REMEDY CORP
10-Q, 2000-11-14
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 SEPTEMBER 30, 2000

                                       OR

      [ ]   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 30,756,486 shares of the Company's Common Stock, par value
$.00005, outstanding on November 3, 2000.

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<PAGE>   2

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                       PAGE
                                                                       NO.
                                                                       ----
<S>      <C>                                                           <C>
                      PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets as of September 30,
         2000 and December 31, 1999..................................    3

         Condensed Consolidated Statements of Income for the Three
         and Nine Months Ended September 30, 2000 and September 30,
         1999........................................................    4

         Condensed Consolidated Statements of Cash Flows for the Nine
         Months Ended September 30, 2000 and September 30, 1999......    5

         Notes to Condensed Consolidated Financial Statements........    6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................    9

Item 3.  Quantitative and Qualitative Disclosures About Market
         Risk........................................................   18

                        PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K............................   20

SIGNATURE............................................................   21
</TABLE>

                                        2
<PAGE>   3

                         PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                               REMEDY CORPORATION

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

                                     ASSETS

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,   DECEMBER 31,
                                                                  2000          1999(1)
                                                              -------------   ------------
                                                               (UNAUDITED)
<S>                                                           <C>             <C>
Current assets:
  Cash and cash equivalents.................................    $ 33,286        $ 47,302
  Short-term investments....................................     162,907         125,116
  Accounts receivable, net..................................      65,124          64,105
  Prepaid expenses and other current assets.................       6,979           7,383
  Deferred tax assets.......................................      10,765           6,831
                                                                --------        --------
          Total current assets..............................     279,061         250,737
Property and equipment, net.................................      18,729          14,945
Other non-current assets....................................       1,249           2,996
Goodwill and other intangible assets, net...................      27,876          18,809
                                                                --------        --------
                                                                $326,915        $287,487
                                                                ========        ========

                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $  3,683        $  1,861
  Accrued compensation and related liabilities..............      10,423          15,432
  Income taxes payable......................................       3,101           1,341
  Other accrued liabilities.................................      19,061          15,395
  Deferred revenue..........................................      47,854          38,828
  Current portion of obligations under capital leases.......          13              67
                                                                --------        --------
          Total current liabilities.........................      84,135          72,924
Noncurrent portion of obligations under capital leases......          --              23
Stockholders' equity:
  Common stock and additional paid-in capital...............     175,195         141,546
  Treasury Stock (3,372,300 and 2,002,300 shares,
     respectively)..........................................     (59,408)        (31,267)
  Notes receivable from stockholders........................         (46)            (45)
  Accumulated other comprehensive income/(loss).............        (436)              9
  Retained earnings.........................................     127,475         104,297
                                                                --------        --------
          Total stockholders' equity........................     242,780         214,540
                                                                --------        --------
                                                                $326,915        $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.
                                        3
<PAGE>   4

                               REMEDY CORPORATION

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

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED     NINE MONTHS ENDED
                                                      SEPTEMBER 30,          SEPTEMBER 30,
                                                    ------------------    --------------------
                                                     2000       1999        2000        1999
                                                    -------    -------    --------    --------
<S>                                                 <C>        <C>        <C>         <C>
Revenue:
  Products........................................  $43,782    $38,291    $118,952    $ 93,785
  Maintenance and service.........................   31,197     22,573      87,085      62,514
                                                    -------    -------    --------    --------
          Total revenue...........................   74,979     60,864     206,037     156,299
Costs and expenses:
  Cost of product revenue.........................    2,616      2,053       7,405       4,594
  Cost of maintenance and service revenue.........   11,862      9,718      35,467      26,347
  Research and development........................   13,049     10,221      37,171      29,640
  Sales and marketing.............................   27,349     23,024      78,339      61,216
  General and administrative......................    4,837      3,071      12,411       8,489
  Amortization of goodwill and other
     intangibles..................................    2,437      1,149       6,469       2,609
                                                    -------    -------    --------    --------
          Total costs and expenses................   62,150     49,236     177,262     132,895
Income from operations............................   12,829     11,628      28,775      23,404
Interest income and other, net....................    2,485      1,169       6,567       3,453
Non-recurring charges.............................   (2,000)        --      (2,000)         --
                                                    -------    -------    --------    --------
Income before provision for income taxes..........   13,314     12,797      33,342      26,857
Provision for income taxes........................    3,995      4,223      10,164       8,863
                                                    -------    -------    --------    --------
Net income........................................  $ 9,319    $ 8,574    $ 23,178    $ 17,994
                                                    =======    =======    ========    ========
Net income per share:
  Basic...........................................  $  0.30    $  0.30    $   0.75    $   0.63
                                                    =======    =======    ========    ========
  Diluted.........................................  $  0.28    $  0.27    $   0.69    $   0.59
                                                    =======    =======    ========    ========
Shares used in computing per share amounts:
  Basic...........................................   30,980     28,839      30,878      28,662
                                                    =======    =======    ========    ========
  Diluted.........................................   32,860     31,608      33,754      30,636
                                                    =======    =======    ========    ========
</TABLE>

