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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
(FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
(NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER 0-25494
REMEDY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0265675
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
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1505 SALADO DRIVE, MOUNTAIN VIEW, CA 94043
(415) 903-5200
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $.00005 PAR VALUE;
REGISTERED ON THE NASDAQ NATIONAL MARKET
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 3, 1997 was approximately $864,124,605 (based on the
last reported sale price of $39.625 on March 3, 1997 on the Nasdaq National
Market).
The number of shares outstanding of Common Stock as of March 3, 1997 was
26,989,764.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT FORM 10-K REFERENCE
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Proxy Statement for Registrant's Annual Part III, Items 10-13
Meeting to be held on May 21, 1997
Annual Report to Stockholders for the fiscal Part II, Items 6-8
year ended December 31, 1996. Part IV, Item 14
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PART I
This Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" in Item 1.
ITEM 1. BUSINESS.
Remedy Corporation (Remedy or the Company) develops, markets and supports
highly adaptable, client/server applications software for support and business
processes. The Company's Action Request System is primarily used today as an
internal help desk application for tracking and resolving support requests and
problems in PC, UNIX and NT computing environments. Due to its versatility, the
Action Request System is also used as an application for automating and
consolidating additional internal business operations related to the help desk,
in a market referred to as the Consolidated Operations Management (COM) market.
The Company was incorporated on November 20, 1990 in Delaware. The Company
maintains its executive offices and principal facilities at 1505 Salado Drive,
Mountain View, California 94043. Its telephone number is (415) 903-5200.
BACKGROUND
The Company believes that few organizations have fully realized the
potential benefits offered by client/ server computing. In particular, the need
for an adaptable internal help desk must be addressed as a prerequisite for a
well-managed computing infrastructure. Moreover, to realize the full benefits of
applying client/server applications to meet the demands of changing support and
business processes, the Company believes that a new class of highly adaptable,
client/server application software is required.
The Company's technology and applications are also well suited for
consolidating a variety of internal business processes in the COM market,
including change management, asset management, customer and technical support,
defect tracking, service level agreement tracking, project tracking, facilities
management and inventory management. The Company's Action Request System employs
an easy-to-use client interface over a workflow server and an incident tracking
relational database. The following are the key attributes of the Remedy
solution:
Adaptability Without Programming. The Action Request System offers users
the versatility of a spreadsheet, enabling customers to create or alter all
visual, functional and process definitions without programming. End users can
customize their interface to match their role in a process. Departments or lines
of business can select and tailor the information to be tracked and define the
workflow of a process. Information technology organizations can quickly adapt
the Action Request System to any internal operational process that involves a
group of people who must proactively respond to frequent incidents or requests.
When a process needs to be changed, creating the database fields, process
workflow and application linkages can occur rapidly. More importantly, the
application is adaptable to meet most future requirements, without costly
programming.
Scalable, High Performance Architecture. The Company's product
architecture offers users departmental to enterprise scalability with high
system performance. The Action Request System is scalable across a range of
sites from small department networks to multi-site, global implementations. The
product has been designed to move only the required amount of information
between clients and servers, thereby minimizing end user response time and
maximizing utilization of an organization's computing and networking resources.
Fast and Broad Deployment. The Company's product design and philosophy to
user licensing practices allows for fast deployment of the Action Request System
to a broad range of users. While the product is highly adaptable, solution
templates for help desk, change management and asset management provide a high
degree of functionality to users upon initial installation. User capabilities
for self help, status query and direct problem submission are all offered at no
cost to users, providing additional value to both user and help desk staff.
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Integration with Third-Party Software and Systems. The Company's software
is designed to integrate (generally without programming) with a wide variety of
computer and telecommunication technologies and products, including desktop
applications, telephony devices, network management systems and legacy systems.
The Company's products integrate with many of the most prevalent Windows, MAC
and UNIX desktop applications, such as e-mail, document or media browsers,
spreadsheets and document editors. The Company's software links with automatic
call distributors and interactive voice response systems to simultaneously
display customer profile and historical problem resolution data for the support
personnel as the call is being answered. Workflow notifications, such as
incident arrivals, transfers or delegations, and incident resolution notices,
are frequently sent via e-mail, pagers, facsimile systems or voice response
units. Network management outage alarms are sent from leading network management
systems, such as SunNet Manager or HP OpenView, to Action Request System
servers, automatically creating a problem report to be handled by the internal
help desk staff.
The Action Request System provides important technology for organizations
implementing process improvement or re-engineering. New process solutions or
modifications can be quickly prototyped for evaluation. Proactive workflow
notifications can reduce delays previously caused by unaddressed requests.
Information is more readily available to the people making the decisions and
serving the customer. Process performance can be easily monitored, measured and
displayed, identifying problems or additional opportunities for further
improvement. These features represent fundamental enabling technologies critical
for building successful client/server applications for support and business
processes.
PRODUCTS
Action Request System
The Action Request System is a client/server application that features
versatile incident tracking used to consolidate internal operational processes.
The product is primarily used as an internal help desk application for tracking
and resolving support requests and problems in PC, UNIX and NT computing
environments. Due to its versatility, the Action Request System is also used as
an application for many other internal operations. The product includes
templates that help customers start application specialization. Using simple
point-and-click methods, customers specialize a template to the unique
information, process and integration requirements of their department or
enterprise. The Company provides numerous application templates, including
internal help desk, asset management, customer and technical support, defect
tracking and recruiting management.
The Action Request System's client/server architecture balances
functionality among three elements: desktop client, workflow server and database
server. The desktop client and workflow server communicate via industry standard
remote procedure calls that allow clients to access servers over local area
networks (LANs), wide area networks (WANs), and dial-up phone lines, without
concern about mixed hardware or software environments. The workflow server
actively manages and coordinates the progress of incidents from inception to
closure. It makes all routing, escalation, access control and integration
decisions prior to communicating new or updated information to the database
server. The product employs a low-impact transaction model that moves only the
necessary information between client and workflow server, thereby conserving
bandwidth and giving users WAN and dial-up performance that is similar to LAN
performance. The database server stores and maintains incident information and
related information, such as detailed information about the computing
configuration of the customer that submitted an incident. The contents of the
database become a knowledge repository that can be consulted in resolving future
incidents. The database may be co-resident with the server or on a different
system, in which case it is accessed using the database vendor's communication
methods.
Flashboards
Flashboards is an independent companion product to the Action Request
System. It presents panels of graphical charts and meters that show current and
historical measures of process quality and performance. Such measures are useful
for organizations that want a quantitative view of their processes, whether for
continual improvement or to make informed planning decisions. The product's
client/server architecture is
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similar to the Action Request System. Clients run on the desktops of users who
are managing or participating in a process, such as a customer support hot-line,
and support one or more visual panels. The Flashboard Server is designed to run
on any processor and accesses the Action Request Server for statistics about the
process. It optimizes access to the Action Request Server on behalf of all
users, greatly reducing load compared to other report and statistics generating
tools. The Flashboard Administrator Tool allows point-and-click definition of
panels, which contain graphical representations of virtually any process metric
accessible in the Action Request System. The product features the ability to
continually view and compare the process metrics over time. Users are able to
view several metrics synchronized in time for quickly correlating multiple
trends. Flashboards is highly adaptable and assists organizations in meeting
their quality and operational goals as they constantly change and evolve.
ARWeb
ARWeb is a gateway between the Action Request System and a World Wide Web
server. It is designed to allow Internet browsers to be clients of any Action
Request Server. The product converts the Action Request System form-like views
into World-Wide Web browser forms dynamically and automatically as they are
accessed. Since the Action Request System allows flexible customization of
forms, World-Wide Web browser users will benefit from that customization without
learning HTML, the World-Wide Web browser graphics forms language.
Distributed Server Option
The Distributed Server Option for the Action Request System expands the
help desk solution to multiple locations and multiple applications across the
corporate enterprise. The highly efficient architecture enables information
transfer to specialized departments or individuals throughout the enterprise. It
enables automatic data transfer between AR System servers while maintaining
consistent information throughout the environment. Each site retains its
autonomy for administration and operation while benefiting from sharing
information with other sites. The AR System Distributed Server Option
coordinates requests between independent support organizations, provides
centralized dispatching of services through different operations groups, links
different organizations and applications and creates a knowledge base of
solutions for the entire enterprise.
CUSTOMERS
As of the end of December 1996, the Company had licensed its software to
more than 1,850 customers at over 3,400 sites. In 1996, no customer accounted
for more than 10% of the Company's total revenue.
PRODUCT PRICING
The domestic end user list price for the Action Request System is $6,500,
which includes server software and three "write licenses." These licenses enable
three individuals at a customer site to modify and manage existing information
in the database. The Company has structured its pricing policies so that a
customer has an unlimited number of "read-only licenses" for creating new action
requests and for reading information in the database. For example, in the case
of a customer using the Action Request System for an internal help desk
application, the three write licenses would enable three support staff to modify
and manage existing information in the database and the unlimited number of
read-only licenses would enable an unlimited number of end users to submit
action requests and monitor their status. If a customer needs more than three
write licenses, the Company offers additional packages of five fixed or floating
licenses. The Company's list price for five additional fixed licenses is $4,000,
and for five additional floating licenses is $10,000. Floating licenses control
the number of simultaneous users accessing a server, rather than being
associated with either specific computers or specific users. License fees are
subject to varying discounts depending on customer volume. The Company offers an
annual maintenance program to its licensees that includes product updates and
hotline support.
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The Company's indirect sales channels include value-added resellers (VARs),
system integrators (SIs) and original equipment manufacturers (OEMs), who
license the Company's products at a discount for relicensing. The Company
expects to increase revenue from the indirect channels as a percentage of total
revenue, which could adversely affect the Company's operating margins because
the sale of a greater number of licenses will be required to offset the lower
net license fees generated on the sale of the same products through indirect
resellers.
The Company believes that its products currently are priced substantially
below most of its competitors' products. The market for the Company's products
is highly competitive, and the Company expects that it will face increasing
pricing pressures from its current competitors and new market entrants. Any
material reduction in the price of the Company's products would negatively
affect gross margins and could materially adversely affect the Company's
business, operating results and financial condition if the Company were unable
to increase unit sales.
SALES AND MARKETING
The Company markets its software and services through its direct
headquarters-based sales organization and through its indirect sales channels
(VARs, SIs and OEMs). The Company's headquarters-based direct sales force
accounted for approximately 58% of the Company's total revenue for 1996, and
sales through indirect channels accounted for approximately 42%. As of December
31, 1996, the Company's sales and marketing organization consisted of 139
individuals, 96 at the Company's offices in Mountain View, California, six in
New Jersey, eight in Maryland, 19 in the United Kingdom, four in France, four in
Germany, and two in Singapore.
