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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, 1998
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.
I. 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 of 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, 1998, there were 10,462,755 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was approximately $83,053,349 based upon the closing price of
the Common Stock on October 31, 1998 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, 1998 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 1998 Annual Meeting
of Stockholders to be held January 21, 1999, 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 16
Item 3. Legal Proceedings ................................................................. Page 16
Item 4. Submission of Matters to a Vote of Security Holders ............................... Page 16
PART II ..................................................................................... Page 16
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters .......... Page 16
Item 6. Selected Consolidated Financial Data .............................................. Page 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................... Page 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ........................ Page 24
Item 8. Consolidated Financial Statements and Supplementary Data .......................... Page 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ........................................................................ Page 24
PART III .................................................................................... Page 25
Item 10. Directors and Executive Officers of the Registrant ................................ Page 25
Item 11. Executive Compensation ............................................................ Page 25
Item 12. Security Ownership of Certain Beneficial Owners and Management .................... Page 25
Item 13. Certain Relationships and Related Transactions .................................... Page 25
PART IV ..................................................................................... Page 25
Item 14. Exhibits, Consolidated Financial Statements, Schedules, and Reports on Form 8-K ... Page 25
SIGNATURES .................................................................................. Page 26
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 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 and methodologies.
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 and customers. 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,
it is increasingly software that plays a critical role. Therefore, as
businesses become more dependent on these information systems, they become 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 increasingly error prone.
Adoption of Object-Oriented Technologies. To address the difficulties of
developing and maintaining complex software systems, organizations are
increasingly 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
2.
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.
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 each system
of their application work in concert 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
the core part 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 such as Visual CASE and
DBFactory, as well as 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 for all of 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.
3.
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 applications rather than the arcane features of the
environments in which they are developing.
Rogue Wave has traditionally marketed its products to individual
professional programmers. The Company intends to leverage 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 three different
product groups: Cross-platform C++ development, Windows-specific development,
and Java development.
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 which includes network
communication classes, thread-hot Internet classes, two solutions for
Java/C++ interoperability, and CORBA streaming classes.
. Standard C++ Library is widely used and conforms to the ANSI/ISO standard.
Standard C++ Library 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 multi-threaded applications.
Database Access
- ---------------
. DBTools.h++, which is built on top of the Tools.h++ foundation class library,
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, 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, datamining, 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.
4.
. 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
- --------------------------
. OS/390 Products provide the same reliability, portability, and scalability of
several of the most popular Rogue Wave products for the OS/390 platform.
Products included are Tools.h++, DBTools.h++, Threads.h++, and Money.h++.
. 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 Diagram allows the developer to create drag-and-drop programs
giving users the ability to add objects, create hierarchies, connections, and
containers.
. 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 Plug-in converts an MFC application to a Web browser plug-in and
supports the document/view paradigm
. Objective Chart is an extension allowing the developer to add charts to any
CWnd-based class, including views, dialogs, and controls.
Modeling Tools
- --------------
. Visual Case 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.
Visual CASE 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 a suite of Active X controls 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 Pro for the
Visual Basic programmer as an ActiveX control.
5.
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 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.
JAVA DEVELOPMENT
JavaBeans Components
- -----------------------
. BlendJ is a collection of more than 45 controls for Java developers with JFC
and AWT support.
. GridJ provides the many of the same features as Objective Grid to turn a Java
grid into a fully functioning spreadsheet
. ChartJ is used to incorporate customizable, dynamic charts in Java
applications.
Java Classes
- ------------
. DBToolsJ 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.
. 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.
CUSTOMERS
The Company's products are used by programmers to develop software
applications for organizations in a wide variety of industries. To date, the
Company has sold over 100,000 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.
SALES AND MARKETING
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, 1998, 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, 1998, the Company employed 57 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, Oregon, Germany, and the Netherlands.
Direct Field Sales. As of September 30, 1998, the Company employed four
domestic direct field sales representatives supported by three 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 or
personnel in Colorado, Oregon, New York, and Virginia.
6.
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, 1998, the Company's European
sales, support and consulting organization consisted of 40 individuals. The
Company maintains European sales and support offices in Germany, the United
Kingdom, France, the Netherlands, and Italy.
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 that provides Company and product
information and handles sales and distribution for its products.
STRATEGIC PARTNERSHIPS
One of the goals of our partnership program is to ease the burden of
integrating products from various vendors. To this end, we have established a
partnership program to enhance and build upon relationships with complimentary
technology providers. Many of these partners develop applications and tools
that complement Rogue Wave technology, such as Iona, IBM, Rational, and
Transarc. The Company's foundation products are bundled with many leading C++
compilers and distributed by major Original Equipment Manufacturers (OEM)
including Hewlett-Packard, Microware, Siemens-Nixdorf, Silicon Graphics, Sun
Microsystems, Object Design, Rational, SAS, and Fujitsu.
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 that provides Company and product
information and handles sales and distribution for its products.
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, 1998,
there were 46 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.
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, 1998, there were 11 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
7.
As of September 30, 1998, there were 78 employees on the Company's product
development staff. The Company's product development expenditures in fiscal
1996, 1997 and 1998 were $5.8 million, $7.6 million, and $9.5 million,
respectively, and represented 29.0%, 22.8%, and 21.5% 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 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),
8.
Microsoft, Sybase, Symantec and other companies for our Java products and expect
to face significant competition in the future from such companies with respect
to other Java products we may introduce.
Software applications can also be developed using 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.
EMPLOYEES
As of September 30, 1998, the Company had a total of 292 employees, of
which 252 were based in the United States and 40 were based in Europe. Of the
total, 116 were in sales and marketing, 78 were in product development, 46 were
in customer support, 11 were in consulting services, and 41 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;
9.
. the timing of new product introductions and product enhancements;
. levels of international sales;
. changes in our pricing policy or that of our competitors;
. publication of opinions about us, our products and object-oriented, component
technology by industry analysts;
. our ability to retain key employees and hire new employees; and
. our ability to develop and market new products and control costs.
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 second fiscal quarter of 1998 were below
the expectations of public market financial analysts. The primary factors
leading to the lower than expected results were (1) the delay of a number of
large orders, several due to industry mergers, and (2) the lingering effects of
our sales force reorganization during the fall of 1997. 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 and as a result typically have little or no backlog. The lack of
significant backlog means that quarterly revenue and operating results depend
substantially on the volume and timing of orders we receive during the quarter,
which are difficult to forecast due to a number of reasons, many of which are
outside our control. Such reasons include:
. lack of a reliable means to assess overall customer demand;
. historically we have earned a substantial portion of our revenue in the
last weeks, or even days, of each quarter;
. larger customer orders are subject to long sales cycles and are frequently
delayed; and
. our service and maintenance revenue tends to fluctuate as consulting
contracts are undertaken, renewed, completed or terminated.
