<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 1996
REGISTRATION NO. 333-13517
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ROGUE WAVE SOFTWARE, INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 93-1064214
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
--------------------------
850 SW 35TH STREET
CORVALLIS, OREGON 97333
(541) 754-3010
(Address and telephone number of principal executive offices and principal place
of business)
--------------------------
THOMAS KEFFER, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ROGUE WAVE SOFTWARE, INC.
850 SW 35TH STREET
CORVALLIS, OREGON 97333
(541) 754-3010
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Mark P. Tanoury, Esq. Mark C. Stevens, Esq.
James F. Fulton, Jr., Esq. Edward M. Urschel, Esq.
COOLEY GODWARD LLP FENWICK & WEST LLP
3000 Sand Hill Road Two Palo Alto Square
Building 3, Suite 230 Palo Alto, CA 94306
Menlo Park, CA 94025-7116 (415) 494-0600
(415) 843-5000
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 18, 1996
PROSPECTUS
2,025,000 SHARES
[LOGO]
COMMON STOCK
Of the 2,025,000 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by the Company and 25,000 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $9.00 and $11.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol RWAV.
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total (3)............... $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company and certain stockholders of the Company have granted to the
Underwriters a 30-day option to purchase up to 303,750 additional shares of
Common Stock solely to cover over-allotments, if any. If all such shares are
purchased, the total Price to Public, Underwriting Discount, Proceeds to
Company and Proceeds to Selling Stockholders will be $ , $ , $ and
$ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1996 at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST WESSELS, ARNOLD & HENDERSON
, 1996
<PAGE>
Rogue Wave's object-oriented
software parts work behind the
scenes in a diverse set of
industries such as
telecommunications, finance and
aerospace.
[A graphic showing a sample screen from one of the Company's products with a
reflection of a person on the screen. Below the sample screen are two columns,
one listing several of the Company's C++ products and the other listing the
Company's Java products]
The Software Parts Company-TM- [Company Logo]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.
THE COMPANY
Rogue Wave is a leading provider of object-oriented software parts and
related tools. The Company's C++ and Java-based products are used to develop
robust, scalable software applications for a wide variety of environments,
including client-server, intranet and Internet environments. These products
enable customers to construct software applications more quickly, with higher
quality and across multiple platforms, and reduce the complexity associated with
the software development process. The Company's software parts provide the
functionality to perform fundamental operations such as network and database
connectivity, thereby allowing programmers to focus on the core functionality of
the software under development. Rogue Wave offers a broad suite of software
parts and related tools for C++, and has recently introduced and continues to
develop software parts and related tools for Java. The Company believes it was
the first to deliver a commercially available Java interface builder.
Software is increasingly the most critical component of today's information
systems. Businesses typically rely on such information systems as a strategic
resource and as a way of differentiating themselves from their competitors.
However, 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. To address these difficulties in
developing and maintaining complex software systems, organizations are
increasingly adopting object-oriented technologies and development
methodologies. For object-oriented software development, C++ has emerged as the
industry standard programming language. Java, another object-oriented
programming language that is similar to C++, has been recently popularized
through the growth of the Internet and intranet environments. Java offers
additional benefits in the areas of platform independence and distributed
computing.
While objects are easy to use once built, developing robust, well-designed
objects can be extremely difficult and time consuming. Organizations are seeking
to improve quality and time-to-market by purchasing pre-written objects or
"parts" from independent vendors to handle fundamental operations ranging from
simple functions such as date handling to more complex functions such as network
communications. The Company believes that the use of third-party software parts
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 Company's objective is to be the leading provider of high quality,
reusable software parts and related tools for the development of object-oriented
software applications. The Company's products have the features and
functionality necessary to provide customers with the benefits of increased
software flexibility and quality, accelerated development times and reduced
maintenance costs. The Company follows a cross-platform strategy allowing most
objects to be used on the most popular operating systems, such as Windows and
UNIX. The Company's strategy is to leverage its installed base of Tools.h++
customers by offering additional object-oriented software parts and related
tools. The Company also intends to extend its technological leadership, promote
the enterprise-wide adoption of Rogue Wave products and expand its worldwide
distribution.
To date, Rogue Wave has sold over 50,000 end-user licenses. Rogue Wave
markets its software primarily through its direct sales organization, and to a
lesser extent through outside sales representatives and indirect channel
partners. The Company bundles its Tools.h++ and/or Standard C++ Library products
with popular compilers offered by leading vendors, including Fujitsu,
Hewlett-Packard, Microware, Siemens-Nixdorf, Silicon Graphics and Sun
Microsystems. The Company's products are used by programmers to develop software
applications for organizations in a wide variety of industries. The Company's
customers include FedEx, Ford, Hewlett-Packard, IBM, MCI, Motorola, Netscape,
Sony and Sun Microsystems.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 2,000,000 shares
Common Stock offered by the Selling Stockholders........ 25,000 shares
Common Stock to be outstanding after the offering....... 7,201,641 shares (1)
Use of proceeds......................................... Working capital and other corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.................. RWAV
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue.......................................................... $ 3,212 $ 7,209 $ 11,937 $ 18,845
Income (loss) from operations.......................................... 180 644 195 (80)
Net income............................................................. 175 568 79 35
Net income per common share (2)........................................ $ 0.05 $ 0.14 $ 0.02 $ 0.01
Shares used in per share calculation (2)............................... 3,878 4,154 5,009 6,045
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------
ACTUAL PRO FORMA (3) AS ADJUSTED(3)
--------- ------------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 1,714 $ 1,714 $ 19,314
Total assets.......................................................... 10,194 10,194 27,794
Long-term obligations, less current portion........................... 322 322 322
Mandatorily redeemable preferred stock................................ 4,664 -- --
Total stockholders' equity............................................ 668 5,332 22,932
</TABLE>
- ------------------------
(1) Excludes 1,450,726 shares of the Company's Common Stock issuable upon
exercise of stock options outstanding as of September 30, 1996 at a weighted
average exercise price of $2.38 per share. See "Management--Equity Incentive
Plans."
(2) See Note 1 of Notes to Consolidated Financial Statements for a description
of the calculation of the number of shares used in the calculation of net
income per common share.
(3) Pro forma to reflect the conversion of the mandatorily redeemable preferred
stock and as adjusted to reflect the sale of the 2,000,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $10.00 per share. See "Capitalization."
------------------------
EXCEPT AS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES (i) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (ii) A
TWO-FOR-THREE REVERSE STOCK SPLIT EXPECTED TO OCCUR PRIOR TO THE COMPLETION OF
THE OFFERING, (iii) THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK
INTO SHARES OF COMMON STOCK, WHICH WILL OCCUR UPON THE CLOSING OF THE OFFERING,
AND (iv) THE COMPANY'S REINCORPORATION INTO DELAWARE EXPECTED TO OCCUR PRIOR TO
THE COMPLETION OF THE OFFERING. SEE "DESCRIPTION OF CAPITAL STOCK" AND
"UNDERWRITING."
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS.
LIMITED OPERATING HISTORY. The Company was founded in September 1989 and
first shipped products in November 1989. Although the Company's revenue has
increased in each of the last six quarters and the Company had net income in
several of those quarters, the Company incurred net losses in the quarters ended
June 30, 1995, September 30, 1995 and June 30, 1996. The Company's limited
profitability is due in part to the combination of its financial results with
those of Inmark Development Corporation ("Inmark"), with which the Company
merged in October 1995 (the "Inmark Merger"), as well as the significant
commitment of resources to the Company's product development, sales and
marketing and technical support organizations. The Company expects to continue
to devote substantial resources in these areas and as a result will need to
recognize significant quarterly revenue to achieve and maintain profitability.
The Company's limited operating history makes the prediction of future operating
results difficult or impossible. Although the Company has experienced
significant revenue growth in recent years, there can be no assurance that the
Company will sustain such growth, if any, or that the Company will remain
profitable on a quarterly basis or at all. See "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
UNCERTAINTY OF FUTURE OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS. Prior growth rates in the Company's revenue and net income should not
be considered indicative of future operating results. Future operating results
will depend upon many factors, including the demand for the Company's products,
the level of product and price competition, the length of the Company's sales
cycle, the size and timing of individual license transactions, the delay or
deferral of customer implementations, the budget cycles of the Company's
customers, the Company's success in expanding its direct sales force and
indirect distribution channels, the timing of new product introductions and
product enhancements, the mix of products and services sold, levels of
international sales, activities of and acquisitions by competitors, the timing
of new hires, changes in foreign currency exchange rates, and the ability of the
Company to develop and market new products and control costs. A significant
portion of the Company's revenue has been, and the Company believes will
continue to be, derived from relatively large orders, and the timing of such
orders has caused and may continue to cause material fluctuations in the
Company's operating results, particularly on a quarterly basis. The Company
generally ships orders as received and as a result typically has little or no
backlog. Quarterly revenue and operating results therefore depend on the volume
and timing of orders received during the quarter, which are difficult to
forecast. In addition, the Company has historically earned a substantial portion
of its revenue in the last days of each quarter. To the extent this trend
continues, the failure to achieve such revenue during the last days of any given
quarter will have a material adverse effect on the Company's business, financial
condition and results of operations.
Service and maintenance revenue tend to fluctuate as consulting contracts,
which may extend over several months, are undertaken, renewed, completed or
terminated. License fee revenue is difficult to forecast due to the fact that
the Company's sales cycle, from initial evaluation to purchase, varies
substantially from customer to customer. As a result of these and other factors,
revenue for any quarter is subject to significant variation, and the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Because the Company's operating expenses are based on anticipated
revenue trends and because a high percentage of the Company's expenses are
relatively fixed, a delay in the recognition of revenue from a limited number of
transactions could cause significant variations in operating results from
quarter to quarter and could result in significant losses. To the extent such
expenses precede, or are not subsequently followed by, increased revenue, the
Company's operating results would be materially and adversely affected. Due to
all of the foregoing factors, it is likely that in some future
5
<PAGE>
quarter the Company's operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would likely be materially and adversely affected. Fluctuations in
operating results may also result in volatility in the price of the Company's
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business-- Sales, Marketing and Customer
Support."
COMPETITION. The market for the Company's products is intensely
competitive, subject to rapid change and significantly affected by new product
introductions and other market activities of industry participants. The
Company's products are targeted at the emerging market for C++ software parts
and programming tools, and the Company's competitors offer a variety of products
and services to address this market. The Company believes that the principal
competitive factors in this market are product quality, flexibility,
performance, functionality and features, use of standards based technology,
quality of support and service, company reputation and price. While price is
less significant than other factors for corporate customers, price can be a
significant factor for individual programmers. Direct competitors include
Microsoft (with its Microsoft Foundation Classes, "MFC"), IBM 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 may broaden the functions of MFC in order to address and more
effectively compete with the functionality of the Company's products. Software
applications can also be developed using software parts and programming tools in
environments other than C++. Indirect competitors with such offerings include
Microsoft (with its ActiveX technology), Borland, Oracle, ParcPlace-Digitalk and
Powersoft (a subsidiary of Sybase). Many of these competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, significantly greater name recognition and larger installed
bases of customers than the Company. In addition, several database vendors, such
as Informix, Oracle and Sybase are increasingly developing robust software parts
for inclusion with their database products and may begin to compete with the
Company in the future. These potential competitors have well-established
relationships with current and potential customers and have the resources to
enable them to more easily offer a single vendor solution. Like the Company's
current competitors, many of these companies have longer operating histories,
significantly greater resources and name recognition and larger installed bases
of customers than the Company. As a result, these potential competitors may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than the Company. In addition, the Company
faces competition from Borland, Symantec and other companies for its current
Java products and it expects to face significant competition in the future from
such companies with respect to other Java products the Company may introduce.
The Company also faces competition from systems integrators and internal
development efforts. Many systems integrators possess industry specific
expertise that may enable them to offer a single vendor solution more easily,
and already have a reputation among potential customers for offering
enterprise-wide solutions to software programming needs. There can be no
assurance that these third parties, many of which have significantly greater
resources than the Company, will not market competitive software products in the
future. It is also possible that new competitors or alliances among competitors
will emerge and rapidly acquire significant market share. The Company also
expects that competition will increase as a result of software industry
consolidation. Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could materially and
adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, financial condition and results of operations.
MANAGEMENT OF GROWTH. The Company is experiencing a period of transition
and aggressive product introductions that has placed, and may continue to place,
a significant strain on its resources, including its personnel. Following the
Inmark Merger, management and other personnel have focused a significant amount
of attention on the integration of Inmark with the Company, including the
integration of Inmark personnel, as well as the integration of zApp and zApp
Factory with the Company's existing product line and the introduction of
JFactory. Expansion of the Company's product lines, additional product
development and product introductions, or acquisitions of other technologies or
companies, when added to the day-to-day activities of the
6
<PAGE>
Company, will place a further strain on the Company's resources and personnel.
The Inmark Merger has also resulted in the Company's product development team
being distributed in three separate sites across the country. Managing this
distribution requires a significant amount of attention from management,
particularly the Vice President, Development and the Chief Technology Officer,
to ensure that the Company's development efforts are timely, consistent and well
integrated.
Furthermore, the Company believes that its ability to achieve significant
revenue growth in the future will depend in large part on its success in
recruiting and training sufficient direct sales personnel and establishing and
maintaining relationships with its outside sales representatives. Although the
Company is currently investing, and plans to continue to invest, significant
resources to expand its direct sales force and to develop distribution
relationships with outside sales representatives, the Company has at times
experienced and continues to experience difficulty in recruiting qualified sales
personnel and in establishing necessary sales representative relationships. The
Company believes that the hiring and retaining of qualified individuals at all
levels in the Company is essential to the Company's ability to manage growth
successfully, and there can be no assurance that the Company will be successful
in attracting and retaining the necessary personnel. If Company management is
unable to effectively manage growth, the Company's business, financial condition
and results of operations will be materially and adversely affected. See
"--Future Acquisitions," "Business--The Rogue Wave Strategy" and
"Business--Sales, Marketing and Customer Support."
DEPENDENCE ON EMERGING MARKET FOR C++ AND JAVA. The Company's product lines
are designed for use in object-oriented software application development,
specifically the C++ programming language, and substantially all of the
Company's revenue has been attributable to sales of products and related
maintenance and consulting services related to C++ programming and development.
The Company believes that while the market for object-oriented technology in
general, and C++ tools and programming applications in particular, is growing,
the Company's growth depends upon broader market acceptance of object-oriented
technology and the C++ programming language. Even if broader market acceptance
is achieved, the object-oriented market may continue to be characterized by a
lack of standards and numerous competitors in the areas of tools, methodology
and services. Furthermore, the C++ programming language is very complex. Should
the C++ programming language lose market acceptance or be replaced by another
programming language, the Company's business, financial condition and results of
operations would be materially and adversely affected. The Company's financial
performance will depend in part upon continued growth in the object-oriented
technology and C++ markets and the development of standards that the Company's
products address. There can be no assurance that the market will continue to
grow or that the Company will be able to respond effectively to the evolving
requirements of the market.
The number of software developers using the C++ programming language is
relatively small compared to the number of developers using more traditional
software development technology. The adoption of the C++ programming language by
software programmers who have traditionally used other technology requires
reorientation to significantly different programming methods, and there can be
no assurance that the acceptance of the C++ programming language will expand
beyond the early adopters of the technology. Furthermore, there can be no
assurance that potential corporate customers will be willing to make the
investment required to retrain programmers to build software using C++ rather
than structured or other object-oriented programming techniques. Many of the
Company's customers have purchased only small quantities of the Company's
products and there can be no assurance that these or new customers will broadly
implement C++ programming or purchase additional products.
In addition, the Company has recently introduced several products for use in
the Java market. The Company has spent and will continue to devote resources on
the development of new and enhanced products that address the Java market. There
can be no assurance that the Company will be successful in marketing its
existing or future Java products or that the market for Java products will grow.
If the Java market fails to grow, or grows more slowly than the Company
currently anticipates, the Company's business, financial condition and results
of operations could be materially and adversely affected. See
"Business--Industry Background," "--The Rogue Wave Strategy" and "--Product
Development."
7
<PAGE>
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS. The market for
software development tools is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements. The Company must respond rapidly to developments related to
hardware platforms, operating systems and applicable programming languages. Such
developments will require the Company to continue to make substantial product
development investments. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness or revenue.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and otherwise
achieve market acceptance. There can be no assurance that the Company will be
successful in continuing to develop and market on a timely and cost-effective
basis fully functional product enhancements or new products that respond to
technological advances by others, or that its enhanced and new products will
achieve market acceptance. In addition, the Company has in the past experienced
delays in the development, introduction and marketing of new or enhanced
products, 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. See "--Dependence on Emerging Market for C++ and Java" and
"Business--Products" and "--Product Development."
FUTURE ACQUISITIONS. While there are currently no commitments or
negotiations with respect to any particular acquisition, the Company frequently
evaluates strategic opportunities available to it and may in the future pursue
acquisitions of complementary technologies, products or businesses. Future
acquisitions of complementary technologies, products or businesses by the
Company will result in the diversion of management's attention from the
day-to-day operations of the Company's business and may include numerous other
risks, including difficulties in the integration of the operations, products and
personnel of the acquired companies. Future acquisitions by the Company may also
result in dilutive issuances of equity securities, the incurrence of debt and
amortization expenses related to goodwill and other intangible assets. Failure
of the Company to successfully manage future acquisitions may have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE UPON KEY PERSONNEL. The Company's future performance depends in
significant part upon the continued service of its key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
The Company believes that the technological and creative skills of its personnel
are essential to establishing and maintaining a leadership position,
particularly in light of the fact that its intellectual property, once sold to
the public market, is easily replicated. The loss of the services of one or more
of the Company's executive officers or key technical personnel would have a
material adverse effect on the Company's business, financial condition and
results of operations. In particular, the services of Thomas Keffer, Dan
Whitaker and Michael Scally, the Company's President and Chief Executive
Officer, Executive Vice President and Chief Operating Officer, respectively,
would be difficult to replace. The Company has key person life insurance
policies in the amount of $1.0 million on each of Dr. Keffer, Mr. Whitaker and
Mr. Scally. The Company's future success also depends on its continuing ability
to attract and retain highly-qualified technical, sales and managerial
personnel. In the past, the Company has experienced some difficulty in
attracting key technical personnel to work at its headquarters in Corvallis,
Oregon. Competition for such personnel is intense, and there can be no assurance
that the Company can retain its key technical, sales and managerial employees or
that it can attract, assimilate or retain other highly qualified technical,
sales and managerial personnel in the future. See "Business--Sales, Marketing
and Customer Support" and "Management."
VARIABILITY OF SALES CYCLES. The Company distributes its products through
two different direct sales channels, a telesales force and a field sales force,
each of which is subject to a variable sales cycle. Products sold by the
Company's telesales force may be sold after a single phone call or may require
several weeks of education and negotiation before a sale is made. As such, the
sales cycle associated with telesales typically ranges from a few days to two
months. On the other hand, the purchase of products from the Company's field
sales force is often an enterprise-wide decision and may require the sales
person to provide a significant level of education to
8
<PAGE>
prospective customers regarding the use and benefits of the Company's products.
For these and other reasons, the sales cycle associated with the sale of the
Company's products through its field sales force typically ranges from two to
six months and is subject to a number of significant delays over which the
Company has little or no control. Due to the foregoing factors, quarterly
revenue and operating results can be variable and are difficult to forecast, and
the Company believes that period-to-period comparisons of quarterly revenue are
not necessarily meaningful and should not be relied upon as an indicator of
future revenue. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Sales, Marketing and Customer
Support."
