-----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, DmipB708No0o0GpXZfsSVZxFu1bEySPCS1GEMaCewWNEOH8/SWR9p9gAlJT2fhiN iYZWealBxcvFeusAezPAnA== 0000891618-99-000890.txt : 19990311 0000891618-99-000890.hdr.sgml : 19990311 ACCESSION NUMBER: 0000891618-99-000890 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REMEDY CORP CENTRAL INDEX KEY: 0000936653 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770265675 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25494 FILM NUMBER: 99562216 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 FISCAL YEAR ENDED 12/31/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM --------------- TO --------------- . COMMISSION FILE NUMBER 0-25494 REMEDY CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 77-0265675 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1505 SALADO DRIVE, MOUNTAIN VIEW, CA 94043 (650) 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; PREFERRED SHARE PURCHASE RIGHTS, $.00005 PAR VALUE; REGISTERED ON THE NASDAQ NATIONAL MARKET(R) (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. No [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 3, 1999 was approximately $470,709,903 (based on the last reported sale price of $18.875 on March 3, 1999 on the NASDAQ Stock Market). The number of shares of Common Stock outstanding as of March 3, 1999 was 28,639,480. 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 27, 1999
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 REMEDY CORPORATION FISCAL YEAR 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 8 Item 3. Legal Proceedings........................................... 8 Item 4. Submission of Matters to a Vote of Security Holders......... 8 Item 4A. Officers of the Registrant.................................. 8 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters..................................................... 11 Item 6. Selected Financial Data..................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 18 Item 8. Financial Statements and Supplementary Data................. 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 25 PART III Item 10. Directors and Officers of the Registrant.................... 26 Item 11. Executive Compensation...................................... 26 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 26 Item 13. Certain Relationships and Related Transactions.............. 26 PART IV Item 14. Exhibits, Report of Independent Auditors, Consolidated Financial Statement Schedules and Reports on Form 8-K, and Notes to Consolidated Financial Statements.................. 27 Signatures............................................................ 47
2 3 PART I The discussion in this Form 10-K (10-K) contains forward-looking statements that involve risks and uncertainties. The statements contained in this 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on the information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. The Company's actual results could differ materially from the results discussed herein. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in "Quantitative and Qualitative Disclosures about Market Risk" in Item 7A on page 18 of this document. The risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly the quarterly reports on Form 10-Q should also be reviewed. ITEM 1. BUSINESS OVERVIEW Remedy(R) Corporation ("Remedy" or the "Company") develops, markets and supports highly adaptable, client/server and web-based application software products and solutions that simplify employee-intensive business processes. Unlike traditional enterprise applications, Remedy applications are designed to deploy in weeks, not years and the applications adapt quickly to the needs and changes in the customers' business, instead of requiring the customer and solutions to adapt to the software. These applications help organizations establish a market advantage by reacting to opportunities faster than their competitors. Remedy offers adaptable applications for Information Technology (IT) Service Management, Customer Relationship Management and Employee Workplace Automation. Remedy is one of the largest providers of enterprise applications with over 6,800 customer sites in more than 70 countries, including over 60% of the Fortune 100. 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 (650) 903-5200. Remedy shipped the first version of the Action Request System(R) product and foundation technology (AR System(TM)) in December of 1991. In addition to the IT focused Internal Help Desk solutions provided by Remedy, the Company's customers and partners have had a long history of adapting the AR System to solve other types of employee intensive business processes. These solutions have included external customer service and support, project tracking, change management, purchase requisitions, product defect tracking, asset management, network and system management, and inventory management tracking. Initially, the Company's sales and marketing strategy for success was to gain a significant number of IT and help desk sites before broadening the product offering. With over 6,800 customer sites, Remedy has begun to broaden the product offering and is leveraging the Company's large number of satisfied customers to sell additional solutions aimed at further increases to our customers' employee productivity. REMEDY SUCCESSES. The Company's products lead the industry as a fast path to customer production and cost to deploy. Remedy has a record of leading the industry in the following areas of IT services innovation: web-based help desk, multi-tier help desk, distributed server technology, mobile client links, graphical service level management product, ERP link for any service desk. The Company has a very high customer satisfaction rating; 97% of sites would recommend Remedy products to a colleague according to a third party survey. FAST PATH TO PRODUCTION. The Company's application design and licensing practices allow for fast deployment to a broad range of users. While the GartnerGroup says that half of all client-server solutions exceed their expected completion times and budgets and almost two thirds take more than a year to finish, Remedy's philosophy and results are different. Remedy provides out-of-the-box enterprise applications that can be quickly and easily adapted to unique requirements. No programming. Little or no integration. The 3 4 average Remedy installation is fully deployed in less than 45 days and our large enterprise installations are typically implemented in approximately 3 months. 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 solutions integrate with many of the most prevalent Windows, MAC and UNIX desktop applications, such as e-mail, document or media browsers, spreadsheets and document editors. 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 Solstice SunNet Manager or HP OpenView, to AR System servers, automatically creating a problem report to be handled by the internal help desk staff. Separately installable links are sold by Remedy for Oracle and the Palm computing platform. ADAPTABILITY TO CHANGING BUSINESS NEEDS. Remedy applications provide a ready-to-deploy structure that is also easy to change at will. You can use the solutions as is, or point and click to easily tailor them to specific company requirements. The concept is similar to spreadsheet software, which can be used as a simple calculator or be modified to include sophisticated formulas and style changes. Remedy's open architecture and versatility allow IT professionals to lead the business productivity effort. More importantly, the applications are adaptable to meet most future requirements without costly programming. STRATEGIC MARKETING UNITS. In 1998, as Remedy leveraged past success to broaden the Company's out-of-the-box offering of applications, three new product units were formed: IT Service Management, Customer Relationship Management and Employee Workplace Automation. All units develop, market and support out- of-the-box applications leveraging the foundation AR System technology supported by the Core Product Unit. PRODUCTS CORE PRODUCT UNIT. Under the Core Product Unit, the primary product is the AR System, a flexible foundation for automating complex business processes throughout the enterprise. Built for adaptability in a continuously changing business environment, the AR System allows for rapid prototyping and affordable applications. Remedy Service Level Agreements(TM) (SLA) application helps managers track service quality and market their success. By automating negotiated service commitments, SLA provides for proactive alerting, notification and measurement. The SLA application is designed to scale to the enterprise as commitments, applications and actions are added. ARWeb(R) application is a fast way to deliver business processes using the World Wide Web, enabling users to perform self-help tasks, submit action requests and update database information using today's popular Web browsers. Flashboards(R) application monitors service levels and tracks trends in internal operations using an intuitive graphical interface allowing for proactive management of service quality and commitments. Remedy Distributed Server Option(TM) application expands Remedy applications to multiple applications and locations across the enterprise, enabling the automatic transfer of data between AR System servers while maintaining consistent information throughout the environment. AR System reduces the cost of automating many internal processes by using simple point-and-click methods to adapt the application's workflow and tracking capability to the unique information, process and integration requirements of the customer's department or enterprise. AR System is the foundation for all of Remedy's out-of-the-box applications, partner applications and customer adaptations including solutions for IT Service Management, Customer Relationship Management and Employee Workplace Automation. IT SERVICE MANAGEMENT. The Remedy Help Desk(TM) application is a client server application used for tracking and resolving IT support requests and problems. Using simple point-and-click methods, customers adapt the application's workflow and tracking capability to the unique information, process and integration requirements of their department or enterprise. According to a survey conducted by the Aberdeen Group, Remedy is the worldwide leader in help desk software with nearly a 25% share of the internal help desk 4 5 market -- more than twice that of our closest competitor. Remedy has integrated the functions of problem management, problem resolution, asset inventory, change tasking, measurement and reporting into a single, easy-to-use application. Remedy's enterprise customers may purchase the Remedy Strategic Service Suite(TM), a suite of Remedy applications, for an enterprise consolidated service desk solution that enables the IT manager to focus on strategic investments by reducing the costs of operating the enterprise and delivering solutions that can easily adapt to change. Remedy Change Management(TM) application enables IT professionals to plan, track and implement changes quickly and efficiently, and creates a history log to help diagnose problems. Remedy Asset Management(TM) application increases efficiency by putting accurate asset information at the fingertips of help desk professionals and change planners. Remedy Year 2000 Compliance Manager(TM) application tracks and reports Year 2000 compliance records of products. Remedy Help Desk provides the IT help desk staff with the power to resolve problems faster than previously possible, improving productivity across the enterprise. Remedy offers a broad range of Help Desk customer services, including the Remedy Rapid Results program. This program minimizes the necessary use of customer internal resources for setting up an internal help desk by using Remedy consultants. The program guarantees a 15-day implementation. Several links are available for purchase: Remedy Link for Oracle Applications connects Remedy applications to the front and back office. Remedy Link for Palm Computing Platform is the industry's first native integration between Remedy Help Desk and the Palm Computing platform. CUSTOMER RELATIONSHIP MANAGEMENT. Remedy's Customer Relationship Management (CRM) unit is focused on developing, marketing and supporting client server applications for acquisition and retention of long-term profitable customers. Remedy purchased BayStone(R) Software in October of 1998 to form the cornerstone of the CRM strategic marketing unit. We believe this acquisition, and the large number of existing AR System customers adapting the product for external support, positions Remedy in the mid-tier and enterprise CRM market. Remedy now offers comprehensive applications for CRM that are designed for fast deployment and easy scalability from small and mid-size companies to large enterprise use. Remedy's CRM product suite includes Remedy Customer Support(TM) for technical support, Remedy Quality Management(TM) for product quality assurance, and Remedy Leads Management(TM) for opportunity management and telesales. EMPLOYEE WORKPLACE AUTOMATION. Remedy's Employee Workplace Automation (EWA) unit is focused on developing, marketing and supporting web-based applications that automate common tasks and approval processes to improve employee productivity by reducing workflow cycles and mundane, paper-based tasks. This unit's first product, Remedy Purchasing@Work(TM) version 1.0, was released in December of 1998, and is designed to automate the purchasing cycle. Additional applications are planned for release in 1999, and are being designed to focus on automating new employee set-up management and travel and expense management. All of this unit's products are being designed to save customers' time and money by utilizing their existing investments in corporate web-based Intranet or Internet applications by integrating the unit's applications into back office ERP systems. Today, many Remedy customers are using the AR System foundation to create these types of applications independently. Remedy plans to leverage these customers' investments as well as market to new customers who are looking for out of the box applications. The Company does expect each of the new products to encounter significant competition from existing competitors as well as from new entrants in such markets. REMEDY PRODUCT ARCHITECTURE Remedy's solutions are unique in that they are all developed and deployed on a single, open process-automation infrastructure called the Remedy AR System. Because Remedy's solutions are all built on the AR System, they are scalable, adaptable and can automatically share data and business rules. AR System product upgrades have backward compatibility without requiring applications to be reworked. The multi-tier architecture of Remedy's AR System delivers high performance by combining the power of the latest relational databases with a customizable workflow server to deliver power to users where they need it. 5 6 A major benefit of Remedy's workflow server is that business rules are defined with point-and-click simplicity without programming. The open design and published multi-threaded API enable a wide range of integrations and extensions, including the Internet and World Wide Web, email systems, automatic call distribution systems, integrated voice response systems, pagers, report writers, knowledge databases, case-based reasoning tools, network and system management platforms, transaction processing systems, ERP, CIS and other application suites. With its extremely broad platform support, Remedy's AR System workflow server supports UNIX (e.g., Sun, HP, IBM, SGI) and Windows NT as well as the database engines from the major relational database vendors (e.g., Oracle, Microsoft, Informix, Sybase). Remedy delivers the power of the workflow server to users via a broad range of clients, including World Wide Web browsers, Microsoft Windows 95/98/NT, Sun Microsystems' Java platform, OSF Motif and even leading-edge clients like 3Com's PalmPilot and email systems. The clients were designed in conjunction with well-known and respected usability specialists to help maximize the productivity of the application users. Remedy's AR System supports a "write once, run anywhere" architecture so all these platforms employ a single set of forms and business rules. In addition, any changes to the business rules or forms are automatically distributed to the clients, thereby eliminating software distribution costs. These adaptable applications can be compared to spreadsheets, which can be used as is or modified by changing formulas, moving and deleting items, and making stylistic changes. The competitive differentiator with Remedy's 3-tier client/server architecture is the Company's lean client and network. The architecture balances functionality among the following elements: client, workflow server, web-based application 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 web-based clients communicate with the Remedy Web(TM) Application Server using a combination of industry standard HTTP and a high-performing Remedy proprietary protocol, optimized to run light over the wire. Remedy's web-based products use industry standard web-based page technologies such as HTML, Javascript, and Java to allow Remedy's workflow to be delivered through all industry-standard web browsers. The Company's product architecture delivers a unique combination of solutions-oriented enterprise applications and a single, cohesive and powerful process-automation infrastructure to support them. CUSTOMERS As of December 31, 1998, the Company had licensed its software to more than 3,700 customers at more than 6,800 sites, including over 60% of the Fortune 100. In 1998, no customer accounted for more than 10% of the Company's total revenue. Remedy serves vertical industry's including automotive, computer, chemical/ pharmaceutical, energy/utilities, financial, insurance, government/research, semiconductor, telecom/network and others. SALES AND MARKETING The Company markets its software and services through its regionally based direct sales force, a headquarters-based direct telesales force and through its indirect sales channels (VARs, SIs and ISVs). The Company's direct and telesales forces accounted for approximately 52% of the Company's total revenue for 1998, and sales through indirect channels accounted for approximately 48%. As of December 31, 1998, the Company's sales and marketing organization consisted of 263 individuals. Generally, the AR System and related applications and services are sold through a sales representative with occasional help from a pre-sales engineer. Telesales representatives generally sell standard products and services and they pass large or more complicated deals on to regionally based direct sales representatives. The Company's marketing organization provides leads to members of the sales organization. Leads are primarily generated through public relations, seminars, trade shows, telesales and the Company's web site. 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. The Company 6 7 increased the size of its sales organization from 157 to 189 employees in 1998 and intends to increase the size of its sales organization in 1999 and beyond. The Company's sales and marketing organization is complemented by indirect sales channels (VARs, SIs, and ISVs), who license the Company's products at a discount for re-licensing, and may provide training, support and customer services to end users. The Company anticipates that revenue derived from indirect sales, particularly through VARs and SIs, will increase in the future. The Company increased the number of channel partners from 133 to 160 in 1998. The Company's indirect sales as a percentage of revenue may adversely affect the Company's average selling prices and gross margins due to somewhat lower unit prices that the Company receives when selling through indirect channels. For 1998, 1997 and 1996, international sales represented 38%, 37% and 37%, respectively, of the Company's total revenue. PROFESSIONAL SERVICES The Company's professional services organization provides customers with consulting, education and customer support services. The Company believes that providing a high level of customer service and technical support is critical to customer satisfaction and the Company's growth. As of December 31, 1998, the Company had 163 employees in its professional services organization. CONSULTING SERVICES. Consulting Services consist of assisting customers in a wide range of activities, from application designs, implementations and re-architecting existing applications to align with company business practices and strategy. The Company has been adding consultants focused on requirements analysis, project management and implementation for large enterprise projects. Fees for consulting services are charged separately from the Company's software products. Remedy also has 150 Remedy Approved Consultant(TM) contractors (RACs) working for over 50 Remedy Partners, in 21 countries. CUSTOMER SUPPORT SERVICES. In providing technical support to customers, the Company uses its own products extensively. Most of the Company's customers currently have support agreements with the Company and the majority renew their contracts on a yearly basis. The Company offers telephone, electronic mail, Web and fax support through its support services staff. Additional customer support is provided in the United States and particularly in international markets by the Company's VARs, SIs, and ISVs. Initial product license fees do not include software maintenance. As part of their annual maintenance fee, customers are entitled to receive new software releases, maintenance releases and support for licensed products. EDUCATIONAL SERVICES. An important piece of the Company's strategy is to offer comprehensive training to customers. Classes are offered through in-house facilities at the Company's offices in Pleasanton, California, Columbia, Maryland, and Bracknell, in the United Kingdom. Courses are also available from more than 25 Approved Education Partners around the world. Educational Services also provides on-site training and customized training services. In 1998, the Company and its partners trained almost 11,000 people. Fees for educational 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 platform products 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, 1998, the Company's research and development organization consisted of 212 employees. This includes employees in a core engineering group, research employees in the IT Services 7 8 Management group, the Customer Relationship Management group and the Employee Workplace Automation group. The Company's total expenses for research and development for fiscal years 1998, 1997 and 1996 were $33.7 million, $21.2 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. 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 2001. The Company also leases two other facilities of approximately 43,000 square feet each in Mountain View, California, through October 2005. 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 center is located in two facilities totaling approximately 77,000 square feet of space in Pleasanton, California. These facilities are leased to the Company through the year 2000. The Company also leases office space in Maryland, New Jersey, Virginia, Colorado, Illinois, Georgia, Texas, the United Kingdom, Frankfurt, Paris, Singapore, Australia and Tokyo. From its purchase of BayStone Software, the Company is leasing additional facilities in Saratoga (California), New York, and Boston 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 Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security-holders during the fourth quarter of the fiscal year covered by this report. ITEM 4A. OFFICERS OF THE REGISTRANT The officers of the Company and their ages as of March 10, 1999 are as follows:
NAME AGE POSITION ---- --- -------- Lawrence L. Garlick........ 50 Chairman of the Board and Chief Executive Officer David A. Mahler(1)......... 42 Vice President Business Development and Director Richard P. Allocco......... 44 Vice President and General Manager Global Professional Services and Customer Relationship Management Strategic Marketing Unit Todd Basche................ 44 Vice President and General Manager, Employee Workplace Automation Strategic Marketing Unit Eric S. Bergan(2).......... 41 Vice President Independent Software Vendors Bernard R. Cote(3)......... 51 Vice President Customer Support George A. de Urioste(4).... 43 Vice President Finance and Operations, and Chief Financial Officer Mike L. Dionne............. 50 Senior Vice President Worldwide Sales Ron J. Fior(5)............. 41 Vice President Finance and Operations, and Chief Financial Officer Matthew R. Miller.......... 35 Vice President Corporate Marketing and General Manager Core Products Unit
