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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number: 0-28900
ROGUE WAVE SOFTWARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 93-1064214
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
850 SW 35th Street, Corvallis, Oregon 97333
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(Address of principal executive offices) (Zip Code)
(541) 754-3010
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
Class Outstanding at March 31, 1997
----- -----------------------------
Common Stock, $0.001 par value 7,647,188
1.
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ROGUE WAVE SOFTWARE, INC.
FORM 10-Q
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 1997
and September 30, 1996..........................................3
Consolidated Statements of Operations for the three and six
months ended March 31, 1997 and 1996............................4
Consolidated Statements of Cash Flows for the
six months ended March 31, 1997 and 1996........................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................15
Item 6. Exhibits and Reports on Form 8-K....................................15
SIGNATURES...................................................................16
2.
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PART I - FINANCIAL INFORMATION
Item 1. - Consolidated Financial Statements:
ROGUE WAVE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, September 30,
1997 1996
-------- --------
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 30,934 $ 1,714
Accounts receivable, net 3,892 4,527
Prepaid and other current assets 716 981
-------- --------
Total current assets 35,542 7,222
Furniture, fixtures and equipment, net 3,041 2,718
Other assets, net 2,161 254
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Total assets $ 40,744 $ 10,194
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-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 1,037 $ 637
Accrued expenses 2,776 805
Deferred revenue 4,565 2,881
Current portion of long-term obligations 218 217
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Total current liabilities 8,596 4,540
Long-term obligations, less current portion 428 322
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Total liabilities 9,024 4,862
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Mandatorily redeemable preferred stock -- 4,664
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Stockholders' equity:
Common stock 8 4
Additional paid-in capital 30,775 676
Shareholder note receivable (13) (13)
Retained earnings 949 24
Cumulative translation adjustment 1 (23)
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Total stockholders' equity 31,720 668
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Total liabilities and
stockholders' equity $ 40,744 $ 10,194
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-------- --------
See accompanying notes.
3.
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ROGUE WAVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data, unaudited)
Three months ended Six months ended
March 31, March 31,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenue:
License revenue $ 5,125 $ 3,697 $ 9,610 $ 6,430
Service and maintenance revenue 1,787 950 3,181 1,754
------- ------- ------- -------
Total revenue 6,912 4,647 12,791 8,184
------- ------- ------- -------
Cost of revenue:
Cost of license revenue 438 242 780 461
Cost of service and
maintenance revenue 595 343 1,097 637
------- ------- ------- -------
Total cost of revenue 1,033 585 1,877 1,098
------- ------- ------- -------
Gross profit 5,879 4,062 10,914 7,086
------- ------- ------- -------
Operating expenses:
Product development 1,592 1,486 3,076 2,410
Sales and marketing 2,978 2,101 5,455 3,707
General and administrative 749 500 1,454 972
------- ------- ------- -------
Total operating expenses 5,319 4,087 9,985 7,089
------- ------- ------- -------
Income (loss) from operations 560 (25) 929 (3)
Other income, net 342 43 452 57
------- ------- ------- -------
Income before income taxes 902 18 1,381 54
Income tax expense 298 4 456 11
------- ------- ------- -------
Net income $ 604 $ 14 $ 925 $ 43
------- ------- ------- -------
------- ------- ------- -------
Net income per common share $ 0.07 $ 0.00 $ 0.11 $ 0.01
------- ------- ------- -------
------- ------- ------- -------
Shares used in per share calculation 8,896 6,066 8,116 6,775
See accompanying notes.
4.
