REMEDY CORP, 10-Q, 2000-08-11

REMEDY CORP
10-Q, 2000-08-11
PREPACKAGED SOFTWARE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-Q
------------------------

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM
--------------- TO
--------------- .

COMMISSION FILE NUMBER 0-25494

REMEDY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
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)
</TABLE>

(650) 903-5200
(REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE)

WWW.REMEDY.COM
(REGISTRANT'S INTERNET ADDRESS)

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 31,623,418 shares of the Company's Common Stock, par value
$.00005, outstanding on August 3, 2000.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999....................................... 1
Condensed Consolidated Statements of Income for the Three
and Six Months Ended June 30, 2000 and June 30, 1999........ 2
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and June 30, 1999................ 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 17

PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 18
Item 6. Exhibits and Reports on Form 8-K............................ 18
SIGNATURE............................................................ 19
</TABLE>

i
<PAGE> 3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REMEDY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999(1)
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 66,044 $ 47,302
Short-term investments.................................... 145,283 125,116
Accounts receivable, net.................................. 56,393 64,105
Prepaid expenses and other current assets................. 9,318 7,383
Deferred tax assets....................................... 10,755 6,831
-------- --------
Total current assets.............................. 287,793 250,737
Property and equipment, net................................. 17,007 14,945
Other non-current assets.................................... 3,034 2,996
Goodwill and other intangible assets, net................... 30,288 18,809
-------- --------
$338,122 $287,487
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,100 $ 1,861
Accrued compensation and related liabilities.............. 14,194 15,432
Income taxes payable...................................... -- 1,341
Other accrued liabilities................................. 16,805 15,395
Deferred revenue.......................................... 43,648 38,828
Current portion of obligations under capital leases....... 18 67
-------- --------
Total current liabilities......................... 78,765 72,924
Noncurrent portion of obligations under capital leases...... 18 23
Stockholders' equity:
Common stock and additional paid-in capital............... 172,899 141,546
Treasury Stock (2,002,300 shares)......................... (31,267) (31,267)
Notes receivable from stockholders........................ (45) (45)
Accumulated other comprehensive income.................... (404) 9
Retained earnings......................................... 118,156 104,297
-------- --------
Total stockholders' equity........................ 259,339 214,540
-------- --------
$338,122 $287,487
======== ========
</TABLE>

---------------
(1) The balance sheet at December 31, 1999 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.

1
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REMEDY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Products.......................................... $39,750 $32,065 $75,170 $55,494
Maintenance and service........................... 29,376 20,971 55,888 39,942
------- ------- ------- -------
Total revenue............................. 69,126 53,036 131,058 95,436
Costs and expenses:
Cost of product revenue........................... 2,387 1,663 4,789 2,541
Cost of maintenance and service revenue........... 12,568 8,916 23,605 16,629
Research and development.......................... 12,836 10,204 24,122 19,418
Sales and marketing............................... 25,218 20,184 50,990 38,192
General and administrative........................ 4,335 3,260 7,574 5,418
Amortization of goodwill and other intangibles.... 2,203 713 4,032 1,461
------- ------- ------- -------
Total costs and expenses.................. 59,547 44,940 115,112 83,659
Income from operations.............................. 9,579 8,096 15,946 11,777
Interest income and other, net...................... 2,408 1,194 4,082 2,284
------- ------- ------- -------
Income before provision for income taxes............ 11,987 9,290 20,028 14,061
Provision for income taxes.......................... 3,596 3,066 6,169 4,640
------- ------- ------- -------
Net income.......................................... $ 8,391 $ 6,224 $13,859 $ 9,421
======= ======= ======= =======
Net income per share:
Basic............................................. $ 0.27 $ 0.22 $ 0.45 $ 0.33
======= ======= ======= =======
Diluted........................................... $ 0.24 $ 0.21 $ 0.41 $ 0.31
======= ======= ======= =======
Shares used in computing per share amounts:
Basic............................................. 31,235 28,650 30,827 28,574
======= ======= ======= =======
Diluted........................................... 34,316 30,252 34,200 30,150
======= ======= ======= =======
</TABLE>

See accompanying notes.

2
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REMEDY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 13,859 $ 9,421
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 4,200 3,568
Amortization of goodwill and other intangibles......... 4,032 1,461
Changes in assets and liabilities:
Accounts receivable....................................... 7,712 1,380
Prepaid expenses and other current assets................. 8,006 (1,727)
Deferred tax asset........................................ (3,924) --
Accounts payable.......................................... 2,239 1,646
Accrued compensation and related liabilities.............. (1,238) (625)
Income taxes payable...................................... (1,341) 1,226
Other accrued liabilities................................. 446 (209)
Other non-current assets.................................. (38) --
Deferred revenue.......................................... 4,820 963
--------- ---------
Net cash provided by operating activities......... 38,773 17,104
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments......................... (312,468) (174,626)
Maturities of short-term investments........................ 292,301 152,170
Other non-current assets.................................... -- (2,000)
Cash paid for businesses acquired, net of cash assumed...... (15,315) --
Capital expenditures........................................ (5,908) (5,546)
--------- ---------
Net cash used in investing activities............. (41,390) (30,002)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations.......... (54) (119)
Proceeds from issuance of common stock...................... 21,413 8,158
Purchase of treasury stock.................................. -- (8,991)
--------- ---------
Net cash provided by (used in) financing
activities...................................... 21,359 (952)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 18,742 (13,850)
Cash and cash equivalents at beginning of period............ 47,302 58,976
--------- ---------
Cash and cash equivalents at end of period.................. $ 66,044 $ 45,126
========= =========
</TABLE>

See accompanying notes.