- --------------- (1) As of February 1, 1999, Mr. Mahler no longer holds the position of Vice President Business Development. However, he still remains a Director. 8 9 (2) As of December 31, 1998, Mr. Bergan no longer holds the position of Vice President Independent Software Vendors. (3) As of November 13, 1998, Mr. Cote no longer holds the position of Vice President Customer Support. (4) As of September 1, 1998, Mr. de Urioste no longer holds the position of Vice President Finance and Operations, and Chief Financial Officer. (5) As of September 2, 1998, Mr. Fior holds the position of Vice President Finance and Operations, and Chief Financial Officer. 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 most recently as Vice President of Distributed Systems at Sun Microsystems, Inc. (Sun), a manufacturer of computer workstations. Prior to joining Sun, Mr. Garlick was employed by Xerox Corporation (Xerox), a document management company, for six years. Mr. Garlick holds B.S.E.E. and M.S.E.E. degrees in computer engineering from Stanford University. Mr. Mahler no longer holds the position of Vice President Business Development as of February 1, 1999. However, he still remains a director. Mr. Mahler co-founded the Company in November 1990. Since June 1995, he has served as Vice President Business Development. Between November 1997 and March 1998, Mr. Mahler also served as acting Vice President, Worldwide Sales. 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 as Product Marketing Manager at Hewlett-Packard Company, a manufacturer of computers and related products. Mr. Mahler holds a B.S. degree in computer science from Case Western Reserve University. Mr. Allocco joined the Company in March 1998 as Vice President and General Manager Worldwide Customer Services. From January 1996 to February 1998, Mr. Allocco was employed as Senior Vice President, Marketing and Field Support by Siemens Business Communication Systems, Inc., a manufacturer of telecommunication and related network equipment. Prior to joining Siemens, Mr. Allocco served as Vice President and General Manager, Western Area, at Siemens ROLM Communications, a manufacturer of telecommunication and related network equipment, from May 1989 to May 1995. Mr. Allocco was employed by IBM Corporation, an information systems and applications manufacturer, for over 12 years in various sales, marketing and management positions, prior to joining Rolm. Mr. Allocco holds a B.A. degree in economics from University of Notre Dame. Mr. Basche joined the Company in August 1997 as Vice President Engineering. From March 1993 to May 1997, Mr. Basche was employed as Vice President by Visioneer, Inc., a shrink-wrapped consumer hardware and software products company. Prior to joining Visioneer, Mr. Basche was employed from February 1989 to February 1993, as Director of Desktop and Graphics Systems for Sun Microsystems, Inc., a manufacturer of computer workstations. Mr. Basche holds a B.S. degree in electrical engineering from Northeastern University. Mr. Bergan no longer holds the position of Vice President Independent Software Vendors as of December 31, 1998. Mr. Bergan joined the Company in April 1993 and since August 1997 has served as Vice President Independent Software Vendors. From April 1993 to August 1997, Mr. Bergan was Vice President, Engineering. From October 1991 to March 1993, Mr. Bergan was employed most recently as Director of Engineering, Applications by NetLabs Inc., a network management software company. 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 a M.S. degree in computer science from Johns Hopkins University. Mr. Cote no longer holds the position of Vice President Customer Support as of November 13, 1998. Mr. Cote joined the Company in November 1993 as Vice President Customer Support. From March 1984 to May 1993, Mr. Cote was employed most recently as Vice President of Worldwide Support by Sun. Prior to 9 10 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 no longer holds the position of Vice President Finance and Operations, and Chief Financial Officer as of September 1, 1998. Mr. de Urioste joined the Company in March 1993 as Vice President Finance and Operations, and Chief Financial Officer. From January 1991 to June 1992, Mr. de Urioste was employed most recently as Chief Financial Officer by TeamOne Systems, Inc. (TeamOne), a configuration management software company. 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 a M.B.A. degree in finance and international business from the University of California, Berkeley. Mr. Dionne joined the Company in March 1998 as Senior Vice President Worldwide Sales. From May 1983 to March 1997, Mr. Dionne was employed as Senior Vice President and General Manager, Service and Support at Apple Computer, Inc. (Apple), a manufacturer of computers and related products. Prior to joining Apple, Mr. Dionne was employed by Xerox Corporation, a document management company, for six years in various sales and management positions. Mr. Dionne holds a B.S. degree in business administration from Bryant College. Mr. Fior joined the Company in September 1998 as Vice President Finance and Operations, and Chief Financial Officer. From September 1985 to February 1998, Mr. Fior was employed as Senior Vice President and Chief Financial Officer by the education publishing unit of The Thomson Corporation, an information and publishing company. Mr. Fior worked for over 7 years at Ernst & Young, a professional services firm, in New York and Canada, and he holds a Bachelor of Commerce degree from the University of Saskatchewan, Canada. Mr. Miller joined the Company in July 1996 as Vice President Marketing. From April 1993 to July 1996, Mr. Miller was employed as Vice President of Marketing at Gupta Corporation, a provider of client-server tools and databases. From June 1989 to May 1992, he was employed by Oracle Corporation, a database software provider, serving as Director of Marketing for the Desktop Products Division. Mr. Miller holds a B.A. degree in psychology and computer science from Cornell University and a M.B.A. degree in finance and marketing from Columbia University. 10 11 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 Stock Market(R) under the symbol "RMDY" since March 17, 1995. The following table sets forth, for the fiscal quarters indicated, the high and low sale prices of the Company's Common Stock as reported by The NASDAQ Stock Market.
HIGH LOW ------ ------ Fiscal 1998: First Quarter............................................ $22.50 $12.63 Second Quarter........................................... $25.50 $15.50 Third Quarter............................................ $19.69 $ 8.13 Fourth Quarter........................................... $15.94 $ 7.56 Fiscal 1997: First Quarter............................................ $54.63 $31.50 Second Quarter........................................... $47.63 $25.25 Third Quarter............................................ $47.13 $34.44 Fourth Quarter........................................... $47.00 $20.88
On March 3, 1999 the closing sale price of the Common Stock was $18.875 per share. On that date, there were 173 holders of record. 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. 11 12 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data is qualified in its entirety by, and should be read in conjunction with, the Consolidated Financial Statements of the Company and the Notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this Form 10-K. The selected consolidated financial data as of and for each of the five years in the period ended December 31, 1998 have been derived from the audited Consolidated Financial Statements of the Company.
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF INCOME DATA: Total revenue....................... $157,420 $129,184 $80,635 $40,117 $19,750 Non-recurring charges............... 3,104 -- -- -- -- Income from operations.............. 23,733 38,475 23,707 10,189 4,982 Net income.......................... 18,977 27,290 16,824 7,561 3,059 Basic net income per share(1)....... $ 0.66 $ 0.99 $ 0.64 $ 0.32 $ 0.37 Diluted net income per share(1)..... $ 0.63 $ 0.89 $ 0.56 $ 0.27 $ 0.14 Shares used in computing basic per share amounts(1)................. 28,722 27,614 26,365 23,439 8,237 Shares used in computing diluted per share amounts(1)................. 29,901 30,524 30,031 27,642 22,528
AS OF DECEMBER 31, ------------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and short-term investments........... $136,637 $133,833 $ 86,757 $56,186 $ 3,007 Working capital..................... 136,813 138,102 87,718 60,767 4,423 Total assets........................ 213,500 181,616 119,434 74,733 12,006 Long-term obligations............... 127 502 513 324 219 Total stockholders' equity.......... $160,704 $148,072 $ 92,497 $63,131 $ 5,882
- --------------- (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. The earnings per share amounts have been restated as required to comply with Statement of Financial Accounting Standards No. 128 and Staff Accounting Bulletin No. 98. See Note 2 of Notes to Consolidated Financial Statements. 12 13 SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
1998 SUMMARY BY QUARTER ---------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL YEAR FIRST SECOND THIRD FOURTH 1998 --------- -------- ------------- ------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenue............................ $30,599 $36,613 $40,117 $50,091 $157,420 Non-recurring charges.................... -- -- -- 3,104 3,104 Income from operations................... 2,260 6,061 8,369 7,043 23,733 Net income............................... 2,364 4,803 6,224 5,586 18,977 Basic net income per share(1)............ $ 0.08 $ 0.17 $ 0.22 $ 0.20 $ 0.66 Diluted net income per share(1).......... $ 0.08 $ 0.16 $ 0.21 $ 0.19 $ 0.63 Shares used in computing basic per share amounts(1)............................. 28,776 29,035 28,688 28,387 28,722 Shares used in computing diluted per share amounts(1)....................... 30,231 30,598 29,574 29,199 29,901
1997 SUMMARY BY QUARTER ---------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL YEAR FIRST SECOND THIRD FOURTH 1997 --------- -------- ------------- ------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total revenue............................ $23,301 $30,002 $37,066 $38,815 $129,184 Income from operations................... 6,489 8,683 11,655 11,648 38,475 Net income............................... 4,785 6,163 8,113 8,229 27,290 Basic net income per share(1)............ $ 0.18 $ 0.23 $ 0.29 $ 0.29 $ 0.99 Diluted net income per share(1).......... $ 0.16 $ 0.20 $ 0.26 $ 0.27 $ 0.89 Shares used in computing basic per share amounts(1)............................. 26,973 27,326 27,789 28,368 27,614 Shares used in computing diluted per share amounts(1)....................... 30,426 30,391 30,592 30,686 30,524
- --------------- (1) The earnings per share amounts have been restated as required to comply with Statement of Financial Accounting Standards No. 128 and Staff Accounting Bulletin No. 98. See Note 2 of Notes to Consolidated Financial Statements. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on the information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results may differ materially from the results discussed herein. Factors that might cause such a difference include, but are not limited to, those discussed in "Quantitative and Qualitative Disclosures about Market Risk" on page 18. The following table sets forth, as a percentage of total revenue, consolidated statements of income data for the periods indicated.
YEAR ENDED DECEMBER 31, ------------------------- 1998 1997 1996 ----- ----- ----- REVENUE: Product................................................... 64% 71% 76% Maintenance and service................................... 36 29 24 --- --- --- Total revenue..................................... 100 100 100 COSTS AND EXPENSES: Cost of product revenue................................... 3 3 4 Cost of maintenance and service revenue................... 15 12 13 Research and development.................................. 21 16 16 Sales and marketing....................................... 38 33 29 General and administrative................................ 6 6 9 Non-recurring charges..................................... 2 -- -- --- --- --- Total costs and expenses.......................... 85 70 71 Income from operations...................................... 15 30 29 Interest income, net........................................ 4 3 3 --- --- --- Income before provision for income taxes.................... 19 33 32 Provision for income taxes.................................. 7 12 12 --- --- --- Net income.................................................. 12% 21% 20% === === ===
REVENUE Total revenue was $157.4 million, $129.2 million and $80.6 million in 1998, 1997 and 1996, respectively, representing increases of 22% from 1997 to 1998 and 60% from 1996 to 1997. The Company recognizes revenue in accordance with the Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended by Statement of Position 98-4, Deferral of the Effective Date of a Provision of SOP 97-2. The Company derives revenue from the sale of software licenses, post-contract support ("support") and other services. Support includes telephone technical support, bug fixes, and rights to upgrades on a when-and-if available basis. Services range from installation, training, and basic consulting for software modification to meet specific customer needs. In software arrangements that include rights to multiple software products, specified upgrades, support and/or other services, the Company allocates the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined based on vendor-specific objective evidence. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant Company obligations with regard to implementation remain, the fee is 14 15 fixed or determinable and collectibility is probable. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Revenue on arrangements with customers who are not the ultimate end users (primarily resellers) is not recognized until the product is delivered to the end user. Revenue allocable to support is recognized on a straight-line basis over the period support is provided. Arrangements that include other software services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenue under the arrangement is recognized using contract accounting. When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed. The Company distributes the majority of its products through its headquarters-based direct sales organization which is complemented by indirect sales channels, including value added resellers (VARs), system integrators (SIs) and independent software vendors (ISVs). Sales derived through indirect channels accounted for approximately 48% of the Company's total revenue in 1998 as compared to 44% in 1997. The Company expects that sales derived through indirect channels will increase. International sales accounted for 38% of total revenue in 1998 and 37% of total revenue in both 1997 and 1996. International sales are denominated and collected in U.S. currency. The majority of international sales were made in Europe, with lower amounts in Canada, the Pacific Rim and Latin America. Currently the Company maintains offices in the United Kingdom, France, Germany, Singapore, Australia, Japan and Canada. In October 1998, the Company set up Remedy Software International Limited (RSIL) in Ireland. From this location, the Company ships its products to customers in Europe, the Middle East and Africa. The Company also expects to increase the staffing levels of its international based operations in 1999. 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 may 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. In the future, some portion of the Company's revenues may be denominated in currencies other than U.S. dollars and, as a result, the Company may in the future engage in minimal hedging activities. If any revenues are denominated in currencies other than U.S. dollars, the Company will be subject to the risks associated with foreign exchange rate fluctuations. Accordingly, due to the substantial volatility of foreign exchange rates, the Company's business, operating results or financial condition could be materially adversely affected. PRODUCT REVENUE. The Company currently derives substantially all of its product revenue from licenses of the AR System. Revenue from product licenses was $101.1 million, $92.1 million, and $61.1 million in 1998, 1997 and 1996, respectively. This represents increases of 10% from 1997 to 1998 and 51% from 1996 to 1997. The growth of revenue in absolute dollars is largely a result of the Company's sales and marketing efforts and the increased acceptance of the AR System. The prices of the Company's products have remained relatively constant in the periods presented. 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 the foreseeable future. MAINTENANCE AND SERVICE REVENUE. Maintenance and service revenue was $56.3 million, $37.1 million, $19.5 million in 1998, 1997 and 1996, respectively, representing increases of 52% from 1997 to 1998 and 90% from 1996 to 1997. This growth is primarily due to the renewal of maintenance contracts after the initial one-year term. Although prior years' licensing growth has resulted in increased revenue from maintenance and support, training and consulting services, the Company expects that prior growth rates of the Company's installed base and, consequently, in the Company's service revenue, may not be sustainable in the future. 15 16 COST AND EXPENSES 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 $4.5 million, $3.3 million and $2.9 million in 1998, 1997 and 1996, respectively, representing 4% of the related product revenue for 1998 and 1997, and 5% in 1996. 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 1996 to 1997 was primarily due to economies of scale realized as a result of shipping greater quantities of product in 1996 and 1997. 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 $23.2 million, $15.2 million and $10.4 million in 1998, 1997 and 1996, respectively, representing 41% of the related maintenance and service revenue for 1998 and 1997, and 53% in 1996. The increases in the dollar amounts of cost of maintenance and service since 1996 are a result of increased personnel related costs, as the Company continued to build its customer support and training organizations. The Company believes that cost of maintenance and service revenue will continue to increase in dollar amounts. RESEARCH AND DEVELOPMENT. Research and development expenses were $33.7 million, $21.2 million, and $13.3 million or 21% of total revenue in 1998 and 16% of total revenue in both 1997 and 1996. The increases in research and development expenses in both absolute dollar amounts and as a percentage of total revenue were primarily attributable to increased staffing, outside contractors 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. SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries, commissions and bonuses for sales and marketing personnel, as well as promotional expenses. Sales and marketing expenses were $59.3 million $42.6 million and $23.3 million, or 38%, 33% and 29% of total revenue, in 1998, 1997 and 1996, respectively. The increases in sales and marketing expenses in both absolute dollar amounts and as a percentage of total revenue were primarily due to the expansion of sales and marketing resources and increased marketing activities, including trade shows and promotional activities. The Company believes that sales and marketing expenses will continue to increase in dollar amounts in the future as the Company expands its sales and marketing staff. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $9.9 million, $8.4 million and $7.1 million or 6% of total revenue in 1998 and 1997 and 9% of total revenue in 1996. 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. NON-RECURRING CHARGES. In October 1998, the Company acquired BayStone Software (BayStone), a privately held provider of a suite of customer support, quality assurance, and opportunity management and telesales automation applications for rapidly growing businesses. The purchase price for BayStone approximated $13.3 million, which consisted of $10.4 million of cash and $2.9 million assumption of net liabilities and other direct costs. The aggregate purchase price was allocated to the fair value of the assets acquired. A total of $3.1 million was expensed in the Company's final fiscal quarter of 1998. This was comprised of purchased in-process research and development of $1.5 million and approximately $1.6 million in other merger related expenses, including $1.1 million for subsequent personnel severance and outplacement expenses and $0.5 million for other indirect costs of the acquisition. Purchased in-process research and development of $1.5 million was recorded representing the present value of the estimated after-tax cash flows 16 17 expected to be generated by the purchased technology, which, at the acquisition date, had not yet reached technological feasibility. The amount allocated to goodwill ($11.8 million) is being amortized on a straight-line basis over a period of four years from the date of the acquisition. A total of $0.4 million has been amortized as of December 31, 1998. Pro forma results of operations have not been presented since the effect of this acquisition was not material to the Company's consolidated financial position or results of operations. INTEREST INCOME AND OTHER, NET. Interest income and other, net was $5.9 million, $4.2 million and $2.6 million in 1998, 1997 and 1996, respectively. The increase in 1998 is primarily due to the investment of increased amounts of cash provided by operating activities. PROVISION FOR INCOME TAXES. The effective tax rate for the years ended December 31, 1998, 1997 and 1996 was 36%. The effective tax rate differs from the federal statutory rate primarily due to state income taxes, offset by tax-exempt interest income and research and development tax credits. See Note 11 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities in 1998, 1997 and 1996 was $29.1 million, $41.1 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, and in all three years the Company experienced significant growth in receivables, accompanying the Company's increased sales volumes, partially offset by growth in deferred revenue balances. On August 5, 1998, the Board of Directors authorized management of the Company to repurchase up to 3 million shares or approximately 10 percent of the Company's outstanding shares of common stock over the next twelve months. The Company plans to purchase the shares on the open market from time to time, depending on market conditions. The repurchases will be funded from the Company's cash and short-term investments. At December 31, 1998, the Company had repurchased a total of approximately 1.1 million shares of the Company's stock at an average price of $12.50 for approximately $14.0 million. The Company's investing activities consisted primarily of purchases of short-term investments, goodwill related to the acquisition of BayStone Software and property and equipment. Purchases of short-term investments exceeded maturities by $14.4 million. 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 continue to be invested in investment grade, interest-bearing securities. In 1998, $10.4 million of the investing activity represented the acquisition of BayStone Software. See Note 13 of Notes to Consolidated Financial Statements. Cash used to purchase property and equipment, primarily computer workstations and file servers for the Company's growing employee base was $8.2 million in 1998 and 1997 and $3.9 million in 1996. 