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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For Quarterly Period Ended March 31, 2002





OR





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




Commission File Number: 0-28900





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ROGUE WAVE SOFTWARE, INC.


(Exact name of registrant as specified in its charter)





Delaware

93-1064214(State or other jurisdiction of incorporation or organization)

(IRS Employer 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)





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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 April 30, 2002Common Stock, $0.001 par value

11,098,516





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ROGUE WAVE SOFTWARE, INC.





FORM 10-Q





I
NDEX





Page No.PART IFINANCIAL INFORMATIONItem 1.

Condensed Consolidated Financial Statements:Condensed Consolidated Balance Sheets at March 31, 2002 and September 30, 2001

3Condensed Consolidated Statements of Operations and Other Comprehensive Loss for the Three and Six Months Ended March 31, 2002 and2001

4Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

12Factors That May Affect Future Results

20Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25PART IIOTHER INFORMATIONItem 4.

Submission of Matters to a Vote of Security Holders

26Item 6.

Exhibits and Reports on Form 8-K

27SIGNATURES

30




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##### Table of Contents




PART IFINANCIAL INFORMATION





Item 1.Consolidated Financial Statements





ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES





CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)





March 31, 2002


September 30, 2001(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
11,097


$
17,047Short-term investments


17,663



17,150Accounts receivable, net


11,245



12,193Prepaid expenses and other current assets


803



940Deferred income taxes


3,258



2,828Total current assets


44,066



50,158Deferred income taxes


1,162



789Equipment, net


3,926



5,114Other assets, net


559



776Total assets

$
49,713


$
56,837LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
380


$
821Accrued expenses


5,892



6,927Deferred revenue


9,257



11,801Total current liabilities


15,529



19,549Stockholders equity:Common stock


11



11Additional paid-in capital


40,199



41,573Accumulated deficit


(5,470
)


(4,030
)Accumulated other comprehensive loss


(556
)


(266
)Total stockholders equity


34,184



37,288Total liabilities and stockholders equity

$
49,713


$
56,837





The accompanying notes to the condensed consolidated financial statements are an integral
part of these statements.




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ROGUE WAVE SOFTWARE, INC.


AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS


(in thousands, except per share data, unaudited)





Three Months Ended March 31,


Six Months Ended March 31,2002


2001


2002


2001Revenue:License revenue

$
6,721


$
7,681


$
12,791


$
14,469Service and maintenance revenue


5,311



7,338



11,186



14,845Total revenue


12,032



15,019



23,977



29,314Cost of revenue:Cost of license revenue


123



220



292



479Cost of service and maintenance revenue


1,915



3,536



3,921



6,452Total cost of revenue


2,038



3,756



4,213



6,931Gross profit


9,994



11,263



19,764



22,383Operating expenses:Product development


3,361



3,738



6,606



7,532Sales and marketing


5,392



6,510



11,429



12,610General and administrative


1,555



1,714



3,182



2,861Restructuring, severance and goodwill amortization


483



640



1,045



640Total operating expenses


10,791



12,602



22,262



23,643Loss from operations


(797
)


(1,339
)


(2,498
)


(1,260
)Other income, net


214



333



474



815Loss before income taxes


(583
)


(1,006
)


(2,024
)


(445
)Income tax benefit


(99
)


(353
)


(584
)


(157
)Net loss

$
(484
)

$
(653
)

$
(1,440
)

$
(288
)Basic and diluted loss per share

$
(0.05
)

$
(0.06
)

$
(0.13
)

$
(0.03
)Shares used in share calculations


10,740



10,966



10,830



10,937Net loss

$
(484
)

$
(653
)

$
(1,440
)

$
(288
)Other comprehensive loss:Foreign currency translation losses


(154
)


(430
)


(290
)


(414
)Total comprehensive loss

$
(638
)

$
(1,083
)

$
(1,730
)

$
(702
)





The accompanying notes to the condensed consolidated financial statements are an integral
part of these statements.




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ROGUE WAVE SOFTWARE, INC. AND SUBSIDIARIES





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands, unaudited)





Six Months Ended March 31,2002


2001Cash flows from operating activities:Net loss

$
(1,440
)

$
(288
)Adjustments to reconcile net loss to net cash from (used in) operating activities:Depreciation and amortization


1,901



1,733Loss on disposal of assets


64



Changes in assets and liabilities:Accounts receivable


862



(2,126
)Prepaid expenses and other current assets


134



(44
)Deferred income taxes


(803
)


Other noncurrent assets


146



(225
)Accounts payable and accrued expenses


(1,357
)


(135
)Deferred revenue


(2,432
)


165Net cash from operating activities


(2,925
)


(920
)Cash flows from investing activities:Short-term investments


(705
)


(5,365
)Equipment acquisitions


(513
)


(1,261
)Net cash from investing activities


(1,218
)


(6,626
)Cash flows from financing activities:Proceeds from Employee Stock Purchase Plan


22



2Proceeds from exercise of stock options


191



408Treasury stock purchase


(1,646
)


Net cash from financing activities


(1,433
)


410Effect of exchange rate changes on cash and cash equivalents


(374
)


(414
)Net change in cash and cash equivalents


(5,950
)


(7,550
)Cash and cash equivalents at beginning of period


17,047



21,823Cash and cash equivalents at end of period

$
11,097


$
14,273





The accompanying notes to the condensed consolidated financial statements are an integral
part of these statements.




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##### Table of Contents




ROGUE WAVE SOFTWARE, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.    Basis of Presentation





The accompanying unaudited financial statements have been prepared in conformity with generally accepted accounting principles in the United
States of America. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the 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 Rogue Wave Software, Inc.s (Rogue Wave or the Company) consolidated financial statements and notes thereto (the Consolidated Financial Statements) for
the year ended September 30, 2001, 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 fiscal year ending September 30, 2002.