3
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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, 2000, and the
condensed consolidated statements of income for the three months and six months
ended June 30, 2000 and 1999, and the condensed consolidated statements of cash
flows for the six months ended June 30, 2000 and 1999, have been prepared by
Remedy Corporation ("Remedy" or 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, 2000 and for all periods presented have been made. The
condensed consolidated balance sheet at December 31, 1999 has been derived from
the audited financial statements at that date but does not include all
disclosures required by generally accepted accounting principles.

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 1999 Annual Report on Form 10-K filed with the
Securities and Exchange Commission in March 2000.

The results of operations for the three and six months ended June 30, 2000
are not necessarily indicative of results that may be expected for any other
interim period or for the full fiscal year.

2. REVENUE RECOGNITION

The Company recognizes revenue in accordance with Statement of Position
97-2 (SOP 97-2), "Software Revenue Recognition", as amended. The Company derives
revenue from the sale of software licenses, post-contract support ("support")
and other services. Support includes telephone technical support, bug fixes and
rights to upgrades on a when-and-if available basis for a stated term of
generally one year. Services range from training and basic consulting to
software modification to meet specific customer needs. In software arrangements
that include rights to multiple software products, specified upgrades, support
and/or other services, the Company allocates the total arrangement fee among
each deliverable based on the relative fair value of each of the deliverables
determined based on objective evidence which is specific to the Company.

Revenue from license fees is recognized when persuasive evidence of an
agreement exists, delivery of the product has occurred, the fee is fixed or
determinable and collection is probable. If the fee due from the customer is not
fixed or determinable, revenue is recognized as payments become due from the
customer. If collection is not considered probable, revenue is recognized when
the fee is collected.

Revenue allocable to support is recognized on a straight-line basis over
the periods in which the support is provided.

Arrangements that include consulting services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are considered essential, revenue under the
arrangement is recognized using contract accounting. When services are not
considered essential, the revenue allocable to the software services is
recognized as the services are performed.

3. EARNINGS PER SHARE

Basic earnings per share is computed using the weighted-average number of
common shares outstanding. Diluted earnings per share includes the
weighted-average number of common share equivalents outstanding during the
period. Dilutive common share equivalents consist of employee stock options and
are calculated by using the treasury stock method.

4
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REMEDY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- --------
(IN THOUSANDS, EXCEPT (IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS) PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Numerator:
Net Income................................... $8,391 $6,224 $13,859 $9,421
====== ====== ======= ======
Denominator:
Denominator for basic earnings per
share-weighted-average shares............. 31,235 28,650 30,827 28,574
Effect of dilutive securities:
Employee stock options....................... 3,081 1,602 3,373 1,576
------ ------ ------- ------
Denominator for diluted earnings per share-
weighted-average shares and dilutive
securities................................ 34,316 30,252 34,200 30,150
====== ====== ======= ======
Basic earnings per share..................... $ 0.27 $ 0.22 $ 0.45 $ 0.33
====== ====== ======= ======
Diluted earnings per share................... $ 0.24 $ 0.21 $ 0.41 $ 0.31
====== ====== ======= ======
</TABLE>

4. RECENT PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement No.
133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activity",
which was subsequently amended by Statement No. 137 (SFAS 137), "Accounting for
Derivative Instruments and Hedging Activities: Deferral of Effective Date of
FASB 133" and Statement No. 138 (SFAS 138), "Accounting for Certain Derivative
Instruments and Certain Hedging Activities: an amendment of FASB Statement No.
133". SFAS 137 requires adoption of SFAS 133 in years beginning after June 15,
2000. SFAS 138 establishes accounting and reporting standards for derivative
instruments and addresses a limited number of issues causing implementation
difficulties for numerous entities. The Statements require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be recorded at fair value through earnings. If the
derivative qualifies as a hedge, depending on the nature of the exposure being
hedged, changes in the fair value of derivatives are either offset against the
change in fair value of hedged assets, liabilities, or firm commitments through
earnings or are recognized in other comprehensive income until the hedged cash
flow is recognized in earnings. The ineffective portion of a derivative's change
in fair value is recognized in earnings. The Statements permit early adoption as
of the beginning of any fiscal quarter. The Company adopted SFAS 133 during the
quarter ended September 30, 1999 and subsequently implemented a hedging program
related to multi-currency invoicing. The adoption of SFAS 133 did not have a
material effect on the Company's financial statements. See Note 6.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain aspects of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. On June 26, 2000, the SEC issued SAB 101B, which extended the
transition provision of SAB 101 to December 31, 2000 for a calendar year-end
company. The Company believes that its current revenue recognition principles
comply with SAB 101.

5. BUSINESS COMBINATIONS

In June 2000, the Company acquired ESQ System Integrators, Inc. consulting
practice (ESQ), a privately held professional service firm specializing in
implementation services for Remedy's customer

5
<PAGE> 8
REMEDY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

relationship management (CRM) and eBusiness infrastructure solutions. The
purchase price for the acquisition was approximately $5.6 million, consisting of
$5.0 million cash and $.6 million of accrued liabilities. Approximately $4.8
million of the purchase price was allocated to goodwill and approximately $0.8
million was allocated to acquired workforce. The acquired workforce valuation
was recorded representing the cost to locate, hire and train qualified
replacement employees. All intangibles are being amortized on a straight-line
basis over a period of four years from the date of acquisition. Approximately
$0.1 million of intangibles have been amortized as of June 30, 2000. The total
cost of the ESQ acquisition is expected to be approximately $7.3 million, which
consists of the $5.6 million purchase price as well as employee related costs of
$1.7 million. Employee related costs comprised primarily of retention bonuses,
which will be expensed over the appropriate service period. The acquisition was
accounted for under the purchase method and accordingly, ESQ's operating results
have been included in the Company's consolidated financial statements since the
date of acquisition. Pro forma results of operations have not been presented
since the effect of this acquisition was not material to the Company's
consolidated financial position or results of operations.

6. DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments principally to minimize
the exposures to the United States Dollar (USD) value of foreign currency
denominated sales and expenses. The Company began pricing its products in
multiple currencies during the fourth quarter of 1999, and in preparation,
foreign exchange forward and simple purchase option contracts were entered into
beginning in the quarter ended September 30, 1999 to hedge the risk that the USD
value of the foreign currency denominated sales and expenses may be adversely
affected by changes in foreign currency exchange rates. As part of its overall
strategy to manage the level of exposure to the risk of foreign currency
exchange rate fluctuations, the Company hedges a portion of its foreign currency
exposures anticipated over the ensuing twelve month period. At June 30, 2000,
the Company had hedged transactions via Pound Sterling and Euro denominated cash
flow hedges, using forward contracts that generally have maturities of six
months or less.

The Company records these foreign exchange contracts at fair value in its
consolidated balance sheet and the related gains or losses on these contracts
are reflected, in stockholders' equity as a component of other comprehensive
income. These gains and losses are reclassified into earnings in the period in
which the sales and expenses being hedged are recognized. However, if any of
these contracts were considered to be ineffective in offsetting the change in
the forecasted cash flows relating to the sales being hedged, any changes in
fair value relating to the ineffective portion of these contracts would be
immediately recognized in earnings.

The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. The Company also formally
assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedged items. Changes in the time value of
option contracts are excluded from this effectiveness assessment and recorded
directly in earnings. During the quarter ended June 30, 2000 no charge
representing the change in option time values, was recorded in earnings.

As of June 30, 2000, the Company included the fair value of forward
contracts of $200,000 in prepaid expenses and other current assets in its
consolidated balance sheet. The company had no simple purchase option contracts
at June 30, 2000.

At June 30, 2000, the Company had a balance of $70,000 in other
comprehensive income related to future transactions. The other comprehensive
income balance at June 30, 2000 is expected to be recognized into earnings
within the next twelve months. A loss of $62,000 was reclassed into earnings
from other comprehensive income for the quarter ended June 30, 2000 upon
recognition of the related revenue and expenses.

6
<PAGE> 9
REMEDY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

7. SUBSEQUENT EVENT

On July 26, 2000, the Board of Directors authorized management of the
Company to purchase up to 3 million shares or approximately 10 percent of the
Company's outstanding shares of common stock over the next twelve months. The
Company plans to purchase the shares on the open market from time to time,
depending on market conditions. The repurchase will be funded from Remedy's cash
and short-term investments that totaled $211 million as of June 30, 2000.

7
<PAGE> 10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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. The Company's quarterly
operating results have in the past and may in the future vary significantly
depending on factors including, but not limited to, those discussed in the
"Factors That May Affect Future Operating Results" section on page 14 of this
report and in the Company's 1999 Form 10-K filed with the Securities and
Exchange Commission in March 2000, 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, the
Company's ability to attract and retain highly qualified technical, sales,
marketing and managerial personnel, foreign currency exchange rates and general
economic factors. 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
degree of certainty. Product revenue is also difficult to forecast because the
market for client/server and web-based application software products is rapidly
evolving, and the Company's sales cycle, from initial trial to multiple copy
purchases and the provision of support services, varies substantially from
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, may increase as a percentage of total revenue. The Company's
expense levels are based, in part, on its expectations as to future revenues. 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 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.

Remedy Corporation ("Remedy" or the "Company") is the world's leading
supplier of eCRM and eBusiness infrastructure solutions. With over 9,100 sites
in production, more organizations use Remedy products for eCRM and eBusiness
infrastructure management than any other solution. Remedy delivers service
solutions that accelerate an organization's move to eBusiness and raise its
agility to continually differentiate itself from competitors. Remedy's fast
deployment programs and radical adaptability enable organizations to move more
quickly to an eBusiness model, and to do so in a differentiated way. By focusing
on internal and external service as competitive differentiators, our customers
continually improve both their customer interactions and internal operations to
raise satisfaction and lower costs.

The Company was incorporated on November 20, 1990 in Delaware. The Company
maintains its executive offices and principal facilities at 1505 Salado Drive,
Mountain View, California 94043. Its telephone number is (650) 903-5200.

8
<PAGE> 11

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of total revenue, statement
of income data for the periods indicated.

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Products.................................................. 58% 60% 57% 58%
Maintenance and service................................... 42% 40% 43% 42%
--- --- --- ---
Total revenue..................................... 100% 100% 100% 100%
Costs and expenses:
Cost of product revenue................................... 3% 3% 4% 3%
Cost of maintenance and service revenue................... 18% 17% 18% 17%
Research and development.................................. 19% 19% 18% 20%
Sales and marketing....................................... 36% 38% 39% 40%
General and administrative................................ 6% 6% 6% 6%
Amortization of goodwill and other intangibles............ 3% 2% 3% 2%
--- --- --- ---
Total costs and expenses.......................... 86% 85% 88% 88%
Income from operations...................................... 14% 15% 12% 12%
Interest income and other, net.............................. 3% 2% 3% 3%
--- --- --- ---
Income before provision for income taxes.................... 17% 17% 15% 15%
Provision for income taxes.................................. 5% 5% 5% 5%
--- --- --- ---
Net income.................................................. 12% 12% 11% 10%
=== === === ===
</TABLE>

REVENUE

Revenue allocable to support is recognized on a straight-line basis over
the periods in which the support is provided.