PROPRIETARY RIGHTS, RISKS OF INFRINGEMENT AND SOURCE CODE RELEASE. The
Company relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. The Company also believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance
are essential to establishing and maintaining a technological leadership
position. The Company seeks to protect its software, documentation and other
written materials under trade secret and copyright laws, which afford only
limited protection. The Company currently has one patent application pending in
the United States. There can be no assurance that the Company's pending patent
application, whether or not being currently challenged by applicable
governmental patent examiners, will be issued with the scope of the claims
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology or design around the Company's pending patent. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. The nature of many of the
Company's products requires the release of the source code to all customers. As
such, policing unauthorized use of the Company's products is difficult, and
while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary
rights in the United States or abroad will be adequate or that competition will
not independently develop similar technology.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement claims as the number of products and competitors in the Company's
industry segment grows and the functionality of products in different industry
segments overlaps. Any such claims, with or without merit, could be time
consuming to defend, result in costly litigation, divert management's attention
and resources, cause product shipment delays or require the Company to enter
into royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, financial condition and results of
operations would be materially and adversely affected.
LIMITED INTERNATIONAL SALES AND MARKETING EXPERIENCE. The Company opened
its first international sales office in Germany in January 1996. As of September
30, 1996, there were six employees in the German office. International revenue
accounted for approximately 19% of the Company's total revenue in fiscal 1996.
The Company believes that in order to increase sales opportunities and
profitability it will be required to expand its international operations. The
Company has committed and continues to commit significant management time and
financial resources to developing direct and indirect international sales and
support channels. There can be no assurance, however, that the Company will be
able to maintain or increase international market demand for its products. To
the extent that the Company is unable to do so in a timely manner, the Company's
international revenue would be limited, and the Company's business, financial
condition and results of operations would be materially and adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales, Marketing and Customer Support."
9
<PAGE>
RISKS INHERENT IN INTERNATIONAL OPERATIONS. International operations are
subject to inherent risks, including the impact of possible recessionary
environments in economies outside the United States, costs of localizing
products for foreign markets, longer receivables collection periods and greater
difficulty in accounts receivable collection, unexpected changes in regulatory
requirements, difficulties and costs of staffing and managing foreign
operations, reduced protection for intellectual property rights in some
countries, potentially adverse tax consequences, and political and economic
instability. There can be no assurance that the Company will be able to sustain
or increase international revenue from licenses or from maintenance and service,
or that the foregoing factors will not have a material adverse effect on the
Company's future international revenue and, consequently, on the Company's
business, financial condition and results of operations. The Company's direct
international revenue is generally denominated in local currencies. The Company
does not currently engage in hedging activities. Although exposure to currency
fluctuations to date has been insignificant, there can be no assurance that
fluctuations in currency exchange rates in the future will not have a material
adverse impact on international revenue and thus the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--Sales,
Marketing and Customer Support."
PRODUCT LIABILITY. The Company's license agreements with its customers
typically contain provisions designed to limit the Company's exposure to
potential product liability claims. It is possible, however, that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may entail the risk of such claims, and there can be no
assurance that the Company will not be subject to such claims in the future. A
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, financial condition and
results of operations.
RISK OF PRODUCT DEFECTS. Software products as complex as those offered by
the Company frequently contain errors or failures, especially when first
introduced or when new versions are released. Also, new products or enhancements
may contain undetected errors, or "bugs," or performance problems that, despite
testing, are discovered only after a product has been installed and used by
customers. There can be no assurance that such errors or performance problems
will not be discovered in the future, causing delays in product introduction and
shipments or requiring design modifications that could materially and adversely
affect the Company's competitive position and operating results. The Company's
products are typically intended for use in applications that may be critical to
a customer's business. As a result, the Company expects that its customers and
potential customers have a greater sensitivity to product defects than the
market for software products generally. Although the Company has not experienced
material adverse effects resulting from any such errors to date, there can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, diversion of development resources, damage to the Company's
reputation, or increased service and warranty costs, any of which could have a
material adverse effect upon the Company's business, financial condition and
results of operations. See "Business--Product Development."
CONTROL BY EXISTING STOCKHOLDERS. Upon completion of this offering, the
Company's executive officers, directors and affiliated entities together will
beneficially own approximately 57.5% of the outstanding shares of Common Stock
(53.8% if the Underwriters' over-allotment option is exercised in full). In
particular, upon completion of this offering, Thomas Keffer, the Company's
President and Chief Executive Officer, will own approximately 22.1% of the
outstanding shares of Common Stock (21.5% if the Underwriters' over-allotment
option is exercised in full). As a result, these stockholders will be able to
exercise control over matters requiring stockholder approval, including the
election of directors, mergers, consolidations and sales of all or substantially
all of the assets of the Company. This stockholder control may prevent or
discourage tender offers for the Company's Common Stock unless the terms are
approved by such stockholders. See "Principal and Selling Stockholders."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICE. Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price will be
10
<PAGE>
determined by negotiations between the Company, the representatives of the
Selling Stockholders and the representatives of the Underwriters. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The trading price of the Company's Common
Stock could be subject to significant fluctuations in response to variations in
quarterly operating results, the gain or loss of significant orders, changes in
earning estimates by analysts, announcements of technological innovations or new
products by the Company or its competitors, general conditions in the software
and computer industries and other events or factors. In addition, the stock
market in general has experienced extreme price and volume fluctuations that
have affected the market price for many companies in industries similar or
related to that of the Company and that have been unrelated to the operating
performance of these companies. These market fluctuations may materially and
adversely affect the market price of the Company's Common Stock.
ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE
LAW. The Company's Board of Directors has the authority to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The Preferred
Stock could be issued with voting, liquidation, dividend and other rights
superior to those of the Common Stock. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. Further, certain provisions of the
Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company. See "Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of substantial
numbers of shares of Common Stock in the public market following this offering
could adversely affect the market price for the Common Stock. Upon completion of
this offering, the Company will have outstanding an aggregate of 7,201,641
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options and based upon the number of
shares outstanding as of September 30, 1996. Of these shares, the 2,025,000
shares sold in this offering will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless such shares are purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. In
addition, 586,387 shares issued in connection with the Inmark Merger will be
freely tradeable without restriction upon the expiration of the lock-up period
described below. The remaining 4,590,254 shares of Common Stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act (the "Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k), 145 or 701 promulgated under the
Securities Act. Holders of an aggregate of 4,857,529 shares of Common Stock
after the offering, have agreed that they will not, without the prior written
consent of Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract
to sell, transfer the economic risk of ownership in, make any short sale, pledge
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any other rights to purchase or
acquire shares of Common Stock owned by them during the 180-day period
commencing on the date of this Prospectus. Upon expiration of the lock-up
period, in addition to the 586,387 shares issued in connection with the Inmark
Merger, approximately 536,551 shares of Common Stock held by existing
stockholders will be eligible for sale without restriction pursuant to Rule
144(k) or Rule 701, and approximately 3,057,933 shares held by existing
stockholders will be eligible for sale subject to the volume and other
restrictions of Rule 144. The remaining 995,770 shares held by existing
stockholders will become eligible for sale pursuant to Rule 144 upon the
expiration of their two-year holding periods. In addition, as of September 30,
1996, 1,450,726 shares were subject to outstanding options. Substantially all of
these shares are subject to the lock-up agreements described above. Upon the
expiration of such lock-up agreements, approximately 659,152 shares subject to
such options will be vested. 4,150,654 of the shares outstanding immediately
following the completion of this offering will be entitled to registration
rights with respect to such shares upon termination of lock-up agreements. The
number of shares sold in the public market could increase if registration rights
are exercised. See "Description of Capital Stock" and "Shares Eligible for
Future Sale."
11
<PAGE>
UNCERTAINTY AS TO USE OF PROCEEDS. The principal purposes of this offering
are to increase the Company's equity capital and to create a public market for
the Company's Common Stock, which will enhance the ability of the Company to use
its Common Stock as consideration for acquisitions and as a means for attracting
and retaining key employees. As of the date of this Prospectus, the Company has
no specific plans to use the net proceeds from this offering other than for
working capital and general corporate purposes. Accordingly, the Company's
management will retain broad discretion as to the allocation of the net proceeds
from this offering. Pending the uses described above, the Company plans to
invest the net proceeds in short-term, investment-grade, interest-bearing
securities. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION. Investors participating in this
offering will incur immediate, substantial dilution of $6.83 per share. To the
extent outstanding options to purchase the Company's Common Stock are exercised,
there will be further dilution. If the net proceeds of this offering, together
with available funds and cash generated from operations, are insufficient to
satisfy the Company's cash needs, the Company may be required to sell additional
equity or convertible debt securities. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
stockholders. See "Dilution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
THE COMPANY
The Company was founded in 1989 and incorporated in Oregon in July 1991. The
Company intends to reincorporate in Delaware prior to the completion of this
offering. Unless the context otherwise requires, "Rogue Wave" and the "Company"
refer to Rogue Wave Software, Inc. and its subsidiary. The Company's executive
offices are located at 850 SW 35th Street, Corvallis, Oregon 97333. Its
telephone number is (541) 754-3010. The Company maintains a Web site on the
World Wide Web.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.
Rogue Wave-Registered Trademark-, .h++-Registered Trademark-,
zApp-Registered Trademark- and zApp Factory-Registered Trademark- are registered
trademarks of the Company. JFactory, JMoney, JTools, JWidgets, DBTools and
DBFactory are trademarks of the Company. All other brand names or trademarks
appearing in this Prospectus are the property of their respective holders.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be $17,600,000
($17,634,875 if the Underwriters' over-allotment option is exercised in full) at
an assumed initial public offering price of $10.00 per share. The Company will
not receive any proceeds from the sale of shares of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders."
The principal purposes of this offering are to increase the Company's equity
capital and to create a public market for the Company's Common Stock, which will
enhance the ability of the Company to use its Common Stock as consideration for
acquisitions and as a means for attracting and retaining key employees.
The Company intends to use the net proceeds of this offering primarily for
working capital and other general corporate purposes, including expansion of
general sales and customer support activities to accommodate growth in the
Company's business and customer base. The amounts actually expended by the
Company for working capital purposes will vary significantly depending upon a
number of factors, including future revenue growth, the amount of cash generated
by the Company's operations and the progress of the Company's product
development efforts, and hence the Company's management will retain broad
discretion in the allocation of the proceeds from this offering. In addition,
the Company may make one or more acquisitions of technologies, products or
businesses that broaden or enhance the Company's current product offerings. The
Company has no specific agreements or commitments, however, and is not currently
engaged in any negotiations for any such acquisition. Pending the uses described
above, the Company plans to invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
In June 1994, the Company, as a Subchapter S corporation, declared and paid
a cash dividend in the aggregate amount of $500,000. The Company currently
intends to retain any future earnings to finance the growth and development of
its business and therefore does not anticipate paying any cash dividends in the
foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
September 30, 1996, (ii) the pro forma capitalization of the Company after
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock, and (iii) the pro forma capitalization as adjusted to reflect
the sale by the Company of the 2,000,000 shares of the Common Stock offered
hereby at an assumed initial offering price of $10.00.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, less current portion
(1)........................................... $ 322 $ 322 $ 322
Mandatorily redeemable preferred stock, $.001
par value; 2,350,000 shares authorized;
1,543,000 shares issued and outstanding,
actual; none issued and outstanding, pro forma
and as adjusted............................... 4,664 -- --
Stockholders' equity:
Common Stock, $.001 par value; 13,000,000
shares authorized; 3,659,000 shares issued
and outstanding, actual; 5,202,000 shares
issued and outstanding, pro forma; and
7,202,000 shares issued and outstanding, as
adjusted (2)................................ 4 5 7
Additional paid-in capital.................... 676 5,339 22,937
Stockholder note receivable................... (13) (13) (13)
Retained earnings............................. 24 24 24
Cumulative translation adjustment............. (23) (23) (23)
------ --------- -----------
Total stockholders' equity................ 668 5,332 22,932
------ --------- -----------
Total capitalization.................... $5,654 $5,654 $23,254
------ --------- -----------
------ --------- -----------
</TABLE>
- ------------------------
(1) See Notes 4 and 5 of Notes to Consolidated Financial Statements for a
description of the Company's long-term obligations, less current portion.
(2) Excludes 2,766,205 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Equity Incentive Plan (the "Equity Incentive Plan"),
under which options to purchase 1,450,726 shares of Common Stock were
outstanding as of September 30, 1996 at a weighted average exercise price of
$2.38. Also excludes 350,000 shares of Common Stock reserved for issuance
pursuant to the Company's Employee Stock Purchase Plan (the "Purchase
Plan").
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company, as of September 30,
1996, was approximately $5.2 million or $1.00 per share. Pro forma net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities, divided by the number of outstanding shares of Common Stock,
assuming conversion of all outstanding shares of Preferred Stock into Common
Stock. After giving effect to the sale of the 2,000,000 shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price of
$10.00 per share), the pro forma net tangible book value of the Company at
September 30, 1996 would have been approximately $22.8 million or $3.17 per
share. This represents an immediate increase in such net tangible book value of
$2.17 per share to existing stockholders and an immediate dilution of $6.83 per
share to new investors purchasing shares in this offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $ 10.00
Pro forma net tangible book value per share as of September
30, 1996..................................................... $ 1.00
Increase per share attributable to new investors.............. 2.17
---------
Pro forma net tangible book value per share after this
offering....................................................... 3.17
---------
Dilution per share to new investors............................. $ 6.83
---------
---------
</TABLE>
The following table summarizes on a pro forma basis, as of September 30,
1996, the differences between the number of shares purchased from the Company,
assuming conversion of all outstanding shares of Preferred Stock into Common
Stock, the total consideration paid and the average price paid per share by the
existing holders of Common Stock and by the new investors at an assumed initial
public offering price of $10.00 per share:
<TABLE>
<CAPTION>
AVERAGE PRICE
PER SHARE
-------------
SHARES TOTAL
PURCHASED CONSIDERATION
---------------- --------------------
NUMBER PERCENT AMOUNT PERCENT
------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).......... 5,201,641 72.2% $ 5,331,000 21.0% $ 1.03
New investors (1).................. 2,000,000 27.8 20,000,000 79.0 10.00
------- ------- ----------- -------
Total.......................... 7,201,641 100.0% $25,331,000 100.0%
------- ------- ----------- -------
------- ------- ----------- -------
</TABLE>
The foregoing tables exclude 2,766,205 shares of Common Stock reserved for
issuance pursuant to the Equity Incentive Plan, under which options to purchase
1,450,726 shares of Common Stock at a weighted average exercise price of $2.38
were outstanding as of September 30, 1996, and 350,000 shares of Common Stock
that have been reserved for issuance under the Purchase Plan. To the extent that
outstanding options are exercised in the future, there may be further dilution
to new stockholders. See "Management--Equity Incentive Plans."
- ------------------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 5,176,641 shares or approximately
71.9% of the total shares of Common Stock outstanding after this offering
and will increase the number of shares held by new investors to 2,025,000
shares or approximately 28.1% of the total shares of Common Stock
outstanding after this offering.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The selected consolidated
financial data presented below for each of the years in the three-year period
ended September 30, 1996 and the balance sheet data as of September 30, 1995 and
1996 are derived from the Consolidated Financial Statements of the Company,
which are included elsewhere in this Prospectus and have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, whose report thereon
also is included herein.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License revenue.......................................... $ 2,949 $ 6,652 $ 10,417 $ 14,986
Service and maintenance revenue.......................... 263 557 1,520 3,859
--------- --------- --------- ---------
Total revenue.......................................... 3,212 7,209 11,937 18,845
--------- --------- --------- ---------
Cost of revenue:
Cost of license revenue.................................. 301 693 1,048 1,276
Cost of service and maintenance revenue.................. 166 331 1,123 1,663
--------- --------- --------- ---------
Total cost of revenue.................................. 467 1,024 2,171 2,939
--------- --------- --------- ---------
Gross profit........................................... 2,745 6,185 9,766 15,906
--------- --------- --------- ---------
Operating expenses:
Product development...................................... 893 2,109 3,204 5,548
Sales and marketing...................................... 1,330 2,652 4,880 8,234
General and administrative............................... 342 780 1,487 2,204
--------- --------- --------- ---------
Total operating expenses............................... 2,565 5,541 9,571 15,986
--------- --------- --------- ---------
Income (loss) from operations.......................... 180 644 195 (80)
Other income (expense), net................................ (5) 4 (10) 91
--------- --------- --------- ---------
Income before income taxes............................. 175 648 185 11
Income tax expense (benefit)............................... -- 80 106 (24)
--------- --------- --------- ---------
Net income............................................. $ 175 $ 568 $ 79 $ 35
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common share (1)............................ $ 0.04 $ 0.14 $ 0.02 $ 0.01
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in per share calculation (1)................... 3,914 4,154 5,009 6,045
Pro forma net income data (2):
Income before income taxes, as reported.................. $ 175 $ 648
Pro forma income tax expense............................. 32 142
--------- ---------
Pro forma net income................................... $ 143 $ 506
--------- ---------
--------- ---------
Pro forma net income per common share...................... $ 0.04 $ 0.12
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 76 $ 609 $ 1,010 $ 1,714
Total assets................................................. 881 3,301 4,758 10,194
Long-term obligations, less current portion.................. 59 166 230 322
Mandatorily redeemable preferred stock....................... -- 941 1,140 4,664
Total stockholders' equity................................... 457 536 619 668
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the calculation of the number of shares used in the calculation of net
income per common share.
(2) The Company was a Subchapter S corporation until June 30, 1994 and
accordingly not subject to federal and state income taxes during the periods
indicated. Pro forma net income reflects federal and state income taxes as
if the Company has been a C corporation, based on effective tax rates during
the periods indicated. See Notes 1 and 6 of Notes to Consolidated Financial
Statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN
THIS PROSPECTUS.
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. The
transaction was accounted for as a pooling-of-interests business combination.
The Inmark graphical user interface library is currently being marketed by Rogue
Wave as a component of its Visual User Interface family of products. The Company
intends to integrate these products into future product releases.
The Company has experienced significant revenue growth over the last several
years. The Company has in recent periods shifted its focus from achieving
profitability to expanding its sales channels, marketing efforts and product
development capacity. While the Company expects operating expenses to continue
to increase in absolute dollar amounts, the Company expects operating expenses
to decrease as a percentage of total revenue. There can be no assurance that the
Company will be profitable on a quarterly or annual basis. The Company's limited
operating history makes the prediction of future operating results difficult, if
not impossible. See "Risk Factors--Limited Operating History" and "--Uncertainty
of Future Operating Results; Fluctuations in Quarterly Operating Results."
To date, the Company's revenue has been derived from licenses of its
software products and related maintenance, training and consulting services.
License revenue is recognized upon execution of a license agreement and shipment
of the product if no significant contractual obligations remain and collection
of the resulting receivable is probable. Allowances for credit risks and for
estimated future returns are provided for upon shipment. Returns to date have
not been material. Service and maintenance revenue consists of fees that are
charged separately from the product licenses. Maintenance revenue consists of
fees for ongoing support and product updates and is recognized ratably over the
term of the contract, which is typically 12 months. Service revenue consists of
training and consulting services and is recognized upon completion of the
related activity. For all periods presented, the Company has recognized revenue
in accordance with Statement of Position 91-1, SOFTWARE REVENUE RECOGNITION. See
Note 1 of Notes to Consolidated Financial Statements.