We base operating expenses on anticipated revenue trends and a high
percentage of these expenses are relatively fixed. As a result, a delay in the
recognition of revenue from a limited number of transactions could cause
significant variations in operating results from quarter to quarter and could
lead to significant losses. In addition, we contributed technology to and made
an investment in HotData Inc. ("HotData") in order to develop technology
relating to the collection and verification of data across the Internet. We
account for HotData using the equity method of accounting. Accordingly,
HotData's financial results affect our financial results, and fluctuations in
their results will cause fluctuations in our operating results. As a result of
these factors, operating results and growth rates for any particular quarter or
other fiscal period may not be indicative of future operating results.
Furthermore, fluctuations in our quarterly operating results will likely result
in volatility in the price of our Common Stock in the future.
Management of Growth. Our business has grown 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. 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, we recently moved our administrative
operations from Corvallis, Oregon, to Boulder, Colorado. This move has resulted
in the
10.
distribution of our senior management team, which may make managing our
operations in the future more difficult.
Dependence on Emerging Market for C++, Visual C++/MFC and Java. Our
product lines are designed for use in object-oriented software application
development, specifically the C++, Visual C++/MFC and Java programming
languages. To date, a substantial majority of our revenue has been attributable
to sales of products and related maintenance and consulting services related to
C++ programming and development. We believe that while the market for object-
oriented technology is growing, our growth depends upon broader market
acceptance of object-oriented technology. Object-oriented programming languages
are very complex and the number of software developers using them is relatively
small compared to the number of developers using other software development
technology. Our financial performance will depend in part upon continued growth
in object-oriented technology and markets and the development of standards that
our products address. There can be no assurance that the market will continue
to grow or that we will be able to respond effectively to the evolving
requirements of the market.
We have also developed several products for use in the Java market. We
have spent and will continue to devote resources to the development of new and
enhanced products that address the Java market. There can be no assurance that
we will be successful in marketing our Java products or that the market for Java
products will grow. If the Java market fails to grow, or grows more slowly than
we currently anticipate, our business could be adversely affected.
Competition. Our products target the emerging market for 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.
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
11.
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 1998 we
completed a business combination with Stingray Software, Inc. Completing the
acquisition and commencing the integration of the acquired business required
significant attention from our management and caused disruption to our ongoing
business. We believe that such disruption had a material adverse effect on the
Company's financial results for the second fiscal quarter of 1998.
We frequently evaluate strategic opportunities available to us and may in
the future pursue additional acquisitions of complementary technologies,
products or businesses. Future acquisitions of complementary technologies,
products or businesses will result in the diversion of management's attention
from the day-to-day operations of our business and may include numerous other
risks, including difficulties in the integration of the operations, products and
personnel of the acquired companies. Future acquisitions may also result in
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 revenues 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
12.
technical personnel would have a material adverse effect on our business. In
particular, the services of Thomas Keffer and Michael Scally, the Company's
Chairman of the Board, and President and Chief Executive Officer, respectively,
would be difficult to replace. We have key person life insurance policies in the
amount of $1.0 million each for Dr. Keffer and Mr. Scally.
Our future success also depends on our continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. In the past,
we have experienced some difficulty in attracting key personnel. Competition
for such personnel is intense, and there can be no assurance that we can retain
key employees or that we can attract, assimilate or retain other highly
qualified personnel in the future.
Variability of Sales Cycles. We distribute our products through two
different direct sales channels, a telesales force and a field sales force, each
of which is subject to a variable sales cycle. Products sold by our telesales
force may be sold after a single phone call or may require several weeks of
education and negotiation before a sale is made. As such, the sales cycle
associated with telesales typically ranges from a few days to two months. On
the other hand, the purchase of products from our field sales force is often an
enterprise-wide decision and may require the sales person to provide a
significant level of education to prospective customers regarding the use and
benefits of our products. For these and other reasons, the sales cycle
associated with the sale of our products through our field sales force typically
ranges from two to six months and is subject to a number of significant delays
over which we have little or no control. As a result, quarterly revenue and
operating results 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.
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.
13.
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.
Three of our products perform date and time manipulations; Tools.h++,
Tools.h++ Professional, and DBTools.h++: Class RWDate, Class RWTime, and
RWDBDateTime. All three products were designed to function properly during the
century transition. However, the range of years that the current implementation
of RWTime can store spans only 1901 to 2037. This upper limit is found on
platforms that implement unsigned longs with 32 bits. A future release of
Tools.h++ will include a 64-bit implementation of RWTime that will eliminate the
year 2037 restriction.
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.
We do, however, utilize some third-party vendor network equipment,
telecommunication products and other products that may or may not be year 2000
compliant. We also rely, directly and indirectly, on external systems of
customers, suppliers, creditors, financial organizations and governmental
entities for accurate exchange of data. We are evaluating our information
technology infrastructure for year 2000 compliance to determine what actions are
required to make all internal systems year 2000 compliant and what actions are
needed to mitigate vulnerability to problems related to enterprises with which
we interact.
While we have not fully identified the impact of the year 2000 issue on our
internal systems or our operations, we expect to complete our evaluation of the
Year 2000 issue in March 1999. To date, amounts spent on the Year 2000 issue
have been immaterial. In addition, our current estimate is that the costs
associated with the year 2000 issue, and the consequences of incomplete or
untimely resolution of the year 2000 issue, will not have a material adverse
effect on our business or financial condition.
There can be no assurance that we will not be affected by year 2000
disruption in the operation of the enterprises with which we interact.
Accordingly, year 2000 problems could have a material adverse effect upon our
business.
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.
14.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages and positions as of October
31, 1998, are as follows:
NAME AGE POSITION
---- --- --------
Michael Scally..................... 47 President, Chief Executive Officer and Director
Robert M. Holburn, Jr.............. 52 Vice President, Chief Financial Officer and Secretary
Rolf Doerr, Ph.D................... 48 Vice President, European Operations
Michael Ernst...................... 40 Vice President, Professional Services and Support
Michael M. Foreman................. 47 Vice President, North American Sales
Allan Vermeulen, Ph.D.............. 33 Vice President, Development
Gillian Webster.................... 37 Vice President, Marketing
Mitchell Scot Wingo................ 30 Vice President, Stingray Division
Michael J. Scally, President and Chief Executive Officer, served as the
Chief Operating Officer of the Company from June 1996 until October 1998, and
was appointed to the Board of Directors October 1997. From May 1994 until June
1996, he served as Vice President, National Telesales of Intersolv, a software
company. From November 1988 until April 1994, he was the Vice President,
General Manager of Carnegie Group Inc., a computer consulting company. Mr.
