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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
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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 OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1505 SALADO DRIVE, MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(650) 903-5200
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)
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 [ ]
There were 29,217,371 shares of the Company's Common Stock, par value
$.00005, outstanding on July 31st, 1998.
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TABLE OF CONTENTS
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PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997......................................... 3
Condensed Consolidated Statements of Income for the Three
and Six Months Ended June 30, 1998 and June 30, 1997.......... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and June 30, 1997.................. 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
PART II OTHER INFORMATION
Item 4 -- Submission of Matters to a Vote of Security Holders............. 15
Item 6 -- Exhibits and Reports on Form 8-K................................ 15
SIGNATURE................................................................. 16
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REMEDY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
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JUNE 30, DECEMBER 31,
1998 1997
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(UNAUDITED) (1)
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Current assets:
Cash and cash equivalents................................. $ 72,891 $ 70,568
Short-term investments.................................... 74,822 63,265
Accounts receivable, net of allowance for doubtful
accounts of $2,430 and $1,974, respectively............ 26,792 31,528
Prepaid expenses and other current assets................. 5,844 2,682
Deferred tax asset........................................ 3,556 3,101
-------- --------
Total current assets.............................. 183,905 171,144
Property and equipment, net................................. 12,044 10,472
-------- --------
$195,949 $181,616
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,596 $ 1,230
Accrued compensation and related liabilities.............. 3,990 5,519
Income taxes payable...................................... 2,674 806
Other accrued liabilities................................. 7,244 6,141
Deferred revenue.......................................... 19,308 18,986
Current portion of obligations under capital leases....... 499 360
-------- --------
Total current liabilities......................... 35,311 33,042
Noncurrent portion of obligations under capital leases...... 390 502
Stockholders' equity:
Common stock and additional paid-in capital............... 97,330 92,397
Notes receivable from stockholders........................ (46) (47)
Deferred compensation..................................... -- (75)
Retained earnings......................................... 62,964 55,797
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Total stockholders' equity........................ 160,248 148,072
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$195,949 $181,616
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(1) The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date, but does not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
3
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REMEDY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1998 1997 1998 1997
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Revenue:
Products.......................................... $23,215 $21,126 $41,833 $37,190
Maintenance and service........................... 13,398 8,876 25,379 16,113
------- ------- ------- -------
Total revenue............................. 36,613 30,002 67,212 53,303
Costs and expenses:
Cost of product revenue........................... 784 694 1,978 1,629
Cost of maintenance and service revenue........... 5,195 3,565 10,272 6,686
Research and development.......................... 8,018 4,305 15,746 8,020
Sales and marketing............................... 13,742 10,669 25,998 18,217
General and administrative........................ 2,813 2,086 4,897 3,579
------- ------- ------- -------
Total costs and expenses.................. 30,552 21,319 58,891 38,131
Income from operations.............................. 6,061 8,683 8,321 15,172
Interest income, net................................ 1,443 992 2,877 1,864
------- ------- ------- -------
Income before provision for income taxes............ 7,504 9,675 11,198 17,036
Provision for income taxes.......................... 2,701 3,512 4,031 6,088
------- ------- ------- -------
Net income.......................................... $ 4,803 $ 6,163 $ 7,167 $10,948
======= ======= ======= =======
Net income per share:
Basic............................................. $ 0.17 $ 0.23 $ 0.25 $ 0.40
Diluted........................................... $ 0.16 $ 0.20 $ 0.24 $ 0.36
======= ======= ======= =======
Shares used in computing per share amounts:
Basic............................................. 29,035 27,326 28,906 27,150
Diluted........................................... 30,598 30,391 30,415 30,409
======= ======= ======= =======
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See accompanying notes.