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 on its telephone system. See Note 4 of Notes to Consolidated Financial Statements. The net cash used in financing activities in 1998 was $7.5 million in contrast to the $14.1 million and the $3.6 million provided by investing activities in 1997 and 1996, respectively. This comparative decrease is primarily due to the use of approximately $14.0 million as part of the Company's initial purchase of 1.1 million shares of the Company's stock under the share repurchase program. The Board of Directors has authorized management to repurchase up to 3.0 million shares through July 1999. See Note 8 of Notes to Consolidated Financial Statements. At December 31, 1998, the Company had $136.6 million in cash, cash equivalents and short-term investments and $136.8 million of working capital. The Company also has available a $15.0 million unsecured bank line of credit which expires in June 1999. There were no borrowings outstanding under the line of credit as of December 31, 1998. 17 18 The Company believes that its current cash and 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. 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. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activity" (SFAS 133), which is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter. The Company has yet to determine its date of adoption. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Management has not yet determined what the effect of SFAS 133 will be on the Company's consolidated financial position, results of operations or cash flows. In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. Management expects that the adoption of SOP No. 98-1 will not have a material impact on the Company's financial position or results of operations. Remedy will be required to implement SOP No. 98-1 for the year ending December 31, 1999. In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. Management expects that the adoption of SOP 98-5 will not have a material impact on the Company's financial position or results of operations. Remedy will be required to implement SOP No. 98-5 for the year ending December 31, 1999. SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" was issued in December 1998 and addresses software revenue recognition as it applies to certain multiple-element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of a Position of SOP 97-2," to extend the deferral of application of certain passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Remedy has not yet determined the effect of the final adoption of SOP 98-9 on its future revenues. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 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 rate fluctuations and general economic factors. The Company operates with no significant order backlog because its software products typically are shipped or electronically downloaded over the Web shortly after orders are received. Furthermore, 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 and web-based 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 18 19 customer to customer. 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. 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, 1999 will be lower than in the quarter ended December 31, 1998. COMPETITION. The client/server and web-based application software markets are intensely competitive and subject to rapid change. The Company expects the number of competitors to increase with the Company's expansion into additional client server and web-based applications. 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 or outsourcers 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 and web-based 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 could continue to 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 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 and web-based application software market is characterized by rapid technological change, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. The life cycles of 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. In 1998, the Company invested significant resources into the research and development, sales and marketing of new client/server and web-based applications. The Company is continuing to invest heavily in these efforts in 1999. 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, evolving industry standards and customer requirements, or 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 19 20 changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially adversely affected. If the new products currently being developed by the Company do not achieve market acceptance or are not released when expected, 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 began shipping products in December 1991. Although the Company has experienced significant absolute dollar growth in revenue in recent years, there can be no assurance that the prior growth rates are sustainable or indicative of future operating results or 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 organization 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 may have lower gross margins than direct sales. In particular, the Company intends to hire a significant number of additional sales personnel in 1999 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 sales organization from 100 to 157 in 1997 and from 157 to 189 in 1998. In the past, the Company has experienced difficulty in recruiting a sufficient number of qualified 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 may not sustain current operating margins in the future. PRODUCT CONCENTRATION. The Company currently derives the majority of its revenue from licenses of the AR System, the applications Remedy provides, which are built upon the AR System foundation, and related services. Broad market acceptance of 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 AR System foundation and applications as a result of competition, technological change or otherwise, would have a material adverse effect on the business, operating results and financial condition of the Company. 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 AR System foundation and other applications. There can be no assurance that the Company will continue to be successful in marketing the AR System or any new or enhanced products or applications. In 1998, the Company invested significant resources into the research and development, sales and marketing of new client/server and web-based applications. However, the Company believes that its success in expanding its product line will depend largely on new products achieving market acceptance and technological competitiveness. MANAGEMENT OF GROWTH; DEPENDENCE UPON KEY PERSONNEL. The Company has recently experienced a period of significant growth 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 20 21 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 current executive officers could have a material adverse effect on the Company's business, operating results and financial condition. The Company has experienced several changes at the executive officer level in the past year. In March 1998, Michael L. Dionne joined the Company as Senior Vice President Worldwide Sales. Also in March 1998, Richard P. Allocco joined the Company as Vice President and General Manager Worldwide Customer Services. In July 1998, George de Urioste, the Company's Vice President of Finance and Operations and Chief Financial Officer, left the Company and Ron J. Fior joined the Company as his replacement. 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 continue to develop the marketing channels of value-added resellers (VARs), system integrators (SIs) and independent software vendors (ISVs). VARs, SIs and ISVs accounted for approximately 48% of the Company's total revenue in 1998. If these marketing channels increase as a percentage of sales, the Company's operating margins may be adversely affected due to the lower unit prices that the Company receives when selling through indirect channels. There can be no assurance that the Company will be able to attract VARs, SIs and ISVs 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 ISVs are not exclusive and in many cases may be terminated by either party without cause, and many of the Company's VARs, SIs and ISVs carry competing product lines. Therefore, there can be no assurance that any VAR, SI or ISV will continue to represent the Company's products, and the inability to recruit, or the loss of important VARs, SIs or ISVs 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 may 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 intends to rely on third-party implementation providers, including integration consulting firms and Remedy Approved Consultant contractors (RACs), to assist with the implementation of its products in large enterprise customers and in the training of personnel within such enterprises, in order to meet demand for implementation of the Company's product from large enterprise customers, if any. If the Company's strategy to increase its sales to enterprise customers and to use third party service providers to service such customers is successful, the Company's operating margins may be lower as a result of the higher expenses associated with engaging third party service providers. INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS. International sales represented approximately 38% of the Company's revenue in 1998. The Company currently has seven international wholly owned subsidiaries, which are primarily sales offices, which are located in the United Kingdom, France, Germany, Singapore, Australia, Japan and Canada. One of the Company's strategies is to continue to expand its existing international operations and enter additional international markets, which will require significant management attention and financial resources. Traditionally, international operations are characterized by higher operating expenses and lower operating margins. As a result, if international revenues increase as a percentage of total revenue, operating margins may be adversely affected. Costs associated with international expansion include the establishment of additional foreign offices, the hiring of additional personnel, the localization and marketing of its products for particular foreign markets and the development of relationships with additional international service providers. If international revenue is not adequate to offset the expense of expanding foreign operations, the Company's business, operating results or financial condition could be materially adversely affected. 21 22 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. In the future, some portion of the Company's revenues may be denominated in currencies other than U.S. dollars and, as a result, the Company may in the future engage in minimal hedging activities. If any revenues are denominated in currencies other than U.S. dollars, the Company will be subject to the risks associated with foreign exchange rate fluctuations. Accordingly, due to the substantial volatility of foreign exchange rates, the Company's business, operating results or financial condition could be materially adversely affected. The Company's international operations are subject to other risks inherent in international business activities and generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, products 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, the burdens of complying with a wide variety of foreign laws and general economic conditions in such countries. There can be no assurance that such factors will not have a material adverse effect on 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 may 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. GENERAL ECONOMIC AND MARKET CONDITIONS. During recent years, segments of the personal computer industry have experienced significant economic downturns characterized by decreased product demand, production over-capacity, price erosion, work slowdowns and layoffs. The 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 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. 22 23 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. RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. From time to time the Company may acquire or invest in companies, technologies or products that complement the Company's business or its product offerings. Any such acquisitions may result in the use of cash, potentially dilutive issuances of equity securities, the write-off of software development costs or other assets, incurrence of severance liabilities, the amortization of expenses related to goodwill and other intangible assets and/or the incurrence of debt, any of which could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. Acquisitions involve numerous additional risks including difficulties in the assimilation of operations, services, products and personnel, the diversion of management's attention from other business concerns, the disruption of the Company's business, and the entry into markets in which the Company has little or no direct prior experience. In addition, potential acquisition candidates targeted by the Company may not have audited financial statements, detailed financial information or any degree of internal controls. There can be no assurance that an audit subsequent to any successful completion of an acquisition will not reveal matters of significance, including with respect to revenues, expenses, liabilities, contingent or otherwise, and intellectual property. There can be no assurance that the Company would be successful in overcoming these or any other significant risks encountered and the failure to do so could have a material adverse effect upon the Company's business, operating results and financial condition. RISKS ASSOCIATED WITH SELLING TO LARGE ENTERPRISE CUSTOMERS. The Company has recently increased it efforts to sell its products to large enterprise customers, and has devoted significant management and financial resources to achieving this goal. If successful, large enterprise customers are expected to deploy the Company's products in business critical operations which involve significant capital and management commitments by such customers. Potential large enterprise customers generally commit significant resources to an evaluation of available enterprise software and require the Company to expend substantial time, effort and money educating them about the value of the Company's solutions. Sales of the Company's products to such customers require an extensive sales effort throughout a customer's organization because decisions to purchase such products generally involve the evaluation of the software by a significant number of customer personnel in various functional and geographic areas, each often having specific and conflicting requirements. A variety of factors, including factors over which the Company has little or no control, may cause potential large enterprise customers to favor a particular supplier or to delay or forego a purchase. As a result of these or other factors, the sales cycle for the Company's products is long, typically ranging between three and nine months. As a result of the length of the sales cycle and the significant selling expenses resulting from selling into the large enterprise, the Company's ability to forecast the timing and amount of specific sales is limited, and the delay or failure to complete one or more large transactions to which the Company has devoted significant resources could have a material adverse effect on the Company's business, operating results or financial condition and could cause significant variations in the Company's operating results from quarter to quarter. YEAR 2000 COMPLIANCE. The Company is aware of the issues associated with the programming code in existing computer systems as the Year 2000 approaches. The "Year 2000 problem" is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two-digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. 23 24 In 1998, the Company incurred approximately $0.2 million in its Year 2000 remediation efforts. Roughly half of these costs are attributed to external consulting with the remainder being internal costs and equipment. Remedy expects additional remediation costs of approximately $0.5 million in 1999, which includes expenditures for consulting, equipment and internal personnel. It is expected that the entire amount will be expensed in 1999. Although the Company is not currently aware of any material operational issues or costs associated with preparing its internal IT systems and non-IT systems for the Year 2000, the Company may experience material unanticipated problems caused by undetected errors in both technology utilized for our IT systems and vendors with whom Remedy does business. Any Year 2000 compliance problems of either the Company or its vendors could materially adversely affect the Company's business, results of operations, financial condition and prospects. The Company is currently taking steps to address Year 2000 issues in the following three areas: (1) Remedy products (2) Internal systems (including information technology such as financial and order entry systems and non-information technology systems such as phones and facilities) (3) Third parties with whom we have business relationships The Company has assigned a dedicated Year 2000 project team to develop and implement a comprehensive Year 2000 readiness plan for our world-wide operations relating to all of these areas. This plan has executive sponsorship, is regularly reviewed by senior management and includes progress reports to appropriate parties on a regular basis. REMEDY PRODUCTS Remedy software currently supports any date value set by the operating system. All date information, such as creation dates, modification dates, and time/date stamps, is generated using the date value provided by the operating system (Microsoft Windows, Apple Macintosh, UNIX, and others). The Company believes the functionality of the current or listed versions of the following Remedy products will not be impaired by the change to the Year 2000. The current versions of these products accurately represent date information within the constraints of the operating systems on which they run: Action Request System(R) (Version 3.0 or newer, including localized versions) Multi-Processing Server Option(TM) Distributed Server Option(TM) Full Text Search Option(TM) ARWeb(R) (Version 2.0 or newer) Flashboards(R) (Version 2.0 or newer) Remedy Help Desk(TM) (Version 2.0 or newer) Remedy Help Desk Express(TM) Remedy Service Level Agreements(TM) Remedy Change Management(TM) Remedy Asset Management(TM) As Remedy software supports the date value set by the operating system, it is important for customers to confirm that the operating systems in use are, or will be, Year 2000 compliant. The software license agreement provided with the Remedy software includes a Year 2000 certification. That provision states that the Remedy software, when used in conjunction with the Remedy-compatible operating systems described in the Remedy software documentation, will accurately process date data (including, but not limited to, calculating, comparing, and sequencing) from, into and between the twentieth and twenty-first centuries -- including leap year calculations. The provision also assumes that all products (hardware, software and firmware) used in combination with the Remedy software will properly exchange date data with the Remedy software. 24 25 INTERNAL SYSTEMS The Company's internal systems include both its information technology (IT) and non-IT systems. The Company has initiated an assessment of its internal IT systems including third-party software and hardware technology and its non-IT systems (such as its security system, building equipment, and embedded microcontrollers) and retained an outside contractor to provide assistance. The Company expects to complete that testing in Q2 of 1999. To the extent the Company is unable to test the technology provided by third-party vendors, the Company is seeking assurances from such vendors that their systems are Year 2000 compliant. THIRD PARTIES The Company is currently researching the status of its vendors concerning the Year 2000-compliance status. If the Company's current or future vendors fail to achieve Year 2000 compliance or if they divert technology expenditures (especially technology expenditures that were reserved for enterprise software) to address Year 2000 compliance problems, the Company's business, results of operations, or financial condition could be materially adversely affected. The Company has not yet fully developed a comprehensive contingency plan to address situations that may result if the Company is unable to achieve Year 2000 readiness of its critical operations. The cost of developing and implementing such a plan may itself be material. Finally, the Company is also subject to external forces that might generally affect industry and commerce, such as utility or transportation companies' Year 2000 compliance failures and related service interruptions. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is submitted as a separate section of this Form 10-K. See Part IV, Item 14 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable 25 26 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The information under the caption "Election of Directors" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held on May 27, 1999 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 and related information" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held on May 27, 1999 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Security Ownership of Certain Beneficial Owners and Management" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held on May 27, 1999 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Certain Relationships and Related Transactions" as set forth in the Company's proxy statement for its annual stockholders' meeting to be held on May 27, 1999 is incorporated herein by reference. 26 27 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 filed as part of this report:
PAGE ---- Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... 31 Consolidated Statements of Income for each of the three years ended December 31, 1998, 1997 and 1996.............. 32 Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 1998, 1997 and 1996.... 33 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1998, 1997 and 1996.............. 34 Notes to Consolidated Financial Statements.................. 35
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES The following consolidated financial statement schedule for each of the three years in the period ended December 31, 1998, 1997 and 1996 is submitted herewith:
PAGE ---- Schedule II: Valuation and Qualifying Accounts and Reserves.................................................. 46
Schedules not listed above have been omitted because they are not applicable or required, or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. 3.EXHIBITS See Item 14(c). b) REPORTS ON FORM 8-K 1. None 27 28 c) EXHIBITS
EXHIBIT NUMBER 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* Lease Agreement by and between the Registrant and Charleston Properties (Charleston), dated March 11, 1994, regarding the space located at 1500 Salado Drive. 10.7* Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc. (Sun), dated March 11, 1994, regarding the space located at 1500 Salado Drive, and related consent of Charleston, dated March 10, 1994. 10.8* Lease Agreement for use of Real Property by and between the Registrant and Sun, dated March 11, 1994, regarding the space located at 1505 Salado Drive, and related consent of Peery/Arrillaga, dated March 9, 1994. 10.9* Form of Action Request System Shrink Wrap License Agreement. 10.10* Form of Value Added Reseller Agreement. 10.11**** Amended and Restated Business Loan Agreement by and between the Registrant and SVB, dated June 15, 1997. 10.12**** Amended and Restated Promissory Note by and between the Registrant and SVB, dated June 15, 1997. 10.13**** Lease Agreement by and between the Registrant and Greiner, Inc. Pacific, dated March 29, 1996, regarding the space located at 5890 Stoneridge Drive. 10.14**** Lease Agreement by and between the Registrant and Viacom International Inc., dated March 17, 1997, regarding the space located at 5924 Stoneridge Drive. 10.15 Business Loan Agreement by and between the Registrant and Silicon Valley Bank (SVB), dated July 20, 1998. 14.1** Rights Agreement dated as of July 25, 1997, between the Company and Harris Trust Savings Bank, including the Certificate of Designation of Series A Junior Participating Preferred Stock, Form of Right Certificate and Summary of Rights to Purchase Preferred Shares attached thereto as Exhibits A, B and C, respectively.