Scally received his B.S. from Michigan Technological University.
Robert M. Holburn, Jr., the 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.
Rolf Doerr, Ph.D., Vice President of European Operations, has been with the
company since February 1997. Between August 1992 and February 1997 he served as
President-Owner of Precision Software, a European-wide distributor of C and C++
development tools. From October 1984 until August 1992 he served as Vice
President of Precision Visuals, Inc., a Boulder, Colorado, based computer
graphics software company. During 1989 and 1991 Mr. Doerr attended the
Owners/Presidents Program at the Harvard Business School. Prior to October 1984
he served as Sales and Marketing Manager of Applicon GmbH, a leading vendor in
the CAD/CAM environment. Mr. Doerr received his Ph.D. in Physical Chemistry and
his B.S. in Nuclear Physics, both from the University of Frankfurt
Michael Ernst, Vice President of Professional Services and Support, has
been with the company since April 1997. Prior to Rogue Wave Software, Mr. Ernst
was President of XVT Software, an object-oriented software development company,
from September 1996 to April 1997. While at XVT Software, Mr. Ernst held
various management and engineering positions from March 1992 to September 1996.
Mr. Ernst received his B.A. in Computer Science from the University of Colorado,
and an Associate Degree in Electronics Engineering from Ohio Institute of
Technology.
Michael M. Foreman, Vice President of North American Sales, has been with
the company since January 1995. Prior to his position as VP of North American
Sales, Mr. Foreman served as VP of North American Field Sales. Prior to Rogue
Wave, Mr. Foreman served as Vice President of Sales, North America for Acxiom
Corporation, a leading 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.
15.
Allan Vermeulen, Ph.D., Vice President of Development, has been with the
company since January 1993. For the past two years, Mr. Vermeulen has served as
Chief Technology Officer. Prior to working for Rogue Wave, Mr. Vermeulen was a
consultant on object-oriented technology to the financial industry. Mr.
Vermeulen holds a Ph.D. in Systems Design Engineering from the University of
Waterloo in Waterloo, Canada.
Gillian Webster, Vice President of Marketing, has been with the company
since July 1998. Prior to Rogue Wave Software, she served as Director of
Product Marketing and Management for Inprise (formerly Borland) from 1993 to
1995 and again from 1997 to 1998. Gillian also served as Director of Marketing
at Sagent Technology, Inc., a data warehousing startup from 1995 to 1997.
Previously, Ms. Webster held senior marketing, sales and product development
positions with Viewstar Corporation, Wang Laboratories and British Olivetti.
Ms. Webster received her B.A. from London University.
Mitchell Scot Wingo, Vice President, Stingray Division, has been with the
company since February 1998 when Rogue Wave acquired Stingray Software. Mr.
Wingo is the co-founder of Stingray Software and from June 1995 to February
1998 served as its President and Chief Financial Officer. Prior to working for
Rogue Wave, Mr. Wingo was the Engineering Manager at Bristol Technology, a
provider of cross-platform development solutions, from January 1991 to January
1995. Mr. Wingo has a Computer Engineering degree from the University of South
Carolina and a Masters degree from North Carolina State University.
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; 29,000 square feet in
Corvallis, Oregon; and 16,000 square feet in Raleigh, North Carolina. The
leases on the Boulder, Corvallis, and Raleigh facilities expire on various dates
from 1999 through 2005. The Company currently leases other domestic sales,
development, and support offices in New York and Virginia. The Company also
rents space on a month-to-month 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.
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.
16.
HIGH LOW
------ ------
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, 1998, there were approximately 124 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 4,000 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.
17.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED SEPTEMBER 30,
------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License revenue................................................ $6,652 $10,417 $15,968 $24,096 $28,663
Service and maintenance revenue................................ 557 1,520 3,916 9,313 15,776
------ ------- ------- ------- -------
Total revenue................................................ 7,209 11,937 19,884 33,409 44,439
------ ------- ------- ------- -------
Cost of revenue:
Cost of license revenue........................................ 693 1,048 1,390 1,973 2,377
Cost of service and maintenance revenue........................ 331 1,123 1,663 2,963 4,920
------ ------- ------- ------- -------
Total cost of revenue........................................ 1,024 2,171 3,053 4,936 7,297
------ ------- ------- ------- -------
Gross profit................................................. 6,185 9,766 16,831 28,473 37,142
------ ------- ------- ------- -------
Operating expenses:
Product development............................................ 2,109 3,207 5,766 7,619 9,532
Sales and marketing............................................ 2,652 4,880 8,367 14,338 19,313
General and administrative..................................... 780 1,487 2,277 3,620 4,164
Merger, reorganization and relocation costs.................... -- -- -- -- 1,789
------ ------- ------- ------- -------
Total operating expenses..................................... 5,541 9,574 16,410 25,577 34,798
------ ------- ------- ------- -------
Income from operations....................................... 644 192 421 2,896 2,344
Other income (expense), net..................................... 4 (10) 94 1,396 794
------ ------- ------- ------- -------
Income before income taxes................................... 648 182 515 4,292 3,138
Income tax expense (benefit).................................... 80 106 (24) 1,459 961
------ ------- ------- ------- -------
Net income................................................... $ 568 $ 76 $ 539 $ 2,833 $ 2,177
====== ======= ======= ======= =======
Pro Forma net income data(1):
Income before income taxes..................................... $ 648 $ 182 $ 515 $ 4,292 $ 3,138
Pro forma income tax expense................................... 142 105 147 1,471 1,098
------ ------- ------- ------- -------
Pro forma net income......................................... $ 506 $ 77 $ 368 $ 2,821 $ 2,040
====== ======= ======= ======= =======
Pro forma basic earnings per share............................. $ 0.15 $ 0.02 $ 0.07 $ 0.32 $ 0.20
====== ======= ======= ======= =======
Pro forma diluted earnings per share........................... $ 0.12 $ 0.02 $ 0.05 $ 0.27 $ 0.19
====== ======= ======= ======= =======
Basic EPS....................................................... $ 0.17 $ 0.02 $ 0.11 $ 0.32 $ 0.21
====== ======= ======= ======= =======
Diluted EPS..................................................... $ 0.14 $ 0.02 $ 0.07 $ 0.27 $ 0.20
====== ======= ======= ======= =======
Basic shares outstanding........................................ 3,363 4,129 5,077 8,807 10,209
Diluted shares outstanding...................................... 4,154 4,941 7,593 10,419 10,670
SEPTEMBER 30,
-------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............... $ 609 $1,010 $ 2,113 $35,737 $35,264
Total assets.................................................... 3,301 4,758 10,722 50,018 54,527
Long-term obligations, less current portion..................... 166 230 322 351 --
Mandatorily redeemable preferred stock.......................... 941 1,140 4,664 -- --
Total stockholders' equity...................................... 536 619 1,184 39,920 42,905
- -------------------------------------------------------------------------------
(1) The Company was a Subchapter S corporation until June 30, 1994, and
accordingly not subject to federal and state income taxes during the year
1994. Stingray 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 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.
