<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, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number: 0-28900
Rogue Wave Software, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 93-1064214
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5500 Flatiron Parkway, Boulder, Colorado 80301
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(Address of principal executive offices) (Zip Code)
(303) 473-9118
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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 July 31, 2000
----- ----------------------------
Common Stock, $0.001 par value 10,892,319
1.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I - FINANCIAL INFORMATION,
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1999
and June 30, 2000............................................................. 3
Condensed Consolidated Statements of Operations for the three and the
nine months ended June 30, 1999 and 2000...................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended June 30, 1999 and 2000.................................................. 5
Notes to Condensed Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................ 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 19
SIGNATURES................................................................................... 21
</TABLE>
2.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1999 2000
--------------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $13,875 $18,972
Short term investments............................................ 13,789 16,288
------- -------
Total cash, cash equivalents and short term investments........ 27,664 35,260
Accounts receivable, net.......................................... 10,176 10,446
Prepaid expenses and other current assets......................... 2,660 2,338
------- -------
Total current assets........................................... 40,500 48,044
Equipment, net....................................................... 4,310 4,425
Goodwill, net........................................................ 11,922 10,600
Other assets, net.................................................... 2,738 1,916
------- -------
Total assets................................................... $59,470 $64,985
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 423 $ 680
Accrued expenses.................................................. 5,399 5,949
Deferred revenue.................................................. 11,306 11,596
------- -------
Total current liabilities...................................... 17,128 18,225
Stockholders' equity:
Common stock...................................................... 10 10
Additional paid-in capital........................................ 34,994 40,026
Retained earnings................................................. 7,084 6,731
Accumulated other comprehensive income (loss)..................... 254 (7)
------- -------
Total stockholders' equity..................................... 42,342 46,760
------- -------
Total liabilities and stockholders' equity..................... $59,470 $64,985
======= =======
</TABLE>
See accompanying notes.
3.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER
COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
-------------------- ---------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
License revenue.................................................. $ 8,209 $ 8,023 $24,637 $21,848
Service and maintenance revenue.................................. 5,822 6,038 14,958 17,871
------- ------- ------- -------
Total revenue.................................................. 14,031 14,061 39,595 39,719
Cost of revenue:
Cost of license revenue.......................................... 533 541 1,590 1,349
Cost of service and maintenance revenue.......................... 2,025 2,083 5,363 6,008
------- ------- ------- -------
Total cost of revenue.......................................... 2,558 2,624 6,953 7,357
------- ------- ------- -------
Gross profit................................................... 11,473 11,437 32,642 32,362
Operating expenses:
Product development.............................................. 3,295 3,598 8,156 10,755
Sales and marketing.............................................. 6,041 6,072 17,114 17,425
General and administrative....................................... 1,325 1,336 3,922 4,065
Acquisition, relocation and goodwill amortization costs.......... 384 354 486 1,309
------- ------- ------- -------
Total operating expenses....................................... 11,045 11,360 29,678 33,554
Income (loss) from operations.................................. 428 77 2,964 (1,192)
Other income, net................................................. 239 551 762 1,242
------- ------- ------- -------
Income before income taxes.................................... 667 628 3,726 50
Income tax expense................................................ 233 362 1,304 403
------- ------- ------- -------
Net income (loss).............................................. $ 434 $ 266 $ 2,422 $ (353)
======= ======= ======= =======
Basic earnings (loss) per share................................... $0.04 $0.02 $0.23 $(0.03)
======= ======= ======= =======
Diluted earnings (loss) per share................................. $0.04 $0.02 $0.22 $(0.03)
======= ======= ======= =======
Shares used in basic per share calculation........................ 10,405 10,686 10,429 10,465
Shares used in diluted per share calculation...................... 10,882 10,827 10,984 10,465
Net income (loss).............................................. 434 266 2,422 (353)
Other comprehensive income (loss)
Foreign currency translation gain (loss)......................... 80 (77) (13) (261)
------- ------- ------- -------
Total comprehensive income (loss).............................. $ 514 $ 189 $ 2,409 $ (614)
======= ======= ======= =======
</TABLE>
See accompanying notes.
4.
