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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-28900
ROGUE WAVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-1064214
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5500 Flatiron Parkway, Boulder, Colorado 80301
(Address of principal executive offices) (Zip code)
(303) 473-9118
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
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 periods as 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of October 31, 1999, there were 10,126,365 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was approximately $49,993,864 based upon the closing price of
the Common Stock on October 31, 1999 on the NASDAQ National Market System.
Shares of Common Stock held by each officer, director and holder of five percent
or more of the Common Stock outstanding as of October 31, 1999 have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 2000 Annual Meeting
of Stockholders to be held January 25, 2000, are incorporated by reference in
Part III of this Form 10-K.
FORM 10-K
INDEX
PART I................................................................................................ Page 2
Item 1. Business..................................................................................... Page 2
Item 2. Properties................................................................................... Page 14
Item 3. Legal Proceedings............................................................................ Page 14
Item 4. Submission of Matters to a Vote of Security Holders.......................................... Page 14
PART II............................................................................................... Page 15
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters..................... Page 15
Item 6. Selected Consolidated Financial Data......................................................... Page 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ Page 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................... Page 21
Item 8. Consolidated Financial Statements and Supplementary Data..................................... Page 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... Page 22
PART III.............................................................................................. Page 22
Item 10. Directors and Executive Officers of the Registrant........................................... Page 22
Item 11. Executive Compensation....................................................................... Page 22
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... Page 22
Item 13. Certain Relationships and Related Transactions.............................................. Page 22
PART IV............................................................................................... Page 23
Item 14. Exhibits, Consolidated Financial Statements, Schedules, and Reports on Form 8-K.............. Page 23
SIGNATURES............................................................................................ Page 24
1
PART I
ITEM 1. BUSINESS
The following discussion contains forward-looking statements regarding the
company, its business, prospects and results of operations that are subject to
risks and uncertainties posed by many factors and events that could cause the
company's actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed herein as well as those discussed under the captions
"risk factors" and "management's discussion and analysis of financial condition
and results of operations" as well as those discussed elsewhere in this
prospectus. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date of this report. The company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made by the company in
this report and in the company's other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect the company's business.
GENERAL
Rogue Wave is a leading provider of software solutions for creating and
managing enterprise systems using object-oriented, component technology. The
company offers software components for building distributed client-server,
intranet and Internet applications which scale to the enterprise, honor legacy
investments, and are highly customizable. The Company's products and
Professional Services Group provide organizations worldwide with the business
expertise and technology to build, manage and grow scalable enterprise-class
systems.
Rogue Wave's products are marketed to professional programmers in all
industrial segments, in all geographic locations, through multiple distribution
channels. The Company's products are designed to enable customers to construct
robust applications quickly, with higher quality, across multiple platforms,
while reducing the complexity associated with the development process. The
Company provides customers with proven object-oriented development technology so
that they can better apply the principles of software reuse to their own
software development efforts. Rogue Wave's products are designed to be general
purpose in nature, supporting a broad range of development environments
including: Windows, Windows CE, Windows NT, Unix, AS/400 and OS/390 and a wide
range of development languages and methodologies including: C++, MFC, CORBA, COM
and Java.
INDUSTRY BACKGROUND
Increasing Dependence on Software. Businesses are increasingly relying on
information systems as a strategic resource and as a way of differentiating
themselves from their competitors. A sophisticated enterprise-wide information
system can allow a company to take advantage of new markets before a competitor,
reduce operating expenses and increase ties with suppliers, customers and other
alliance partners. More specifically, Internet and intranet technologies can be
particularly effective in extending the information system outside the bounds of
a company, creating even more opportunities. Of all the pieces that make up an
information system, software plays the most critical role. Therefore,
businesses looking to achieve competitive advantage through their information
systems are becoming more and more dependent on software.
Need For Improved Software Development Technologies and Methods. Software
development technologies and methods have not kept pace with the increasing
reliance on software systems. In fact, the intricacies of modern software
systems have tended to make the software development process longer, more
complicated and error prone.
Adoption of Object-Oriented Technologies. To address the difficulties of
developing and maintaining complex software systems, organizations are adopting
object-oriented technologies and development methodologies. Object-oriented
programming allows software to be written in terms of objects (components) that
are used as building blocks to model real-world components and systems. Objects
are self-contained units that encapsulate a collection of data and related
procedures. Although objects may be internally complex, they are designed to
have simple interfaces that allow programmers to develop and change components
independently without affecting other segments of the software system. The
generalized, self-contained nature of well-designed objects allows them to be
reused within a single software system and in subsequent applications. To a
large extent, developing software applications then becomes a matter of
assembling new and existing objects, rather than writing entire programs from
scratch, resulting in significantly reduced development times and improved
software quality. In addition, because the internal details of each object are
relatively insulated from the rest of the system, objects can be tested,
modified and maintained independently.
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Need for Robust Third-Party Software Solutions. While objects are easy to
use once built, developing robust, well-designed objects can be extremely
difficult and time consuming. Many technical details must be addressed,
including support for various platforms, graphical user interfaces, databases
and networking protocols. As a result, object-oriented software development can
be improved significantly through the use of pre-built, industry-standard
objects. Organizations seek to improve quality and time-to-market by purchasing
pre-written objects from independent vendors to handle fundamental operations
ranging from simple functions such as date handling to more complex functions
such as network communications. Using off-the-shelf parts for such tasks allows
programmers to focus on the core functionality of the systems they are
developing. For example, using a standard object for database connectivity
allows a programmer to develop an application without regard to the low-level
details of programming to any particular database while allowing the freedom to
switch between different database vendors. In addition, commercially available
software objects typically are more thoroughly tested and provide more complete
functionality than those developed in-house. The Company believes that the use
of third-party software objects will enable organizations to develop robust
software applications more rapidly, at lower cost and with more functionality
than applications using only internally developed objects.
The Rogue Wave Solution and Strategy
The Company's products are used for building distributed applications that
scale to the enterprise, honor legacy investments and are highly customizable.
Customers can produce and test fewer lines of original code, thereby
accelerating project development time while increasing quality and reducing
overall maintenance and support costs. In addition, Rogue Wave products foster
increased development flexibility by supporting multiple platforms and operating
systems. More specifically the Company's products and services provide
customers with the following benefits:
Distributed Applications. Programmers who are developing complicated large
and distributed applications can use the Company's products to make their
application work in concert, across systems and seamless to the whole. The
result is applications that are simpler and contain less untested code resulting
in fewer bugs and higher quality.
Scale to the enterprise. Customers who are working on large systems depend
on scalability. Scalability and performance are great strengths of C++ and are
core parts of the Company's product line. Rogue Wave's components and tools are
designed to reduce overall maintenance and support costs over the life of an
application. The use of the Company's products helps programmers develop
flexible, modular applications that can be more easily updated, modified and
refined.
Honor Legacy Investments. The Company's components and tools can easily
work with legacy systems, being all or part of the solution. This is a great
strength of modular design, reverse engineering tools and architectural
approaches such as stateless design and functions. Rogue Wave honors legacy
investments, not just systems. Part of a customer's legacy investment is the
training and skills it has invested in its employees. Rogue Wave leverages that
investment by using standard languages such as C++ and Java across its products
Highly Customizable. Most of the Company's software parts have been
written to allow programmers to "Build It Your Way." Customers can customize by
substituting components or by subclassing. Most of the Company's products are
cross-platform, and the database products can be used with a wide variety of
databases. This flexibility allows programmers to develop applications with
minimal regard to the environments in which they will be deployed. Businesses
gain the ability to deploy software systems in a wide variety of environments
with minimal redevelopment. Rogue Wave's products encapsulate fundamental
operations within software components, allowing developers to focus on creating
the critical business logic within their applications rather than the arcane
features of their development environments.
Rogue Wave has traditionally marketed its products to individual
professional programmers. The Company also leverages its installed customer
base of corporate programmers to promote its component architecture for the
enterprise.
Products
Rogue Wave's products are designed to be used individually, with each
other, or with other industry standard products. They fall into four different
product groups: Cross-platform C++ development, Windows-specific development,
Java development and Middleware development.
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Cross Platform C++ Development
Foundation Programming
- ----------------------
Cross platform foundations are constructed with Tools.h++, Tools.h++
Professional, Standard C++ Library and Threads.h++.
. Tools.h++ compliments the Standard C++ Library with an easy-to-use
interface and contains 130 fundamental programming building blocks such as
string, collection, date and time internationalization and streaming
classes.
. Tools.h++Professional is an expanded tool set that includes network
communication classes, thread-hot Internet classes, Java/C++
interoperability and CORBA streaming classes.
. Standard C++ Library conforms to the ANSI/ISO standard and includes
fundamental data structures, as well as string, numeric limits, complex,
allocator, valarray, iostream and locale classes.
. Threads.h++, which is built on top of the Tools.h++ foundation class
library, is a C++ class library for developing multithreaded applications.
Database Access
- ---------------
. DBTools.h++, which is built on top of Tools.h++, provides a common, object-
oriented interface to relational databases. Applications can be written
once to the DBTools.h++ API and then deployed to any of the supported
databases, regardless of the differences in data structures and function
calls between the different databases. DBTools.h++ provides native access
to Informix, Microsoft SQL Server, Oracle and Sybase, plus general
connectivity to these and other relational databases through the ODBC
standard.
Analysis
- --------
Rogue Wave's analysis tools consist of Analytics.h++, Math.h++, Money.h++ and
LAPACK.h++.
. Analytics.h++ is a solution for development teams building custom, in-house
applications that perform sophisticated data analysis. Example applications
include decision support, data warehousing, data mining, financial risk
management, electronic design automation and clinical trial testing.
. Math.h++ is a C++ class library that combines power and ease of use in a
set of classes designed to improve the performance and reliability of any
code that manipulates arrays of numbers.
. Money.h++ is a C++ class library for representing and manipulating exact
decimal fractions, currency conversions and monetary representations.
. LAPACK.h++ is a C++ class library that is designed to solve numerical
linear algebra problems by managing the details of data representation,
enabling the programmer to concentrate on application development.
Enterprise System Products
- --------------------------
. Enterprise system products provide the same reliability, portability and
scalability of several of the most popular Rogue Wave products for the
OS/390 and AS/400 platforms. Product lines are available in various
combinations of Tools.h++, DBTools.h++ with DB2 Access Library, Rogue
Wave's Standard C++ Library, Threads.h++, Money.h++, Tools h++ Professional
and NobleNet RPC.
. DBToolsXA allows the programmer to develop applications that simultaneously
access multiple, heterogeneous databases and ensure data integrity at the
same time. DBTools.h++ XA provides support for Encina TPM, providing cross-
database recoverability and distributed transactions.
Window-specific Development
Visual C++/MFC Libraries
- ------------------------
. Objective Toolkit is the de facto standard library used by Microsoft Visual
C++ 6.0 developers. Objective Toolkit is a collection of MFC user interface
extensions, with over 70 distinct features such as Office 97-style
customizable toolbars and menu bars, masked and currency edit controls,
word wrap and MDI alternatives.
. Objective ToolkitPro includes Advanced Docking Window (ADW) architecture
that supports the software development industry's first and only generic
docking mechanism. ADW includes advanced features such as nested Docking
Windows, container-independent docking, real-time Microsoft Office-style
dragging, alternate docking layout logic and fixed size dockable windows.
. Objective Grid & Grid Lite are MFC tools with grid layout design
capability, data source binding and provides more that 200 built-in Excel-
like formulas. Objective Grid Lite is geared for the beginning MFC
developer or the developer concerned with the footprint impact of a class
library.
. Objective Views allows the developer to create drag-and-drop programs
giving users the ability to add objects, create hierarchies, connections
and containers.
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. Objective Edit is an MFC extension embeddable source code editor. This
full-featured editor provides automatic syntax highlighting and coloring,
as well as a complete test-editing environment.