The Company markets its products primarily through its direct sales force,
and to a lesser extent through the Internet and an indirect channel consisting
of OEMs, VARs, dealers and distributors. The Company's direct sales force
consists of an inside telesales group that focuses on smaller orders ($50,000 or
less), and an outside sales force that focuses on larger site licenses. The
Company makes all of its products available for sale and distribution over the
Internet to customers in the United States. Revenue through this channel has not
been significant to date, and there can be no assurance that the Company will be
successful in marketing its products through this channel.
International revenue accounted for approximately 19% of total revenue in
fiscal 1996. 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. The Company anticipates establishing similar
organizations in other locations in Europe, and possibly in Asia. The Company
expects that international license and service and maintenance revenue will
account for an increasing portion of its total revenue in the future. The
Company has committed and continues to commit significant management time and
financial resources to developing direct and indirect international sales and
support channels. There can be no assurance, however, that the Company will be
able to maintain or increase international market demand for its products. To
date, other than revenue generated by the Company's German subsidiary, the
Company's international revenue has been denominated in United States dollars
and the Company has not engaged in hedging activities. Although exposure to
currency
17
<PAGE>
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."
RESULTS OF OPERATIONS
The following table sets forth certain operating data expressed as a
percentage of total revenue for each period indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenue:
License revenue................................................................ 92.3% 87.3% 79.5%
Service and maintenance revenue................................................ 7.7 12.7 20.5
----- ----- -----
Total revenue................................................................ 100.0 100.0 100.0
----- ----- -----
Cost of revenue:
Cost of license revenue........................................................ 9.6 8.8 6.8
Cost of service and maintenance revenue........................................ 4.6 9.4 8.8
----- ----- -----
Total cost of revenue........................................................ 14.2 18.2 15.6
----- ----- -----
Gross profit................................................................. 85.8 81.8 84.4
----- ----- -----
Operating expenses:
Product development............................................................ 29.3 26.8 29.4
Sales and marketing............................................................ 36.8 40.9 43.7
General and administrative..................................................... 10.8 12.5 11.7
----- ----- -----
Total operating expenses..................................................... 76.9 80.2 84.8
----- ----- -----
Income (loss) from operations................................................ 8.9 1.6 (0.4)
Other income (expense), net...................................................... 0.1 (0.1) 0.5
----- ----- -----
Income before income taxes................................................... 9.0 1.5 0.1
Income tax expense (benefit)..................................................... 1.1 0.8 (0.1)
----- ----- -----
Net income................................................................... 7.9% 0.7% 0.2%
----- ----- -----
----- ----- -----
</TABLE>
REVENUE
The Company's total revenue was $7.2 million, $11.9 million and $18.8
million in fiscal 1994, 1995 and 1996, respectively. License revenue was $6.7
million, $10.4 million and $15.0 million in fiscal 1994, 1995 and 1996,
respectively. License revenue increased primarily as a result of an increase in
the number of licenses sold to existing and new customers, reflecting additional
product offerings, an expanding market, increased market awareness and expansion
of the Company's direct sales organization. In particular, the Company
introduced its DBTools.h++ product in the first half of fiscal 1995 and its
Standard C++ Library product during the third quarter of fiscal 1995, and
established its field sales force in the second quarter of fiscal 1995. During
fiscal 1996, the Company introduced its DBFactory product and a suite of Java
products in addition to new releases of its Tools.h++, DBTools.h++ and zApp
Developers Suite products. Service and maintenance revenue was $557,000, $1.5
million and $3.9 million in fiscal 1994, 1995 and 1996, respectively. These
increases in service and maintenance revenue were generally attributable to the
growing installed base of the Company's products and the associated increase in
demand for maintenance and training services. An increased focus on marketing
support and maintenance services, which include upgrades and telephone support,
as well as the introduction of mentoring services, also contributed to increased
service and maintenance revenue for fiscal 1995 and fiscal 1996.
COST OF REVENUE
COST OF LICENSE REVENUE. Cost of license revenue consists primarily of
amortization of purchased software, materials, packaging and freight expenses.
Cost of license revenue was $693,000, $1.0 million and $1.3 million in fiscal
1994, 1995 and 1996, respectively, representing 10.4%, 10.1%, and 8.5% of the
license revenue for the
18
<PAGE>
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, the timing of large site license sales and the timing of product upgrades.
COST OF SERVICE AND MAINTENANCE REVENUE. 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 $331,000, $1.1 million and $1.7 million in fiscal 1994, 1995 and 1996,
respectively, representing 59.4%, 73.9% and 43.1% 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 and additional product support personnel. The higher
percentages of cost of service and maintenance revenue as a percentage of
service and maintenance revenue for fiscal 1995 reflect the fact that the
increase in such costs occurred prior to an anticipated increase in demand. The
decrease as a percentage of service and maintenance revenue for fiscal 1996 was
primarily the result of the increase in service and maintenance revenue.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses consist primarily of
personnel related expenses. Product development expenses were $2.1 million, $3.2
million and $5.5 million in fiscal 1994, 1995 and 1996, respectively. As a
percentage of total revenue, product development expenses were 29.3%, 26.8% and
29.4% 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 1997. 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 $2.7 million, $4.9 million and $8.2 million in fiscal
1994, 1995 and 1996, respectively. As a percentage of total revenue, sales and
marketing expenses were 36.8%, 40.9% and 43.7% 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 1997 as the Company
continues to hire additional sales and marketing personnel and increase
promotional activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$780,000, $1.5 million and $2.2 million in fiscal 1994, 1995 and 1996,
respectively. As a percentage of total revenue, general and administrative
expenses were 10.8%, 12.5% and 11.7% 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 1997 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.
OTHER INCOME (EXPENSE), NET
Other income (expense), net primarily represents interest income earned on
the Company's cash, cash equivalents and short-term investments, net of interest
expense.
PROVISION FOR INCOME TAXES
The Company was a cash basis taxpayer through fiscal 1994. Prior to July 1,
1994, the Company was taxed under the S corporation provisions of the Internal
Revenue Code. Under those provisions, the Company did not pay federal or state
corporate income taxes on its income. The Company's income taxes since July 1,
1994, and Inmark's income taxes for all periods presented, have been accounted
for in accordance with Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES. The Company's effective tax rates were 12.3%, 57.3%
and (218.2)% for fiscal 1994, 1995 and 1996. The 12.3% rate of fiscal 1994
reflects three quarters of
19
<PAGE>
exclusion of earnings due to the Subchapter S status of the Company and marginal
profitability of Inmark. The tax rate for fiscal 1995 reflects the inability to
offset Inmark's losses against the Company's income for the period. The tax
benefit in fiscal 1996 was due to the use of Inmark net operating loss
carryforwards. As a result of the merger with Inmark, utilization of federal and
state net operating loss carryforwards of $186,000 and $172,000, respectively,
are limited to the future income attributable to Inmark.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth the quarterly financial data for the six
quarters ended September 30, 1996, including such amounts expressed as a
percentage of total revenue, as well as certain operating data. This quarterly
information is unaudited, has been prepared on the same basis as the annual
consolidated financial statements and, in the opinion of the Company's
management, reflects all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
periods presented. Such statement of operations data should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto. Operating results for any quarter are not necessarily indicative
of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30,
1995 1995 1995 1996 1996 1996
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue................................ $ 2,447 $ 2,850 $ 2,733 $ 3,697 $ 4,175 $ 4,381
Service and maintenance revenue................ 426 558 804 950 833 1,272
---------- ---------- ---------- ---------- ---------- ----------
Total revenue................................ 2,873 3,408 3,537 4,647 5,008 5,653
---------- ---------- ---------- ---------- ---------- ----------
Cost of revenue:
Cost of license revenue........................ 274 262 219 242 412 403
Cost of service and maintenance revenue........ 249 348 294 343 388 638
---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenue........................ 523 610 513 585 800 1,041
---------- ---------- ---------- ---------- ---------- ----------
Gross profit................................. 2,350 2,798 3,024 4,062 4,208 4,612
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Product development............................ 763 903 924 1,486 1,574 1,564
Sales and marketing............................ 1,305 1,544 1,606 2,101 2,262 2,265
General and administrative..................... 329 502 472 500 624 608
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..................... 2,397 2,949 3,002 4,087 4,460 4,437
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations................ (47) (151) 22 (25) (252) 175
Other income (expense), net...................... (6) 9 14 43 11 23
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............ (53) (142) 36 18 (241) 198
Income tax expense (benefit)..................... (30) (81) 7 4 (84) 49
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............................ $ (23) $ (61) $ 29 $ 14 $ (157) $ 149
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue................................ 85.2% 83.6% 77.3% 79.6% 83.4% 77.5%
Service and maintenance revenue................ 14.8 16.4 22.7 20.4 16.6 22.5
---------- ---------- ---------- ---------- ---------- ----------
Total revenue................................ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of license revenue........................ 9.5 7.7 6.2 5.2 8.3 7.1
Cost of service and maintenance revenue........ 8.7 10.2 8.3 7.4 7.7 11.3
---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenue........................ 18.2 17.9 14.5 12.6 16.0 18.4
---------- ---------- ---------- ---------- ---------- ----------
Gross profit................................. 81.8 82.1 85.5 87.4 84.0 81.6
Operating expenses:
Product development............................ 26.6 26.5 26.1 32.0 31.4 27.7
Sales and marketing............................ 45.4 45.3 45.5 45.2 45.2 40.1
General and administrative..................... 11.4 14.7 13.3 10.8 12.4 10.7
---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses..................... 83.4 86.5 84.9 88.0 89.0 78.5
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations................ (1.6) (4.4) 0.6 (0.6) (5.0) 3.1
Other income (expense), net...................... (0.2) 0.3 0.4 0.9 0.2 0.4
---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes............ (1.8) (4.1) 1.0 0.3 (4.8) 3.5
Income tax expense (benefit)..................... (1.0) (2.3) 0.2 0.0 (1.7) 0.9
---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............................ (0.8)% (1.8)% 0.8% 0.3% (3.1)% 2.6%
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
20
<PAGE>
Prior growth rates in the Company's revenue and net income should not be
considered indicative of future operating results. Future operating results will
depend upon many factors, including the demand for the Company's products, the
level of product and price competition, the length of the Company's sales cycle,
the size and timing of individual license transactions, the delay or deferral of
customer implementations, the budget cycles of the Company's customers, the
Company's success in expanding its direct sales force and indirect distribution
channels, the timing of new product introductions and product enhancements, the
mix of products and services sold, levels of international sales, activities of
and acquisitions by competitors, the timing of new hires, changes in foreign
currency exchange rates, and the ability of the Company to develop and market
new products and control costs. A significant portion of the Company's revenue
has been, and the Company believes will continue to be, derived from relatively
large orders, and the timing of such orders has caused and may continue to cause
material fluctuations in the Company's operating results, particularly on a
quarterly basis. The Company generally ships orders as received and as a result
typically has little or no backlog. Quarterly revenue and operating results
therefore depend on the volume and timing of orders received during the quarter,
which are difficult to forecast. In addition, the Company has historically
earned a substantial portion of its revenue in the last days of each quarter. To
the extent this trend continues, the failure to achieve such revenue during the
last days of any given quarter will have a material adverse effect on the
Company's business, financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations through cash flows
from operations and the private sale of $5.3 million of equity securities. As of
September 30, 1996, the Company had $1.7 million in cash and cash equivalents.
Net cash from operating activities was $1.1 million, $493,000 and $(520,000) in
fiscal 1994, 1995 and 1996, respectively. For fiscal 1995, net cash from
operating activities of $493,000 was primarily attributable to increases in
accounts payable and accrued expenses of $440,000 and deferred revenue of
$702,000, offset by an increase in accounts receivable of $1.1 million, and
adjusted for depreciation and amortization of $514,000. For fiscal 1996, net
cash from operating activities of $(520,000) was primarily attributable to an
increase in accounts receivable of $2.4 million, partially offset by an increase
in deferred revenue of $1.5 million.
The Company currently does not employ a line of credit for support of its
working capital requirements.
As of September 30, 1996, the Company's primary investing activities have
consisted of purchases of equipment and software rights. The Company's
expenditures for equipment, including those under capital leases, totaled
$414,000, $672,000 and $2.4 million in fiscal 1994, 1995 and 1996, respectively.
Capital expenditures were primarily for computer equipment, telecommunications
and Internet infrastructure hardware and software used in support of product
development and other Company activities.
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 believes that the net proceeds from the offering, together with
the anticipated cash flows from operations and cash and cash equivalents, will
be adequate to meet its cash needs for working capital and capital expenditures
for at least the next 18 months. Thereafter, the Company may require additional
funds to support its working capital requirements or for other purposes, and may
seek to raise such additional funds through public or private equity financing
or from other sources. There can be no assurance that such additional financing
will be available on terms favorable to the Company, if at all, and will not be
dilutive to the Company's then current stockholders.
NEW ACCOUNTING PRONOUNCEMENTS
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS 123"), which establishes a fair value based method of
accounting for equity compensation plans. The Company believes that there will
be no impact of the pronouncement other than pro forma disclosures in the
footnotes to the financial statements and it will continue to account for
employee stock options under APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. SFAS 123 is effective for fiscal years beginning after December 15,
1995.
21
<PAGE>
BUSINESS
Rogue Wave is a leading provider of object-oriented software parts and
related tools. The Company's C++ and Java-based products are used to develop
robust, scalable software applications for a wide variety of environments,
including client-server, intranet and Internet environments. These products
enable customers to construct software applications more quickly, with higher
quality and across multiple platforms, and reduce the complexity associated with
the software development process. The Company's software parts provide the
functionality to perform fundamental operations such as network and database
connectivity, thereby allowing programmers to focus on the core functionality of
the software under development. Rogue Wave offers a broad suite of software
parts and related tools for C++, and has recently introduced and continues to
develop software parts and related tools for Java. The Company believes it was
the first to deliver a commercially available Java interface builder.
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.
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. In addition, electronic systems manufacturers and independent
software vendors are increasingly dependent on the development of software to
provide critical functionality and product differentiation.
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. For example, many businesses are
implementing client-server applications that must be scalable enough to handle
hundreds or thousands of users, yet flexible enough to meet continually changing
business requirements. Businesses implementing enterprise-wide information
systems face a particularly difficult challenge in developing software for the
distributed, heterogeneous environments that these systems typically demand. In
addition, businesses recognize that not only are these software systems
expensive to develop, they can also be expensive to maintain.
Organizations have taken an initial step in addressing the complexity and
cost of today's software systems by breaking software applications into
functional segments to be developed by separate teams of programmers. However,
traditional software development methodologies often produce unnecessary and
complex interdependencies among functional software segments. The resulting
software is typically difficult to develop and test, as well as expensive to
modify and maintain.
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 that are used as building blocks to model real-world objects
and systems. Objects are self-contained units that encapsulate a collection of
data and related procedures. Although objects may be internally complex, they
are designed to have simple interfaces that allow programmers to develop and
change objects 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.
22
<PAGE>
As object-oriented technologies have been adopted over the last several
years, C++ has emerged as the de facto standard computer language for
object-oriented software development. Java, another object-oriented programming
language that is similar to C++, has been recently popularized through the
growth of the Internet and intranet environments. Java offers additional
benefits in the areas of platform independence and distributed computing.
NEED FOR ROBUST THIRD-PARTY SOFTWARE PARTS. 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 ("software
parts"). Software parts are typically sold as a "class library," a group of
20-100 related object types ("classes"). 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 parts typically are more
thoroughly tested and provide more complete functionality than parts developed
in-house. The Company believes that the use of third-party software parts 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
Rogue Wave is a leading provider of object-oriented software parts and
related tools. The Company's products are designed to enable customers to
construct robust applications more quickly, with higher quality and 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. The Company's software parts span a
range of functionality from low-level ANSI/ISO standardized data structures to
higher level database connectivity objects. The Company follows a cross-platform
strategy that allows most objects to be used on the most popular operating
systems, such as Windows and UNIX. The Company offers a broad suite of software
parts and related tools for C++, the de facto standard object-oriented
programming language. In addition, the Company is developing a suite of
Java-based software parts and related tools, and believes it was the first to
deliver a commercially available Java interface builder.
The Company's products and services provide professional programmers with
the following benefits:
IMPROVED SOFTWARE QUALITY. Rogue Wave's products improve software quality
by providing professional programmers with robust and reusable software parts
and related tools. The use of the Company's products can result in applications
that are internally simpler and contain less untested code, resulting in fewer
bugs and higher quality.
ACCELERATED DEVELOPMENT TIME. By using the Company's software parts,
developers produce and test fewer lines of original code, thereby reducing
overall development time. In addition, the Company's C++ and Java application
builders simplify and accelerate prototyping and development efforts by offering
visual design environments along with code generation and testing capabilities.
INCREASED FLEXIBLITY. Most of the Company's software parts have been
written to be cross-platform. In addition, the database products can be used
with a wide variety of databases, and the visual products with a wide variety of
GUIs. This flexiblity 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.
23
<PAGE>
INCREASED FOCUS ON CRITICAL FUNCTIONALITY. Rogue Wave's products
encapsulate fundamental operations within software parts, 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.
REDUCED MAINTENANCE COST. Rogue Wave's products 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.
THE ROGUE WAVE STRATEGY
The Company's objective is to be the leading provider of high quality,
reusable software parts and related tools for the development of object-oriented
software applications. The key elements of the Company's strategy to achieve
this objective include:
PROMOTE "TOOLS.H++ EVERYWHERE" STRATEGY. In order to establish brand
awareness and cultivate a loyal base of programmers using the Company's
products, the Company promotes the widespread use of its Tools.h++ product. The
Company believes that Tools.h++ is the most widely used cross-platform C++ class
library. In addition to its direct sales efforts, the Company has entered into
OEM agreements to bundle Tools.h++ with popular compilers offered by leading
vendors, including Fujitsu, Hewlett-Packard, Microware, Siemens-Nixdorf, Silicon
Graphics and Sun Microsystems. The Company believes its "Tools.h++ Everywhere"
strategy enables the Company to leverage its installed base of Tools.h++
customers by offering additional object-oriented software parts and related
tools through its telesales organization.
EXTEND TECHNOLOGICAL LEADERSHIP. The Company believes that it has developed
industry-leading, standards-based class libraries. The Company is an active
participant on the ANSI/ISO C++ Standards Committee and has authored several
standards. The Company's implementation of the ANSI/ISO Standard C++ Library has
been evaluated and selected by several compiler vendors such as Hewlett-Packard,
Siemens-Nixdorf, Silicon Graphics and Sun Microsystems. The Company intends to
continue to invest significant resources to maintain and extend its
technological leadership.
LEVERAGE C++ EXPERTISE TO ADDRESS THE JAVA MARKET. The Company has
considerable expertise in the C++ language, gained through the development of
its class libraries, that is directly applicable to the Java language. Java has
many of the same features of C++ but is simpler to use. Java also explicitly
supports cross-platform, distributed applications. The Company believes it was
the first to deliver a commercially available Java interface builder (JFactory)
and believes it will be able to leverage its C++ expertise to continue to
address the Java marketplace. The Company's strategy is to continue to focus on
the Java language in order to expand its product offering by developing a full
suite of Java class libraries and related development tools.
PROMOTE THE ENTERPRISE-WIDE ADOPTION OF ROGUE WAVE PRODUCTS. The Company
has traditionally marketed its products to individual professional programmers,
and the Company has sold over 50,000 end-user licenses to date. The Company
intends to leverage its installed customer base of corporate programmers to
approach its customers' higher level management and promote the standardization
of its products within customer organizations. Furthermore, the Company intends
to broaden its suite of complementary products, allowing the Company to fulfill
more of its customers' software development needs.