<PAGE>
ROGUE WAVE SOFTWARE, INC
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Nine months ended
-----------------
June 30,
--------
1999 2000
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................. $ 2,422 $ (353)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization.................................................... 2,892 3,569
Loss on disposal of assets....................................................... 58 --
Changes in assets and liabilities:
Accounts receivable............................................................. (1,858) (270)
Prepaid expenses and other current assets....................................... 512 338
Deferred income taxes........................................................... -- (16)
Other noncurrent assets......................................................... (1,001) 321
Accounts payable and accrued expenses........................................... 704 811
Deferred revenue 2,420 290
-------- -------
Net cash from operating activities............................................ 6,149 4,690
-------- -------
Cash flows from investing activities :
Purchase of business net of cash acquired......................................... (11,840) --
Short term investments............................................................ 4,367 (2,499)
Equipment acquisitions............................................................ (1,068) (1,861)
-------- -------
Net cash from investing activities............................................ (8,541) (4,360)
-------- -------
Cash flows from financing activities:
Payments on debt and capital lease obligations.................................... (105) (4)
Net proceeds from issurance of common stock....................................... 337 --
Purchase of treasury stock........................................................ (1,883) --
Proceeds from exercise of stock options........................................... 364 5,032
-------- -------
Net cash from financing activities............................................ (1,287) 5,028
-------- -------
Effect of exchange rate changes on cash............................................ (13) (261)
-------- -------
Net change in cash and cash equivalents....................................... (3,692) 5,097
Cash and cash equivalents at beginning of period................................... 13,981 13,875
-------- -------
Cash and cash equivalents at end of period......................................... $ 10,289 $18,972
======== =======
</TABLE>
See accompanying notes.
5.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
NOTES TO
CONDENSED 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 and notes
thereto (the "Consolidated Financial Statements") for the year ended
September 30, 1999, as included in the Company's annual report on Form 10-
K. The interim results presented are not necessarily indicative of results
for any subsequent quarter or for the year ending September 30, 2000.
2. Revenue Recognition
The Company's revenue is recognized according to the criteria of the
American Institute of Certified Public Accountants Statements of Position
97-2, 98-4 and 98-9, relating to software revenue recognition. License
revenue is booked upon the execution of a license agreement or signed
written contract with fixed or determinable fees, shipment or electronic
delivery of the product, and determination that collection of the resulting
receivable is probable. Maintenance and service revenue includes
maintenance revenue that is deferred and recognized over the maintenance
period and service revenue that includes training and consulting, which is
recognized as services are performed.
3. Common Stock Repurchase
In October 1998, the Board of directors authorized the Company to
repurchase up to the lesser of 500,000 shares of the Company's common stock
or $10,000,000. In July 1999, the Board of Directors further authorized the
Company to repurchase the lesser of an additional 500,000 shares, or a
cumulative total of $8,500,000 for the full 1,000,000 shares. The Company
has purchased and subsequently issued a total of 358,300 shares for
employee benefit plans as of June 30, 2000.
4. Acquisition
On March 1, 1999, the Company acquired 100% of the outstanding stock of
NobleNet, Inc. ("NobleNet") for $11.8 million in cash. The acquisition was
accounted for under the purchase method and, accordingly, the accompanying
financial statements include NobleNet's results beginning with the
acquisition date. The purchase price was allocated to the assets of
NobleNet based on their respective fair values. The excess of the purchase
price over net identifiable assets acquired approximated $12.0 million and
is being amortized over 10 years. The following are the pro forma results
of operations as if NobleNet had been acquired on October 1, 1998:
<TABLE>
<CAPTION>
Nine Months Ended
June 30, 1999
-------------
<S> <C>
Revenue......................................................................... $40,234
Net loss........................................................................ (462)
Basic and diluted loss per share................................................ (0.04)
</TABLE>
6.
<PAGE>
5. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings (loss) per
share is computed on the basis of the weighted average number of common
shares outstanding plus the effect of outstanding stock options using the
"treasury stock" method unless the impact is anti-dilutive. The difference
between basic earnings per share and diluted earnings per share is due to
the effect of outstanding stock options. For the three months ended June
30, 2000, the dilutive effect of outstanding options would have been
140,471. The effect of outstanding stock options was antidulitive for the
for the nine months ended July 31, 2000.