. Objective Chart is an extension allowing the developer to add graphs and
charts to any CWnd-based class, including views, dialogs and controls.
Modeling Tools
- --------------
. RW-UML Studio uses UML (Unified Modeling Language) to let programmers see
their code graphically and is the industry's only object-oriented design
and modeling tool that is fully integrated with Microsoft's Visual C++ 6.0
IDE. RW-UML Studio enables Visual C++/MFC developers to design, develop,
test and edit code for cutting-edge applications without ever having to
leave the Visual C++ development environment.
Visual Basic/ActiveX Extensions
- -------------------------------
. Objective Grid CCE is an Active X grid control that makes use of automation
objects to expose the functionality of Objective Grid/MFC.
. Objective Toolkit/X makes use of the power of Objective Toolkit for the
Visual Basic programmer as an ActiveX control.
Java Development
Visual J++/WFC Libraries
- ------------------------
. Objective Toolkit for WFC is built on top of Microsoft's latest Java
technology and provides a solid foundation for developing Windows
applications with the productivity of the Java language. Objective Toolkit
for WFC provides developers with greater flexibility in manipulating data,
while also greatly reducing the coding necessary for creating rich
functionality in their WFC applications.
JavaBeans Components
- --------------------
. Blend.J is a collection of user interface controls for Java developers with
JFC and AWT support.
. Grid.J provides developers with sophisticated features to turn a Java grid
into a fully functioning spreadsheet, including embedded controls and a
formula engine.
. Chart.J is used to incorporate customizable, dynamic charts in Java
applications.
Java Classes
- ------------
. DBTools.J delivers database access and manipulation capabilities from an
intuitive, pure Java API. It enhances JDBC, providing object-oriented,
thread-safe, extensible classes that use SQL standards and relational
constructs. Using DBTools.J, developers do not have to write SQL.
. JMoney is a Java class library for representing and manipulating exact
decimal fractions, primarily for banking and other financial applications.
It also includes algorithms for calculating amortization and other
schedules.
Middleware Development
NobleNet RPC
- ------------
. NobleNet RPC is compiler technology with extended features that allow
application programmers with little networking experience to build
client/server applications. NobleNet RPC converts stand-alone applications
into client/server applications without requiring major rewrites or porting
and is compliant with the ONC-RPC standard.
Nouveau
- -------
. Nouveau provides a cross paradigm (COM, CORBA, RPC) set of programming
tools (IDL compiler, code generation tools) as well as a runtime
environment (consisting of libraries and services) to enable distributed
application development and deployment.
Customers
The Company's products are used by programmers to develop software
applications for organizations around the world in a wide variety of industries.
To date, the Company has sold over 150,000 end-user licenses to individual
programmers and customers in industries such as telecommunications, computers
and electronics, software and information systems, transportation, consulting
services, financial services and other industrial and consumer products
companies.
5
Sales
The Company markets its software primarily through its direct sales
organization and, to a lesser extent, through outside sales representatives and
indirect channel partners. As of September 30, 1999, the Company's sales and
marketing organization consisted of 116 individuals. The Company primarily
sells perpetual use, non-exclusive licenses to use its products for an up front
fee. The licenses generally include a 30-day right of return policy.
Telesales. As of September 30, 1999, the Company employed 63 domestic and
international telesales representatives. The Company's telesales force targets
individuals and small to medium sized groups of programmers. Sales through this
channel are typically less than $50,000 per order and the sales cycle is
generally less than two months. The Company maintains telesales operations in
Colorado, North Carolina and the Netherlands.
Direct Field Sales. As of September 30, 1999, the Company employed six domestic
direct field sales representatives supported by five technical sales
representatives. The Company's domestic field sales force targets Fortune 1000
customers. The field sales force typically focuses enterprise-wide technology
purchasers. The sales cycle for this "top down" approach typically ranges from
two to six months. The Company maintains domestic direct sales offices in
California, Colorado, Georgia, New York, Texas and Virginia.
The Company's international channel development efforts have initially
focused on Europe. The Company established a German sales and support office in
January 1996 and acquired PVI Precision Software, GmbH ("Precision"), a European
distributor with offices in Germany, the United Kingdom, France and the Benelux
countries, in February 1997. As of September 30, 1999, the Company's European
sales, support and consulting organization consisted of 51 individuals. The
Company maintains European sales and support offices in France, Germany, Italy,
the Netherlands and the United Kingdom.
Marketing and Advertising
The Company's marketing efforts are directed at broadening the market for
its products by increasing awareness among corporate programmers and chief
information officers. In support of its sales efforts, the Company's marketing
department conducts comprehensive programs that include advertising, direct
mail, public relations, trade shows, seminars and ongoing customer
communications programs. The Company also keeps its customers informed of
advances in the field through technical papers and other mailings. The Company
maintains a Web site on the Internet (www.roguewave.com) that provides Company
-----------------
and product information and handles sales and distribution for its products.
Strategic Alliances and Business Partnerships
The world's leading hardware and software vendors, system integrators,
software developers and distributors have chosen Rogue Wave Software as a
strategic partner because Rogue Wave offers the products to build the e-business
solutions and develop applications for the future. We are continually driven to
offer our partners a premier framework to help build powerful Internet, Intranet
and extranet applications. Rogue Wave Software partners with vendors such as
Microsoft, IBM, Sun Microsystems, Intel, Oracle, HP, SGI, BEA Systems and
Sybase. These relationships may include technology licensing agreements,
cooperative marketing relationships as well as exchange of development plans and
strategic direction.
As new markets open, Rogue Wave will be partnering with leading vendors to
offer solutions to the marketplace. Rogue Wave has a very strong relationship
with Microsoft and is a charter member of both the Visual Studio Integrator
Program and Embedded Tool Partner program.
Product Support
The Company believes that a high level of customer support is important to
the successful marketing and sale of its products. As of September 30, 1999,
there were 49 employees in the Company's product support group. The Company
offers telephone, electronic mail, fax and Internet-based customer support
through its support services staff. Initial product license fees include 30
days of customer support. The Company also offers annual maintenance agreements
that include technical support and upgrades, and offers introductory and
advanced classes and training programs.
6
Professional Services
In April 1997, the Company established a domestic consulting and training
services group in Boulder, Colorado, to provide services to the Company's
Fortune 1000 customers. As of September 30, 1999, there were 16 employees in
the professional services group. The professional services group specializes in
object-oriented programming in C++ and Java. The group helps customers assess
needs and develop solutions, with a particular expertise in mixed language
environments that use both C++ and Java.
Product Development
As of September 30, 1999, there were 105 employees on the Company's product
development staff. The Company's product development expenditures in fiscal
1997, 1998 and 1999 were $7.6 million, $9.5 million and $11.5 million,
respectively, and represented 22.8%, 21.4% and 21.7% of total revenue,
respectively. The Company expects that it will continue to commit substantial
resources to product development in the future. Although Rogue Wave has
primarily developed products internally, it may, based on timing and cost
considerations, acquire technologies or products from third parties.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and otherwise
achieve market acceptance. There can be no assurance that the Company will be
successful in continuing to develop and market on a timely and cost-effective
basis fully functional product enhancements or new products that respond to
technological advances by others, or that its enhanced and new products will
achieve market acceptance. In addition, the Company has in the past experienced
delays in the development, introduction and marketing of new or enhanced
products, and there can be no assurance that the Company will not experience
similar delays in the future. Any failure by the Company to anticipate or
respond adequately to changes in technology and customer preferences, or any
significant delays in product development or introduction, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Intellectual Property And Other Proprietary Rights
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 its 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 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.
Competition
Our products target the growing market for C++, Visual C++/MFC, Visual
Basic/ActiveX and Java software parts and programming tools. Direct competitors
in the C++ market include Microsoft (with its Microsoft Foundation Classes,
"MFC"), IBM, ILOG and several privately held companies. Microsoft is a
particularly strong competitor due to its large installed base and the fact that
it bundles its MFC library with its own and other C++ compilers. Microsoft may
decide in the future to devote more resources to or broaden the functions of MFC
in order to address and more effectively compete with
7
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. In the distributed application development
market we face competition from a variety of CORBA vendors including Iona,
Inprise, BEA, IBM, and others. In this market we expect basic connectivity to be
bundled with a variety of offerings from these vendors, as well as Sun (with a
free Java ORB) and Microsoft (with connectivity bundled into its offerings).
Software applications can also be developed using software parts and
programming tools in environments other than C++ or Java. Indirect competitors
with such offerings include Microsoft (with its ActiveX technology), 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
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, programming tools and distributed application
development products, 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.
Employees
As of September 30, 1999, the Company had a total of 346 employees, of
which 295 were based in the United States and 51 were based in Europe. Of the
total, 116 were in sales and marketing, 105 were in product development, 49 were
in customer support, 16 were in consulting services and 60 were in finance,
administration and operations. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
The loss of the services of one or more of the Company's key employees could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company's future success also depends on its
continuing ability to attract, train and retain highly qualified technical,
sales and managerial personnel. Competition for such personnel is intense and
there can be no assurance that the Company can retain its key technical, sales
and managerial personnel in the future. The Company has not experienced any
work stoppages and considers relations with its employees to be good.
Risk Factors
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;
8
. our ability to retain key employees and hire new employees; and
. our ability to develop and market new products and control costs.
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 quarters 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) NobleNet merger and integration
distractions. After our announcement of such financial results, the price of
our common stock declined materially.
Fluctuations in Quarterly Operating Results. 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
will likely result in volatility in the price of our Common Stock in the future.
Management of Growth. Our business has grown rapidly in the 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. in 1998 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 during 1998, we moved our administrative
operations from Corvallis, Oregon, to Boulder, Colorado. This move has resulted
in the distribution of our senior management team, which may make managing our
operations in the future more difficult. In 1999, the Company acquired
NobleNet, Inc. which resulted in another development site and further
distribution of management resources.
Dependence on 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.
9
Competition. Our products target the emerging market for C++, Visual
C++/MFC, Visual Basic/ActiveX and Java software parts and programming tools.
Direct competitors in the C++ market include Microsoft (with its Microsoft
Foundation Classes, "MFC"), IBM, ILOG and several privately held companies.
Microsoft is a particularly strong competitor due to its large installed base
and the fact that it bundles its MFC library with its own and other C++
compilers. Microsoft may decide in the future to devote more resources to or
broaden the functions of MFC in order to address and more effectively compete
with the functionality of 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. In the distributed application development
market we face competition form a variety of CORBA vendors; including Iona,
Inprise, BEA, IBM, and others. In this market we expect basic connectivity to
be bundled with a variety of offerings form these vendors, as well as Sun (with
a free Java ORB) and Microsoft (with connectivity bundled into its offerings).
Software applications can also be developed using software parts and
programming tools in environments other than C++ or Java. Indirect competitors
with such offerings include Microsoft (with its ActiveX technology), 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
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 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.
Risk 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. In the second fiscal quarter of 1999 we
completed a business acquisition with NobleNet, 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 negative impact on the Company's financial
results for the third and fourth fiscal quarter of 1999.
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
10
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 issuances of equity securities, the
incurrence of debt and amortization expenses 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.
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
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 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 future performance depends in
significant part 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. The Company views the services of Thomas Keffer, the Company's
Chairman of the Board, as difficult to replace. We have a key person life
insurance policy in the amount of $2.0 million for Dr. Keffer.
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 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 can be 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.
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 its proprietary rights in
the United States or abroad will be adequate or that competition will not
independently develop similar technology.
11
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.
Uncertainty of the Effects of the Year 2000 on Computer Programs and
Systems. Many currently installed computer systems and software programs were
designed to use only a two-digit date field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. Until the date fields are updated, the systems and programs could fail or
give erroneous results when referencing dates following December 31, 1999. Such
failure or errors could occur prior to the actual change in century.
