<PAGE>
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 June 30, 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.
- ------------------------------------------------------------------------------
(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 JUNE 30, 1997
------------------------------ ----------------------------
Common Stock, $0.001 par value 7,710,063
1.
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ROGUE WAVE SOFTWARE, INC.
FORM 10-Q
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at June 30,
1997 and September 30, 1996 ........................ 3
Consolidated Statements of Operations for the
three and nine months ended June 30, 1997 and 1996.. 4
Consolidated Statements of Cash Flows for the
three months ended June 30, 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)
June 30, September 30,
1997 1996
----------- -------------
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $ 5,082 $ 1,714
Short-term investments 25,458 -
Accounts receivable, net 5,164 4,527
Prepaid and other current assets 907 981
--------- ---------
Total current assets 36,611 7,222
Furniture, fixtures and equipment, net 3,395 2,718
Other assets, net 2,169 254
--------- ---------
Total assets $ 42,175 $ 10,194
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 600 $ 637
Accrued expenses 3,411 805
Deferred revenue 4,977 2,881
Current portion of long-term obligations 242 217
--------- ---------
Total current liabilities 9,230 4,540
Long-term obligations, less current portion 370 322
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Total liabilities 9,600 4,862
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Mandatorily redeemable preferred stock - 4,664
--------- ---------
Stockholders' equity:
Common stock 8 4
Additional paid-in capital 30,823 676
Shareholder note receivable - (13)
Retained earnings 1,752 24
Cumulative translation adjustment (8) (23)
--------- ---------
Total stockholders' equity 32,575 668
--------- ---------
Total liabilities and stockholders'
equity $ 42,175 $ 10,194
--------- ---------
--------- ---------
See accompanying notes.
3.
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ROGUE WAVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data, unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
----------------------- ------------------------
1997 1996 1997 1996
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Revenue:
License revenue $ 5,630 $ 4,175 $ 15,240 $ 10,605
Service and maintenance revenue 2,622 833 5,803 2,587
-------- -------- --------- ---------
Total revenue 8,252 5,008 21,043 13,192
-------- -------- --------- ---------
Cost of revenue:
Cost of license revenue 482 412 1,262 873
Cost of service and maintenance revenue 872 388 1,969 1,025
-------- -------- --------- ---------
Total cost of revenue 1,354 800 3,231 1,898
-------- -------- --------- ---------
Gross profit 6,898 4,208 17,812 11,294
-------- -------- --------- ---------
Operating expenses:
Product development 1,706 1,574 4,782 3,984
Sales and marketing 3,648 2,262 9,103 5,969
General and administrative 787 624 2,241 1,596
-------- -------- --------- ---------
Total operating expenses 6,141 4,460 16,126 11,549
-------- -------- --------- ---------
Income (loss) from operations 757 (252) 1,686 (255)
Other income, net 473 11 925 68
-------- -------- --------- ---------
Income (loss) before income taxes 1,230 (241) 2,611 (187)
Income tax expense (benefit) 427 (84) 883 (73)
-------- -------- --------- ---------
Net income (loss) $ 803 $ (157) $ 1,728 $ (114)
-------- -------- --------- ---------
-------- -------- --------- ---------
Net income (loss) per common share $ 0.09 $ (0.04) $ 0.21 $ (0.03)
-------- -------- --------- ---------
-------- -------- --------- ---------
Shares used in per share calculation 8,693 4,196 8,348 4,088
</TABLE>
See accompanying notes.
4.
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ROGUE WAVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------------
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,728 $ (114)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 1,236 577
Changes in assets and liabilities:
Accounts receivable 416 (1,171)
Prepaid and other current assets 272 (481)
Other assets (223) (146)
Accounts payable and accrued expenses 1,432 234
Deferred revenue 1,405 858
-------- -------
Net cash from operating activities 6,266 (243)
-------- -------
Cash flows from investing activities:
Purchase of furniture, fixtures, and equipment (1,559) (1,590)
Purchase of short-term investments (25,458) -
Purchase of business net of cash acquired (1,245) -
-------- -------
Net cash from investing activities (28,262) (1,590)
-------- -------
Cash flows from financing activities:
Payments on long-term obligations (140) (121)
Net proceeds from issuance of mandatorily redeemable preferred stock - 3,524
Net proceeds from issuance of common stock, net 25,380 -
Payment on shareholder note receivable 13 -
Proceeds from exercise of stock options 107 35
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Net cash from financing activities 25,360 3,438
-------- -------
Effect of exchange rate on cash and cash equivalents 4 (4)
-------- -------
Net change in cash and cash equivalents 3,368 1,601
Cash and cash equivalents at beginning of period 1,714 1,010
-------- -------
Cash and cash equivalents at end of period $ 5,082 $ 2,611
-------- -------
-------- -------
</TABLE>
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. Short-term Investments
Short-term investments consist primarily of commercial paper with acquired
maturities of 180 days or less. The carrying amount of short-term
investments is the cost plus interest earned as of June 30, 1997, which
approximates market value.