CONTINUE TO PROVIDE FLEXIBLE CROSS-PLATFORM SOFTWARE. The Company supports
multiple development platforms, including Windows 3.1, Windows 95, Windows NT,
UNIX, OS/2 and MacOS. In addition, the Company is committed to providing "policy
free" class libraries that provide users the flexibility to use Rogue Wave's
products with a wide variety of C++ based programming environments and
methodologies. The Company believes that this flexibility improves the
competitiveness of its products.
EXPAND WORLDWIDE DISTRIBUTION. The Company distributes its products
primarily through its direct telesales and field sales organizations and, to a
lesser extent, through OEMs and VARs. The Company intends to expand its global
distribution capabilities by increasing its presence in strategic international
markets. In particular, the Company believes that there are significant growth
opportunities in Europe. The Company intends to build on the success of its
German subsidiary, established in January 1996, by establishing direct sales
forces in additional European markets. The Company also plans to continue to
increase its domestic sales force in order to expand its market presence.
24
<PAGE>
PRODUCTS
Rogue Wave's products are designed to be used individually, with each other,
or with other industry standard products. They fall into six different product
groups: Foundation (general purpose data structures and algorithms); Database
(software parts for interfacing to relational databases as well as related
tools); Visual User Interface (GUI libraries as well as related tools);
Mathematical (software parts for numerical and mathematical calculations);
Distributed (software parts for facilitating distributed computing); and Java
(Java software parts and related tools). All products are portable between
Windows and UNIX, except Heap.h++ and View.h++, which are for UNIX only.
The table below summarizes the development and release history of Rogue
Wave's principal products, and includes current list prices for perpetual-use
single-user licenses and single-user multiple platform licenses. Support is
generally available at an annual cost equal to 20% to 50% of the list price.
Rogue Wave offers site pricing for 25, 50 and 100 users.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
PRICE
ORIGINAL SINGLE-USER
RELEASE CURRENT LATEST RELEASE SINGLE-USER MULTI-PLATFORM
PRODUCT LINE DATE VERSION DATE LICENSES LICENSES
<S> <C> <C> <C> <C> <C>
FOUNDATION
Standard C++ Library 1995 2.0 October 1996 $ 195 $ 390
Tools.h++ 1990 7.0 July 1996 395 790
Heap.h++ 1994 1.0 September 1994 995 N/A
Threads.h++ 1996 1.0 September 1996 695 1,390
DATABASE
DBTools.h++ 1994 2.0 June 1996 $ 1,295 $ 2,090
DBFactory 1996 1.0 February 1996 995 1,990
VISUAL USER INTERFACE
zApp Developers Suite 1994 3.0 July 1996 $ 2,995 $ 4,990
View.h++ 1993 1.3 February 1996 1,995 N/A
MATHEMATICAL
Money.h++ 1994 1.3 October 1995 $ 1,295 $ 2,590
Math.h++ 1989 6.0 May 1996 595 1,190
LAPACK.h++ 1994 2.0 July 1996 795 1,590
DISTRIBUTED
Net.h++ 1995 1.1 May 1996 $ 1,495 $ 2,490
ORBstreams.h++ 1996 1.0 May 1996 395 790
JAVA
JFactory 1996 1.1 July 1996 $ 195 $ 390
JMoney 1996 2.0 September 1996 99 198
JTools 1996 1.0 July 1996 99 198
JWidgets 1996 2.0 September 1996 99 198
</TABLE>
FOUNDATION
STANDARD C++ LIBRARY. Rogue Wave has played an active role on the ANSI/ISO
C++ Standards Committee and has leveraged that experience to develop its version
of the Standard C++ Library. Rogue Wave's Standard C++ Library includes
fundamental data structures, as well as string, numeric limits, complex,
allocator, valarray, iostream and locale classes. Rogue Wave's Standard C++
Library has been adopted by many of the leading C++ compiler vendors, including
Fujitsu, Hewlett-Packard, Siemens-Nixdorf, Silicon Graphics, Sun Microsystems
and others.
25
<PAGE>
TOOLS.H++. Tools.h++ encapsulates and extends the Standard C++ Library,
making the Standard C++ Library easier to use by introducing object-oriented
constructs and adding new classes, such as hash tables, that are not part of the
Standard C++ Library. Used together, Tools.h++ and the Standard C++ Library give
users the portability of the Standard C++ Library plus the safety and
reusability associated with object-oriented design.
HEAP.H++. Heap.h++ is a replacement for the standard memory allocator that
comes with UNIX machines. This product uses a proprietary memory allocation
algorithm that allocates memory faster and with less fragmentation than most
native allocators.
THREADS.H++. Threads.h++, which is built on top of the Tools.h++ foundation
class library, is a C++ class library for developing multi-threaded
applications. Multi-threaded applications can offer improved responsiveness and
performance. By writing to the Threads.h++ Application Programming Interface
("API"), users can write code that is both simpler and platform independent.
DATABASE
DBTOOLS.H++. 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, Ingres, Oracle and Sybase, plus general
connectivity to these and other relational databases through the ODBC standard.
In addition, DBTools.h++ provides a flexible error-handling model and
encapsulates SQL 92 DML functionality, including SQL extensions such as stored
procedures.
DBFACTORY. DBFactory is a development tool that automatically creates
business objects represented in the schemas held in a relational database.
DBFactory maps schema information, stored procedure activation and query results
into DBTools.h++ classes. Code generation is controlled through a
point-and-click interface, which displays database and schema information on the
screen. DBFactory uses "style files" to control code generation. The user can
edit the style files to tailor output to specific needs.
VISUAL USER INTERFACE
ZAPP DEVELOPERS SUITE. The zApp Developers Suite consists of three
different products: the zApp Application Framework, zApp Factory and the zApp
Interface Pack. The zApp Application Framework, which is built on top of the
Tools.h++ foundation class library, is an object-oriented, GUI library written
in C++ that provides portability among Windows 95, Windows NT, OS/2 and many
versions of UNIX. The user programs once to the zApp API and is then able to
deploy to any supported platform with minimal changes. zApp Factory allows the
user to create an application visually. The user drags and drops various user
elements, such as push buttons, edit boxes and drop down lists, onto a window,
thereby building an application more quickly. zApp Factory then generates calls
to the zApp Application Framework library needed to represent the visual
interface. zApp Interface Pack provides high-level visual objects and custom
controls and extends the functionality of the zApp Application Framework. zApp
Interface Pack consists of approximately 100 classes, including tables,
toolbars, status lines, 3D controls and bitmap buttons. The zApp Developers
Suite was acquired by the Company in the Inmark Merger in October 1995.
VIEW.H++. View.h++, which is built on top of the Tools.h++ foundation class
library, is a C++ library that provides an object-oriented, C++ interface to
OSF/Motif, the industry standard GUI for UNIX machines. View.h++ supports both
Motif 1.1 and Motif 1.2 features.
MATHEMATICAL
MONEY.H++. Money.h++ is a C++ class library for representing and
manipulating exact decimal fractions, primarily in banking and other financial
applications. It also includes I/O formatting objects, error handling, control
over rounding and explicit representation for several non-numeric values.
26
<PAGE>
MATH.H++. Math.h++ is a C++ class library that improves the performance and
reliability of any code that manipulates arrays of numbers. It includes vectors,
matrices, arrays, random number generators and Fast Fourier Transforms. Math.h++
is useful in mathematical and numerical applications.
LAPACK.H++. LAPACK.h++ is a C++ class library that is designed to solve
numerical linear algebra problems. It manages the details of data
representation, enabling the programmer to concentrate on application
development.
DISTRIBUTED
NET.H++. Net.h++, which is built on top of the Tools.h++ foundation class
library, is a C++ class library for developing applications that communicate
across a network. By programming to the Net.h++ API, the user can write code
that is both simpler and platform independent.
ORBSTREAMS.H++. ORBstreams.h++, which is built on top of the Tools.h++
foundation class library, is a C++ library that makes C++ programming in an OMG
CORBA environment much easier by providing C++ classes that stream complicated
C++ objects across a CORBA interface, eliminating the need to write custom
marshalling and unmarshalling routines.
JAVA
JFACTORY. JFactory is similar to zApp Factory, except that it generates
Java calls to the Abstract Windowing Toolkit (from Sun Microsystems), instead of
C++ calls to the zApp Application Framework. The user can design an application
visually by dragging and dropping elements, such as radio buttons and edit
boxes, onto a window. Once the look of the application has been designed,
JFactory automatically generates the code for the application.
JMONEY. 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.
JTOOLS. JTools is a Java class library that extends the set of utility data
structures that comes with the Java Development Kit distributed by Sun
Microsystems.
JWIDGETS. JWidgets is a Java class library that extends the set of user
controls that comes with the Java Development Kit distributed by Sun
Microsystems. It includes such controls as trees, tabbed notebooks, grids and
others.
27
<PAGE>
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 50,000 end-user licenses. The following is a
representative list of customers responsible for more than $50,000 in revenue
during the 24 months ended September 30, 1996.
TELECOMMUNICATIONS
- ----------------------------------------
Bell Atlantic
Bell Northern Research
BellSouth Telecommunications
Bosch Telecom
Deutche Telecom
Ericsson
Lucent Technologies
MCI
Motorola
Northern Telecom
NYNEX
US West Communications
INFORMATION SYSTEMS/SOFTWARE
- ----------------------------------------
Cadence Design Systems
ComputerVision
D&B Software
ICON Solutions
Netscape
Objective Systems Integrators
SYSTEMS INTEGRATORS
- ----------------------------------------
American Management Systems
Andersen Consulting
Cap Gemini
E Systems
PSI AG
FINANCIAL INSTITUTIONS
- ----------------------------------------
Citicorp
Deutsche Bank
Edward D. Jones and Company
Lehman Brothers
Morgan Guaranty Trust Co.
Morgan Stanley
Smith Barney
The Options Clearing Corporation
Union Bank of Switzerland
Westdeutche Landesbank
INDUSTRIAL, CONSUMER & OTHER
- ----------------------------------------
A.C. Nielsen Company
Blue Cross/Blue Shield
DOD, Maryland Procurement Office
FedEx
Ford Motor Company
Hughes Electronics
Lockheed Martin
Loral
Mead Data Central
Medaphis Corporation
Schlumberger Technologies
TASC
COMPUTER/ELECTRONICS
- ----------------------------------------
3Com
Cable Data
Cabletron Systems
IBM
Sony
TRANSPORTATION
- ----------------------------------------
Sabre Decision Technologies
TransQuest Information Systems
Worldspan
VARS AND OEMS
- ----------------------------------------
Hewlett-Packard
Microware
Rational Software
Siemens Nixdorf
Silicon Graphics
Sun Microsystems
Tandem Computers
SALES, MARKETING AND CUSTOMER SUPPORT
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, 1996, the Company's sales and
marketing organization consisted of 64 individuals. In addition, the Company's
products and related tools are sold directly through VARs and OEMs.
TELESALES. As of September 30, 1996, the Company employed 28 telesales
representatives. A significant part of the Company's "Tools.h++ Everywhere"
strategy is the sale of its products to individual and small groups of
programmers. The Company uses OEM generated and other targeted mailing lists to
distribute product catalogs to those individuals. The Company's telesales force
complements the "Tools.h++ Everywhere" strategy by fielding inquiries and orders
from a broad range of users who are exposed to one or more of the Company's
products. Sales through this channel are typically less than $50,000 per order
and the sales cycle is generally less than two months.
DIRECT FIELD SALES. To date, the Company has primarily conducted its direct
sales activities in the United States and through a recently established sales
office in Germany. As of September 30, 1996, the Company employed eight direct
field sales representatives supported by one technical sales representative. The
Company's field sales force targets Fortune 500 customers in strategic
industries, such as financial services and telecommunications. The field sales
force typically focuses on reaching chief information officers or similar
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 Oregon, California, Colorado and New York.
German direct sales operations are located in Aschaffenburg, Germany.
28
<PAGE>
ORIGINAL EQUIPMENT MANUFACTURERS AND VALUE ADDED RESELLERS. The Company's
foundation products are bundled with many leading C++ compilers and distributed
by major OEMs and VARs. Although this use of OEMs and VARs does not contribute
significantly to the Company's revenue, it does further the Company's "Tools.h++
Everywhere" strategy by increasing the exposure of C++ users to the Company's
products and providing name recognition for the Company.
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 of JFactory. The Company makes
all of its products available for sale and distribution over the Internet to
customers in the United States.
The Company believes that a high level of customer support is important to
the successful marketing and sale of its products. 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.
PRODUCT DEVELOPMENT
As of September 30, 1996, there were 62 employees on the Company's product
development staff. The Company's product development expenditures in fiscal
1994, 1995 and 1996 were $2.1 million, $3.2 million and $5.5 million,
respectively, and represented 29.3%, 26.8% and 29.4% of revenue, respectively.
The Company expects that it will continue to commit substantial resources to
product development in the future.
The majority of the Company's research and development department is located
at the Company's headquarters in Corvallis, Oregon, with additional groups in
Mountain View, California and Charlotte, North Carolina. The Company's research
and development department is organized into six different teams, reflecting the
six different product groups, Foundation, Database, Visual User Interface,
Mathematical, Distributed and Java. Each team has a lead architect who is
responsible for the technical content of the product group, as well as a
development manager who is responsible for the personnel in the group, both of
whom work closely with a corresponding marketing manager in the marketing
department. Although development teams are responsible for the overall design,
implementation and testing of products, the Company has a Quality Engineering
("QE") team that designs test suites and maintains configuration management
systems.
The Company has begun to adopt ClearCase from Atria Software for
configuration management. The Company intends to perform synchronization between
sites using the ClearCase "Remote Site" option. Full adoption is expected by
late calendar 1996. In addition, the Company uses Purify and Quantify from Pure
Software to improve product quality. All products developed by the Company are
tested using Purify during the Company QE process. The Company uses an internal
DESIGN AND STYLE GUIDE to ensure consistency of general architectural, design
and style features. Furthermore, the Chief Technical Officer is responsible for
the design and implementation of common architectural features across all
products.
Rogue Wave is continuing to expand and enhance its catalogue of C++ class
libraries and related development tools. In addition, Rogue Wave is working to
solidify its place as a leader in the newly developing Java tools market.
An important architectural principle of the Company is that all products
should be "policy-free." That is, they should not dictate how the product should
be used and in what environment. As an example, DBTools.h++ can manage database
connections (how and when they are established and terminated) or it can allow
the programmer to manage them manually.
29
<PAGE>
C++ PRODUCTS. The Company plans to introduce a new version of DBTools.h++
that will support SQL 3 features, as well as improved performance and support
for transactions. The Company is also working on libraries to facilitate
developing distributed intranet applications.
Rogue Wave plans to introduce a new product designed to integrate and
enhance the functionality of its code generation tools, zApp Factory and
DBFactory. The new product is being designed to enable customers to create
business objects that can include both visual and database access components.
The product is being designed to utilize live data, even in design mode, to
enhance the realism of applications as they are being developed. It is expected
to be able to generate both C++ code and database schema information to model
business objects.
JAVA PRODUCTS. The Company is also developing additional products for Java.
Although the Java language comes with a development library, the built-in
library lacks the breadth and sophistication of a complete foundation library
like Rogue Wave's Tools.h++. Rogue Wave plans to fill this gap by continuing to
augment JTools, its Java foundation library. Rogue Wave also plans to enhance
the current JFactory product with a family of products designed to allow the
building of business objects in Java. The new products will utilize the same
underlying code base used in the Company's C++ Factory product line. As with the
C++ Factory products, the resulting business objects can have both visual and
database components.
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
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company also believes that factors such as
the technological and creative skills of its personnel, new product
developments, frequent product enhancements, name recognition and reliable
product maintenance are essential to establishing and maintaining a
technological leadership position. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company currently has one patent
application pending in the United States. There can be no assurance that the
Company's pending patent application, whether or not being currently challenged
by applicable governmental patent examiners, will be issued with the scope of
the claims sought by the Company, if at all. Furthermore, there can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology or design around the Company's pending patent.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. The nature of many of
the Company's products requires the release of the source code to all customers.
As such, policing unauthorized use of the Company's products is difficult, and
while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights as fully as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary
rights in the United States or abroad will be adequate or that competition will
not independently develop similar technology.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties will not
claim infringement by the Company of their intellectual property rights. The
Company expects that software product developers will increasingly be subject to
infringement
30
<PAGE>
claims as the number of products and competitors in the Company's industry
segment grows and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time consuming to
defend, result in costly litigation, divert management's attention and
resources, cause product shipment delays or require the Company to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to the Company, if at all. In
the event of a successful claim of product infringement against the Company and
failure or inability of the Company to license the infringed or similar
technology, the Company's business, operating results and financial condition
would be materially and adversely affected.
COMPETITION
The market for the Company's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company's products are targeted
at the emerging market for C++ software parts and programming tools, and the
Company's competitors offer a variety of products and services to address this
market. The Company believes that the principal competitive factors in this
market are product quality, flexibility, performance, functionality and
features, use of standards based technology, quality of support and service,
company reputation and price. While price is less significant than other factors
for corporate customers, price can be a significant factor for individual
programmers. Direct competitors include Microsoft (with its MFC), IBM 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 may broaden the functions of MFC in order to address
and more effectively compete with the functionality of the Company's products.
Software applications can also be developed using software parts and programming
tools in environments other than C++. Indirect competitors with such offerings
include Microsoft (with its ActiveX technology), Borland, Oracle,
ParcPlace-Digitalk and Powersoft (a subsidiary of Sybase). Many of these
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources, significantly greater name recognition
and larger installed bases of customers than the Company. In addition, several
database vendors, such as Informix, Oracle and Sybase are increasingly
developing robust software parts for inclusion with their database products and
may begin to compete with the Company in the future. These potential competitors
have well-established relationships with current and potential customers and
have the resources to enable them to more easily offer a single vendor solution.
Like the Company's current competitors, many of these companies have longer
operating histories, significantly greater resources and name recognition and
larger installed bases of customers than the Company. As a result, these
potential competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than the
Company. In addition, the Company faces competition from Borland, Symantec and
other companies for its current Java products and it expects to face significant
competition in the future from such companies with respect to other Java
products the Company may introduce.
The Company also faces competition from systems integrators and internal
development efforts. Many systems integrators possess industry specific
expertise that may enable them to offer a single vendor solution more easily,
and already have a reputation among potential customers for offering
enterprise-wide solutions to software programming needs. There can be no
assurance that these third parties, many of which have significantly greater
resources than the Company, will not market competitive software products in the
future. It is also possible that new competitors or alliances among competitors
will emerge and rapidly acquire significant market share. The Company also
expects that competition will increase as a result of software industry
consolidation. Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could materially and
adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current and future competitors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, financial condition and results of operations.
31
<PAGE>
EMPLOYEES
As of September 30, 1996, the Company had a total of 172 employees, of which
166 were based in the United States and six were based in Germany. Of the total,
64 were engaged in sales and marketing, 62 were in product development, 18 were
in customer support, and 28 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 it relations with
its employees to be good.