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REMEDY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 7,167 $ 10,948
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,780 1,403
Amortization of deferred compensation.................. 75 90
Changes in assets and liabilities:
Accounts receivable.................................. 4,736 4,061
Prepaid expenses and other current assets............ (3,162) (1,147)
Deferred tax asset................................... (455) (41)
Accounts payable..................................... 366 (430)
Accrued compensation and related liabilities......... (1,529) (3,212)
Income taxes payable................................. 2,508 2,701
Other accrued liabilities............................ 1,103 (1,352)
Deferred revenue..................................... 322 2,174
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Net cash provided by operating activities................... 13,911 15,195
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments......................... (98,606) (65,578)
Maturities of short-term investments........................ 87,049 65,012
Capital expenditures........................................ (4,103) (3,611)
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Net cash used in investing activities....................... (15,660) (4,177)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations.......... (221) (119)
Proceeds from issuance of common stock...................... 4,293 3,818
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Net cash provided by financing activities................... 4,072 3,699
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Net increase in cash and cash equivalents................... 2,323 14,717
Cash and cash equivalents at beginning of period............ 70,568 39,770
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Cash and cash equivalents at end of period.................. $ 72,891 $ 54,487
======== ========
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See accompanying notes.
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REMEDY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 1998, and the
condensed consolidated statements of income for the three months and six months
ended June 30, 1998 and 1997, and the condensed consolidated statements of cash
flows for the six months ended June 30, 1998 and 1997, have been prepared by the
Company, without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at June 30, 1998 and
for all periods presented have been made. The condensed consolidated balance
sheet at December 31, 1997 has been derived from the audited financial
statements at that date.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations. These condensed financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's 1997 Annual Report on Form 10-K filed with the
Securities and Exchange Commission in March 1998.
The results of operations for the three and six months ended June 30, 1998
are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year.
2. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". SFAS 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is similar to the previously
reported fully diluted earnings per share.
Basic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share also includes the weighted
average number of common share equivalents outstanding during the period.
Dilutive common share equivalents consist of employee stock options using the
treasury method.
The following table sets forth the computation of basic and diluted
earnings per share:
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1998 1997 1998 1997
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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Numerator:
Net Income........................................ $ 4,803 $ 6,163 $ 7,167 $10,948
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share-weighted-
average shares................................. 29,035 27,326 28,906 27,150
Effect of dilutive securities:
Employee stock options............................ 1,563 3,065 1,509 3,259
------- ------- ------- -------
Dilutive potential common shares.................. 1,563 3,065 1,509 3,259
Denominator for diluted earnings per share........ 30,598 30,391 30,415 30,409
======= ======= ======= =======
Basic earnings per share.......................... $ 0.17 $ 0.23 $ 0.25 $ 0.40
Diluted earnings per share........................ $ 0.16 $ 0.20 $ 0.24 $ 0.36
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REMEDY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. REVENUE RECOGNITION
As of January 1, 1998, the Company adopted AICPA SOP 97-2, Software Revenue
Recognition, as amended by EITF 98-4 which was effective for transactions that
the Company entered into in 1998. Prior years were not restated. The adoption of
SOP 97-2 did not have a material affect on the revenues or earnings for the
period.
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board's Statement No. 130, Reporting Comprehensive Income (Statement 130).
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components. Comprehensive income is the same as net
income as there are no necessary adjustments reported in stockholders' equity
which are to be included in the computation. Accordingly, the adoption of this
statement had no impact on the Company's net income or stockholders' equity.
5. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (Statement
131). Statement 131 superseded Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement 131 established standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
Statement 131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of Statement
131 did not affect the results of operations or financial position, but may
affect the disclosure of the segment information that will be disclosed in the
annual report on Form 10K.
6. STOCK OPTION EXCHANGE
On February 4, 1998, the Compensation Committee of the Board of Directors
approved the exchange of certain outstanding stock options under the Company's
1995 Stock Option/Stock Issuance Plan with exercise prices ranging from $17.92
to $53.75. Each employee who elected prior to February 2, 1998 to participate in
the exchange program received a new option with an exercise price of $16.75 per
share (the fair market value on February 4, 1998). Each new option that replaces
an option outstanding for at least 12 months shall vest in equal monthly
installments over the period remaining under the original option plus an
additional 12 months, not to exceed 48 months. Each new option that replaces an
option outstanding for less than 12 months shall vest 25% at the end of 12
months from the grant date of February 4, 1998 and 1/48th per month thereafter.
Approximately, 3,200,000 stock options were exchanged pursuant to this program.