7.
<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, 1999. 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 Software, Inc. ("Rogue Wave" or the "Company") was founded in
1989 to provide reusable software components for the development of object-
oriented software applications. The Company operated as a Subchapter S
corporation until June 1994. In October 1995, the Company 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. In February 1998,
the Company merged with Stingray Software, Inc. ("Stingray"), a privately held
corporation specializing in the development and distribution of object-oriented
development tools for Windows programmers and a leading provider of Visual C++
class libraries. Both transactions were accounted for using the pooling-of-
interests method of accounting. In March 1999, the Company merged with
NobleNet, Inc. ("NobleNet") in a transaction utilizing the purchase method of
accounting. NobleNet specialized in building and marketing software products
that allow existing information technology ("IT") systems to communicate and
interoperate across corporate networks and the Internet. The products are used
to build sophisticated, enterprise-wide, distributed applications that run on
more than 40 platforms.
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 booked upon execution of a license agreement or signed
written contract with fixed or determinable fees, shipment or electronic
delivery 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 recorded upon shipment. Returns to date
have not been significant. Service and maintenance revenue consists of fees
that are charged separately from 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. The Company's revenue recognition policies are in
compliance with American Institute of Certified Public Accountants' Statements
of Position 97-2, 98-4, and 98-9 relating to software revenue recognition.
The Company markets its products primarily through its direct sales force,
and to a lesser extent through the Internet and an indirect channel consisting
of OEMs, VARs, dealers and distributors. The Company's direct sales force
consists of an inside telesales group that focuses on smaller orders ($50,000 or
less), and a field sales force that focuses on larger site licenses. The
Company makes most 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.
8.
<PAGE>
International revenue accounted for approximately 28%, 24% and 20% of total
revenue in fiscal 1998, 1999 and the nine months ended June 30, 2000,
respectively. 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 ("Precision"), a distributor of Rogue Wave
software products in Germany, the United Kingdom, France and the Benelux
countries. In 1998, the Company established a subsidiary in Italy. 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. The Company has initiated a management reorganization that is
expected to support accelerated European growth. There can be no assurance,
however, that the Company will be able to maintain or increase international
market demand for its products.
The majority of the Company's international revenue is generated by the
Company's European subsidiaries and is denominated in local currencies. 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 Associated with International Operations."
The Company acquired a controlling interest in HotData, Inc. ("HotData")
for $1.3 million on October 1, 1997. HotData began operations during 1997 and
has developed technology relating to the collection and verification of data
across the Internet. On September 1, 1998 and on January 11, 1999, HotData sold
capital stock to additional investors thereby reducing the Company's percentage
ownership from 78% to 42% and 42% to 21%, respectively. The HotData investment
was accounted for using the equity method of accounting for fiscal 1998, 1999
and 2000. As of June 30, 2000, the Company's recorded investment balance in
HotData is zero as a result of the Company's share of HotData's losses.
In February 1998, the Company acquired all of the outstanding shares of
Stingray common stock in a business combination accounted for as a pooling-of-
interests transaction for approximately 1.65 million shares of Rogue Wave common
stock. Stingray was a privately held company that developed and distributed
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 the Company's
offerings in the Java marketplace. The financial results for all periods
presented include the accounts of the Company and Stingray.
In March 1999, the Company acquired all of the outstanding shares of NobleNet
common stock in a transaction accounted for under the purchase method of
accounting for approximately $11.8 million in cash. NobleNet's Nouveau
technology expanded the Company's product offering by providing a unified
architecture for building high performance, distributed applications that
interoperate across an enterprise or over the Internet.
9.