18.
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. Both transactions were accounted for as
a pooling-of-interests business combination. 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 upon execution of a license agreement and shipment
of the product if no significant contractual obligations remain and collection
of the resulting receivable is probable. Allowances for credit risks and for
estimated future returns are provided for upon shipment. Returns to date have
not been material. Service and maintenance revenue consists of fees that are
charged separately from the product licenses. Maintenance revenue consists of
fees for ongoing support and product updates and is recognized ratably over the
term of the contract, which is typically 12 months. Service revenue consists of
training and consulting services and is recognized upon completion of the
related activity. The Company's revenue recognition policies are in compliance
with American Institute of Certified Public Accountants Statements of Position
91-1, 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
consist 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 21%, 24% and 28% of total
revenue in fiscal 1996, 1997 and 1998, 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
19.
account for an increasing portion of its total revenue in the future. The
Company has committed and continues to commit significant management time and
financial resources to developing direct and indirect international sales and
support channels. There can be no assurance, however, that the Company will be
able to maintain or increase international market demand for its products. To
date, other than revenue generated by the Company's European subsidiaries, the
Company's international revenue has been denominated in United States dollars.
The Company may enter into forward foreign exchange contracts to reduce the risk
associated with currency fluctuations. Although exposure to currency
fluctuations to date has been insignificant, to the extent international revenue
is denominated in local currencies, foreign currency translations may contribute
to significant fluctuations in, and could have a material adverse effect upon,
the Company's business, financial condition and results of operations. See "Risk
Factors - Risks Inherent in International Operations."
The Company 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 1998.
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 is a privately held company that 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.
20.
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,
------------------------
1996 1997 1998
---- ---- ----
STATEMENTS OF OPERATIONS:
Revenue:
License revenue......................................................... 80.3% 72.1% 64.5%
Service and maintenance revenue......................................... 19.7 27.9 35.5
----- ----- -----
Total revenue.......................................................... 100.0 100.0 100.0
Cost of revenue:
Cost of license revenue................................................. 7.0 5.9 5.4
Cost of service and maintenance revenue................................. 8.4 8.9 11.1
----- ----- -----
Total cost of revenue.................................................. 15.4 14.8 16.5
----- ----- -----
Gross profit........................................................... 84.6 85.2 83.5
Operating expenses:
Product development..................................................... 29.0 22.8 21.4
Sales and marketing..................................................... 42.1 42.9 43.4
General and administrative.............................................. 11.4 10.8 9.4
Merger, reorganization and relocation costs............................. -- -- 4.0
----- ----- -----
Total operating expenses............................................... 82.5 76.5 78.2
----- ----- -----
Income from operations................................................. 2.1 8.7 5.3
Other income, net........................................................ 0.5 4.2 1.8
----- ----- -----
Income before income taxes............................................. 2.6 12.9 7.1
Income tax expense (benefit)............................................. (0.1) 4.4 2.2
----- ----- -----
Net income............................................................. 2.7% 8.5% 4.9%
===== ===== =====
Revenue. The Company's total revenue increased 32.9% to $44.4 million in fiscal
1998 from $33.4 million in fiscal 1997. Total revenue in fiscal 1997 increased
68.2% from $19.9 million in fiscal 1996. License revenue increased 19.0% to
$28.7 million in 1998 from $24.1 million in fiscal 1997. License revenue in
fiscal 1997 increased 50.9% from $16.0 million in fiscal 1996. License revenue
increased primarily as a result of an increase in the number of licenses sold to
existing and new customers, reflecting additional product offerings, an
expanding market, increased market awareness and expansion of the Company's
telesales and international sales organizations.
Service and maintenance revenue increased 69.4% to $15.8 million in fiscal
1998 from $9.3 million in fiscal 1997. Service and maintenance revenue in
fiscal 1997 increased 137.8% from $3.9 million in fiscal 1996. 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, as well as an increase in consulting revenue
resulting from the establishment of the Company's consulting business group in
Boulder, Colorado, in April 1997.
Cost of Revenue. Cost of license revenue consists primarily of amortization of
purchased software, materials, packaging and freight expenses. Cost of license
revenue was $1.4 million, $2.0 million and $2.4 million in fiscal 1996, 1997 and
1998, respectively, representing 8.7%, 8.2%, and 8.3% of the license revenue for
the respective periods. The period to period dollar increases in cost of
license revenue were primarily the result of an increase in the number of
licenses sold. 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 $1.7 million, $3.0 million and $4.9
million in
21.
fiscal 1996, 1997 and 1998, respectively, representing 42.5%, 31.8% and 31.2%
of the service and maintenance revenue for each respective period. 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 higher
percentages of cost of service and maintenance revenue as a percentage of
service and maintenance revenue for fiscal 1996 reflect the fact that the
increase in such costs occurred prior to an anticipated increase in demand.
The decreases as a percentage of service and maintenance revenue for fiscal
1997 and 1998 were primarily the result of the increase in service and
maintenance revenue. The increases 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.
Product Development. Product development expenses consist primarily of
personnel related expenses. Product development expenses were $5.8 million,
$7.6 million and $9.5 million in fiscal 1996, 1997 and 1998, respectively. As a
percentage of total revenue, product development expenses were 29.0%, 22.8% and
21.4% 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 for fiscal 1999 as the Company continues to increase
its product development capacity, although the Company does not believe such
expenses will increase as a percentage of total revenue. 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 $8.4 million, $14.3 million and $19.3 million in fiscal
1996, 1997 and 1998, respectively. As a percentage of total revenue, sales and
marketing expenses were 42.1%, 42.9% and 43.4% 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 for fiscal 1998 as the Company
continues to hire additional sales and marketing personnel and increase
promotional activities. The Company does not expect sales and marketing
expenses to change as a percentage of total revenue in fiscal 1999.