                            See accompanying notes.
                                        4
<PAGE>   5

                               REMEDY CORPORATION

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

<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED
                                                                  SEPTEMBER 30,
                                                              ----------------------
                                                                2000         1999
                                                              ---------    ---------
<S>                                                           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................  $  23,178    $  17,994
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation...........................................      6,682        5,612
     Amortization of goodwill and other intangibles.........      6,468        2,609
  Changes in assets and liabilities:
     Accounts receivable....................................     (1,019)      (7,778)
     Prepaid expenses and other current assets..............     10,345       (1,961)
     Deferred tax asset.....................................     (3,934)          --
     Accounts payable.......................................      1,822         (161)
     Accrued compensation and related liabilities...........     (5,009)         957
     Income taxes payable...................................      1,760        2,827
     Other accrued liabilities..............................      2,670        2,820
     Other non-current assets...............................      1,747         (593)
     Deferred revenue.......................................      9,026        4,228
                                                              ---------    ---------
          Net cash provided by operating activities.........     53,736       26,554
                                                              ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.........................   (450,793)    (238,559)
Maturities of short-term investments........................    413,002      215,124
Other non-current assets....................................         --      (11,028)
Cash paid for businesses acquired, net of cash assumed......    (15,339)      (2,000)
Capital expenditures........................................    (10,112)      (7,768)
                                                              ---------    ---------
          Net cash used in investing activities.............    (63,242)     (44,231)
                                                              ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations..........        (77)        (460)
Proceeds from issuance of common stock......................     23,708       13,910
Purchase of treasury stock..................................    (28,141)     (17,290)
                                                              ---------    ---------
          Net cash used in financing activities.............     (4,510)      (3,840)
                                                              ---------    ---------
Net decrease in cash and cash equivalents...................    (14,016)     (21,517)
Cash and cash equivalents at beginning of period............     47,302       58,976
                                                              ---------    ---------
Cash and cash equivalents at end of period..................  $  33,286    $  37,459
                                                              =========    =========
</TABLE>

                            See accompanying notes.
                                        5
<PAGE>   6

                               REMEDY CORPORATION

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

 1. BASIS OF PRESENTATION

     The condensed consolidated balance sheet as of September 30, 2000, the
condensed consolidated statements of income for the three and nine months ended
September 30, 2000 and 1999, and the condensed consolidated statements of cash
flows for the nine months ended September 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 September 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 nine months ended September 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 generally
of 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 the
several deliverables based on the relative fair value of each of the
deliverables based on objective evidence 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 to be 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 the services are considered essential, revenue under the
arrangement is recognized using contract accounting. When the 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.

                                        6
<PAGE>   7
                               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    NINE MONTHS ENDED
                                                        SEPTEMBER 30,         SEPTEMBER 30,
                                                      ------------------    ------------------
                                                       2000       1999       2000       1999
                                                      -------    -------    -------    -------
                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                   <C>        <C>        <C>        <C>
Numerator:
  Net Income........................................  $ 9,319    $ 8,574    $23,178    $17,994
                                                      =======    =======    =======    =======
Denominator:
  Denominator for basic earnings per share-weighted-
     average shares.................................   30,980     28,839     30,878     28,662
  Effect of dilutive securities:
  Employee stock options............................    1,880      2,769      2,876      1,974
                                                      -------    -------    -------    -------
  Denominator for diluted earnings per
     share-weighted-average shares and dilutive
     securities.....................................   32,860     31,608     33,754     30,636
                                                      =======    =======    =======    =======
  Basic earnings per share..........................  $  0.30    $  0.30    $  0.75    $  0.63
                                                      =======    =======    =======    =======
  Diluted earnings per share........................  $  0.28    $  0.27    $  0.69    $  0.59
                                                      =======    =======    =======    =======
</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. SHARE REPURCHASE