The Company's sales organization consists of technically proficient sales
people who consummate most sales through telephone contact with existing or
prospective customers. Each sales representative typically travels three to five
days per month to visit existing and prospective customers, which include both
direct customers and indirect channels. The Company's marketing organization
provides leads to members of the sales force. Leads are primarily generated
through public relations, seminars, trade shows and the Company's web site.
The Company increased the size of its headquarters-based direct sales force
from 42 to 100 individuals in 1996. The Company intends to substantially
increase the size of its sales force in 1997 and beyond, which is required if
the Company is to achieve significant revenue growth in the future. Competition
for such persons is intense, and there can be no assurance that the Company will
be able to attract highly qualified sales personnel. If the Company is unable to
hire such people on a timely basis, the Company's business, operating results
and financial condition could be adversely affected.
The Company's sales and marketing organization is complemented by indirect
sales channels (VARs, SIs and OEMs), who license the Company's products at a
discount for relicensing, and may provide training, support and customer
services to end users. The Company anticipates that the percentage of its total
revenue derived from indirect sales, particularly through VARs and SIs, will
increase in the future. However, there can be no assurance that the Company will
be able to attract and retain VARs, SIs and OEMs that will be able to market the
Company's products effectively. In addition, there can be no assurance that any
existing VAR, SI or OEM will continue to represent the Company's products. The
Company expects that any material increase in the Company's indirect sales as a
percentage of revenue will adversely affect the Company's average selling prices
and gross margins due to the lower unit prices that the Company receives when
selling through indirect channels.
The Company and its indirect sales channels generally sell the Action
Request System and related services through a sales representative with
occasional help from a pre-sales engineer. To further encourage sales, the
Company conducts comprehensive marketing programs that include public relations,
seminars, trade shows, user group meetings and ongoing customer communications
programs.
For 1994, 1995 and 1996, international sales represented 28%, 31% and 37%,
respectively, of the Company's total revenue.
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CUSTOMER SERVICE AND SUPPORT
The Company's customer service and support organization provides customers
with technical support, education and consulting services. The Company believes
that providing a high level of customer service and technical support is
critical to customer satisfaction and the Company's success. In providing
service and support to customers, the Company uses its own products extensively.
As of December 31, 1996, the Company had 89 people in its customer service and
support organization. Most of the Company's customers currently have support
agreements with the Company.
Technical Support. The Company offers telephone, electronic mail and fax
customer support through its support services staff. Additional customer support
is provided by the Company's VARs, SIs and OEMs. Initial product license fees do
not cover software maintenance. Customers are entitled to receive new software
releases, maintenance releases and support for an annual fee.
Education. The Company offers a comprehensive education and training
program to customers. Training classes are offered through in-house facilities
at the Company's offices in Pleasanton, California. The Company also provides
on-site training services upon request by customers. Fees for education and
training services are charged separately from the Company's software products.
Consulting. The Company's consultants are available to work closely with
customers' information systems organizations. These consulting services
generally consist of assisting customers who are planning large implementations
or who wish to outsource the specialization of the Company's products to their
needs. Fees for consulting services are charged separately from the Company's
software products.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has made substantial investments in
research and development. The Company believes that its future performance will
depend in large part on its ability to maintain and enhance its current product
line, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. The Company intends to expand its existing product offerings and
to introduce new products for the client/server application software market. In
the development of new products and enhancements to existing products, the
Company uses its own tools extensively. Although the Company expects that
certain of its new products will be developed internally, the Company may, based
on timing and cost considerations, acquire technology and/or products from third
parties or consultants.
As of December 31, 1996, the Company's research and development staff
consisted of 96 employees. The Company's total expenses for research and
development for fiscal years 1994, 1995 and 1996 were $4.2 million, $7.2 million
and $13.3 million, respectively. The Company anticipates that it will continue
to commit substantial resources to research and development in the future. To
date, the Company's development efforts have not resulted in any capitalized
software development costs.
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RISK FACTORS
In addition to the other information in this report on Form 10-K, the
following factors should be considered carefully.
Potential Fluctuations in Quarterly Results; Seasonality. The Company's
quarterly operating results have in the past and may in the future vary
significantly depending on factors such as increased competition, the timing of
new product announcements and changes in pricing policies by the Company and its
competitors, market acceptance of new and enhanced versions of the Company's
products, the size and timing of significant orders, the mix of direct and
indirect sales, changes in operating expenses, changes in Company strategy,
personnel changes, foreign currency exchange rates fluctuations and general
economic factors. The Company operates with no significant order backlog because
its software products typically are shipped shortly after orders are received.
Furthermore, the Company has often recognized a substantial portion of its
revenue in the last month of a quarter, with this revenue frequently
concentrated in the last weeks of a quarter. As a result, product revenue in any
quarter is substantially dependent on orders booked and shipped in that quarter,
and revenue for any future quarter is not predictable with any significant
degree of certainty. Product revenue is also difficult to forecast because the
market for client/server application software products is rapidly evolving, and
the Company's sales cycle, from initial trial to multiple copy purchases and the
provision of support services, varies substantially from customer to customer.
In addition, the Company expects that sales derived through indirect channels,
which are harder to predict and have lower margins than direct sales, will
increase as a percentage of total revenue. The Company's expense levels are
based, in part, on its expectations as to future revenue. If revenue levels are
below expectations, operating results are likely to be adversely affected. Net
income may be disproportionately affected by a reduction in revenue because a
proportionately smaller amount of the Company's expenses varies with its
revenue. As a result, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected.
The Company's business has experienced and is expected to continue to
experience a level of seasonality, in part due to customer buying patterns. In
recent years, the Company has generally had weaker demand in the quarter ending
in March. The Company believes this pattern will continue and accordingly
anticipates total revenue and net income in the quarter ending March 31, 1997,
will be higher than in the quarter ended March 31, 1996, but lower than in the
quarter ended December 31, 1996.
Competition. The client/server application software market is intensely
competitive and subject to rapid change. Competitors vary in size and in the
scope and breadth of the products and services offered. The Company encounters
competition from a number of sources, including: (i) other software companies,
(ii) third-party professional services organizations that develop custom
software, and (iii) management information systems departments of potential
customers that develop custom software. In addition, because there are
relatively low barriers to entry in the software market, the Company expects
additional competition from other established and emerging companies as the
client/server application software market continues to develop and expand.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company's business, operating results and financial condition. Some of the
Company's current, and many of the Company's potential, competitors have
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company can. The Company also expects that competition will increase as a result
of software industry consolidations. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. There can be no assurance that
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the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition.
Dependence on New Products and Rapid Technological Change; Risk of Product
Bugs. The client/server application software market is characterized by rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. The life cycles of the Company's products are difficult to
estimate. The Company's future success will depend upon its ability to enhance
its current products and to develop and introduce new products on a timely basis
that keep pace with technological developments and emerging industry standards
and address the increasingly sophisticated needs of its customers. There can be
no assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change or
evolving industry standards, that the Company will not experience difficulties
that could delay or prevent the successful development, introduction and
marketing of these products, or that its new products and product enhancements
will adequately meet the requirements of the marketplace and achieve market
acceptance. If the Company is unable, for technological or other reasons, to
develop and introduce new products or enhancements of existing products in a
timely manner in response to changing market conditions or customer
requirements, the Company's business, operating results and financial condition
will be materially adversely affected. During 1996, the Company released several
new products, along with significant upgrades to existing products. These
products are subject to significant technical risks. If the new products do not
achieve market acceptance, the Company's business, operating results and
financial condition will be materially adversely affected. Software products as
complex as those offered by the Company may contain undetected errors or
failures when first introduced or when new versions are released. The Company
has in the past discovered software errors in certain of its new products and
enhancements after their introduction and has experienced delays or lost revenue
during the period required to correct these errors. Although the Company has not
experienced material adverse effects resulting from any such errors to date,
there can be no assurance that, despite testing by the Company and by current
and potential customers, errors will not be found in new products or releases
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition.
Limited Operating History; Future Operating Results Uncertain; Need to
Increase Sales Force. The Company was incorporated in November 1990 and did not
begin shipping products until December 1991. Although the Company has
experienced significant percentage growth in revenue and net income in recent
years, the Company does not believe prior growth rates are sustainable or
indicative of future operating results. There can be no assurance that the
Company will remain profitable on a quarterly or annual basis. In addition, the
Company's limited operating history makes the prediction of future operating
results difficult or impossible. Future operating results will depend on many
factors, including the demand for the Company's products, the level of product
and price competition, the Company's success in expanding its direct sales force
and indirect distribution channels, the ability of the Company to develop and
market new products and control costs, and the percentage of the Company's
revenue derived from indirect channels, which have lower margins than direct
sales. In particular, the Company intends to hire a significant number of
additional sales personnel in 1997 and beyond, which is required if the Company
is to achieve significant revenue growth in the future. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its existing sales personnel or that it can attract, assimilate or retain
additional highly qualified sales persons in the future. The Company increased
the size of its headquarters-based direct sales force from 20 to 42 in 1995 and
from 42 to 100 in 1996. In the past, the Company has experienced difficulty in
recruiting a sufficient number of sales persons. If the Company is unable to
hire such personnel on a timely basis, the Company's business, operating results
and financial condition could be adversely affected. The Company expects
increased competition and intends to invest significantly in its business. As a
result, the Company does not expect to sustain current operating margins in the
future.
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Product Concentration. The Company currently derives substantially all of
its revenue from licenses of the Action Request System and related services.
Broad market acceptance of the Company's products is critical to the Company's
future success. As a result, a decline in demand for or failure to achieve broad
market acceptance of the Action Request System as a result of competition,
technological change or otherwise, would have a material adverse effect on the
business, operating results and financial condition of the Company. A decline in
sales of the Action Request System could also have a material adverse effect on
sales of other Company products that may be sold to Action Request System
customers. The Company's future financial performance will depend in part on the
successful development, introduction and customer acceptance of new and enhanced
versions of the Action Request System and other products. There can be no
assurance that the Company will continue to be successful in marketing the
Action Request System or any new or enhanced products.
Management of Growth; Dependence Upon Key Personnel. The Company has
recently experienced a period of significant growth in net revenue that has
placed a significant strain upon its management systems and resources. The
Company recently implemented a number of new financial and management controls,
reporting systems and procedures. The Company's ability to compete effectively
and to manage future growth, if any, will require the Company to continue to
improve its financial and management controls, reporting systems and procedures
on a timely basis and expand, train and manage its employee work force. There
can be no assurance that the Company will be able to do so successfully. The
Company's failure to do so could have a material adverse effect upon the
Company's business, operating results and financial condition. The Company's
future performance depends in significant part upon the continued service of its
key technical, sales and senior management personnel, none of whom is bound by
an employment agreement. The loss of the services of one or more of the
Company's executive officers could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
future success also depends on its continuing ability to attract and retain
highly qualified technical, sales and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that the Company can retain
its key technical, sales and managerial employees or that it can attract,
assimilate or retain other highly qualified technical, sales and managerial
personnel in the future.