The Company distributes the majority of its products through its direct
sales organization, which is complemented by indirect sales channels, including
value added resellers (VARs), system integrators (SIs) and independent software
vendors (ISVs). Billings derived through indirect channels accounted for
approximately 47% of the Company's total billings for the quarter ended June 30,
2000 and 52% for the comparable

9
<PAGE> 12

period in 1999 and approximately 47% for the six months ended June 30, 2000 and
49% in the comparable period in 1999. The Company expects that billings derived
through indirect channels, while growing in absolute dollar amounts, will
fluctuate as a percentage of total billings.

PRODUCT REVENUE. The Company currently derives substantially all of its
product revenue from licenses of the Action Request System ("AR System") and
applications, which are built upon the AR System foundation. Revenue from
product licenses increased 24% to $39.8 million for the quarter ended June 30,
2000 from $32.1 million in the comparable quarter in 1999. Product license fees
increased 35% to $75.2 million for the six months ended June 30, 2000 from $55.5
million in the comparable period in 1999. The growing acceptance of the
Company's software solutions in both U.S. and international markets has been a
major factor in this increase. International sales accounted for approximately
36% and 34% of the Company's total revenue for the quarters ended June 30, 2000
and June 30, 1999, respectively. International sales accounted for approximately
36% of the Company's total revenue for the six months ended June 30, 2000 and
33% in the comparable period in 1999. The growth of revenue in absolute dollars
is largely a result of the Company's sales and marketing efforts and the
increased acceptance of the Company's new product lines, such as the Remedy Help
Desk(TM) and the eCRM suite. 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 majority of its revenue in the foreseeable future. Remedy has
experienced significant absolute dollar growth in revenue in recent years, in
order to sustain this trend the Company needs to hire and retain additional
highly qualified sales persons in the future.

MAINTENANCE AND SERVICE REVENUE. Revenue from maintenance and services
increased by 40% to $29.4 million for the quarter ended June 30, 2000 from $21.0
million in the comparable quarter in 1999. Revenue from services increased by
40% to $55.9 million for the six months ended June 30, 2000 from $39.9 million
in the comparable 1999 period. The growth of maintenance and service revenue in
absolute dollars is primarily due to the renewal of maintenance contracts after
the initial one-year term and increased licensing activity, which has resulted
in increased revenue from ancillary sources such as maintenance, support,
training and consulting services. Although prior quarters' licensing growth has
resulted in increased revenue from maintenance and support, training and
consulting services, the Company expects that prior growth rates of the
Company's installed base and, consequently, in the Company's service revenue,
may not be sustainable in the future.

COSTS AND EXPENSES

COST OF PRODUCT REVENUE. Costs of product revenue consist primarily of
costs related to product media and duplication, manuals, packaging materials,
personnel, shipping expenses and royalties paid to third-party vendors. Cost of
product revenue increased to $2.4 million for the quarter ended June 30, 2000
from $1.7 million for the comparable quarter in 1999, representing 6% and 5% of
the related product revenue, respectively. Cost of product revenue increased to
$4.8 million for the six months ended June 30, 2000 from $2.5 million in the
comparable 1999 period, representing 6% and 5% of the related product revenue in
such periods, respectively. The increase in cost of product revenue as a
percentage of product revenue and in absolute dollars primarily relates to an
increase in royalties paid to third party vendors as well as the higher volumes
of product shipped in successive quarters. Cost of product revenue does not
include amortization of capitalized software development costs as all
development costs incurred in the research and development of new software
products and enhancements to existing software products have been expensed as
incurred. The Company believes that cost of product revenue will increase in
absolute dollar amounts in the future.

COST OF MAINTENANCE AND SERVICE REVENUE. Costs of maintenance and service
revenue consist primarily of personnel related costs incurred in providing
telephone support, consulting services and training to customers. Cost of
maintenance and service revenue increased to $12.6 million for the quarter ended
June 30, 2000 from $8.9 million in the comparable quarter in 1999, representing
43% of the related maintenance and service revenue for both quarters. Cost of
maintenance and service revenue increased to $23.6 million for the six months
ended June 30, 2000 from $16.6 million in the comparable 1999 period,
representing 42% of the related maintenance and service revenue in both periods.
Cost of maintenance and service revenue in absolute dollars increased
significantly, primarily due to costs from increased personnel and third-party
implementation
10
<PAGE> 13

providers, including Remedy Approved Consultants (RACs) as the Company continues
to invest in its customer support and consulting organizations. The Company
believes that cost of maintenance and service revenue will increase in absolute
dollar amounts in the future.