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage of
net revenue represented by certain line items in the Company's Condensed
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Percentage of Total Net Revenue
-----------------------------------------
Three months ended Nine months ended
June 30, June 30,
------------------ -----------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
Revenue:
License revenue.................................................. 59% 57% 62% 55%
Service and maintenance revenue.................................. 41 43 38 45
---- ---- ---- ----
Total revenue.................................................. 100 100 100 100
---- ---- ---- ----
Cost of revenue:
Cost of license revenue.......................................... 4 4 4 4
Cost of service and maintenance revenue.......................... 14 15 14 15
---- ---- ---- ----
Total cost of revenue.......................................... 18 19 18 19
---- ---- ---- ----
Gross profit 82 81 82 81
---- ---- ---- ----
Operating expenses:
Product development.............................................. 23 26 21 27
Sales and marketing.............................................. 43 43 43 44
General and administrative....................................... 10 10 10 10
Acquisition, relocation and goodwill amortization................ 3 3 1 3
---- ---- ---- ----
Total operating expenses....................................... 79 82 75 84
---- ---- ---- ----
Income (loss) from operations.................................. 3 1 7 (3)
Other income, net................................................. 2 4 2 3
---- ---- ---- ----
Income before income taxes..................................... 5 5 9 --
Income tax expense................................................ 2 3 3 1
---- ---- ---- ----
Net income (loss).............................................. 3% 2% 6% (1)%
==== ==== ==== ====
</TABLE>
Revenue
Total revenue for the three and nine months ended June 30, 2000 was $14.1
million and $39.7 million, respectively, versus $14.0 million and $39.6 million
for the three and nine months ended June 30, 1999, representing an increase of
1%, respectively. License revenue for the three and nine months ended June 30,
2000 was $8.0 million and $21.8 million, respectively, versus $8.2 million and
$24.6 million for the three and nine months ended June 30, 1999, representing a
decrease of 2% and 11%, respectively. License revenue decreased primarily as a
result of a decrease in the number of licenses sold to existing and new
customers, reflecting a lack of additional product offerings, and sales force
turnover.
Service and maintenance revenue for the three and nine months ended June
30, 2000 was $6.0 million and $17.9 million, respectively, versus $5.8 million
and $15.0 million for the three and nine months ended June 30, 1999,
representing an increase of 4% and 19%, respectively. The increase in service
and maintenance revenue was primarily attributable to increased sales volume of
the Company's support and maintenance services during the last twelve months,
which are recognized ratably over the term of the support agreement.
10.
<PAGE>
Cost of Revenue
Cost of license revenue for the three and nine months ended June 30, 2000
was $541,000 and $1.3 million, respectively, versus $533,000 and $1.6 million
for the three and nine months ended June 30, 1999, representing an increase of
2% and a decrease of 19%, respectively. As a percentage of total revenue, cost
of license revenue was 4% for all periods presented. The overall decrease in
cost of license revenue is a result of a decrease in the number of licenses and
manuals sold. The Company expects that the cost of license revenue as a
percentage of total revenue will remain constant in fiscal 2000 and 2001.
Cost of service and maintenance revenue for the three and nine months ended
June 30, 2000 was $2.1 million and $6.0 million, respectively, versus $2.0
million and $5.4 million for the three and nine months ended June 30, 1999,
representing an increase of 5% and 12%, respectively. As a percentage of total
revenue, cost of service and maintenance revenue was 15% for the three and nine
months ended June 30, 2000 versus 14% for the three and nine months ended June
30, 1999. The increase in cost of service and maintenance revenue was due
primarily to a higher mix of outside contractors used to provide consulting
services. While the Company expects that service and maintenance revenue will
continue to grow, the Company does not believe the cost of such revenue will
increase as a percentage of total revenue.
Operating Expenses
Product development expense for the three and nine months ended June 30,
2000 was $3.6 million and $10.8 million, respectively, versus $3.3 million and
$8.2 million for the three and nine months ended June 30, 1999 representing an
increase of 9% and 32%, respectively. As a percentage of total revenue, product
development expenses were 26% and 27% for the three and nine months ended June
30, 2000 versus 23% and 21% for the three and nine months ended June 30, 1999.
The increase in product development expenses was primarily attributable to the
expense of additional product development personnel as a result of the
acquisition of NobleNet. The increase in product development expenses as a
percentage of revenue is due primarily to the slower growth of revenue relative
to the growth in product development activities. The Company anticipates that
it will continue to devote substantial resources to product development and that
product development expenses will increase throughout fiscal 2000 and 2001.