28 29
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 21.1* Subsidiary of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 27.1 Financial Data Schedule. 27.2**** Restated Financial Data Schedule for period ended March 31, 1996. 27.3**** Restated Financial Data Schedule for period ended June 30, 1996. 27.4**** Restated Financial Data Schedule for period ended September 30, 1996. 27.5**** Restated Financial Data Schedule for period ended December 31, 1996. 27.6**** Restated Financial Data Schedule for period ended March 31, 1997. 27.7**** Restated Financial Data Schedule for period ended June 30, 1997. 27.8**** Restated Financial Data Schedule for period ended September 30, 1997.
- --------------- * Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-89026). ** Incorporated by reference from the Exhibits to Remedy Corporation's Form 8-A, dated July 29, 1997. *** Incorporated by reference from the Exhibits to Remedy Corporation's Definitive Proxy Statement for Annual Meeting of Stockholders, dated April 16, 1997. **** Incorporated by reference from the Exhibits to Remedy Corporation's Form 10-K Annual Report for the year ended December 31, 1997. Remedy, Remedy Corporation and design, Action Request System, AR System, ARWeb, Flashboards, Distributed Server Option, Remedy Help Desk, Remedy Asset Management, Remedy Change Management, Remedy Service Level Agreements, Remedy Approved Consultant, Remedy Purchasing@Work, Remedy Strategic Service Suite, Remedy Web, Multi-Processing Server Option, Full Text Search Option, Remedy Help Desk Express, BayStone, Remedy Quality Management, Remedy Year 2000 Compliance Manager, Remedy Customer Support and Remedy Leads Management are all registered or other trademarks of Remedy Corporation. All other trademarks and registered trademarks mentioned in this Report on Form 10-K may be trademarks, registered trademarks or service marks of the companies with which they are associated. 29 30 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders of Remedy Corporation We have audited the accompanying consolidated balance sheets of Remedy Corporation as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Remedy Corporation at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Palo Alto, California January 21, 1999 30 31 REMEDY CORPORATION CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 ASSETS
1998 1997 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Current assets: Cash and cash equivalents................................. $ 58,976 $ 70,568 Short-term investments.................................... 77,661 63,265 Accounts receivable, net of allowance for doubtful accounts of $2,392 and $1,974, respectively............ 42,278 31,528 Prepaid expenses and other current assets................. 6,036 2,682 Deferred tax asset........................................ 4,531 3,101 -------- -------- Total current assets.............................. 189,482 171,144 Property and equipment, net................................. 12,636 10,472 Goodwill, net............................................... 11,382 -- -------- -------- $213,500 $181,616 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 1,852 $ 1,230 Accrued compensation and related liabilities.............. 7,799 5,519 Income taxes payable...................................... 3,564 806 Other accrued liabilities................................. 9,929 6,141 Deferred revenue.......................................... 28,955 18,986 Current portion of obligations under capital leases....... 570 360 -------- -------- Total current liabilities......................... 52,669 33,042 Noncurrent portion of obligations under capital leases...... 127 502 Commitments and contingencies Stockholders' equity: Preferred stock, par value $.00005 per share; authorized 20,000,000 shares; issued and outstanding: none........ -- -- Common stock, par value $.00005 per share; authorized: 240,000,000 and 120,000,000 shares, respectively; issued and outstanding: 28,487,769 and 28,619,061 shares, respectively................................... -- -- Additional paid-in capital................................ 99,952 92,397 Treasury Stock (1,117,500 shares in 1998)................. (13,977) -- Notes receivable from stockholders........................ (45) (47) Deferred compensation..................................... -- (75) Retained earnings......................................... 74,774 55,797 -------- -------- Total stockholders' equity........................ 160,704 148,072 -------- -------- $213,500 $181,616 ======== ========
See accompanying notes. 31 32 REMEDY CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenue: Product................................................... $101,132 $ 92,133 $61,133 Maintenance and service................................... 56,288 37,051 19,502 -------- -------- ------- Total revenue..................................... 157,420 129,184 80,635 Costs and expenses: Cost of product revenue................................... 4,475 3,300 2,926 Cost of maintenance and service revenue................... 23,196 15,176 10,364 Research and development.................................. 33,734 21,214 13,266 Sales and marketing....................................... 59,295 42,608 23,318 General and administrative................................ 9,883 8,411 7,054 Non-recurring charges..................................... 3,104 -- -- -------- -------- ------- Total costs and expenses.......................... 133,687 90,709 56,928 -------- -------- ------- Income from operations...................................... 23,733 38,475 23,707 Interest income and other, net.............................. 5,918 4,169 2,583 -------- -------- ------- Income before provision for income taxes.................... 29,651 42,644 26,290 Provision for income taxes.................................. 10,674 15,354 9,466 -------- -------- ------- Net income.................................................. $ 18,977 $ 27,290 $16,824 ======== ======== ======= Net income per share: Basic..................................................... $ 0.66 $ 0.99 $ 0.64 ======== ======== ======= Diluted................................................... $ 0.63 $ 0.89 $ 0.56 ======== ======== ======= Shares used in computing per share amounts: Basic..................................................... 28,722 27,614 26,365 ======== ======== ======= Diluted................................................... 29,901 30,524 30,031 ======== ======== =======
See accompanying notes. 32 33 REMEDY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTES RECEIVABLE COMMON STOCK ADDITIONAL FROM DEFERRED TOTAL --------------- PAID-IN TREASURY STOCK- COMPEN- RETAINED STOCKHOLDERS SHARES AMOUNT CAPITAL STOCK HOLDERS' SATION EARNINGS EQUITY ------ ------ ---------- -------- ---------- -------- -------- ------------- (IN THOUSANDS) 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 ------ --- ------- -------- ---- ----- ------- -------- Balance at December 31, 1996.... 26,894 -- 64,305 -- (60) (255) 28,507 92,497 Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan........... 1,725 -- 14,383 -- -- -- -- 14,383 Tax benefit from employee stock transactions.................. -- -- 13,709 -- -- -- -- 13,709 Amortization of deferred compensation.................. -- -- -- -- -- 180 -- 180 Repayment of note receivable.... 13 13 Net income...................... -- -- -- -- -- -- 27,290 27,290 ------ --- ------- -------- ---- ----- ------- -------- Balance at December 31, 1997.... 28,619 -- 92,397 -- (47) (75) 55,797 148,072 Issuance of common stock upon exercise of options and purchases under the employee stock purchase plan........... 986 -- 6,594 -- -- -- -- 6,594 Tax benefit from employee stock transactions.................. -- -- 961 -- -- -- -- 961 Amortization of deferred compensation.................. -- -- -- -- -- 75 -- 75 Repayment of note receivable.... -- -- -- -- 2 -- -- 2 Treasury stock purchased........ (1,117) -- -- (13,977) -- -- -- (13,977) Net income...................... -- -- -- -- -- -- 18,977 18,977 ------ --- ------- -------- ---- ----- ------- -------- Balance at December 31, 1998.... 28,488 $-- $99,952 $(13,977) $(45) $ -- $74,774 $160,704 ====== === ======= ======== ==== ===== ======= ========
See accompanying notes. 33 34 REMEDY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 --------- --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................ $ 18,977 $ 27,290 $ 16,824 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................... 6,563 3,371 1,810 Amortization of deferred compensation and other......................................... 75 193 179 Change in assets and liabilities: Accounts receivable.............................. (9,432) (7,339) (12,599) Prepaid expenses and other current assets........ (3,113) (1,521) (600) Deferred tax assets.............................. (1,430) (1,066) (996) Accounts payable................................. 622 (409) 471 Accrued compensation and related liabilities..... 2,280 (1,117) 3,086 Income taxes, net of benefit from employee stock transactions.................................. 3,720 12,678 13,113 Other accrued liabilities........................ 1,266 489 3,918 Deferred revenue................................. 9,531 8,556 5,698 --------- --------- --------- Net cash provided by operating activities..... 29,059 41,125 30,904 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments................... (185,858) (161,734) (106,562) Maturities of short-term investments.................. 171,462 145,456 84,309 Payment for BayStone Software, net.................... (10,427) -- -- Capital expenditures.................................. (8,281) (8,160) (3,942) --------- --------- --------- Net cash used in investing activities......... (33,104) (24,438) (26,195) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock............................ (13,977) -- -- Principal payments under capital lease obligations, net................................................ (165) (272) (147) Proceeds from issuance of common stock................ 6,595 14,383 3,756 --------- --------- --------- Net cash (used in) provided by financing activities.................................. (7,547) 14,111 3,609 --------- --------- --------- Net (decrease) increase in cash and cash equivalents........................................ (11,592) 30,798 8,318 Cash and cash equivalents at beginning of year........ 70,568 39,770 31,452 --------- --------- --------- Cash and cash equivalents at end of year.............. $ 58,976 $ 70,568 $ 39,770 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid during the year......................... $ 132 $ 57 $ 47 Income taxes paid (refunded) during the year.......... $ 8,242 $ 3,586 $ (2,647) Supplemental schedule of noncash financing activities: Equipment acquired under capital lease arrangements... $ 76 $ 392 $ 472
See accompanying notes. 34 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION OF THE COMPANY THE COMPANY. Remedy Corporation (the "Company") develops, markets and supports highly adaptable, client/server and web-based application software products that simplify employee-intensive business processes. The Company was incorporated in Delaware in November 1990. The Company has wholly owned subsidiaries in the following countries: United Kingdom, France, Germany, Singapore, Australia, Japan and Canada. 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. The Company recognizes revenue in accordance with the Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended by Statement of Position 98-4, Deferral of the Effective Date of a Provision of SOP 7-2. The Company derives revenue from the sale of software licenses, post-contract support ("support") and other services. Support includes telephone technical support, bug fixes, and rights to upgrades on a when-and-if available basis. Services range from installation, training, and basic consulting for software modification to meet specific customer needs. In software arrangements that include rights to multiple software products, specified upgrades, support and/or other services, the Company allocates the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined based on vendor-specific objective evidence. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant Company obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Revenue on arrangements with customers who are not the ultimate end users (primarily resellers) is not recognized until the product is delivered to the end user. Revenue allocable to support is recognized on a straight-line basis over the period support is provided. Arrangements that include other software services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenue under the arrangement is recognized using contract accounting. When services are not considered essential, the revenue allocable to the software services is recognized as 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 to 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, 1998, 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. 35 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 the years ended December 31, 1998 and 1997. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. At December 31, 1998, the Company's available-for-sale securities consisted of the following: municipal obligations $25.9 million; municipal auction rate preferred stock $46.5 million; floating rate bonds $25.7 million and money market funds $0.7 million. Of these securities, $21.1 million and $77.7 million were classified as cash equivalents and short-term investments, respectively. At December 31, 1997, the Company's available-for-sale securities consisted of the following: municipal obligations -- $64.7 million; municipal auction rate preferred stock -- $23.8 million; and money market funds -- $5.1 million. Of these securities, $30.4 million and $63.3 million were classified as cash equivalents and short-term investments, respectively. As of December 31, 1998 and 1997, the difference between the fair value and the amortized cost of available-for-sale securities was insignificant; therefore, no unrealized gains or losses were recorded in stockholders' equity. During the year ended December 31, 1998 and 1997, realized gains and losses were not material. As of December 31, 1998 and 1997, 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, independent software vendors and original equipment manufacturers. The Company performs on-going credit evaluations of its customers' financial condition, and generally no collateral is required. The Company maintains reserves for credit losses, and such losses have been within management's expectations. PRODUCT CONCENTRATION. The Company currently derives the majority of its revenue from the licensing of products in its AR System and fees from related services. These products and services are expected to account for the majority of the Company's revenue for the foreseeable future. Consequently, a reduction in demand for these products and services, or a decline in sales of these products and services, will adversely affect operating results. RESEARCH AND DEVELOPMENT. Research and development expenditures are generally charged to operations as incurred. Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. Through December 31, 1998, all research and development costs have been expensed. ADVERTISING COSTS. The Company accounts for advertising costs as expense in the period in which they are incurred. Advertising expense for the years ended December 31 1998, 1997 and 1996 was $2.5 million, $0.9 million and $0.2 million, respectively. 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 36 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) plans and, accordingly, does not recognize compensation expense related to its employees under its stock option plans or employee stock purchase plans. Note 9 contains a summary of the pro-forma effects to reported net income and net income per share for 1998, 1997 and 1996 as if the Company had elected to recognize compensation expense based on the fair value of the options granted as described by SFAS 123. 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. EARNINGS PER SHARE. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, " Earnings per Share." Statement 128 replaced the previously reported primarily and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to Statement 128 requirements. Basic earnings per share is computed using the weighted-average number of common shares. Diluted earnings per share is computed using the weighted-average number of common share equivalents outstanding during the period. Dilutive common share equivalents consist of employee stock options using the treasury method and dilutive if-converted methods. The following table sets forth the computation of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NUMERATOR: Net Income.............................................. $18,977 $27,290 $16,824 ======= ======= ======= DENOMINATOR: Denominator for basic earnings per share-weighted-average shares........................ 28,722 27,614 26,365 Effect of dilutive securities: Employee stock options............................... 1,581 2,910 3,666 Treasury Stock....................................... (402) -- -- ------- ------- ------- Dilutive potential common shares..................... 1,179 2,910 3,666 ------- ------- ------- Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions...... 29,901 30,524 30,031 ======= ======= ======= Basic earnings per share.................................. $ 0.66 $ 0.99 $ 0.64 ======= ======= ======= Diluted earnings per share................................ $ 0.63 $ 0.89 $ 0.56 ======= ======= =======
RECENT PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activity" (SFAS 133), which is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter. The Company has yet to determine its date of adoption. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Management has not yet determined what the effect of SFAS 133 will be on the Company's consolidated financial position, results of operations or cash flows. In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. Management expects that the adoption of SOP No. 98-1 will not have a material impact on the Company's financial position or results of operations. Remedy will be required to implement SOP No. 98-1 for the year ending December 31, 1999. 37 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. Management expects that the adoption of SOP 98-5 will not have a material impact on the Company's financial position or results of operations. Remedy will be required to implement SOP No. 98-5 for the year ending December 31, 1999. SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" was issued in December 1998 and addresses software revenue recognition as it applies to certain multiple-element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of a Position of SOP 97-2," to extend the deferral of application of certain passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Remedy has not yet determined the effect of the final adoption of SOP 98-9 on its future revenues. 3. PROPERTY AND EQUIPMENT Property and equipment, at cost, consist of the following:
DECEMBER 31, ------------------- 1998 1997 -------- ------- (IN THOUSANDS) Machinery and equipment..................................... $ 20,327 $14,760 Furniture and fixtures...................................... 1,530 467 Purchased software.......................................... 1,838 883 Leasehold improvements...................................... 1,985 1,289 -------- ------- 25,680 17,399 Less accumulated depreciation............................... (13,044) (6,927) -------- ------- $ 12,636 $10,472 ======== =======
4. COMMITMENTS LEASE COMMITMENTS. The Company leases its facilities under operating lease arrangements. Certain of the leases provide for annual rent increases of approximately 3%. Additionally, the Company leases certain equipment under capital leases. The Company had capitalized property and equipment totaling $1.6 million and $1.3 million with associated accumulated amortization of $1.1 million and $0.5 million at December 31, 1998 and 1997, respectively. Approximate annual minimum rental commitments/future minimum lease payments under these leases are as follows:
OPERATING CAPITAL LEASES LEASES --------- ------- (IN THOUSANDS) 1999........................................................ $ 6,039 $ 575 2000........................................................ 4,601 112 2001........................................................ 2,873 35 2002........................................................ 2,792 29 2003........................................................ 2,840 29 Thereafter.................................................. 4,860 3 ------- ----- Total minimum lease payments...................... $24,005 783 ======= Less amount representing interest........................... (86) ----- Present value of future minimum lease payments.............. 697 Less current portion........................................ (570) ----- Noncurrent obligations under capital leases................. $ 127 =====
38 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Total rent expense for the years ended December 31, 1998, 1997 and 1996 was $4.9 million, $4.2 million and $2.3 million respectively. 5. BANK LINE OF CREDIT The Company has available a bank line of credit expiring June 1999 under which $15.0 million is available. The agreement contains covenants that require the Company to maintain certain financial ratios and to maintain quarterly profitability. At December 31, 1998, the Company had no outstanding balance under this line of credit. 6. STOCKHOLDERS' EQUITY PREFERRED STOCK. As of December 31, 1998, the Company has been authorized to issue up to 20,000,000 shares of preferred stock by the Board of Directors. COMMON STOCK. As of December 31, 1998, the Company has been authorized to issue up to 240,000,000 shares of common stock by the Board of Directors. The Company 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 1998, 1997 and 1996 was $75,000, $180,000 and $179,000, respectively. No deferred compensation remained at December 31, 1998. 7. STOCK OPTION EXCHANGE On February 4, 1998, the Compensation Committee of the Board of Directors approved the exchange of certain outstanding stock options under the Company's 1995 Stock Option/Stock Issuance Plan with exercise prices ranging from $17.92 to $53.75. Each employee who elected prior to February 2, 1998 to participate in the exchange program received a new option with an exercise price of $16.75 per share (the fair market value on February 4, 1998). Each new option that replaces an option outstanding for at least 12 months shall vest in equal monthly installments over the period remaining under the original option plus an additional 12 months, not to exceed 48 months. Each new option that replaces an option outstanding for less than 12 months shall vest 25% at the end of 12 months from the grant date of February 4, 1998 and 1/48th per month thereafter. Approximately, 3.2 million stock options were exchanged pursuant to this program. The Board of Directors of the Company were not eligible to participate in this program. 8. SHARE REPURCHASE On August 5, 1998, the Board of Directors authorized management of the Company to repurchase up to 3.0 million shares or approximately 10 percent of the Company's outstanding shares of common stock over the next twelve months. The Company plans to purchase the shares on the open market from time to time, depending on market conditions. The repurchases will be funded from the Company's cash and short-term investments. As of December 31, 1998, the Company had repurchased a total of approximately 1.1 million shares of the Company's stock at an average price of $12.50 for approximately $14.0 million. 9. 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, 1998. 1995 STOCK OPTION/STOCK ISSUANCE PLAN. In January 1995, the Board of Directors (Board) adopted the 1995 Stock Option/Stock Issuance Plan (the 1995 Plan), as the successor to the 1991 Stock Option/Stock 39 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Issuance Plan. Under the 1995 Plan, 15,718,426 shares of common stock, plus an additional number of shares equal to the lesser of 4,000,000 shares or 6% of the number of shares of Common Stock and Common Stock equivalents outstanding on the first day of each of 1999 and 2000 are authorized for issuance. Under the 1995 plan, options to purchase common stock may be granted and common stock may be granted at prices not less than 85% of the fair market value at the date of grant/issuance. Options issued to new employees under the plan become exercisable according to a vesting schedule, which typically provides for the first 25% of the option shares to become available after one year with the remaining shares and options vesting on a pro-rata basis over the following 36 months. Options issued to existing employees typically vest in equal monthly installments over 4 years. 1995 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN. During 1995, the Company additionally adopted the 1995 Non-Employee Directors Stock Option Plan (the Directors Plan), and reserved 412,500 shares for issuance, plus an additional 37,500 shares on the first day of 1999 and 2000. Under the Directors Plan, each non-employee member of the Board is automatically granted an option to purchase 20,000 shares of the Company's stock upon initial appointment or election to the Board, and 10,000 shares of the Company's stock upon reelection to the Board. An additional 5,000 shares are granted to each non-employee director serving on a Board committee, up to a maximum of 10,000 shares each year for committee assignments. Stock Options to non-employee directors are granted at no less than 100% of the Fair Market Value on the grant date. Stock options granted upon reelection to the Board vest in 48 equal monthly installments. 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 2,120,593 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 the fair market value of the shares at: (i) the participant's entry date into the two-year offering period, or (ii) the end of each six-month segment within such offering period. During fiscal 1998, shares totaling 406,781 were issued under the Purchase Plan at an average price of $11.40 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 1998, 1997 and 1996, respectively; risk-free interest rate in the range of 4.18% 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 in the range of 4 to 5 years. The effects of applying SFAS 123 for recognizing compensation expense and providing pro forma disclosures in 1998, 1997 and 1996 are not likely to be representative of the effect 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. 40 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 1998, 1997 and 1996; risk-free interest rate in the range of 4.38% to 6.19%; dividend yields of zero; expected volatility factor of 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 1998, 1997 and 1996 were $6.19, $6.54 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 periods. The Company's historical and pro forma information follows:
1998 1997 1996 --------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income Pro Forma........................................ $2,586 $12,318 $10,368 Net income per share Pro Forma Basic......................................... $ 0.09 $ 0.45 $ 0.39 Diluted....................................... $ 0.12 $ 0.42 $ 0.36
At December 31, 1998, options to purchase 2,492,437 shares were vested and 9,882,074 shares were reserved for issuance on exercise of stock options. A summary of the Company's stock options activity for the three years ended December 31, 1998 follows:
OPTIONS OUTSTANDING ------------------------------------------ WEIGHTED- OPTIONS AVERAGE AVAILABLE NUMBER EXERCISE FOR GRANT OF SHARES PRICE PER SHARE PRICE --------- --------- ---------------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Balance at December 31, 1995............... 619 4,633 $ 0.01 - $20.33 $ 3.61 Additional shares reserved................. 2,997 -- -- -- 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 $14.18 Additional shares reserved................. 1,592 -- -- -- Options granted............................ (2,543) 2,543 $21.00 - $49.00 $39.29 Options exercised.......................... -- (1,483) $ 0.01 - $41.63 $ 6.75 Options canceled or expired................ 567 (567) $ 0.13 - $51.19 $30.83 ------ ------ ---------------- ------ Balance at December 31, 1997............... 1,059 6,297 $ 0.01 - $53.75 $24.85 Additional shares reserved................. 3,106 -- -- -- Options granted............................ (7,450) 7,450 $8.75 - $22.125 $15.49 Options exercised.......................... -- (579) $ 0.025 - $19.19 $ 3.37 Options canceled or expired................ 4,898 (4,898) $ 0.041 - $53.75 $31.18 ------ ------ ---------------- ------ Balance at December 31, 1998............... 1,613 8,270 $ 0.01 - $42.50 $14.17 ====== ====== ================ ======
The weighted-average fair value of options granted in 1998, 1997 and 1996 were $8.33, $23.63 and $17.06, respectively. 41 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The options outstanding at December 31, 1998 have been segregated into ranges for additional disclosure as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- -------------------------- OPTIONS OPTIONS WEIGHTED- WEIGHTED- CURRENTLY WEIGHTED- OUTSTANDING AT AVERAGE AVERAGE EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE EXERCISE PRICES 1998 CONTRACTUAL LIFE PRICE 1998 PRICE - --------------- -------------- ---------------- --------- -------------- --------- $ 0.01 - $10.63 2,200,508 7.43 $ 6.49 1,062,918 $ 3.06 $11.06 - $16.50 1,351,355 8.94 $12.46 357,602 $13.32 $16.75 - $16.75 2,285,748 9.09 $16.75 319,719 $16.75 $17.00 - $42.50 2,431,895 8.66 $19.65 752,198 $20.65 --------- ---- ------ --------- ------ $ 0.01 - $42.50 8,269,506 8.50 $14.17 2,492,437 $11.96 ========= ==== ====== ========= ======
10. STOCKHOLDER RIGHTS PLAN In July 1997, the Company's Board of Directors adopted a Stockholder Rights Plan, effective July 25, 1997, and declared a dividend distribution of one Preferred Share Purchase Right (a Right) on each outstanding share of Remedy's common stock. The Rights will not become exercisable, and will continue to trade with the common stock, unless a person or group acquires 20 percent or more of Remedy's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20 percent or more of the Company's common stock. Each Right will entitle a stockholder to buy one one- thousandth of a share of a newly created Series A Junior Participating Preferred Stock of the Company at an exercise price of $230 per one one-thousandth of a share. If a person or group acquires 20 percent or more of Remedy's outstanding common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 20 percent or more of the Company's common stock, each Right will entitle its holder (other than the acquiring person or group) to purchase, at the Rights then current exercise price, a number of Remedy's common stock shares having a market value of twice that price. In addition, if Remedy is acquired in a merger or other business combination transaction after a person has acquired 20 percent or more of Remedy's outstanding common stock, each Right will entitle its holder to purchase, at the Right's then current exercise price, a number of the acquiring Company's common shares having a market value of twice that price. Following the acquisition by a person or group of 20 percent or more of Remedy's common stock and prior to an acquisition of 50 percent or more of the common stock, the Board of Directors may exchange the Rights (other than Rights owned by such person or group), in whole or in part, for consideration per Right consisting of one-half of the common stock that would be issuable upon exercise of one Right. Alternatively, the Rights may be redeemed for 1/10th of a cent per Right, at the option of the Board of Directors, prior to the acquisition by a person or group of beneficial ownership of 20 percent or more of Remedy's common stock or if a person or group announces a tender offer, the consummation of which would result in ownership by a person or group of 20 percent or more of the Company's common stock. The non-taxable dividend distribution was made on August 29, 1997, payable to Stockholders of record on that date. The Rights will expire on July 24, 2007. 42 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 ------- ------- ------ (IN THOUSANDS) Federal: Current.............................................. $ 8,746 $ 2,169 $1,452 Deferred............................................. (1,730) (475) (817) ------- ------- ------ 7,016 1,694 635 State: Current.............................................. 1,263 128 261 Deferred............................................. 300 (591) (178) ------- ------- ------ 1,563 (463) 83 Foreign: Current.............................................. 1,133 414 141 Income tax benefits attributable to employee stock plan activity allocated to stockholders' equity...... 962 13,709 8,607 ------- ------- ------ Provision for income taxes............................. $10,674 $15,354 $9,466 ======= ======= ======
Pre-tax income from foreign operations was $4.6 million, $1.0 million and $0.2 million for 1998, 1997 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:
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 ------- ------- ------ (IN THOUSANDS) Tax at federal statutory rate.......................... $10,378 $14,926 $9,201 State tax, net of federal benefit...................... 1,305 1,780 1,159 Research and development credit........................ (563) (372) (236) Tax exempt interest income............................. (1,137) (761) (678) Other.................................................. 691 (219) 20 ------- ------- ------ Provision for income taxes............................. $10,674 $15,354 $9,466 ======= ======= ======
Significant components of the Company's deferred tax assets as of December 31, 1998, 1997 and 1996, respectively, are as follows:
DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------ (IN THOUSANDS) Reserves and accruals not yet deductible for tax......... $4,049 $2,352 $2,072 Deferred revenue......................................... 729 746 226 Other.................................................... 267 3 (263) ------ ------ ------ Total deferred tax assets................................ 5,045 3,101 2,035 Unremitted foreign earnings.............................. (514) -- -- ------ ------ ------ Net deferred tax assets.................................. $4,531 $3,101 $2,035 ====== ====== ======
43 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. 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. 13. BUSINESS COMBINATION In October 1998, the Company acquired BayStone Software (BayStone), a privately held provider of a suite of customer support, quality assurance, and opportunity management and telesales automation applications for rapidly growing businesses. The purchase price for BayStone approximated $13.3 million, which consisted of $10.4 million of cash and $2.9 million assumption of net liabilities and other direct costs. The aggregate purchase price was allocated to the fair value of the assets acquired. A total of $3.1 million was expensed in the Company's final fiscal quarter of 1998. This was comprised of purchased in-process research and development of $1.5 million and approximately $1.6 million in other merger related expenses, including $1.1 million for subsequent personnel severance and outplacement expenses and $0.5 million for other indirect costs of the acquisition. Purchased in-process research and development of $1.5 million was recorded representing the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which, at the acquisition date, had not yet reached technological feasibility. The amount allocated to goodwill ($11.8 million) is being amortized on a straight-line basis over a period of four years from the date of the acquisition. A total of $0.4 million has been amortized as of December 31, 1998. Pro forma results of operations have not been presented since the effect of this acquisition was not material to the Company's consolidated financial position or results of operations. 14. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Financial Accounting Standards Board's Statement No. 130, Reporting Comprehensive Income (Statement 130). Statement 130 establishes new rules for the reporting and display of comprehensive income and its components. Comprehensive income is the same as net income as there are no adjustments reported in stockholders' equity which are to be included in the computation. Accordingly, the adoption of this statement had no impact on the Company's net income or stockholders' equity. 15. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131). Statement 131 superseded Statement No. 14, Financial Reporting for Segments of a Business Enterprise. Statement 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company operates solely in one segment, the development and marketing of client/server and web-based application software products and, therefore, as of December 31, 1998, Statement 131 does not have an impact. However, as the Company expands its product line and increases its international operations, FAS 131 may affect the Company's disclosure in the future. 44 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) No customer accounted for more than 10% of revenue in 1998, 1997, or 1996. Net revenue from international customers accounted for 38% of total net revenue in 1998 and 37% of total net revenue in 1997 and 1996. The majority of export sales were made to Canada and Europe. Effective October 1, 1998, the Company began shipping its product from Remedy Software International Limited (RSIL) in Ireland to its customers in Europe, the Middle East and Africa. 45 46 REMEDY CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Allowance for Doubtful Accounts (in thousands):
ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER DEDUCTIONS BALANCE AT DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS END OF PERIOD ----------- ---------- ---------- ---------- ---------- ------------- Year Ended December 31, 1996........ $ 541 $ 833 $0 $126(1) $1,248 Year Ended December 31, 1997........ $1,248 $1,076 $0 $350(1) $1,974 Year Ended December 31, 1998........ $1,974 $ 526 $0 $108(1) $2,392
- --------------- (1) Uncollectible accounts written off, net of recoveries. 46 47 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 5th day of March, 1999. 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 5, 1999 - ----------------------------------------------------- Chief Executive Officer Lawrence L. Garlick (Principal Executive Officer) /s/ RON J. FIOR Vice President Finance March 5, 1999 - ----------------------------------------------------- and Operations, and Ron J. Fior Chief Financial Officer (Principal Financial and Accounting Officer) /s/ HARVEY C. JONES, JR. Director March 5, 1999 - ----------------------------------------------------- Harvey C. Jones, Jr. /s/ DAVID A. MAHLER Director March 5, 1999 - ----------------------------------------------------- David A. Mahler /s/ JOHN F. SHOCH Director March 5, 1999 - ----------------------------------------------------- John F. Shoch /s/ JAMES R. SWARTZ Director March 5, 1999 - ----------------------------------------------------- James R. Swartz
47 48 INDEX TO EXHIBITS
EXHIBIT NUMBER 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* Lease Agreement by and between the Registrant and Charleston Properties (Charleston), dated March 11, 1994, regarding the space located at 1500 Salado Drive. 10.7* Lease Agreement for use of Real Property by and between the Registrant and Sun Microsystems, Inc. (Sun), dated March 11, 1994, regarding the space located at 1500 Salado Drive, and related consent of Charleston, dated March 10, 1994. 10.8* Lease Agreement for use of Real Property by and between the Registrant and Sun, dated March 11, 1994, regarding the space located at 1505 Salado Drive, and related consent of Peery/Arrillaga, dated March 9, 1994. 10.9* Form of Action Request System Shrink Wrap License Agreement. 10.10* Form of Value Added Reseller Agreement. 10.11**** Amended and Restated Business Loan Agreement by and between the Registrant and SVB, dated June 15, 1997. 10.12**** Amended and Restated Promissory Note by and between the Registrant and SVB, dated June 15, 1997. 10.13**** Lease Agreement by and between the Registrant and Greiner, Inc. Pacific, dated March 29, 1996, regarding the space located at 5890 Stoneridge Drive. 10.14**** Lease Agreement by and between the Registrant and Viacom International Inc., dated March 17, 1997, regarding the space located at 5924 Stoneridge Drive. 10.15 Business Loan Agreement by and between the Registrant and Silicon Valley Bank (SVB), dated July 20, 1998. 14.1** Rights Agreement dated as of July 25, 1997, between the Company and Harris Trust Savings Bank, including the Certificate of Designation of Series A Junior Participating Preferred Stock, Form of Right Certificate and Summary of Rights to Purchase Preferred Shares attached thereto as Exhibits A, B and C, respectively. 21.1* Subsidiary of the Registrant.