General and Administrative. General and administrative expenses were $2.3
million, $3.6 million and $4.2 million in fiscal 1996, 1997 and 1998,
respectively. As a percentage of total revenue, general and administrative
expenses were 11.4%, 10.8% and 9.4% 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 for fiscal 1999 as a
result of an anticipated expansion of the Company's administrative staff
required to support its growing operations and as a result of an increase in
expenses associated with being a public company. The Company does not expect
general and administrative expenses to change as a percentage of total revenue
in fiscal 1999.
Other Income (Expense), Net. Other income (expense), 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 in equity losses from the
investment in HotData.
Income Tax Expense (Benefit). The Company's effective tax rates were (4.7%),
34.0%, and 30.6% for fiscal 1996, 1997, and 1998. The effective rates for these
periods 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 tax rate for 1996 reflects the use of an Inmark net operating
loss carryforward and exclusion of Stingray earnings for tax purposes. The
increase in the tax rate for 1997 is primarily due to immaterial Stingray net
income. The decrease in the tax rate for 1998 is primarily attributable to an
increase in Stingray's Subchapter S net income.
22.
As of September 30, 1998, the Company had net operating loss carryforwards
for federal and foreign income tax purposes of $199,000 and $999,000,
respectively. The federal losses expire 2007 to 2010 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 6 of Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash, cash equivalents and short-
term investments of $35.3 million. Net cash provided by operating activities
was $2.5 million for the period ending September 30, 1998 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 $2.5 million, $29.4 million and $1.3
million in fiscal 1996, 1997, and 1998. 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). The Company's investment
activity also included the purchase and sale of short-term investments, which
provided cash of $4.5 million in fiscal 1998.
Financing activities generated $65,000 for fiscal 1998 primarily consisting
of proceeds from stock option exercises and purchases of shares under the
Company's Employee Stock purchase Plan. 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. In fiscal 1996, financing activities generated $3.3 million,
of which $3.5 million was generated by the issuance of mandatorily redeemable
preferred stock.
The Company believes that expected cash flow from operations combined with
existing cash and cash equivalents and short-term investments will be sufficient
to meet its cash requirements for the foreseeable future. See "Risk Factors -
Future Acquisition."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income,
which establishes standards for reporting and display of comprehensive income
and its components (revenue, expenses, gains, and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS 130 during
fiscal year 1998 and restated all presented prior periods. The adoption of this
Statement did not have a significant impact on the financial statements.
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,
Employer's Disclosures about Pensions and Other
23.
Postretirement Benefits. In June 1998, the FASB issued SFAS 133, Accounting for
Derivative Instruments and Hedging Activities. These new Statements are required
to be adopted by the Company during fiscal year 1999, 1999, and 2000
respectively. The Company does not expect these new pronouncements 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. Management does not
believe that the adoption of SOP 97-2 in fiscal 1999 will 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, 1998, short-term investments of $25.7 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 substantial 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 German mark.
The Company does not enter into any derivative transactions for speculative
purposes. The sensitivity of earnings and cash flows to variability in exchange
rates is assessed by applying an appropriate range of potential rate
fluctuations to the Company's assets, obligations and projected results of
operations denominated in foreign currencies. Based on the Company's overall
foreign currency rate exposure at September 30, 1998, 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.
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.
24.
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 21, 1999
(the "1998 Proxy Statement") and is incorporated herein by reference. The 1998
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 1998 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 1998
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 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATD 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 Peat Marwick 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 Peat Marwick LLP on Schedule ................................ S-1
Schedule II -- Valuation and Qualifying Accounts ........................... S-2
(b) REPORTS ON FORM 8-K
(1) Current Report on form 8-K dated July 21, 1998, and filed with the
Securities and Exchange Commission on July 30, 1998, relating to the Company's
press release of financial results for the quarter and nine months ended June
30, 1998.
(c) SEE EXHIBITS LISTED UNDER ITEM 14(a)3.
(d) THE FINANCIAL STATEMENT SCHEDULES REQUIRED BY THIS ITEM ARE LISTED UNDER
ITEM 14(a) 2.
25.
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, 1998 /s/ Michael Scally
------------------
Michael Scally
President
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael Scally 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, 1998
-----------------
Thomas Keffer
/s/ Michael Scally President, Chief Executive Officer and Director December 3, 1998
------------------ (Principal Executive Officer)
Michael Scally
/s/ Robert M. Holburn, Jr. Vice President, Chief Executive Officer and Secretary December 3, 1998
-------------------------- (Principal Financial and Accounting Officer)
Robert M. Holburn, Jr.
/s/ Thomas M. Atwood Director December 3, 1998
--------------------
Thomas M. Atwood
/s/ Louis C. Cole Director December 3, 1998
-----------------
Louis C. Cole
/s/ Richard P. Magnuson Director December 3, 1998
-----------------------
Richard P. Magnuson
/s/ Thomas H. Peterson Director December 3, 1998
----------------------
Thomas H. Peterson
26.
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, 1997 and 1998, 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, 1998.
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, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1998 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Boulder, Colorado
October 21, 1998
F-1
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30,
-------------------
1997(1) 1998
------- -------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 9,999 $13,981
Short-term investments available for sale........ 25,738 21,283
Accounts receivable, net......................... 6,585 7,341
Prepaid expenses and other current assets........ 874 2,339
Deferred income taxes............................ 381 815
------- -------
Total current assets.......................... 43,577 45,759
Equipment, net..................................... 4,186 4,820
Other noncurrent assets, net....................... 2,255 3,948
------- -------
Total assets.................................. $50,018 $54,527
======= =======
a) LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. 816 1,067
Accrued expenses................................. 2,624 2,862
Deferred revenue................................. 6,105 7,577
Current portion of long-term obligations......... 202 116
------- -------
Total current liabilities..................... 9,747 11,622
Long-term obligations, less current portion........ 351 --
------- -------
Total liabilities............................. 10,098 11,622
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value.
Authorized 35,000 shares; issued
and outstanding 10,024 and 10,457
shares at September 30, 1997
and 1998, respectively.......................... 9 10
Additional paid-in capital....................... 36,709 37,848
Retained earnings................................ 3,322 5,073
Other comprehensive loss......................... (120) (26)
------- -------
Total stockholders' equity.................... 39,920 42,905
------- -------
Total liabilities and stockholders' equity.... $50,018 $54,527
======= =======
(1) Restated for pooling of interests.