Sales and marketing expense for the three and nine months ended June 30,
2000 were $6.1 million and $17.4 million, respectively, versus $6.0 million and
$17.1 for the three and nine months ended June 30, 1999 representing no change
and an increase of 2%, respectively. As a percentage of total revenue, sales
and marketing expenses were 43% and 44% for the three and nine months ended June
30, 2000 versus 43% for the three and nine months ended June 30, 1999. The
increase in sales and marketing expense was primarily due to continued
investment in systems and personnel to expand the Company's sales channels.
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 nine months ended June
30, 2000 were $1.3 million and $4.1 million, respectively, versus $1.3 million
and $3.9 million for the three and nine months ended June 30, 1999 representing
no change and an increase of 4%, respectively. The increase in general and
administrative expenses was primarily due to continued investment in
infrastructure and associated expenses necessary to manage and support the
Company's growing operations.
11.
<PAGE>
Goodwill amortization and severance costs were $354,000 and $1.3 million
for the three and nine months ended June 30, 2000 versus $384,000 and $486,000
for the three and nine months ended June 30, 1999. The increase in costs relates
primarily to goodwill amortization associated with the acquisition of NobleNet.
Other Income, Net
Other income for the three and nine months ended June 30, 2000 and the
three and nine months ended June 30, 1999, primarily consists of interest income
on the Company's short term investments. The increase in other income of 63% for
the nine months ended June 30, 2000 compared to the nine months ended June 30,
1999, is due to an increase in short term investments as well as general
increases in interest rates.
Income Tax Expense
Income taxes are provided on an interim basis at the expected tax rate for
the year. The expected tax rate for the year exceeds the statutory tax rate of
34% mainly due to the non-deductibility of goodwill resulting from the NobleNet
acquisition.
Liquidity and Capital Resources
The decrease in cash flows from operations for the nine months ended June
30, 2000 compared to the nine months ended June 30, 1999, was due primarily to a
net loss for the nine months ended June 30, 2000 and changes in components of
working capital. 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 flows 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. Our future operating results are
difficult to predict due to a variety of factors, many of which are outside of
our control. These factors include:
. the demand for our products and services;
. the level of product and price competition;
. the size, type and timing of individual license transactions;
. the delay or deferral of customer implementations;
. our success in expanding our direct sales force and indirect
distribution channels;
. the timing of new product introductions and product enhancements;
. levels of international sales;
. changes in our pricing policy or that of our competitors;
. publication of opinions about us, our products and object-oriented,
component technology by industry analysts;
. our ability to retain key employees and hire new employees; and
. our ability to develop and market new products and control costs.
12.
<PAGE>
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue and
operating results to fluctuate significantly. Based on the preceding factors,
we may experience a shortfall in revenue or earnings or otherwise fail to meet
public market expectations, which could materially adversely affect our
business, financial condition and the market price of our common stock. For
example, our financial results for the third and fourth fiscal quarter of 1999
were below the expectations of public market financial analysts. The primary
factors leading to the lower than expected results were (1) a longer sales cycle
and product learning curve for the newly acquired Nouveau products, (2) lower
than expected European sales, and (3) distractions associated with mergers and
reorganization. After each such announcement of financial results, the price of
our common stock declined materially.
Fluctuations in Quarterly Operating Results. We generally ship orders as
received and as a result typically have little or no backlog. The lack of
significant backlog means that quarterly revenue and operating results depend
substantially on the volume and timing of orders we receive during the quarter,
which are difficult to forecast due to a number of reasons, many of which are
outside our control. Such reasons include:
. lack of a reliable means to assess overall customer demand;
. historically we have earned a substantial portion of our revenue in the last
weeks, or even days, of each quarter;
. larger customer orders are subject to long sales cycles and are frequently
delayed; and
. our service and maintenance revenue tends to fluctuate as consulting
. contracts are undertaken, renewed, completed or terminated.
We base operating expenses on anticipated revenue trends and a high
percentage of these expenses are relatively fixed. As a result, 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
lead to significant losses. As a result of these factors, operating results and
growth rates for any particular quarter or other fiscal period may not be
indicative of future operating results. Furthermore, fluctuations in our
quarterly operating results will likely result in volatility in the price of our
common stock in the future.
Management of Growth. Our business has grown in recent years. This growth
has placed a significant strain on our management systems and resources. To
manage future growth we must continue to (1) improve our financial and
management controls, reporting systems and procedures on a timely basis and (2)
expand, train and manage our employee work force. If we fail to manage our
growth effectively, our business, financial condition and results of operations
could be materially and adversely affected.