FACILITIES
The Company's principal administrative, sales, marketing, support and
product development offices are located in facilities consisting of
approximately 41,000 square feet in Corvallis, Oregon and 13,000 square feet in
Mountain View, California. The leases on the Corvallis facilities expire on
various dates from 1998 through 2001 and the lease on the Mountain View facility
expires in 1999. The Company currently leases other domestic sales and support
offices in Colorado, New York, North Carolina and Oregon. The Company also
maintains an international office in Germany. The Company believes that its
existing 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.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
The directors, executive officers and certain key employees of the Company,
and their ages as of September 30, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- --- ------------------------------------
<S> <C> <C>
Thomas Keffer, Ph.D. 44 President, Chief Executive Officer
(1)...................... and Chairman of the Board of
Directors
Dan Whitaker.............. 42 Executive Vice President, Marketing
and Director
Michael Scally............ 45 Chief Operating Officer
Robert M. Holburn, Jr..... 50 Chief Financial Officer and
Secretary
Thomas B. Brookes......... 33 Vice President, Corporate Counsel
Michael A. Foreman........ 45 Vice President, Development
Allan Vermeulen, Ph.D..... 31 Chief Technical Officer
Thomas M. Atwood.......... 47 Director
Howard M. Love, Jr........ 36 Director
Richard P. Magnuson 40 Director
(1)(2)...................
Thomas H. Peterson 40 Director
(1)(2)...................
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
THOMAS KEFFER, PH.D., President, Chief Executive Officer and Chairman of the
Board of Directors, has been with the Company since its inception in 1989. Dr.
Keffer was a founder of the Company. Prior to 1989, Dr. Keffer was an Assistant
Professor of Oceanography at the University of Washington. Dr. Keffer received
his Ph.D. in Physical Oceanography from Oregon State University and his B.A.
from Cornell University.
DAN WHITAKER, Executive Vice President, Marketing and a director, has been
with the Company since January 1992. From June 1990 until January 1992, Mr.
Whitaker was the Vice President of Marketing for Evergreen Technologies, a
computer hardware company. Mr. Whitaker was a founder of the Software
Association of Oregon and served as its Director from 1989 to 1990. From 1982 to
1989 Mr. Whitaker served as President of Software Support Services, Inc., a
software company. Mr. Whitaker received his B.A. from Oregon State University.
MICHAEL SCALLY has served as the Chief Operating Officer of the Company
since June 1996. 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 world-wide MOS memory
operations. Mr. Holburn received his M.B.A. from the College of William and Mary
and his B.S. from the University of Rhode Island.
THOMAS B. BROOKES has served as the Company's Vice President, Corporate
Counsel since June 1996 and has been employed as legal counsel by the Company
since March 1994. From May 1993 to March 1994, Mr. Brookes was a practicing
attorney. From July 1992 to December 1992, Mr. Brookes served as the Vice
President of Text-Tel, Inc., a developer and designer of products for the
hearing impaired. From October 1989 to July 1992, Mr. Brookes was an attorney
with the law firm Wood Tatum Wonnacot & Landis. Mr. Brookes received his B.A.
from the University of Oregon and his J.D. from the University of Washington.
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<PAGE>
MICHAEL A. FOREMAN has served as Vice President, Development of the Company
since September 1996. From March 1995 to June 1996, he served as Vice President
of Research and Development for EyeSys Technologies, a medical device company.
Between May 1992 and March 1995, he was Senior Manager, Software Development at
Informix Software, a software company. Prior to joining Informix, he was
employed for nine years with Hewlett-Packard, a computer hardware company, where
he last served as Research and Development Project Manager, Software Engineering
Systems Division. Mr. Foreman received his M.B.A. from the University of
Maryland and his B.S. from Virginia Polytechnic Institute.
ALLAN VERMEULEN, PH.D. has served in a variety of positions with the Company
since January 1993, serving as Chief Technical Officer since October 1995. From
November 1994 to October 1995, Dr. Vermeulen served as Senior Software Engineer.
From January 1993 to November 1994, he served as a Technical Manager and
Software Engineer. Mr. Vermeulen was enrolled in a doctoral program at the
University of Waterloo, Canada prior to joining the Company. Dr. Vermeulen
received his Ph.D. in Systems Design Engineering and his B.S. from the
University of Waterloo, Canada.
THOMAS M. ATWOOD has been a director of the Company since October 1994. Mr.
Atwood is currently Chief Executive Officer of Cinebase Software, a software
company. Prior to that, he founded Object Design, Inc., a software company, in
1988 and served as its Chairman through December 1995.
HOWARD M. LOVE, JR. has been a director of the Company since October 1995.
Since May 1996, Mr. Love has been General Partner of Love Capital Partners,
L.P., an investment fund. From June 1984 until October 1995, Mr. Love served as
President and Chairman of the Board of Inmark.
RICHARD P. MAGNUSON has been a director of the Company since November 1995.
Mr. Magnuson has served as a partner of Menlo Ventures, a venture capital firm,
since 1984. Mr. Magnuson also serves as a director of OrCAD, Inc., a software
company, California Water Service Company, a water utility, and several
privately held companies.
THOMAS H. PETERSON has been a director of the Company since July 1994. Mr.
Peterson has been a general partner of certain venture capital funds associated
with El Dorado Ventures, a venture capital company, since May 1991. From 1986 to
May 1991, Mr. Peterson was an associate with El Dorado Ventures. Mr. Peterson
also serves as a director of several privately held companies.
The Company currently has authorized six directors. The current directors
were elected pursuant to the provisions of the Company's Certificate of
Incorporation in effect prior to the closing of this offering, and a voting
agreement that will expire upon the closing of this offering. The Certificate of
Incorporation provides for the election of two directors solely by the holders
of Preferred Stock, two directors solely by the holders of Common Stock and the
remaining two directors by the holders of Preferred Stock and Common Stock
voting together as a class, one of whom is designated in accordance with the
voting agreement. Each director holds office until the next annual meeting of
stockholders or until a successor is duly elected and qualified. The Company's
officers serve at the discretion of the Board of Directors.
COMMITTEES
The Audit Committee consists of Mr. Magnuson and Mr. Peterson. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.
The Compensation Committee consists of Dr. Keffer, Mr. Magnuson and Mr.
Peterson. The Compensation Committee makes recommendations regarding the
Company's 1996 Equity Incentive Plan and Employee Stock Purchase Plan and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
DIRECTORS' COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board and
committee meetings. Upon the completion of this offering, non-employee directors
will be eligible to participate in the Equity Incentive Plan. See "--Equity
Incentive Plans."
34
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Company serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of Directors
or Compensation Committee. See "Certain Transactions" for a description of
transactions between the Company and entities affiliated with members of the
Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the three other most highly compensated executive
officers (collectively, the "Named Executive Officers") whose salary and bonus
for the fiscal year ended September 30, 1996 were in excess of $100,000 for
services rendered in all capacities to the Company for that fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION ---------------------
------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION (1) SALARY ($) OPTIONS (#) COMPENSATION ($)
- ---------------------------------------------------------- ------------- --------------------- ----------------
<S> <C> <C> <C>
Thomas Keffer............................................. $ 145,000 -- --
President, Chief Executive Officer and Chairman of the
Board
Dan Whitaker.............................................. 120,000 -- --
Executive Vice President, Marketing and Director
Robert M. Holburn, Jr..................................... 105,000 26,666 --
Chief Financial Officer and Secretary
Thomas A. Nora (2)........................................ 98,440 -- $ 58,499(3)
Former Vice President of Sales
</TABLE>
- ------------------------
(1) Michael Scally, who joined the Company in June 1996 as Chief Operating
Officer, is paid an annual salary of $175,000 and would have been a Named
Executive Officer had he served during the entire fiscal 1996.
(2) Mr. Nora served as the Company's Vice President of Sales from March 1994
until July 1996.
(3) Represents commissions paid.
EQUITY INCENTIVE PLANS
1996 EQUITY INCENTIVE PLAN. The Company's 1996 Equity Incentive Plan (the
"Equity Incentive Plan") was adopted by the Board of Directors in June 1996 and
is expected to be approved by the stockholders in October 1996. The Equity
Incentive Plan amends and restates the Company's 1994 Stock Option Plan and the
Inmark Stock Option Plan. The Company has reserved a total of 3,000,000 shares
of Common Stock for issuance under the Equity Incentive Plan. The Equity
Incentive Plan provides for the following types of stock-based awards: incentive
stock options for employees (including officers and employee directors);
nonstatutory stock options for employees (including officers and employee
directors), directors and consultants; and restricted stock purchase awards,
stock bonuses and stock appreciation rights to employees (including officers and
employee directors) and consultants. The Equity Incentive Plan is administered
by the Board of Directors or a committee appointed by the Board, which
determines recipients and types of awards to be granted, including the exercise
prices, numbers of shares subject to the awards and the exercisability thereof,
provided that the terms of options granted to non-employee directors are
specified in the Equity Incentive Plan.
Non-employee directors are eligible only for nonstatutory option grants.
Each of the Company's existing non-employee directors (Messrs. Atwood, Love,
Magnuson and Peterson) will be granted an option to purchase 10,000 shares of
Common Stock on the date of this offering. In addition, each person who becomes
a non-employee director after the date of this offering will automatically be
granted an option to purchase 10,000 shares of Common Stock on the date of his
or her election to the Board. Such options will vest in 36 equal monthly
installments. Following each annual meeting of the Company's stockholders
occuring after September 30, 1997, each non-employee director who has
continuously served as a non-employee director since the last annual meeting
will be granted an option to purchase 3,500 shares of Common Stock, and each
other person who
35
<PAGE>
is then a non-employee director will be granted an option to purchase a prorated
number of shares of Common Stock based on the number of days such person has
continuously served as a non-employee director since the last annual meeting.
These options will be fully vested when granted.
The term of a stock option granted under the Equity Incentive Plan generally
may not exceed 10 years. 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, except that options
shall be fully vested if the optionee dies before the end of the three-month
period (12 months if the optionee is totally disabled) commencing with the
termination of the optionee's relationship with the Company. No stock option may
be transferred by the optionee other than by will or the laws of descent or
distribution or, in certain limited instances, pursuant to a domestic relations
order, provided that an optionee may designate a beneficiary who may exercise
the option following the optionee's death and a nonstatutory option may be
transferred to the extent provided in the option agreement. An optionee whose
relationship with the Company or any related corporation ceases for any reason
(other than by death or permanent and total disability) may exercise options in
the three-month period following such cessation (unless such options terminate
sooner or later by their terms). Options may be exercised for up to twelve
months after an optionee's relationship with the Company and related
corporations ceases due to death or disability (unless such options terminate
sooner or later by their terms).
No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of the Company or any affiliate of the Company,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant, and the term of the option
does not exceed five years from the date of grant. The aggregate fair market
value, determined at the time of grant, of the shares of Common Stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year (under all such plans of the Company and
its affiliates) may not exceed $100,000.
Shares subject to stock awards that have expired or otherwise terminated
without having been exercised in full again become available for the grant of
awards under the Equity Incentive Plan. Shares subject to exercised stock
appreciation rights will not again become available for the grant of new awards.
The Board of Directors has the authority to reprice outstanding options and
stock appreciation rights and to offer optionees and holders of stock
appreciation rights the opportunity to replace outstanding options and stock
appreciation rights with new options or stock appreciation rights for the same
or a different number of shares.
Restricted stock purchase awards granted under the Equity Incentive Plan may
be granted pursuant to a repurchase option in favor of the Company in accordance
with a vesting schedule and at a price determined by the Board of Directors.
Restricted stock purchases must be at a price equal to at least 85% of the
stock's fair market value on the award date, but stock bonuses may be awarded in
consideration of past services without a purchase payment. Rights under a stock
bonus or restricted stock bonus agreement may not be transferred other than by
will, the laws of descent and distribution or a domestic relations order while
the stock awarded pursuant to such an agreement remains subject to the
agreement. Stock appreciation rights granted under the Equity Incentive Plan may
be tandem rights, concurrent rights or independent rights.
Upon certain changes in control of the Company, all outstanding awards under
the Equity Incentive Plan must either be assumed or substituted by the surviving
entity. If the surviving entity determines not to assume or substitute such
awards, and with respect to persons then performing services as employees,
directors or consultants, the time during which such awards may be exercised
must be accelerated and the awards terminated if not exercised prior to such
change in control.
As of September 30, 1996, 233,795 shares of Common Stock had been issued
upon the exercise of options granted under the Equity Incentive Plan, options to
purchase 1,450,726 shares of Common Stock at a weighted average exercise price
of $2.38 were outstanding and 1,315,479 shares remained available for future
grant. The Equity Incentive Plan will terminate in June 2006 unless sooner
terminated by the Board of Directors.
36
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Board of Directors in June 1996 and is
expected to be approved by the stockholders in October 1996. The Company has
reserved a total of 350,000 shares of Common Stock for issuance under the
Purchase Plan. 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% (as determined by the Board for
each offering) of their earnings withheld pursuant to the Purchase Plan and
applied, on specified 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.
In the event of certain changes of control, the Company and the Board of
Directors have discretion to provide that each right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor corporation,
or the Board may shorten the offering period and provide for all sums collected
by payroll deductions to be applied to purchase stock immediately prior to the
change in control. The Purchase Plan will terminate at the Board's discretion.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during the
fiscal year ended September 30, 1996 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION FOR
UNDERLYING TOTAL OPTIONS OPTION TERM ($)(4)
OPTIONS GRANTED IN EXERCISE EXPIRATION ----------------------
NAME (1) GRANTED (2) FISCAL 1996 (3) PRICE ($/SH) DATE 5% 10%
- ----------------------------------- ----------- --------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thomas Keffer...................... -- -- -- -- -- --
Dan Whitaker....................... -- -- -- -- -- --
Robert M. Holburn, Jr.............. 26,666 4.8% $ 6.75 6/6/2006 $ 113,198 $ 286,866
Thomas A. Nora..................... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) Mr. Scally was granted options to purchase 200,000 shares in June 1996, each
with an exercise price of $6.75 per share. These options have a term of 10
years.
(2) 25% of these options vest on the first anniversary of the date of grant and
an additional 2.083% vest each month thereafter. These options have a term
of 10 years.
(3) Based on an aggregate of 555,066 shares subject to options granted to
employees of the Company under the Equity Incentive Plan in fiscal 1996,
including the Named Executive Officer.
(4) The potential realizable value is calculated based on the term of the option
at the time of grant (10 years). Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent the Company's prediction of its stock
price performance. The potential realizable values at 5% and 10%
appreciation are calculated by assuming that the exercise price on the date
of grant appreciates at the indicated rate for the entire term of the option
and that the option is exercised at the exercise price and sold on the last
day of its term at the appreciated price.
37
<PAGE>
AGGREGATED OPTIONS EXERCISED IN 1996 AND YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
shares acquired and the value realized on each exercise of stock options during
the year ended September 30, 1996 and the number and value of securities
underlying unexercised options held by the Named Executive Officers at September
30, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS (1)
SHARES VALUE -----------------------------
NAME ACQUIRED ON EXERCISE REALIZED EXERCISABLE
- ------------------------- ------------ ----------- ------------
<S> <C> <C> <C>
Thomas Keffer............ -- -- --
Dan Whitaker............. -- -- 150,493
Robert M. Holburn, Jr.... 10,000 $ 58,500 17,361
Thomas A. Nora........... 48,264 183,828 12,842
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS (2)
--------------------------------
NAME UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ------------------------- ------------- -------------------------
<S> <C> <C> <C>
Thomas Keffer............ -- -- --
Dan Whitaker............. 127,340 $ 1,106,123 $ 935,950
Robert M. Holburn, Jr.... 65,971 125,727 303,268
Thomas A. Nora........... -- 93,348 --
</TABLE>
- ------------------------
(1) These options vest monthly over four years and have a term of 10 years.
(2) Based on the difference between the deemed fair market value as determined
by the Board of Directors on September 30, 1996 ($7.50 per share) and the
exercise price.
401(K) PLAN
In January 1993, the Board adopted an employee savings and retirement plan
(the "401(k) Plan") covering certain of the Company's employees who have at
least 90 days of service with the Company, work a minimum of 1,000 hours during
the plan year and have attained the age of 21. Pursuant to the 401(k) Plan,
eligible employees may elect to reduce their current compensation by up to the
lesser of 20% of such compensation or the statutorily prescribed annual limit
($9,500 in 1996) and have the amount of such reduction contributed to the 401(k)
Plan. The Company matches all employee contributions up to 3% of earnings and
half of employee contributions from 3% to 5% of earnings. In addition, eligible
employees may make roll-over contributions to the 401(k) Plan from a
tax-qualified retirement plan. Employees become 20% vested in these Company
contributions after two years of service, and increase their vested percentages
by an additional 20% for each year of service thereafter. The 401(k) Plan is
intended to qualify under Section 401 of the Internal Revenue Code of 1986, as
amended, so that contributions by employees or by the Company to the 401(k)
Plan, and income earned on the 401(k) Plan contributions, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by the
Company, if any, will be deductible by the Company when made. The trustee under
the 401(k) Plan, at the direction of each participant, invests the 401(k) Plan
employee salary deferrals in selected investment options.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its other employees and agents to the fullest
extent permitted by Delaware law. The Company is also empowered under its Bylaws
to enter into indemnification contracts with its directors and officers and to
purchase insurance on behalf of any person it is required or permitted to
indemnify. Pursuant to this provision, the Company expects to enter into
indemnity agreements with each of its directors and executive officers.
In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. Each director
will continue to be subject to liability for breach of the director's duty of
loyalty to the Company, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for any transaction from
which the director derived an improper personal benefit, for improper
transactions between the director and the Company and for improper distributions
to stockholders and loans to directors and officers. This provision also does
not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws.
38
<PAGE>
The Company expects to enter into agreements with its directors and officers
that require the Company to indemnify such persons against expenses, judgments,
fines, settlements and other amounts actually and reasonably incurred (including
expenses of a derivative action) in connection with any proceeding, whether
actual or threatened, to which any such person may be made a party by reason of
the fact that such person is or was a director or officer of the Company or any
of its affiliated enterprises, provided such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described above or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
CERTAIN TRANSACTIONS
In July 1994, the Company issued an aggregate of 666,666 shares of Series A
Preferred Stock for an aggregate consideration of $1.0 million to entities
affiliated with El Dorado Ventures III, L.P. ("El Dorado III").
In December 1994, the Company issued an aggregate of 133,333 shares of
Series A Preferred Stock for an aggregate consideration of $200,000 to entities
affiliated with El Dorado III.
In November 1995, the Company issued an aggregate of 742,533 shares of
Series B Preferred Stock for an aggregate consideration of approximately $3.5
million. In connection with such financing, the Company issued (i) 247,225
shares of Series B Preferred Stock to entities affiliated with El Dorado III for
cash and (ii) 453,248 shares of Series B Preferred Stock to entities affiliated
with Menlo Ventures VI, L.P. ("Menlo Ventures VI") for cash.
Thomas Peterson, a director of the Company, is a general partner of El
Dorado Venture Partners III, the general partner of El Dorado III, El Dorado
Technology IV, L.P. and El Dorado C&L Fund, L.P. Richard Magnuson, a director of
the Company, is a partner of MV Management VI, L.P., the general partner of
Menlo Ventures VI.
As part of the Inmark Merger, Howard M. Love, Jr., a director of the
Company, exchanged all of his outstanding shares of Common Stock of Inmark for
284,233 shares of Common Stock of the Company. In addition, the Company entered
into an employment agreement with Mr. Love that provided for Mr. Love to remain
with the Company until January 1, 1996. The terms of the agreement provided for
a payment of $55,500 for back wages and a severance payment upon his termination
of employment of $16,667. Mr. Love terminated his employment in January 1996.
In June 1996, the Board of Directors amended the terms of the stock options
held by Mr. Holburn, Mr. Brookes and Mr. Nora to provide that, upon a change in
control of the Company, 50% of the unvested options of each such officer would
become immediately vested. The stock options were amended to make them
consistent with the terms of stock options granted to other executive officers.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been otherwise
obtained from unaffiliated third parties.