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ROGUE WAVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands unaudited)
Six Months Ended
March 31,
-----------------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 925 $ 43
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 706 361
Changes in assets and liabilities:
Accounts receivable 1,698 (1,198)
Prepaid and other current assets 460 (58)
Other assets (109) (110)
Accounts payable and accrued expenses 1,240 (199)
Deferred revenue 982 531
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Net cash from operating activities 5,902 (630)
-------- --------
Cash flows from investing activities:
Purchase of furniture, fixtures, and equipment (793) (531)
Purchase of business, net of cash acquired (1,245) --
-------- --------
Net cash from investing activities (2,038) (531)
-------- --------
Cash flows from financing activities:
Payments on long-term obligations (105) (72)
Net proceeds from issuance of mandatorily
redeemable preferred stock -- 3,523
Proceeds from issuance of common stock, net 25,627 --
Stock issuance costs (248) --
Proceeds from exercise of stock options 60 24
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Net cash from financing activities 25,334 3,475
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Effect of exchange rate on cash and cash equivalents 22 (2)
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Net change in cash and
cash equivalents 29,220 2,312
Cash and cash equivalents at beginning of period 1,714 1,010
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Cash and cash equivalents at end of period $ 30,934 $ 3,322
-------- --------
-------- --------
See accompanying notes.
5.
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ROGUE WAVE SOFTWARE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the statements include all adjustments necessary (which are
of a normal and recurring nature) for the fair presentation of the
results of the interim periods presented. These financial statements
should be read in conjunction with the Company's audited consolidated
financial statements for the year ended September 30, 1996, as included
in the Company's Registration Statement on Form SB-2 (Registration No.
333-13517) filed with the Securities and Exchange Commission.
2. Net Income Per Common Share
Net income per common share is computed using the weighted average
number of common and dilutive common equivalent shares assumed to be
outstanding during the period. Common equivalent shares consist of
options to purchase common stock.
3. Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
4. Stockholders' Equity
On November 21, 1996, the Company completed a public offering of
2,363,890 shares of common stock which generated net proceeds of
approximately $25.6 million after deducting applicable issuance costs
and expenses. On December 3, 1996 the Company's underwriters exercised
their over-allotment option resulting in the issuance of an additional
3,750 shares of common stock which generated net proceeds of
approximately $41,850 after deducting applicable issuance costs and
expenses. The net proceeds are expected to be used for working capital
and general corporate purposes, including the expansion of general sales
and customer support and possible future acquisitions of technologies,
products or businesses.
5. Acquisition
On February 15, 1997, the Company acquired 100% of the outstanding stock
of PVI Precision Software GmbH (Precision) for $2 million in cash.
Precision is a European distributor of Rogue Wave software products and
other companies' software products in Germany, the United Kingdom,
France, and the Benelux countries. The acquisition has been accounted
for under the purchase method and accordingly, the accompanying
financial statements include Precision's results beginning with the
acquisition date.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THIS SECTION, AS WELL AS IN THE SECTION ENTITLED "FACTORS
THAT MAY AFFECT FUTURE RESULTS," AND THOSE DISCUSSED UNDER THE CAPTION
"RISK FACTORS" IN THE COMPANY'S REGISTRATION STATEMENT ON FORM SB-2 (NO.
333-13517). READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS
OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
RELEASE THE RESULTS OF ANY REVISION TO THESE FORWARD-LOOKING STATEMENTS
WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
OVERVIEW
Rogue Wave was founded in 1989 to provide reusable software parts
for the development of object-oriented software applications. The
Company operated as a Subchapter S corporation until June 1994. In
October 1995, Rogue Wave merged with Inmark Development Corporation
("Inmark"), a privately held corporation specializing in the
development, distribution and support of an object-oriented graphical
user interface library written in the C++ programming language.
To date, the Company's revenue has been derived from licenses of
its software products and related maintenance, training and consulting
services. License revenue is recognized upon execution of a license
agreement and shipment of the product if no significant contractual
obligations remain and collection of the resulting receivable is
probable. Allowances for credit risks and for estimated future returns
are provided for upon shipment. Returns to date have not been material.