2.    Revenue Recognition





The Company derives revenues from licensing its software products and providing related maintenance and support, and training and consulting services. License revenue is recognized according to the criteria of SOP
97-2, as amended. Revenue is recognized upon execution of a license agreement or signed written contract with fixed or determinable fees, shipment or electronic delivery of the product, and collection of the resulting receivable is probable. The
Company considers fees relating to arrangements with payment terms extending beyond twelve months not to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. Maintenance
and service revenue includes maintenance revenue that is deferred and recognized ratably over the maintenance period. Service revenue, including training and consulting services, is recognized as services are performed. In instances where the
Company enters into customized software consulting contracts, the fees are recognized using the percentage of completion method of contract accounting in accordance with SOP No. 81-1, Accounting for Performance of Construction-Type and Certain
Product-Type Contracts.





3.    Concentration of Credit Risk





Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, short-term investments and accounts receivable. The
counter parties to the agreements relating to the Companys cash equivalents and short-term investments consist of various major corporations and financial institutions of high credit standing. The Companys receivables are derived
primarily from the sales of software products and services to customers in diversified industries as well as distributors in the United States and foreign markets. As of March 31, 2002, our accounts receivable balance was $11.2 million, net of
allowance for collection of doubtful accounts and sales returns of approximately $1.1 million. One customer accounted for 16% of the gross accounts receivable balance at March 31, 2002. There were no other customers that accounted for 10% or more of
revenue for the three and six months ended March 31, 2002.





4.    Basic and Diluted Loss Per Share





Basic loss per share for the three and six months ended March 31, 2002 and 2001 is computed on the basis of the weighted average number of common shares
outstanding. Diluted loss per share is




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ROGUE WAVE SOFTWARE, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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. As a result of the net loss incurred for the three and six months ended March 31, 2002 and 2001, all options are anti-dilutive and, accordingly, the number of shares used in
computing the basic and diluted shares is the same. For the three and six months ended March 31, 2002 and 2001, options to acquire 55,000 and 75,000, and 66,000 and 65,000 shares, respectively, were excluded from the calculation because of their
anti-dilutive effect.





Calculation of basic and diluted loss per share is as follows (in thousands, except per share amounts):





Three months ended March 31,


Six months ended March 31,2002


2001


2002


2001Numerator:Net loss

$
(484
)

$
(653
)

$
(1,440
)

$
(288
)Denominator:Historical common shares outstanding for basic and diluted loss per share at beginning of period


10,781



10,909



11,090



10,909Weighted average number of common equivalent shares purchased during the period


(92
)






(288
)


Weighted average number of common equivalent shares issued during the period


51



57



28



28Denominator for basic and diluted loss per shareweighted average shares


10,740



10,966



10,830



10,937Basic and diluted loss per share

$
(0.05
)

$
(0.06
)

$
(0.13
)

$
(0.03
)





5.    Common Stock Repurchase





In September 2001, the Board of Directors authorized the Company to repurchase up to an aggregate of $5.0 million or 2.5 million shares of its Common
Stock. At March 31, 2002, the Company had repurchased 525,000 shares for $1.6 million, at prices ranging from $2.50$3.65 per share.





6.    Restructuring and Severance





Strategic Realignment





During the second quarter of fiscal year 2002, the Company announced a realignment of its corporate strategy, to include an aggressive focus on
expansion in Europe, Asia Pacific and Latin America. In conjunction with this action and to better align its cost structure with its new international business focus, on March 29, 2002, the Company announced plans to restructure certain areas of its
global operations, which resulted in a workforce reduction of approximately 10 percent, or 30 employees. As a result, during the quarter, the Company recognized a one-time severence related charge of approximately $352,000 which is expected to be
paid during the quarter ended June 30, 2002. These actions, along with other cost reduction measures, are expected to reduce future operational expenses by approximately $2 million quarterly, or 15% of total expenses.




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ROGUE WAVE SOFTWARE, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Severance





During the six months ended March 31, 2002, the employment of two certain senior managers was terminated. As a result, the Company recognized approximately $505,000 in severance costs in
December 2001 and $112,000 in the second quarter of fiscal 2002.





Stingray Restructuring





In early May 2001, as part of an ongoing effort to optimize its corporate organizational structure and in conjunction with continuing cost containment
programs, the Company restructured its Stingray business unit. As part of this restructuring, during the three months ended June 30, 2001, the Company recognized a restructuring charge of $621,000, related primarily to severance costs associated
with the termination of approximately 50 employees as well as certain closure costs, including those related to facility lease costs. In the fourth fiscal quarter of 2001, the Company incurred additional restructuring costs of $456,000 as a result
of an asset impairment charge and finalization of severance costs. The asset impairment charge was the result of the Companys review of its furniture and fixtures in the Stingray facility. The carrying amount of the assets prior to the asset
impairment charge was $402,000 and the Company plans to dispose of the assets before the end of fiscal 2002. In the second fiscal quarter of 2002, the Company incurred an additional $7,000 for certain final closure costs; resulting in a total of
$1.1 million restructuring charge for both fiscal year 2001 and 2002. The Stingray products, which primarily consist of development tools for Windows Programmers, will continue to be sold and supported by the Company.