49
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 23.1 Consent of Ernst & Young LLP, Independent Auditors. 27.1 Financial Data Schedule. 27.2**** Restated Financial Data Schedule for period ended March 31, 1996. 27.3**** Restated Financial Data Schedule for period ended June 30, 1996. 27.4**** Restated Financial Data Schedule for period ended September 30, 1996. 27.5**** Restated Financial Data Schedule for period ended December 31, 1996. 27.6**** Restated Financial Data Schedule for period ended March 31, 1997. 27.7**** Restated Financial Data Schedule for period ended June 30, 1997. 27.8**** Restated Financial Data Schedule for period ended September 30, 1997.
- --------------- * Incorporated by reference from the Exhibits to the Company's Registration Statement on Form S-1 (File No. 33-89026). ** Incorporated by reference from the Exhibits to Remedy Corporation's Form 8-A, dated July 29, 1997. *** Incorporated by reference from the Exhibits to Remedy Corporation's Definitive Proxy Statement for Annual Meeting of Stockholders, dated April 16, 1997. **** Incorporated by reference from the Exhibits to Remedy Corporation's Form 10-K Annual Report for the year ended December 31, 1997. Remedy, Remedy Corporation and design, Action Request System, AR System, ARWeb, Flashboards, Distributed Server Option, Remedy Help Desk, Remedy Asset Management, Remedy Change Management, Remedy Service Level Agreements, Remedy Approved Consultant, Remedy Purchasing@Work, Remedy Strategic Service Suite, Remedy Web, Multi-Processing Server Option, Full Text Search Option, Remedy Help Desk Express, BayStone, Remedy Quality Management, Remedy Year 2000 Compliance Manager, Remedy Customer Support and Remedy Leads Management are all registered or other trademarks of Remedy Corporation. All other trademarks and registered trademarks mentioned in this Report on Form 10-K may be trademarks, registered trademarks or service marks of the companies with which they are associated. EX-10.15 2 BUSINESS LOAN AGREEMENT BY AND BETWEEN REGISTRANT 1 EXHIBIT 10.15 [SILICON VALLEY BANK LETTERHEAD] July 20, 1998 Kathy Kobayashi Manager, Treasury & Tax REMEDY CORPORATION 1505 Salado Drive Mountain View, CA 94043 Dear Kathy: Silicon Valley Bank ("Bank") is pleased to outline the terms for renewal of the Company's existing credit facility in the principal amount of $15,000,000 ("Credit Facility", "Loan") to provide Remedy Corporation ("Borrower") with working capital financing under the terms and conditions in this expression of interest letter. The following, however, is a summary of the basic business points of the Credit Facility under discussion: CREDIT FACILITY: $15,000,000 unsecured working capital facility. PURPOSE: Finance the working capital needs of the Borrower. EXPIRATION: June 15, 1999. SECURITY: Unsecured. Bank to continue to require a non-hypothecation agreement in support of credit facility. Agreement shall provide that Borrower acknowledge and agree not to sell, transfer, assign, mortgage, pledge, lease, encumber, or grant a security interest in the corporate assets of Remedy Corporation without Lender's prior written consent. BORROWING BASE FORMULA: None. INTEREST REPAYMENT: Monthly. PRINCIPAL REPAYMENT: Maturity. PRICING: Interest Rate: Borrower's choice of: 1. Bank's Prime Rate of Lending; or 2. LIBOR plus 2.50% for 30, 60, or 90 days. Interest shall be calculated on a 360 day basis. LOAN FEE: None, with the general understanding that Borrower will maintain minimum account balances in Silicon Valley Bank Money Market account of $8,000,000. (Member FDIC) 2 Kathy Kobayashi REMEDY CORPORATION 7/31/98 Page 2 TERMS AND CONDITIONS OF CREDIT AGREEMENT This Facility will be governed by a Credit Agreement, which will include, but is not limited to, the following terms and conditions: CONDITIONS PRECEDENT: The following shall be satisfied by Borrower prior to closing and shall be conditions precedent to bank's obligation to fund the Loan. 1. After due diligence inquiry conducted by the Bank, there shall be no discovery of any facts or circumstances which would negatively affect or tend to negatively affect, in the Bank's sole discretion, collect ability of the Loan against Borrower. 2. Completion of documentation satisfactory to Bank. AFFIRMATIVE COVENANTS: 1. Quarterly prepared 10Q financial statements received within 45 days of quarter end. 2. Annual CPA audited financial statements and 10K report received within ninety (90) days after fiscal year end. NEGATIVE COVENANTS: Standard, including but not limited to, prohibitions against the Borrower from performing the following without Bank's consent; 1. Pledge or other encumber its assets other than to Bank; 2. Enter into additional direct borrowings or guarantees; 3. To the extent that Borrowings exist under the subject facility, Borrower will be prohibited from entering into mergers and/or acquisitions affecting greater than 25% of Company's Tangible Net Worth, as determined by the company's financial statement accounts, without the Bank's prior written consent FINANCIAL COVENANTS: Borrower will be required to maintain certain reasonable financial covenants on a Quarterly basis to include the following: o QUARTERLY PROFITABILITY (Borrower allowed one quarterly loss not to exceed $5,000,000). o ADJUSTED QUICK RATIO OF 2.00:1.00. EXPENSES: Borrower agrees to pay all reasonable out of pocket costs, fees and expenses incurred by the Bank in the initiation of the facility. If the proposed terms are acceptable, we can proceed with our due diligence and seek final credit approval from our Internal Loan Committee. On behalf of the Bank, we are delighted to make this proposal to you and look forward to this opportunity to continue our long standing working relationship with your company. Very Truly yours, SILICON VALLEY BANK John D. China Colleen Atkinson Vice President Senior Vice President 3 CORPORATE BORROWING RESOLUTION Borrower: Remedy Corp. Bank: Silicon Valley Bank 1505 Salado Drive 1731 Embarcadero, Ste. 220 Mountain View, CA 94043 Palo Alto, CA 94303 I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF REMEDY CORP. ("BORROWER"), HEREBY CERTIFY that Borrower is a corporation duly organized and existing under and by virtue of the laws of the State of Delaware. I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by other duly authorized corporate action in lieu of a meeting), duly called and held, at which a quorum was present and voting, the following resolutions were adopted. BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or agents of Borrower, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES ----- --------- ----------------- Ron J. Fior VP and CFO /s/ RON J. FIOR
acting for and on behalf of Borrower and as its act and deed be, and they hereby are, authorized and empowered: BORROW MONEY. To borrow from time to time from Silicon Valley Bank ("Bank"), on such terms as may be agreed upon between the officers of Borrower and Bank, such sum or sums of money as in their judgment should be borrowed. EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the Loan documents of Borrower, on Bank's forms, at such rates of interest and on such terms as may be agreed upon, evidencing the sums of money so borrowed or any indebtedness of Borrower to Bank, and also to execute and deliver to Bank one or more renewals, extensions, modifications, refinancings, consolidations, or substitutions for one or more of the loan documents, or any portion of the loan documents. GRANT SECURITY. To grant a security interest to Bank in any of Borrower's assets, which security interest shall secure all of Borrower's obligations to Bank. NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade acceptances, promissory notes, or other evidences of indebtedness payable to or belonging to Borrower or in which Borrower may have an interest, and either to receive cash for the same or to cause such proceeds to be credited to the account of Borrower with Bank, or to cause such other disposition of the proceeds derived therefrom as they may deem advisable. LETTERS OF CREDIT. To execute letter of credit applications and other related documents pertaining to Bank's issuance of letters of credit. 4 FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange contracts, either spot or forward, from time to time, in such amount as, in the judgment of the officer or officers herein authorized. ISSUE WARRANTS. To issue warrants to purchase Borrower's capital stock, for such class, series and number and on such terms, as an officer of Borrower shall deem appropriate. FURTHER ACTS. In the case of lines of credit, to designate additional or alternate individuals as being authorized to request advances thereunder, an in all cases, to do and perform such other acts and things, to pay any and all fees and costs, and to execute and deliver such other documents and agreements, including agreements waiving the right to a trial by jury, as they may in their discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these Resolutions and performed prior to the passage of these resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Bank may rely on these Resolutions until written notice of their revocation shall have been delivered to and received by Bank. Any such notice shall not affect any of Borrower's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the persons named above are principal offices of the Borrower and occupy the positions set opposite their respective names; that the foregoing Resolutions now stand of record on the books of the Borrower; and that they are in full force and effect and have not been modified or revoked in any manner whatsoever. IN WITNESS WHEREOF, I have hereunto set my hand on September 15, 1998 and attest that the signatures set opposite the names listed above are their genuine signatures. CERTIFIED TO AND ATTESTED BY: x [SIG] - -------------------------------- Secretary or Assistant Secretary x /s/ LAURENCE GARLICK - -------------------------------- Laurence Garlick *NOTE: In case the Secretary or other certifying officer is designated by the foregoing resolutions as one of the signing officers, this resolution should also be signed by a second Officer or Director of Borrower. 2 5 ================================================================================ AMENDED AND RESTATED LOAN AGREEMENT REMEDY CORP. ================================================================================ 6 TABLE OF CONTENTS
PAGE ---- 1 ACCOUNTING AND OTHER TERMS.......................................... 4 2 LOAN AND TERMS OF PAYMENT........................................... 4 2.1 Credit Extensions.............................................. 4 2.2 Overadvances................................................... 6 2.3 Interest Rate, Payments........................................ 6 2.4 Fees........................................................... 6 3 CONDITIONS OF LOANS................................................. 6 3.1 Conditions Precedent to Initial Credit Extension............... 6 3.2 Conditions Precedent to all Credit Extensions.................. 6 4 REPRESENTATIONS AND WARRANTIES...................................... 7 4.1 Due Organization and Authorization............................. 7 4.2 Litigation..................................................... 7 4.3 No Material Adverse Change in Financial Statements............. 7 4.4 Solvency....................................................... 7 4.5 Regulatory Compliance.......................................... 7 4.6 Subsidiaries................................................... 8 4.7 Full Disclosure................................................ 8 5 AFFIRMATIVE COVENANTS............................................... 8 5.1 Government Compliance.......................................... 8 5.2 Financial Statements, Reports, Certificates.................... 8 5.3 Taxes.......................................................... 8 5.4 Insurance...................................................... 8 5.5 Primary Accounts............................................... 8 5.6 Financial Covenants............................................ 8 6 NEGATIVE COVENANTS.................................................. 9 6.1 Dispositions................................................... 9 6.2 Changes in Business, Ownership, Management or Business Locations........................................... 9 6.3 Mergers or Acquisitions........................................ 9 6.4 Indebtedness................................................... 9 6.5 Encumbrance.................................................... 9 6.6 Distributions; Investments..................................... 9 6.7 Transactions with Affiliates................................... 10 6.8 Subordinated Debt.............................................. 10 6.9 Compliance..................................................... 10 7 EVENTS OF DEFAULT................................................... 10 7.1 Payment Default................................................ 10 7.2 Covenant Default............................................... 10 7.3 Material Adverse Change........................................ 10 7.4 Attachment..................................................... 10 7.5 Insolvency..................................................... 11 7.6 Other Agreements............................................... 11 7.7 Judgments...................................................... 11 7.8 Misrepresentations............................................. 11
2 7 8 BANK'S RIGHTS AND REMEDIES ........................................... 11 8.1 Rights and Remedies ...................................... 11 8.2 Remedies Cumulative ...................................... 11 8.3 Demand Waiver ............................................ 11 9 NOTICES .............................................................. 12 10 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER ........................... 12 11 GENERAL PROVISIONS ................................................... 12 11.1 Successors and Assigns ................................... 12 11.2 Indemnification .......................................... 12 11.3 Time of Essence .......................................... 12 11.4 Severability of Provision ................................ 12 11.5 Amendments in Writing, Integration ....................... 12 11.6 Counterparts ............................................. 13 11.7 Survival ................................................. 13 11.8 Confidentiality .......................................... 13 11.9 Effect of Amendment and Restatement ...................... 13 11.10 Attorney's Fees. Costs and Expenses ...................... 13 12 DEFINITIONS .......................................................... 13 12.1 Definitions .............................................. 13
3 8 THIS AMENDED AND RESTATED LOAN AGREEMENT dated July 30, 1998, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 with a loan production office located at 1731 Embarcadero, Ste. 220, Palo Alto, California 94303 and REMEDY CORP. ("Borrower"), whose address is 1505 Salado Drive, Mountain View, California 94043. RECITALS A. Bank and Borrower are parties to that certain Amended and Restated Promissory Note, Amended and Restated Business Loan Agreement, and Amended and Restated Commercial Security Agreement, each dated June 15, 1997, as amended (collectively, the "Original Agreement"). B. Borrower and Bank desire in this Agreement to set forth their agreement with respect to a working capital loan and to amend and restate in its entirety without novation the Original Agreement in accordance with the provisions herein. AGREEMENT The parties agree as follows: 1 ACCOUNTING AND OTHER TERMS Accounting terms not defined in this Agreement will be construed following GAAP Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. This Agreement shall be construed to impart upon Bank a duty to act reasonably at all times. 2 LOAN AND TERMS OF PAYMENT 2.1 CREDIT EXTENSIONS. Borrower will pay Bank the unpaid principal amount of all Credit Extensions and interest on the unpaid principal amount of the Credit Extensions. 2.1.1 REVOLVING ADVANCES. (a) Bank will make Advances not exceeding (i) the Committed Revolving Line, minus (ii) the Cash Management Services Sublimit, minus (iii) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), and minus (iv) the Foreign Exchange Reserve. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement. (b) To obtain an Advance, Borrower must notify Bank by facsimile or telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be made. Borrower must promptly confirm the notification by delivering to Bank the Payment/Advance Form attached as Exhibit A. Bank will credit Advances to Borrower's deposit account. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to reliance. (c) The Committed Revolving Line terminates on the Revolving Maturity Date, when all Advances and other amounts due under this Agreement are immediately payable. 4 9 2.1.2 Letters of Credit. Bank will issue or have issued Letters of Credit for Borrower's account not exceeding (i) the Committed Revolving Line minus (ii) the outstanding principal balance of the Advances minus the Cash Management Sublimit, minus the Foreign Exchange Reserve; however, the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not exceed $15,000,000. Each Letter of Credit will have an expiry date of no later than 180 days after the Revolving Maturity Date, but Borrower's reimbursement obligation will be secured by cash on terms acceptable to Bank at any time after the Revolving Maturity Date if the term of this Agreement is not extended by Bank. 2.1.3 Foreign Exchange Contract; Foreign Exchange Settlements. Borrower may enter foreign exchange contracts (the "Exchange Contracts") not exceeding an aggregate amount of $15,000,000 (the "Contract Limit"), under which Bank will sell to or purchase from Borrower foreign currency on a spot or future basis. Borrower may not request any Exchange Contracts if it is out of compliance with any provision of this Agreement. Exchange Contracts must provide for delivery of settlement on or before the Revolving Maturity Date. The amount available under the Committed Revolving Line is reduced by the following (the "Foreign Exchange Reserve") on any given day (the "Determination Date"): (i) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed more than two business days after the Determination Date, 10% of the gross amount of the Exchange Contracts; plus (ii) on all outstanding Exchange Contracts on which delivery is to be effected or settlement allowed within two business days after the Determination Date, 100% of the gross amount of the Exchange Contracts. Bank may terminate the Exchange Contracts if (a) an Event or Default occurs or (b) there is not sufficient availability under the Committed Revolving Line and Borrower does not have available funds in its deposit account for the Foreign Exchange Reserve. If Bank terminates the Exchange Contracts, Borrower will reimburse Bank for all fees, costs and expenses in connection with the Exchange Contracts. Borrower may not permit the total of all Exchange Contracts on which delivery is to be effected and settlement allowed in any two business day period to be more than $15,000,000 (the "Settlement Limit") nor may Borrower permit the total of all Exchange Contracts outstanding at any one time, to exceed the Contract Limit. However, the amount which may be settled in any 2 business day period may be increased above the Settlement Limit up to, but not above the Contract Limit if: (i) there is sufficient availability under the Committed Revolving Line in the amount of the Foreign Exchange Reserve for each Determination Date, provided that Bank in advance shall reserve the full amount of the Foreign Exchange Reserve against the Committed Revolving Line; or (ii) there is insufficient availability under the Committed Revolving Line for settlements within any 2 business day period, but Bank: (A) verifies good funds overseas before crediting Borrower's deposit account (if Borrower sells foreign currency); or (B) debits Borrower's deposit account before delivering foreign currency overseas (if Borrower purchases foreign currency). If Borrower purchases foreign currency, Borrower in advance must instruct Bank either to treat the settlement as an advance under the Committed Revolving Line, or to debit Borrower's account for the amount settled. Borrower will execute all Bank's standard applications and agreements in connection with the Exchange Contracts and pay all Bank's standard fees and charges. 