Service and maintenance revenue consists of fees that are charged
separately from the product licenses. Maintenance revenue consists of
fees for ongoing support and product updates and is recognized ratably
over the term of the contract, which is typically 12 months. Service
revenue consists of training and consulting services and is recognized
upon completion of the related activity. For all periods presented, the
Company has recognized revenue in accordance with Statement of Position
91-1, SOFTWARE REVENUE RECOGNITION.
The Company markets its products primarily through its direct sales
force, and to a lesser extent through the Internet and an indirect
channel consisting of OEMs, VARs, dealers and distributors. The
Company's direct sales force consists of an inside telesales group that
focuses on smaller orders ($50,000 or less), and an outside sales force
that focuses on larger site licenses. The Company makes all of its
products available for sale and distribution over the Internet to
customers in the United States. Revenue through this channel has not
been significant to date, and there can be no assurance that the Company
will be successful in marketing its products through this channel.
International revenue accounted for approximately 24% of total
revenue in the second quarter of fiscal 1997. In January 1996, the
Company established a wholly-owned subsidiary in Germany to market and
support the Company's products in Germany and neighboring countries. In
February 1997, the Company expanded its European operations by acquiring
100% of the outstanding stock of PVI Precision Software GmbH
"Precision". Precision is a European distributor of Rogue Wave software
products and other companies' software products in Germany, the United
Kingdom, France, and the Benelux countries. The Company anticipates
establishing or acquiring similar organizations in other locations in
Europe, and possibly in Asia. The Company expects that international
license and service and maintenance
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revenue will account for an increasing portion of its total revenue in the
future. The Company has committed and continues to commit significant
management time and financial resources to developing direct and indirect
international sales and support channesl. There can be no assurance, however,
that the Company will be able to maintain or increase international market
demand for its products. To date, other than revenue gernerated by the
Company's European subsidiaries, the Company's international revenue has
been denominated in United States dollars. As a result of recent
fluctuations in international exchange rates, the Company's Board of
Directors has authorized the Company to enter into forward foreign exchange
contracts to minimize the transaction risk associated with such fluctuations.
Although exposure to currency fluctuations to date has been insignificant,
there can be no assurance that the Company will not experience a material
adverse impact on its financial condition and results of operations from
fluctuations in foreign currencies in the future.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of net revenues represented by certain line items in the Company's
Consolidated Statements of Operations.
Percentage of total net revenues for the
----------------------------------------
Three months ended Six months ended
March 31, March 31,
------------------ ------------------
1997 1996 1997 1996
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Revenue:
License revenue 74% 80% 75% 79%
Service and maintenance revenue 26% 20% 25% 21%
------ ------ ------ ------
Total revenue 100% 100% 100% 100%
------ ------ ------ ------
Cost of revenue:
Cost of license revenue 6% 5% 6% 6%
Cost of service and
maintenance revenue 9% 8% 9% 8%
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Total cost of revenue 15% 13% 15% 14%
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Gross profit 85% 87% 85% 86%
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Operating expenses:
Product development 23% 32% 24% 29%
Sales and marketing 43% 45% 43% 45%
General and administrative 11% 11% 11% 12%
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Total operating expenses 77% 88% 78% 86%
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Income (loss) from operations 8% (1%) 7% 0%
Other income, net 5% 1% 4% 1%
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Income before income taxes 13% 0% 11% 1%
Income tax expense 4% 0% 4% 0%
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Net income 9% 0% 7% 1%
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REVENUE
Total revenue for the three and six months ended March 31, 1997 was $6.9
million and $12.8 million, respectively, versus $4.6 million and $8.2 million
for the three and six months ended March 31, 1996, representing an increase
of 50% and 56%, respectively. License revenue for the three and six months
ended March 31, 1997 were $5.1 million and $9.6 million, respectively, versus
$3.7 million and $6.4 million for the three and six months ended March 31,
1996, representing and increase of 38% and 50%, respectively. License revenue
increased primarily as a result of an increase in the number of licenses sold
to existing and new customers, reflecting additional product offerings, an
expanding market, increased market awareness and expansion of the Company's
direct sales organization. In particular, the Company introduced its
Threads.h++, Inter.Net.h++, and Jchart products in the first half of fiscal
1997.