We are currently reviewing and testing all of our products for the
transition to the 21st century. In addition we have developed and circulated to
our customers a standard for evaluating software reliability during the century
transition and provides information on compliance with existing standards
addressing the year 2000 problem.
We have identified year 2000-related issues with five of our currently
supported products: NobleNet RPC and EZ-RPC, Tools.h++, Objective Grid and
Objective Toolkit.
The Unix versions of NobleNet RPC and EZ-RPC prior to version 3.5 that are
licensed for evaluation purposes under a temporary license may fail to operate
if the temporary license expires in the year 2000. The operation of this
software is not affected by other termination dates and software issued under
perpetual licenses is not affected. The abnormality relates to the license
management function of the software and has been remedied in versions 3.5 and
above.
The Rogue Wave product Tools.h++ contains a date-related limitation that
appears in class RWTime. As implemented in all Tools.h++ versions, RWTime
permits creation of dates limited to the range of 1901 to 2037 on computer
platforms that implement 32 bit unsigned long integers. A future release of
Tools.h++ will eliminate this year 2037 restriction in RWTime by introducing a
new class, RWDateTime. Furthermore, in Tools.h++ version 7.0.x and earlier, a
two-digit year input of '00' will be converted to the four-digit year '1900.'
Tools.h++ version 7.0.3 and later introduces the macro RW_CENTURY_REQD, which
limits valid year inputs to four digits. However, all versions of Tools.h++
accept four-digit year input.
Objective Grid version 7.0 and earlier may, under certain circumstances,
use two different algorithms to convert two-digit date input into four-digit
year input. However, as with Tools.h++, Objective Grid does accept four-digit
year inputs. This year 2000-related issue has been eliminated in the version
7.01 release of Objective Grid. Objective Toolkit versions 5.21 and later are
year 2000 compliant when used with Visual C++ versions 4.2 or later.
Although our products have and are continuing to undergo normal quality
testing procedures, there can be no assurance that these products contain all
necessary date code changes. Any system malfunctions due to the onset of the
year 2000 and any disputes with customers relating to year 2000 compliance,
including licensees of non-compliant products that we are unable to locate,
could have a material adverse effect on our business.
The Company has established a year 2000 project team to develop and
implement a comprehensive four-phase year 2000 readiness plan for its worldwide
operations relating to the Company's internal IT and non-IT systems and third
party customers, vendors and others with whom the Company does business. Phase
One (Inventory) consists of identifying all potential business disruption
problems, including those with products and systems, as well as potential
disruption from suppliers and other third parties. Phase Two (Assessment)
involves determining the Company's current state of year 2000 readiness for
those areas identified in the inventory phase and prioritizing the areas that
need to be fixed. Phase Three (Remediation) consists of programs to solve or
mitigate any identified year 2000 problems. Phase Four (Contingency) consists of
developing contingency plans to attain year 2000 readiness.
With respect to its most critical internal IT systems, consisting of
accounting, data processing and other systems, the Company has completed the
Inventory, Assessment and Remediation phases. The Company believes that its
internal computer systems are year 2000 compliant and that the risk of major
disruption from these systems due to year 2000 issues is minimal. No system
implementations will be undertaken for the sole purpose of becoming year 2000
compliant but rather in the course of introducing new systems and system
upgrades to support the Company's recent rapid growth, including growth
12
through acquisitions. The cost related to year 2000 compliance involved in
system implementations is estimated at approximately $160,000.
With respect to non-critical IT systems, consisting primarily of security
systems, fax machines and other miscellaneous systems, and non-IT embedded
systems, the Company initiated formal communications with its significant
suppliers and financial institutions to evaluate their year 2000 compliance
plans and state of readiness. The Company has completed the Inventory,
Assessment and Remediation phases. The Company funded any remediation costs from
operating cash flows and did not establish any specific reserves for those
costs. The Company has incurred material costs of approximately $75,000
specifically related to becoming year 2000 compliant in its non-critical IT and
non-IT embedded systems. As with critical IT systems, discussed above, many of
the Company's non-critical IT systems have been, or will be, replaced or
upgraded to accommodate expanded business processes due to recent growth and
merger activity. No system implementations will be undertaken for the sole
purpose of becoming year 2000 compliant.
The Company is completing year 2000 contingency plans for critical business
suppliers and customers to respond to previously undetected year 2000 problems
and business interruption from suppliers. Contingency plans will include
alternative suppliers, as necessary, as well as assuring the availability of key
personnel at year-end to address unforeseen year 2000 problems. At this time,
the Company cannot estimate the additional cost, if any, from the implementation
of such contingency plans.
The above discussion regarding costs, risks and estimated completion dates
for the year 2000 is based on the Company's best estimates given information
that is currently available and is subject to change. There can be no assurance
that actual costs will not substantially exceed the Company's assessment due to
internal year 2000 problems or year 2000 problems associated with the Company's
IT and non-IT systems and products. In addition, while the Company believes it
has achieved year 2000 compliance with respect to its software products and
critical IT systems, there could be unanticipated year 2000 related failures in
such products or systems that could have a material and adverse effect on the
Company's results of operations and financial condition. Further, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be remediated in a timely manner, or that a failure to remediate by
another company, including without limitation any of the Company's vendors,
customers, or partners, or a remediation that is incompatible with the Company's
systems would not have a material adverse effect on the Company.
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.
Executive Officers of the Company
The executive officers of the Company and their ages and positions as of
November 15, 1999, are as follows:
Name Age Position
---- --- --------
Bruce Coleman.......................... 60 Chief Executive Officer and Director
Robert M. Holburn, Jr.................. 53 Vice President, Chief Financial Officer and Secretary
Michael M. Foreman..................... 48 Vice President, World-Wide Sales
Peter Weyman........................... 44 Vice President, Division Manager
13
Bruce Coleman, Chief Executive Officer, has served as CEO and director of
the Company since October 1999. Since September 1991, he has been the Chief
Executive Officer of El Salto Advisors, a consulting firm that provides interim
management to computer software and service companies. In the years 1992 to
1999, Mr. Coleman served as interim CEO for Computer Network Technology
Corporation, Fischer International, Image BSN Systems, Knowledge Systems
Corporation, Resumix, Inc., Viewpoint Systems, WebSense, Inc. (formerly
NetPartners, Inc.) and Open Horizon, Inc. From 1988 to 1991, Mr. Coleman managed
Information Science, Inc., a human resource software and service company. Mr.
Coleman is a director of Printronix, Inc., WebSense, Inc. and Sirius Software
Inc. Mr. Coleman received his BA from Trinity College and his MBA with High
Distinction from Harvard Business School.
Robert M. Holburn, Jr., Vice President, Chief Financial Officer and
Secretary of the Company, has been with the Company since October 1994. Between
March 1994 and October 1994, he served as the Chief Financial Officer for
MacSema, Inc., a manufacturer of electronic data storage systems. From August
1993 until March 1994, he served as an independent financial consultant. From
August 1992 until August 1993, he served as the Chief Financial Officer for
Pacific Coast Technologies, an electronics company. From 1987 until August 1992,
Mr. Holburn served as Vice President of Administration, Chief Financial Officer
and Secretary of Advanced Power Technology, a semiconductor manufacturer. Prior
to 1987, he was employed for 13 years with Texas Instruments, Inc., an
electronics company, where he last served as Controller for its worldwide MOS
memory operations. Mr. Holburn received his MBA from the College of William and
Mary and his B.S. from the University of Rhode Island.
Michael M. Foreman, Vice President of World-Wide Sales, has been with the
company since January 1995. Prior to Rogue Wave, Mr. Foreman served as Vice
President of Sales, North America for Acxiom Corporation, a database and direct
marketing services corporation, from 1986 to 1992 and then held a senior sales
position with Information Resources just prior to joining Rogue Wave. Mr.
Foreman also worked for IBM and held various sales, sales management and
marketing positions. Mr. Foreman received his B.S./B.A. from the University of
Northern Colorado.
Peter J. Weyman, Vice President, Division Manager, has been with the
Company since its acquisition of NobleNet, Inc., in March 1999. Between August
1998 and March 1999, he was President and CEO of NobleNet. Prior to his
nomination as CEO, he was NobleNet's Vice President of Engineering from March
1997 through August 1998. Prior to joining NobleNet, he was at VMARK Software,
Inc. from February 1994 through March 1997. At VMARK he held the positions of
Vice President, Engineering and Vice President, Strategic Marketing. Prior to
joining VMARK, he was President and CEO of Blackstone Valley Software, Inc., and
was employed for 8 years at Prime Computer, Inc., where he last served as Vice
President, Engineering. Mr. Weyman holds a SB degree from the Massachusetts
Institute of Technology and a DCS degree from Sir George Williams University in
Montreal, Canada.
ITEM 2. PROPERTIES
The Company's principal domestic administrative, sales, marketing, support,
consulting and product development offices are located in facilities consisting
of approximately 37,000 square feet in Boulder, Colorado; 33,000 square feet in
Corvallis, Oregon; 16,000 square feet in Raleigh, North Carolina, and 12,000
square feet in Southboro, Massachusetts. The leases on the Boulder, Corvallis,
Raleigh and Southboro facilities expire on various dates from 2000 through 2005.
The Company currently leases other domestic sales, development and support
offices in California, New York, Texas and Virginia. The Company also rents
space basis for its international offices in Europe. Note 4 of Notes to
Consolidated Financial Statements describes the amount of the Company's lease
obligations. The Company believes that these facilities are adequate for its
current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock trades on the NASDAQ National Market ("NASDAQ")
under the symbol "RWAV". The following table sets forth the high and low closing
sales prices for the Company's Common Stock since public trading commenced on
November 22, 1996, as furnished by NASDAQ. These prices reflect prices between
dealers, without retail markups, markdowns or commissions, and may not represent
actual transactions.
High Low
---- ---
Year ended September 30, 1999
1st Quarter.......................................... $10.00 $ 5.13
2nd Quarter.......................................... 12.38 6.56
3rd Quarter.......................................... 9.38 6.75
4th Quarter.......................................... 9.25 5.56
Year ended September 30, 1998
1st Quarter.......................................... $14.88 $10.16
2nd Quarter.......................................... 16.88 8.43
3rd Quarter.......................................... 15.50 7.38
4th Quarter.......................................... 10.63 5.00
As of October 31, 1999, there were approximately 134 stockholders of record
(which number does not include the number of stockholders whose shares are held
of record by a brokerage house or clearing agency but does include such
brokerage house or clearing agency as one record holder). The Company believes
it has in excess of 4,500 beneficial holders of the Company's Common Stock.