Expansion of Indirect Channels. An integral part of the Company's strategy
is to develop the marketing channels of value added resellers (VARs), system
integrators (SIs) and original equipment manufacturers (OEMs), and to increase
the proportion of the Company's customers licensed through these channels. VARs,
SIs and OEMs accounted for approximately 42% of the Company's total revenue in
1996. The Company is currently investing, and intends to continue to invest,
significant resources to develop these channels, which could adversely affect
the Company's operating margins. There can be no assurance that the Company will
be able to attract VARs, SIs and OEMs that will be able to market the Company's
products effectively and will be qualified to provide timely and cost-effective
customer support and service. In addition, the Company's agreements with VARs,
SIs and OEMs are not exclusive and in many cases may be terminated by either
party without cause, and many of the Company's VARs, SIs and OEMs carry
competing product lines. Therefore, there can be no assurance that any VAR, SI
or OEM will continue to represent the Company's products, and the inability to
recruit, or the loss of important VARs, SIs or OEMs could adversely affect the
Company's results of operations. In addition, if it is successful in selling
products through these channels, the Company expects that any material increase
in the Company's indirect sales as a percentage of total revenue will adversely
affect the Company's average selling prices and gross margins due to the lower
unit prices that the Company receives when selling through indirect channels.
International Operations. International sales represented approximately
37% of the Company's revenue in 1996. The Company currently has four
international sales offices, which are located in the United Kingdom, France,
Germany, and Singapore. The Company believes that its continued growth and
profitability will require expansion of its international operations.
Accordingly, the Company intends to continue to expand its international
operations and enter additional international markets, which will require
significant management attention and financial resources and could adversely
affect the Company's operating margins. In order to successfully expand
international sales in 1997 and subsequent periods, the Company must establish
additional foreign operations, hire additional personnel and recruit additional
international resellers. To the extent that
8
<PAGE> 10
the Company is unable to do so in a timely manner, the Company's growth, if any,
in international sales will be limited, and the Company's business, operating
results and financial condition could be materially adversely affected. In
addition, there can be no assurance that the Company will be able to maintain or
increase international market demand for the Company's products. The Company's
international sales are currently denominated in U.S. dollars. An increase in
the value of the U.S. dollar relative to foreign currencies could make the
Company's products more expensive and, therefore, potentially less competitive
in those markets. Additional risks inherent in the Company's international
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs of localizing products for
foreign countries, lack of acceptance of localized products in foreign
countries, longer accounts receivable payment cycles, difficulties in managing
international operations, potentially adverse tax consequences including
restrictions on the repatriation of earnings, and the burdens of complying with
a wide variety of foreign laws. There can be no assurance that such factors will
not have a material adverse effect on the Company's future international sales
and, consequently, the Company's results of operations. In addition, because a
substantial majority of the Company's international sales are indirect, any
material increase in the Company's international sales as a percentage of total
revenue will adversely affect the Company's average selling prices and gross
margins due to the lower unit prices that the Company receives when selling
through indirect channels.
Dependence on Growth in the Client/Server Computing Market; General
Economic and Market Conditions. Substantially all of the Company's revenue have
been attributable to sales of the Action Request System, which is utilized in
client/server computing environments. This product is currently expected to
account for a significant part of the Company's future revenue. Although demand
for the Action Request System has grown in recent years, the client/server
computing market is still an emerging market. The Company's future financial
performance will depend in large part on continued growth in the number of
organizations adopting client/server computing environments and the number of
applications developed for use in those environments. There can be no assurance
that the market for client/server computing will continue to grow. If the
client/server computing market fails to grow or grows more slowly than the
Company currently anticipates, the Company's business, operating results and
financial condition would be materially adversely affected. During recent years,
segments of the personal computer industry have experienced significant economic
downturns characterized by decreased product demand, production overcapacity,
price erosion, work slowdowns and layoffs. The Company's operations may in the
future experience substantial fluctuations from period to period as a
consequence of such industry patterns, general economic conditions affecting the
timing of orders from major customers, and other factors affecting capital
spending. There can be no assurance that such factors will not have a material
adverse effect on the Company's business, operating results or financial
condition.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success is heavily dependent upon proprietary technology. The Company relies
primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. The Company presently has no patents or patent applications
pending. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult, and while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In selling
its products, the Company relies primarily on "shrink wrap" licenses that are
not signed by licensees and, therefore, it is possible that such licenses may be
unenforceable under the laws of certain jurisdictions. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to as
great an extent as do the laws of the United States. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar
technology. The Company is not aware that any of its products infringes the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to current
or future products. The Company expects that software product developers will
increasingly be subject to infringement claims as the
9
<PAGE> 11
number of products and competitors in the Company's industry segment grows and
the functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company or at all,
which could have a material adverse effect upon the Company's business,
operating results and financial condition.
Product Liability. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. In selling its products, the Company relies
primarily on "shrink wrap" licenses that are not signed by licensees and,
therefore, it is possible that such licenses may be unenforceable under the laws
of certain jurisdictions. For these and other reasons, it is possible that the
limitation of liability provisions contained in the Company's license agreements
may not be effective. Although the Company has not experienced any product
liability claims to date, the sale and support of products by the Company may
entail the risk of such claims. A successful product liability claim brought
against the Company could have a material adverse effect upon the Company's
business, operating results and financial condition.
ITEM 2. PROPERTIES.
The Company's principal administrative, sales and marketing facility is
located in approximately 51,000 square feet of space in Mountain View,
California. This facility is subleased to the Company through June 1999. The
Company also leases two other facilities of approximately 43,000 square feet
each in Mountain View, California, through June 2003. In December 1995, the
Company began to occupy one of the 43,000 square foot facilities for use
primarily for product development. The Company is currently subleasing the
second facility to a third party through June 1999. In addition, the Company's
support facility is located in approximately 30,000 square feet of space in
Pleasanton, California. This facility is leased to the Company through August
2000. The Company believes that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to ordinary routine litigation incidental to its
business. Management currently believes that the ultimate amount of liability,
if any, with respect to any pending actions, either individually or in the
aggregate, will not materially affect the Company's business, operating results
or financial condition. However, the ultimate outcome of any litigation is
uncertain. If an unfavorable outcome were to occur, the impact could be
material. Furthermore, any litigation, regardless of the outcome, can have an
adverse impact on the Company's results of operations as a results of defense
costs, diversion of management resources, and other factors.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year covered by this report.
10
<PAGE> 12
ITEM 4A. OFFICERS OF THE REGISTRANT.
The officers of the Company, and their ages as of March 1, 1997, are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- --- ----------------------------------------------------
<S> <C> <C>
Lawrence L. Garlick...... 47 Chairman of the Board and Chief Executive Officer
David A. Mahler.......... 40 Vice President, Business Development and Director
Eric S. Bergan........... 39 Vice President, Engineering
Bernard R. Cote.......... 49 Vice President, Customer Support
George A. de Urioste..... 41 Vice President, Finance and Chief Financial Officer
Vasu S. Devan............ 45 Vice President, Sales
Carajane Finn............ 36 Vice President, Employee Services
Lori L. Laub............. 37 Vice President, Information Systems
Matthew R. Miller........ 33 Vice President, Marketing
</TABLE>
Mr. Garlick co-founded the Company in November 1990. Since that time he has
served as Chairman of the Board and Chief Executive Officer of the Company. From
September 1984 to June 1990, Mr. Garlick was employed by Sun Microsystems, Inc.
(Sun), a manufacturer of computer workstations, most recently as Vice President
of Distributed Systems. Prior to joining Sun, Mr. Garlick was employed by Xerox
Corporation, a document management company, for six years. Mr. Garlick holds
B.S.E.E. and M.S.E.E. degrees in computer engineering from Stanford University.
Mr. Mahler co-founded the Company in November 1990 and currently serves as
Vice President, Business Development. From April 1993 to June 1995, Mr. Mahler
served as Vice President, Marketing. From November 1990 to March 1993, Mr.
Mahler served as Vice President, Marketing and Chief Financial Officer. From
November 1978 to October 1990, Mr. Mahler was employed by Hewlett-Packard
Company, a manufacturer of computers and related products, most recently as
product marketing manager. Mr. Mahler holds a B.S. degree in computer science
from Case Western Reserve University.
Mr. Bergan joined the Company in April 1993 as Vice President, Engineering.
From October 1991 to March 1993, Mr. Bergan was employed by NetLabs Inc., a
network management software company, most recently as Director of Engineering,
Applications. Prior to joining NetLabs, Mr. Bergan was employed by Pyramid
Technology Corp., a computer manufacturer, for four years, serving as Director
of Data Bases, Applications Engineering, and SW Quality Assurance. Mr. Bergan
holds a B.S. degree in computer science from the University of Kansas and an
M.S. degree in computer science from Johns Hopkins University.
Mr. Cote joined the Company in November 1993 as Vice President, Customer
Support. From March 1984 to May 1993, Mr. Cote was employed by Sun, most
recently as Vice President of Worldwide Support. Prior to joining Sun, Mr. Cote
was employed by Digital Equipment Corporation, a manufacturer of computers and
related products, for over fifteen years in various customer support management
roles. Mr. Cote holds an A.A. degree from Chabot College.
Mr. de Urioste joined the Company in March 1993 as Vice President, Finance
and Chief Financial Officer. From January 1991 to June 1992, Mr. de Urioste was
employed by TeamOne Systems, Inc. (TeamOne), a configuration management software
company, most recently as Chief Financial Officer. Prior to joining TeamOne, Mr.
de Urioste served as Manager of Financial Planning and Analysis at ASK Computer
Systems, Inc., a manufacturing management software company, from November 1988
to November 1990. Mr. de Urioste is a Certified Public Accountant and holds a
B.S. degree in accounting from the University of Southern California and an
M.B.A. degree in Finance and International Business from the University of
California, Berkeley.
Mr. Devan joined the Company in August 1992 as Vice President, Vertical
Market Applications, and in May 1993, was promoted to Vice President, Sales.
From December 1989 to August 1992, Mr. Devan was employed by Teknekron
Communications Systems, Inc., a consulting firm, most recently as General
Manager. Prior to that time, Mr. Devan was employed by Bell-Northern Research,
Ltd., a manufacturer of telecommunications products, for two years. Mr. Devan
holds a Masters degree in management information systems from
11
<PAGE> 13
the Indian Institute of Technology and a B.S. degree in electronics and
communications engineering from the University of Madras.