Service and maintenance revenue for the three and six months ended March
31, 1997 was $1.8 million and $3.2 million, respectively, versus $950,000 and
$1.8 million for the three and six months ended March 31,1996, representing
an increase of 89% and 78%, respectively. The increase in service and
maintenance revenue was generally attributable to the growing installed base
of the Company's products and the associated increase in demand for support
and maintenance services.
COST OF REVENUE
Cost of license revenue for the three and six months ended March 31,
1997 were $438,000 and $780,000 respectively versus $242,000 and $461,000 for
the three and six months ended March 31, 1996, representing an increase of
81% and 69%, respectively. As a percentage of total revenue cost of license
revenue was 6% and 6% for the three and six months ended March 31, 1997
versus 5% and 6% for the three and six months ended March 31, 1996. The
increases were primarily the result of higher royalties paid to third parties
associated with Precision's revenue mix and an increase in the number of
licenses sold. The Company expects that the cost of license revenue will
increase in dollar amount for the remainder of the year.
Cost of service and maintenance revenue for the three and six months
ended March 31, 1997 were $595,000 and $1.1 million, respectively, versus
$343,000 and $637,000 for the three and six months ended March 31, 1996
representing an increase of 73% and 73% respectively. As a percentage of
total revenue cost of service and maintenance revenue was 9% and 9% for the
three and six months ended March 31, 1997 versus 8% and 8% for the three and
six months ended March 31, 1996. The increases were primarily the result of
expenses associated with the development of training programs, utilization of
training and mentoring consultants and the hiring of additional product
support personnel.
OPERATING EXPENSES
Product development expense for the three and six months ended March 31,
1997 were $1.6 million and $3.1 million, respectively, versus $1.5 million
and $2.4 million for the three and six months ended March 31, 1996
representing an increase of 7% and 29%, respectively. As a percentage of
total revenue product development expenses were 23% and 24% for the three and
six months ended March 31, 1997 versus 32% and 29% for the three and six
months ended March 31, 1996. The increase in product
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development expense was primarily attributable to the hiring of additional
product development personnel. The decrease in product development expenses
as a percent of revenue was primarily due to the rapid growth in revenues.
The Company anticipates that it will continue to devote substantial resources
to product development and that product development expenses will increase in
dollar amount through fiscal 1997 as the Company continues to increase its
product development capacity, although the Company does not believe such
expenses will increase as a percentage of total revenue.
Sales and marketing expense for the three and six months ended March 31,
1997 were $3.0 million and $5.5 million, respectively, versus $2.1 million
and $3.7 million for the three and six months ended March 31, 1996
representing an increase of 43% and 49%, respectively. As a percentage of
total revenue, sales and marketing expenses were 43% and 45% in each
respective period. The increases were primarily due to the addition of sales
personnel through the acquisition of Precision, commissions and related costs
required in sales and marketing to expand the Company's sales channels. The
decrease in sales and marketing expenses as a percent of revenue was
primarily due to the rapid growth in revenues. While the Company expects that
sales and marketing expenses will continue to grow, the Company does not
believe such expenses will increase as a percentage of total revenue.
General and administrative expense for the three and six months ended
March 31, 1997 were $749,000 and $1.5 million, respectively, versus $500,000
and $972,000 for the three and six months ended March 31, 1996 representing
an increase of 50% and 54%, respectively. The increase in general and
administrative expenses were primarily due to increased staffing, investment
in infrastructure and associated expenses necessary to manage and support the
Company's growing operations. The Company believes that during the near term
its general and administrative expenses will continue to grow in absolute
dollars as a result of additional anticipated expansion.
OTHER INCOME, NET
Other income increased as a result of higher interest income due to
higher investment balances resulting from the infusion of cash from the
Company's initial public offering and cash generated from operations.