For example, the acquisition of Stingray Software, Inc. resulted in our
product development team being distributed in four separate sites across the
country. The difficulty of managing this distribution contributed to our
decision during 1998 to close two of our four development sites. The closures
resulted in one-time charges of approximately $580,000 and caused disruption to
our development efforts. In addition, in 1998 we moved our administrative
operations from Corvallis, Oregon, to Boulder, Colorado. This move resulted in
the distribution of our senior management team, which may make managing our
operations in the future more difficult. More recently, we completed the
acquisition of NobleNet in the Boston, Massachusetts area, and established a
development team in Boulder, Colorado, again adding to the number of development
sites and distribution of senior management.
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Dependence on Emerging Market for C++, Visual C++/MFC and Java. Our
product lines are designed for use in object-oriented software application
development, specifically the C++, Visual C++/MFC and Java programming
languages. To date, a substantial majority of our revenue has been attributable
to sales of products and related maintenance and consulting services related to
C++ programming and development. We believe that while the market for object-
oriented technology is growing, our growth depends upon broader market
acceptance of object-oriented technology. Object-oriented programming languages
are very complex and the number of software developers using them is relatively
small compared to the number of developers using other software development
technology. Our financial performance will depend in part upon continued growth
in object-oriented technology and markets and the development of standards that
our products address. There can be no assurance that the market will continue
to grow or that we will be able to respond effectively to the evolving
requirements of the market.
We have also developed several products for use in the Java market. We
have spent and will continue to devote resources to the development of new and
enhanced products that address the Java market. There can be no assurance that
we will be successful in marketing our Java products or that the market for Java
products will grow. If the Java market fails to grow, or grows more slowly than
we currently anticipate, our business could be adversely affected.
Competition. Our products target the emerging market for network-based
applications, C++, Visual C++/MFC, Visual Basic/ActiveX and Java software parts
and programming tools. Direct competitors in the network based application and
C++ market include Microsoft (with its Microsoft Foundation Classes, "MFC"),
IBM, ILOG, IONA Technologies, BEA Systems, and Inprise 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 our products. We face direct
competition in the Java market from Inprise, JavaSoft (a business unit of Sun
Microsystems), Microsoft, Sybase, Symantec and other companies for our Java
products and expect to face significant competition in the future from such
companies with respect to other Java products we may introduce.
Software applications can also be developed using our components in
environments other than C++ or Java. Indirect competitors with such offerings
include Microsoft (with its ActiveX technology), Inprise, Oracle, and Powersoft
(a subsidiary of Sybase). Many of these competitors have significantly greater
resources, name recognition and larger installed bases of customers than we do.
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 us 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 our current competitors, many of these companies have
longer operating histories, significantly greater resources and name recognition
and larger installed bases of customers than we do. 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 we may.
We also face competition from systems integrators and our customers'
internal information technology departments. 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
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customers for offering enterprise-wide solutions to software programming needs.
Systems integrators may market competitive software products in the future.
There are many factors that may increase competition in the market for
object-oriented software parts and programming tools, including (1) entry of new
competitors, (2) alliances among existing competitors and (3) consolidation in
the software industry. Increased competition may result in price reductions,
reduced gross margins or loss of market share, any of which could materially
adversely affect our business, operating results and financial condition. If we
cannot compete successfully against current and future competitors or overcome
competitive pressures, our business, operating results and financial condition
may be adversely affected.
Risks Associated with New Versions and New Products; Rapid Technological
Change. The software market in which we compete is characterized by (1) rapid
technological change, (2) frequent introductions of new products, (3) changing
customer needs, and (4) evolving industry standards. To keep pace with
technological developments, evolving industry standards and changing customer
needs, we must support existing products and develop new products. We may not
be successful in developing, marketing and releasing new products or new
versions of our products that respond to technological developments, evolving
industry standards or changing customer requirements. We may also experience
difficulties that could delay or prevent the successful development,
introduction and sale of these enhancements. In addition, these enhancements
may not adequately meet the requirements of the marketplace and may not achieve
any significant degree of market acceptance. If release dates of any future
products or enhancements are delayed, or if these products or enhancements fail
to achieve market acceptance when released, our business, operating results and
financial condition could be materially and adversely affected. In addition,
new products or enhancements by our competitors may cause customers to defer or
forgo purchases of our products, which could have a material adverse effect on
our business, financial condition and results of operations.