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,
-------------------------------
1996(1) 1997(1) 1998
------- ------- -------
Revenue:
License revenue................................ $15,968 $24,096 $28,663
Service and maintenance revenue................ 3,916 9,313 15,776
------- ------- -------
Total revenue................................ 19,884 33,409 44,439
------- ------- -------
Cost of revenue:
Cost of license revenue........................ 1,390 1,973 2,377
Cost of service and maintenance revenue........ 1,663 2,963 4,920
------- ------- -------
Total cost of revenue........................ 3,053 4,936 7,297
------- ------- -------
Gross profit................................. 16,831 28,473 37,142
------- ------- -------
Operating expenses:
Product development............................ 5,766 7,619 9,532
Sales and marketing............................ 8,367 14,338 19,313
General and administrative..................... 2,277 3,620 4,164
Merger, reorganization and relocation.......... -- -- 1,789
costs......................................... ------- ------- -------
Total operating expenses..................... 16,410 25,577 34,798
------- ------- -------
Income from operations....................... 421 2,896 2,344
Other income, net............................... 94 1,396 794
------- ------- -------
Income before income taxes................... 515 4,292 3,138
Income tax expense (benefit).................... (24) 1,459 961
------- ------- -------
Net income................................... $ 539 $ 2,833 $ 2,177
======= ======= =======
Pro forma net income data (unaudited):
Income before income taxes, as reported........ $ 515 $ 4,292 $ 3,138
Pro forma income tax expense................... 147 1,471 1,098
------- ------- -------
Pro forma net income......................... $ 368 $ 2,821 $ 2,040
======= ======= =======
Pro forma diluted earnings per share......... $ 0.05 $ 0.27 $ 0.19
======= ======= =======
Basic earnings per share........................ $ 0.11 $ 0.32 $ 0.21
======= ======= =======
Diluted earnings per share...................... $ 0.07 $ 0.27 $ 0.20
======= ======= =======
Shares used in basic per share calculation...... 5,077 8,807 10,209
Shares used in diluted per share calculation.... 7,593 10,419 10,670
(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)
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDER RETAINED OTHER STOCK-
------------------- PAID-IN NOTE EARNINGS COMPREHENSIVE HOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT) INCOME (LOSS) EQUITY
------ ------ ---------- ----------- --------- -------------- -------
Balance at September 30, 1995 (1)..... 5,077 $ 4 $ 654 $ (13) $ (14) $ -- $ 631
Exercise of stock options............ 230 1 36 -- -- -- 37
Net income........................... -- -- -- -- 539 -- 539
Foreign currency translation
adjustment.......................... -- -- -- -- -- (23) (23)
------ --- ------- ------- ------ ----- -------
Balance at September 30, 1996 (1)..... 5,307 5 690 (13) 525 (23) 1,184
Issuance of common stock, net........ 2,754 2 29,607 -- -- -- 29,609
Conversion of mandatorily
redeemable preferred stock.......... 1,543 2 4,662 -- -- -- 4,664
Exercise of stock options............ 420 -- 327 -- -- -- 327
Tax benefit from stock option
exercises........................... -- -- 1,423 -- -- -- 1,423
Net income........................... -- -- -- -- 2,833 -- 2,833
Dividends paid....................... -- -- -- -- (36) -- (36)
Payment on shareholder note
receivable.......................... -- -- -- 13 -- -- 13
Foreign currency translation
adjustment.......................... -- -- -- -- -- (97) (97)
------ --- ------- ------- ------ ----- -------
Balance at September 30, 1997 (1)..... 10,024 9 36,709 -- 3,322 (120) 39,920
Issuance of common stock, net........ 97 1 587 -- -- -- 588
Exercise of stock options............ 336 -- 341 -- -- -- 341
Tax benefit from stock option
exercises........................... -- -- 211 -- -- -- 211
Net income........................... -- -- -- -- 2,177 -- 2,177
Dividends paid....................... -- -- -- -- (426) -- (426)
Foreign currency translation
adjustment.......................... -- -- -- -- -- 94 94
------ --- ------- ------- ------ ----- -------
Balance at September 30, 1998......... 10,457 $10 $37,848 $ -- $5,073 $ (26) $42,905
====== === ======= ======= ====== ===== =======
(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,
------------------------------
1996 (1) 1997 (1) 1998
--------- --------- --------
Cash flows from operating activities:
Net income.................................... $ 539 $ 2,833 $ 2,177
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization............... 816 1,863 3,115
Tax benefit from stock options.............. -- 1,423 211
Loss on disposal of equipment............... -- -- 247
Changes in assets and liabilities:
Accounts receivable........................ (2,471) (913) (756)
Prepaid expenses and other current assets.. (670) 203 (1,110)
Deferred income taxes...................... (28) (273) (434)
Other noncurrent assets.................... (72) (595) (2,901)
Accounts payable and accrued expenses...... 266 611 489
Deferred revenue........................... 1,530 2,522 1,472
-------- -------- -------
Net cash from operating activities........ (90) 7,674 2,510
-------- -------- -------
Cash flows from investing activities:
Purchase of equipment......................... (2,083) (2,790) (3,143)
(Purchase) maturity of short-term investments
available for sale.......................... -- (25,738) 4,456
Purchase of business, net of cash acquired.... -- (879) --
-------- -------- -------
Net cash from investing activities........ (2,083) (29,407) 1,313
-------- -------- -------
Cash flows from financing activities:
Payments on long-term obligations............. (296) (198) (438)
Net proceeds from issuance of
mandatorily redeemable preferred stock....... 3,524 -- --
Dividends paid................................ -- (36) (426)
Net proceeds from issuance of common stock.... -- 29,609 588
Payment on shareholder note receivable........ -- 13 --
Proceeds from exercise of stock options....... 37 327 341
-------- -------- -------
Net cash from financing activities........ 3,265 29,715 65
-------- -------- -------
Effect of exchange rate changes on cash
and cash equivalents.......................... (1) (96) 94
-------- -------- -------
Net change in cash and cash equivalents... 1,091 7,886 3,982
Cash and cash equivalents at beginning
of period..................................... 1,022 2,113 9,999
-------- -------- -------
Cash and cash equivalents at end of period..... $ 2,113 $ 9,999 $13,981
======== ======== =======
Supplemental disclosure of cash flow
information:
Cash paid for interest........................ $ 37 $ 38 $ 35
Cash paid for taxes........................... 106 47 1,601
Supplemental disclosure of non-cash
investing and financing activities:
Acquisition of equipment financed by
capital lease obligations.................... $ 375 $ -- $ --
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) $ --
Equipment..................................... -- 121 --
Cost in excess of net assets acquired, net.... -- 1,539 --
Other......................................... -- 42 --
--------
Net cash used to acquire business......... -- 879 --
--------
(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 single industry segment 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 original 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, 1998, $295 of
cash was restricted for various purposes.