Ms. Finn joined the Company in 1991 as Manager of Operations and
Administration. In January 1995, she was promoted to Director of Employee
Services and Operations, with responsibility for Human Resources, Manufacturing,
Facilities and Real Estate. In January 1997, Ms. Finn was named Vice President
of Employee Services and is responsible for the Human Resources, Facilities and
Real Estate functions of the Company. From 1986 to 1991, Ms. Finn managed a
private consulting firm specializing in start up operations for professional
private practices.
Ms. Laub joined the Company in October 1995 as Vice President, Information
Systems. Since May 1994, Ms. Laub has also been a principal at Excellence By
Design, an executive management firm. From September 1993 to April 1994, Ms.
Laub was employed by Computer Library, a division of Ziff Communications, a
publishing firm, as Vice President, Product and Business Development. From July
1992 to August 1993, Ms. Laub served as Vice President, Customer Satisfaction at
The Vantive Corporation, a software development company. From February 1991 to
July 1992, Ms. Laub was employed by Great Plains Software, Inc., a financial
software company, serving most recently as Vice President, Customer Assistance
and General Manager, Entry Business Unit. From July 1989 to January 1991, Ms.
Laub served as Vice President, Customer Support at Intuit Corporation. Ms. Laub
holds a B.S. degree in Business Administration from North Dakota State
University.
Mr. Miller joined the Company in July 1996 as Vice President, Marketing.
From April 1993 to July 1996, Mr. Miller was employed at Gupta Corporation, a
provider of client-server tools and databases, most recently as Vice President
of Marketing. From June 1989 to May 1992, he was employed by Oracle Corporation,
a database software provider, most recently serving as Director of Marketing for
the Desktop Products Division. Mr. Miller holds a Masters degree in business
from Columbia University and a B.A. degree from Cornell University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "RMDY" since March 17, 1995. The following table sets forth,
for the fiscal quarters indicated, the high and low sale prices of the Company's
Common Stock as reported by the Nasdaq National Market System.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1996:
First Quarter.................................. $28.25 $15.50
Second Quarter................................. $45.13 $26.50
Third Quarter.................................. $40.88 $21.63
Fourth Quarter................................. $55.75 $38.13
Fiscal 1995:
First Quarter.................................. $14.46 $10.50
Second Quarter................................. $14.33 $11.58
Third Quarter.................................. $13.33 $10.67
Fourth Quarter................................. $23.75 $11.50
</TABLE>
The stock prices set forth in the table above have been adjusted to reflect
the three-for-two stock dividend effected March 25, 1996 and the two-for-one
stock dividend effected October 25, 1996.
On March 3, 1997 the closing sale price of the Common Stock was $39.625 per
share. On that date, there were 135 holders of record.
12
<PAGE> 14
DIVIDENDS
The Company has never paid cash dividends on its capital stock and does not
expect to pay cash dividends in the foreseeable future. In addition, the
Company's bank credit agreement currently restricts the Company's ability to pay
cash dividends without the bank's consent.
ITEM 6. SELECTED FINANCIAL DATA.
The information appearing under the caption, "Selected Financial Data" in
the Company's 1996 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information appearing under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1996
Annual Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and supplementary data in
the Company's 1996 Annual Report to Stockholders are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not Applicable
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information under the caption "Re-election of Directors" as set forth
in the Company's definitive proxy statement for its annual stockholders' meeting
to be held on May 21, 1997 is incorporated herein by reference.
Information concerning officers is included in Part I under the caption
"Item 4a. Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information under the caption "Executive Compensation" as set forth in
the Company's definitive proxy statement for its annual stockholders' meeting to
be held on May 21, 1997 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information under the caption "Security Ownership of Management" and
"Principal Stockholders" as set forth in the Company's definitive proxy
statement for its annual stockholders' meeting to be held on May 21, 1997 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Transactions" as set forth in
the Company's definitive proxy statement for its annual stockholders' meeting to
be held on May 21, 1997 is incorporated herein by reference.
13
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
a) 1. Consolidated Financial Statements
The following consolidated financial statements are incorporated
herein by reference in the Company's 1996 Annual Report to Stockholders:
<TABLE>
<CAPTION>
PAGE IN
-------------
ANNUAL REPORT
-------------
<S> <C>
- Report of Ernst & Young LLP, Independent Auditors................... 31
- Consolidated Balance Sheets as of December 31, 1995 and 1996........ 18
- Consolidated Statements of Income for each of the three years ended
December 31, 1994, 1995 and 1996.................................... 19
- Consolidated Statements of Stockholders' Equity for each of the
three years ended December 31, 1994, 1995 and 1996.................. 20
- Consolidated Statements of Cash Flows for each of the three years
ended
December 31, 1994, 1995 and 1996.................................... 21
- Notes to Consolidated Financial Statements.......................... 22-30
</TABLE>
2. Consolidated Financial Statement Schedules
The following consolidated financial statement schedule for each of
the three years in the period ended December 31, 1996 is submitted
herewith:
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
- Schedule II: Valuation and Qualifying Accounts and Reserves............ 18
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or required, or the
information required to be set forth therein is included in the Financial
Statements or Notes thereto, are
incorporated herein by reference in the Company's 1996 Annual Report to
Stockholders.
3. Exhibits.
See Item 14(c).
b) Reports on Form 8-K
1. None
14
<PAGE> 16
c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
4.1* Reference is made to Exhibits 3.1 and 3.2.
4.2* Specimen Common Stock certificate.
4.3* Restated Investor Rights Agreement, dated May 4, 1992, among the Registrant and
the investors and the founders named therein.
4.4* Amendment of Restated Investor Rights Agreement, dated April 23, 1994, among the
Registrant and the investors named therein.
4.5* Second Amendment of Restated Investor Rights Agreement, dated January 18, 1995,
among the Registrant and the investors named therein.
10.1* Form of Indemnification Agreement entered into between the Registrant and its
directors and officers.
10.2* The Registrant's 1991 Stock Option/Stock Issuance Plan and forms of agreements
thereunder.
10.3* The Registrant's 1995 Stock Option/Stock Issuance Plan and forms of agreements
thereunder.
10.4* The Registrant's Employee Stock Purchase Plan and forms of agreements thereunder.
10.5* The Registrant's 1995 Non-Employee Directors Stock Option Plan and forms of
agreements thereunder.
10.6* Business Loan Agreement by and between the Registrant and Silicon Valley Bank
(SVB), dated January 4, 1993.
10.7* Promissory Note from Registrant to SVB, dated January 4, 1993.
10.8* Loan Modification Agreement by and between the Registrant and SVB, dated August 3,
1994.
10.9* Negative Pledge Agreement by and between the Registrant and SVB, dated August 3,
1994.
10.10** Loan Modification Agreement by and between the Registrant and SVB, dated June 5,
1995.
10.11* Lease Agreement by and between the Registrant and Charleston Properties
(Charleston), dated March 11, 1994, regarding the space located at 1500 Salado
Drive.
10.12* License Agreement for use of Real Property by and between the Registrant and Sun
Microsystems, Inc. (Sun), dated March 11, 1994, regarding the space located at
1500 Salado Drive, and related consent of Charleston, dated March 10, 1994.
10.13* License Agreement for use of Real Property by and between the Registrant and Sun,
dated March 11, 1994, regarding the space located at 1505 Salado Drive, and
related consent of Peery/Arrillaga, dated March 9, 1994.
10.14* Form of Action Request System Shrink Wrap License Agreement.
10.15* Form of Value Added Reseller Agreement.
11.1 Computation of Net Income per Common and Common Equivalent Share.
13.1 1996 Annual Report.
21.1* Subsidiary of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 17).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1
(File No. 33-89026).
** Incorporated by reference from the Exhibits to Remedy Corporation's Form 10-K
Annual Report for the year ended December 31, 1995.
Remedy, Remedy Corporation, the Remedy logo, Action Request System, AR System,
Flashboards and ARWeb are trademarks or registered trademarks of Remedy
Corporation. All other trademarks and registered trademarks mentioned in this
Report on Form 10-K may be trademarks, registered trademarks or service marks of
the companies with which they are associated.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 24th day of
March, 1997.
REMEDY CORPORATION
By: /s/ LAWRENCE L. GARLICK
------------------------------------
Lawrence L. Garlick
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- --------------------------- ---------------
<C> <S> <C>
/s/ LAWRENCE L. GARLICK Chairman of the Board and March 24, 1997
- --------------------------------------------- Chief Executive Officer
Lawrence L. Garlick (Principal Executive
Officer)
/s/ GEORGE A. DE URIOSTE Vice President, Finance and March 24, 1997
- --------------------------------------------- Chief Financial Officer
George A. de Urioste (Principal Financial and
Accounting Officer)
/s/ HARVEY C. JONES, JR. Director March 24, 1997
- ---------------------------------------------
Harvey C. Jones, Jr.
/s/ DAVID A. MAHLER Director March 24, 1997
- ---------------------------------------------
David A. Mahler
/s/ JOHN F. SHOCH Director March 24, 1997
- ---------------------------------------------
John F. Shoch
/s/ JAMES R. SWARTZ Director March 24, 1997
- ---------------------------------------------
James R. Swartz
</TABLE>
16
<PAGE> 18
REMEDY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Allowance for Doubtful Accounts (in thousands):
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS
BEGINNING COSTS AND OTHER ---------- BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS END OF PERIOD
- --------------------------------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994........... $ 70 $118 $0 $ 10 $ 178
Year Ended December 31, 1995........... $178 $413 $0 $ 50(1) $ 541
Year Ended December 31, 1996........... $541 $833 $0 $126(1) $ 1,248
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
18
<PAGE> 19
EXHIBIT INDEX
Exhibit 11.1 Computation of Net Income per Common and Common Equivalent
Share.
Exhibit 13.1 1996 Annual Report.
Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors.
Exhibit 27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 11.1
REMEDY CORPORATION
COMPUTATION OF NET INCOME
PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
PRIMARY
Weighted average number of common shares outstanding(1)......... 8,241 21,552 26,365
Convertible preferred shares, as if converted(1)................ 9,060 1,887 --
Incremental common shares attributable to shares issuable under
employee stock plans(1)...................................... 3,165 4,211 3,661
Stock related to SAB No. 64 and 83(1)........................... 1,782 -- --
------- ------- -------
Total shares(1)......................................... 22,248 27,650 30,026
======= ======= =======
Net income:
Amount.......................................................... $ 3,059 $ 7,561 $16,824
======= ======= =======
Per share(1).................................................... $ 0.14 $ 0.27 $ 0.56
======= ======= =======
FULLY DILUTED
Weighted average number of common shares outstanding(1)......... 8,241 21,552 26,365
Convertible preferred shares, as if converted(1)................ 9,060 1,887 --
Incremental common shares attributable to shares issuable under
employee stock plans(1)...................................... 3,192 4,281 3,840
Stock related to SAB No. 64 and 83(1)........................... 1,782 -- --
------- ------- -------
Total shares(1)......................................... 22,275 27,720 30,205
======= ======= =======
Net income:
Amount.......................................................... $ 3,059 $ 7,561 $16,824
======= ======= =======
Per share(1).................................................... $ 0.14 $ 0.27 $ 0.56
======= ======= =======
</TABLE>
- ---------------
(1) All shares and per share amounts have been adjusted to reflect the
three-for-two stock dividend effected March 25, 1996 and the two-for-one
stock dividend effected October 25, 1996.