3. 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.
4. Acquisition
On February 15, 1997, the Company acquired 100% of the outstanding
stock of PVI Precision Software GmbH (Precision) for $1.2 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.
6.
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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. The
transaction was accounted for as a pooling-of-interests business combination.
See Note 2 of Notes to Consolidated Financial Statements. The Inmark graphical
user interface library is currently being marketed by Rogue Wave as a component
of its Visual User Interface family of products.
The Company has experienced significant revenue growth over the last several
years. During fiscal 1995, the Company shifted its focus from achieving
profitability to expanding its sales channels, marketing efforts and product
development capacity. The shift resulted in expenses growing faster than
revenue, causing a substantial decrease in net income in fiscal 1995 and fiscal
1996. As part of the shift toward expanding its product development capacity,
the Company acquired Inmark. The Inmark Merger also contributed to the Company's
higher product development expenses as a percentage of total revenue during
fiscal years 1994, 1995 and 1996 because, prior to the time of the Inmark
Merger, Inmark was engaged in a new product development effort that resulted in
increased product development expenses.
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. See
Note 1 of Notes to Consolidated Financial Statements.
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. 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 19% of total revenue in
fiscal 1996 and 23% of total revenue for the nine months ended June 30, 1997.
The Company does not monitor the percentage of its net income represented by
international revenue. 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 Precision, a distributor of
Rogue Wave software products in Germany, the United Kingdom, France and the
Benelux countries. The Company anticipates further expansion in foreign
countries and expects that international license and service and maintenance
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 channels. 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 generated by the
Company's European subsidiaries, the Company's international revenue has been
denominated in United States dollars. The Company may enter into forward
foreign exchange contracts to reduce the risk associated with currency
fluctuations. Although exposure to currency fluctuations to date has been
insignificant, to the extent international revenue is denominated in local
currencies, foreign currency translations may contribute to significant
fluctuations in, and could have a material adverse effect upon, the Company's
business, financial condition and results of operations. See "Risk
Factors--Risks Inherent in International Operations."
The Company has developed technology relating to the collection and
verification of data across the Internet. The Company intends to contribute such
technology, and to make a funding commitment of up to $2.0 million over the next
six to 18 months, to a majority-owned subsidiary for further development and
possible commercialization of this technology. The Company will have the option
to purchase the minority interest of the subsidiary during a specified time
period in the future. Dan Whitaker, the Company's former Executive Vice
President, Marketing, resigned his office and his position on the Company's
Board of Directors to devote full time to the management of this subsidiary, but
has agreed to serve as a consultant to the Company through July 1998. The
Company expects that such subsidiary will be in the development stage for at
least one year. There can be no assurance that the technology developed by such
subsidiary will be commercialized, and even if it is commercialized there can be
no assurance that the technology will receive market acceptance due to the
subsidiary's new and untested business model. The financial results of such
subsidiary will be consolidated with the Company's financial results.
Accordingly, fluctuations in the operating results of such subsidiary may have a
material adverse effect on the Company's operating results.
In April 1997, the Company established a consulting group in Boulder,
Colorado consisting of 15 employees. The addition of these employees has
resulted in an increase in service and maintenance revenue and a corresponding
increase in the cost of service and maintenance revenue. The gross margin
associated with such consulting work has been and is expected to continue to be
lower than the Company's historical gross margin on service and maintenance
revenue. More recently, the Company announced its intention to move its
administrative operations from its current location in Corvallis, Oregon to
Boulder, Colorado during fiscal 1998. The Company expects to incur charges
totaling approximately $1.5 million during fiscal 1998 in connection with this
move. Such charges will have a material adverse effect on the operating results
for the quarters in which they are incurred. Specifically, the Company
anticipates that it will incur the substantial majority of such charges during
the second quarter of fiscal 1998. Furthermore, the Company may incur additional
charges associated with the move which, if incurred, may have a material adverse
effect on the Company's operating results.