     On July 26, 2000, the Board of Directors authorized management of the
Company to purchase up to an additional 3 million shares or approximately 10
percent of the Company's outstanding shares of common stock

                                        7
<PAGE>   8
                               REMEDY CORPORATION

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

over the next twelve months. Since 1998, the Company has purchased shares on the
open market from time to time, depending on market conditions. The repurchases
have been funded by the Company's cash and short-term investments. During the
three months ended September 30, 2000, the Company repurchased a total of
approximately 1.4 million shares of the Company's stock at an average price of
$20.54 totaling approximately $28.1 million.

 6. DERIVATIVE FINANCIAL INSTRUMENTS

     The Company uses derivative financial instruments principally to minimize
exposure 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 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 September 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 September 30, 2000 no charge
representing the change in option time values, was recorded in earnings.

     As of September 30, 2000, the Company included the fair value of forward
contracts of $612,000 in prepaid expenses and other current assets in its
consolidated balance sheet. The company had no simple purchase option contracts
at September 30, 2000.

     At September 30, 2000, the Company had a balance of $42,000 in other
comprehensive income related to future transactions. The other comprehensive
income balance at September 30, 2000 is expected to be recognized into earnings
within the next twelve months. A loss of $3,100 was reclassed into earnings from
other comprehensive income for the quarter ended September 30, 2000 upon
recognition of the related revenue and expenses.

                                        8
<PAGE>   9

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 Information Technology Service Management (ITSM), Customer
Relationship Management (CRM) and eBusiness solutions. With more than 9,500
sites, more organizations use Remedy products for CRM and ITSM 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.

                                        9
<PAGE>   10

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      NINE MONTHS
                                                                  ENDED             ENDED
                                                              SEPTEMBER 30,     SEPTEMBER 30,
                                                              --------------    --------------
                                                              2000     1999     2000     1999
                                                              -----    -----    -----    -----
<S>                                                           <C>      <C>      <C>      <C>
Revenue:
  Products..................................................    58%      63%      58%      60%
  Maintenance and service...................................    42%      37%      42%      40%
                                                               ---      ---      ---      ---
          Total revenue.....................................   100%     100%     100%     100%
Costs and expenses:
  Cost of product revenue...................................     4%       3%       4%       3%
  Cost of maintenance and service revenue...................    16%      16%      17%      17%
  Research and development..................................    17%      17%      18%      19%
  Sales and marketing.......................................    37%      38%      38%      39%
  General and administrative................................     6%       5%       6%       5%
  Amortization of goodwill and other intangibles............     3%       2%       3%       2%
                                                               ---      ---      ---      ---
          Total costs and expenses..........................    83%      81%      86%      85%
Income from operations......................................    17%      19%      14%      15%
Interest income and other, net..............................     3%       2%       3%       2%
  Non-recurring charges.....................................    (3)%      0%      (1)%      0%
                                                               ---      ---      ---      ---
Income before provision for income taxes....................    17%      21%      16%      17%
Provision for income taxes..................................     5%       7%       5%       6%
                                                               ---      ---      ---      ---
Net income..................................................    12%      14%      11%      11%
                                                               ===      ===      ===      ===
</TABLE>

  REVENUE

     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 generally
of 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 the
several deliverables based on the relative fair value of each of the
deliverables based on objective evidence 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 to be 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 the services are considered essential, revenue under the
arrangement is recognized using contract accounting. When the services are not
considered essential, the revenue allocable to the software services is
recognized as the services are performed.

     The Company distributes the majority of its products through its 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


                                       10
<PAGE>   11

approximately 45% of the Company's total billings for both quarters ended
September 30, 2000 and September 30, 1999 and approximately 46% for the nine
months ended September 30, 2000 and 47% for 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. Revenue from product licenses increased 14% to $43.8
million for the quarter ended September 30, 2000 from $38.3 million for the
comparable quarter in 1999. Product license fees increased 27% to $119.0 million
for the nine months ended September 30, 2000 from $93.8 million for 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 Customer Relationship Management suite. 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
38% and 35% of the Company's total revenue for the quarters ended September 30,
2000 and September 30, 1999, respectively. International sales accounted for
approximately 37% of the Company's total revenue for the nine months ended
September 30, 2000 and 34% for the comparable period in 1999. The new software
solutions (Help Desk, Asset Management, Change Management, Serviceware, etc.)
comprised 43% of total license revenue compared to 39% last quarter and 29% in
the third quarter of 1999. The growth of our generic customer configurable
Action Request System is slowing as customers adopt more of our packaged
solutions. 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 continue to hire and retain additional
highly qualified sales persons.