5 10 Borrower will indemnify Bank and hold it harmless from all claims, liabilities, demands, obligations, actions, costs and expenses (including reasonable attorneys' fees) which it incurs arising out of or in any way relating to any of the Exchange Contracts or any contemplated transactions. 2.1.4 CASH MANAGEMENT SERVICES SUBLIMIT. Borrower may use up to $15,000,000 for Bank's Cash Management Services, which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in various cash management services agreements related to such services (the "Cash Management Services"). All amounts Bank pays for any Cash Management Services will be treated as Advances under the Committed Revolving Line. 2.2 OVERADVANCES. If Borrower's Obligations under Section 2.1.1, 2.1.2 and 2.1.3 exceed the Committed Revolving Line, Borrower must immediately pay in cash to Bank the excess. 2.3 INTEREST RATE, PAYMENTS. (a) Interest Rate. Advances accrue interest on the outstanding principal balance, at Borrower's option of either (a) a variable rate equal to Prime Rate, or (b) a fixed rate equal to 250 basis points above the LIBOR Rate, each as described in the LIBOR Supplement to Loan and Security Agreement, attached hereto. After an Event of Default, Obligations accrue interest at 5 percent above the rate effective immediately before the Event of Default. Interest is computed on a 360 day year for the actual number of days elapsed. (b) Payments. Interest due on the Committed Revolving Line is payable on the 14th of each month. Bank may debit any of Borrower's deposit accounts including Account Number 273205470 for principal and interest payments or any amounts Borrower owes Bank. Bank will notify Borrower when it debits Borrower's accounts. These debits are not a set-off. Payments received after 12:00 noon Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 2.4 FEES. Borrower will pay: (a) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and expenses) incurred through and after the date of this Agreement, are payable when due. 3 CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. Bank's obligation to make the initial Credit Extension is subject to the condition precedent that it receive the agreement, documents and fees it requires. 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. Bank's obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following: (a) timely receipt of any Payment/Advance Form; and 6 11 (b) the representations and warranties in Section 4 must be materially true on the date of the Payment/Advance Form and on the effective date of each Credit Extension and no Event of Default may have occurred and be continuing, or result from the Credit Extension. Each Credit Extension is Borrower's representation and warranty on that date that the representations and warranties of Section 4 remain true. 4 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 4.1 DUE ORGANIZATION AND AUTHORIZATION. Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could cause a Material Adverse Change. 4.2 LITIGATION. Except as shown in the Schedule, there are no actions or proceedings pending or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary in which an adverse decision could cause a Material Adverse Change. 4.3 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. 4.4 SOLVENCY. The fair salable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 4.5 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has complied with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storage, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted. 7 12 4.6 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments. 4.7 FULL DISCLOSURE. No representation, warranty or other statement of Borrower in any certificate or written statement given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading. 5 AFFIRMATIVE COVENANTS Borrower will do all of the following: 5.1 GOVERNMENT COMPLIANCE. Borrower will maintain its and all Subsidiaries' legal existence and good standing in its jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to so qualify could have a material adverse effect on Borrower's business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change. 5.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Borrower will deliver to Bank: (i) within 5 days of filing, copies of all statements, reports and notices made available to Borrower's security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (ii) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $100,000 or more; and (iii) budgets, sales projections, operating plans or other financial information Bank requests. (b) At such times as a Credit Extension is outstanding and prior to the initial Credit Extension, within 45 days after the last day of each quarter, Borrower will deliver to Bank with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer in the form of Exhibit B. 5.3 TAXES. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments and will deliver to Bank, on demand, appropriate certificates attesting to the payment. 5.4 INSURANCE. Borrower will keep its business insured for risks and in amounts, as Bank requests. 5.5 PRIMARY ACCOUNTS. Borrower will maintain its primary depository and operating accounts with Bank. 5.6 FINANCIAL COVENANTS. Borrower will maintain as of the last day of each quarter: 8 13 (i) QUICK RATIO (ADJUSTED). A ratio of Quick Assets to Current Liabilities minus Deferred Revenue of at least 2.00 to 1.00. (ii) PROFITABILITY. Borrower will be profitable each quarter, except that Borrower may suffer a loss not to exceed $5,000,000 in one fiscal quarter per fiscal year. 6. NEGATIVE COVENANTS Borrower will not do any of the following: 6.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, other than Transfers (i) of Inventory in the ordinary course of business; (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; or (iii) of worn-out or obsolete Equipment. 6.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or have a material change in its ownership of greater than 25%. Borrower will not, without at least 30 days prior written notice, relocate its chief executive office or add any new offices or business locations. 6.3 MERGERS OR ACQUISITIONS. (i) At such times as there are outstanding Credit Extensions, merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, provided no Event of Default has occurred and is continuing or would result from such action during the term of this Agreement and result in a decrease of more than 25% of Tangible Net Worth; or (ii) merge or consolidate a Subsidiary into another Subsidiary or into Borrower. 6.4 INDEBTEDNESS. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 6.5 ENCUMBRANCE. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted here. 6.6 DISTRIBUTIONS; INVESTMENTS. Directly or indirectly acquire or own any Person, or make any investment in any Person, other than Permitted Investments, or permit any of its Subsidiaries to do so. Pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock. 9 14 6.7 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter or permit any material transaction with any Affiliate except transactions that are in the ordinary course of Borrower's business, on terms less favorable to Borrower than would be obtained in an arm's length transaction with a non-affiliated Person. 6.8 SUBORDINATED DEBT. Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without Bank's prior written consent. 6.9 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Advance for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could have a material adverse effect on Borrower's business or operations or cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 7. EVENTS OF DEFAULT. Any one of the following is an Event of Default: 7.1 PAYMENT DEFAULT. If Borrower fails to pay any of the Obligations; 7.2 COVENANT DEFAULT. If Borrower does not perform any obligation in Section 5 or violates any covenant in Section 6 or does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within 10 days after it occurs, or if the default cannot be cured within 10 days or cannot be cured after Borrower's attempts within 10 day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than 30 days) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Credit Extensions will be made during the cure period); 7.3 MATERIAL ADVERSE CHANGE. If the Bank determines, based upon information available to it and in the exercise of its reasonable judgment, that there is a reasonable likelihood that Borrower will fail to comply with one or more of the financial covenants set forth in Section 5 during the next succeeding financial reporting period. 7.4 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in 10 days, or if Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed against any of Borrower's assets by any government agency 10 15 and not paid within 10 days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions will be made during the cure period); 7.5 INSOLVENCY. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within 30 days (but no Credit Extensions will be made before any Insolvency Proceeding is dismissed); 7.6 OTHER AGREEMENTS. If there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding $100,000 or that could cause a Material Adverse Change; 7.7 JUDGMENTS. If a money judgment(s) in the aggregate of at least $50,000 is rendered against Borrower and is unsatisfied or unstayed for 10 days (but no Credit Extensions will be made before the judgment is stayed or satisfied); or 7.8 MISREPRESENTATIONS. If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document. 8 BANK'S RIGHTS AND REMEDIES 8.1 RIGHTS AND REMEDIES. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 7.5 occurs all Obligations are immediately due and payable without any action by Bank); and (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; 8.2 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 8.3 DEMAND WAIVER. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of 11 16 accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 9 NOTICES All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. A Party may change its notice address by giving the other Party written notice. 10 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California. BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS, THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 11 GENERAL PROVISIONS 11.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 11.2 INDEMNIFICATION. Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys fees and expenses); except for losses caused by Bank's gross negligence or willful misconduct. 11.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations in this Agreement. 11.4 SEVERABILITY OF PROVISION. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 11.5 AMENDMENTS IN WRITING, INTEGRATION. All amendments to this Agreement must be in writing and signed by Borrower and Bank. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations 12 17 or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. 11.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 11.7 SURVIVAL. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligations of Borrower in Section 11.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 11.8 CONFIDENTIALITY. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (i) to Bank's subsidiaries or affiliates in connection with their business with Borrower, (ii) to prospective transferees or purchasers of any interest in the Loans, (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank's examination or audit and (v) as Bank considers appropriate exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information. 11.9 EFFECT OF AMENDMENT AND RESTATEMENT. This Agreement is intended to and does completely amend and restate, without novation, the Original Agreement. All credit extensions or loans outstanding under the Original Agreement are and shall continue to be outstanding under this Agreement. All security interests granted under the Original Agreement are hereby confirmed and ratified and shall continue to secure all Obligations under this Agreement. 11.10 ATTORNEYS' FEES, COSTS AND EXPENSES. In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys' fees and other costs and expenses incurred, in addition to any other relief to which it may be entitled. 12 DEFINITIONS 12.1 DEFINITIONS. In this Agreement: "AFFILIATE" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. 13 18 "BANK EXPENSES" are all audit fees and expenses and reasonable costs or expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which the Bank is closed. "CASH MANAGEMENT SERVICES" are defined in Section 2.1.4. "CLOSING DATE" is the date of this Agreement. "COMMITTED REVOLVING LINE" is an Advance of up to $15,000,000. "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. "CREDIT EXTENSION" is each Advance, Letter of Credit, Exchange Contract, or any other extension of credit by Bank for Borrower's benefit. "CURRENT LIABILITIES" are the aggregate amount of Borrower's Total Liabilities which mature within one (1) year. "DEFERRED REVENUE" is all amounts received in advance of performance under contracts and not yet recognized as revenue. "EQUIPMENT" is all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "EXCHANGE CONTRACT" is defined in Section 2.1.3. "GAAP" is generally accepted accounting principles. "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations. "INSOLVENCY PROCEEDING" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. 14 19 "INVENTORY" is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title. "INVESTMENT" is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "LETTER OF CREDIT" is defined in Section 2. "LIBOR RATE" is defined in that LIBOR Supplement to Loan and Security Agreement. "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or guaranties executed by Borrower or Guarantor, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "MATERIAL ADVERSE CHANGE" is defined in Section 7.3. "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including letters of credit and Exchange Contracts and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank. "ORIGINAL AGREEMENT" has the meaning set forth in recital paragraph A. "PERMITTED INDEBTEDNESS" is: (a) Borrower's indebtedness to Bank under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and shown on the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens. "PERMITTED INVESTMENTS" are: (a) Investments shown on the Schedule and existing on the Closing Date; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of deposit issued maturing no more than 1 year after issue. 15 20 "PERMITTED LIENS" are: (a) Liens existing on the Closing Date and shown on the Schedule or arising under this Agreement or other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank's security interests; (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of the Equipment, or (ii) existing on equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment; (d) Leases or subleases and licenses or sublicenses granted in the ordinary course of Borrower's business and any interest or title of a lessor, licensor or under any lease or license, if the leases, subleases, licenses and sublicenses permit granting Bank a security interest; (e) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase. "PERSON" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "PRIME RATE" is defined in that LIBOR Supplement to Loan and Security Agreement. "QUICK ASSETS" is, on any date, the Borrower's consolidated, unrestricted cash, cash equivalents, net billed accounts receivable and investments with maturities of fewer than 12 months determined according to GAAP. "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "REVOLVING MATURITY DATE: is June 14, 1999. "SCHEDULE" is any attached schedule of exceptions. "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's debt to Bank (and identified as subordinated by Borrower and Bank). "SUBSIDIARY" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. 16 21 BORROWER: Remedy Corp. By: /s/ [SIG] --------------------------------- Title: Interim VP & CFO Remedy Corp. ------------------------------ BANK: SILICON VALLEY BANK By: --------------------------------- Title: ------------------------------ 17 22 EXHIBIT A LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: ------------------------------ FAX #: (408) 496-2426 TIME: ------------------------------ - -------------------------------------------------------------------------------- FROM: Remedy Corp. -------------------------------------------------------------------------- CLIENT NAME (BORROWER) REQUESTED BY: ------------------------------------------------------------------- AUTHORIZED SIGNER'S NAME AUTHORIZED SIGNATURE: ---------------------------------------------------------- PHONE NUMBER: ------------------------------------------------------------------- FROM ACCOUNT # TO ACCOUNT # ------------------ ---------------------------------- REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT PRINCIPAL INCREASE (ADVANCE) $ ------------------------------------ PRINCIPAL PAYMENT (ONLY) $ ------------------------------------ INTEREST PAYMENT (ONLY) $ ------------------------------------ PRINCIPAL AND INTEREST (PAYMENT) $ ------------------------------------ OTHER INSTRUCTIONS: ------------------------------------------------------------- - -------------------------------------------------------------------------------- All Borrower's representations and warranties in the Loan and Security Agreement are true, correct and complete in all material respects on the date of the telephone request for and Advance confirmed by this Borrowing Certificate; but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of that date. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BANK USE ONLY TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. - ------------------------------- ----------------------------------- Authorized Requester Phone # - ------------------------------- ----------------------------------- Received By (Bank) Phone # ------------------------------- Authorized Signature (Bank) - -------------------------------------------------------------------------------- 23 EXHIBIT B COMPLIANCE CERTIFICATE TO; SILICON VALLEY BANK 3003 Tasman Drive Santa Clara, CA 95054 FROM: REMEDY CORP. The undersigned authorized officer of Remedy Corp. ("Borrower") certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date. Attached are the required documents supporting the certification. The Officer certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN. REPORTING COVENANT REQUIRED COMPLIES - ------------------ -------- -------- Compliance Cert. Quarterly within 50 days* Yes No 10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No *At such times as Credit Extensions exist and prior to the initial Credit Extension. FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES - ------------------- -------- ------ -------- Maintain on a Quarterly Basis: Minimum Adjusted Quick Ratio 2.00:1.00 _____:1.00 Yes No Profitability: Quarterly $_________ Yes No Losses not to exceed: $5,000,000 in one fiscal quarter Yes No per fiscal year. COMMENTS REGARDING EXCEPTIONS: See Attached ----------------------------- BANK USE ONLY Received by: ----------------- Authorized Signer Date: ------------------------ Verified: -------------------- Authorized Signer Date: ------------------------ Compliance Status: Yes No ----------------------------- 24 Sincerely, Remedy Corp. - ----------------------------- SIGNATURE - ----------------------------- TITLE - ----------------------------- DATE 2 25 LIBOR SUPPLEMENT TO LOAN AND SECURITY AGREEMENT This LIBOR Supplement to Loan and Security Agreement (the "Supplement") is a supplement to the Loan and Security Agreement dated July 30, 1998 (the "Loan Agreement"), between Silicon Valley Bank ("Bank") and Remedy Corp. ("Borrower"), and forms a part of and is incorporated into the Loan Agreement. Defined terms used but not otherwise defined herein shall have the same meanings as in the Loan Agreement. 