39
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's outstanding Common Stock as of September
30, 1996, and as adjusted to reflect the sale of the Common Stock being offered
hereby by (i) each person (or group of affiliated persons) who is known by the
Company to own beneficially more than 5% of the Common Stock, (ii) each of the
Company's directors, (iii) each of the Named Executive Officers, (iv) each of
the Selling Stockholders, and (v) all directors and executive officers of the
Company as a group. The table assumes the conversion of all outstanding
Preferred Stock into Common Stock upon the completion of this offering. Unless
otherwise specified, the address of the stockholder is the address of the
Company set forth herein.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO NUMBER OWNED AFTER
OFFERING (1) OF SHARES OFFERING (1)(2)
------------------------ BEING ----------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------------------- ---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Thomas Keffer, Ph.D....................................... 1,591,200 30.6% -- 1,591,200 22.1%
Entities affiliated with.................................. 1,130,984 21.7 -- 1,130,984 15.7
El Dorado Ventures III, L.P. (3)
20300 Stevens Creek Blvd., Suite 395
Cupertino, CA 95014
Entities affiliated with.................................. 606,809 11.7 -- 606,809 8.4
Menlo Ventures VI, L.P. (4)
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Dan Whitaker (5).......................................... 550,903 10.3 -- 550,903 7.5
Thomas A. Nora (6)........................................ 61,106 1.2 -- 61,106 *
Mary F. Rabe (7).......................................... 34,999 * 13,000 21,999 *
Robert M. Holburn, Jr. (8)................................ 30,139 * 30,139 *
Thomas H. Peterson (3).................................... 1,130,984 21.7 -- 1,130,984 15.7
Richard P. Magnuson (9)................................... 613,475 11.8 -- 613,475 8.5
Howard M. Love, Jr........................................ 303,725 5.8 -- 303,725 4.2
Thomas M. Atwood (10)..................................... 6,111 * -- 6,111 *
Peter Handsman (11)....................................... 52,465 1.0 7,000 45,465 *
Mark Richards (12)........................................ 13,427 * 5,000 8,427 *
All directors and executive officers as a group (9
persons) (13)............................................ 4,273,759 78.6 -- 4,273,759 57.5
</TABLE>
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 5,201,641 shares of Common
Stock outstanding as of September 30, 1996 and 7,201,641 shares of Common
Stock outstanding after completion of this offering.
(2) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." If the Underwriters' over-allotment option is exercised in
full, the Company and certain stockholders will sell up to an aggregate of
303,750 shares of Common Stock of the Company, and 7,205,391 shares of
Common Stock will be outstanding after the completion of this offering.
Specifically, (i) the Company will sell 3,750 shares, (ii) entities
affiliated with El Dorado III will sell an aggregate of up to 136,000 shares
and will beneficially own 994,984 shares, or 13.8% of the Company's Common
Stock, after completion of this offering, (iii) entities affiliated with
Menlo Ventures VI will sell an aggregate of up to 72,000 shares and will
beneficially own
40
<PAGE>
534,809 shares, or 7.4% of the Company's Common Stock, after completion of
this offering, (iv) Thomas Keffer will sell 40,000 shares and will
beneficially own 1,551,200 shares, or 21.5% of the Company's Common Stock,
after completion of this offering, (v) Howard M. Love, Jr. will sell 15,000
shares and will beneficially own 288,725 shares, or 4.0% of the Company's
Common Stock, after completion of this offering, (vi) Allan Vermeulen will
sell 16,000 shares and will beneficially own 121,156 shares or 1.7% of the
Company's Common Stock, after completion of this offering, (vii) Kevin
Gartner, an employee of the Company, will sell 16,000 shares and will
beneficially own 226,970 shares, or 3.1% of the Company's Common Stock,
after completion of this offering, and (viii) Michael Scally will sell 5,000
shares and will beneficially own 42,222 shares (less than 1% of the
Company's Common Stock) after completion of this offering.
(3) Represents 1,075,019 shares held by El Dorado III, 36,059 shares held by El
Dorado Technology IV, L.P., and 19,906 shares held by El Dorado C&L Fund,
L.P. Mr. Peterson, a director of the Company, is a general partner of El
Dorado Venture Partners III, the general partner of the entities affiliated
with El Dorado III. Mr. Peterson disclaims beneficial ownership of such
shares except to the extent of his partnership interest therein.
(4) Represents 597,708 shares held by Menlo Ventures VI and 9,101 shares held
by Menlo Entrepreneurs Fund VI, L.P. Mr. Magnuson, a director of the
Company, is a partner of MV Management VI, L.P., general partner of the
entities affiliated with Menlo Ventures VI. Mr. Magnuson disclaims
beneficial ownership of such shares except to the extent of his partnership
interest therein.
(5) Includes 162,069 shares subject to stock options exercisable within 60 days
of September 30, 1996.
(6) Includes 12,842 shares subject to stock options exercisable within 60 days
of September 30, 1996.
(7) Includes 28,333 shares subject to stock options exercisable within 60 days
of September 30, 1996.
(8) Includes 20,139 shares subject to stock options exercisable within 60 days
of September 30, 1996.
(9) Includes 597,708 shares held by Menlo Ventures VI and 9,101 shares held by
Menlo Entrepreneurs Fund VI, L.P. Mr. Magnuson, a director of the Company,
is a partner of MV Management VI, L.P., general partner of the entities
affiliated with Menlo Ventures VI. Mr. Magnuson disclaims beneficial
ownership of such shares except to the extent of his partnership interest
therein. Also includes 6,666 shares held by Richard P. and Amy C. Magnuson,
Trustees of the Magnuson Revocable Trust dated 1/14/94.
(10) Represents 6,111 shares subject to stock options exercisable within 60 days
of September 30, 1996.
(11) Includes 39,783 shares subject to stock options exerciable within 60 days
of September 30, 1996.
(12) Includes 3,031 shares subject to stock options exercisable within 60 days
of September 30, 1996.
(13) Includes 235,541 shares subject to stock options exercisable within 60 days
of September 30, 1996.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Certificate of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement, of which this Prospectus is a part.
Upon the closing of this offering, the authorized capital stock of the
Company, after giving effect to the conversion of all outstanding Preferred
Stock into Common Stock, and the amendment of the Company's Certificate of
Incorporation, will consist of 35,000,000 shares of Common Stock, $.001 par
value, and 5,000,000 shares of Preferred Stock, $.001 par value. As of September
30, 1996, there were approximately 74 holders of record of the Company's Common
and Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and, as a consequence, minority stockholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any then outstanding shares of Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of the Common Stock are entitled
41
<PAGE>
to share ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no preemptive rights and no right to convert their Common
Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred Stock
will be converted into 1,542,532 shares of Common Stock. See Note 7 of Notes to
Consolidated Financial Statements for a description of the currently outstanding
Preferred Stock. Following the conversion, the Company's Certificate of
Incorporation will be restated to delete all references to the prior series of
Preferred Stock. The Board of Directors has the authority, without further
action by the stockholders, to issue any undesignated shares of Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series,
without any further vote or action by stockholders. The issuance of Preferred
Stock could adversely affect the voting power of holders of Common Stock and the
likelihood that such holders will receive dividend payments and payments upon
liquidation and could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no present plan to issue any
shares of Preferred Stock.
REGISTRATION RIGHTS
After this offering, the holders of approximately 4,150,654 shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act, pursuant to the Amended and Restated
Investors' Rights Agreement among such holders and the Company, dated November
10, 1995 as amended June 27, 1996 (the "Investors' Rights Agreement"). Under the
terms of the Investors' Rights Agreement, if the Company proposes to register
any of its securities under the Securities Act, either for its own account or
for the account of other security holders exercising registration rights, such
holders are entitled to notice of such registration and are entitled, subject to
certain limitations, to include shares therein. The holders may also require the
Company to file a registration statement under the Securities Act with respect
to their shares, and the Company is required to use its best efforts to effect
two such registrations. Furthermore, the holders may require the Company to
register their shares on Form S-3 when such form becomes available to the
Company. Generally, the Company is required to bear all registration and selling
expenses incurred in connection with any such registrations. These rights are
subject to certain conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares included in such
registration. Such registration rights terminate seven years from the date of
this offering.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.
The Company's Certificate of Incorporation also requires that, effective
upon the closing of this offering, any action required or permitted to be taken
by stockholders of the Company must be effected at a duly called annual or
special meeting of the stockholders and may not be effected by a consent in
writing. In addition, special meetings of the stockholders of the Company may be
called only by the Board of Directors, the Chairman of the Board or the Chief
Executive Officer. These provisions may have the effect of delaying, deferring
or preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
Chase Mellon Shareholder Services L.L.C. has been appointed as the transfer
agent and registrar for the Company's Common Stock. Its telephone number is
(415) 954-9512.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of the offering, the Company will have outstanding an
aggregate of 7,201,641 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options and
based upon the number of shares outstanding as of September 30, 1996. Of these
shares, all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless such shares
are purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Affiliates"). In addition, 586,387 shares issued
in connection with the Inmark Merger will be freely tradeable without
restriction upon the expiration of the lock-up period described below. The
remaining 4,590,254 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act (the "Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules
are summarized below.
Upon completion of this offering, the holders of 4,150,654 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by Affiliates) immediately upon the effectiveness of such
registration. See "Description of Capital Stock--Registration Rights."
The Company, the Selling Stockholders and certain other stockholders of the
Company, including the executive officers and directors, who will own in the
aggregate 4,857,529 shares of Common Stock after the offering, have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire shares of Common
Stock owned by them during the 180-day period commencing on the date of this
Prospectus. The Company may, however, issue shares of Common Stock upon the
exercise of stock options that are currently outstanding, and may grant
additional options under the Equity Incentive Plan, provided that, without the
prior written consent of Hambrecht & Quist LLC, such additional options shall
not be exercisable during such period.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company, or person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Company's Common Stock or (ii) the average weekly
trading volume of the Company's Common Stock in the Nasdaq National Market
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission. Sales pursuant to
Rule 144 are subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
person whose shares are aggregated) who is not deemed to have been an Affiliate
of the Company at any time during the 90 days immediately preceding the sale and
who has beneficially owned Restricted Shares for at least three years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.
The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding periods required for shares
subject to Rule 144 and Rule 144(k) to become eligible for resale in the public
market. This proposal, if adopted, would substantially increase the number of
shares of Common Stock eligible for immediate resale following the expiration of
the lock-up agreements described above. No assurance can be given concerning
whether or when the proposal will be adopted by the Securities and Exchange
Commission.
Any employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
43
<PAGE>
provisions of Rule 701 under the Securities Act, which permits Affiliates and
non-Affiliates to sell their Rule 701 shares without having to comply with Rule
144's holding period restrictions, in each case commencing 90 days after the
date of this Prospectus. In addition, non-Affiliates may sell Rule 701 shares
without complying with the public information, volume and notice provisions of
Rule 144. Rule 701 is available for stockholders of the Company as to all shares
issued pursuant to the exercise of options granted prior to this offering.
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Company's
Equity Incentive Plan and the Purchase Plan. Based on the number of options
outstanding and options and shares reserved for issuance at September 30, 1996,
such registration statement would cover approximately 3,116,205 shares. Such
registration statement is expected to be filed and to become effective as soon
as practicable after the date hereof. Shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to Affiliates,
be available for sale in the open market, unless such shares are subject to
vesting restrictions with the Company or the lock-up agreements described above.
See "Management."
LEGAL PROCEEDINGS
On December 15, 1995, the Company filed suit in the Circuit Court of Benton
County (Oregon) against Eugene O. Cho, former Vice President of Marketing,
seeking a declaration of the rights of the parties in connection with 162,483
shares of Common Stock of the Company. The shares were the subject of two Stock
Restriction Agreements dated as of July 1, 1994 (the "Restriction Agreements"),
the meaning of the second of which is in dispute. The Company and Mr. Cho had
entered into a Separation Agreement on July 17, 1995 (the "Separation
Agreement") granting the Company repurchase rights as to certain of the shares
covered by the second Restriction Agreement and covering other issues relating
to Mr. Cho's termination of employment. After Mr. Cho refused to perform the
Separation Agreement that had been executed, the Company filed suit as described
above. The Company claims that the formula controlling the vesting of the
subject shares was inadvertently misstated in the second Restriction Agreement,
and seeks reformation of that agreement to reflect the true intent of the
parties, such that, effective upon the termination of Mr. Cho in May 1995, the
Company was entitled to repurchase 92,763 shares of Common Stock of the Company
at $0.15 per share. A First Amended Complaint was filed by the Company on March
26, 1996. On April 26, 1996, Mr. Cho filed an answer and counterclaims against
the Company, denying the Company's claims and seeking damages in connection with
the alleged breach by the Company of the Restriction Agreements and the
Separation Agreement. Mr. Cho also asserts a claim for rescission of the second
Restriction Agreement. The Company has denied the material allegations of the
counterclaims. The Company filed a Second Amended Complaint on August 23, 1996
adding a claim for breach of contract in connection with the Separation
Agreement. On September 16, 1996, Mr. Cho filed an answer denying the Company's
claims and asserting the same counterclaims as previously set forth. The case is
currently in the discovery stage. Trial is set for December 2, 1996.
On January 23, 1996, Matthew Steinauer, a former employee of the Company,
filed suit against Thomas Nora, the Company's former Vice President of Sales,
and Kevin Gartner, an employee of the Company, for intentional interference with
a contractual relationship. Mr. Steinauer also named the Company in his
complaint, alleging breach of contract. Mr. Steinauer is seeking $150,000 in
damages against Messrs. Nora and Gartner and $56,242 in damages against the
Company. As a former officer of the Company, Mr. Nora may have a claim for
indemnification with the Company. The Company and Messrs. Nora and Gartner filed
an answer on March 12, 1996, denying Mr. Steinauer's claims. The case is
currently in the discovery stage.
The Company has received a letter, dated October 1, 1996, from legal counsel
for Thomas Nora asserting various claims against the Company relating to the
termination of Mr. Nora's employment with the Company. The letter asserts Mr.
Nora's ownership of 140,000 shares of the Company's Common Stock and seeks to
have the Company repurchase such shares at a deemed fair value and to reimburse
Mr. Nora for specified expenses and unpaid wages. The Company believes that Mr.
Nora rightfully owns 48,264 shares of Common Stock and has the right to purchase
an additional 12,842 shares pursuant to stock options that expire on October 23,
1996.
44
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC
and Wessels, Arnold & Henderson, L.L.C., have severally agreed to purchase from
the Company and the Selling Stockholders the following respective numbers of
shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC.............................................................
Wessels, Arnold & Henderson, L.L.C................................................
----------
Total............................................................................. 2,025,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters.
The Company and certain stockholders have granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to 303,750 additional shares of Common Stock at the initial public
offering price, less the underwriting discount, set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise this option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the above table bears to the total number of shares of
Common Stock offered hereby. The Company and such stockholders will be
obligated, pursuant to the option, to sell shares to the Underwriters to the
extent the option is exercised. The Underwriters may exercise such option only
to cover over-allotments made in connection with the sale of shares of Common
Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Company, the Selling Stockholders and certain other stockholders of the
Company, including the executive officers and directors, who will own in the
aggregate 4,857,529 shares of Common Stock after the offering, have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
directly or indirectly, sell, offer, contract to sell, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of any
shares of Common Stock or any securities convertible into or exchangeable or
45
<PAGE>
exercisable for or any other rights to purchase or acquire shares of Common
Stock owned by them during the 180-day period commencing on the date of this
Prospectus. The Company may, however, issue shares of Common Stock upon the
exercise of stock options that are currently outstanding, and may grant
additional options under the Equity Incentive Plan, provided that, without the
prior written consent of Hambrecht & Quist LLC, such additional options shall
not be exercisable during such period.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company, the Selling Stockholders and the Representatives.
Among the factors to be considered in determining the initial public offering
price are prevailing market and economic conditions, revenue and earnings of the
Company, market valuations of other companies engaged in activities similar to
the Company, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, the Company's management
and other factors deemed relevant. The estimated initial public offering price
range set forth on the cover of this preliminary prospectus is subject to change
as a result of market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP, Menlo Park, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Fenwick & West LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company as of September 30,
1995 and 1996 and for each of the years in the three-year period ended September
30, 1996 have been included in this Prospectus and elsewhere in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein and upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission (the "Commission"). This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and copies of all or any part thereof may be
obtained from the Commission upon the payment of certain fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information filed
electronically with the Commission. The address of the site is
http://www.sec.gov.
46
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP........................................... F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Stockholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rogue Wave Software, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Rogue Wave
Software, Inc. and subsidiaries as of September 30, 1995 and 1996, 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, 1996.
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, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 1996 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Portland, Oregon
October 16, 1996
F-2
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
ASSETS 1995 1996 1996
--------- --------- -----------
(UNAUDITED)
(PRO FORMA)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 1,010 $ 1,714
Accounts receivable, net....................................... 2,164 4,527
Prepaid expenses and other current assets...................... 212 873
Deferred income taxes.......................................... 80 108
--------- ---------
Total current assets......................................... 3,466 7,222
Furniture, fixtures and equipment, net........................... 889 2,718
Other noncurrent assets, net..................................... 403 254
--------- ---------
Total assets................................................. $ 4,758 $ 10,194
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... 520 637
Accrued expenses............................................... 668 805
Deferred revenue............................................... 1,351 2,881
Current portion of long-term obligations....................... 230 217
--------- ---------
Total current liabilities.................................... 2,769 4,540
Long-term obligations, less current portion...................... 230 322
--------- ---------
Total liabilities............................................ 2,999 4,862
--------- ---------
Commitments and contingencies
Mandatorily redeemable preferred stock, $.001 par value.