INCOME TAX EXPENSE
The Company's effective tax rate for the second quarter and first half
of fiscal 1997 was 33%, compared to 22.2% and 20.4% for the second quarter
and first half of fiscal 1996, respectively. The higher effective tax rates
in fiscal 1997 were primarily due to the decrease in research and
experimentation tax credits. The Company anticipates its fiscal 1997
effective tax rate will be approximately 33% percent; however, this rate
could change based on a change in the percentage of total revenue derived
from international sources.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed an initial public offering of common stock on
November 21, 1996 with net proceeds of approximately $25.6 million. The
common stock is trading on the Nasdaq National Market under the symbol RWAV.
The Company generated cash flows from operating activities of $5.9 million in
the six months ended March 31, 1997 versus ($630,000) for the six months
ended March 31, 1996. The increase in cash flows from operations was due
primarily to increase in net income, decrease in accounts receivable, and
increases in accounts payable, accrued expenses and deferred revenues.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS REPORT.
UNCERTAINTY OF FUTURE OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS. Prior growth rates in the Company's revenue and net income
should not be considered indicative of future operating results. Future
operating results will depend upon many factors, including the demand for the
Company's products, the level of product and price competition, the length of
the Company's sales cycle, the size and timing of individual license
transactions, the delay or deferral of customer implementations, the budget
cycles of the Company's customers, the Company's success in expanding its
direct sales force and indirect distribution channels, the timing of new
product introductions and product enhancements, the mix of products and
services sold, levels of international sales, activities of and acquisitions
by competitors, the timing of new hires, changes in foreign currency exchange
rates, and the ability of the Company to develop and market new products and
control costs. A significant portion of the Company's revenue has been, and
the Company believes will continue to be, derived from relatively large
orders, and the timing of such orders has caused and may continue to cause
material fluctuations in the Company's operating results, particularly on a
quarterly basis. The Company gernerally ships orders as received and as a
result typically has little or no backlog. Quarterly revenue and operating
results therefore depend on the volume and timing of orders received during
the quarter, which are difficult to forecast. In addition, the Company has
historically earned a substantial portion of its revenue in the last days of
each quarter. To the extent this trend continues, the failure to achieve such
revenue during the last days of any given quarter will have a material
adverse effect on the Company's business, financial condition and results of
operations. Furthermore, due to all of the foregoing factors, it is likely
that in some future period 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.
Service and maintenance revenue tend to fluctuate as consulting
contracts, which may extend over several months, are undertaken, renewed,
completed or terminated. License fee revenue is difficult to forecast due to
the fact that the Company's sales cycle, from initial evaluation to purchase,
varies substantially from customer to customer. As a result of these and
other factors, revenue for any quarter is subject to significant variation,
and 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. Because the Company's operating expenses
are based on anticipated revenue trends and because a high percentage of the
Company's expenses are relatively fixed, a delay in the recognition of
revenue from a limited number of transactions could cause significant
variations in operating results from quarter to quarter and could result in
significant losses. To the extent such expenses precede, or are not
subsequently followed by, increased revenue, the Company's operating results
would be materially and adversely affected. Fluctuations in operating results
may also result in volatility in the price of the Company's Common Stock.
DEPENDENCE ON EMERGING MARKET FOR C++ AND JAVA. The Company's product
lines are designed for use in object-oriented software application
development, specifically the C++ programming language, and substantially all
of the Company's revenue has been attributable to sales of products and
related maintenance and consulting services related to C++ programming and
development. The Company believes that while the market for object-oriented
technology in general, and C++ tools and programming applications in
particular, is growing, the Company's growth depends upon broader market
acceptance of object-oriented technology and the C++ programming language.