The following table summarizes restructuring costs by primary component at March 31, 2002 (in thousands):





Employee Severance & Related


Site Closure Costs


Other


TotalStingray restructuring estimate at May 31, 2001

$
432


$
154


$
35


$
621Cash payments


(314
)






(29
)


(343
)Balance at June 30, 2001


118



154



6



278Cash payments


(84
)


(69
)


(6
)


(159
)Adjustments for revised estimates


132











132Balance at September 30, 2001


166



85







251Cash payments


(55
)


(84
)






(139
)Adjustments for revised estimates


(1
)










(1
)Balance at December 31, 2001


110



1







111Cash payments


(110
)


(8
)






(118
)Adjustments for revised estimates






7







7Balance at March 31, 2002

$



$



$



$






7.    Foreign Exchange Contracts





The Company accounts for foreign exchange contracts under Statement of Financial Accounting Standards (SFAS) No. 133 Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, which establishes accounting and reporting standards for derivative instruments, including foreign exchange forward contracts.





The Company enters into foreign exchange forward contracts to hedge certain operational and balance sheet exposures, primarily intercompany royalty
fees, from changes in foreign currency exchange rates. At inception, such contracts are designated as cash flow hedges. To achieve hedge




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ROGUE WAVE SOFTWARE, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)




accounting, contracts must reduce the foreign currency exchange rate risk otherwise inherent in the amount and duration of the hedged exposure and
comply with established company risk management policies. The Company does not enter into any derivative transactions for speculative purposes. Hedging contracts generally mature within 60 to 425 days.





When hedging the intercompany receivable exposure, the effective portion of the derivatives gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into earnings in the period in which earnings are impacted by the variability of the cash flow of the hedged item. The ineffective portion of the gain or loss is reported in current period
earnings immediately. The realized gains and losses are recorded in Other income-net in the consolidated statement of operations.





The notional amount of foreign exchange contracts outstanding at March 31, 2002 was $909,000 with a fair value of $(26,000). The fair value of the forward contracts is estimated based on quoted exchange rates at March
31, 2002. The effective or unrealized gain related to the outstanding contracts was $36,000 and the ineffective or realized gain was $11,000 at March 31, 2002. Also during the six months ended March 31, 2002 and 2001, certain foreign currency
contracts matured resulting in a total realized net gain of $4,000 and $98,000, respectively, of which $0 and $34,000 were recognized in the second quarters of fiscal 2002 and 2001, respectively.





8.    Worldwide Operations





Revenue by geographic area for
the three months ended March 31, 2002 and 2001 was 79% and 74% in the United States, 19% and 25% in Europe, and 1% and 2% in Japan, respectively.





Information regarding worldwide operations is as follows (in thousands):





United States


Europe

Japan


Eliminations


TotalMarch 31, 2002, and for the quarter then ended:Revenue to unaffiliated customers

$
9,529


$
2,333

$
170


$



$
12,032Intercompany transfers


845










(845
)


Net revenue


10,374



2,333


170



(845
)


12,032Operating income (loss)


(793
)


50


(54
)






(797
)Long-lived assets


3,639



284


3







3,926March 31, 2001, and for the quarter then ended:Revenue to unaffiliated customers

$
11,189


$
3,744

$
86


$



$
15,019Intercompany transfers


1,344










(1,344
)


Net revenue


12,533



3,744


86



(1,344
)


15,019Operating income (loss)


(1,739
)


577


(177
)






(1,339
)Long-lived assets


4,839



428










5,267




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ROGUE WAVE SOFTWARE, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Revenue by geographic area for the six months ended March 31, 2002 and 2001 was 74%
and 72% in the United States, 21% and 27% in Europe, and 5% and 1% in Japan, respectively.





Information regarding worldwide
operations is as follows (in thousands):





United States


Europe


Japan


Eliminations


TotalMarch 31, 2002, and for the six months then ended:Revenue to unaffiliated customers

$
17,762


$
4,932


$
1,283


$



$
23,977Intercompany transfers


2,218











(2,218
)


Net revenue


19,980



4,932



1,283



(2,218
)


23,977Operating income (loss)


(2,730
)


(21
)


253







(2,498
)Long-lived assets


3,639



284



3







3,926March 31, 2001, and for the six months then ended:Revenue to unaffiliated customers

$
21,160


$
7,956


$
198


$



$
29,314Intercompany transfers


3,024











(3,024
)


Net revenue


24,184



7,956



198



(3,024
)


29,314Operating income (loss)


(2,532
)


1,491



(219
)






(1,260
)Long-lived assets


4,839



428











5,267





9.    New Accounting Pronouncements





On June 30, 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, Business Combinations, and SFAS 142,
Goodwill and Other Intangible Assets. Major provisions of these Statements are as follows: all business combinations initiated after June 30, 2001 must use the purchase method of accounting; the pooling of interests method of accounting
is prohibited except for transactions initiated before July 1, 2001; intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the
acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability; goodwill and intangible assets with indefinite lives are not amortized but are tested for
impairment annually, except in certain circumstances, and whenever there is an impairment indicator and all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. Effective with adoption,
goodwill will no longer be subject to amortization. SFAS 142 will be effective for the Company for fiscal year beginning October 1, 2002. Management does not believe adoption of these statements will have a material impact on the Companys
financial position, results of operations or cash flows.





In August 2001, the FASB issued SFAS 143, Accounting for Asset
Retirement Obligations. SFAS 143 requires entities to record the then fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the period in which it is incurred and the
corresponding cost capitalized by increasing the carrying amount of the related asset. The liability will continue to be accreted to the fair value at the time of settlement over the useful life of the asset with the capitalized cost being
depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. The standard is effective for the Company beginning fiscal year October 1, 2002.
Management does not believe that this statement will have a material impact on the Companys financial position, results of operations, or cash flows.




