<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 March 31, 1998
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
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5500 Flatiron Parkway, Boulder, Colorado 80301
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 473-9118
- --------------------------------------------------------------------------------
(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, 1998
----- -----------------------------
Common Stock, $0.001 par value 10,167,666
<PAGE>
ROGUE WAVE SOFTWARE, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1997
and March 31, 1998.................................................... 1
Consolidated Statements of Operations for the three and six
months ended March 31, 1997 and 1998.................................. 2
Consolidated Statements of Cash Flows for the
six months ended March 31, 1997 and 1998.............................. 3
Notes to Consolidated Financial Statements.............................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............. 16
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................... 17
Item 6. Exhibits and Reports on Form 8-K........................................ 17
SIGNATURES................................................................................ 19
</TABLE>
i
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997(1) 1998
------------------ ---------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $35,737 $34,771
Accounts receivable, net................................................ 6,585 6,723
Prepaid and other current assets........................................ 1,255 1,607
------- -------
Total current assets.................................................... 43,577 43,101
Furniture, fixtures and equipment, net..................................... 4,186 5,594
Other assets, net.......................................................... 2,255 3,877
------- -------
Total assets............................................................ $50,018 $52,572
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 816 $ 2,877
Accrued expenses........................................................ 2,624 1,251
Deferred revenue........................................................ 6,105 6,616
Current portion of long-term obligations................................ 202 184
------- -------
Total current liabilities............................................... 9,747 10,928
Long-term obligations, less current portion................................ 351 280
------- -------
Total liabilities....................................................... 10,098 11,208
------- -------
Stockholders' equity:
Common stock............................................................ 8 9
Additional paid-in capital............................................ 36,710 37,265
Retained earnings....................................................... 3,322 4,147
Cumulative translation adjustment....................................... (120) (57)
------- -------
Total stockholders' equity.............................................. 39,920 41,364
------- -------
Total liabilities and stockholders' equity.............................. $50,018 $52,572
======= =======
</TABLE>
(1) Restated for pooling of interests. See note 3.
See accompanying notes.
1.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
1997 (1) 1998 1997 (1) 1998
------------ ------------ ------------- -----------
<S> <C> <C> <C> <C>
Revenue:
License revenue........................................................ $ 5,783 $ 6,092 $10,624 $13,463
Service and maintenance revenue........................................ 1,885 4,197 3,342 7,698
------- ------- ------- -------
Total revenue........................................................ 7,668 10,289 13,966 21,161
------- ------- ------- -------
Cost of revenue:
Cost of license revenue................................................ 506 516 961 1,055
Cost of service and maintenance revenue................................ 595 1,223 1,097 2,156
------- ------- ------- -------
Total cost of revenue................................................ 1,101 1,739 2,058 3,211
------- ------- ------- -------
Gross profit......................................................... 6,567 8,550 11,908 17,950
------- ------- ------- -------
Operating expenses:
Product development.................................................... 1,767 2,556 3,575 4,853
Sales and marketing.................................................... 3,197 4,819 5,915 9,238
General and administrative............................................. 859 1,032 1,775 2,121
Merger and relocation costs............................................ -- 1,209 -- 1,209
------- ------- ------- -------
Total operating expenses............................................. 5,823 9,616 11,265 17,421
------- ------- ------- -------
Income (loss) from operations........................................ 744 (1,066) 643 529
Other income, net....................................................... 344 594 460 1,178
------- ------- ------- -------
Income (loss) before income taxes.................................... 1,088 (472) 1,103 1,707
Income tax expense (benefit)............................................ 298 (165) 456 456
------- ------- ------- -------
Net income (loss).................................................... $ 790 $ (307) $ 647 $ 1,251
======= ======= ======= =======
Pro forma net income data:
Income before income taxes, as reported.............................. $ 1,088 $ 1,103 $ 1,707
Pro forma income tax expense......................................... 381 386 597
------- ------- -------
Pro forma net income............................................. $ 707 $ 717 $ 1,110
======= ======= =======
Pro forma diluted earnings per share................................. $ 0.07 $ 0.07 $ 0.11
======= ======= =======
Basic earnings per share................................................ $ 0.09 $ (0.03) $ 0.09 $ 0.12
======= ======= ======= =======
Diluted earnings per share.............................................. $ 0.07 $ (0.03) $ 0.07 $ 0.11
======= ======= ======= =======
Shares used in basic per share calculation.............................. 9,291 10,128 7,046 10,084
Shares used in diluted per share calculation............................ 10,547 10,924 9,767 10,893
</TABLE>
(1) Restated for pooling of interests. See note 3.