Even if broader market acceptance is
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achieved, the object-oriented market may continue to be characterized by
multiple software environments, many of which are not supported by the
Company's products, and numerous competitors in the areas of tools,
methodology and services. Furthermore, the C++ programming language is very
complex. Should the C++ programming language lose market acceptance or be
replaced by another programming language, the Company's business, financial
condition and results of operations would be materially and adversely
affected. The Company's financial performance will depend in part upon
continued growth in the object-oriented technology and C++ markets and the
development of standards that the Company's products address. There can be no
assurance that the market will continue to grow or that the Company will be
able to respond effectively to the evolving requirements of the market.
The number of software developers using the C++ programming language is
relatively small compared to the number of developers using more traditional
software development technology. The adoption of the C++ programming language
by software programmers who have traditionally used other technology requires
reorientation to significantly different programming methods, and there can
be no assurance that the acceptance of the C++ programming language will
expand beyond the early adopters of the technology. Furthermore, there can be
no assurance that potential corporate customers will be willing to make the
investment required to retrain programmers to build software using C++ rather
than structured or other object-oriented programming techniques. Many of the
Company's customers have purchased only small quantities of the Company's
products and there can be no assurance that these or new customers will
broadly implement C++ programming or purchase additional products.
In addition, the Company has recently introduced several products for
use in the Java market. The Company has spent and will continue to devote
resources on the development of new and enhanced products that address the
Java market. There can be no assurance that the Company will be successful in
marketing its existing or future Java products or that the market for Java
products will grow. If the Java market fails to grow, or grows more slowly
than the Company currently anticipates, the Company's business, financial
condition and results of operations could be materially and adversely
affected.
COMPETITION. The market for the Company's products is intensely
competitive, subject to rapid change and significantly affected by new
product introductions and other market activities of industry participants.
The Company's products are targeted at the emerging market for C++ and Java
software parts and programming tools, and the Company's competitors offer a
variety of products and services to address this market. The Company believes
that the principal competitive factors in this market are product quality,
flexibility, performance, functionality and features, use of standards based
technology, quality of support and service, company reputation and price.
While price is less significant than other factors for corporate customers,
price can be a significant factor for individual programmers. Certain of the
Company's competitors have well-established relationships with current and
potential customers and have the resources to enable them to more easily
offer a single vendor solution. Many of these companies have longer operating
histories, significantly greater resources and name recognition and larger
installed bases of customers than the Company. As a result, competitors may
be able to respond more quickly to new or emerging technologies and changes
in customer reqquirements, or to devote greater resources to the development,
promotion and sale of their products than the Company.
The Company also faces competition from systems integrators and internal
development efforts. Many systems integrators possess industry specific
expertise that may enable them to offer a single vendor solution more easily,
and already have a reputation among potential customers for offering
enterprise-wide solutions to software programming needs. There can be no
assurance that these third parties, many of which have significantly greater
resources than the Company, will not market competitive software products in
the future. It is also possible that new competitors or alliances among
competitors will emerge and rapidly
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acquire significant market share. The Company also expects that competition
will increase as a result of software industry consolidation. Increased
competition may result in price reductions, reduced gross margins and loss of
market share, any of which could materially and adversely affect the
Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to compete successfully against
curent and futrue competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, financial
condition and results of operations.
MANAGEMENT OF GROWTH. The Company is experiencing a period of transition
and aggressive product introductions that has placed, and may continue to
place, a significant strain on its resources, including its personnel.
Expansion of the Company's product lines, additional product development and
product introductions, or acquisitions of other technologies or companies,
when added to the day-to-day activities of the Company, will place a further
strain on the Company's resources and personnel. The Company's acquisition of
Inmark Development Corporation in October 1995 has also resulted in the
Company's product development team being distributed in three separate sites
across the country. Managing this distribution requires a significant amount
of attention from management, particularly the Vice President, Development
and the Chief Technology Officer, to ensure that the Company's development
efforts are timely, consistent and well integrated.