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ROGUE WAVE SOFTWARE, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)







In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and replaces the accounting and reporting provisions for segments of a
business to be disposed of under Accounting Principles Board (APB) Opinion No. 30, Reporting Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 maintains the requirement that an impairment loss be recognized for a long-lived asset to be held and used if its carrying value is not expected to be recoverable from its undiscounted cash flows.
SFAS 144 requires that long-lived assets to be disposed of, other than by sales, be considered held and used until actually disposed of and requires that depreciable lives be revised in accordance with APB Opinion No. 20, Accounting
Changes. SFAS 144 also requires that long-lived assets to be disposed of by sale be measured at the lower of carrying amount or fair value less selling costs, but retains the requirement to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity that has either been disposed of or is classified as held for sale. The provisions of SFAS 144 are effective for the Company for the fiscal year beginning October 1, 2002.
Management does not believe adoption of this statement will have a material impact on the Companys financial position, results of operations or cash flows.




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Item  2.Managements Discussion and Analysis af 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, 2001. 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. The
following discussions should be read in conjunction with our condensed consolidated financial statements and the notes thereto.





Overview





Rogue Wave was founded in 1989, and is a leading provider of object-oriented software technology. Customers around the
world rely on Rogue Wave products to build comprehensive application solutions. Rogue Wave believes that application development efforts are most effective when businesses are able to concentrate on the domain specific application capabilities that
enables them to differentiate themselves from their competitors. Rogue Wave offers proven software components and frameworks that enhance developer productivity for implementing common application functionality. The Companys software also
handles the complex architectural issues key to successful application implementation, but which most often fall outside a companys in-house development expertise. Rogue Wave is committed to providing products and services that reduce the
effort, time to market, and overall project risk associated with the development of comprehensive application solutions.





The
Companys products are marketed to information technology development managers, independent software vendors, value added resellers, original equipment manufacturers and professional programmers in all industry and geography segments. The
Companys products are designed to enable customers to construct robust applications faster, with higher quality, and lower risk, resulting in significant cost savings. These products provide customers with greater independence from hardware
platforms, operating systems and other vendor-specific dependencies.





The Rogue Wave Strategy and Business Model





Rogue Waves strategic objective is to provide technology and services that allow customers to optimize productivity when building software
solutions to address their business requirements. Simply, the Company strives to create products that efficiently and effectively align underlying information technology with a customers application of that technology.





Core TechnologySourcePro C++





The Companys history is rich in object oriented C++, the language of choice for large scale, business critical applications. During fiscal 2001, Rogue Wave announced the launch of the SourcePro C++ product line,
reflecting a substantive alteration to the Companys core products and business model. The SourcePro C++ products, which integrate the majority of formerly offered Rogue Wave C++ component technology as well as features not previously
available, are designed to provide more




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##### Table of Contents

comprehensive solutions while optimizing the use of the Companys core C++ products. SourcePro C++ is comprised of four products: SourcePro Core, SourcePro
DB, SourcePro Net and SourcePro Analysis. Pricing of the SourcePro C++ products is based on a customer value model, which considers scope of deployment, including operating systems, in contrast to the historically employed license per
developer approach. Overall, the model allows customers greater flexibility in their utilization of the Companys products. Additionally, the Company has made significant investment in Java and XML initiatives. Most recently, Rogue Wave
has initiated the pursuit of two new technologies, the first addressing the Web integration needs of the C++ developer and the second involving an Internet shared memory space for transparent collaborative applications, providing an area on the
Internet where XML documents can be written or read, subject to appropriate security constraints. These core products represent the foundation of the Companys technological sophistication and capabilities.





Evolution of the market place has created the need for higher order solutions. We believe that customers are less interested in atomic software
components and more interested in technology suites and frameworks that address a higher percentage of their needs. We believe that customer purchasing practices have migrated away from the individual developer, with a greater focus on project,
division or enterprise requirements. Further, to better position itself in the market, the Company is also aggressively pursuing partnership opportunities with some of the worlds leading technology companies. Rogue Waves technological
history is deep and highly regarded by its clients and the technological community. By better aligning the Companys current products, and more importantly, its product development efforts with the worlds leading companies, Rogue Wave
expects to have greater success building solutions that solve real world business problems that meets our customers needs.





The majority of the Companys international revenue is generated primarily by the Companys European subsidiaries. The Company has entered into forward foreign exchange contracts to reduce certain risks 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 Factors That May Affect Future Results.





Strategic RealignmentGlobalization





During the
second quarter of fiscal year 2002, the Company announced a realignment of its corporate strategy, to include an aggressive focus on expansion in Europe, Asia Pacific and Latin America. In conjunction with this action and to better align its cost
structure with its new international business focus, on March 29, 2002, the Company announced plans to restructure certain areas of its global operations, which resulted in a workforce reduction of approximately 10 percent, or 30 employees. As a
result of the restructuring plan, the Company recognized a one-time charge of approximately $352,000 during the second quarter of fiscal year 2002. These actions, along with other cost reduction measures, are expected to reduce future operational
expenses by approximately $2 million quarterly, or 15% of total expenses.





Additionally, as part of this restructuring plan and
to better meet the needs of our customers, the Company has established three separate regional operations, the Americas, EMEA (Europe) and Asia Pacific in an effort to drive autonomy and greater accountability. During the current period, the Company
opened an office in Australia and increased its resources in Europe and other areas of the Asia Pacific region. The Company anticipates further expansion in foreign countries, including within the Asian markets, and expects that international
license and service and maintenance revenue will account for an increasing portion of its total revenue in the future. There can be no assurance, however, that the




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Company will be able to maintain or increase international market demand for its products. See Factors that May Affect Future Results for additional
risk factors associated with the Companys global expansion.





Large Scale Object Solutions





Large Scale Object Solutions (LSOS) is a set of technologies targeted at customers with specific needs related to running very high
throughput systems deployed against a relational database. LSOS offers services such as a hierarchical object model, object history, object reconciliation, and a method for storing objects on relational databases in order to maximize performance.