RESEARCH AND DEVELOPMENT. Research and development costs relate to the
personnel and equipment costs associated with maintaining and enhancing existing
product lines as well as developing new product lines to meet the expanding
range of customer requirements. Research and development expenses were $12.8
million and $10.2 million for the quarters ended June 30, 2000 and June 30,
1999, respectively, representing 19% of total revenue for both periods. Research
and development expenses increased to $24.1 million for the six months ended
June 30, 2000 from $19.4 million in the comparable period in 1999, or 18% and
20% of total revenue, respectively. The decrease in research and development
expenses as a percentage of total revenue primarily relates to a slower hiring
rate of research and development employees and consequently fewer expenditures
related to research and development activities in the six month period ended
June 30, 2000 when compared to the same period in prior year. The increase in
research and development expenses in absolute dollar amounts is primarily
attributable to increased staffing, outside contractors and associated support
for software engineers necessary to expand and enhance the Company's product
line. The Company believes that research and development expenses will continue
to increase in absolute dollar amounts in the future.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses for sales and marketing personnel, as well as
promotional expenses. Sales and marketing expenses were $25.2 million and $20.2
million, for the quarters ended June 30, 2000 and June 30, 1999, or 36% and 38%
of total revenue, respectively. Sales and marketing expenses increased to $51.0
million for the six months ended June 30, 2000 from $38.2 million in the
comparable 1999 period, or 39% and 40% of total revenue, respectively. The
increase in sales and marketing expenses in absolute dollar amounts is primarily
due to the Company increasing number of sales and marketing employees and
marketing activities, including trade shows and promotional activities, to
further promote the Company's new and existing products. The Company believes
that sales and marketing expenses will continue to increase in absolute dollar
amounts in the future as the Company plans to further promote the sales of its
expanding product line and increase the size of its sales and marketing
organization.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of the salaries and related expenses for executive and finance
personnel, professional fees and other corporate expenses. General and
administrative expenses were $4.3 million and $3.3 million, for the quarters
ended June 30, 2000 and June 30, 1999, respectively, or 6% of total revenue for
both quarters. General and administrative expenses increased to $7.6 million for
the six months ended June 30, 2000 from $5.4 million for the comparable 1999
period, representing 6% of total revenue for both periods. The increase in
absolute dollar amounts is 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
absolute dollar amounts in the future as the Company expands its staffing.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles relates to the purchase of BayStone Software, Inc. in
October 1998, the purchase of Pipestream Technologies, Inc. in July 1999, the
purchase of Fortress Technologies, Inc. in September 1999, the purchase of
Axtive Software, Inc. in February 2000, the purchase of Ostream Software, Inc.
in February 2000, and the purchase of ESQ Systems Integrators, Inc. in June
2000. Goodwill and other intangibles, which consist of $36.8 million of goodwill
and $2.1 million of acquired workforce valuation are being amortized on a
straight-line basis over a period of four years from the date of acquisition.
Amortization expense totaled $2.2 million and $0.7 million for the quarters
ended June 30, 2000 and June 30, 1999, respectively. Amortization expense
totaled $4.0 million and $1.5 million for the six months ended June 30, 2000 and
June 30, 1999, respectively. Amortization expense related to the acquisitions is
expected to be approximately $8.9 million and $9.7 million, for the twelve
months ending December 31, 2000 and December 31, 2001, respectively.

INTEREST INCOME AND OTHER, NET. Interest income and other, net consists
primarily of interest income earned on the Company's cash and short term
investments, was $2.4 million and $1.2 million for the quarters ended June 30,
2000 and June 30, 1999, respectively. Interest income and other, net increased
to $4.1 million

11
<PAGE> 14

for the six months ended June 30, 2000 from $2.3 million for the comparable 1999
period. The increase is primarily due to larger short-term investment balances
maintained in the quarter ended June 30, 2000 compared to the same period in
1999, as well as to a lesser extent, increased interest rates over the same
comparative period.

PROVISION FOR INCOME TAXES. The effective tax rate for the quarters ended
June 30, 2000 and June 30, 1999 was 30% and 33%, respectively. The effective tax
rate for the six months ended June 30, 2000 and June 30, 1999 was 31% and 33%,
respectively. The effective tax rate for 2000 is lower than the effective tax
rate for 1999 due to higher amounts of low-taxed foreign income and research and
development credits.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $38.8 million and $17.1
million during the six months ended June 30, 2000 and June 30, 1999,
respectively. The increase in the Company's net cash provided by operations was
primarily attributable to the income generated from the current period and
collections of accounts receivable balances.

Net cash used in investing activities was $41.4 million and $30.0 million
during the six months ended June 30, 2000 and June 30, 1999, respectively. The
increase in the Company's net cash used in investing activities is primarily due
to net short-term investment purchases and cash spent on businesses acquired.

Purchases of short-term investments exceeded maturities by $20.2 million
and $22.5 million for the six months ended June 30, 2000 and June 30, 1999,
respectively.

Cash paid to acquire businesses during the six months ended June 30, 2000
amounted to $15.3 million. The $15.3 million is comprised of $7.5 million spent
to acquire Axtive Software, Inc., $2.8 million spent to acquire Ostream
Software, Inc. and $5.0 million spent to acquire ESQ Systems Integrators, Inc.

Cash used to purchase property and equipment, primarily for computer
workstations, capitalized internal use software, leasehold improvements and file
servers for the Company's growing employee base was $5.9 million and $5.5
million during the six months ended June 30, 2000 and June 30, 1999,
respectively. The Company's principal commitments consist primarily of leases on
its facilities and its telephone system.

Net cash provided by financing activities during the six months ended June
30, 2000 increased to $21.4 million from $1.0 million used by financing
activities during the six months ended June 30, 1999. This comparative increase
of $22.4 million is primarily due to the increase in proceeds of $13.3 million
from the issuance of common stock under the stock purchase and stock option
plans during the six month period ended June 30, 2000, compared to the same six
month period in prior year, as well as $9.0 million used to purchase treasury
stock in the six month period ended June 30, 1999.

At June 30, 2000, the Company had $66.0 million in cash and cash
equivalents, $145.3 million in short-term investments and $209.0 million of
working capital.

The Company believes that its current cash and short-term investments
balances and cash flow from operations will be sufficient to meet its working
capital and capital expenditure requirements for at least the next 12 months.
Although operating activities may provide cash 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. In addition, the Company may
utilize cash resources to fund acquisitions or investments in complementary
businesses, technologies or product lines. Consequently, significant future
growth may require the Company to obtain additional equity or debt financing.

12
<PAGE> 15

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

POTENTIAL FLUCTUATIONS IN QUARTERLY 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 no significant order backlog because
its software products typically are shipped or electronically downloaded over
the Web shortly after orders are received. Furthermore, the Company has often
recognized a substantial portion of its revenue in the last month of a quarter,
with this revenue frequently concentrated in the last weeks of a quarter. As a
result, product revenue in any quarter is substantially dependent on orders
booked and shipped in that quarter and revenue for any future quarter is not
predictable with any significant degree of certainty. Product revenue is also
difficult to forecast because the market for 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. The Company's expense levels are based, in part, on its
expectations as to future revenue. If revenue levels are below expectations,
operating results are likely to be adversely affected. Net income may be
disproportionately affected by a reduction in revenue because a proportionately
smaller amount of the Company's expenses varies with its revenue. As a result,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. It is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's Common Stock
would likely be materially adversely affected.