See accompanying notes.
2.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
MARCH 31,
---------
1997 (1) 1998
-------------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................................... $ 759 $ 1,251
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization.................................................................... 706 1,308
Changes in assets and liabilities:
Accounts receivable............................................................................. 1,490 (138)
Prepaid expenses and other current assets....................................................... 456 (352)
Other noncurrent assets......................................................................... (117) (1,917)
Accounts payable and accrued expenses........................................................... 1,490 687
Deferred revenue............................................................................... 1,146 511
-------- -------
Net cash from operating activities............................................................ 5,930 1,350
-------- -------
Cash flows from investing activities:
Equipment acquisitions........................................................................... (837) (2,420)
Short-term investments........................................................................... (28,278) (4,089)
-------- -------
Net cash from investing activities............................................................ (29,115) (6,509)
-------- -------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations......................................... (105) (89)
Net proceeds from issuance of common stock, net.................................................. 25,627 351
Stock issuance costs............................................................................. (248) (23)
Payments of dividends............................................................................ (38) (426)
Proceeds from exercise of stock options.......................................................... 60 228
-------- -------
Net cash from financing activities............................................................ 25,296 41
-------- -------
Effect of exchange rate changes on cash............................................................. 22 63
-------- -------
Net increase (decrease) in cash and cash equivalents.......................................... 2,133 (5,055)
Cash and cash equivalents at beginning of period.................................................... 2,113 9,999
-------- -------
Cash and cash equivalents at end of period.......................................................... 4,246 4,944
======== =======
</TABLE>
(1) Restated for pooling of interests. See note 3.
See accompanying notes.
3.
<PAGE>
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, 1997, as included in the Company's annual
report on Form 10-K.
2. Earnings per share In 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 requires the replacement of previously reported primary
and fully diluted earnings per share required by Accounting Principles Board
Opinion No. 15 with basic earnings per share and diluted earnings per share.
The calculation of basic earnings per share excludes any dilutive effect of
stock options, while diluted earnings per share includes the dilutive effect
of stock options. Per share amounts for the three and six months ended March
31, 1997 have been restated to conform to the requirements of SFAS No. 128.
There was no change in the diluted earnings per share amounts.
3. Acquisitions
During October 1997, the Company acquired 78% of the outstanding stock of
HotData Inc. ("HotData") for $1.3 million in cash and can contribute up to a
total of $2.0 million through the end of December 1998. HotData, which began
operations in 1997, is developing technology to collect and verify data
across the Internet. HotData is a majority-owned subsidiary with the
financial results of such subsidiary consolidated with the Company's as of
October 1, 1997. The Company will have the option to purchase the minority
interest of the subsidiary during a specified time period in the future.
Consolidated pro forma results of operations as if the acquisition had
occurred at the beginning of fiscal year 1997 are not presented as the pro
forma effect is not material.
On February 28, 1998, the Company acquired all of the common stock of
Stingray Software, Inc. (Stingray) in exchange for 1,652 shares of the
Company's common stock in a transaction accounted for as a pooling of
interests. Stingray is a privately held company that develops and
distributes development tools for Windows programmers. The Company's
consolidated financial statements have been restated for all periods
presented to combine the financial position, results of operations and cash
flows of Stingray with those of the Company. All share and per share
information has been restated for the issuance of Rogue Wave Common shares
in the merger.
4. Recent Pronouncements
In 1997, the FASB issued SFAS 132, Employer's Disclosures about Pensions and
Other Postretirement Benefits, which standardized the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information and changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company will adopt SFAS 132 in its fiscal year 1998. The Company does not
expect this new pronouncement to have a significant impact on the financial
statements.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("ACSEC") issued
Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition. SOP 97-
2 supersedes SOP 91-1. SOP 97-2 requires companies to defer revenue and
profit recognition unless four required criteria of a sale are met. In
addition, SOP 97-2 requires that revenue recognized from software
arrangements be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post-contract customer support, installation, or training. SOP
97-2 is effective for
4.
<PAGE>
all transactions entered into in fiscal years beginning after December 15,
1997. Management does not believe that the adoption of SOP 97-2 will have a
material effect on the Company's financial position or results of
operations.
