 Additional shares reserved 2,997(a) Options granted (2,502) 2,502 $17.83-$53.75 $ 28.32 Options exercised -- (1,002) $ 0.01-$25.38 $ 1.64 Options canceled or expired 329 (329) $ 0.01-$41.63 $ 11.05 ------------------------------------------------------- Balance at December 31, 1996 1,443 5,804 $ 0.01-$53.75 $ 14.32 - ------------------------------------------------------------------------------------------------
(a) 1,500 of these shares added to the 1995 plan effective January 1, 1997 The weighted-average fair value of options granted in 1995 and 1996 were $4.96 and $17.06, respectively. 27 Remedy Corporation 17 The options outstanding at December 31, 1996 have been segregated into ranges for additional disclosure as follows:
(in thousands, except exercise prices) Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------- Options Options Weighted- Weighted- currently Weighted- outstanding average average exercisable average Range of at December remaining exercise at December exercise exercise prices 31, 1996 contractual life price 31, 1996 price - -------------------------------------------------------------------------------------------- $ 0.01 - $ 0.42 1,605 6.75 $ 0.20 1,605 $ 0.20 $ 0.83 - $12.29 1,500 7.93 $ 6.09 1,050 $ 4.21 $12.75 - $23.50 1,498 9.08 $18.12 140 $16.62 $23.92 - $53.75 1,201 9.56 $38.06 23 $42.14 --------------------------------------------------------------------- 5,804 8.24 $14.18 2,818 $ 2.85 =====================================================================
8. Income Taxes The provision for income taxes consists of the following:
(in thousands) 1994 1995 1996 - ---------------------------------------------------------------- Federal: Current $2,139 $3,239 $8,359 Deferred (665) (19) (817) State: Current 563 828 1,961 Deferred (139) (39) (178) Foreign: Current 54 36 141 ---------------------------- Provision for income taxes $1,952 $4,045 $9,466 ============================
The income tax benefit related to the exercise of stock options reduces taxes currently payable and is credited to additional paid-in-capital. Such amount was $5.1 million and $8.6 million for 1995 and 1996, respectively. 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:
(in thousands) 1994 1995 1996 - ---------------------------------------------------------------- Tax at federal statutory rate $1,754 $4,062 $9,201 State tax, net of federal benefit 280 521 1,159 Research and development credit (114) (111) (236) Tax exempt interest income -- (414) (678) Other 32 (13) 20 ---------------------------- Provision for income taxes $1,952 $4,045 $9,466 ============================
28 Remedy Corporation 18 Significant components of the Company's deferred tax assets as of December 31, 1995 and 1996, respectively, are as follows:
(in thousands) 1995 1996 - ------------------------------------------------------------------------- Reserves and accruals not yet deductible for tax $832 $2,072 Deferred revenue 242 226 Other (35) (263) ----------------- Total deferred tax assets $1,039 $2,035 =================
9. Segment, Geographic and Significant Customer Information The Company conducts its business within one industry segment. No customer accounted for more than 10% of revenue in 1994, 1995 or 1996. Net revenue from international customers accounted for 28%, 31%, and 37% of total net revenue in 1994, 1995, and 1996, respectively. The majority of export sales were made to Canada and Europe. The Company has had no significant operations outside the United States through December 31, 1996. 10. 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. 29 Remedy Corporation 19 Selected Quarterly Consolidated Financial Data (unaudited) 1995 Summary by Quarter
(in thousands, except per share amounts) March 31 June 30 September 30 December 31 ------------------------------------------------------------ First Second Third Fourth Year - ------------------------------------------------------------------------------------------------- Total revenue $ 6,364 $ 8,404 $10,218 $15,131 $40,117 Income from operations 1,293 2,125 2,587 4,184 10,189 Income before provision for income taxes 1,315 2,555 3,050 4,686 11,606 Net income 802 1,658 2,084 3,017 7,561 Net income per share(1) $ 0.04 $ 0.06 $ 0.07 $ 0.10 $ 0.27 Number of shares(1) 23,448 29,022 28,932 29,197 27,650 Common stock price per share(1): High(2) $ 14.46 $ 14.33 $ 13.33 $ 23.75 $ 23.75 Low(2) $ 10.50 $ 11.58 $ 10.67 $ 11.50 $ 10.50 - -------------------------------------------------------------------------------------------------
1996 Summary by Quarter
(in thousands, except per share amounts) March 31 June 30 September 30 December 31 ------------------------------------------------------- First Second Third Fourth Year - -------------------------------------------------------------------------------------------- Total revenue $13,001 $17,012 $21,013 $29,609 $80,635 Income from operations 3,040 4,625 6,222 9,820 23,707 Income before provision for income taxes 3,543 5,280 6,864 10,603 26,290 Net income 2,267 3,380 4,393 6,784 16,824 Net income per share(1) 0.08 0.11 0.15 0.22 0.56 Number of shares(1) 29,586 30,136 29,842 30,539 30,026 Common stock price per share(1): High(2) $28.25 $45.13 $40.88 $55.75 $55.75 Low(2) $15.50 $26.50 $21.63 $38.13 $15.50 - --------------------------------------------------------------------------------------------
(1) All shares and per-share amounts have been adjusted to reflect the three-for-two stock dividend effected March 25, 1996 and the two-for-one stock dividend effected October 25, 1996. (2) The Company's common stock has been traded on The Nasdaq Stock Market under the symbol "RMDY" since March 17, 1995. The table above reflects the closing high and low sales prices of the Company's common stock as reported by The Nasdaq Stock Market. 30 Remedy Corporation 20 Report of Ernst & Young, LLP Independent Auditors The Board of Directors and Stockholders Remedy Corporation We have audited the accompanying consolidated balance sheets of Remedy Corporation as of December 31, 1995 and 1996 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, 1995 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP ----------------------- ERNST & YOUNG LLP Palo Alto, California January 24, 1997 31 Remedy Corporation EX-23.1 4 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Remedy Corporation of our report dated January 24, 1997, included in the 1996 Annual Report to Stockholders of Remedy Corporation. Our audits also included the consolidated financial statement schedule of Remedy Corporation listed in Item 14(a)2. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 File Nos. 33-90378 and 33-91560) pertaining to the Employee Stock Purchase Plan and the 1995 Stock Option/Stock Issuance Plan and 1995 Non-Employee Directors Stock Option Plan of Remedy Corporation of our report dated January 24, 1997 with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the consolidated financial statement schedule included in this Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ ERNST & YOUNG LLP Palo Alto, California March 27, 1997 17 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated financial statements included in the Company's Form 10-K and is qualified in its entirety by reference to such consolidated financial statements. 1,000 12-MOS DEC-31-1996 DEC-31-1996 39,770 46,987 25,437 1,248 0 114,142 8,847 3,555 119,434 26,424 0 0 0 0 92,497 119,434 61,133 80,635 2,926 13,290 13,266 0 79 26,290 9,466 0 0 0 0 16,824 0.56 0.56
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