DEPENDENCE ON NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; RISK OF PRODUCT
BUGS. The client/server and web-based application software market is
characterized by rapid technological change, frequent new product introductions
and evolving industry standards. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. The life cycles of the Company's products
are difficult to estimate. The Company's future success will depend upon its
ability to enhance its current products and to develop and introduce new
products on a timely basis that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs of
its customers. In 1999, the Company invested significant resources into the
research and development, sales and marketing of software applications. The
Company is continuing to invest heavily in these efforts in 2000. There can be
no assurance that the Company will be successful in developing and marketing
product enhancements or new products that respond to technological change,
evolving industry standards and customer requirements, or that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products, or that its new
products and product enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. If the Company is unable, for
technological or other reasons, to develop and introduce new products or
enhancements of existing products in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially adversely affected. If the
new products currently being developed by the Company do not achieve market
acceptance or are not released when expected, the Company's business, operating
results and financial condition will be materially adversely affected. Software
products as complex as those offered by the Company may contain undetected
errors or failures when first introduced or when new versions are released. The
Company has in the past discovered software errors in certain of its new
products and enhancements after their introduction and has experienced delays or
lost revenue during the period required to correct these errors. Although the
Company has not experienced material adverse effects resulting from any such
errors to date, there can be no assurance that, despite testing by the Company
and by current and potential customers, errors will not be found in new products
or releases after commencement of commercial shipments, resulting in loss of or
delay in market acceptance, which could have a material adverse effect upon the
Company's business, operating results and financial condition.

13
<PAGE> 16

INTERNATIONAL OPERATIONS. International sales represented approximately 36%
of the Company's revenue in the six months ended June 30, 2000. The Company
currently has thirteen international wholly owned subsidiaries, which are
primarily sales offices, and are located in the United Kingdom, Ireland, Canada,
Germany, France, Spain, Italy, The Netherlands, Sweden, Singapore, Australia,
Japan and Hong Kong. One of the Company's strategies is to continue to expand
its existing international operations and enter additional international
markets, which will require significant management attention and financial
resources. Traditionally, international operations are characterized by higher
operating expenses and lower operating margins. As a result, if international
revenues increase as a percentage of total revenue, operating margins may be
adversely affected. Costs associated with international expansion include the
establishment of additional foreign offices, the hiring of additional personnel,
the localization and marketing of its products for particular foreign markets
and the development of relationships with additional international service
providers. If international revenue is not adequate to offset the expense of
expanding foreign operations, the Company's business, operating results or
financial condition could be materially adversely affected.

The Company's international operations are subject to other risks inherent
in international business activities and generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, product acceptance in
foreign countries, longer accounts receivable payment cycles, difficulties in
managing international operations, potentially adverse tax consequences
including restrictions on the repatriation of earnings, the burdens of complying
with a wide variety of foreign laws, changes in foreign currency exchange rates
and general economic conditions in such countries. There can be no assurance
that such factors will not have a material adverse effect on the Company's
future international sales and, consequently, the Company's results of
operations. In addition, because a substantial majority of the Company's
international sales are indirect, any material increase in the Company's
international sales as a percentage of total revenue may adversely affect the
Company's average selling prices and gross margins due to the lower unit prices
that the Company receives when selling through indirect channels.

PRODUCT CONCENTRATION. The Company currently derives the majority of its
revenue from licenses of the AR System, the applications Remedy provides, which
are built upon the AR System foundation, and related services. Broad market
acceptance of the Company's products is critical to the Company's future
success. As a result, a decline in demand for or failure to achieve broad market
acceptance of the AR System foundation and applications as a result of
competition, technological change or otherwise, would have a material adverse
effect on the business, operating results and financial condition of the
Company. The Company's future financial performance will depend in part on the
successful development, introduction and customer acceptance of new and enhanced
versions of the AR System foundation and other applications, specifically eCRM
and eBusiness Infrastructure Management applications. There can be no assurance
that the Company will continue to be successful in marketing the AR System or
any new or enhanced products or applications. In 2000, the Company continues to
invest significant resources into the research and development, sales and
marketing of new software applications. However, the Company believes that its
success in expanding its product line will depend largely on new products
achieving market acceptance and technological competitiveness.

EMPLOYMENT MARKET; NEED TO INCREASE SALES FORCE. The Company's future
success depends, in part, on its continuing ability to attract and retain highly
qualified technical, sales, marketing and managerial personnel. As a majority of
the Company's workforce is located in the competitive employment market of the
Silicon Valley in California, competition for personnel is intense, and there
can be no assurance that the Company can attract, assimilate or retain adequate
levels of technical, sales, marketing and managerial personnel in the future. In
particular, the Company intends to hire a significant number of additional sales
personnel in 2000 and beyond, which is required if the Company is to achieve
significant revenue growth in the future. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its existing
sales personnel or that it can attract, assimilate or retain additional highly
qualified sales persons in the future. The Company increased the size of its
sales organization from 157 to 189 in 1998, from 189 to 242 in 1999 and from 242
to 275 in the six-month period ended June 30, 2000. In the past, the Company has
experienced difficulty in recruiting a sufficient number of qualified sales
persons. Any failure of the Company

14
<PAGE> 17

to attract and retain such qualified employees could have a material adverse
effect on its business, operating results and financial condition.