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.
7.
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<TABLE>
<CAPTION>
Percentage of total net revenues for the
----------------------------------------
Three months ended Nine months ended
June 31, June 31,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
License revenue 68% 83% 73% 80%
Service and maintenance revenue 32% 17% 27% 20%
---- ---- ---- ----
Total revenue 100% 100% 100% 100%
---- ---- ---- ----
Cost of Revenue:
Cost of license revenue 6% 8% 6% 7%
Cost of service and maintenance revenue 11% 8% 9% 8%
---- ---- ---- ----
Total cost of revenue 17% 16% 15% 15%
---- ---- ---- ----
Gross profit 83% 84% 85% 85%
---- ---- ---- ----
Operating expenses:
Product development 21% 31% 23% 30%
Sales and marketing 44% 45% 43% 45%
General and administrative 9% 13% 11% 12%
---- ---- ---- ----
Total operating expenses 74% 89% 77% 87%
---- ---- ---- ----
Income (loss) from operations 9% (5%) 8% (2%)
Other income, net 6% 0% 4% 1%
---- ---- ---- ----
Income (loss) before income taxes 15% (5%) 12% (1%)
Income tax expense (benefit) 5% (2%) 4% 0%
---- ---- ---- ----
Net income (loss) 10% (3%) 8% (1%)
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1996
REVENUE
Total revenue increased 66% to $8.3 million for the three months ended
June 30, 1997 from $5.0 million for the three months ended June 30, 1996.
License revenue increased 33% to $5.6 million for the three months ended June
30, 1997 from $4.2 million for the three months ended June 30, 1996. 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 and international presence.
Service and maintenance revenue increased 212% to $2.6 million for the
three months ended June 30, 1997 from $833,000 for the three months ended
June 30,1996. The increases in service and maintenance
8.
<PAGE>
revenue were primarily attributable to increased sales volume of the
Company's support and maintenance services and an increase in consulting
revenue as a result of the establishment of a consulting business group.
COST OF REVENUE
Cost of license revenue increased 17% to $482,000 for the three months
ended June 30, 1997 from $412,000 for the three months ended June 30, 1996.
Cost of license revenue as a percent of total revenue decreased because of
cost savings associated with increased shipments of the Company's products on
CD-ROM and online distribution.
Cost of service and maintenance revenue increased 125% to $872,000 for
the three months ended June 30, 1997 from $388,000 for the three months ended
June 30, 1996. The increase was primarily the result of the establishment of
a consulting business group in April 1997.
OPERATING EXPENSES
Product development increased 6% to $1.7 million for the three months
ended June 30, 1997 from $1.6 million for the three months ended June 30,
1996. The increase in product development expense was primarily attributable
to the hiring of additional product development personnel. The decrease in
product development expense as a percent of revenue was primarily due to the
faster growth in revenues relative to the growth in development expense. 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 expenses increased 57% to $3.6 million for the three
months ended June 30, 1997 from $2.3 million for the three months ended June
30, 1996. The increase was primarily due to continued investment in systems
and personnel to expand the Company's sales channels and the addition of
sales personnel through the acquisition of Precision during the second
quarter of fiscal 1997. 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 expenses increased 26% to $787,000 for the
three months ended June 30, 1997 from $624,000 for the three months ended
June 30, 1996. 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 and the Company's scheduled move of its
administrative operations to Boulder, Colorado.
OTHER INCOME, NET
Other income increased during the three months ended June 30, 1997 versus
the three months ended June 30, 1996 as a result of higher interest income
due to a higher investment portfolio generated by cash from the Company's
initial public offering and operations.
INCOME TAX EXPENSE
9.
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The Company's effective tax rate for the three months ended June 30, 1997
was 35%. The Company anticipates its fiscal 1997 effective tax rate will be
approximately 34% percent; however, this rate could change based on a change
in the percentage of total revenue derived from international sources.