     MAINTENANCE AND SERVICE REVENUE. Revenue from maintenance and services
increased by 38% to $31.2 million for the quarter ended September 30, 2000 from
$22.6 million for the comparable quarter in 1999. Revenue from services
increased by 39% to $87.1 million for the nine months ended September 30, 2000
from $62.5 million for 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 $2.6 million for the quarter ended September 30,
2000 from $2.1 million for the comparable quarter in 1999, representing 6% and
5% of the related product revenue, respectively. Cost of product revenue
increased to $7.4 million for the nine months ended September 30, 2000 from $4.6
million for 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 $11.9 million for the quarter ended
September 30, 2000 from $9.7 million for the comparable quarter in 1999,
representing 38% and 43% of the related maintenance and service revenue,
respectively. Cost of maintenance and service revenue increased to

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$35.5 million for the nine months ended September 30, 2000 from $26.3 million
for the comparable 1999 period, representing 41% and 42%, respectively, of the
related maintenance and service revenue in such periods. Cost of maintenance and
service revenue as a percentage of related maintenance and service revenue
decreased primarily due to the increased use of in-house consultants resulting
from the acquisition of ESQ System Integrators, Inc. in the second quarter ended
June 30, 2000. Cost of maintenance and service revenue in absolute dollars
increased, primarily due to costs from increased personnel, 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; however, maintenance and service costs as
a percentage of maintenance and service revenues were 38% for this quarter and
lower than our historical 43%. The Company believes that these costs should
remain at this improved rate for the balance of the year.

     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 $13.0
million and $10.2 million for the quarters ended September 30, 2000 and
September 30, 1999, respectively, representing 17% of total revenue for both
periods. Research and development expenses increased to $37.2 million for the
nine months ended September 30, 2000 from $29.6 million for the comparable
period in 1999, or 18% and 19% of total revenue for each quarter, respectively.
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 $27.3 million and $23.0
million for the quarters ended September 30, 2000 and September 30, 1999, or 37%
and 38% of total revenue for each quarter, respectively. Sales and marketing
expenses increased to $78.3 million for the nine months ended September 30, 2000
from $61.2 million for the comparable 1999 period, or 38% and 39% of total
revenue, respectively. The decrease in sales and marketing expenses as a
percentage of total revenue primarily relates to a slower hiring rate of sales
and marketing employees and consequently fewer expenditures related to sales and
marketing activities in the nine month period ended September 30, 2000. The
increase in sales and marketing expenses in absolute dollar amounts is primarily
due to the Company's 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 $4.8 million and $3.1 million, or 6% and 5% of
total revenue, for the quarters ended September 30, 2000 and September 30, 1999,
respectively. General and administrative expenses increased to $12.4 million for
the nine months ended September 30, 2000 from $8.5 million for the comparable
1999 period, or 6% and 5% of total revenue for each quarter, respectively. 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 to support future growth.

     AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles relates to the purchase of BayStone Software, Inc. in
October 1998, Pipestream Technologies, Inc. in July 1999, Fortress Technologies,
Inc. in September 1999, Axtive Software, Inc. in February 2000, Ostream
Software, Inc. in February 2000, and 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.

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<PAGE>   13

Amortization expense totaled $2.4 million and $1.1 million for the quarters
ended September 30, 2000 and September 30, 1999, respectively. Amortization
expense totaled $6.5 million and $2.6 million for the nine months ended
September 30, 2000 and September 30, 1999, respectively. Amortization expense
related to these 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 and was $2.5 million and $1.2 million for the quarters ended
September 30, 2000 and September 30, 1999, respectively. Interest income and
other, net increased to $6.6 million for the nine months ended September 30,
2000 from $3.5 million for the comparable 1999 period. The increase is primarily
due to larger short-term investment balances maintained in the quarter ended
September 30, 2000 compared to the same period in 1999, as well as, to a lesser
extent, increased interest rates over the same comparative period.