The Officers and Board of Directors of the Company were not eligible to
participate in this program.
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Remedy Corporation (the "Company") develops, markets and supports highly
adaptable, client/server applications software for support and business
processes. The Company was founded in November 1990 and made its initial product
shipments in December 1991. The Company has been profitable since the quarter
ended June 30, 1992. There can be no assurance, however, that the Company will
remain profitable on a quarterly or annual basis in the future.
Although the Company has experienced significant percentage growth in
revenues and net income in recent years, the Company does not believe prior
growth rates are sustainable or indicative of future operating results. In
addition, 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.
The Company believes that its products 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.
This Report on Form 10-Q 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 the
"Additional Factors That May Affect Future Results" section on page 12 and in
the "Risk Factors" section of the Company's 1997 Report on form 10-K filed with
the Securities and Exchange Commission in March 1998.
RESULTS OF OPERATIONS
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 week 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. In the quarter ended December
31, 1997, the Company received significantly fewer orders than expected, which
had an immediately adverse effect on the Company's financial performance for the
quarter. The Company's operating results were below the expectations of public
market analysts and investors, and the Company's stock price declined
significantly. It is likely that in some future quarter the Company's operating
results will again 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.
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The following table sets forth, as a percentage of total revenue, statement
of income data for the periods indicated.
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THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
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1998 1997 1998 1997
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Revenue:
Product........................................ 63% 70% 62% 70%
Maintenance and service........................ 37 30 38 30
--- --- --- ---
Total revenue.......................... 100 100 100 100
Costs and expenses:
Cost of product revenue........................ 2 2 3 3
Cost of maintenance and service revenue........ 14 12 15 13
Research and development....................... 22 14 23 15
Sales and marketing............................ 38 36 39 34
General and administrative..................... 8 7 7 7
--- --- --- ---
Total costs and expenses............... 84 71 87 72
--- --- --- ---
Income from operations........................... 16 29 13 28
Interest income, net............................. 4 3 4 4
--- --- --- ---
Income before provision for income taxes......... 20 32 17 32
Provision for income taxes....................... 7 12 5 11
--- --- --- ---
Net income....................................... 13% 20% 12% 21%
=== === === ===
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REVENUE
The Company's revenue is derived from two sources: product licenses and
fees for services. License revenue is derived from product licensing fees, while
service revenue is derived from maintenance support services, training and
consulting. The Company recognizes revenue in accordance with the Statement of
Position on Software Revenue Recognition ("SOP 97-2"), issued by the American
Institute of Certified Public Accountants. The adoption of SOP 97-2 on January
1, 1998 did not have a material affect on the revenues or earning for the
period. Product revenue is recognized upon delivery only if no significant
vendor obligations remain and collection of the resulting receivable is deemed
probable. Delivery is 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. Service revenue
from customer maintenance fees for ongoing customer support and product updates
is recognized ratably over the term of the maintenance contract, which is
typically twelve months. Service revenue from training and consulting is
recognized when the services are performed. Fees for such services are charged
separately from the Company's software products. The Company's license
agreements generally do not provide a right of return. However, reserves are
maintained for 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),
independent software vendors (ISVs) and original equipment manufacturers (OEMs).
Sales derived through indirect channels accounted for approximately 46% of the
Company's total billings for the quarter ended June 30, 1997 and 43% in the
comparable quarter in 1998. 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.
Product Revenue. The Company currently derives substantially all of its
product revenue from licenses of the Action Request System. Revenue from product
licenses increased by 10% from $21.1 million for the quarter ended June 30, 1997
to $23.2 million in the comparable quarter in 1998. Product license fees
increased
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12% from $37.2 million for the six months ended June 30, 1997 to $41.8 million
in the comparable period in 1998. The growing acceptance of the Company's
software products in both U.S. and international markets is a major factor in
these increases. International sales accounted for approximately 37% of the
Company's total revenue for the quarters ended June 30, 1997 and 1998.