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1997 AND 1996
REVENUE. Total revenue increased 59% to $21.0 million for the nine months
ended June 30, 1997 from $13.2 million for the nine months ended June 30, 1996.
License revenue increased 43% to $15.2 million for the nine months ended June
30, 1997 from $10.6 million for the nine months ended June 30, 1996. 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
telesales organization and international presence.
Service and maintenance revenue increased 123% to $5.8 million for the nine
months ended June 30, 1997 from $2.6 million for the nine months ended June 30,
1996. The increase in service and maintenance revenue was primarily attributable
to increased sales volume of the Company's support and maintenance services, as
well as an increase in consulting revenue as a result of the establishment of
the Company's consulting business group in Boulder, Colorado in April 1997.
COST OF REVENUE. Cost of license revenue increased 49% to $1.3 million for
the nine months ended June 30, 1997 from $873,000 for the nine months ended June
30, 1996, representing 8.3% and 8.2% of the license revenue for the respective
periods.
Cost of service and maintenance revenue increased 100% to $2.0 million for
the nine months ended June 30, 1997 from $1.0 million for the nine months ended
June 30, 1996, representing 33.9% and 39.6% of the service and maintenance
revenue for the respective periods. The period to period dollar increase in cost
of service and maintenance revenue was primarily the result of adding additional
personnel and the establishment of the Company's consulting business group in
Boulder, Colorado in April 1997. The period to period decrease in the cost of
service and maintenance revenue as a percentage of service and maintenance
revenue is primarily the result of economies of scale resulting from increasing
maintenance revenue.
10.
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PRODUCT DEVELOPMENT. Product development expenses increased 20% to $4.8
million for the nine months ended June 30, 1997 from $4.0 million for the nine
months ended June 30, 1996. As a percentage of total revenue, product
development expenses were 22.7% and 30.2% for the respective periods. The
increase in product development expenses was primarily attributable to the
hiring of additional product development personnel. The decrease in product
development expenses as a percentage of total revenue was primarily due to the
higher growth in total revenue relative to the growth of product development
expenses. 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 1998 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. Sales and marketing expenses increased 52% to $9.1
million for the nine months ended June 30, 1997 from $6.0 million for the nine
months ended June 30, 1996. As a percentage of total revenue, sales and
marketing expenses were 43.3% and 45.2% for the respective periods. The increase
in sales and marketing expenses was primarily due to continued investment in
systems and personnel to expand the Company's sales channels and the addition of
sales personnel through the acquisition of Precision during the second quarter
of fiscal 1997. While the Company expects that sales and marketing expenses will
continue to grow in dollar amount through fiscal 1998, the Company does not
expect such expenses to increase as a percentage of total revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
38% to $2.2 million for the nine months ended June 30, 1997 from $1.6 million
for the nine months ended June 30, 1996. As a percentage of total revenue,
general and administrative expenses were 10.6% and 12.1% for the respective
periods. The increase in general and administrative expenses was 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 general and administrative expenses will continue to grow in
dollar amount through fiscal 1998 as a result of additional anticipated
expansion and the Company's scheduled move of its administrative operations to
Boulder, Colorado.
OTHER INCOME, NET. Other income increased during the nine months ended June
30, 1997 as compared with the nine months ended June 30, 1996 as a result of
higher interest income due to a higher investment portfolio generated by cash
from the Company's initial public offering and operations.
INCOME TAX EXPENSE. The Company's effective tax rate for the nine months
ended June 30, 1997 was 34%. The Company anticipates its fiscal 1997 effective
tax rate will be approximately 34%; however, this rate could change based on a
change in the percentage of total income derived from international sources.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had cash, cash equivalents short-term
investments of $30.5 million. This was due primarily to the completion of the
Company's initial public offering of Common Stock on November 21, 1996 with net
proceeds of approximately $25.6 million. Net cash from operating activities was
$1.1 million, $493,000 and $(520,000) in fiscal 1994, 1995 and 1996,
respectively. For fiscal 1995, net cash from operating activities of $493,000
was primarily attributable to increases in accounts payable and accrued expenses
of $440,000 and deferred revenue of $702,000, offset by an increase in accounts
receivable of $1.1 million, and adjusted for depreciation and amortization of
$514,000. For fiscal 1996, net cash from operating activities of $(520,000) was
primarily attributable to an increase in accounts receivable of $2.4 million,
partially offset by an increase in deferred revenue of $1.5 million. The Company
generated cash flows from operating activities of $6.3 million in the nine
months ended June 30, 1997 as compared with cash used in operations of $243,000
for the nine months ended June 30, 1996. The increase in cash flows from
operations during the nine months ended June 30, 1997 was due primarily to
increases in net income, accrued expenses and deferred revenue.