     NON-RECURRING CHARGES. During 1999, Remedy made a minority equity
investment of $2.0 million in a non-publicly traded software company. During the
quarter ended September 30, 2000, Remedy wrote off the $2.0 million investment
after determining that the investment was permanently impaired. Remedy accounts
for long-term investments using the cost method. However, when it is determined
that an investment is permanently impaired, Remedy records an impairment
adjustment.

     PROVISION FOR INCOME TAXES. The effective tax rates for the quarters ended
September 30, 2000 and September 30, 1999 were 30% and 33%, respectively. The
effective tax rates for the nine months ended September 30, 2000 and September
30, 1999 were 31% and 33%, respectively. The effective tax rate for 2000 is
lower than the effective tax rate for 1999 primarily 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 $53.7 million and $26.6
million during the nine months ended September 30, 2000 and September 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.

     Net cash used in investing activities was $63.2 million and $44.2 million
during the nine months ended September 30, 2000 and September 30, 1999,
respectively. The increase in the Company's net cash used in investing
activities is primarily due to net short-term investment purchases, cash spent
on businesses acquired and purchases of property and equipment.

     Purchases of short-term investments exceeded maturities of short-term
investments by $37.8 million and $23.4 million for the nine months ended
September 30, 2000 and September 30, 1999, respectively.

     Cash paid to acquire businesses during the nine months ended September 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 $10.1 million and $7.8
million during the nine months ended September 30, 2000 and September 30, 1999,
respectively. The Company's principal commitments consist primarily of leases on
its facilities and its telephone system.

     Net cash used in financing activities during the nine months ended
September 30, 2000 increased to $4.5 million from $3.8 million used in financing
activities during the nine months ended September 30, 1999. This comparative
increase of approximately $1 million is primarily due to the repurchase of
approximately 1.4 million shares of common share at a cost of $28.1 million
netted with proceeds of $23.7 million from the issuance of common stock under
the stock purchase and stock option plans during the nine month period ended
September 30, 2000, compared with approximately 900,000 shares repurchased for


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$17.3 million netted with proceeds of $13.9 million from the issuance of common
stock under the stock purchase and option plans, during the nine month period
ended September 30, 1999.

     At September 30, 2000, the Company had $33.3 million in cash and cash
equivalents, $162.9 million in short-term investments and $194.9 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.

     On July 26, 2000, the Board of Directors authorized management of the
Company to purchase up to an additional 3 million shares or approximately 10
percent of the Company's outstanding shares of common stock over the next twelve
months. Since 1998, the Company has purchased shares on the open market from
time to time, depending on market conditions. The repurchases have been funded
by the Company's cash and short-term investments. During the three months ended
September 30, 2000, the Company had repurchased a total of approximately 1.4
million shares of the Company's stock at an average price of $20.54 for
approximately $28.1 million.

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


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<PAGE>   15

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.

     INTERNATIONAL OPERATIONS. International sales represented approximately 37%
of the Company's revenue in the nine months ended September 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 that
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

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Customer Relationship Management and Information Technology Service 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 223 in 1999 and from 223
to 283 in the nine-month period ended September 30, 2000. In the past, the
Company has experienced difficulty in recruiting a sufficient number of
qualified sales persons. Any failure of the Company 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 46% of the Company's total billings in
the nine-month period ended September 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

                                       16
<PAGE>   17

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 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, incurrence of severance liabilities, the amortization of expenses
related to goodwill and other intangible assets and/or the incurrence of debt,
any of which could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations. Acquisitions involve
numerous additional risks including difficulties in the assimilation of
operations, services, products and personnel, the diversion of management's
attention from other business concerns, the disruption of the Company's business
and the entry into markets in which the Company has little or no direct prior
experience. In addition, potential acquisition candidates targeted by the
Company may not have audited financial statements, detailed financial
information or any degree of internal controls. There can be no assurance that
an audit subsequent to any successful completion of an acquisition will not
reveal matters of significance, including with respect to revenues, expenses,
liabilities, contingent or otherwise, and intellectual property. There can be no
assurance that the Company would be successful in overcoming these or any other
significant risks encountered and the failure to do so could have a material
adverse effect upon the Company's business, operating results and financial
condition.

                                       17
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     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 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,

                                       18
<PAGE>   19

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.

                                       19
<PAGE>   20

                          PART II.  OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) List of Exhibits

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

     (b) Reports on Form 8-K: None

                                       20
<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: November 10, 2000

                                       21
<PAGE>   22

                                 EXHIBIT INDEX

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

                                       22


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