Risks of Future Acquisitions. We frequently evaluate strategic
opportunities available to us and may in the future pursue additional
acquisitions of complementary technologies, products or businesses. Future
acquisitions of complementary technologies, products or businesses may result in
the diversion of management's attention from the day-to-day operations of our
business and may include numerous other risks, including difficulties in the
integration of the operations, products and personnel of the acquired companies.
Future acquisitions may also result in dilutive issuance of equity securities
and the incurrence of debt and amortization expense related to goodwill and
other intangible assets. Our failure to successfully manage future acquisitions
may have a material adverse effect on our business and financial results.
In the second fiscal quarter of 1998 we completed a business combination
with Stingray Software, Inc. Completing the acquisition and commencing the
integration of the acquired business required significant attention from our
management and caused disruption to our ongoing business. We believe that such
disruption had a material adverse effect on the Company's financial results for
the second fiscal quarter of 1998. In the second fiscal quarter of 1999, we
completed the acquisition of NobleNet, Inc. We believe that the longer sales
cycle and product learning curve had a material adverse effect on our financial
results for the third and fourth fiscal quarters of 1999. In addition, the
continued integration of these acquisitions may result in material adverse
results in future quarters.
Risks Associated with International Operations. A significant portion of
our revenue is derived from international sources. To service the needs of
these companies, we must provide worldwide product support services. We have
expanded, and intend to continue expanding, our international operations and
entering additional international markets. This will require significant
management
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attention and financial resources that could adversely affect our operating
margins and earnings. We may not be able to maintain or increase international
market demand for our products. If we do not, our international sales will be
limited, and our business, operating results and financial condition could be
materially and adversely affected.
Our international operations are subject to a variety of risks, including
(1) foreign currency fluctuations, (2) economic or political instability, (3)
shipping delays, and (4) various trade restrictions. Any of these risks could
have a significant impact on our ability to deliver products on a competitive
and timely basis. Significant increases in the level of customs duties, export
quotas or other trade restrictions could also have an adverse effect on our
business, financial condition and results of operations. In situations where
direct sales are denominated in foreign currency, any fluctuation in foreign
currency or the exchange rate may adversely affect our business, financial
condition and results of operations.
Dependence Upon Key Personnel. Our business is highly dependent on the
ability of our management team to work effectively to meet the demands of our
growth. Several members of our senior management, including our Chief Executive
Officer, Chief Technical Officer, Business Development Vice President, Managing
Director of Europe, and our Vice President of Worldwide Sales have been employed
by us for a relatively short period of time. These individuals have not
previously worked together as a management team. The failure of our management
team to work together effectively could prevent efficient decision-making by our
executive team, affecting product development and sales and marketing efforts,
which would negatively impact our operating results.
Our future performance depends in significant part upon the continued
service of our key technical and sales personnel, none of whom is bound by an
employment agreement. We believe that the technological and creative skills of
our personnel are essential to establishing and maintaining a leadership
position, particularly in light of the fact that our intellectual property, once
sold to the public market, is easily replicated. The loss of the services of
one or more of our key technical personnel could have a material adverse effect
on our business.
Our future success also depends on our continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. In the past,
we have experienced some difficulty in attracting key personnel. Competition
for such personnel is intense, and there can be no assurance that we can retain
key employees or that we can attract, assimilate or retain other highly
qualified personnel in the future.
Variability of Sales Cycles. We distribute our 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 our 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 our 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 our products. For these and other reasons, the sales cycle
associated with the sale of our products through our field sales force typically
ranges from two to six months and is subject to a number of significant delays
over which we have little or no control. As a result, quarterly revenue and
operating results are variable and are difficult to forecast, and we believe
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. We rely
primarily on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We also believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential to
establishing and maintaining a technological leadership position. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. The nature of many of our products requires the release of the
source code to all customers. As such, policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights as fully as do the laws of the United States.