In March 1998, the ACSEC issued SOP 98-1, Accounting For The Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1
establishes criteria for determining which costs of developing or obtaining
internal-use computer software should be charged to expense and which should
be capitalized. SOP 98-1 is effective for all transactions entered into in
fiscal years beginning after December 15, 1998. Management does not believe
that the adoption of SOP 98-1 will have a material effect on the Company's
financial position or results of operations.
5.
<PAGE>
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 "Risk Factors" and "Business" in the Company's Annual Report on Form
10-K for the year ended September 30, 1997. 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.
The Company has experienced significant revenue growth over the last
several years. During fiscal 1997, the Company's revenue grew primarily from
the continued strong demand for C++ and Java-based software parts and tools and
the establishment of a consulting group based in Boulder, Colorado. In
addition, the Company's international revenue increased from 23% in fiscal 1997
to 30% during the six months ended March 31, 1998 due to the increased revenue
growth in the European sales channel from continued expansion of European
operations.
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%, 23% and 30% of total
revenue in fiscal 1996, fiscal 1997, and the six months ended March 31, 1998,
respectively. 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 has entered
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
6.
<PAGE>
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 contributed such
technology, and made a funding commitment of $1.3 million on October 1, 1997 and
can contribute up to a total of $2.0 million through December 1998, to a
majority-owned subsidiary, HotData, 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. The Company expects that such subsidiary will be in the
development stage through at least fiscal 1998. 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 HotData have been consolidated with the Company's financial
results. Accordingly, fluctuations in the operating results of HotData 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. During the quarter ended March 31, 1998, the Company moved its
administrative operations from its previous location in Corvallis, Oregon to
Boulder, Colorado. The Company incurred charges totaling approximately $500,000
during the quarter ended March 31, 1998 in connection with this move.
On February 28, 1998, the Company acquired all of the outstanding shares of
Stingray Software, Inc. (Stingray) common stock in a business combination
accounted for as a pooling of interests for approximately 1.65 million shares of
Rogue Wave common stock. Stingray develops and distributes development tools
for Windows programmers. The merger added several new product lines to Rogue
Wave's current slate of object-oriented C++ and Java TM class libraries and
builders. Stingray offers an extensive line of add-on libraries that extend and
enhance the Microsoft Foundation Classes (MFC), providing additional, prebuilt
functionality for creating sophisticated GUI controls, grids, diagrams and
charts. Stingray also offers ActiveX components, and several Java class
libraries that will further strengthen Rogue Wave's offerings in the Java
marketplace. The Company incurred approximately $700,000 in merger costs during
the quarter ended March 31, 1998. The financial results for the quarter and
six months ended March 31, 1997 and 1998 include the accounts of the Company and
Stingray.
7.
<PAGE>
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.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL NET REVENUES
--------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- ------- ------------
<S> <C> <C> <C> <C>
Revenue:
License revenue........................................................ 59% 75% 64% 76%
Service and maintenance revenue........................................ 41% 25% 36% 24%
------- ------- ------ -------
Total revenue........................................................ 100% 100% 100% 100%
------- ------- ------ -------
Cost of revenue:
Cost of license revenue................................................ 5% 7% 5% 7%
Cost of service and maintenance revenue................................ 12% 8% 10% 8%
------- ------- ------ -------
Total cost of revenue................................................ 17% 15% 15% 15%
------- ------- ------ -------
Gross profit......................................................... 83% 85% 85% 85%
------- ------- ------ -------
Operating expenses:
Product development.................................................... 25% 23% 23% 26%
Sales and marketing.................................................... 47% 42% 44% 42%
General and administrative............................................. 10% 11% 10% 13%
Merger and relocation costs............................................ 12% 0% 6% 0%
------- ------- ------ -------
Total operating expenses............................................. 94% 76% 83% 81%
------- ------- ------ -------
Income from operations............................................... (11)% 9% 2% 4%
Other income, net....................................................... 6% 5% 6% 3%
------- ------- ------ -------
Income before income taxes........................................... (5)% 14% 8% 7%
Income tax expense...................................................... 2% 4% 2% 3%
------- ------- ------ -------
Net income........................................................... (7)% 10% 6% 4%
======= ======= ====== =======
</TABLE>
Revenue
Total revenue for the three and six months ended March 31, 1998 was $10.3
million and $21.2 million, respectively, versus $7.7 million and $14.0 million
for the three and six months ended March 31, 1997, representing an increase of
34% and 51%, respectively. License revenue for the three and six months ended
March 31, 1998 were $6.1 million and $13.5 million, respectively, versus $5.8
million and $10.6 million for the three and six months ended March 31, 1997,
representing and increase of 8% and 27%, 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
telesales and direct sales organization and international presence.