RISKS ASSOCIATED WITH SELLING TO LARGE ENTERPRISE CUSTOMERS. The Company
has recently increased its efforts to sell its products to large enterprise
customers, and has devoted significant management and financial resources to
achieving this goal. If successful, large enterprise customers are expected to
deploy the Company's products in business critical operations, which involve
significant capital and management commitments, by such customers. Potential
large enterprise customers generally commit significant resources to an
evaluation of available enterprise software and require the Company to expend
substantial time, effort and money educating them about the value of the
Company's solutions. Sales of the Company's products to such customers require
an extensive sales effort throughout a customer's organization because decisions
to purchase such products generally involve the evaluation of the software by a
significant number of customer personnel in various functional and geographic
areas, each often having specific and conflicting requirements. A variety of
factors, including factors over which the Company has little or no control, may
cause potential large enterprise customers to favor a particular supplier or to
delay or forego a purchase. As a result of these or other factors, the sales
cycle for the Company's products is long, typically ranging between three and
nine months. As a result of the length of the sales cycle and the significant
selling expenses resulting from selling into the large enterprise, the Company's
ability to forecast the timing and amount of specific sales is limited, and the
delay or failure to complete one or more large transactions to which the Company
has devoted significant resources could have a material adverse effect on the
Company's business, operating results or financial condition and could cause
significant variations in the Company's operating results from quarter to
quarter.

EXPANSION OF INDIRECT CHANNELS. An integral part of the Company's strategy
is to continue to develop the marketing channels of value-added resellers
(VARs), system integrators (SIs) and independent software vendors (ISVs). VARs,
SIs and ISVs accounted for approximately 47% of the Company's total billings in
the six-month period ended June 30, 2000. If these marketing channels increase
as a percentage of sales, the Company's operating margins may be adversely
affected due to the lower unit prices that the Company receives when selling
through indirect channels. There can be no assurance that the Company will be
able to attract VARs, SIs and ISVs that will be able to market the Company's
products effectively and will be qualified to provide timely and cost-effective
customer support and service. In addition, the Company's agreements with VARs,
SIs and ISVs are not exclusive and in many cases may be terminated by either
party without cause, and many of the Company's VARs, SIs and ISVs carry
competing product lines. Therefore, there can be no assurance that any VAR, SI
or ISV will continue to represent the Company's products, and the inability to
recruit, or the loss of important VARs, SIs or ISVs could adversely affect the
Company's results of operations.

The Company intends to rely on third-party implementation providers,
including integration consulting firms and Remedy Approved Consultants (RACs),
to assist with the implementation of its products in large enterprise customers
and in the training of personnel within such enterprises, in order to meet the
demand for implementation of the Company's product from large enterprise
customers. As it is the Company's strategy to increase its sales to enterprise
customers and to use third party service providers to service such customers,
the Company's operating margins may be lower as a result of the higher expenses
associated with engaging such third party service providers.

GENERAL ECONOMIC AND MARKET CONDITIONS. During recent years, segments of
the personal computer industry have experienced significant economic downturns
characterized by decreased product demand, production over-capacity, price
erosion, work slowdowns and layoffs. The Company's operations may in the future
experience substantial fluctuations from period to period as a consequence of
such industry patterns, general economic conditions affecting the timing of
orders from major customers and other factors affecting capital spending. There
can be no assurance that such factors will not have a material adverse effect on
the Company's business, operating results or financial condition.

EURO CONVERSION. The Company is aware of the issues associated with the
changes in Europe aimed at forming a European Economic and Monetary Union (EMU).
On January 1, 1999, certain member countries

15
<PAGE> 18

of the European Union established fixed conversion rates between their existing
currencies and the European Union's common currency (the "Euro"). On that day,
the Euro became a functional legal currency within these countries and over the
next three years, business in the EMU member states will be conducted in both
the existing national currency and the Euro. As a result, companies operating in
or conducting business in EMU member states will need to ensure that their
financial and other software systems are capable of processing transactions and
properly handling these currencies, including the Euro. No later than July 1,
2002, the participating countries will withdraw all bills and coins denominated
in the legacy currencies, so that the legacy currencies will no longer be legal
tender for any transactions, making the conversion to the Euro complete. The
Company recognizes that by January 1, 2002, all its customers in the
participating countries in Europe will need to have converted all the values in
their databases to the Euro, having previously reflected all values in the
appropriate local currencies. At this time, it is not possible to summarize the
potential costs associated with addressing any Euro conversion issues and there
can be no assurance that these issues and their related costs will not have a
materially adverse effect on the Company's business, operating results and
financial position. However, based on progress to date, the Company believes
that the use of the Euro will not have a significant impact on the manner in
which it conducts its business.

RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. From time to time the Company
may acquire or invest in companies, consulting practices, technologies or
products that complement the Company's business or its product offerings. Any
such acquisitions may result in the use of cash, potentially dilutive issuances
of equity securities, the write-off of software development costs or other
assets, incurrance of severance liabilities, the amortization of expenses
related to goodwill and other intangible assets and/or the incurrance of debt,
any of which could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations. Acquisitions involve
numerous additional risks including difficulties in the assimilation of
operations, services, products and personnel, the diversion of management's
attention from other business concerns, the disruption of the Company's
business, and the entry into markets in which the Company has little or no
direct prior experience. In addition, potential acquisition candidates targeted
by the Company may not have audited financial statements, detailed financial
information or any degree of internal controls. There can be no assurance that
an audit subsequent to any successful completion of an acquisition will not
reveal matters of significance, including with respect to revenues, expenses,
liabilities, contingent or otherwise, and intellectual property. There can be no
assurance that the Company would be successful in overcoming these or any other
significant risks encountered and the failure to do so could have a material
adverse effect upon the Company's business, operating results and financial
condition.