International sales accounted for approximately 38% and 37% of the Company's
total revenue for the six months ended June 30, 1997 and 1998, respectively. The
prices of the Company's products have remained relatively constant from 1992
through June 30, 1998. The Company intends to continue to enhance its current
software products as well as to develop new software products. As a result, the
Company anticipates that revenue from product licenses will continue to
represent a substantial majority of its revenue in the foreseeable future. The
Company expects that prior growth rates of the Company's product revenue may not
be sustainable in the future.
Maintenance and Service Revenue. Maintenance and service revenue increased
by 51% from $8.9 million for the quarter ended June 30, 1997 to $13.4 million in
the comparable quarter in 1998. Service revenue increased 58% from $16.1 million
for the six months ended June 30, 1997 to $25.4 million in the comparable 1998
period. This growth is primarily due to the renewal of maintenance contracts
after the initial one-year term. Increased licensing activity, which has
resulted in increases in revenue from maintenance and support, training and
consulting services also contributes to the growth rate. The Company expects
that prior growth rates of the Company's installed base and, consequently, in
the Company's service revenue, may not be sustainable in the future.
COSTS AND EXPENSES
Cost of Product Revenue. Cost of product revenue consists primarily of the
costs of royalties paid to third-party vendors, product media and duplication,
manuals, packaging materials, personnel-related costs and shipping expenses.
Cost of product revenue increased from $694,000 for the quarter ended June 30,
1997 to $784,000 for the comparable quarter in 1998, representing 3% of the
related product revenue in such quarters. Cost of product revenue increased from
$1.6 million for the six months ended June 30, 1997 to $2.0 million in the
comparable 1998 period, representing 4% and 5% of related product revenue in
such periods. The increase in the dollar amounts of cost of product revenue for
the quarter ended June 30, 1998 was primarily due to the higher volumes of
product shipped during the quarter. Because all development costs incurred in
the research and development of new software products and enhancements to
existing software products have been expensed as incurred, cost of product
revenue includes no amortization of capitalized software development costs.
Cost of Maintenance and Service Revenue. Cost of maintenance and service
revenue consists primarily of personnel-related costs incurred in providing
telephone support, consulting and training to customers. Cost of maintenance and
service revenue increased from $3.6 million for the quarter ended June 30, 1997
to $5.2 million in the comparable quarter in 1998, representing 40% and 39% of
the related maintenance and service revenue for the respective quarters. Cost of
maintenance and service revenue increased from $6.7 million for the six months
ended June 30, 1997 to $10.3 million in the comparable 1998 period, representing
41% and 40%, respectively, of the related maintenance and service revenue in
such periods. Cost of maintenance and service revenue increased significantly in
absolute dollars from the quarter ended June 30, 1997 to the quarter ended June
30, 1998, primarily due to increased personnel-related costs as the Company
continued to build its customer support and training organizations. In addition,
such costs increased from quarter to quarter 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.
Research and Development. Research and development expenses were $4.3
million and $8.0 million, or 14% and 22% of total revenue, for the quarters
ended June 30, 1997 and June 30, 1998, respectively. Research and development
expenses increased from $8.0 million for the six months ended June 30, 1997 to
$15.7 million in the comparable 1998 period, or 15% and 23% of total revenue,
respectively. The increases in research and development expenses in both
absolute dollar amounts and as a percentage of total revenue were primarily
attributable to an increase in staffing, outside contractors and associated
support for software engineers required to expand and enhance the Company's
product line as the company continues to invest in
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new products. The Company believes that research and development expenses will
continue to increase in dollar amounts and may increase as a percentage of total
revenue in the future.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses of sales and marketing personnel, as well as
promotional expenses. Sales and marketing expenses were $10.7 million and $13.7
million, or 36% and 38% of total revenue, for the quarters ended June 30, 1997
and June 30, 1998, respectively. Sales and marketing expenses increased from
$18.2 million for the six months ended June 30, 1997 to $26.0 million in the
comparable 1998 period, or 34% and 39% of total revenue, respectively. The
increases in sales and marketing expenses in both absolute dollar amounts and as
a percentage of total revenue were primarily due to the expansion of sales and
marketing resources and increased marketing activities, including trade shows
and promotional activities. The Company believes that sales and marketing
expenses will continue to increase in dollar amounts and may increase as a
percentage of total revenue in the future as the Company expands its sales and
marketing staff.