19
<PAGE> 1
Financial Review
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Year ended December 31, 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Total revenue $ 2,547 $ 8,493 $19,750 $40,117 $80,635
Income from operations 134 2,316 4,982 10,189 23,707
Net income 136 1,720 3,059 7,561 16,824
Net income per share(1) $ 0.01 $ 0.09 $ 0.14 $ 0.27 $ 0.56
Shares used in computing
per share amounts(1) 17,877 20,046 22,248 27,650 30,026
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992 1993 1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 152 $1,266 $ 3,007 $56,186 $ 86,757
Working capital 646 1,959 4,423 60,767 87,718
Total assets 1,406 4,487 12,006 74,733 119,434
Long-term obligations -- -- 219 324 513
Total stockholders' equity $ 852 $2,573 $ 5,882 $63,131 $ 92,497
- -----------------------------------------------------------------------------------------
</TABLE>
(1) All shares and per-share amounts have been adjusted to reflect the
three-for-two stock dividend effected March 25, 1996 and the two-for-one
stock dividend effected October 25, 1996.
12
Remedy Corporation
<PAGE> 2
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
This annual report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" in the Report on Form 10-K for the fiscal year ended December 31, 1996,
which was filed with the Securities and Exchange Commission in March 1997.
The following table sets forth, as a percentage of total revenue, consolidated
statement of income data for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1995 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Product 82% 76% 76%
Maintenance and service 18 24 24
-----------------
Total revenue 100 100 100
COSTS AND EXPENSES:
Cost of product revenue 7 5 4
Cost of maintenance and service revenue 16 16 13
Research and development 21 18 16
Sales and marketing 24 27 29
General and administrative 7 9 9
-----------------
Total costs and expenses 75 75 71
Income from operations 25 25 29
Interest income, net -- 4 3
-----------------
Income before provision for income taxes 25 29 32
Provision for income taxes 10 10 12
-----------------
Net income 15% 19% 20%
=================
</TABLE>
Revenue
Total revenue was $19.8 million, $40.1 million and $80.6 million in 1994, 1995
and 1996, respectively, representing increases of 103% from 1994 to 1995 and
101% from 1995 to 1996. The Company's revenue is derived from two sources,
product licenses and fees for services, including maintenance and support,
training and consulting. The Company's license agreements generally do not
provide a right of return. However, reserves are maintained for return
allowances and potential credit losses, which have not been significant to date.
The Company distributes the majority of its products through its
headquarters-based direct sales force which is complemented by indirect sales
channels, including value added resellers (VARs), system integrators (SIs) and
original equipment manufacturers (OEMs). Sales derived through indirect channels
accounted for approximately 42% of the Company's total revenue in 1996 as
compared to 37% in 1995. The Company expects that sales derived through indirect
channels, which have lower average selling prices and gross margins than direct
sales, will increase as a percentage of total revenue. As a result, the Company
expects that its gross margins on product sales may decline if sales through
indirect channels increase.
13
Remedy Corporation
<PAGE> 3
International sales accounted for 28%, 31% and 37% of total revenue in 1994,
1995 and 1996, respectively. The increasing volume of international sales is
primarily attributable to an increase in the Company's international marketing
efforts and an increase in the number of international resellers marketing the
Company's products. The majority of international sales were made in Canada and
Europe, with lower amounts in Latin America, South Africa and the Pacific Rim.
International sales are denominated and collected in U.S. currency. The Company
intends to continue to expand its international operations and enter additional
international markets. The Company currently maintains sales offices in the
United Kingdom, France, Germany and Singapore and plans to open offices in
Australia, Japan and Canada in 1997. The Company also expects to increase the
staffing levels of its international based operations in 1997. Because a
substantial majority of the Company's international sales are indirect, any
material increase in the Company's international sales as a percentage of total
revenue will adversely affect the Company's average selling prices and gross
margins due to the lower unit prices that the Company receives when selling
through indirect channels. Although the Company's international revenue is
currently not at risk for currency fluctuations because such sales are currently
denominated in U.S. dollars, an increase in the value of the U.S. dollar
relative to foreign currencies could make the Company's products more expensive
and, therefore, potentially less competitive in those markets. The Company has
not engaged in foreign currency hedging activities.
PRODUCT REVENUE The Company currently derives substantially all of its product
revenue from licenses of the Action Request System. Revenue from product
licenses was $16.1 million, $30.4 million and $61.1 million in 1994, 1995 and
1996, respectively. This represents increases of 89% from 1994 to 1995 and 101%
from 1995 to 1996. The growing acceptance of the Company's software products in
both U.S. and international markets is a major factor in these increases.
Substantially all of the period-to-period growth in product revenue was due to
higher unit sales volumes. The prices of the Company's products have remained
relatively constant from 1992 through 1996.
The Company intends to continue to enhance its current software products as
well as to develop new products. As a result, the Company anticipates that
revenue from product licenses will continue to represent a substantial majority
of its revenue in for the foreseeable future. The Company expects that both
market penetration and competition will increase, and, as a result, that prior
growth rates of the Company's product revenue will not be sustainable in the
future.
MAINTENANCE AND SERVICE REVENUE Maintenance and service revenue was $3.6
million, $9.7 million and $19.5 million in 1994, 1995 and 1996, respectively,
representing increases of 169% from 1994 to 1995 and 101% from 1995 to 1996.
This growth is primarily due to increased licensing activity, which has resulted
in increases in revenue from services related to maintenance and support,
training and consulting. Renewal of maintenance contracts after the initial
one-year term also contributes to the growth rate. The Company expects that as
market penetration and competition increase, prior growth rates of the Company's
installed base and, consequently, in the Company's service revenue, may not be
sustainable in the future.
Cost of Revenue
COST OF PRODUCT REVENUE Cost of product revenue consists primarily of the costs
of royalties paid to third-party vendors, product media and duplication,
manuals, packaging materials, personnel-related costs and shipping expenses.
Cost of product revenue was $1.4 million, $1.9 million and
14
Remedy Corporation
<PAGE> 4
$2.9 million in 1994, 1995 and 1996, respectively, representing 9%, 6% and 5% of
the related product revenue for each year, respectively. The increases in the
dollar amount of cost of product revenue in each successive year reflect the
higher volumes of product shipped in each year. The decrease in costs as a
percentage of the related product revenue from 1994 to 1995 and 1996 is
primarily due to economies of scale realized as a result of shipping greater
quantities of product in 1995 and 1996. Because all development costs incurred
in the research and development of software products and enhancements to
existing software products have been expensed as incurred, cost of product
revenue includes no amortization of capitalized software development costs. See
Note 2 of Notes to Consolidated Financial Statements.
COST OF MAINTENANCE AND SERVICE REVENUE Cost of maintenance and service revenue
consists primarily of personnel-related costs incurred in providing telephone
support, consulting services and training to customers. Cost of maintenance and
service revenue was $3.3 million, $6.2 million and $10.4 million in 1994, 1995
and 1996, respectively, representing 90%, 64% and 53% of the related maintenance
and service revenue for each year, respectively. Cost of maintenance and service
revenue increased significantly from 1994 to 1995 and from 1995 to 1996 as a
result of increased personnel-related costs, as the Company continued to build
its customer support and training organizations. In addition, from 1995 to 1996
such costs increased, due to the Company's increased partnering with third-party
service providers to deliver consulting services to its customers. The Company
believes that cost of maintenance and service revenue will increase in dollar
amounts and may increase as a percentage of total revenue in the future.
Operating Expenses
RESEARCH AND DEVELOPMENT Research and development expenses were $4.2 million,
$7.2 million and $13.3 million, or 21%, 18% and 16% as a percentage of total
revenue, in 1994, 1995 and 1996, respectively. The increases in dollar amounts
in research and development expenses since 1994 were primarily attributable to
increased staffing and associated support for software engineers required to
expand and enhance the Company's product line. The Company believes that
research and development expenses will continue to increase in dollar amounts in
the future.
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion of
a working model. Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general release have been
insignificant. Through December 31, 1996, all research and development costs
have been expensed.
SALES AND MARKETING Sales and marketing expenses consist primarily of salaries,
commissions and bonuses of sales and marketing personnel and promotional
expenses. Sales and marketing expenses were $4.7 million, $11.0 million and
$23.3 million, or 24%, 27% and 29% of total revenue, in 1994, 1995 and 1996,
respectively. The increases in dollar amounts in sales and marketing expenses
were primarily due to the expansion of sales and marketing resources and
increased marketing activities, including trade shows and promotional expenses.
The Company believes that such expenses will increase in dollar amounts in the
future as the Company expands its sales and marketing staff.
15
Remedy Corporation
<PAGE> 5
GENERAL AND ADMINISTRATIVE General and administrative expenses were $1.3
million, $3.7 million and $7.1 million, or 7%, 9% and 9% as a percentage of
total revenue, in 1994, 1995 and 1996, respectively. The increases in dollar
amounts were primarily the result of increased staffing and associated expenses
necessary to manage and support the Company's growth. The Company believes that
its general and administrative expenses will increase in dollar amounts in the
future as the Company expands its staffing.
INTEREST INCOME Interest income was $32,000, $1.4 million and $2.7 million in
1994, 1995 and 1996, respectively. The increase in 1996 is primarily due to a
full year of invested proceeds following the Company's March 1995 initial public
offering and investment of cash provided by operating activities.
Provision for Income Taxes
The effective tax rates for the years ended December 31, 1994, 1995 and 1996
were 39%, 35% and 36%, respectively. The 1994 effective tax rate of 39% differs
from the federal statutory rate primarily due to state income taxes, partly
offset by certain research and development credits. The 1995 and 1996 effective
tax rates of 35% and 36%, respectively, differ from the federal statutory rate
primarily due to state income taxes, offset by tax-exempt interest income and
research and development credits. See Note 8 of Notes to Consolidated Financial
Statements.