Dividend Policy
In December 1996 and 1997, Stingray, as a Subchapter (S) Corporation,
declared and paid a cash dividend in the aggregate amount of $36,000 and
$426,000 respectively. The Company has not historically paid cash dividends and
currently intends to retain any future earnings for use in its business for the
foreseeable future.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year ended September 30,
-----------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Revenue:
License revenue..................................................... $10,417 $15,968 $24,096 $28,663 $32,394
Service and maintenance revenue..................................... 1,520 3,916 9,313 15,776 20,710
------- ------- ------- ------- -------
Total revenue..................................................... 11,937 19,884 33,409 44,439 53,104
------- ------- ------- ------- -------
Cost of revenue:
Cost of license revenue............................................. 1,048 1,390 1,973 2,377 2,149
Cost of service and maintenance revenue............................. 1,123 1,663 2,963 4,920 7,306
------- ------- ------- ------- -------
Total cost of revenue............................................. 2,171 3,053 4,936 7,297 9,455
------- ------- ------- ------- -------
Gross profit...................................................... 9,766 16,831 28,473 37,142 43,649
------- ------- ------- ------- -------
Operating expenses:
Product development................................................. 3,207 5,766 7,619 9,532 11,512
Sales and marketing................................................. 4,880 8,367 14,338 19,313 23,510
General and administrative.......................................... 1,487 2,277 3,620 4,164 5,354
Merger, reorganization and relocation costs......................... -- -- -- 1,789 1,170
------- ------- ------- ------- -------
Total operating expenses.......................................... 9,574 16,410 25,577 34,798 41,546
------- ------- ------- ------- -------
Income from operations............................................ 192 421 2,896 2,344 2,103
Other income (expense), net........................................... (10) 94 1,396 794 1,182
------- ------- ------- ------- -------
Income before income taxes........................................ 182 515 4,292 3,138 3,285
Income tax expense (benefit).......................................... 106 (24) 1,459 961 1,274
------- ------- ------- ------- -------
Net income........................................................ $ 76 $ 539 $ 2,833 $ 2,177 $ 2,011
======= ======= ======= ======= =======
Pro forma net income data/(1)/:
Income before income taxes.......................................... $ 182 $ 515 $ 4,292 $ 3,138
Pro forma income tax expense........................................ 105 147 1,471 1,098
======= ======= ======= =======
Pro forma net income.............................................. $ 77 $ 368 $ 2,821 $ 2,040
======= ======= ======= =======
Pro forma basic earnings per share.................................. $ 0.02 $ 0.07 $ 0.32 $ 0.20
======= ======= ======= =======
Pro forma diluted earnings per share................................ $ 0.02 $ 0.05 $ 0.27 $ 0.19
======= ======= ======= =======
Basic EPS............................................................. $ 0.02 $ 0.11 $ 0.32 $ 0.21 $ 0.19
======= ======= ======= ======= =======
Diluted EPS........................................................... $ 0.02 $ 0.07 $ 0.27 $ 0.20 $ 0.19
======= ======= ======= ======= =======
Basic shares outstanding.............................................. 4,129 5,077 8,807 10,209 10,383
Diluted shares outstanding............................................ 4,941 7,593 10,419 10,670 10,860
September 30,
-------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In thousands)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................... $ 1,010 $ 2,113 $35,737 $35,264 $27,664
Total assets.......................................................... 4,758 10,722 50,018 54,527 59,470
Long-term obligations, less current portion........................... 230 322 351 -- --
Mandatorily redeemable preferred stock................................ 1,140 4,664 -- -- --
Total stockholders' equity............................................ 619 1,184 39,920 42,905 42,342
- --------------------------------------------------------------------------------
(1) Stingray, which was acquired in a pooling of interests, was a Subchapter S
corporation since inception (July 10, 1995) until December 31, 1997, and
accordingly not subject to federal and state income taxes during the years
1995, 1996, 1997 and a portion of fiscal 1998. Pro forma net income
reflects federal and state income taxes as if the Company and Stingray had
been a C corporation, based on effective tax rates during the periods
indicated.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements regarding the
company, its business, prospects and results of operations that are subject to
risks and uncertainties posed by many factors and events that could cause the
company's actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed herein as well as those discussed under the captions
"risk factors" and "business" as well as those discussed elsewhere in this
prospectus. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date of this report. The company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made by the company in
this report and in the company's other reports filed with the securities and
exchange commission that attempt to advise interested parties of the risks and
factors that may affect the company's business.
Overview
Rogue Wave was founded in 1989 to provide reusable software parts for the
development of object-oriented software applications. The Company operated as a
Subchapter S corporation until June 1994. In October 1995, Rogue Wave merged
with Inmark Development Corporation ("Inmark"), a privately held corporation
specializing in the development, distribution and support of an object-oriented
graphical user interface library written in the C++ programming language. 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 is a leading
provider of Visual C++ class libraries. The Inmark and Stingray acquisitions
were accounted for as a pooling-of-interests business combination. In 1999, the
Company acquired NobleNet, Inc., a privately held corporation specializing in
Internet-generation Object Request Broker technology, through the purchase of
100% of the outstanding shares. This acquisition was accounted for under the
purchase accounting method. See Note 2 of Notes to Consolidated Financial
Statements.
To date, the Company's revenue has been derived from licenses of its
software products and related maintenance, training and consulting services.
License revenue is recognized according to the criteria of SOP 97-2. 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, and
collection of the resulting receivable is probable. Allowances for credit risks
and for estimated future returns are provided for upon shipment. Returns to date
have not been material. Service and maintenance revenue consists of fees that
are charged separately from the product licenses. Maintenance revenue consists
of fees for ongoing support and product updates and is recognized ratably over
the term of the contract, which is typically 12 months. Service revenue consists
of training and consulting services and is recognized upon completion of the
related activity. The Company's revenue recognition policies are in compliance
with American Institute of Certified Public Accountants Statements of Position
97-2 and 98-4, relating to Software Revenue Recognition. See Note 1 of Notes to
Consolidated Financial Statements.
The Company markets its products primarily through its direct sales force,
and to a lesser extent through the Internet and an indirect channel consisting
of OEMs, VARs, dealers and distributors. The Company's direct sales force
consists of an inside telesales group that focuses on smaller orders ($50,000 or
less), and an outside sales force that focuses on larger site licenses. The
Company makes all of its products available for sale and distribution over the
Internet. Revenue through this channel has not been significant to date, and
there can be no assurance that the Company will be successful in marketing its
products through this channel.
International revenue accounted for approximately 24%, 28% and 24% of total
revenue in fiscal 1997, 1998 and 1999, 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, a
distributor of Rogue Wave software products in Germany, the United Kingdom,
France and the Benelux countries. The Company anticipates further expansion in
foreign countries and expects that international license and service and
maintenance revenue will account for an increasing portion of its total revenue
in the future. The Company has committed and continues to commit significant
management time and financial resources to developing direct and indirect
international sales and support channels. There can be no assurance, however,
that the Company will be able to maintain or increase international market
demand for its products. To date, other than revenue generated by the Company's
European subsidiaries, the Company's international revenue has been denominated
in United States dollars. The Company may enter into forward foreign exchange
contracts to reduce the risk associated with currency fluctuations. Although
exposure to currency fluctuations to date has been insignificant, to the extent
international revenue is denominated in local
17
currencies, foreign currency translations may contribute to significant
fluctuations in, and could have a material adverse effect upon, the Company's
business, financial condition and results of operations. See "Risk Factors-
Risks Inherent in International Operations."
The Company 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, HotData issued common stock to additional
investors thereby reducing the Company's percentage ownership from 78% to 42%.
The HotData investment has been accounted for using the equity method of
accounting for fiscal 1999. The Company incurred $1.1 million and $252,000 in
HotData equity losses during fiscal years 1998 and 1999, respectively. The
Company's recorded investment in HotData was $252,000 and zero at September 30,
1998 and 1999, respectively.
In April 1997, the Company established a consulting group in Boulder,
Colorado consisting of 15 employees. The addition of these employees has
resulted in an increase in service and maintenance revenue and a corresponding
increase in the cost of service and maintenance revenue. The gross margin
associated with such consulting work has been and is expected to continue to be
lower than the Company's historical gross margin on service and maintenance
revenue. The Company moved its administrative operations from its previous
location in Corvallis, Oregon, to Boulder, Colorado, during fiscal 1998. The
Company incurred charges totaling approximately $500,000 during fiscal 1998 in
connection with this move.
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 for approximately 1.65 million shares of Rogue Wave common stock.
Stingray develops and distributes development tools for Windows programmers. The
merger added several new product lines to Rogue Wave's current slate of object-
oriented C++ and Java TM class libraries and builders. Stingray offers an
extensive line of add-on libraries that extend and enhance the Microsoft
Foundation Classes (MFC), providing additional, prebuilt functionality for
creating sophisticated GUI controls, grids, diagrams and charts. Stingray also
offers ActiveX components and several Java class libraries that will further
strengthen Rogue Wave's offerings in the Java marketplace. The Company incurred
approximately $700,000 in merger related costs during fiscal 1998. The financial
results for all periods presented include the accounts of the Company and
Stingray.
In June 1998, the Company implemented a reorganization and realignment of
its product strategy. Cost saving actions were taken which resulted in the
closing of its Mountain View, California, and Charlotte, North Carolina,
development operations, reducing its domestic administration staff and began the
process of consolidating the Oregon operations into one facility. In connection
with these actions, the Company incurred a $589,000 reorganization charge
primarily consisting of severance and lease termination costs.
In March 1999, the Company acquired all of the outstanding shares of
NobleNet common stock which were accounted for under the purchase method for
approximately $11.8 million in cash. NobleNet's Nouveau technology, an Internet-
generation Object Request Broker (ORB), is expected to expand Rogue Wave's
product offering by providing a unified architecture for building high
performance, distributed applications that interoperate across an enterprise or
over the Internet. The Company incurred approximately $702,000 in goodwill
amortization costs during fiscal 1999.
See Risk Factors for a discussion of issues relating to the year 2000.
18
Results of Operations
The following table sets forth certain operating data expressed as a
percentage of total revenue for each period indicated:
Year ended September 30,
------------------------
1997 1998 1999
---- ---- ----
Statements of Operations:
Revenue:
License revenue............................................... 72.1% 64.5% 61.0%
Service and maintenance revenue............................... 27.9 35.5 39.0
----- ----- -----
Total revenue............................................... 100.0 100.0 100.0
Cost of revenue:
Cost of license revenue....................................... 5.9 5.4 4.0
Cost of service and maintenance revenue....................... 8.9 11.1 13.8
----- ----- -----
Total cost of revenue....................................... 14.8 16.5 17.8
----- ----- -----
Gross profit................................................ 85.2 83.5 82.2
Operating expenses:
Product development........................................... 22.8 21.4 21.7
Sales and marketing........................................... 42.9 43.4 44.3
General and administrative.................................... 10.8 9.4 10.0
Merger, reorganization and relocation costs................... -- 4.0 2.2
----- ----- -----
Total operating expenses.................................... 76.5 78.2 78.2
----- ----- -----
Income from operations...................................... 8.7 5.3 4.0
Other income, net............................................... 4.2 1.8 2.2
----- ----- -----
Income before income taxes.................................. 12.9 7.1 6.2
Income tax expense.............................................. 4.4 2.2 2.4
----- ----- -----
Net income.................................................. 8.5% 4.9% 3.8%
===== ===== =====
Revenue. The Company's total revenue increased 19.5% to $53.1 million in fiscal
1999 from $44.4 million in fiscal 1998. Total revenue in fiscal 1998 increased
33.0% from $33.4 million in fiscal 1997. License revenue increased 13.0% to
$32.4 million in 1999 from $28.7 million in fiscal 1998. License revenue in
fiscal 1998 increased 19.0% from $24.1 million in fiscal 1997. License revenue
increased primarily as a result of an increase in the number of licenses sold to
existing and new customers, reflecting additional product offerings, an
expanding market, increased market awareness and expansion of the Company's
telesales and international sales organizations.
Service and maintenance revenue increased 31.3% to $20.7 million in fiscal
1999 from $15.8 million in fiscal 1998. Service and maintenance revenue in
fiscal 1998 increased 69.4% from $9.3 million in fiscal 1997. These increases in
service and maintenance revenue were primarily attributable to increased sales
volume of the Company's support and maintenance services related to the
Company's larger installed base.
Cost of Revenue. Cost of license revenue consists primarily of amortization of
purchased software, materials, packaging and freight expenses. Cost of license
revenue was $2.0 million, $2.4 million and $2.1 million in fiscal 1997, 1998 and
1999, respectively, representing 8.2%, 8.3% and 6.6% of the license revenue for
the respective periods. Fluctuations in cost of license revenue as a percentage
of total license revenue are primarily the result of varying levels of royalties
paid, changes in product mix and the timing of large site license sales.
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 services.
Cost of service and maintenance revenue was $3.0 million, $4.9 million and $7.3
million in fiscal 1997, 1998 and 1999, respectively, representing 31.8%, 31.2%
and 35.3% of the service and maintenance revenue for each respective periods.