1. Definitions. "Agreement" means the Loan Agreement, as amended. "Interest Period" means for each LIBOR Rate Loan, a period of approximately one, two or three months as the Borrower may elect, provided that the last day of an Interest Period for a LIBOR Rate Loan shall be determined in accordance with the practices of the LIBOR interbank market as from time to time in effect, provided, further, in all cases such period shall expire not later than the applicable maturity date of the Loan Agreement. "Interest Rate" shall mean as to: (a) Prime Rate Loans, a per annum rate equal to the Prime Rate; and (b) LIBOR Rate Loans, a rate of (i) 2.50% in excess of the LIBOR Rate (based on the LIBOR Rate applicable for the Interest Period selected by the Borrower). "LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate Loan, the rate of interest per annum determined by Bank to be the per annum rate of interest as which deposits in United States Dollars are offered to Bank in the London interbank market in which Bank customarily participates at 11:00 A.M. (local time in such interbank market) two (2) Business Days before the first day of such Interest Period for a period approximately equal to such Interest Period and in an amount approximately equal to the amount of such loan. "LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) equal to (i) the LIBOR Rate for such Interest Period divided by (ii) 1 minus the Reserve Requirement for such Interest Period. "LIBOR Rate Loans" means any Loans made or a portion thereof on which interest is payable on the LIBOR Rate in accordance with the terms hereof. "Prime Rate" means the variable rate of interest per annum, most recently announced by Bank as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. The interest rate applicable to the Prime Rate Loans shall change on each date there is a change in the Prime Rate. "Prime Rate Loan" means any Loans made or a portion thereof on which interest is payable based on the Prime Rate in accordance with the terms hereof. "Regulatory Change" means, with respect to Bank, any change on or after the date of this Loan Agreement in United States federal, state or foreign laws or regulations, including Regulation D, or the adoption or making on or after such date of any interpretations, directives or requests applying to a class of lenders including Bank of or under any United States federal or state, or any foreign, laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reserve Requirement" means, for any Interest Period, the average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained during such Interest Period under Regulation D against "Eurocurrency liabilities" (as such term is used in Regulation D) by member banks of the Federal Reserve System. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by Bank by reason of any Regulatory Change against (i) any category of liabilities which includes deposits by reference to which the LIBOR Rate is to be determined as provided in the definition of "LIBOR Base Rate" or (ii) any category of extensions of credit or other assets which include Loans. 3 26 2. Requests for Loans; Confirmation of Initial Loans. From and after the Closing Date, so long as no Event of Default occurs or has occurred under the Loan Agreement, and subject to the terms of the Loan Agreement, Borrower shall be entitled to request LIBOR Rate Loans, Each LIBOR Rate Loan shall be made upon the irrevocable written request of Borrower received by Bank not later than 11:00 a.m. (Santa Clara, California time) on the Business Day three (3) Business Days prior to the date such Loan is to be made. Each such notice shall specify the date such Loan is to be made, which day shall be a Business Day; the amount of such Loan, the Interest Period for such Loan, and comply with such other requirements as Bank determines are reasonable or desirable in connection therewith. Each written request for a LIBOR Rate Loan shall be in the form of a LIBOR Rate Loan Borrowing Certificate as set forth on Exhibit A, which shall be duly executed by the Borrower. Each Prime Rate Loan shall be made upon the irrevocable written request of Borrower received by Bank not later than 11:00 a.m. (Santa Clara, California time) on the Business Day one (1) Business day prior to the date such Loan is to be made. Each such notice shall specify the date such Loan is to be made, which day shall be a Business Day and the amount of such Loan, and comply with such other requirements as Bank determines are reasonable or desirable in connection therewith. Borrower hereby confirms its request that the Loan Agreement shall initially be funded as a Prime Rate Loan. 3. Conversion/Continuation of Loans. (a) Borrower may from time to time submit in writing a request that Prime Rate Loans be converted to LIBOR Rate Loans or that any existing LIBOR Rate Loans continue for an additional Interest Period. Such request shall specify the amount of the Prime Rate Loans which will constitute LIBOR Rate Loans (subject to the limits set forth below) and the Interest Period to be applicable to such LIBOR Rate Loans. Each written request for a conversion to a LIBOR Rate Loan or a continuation of a LIBOR Rate Loan shall be substantially in the form of a LIBOR Rate Conversion/Continuation Certificate as set forth on Exhibit B, which shall be duly executed by the Borrower. Subject to the terms and conditions contained herein, three (3) Business Days after Bank's receipt of such a request from Borrower, such Prime Rate Loans shall be converted to LIBOR Rate Loans or such LIBOR Rate Loans shall continue, as the case may be provided that: (i) no Event of Default or event which with notice or passage of time or both would constitute an Event of Default exists; (ii) no party hereto shall have sent any notice of termination of this Supplement or of the Loan Agreement. (iii) Borrower shall have complied with such customary procedures as Bank has established from time to time for Borrower's requests for LIBOR Rate Loans; (iv) the amount of a LIBOR Rate Loan shall be $500,000 or such greater amount which is an integral multiple of $50,000; and (v) Bank shall have determined that the Interest Period or LIBOR Rate is available to Bank which can be readily determined as of the date of the request for such LIBOR Rate Loan. Any request by Borrower to convert Prime Rate Loans to LIBOR Rate Loans or continue any existing LIBOR Rate Loans shall be irrevocable. Notwithstanding anything to the contrary contained herein, Bank shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable LIBOR Rate market to fund any LIBOR Rate Loans, but the provisions hereof shall be deemed to apply as if Bank had purchased such deposits to fund the LIBOR Rate Loans. (b) Any LIBOR Rate Loans shall automatically convert to Prime Rate Loans upon the last day of the applicable Interest Period, unless Bank has received and approved a complete and proper request to continue such 4 27 LIBOR Rate Loan at least three (3) Business Days prior to such last day in accordance with the terms hereof. Any LIBOR Rate Loans shall, at Bank's option, convert to Prime Rate Loans in the event that (i) an Event of Default, or event which with the notice or passage of time or both would constitute an Event of Default, shall exist, (ii) this Supplement or the Loan Agreement shall terminate, or (iii) the aggregate principal amount of the Prime Rate Loans which have previously been converted to LIBOR Rate Loans, or the aggregate principal amount of existing LIBOR Rate Loans continued, as the case may be, at the beginning of an Interest Period shall at any time during such Interest Period exceeds the "Borrowing Availability" under and as defined in the Agreement. Borrower agrees to pay to Bank, upon demand by Bank (or Bank may, at its option, charge Borrower's loan account) any amounts required to compensate Bank for any loss (including loss of anticipated profits), cost or expense incurred by such person, as a result of the conversion of LIBOR Rate Loans to Prime Rate Loans pursuant to any of the foregoing. (c) On all Loans, Interest shall be payable by Borrower to Bank monthly in arrears not later than the Twentieth (20th) day of each calendar month at the applicable Interest Rate. 4. Additional Requirements/Provisions Regarding LIBOR Rate Loans; Etc. (a) If for any reason (including voluntary or mandatory prepayment or acceleration), Bank receives all or part of the principal amount of a LIBOR Rate Loan prior to the last day of the Interest Period for such Loan, Borrower shall immediately notify Borrower's account officer at Bank and, on demand by Bank, pay Bank the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period exceeds (ii) the interest which would have been recoverable by Bank by placing the amount so received on deposit in the certificate of deposit markets or the offshore currency interbank markets or United States Treasury investment products, as the case may be, for a period starting on the date on which it was so received and ending on the last day of such Interest Period at the interest rate determined by Bank in its reasonable discretion. Bank's determination as to such amount shall be conclusive absent manifest error. (b) Borrower shall pay to Bank, upon demand by Bank, from time to time such amounts as Bank may determine to be necessary to compensate it for any costs incurred by Bank that Bank determines are attributable to its making or maintaining of any amount receivable by Bank hereunder in respect of any Loans relating thereto (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), in each case resulting from any Regulatory Change which: (i) changes the basis of taxation of any amounts payable to Bank under this Supplement in respect of any Loans (other than changes which affect taxes measured by or imposed on the overall net income of Bank by the jurisdiction in which such Bank has its principal office); or (ii) imposes or modifies any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of Bank (including any Loans or any deposits referred to in the definition of "LIBOR Base Rate"); or (iii) imposes any other condition affecting this Supplement (or any of such extensions of credit or liabilities). Bank will notify Borrower of any event occurring after the date of the Loan Agreement which will entitle Bank to compensation pursuant to this section as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Bank will furnish Borrower with a statement setting forth the basis and amount of each request by Bank for compensation under this Section 4. Determinations and allocations by Bank for purposes of this Section 4 of the effect of any Regulatory Change on its costs of maintaining its obligations to make Loans or of making or maintaining Loans or on amounts receivable by it in respect of Loans, and of the additional amounts required to compensate Bank in respect of any Additional Costs, shall be conclusive absent manifest error. (c) Borrower shall pay to Bank, upon the request of Bank, such amount or amounts as shall be sufficient (in the sole good faith opinion of such Bank) to compensate it for any loss, costs or expense incurred by it as a result of any 5 28 failure by Borrower to borrow a Loan on the date for such borrowing specified in the relevant notice of borrowing hereunder. (d) If Bank shall determine that the adoption or implementation of any applicable law, rule, regulation or treaty regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its applicable lending office) with any respect or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of Bank or any person or entity controlling Bank (a "Parent") as a consequence of its obligations hereunder to a level below that which Bank (or its Parent) could have achieved but for such adoption, change or compliance (taking into consideration its policies with respect to capital adequacy) by an amount deemed by Bank to be material, then from time to time, within 15 days after demand by Bank, Borrower shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction. A statement of Bank claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive absent manifest error. (e) If at any time Bank, in its sole and absolute discretion, determines that: (i) the amount of the LIBOR Rate Loans for periods equal to the corresponding Interest Periods are not available to Bank in the offshore currency interbank markets, or (ii) the LIBOR Rate does not accurately reflect the cost to Bank of lending the LIBOR Rate Loan, then Bank shall promptly give notice thereof to Borrower, and upon the giving of such notice Bank's obligation to make the LIBOR Rate Loans shall terminate, unless Bank and the borrower agree in writing to a different interest rate Loans shall terminate, unless Bank and the Borrower agree in writing to a different interest rate applicable to LIBOR Rate Loans. If it shall become unlawful for Bank to continue to fund or maintain any Loans, or to perform its obligations hereunder, upon demand by Bank, Borrower shall prepay the Loans in full with accrued interest thereon and all other amounts payable by Borrower hereunder (including, without limitation, any amount payable in connection with such prepayment pursuant to Section 4(a)). 6 29 EXHIBIT A LIBOR RATE LOAN BORROWING CERTIFICATE The undersigned hereby certifies as follows: I, _____________________, am the duly elected and acting _____________ of Remedy Corp. ("Borrower"). This certificate is delivered pursuant to Section 2 of that certain LIBOR Supplement to Loan and Security Agreement together with the Loan and Security Agreement by and between Borrower and Silicon Valley Bank ("Bank") (the "Loan Agreement"). The terms used in this Borrowing Certificate which are defined in the Loan Agreement have the same meaning herein as ascribed to them therein. Borrower hereby requests on ____________, 19__ a LIBOR Rate Loan (the "Loan") as follows: (a) The date on which the Loan is to be made is ____________, 19__. (b) The amount of the Loan is to be _____________ and 00/100 Dollars ($________), for an Interest Period of ___ month(s). All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of this request for a loan; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. IN WITNESS WHEREOF, this Borrowing Base Certificate is executed by the undersigned as of this _________ day of __________, 19__. Remedy Corp. By: ------------------------------ Title: --------------------------- FOR INTERNAL BANK USE ONLY
- -------------------------------------------------------------------------------- LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date - -------------------------------------------------------------------------------- ___% - --------------------------------------------------------------------------------
7 30 EXHIBIT B LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE The undersigned hereby certifies as follows: I, _____________________, am the duly elected and acting _____________ of Remedy Corp. ("Borrower"). This certificate is delivered pursuant to Section 2 of that certain LIBOR Supplement to Loan and Security Agreement together with the Loan and Security Agreement by and between Borrower and Silicon Valley Bank ("Bank") (the "Loan Agreement"). The terms used in this LIBOR Rate Conversion/Continuation Certificate which are defined in the Loan Agreement have the same meaning herein as ascribed to them therein. Borrower hereby requests on ____________, 19__ a LIBOR Rate Loan (the "Loan") as follows: (a) _____ (i) A rate conversion of an existing Prime Rate Loan from a Prime Rate Loan to a LIBOR Rate Loan; or _____ (ii) A continuation of an existing LIBOR Rate Loan as a LIBOR Rate Loan; [Check (i) or (ii) above] (b) The date on which the Loan is to be made is ____________, 19__. (c) The amount of the Loan is to be _____________ ($__________), for an Interest Period of ________ month(s). All representations and warranties of Borrower stated in the Loan Agreement are true, correct and complete in all material respects as of the date of this request for a loan; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation Certificate is executed by the undersigned as of this _________ day of __________, 19__. Remedy Corp. By: ------------------------------ Title: --------------------------- FOR INTERNAL BANK USE ONLY
- -------------------------------------------------------------------------------- LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date - -------------------------------------------------------------------------------- ___% - --------------------------------------------------------------------------------
8 31 SILICON VALLEY BANK PRO FORMA INVOICE FOR LOAN CHARGES BORROWER: REMEDY CORP. LOAN OFFICER: JOHN CHINA DATE: JULY 30, 1998 CREDIT REPORT 35.00 DOCUMENTATION FEE 250.00 TOTAL FEE DUE $285.00 ------------- =======
Please indicate the method of payment: { } A check for the total amount is attached. { } Debit DDA# _______________ for the total amount. { } Loan proceeds Borrower: By: /s/ RON J. FIOR - --------------------------------------- (Authorized Signer) - --------------------------------------- Silicon Valley Bank (Date) Account Officer's Signature 32 NEGATIVE PLEDGE AGREEMENT This Negative Pledge Agreement is made as of July 30, 1998, by and between Remedy Corp. ("Borrower") and Silicon Valley Bank ("Bank"). In connection with the Loan Agreement being concurrently executed between Borrower and Bank, Borrower agrees as follows: 1. Borrower shall not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of Borrower's documents, fixtures, investment property, deposit accounts, inventory, equipment, chattel paper, accounts, contract rights, general intangibles (including intellectual property), and instruments, without Bank's prior written consent, which consent shall not be unreasonably withheld. 2. It shall be an event of default under the Existing Loan Documents and under any of the related documents between Borrower and Bank if there is a breach of any term of this Negative Pledge Agreement. BORROWER: Remedy Corp. By: /s/ RON J. FIOR ------------------- Name: Ron J. Fior ------------------ Title: INTERIM VP & CFO ----------------- BANK: SILICON VALLEY BANK By: -------------------- Name: ------------------ Title: ----------------- EX-23.1 3 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 File Nos. 33-90378, 33-91560, 333-29191, 333-4148 and 333-56931) 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 21, 1999 with respect to the consolidated financial statements and schedule of Remedy Corporation included in the Annual Report on Form 10-K for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Palo Alto, California March 10, 1999 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 58,976 77,661 44,670 2,392 0 189,482 25,680 13,044 213,500 52,669 0 0 0 0 160,704 213,500 101,132 157,420 4,475 27,671 33,734 0 132 29,651 10,674 0 0 0 0 18,977 0.66 0.63 For Purposes of This Exhibit, Primary means Basic.
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