Authorized 1,200 and 2,350 shares at September 30, 1995 and
1996, respectively; issued and outstanding 800 and 1,543 shares
at September 30, 1995 and 1996, respectively ($1,200 and $4,731
aggregate liquidation and redemption preference at September 30,
1995 and 1996, respectively); pro forma no shares issued and
outstanding..................................................... 1,140 4,664 $ --
--------- --------- -----------
Stockholders' equity:
Common stock, $.001 par value. Authorized 13,000 shares; issued
and outstanding 3,425 and 3,659 shares at September 30, 1995
and 1996, respectively; pro forma 5,202 shares issued and
outstanding................................................... 3 4 5
Additional paid-in capital..................................... 640 676 5,339
Stockholder note receivable.................................... (13) (13) (13)
Retained earnings (deficit).................................... (11) 24 24
Cumulative translation adjustment.............................. -- (23) (23)
--------- --------- -----------
Total stockholders' equity................................... 619 668 $ 5,332
--------- --------- -----------
-----------
Total liabilities and stockholders' equity................... $ 4,758 $ 10,194
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
Revenue:
<S> <C> <C> <C>
License revenue................................................. $ 6,652 $ 10,417 $ 14,986
Service and maintenance revenue................................. 557 1,520 3,859
--------- --------- ---------
Total revenue................................................. 7,209 11,937 18,845
--------- --------- ---------
Cost of revenue:
Cost of license revenue......................................... 693 1,048 1,276
Cost of service and maintenance revenue......................... 331 1,123 1,663
--------- --------- ---------
Total cost of revenue......................................... 1,024 2,171 2,939
--------- --------- ---------
Gross profit.................................................. 6,185 9,766 15,906
--------- --------- ---------
Operating expenses:
Product development............................................. 2,109 3,204 5,548
Sales and marketing............................................. 2,652 4,880 8,234
General and administrative...................................... 780 1,487 2,204
--------- --------- ---------
Total operating expenses...................................... 5,541 9,571 15,986
--------- --------- ---------
Income (loss) from operations................................. 644 195 (80)
Other income (expense), net....................................... 4 (10) 91
--------- --------- ---------
Income before income taxes.................................... 648 185 11
Income tax expense (benefit)...................................... 80 106 (24)
--------- --------- ---------
Net income.................................................... $ 568 $ 79 $ 35
--------- --------- ---------
--------- --------- ---------
Net income per common share....................................... $ 0.14 $ 0.02 $ 0.01
--------- --------- ---------
--------- --------- ---------
Shares used in per share calculation.............................. 4,154 5,009 6,045
Pro forma net income data (unaudited):
Income before income taxes, as reported......................... $ 648
Pro forma income tax expense.................................... 142
---------
Pro forma net income.......................................... $ 506
---------
---------
Pro forma net income per common share (unaudited)................. $ 0.12
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDER RETAINED CUMULATIVE TOTAL
--------------- PAID-IN NOTE EARNINGS TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT) ADJUSTMENT EQUITY
------ ------ ---------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993........... 3,342 $ 3 $ 612 $ -- $ (158) $ -- $ 457
Issuance of common stock................ 83 -- 24 (13) -- -- 11
Dividends paid.......................... -- -- -- -- (500) -- (500)
Net income.............................. -- -- -- -- 568 -- 568
------ ------ ---------- ----------- --------- ----------- -----
Balance at September 30, 1994........... 3,425 3 636 (13) (90) -- 536
Issuance of common stock................ -- -- 4 -- -- -- 4
Net income.............................. -- -- -- -- 79 -- 79
------ ------ ---------- ----------- --------- ----------- -----
Balance at September 30, 1995........... 3,425 3 640 (13) (11) -- 619
Exercise of stock options............... 234 1 36 -- -- -- 37
Net income.............................. -- -- -- -- 35 -- 35
Foreign currency translation
adjustment............................. -- -- -- -- -- (23) (23)
------ ------ ---------- ----------- --------- ----------- -----
Balance at September 30, 1996........... 3,659 $ 4 $ 676 $ (13) $ 24 $ (23) $ 668
------ ------ ---------- ----------- --------- ----------- -----
------ ------ ---------- ----------- --------- ----------- -----
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income........................................................... $ 568 $ 79 $ 35
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization...................................... 266 514 807
Loss on disposal of equipment...................................... -- 23 --
Changes in assets and liabilities:
Accounts receivable.............................................. (618) (1,115) (2,385)
Prepaid expenses and other current assets........................ (105) (54) (661)
Deferred income taxes............................................ -- (80) (28)
Other noncurrent assets.......................................... (54) (16) (72)
Accounts payable and accrued expenses............................ 610 440 254
Deferred revenue................................................. 462 702 1,530
--------- --------- ---------
Net cash from operating activities............................. 1,129 493 (520)
--------- --------- ---------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment........................ (368) (326) (2,040)
(Purchase) maturity of short-term investments........................ (344) 344 --
Payments for software rights......................................... (174) -- --
--------- --------- ---------
Net cash from investing activities............................. (886) 18 (2,040)
--------- --------- ---------
Cash flows from financing activities:
Payments on long-term obligations.................................... (162) (313) (296)
Dividends paid....................................................... (500) -- --
Net proceeds from issuance of mandatorily redeemable preferred
stock............................................................... 941 199 3,524
Proceeds from issuance of common stock............................... 11 4 --
Proceeds from exercise of stock options.............................. -- -- 37
--------- --------- ---------
Net cash from financing activities............................. 290 (110) 3,265
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents........... -- -- (1)
--------- --------- ---------
Net change in cash and cash equivalents........................ 533 401 704
Cash and cash equivalents at beginning of period....................... 76 609 1,010
--------- --------- ---------
Cash and cash equivalents at end of period............................. $ 609 $ 1,010 $ 1,714
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest............................................... $ 9 $ 53 $ 37
Cash paid for taxes.................................................. 18 258 106
Supplemental disclosure of non-cash investing and financing activities:
Acquisition of equipment financed by capital lease obligations....... 46 346 375
Purchase of software rights financed by long-term debt............... 445 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
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. (the Company) was founded in 1989 and is primarily
engaged in the development, sale and support of object-oriented software parts
and related tools. As more fully discussed in note 2, the Company acquired
Inmark Development Corporation (Inmark) in a transaction accounted for as a
pooling of interests effective October 27, 1995. Financial statements for the
periods prior to the merger have been restated to reflect the combined amounts
for the Company and Inmark.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Rogue Wave Software GmbH (incorporated
January 1996) and Inmark. The Company translates the accounts of its foreign
subsidiary using the local foreign currency as the functional currency. All
significant intercompany balances and transactions have been eliminated in
consolidation.
CASH EQUIVALENTS
Cash equivalents consist of investments in highly liquid investment
instruments with original maturities of three months or less to the Company.
ACCOUNTS RECEIVABLE
Accounts receivable are shown net of allowance for doubtful accounts of $251
and $107 at September 30, 1995 and 1996, respectively.
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 assets.
INTANGIBLE ASSETS
Other noncurrent assets include purchased software rights and a covenant not
to compete, which are amortized over three years using the straight-line method.
Original cost of these intangibles was $670 at September 30, 1995 and 1996.
Accumulated amortization at September 30, 1995 and 1996 was $341 and $562,
respectively. Amortization charged to expense was $106, $224 and $221 for the
years ended September 30, 1994, 1995 and 1996, respectively.
REVENUE RECOGNITION
License revenue is recognized at the time of shipment. Revenue from service
contracts sold in conjunction with product sales is also recognized at the time
of sale. The service contracts generally are for thirty days.
Maintenance and service revenue includes maintenance revenue which is
recognized ratably over the maintenance period and revenue from training and
consulting services, which is recognized as services are performed.
The Company generally provides a thirty-day right of return policy for
software sales. The allowance for returns was $111 at September 30, 1995 and
1996.
F-7
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents and
accounts receivable. Management believes the credit risk associated with cash
and cash equivalents is minimal. At September 30, 1996, one customer accounted
for approximately 11% of accounts receivable.
The Company sells its products primarily to major corporations that serve a
wide variety of U.S. and foreign markets. International revenue accounted for
approximately 19% of the Company's total revenue in 1996.
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. Future capitalized costs, if any,
will be amortized on a straight-line basis over the estimated life of the
products or the ratio of current revenue to the total of current and anticipated
future revenue, whichever expense is greater.
INCOME TAXES
Prior to July 1, 1994, the Company was taxed under the S Corporation
provisions of the Internal Revenue Code. Under those provisions, the Company did
not pay federal or state corporate income taxes on its taxable income. Instead,
the stockholders were liable for federal and state income taxes on the Company's
taxable income.
Effective June 30, 1994, the S Corporation election was terminated. The
Company's income taxes since that date, as well as unaudited pro forma and
Inmark income taxes for all periods presented, have been provided for under
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES
(SFAS No. 109). SFAS No. 109 is an asset and liability approach that requires
deferred tax assets and liabilities to be recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
COMPUTATION OF NET INCOME PER SHARE
Net income per share is computed using the weighted average number of shares
of common and common equivalent shares outstanding. Common equivalent shares are
excluded from the computation if their effect is antidilutive, except that
pursuant to the Securities and Exchange Staff Accounting Bulletins, common and
common equivalent shares issued at prices below the public offering price during
the twelve months immediately preceding the initial filing date have been
included in the calculation as if they were outstanding for all periods
presented using the treasury stock method and the initial public offering price.
Common equivalent shares consist of the common shares issuable upon the
conversion of the Series A preferred stock (using the if-converted method) and
incremental shares issuable upon the exercise of stock options and upon the
conversion of the Series B preferred stock (using the treasury stock method).
FINANCIAL INSTRUMENTS
The recorded amounts of financial instruments approximate their fair market
values.
F-8
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
(2) MERGER
On October 27, 1995, the Company acquired all of the common stock of 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.
Separate results of operations for the periods prior to the merger are as
follows:
<TABLE>
<CAPTION>
THE COMPANY INMARK COMBINED
----------- --------- -----------
<S> <C> <C> <C>
Year ended September 30, 1994:
Total revenue.................................................... $ 4,570 $ 2,639 $ 7,209
Net income....................................................... 528 40 568
Year ended September 30, 1995:
Total revenue.................................................... 8,663 3,274 11,937
Net income (loss)................................................ 349 (270) 79
One month ended October 31, 1995:
Total revenue.................................................... 835 237 1,072
Net income (loss)................................................ (58) 16 (42)
</TABLE>
Merger costs of $120 were incurred and charged to expense in the first
quarter of 1996 for services rendered to facilitate completion of the
transaction.
(3) BALANCE SHEET COMPONENTS
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1995 1996
------ ---------
<S> <C> <C>
Computer equipment....................... $1,213 $ 3,257
Furniture, fixtures and equipment........ 179 550
------ ---------
1,392 3,807
Less accumulated depreciation and
amortization............................ 503 1,089
------ ---------
Furniture, fixtures and equipment,
net................................... $ 889 $ 2,718
------ ---------
------ ---------
</TABLE>
Depreciation expense for the years ended September 30, 1994, 1995, and 1996
was $160, $262 and $586, respectively.
F-9
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) BALANCE SHEET COMPONENTS (CONTINUED)
ACCRUED EXPENSES
The Company's accrued expenses include the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1995 1996
---- ----
<S> <C> <C>
Accrued payroll and related
liabilities............................. $316 $471
Other accrued expenses................... 352 334
---- ----
Accrued expenses....................... $668 $805
---- ----
---- ----
</TABLE>
(4) LEASES
The Company leases certain of its office space through noncancelable
operating lease arrangements. The leases expire 1997 through 2001 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, 1994, 1995 and 1996 was $157, $210 and $566, respectively.
Property under capital leases at September 30, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Computer equipment........................................ $388 $750
Office furniture and equipment............................ 26 39
---- ----
Total................................................... 414 789
Less accumulated amortization............................. 112 282
---- ----
Property under capital leases, net...................... $302 $507
---- ----
---- ----
</TABLE>
Amortization expense is included in depreciation expense for furniture,
fixtures and equipment.
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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
Year ending September 30:
1997............................................ $248 $ 606
1998............................................ 217 700
1999............................................ 121 650
2000............................................ 4 259
2001............................................ -- 156
------- ---------
Total minimum lease payments.................. 590 $2,371
---------
---------
Less amounts representing interest................ 51
-------
Present value of future minimum lease
payments..................................... 539
Less current portion.............................. 217
-------
Obligations under capital leases, less current
portion...................................... $322
-------
-------
</TABLE>
F-10
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
-------------
<S> <C>
Note payable to bank, secured by all accounts
receivable, inventory and equipment, payable in
monthly installments of $3, including interest at
9.5%, due February 1996, guaranteed by certain
stockholders...................................... $ 17
Notes payable in installments of $150 and $125, due
July 1, 1995 and July 1, 1996, respectively,
noninterest bearing (less unamortized discount of
$19 at September 30, 1995, based on imputed
interest rate of 8.75%)........................... 106
---
123
Less current portion of long-term debt............. 123
---
Long-term debt, less current portion............. $ --
---
---
</TABLE>
(6) INCOME TAXES
As described in note 1, the Company was taxed as an S Corporation through
June 30, 1994. Pro forma figures for 1994 are presented to show the impact as if
the Company's earnings from continuing operations had been subject to federal
and state income taxes as a C Corporation in that year. Actual figures for 1994
and all remaining periods presented reflect the Company's taxes as a C
Corporation effective July 1, 1994 and Inmark's taxes as a C Corporation.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1994 1994 1995 1996
--- ------------- --------- ---------
(UNAUDITED)
(PRO FORMA)
<S> <C> <C> <C> <C>
Current:
Federal..................................................... $ 62 $ 154 $ 142 $ --
State and local............................................. 18 42 44 4
--
--- --- ---------
80 196 186 4
--
--- --- ---------
Deferred:
Federal..................................................... -- (37) (49) (22)
State and local............................................. -- (17) (31) (6)
--
--- --- ---------
-- (54) (80) (28)
--
--- --- ---------
Total..................................................... $ 80 $ 142 $ 106 $ (24)
--
--
--- --- ---------
--- --- ---------
</TABLE>
F-11
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) INCOME TAXES (CONTINUED)
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1994 1994 1995 1996
--------- ------------- --------- ---------
<CAPTION>
(UNAUDITED)
(PRO FORMA)
<S> <C> <C> <C> <C>
Computed expected income tax expense........................................ $ 220 $ 220 $ 63 $ 4
Increase (reduction) in income tax expense resulting from:
State income tax expense.................................................. 14 32 1 3
Research and experimentation credit....................................... (57) (152) (110) (108)
Change in valuation allowance............................................. 16 16 120 43
Rate differential......................................................... -- -- 14 --
Exclusion of earnings for period that S Corporation election was valid.... (121) -- -- --
Non-deductible meals and entertainment.................................... 3 4 9 14
Other, net................................................................ 5 22 9 20
--- --- --------- ---------
Income tax expense (benefit)............................................ $ 80 $ 142 $ 106 $ (24)
--- --- --------- ---------
--- --- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1995 1996
----- -----
Deferred tax assets:
<S> <C> <C>
Intangible assets.............................. $ 25 $ 37
Accrued expenses............................... 142 95
Net operating loss carryforwards............... 171 74
Foreign operating loss carryforwards........... -- 66
Research and experimentation credit
carryforward.................................. 120 217
Other.......................................... 3 14
----- -----
Total gross deferred tax assets.............. 461 503
Valuation allowance............................ (314) (357)
----- -----
Net deferred tax assets...................... 147 146
Deferred tax liabilities:
Cash to accrual adjustment..................... 27 18
Property and equipment, due to differences in
depreciation.................................. 40 20
----- -----
Total gross deferred tax liabilities......... 67 38
----- -----
Net deferred taxes........................... $ 80 $ 108
----- -----
----- -----
</TABLE>
At September 30, 1996, the Company had net operating loss carryforwards for
federal, state and foreign income tax purposes of $186, $172 and $136,
respectively. The federal net operating losses expire 2007 to 2010 and the state
net operating loss expires in 2000. The Company also had $217 of tax credit
carryforwards that expire 2003 to 2011. The net operating loss and $120 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
are limited by the future taxable income of Inmark.
F-12
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) PREFERRED STOCK
The Company has 2,350 shares of preferred stock authorized at September 30,
1996. The stock has a par value of $.001 and was issued in mandatorily
redeemable Series A and Series B (Series A and B). The terms of the Series A and
B preferred stock are:
- Each share of Series A and B preferred stock is voting and convertible
into common stock using formulas specified in the Series A and B Preferred
Stock Purchase Agreements. Series A and B preferred stockholders have
non-cumulative dividend rights at the rate of $.09 per share and $.48 per
share, respectively, payable in preference and priority to common stock.
Upon liquidation, Series A and B preferred stockholders are entitled to be
paid out of the assets of the Company which are available for distribution
to its stockholders before any payment is made to common stockholders.
Series A and B preferred stockholders will receive an amount equal to
$1.50 per share and $4.76 per share, respectively, plus all related
declared and unpaid dividends.
- There is an automatic conversion of Series A and B preferred stock into
shares of common stock upon the affirmative vote of the holders of at
least a majority of the outstanding shares of the Series A and B preferred
stock, or immediately upon the closing of a firmly underwritten public
offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of the
Company's common stock that results in gross cash proceeds of at least
$10,000 and that has a public offering price of at least $9.51 per share.
Other rights and restrictions of Series A and B preferred stockholders are
as follows:
- Redemption rights upon demand of at least a majority of the then
outstanding shares of Series A and B preferred stock in three equal annual
installments beginning on May 15, 1999 and ending on May 15, 2001. The
redemption rights provide for redemption rates identical to the
liquidation rates described above.
- Shares are subject to an Investors' Rights Agreement which provides for
the registration of the shares under the Securities Act of 1933 under
certain circumstances.
- Shares are subject to a Co-Sale and Voting Agreement which obligates the
Series A and B preferred stockholders to vote in a certain manner with
regard to the election of the Board members and which grants to preferred
stockholders and common "key stockholders" the opportunity to participate
on a pro-rata basis in subsequent sales of the common or preferred stock
of the Company made by each stockholder subject to this Agreement.
(8) EQUITY INCENTIVE PLAN
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 replaces the Company's 1994 Stock Option Plan and the Inmark
Stock Option Plan.
The Equity Incentive Plan provides for grants of 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 the Board of
Directors of a committee appointed by the Board, 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.
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
F-13
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) EQUITY INCENTIVE PLAN (CONTINUED)
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.
The following table summarizes stock option activity through September 30,
1996:
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------
QUALIFIED NONQUALIFIED
INCENTIVE STOCK
OPTIONS OPTIONS TOTAL PRICE PER SHARE
--------- ------------ ----- ---------------
<S> <C> <C> <C> <C>
Outstanding options at September 30, 1993.... 103 -- 103 $ .39-1.94
Granted...................................... 1,085 -- 1,085 .15-1.94
Exercised.................................... -- -- -- --
Canceled..................................... -- -- -- --
--------- ----- ----- ---------------
Outstanding options at September 30, 1994.... 1,188 -- 1,188 .15-1.94
Granted...................................... 447 13 460 .15-1.94
Exercised.................................... -- -- -- --
Canceled..................................... (267) -- (267) .15
--------- ----- ----- ---------------
Outstanding options at September 30, 1995.... 1,368 13 1,381 .15-1.99
Granted...................................... 441 113 554 .53-7.50
Exercised.................................... (234) -- (234) .15-1.94
Canceled..................................... (251) -- (251) .15-6.76
--------- ----- ----- ---------------
Outstanding options at September 30, 1996.... 1,324 126 1,450 $ .15-7.50
--------- ----- ----- ---------------
--------- ----- ----- ---------------
</TABLE>
Of the 1,450 options outstanding, 446 options were vested and exercisable as
of September 30, 1996.
(9) EMPLOYEE STOCK PURCHASE PLAN
In June 1996, the Board 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.
(10) STOCK RESTRICTION AGREEMENTS
The Company has entered into stock restriction agreements with certain
stockholders which restrict the sale or transfer of "unvested shares" (shares
vest 50% on or after July 1, 1994, plus an additional 1.388% on or after the
first day of each full month thereafter; shares are 100% vested on or after July
1, 1997).
F-14
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(10) STOCK RESTRICTION AGREEMENTS (CONTINUED)
These agreements also give the Company the option to purchase stockholders'
unvested shares under certain conditions at prices determined according to terms
specified in the agreements.
These stock restriction agreements terminate upon the earlier to occur of
the following events:
- Consummation of the Company's sale of its common stock in a firm
commitment underwritten public offering pursuant to a registration
statement filed under the Securities Act of 1933, as amended, which
results in aggregate offering proceeds paid to the Company of at least
$7,500 and a public offering price of at least $11.25 per share (as
adjusted for subsequent stock dividends, stock splits and
recapitalizations) (see note 13); or
- The stockholder no longer holds any unvested shares.
(11) QUALIFIED PROFIT SHARING PLAN
The Company adopted a 401(k) profit sharing plan in January 1993. The plan
is offered to eligible employees and calls for a discretionary employer match of
employee contributions which is approved by the Board of Directors. To
participate in the plan, employees must be 21 years of age, 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 percent of earnings and half of
employee contributions from 3 percent to 5 percent. Company contributions paid
in the years ended September 30, 1994, 1995 and 1996, were $49, $31 and $118,
respectively.
(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) SUBSEQUENT EVENT
The Company effected a 2 for 3 reverse stock split in October 1996. All
share and per share amounts have been restated to reflect the reverse split.