The period to period dollar increases in cost of service and maintenance revenue
were primarily the result of expenses associated with the development of
training programs, utilization of training and mentoring consultants, additional
product support personnel and the timing of product upgrades. The increase as a
percentage of service and maintenance revenue for fiscal 1999 was primarily the
result of the utilization of third-party resources in providing training and
consulting services. The increase in cost of service and maintenance revenue as
a percentage of total cost of revenue during the respective periods reflect the
fact that license revenue grew at a lower percentage rate than did service and
maintenance revenue during such periods, and the gross profit margin on service
and maintenance revenue is lower than the gross profit margin on license
revenue.
19
Product Development. Product development expenses consist primarily of
personnel related expenses. Product development expenses were $7.6 million, $9.5
million and $11.5 million in fiscal 1997, 1998 and 1999, respectively. As a
percentage of total revenue, product development expenses were 22.8%, 21.4% and
21.7% in each respective period. The increases in product development expenses
were primarily attributable to the hiring of additional product development
personnel. The Company anticipates that it will continue to devote substantial
resources to product development and that product development expenses will
increase in dollar amount and as a percentage of revenue for fiscal 2000 as the
Company continues to increase its product development capacity. All costs
incurred in the research and development of software products and enhancements
to existing products have been expensed as incurred. See Note 1 of Notes to
Consolidated Financial Statements.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expenses and travel, entertainment and promotional expenses. Sales and
marketing expenses were $14.3 million, $19.3 million and $23.5 million in fiscal
1997, 1998 and 1999, respectively. As a percentage of total revenue, sales and
marketing expenses were 42.9%, 43.4% and 44.3% in each respective period. The
increase in sales and marketing expenses reflects the hiring of additional sales
and marketing personnel and related costs, as well as increased costs associated
with expanded promotional activities. The Company expects that sales and
marketing expenses will increase in dollar amount and as a percentage of revenue
for fiscal 2000 as the Company continues to hire additional sales and marketing
personnel and increase promotional activities.
General and Administrative. General and administrative expenses were $3.6
million, $4.2 million and $5.4 million in fiscal 1997, 1998 and 1999,
respectively. As a percentage of total revenue, general and administrative
expenses were 10.8%, 9.4% and 10.1% in each respective period. The increases in
general and administrative expenses were primarily due to increased staffing,
investment in infrastructure and associated expenses necessary to manage and
support the Company's growing operations. The Company believes that its general
and administrative expenses will increase in dollar amount and as a percentage
of revenue for fiscal 2000 as a result of an anticipated expansion of the
Company's administrative staff required to support its growing operations.
Merger, Reorganization and Relocation Costs. Merger, reorganization and
relocation costs were zero in 1997 and $1.8 million and $1.2 million in 1998 and
1999, respectively. As a percentage of total revenue, merger and acquisition
costs were 4.0% and 2.2% in the respective periods. These costs primarily relate
to the legal and professional fees, initial organizational costs and goodwill
amortization associated with the merger of Stingray in 1998 and the acquisition
of NobleNet in 1999. Goodwill amortization related to the NobleNet acquisition
was $870,000 during 1999. The reorganization costs consist of the closure of
development operations in Mountain View, California, and Charlotte, North
Carolina, and moving the corporate headquarters from Oregon to Colorado. The
Company has no immediate plans to acquire complementary businesses as of
September 1999, but expects that these costs could continue if favorable
business opportunities were to arise in fiscal year 2000.
Other Income, Net. Other income, net consists of interest income earned on the
Company's cash, cash equivalents and short-term investments, net of interest
expense and $1.1 million and $252,000 in equity losses in fiscal years 1998 and
1999 respectively, from the investment in HotData.
Income Tax Expense. The Company's effective tax rates were 34.0%, 30.6% and
38.8% for fiscal 1997, 1998 and 1999. The effective rates for 1997 and 1998 are
impacted by the exclusion of earnings due to the Subchapter S status of
Stingray. Effective January 1998, Stingray became a C Corporation for tax
purposes. The decrease in the tax rate for 1998 is primarily attributable to an
increase in Stingray's Subchapter S net income. The increase in the rate for
1999 is primarily attributable to the termination of the research and
development tax credit on June 30, 1999. The Company expects the effective tax
rate to increase during the fiscal year 2000.
As of September 30, 1999, the Company had net operating loss carryforwards
for federal and foreign income tax purposes of $133,000 and $1.3 million,
respectively. The federal losses expire 2007 to 2011 and are limited as a result
of the merger with Inmark. Utilization of the acquired foreign net operating
loss carryforwards will first be offset against goodwill associated with the
acquisition of Precision before being recorded as a tax benefit.
Under Statement of Financial Accounting Standards No. 109 ("SFAS 109"),
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. SFAS 109 provides for the recognition of deferred tax
assets if realization of such assets is more likely than not. Based upon
management's estimates the Company has provided a valuation allowance against
certain deferred tax assets. The Company intends to evaluate the realizability
of the deferred tax assets on a quarterly basis. See Note 5 of Notes to
Consolidated Financial Statements.
20
Liquidity and Capital Resources
As of September 30, 1999, the Company had cash, cash equivalents and short-
term investments of $27.7 million. Net cash provided by operating activities was
$8.8 million for the year ended September 30, 1999 and was composed primarily of
net income that was increased by non-cash charges for depreciation and
amortization, plus increases in accounts payable and accrued expenses, and
deferred revenue offset by an increase in accounts receivable and other
noncurrent assets. Deferred revenue consists primarily of the unrecognized
portion of revenue under maintenance and support contracts, which revenue is
deferred and recognized ratably over the term of such contracts and for the
unrecognized portion of revenue associated with product license subscription
contracts (see Note 1 of Notes to Consolidated Financial Statements).
The Company's investing activities consisted primarily of purchases of
equipment including those under capital leases and purchases and maturities of
short-term investments, which totaled ($29.4) million, $1.3 million and ($6.1)
million in fiscal 1997, 1998 and 1999. During fiscal 1997, the Company purchased
Precision for $900,000 in cash and a $1.0 million note payable (see Note 2 of
Notes to Consolidated Financial Statements). During fiscal 1999 the Company
purchased NobleNet, Inc. for $11.8 million in cash (see Note 2 of Notes to
Consolidated Financial Statements). The Company's investment activity also
included the maturities of short-term investments, which provided cash of $7.5
million in fiscal 1999.
Financing activities consumed $3.1 million during fiscal 1999 primarily
consisting of repurchase of the Company's common stock (see Note 8 of Notes to
Consolidated Financial Statements). In fiscal 1997, financing activities
generated $29.7 million, of which approximately $25.4 million was by an initial
public offering of the Company's Common Stock on November 21, 1996 and $3.9
million was generated by the public offering of the Company's Common Stock on
August 21, 1997.
The Company believes that expected cash flow from operations combined with
existing cash and cash equivalents and short-term investments will be sufficient
to meet its cash requirements for the on-going operation of the company. See
"Risk Factors - Future Acquisition."
New Accounting Pronouncements
In June 1997, the FASB issued SFAS 131, Disclosure about Segments of an
Enterprise and Related Information. In February 1998 the FASB issued SFAS 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits. The
Company adopted these statements in 1999. The adoption did not have a
significant impact on the Company's financial statements. In June 1998 the FASB
issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities.
This new Statement is required to be adopted by the Company during fiscal year
2001. The Company does not expect this new pronouncement to have a significant
impact on the financial statements.
In October 1997 the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("ACSEC") issued Statement of
Position 97-2 (SOP 97-2), Software Revenue Recognition. SOP 97-2 supersedes SOP
91-1. SOP 97-2 requires companies to defer revenue and profit recognition unless
four required criteria of a sale are met. In addition, SOP 97-2 requires that
revenue recognized from software arrangements be allocated to each element of
the arrangement based on the relative fair values of the elements, such as
software products, upgrades, enhancements, post-contract customer support,
installation, or training. SOP 97-2 is effective for all transactions entered
into in fiscal years beginning after December 15, 1997. The adoption of SOP 97-2
in fiscal 1999 did not have a material effect on the Company's financial
position or results of operations.
ITEM 7A. 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 September 30, 1999, short-term investments of $15.5 million were held
available for sale with acquired maturities of less than 180 days. Short-term
investments consist primarily of high credit and highly liquid corporate
commercial paper. A reasonable reduction 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
21
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
September 30, 1999, movements in foreign currency rates would not materially
affect the financial position of the Company. As of September 30, 1998, the
Company had outstanding short-term forward exchange contracts to exchange German
marks for U.S. dollars in the amount of $1.6 million. As of September 30, 1999,
the Company had outstanding short-term forward exchange contracts to exchange
Euros for U.S. dollars in the amount of $816,000.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the financial statements and supplementary
financial information, which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Registrant's directors will be set forth under the
caption "Election of Directors - Nominees" in Registrant's proxy statement for
use in connection with the Annual Meeting of Stockholders to be January 25, 2000
(the "1999 Proxy Statement") and is incorporated herein by reference. The 1999
Proxy Statement will be filed with the Securities and Exchange Commission within
120 days after the end of the Registrant's fiscal year.
Information regarding Registrant's executive officers is set forth in this
Form 10-K in Part I, Item 1.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the information set forth under the caption "Compensation of Executive
Officers" in the Registrant's 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Registrant's 1999
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
from the information set forth under the caption "Certain Transactions" in the
Registrant's 1999 Proxy Statement.
22
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Index To Consolidated Financial Statements Page
----
Report of KPMG LLP............................................ F-1
Consolidated Balance Sheets................................... F-2
Consolidated Statements of Operations......................... F-3
Consolidated Statements of Stockholders' Equity............... F-4
Consolidated Statements of Cash Flows......................... F-5
Notes to Consolidated Financial Statements.................... F-6
(2) Report of KPMG LLP on Schedule................................ S-1
Schedule II - Valuation and Qualifying Accounts............... S-2
(b) Reports on Form 8-K
None
(c) See Exhibits Listed under Exhibit Index.
(d) The financial statement schedules required by this Item are listed under
Item 14(a)(2).
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 3, 1999 /s/ Bruce Coleman
--------------------------------------------
Bruce Coleman
Chief Executive Officer
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Bruce Coleman and Robert M. Holburn, Jr., and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that
all said attorneys-in-fact and agents, or any of them or their or his substitute
or substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas Keffer Chairman of the Board December 3, 1999
- ----------------------------------
Thomas Keffer
/s/ Bruce Coleman Chief Executive Officer and Director December 3, 1999
- ----------------------------------
Bruce Coleman (Principal Executive Officer)
/s/ Robert M. Holburn, Jr. Vice President, Chief Financial Officer and Secretary December 3, 1999
- ----------------------------------
Robert M. Holburn, Jr. (Principal Financial and Accounting Officer)
/s/ Thomas M. Atwood Director December 3, 1999
- ----------------------------------
Thomas M. Atwood
/s/ Louis C. Cole Director December 3, 1999
- ----------------------------------
Louis C. Cole
/s/ Richard P. Magnuson Director December 3, 1999
- ----------------------------------
Richard P. Magnuson
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rogue Wave Software, Inc.:
We have audited the accompanying consolidated balance sheets of Rogue Wave
Software, Inc. and subsidiaries as of September 30, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rogue Wave
Software, Inc. and subsidiaries as of September 30, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
October 26, 1999
F-1
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30,
--------------
1998 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................................... $13,981 $13,875
Short-term investments available for sale................................... 21,283 13,789
Accounts receivable, net.................................................... 7,341 10,176
Prepaid expenses and other current assets................................... 2,339 1,420
Deferred income taxes....................................................... 815 1,240
------- -------
Total current assets..................................................... 45,759 40,500
Equipment, net................................................................ 4,820 4,310
Intangibles resulting from business acquisitions, net......................... 755 11,917
Other noncurrent assets, net.................................................. 3,193 2,743
------- -------
Total assets............................................................. $54,527 $59,470
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................ 1,067 423
Accrued expenses............................................................ 2,862 5,399
Deferred revenue............................................................ 7,577 11,306
------- -------
Total liabilities........................................................ 11,622 17,128
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value. Authorized 35,000 shares; issued
and outstanding 10,457 and 10,475 shares at September 30, 1998
and 1999, respectively................................................... 10 10
Additional paid-in capital.................................................. 37,848 38,053
Retained earnings........................................................... 5,073 7,084
Accumulated comprehensive income (loss)..................................... (26) 254
Treasury stock at cost, 358 shares in 1999.................................. -- (3,059)
------- -------
Total stockholders' equity............................................... 42,905 42,342
------- -------
Total liabilities and stockholders' equity............................... $54,527 $59,470
======= =======
See accompanying notes to consolidated financial statements.