Furniture, Fixtures and 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
Other noncurrent assets include purchased software rights, a covenant
not to compete and goodwill, which are amortized over estimated useful lives of
three to five years using the straight-line method. Original cost of these
intangibles was $2.8 million and $5.0 million at September 30, 1997 and 1998
respectively. Accumulated amortization at September 30, 1997 and 1998 was $955
and $1,808, respectively. Amortization charged to expense was $221, $386 and
$853 for the years ended September 30, 1996, 1997 and 1998, respectively.
F-6
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 into to hedge purchases,
sales, and other normal recurring transactions and accordingly are not
speculative in nature. The Company does not hold or issue financial instruments
for trading purposes nor does it hold or issue leveraged derivative financial
instruments. Market value gains and losses on such contracts that result from
fluctuations in foreign exchange rates are recognized as offsets to the exchange
gains or losses on the hedged transactions. By their nature, these transactions
generally offset. The net gain or loss on such foreign currency contracts and
underlying transactions was not material during 1997 or 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 at September 30, 1998.
Revenue Recognition
License revenue is recognized at the time of shipment. Maintenance and
service revenue includes maintenance revenue that is 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 $225 and $278 at September 30, 1997 and September 30, 1998, 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 21%, 24%, and 28% of the Company's total revenue for the years
ended September 30, 1996, 1997, and 1998, 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 $243
and $259 at September 30, 1997 and 1998, 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
F-7
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 includes 461 shares of dilutive stock options for 1998 and 1,612 and
2,516 of dilutive stock options and convertible preferred stock for 1997 and
1996 respectively. Diluted earnings per share is not significantly different
from previously presented fully diluted earnings per share.
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.
(2) MERGERS AND ACQUISITIONS
On October 27, 1995, the Company acquired all of the common stock of
Inmark Development Corporation ("Inmark") in exchange for 878 shares of the
Company's common stock in a transaction accounted for as a pooling of interests.
Inmark was a privately held corporation specializing in the development,
distribution and support of object-oriented graphical user interface library
software. The Company's consolidated financial statements and notes to
consolidated financial statements have been restated to include the results of
Inmark for all periods presented.
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 1998.
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 is 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 1996, 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, 1996:
Total revenue........................ $18,845 $1,039 $19,884
Net income........................... 35 504 539
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
Merger costs of $700,000 were incurred and charged to expense during
fiscal 1998 for services rendered to facilitate completion of the transaction.
F-8
(3) BALANCE SHEET COMPONENTS
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment at September 30, consist of the
following:
1997 1998
------ ------
Computer equipment............................................ $4,903 $6,191
Furniture, fixtures and equipment............................. 1,769 2,926
------ ------
6,672 9,117
Less accumulated depreciation and amortization................ 2,486 4,297
------ ------
Furniture, fixtures and equipment, net........................ $4,186 $4,820
====== ======
Depreciation expense for the years ended September 30, 1996, 1997 and
1998 was $595, $1,477 and $2,262, respectively.
Accrued Expenses
The Company's accrued expenses at September 30, include the following:
1997 1998
------ ------
Accrued payroll and related liabilities....................... $1,502 $1,787
Other accrued expenses........................................ 1,122 1,075
------ ------
Accrued expenses.............................................. $2,624 $2,862
====== ======
(4) LEASES
The Company leases certain equipment and office space through
noncancelable operating lease arrangements. The leases expire in 1998 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, 1996, 1997 and 1998 was $601, $915 and $1,532,
respectively.
Property held under capital leases at September 30 is as follows:
1997 1998
----- ------
Computer equipment............................................ $ 750 $ 698
Office furniture and equipment................................ 39 --
----- -----
Total....................................................... 789 698
Less accumulated amortization 282 (598)
----- -----
Property held under capital leases, net $ 267 $ 100
===== =====
Amortization expense is included in depreciation expense for
furniture, fixtures and equipment.
F-9
Future minimum lease payments under capital and operating leases (with
initial or remaining lease terms in excess of one year) and the present value of
future minimum capital lease payments are as follows:
CAPITAL OPERATING
------- ---------
Year ending September 30:
1999........................................................ $122 $1,803
2000........................................................ -- 1,419
2001........................................................ -- 1,091
2002........................................................ -- 1,018
2003........................................................ -- 929
2003 thereafter............................................. -- 797
---- ------
Total minimum lease payments.............................. 122 $7,057
======
Less amounts representing interest........................... 6
----
Present value of future minimum lease payments............ 116
Less current portion......................................... 116
----
Obligations under capital leases, less current portion.... $ 0
====
(5) LONG-TERM DEBT
Long-term debt at September 30, 1997 of $231,000 consisted of a non-
interest bearing note payable related to a business combination due February
2012. During 1998, the Company retired the note payable, at carrying value.
(6) INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED SEPTEMBER 30,
-----------------------
1996 1997 1998
------ ------- ------
Current:
Federal................... $ -- $1,582 $ 980
State and local........... 4 150 415
----- ------ ------
4 1,732 1,395
----- ------ ------
Deferred:
Federal................... (22) (213) (347)
State and local........... (6) (60) (87)
----- ------ ------
(28) (273) (434)
----- ------ ------
Total................... $ (24) $1,459 $ 961
===== ====== ======
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,
-----------------------
1996 1997 1998
------ ------ ------
Computed expected income tax expense............. $ 175 $1,459 $1,067
Increase (reduction) in income tax
expense resulting from:
Subsidiary S-Corp earnings exclusion............ (171) (12) (156)
State income tax expense........................ 3 228 57
Research and experimentation credit............. (108) (312) (265)
Change in valuation allowance................... 43 610 (374)
Acquired foreign net operating loss
carryforwards.................................. -- (568) --
Foreign net operating loss applied as
a reduction of goodwill........................ -- -- 344
Non-deductible meals and entertainment.......... 14 59 87
Non-deductible intangible amortization.......... -- 81 149
International rate difference................... -- (16) 30
Other, net...................................... 20 (60) 22
----- ------ ------
Income tax expense (benefit).................. $ (24) $1,459 $ 961
===== ====== ======
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,
----------------
1997 1998
------- -------
Deferred tax assets:
Accounts receivable................................... $ 120 $ 161
Intangible assets..................................... 61 72
Accrued expenses...................................... 99 116
Net operating loss carryforwards...................... 96 68
Foreign operating loss carryforwards.................. 692 423
Research and experimentation credit carryforward...... 288 121
Equity losses of unconsolidated subsidiary............ -- 405
Other................................................. 30 42
------ ------
Total gross deferred tax assets..................... 1,386 1,408
Valuation allowance................................... (967) (593)
------ ------
Net deferred tax assets............................. 419 815
Deferred tax liabilities:
Cash to accrual adjustment............................ 9 --
Equipment, due to differences in depreciation......... 29 --
------ ------
Total gross deferred tax liabilities................ 38 --
------ ------
Net deferred taxes.................................. $ 381 $ 815
====== ======
At September 30, 1998, the Company had net operating loss
carryforwards for federal and foreign income tax purposes of $199 and $999,
respectively. The federal net operating loss expires 2007 to 2010. The Company
also had $121 of tax credit carryforwards that expire 2003 to 2012. 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.