The Companys first implementation of this technology is an application that the Company developed, in partnership with JP
Morgan Chase, known as Global Market Reference Data (GMRD). While the LSOS architecture is expected to be sold to many other industries, GMRD will be sold specifically to other large financial institutions, which are facing the impending
T+1 compliance mandate. Our objective is to expand into additional financial application projects, then branch out into other industries.




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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.





Percentage of Total Net RevenueThree months ended March 31,


Six months ended March 31,2002


2001


2002


2001Revenue:License revenue

56
%

51
%

53
%

49
%Service and maintenance revenue

44


49


47


51Total revenue

100


100


100


100Cost of revenue:Cost of license revenue

1


1


1


2Cost of service and maintenance revenue

16


24


16


22Total cost of revenue

17


25


17


24Gross profit

83


75


83


76Operating expenses:Product development

28


25


28


26Sales and marketing

45


44


48


43General and administrative

13


11


13


10Restructuring, severance and goodwill amortization

4


4


4


2Total operating expenses

90


84


93


81Loss from operations

(7
)

(9
)

(10
)

(5
)Other income, net

2


2


2


3Loss before income taxes

(5
)

(7
)

(8
)

(2
)Income tax benefit

(1
)

(3
)

(2
)

(1
)Net loss

(4
)%

(4
)%

(6
)%

(1
)%





Revenue





Total revenue for the three and six months ended March 31, 2002 was $12.0 million and $24.0 million, respectively, versus $15.0 million and $29.3 million for the three and six months
ended March 31, 2001, representing a decrease of 20% and 18%, respectively. License revenue for the three and six months ended March 31, 2002 was $6.7 million and $12.8 million, respectively, versus $7.7 and $14.5 million for the three and six
months ended March 31, 2001, representing a decrease of 13% and 12%, respectively. The decrease is primarily due to a decrease in the number of licenses sold to existing and new customers. This decrease is primarily due to the launch of the
SourcePro C++ product line, which considers scope of deployment, in contrast to the historically employed license per developer approach. To a certain extent, these decreases were offset by the cross platform deployment rights sales,
also considered a component of license revenue. The decrease in sales is also in part attributed to lower corporate technology spending, reflecting a cautious economic environment, which is lagging behind the overall general economic recovery.
Regardless, as previously discussed, Rogue Wave has adopted a new corporate strategy, which significantly focuses on the development of its International operations designed to increase future revenue.




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Service and maintenance revenue for the three and six months ended March 31, 2002 was $5.3
million and $11.2 million, respectively, versus $7.3 million and $14.8 million, respectively, for the three and six months ended March 31, 2001, representing a decrease of 27% or 24%, respectively. The decrease in service and maintenance revenue was
primarily attributable to the decrease in revenue received from two significant customized consulting contracts signed in the first quarter of 2001. Although the initial projects were comprised entirely of consulting revenue, the Company expects
future sales of the finished resulting application to increase license revenue.





Cost of Revenue





Cost of license revenue consists primarily of amortization of purchased software, materials, packaging and freight expense. Cost of license revenue for
the three and six months ended March 31, 2002 was $123,000 and $292,000, respectively, versus $220,000 and $479,000 for the three and six months ended March 31, 2001, respectively, representing a decrease of 44% and 39%. The decrease in cost of
license revenue during the three and six months ended March 31, 2002 is primarily the result of a decrease in purchased software amortization costs as well as a continued decrease in the number of manuals produced due to an increase in product
offerings delivered through the Internet versus physically shipped.





Cost of service and maintenance revenue consists primarily
of personnel related and facilities costs incurred in providing customer support and training services as well as third party costs incurred in providing training and consulting services. Cost of service and maintenance revenue for the three and six
months ended March 31, 2002 was $1.9 million and $3.9 million, respectively, versus $3.5 million and $6.5 million for the three and six months ended March 31, 2001, respectively, representing a decrease of 46% and 40%, respectively. The decrease in
the three and six months ended March 31, 2002 cost of service and maintenance revenue was due primarily to staffing efficiencies gained from fiscal year 2001 restructuring actions and a decrease in the utilization of third-party consulting services
for the additional costs associated with two significant customized software consulting contracts entered into in the first quarter of fiscal 2001.





Operating Expenses





Product development expense for the three and six months ended March
31, 2002 was $3.4 million and $6.6 million, respectively, versus $3.7 and $7.5 million for the three and six months ended March 31, 2001, respectively, representing a decrease of 8% and 12%, respectively. As a percent of revenue, product development
expense for the three and six months ended March 31, 2002 was 28% and 28%, respectively, versus 25% and 26% for the three and six months ended March 31, 2001, respectively. The decrease in the three and six months ended March 31, 2002 product
development expenses was due to staffing reductions achieved during the last half of fiscal year 2001 restructuring actions. The Company does not expect that product development expenses will grow or that expenses will increase as a percentage of
total revenue for fiscal 2002. All costs incurred in the research and development of software products and enhancements to existing products have been expensed as incurred.





Sales and marketing expenses for the three and six months ended March 31, 2002 was $5.4 million and $11.4 million, respectively, versus $6.5 million and $12.6 million for the three and
six months ended March 31, 2001, respectively, representing a decrease of 17% and 10%, respectively. As a percentage of total revenue, sales and marketing expenses were 45% and 48% for the three and six months ended March 31, 2002, respectively,
versus 44% and 43% for the three and six months ended March 31, 2001, respectively. The current fiscal period decreases in sales and marketing expense is due to the decrease in sales and marketing personnel and related costs associated with the
implementation of cost




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containment programs. The Company does not expect that sales and marketing expenses will grow or that expenses will increase as a percentage of total revenue
for fiscal 2002.