F-2
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended September 30,
-----------------------
1997/(1)/ 1998 1999
---- ---- ----
Revenue:
License revenue.......................................... $24,096 $28,663 $32,394
Service and maintenance revenue.......................... 9,313 15,776 20,710
------ ------ ------
Total revenue........................................... 33,409 44,439 53,104
------ ------ ------
Cost of revenue:
Cost of license revenue.................................. 1,973 2,377 2,149
Cost of service and maintenance revenue.................. 2,963 4,920 7,306
------ ------ ------
Total cost of revenue................................... 4,936 7,297 9,455
------ ------ ------
Gross profit............................................ 28,473 37,142 43,649
------ ------ ------
Operating expenses:
Product development...................................... 7,619 9,532 11,512
Sales and marketing...................................... 14,338 19,313 23,510
General and administrative............................... 3,620 4,164 5,354
Merger, reorganization and relocation costs.............. -- 1,789 1,170
------ ------ ------
Total operating expenses................................ 25,577 34,798 41,546
------ ------ ------
Income from operations.................................. 2,896 2,344 2,103
Other income, net......................................... 1,396 794 1,182
------ ------ ------
Income before income taxes.............................. 4,292 3,138 3,285
Income tax expense........................................ 1,459 961 1,274
------ ------ ------
Net income.............................................. $ 2,833 $ 2,177 $ 2,011
======= ====== ======
Pro forma net income data (unaudited):
Income before income taxes, as reported................. $ 4,292 $ 3,138
Pro forma income tax expense............................ 1,471 1,098
======= =====
Pro forma net income.................................. $ 2,821 $ 2,040
======= =======
Pro forma basic earnings per share...................... $ 0.32 $ 0.20
======= =======
Pro forma diluted earnings per share.................... $ 0.27 $ 0.19
======= =======
Basic earnings per share.................................. $ 0.32 $ 0.21 $ 0.19
======= ======= =======
Diluted earnings per share................................ $ 0.27 $ 0.20 $ 0.19
======= ======= =======
Shares used in basic per share calculation................ 8,807 10,209 10,383
Shares used in diluted per share calculation.............. 10,419 10,670 10,860
/(1)/Restated for pooling of interests.
See accompanying notes to consolidated financial statements
F-3
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Additional Stockholder Retained Accumulated
Common Stock Paid-in Note Earnings Comprehensive
------------
Shares Amount Capital Receivable (Deficit) Income (Loss)
------ ------ ------- ---------- --------- -------------
Balance at September 30, 1996 /(1)/................... 5,307 5 690 (13) 525 (23)
Issuance of common stock, net....................... 2,754 2 29,607 - -- --
Conversion of mandatorily redeemable
preferred stock................................... 1,543 2 4,662 - -- --
Exercise of stock options........................... 420 -- 327 - -- --
Tax benefit from stock option exercises............. -- -- 1,423 - -- --
Net income.......................................... -- -- -- - 2,833 --
Dividends paid...................................... -- -- -- - (36) --
Payment on shareholder note receivable.............. -- -- -- 13 -- --
Foreign currency translation adjustment............. -- -- -- - -- (97)
------ ---- ------ ----- ------ -----
Balance at September 30, 1997 /(1)/................... 10,024 9 36,709 - 3,322 (120)
Issuance of common stock, net....................... 97 1 587 - -- --
Exercise of stock options........................... 336 -- 341 - -- --
Tax benefit from stock option exercises............. -- -- 211 - -- --
Net income.......................................... -- -- -- - 2,177 --
Dividends paid...................................... -- -- -- - (426) --
Foreign currency translation adjustment............. -- -- -- - -- 94
------ ---- ------ ----- ------ -----
Balance at September 30, 1998......................... 10,457 10 37,848 - 5,073 (26)
Repurchase of common stock.......................... -- -- -- - -- --
Issuance of common stock, net....................... -- -- -- - -- --
Exercise of stock options........................... 18 -- 53 - -- --
Tax benefit from stock option exercises............. -- -- 152 - -- --
Net income.......................................... -- -- -- - 2,011 --
Foreign currency translation adjustment............. -- -- -- - -- 280
------ ---- ------- ----- ------ -----
Balance at September 30, 1999......................... 10,475 $ 10 $38,053 $ - $7,084 $ 254
====== ==== ======= ===== ====== =====
Total
Treasury Stock Stockholders'
--------------
Shares Amount Equity
------ ------ ------
Balance at September 30, 1996 /(1)/................... -- -- 1,184
Issuance of common stock, net....................... -- -- 29,609
Conversion of mandatorily redeemable
preferred stock................................... -- -- 4,664
Exercise of stock options........................... -- -- 327
Tax benefit from stock option exercises............. -- -- 1,423
Net income.......................................... -- -- 2,833
Dividends paid...................................... -- -- (36)
Payment on shareholder note receivable.............. -- -- 13
Foreign currency translation adjustment............. -- -- (97)
----- ------ -------
Balance at September 30, 1997 /(1)/................... -- -- 39,920
Issuance of common stock, net....................... -- -- 588
Exercise of stock options........................... -- -- 341
Tax benefit from stock option exercises............. -- -- 211
Net income.......................................... -- -- 2,177
Dividends paid...................................... -- -- (426)
Foreign currency translation adjustment............. -- -- 94
----- ------ -------
Balance at September 30, 1998......................... -- -- 42,905
Repurchase of common stock.......................... 595 (4,011) (4,011)
Issuance of common stock, net....................... (87) 596 596
Exercise of stock options........................... (150) 356 409
Tax benefit from stock option exercises............. -- -- 152
Net income.......................................... -- -- 2,011
Foreign currency translation adjustment............. -- -- 280
----- ------ -------
Balance at September 30, 1999......................... 358 (3,059) $42,342
===== ====== =======
/(1)/ Restated for pooling of interests.
See accompanying notes to consolidated financial statements.
F-4
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended September 30,
------------------------
1997/ (1)/ 1998 1999
-------- ---- ----
Cash flows from operating activities:
Net income.............................................................................. $ 2,833 $ 2,177 $ 2,011
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization.......................................................... 1,863 3,115 4,050
Tax benefit from stock options......................................................... 1,423 211 152
Loss on disposal of equipment.......................................................... -- 247 58
Changes in assets and liabilities:
Accounts receivable.................................................................. (913) (756) (2,805)
Prepaid expenses and other current assets............................................ 203 (1,110) 1,079
Deferred income taxes................................................................ (273) (434) (425)
Other noncurrent assets.............................................................. (595) (2,901) (77)
Accounts payable and accrued expenses................................................ 611 489 1,332
Deferred revenue..................................................................... 2,522 1,472 3,436
-------- ------- -------
Net cash from operating activities................................................. 7,674 2,510 8,811
-------- ------- -------
Cash flows from investing activities:
Purchase of equipment................................................................... (2,790) (3,143) (1,743)
(Purchase) maturity of short-term investments available for sale........................ (25,738) 4,456 7,494
Purchase of business, net of cash acquired.............................................. (879) -- (11,840)
-------- ------- -------
Net cash from investing activities................................................ (29,407) 1,313 (6,089)
-------- ------- -------
Cash flows from financing activities:
Payments on long-term obligations....................................................... (198) (438) (112)
Dividends paid.......................................................................... (36) (426) --
Net proceeds from issuance of common stock.............................................. 29,609 -- --
Payment on shareholder note receivable.................................................. 13 -- --
Treasury stock purchases................................................................ -- -- (4,011)
Proceeds from Employee Stock Purchase Plan.............................................. -- 588 596
Proceeds from exercise of stock options................................................. 327 341 409
-------- ------- -------
Net cash from financing activities................................................ 29,715 65 (3,118)
-------- ------- -------
Effect of exchange rate changes on cash and cash equivalents............................. (96) 94 290
-------- ------- -------
Net change in cash and cash equivalents........................................... 7,886 3,982 (106)
Cash and cash equivalents at beginning of period......................................... 2,113 9,999 13,981
-------- ------- -------
Cash and cash equivalents at end of period............................................... $ 9,999 $13,981 $13,875
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest.................................................................. $ 38 $ 35 $ 28
Cash paid for taxes..................................................................... 47 1,601 1,597
Supplemental disclosure of non-cash investing and financing activities:
Common stock issued for conversion of mandatorily redeemable preferred stock ........... $ 4,664 $ -- $ --
Purchase of business, net of cash acquired:
Working capital, other than cash........................................................ $ (823) $ -- $ (655)
Equipment............................................................................... 121 -- 345
Cost in excess of net assets acquired, net.............................................. 1,539 -- 12,150
Other................................................................................... 42 -- --
-------- ------- -------
Net cash used to acquire businesses............................................... $ 879 $ -- $11,840
======== ======= =======
(1) Restated for pooling of interests.
See accompanying notes to consolidated financial statements.
F-5
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
Rogue Wave Software, Inc. and subsidiaries (the "Company") is primarily
engaged in the development, sale and support of object-oriented software parts
and related tools. The Company markets its products primarily through its direct
sales organization and, to a lesser extent, through outside sales
representatives and indirect channel partners to business and government
customers. The Company operates in a many industrial segments across
geographically diverse markets.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany accounts and transactions have
been eliminated. Investments in 20% to 50% owned affiliates are accounted for
using the equity method. The Company's share of affiliates' activities is
reflected in other income, net. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Currency Translation
The Company translates the assets and liabilities of its non-U.S.
functional currency subsidiaries into dollars at the rates of exchange in effect
at the end of the period. Revenue and expenses are translated using rates that
approximate those in effect during the period. Gains and losses from currency
translation are included in stockholders' equity in the consolidated balance
sheets as other comprehensive income or loss.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of investments in highly liquid investment
instruments with maturities of less than three months at date of acquisition.
Short-term investments consist primarily of commercial paper with acquired
maturities of 180 days or less. Short-term investments are held as securities
available for sale and are carried at their market value as of the balance sheet
date, which approximated cost. At September 30, 1999, $1,280 of cash was
restricted for various purposes.
Equipment
Furniture, fixtures and equipment are stated at cost. Maintenance and
repairs are expensed as incurred. Equipment under capital leases is stated at
the present value of future minimum lease payments at the inception of the
lease. Depreciation of furniture, fixtures and equipment is calculated on the
straight-line method over the estimated useful lives of the assets ranging from
three to seven years. Equipment held under capital leases is amortized
straight-line over the shorter of the lease term or estimated useful lives of
the leased assets.
Intangible Assets
Intangible assets include purchased software rights, a covenant not to
compete and goodwill, which are amortized over estimated useful lives of three
to ten years using the straight-line method. The Company reviews its long-lived
assets including goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets including goodwill held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets including goodwill
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds
F-6
the fair value of the assets. Assets to be disposed of are reported at the lower
of their carrying amount or fair value less cost to sell. Original cost of these
intangibles was $4,651 and $17,249 at September 30, 1998 and 1999, respectively.