General and Administrative. General and administrative expenses were $2.1
million and $2.8 million, or 7% and 8% of total revenue, for the quarters ended
June 30, 1997 and June 30, 1998, respectively. General and administrative
expenses increased from $3.6 million for the six months ended June 30, 1997 to
$4.9 million for the comparable 1998 period, or 7% of total revenue. 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 general and administrative expenses will increase in
dollar amounts and may increase as a percentage of total revenue in the future
as the Company expands its staffing.
Interest Income, Net
Interest income, net was $992,000 and $1.4 million for the quarters ended
June 30, 1997 and June 30, 1998, respectively. Interest income, net increased
from $1.9 million for the six months ended June 30, 1997 to $2.9 million for the
comparable 1998 period. The increase in interest income, net for the quarter
ended June 30, 1998 is primarily due to the investment of increased amounts of
cash provided by operating activities.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998 and June 30, 1997, the Company's
cash provided by operating activities was $13.9 million and $15.2 million,
respectively. The Company's net cash provided by operations for the six months
ended June 30, 1998 was primarily attributable to the net income generated
during the six-month period and the decrease in accounts receivable.
During the six months ended June 30, 1998 and June 30, 1997, the Company's
investing activities have consisted of purchases of short-term investments and
property and equipment. Purchases of short-term investments exceeded maturities
by $11.6 million for the six months ended June 30, 1998, primarily due to
investment of cash provided by operating activities during the period. To date,
the Company has not invested in derivative securities or any other financial
instruments that involve a high level of complexity or risk. Management expects
that, in the future, cash in excess of current requirements will continue to be
invested in investment grade, interest-bearing securities.
Cash used to purchase property and equipment was $4.1 million and $3.6
million during the six months ended June 30, 1998 and June 30, 1997,
respectively, primarily for computer workstations and file servers for the
Company's growing employee base. 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 facilities and its telephone system.
At June 30, 1998, the Company had $72.9 million in cash and cash
equivalents, $74.8 million in short-term investments and $148.6 million of
working capital. The Company also has available a $15 million unsecured bank
line of credit that expires in June 1999. There were no borrowings outstanding
under this line of credit as of June 30,1998.
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The Company believes that its current cash, cash equivalents and short-term
investments balances, cash available under its line of credit and cash flow from
operations, if any, will be sufficient to meet its working capital and capital
expenditure requirements for at least the next 12 months. Although operating
activities may provide cash in certain periods, to the extent the Company
experiences growth in the future, the Company anticipates that its operating and
investing activities may use cash. Consequently, significant future growth may
require the Company to obtain additional equity or debt financing. There can be
no assurance that, in the event that additional financing is required, the
Company will be able to raise such additional financing on acceptable terms or
at all.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS: RISK FACTORS
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 week 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. In the quarter ended December
31, 1997, the Company received significantly fewer orders than expected, which
had an immediately adverse effect on the Company's financial performance for the
quarter. The Company's operating results were below the expectations of public
market analysts and investors, and the Company's stock price declined
significantly. It is likely that in some future quarter the Company's operating
results will again 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.
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
12
<PAGE> 13
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, operating results and financial
condition.
Dependence on New Products and Rapid Technological Change; Risk of Product
Bugs. The client/server 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 1997 and the six months ended June
30, 1998, 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 began
shipping products in 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 1998 and beyond, which is required if the Company is to achieve
significant revenue growth in the future. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its existing
sales personnel or that it can attract, assimilate or retain additional highly
qualified sales persons in the future. The Company increased the size of its
sales force from 42 to 100 in 1996, from 100 to 157 in 1997 and decreased from
157 to 155 in the six months ended June 30, 1998. 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
13
<PAGE> 14
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.
Product Concentration. The Company currently derives substantially all of
its revenue from licenses of the AR System, the applications Remedy provides,
which are built upon the Action Request System foundation, and related services.