The Company's primary investing activities have consisted of purchases of
equipment and the acquisition of Precision. The Company's expenditures for
equipment, including those under capital leases, totaled $414,000, $672,000 and
$2.4 million in fiscal 1994, 1995 and 1996, respectively. Capital expenditures
increased significantly in fiscal 1996 primarily due to the purchase of computer
and telecommunications equipment for over 60 new employees and due to the costs
associated with the purchase of Internet infrastructure hardware and new
software used in support of product development and other Company activities.
During the nine months ended June 30, 1997, the Company's primary investing
activities consisted of purchases of equipment of $1.6 million and $1.2 million
for the acquisition of Precision.
Deferred revenue consists primarily of the unrecognized portion of revenue
under maintenance and support contracts, which revenue is deferred and
recognized ratably over the term of such contracts and for the unrecognized
portion of revenue associated with product license subscription contracts. See
Note 1 of Notes to Consolidated Financial Statements.
The Company believes that existing sources of liquidity and cash flow will
be adequate to fund its operations through at least the end of 1998.
11.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
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
and services, 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 licensed or sold, levels
of international sales, activities of and acquisitions by competitors, changes
in pricing policy by the Company and its competitors, publication of opinions
about the Company, its products and object-oriented technology by industry
analysts, the hiring of new employees, changes in foreign currency exchange
rates, product lifecycles and the ability of the Company to develop and market
new products and control costs. The Company generally 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 possible that in some
future quarter the Company's operating results may 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 and adversely affected.
Service and maintenance revenue tends 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 indicators 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. The Company has
announced its intention to move its administrative operations from its current
location in Corvallis, Oregon to Boulder, Colorado during fiscal 1998. In
connection with this move, the Company expects to incur charges totaling
approximately $1.5 million during fiscal 1998. Such charges will have a material
adverse effect on the operating results for the quarters in which they are
incurred. Specifically, the Company anticipates that it will incur the
substantial majority of such charges during the second quarter of fiscal 1998.
Furthermore, the Company may incur additional charges associated with the move
which, if incurred, may have a material adverse effect on the Company's
operating results. In addition, the Company intends to create a majority-owned
subsidiary to develop technology relating to the collection and verification of
data across the Internet. The Company expects such subsidiary will be in the
development stage for at least one year. There can be no assurance that the
technology developed by such subsidiary will be commercialized, or even if it is
commercialized there can be no assurance of market acceptance due to such
subsidiary's new and untested business model. The financial results of such
subsidiary will be consolidated with the Company's financial results.
Accordingly,
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fluctuations in the operating results of such subsidiary may have a material
adverse effect on the Company's operating results. Fluctuations in operating
results may also result in volatility in the price of the Company's Common
Stock.
LIMITED OPERATING HISTORY. The Company was founded in September 1989 and
first shipped products in November 1989. Although the Company's total revenue
has increased in each of the last eight quarters and the Company had net income
in most of those quarters, the Company incurred net losses in the quarters ended
September 30, 1995 and June 30, 1996. In fiscal 1995 and fiscal 1996, the
Company experienced significant declines in net income. The declines were
primarily the result of two factors, the combination of its financial results
with those of Inmark Development Corporation ("Inmark"), with which the Company
merged in October 1995 (the "Inmark Merger"), as well as the significant
commitment of resources to the Company's product development, sales and
marketing and technical support organizations. The Inmark Merger had a
significant adverse impact on the Company's net income because, prior to the
time of the Inmark Merger, Inmark was engaged in a new product development
effort that resulted in substantial operating losses. The increase in resources
devoted to the Company's product development, sales and marketing and technical
support organization were part of the Company's strategy to expand market share.