Accumulated amortization at September 30, 1998 and 1999, was $1,808 and $3,705
respectively. Amortization charged to expense was $386, $853 and $2,068 for the
years ended September 30, 1997, 1998 and 1999, respectively.
Foreign Exchange Contracts
The Company enters into foreign exchange forward contracts to hedge certain
operational and balance sheet exposures from changes in foreign currency
exchange rates. Such exposures result from the portion of the Company's
operations, assets and liabilities that are denominated in currencies other than
the U.S. dollar. These transactions are entered in to hedge purchases, sales
and other normal recurring transactions and accordingly are not speculative in
nature. The Company does not hold or issue financial instruments for trading
purposes nor does it hold or issue leveraged derivative financial instruments.
Market value gains and losses on such contracts that result from fluctuations in
foreign exchange rates are recognized as offsets to the exchange gains or losses
on the hedged transactions. By their nature, these transactions generally
offset. The net gain or loss on such foreign currency contracts and underlying
transactions was not material during 1997, 1998, or 1999. The Company had
outstanding short-term forward exchange contracts to exchange Euros for U.S.
dollars in the amount of $816 at September 30, 1999.
Revenue Recognition
License revenue is recognized according to the criteria of SOP 97-2.
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, and collection of the resulting receivable is probable. Maintenance
and service revenue includes maintenance revenue that is deferred and recognized
ratably over the maintenance period; and service revenue that includes training
and consulting services recognized as services are performed. The Company
generally provides a thirty-day right of return policy for software sales. The
allowance for returns was $278 and $432 at September 30, 1998 and September 30,
1999, respectively.
Advertising Costs
Advertising costs are charged to expense when incurred.
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 U.S. and foreign markets. International revenue accounted
for approximately 24%, 28% and 24% of the Company's total revenue for the years
ended September 30, 1997, 1998 and 1999, respectively. The Company performs
ongoing credit evaluations of its customers' financial condition and limits the
amount of credit extended when deemed necessary but generally requires no
collateral. The Company has provided an allowance for doubtful accounts of $259
and $470 at September 30, 1998 and 1999, respectively.
Research and Development
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. The
Company begins capitalization upon completion of a working model. To date, such
capitalizable costs have not been material. Accordingly, the Company has charged
all such costs to product development expense.
Computation of Net Income Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings Per Share, in 1998 and in accordance with its provisions has
restated earnings per share for all prior periods. Basic earnings per share is
computed using only the weighted average number of shares outstanding while
diluted earnings per share includes the dilutive effect of stock options and
other potential common stock instruments. Diluted earnings per share include
477 shares of dilutive stock options for 1999 and 461 and 1,612 of dilutive
stock options and convertible preferred stock for 1998 and 1997 respectively.
Diluted earnings per share are not significantly different from previously
presented fully diluted earnings per share.
F-7
Accounting for Stock-Based Compensation
The Company has elected to account for its stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued To Employees ("APB 25") and has adopted the "disclosure only" alternative
described in SFAS 123, Accounting for Stock-Based Compensation.
Reclassifications
Certain prior year amounts have been reclassified to conform to current-
year presentation.
Accounting for Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. A valuation allowance is
recorded to reduce deferred tax assets to an amount whose realization is more
likely than not.
(2) Mergers And Acquisitions
On February 15, 1997, the Company acquired 100% of the outstanding stock of
PVI Precision Software GmbH ("Precision") for $1.9 million in cash and notes
payable. Precision is a European distributor of Rogue Wave software products and
other companies' software products in Germany, the United Kingdom, France and
the Benelux countries. The acquisition has been accounted for under the purchase
method and accordingly, the accompanying consolidated financial statements
include Precision's results beginning with the acquisition date. Consolidated
pro forma results of operations as if the acquisition had occurred at the
beginning of the fiscal years 1996 and 1997 are not presented as the pro forma
effect is not material.
On October 1, 1997, the Company acquired a controlling interest in HotData,
Inc. ("HotData"). HotData began operations in 1997, and has developed technology
related to the collection and verification of data across the Internet. On
September 1, 1998, HotData issued capital stock to additional investors thereby
reducing the Company's percentage ownership from 78% to 42%. The HotData
investment has been accounted for using the equity method of accounting for
fiscal 1999 and 1998. The Company incurred $1,052 and $252 in HotData equity
losses during fiscal years 1998 and 1999 respectively. The Company's recorded
investment in HotData was $252 and zero at September 30, 1998 and 1999,
respectively.
On February 27, 1998, the Company acquired all of the capital stock of
Stingray Software, Inc. (Stingray) in exchange for 1.65 million shares of the
Company's common stock in a transaction accounted for as a pooling of interests.
Stingray was a privately held company that develops and distributes development
tools for Windows programmers. The Company's consolidated financial statements
and notes to consolidated financial statements have been restated to include the
results of Stingray for all periods presented. Prior to January 1, 1998,
Stingray was taxed under the S Corporation provisions of the Internal Revenue
Code. Under those provisions, Stingray did not pay federal or state corporate
income taxes on its income. Pro forma information for 1997 and 1998 are
presented to show the impact as if Stingray's earnings from continuing
operations had been subject to federal and state income taxes as a C Corporation
in those years.
Separate results of operations for the periods prior to the merger with
Stingray are as follows:
The
Company Stingray Combined
------- -------- --------
Year ended September 30, 1997:
Total revenue........................ $30,166 $ 3,243 $ 33,409
Net income........................... 2,798 35 2,833
Year ended September 30, 1998:
Total revenue........................ $41,679 $ 2,760 $ 44,439
Net income........................... 1,823 354 2,177
F-8
Merger costs of $700 were incurred and charged to expense during fiscal
1998 for services rendered to facilitate completion of the transaction.
On March 1, 1999, the Company acquired 100% of the outstanding stock of
NobleNet, Inc. (NobleNet) for $11.8 million in cash ($10.8 million in cash at
closing and $1 million held in an escrow account, payable in January 2000). The
acquisition has been accounted for under the purchase method and accordingly,
the accompanying financial statements include NobleNet's results beginning with
the acquisition date. The purchase price has been allocated to the assets of
NobleNet based on their respective fair values. The excess of the purchase price
over assets acquired approximated $12.0 million and is being amortized over 10
years. The pro forma information that follows assumes that the acquisition of
NobleNet took place as of October 1, 1997. The unaudited pro forma information
is not necessarily indicative of either the results of operations that would
have occurred had the purchase been made during the periods presented or the
future results of the combined operations.
Year Ended
September 30, 1998 September 30, 1999
------------------ ------------------
Revenue...................................... $ 46,653 $ 53,743
Net Loss..................................... (3,171) (873)
Basic Earnings Per Share..................... (0.19) (0.08)
Diluted Earnings Per Share................... (0.19) (0.08)
(3) Balance Sheet Components
Equipment
Furniture, fixtures and equipment at September 30, 1998 and 1999, consist
of the following:
1998 1999
---- ----
Computer equipment.................................................... $6,191 $7,895
Furniture, fixtures and equipment..................................... 2,926 3,181
------ ------
9,117 11,076
Less accumulated depreciation and amortization........................ 4,297 6,766
------ ------
Furniture, fixtures and equipment, net................................ $4,820 $4,310
====== ======
Depreciation expense for the years ended September 30, 1997, 1998 and 1999
was $1,477, $2,262 and $2,486, respectively.
Accrued Expenses
The Company's accrued expenses at September 30, 1998 and 1999, include the
following:
1998 1999
---- ----
Accrued payroll and related liabilities............................... $1,787 $2,423
Funds held in escrow (see Note 2)..................................... -- 1,000
Other accrued expenses................................................ 1,075 1,976
------ ------
Accrued expenses.................................................... $2,862 $5,399
====== ======
(4) Leases
The Company leases certain equipment and office space through noncancelable
operating lease arrangements. The leases expire in 1999 through 2005 and are
net leases with the Company paying all executory costs, including insurance,
utilities and maintenance. Rent expense for operating leases during the years
ended September 30, 1997, 1998 and 1999 was $915, $1,532 and $1,958,
respectively.
F-9
Future minimum lease payments under operating leases are as follows:
Operating
---------
Year ending September 30:
2000........................................................ $1,582
2001........................................................ 1,233
2002........................................................ 1,093
2003........................................................ 990
2004........................................................ 653
2004 thereafter............................................. 245
------
Total minimum lease payments.............................. $5,796
------
(5) Income Taxes
The provision for income taxes consists of the following:
Year Ended September 30,
------------------------
1997 1998 1999
---- ---- ----
Current:
Federal....................... $1,582 $ 980 $1,470
State and local............... 150 415 229
------ ------ -------
1,732 1,395 1,699
------ ------ -------
Deferred:
Federal....................... (213) (347) (333)
State and local............... (60) (87) (92)
------ ------ -------
(273) (434) (425)
------ ------ -------
Total...................... $1,459 $ 961 $ 1,274
------ ------ -------
Income tax expense differs from the expected tax expense (computed by
applying the U.S. federal corporate income tax rate of 34% to net income before
income taxes) as follows:
Year Ended September 30,
------------------------
1997 1998 1999
---- ---- ----
Computed expected income tax expense................................... $ 1,459 $1,067 $1,117
Reduction in income tax expense resulting from:
Subsidiary S-Corp earnings exclusion................................... (12) (156) --
State income tax expense............................................... 228 57 123
Research and experimentation credit.................................... (312) (265) (560)
Change in valuation allowance.......................................... 610 (374) 195
Acquired foreign net operating loss carryforwards...................... (568) -- --
Foreign net operating loss applied as a reduction of goodwill.......... -- 344 65
Non-deductible meals and entertainment................................. 59 87 39
Non-deductible intangible amortization................................. 81 149 399
International rate difference.......................................... (16) 30 9
Other, net............................................................. (60) 22 (113)
------- ------ ------
Income tax expense..................................................... $ 1,459 $ 961 $1,274
======= ====== ======
F-10
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
September 30,
-------------
1998 1999
---- ----
Deferred tax assets:
Accounts receivable............................................ $ 161 $ 270
Intangible assets.............................................. 72 --
Accrued expenses............................................... 116 292
Net operating loss carryforwards............................... 68 45
Foreign operating loss carryforwards........................... 423 511
Research and experimentation credit carryforward............... 121 353
Equity losses of unconsolidated subsidiary..................... 405 503
Other.......................................................... 42 54
------ ------
Total gross deferred tax assets.............................. 1,408 2,028
Valuation allowance............................................ (593) (788)
------ ------
Net deferred tax assets...................................... $ 815 $1,240
====== ======
At September 30, 1999, the Company had net operating loss carryforwards for
federal and foreign income tax purposes of $133 and $1.3 million, respectively.
The federal net operating loss expires 2007 to 2011. The Company also had $121
of tax credit carryforwards that expire 2003 to 2013. The net federal operating
loss and $86 of the tax credit carryforwards were generated by Inmark prior to
Inmark's merger with the Company on October 27, 1995. As a result, utilization
of all such amounts is limited by the future taxable income of Inmark. Tax
benefits resulting from the utilization of the acquired foreign net operating
loss carryforwards will first be offset against goodwill associated with the
acquisition of Precision before being recorded as a tax benefit. Based upon
management's estimates, the Company has provided a valuation allowance against
certain deferred tax assets.
(6) Stockholders' Equity
Initial Public Offering
On November 21, 1996, the Company completed an initial public offering of
2,368 shares of common stock at $12.00 per share. The Company received net
proceeds of $25.4 million. In connection with the initial public offering, all
outstanding shares of preferred stock converted into 1,543 shares of common
stock.
Follow-on Public Offering
On August 21, 1997, the Company completed a public offering of 350 shares
of common stock at $12.00 per share. The Company received net proceeds of $3.9
million.