Service and maintenance revenue for the three and six months ended March
31, 1998 was $4.2 million and $7.7 million, respectively, versus $1.9 million
and $3.3 million for the three and six months ended March 31,1997, representing
an increase of 121% and 133%, respectively. These increases in service and
maintenance revenue were
8.
<PAGE>
primarily attributable to increased sales volume of the Company's support and
maintenance services related to the Company's larger installed base, as well as
an increase in consulting revenue resulting from the establishment of the
Company's consulting business group in Boulder, Colorado, in April 1997.
Cost of Revenue
Cost of license revenue for the three and six months ended March 31, 1998
were $516,000 and $1.1 million respectively versus $506,000 and $961,000 for the
three and six months ended March 31, 1997, representing an increase of 2% and
15%, respectively. As a percentage of total revenue cost of license revenue was
5% and 5% for the three and six months ended March 31, 1998 versus 7% and 7% for
the three and six months ended March 31, 1997. Fluctuations in cost of license
revenue as a percentage of total license revenue are primarily the result of
varying levels of royalties paid, changes in product mix and the timing of large
site license sales. The decrease in the cost of license revenue is primarily
attributable to the increase in cost savings associated with increased shipments
of the Company's products on CD-ROM and online distribution. Such cost savings
contributed to a decrease in cost of license revenue as a percent of total
revenue.
Cost of service and maintenance revenue for the three and six months ended
March 31, 1998 were $1.2 million and $2.2 million, respectively, versus $595,000
and $1.1 million for the three and six months ended March 31, 1997 representing
an increase of 102% and 100% respectively. As a percentage of total revenue
cost of service and maintenance revenue was 12% and 10% for the three and six
months ended March 31, 1998 versus 8% and 8% for the three and six months ended
March 31, 1997. The increase was primarily the result of the establishment of a
consulting business group in April 1997.
Operating Expenses
Product development expense for the three and six months ended March 31,
1998 were $2.6 million and $4.9 million, respectively, versus $1.8 million and
$3.6 million for the three and six months ended March 31, 1997 representing an
increase of 44% and 36%, respectively. As a percentage of total revenue product
development expenses were 25% and 23% for the three and six months ended March
31, 1998 versus 23% and 26% for the three and six months ended March 31, 1997.
The increase in product development expenses was primarily attributable to the
hiring of additional product development personnel. The Company anticipates
that it will continue to devote substantial resources to product development and
that product development expenses will increase in absolute dollars 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 expense for the three and six months ended March 31,
1998 were $4.8 million and $9.2 million, respectively, versus $3.2 million and
$5.9 million for the three and six months ended March 31, 1997 representing an
increase of 50% and 56%, respectively. As a percentage of total revenue, sales
and marketing expenses were 47% and 44% for the three and six months ended March
31, 1998 versus 42% and 42% for the three and six months ended March 31, 1997.
The increases were 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 expense for the three and six months ended March
31, 1998 were $1.0 million and $2.1 million, respectively, versus $900,000 and
$1.8 million for the three and six months ended March 31, 1997 representing an
increase of 11% and 17%, 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.
Merger and relocation costs were $1.2 million for the three and six months
ended March 31, 1998. These costs were related to the business combination with
Stingray and the move of the Company's administrative operations to Boulder,
Colorado.
Other Income, Net
9.
<PAGE>
Other income increased during the three and six months ended March 31, 1998
versus the three and six months ended March 31, 1997 as a result of higher
interest income due to a higher investment portfolio generated by cash from the
Company's public offerings of common stock and operations.
Income Tax Expense
The Company's effective tax rate for the second quarter and first half of
fiscal 1998 was 35% and 27% respectively, compared to 27% and 41% for the second
quarter and first half of fiscal 1997, respectively. The effective rate for the
quarter and six months ended March 31, 1997 reflects the exclusion of earnings
due to the Subchapter S status of Stingray. The effective rate for the six
months ended March 31, 1998 reflects three months of earnings excluded due to
the Subchapter S status of Stingray. The Company anticipates its fiscal 1998
effective tax rate will be approximately 35% percent; however, this rate could
change based on a change in the percentage of total revenue derived from
international sources.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operations was due primarily to the increase in net income,
and increases in accounts payable, accrued expenses and deferred revenues. The
Company's investing activities consist primarily of the purchase and sale of
short-term investments and purchases of equipment. Short-term investments
primarily consist of commercial paper with original maturities of 180 days or
less which are held as securities available for sale. The Company believes that
expected cash flow from operations combined with existing cash and cash
equivalents and short-term investments will be sufficient to meet its cash
requirements for the foreseeable future. See "Risk Factors -Uncertainty of
Future Operating Results; Fluctuations in Quarterly Operating Results," and "-
Future Acquisitions."