Broad market acceptance of the Company's products is critical to the Company's
future success. As a result, a decline in demand for or failure to achieve broad
market acceptance of the AR System foundation and applications as a result of
competition, technological change or otherwise, would have a material adverse
effect on the business, operating results and financial condition of the
Company. The Company's future financial performance will depend in part on the
successful development, introduction and customer acceptance of new and enhanced
versions of the AR System foundation and other applications. There can be no
assurance that the Company will continue to be successful in marketing the AR
System or any new or enhanced products or applications.
The Company's business entails a variety of additional risks not mentioned
above, such as Management of Growth; Dependence Upon Key Personnel, Expansion of
Indirect Channels, International Operations, Dependence on Growth in the
Client/Server Computing Market; General Economic and Market Conditions,
Dependence on Proprietary Technology; Risks of Infringement, Product Liability,
and Year 2000 Compliance which are set forth in the "Risk Factors" section of
the Company's 1997 Report on form 10-K filed with the Securities and Exchange
Commission in March 1998.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 1998, the Annual Meeting of Stockholders of Remedy Corporation
was held in Mountain View, California.
An election of directors was held, with the following individuals being
elected to the Board of Directors of the Company:
<TABLE>
<S> <C>
Lawrence L. Garlick.......... (25,357,796 votes for, 878,625 votes withheld)
David A. Mahler.............. (25,357,706 votes for, 878,715 votes withheld)
Harvey C. Jones, Jr.......... (25,357,696 votes for, 878,725 votes withheld)
John F. Shoch................ (25,230,096 votes for, 1,006,325 votes withheld)
James R. Swartz.............. (25,229,996 votes for, 1,006,425 votes withheld)
</TABLE>
Other matters voted upon at the meeting and the number of affirmative and
negative votes cast with respect to each such matter were as follows:
1. To approve an amendment to and restatement of the Company's Certificate
of Incorporation (i) to increase the number of shares of Common Stock
that the Company is authorized to issue from 120,000,000 to 240,000,000.
(21,808,403 votes in favor, 4,339,208 votes opposed, 14,137 votes
abstaining).
2. To approve amendment to the 1995 Employee Stock Option/Stock Issuance
Plan, including an increase to the number of shares available, as
described in the proxy statement. (11,684,695 votes in favor, 7,955,819
votes opposed, 59,074 votes abstaining).
3. To approve amendment of the Employee Stock Purchase Plan, including an
increase to the number of shares available, as set forth in the proxy
statement. (17,270,843 votes in favor, 2,472,465 votes opposed, 30,953
votes abstaining).
4. To approve amendment the 1995 Non-Employee Directors Stock Option Plan,
including an increase to the number of shares to be awarded periodically
to non-employee directors, as described in the proxy statement.
(13,843,570 votes in favor, 5,894,042 votes opposed, 36,649 votes
abstaining).
5. To ratify the appointment of Ernst & Young LLP as independent auditors
of the Company for the fiscal year ending December 31, 1998. (26,220,622
votes in favor, 8,424 votes opposed, 7,375 votes abstaining).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<C> <S>
27.1 Financial Data Schedule (Filed Electronically)
</TABLE>
(b) Reports on Form 8-K:
None
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements 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.
REMEDY CORPORATION
/s/ GEORGE A. DE URIOSTE
--------------------------------------
George A. De Urioste
Vice President, Finance and
Operations,
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial
and Accounting Officer)
Dated: July 31, 1998
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S ANNUAL
REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 72,891
<SECURITIES> 74,822
<RECEIVABLES> 29,222
<ALLOWANCES> 2,430
<INVENTORY> 0
<CURRENT-ASSETS> 183,905
<PP&E> 21,749
<DEPRECIATION> 9,705
<TOTAL-ASSETS> 195,949
<CURRENT-LIABILITIES> 35,311
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 160,248
<TOTAL-LIABILITY-AND-EQUITY> 195,949
<SALES> 41,833
<TOTAL-REVENUES> 67,212
<CGS> 1,978
<TOTAL-COSTS> 12,250
<OTHER-EXPENSES> 15,746
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> 11,198
<INCOME-TAX> 4,031
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,167
<EPS-PRIMARY> 0.25<F1>
<EPS-DILUTED> 0.24
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