Comprehensive Income
The components of comprehensive income are as follows:
Year Ended September 30,
------------------------
1997 1998 1999
---- ---- ----
Net income................................ $2,833 $2,177 $2,011
Foreign currency translation adjustment... (97) 94 280
------ ------ ------
Total comprehensive income................ $2,736 $2,271 $2,291
====== ====== ======
(7) Equity Incentive Plans
In June 1996, the Company's Board of Directors adopted the 1996 Equity
Incentive Plan (the Equity Incentive Plan). The Company has reserved 3,500
shares of common stock for issuance under the Equity Incentive Plan. The Equity
Incentive Plan replaced the Company's 1994 Stock Option Plan and the Inmark
Stock Option Plan. The Equity Incentive Plan provides for grants of incentive
stock options to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors), directors and consultants of the Company.
F-11
The Equity Incentive Plan and the Non-Officer Equity Incentive Plan are
administered by a committee appointed by the board of directors which determines
recipients, types of awards to be granted, including exercise price, number of
shares subject to the award and the exercisability thereof.
The terms of a stock option granted under the Equity Incentive Plan
generally may not exceed ten years (five years in the case of holders of more
than 10% of the Company's capital stock). The exercise price of options granted
under the Equity Incentive Plan is determined by the Board of Directors but, in
the case of an incentive stock option, cannot be less than 100% of the fair
market value of the common stock on the date of grant. Options granted under
the Equity Incentive Plan vest at the rate specified in the option agreement.
In October 1997, the Company's Board of Directors adopted the 1997 Non-
Officer Equity Incentive Plan. The Company has reserved 900,000 shares of
common stock for issuance under the plan. The Non-Officer Equity Incentive Plan
provides for grants of nonstatutory stock options to non-officer employees or
consultants.
The terms of a stock option granted under the 1997 Non-Officer Equity
Incentive Plan may not exceed ten years. The exercise price of options granted
under the plan shall not be less than 85% of the fair market value of the stock
subject to the option on the date the option is granted. Options granted under
the Non-officer Equity Incentive Plan vest at the rate specified in the option
agreement.
The following table summarizes stock option activity for the three years
ended September 30, 1999:
Weighted avg.
-------------
Shares price per share
------ ---------------
Outstanding options at September 30, 1996.................. 1,450 $ 2.39
Granted.................................................. 964 10.70
Exercised................................................ (420) 0.81
Canceled................................................. (105) 3.44
----- -----
Outstanding options at September 30, 1997.................. 1,889 6.69
Granted.................................................. 1,141 10.59
Exercised................................................ (336) 1.01
Canceled................................................. (404) 9.41
----- -----
Outstanding options at September 30, 1998.................. 2,290 8.97
Granted.................................................. 1,159 6.14
Exercised................................................ (167) 2.45
Canceled................................................. (594) 9.23
------ ------
Outstanding options at September 30, 1999.................. 2,688 $ 8.10
====== ======
Options vested and exercisable were 458, 798, and 1,163 at September 30,
1997, 1998 and 1999, respectively. For various price ranges, weighted average
characteristics of outstanding stock options at September 30, 1999, were as
follows:
Outstanding Options Exercisable Options
------------------- -------------------
Remaining Weighted Weighted
Exercise Price Shares life (years) avg. price Shares avg. price
-------------- ------ ----------- ---------- ------ ----------
$0.15-$5.13................. 695 8.4 $ 4.22 194 $ 1.89
$5.25-$7.88................. 843 9.2 $ 7.39 287 $ 7.03
$7.94-$10.88................ 722 7.9 $ 9.89 418 $ 9.69
$10.94-$17.00............... 428 9.0 $12.79 264 $12.74
----- -----
2,688 8.6 $ 8.10 1,163 $ 8.43
===== =====
F-12
The Company follows APB 25, to account for stock option and employee stock
purchase plans. No compensation cost is recognized because the option exercise
price is equal to the market price of the underlying stock on the date of grant.
Had compensation cost for these plans been determined based on the Black-Scholes
value at the grant dates for awards as prescribed by SFAS 123, pro forma net
income and earnings per share would have been:
Year ended September 30,
-----------------------
1997 1998 1999
---- ---- ----
Pro forma net income.............................. $1,787 $ 198 $ 41
Pro forma diluted earnings per share.............. 0.17 0.02 0.00
The pro forma disclosures above include the amortization of the fair value
of all options vested during 1997, 1998 and 1999. The effects of applying SFAS
123 in this pro forma disclosure may not be indicative of future amounts.
The weighted average Black-Scholes value of options granted under the stock
option plans during 1997, 1998 and 1999, was $6.64, $6.97 and $6.27,
respectively. Such value was estimated using an expected life of five years, no
dividends, volatility of .80 in 1997, .84 in 1998 and .76 in 1999 and risk-free
interest rates of 6.4%, 4.22% and 5.0% in 1997, 1998 and 1999.
(8) Common Stock Repurchase
In October 1998 the Board of Directors authorized the Company to repurchase
up to the lesser of 500 shares of the Company's common stock or $10 million. In
July 1999 the Board of Directors further authorized the Company to repurchase
the lesser of an additional 500 shares, or a cumulative total of $8.5 million
for the full 1,000 shares. The Company purchased 595 shares ($4.0 million) of
its common shares during the period ended September 30, 1999. The Company has
used 237 of the repurchased shares for employee benefit plans as of September
30, 1999.
(9) Employee Stock Purchase Plan
In June 1996, the Board of Directors adopted the Employee Stock Purchase
Plan (the "Purchase Plan") covering an aggregate of 450 shares of common stock.
The Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the Purchase Plan. The offering period for any offering will be no more than 27
months.
Employees are eligible to participate if they are employed by the Company
or an affiliate of the Company designated by the Board of Directors. Employees
who participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specific dates determined by the
Board of Directors, to the purchase of shares of common stock. The price of
common stock purchased under the Purchase Plan will be equal to 85% of the lower
of the fair market value of the common stock on the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
During the years ended September 30, 1997, 1998 and 1999, 36, 97, and 87 shares
respectively, were purchased under this plan.
(10) Qualified Profit Sharing Plan
The Company has a 401(k) profit sharing plan which is offered to eligible
employees and calls for a discretionary employer match of employee
contributions, which is approved by the Board of Directors. To participate in
the plan, employees must be full-time employees and work a minimum of 1,000
hours during the plan year. The Company matches all employee contributions up
to 3% of earnings and half of employee contributions from 3% to 5%. Company
contributions paid in the years ended September 30, 1997, 1998 and 1999, were
$271, $424 and $466, respectively.
F-13
(11) Worldwide Operations
Revenue by geographic area for fiscal years 1997, 1998 and 1999, was
76%, 71% and 76% in the United States; 21%, 25% and 21% in Europe; 1%, 3% and 2%
in Asia and 2%, 1% and 1% in other, respectively.
Information regarding worldwide operations is as follows:
United
States Europe Eliminations Total
------ ------ ------------ -----
September 30, 1999, and for the year then ended:
Revenue to unaffiliated customers........................... $41,852 $11,252 $ -- $53,104
Intercompany transfers...................................... 4,036 -- (4,036) --
------- ------- ------ -------
Net revenues.............................................. 45,888 11,252 (4,036) 53,104
Operating income............................................ 1,592 511 -- 2,103
Assets...................................................... 55,378 7,526 (3,434) 59,470
September 30, 1998, and for the year then ended:
Revenue to unaffiliated customers........................... $34,227 $10,212 $ -- $44,439
Intercompany transfers...................................... 3,033 -- (3,033) --
------- ------- ------ -------
Net revenues.............................................. 37,260 10,212 (3,033) $44,439
Operating income............................................ 1,124 1,220 -- 2,344
Assets...................................................... 50,973 5,701 (2,147) 54,527
September 30, 1997, and for the year then ended:
Revenue to unaffiliated customers........................... $28,289 $ 5,120 $ -- $33,409
Intercompany transfers...................................... 1,567 -- (1,567) --
------- ------- ------ -------
Net revenues.............................................. 29,856 5,120 (1,567) 33,409
Operating income (loss)..................................... 3,076 (180) -- 2,896
Assets...................................................... 48,737 3,340 (2,059) 50,018
(12) Contingencies
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
F-14
(13) Quarterly Information (Unaudited)
The following table presents unaudited quarterly operating results for each
of the Company's eight quarters in the two-year period ended September 30, 1999.
Quarter Ended
-----------------------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sept. 30,
------- ------- ------- --------
Fiscal year 1999
Total revenue...................................... $12,185 $13,379 $14,031 $13,509
Gross margin....................................... 10,115 11,054 11,473 11,007
Income (loss) from operations...................... 1,253 1,283 428 (861)
Net income (loss).................................. 889 1,099 434 (411)
Basic earnings (loss) per share.................... 0.09 0.10 0.04 (0.04)
Diluted earnings (loss) per share.................. 0.08 0.10 0.04 (0.04)
Fiscal Year 1998
Total revenue...................................... $10,872 $10,289 $11,145 $12,133
Gross margin....................................... 9,400 8,550 9,088 10,104
Income (loss) from operations...................... 1,796 (736) (99) 1,383
Net income (loss).................................. 1,558 (307) 13 913
Pro forma net income/(1)/.......................... 1,421 (307) 13 913
Basic earnings (loss) per share.................... 0.16 (0.03) 0.00 0.09
Diluted earnings (loss) per share.................. 0.14 (0.03) 0.00 0.08
Pro forma basic earnings per....................... 0.14 (0.03) 0.00 0.09
share/(1)/
Pro forma diluted earnings per..................... 0.13 (0.03) 0.00 0.08
share/(1)/
__________________________________________________________________________
/(1)/ Stingray was a Subchapter S corporation since inception (July 10,
1995) until December 31, 1997, and accordingly not subject to federal and
state income Pro forma net income taxes. reflects federal and state income
taxes as if the Company and Stingray had been a C corporation, based on
effective tax rates during the periods indicated.
F-15
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
The Board of Directors
Rogue Wave Software, Inc.:
Under date of October 26, 1999, we reported on the consolidated balance sheets
of Rogue Wave Software, Inc. and subsidiaries as of September 30, 1998 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended September 30,
1999, as contained in the Company's Annual Report on Form 10-K for the fiscal
year 1999. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statement schedule, as listed in the accompanying index under Item 14 (a)(2).
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
KPMG LLP
Denver, Colorado
October 26, 1999
S-1
ROGUE WAVE SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Years ended September 30, 1999, 1998 and 1997
Balance Balance
at Beginning at End
of Period Additions Deductions of Period
--------- --------- ---------- ---------
September 30, 1999:
Allowance for doubtful accounts................... $ 259 $ 211 $ -- $ 470
Sales returns and allowance....................... 278 154 -- 432
September 30, 1998:
Allowance for doubtful accounts................... 243 16 -- 259
Sales returns and allowance....................... 225 53 -- 278
September 30, 1997:
Allowance for doubtful accounts................... 107 136 -- 243
Sales returns and allowance....................... 111 114 -- 225
S-2
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-----------------------
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(5) Form of Registration Rights Agreement between Rogue Wave Software,
Inc. and the former shareholders of Stingray Software, Inc.
10.1(1) Registrant's 1996 Equity Incentive Plan.
10.2(1) Registrant's Employee Stock Purchase Plan.
10.3(1) Form of Indemnity Agreement to be entered into between the Registrant
and its officers and directors.
10.4(1) Lease Agreement between Registrant and the State of Oregon dated May
1, 1996.
10.5(1) Lease Agreement between the Registrant and the Landmark dated April
22, 1996.
10.6(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.
21.1 List of Subsidiaries of Registrant.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney (reference is made to signature page).
27.1 Financial Data Schedule.
---------------------
(1) Filed as an Exhibt 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 annual report on Form 10-K for the
year ended September 30, 1998.