(7) 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.
(8) 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 3,000
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.
The Equity Incentive Plan is administered by a committee appointed by
the Board of Directors, which determines recipients and types of awards to be
granted, including the exercise price, number of shares subject to the award and
the exercisability thereof.
F-11
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 the 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.
Both 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 following table summarizes stock option activity for the three
years ended September 30, 1998:
WEIGHTED AVG.
PRICE
SHARES PER SHARE
----- -------------
Outstanding options at September 30, 1995.......... 1,381 $ 0.37
Granted........................................... 554 6.02
Exercised......................................... (230) 0.25
Canceled.......................................... (255) 1.36
----- ------
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
===== ======
Of the 2,290 options outstanding at September 30, 1998, 798 options were
vested and exercisable. For various price ranges, weighted average
characteristics of outstanding stock options at September 30, 1998 were as
follows:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------ --------------------
REMAINING WEIGHTED WEIGHTED
EXERCISE PRICE SHARES LIFE (YEARS) AVG. PRICE SHARES AVG. PRICE
- ---------------- ------ ------------ ---------- ------ ----------
$0.15-$7.75 644 7.7 $ 4.29 415 $ 3.38
$7.81-$10.00 617 9.2 $ 8.66 162 $ 8.80
$10.25-$13.00 1,007 10.3 $12.03 218 $12.40
$13.13-$20.50 22 12.0 $14.72 3 $15.38
----- ---
2,290 9.27 $ 8.97 798 $ 6.99
===== ===
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
1996 1997 1998
----- ----- -----
Pro forma net income................................. $ 366 $1,787 $ 198
Pro forma diluted earnings per share................. 0.05 0.17 0.02
The pro forma disclosures above include the amortization of the fair
value of all options vested during 1996, 1997 and 1998. 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 1996, 1997 and 1998 was $3.57, $6.64 and $6.97,
respectively. Such value was estimated using an expected life of five years, no
dividends, volatility of .80 in 1996 and 1997, and .84 in 1998, and risk-free
interest rates of 6.1%, 6.4% and 4.22% in 1996, 1997 and 1998.
(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 350 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 year ended September 30, 1998, 97 shares 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 have been employed for 90 days, 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, 1996, 1997 and
1998 were $118, $271, and $424 respectively.
F-13
(11) WORLDWIDE OPERATIONS
Revenue by geographic area for fiscal years 1996, 1997, and 1998 was
79%, 76% and 69% in the United States; 14%, 18% and 28% in Europe; 2%, 1% and 2%
in Asia and 5%, 5% and 1% in other, respectively.
Information regarding worldwide operations is as follows:
UNITED
STATES EUROPE ELIMINATIONS TOTAL
------- -------- ------------- -------
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
September 30, 1996, and for the year then ended:
Revenue to unaffiliated customers................. 18,880 1,004 -- 19,884
Intercompany transfers............................ 491 -- (491) --
------- ------- ------- -------
Net revenues.................................... 19,371 1,004 (491) 19,884
Operating income (loss)........................... 554 (133) -- 421
Assets............................................ 10,671 608 (557) 10,722
(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.
(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,
1998.
II. QUARTER ENDED
DEC. 31, MAR. 31, JUN. 30, SEPT. 30,
--------- --------- ---------- ---------
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 -- -- --
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 share(1).................. 0.14 -- -- --
Pro forma diluted earnings per share(1)................ 0.13 -- -- --
FISCAL YEAR 1997
Total revenue.......................................... 6,298 7,668 9,161 10,282
Gross margin........................................... 5,341 6,567 7,712 8,853
Income (loss) from operations.......................... (100) 743 946 1,307
Net income (loss)...................................... (143) 790 998 1,188
Pro forma net income(1)................................ 19 725 930 1,147
Basic earnings (loss) per share........................ (0.02) 0.09 0.11 0.12
Diluted earnings (loss) per share...................... (0.02) 0.07 0.10 0.11
Pro forma basic earnings (loss) per share(1)........... (0.00) 0.08 0.10 0.12
Pro forma diluted earnings (loss) per share(1)......... (0.00) 0.07 0.09 0.11
(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
taxes.
F-14
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
The Board of Directors
Rogue Wave Software, Inc.:
Under date of October 21, 1998, we reported on the consolidated balance sheets
of Rogue Wave Software, Inc. and subsidiaries as of September 30, 1997 and 1998,
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,
1998, as contained in the Company's Annual Report on Form 10-K for the fiscal
year 1998. 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. 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 PEAT MARWICK LLP
Boulder, Colorado
October 21, 1998
S-1
ROGUE WAVE SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
BALANCE BALANCE
AT BEGINNING AT END
OF PERIOD ADDITIONS DEDUCTIONS OF PERIOD
------------ --------- ----------- ---------
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
September 30, 1996:
Allowance for doubtful accounts 251 -- (144) 107
Sales returns and allowance 111 598 (598) 111
See accompanying independent auditor's report.
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.
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 Home Loan Agreement between Registrant and Michael Scally dated
January 7, 1998.
10.7 Home Loan Agreement between Registrant and Robert Holburn dated
February 2, 1998.
21.1 List of Subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (reference is made to signature page).
27.1 Financial Data Schedule.
_________________
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form
SB-2, as amended (No. 333-13517)
(2) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1996.
(3) Filed as Exhibit 2.1 to the Registrant's Form 8-K dated February 27, 1998,
and filed on March 9, 1998.
(4) Filed as Exhibit 2.2 to the Registrant's Form 8-K dated February 27, 1998,
and filed on March 9, 1998.
(5) Filed as Exhibit 4.1 to the Registrant's Form 8-K dated February 27, 1998,
and filed on March 9, 1998.