LIMITED OPERATING HISTORY; FUTURE OPERATING RESULTS UNCERTAIN. The Company
was incorporated in November 1990 and began shipping products in December 1991.
Although the Company has experienced significant absolute dollar growth in
revenue in recent years, there can be no assurance that the prior growth rates
are sustainable or indicative of future operating results or that the Company
will remain profitable on a quarterly or annual basis. In addition, the
Company's limited operating history makes the prediction of future operating
results difficult or impossible. Future operating results will depend on many
factors, including the demand for the Company's products, the level of product
and price competition, the Company's success in expanding its direct sales
organization and indirect distribution channels, the ability of the Company to
develop and market new products and control costs, and the percentage of the
Company's revenue derived from indirect channels, which may have lower gross
margins than direct sales. The Company intends to invest significantly in its
business in order to maintain a competitive position and as a result, current
operating margins may not be sustainable in the future.

YEAR 2000. The "Year 2000 problem" relates to the potential for computer
systems to improperly recognize date sensitive information in the year 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail.

In 1999, the Company spent $0.7 million for its Year 2000 remediation,
which included expenditures for consulting, equipment and internal personnel.
Subsequent to the rollover to the Year 2000, the Company is not aware of any
material Year 2000 operational issues or costs associated with its internal IT
systems and non-IT systems or its products and the Company does not expect to
experience any in the future. The Company may potentially experience
unanticipated post Year 2000 problems caused by undetected errors in
16
<PAGE> 19

both technology utilized for IT systems and vendors with whom Remedy does
business. The Company will continually monitor suppliers of systems, software
and services for any subsequent post Year 2000 effects on the Company's internal
business processes. Any post Year 2000 compliance problems of either the Company
or its vendors could materially adversely affect the Company's business, results
of operations, financial condition and prospects.

ADDITIONAL RISKS. The Company's business entails a variety of additional
risks not mentioned above, such as Management of Growth; Dependence Upon Key
Personnel; Dependence on Proprietary Technology; Risks of Infringementand
Product Liability which are set forth in the "Factors That May Affect Future
Operating Results" section of the Company's 1999 Report on Form 10-K filed with
the Securities and Exchange Commission in March 2000.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK. The Company's exposure to market risk for changes in
interest rates primarily relates to the Company's investment portfolio. As
stated in its policy, the Company is averse to principal loss and seeks to
preserve its invested funds by limiting issuer risk, default risk, liquidity
risk and interest rate risk. The Company limits issuer risk by placing its
investments with high credit quality issuers and, by policy, limiting the amount
of credit exposure to any one issuer. The Company mitigates default and
liquidity risks by investing in only high credit quality securities and by
positioning its portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer or guarantor. The portfolio includes
only marketable securities with active secondary or resale markets to ensure
portfolio liquidity. The Company mitigates interest rate risk by only allowing
suitable investments to be made in taxable and non-taxable U.S. as well as
foreign instruments. All of the Company's investments in aggregate have a
weighted average remaining maturity of less than one year at any given point in
time. For a tabular presentation of interest rate risk sensitive instruments,
including the carrying value, market value and related weighted average interest
rates for the Company's investment portfolio as of December 31, 1999 and
December 31, 1998, see the Company's 1999 Form 10-K filed with the Securities
and Exchange Commission in March 2000.

FOREIGN CURRENCY RISK. The Company transacts business in various foreign
currencies, primarily in Europe. As some revenues are denominated in currencies
other than U.S. dollars, the Company will be subject to the risks associated
with foreign exchange rate fluctuations. In addition, an increase in the value
of the U.S. dollar relative to foreign currencies could make the Company's
products more expensive and, therefore, potentially less competitive in those
markets. As part of its overall strategy to manage the level of exposure to the
risk of foreign currency exchange rate fluctuations, the Company hedges a
portion of its foreign currency exposures anticipated over the ensuing twelve
month period. In the fourth quarter of 1999, the Company began invoicing in
currencies other than U.S. dollars, and as a result, the Company has entered
into hedging activities in order to minimize the exposure of the United States
Dollar (USD) value of foreign currency denominated sales. In the future, more of
the Company's revenues may be denominated in currencies other than U.S. dollars
and, as a result, the Company's exposure in the future may fluctuate depending
upon the nature and success of the hedging activities. Accordingly, due to the
substantial volatility of foreign exchange rates, the Company's business,
operating results or financial condition could be materially adversely affected.
See Note 6 of Notes to Condensed Consolidated Financial Statements.

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<PAGE> 20

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 26, 2000, the Annual Meeting of Stockholders of Remedy Corporation
was held in Mountain View, California. Of the 30,793,431 shares outstanding as
of March 31, 2000, the record date, holders of 28,671,677 shares were present or
represented by proxy at the meeting.

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.................. (24,543,614 votes for, 4,128,063
votes withheld)
David A. Mahler...................... (27,767,757 votes for, 903,920 votes
withheld)
Harvey C. Jones, Jr.................. (24,548,152 votes for, 4,123,525
votes withheld)
John F. Shoch........................ (28,583,778 votes for, 87,899 votes
withheld)
Sheri Anderson....................... (28,580,828 votes for, 90,849 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 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. (16,297,482 votes
in favor, 12,348,122 votes opposed, 26,073 votes abstaining).

2. To ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31,
2000. (28,557,358 votes in favor, 105,166 votes opposed, 9,153
votes abstaining).

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) List of Exhibits

<TABLE>
<CAPTION>
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
27.1 Financial Data Schedule (Filed Electronically)
</TABLE>

(b) Reports on Form 8-K: None

18
<PAGE> 21

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/ RON J. FIOR
--------------------------------------
Ron J. Fior
Vice President, Finance & Operations,
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting
Officer)

Dated: August 11, 2000