General and administrative expenses for the three and six months ended March 31, 2002 was $1.6 million and
$3.2 million, respectively, versus $1.7 million and $2.9 million, respectively, representing a decrease of 6% and an increase of 10%, respectively. The decrease between the second quarter of fiscal 2002 compared to the same quarter in the prior year
is primarily due to cost containment programs implemented during the last half of fiscal year 2001 and the aggressive focus on expense reduction in fiscal year 2002. Overall, general and administrative expenses increased when compared to the same
six month period in the prior fiscal year, as a result of a decrease of approximately $575,000 in certain reserves in the first quarter of fiscal 2001, following the resolution of various potential employment and product distribution contract
issues. The Company believes that its general and administrative expenses will remain flat for fiscal 2002.





Restructuring,
severance and goodwill expenses totaling approximately $483,000 and $1.0 million were recognized during the three and six months ended March 31, 2002, respectively. The Company incurred severance of $505,000 for the termination of two senior
managers and approximately $57,000 related to goodwill amortization in the first quarter of fiscal year 2002. The Company does not expect to incur significant restructuring, severance and goodwill expenses for fiscal 2002.





In the second quarter of fiscal year 2002, the Company announced a realignment of its corporate strategy, to include an aggressive focus on expansion
into Europe, Asia Pacific and Latin America. In conjunction with this action and to better align its cost structure with its new international business focus, on March 29, 2002, the Company announced plans to restructure certain areas of its global
operations, which resulted in a workforce reduction of approximately 10 percent, or 30 employees. As a result of the restructuring plan, the Company recognized a severence related charge of approximately $352,000 during the second quarter of fiscal
year 2002. These actions, along with other cost reduction measures, are expected to reduce future operational expenses for the next few quarters by approximately $2 million quarterly, or 15% of total expenses. The Company also recognized $112,000
for the termination of one senior manager.





Other Income, Net





Other income for the three and six months ended March 31, 2002 and 2001 primarily consists of interest income on the Companys cash, cash equivalents and short-term investments. The
decrease in other income of $119,000 and $341,000 for the three and six months ended March 31, 2002, respectively, compared to the three and six months ended March 31, 2001, is primarily due to a decrease in investments and interest rates during the
current fiscal period as compared to the same fiscal period last year.





Income Tax Benefit





In general, income taxes for the three and six month period ended March 31, 2002 are provided during interim periods based on the expected
effective tax rate for the year. The provision for income taxes benefit for the three and six month period ended March 31, 2002, is based on an estimated annual effective tax rate of approximately 35% and adjustments, which is applied to the loss
before income taxes and includes federal, state and foreign income taxes.





The Company has recorded a deferred tax asset of $4.4
million reflecting the benefit of $2.2 million loss carryforwards and various tax credits and temporary differences, which expire in varying amounts between 2003 and 2021. Realization is dependent on generating sufficient taxable income prior




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to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax asset
will be realized.





Liquidity and Capital Resources





The decrease in cash flows from operations during the six months ended March 31, 2002 compared to the six months ended March 31, 2001 was primarily due to the net loss and a decrease in
deferred revenue. The decrease in deferred revenue is primarily due to the timing of the completion of contracts with a decrease in new maintenance, support and service revenue signed in the first half of fiscal 2002 compared to the preceding
quarters.





The Companys investing activities consist primarily of the purchase and sale of short-term investments and
purchases of equipment. During the six months ended March 31, 2002, net cash used in investing activities was $1.2 million, which included the purchase of short-term investments of $705,000 and the purchase of equipment of $513,000.





In September 2001, the Board of Directors authorized the Company to repurchase up to an aggregate of $5.0 million or 2.5 million shares of
its Common Stock. At March 31, 2002, the Company had repurchased 525,000 shares for $1.6 million at prices ranging from $2.50$3.65 per share.





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 Factors That May Affect Future Results.





Critical Accounting Policies





The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires estimates and assumptions
that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements and accompanying notes. The Securities and Exchange
Commission has defined a companys most critical accounting policies as those that are most important to the portrayal of the companys financial condition and results of operations, which require the company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the critical accounting policies and judgments described below. Additionally, Rogue
Wave also has other key accounting policies, which involve the use of estimates, judgments and assumptions and are detailed in Note 1 Description of Business and Summary of Significant Accounting Policies in Item 14 of Part IV,
Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K, of our Annual Report on Form 10-K for the year ended September 30, 2001. Although the Company believes that its estimates and assumptions are reasonable,
they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions or conditions.





Revenue Recognition





The Companys revenue is derived from licenses of its software
products and related maintenance, training and consulting services. License, maintenance and most services are recognized in accordance with Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended by SOP 98-9, which permits
revenue recognition when (1) persuasive evidence of an arrangement exists, (2) delivery of the product has occurred, (3) the fee is fixed or determinable, and (4) collectibility is probable. The Company defines each of the four criteria above as
follows:




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Persuasive evidence of an arrangement exists.    Rogue Waves customary practice is to execute a
written contract, signed by both the customer and the Company, or a purchase order from those customers who have previously negotiated a license agreement.





Delivery.    The Companys software may be either physically or electronically delivered to the customer. Delivery is deemed to have occurred upon the shipment of the product or
delivery of the authorization code. If undelivered products or services exist in an arrangement that are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are
delivered.





The fee is fixed or determinable.    Rogue Wave negotiates the fee for our products at
the outset of an arrangement. In these arrangements, the majority of the development licenses are perpetual and nonrefundable. The fees are generally due within one to twelve months depending on the length of the contract. The Company considers fees
relating to arrangements with payment terms extending beyond twelve months not to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer.





Collectibility is probable.    Collectibility is evaluated on a customer-by-customer basis. New and existing customers are
subject to a credit review process, which evaluates the customers financial position (e.g. cash position and credit rating) and their ability to pay. If collectibility is not considered probable at the outset of an arrangement in accordance
with our credit review process, revenue is recognized when the fee is collected.