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. 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 weeks, or even days, of each
quarter. To the extent this trend continues, the failure to achieve such
revenue during the last weeks 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.
Prior growth rates in the Company's revenue and net income should not be
considered indicative of future operating results. 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
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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. During the quarter
ended March 31, 1998, the Company moved its administrative operations from
Corvallis, Oregon, to Boulder, Colorado, incurring charges totaling
approximately $500,000. In addition, the Company contributed technology to and
made an investment in HotData Inc. ("HotData") in order to develop technology
relating to the collection and verification of data across the Internet. Because
the Company owns a majority of the outstanding stock of HotData, it is accounted
for as a subsidiary of the Company. The Company expects HotData will be in the
development stage through at least fiscal 1998. There can be no assurance that
the technology developed by HotData will be commercialized, or even if it is
commercialized there can be no assurance of market acceptance due to its new and
untested business model. The financial results of HotData will be consolidated
with the Company's financial results. Accordingly, fluctuations in the operating
results of HotData 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.
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 acquired a
European distributor with offices and personnel in several European countries
and established a consulting group in Boulder, Colorado to help expand its
ability to provide consulting services. In addition, the Company recently
acquired Stingray Software, Inc. which develops and distributes development
tools from their facilities in Morrisville, North Carolina. 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 and Stingray in 1998 have
resulted in the Company's product development team being distributed in four
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 moved its administrative operations from
Corvallis, Oregon to Boulder, Colorado. This move has resulted 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 requires a significant amount of attention from management,
particularly the Company's Chief Operating Officer and Chief Financial Officer,
both of whom have relocated as part of the move.
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.
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
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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 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++ 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. 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.
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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.
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 prior thirteen quarters and the Company had net
income in most of those quarters, the Company's total revenue decreased in the
most recent quarter and the Company incurred a net loss in the quarter ended
June 30, 1996. The Company has devoted an increasing amount of resources to the
its product development, sales and marketing and technical support
organizations. 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.
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.
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.
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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 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 24% and 30% of the Company's total revenue in fiscal
1997 and the six months ended March 31, 1998, respectively. As of March 31,
1998, the Company had 36 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 the past, the Company has experienced some difficulty
in attracting key personnel. 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.
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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 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.
Uncertainty Of The Effects Of The Year 2000 On Computer Programs And
Systems. Many currently installed computer systems and software programs were
designed to use only a two digit date field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. Until the date fields are updated, the systems and programs could fail
or give erroneous results when referencing dates following December 31, 1999.
Such failure or errors could occur prior to the actual change in century. The
Company relies on computer applications to manage and monitor its accounting,
sales, development and administrative functions. In addition, the Company's
customers, suppliers and service providers (particularly financial institutions)
are reliant upon computer applications, some of which may contain software that
may fail as a result of the upcoming change in century, with respect to
functions that materially affect their interactions with the Company. While the
Company does not believe its computer systems or applications currently in use
will be adversely affected by the upcoming change in century, the Company has
not made an assessment as to whether any of its customers, suppliers or service
providers will be so affected. Failure of the Company's software or that of its
customers, suppliers or service providers could have a material adverse impact
on the Company's business, financial condition and result of operations.
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.
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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.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company enters into foreign exchange forward contracts to hedge certain
operational and balance sheet exposures from changes in foreign currency
exchange rates. Such exposures result from the portion of the Company's
operations, assets, and liabilities that are denominated in currencies other
than the U.S. dollar. These transactions are entered into to hedge purchases,
sales, and other normal recurring transactions and accordingly are not
speculative in nature. The Company does not hold or issue financial instruments
for trading purposes nor does it hold or issue leveraged derivative financial
instruments. Market value gains and losses on such contracts that result from
fluctuations in foreign exchange rates are recognized as offsets to the exchange
gains or losses on the hedged transactions. By their nature, these transactions
generally offset. The net gain or loss on such foreign currency contracts and
underlying transactions was not material during the three and six months ended
March 31, 1998, however 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. The Company had outstanding short-term forward exchange
contracts to exchange German marks for U.S. dollars in the amount of $1.1
million at March 31, 1998.