Variability of Results
The Company's quarterly operating results have in the past and may in the future
vary significantly depending on factors such as increased competition, the
timing of new product announcements and changes in pricing policies by the
Company and its competitors, market acceptance of new and enhanced versions of
the Company's products, the size and timing of significant orders, the mix of
direct and indirect sales, changes in operating expenses, changes in Company
strategy, personnel changes, foreign currency exchange rate fluctuations and
general economic factors. The Company operates with virtually no significant
order backlog because its software products typically are shipped shortly after
orders are received. Furthermore, the Company has often recognized a substantial
portion of its revenue in the last month of a quarter, frequently concentrated
in the last weeks of the month. As a result, product revenue in any quarter is
substantially dependent on orders booked and shipped in that quarter, and
revenue for any future quarter is not predictable with any degree of certainty.
Product revenue is also difficult to forecast because the market for
client/server application software products is rapidly evolving, and the
Company's sales cycle, from initial trial to multiple-copy purchases and support
services, varies substantially from customer to customer. In addition, the
Company expects that sales derived through indirect channels, which are harder
to predict and have lower margins than direct sales, will increase as a
percentage of total revenue. The Company's expense levels are based, in part, on
its expectations as to future revenue. If revenue levels are below expectations,
operating results are likely to be adversely affected. Net income may be
disproportionately affected by a reduction in revenue because a proportionately
smaller amount of the Company's expenses varies with its revenue. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Considering the foregoing factors, it is
likely that in some future quarter the Company's operating results will be below
the
16
Remedy Corporation
<PAGE> 6
expectations of public market analysts and investors. In such event, the
price of the Company's common stock would likely be materially adversely
affected.
The Company's business has experienced and is expected to continue to
experience a level of seasonality, in part due to customer buying patterns. In
recent years, the Company has generally had weaker demand in the quarter ending
in March. The Company believes this pattern will continue and accordingly
anticipates total revenue and net income in the quarter ending March 31, 1997,
will be higher than in the quarter ended March 31, 1996, but lower than in the
quarter ended December 31, 1996.
Liquidity and Capital Resources
Cash provided by operating activities in 1994, 1995 and 1996 was $3.0 million,
$10.7 million and $30.9 million, respectively, of which net income was a
significant component in each year. In all three years, cash from operations was
used to support the Company's working capital requirements, as such requirements
expanded. In all three years, the Company experienced significant growth in
receivables, accompanying the Company's increased sales volumes, which was
partially offset by increases in accounts payable and other current liabilities.
In 1995 and 1996, the Company's investing activities consisted entirely of
purchases of property and equipment and of short-term investments. In those
years, the Company used $1.8 million and $3.9 million, respectively, of cash to
purchase property and equipment, primarily computer workstations and file
servers for the Company's growing employee base. In 1994, purchase of property
and equipment comprised the total investing activity. The Company expects that
the rate of purchases of property and equipment will remain constant or increase
as the Company's employee base grows. The Company's principal commitments
consist primarily of leases on its headquarters facilities and its telephone
system. See Note 4 of Notes to Consolidated Financial Statements.
To date, the Company has not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk.
Management expects that, in the future, cash in excess of current requirements
will be invested in investment grade, interest-bearing securities.
On March 24, 1995, the Company completed the initial public offering of its
common stock. A total of 6,210,000 shares of common stock were sold for net
proceeds to the Company of approximately $43.5 million, after deducting expense
of the offering of approximately $750,000. The Company also has available a
$10.0 million unsecured bank line of credit which expires in June 1997. There
were no borrowings outstanding under the line of credit as of December 31, 1996.
At December 31, 1996, the Company had $86.8 million in cash, cash equivalents
and short-term investments and $87.7 million of working capital. Cash flows from
financing activity of $44.4 million and $3.6 million in 1995 and 1996,
respectively, consist primarily of proceeds from the issuance of common stock.
The Company believes that its current cash, cash equivalents short-term
investment balances, cash available under its line of credit and cash flow from
operations, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. (Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, the Company anticipates that its operating and
investing activities may use cash. Consequently, significant future growth may
require the Company to obtain additional equity or debt financing.)
Therefore, the Company may find it necessary to obtain additional equity or
debt financing. There can be no assurance that, in the event that additional
financing is required, the Company will be able to raise such additional
financing on acceptable terms or at all.
17
Remedy Corporation
<PAGE> 7
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(in thousands)
December 31, 1995 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,452 $ 39,770
Short-term investments 24,734 46,987
Accounts receivable, net of allowance for
doubtful accounts
of $541 and $1,248, respectively 11,590 24,189
Income tax receivable 2,669 --
Prepaid expenses and other current assets 561 1,161
Deferred tax asset 1,039 2,035
----------------------
Total current assets 72,045 114,142
Property and equipment, net 2,688 5,292
----------------------
$ 74,733 $ 119,434
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,168 $ 1,639
Accrued compensation and related liabilities 3,550 6,636
Income taxes payable -- 1,837
Other accrued liabilities 1,734 5,652
Deferred revenue 4,732 10,430
Current portion of obligations under capital leases 94 230
----------------------
Total current liabilities 11,278 26,424
Noncurrent portion of obligations under capital leases 324 513
Commitments
Stockholders' equity:
Preferred stock, par value $.00005 per share; authorized:
2,000,000 and 10,000,000 shares, respectively;
issued and outstanding: none -- --
Common stock, par value $.00005 per share; authorized:
20,000,000 and 60,000,000 shares, respectively; issued
and outstanding: 25,670,880 and 26,893,699 shares,
respectively -- --
Additional paid-in capital 51,942 64,305
Notes receivable from stockholders (60) (60)
Deferred compensation (434) (255)
Retained earnings 11,683 28,507
----------------------
Total stockholders' equity 63,131 92,497
----------------------
$ 74,733 $ 119,434
======================
</TABLE>
See accompanying notes.
18
Remedy Corporation
<PAGE> 8
Consolidated Statements of Income
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Year Ended December 31, 1994 1995 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Product $16,112 $30,390 $61,133
Maintenance and service 3,638 9,727 19,502
-------------------------------------------
Total revenue 19,750 40,117 80,635
Costs and expenses:
Cost of product revenue 1,371 1,866 2,926
Cost of maintenance and service revenue 3,262 6,188 10,364
Research and development 4,173 7,160 13,266
Sales and marketing 4,673 10,980 23,318
General and administrative 1,289 3,734 7,054
------- ------- -------
Total costs and expenses 14,768 29,928 56,928
Income from operations 4,982 10,189 23,707
Interest income 32 1,442 2,662
Interest expense 3 25 79
------- ------- -------
Income before provision for income taxes 5,011 11,606 26,290
Provision for income taxes 1,952 4,045 9,466
------- ------- -------
Net income $ 3,059 $ 7,561 $16,824
------- ------- -------
Net income per share $ 0.14 $ 0.27 $ 0.56
------- ------- -------
Shares used in computing per share amounts 22,248 27,650 30,026
===========================================
</TABLE>
See accompanying notes.
19
Remedy Corporation
<PAGE> 9
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Notes
Common Stock Additional Receivable Deferred Total
------------------- Paid-In from Stock- Compensa- Retained Stockholders'
Shares Amount Capital holders sation Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 7,662 $-- $ 1,570 $(60) $ -- $ 1,063 $ 2,573
Issuance of common stock
upon exercise of options 1,146 -- 56 -- -- -- 56
Deferred compensation
related to grant of
stock options -- -- 805 -- (805) -- --
Amortization of deferred
compensation -- -- -- -- 194 -- 194
Net income -- -- -- -- -- 3,059 3,059
- -------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1994 8,808 -- 2,431 (60) (611) 4,122 5,882
Common stock issued upon
initial public offering, net
of issuance costs of
approximately $750 6,210 -- 43,528 -- -- -- 43,528
Preferred stock converted
into common stock 9,060 -- -- -- -- -- --
Issuance of common stock
upon exercise of options
and purchases under
the employee stock
purchase plan 1,593 -- 875 -- -- -- 875
Tax benefit from employee
stock transactions -- -- 5,108 -- -- -- 5,108
Amortization of deferred
compensation -- -- -- -- 177 -- 177
Net income -- -- -- -- -- 7,561 7,561
- -------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1995 25,671 -- 51,942 (60) (434) 11,683 63,131
Issuance of common stock
upon exercise of options
and purchases under
the employee stock
purchase plan 1,223 -- 3,756 -- -- -- 3,756
Tax benefit from employee
stock transactions -- -- 8,607 -- -- -- 8,607
Amortization of deferred
compensation -- -- -- -- 179 -- 179
Net income -- -- -- -- -- 16,824 16,824
- -------------------------------------------------------------------------------------------------------------------
December 31, 1996 26,894 $-- $64,305 $(60) $(255) $28,507 $92,497
==================================================================================
</TABLE>
See accompanying notes.
20
Remedy Corporation
<PAGE> 10
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(in thousands)
Year Ended December 31, 1994 1995 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,059 $ 7,561 $ 16,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 494 1,016 1,810
Amortization of deferred compensation 194 177 179
Change in assets and liabilities:
Accounts receivable (3,641) (5,547) (12,599)
Prepaid expenses and other current assets (269) (264) (600)
Deferred tax assets (804) (58) (996)
Accounts payable 706 90 471
Accrued compensation and related liabilities 789 2,366 3,086
Income taxes 379 1,742 13,113
Other accrued liabilities 651 967 3,918
Deferred revenue 1,418 2,601 5,698
---------------------------------------
Net cash provided by operating activities 2,976 10,651 30,904
---------------------------------------
Cash flows from investing activities:
Purchases of short-term investments -- (57,684) (106,562)
Maturities of short-term investments -- 32,950 84,309
Capital expenditures (1,280) (1,822) (3,942)
---------------------------------------
Net cash used in investing activities (1,280) (26,556) (26,195)
---------------------------------------
Cash flows from financing activities:
Principal payments under capital lease obligations (12) (53) (147)
Proceeds from issuance of common stock 57 44,403 3,756
---------------------------------------
Net cash provided by financing activities 45 44,350 3,609
---------------------------------------
Net increase in cash and cash equivalents 1,741 28,445 8,318
Cash and cash equivalents at beginning of year 1,266 3,007 $ 31,452
---------------------------------------
Cash and cash equivalents at end of year $ 3,007 $ 31,452 $ 39,770
=======================================
Supplemental disclosure of cash flow information:
Interest paid during the year $ 4 $ 15 $ 47
Income taxes paid/(refunded) during the year $ 2,315 $ 2,361 $ (2,647)
Supplemental schedule of noncash financing activities:
Equipment acquired under capital lease arrangements $ 278 $ 204 $ 472
Deferred compensation related to grant of stock options $ 805 $ -- $ --
</TABLE>
See accompanying notes.