SOP 97-2, as amended, generally requires
revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The determination of fair value of each element in multiple-element arrangements is based on
vendor-specific objective evidence (VSOE). The VSOE for license, consulting and training fees is established when the same element is sold separately. VSOE for maintenance and support is determined based upon the customers annual
renewal rates.





Assuming all other revenue recognition criteria are met, revenue from licenses is recognized upon delivery.
Maintenance and support revenue is deferred and recognized on a straight-line basis over the contractual service period, which are typically one to three years. Consulting services, which include training, are not considered essential to the
functionality of the other elements of the arrangement. The revenue allocable to the consulting services is generally recognized as the services are performed. In instances where the Company enters into customized software consulting contracts, the
fees are recognized using the percentage of completion method of contract accounting in accordance with SOP No. 81-1, Accounting for Performance of Construction-Type and Certain Product-Type Contracts.





Sales Returns and Allowance for Doubtful Accounts





The Companys management must make estimates of potential future product returns related to current period product revenue. Management analyzes historical returns, current economic trends, and changes in customer
demand and acceptance of the products when evaluating the adequacy of the sales returns. Significant management judgments must be made and used in connection with establishing the estimated sales returns in any accounting period.





The Companys allowance for doubtful accounts is intended to reduce the value of customer accounts receivable to amounts expected to be
collected. In determining the required allowance, the




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Company considers factors such as customer credit history, overall and industry economic conditions and the customers current financial performance. Rogue
Wave performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customers current credit worthiness, as determined by our review of their current credit information. The Company
continuously monitors collections and payments from the customers. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past.





Accounting for Income Taxes





As part of the process of preparing the Companys condensed consolidated financial statements, Rogue Wave is required to estimate income taxes in each of the jurisdictions in which
it operates. This process involves estimates of the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax
assets, which are included within our consolidated balance sheet. Rogue Wave records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. In assessing the need for a valuation
allowance, the Company estimates future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event
the Company were to determine that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce such amounts through a charge to income in the period that such determination is made. Conversely,
if the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance through an increase to income in the period
that such determination is made.





Factors That May Affect Future Results





In evaluating the Companys business, investors should
carefully consider the following factors in addition to the other information presented in this report.





Our future operating results are
difficult to predict and actual financial results may vary from our expectations, which could have an adverse effect on our stock price.





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:





| |  |  | overall economic conditions of the US and the rest of the world;
| | - |  | ----------------------------------------------------------------




| |  |  | demand for our products and services;
| | - |  | -------------------------------------




| |  |  | level of product and price competition;
| | - |  | ---------------------------------------




| |  |  | size, type and timing of individual license transactions;
| | - |  | ---------------------------------------------------------




| |  |  | delay or deferral of customer implementations;
| | - |  | ----------------------------------------------




| |  |  | our success in expanding our direct sales force and indirect distribution channels;
| | - |  | -----------------------------------------------------------------------------------




| |  |  | 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;
| | - |  | -----------------------------------------------------------



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| |  |  | our ability to develop and market new products and control costs; and
| | - |  | ---------------------------------------------------------------------




| |  |  | our ability to effectively deploy our new strategy including our new business model.
| | - |  | ------------------------------------------------------------------------------------




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.





Our operating results in one or more future periods may fluctuate significantly and could cause our stock price
to be volatile.





We generally ship orders as received, which means that quarterly revenue and operating results depend
substantially on the volume and timing of orders we receive during the quarter. Sales volume is 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. Accordingly, 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 may result in volatility in the price of our Common Stock in the future.





Our failure to manage planned growth could adversely affect our ability to increase revenue.





Our business has evolved significantly in recent years, placing a strain on our management systems and resources. To manage future growth, we must continue to improve our financial and
management controls, reporting systems and procedures on a timely basis and 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.





Failure to attract and retain key employees will adversely affect our business.





Our future performance depends significantly upon the continued service of our key technical, sales and senior management 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 executive officers or key technical personnel may have a material adverse effect on our business.




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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 our sales cycles make it difficult to forecast quarterly revenue and operating results,
making it likely that period-to-period comparisons are not necessarily meaningful as an indicator of future results.





We
distribute our products primarily 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.





We face risks involving future business 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 will 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 a dilutive issuance of equity securities, the incurrence of debt, and amortization expenses related to intangible assets. Our failure to successfully manage
future acquisitions may have a material adverse effect on our business and financial results.





Doing business outside the United States involves
numerous factors that could negatively affect our financial results.





A significant portion of our revenue is derived
from international sources. To service the needs of these customers, we must provide worldwide product support services. We have expanded, and intend to continue expanding, our international operations and plan to enter additional international
markets. This will require significant management 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




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situations where direct sales are denominated in a foreign currency, any fluctuation in foreign currency or the exchange rate may adversely affect our business,
financial condition and results of operations.





We may not be able to adequately protect our intellectual property or operate our business without
infringing on the intellectual property rights of others.





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 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 competition 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 or (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.





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.





Our business will suffer if our products contain defects or do not function
as intended, which would cause our revenue to decline.





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




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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 on our business and results of operations.





We cannot predict whether the market acceptance for C++ and Visual C++/MFC will continue to grow.





Our
product lines are designed for use in object-oriented software application development. To date, a substantial majority of our revenue has been attributable to sales of products and related maintenance and consulting services associated with C++
programming and development. We believe that, while the market for object-oriented technology is maturing, optimization of the C++ solutions through realignment of products and services coupled with the pursuit of unsaturated markets in Asia
Pacific, Europe and Latin America, will serve to enhance future revenue. However, 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.