Furthermore, the Company believes that its ability to achieve
significant revenue growth in the future will depend in large part on its
success in recruiting and training sufficient direct sales personnel and
establishing and maintaining relationships with its outside sales
representatives. Although the Company is currently investing, and plans to
continue to invest, significant resources to expand its direct sales force
and to develop distribution relationships with outside sales representatives,
the Company has at times experienced and continues to experience difficulty
in recruiting qualified sales personnel and in establishing necessary sales
representative relationships. The Company believes that the hiring and
retaining of qualified individuals at all levels in the Company is essential
to the Company's ability to manage growth successfully, and there can be no
assurance that the Company will be successful in attracting and retaining the
necessary personnel. If Company management is unable to effectively manage
growth, the Company's business, financial condition and results of operations
will be materially and adversely affected.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS. The market for
software development tools is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements. The Company must respond rapidly to developments related to
hardware platforms, operating systems and applicable programming languages.
Such developments will require the Company to continue to make substantial
product development investments. Any failure by the Company to anticipate or
respond adequately to technological developments and customer requirements,
or any significant delays in product development or introduction, could
result in a loss of competitiveness or revenue.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and
technological developments, satisfy diverse and evolving customer
requirements and otherwise achieve market acceptance. There can be no
assurance that the Company will be successful in continuing to develop and
market on a timely and cost-effective basis fully functional product
enhancements or new products that respond to technological advances by
others, or that its enhanced and new products will achieve market acceptance.
In addition, the Company has in the past experienced delays in the
development, introduction and marketing of new or enhanced products. Such
delays were primarily associated with increasing product functionality and
implementing new customer requirements. To date,
13.
<PAGE>
such delays have not resulted in a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will not experience similar delays in the future.
Any failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, or any significant delays in product
development or introduction, would have a material adverse effect on the
Company's business, financial condition and results of operations.
LIMITED INTERNATIONAL SALES AND MARKETING EXPERIENCE. The Company opened
its first international sales office in Germany in January 1996. In February
1997, the Company expanded its European operations by acquiring 100% of the
outstanding stock of PVI Precision Software GmbH (Precision). Precision is a
European distributor of Rogue Wave software products and other companies'
software products in Germany, the United Kingdom, France, and the Benelux
countries. As of March 31, 1997, there were 29 employees located outside the
United States. International revenue accounted for approximately 19% and 24%
of the Company's total revenue in fiscal 1996 and the first half of fiscal
1997, respectively. The Company believes that in order to increase sales
opportunities and profitability it will be required to expand its
international operations. The Company has committed and continues to commit
significant management time and financial resources to developing direct and
indirect international sales and support channels. There can be no assurance,
however, that the Company will be able to maintain or increase international
market demand for its products. To the extent that the Company is unable to
do so in a timely manner, the Company's international revenue would be
limited, and the Company's business, financial condition and results of
operations would be materially and adversely affected.
RISKS INHERENT IN INTERNATIONAL OPERATIONS. International operations are
subject to inherent risks, including the impact of possible recessionary
environments in economies outside the United States, costs of localizing
products for foreign markets, longer receivables collection periods and
greater difficulty in accounts receivable collection, unexpected changes in
regulatory requirements, difficulties and costs of staffing and managing
foreign operations, reduced protection for intellectual property rights in
some countries, potentially adverse tax consequences, and political and
economic instability. There can be no assurance that the Company will be able
to sustain or increase international revenue from licenses or from
maintenance and service, or that the foregoing factors will not have a
material adverse effect on the Company's future international revenue and,
consequently, on the Company's business, financial condition and results of
operations. The Company's direct international revenue is generally
denominated in local currencies. As a result of recent fluctuations in
international exchange rates, the Company's Board of Directors has authorized
the Company to enter into forward exchange contracts to minimize the risks
associated with such fluctuations. Although exposure to currency fluctuations
to date has been insignificant, there can be no assurance that fluctuations
in currency exhcange rates in the future will not have a material adverse
impact on international revenue and thus the Company's business, financial
condition and results of operations.