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PART II - OTHER INFORMATION
ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
ISSUANCE OF COMMON STOCK IN ACQUISITION OF STINGRAY SOFTWARE, INC.
On February 27, 1998, SR Acquisition Corp. ("Merger Sub"), a wholly owned
subsidiary of Rogue Wave Software, Inc. ("Rogue Wave"), was merged with and into
Stingray Software, Inc. ("Stingray") pursuant to an Agreement and Plan of Merger
and Reorganization dated as of January 19, 1998 by and among Rogue Wave, Merger
Sub, Stingray and the three stockholders of Stingray (the "Merger Agreement").
Under the Merger Agreement, Rogue Wave issued 1,651,845 shares of its Common
Stock to the former stockholders of Stingray and Stingray became a wholly-owned
subsidiary of Rogue Wave. The shares were issued in reliance on the exemption
from the registration requirements of the Securities Act of 1933, as amended
(the "Securities Act") set forth in Section 4(2) of the Securities Act.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
The effective date of the Company's first registration statement, filed on
Form SB-2 filed under the Securities Act of 1993 (No. 333-13517), was November
21, 1996 (the "Registration Statement"). The class of securities registered was
Common Stock. The offering commenced on November 21, 1996 and all securities
were sold in the offering. The managing underwriters for the offering were
Hambrecht & Quist LLC and Wessels, Arnold & Henderson, L.L.C.
Pursuant to the Registration Statement, the Company sold 2,367,640 shares
of its Common Stock for its own account, for an aggregate offering price of
$28,411,680, and 449,860 shares of its Common Stock for the account of certain
selling stockholders, for an aggregate offering price of $5,398,320. The
Company incurred expenses of approximately $2,838,818, of which $1,988,818
represented underwriting discounts and commissions and $850,000 represented
estimated other expenses. All such expenses were direct or indirect payments to
others. The net offering proceeds to the issuer after total expenses was
$25,572,863.
The Company has used $1,500,000 of the net proceeds from the offering in
the acquisition of other businesses, $1,000,000 of the net proceeds from the
offering for repayment of indebtedness and $12,711,000 of the net proceeds for
working capital. All remaining net proceeds have been invested in commercial
paper. The use of proceeds from the offering does not represent a material
change in the use of proceeds described in the prospectus.
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.
2.3(3) Agreement and Plan of Merger and Reorganization among Rogue
Wave Software, Inc., a Delaware corporation, SR Acquisition
Corp., a North Carolina corporation, Stingray Software, Inc.,
a North Carolina corporation and the shareholders of Stingray
Software, Inc., dated as of January 19, 1998.
2.4(4) Articles of Merger and Plan of Merger dated February 27, 1998,
filed with the Secretary of State of North Carolina on
February 27, 1998.
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.
17.
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4.3(1) Amended and Restated Investors' Rights Agreement between the
Registrant and certain investors, dated November 10, 1995, as
amended June 27, 1996.
4.4(5) Form of Registration Rights Agreement between Rogue Wave
Software, Inc. and the former shareholders of Stingray
Software, Inc.
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.
(3) Filed as Exhibit 2.1 to the Registrant's Form 8-K dated February
27, 1998 and filed on March 9, 1998.
(4) Filed as Exhibit 2.2 to the Registrant's Form 8-K dated February
27, 1998 and filed on March 9, 1998.
(5) Filed as Exhibit 4.1 to the Registrant's Form 8-K dated February
27, 1998 and filed on March 9, 1998.
Items 1, 3, 4, and 5 are not applicable and have been omitted.
18.
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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: May 14, 1998 /S/ ROBERT M. HOLBURN, JR.
-------------------------------
ROBERT M. HOLBURN, JR.
CHIEF FINANCIAL OFFICER
19.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPANY'S
QUARTERLY REPORT ON FORM 10Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 34,771
<SECURITIES> 0
<RECEIVABLES> 7,333
<ALLOWANCES> 610
<INVENTORY> 91
<CURRENT-ASSETS> 43,101
<PP&E> 8,657
<DEPRECIATION> 3,063
<TOTAL-ASSETS> 52,572
<CURRENT-LIABILITIES> 10,928
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 41,341
<TOTAL-LIABILITY-AND-EQUITY> 52,572
<SALES> 21,161
<TOTAL-REVENUES> 21,161
<CGS> 3,211
<TOTAL-COSTS> 3,211
<OTHER-EXPENSES> 17,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 1,707
<INCOME-TAX> 456
<INCOME-CONTINUING> 1,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,251
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
</TABLE>