The strategy represented a shift away from the Company's earlier focus on
achieving profitability and the short term result was the decrease in net
income. The Company expects to continue to devote substantial resources in these
areas and as a result will need to recognize significant quarterly revenue to
achieve and maintain profitability. The Company's limited operating history
makes the prediction of future operating results difficult or impossible.
Although the Company has experienced significant revenue growth in recent years,
there can be no assurance that the Company will sustain such growth, if any, or
that the Company will remain profitable on a quarterly basis or at all.
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++ and Java programming languages, 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 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.
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In addition, the Company has 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.
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. In particular, the Company has recently
acquired a European distributor with offices and personnel in several European
countries. In addition, the Company recently established a consulting group in
Boulder, Colorado to help expand its ability to provide consulting services.
Such additions involve a number of risks, including risks related to the
integration of new businesses or business units, the substantial management time
devoted to such activities, the failure to achieve anticipated benefits, such as
cost savings and increased revenue, and the difficulties of managing additional
operations. The Company's acquisition of Inmark in October 1995 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. In addition, the Company recently
announced that it will move its administrative operations from Corvallis, Oregon
to Boulder, Colorado. This move will result in the distribution of the Company's
senior management team, which may make managing the Company's operations more
difficult. In particular, managing this transition will require a significant
amount of attention from management, particularly the Company's Chief Operating
Officer and Chief Financial Officer who will relocate as part of the move.
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++ software parts
and programming tools and, to a lesser extent, at the emerging Java market. The
Company's competitors offer a variety of products and services to address these
markets. 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. Direct competitors in the C++ market include Microsoft (with its
Microsoft Foundation Classes, "MFC"), IBM, ILOG and several privately held
companies. Microsoft is a particularly strong competitor due to its large
installed base and the fact that it bundles its MFC library with its own and
other C++ compilers. Microsoft may decide in the future to devote more resources
to or broaden the functions of MFC in order to address and more effectively
compete with the functionality of the Company's products. The Company faces
direct competition in the Java market from Borland, JavaSoft (a business unit of
Sun Microsystems), Microsoft, Sybase, Symantec and other companies for its
current Java products and it expects to face significant competition in the
future from such companies with respect to other Java products the Company may
introduce. Software applications can also be developed using software parts and
programming tools in environments other than C++ or Java. Indirect competitors
with such offerings include Microsoft (with its ActiveX technology), Borland,
Oracle, ParcPlace-Digitalk and Powersoft (a subsidiary of Sybase). Many of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name recognition
and larger installed bases of customers than the Company. In addition, several
database vendors, such as Informix, Oracle and Sybase are increasingly
developing robust software parts for inclusion with their database products and
may begin to compete with the Company in the future. These potential 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.
Like the Company's current competitors, many of these companies have longer
operating histories, significantly greater resources and name recognition and
larger installed bases of customers than the Company.
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As a result, these potential competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products than
the Company.
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 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 current and future competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, financial condition and results of operations.
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, 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.
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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.
RISKS OF EXPANDING INTERNATIONAL SALES AND MARKETING. The Company opened
its first international sales office in Germany in January 1996. In February
1997, the Company expanded its European operations by acquiring PVI Precision
Software GmbH ("Precision"). Precision is a distributor of the Company's
software products in Germany, the United Kingdom, France and the Benelux
countries. International revenue accounted for approximately 19% and 23% of the
Company's total revenue in fiscal 1996 and the first nine months of fiscal 1997,
respectively. As of June 30, 1997, the Company had 31 employees located outside
of the United States. 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 not been material, there can be no assurance
that fluctuations in currency exchange 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.
DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
The Company believes that the technological and creative skills of its personnel
are essential to establishing and maintaining a leadership position,
particularly in light of the fact that its intellectual property, once sold to
the public market, is easily replicated. The loss of the services of one or more
of the Company's executive officers or key technical personnel would have a
material adverse effect on the Company's business, financial condition and
results of operations. In particular, the services of Thomas Keffer and Michael
Scally, the Company's President and Chief Executive Officer, and Chief Operating
Officer, respectively, would be difficult to replace. The Company has key person
life insurance policies in the amount of $1.0 million on each of Dr. Keffer and
Mr. Scally. The Company's future success also depends on its continuing ability
to attract and retain highly-qualified technical, sales and managerial
personnel. In July 1997, Dan Whitaker, the Company's former Executive Vice
President, Marketing, resigned to devote full time to the management of a
Company
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subsidiary. Although Mr. Whitaker has agreed to serve as a consultant to the
Company through July 1998, there can be no assurance that the Company will be
able to hire a qualified replacement. In the past, the Company has experienced
some difficulty in attracting key personnel to work at its facilities in
Corvallis, Oregon. Competition for such personnel is intense, and there can be
no assurance that the Company can retain its key technical, sales and managerial
employees or that it can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future.