Our market is highly
competitive and, if we are unable to compete successfully, our ability to grow our business or even maintain revenue and earnings at current levels will be impaired.





Our products target the markets for Visual C++/MFC and Visual Basic/ActiveX software parts and programming tools. Direct competitors in the C++ market include Microsoft (with its MFC),
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 our products.





Software applications can also be developed using software parts and programming tools in environments other than C++. Indirect competitors with such offerings include Microsoft, Borland, Oracle and Powersoft. Many of
these competitors have significantly greater resources, name recognition and larger installed bases of customers than we do. 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 us.





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 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




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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.





We operate in an industry with rapidly changing technology and, if we do not successfully modify
our products to incorporate new technologies, they may become obsolete and sales will suffer.





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 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.





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 March 31, 2002, the Company had
short-term investments of $17.7 million, of which $6.3 million were held to maturity and $11.4 million were held available for sale. All investments had maturities of less than 360 days when acquired. Short-term investments consist primarily of
highly rated credit and highly liquid corporate notes and commercial paper. A reasonable reduction in overall interest rates would not have a material effect on the fair value of the investments or 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 March 31, 2002, movements in foreign currency rates would not
materially affect the financial position of the Company. At March 31, 2002, the Company had outstanding short-term forward exchange contracts to exchange Euros for U.S. dollars in the amount of $909,000. See Note 7 of Notes to Condensed Consolidated
Financial Statements.




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PART IIOTHER INFORMATION





Item 4.Submission of Matters to a Vote of Security Holders





(a)  The Companys
Annual Meeting of Shareholders was held on January 17, 2002 (the Annual Meeting).





(b)  The following
matters were voted upon at the Annual Meeting:





(i)  The first matter related to the election of six
director nominees, Thomas Keffer, Ph.D., John Floisand, Thomas M. Atwood, Louis C. Cole, Margaret M. Norton and Marc H. Sternfeld as directors of the Company to serve until the next annual meeting of stockholders. The votes cast and withheld for
such nominees were as follows:





Names

For

WithheldThomas Keffer, PH.D

8,785,029

141,302John Floisand

8,805,563

120,768Thomas M. Atwood

8,833,383

92,948Louis C. Cole

8,839,801

86,530Margaret M. Norton

8,867,263

59,068Marc H. Sternfeld

8,867,317

59,014





(ii)  The second matter related to the ratification
of the appointment of the selection of KPMG LLP as independent auditors of the Company for its fiscal year ending September 30, 2002. 8,868,901 votes were cast for ratification, 13,937 votes were cast against ratification, and there were 43,493
abstentions.





Based on these reporting results, each director nominated was elected and the appointment of KPMG LLP as the
independent auditors of the Company for its fiscal year ending September 30, 2002 was ratified.




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Item 6.Exhibits and Reports on Form 8-k





Exhibit Number

Description of Document2.1(1)

Agreement and Plan of Reorganization between Registrant, Inmark Development Corporation and RW Acquisitions, Inc., dated as of
September 19, 1995.2.2(2)

Agreement and Plan of Merger between the Registrant and Rogue Wave Software, Inc., an Oregon corporation, dated as of November
21, 1996.2.3(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(5)

Form of Registration Rights Agreement between Rogue Wave Software, Inc. and the former shareholders of Stingray Software, Inc.
and the former shareholders of Stingray Software, Inc.10.1(8)

Registrants 1996 Equity Incentive Plan.10.2(9)

Amended and Restated Employee Stock Purchase Plan, dated June 6, 1996, as amended January 25, 2000.10.3(1)

Form of Indemnity Agreement to be entered into between the Registrant and its officers and directors.




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Exhibit Number

Description of Document10.4(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(7)

Home Loan Agreement between Registrant and Michael Scally, dated January 7, 1998.10.7(7)

Home Loan Agreement between Registrant and Robert Holburn, dated February 2, 1998.10.8(10)

Separation & Release Agreement between Registrant and Michael Ernst, dated November 15, 1999.10.9(10)

Separation & Release Agreement between Registrant and Robert Holburn, dated January 3, 2000.10.10(10)

Separation & Release Agreement between Registrant and Michael Foreman, dated May 1, 2000.10.11(10)

Separation & Release Agreement between Registrant and Harold Julsen, dated December 6, 2000.10.12(10)

1997 Equity Incentive Plan, as amended on January 18, 2001.10.13(11)

Separation & Release Agreement between Registrant and John D. Iacobucci, dated October 9, 2001.10.14(12)

Separation & Release Agreement between Registrant and James M. Smith dated January 7, 2002.


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|(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 10Q 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 annual report on Form 10-K for the year ended September 30, 1998.
|--- |  | ---------------------------------------------------------------------------------------------------------



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|(8) |  | Filed as an Exhibit to the Registrants Proxy Statement on Schedule 14A and filed on December 10, 1998.
|--- |  | -------------------------------------------------------------------------------------------------------

|(9) |  | Filed as an Exhibit to the Registrants quarterly report on Form 10-Q for the quarter ended December 31, 1999.
|--- |  | --------------------------------------------------------------------------------------------------------------

|(10) |  | Filed as an Exhibit to the Registrants quarterly report on Form 10-Q for the quarter ended December 31, 2000.
|---- |  | --------------------------------------------------------------------------------------------------------------

|(11) |  | Filed as an Exhibit to the Registrants quarterly report on Form 10-Q for the quarter ended December 31, 2001.
|---- |  | --------------------------------------------------------------------------------------------------------------

|(12) |  | Filed as an Exhibit to the Registrants quarterly report on Form 10-Q for the quarter ended March 31, 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------




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)By:

/s/    MERLE A.WATERMANMerle A. Waterman Vice President, Chief Financial
Officer and Secretary


Date: May 14, 2002




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