21
Remedy Corporation
<PAGE> 11
Notes To Consolidated Financial Statements
1. Organization of the Company
THE COMPANY Remedy Corporation (the Company) develops, markets and supports
highly adaptable, client/server applications software for support and business
processes. The Company was incorporated in Delaware in November 1990. The
Company has subsidiaries in the following countries: United Kingdom, France,
Germany and Singapore. These subsidiaries serve primarily as sales offices.
2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
all significant intercompany accounts and transactions.
REVENUE RECOGNITION Product revenue is derived from product licensing fees,
while maintenance and service revenue is derived from maintenance support
services, training and consulting. Product revenue is recognized upon delivery
only if no significant vendor obligations remain and collection of the resulting
receivables is deemed probable. Delivery is further defined in certain contracts
as delivery of the product master or first copy for noncancelable product
licensing arrangements under which the customer has certain software
reproduction rights. Product returns and sales allowances (which have not been
significant through December 31, 1996) are estimated and provided for at the
time of sale. Service revenue from customer maintenance fees for ongoing
customer support and product updates is recognized ratably over the term of the
maintenance agreement, which is typically twelve months. Payments for
maintenance fees are generally made in advance and are nonrefundable. Service
revenue from training and consulting is recognized when the services are
performed.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in financial statements and
accompanying notes. Actual results could differ from these estimates.
RECLASSIFICATIONS Certain amounts for prior years have been reclassified to
conform with current year presentation.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all
highly liquid investments with a maturity from date of purchase of three months
or less to be cash equivalents. Cash and cash equivalents consist primarily of
cash on deposit with banks and high quality money market instruments. All other
liquid investments are classified as short-term investments. Short-term
investments consist of auction market preferred stock and municipal bonds.
Management determines the appropriate classification of investment securities
at the time of purchase and reevaluates such designation as of each balance
sheet date. At December 31, 1995 and 1996, all investment securities were
designated as available-for-sale. Available-for-sale securities are carried at
fair value, using available market information and appropriate valuation
methodologies, with unrealized gains and losses reported in stockholders'
equity.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in the
statements of income. There have been no such transactions in December 31, 1995
and 1996. The cost of securities sold is based on specific identification.
Interest and dividends on securities classified as available-for-sale are
included in interest income.
22
Remedy Corporation
<PAGE> 12
At December 31, 1995, the Company's available-for-sale securities consisted of
the following: municipal obligations $31,630,000; municipal auction rate
preferred stock $14,950,000; and money market funds $2,581,000. Of these
securities, $24,427,000 and $24,734,000 are classified as cash equivalents and
short-term investments, respectively.
At December 31, 1996, the Company's available-for-sale securities consisted of
the following: municipal obligations $48,787,000; municipal auction rate
preferred stock $14,250,000; and money market funds $481,000. Of these
securities, $16,531,000 and $46,987,000 are classified as cash equivalents and
short-term investments, respectively.
As of December 31, 1995 and 1996, the difference between the fair value and
the amortized cost of available-for-sale securities was insignificant;
therefore, no valuation allowance was recorded in stockholders' equity. During
the year ended December 31, 1995 and 1996, realized gains and losses were not
material. As of December 31, 1995 and 1996, the contractual maturity of the
investments did not exceed one year.
DEPRECIATION AND AMORTIZATION Depreciation is provided using the straight-line
method over the estimated useful lives of the assets, generally three years.
Leasehold improvements are amortized over the lesser of the term of the lease or
the estimated useful life of the asset.
CONCENTRATION OF CREDIT RISK The Company sells its products primarily to end
users, value-added resellers, system integrators and original equipment
manufacturers. The Company performs ongoing credit evaluations of its customers'
financial condition, and generally no collateral is required. The Company
maintains reserves for credit losses, and such losses have been within
management's expectations.
PRODUCT CONCENTRATION The Company currently derives the majority of its revenue
from the licensing of products in its Action Request System and fees from
related services. These products and services are expected to account for the
majority of the Company's revenue for the foreseeable future. Consequently, a
reduction in demand for these products or a decline in sales of these products,
will adversely affect operating results.
RESEARCH AND DEVELOPMENT Research and development expenditures are generally
charged to operations as incurred. Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," requires capitalization of certain software development
costs subsequent to the establishment of technological feasibility. Based on the
Company's product development process, technological feasibility is established
upon completion of a working model. Costs incurred by the Company between
completion of the working model and the point at which the product is ready for
general release have been insignificant. Through December 31, 1996, all research
and development costs have been expensed.
STOCK-BASED COMPENSATION In October 1995, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation,"
which encourages, but does not require, companies to record compensation expense
for stock-based employee compensation plans at fair value. The Company has
chosen to continue to apply Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock based plans and, accordingly, does not recognize
compensation expense related to its employees under its stock option plans or
employee stock purchase plans. Note 7 contains a summary of the pro-forma
effects to reported net income and net income per share for 1995 and 1996 if the
Company had elected to recognize compensation expense based on the fair value of
the options granted as described by SFAS 123.
23
Remedy Corporation
<PAGE> 13
PER SHARE AMOUNTS Net income per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of shares issuable upon the
exercise of stock options, using the treasury stock method.
STOCK SPLIT All shares and per share amounts have been adjusted to reflect the
three-for-two stock dividend effected March 25, 1996 and the two-for-one stock
dividend effected October 25, 1996.
3. Property and Equipment
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
(in thousands)
December 31, 1995 1996
- ---------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 3,845 $ 7,567
Furniture and fixtures 248 303
Purchased software 310 476
Leasehold improvements 30 501
---------------------
4,433 8,847
Less accumulated depreciation (1,745) (3,555)
---------------------
$ 2,688 $ 5,292
=====================
</TABLE>
4. Commitments
LEASE AGREEMENTS The Company leases its facilities under operating lease
arrangements. Certain of the leases provide for annual rent increases of
approximately 3%. Additionally, the Company leases certain equipment under
capital leases. The Company capitalized property and equipment totaling $482,000
and $954,000, with associated accumulated amortization of $78,000 and $244,000,
at December 31, 1995 and 1996, respectively. All of these assets were acquired
in fiscal 1994, 1995 and 1996. Approximate annual minimum rental
commitments/future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
(in thousands)
Operating Leases Capital Leases
- ---------------------------------------------------------------------------
<S> <C> <C>
1997 $ 2,772 $277
1998 2,746 277
1999 2,477 264
2000 2,361 15
2001 1,948 --
Thereafter 5,086
-------------------------
Total minimum lease payments $17,390 833
=========================
Less amount representing interest (90)
----
Present value of future minimum lease payments 743
Less current portion (230)
----
Noncurrent obligations under capital leases $513
====
</TABLE>
Total rent expense for the years ended December 31, 1994, 1995 and 1996 was
$496,000, $754,000 and $2,285,000, respectively.
24
Remedy Corporation
<PAGE> 14
5. Bank Line of Credit
The Company has available a bank line of credit expiring June 1997, under which
$10.0 million is available. The agreement contains covenants that require the
Company to maintain certain financial ratios and to maintain quarterly
profitability. In addition, the Company's bank credit agreement currently
restricts the Company's ability to pay cash dividends without the bank's
consent. At December 31, 1996, the Company had no outstanding balance under this
line of credit and was in compliance with the required covenants.
6. Stockholders' Equity
In March, 1995, the Company completed the initial public offering (IPO) of its
common stock. The Company sold approximately 6,210,000 shares for net proceeds
of $43.5 million.
PREFERRED STOCK In 1996, the Board of Directors approved the authorization of an
additional 8,000,000 shares of preferred stock.
COMMON STOCK In 1996, the Board of Directors approved the authorization of an
additional 40,000,000 shares of common stock. Certain shares of common stock
issued by the Company at December 31, 1996 are subject to stock repurchase
agreements whereby the Company has the option to repurchase the unvested shares
upon termination of employment for any reason, with or without cause, at the
original price paid for the shares. The stock generally vests 25% one year after
issuance and continues to vest on a pro-rata basis over the following 36 months.
At December 31, 1996, 58,628 shares were subject to repurchase.
The Company has recorded deferred compensation expense of $805,000 for the
difference between the grant price and the deemed fair value of certain of the
Company's common stock options granted in 1994. This amount is being amortized
over the vesting period of the individual options, generally four years.
Compensation expense recognized in 1995 and 1996 was $177,000 and $179,000,
respectively, and at December 31, 1996 deferred compensation totaled $255,000.
7. Compensation and Benefit Plans
401(K) RETIREMENT SAVINGS PLAN The Company maintains a 401(k) retirement savings
plan to provide retirement benefits for substantially all of its employees.
Participants in the plan may elect to contribute from 2% to 15% of their annual
compensation to the plan, limited to the maximum amount allowed by the Internal
Revenue Code. The Company, at its discretion, may make annual contributions to
the plan. The Company has made no contributions to the plan through December 31,
1996.
1995 STOCK OPTION/STOCK ISSUANCE PLAN In January, 1995, the Board of Directors
adopted the 1995 Stock Option/Stock Issuance Plan (the 1995 Plan), as the
successor to the 1991 Stock Option/Stock Issuance Plan. Under the 1995 Plan,
7,902,864 shares of common stock, plus an additional number of shares equal to
the lesser of 1,500,000 shares or 5% of the number of shares of Common Stock and
Common Stock equivalents outstanding on the first day of 1997 are authorized for
issuance.
Under the 1995 plan, options to purchase common stock may be granted and
common stock may be sold at prices not less than 85% of the fair market value at
the date of grant/issuance. Options issued under the plan become exercisable
according to a vesting schedule which typically provides for the first 25% of
the option shares to become available after one year with the remaining shares
and options vesting on a pro-rata basis over the following 36 months.
25
Remedy Corporation
<PAGE> 15
1995 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN During 1995, the Company
additionally adopted the 1995 Non-Employee Directors Stock Option Plan (the
Directors Plan), and reserved 300,000 shares for issuance, plus an additional
37,500 shares on the first day of each calendar year 1996 and 1997. Under the
Directors' Plan, each non-employee member of the Board of Directors (the Board)
is automatically granted an option to purchase 30,000 shares of the Company's
stock upon initial appointment or election to the Board, and 7,500 shares of the
Company's stock upon re-election to the Board, at not less than 100% of the fair
market value of those shares at the grant date. Stock options granted upon
appointment or election to the Board vest 25% annually. Stock options granted
upon reelection to the Board vest 100% after the fourth year of continuous
service.