VARIABILITY OF SALES CYCLES. The Company distributes its products through
two different direct sales channels, a telesales force and a field sales force,
each of which is subject to a variable sales cycle. Products sold by the
Company's telesales force may be sold after a single phone call or may require
several weeks of education and negotiation before a sale is made. As such, the
sales cycle associated with telesales typically ranges from a few days to two
months. On the other hand, the purchase of products from the Company's field
sales force is often an enterprise-wide decision and may require the sales
person to provide a significant level of education to prospective customers
regarding the use and benefits of the Company's products. For these and other
reasons, the sales cycle associated with the sale of the Company's products
through its field sales force typically ranges from two to six months and is
subject to a number of significant delays over which the Company has little or
no control. Due to the foregoing factors, quarterly revenue and operating
results can be variable and are difficult to forecast, and the Company believes
that period-to-period comparisons of quarterly revenue are not necessarily
meaningful and should not be relied upon as an indicator of future revenue.
PROPRIETARY RIGHTS, RISKS OF INFRINGEMENT AND SOURCE CODE RELEASE. The
Company relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining a technological leadership
position. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. The Company currently has one patent application pending in
the United States. There can be no assurance that the Company's pending patent
application, whether or not being currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or design around the Company's pending patent. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. The nature of many of the
Company's products requires the release of the source code to all customers. As
such, policing unauthorized use of the Company's products is difficult, and
while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary
rights in the United States or abroad will be adequate or that competition will
not independently develop similar technology.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a
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successful claim of product infringement against the Company and failure or
inability of the Company to license the infringed or similar technology, the
Company's business, financial condition and results of operations would be
materially and adversely affected.
PRODUCT LIABILITY. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
RISK OF PRODUCT DEFECTS. Software products as complex as those offered by
the Company frequently contain errors or failures, especially when first
introduced or when new versions are released. Also, new products or enhancements
may contain undetected errors, or "bugs," or performance problems that, despite
testing, are discovered only after a product has been installed and used by
customers. There can be no assurance that such errors or performance problems
will not be discovered in the future, causing delays in product introduction and
shipments or requiring design modifications that could materially and adversely
affect the Company's competitive position and operating results. The Company's
products are typically intended for use in applications that may be critical to
a customer's business. As a result, the Company expects that its customers and
potential customers have a greater sensitivity to product defects than the
market for software products generally. 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 revenue or delay in
market acceptance, diversion of development resources, the payment of monetary
damages, damage to the Company's reputation, or increased service and warranty
costs, any of which could have a material adverse effect upon the Company's
business, financial condition and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICE. The Company's stock price has
fluctuated substantially since its initial public offering in November 1996.
There can be no assurance that the market price of the Common Stock will not
decline below the public offering price set forth on the cover page of this
Prospectus. The trading price of the Company's Common Stock is subject to
significant fluctuations in response to variations in quarterly operating
results, the gain or loss of significant orders, changes in earning estimates by
analysts, announcements of technological innovations or new products by the
Company or its competitors, general conditions in the software and computer
industries and other events or factors. In addition, the stock market in general
has experienced extreme price and volume fluctuations that have affected the
market price for many companies in industries similar or related to that of the
Company and that have been unrelated to the operating performance of these
companies. These market fluctuations may materially and adversely affect the
market price of the Company's Common Stock.
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PART II - OTHER INFORMATION
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(3) 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.
(3) Filed as an Exhibit to the Registrant's Registration Statement
on Form S-1, as filed August 1, 1997.
ITEMS 1, 2, 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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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: August 1, 1997 /S/ ROBERT M. HOLBURN, JR.
--------------------------------------
ROBERT M. HOLBURN, JR.
CHIEF FINANCIAL OFFICER