There can be no assurance that our means of protecting our proprietary rights in
the United States or abroad will be adequate or that competitors will not
independently develop similar technology.
Although we do not believe that we are infringing any proprietary rights of
others, third parties may claim that we have infringed their intellectual
property rights. Furthermore, former employers of our former, current or future
employees may assert claims that such employees have improperly disclosed to us
the confidential or proprietary information of such former employers. Any such
claims, with or without merit, could (1) be time consuming to defend, (2) result
in costly litigation, (3) divert management's attention and resources, (4) cause
product shipment delays, and (5) require us to pay money damages or enter into
royalty or licensing agreements. A successful claim of intellectual property
infringement against us and our failure or inability to license or create a
workaround for such infringed or similar technology may materially and adversely
affect our business, operating results and financial condition.
Product Liability. Our license agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims. It is possible, however, that the limitation of liability provisions
contained in our license agreements may not be effective under the laws of
certain jurisdictions. A successful product liability claim brought against us
could have a material adverse effect upon our business, operating results and
financial condition.
Risk Of Product Defects. Software products 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. Errors or performance problems could
cause delays in product introduction and shipments or require design
modifications, either of which could lead to a loss in revenue. Our products
are typically intended for use in applications that may be critical to a
customer's business. As a result, we expect that our customers and potential
customers have a greater sensitivity to product defects than the market for
software products generally. Despite extensive testing by us and by current and
potential customers, errors may 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 our reputation, or increased service and warranty costs, any
of which could have a material adverse effect upon our business and results of
operations.
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Year 2000 Readiness
We have not experienced any significant "year 2000 problems" with our
products and critical business systems and do not expect that we will do so in
the future.
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure is the potential loss arising from
changes in interest rates and its impact on short term investments and foreign
currency exchange rate fluctuations.
As of June 30, 2000, short term investments of $16.2 million were held
available for sale with maturities of less than 180 days. Short term
investments consist primarily of high credit and highly liquid corporate
commercial paper and money market funds. A substantial change in overall
interest rates would not have a material affect on the financial position of the
Company.
Exposure to variability in foreign currency exchange rates is managed
primarily through the use of natural hedges, whereby funding obligations and
assets are both managed in the local currency. In addition, the Company will
from time to time enter into foreign currency exchange agreements to manage its
exposure arising from fluctuating exchange rates, primarily in the Euro. The
Company does not enter into any derivative transactions for speculative
purposes. The sensitivity of earnings and cash flows to variability in exchange
rates is assessed by applying an appropriate range of potential rate
fluctuations to the Company's assets, obligations and projected results of
operations denominated in foreign currencies. Based on the Company's overall
foreign currency rate exposure at June 30, 2000, movements in foreign currency
rates would not materially affect the financial position of the Company. As of
June 30, 2000, the Company had outstanding short term forward exchange contracts
to exchange Euros for U.S. dollars in the amount of $2.1 million.
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PART II - OTHER INFORMATION
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
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.
2.5(6) Agreement and Plan of Merger and Reorganization among Rogue Wave
Software, Inc., a Delaware corporation, NN Acquisition Corp., a Delaware
corporation, NobleNet, Inc., a Delaware corporation and Steve Lemmo, as agent
for the stockholders of NobleNet, dated as of February 11, 1999.
2.6(6) Certificate of Merger and Plan of Merger dated March 1, 1998, filed
with the Secretary of State of the State of Delaware on March 1, 1999.
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.
4.4(7) Registration Rights Agreement between the Registrant and Intel 64 Fund
LLC, dated February 22, 2000.
10.1(1) Registrant's 1996 Equity Incentive Plan.
10.2(8) Amended and Restated Employee Stock Purchase Plan, dated June 6, 1996,
as amended January 25, 2000.
10.3(1) Form of Indemnity Agreement entered into between the Registrant and
its officers and directors.
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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 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.
(6) Filed as an exhibit to the Registrant's Form 8-K dated March 1, 1999 and
filed on March 9, 1999.
(7) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended March 31, 2000.
(8) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q
for the quarter ended December 31, 1999.
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 10, 2000 /s/ Merle Waterman
------------------------------------------------
MERLE WATERMAN
CHIEF FINANCIAL OFFICER
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