1995 EMPLOYEE STOCK PURCHASE PLAN In January, 1995, the Board of Directors and
stockholders adopted the Employee Stock Purchase Plan (the Purchase Plan) and
reserved 1,200,000 shares for issuance. Under the Purchase Plan, employees are
granted the right to purchase shares of common stock at a price per share that
is 85% of the lesser of: (i) the fair market value of the shares at the
participant's entry date into the two-year offering period, or (ii) the end of
each six-month segment within such offering period. During fiscal 1996, shares
totaling 221,000 were issued under the Purchase Plan at an average of $9.32 per
share.
The Company has elected to continue to follow APB 25 and related
interpretations in accounting for its employee stock options and employee stock
purchase plan because, as discussed below, the alternative fair value
accounting provided for under SFAS 123, requires use of option valuation models
that were not developed for use in valuing employee stock options and employee
stock purchase plans. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options granted subsequent to December 31, 1994 under
the fair value method of SFAS 123. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for 1995 and 1996,
respectively; risk-free interest rate in the range of 5.38% to 7.06%; dividend
yields of zero; an expected volatility factor of the expected market price of
the Company's common stock of .65 and an expected life of the option of 5
years. The effects of applying SFAS 123 for recognizing compensation expense
and providing pro forma disclosures in 1995 and 1996 are not likely to be
representative of the effects on reported net income in future years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility and
expected option life. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the Company's
employee stock options.
The fair value of the employee's purchase right was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996; risk-free interest rate in the range of 5.37% to
6.19%; dividend yields of zero; expected volatility factor of
26
Remedy Corporation
<PAGE> 16
the market price of the Company's common stock of .65; and an expected life of
six months. The weighted-average fair value for shares issued under the employee
stock purchase plan for 1995 and 1996 were $3.12 and $4.86, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income over the options' vesting period.
The Company's historical and pro forma information follows:
<TABLE>
<CAPTION>
(in thousands, except
per share amounts)
1995 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Net income
Historical $7,561 $16,824
Pro Forma $6,364 $10,368
Net income per share
Historical $ .27 $ .56
Pro Forma $ .23 $ .36
- -------------------------------------------------------------------------
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully realized until 1998.
A summary of the Company's stock options activity for the years ended December
31 follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Options Outstanding
-------------------------------------------
Weighted
Options Average
Available Number Price Per Exercise
for Grant of Shares Share Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 719 4,077 $ 0.01-$ 0.17 $ 0.05
Additional shares reserved 2,493
Options granted (2,087) 2,087 $ 0.17-$ 3.08 $ 0.86
Options exercised -- (1,146) $ 0.01-$ 0.42 $ 0.05
Options canceled or expired 127 (127) $ 0.03-$ 1.17 $ 0.26
-------------------------------------------------------
Balance at December 31, 1994 1,252 4,891 $ 0.01-$ 3.08 $ 0.39
Additional shares reserved 600
Options granted (1,576) 1,576 $ 3.83-$20.33 $ 9.93
Options exercised -- (1,491) $ 0.01-$ 2.50 $ 0.15
Options canceled or expired 343 (343) $ 0.01-$11.96 $ 1.79
-------------------------------------------------------
Balance at December 31, 1995 619 4,633 $ 0.01-$20.33 $ 3.64
Additional shares reserved 2,997(a)
Options granted (2,502) 2,502 $17.83-$53.75 $ 28.32
Options exercised -- (1,002) $ 0.01-$25.38 $ 1.64
Options canceled or expired 329 (329) $ 0.01-$41.63 $ 11.05
-------------------------------------------------------
Balance at December 31, 1996 1,443 5,804 $ 0.01-$53.75 $ 14.32
- ------------------------------------------------------------------------------------------------
</TABLE>
(a) 1,500 of these shares added to the 1995 plan effective January 1, 1997
The weighted-average fair value of options granted in 1995 and 1996 were $4.96
and $17.06, respectively.
27
Remedy Corporation
<PAGE> 17
The options outstanding at December 31, 1996 have been segregated into ranges
for additional disclosure as follows:
<TABLE>
<CAPTION>
(in thousands, except exercise prices)
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------
Options
Options Weighted- Weighted- currently Weighted-
outstanding average average exercisable average
Range of at December remaining exercise at December exercise
exercise prices 31, 1996 contractual life price 31, 1996 price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 0.42 1,605 6.75 $ 0.20 1,605 $ 0.20
$ 0.83 - $12.29 1,500 7.93 $ 6.09 1,050 $ 4.21
$12.75 - $23.50 1,498 9.08 $18.12 140 $16.62
$23.92 - $53.75 1,201 9.56 $38.06 23 $42.14
---------------------------------------------------------------------
5,804 8.24 $14.18 2,818 $ 2.85
=====================================================================
</TABLE>
8. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(in thousands)
1994 1995 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $2,139 $3,239 $8,359
Deferred (665) (19) (817)
State:
Current 563 828 1,961
Deferred (139) (39) (178)
Foreign:
Current 54 36 141
----------------------------
Provision for income taxes $1,952 $4,045 $9,466
============================
</TABLE>
The income tax benefit related to the exercise of stock options reduces taxes
currently payable and is credited to additional paid-in-capital. Such amount was
$5.1 million and $8.6 million for 1995 and 1996, respectively.
The difference between the provision for income taxes and the amount computed
by applying the federal statutory income tax rate to income before provision for
income taxes is explained below:
<TABLE>
<CAPTION>
(in thousands)
1994 1995 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Tax at federal statutory rate $1,754 $4,062 $9,201
State tax, net of federal benefit 280 521 1,159
Research and development credit (114) (111) (236)
Tax exempt interest income -- (414) (678)
Other 32 (13) 20
----------------------------
Provision for income taxes $1,952 $4,045 $9,466
============================
</TABLE>
28
Remedy Corporation
<PAGE> 18
Significant components of the Company's deferred tax assets as of December 31,
1995 and 1996, respectively, are as follows:
<TABLE>
<CAPTION>
(in thousands)
1995 1996
- -------------------------------------------------------------------------
<S> <C> <C>
Reserves and accruals not yet deductible for tax $832 $2,072
Deferred revenue 242 226
Other (35) (263)
-----------------
Total deferred tax assets $1,039 $2,035
=================
</TABLE>
9. Segment, Geographic and Significant Customer Information
The Company conducts its business within one industry segment. No customer
accounted for more than 10% of revenue in 1994, 1995 or 1996.
Net revenue from international customers accounted for 28%, 31%, and 37% of
total net revenue in 1994, 1995, and 1996, respectively. The majority of export
sales were made to Canada and Europe. The Company has had no significant
operations outside the United States through December 31, 1996.
10. Litigation
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management currently believes that the ultimate
amount of liability, if any, with respect to any pending actions, either
individually or in the aggregate, will not materially affect the financial
position, results of operations or liquidity of the Company. However, the
ultimate outcome of any litigation is uncertain. If an unfavorable outcome were
to occur, the impact could be material. Furthermore, any litigation, regardless
of the outcome, can have an adverse impact on the Company's results of
operations as a result of defense costs, diversion of management resources, and
other factors.
29
Remedy Corporation
<PAGE> 19
Selected Quarterly Consolidated Financial Data (unaudited)
1995 Summary by Quarter
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
March 31 June 30 September 30 December 31
------------------------------------------------------------
First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $ 6,364 $ 8,404 $10,218 $15,131 $40,117
Income from operations 1,293 2,125 2,587 4,184 10,189
Income before provision for
income taxes 1,315 2,555 3,050 4,686 11,606
Net income 802 1,658 2,084 3,017 7,561
Net income per share(1) $ 0.04 $ 0.06 $ 0.07 $ 0.10 $ 0.27
Number of shares(1) 23,448 29,022 28,932 29,197 27,650
Common stock price per share(1):
High(2) $ 14.46 $ 14.33 $ 13.33 $ 23.75 $ 23.75
Low(2) $ 10.50 $ 11.58 $ 10.67 $ 11.50 $ 10.50
- -------------------------------------------------------------------------------------------------
</TABLE>
1996 Summary by Quarter
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
March 31 June 30 September 30 December 31
-------------------------------------------------------
First Second Third Fourth Year
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenue $13,001 $17,012 $21,013 $29,609 $80,635
Income from operations 3,040 4,625 6,222 9,820 23,707
Income before provision for
income taxes 3,543 5,280 6,864 10,603 26,290
Net income 2,267 3,380 4,393 6,784 16,824
Net income per share(1) 0.08 0.11 0.15 0.22 0.56
Number of shares(1) 29,586 30,136 29,842 30,539 30,026
Common stock price per share(1):
High(2) $28.25 $45.13 $40.88 $55.75 $55.75
Low(2) $15.50 $26.50 $21.63 $38.13 $15.50
- --------------------------------------------------------------------------------------------
</TABLE>
(1) All shares and per-share amounts have been adjusted to reflect the
three-for-two stock dividend effected March 25, 1996 and the two-for-one
stock dividend effected October 25, 1996.
(2) The Company's common stock has been traded on The Nasdaq Stock Market
under the symbol "RMDY" since March 17, 1995. The table above reflects
the closing high and low sales prices of the Company's common stock as
reported by The Nasdaq Stock Market.
30
Remedy Corporation
<PAGE> 20
Report of Ernst & Young, LLP Independent Auditors
The Board of Directors and Stockholders
Remedy Corporation
We have audited the accompanying consolidated balance sheets of Remedy
Corporation as of December 31, 1995 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Remedy Corporation
at December 31, 1995 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-----------------------
ERNST & YOUNG LLP
Palo Alto, California
January 24, 1997
31
Remedy Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Remedy Corporation of our report dated January 24, 1997, included in the 1996
Annual Report to Stockholders of Remedy Corporation.
Our audits also included the consolidated financial statement schedule of Remedy
Corporation listed in Item 14(a)2. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the consolidated financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 File Nos. 33-90378 and 33-91560) pertaining to the Employee Stock
Purchase Plan and the 1995 Stock Option/Stock Issuance Plan and 1995
Non-Employee Directors Stock Option Plan of Remedy Corporation of our report
dated January 24, 1997 with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the consolidated financial statement schedule included
in this Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 27, 1997
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements included in the Company's Form 10-K and is
qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 39,770
<SECURITIES> 46,987
<RECEIVABLES> 25,437
<ALLOWANCES> 1,248
<INVENTORY> 0
<CURRENT-ASSETS> 114,142
<PP&E> 8,847
<DEPRECIATION> 3,555
<TOTAL-ASSETS> 119,434
<CURRENT-LIABILITIES> 26,424
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 92,497
<TOTAL-LIABILITY-AND-EQUITY> 119,434
<SALES> 61,133
<TOTAL-REVENUES> 80,635
<CGS> 2,926
<TOTAL-COSTS> 13,290
<OTHER-EXPENSES> 13,266
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79
<INCOME-PRETAX> 26,290
<INCOME-TAX> 9,466
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,824
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.56
</TABLE>