FUTURE ACQUISITIONS. The Company frequently evaluates strategic
opportunities available to it and may in the future pursue acquisitions of
complementary technologies, products or businesses. Future acquisitions of
complementary technologies, products or businesses by the Company will result
in the diversion of management's attention from the day-to-day operations of
the Company's business and may include numerous other risks, including
difficulties in the integration of the operations, products and personnel of
the acquired companies. Future acquisitions by the Company may also result in
dilutive issuances of equity securities, the incurrence of debt and
amortization expenses related to goodwill and other intangible assets.
Failure of the Company to successfully manage future acquisitions may have a
material adverse effect on the Company's business, financial condition and
results of operations.
14.
<PAGE>
PART II - OTHER INFORMATION
Item 1. - LEGAL PROCEEDINGS
On December 15, 1995, the Company filed suit in the Circuit Court of
Benton County (Oregon) against Eugene O. Cho, former Vice President of
Marketing, seeking a declaration of the rights of the parties in connection
with shares of Common Stock of the Company. The Company claimed that the
formula controlling the vesting of the subject shares was inadvertently
misstated and sought reformation of that agreement to reflect the true intent
of the parties, such that, effective upon the termination of Mr. Cho in May
1995, the Company was entitled to repurchase 92,763 shares of Common Stock of
the Company at $0.15 per share. On March 26, 1997, the Circuit Court of
Benton County ruled in favor of the Company and dismissed all counterclaims
filed by Eugene O. Cho.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1(1) Agreement and Plan of Reorganization between Registrant,
Inmark Development Corporation and RW Acquisitions, Inc.,
dated as of September 19, 1995.
2.2(1) Agreement and Plan of Merger between the Registrant and Rogue
Wave Software, Inc., an Oregon corporation.
3.1(2) Amended and Restated Certificate of Incorporation of Rogue Wave
Software, Inc., a Delaware corporation.
3.2(1) Bylaws of Rogue Wave Software, Inc., a Delaware corporation.
4.1(1) Reference is made to Exhibits 3.1 and 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Amended and Restated Investors' Rights Agreement between the
Registrant and certain investors, dated November 10, 1995, as
amended June 27, 1996.
10.1(1) Registrant's 1996 Equity Incentive Plan.
10.2(1) Registrant's Employee Stock Purchase Plan.
10.3(1) Form of Indemnity Agreement to be entered into between the
Registrant and its officers and directors.
10.4(1) Lease Agreement between Registrant and the State of Oregon,
dated May 1, 1996.
10.5(1) Lease Agreement between the Registrant and the Landmark, dated
April 22, 1996.
10.6(1) Loan and Security Agreement between the Registrant and Silicon
Valley Bank, dated October 16, 1996.
10.7(1) Collateral Assignment, Patent Mortgage and Security Agreement
between the Registrant and Silicon Valley Bank, dated
October 16, 1996.
27.1 Financial Data Schedule.
(1) Filed as an Exhibit to the Registrant's Registration Statement on
Form SB-2, as amended (No. 333 -13517)
(2) Filed as an Exhibit to the Registrant's quarterly report on Form
10-Q for the quarter ended December 31, 1996.
ITEMS 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
15.
<PAGE>
SIGNATURES
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.
ROGUE WAVE SOFTWARE, INC.
(Registrant)
Date: May 12, 1997 /S/ ROBERT M. HOLBURN, JR.
----------------------------------------
ROBERT M. HOLBURN, JR.
CHIEF FINANCIAL OFFICER
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 30,934
<SECURITIES> 0
<RECEIVABLES> 4,252
<ALLOWANCES> 360
<INVENTORY> 164
<CURRENT-ASSETS> 35,542
<PP&E> 4,720
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<TOTAL-ASSETS> 40,744
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0
0
<COMMON> 8
<OTHER-SE> 31,712
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<SALES> 12,791
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<CGS> 1,877
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<OTHER-EXPENSES> 9,985
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