F-15
<PAGE>
THE SOFTWARE PARTS COMPANY [COMPANY LOGO]
FACTORIES FOR BUILDING C++ AND JAVA-TM- APPLICATIONS
[GRAPHIC DEPICTING SCREENS FROM THE COMPANY'S ZAPP FACTORY, DBFACTORY AND
JFACTORY PRODUCTS, INCLUDING TEXT NEXT TO THE ZAPP FACTORY SCREEN "BUILD CROSS
PLATFORM, NATIVE C++ GUI'S, DRAWING ON HUNDREDS OF PRE-BUILT CLASSES," TEXT NEXT
TO THE DBFACTORY SCREEN "GENERATE C++ CLASSES THAT MAP TO DATA IN AN RDBMS, AND
TEXT NEXT TO THE JFACTORY SCREEN "BUILD JAVA APPLICATIONS QUICKLY WITH THIS
INTUITIVE, DRAG-AND-DROP DESIGNER."]
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 5
Use of Proceeds...................................... 13
Dividend Policy...................................... 13
Capitalization....................................... 14
Dilution............................................. 15
Selected Consolidated Financial Data................. 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 17
Business............................................. 22
Management........................................... 33
Certain Transactions................................. 39
Principal and Selling Stockholders................... 40
Description of Capital Stock......................... 41
Shares Eligible for Future Sale...................... 43
Legal Proceedings.................................... 44
Underwriting......................................... 45
Legal Matters........................................ 46
Experts.............................................. 46
Additional Information............................... 46
Index to Consolidated Financial Statements........... F-1
</TABLE>
--------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,025,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
, 1996
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act").
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty of
care to the Registrant and its stockholders. These provisions do not eliminate
the directors' duty of care and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Registrant, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for any transaction from which the
director derived an improper personal benefit, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
The Registrant expects to enter into agreements with its directors and
officers that require the Registrant to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Registrant or any of its affiliated enterprises, provided such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Registrant and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The indemnification agreements also set forth certain procedures that
will apply in the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee................................................ $ 7,763
NASD filing fee................................................. 3,062
Nasdaq application fee.......................................... 50,000
Blue sky qualification fee and expenses......................... 12,000
Printing and engraving expenses................................. 135,000
Legal fees and expenses......................................... 325,000
Accounting fees and expenses.................................... 250,000
Directors' and officers' insurance.............................. 150,000
Transfer agent and registrar fees............................... 30,000
Miscellaneous................................................... 37,175
---------
Total....................................................... $1,000,000
---------
---------
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since September 30, 1993, the Registrant has sold and issued the following
unregistered securities:
(1) In July 1994, the Company issued an aggregate of 666,666 shares of
Series A Preferred Stock for an aggregate consideration of $1.0 million to
entities affiliated with El Dorado Ventures III, L.P. ("El Dorado III").
(2) In December, 1994, the Company issued an aggregate of 133,333 shares of
Series A Preferred Stock for an aggregate consideration of $200,000 to entities
affiliated with El Dorado III.
(3) In November 1995, the Company issued an aggregate of 742,533 shares of
Series B Preferred Stock for an aggregate consideration of $3,530,762. In
connection with such financing, the Company issued (i) 247,225 shares of Series
B Preferred Stock to entities affiliated with El Dorado III for cash and (ii)
453,248 shares of Series B Preferred Stock to entities affiliated with Menlo
Ventures VI, L.P. ("Menlo Ventures VI") for cash.
(4) On October 27, 1995, the Company merged with Inmark Development Company
("Inmark") and acquired all of the outstanding common stock of Inmark in
exchange for 877,620 shares of the Company's Common Stock.
(5) The Registrant sold an aggregate of 233,795 shares of its Common Stock
to employees, directors and consultants of the Registrant for consideration in
the aggregate amount of $58,436 pursuant to the exercise of stock options
granted under the 1994 Stock Option Plan and Inmark Stock Option Plan.
The sales and issuances of securities in the transactions described in
paragraphs (1) through (3) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) and/or Regulation D
promulgated under the Securities Act. The purchasers in each case represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof. Appropriate legends are affixed to the stock
certificates issued in such transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.
The sales and issuances of securities in the transaction described in
paragraph (4) above were deemed to be exempt from registration under the
Securities Act by virtue of Section 3(a)(10) promulgated under the Securities
Act.
The sales and issuance of securities in the transaction described in
paragraph (5) above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
+2.1 Agreement and Plan of Reorganization between Registrant, Inmark Development Corporation and RW
Acquisition, Inc., dated as of September 19, 1995.
*2.2 Agreement and Plan of Merger between the Registrant and Rogue Wave Software, Inc., an Oregon
corporation, dated as of , 1996.
*3.1 Certificate of Incorporation of Rogue Wave Software, Inc., a Delaware corporation, as currently in
effect.
*3.2 Amended and Restated Certificate of Incorporation of Rogue Wave Software, Inc., a Delaware corporation,
as in effect immediately following the closing of the offering.
*3.3 Bylaws of Rogue Wave Software, Inc., a Delaware corporation.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
*4.2 Specimen Stock Certificate.
+4.3 Amended and Restated Investors' Rights Agreement between the Registrant and certain investors, dated
November 10, 1995, as amended June 27, 1996.
5.1 Opinion of Cooley Godward LLP.
10.1 Registrant's 1996 Equity Incentive Plan and related documents.
10.2 Registrant's Employee Stock Purchase Plan and related documents.
+10.3 Form of Indemnity Agreement to be entered into between the Registrant and its officers and directors.
+10.4 Lease Agreement between Registrant and the State of Oregon, dated May 1, 1996.
+10.5 Lease Agreement between the Registrant and the Landmark, dated April 22, 1996.
11.1 Statement Regarding Computation of Net Income Per Share.
+21.1 List of Subsidiaries of Registrant.
22.1 Schedule of Valuation and Qualifying Accounts.
23.1 Consent of KPMG Peat Marwick LLP. Reference is made to page II-6.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
+24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed.
* To be filed by amendment.
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 24 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
II-3
<PAGE>
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant undertakes that: (1) for determining any
liability under the Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the Registrant under to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time the Commission declared it
effective, and (2) for determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered in the
registration statement, and that offering of such securities at that time shall
be deemed to be the initial BONA FIDE offering of those securites.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Corvallis, State of Oregon, on the 17th day of
October, 1996.
ROGUE WAVE SOFTWARE, INC.
By:_________*/s/_THOMAS KEFFER________
Thomas Keffer
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------ -------------------
<C> <S> <C>
*/s/THOMAS KEFFER President, Chief Executive Officer and
--------------------------------- Chairman of the Board October 17, 1996
Thomas Keffer (PRINCIPAL EXECUTIVE OFFICER)
*/s/DAN WHITAKER
--------------------------------- Executive Vice President, Marketing and October 17, 1996
Dan Whitaker Director
*/s/ROBERT M. HOLBURN, JR. Chief Financial Officer and Secretary
--------------------------------- (PRINCIPAL FINANCIAL AND ACCOUNTING October 17, 1996
Robert M. Holburn, Jr. OFFICER)
*/s/THOMAS M. ATWOOD
--------------------------------- Director October 17, 1996
Thomas M. Atwood
*/s/HOWARD M. LOVE, JR.
--------------------------------- Director October 17, 1996
Howard M. Love, Jr.
*/s/RICHARD P. MAGNUSON
--------------------------------- Director October 17, 1996
Richard P. Magnuson
*/s/THOMAS H. PETERSON
--------------------------------- Director October 17, 1996
Thomas H. Peterson
*By: /s/ROBERT M. HOLBURN, JR.
----------------------------
Robert M. Holburn, Jr.
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Rogue Wave Software, Inc.:
The audits referred to in our report dated October 16, 1996, included the
related financial statement schedule as of September 30, 1996, and for each of
the years in the three-year period ended September 30, 1996, included in the
registration statement. 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, present fairly in all material respects
the information set forth therein.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" and "Selected Consolidated Financial Data"
in the prospectus.
KPMG PEAT MARWICK LLP
Portland, Oregon
October 17, 1996
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
+2.1 Agreement and Plan of Reorganization between Registrant, Inmark Development Corporation and RW
Acquisition, Inc., dated as of September 19, 1995.
*2.2 Agreement and Plan of Merger between the Registrant and Rogue Wave Software, Inc., an Oregon
corporation, dated as of , 1996.
*3.1 Certificate of Incorporation of Rogue Wave Software, Inc., a Delaware corporation, as currently in
effect.
*3.2 Amended and Restated Certificate of Incorporation of Rogue Wave Software, Inc., a Delaware corporation,
as in effect immediately following the offering.
*3.3 Bylaws of Rogue Wave Software, Inc., a Delaware corporation.
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3.
*4.2 Specimen Stock Certificate.
+4.3 Amended and Restated Investors' Rights Agreement between the Registrant and certain investors, dated
June , 1996, as amended June 27, 1996.
5.1 Opinion of Cooley Godward LLP.
10.1 Registrant's 1996 Equity Incentive Plan, and related documents.
10.2 Registrant's Employee Stock Purchase Plan, and related documents.
+10.3 Form of Indemnity Agreement to be entered into between the Registrant and its officers and directors.
+10.4 Lease Agreement between Registrant and the State of Oregon, dated May 1, 1996.
+10.5 Lease Agreement between the Registrant and the Landmark, dated April 22, 1996.
11.1 Statement Regarding Computation of Net Income Per Share.
+21.1 List of Subsidiaries of Registrant.
22.1 Schedule of Valuation and Qualifying Accounts.
23.1 Consent of KPMG Peat Marwick LLP. Reference is made to page II-6.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
+24.1 Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed.
* To be filed by amendment.
<PAGE>
[LETTERHEAD]
October 17, 1996
Rogue Wave Software, Inc.
850 SW 35th Street
Corvallis, OR 97333
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing on October 4, 1996 by Rogue Wave Software, Inc. (the
"Company") of a Registration Statement on Form SB-2 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission"),
including a prospectus to be filed with the Commission pursuant to Rule
424(b) of Regulation C promulgated under the Securities Act of 1933, as
amended (the "Prospectus"), and the underwritten public offering of up to
2,328,750 (including 303,750 shares of Common Stock for which the
underwriters have been granted an over-allotment option) shares of the
Company's common stock (the "Common Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws, as amended, and the originals or copies certified
to our satisfaction of such records, documents, certificates, memoranda and
other instruments as in our judgment are necessary or appropriate to enable
to render the opinion expressed below and (ii) assumed that the shares of the
Common Stock will be sold by the underwriters at a price established by the
Pricing Committee of the Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus included in the Registration Statement and to the filing of
this opinion as an exhibit to the Registration Statement.
Yours very truly,
COOLEY GODWARD LLP
/s/ Mark P. Tanoury
Mark P. Tanoury
<PAGE>
ROGUE WAVE SOFTWARE, INC.
1996 EQUITY INCENTIVE PLAN
ADOPTED JUNE 6, 1996
APPROVED BY STOCKHOLDERS _______________, 1996
INTRODUCTION.
In June 1996, the Board of Directors adopted this 1996 Equity Incentive
Plan as an amendment and restatement of the Company's 1994 Stock Option Plan and
the Inmark Stock Option Plan.
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company and its Affiliates may
be given an opportunity to benefit from increases in value of the common stock
of the Company ("Common Stock") through the granting of (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to
purchase restricted stock, and (v) stock appreciation rights, all as defined
below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants, to secure and retain
the services of new Employees, Directors and Consultants, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either (i) Options granted pursuant to Section 6 or 7 hereof, including
Incentive Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or
rights to purchase restricted stock granted pursuant to Section 8 hereof, or
(iii) stock appreciation rights granted pursuant to Section 9 hereof. All
Options shall be separately designated Incentive Stock Options or Nonstatutory
Stock Options at the time of grant, and a separate certificate or certificates
will be issued for shares purchased on exercise of each type of Option.
<PAGE>
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means Rogue Wave Software, Inc.
(f) "CONCURRENT STOCK APPRECIATION RIGHT" OR "CONCURRENT RIGHT" means a
right granted pursuant to subsection 9(b)(2) of the Plan.
(g) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
locations of the Company or between the Company, Affiliates or their successors.
(i) "DIRECTOR" means a member of the Board.
(j) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
<PAGE>
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(l) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(1) If the Common Stock is listed on any established stock exchange,
or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in Common Stock) on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(2) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(m) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(n) "INDEPENDENT STOCK APPRECIATION RIGHT" means a right granted pursuant
to subsection 9(b)(3) of the Plan.
(o) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
of 1933 ("Regulation S-K"), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(q) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(r) "OPTION" means a stock option granted pursuant to the Plan.
<PAGE>
(s) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(t) "OPTIONEE" means a person to whom an Option is granted pursuant to the
Plan.
(u) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(v) "PLAN" means this Rogue Wave Software, Inc. 1996 Equity Incentive
Plan.
(w) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(x) "STOCK APPRECIATION RIGHT" means any of the various types of rights
which may be granted under Section 9 of the Plan.
(y) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, and any right to purchase restricted stock.
(z) "STOCK AWARD AGREEMENT" means a written agreement between the Company
and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.
(aa) "TANDEM STOCK APPRECIATION RIGHT" OR "TANDEM RIGHT" means a right
granted pursuant to subsection 9(b)(1) of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
<PAGE>
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock,
a Stock Appreciation Right, or a combination of the foregoing; the provisions of
each Stock Award granted (which need not be identical), including the time or
times when a person shall be permitted to receive stock pursuant to a Stock
Award; whether a person shall be permitted to receive stock upon exercise of an
Independent Stock Appreciation Right; and the number of shares with respect to
which a Stock Award shall be granted to each such person.
(2) To construe and interpret the Plan and Stock Awards granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section 15.
(4) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee or
committees ("Committee") of one or more members of the Board. In the discretion
of the Board, a Committee may consist solely of two or more Outside Directors,
in accordance with Code Section 162(m), or solely of two or more Non-Employee
Directors, in accordance with Rule 16b-3. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the Committee), subject, however, to
such resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish the Committee at
any time and revest in the Board the administration of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 13 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to Stock Awards shall
not exceed in the aggregate four million five hundred thousand (4,500,000)
shares of Common Stock (determined without giving effect to any stock split that
may be made in anticipation of the Company's initial public offering of
<PAGE>
the Common Stock). If any Stock Award shall for any reason expire or otherwise
terminate, in whole or in part, without having been exercised in full (or vested
in the case of Restricted Stock), the stock not acquired under such Stock Award
shall revert to and again become available for issuance under the Plan. Shares
subject to Stock Appreciation Rights exercised in accordance with Section 9 of
the Plan shall not be available for subsequent issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation Rights appurtenant thereto may be granted
only to Employees, Directors or Consultants.
(b) No person shall be eligible for the grant of an Incentive Stock Option
if, at the time of grant, such person owns (or is deemed to own pursuant to
Section 424(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or of any of
its Affiliates unless the exercise price of such Option is at least one hundred
ten percent (110%) of the Fair Market Value of such stock at the date of grant
and the Option is not exercisable after the expiration of five (5) years from
the date of grant.
(c) Subject to the provisions of Section 13 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Options and Stock
Appreciation Rights covering more than seven hundred fifty thousand (750,000)
shares of Common Stock (determined without giving effect to any stock split that
may be made in anticipation of the Company's initial public offering of the
Common Stock) in any calendar year. This subsection 5(c) shall not apply until
(i) the earliest of: (A) the first material modification of the Plan (including
any increase to the number of shares reserved for issuance under the Plan in
accordance with Section 4); (B) the issuance of all of the shares of Common
Stock reserved for issuance under the Plan; (C) the expiration of the Plan; or
(D) the first meeting of stockholders at which directors are to be elected that
occurs after the close of the third calendar year following the calendar year in
which occurred the first registration of an equity security under Section 12 of
the Exchange Act; or (ii) such other date required by Section 162(m) of the Code
and the rules and regulations promulgated thereunder.
<PAGE>
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted, and the exercise price
of each Nonstatutory Stock Option shall be not less than eighty-five percent
(85%) of the Fair Market Value of the stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, an Option may be granted
with an exercise price lower than that set forth in the preceding sentence if
such Option is granted pursuant to an assumption or substitution for another
option in a manner satisfying the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other Common Stock of the Company,
(B) according to a deferred payment or other arrangement (which may include,
without limiting the generality of the foregoing, the use of other Common Stock
of the Company) with the person to whom the Option is granted or to whom the
Option is transferred pursuant to subsection 6(d), or (C) in any other form of
legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be payable
at least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the Code,
of any amounts other than amounts stated to be interest under the deferred
payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person. A Nonstatutory Stock Option may be transferred
to the extent provided in the Option Agreement; provided that if the Option
Agreement does not expressly permit the transfer of a Nonstatutory Stock Option,
the Nonstatutory Stock Option shall not be transferable except by will, by the
laws of descent and distribution or pursuant to a domestic relations order
satisfying the requirements of Rule 16b-3, and shall be
<PAGE>
exercisable during the lifetime of the person to whom the Option is granted only
by such person or any transferee pursuant to a domestic relations order.
Notwithstanding the foregoing, the person to whom the Option is granted may, by
delivering written notice to the Company, in a form satisfactory to the Company,
designate a third party who, in the event of the death of the Optionee, shall
thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability), the
Optionee may exercise his or her Option (to the extent that the Optionee was
entitled to exercise it at the date of termination) but only within such period
of time ending on the earlier of (i) the date three (3) months after the
termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period specified in the Option Agreement),
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement), or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, at the date of termination, the Optionee is
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
<PAGE>
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a three-month period (or 12 month period in the case of totally
disabled Optionees) after the termination of, the Optionee's Continuous Status
as an Employee, Director or Consultant, the Option shall be fully vested and may
be exercised by the Optionee's estate, by a person who acquired the right to
exercise the Option by bequest or inheritance or by a person designated to
exercise the option upon the Optionee's death pursuant to subsection 6(d), but
only within the period ending on the earlier of (i) the date twelve (12) months
following the date of death (or such longer or shorter period specified in the
Option Agreement), or (ii) the expiration of the term of such Option as set
forth in the Option Agreement. If, at the time of death, the Optionee was not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate, and the shares
covered by such Option shall revert to and again become available for issuance
under the Plan.
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
(j) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board or Committee to make or not to make grants of Options hereunder, the Board
or Committee shall have the authority (but not an obligation) to include as part
of any Option Agreement a provision entitling the Optionee to a further Option
(a "Re-Load Option") in the event the Optionee exercises the Option evidenced by
the Option agreement, in whole or in part, by surrendering other shares of
Common Stock in accordance with this Plan and the terms and conditions of the
Option Agreement. Any such Re-Load Option (i) shall be for a number of shares
equal to the number of shares surrendered as part or all of the exercise price
of such Option; (ii) shall have an expiration date which is the same as the
expiration date of the Option the exercise of which gave rise to such Re-Load
Option; and (iii) shall have an exercise price which is equal to one hundred
percent (100%) of the Fair Market Value of the Common Stock subject to the Re-
Load Option on the date of exercise of the original Option. Notwithstanding the
foregoing, a Re-Load Option which is an Incentive Stock Option and which is
granted to a 10% stockholder (as described in subsection 5(b)), shall have an
exercise price which is equal to one hundred ten percent (110%) of the Fair
Market Value of the stock subject to the Re-Load Option on the date of exercise
of the original Option and shall have a term which is no longer than five (5)
years.
Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory
Stock Option, as the Board or Committee may designate at the time of the grant
of the original Option;
<PAGE>
PROVIDED, HOWEVER, that the designation of any Re-Load Option as an Incentive
Stock Option shall be subject to the one hundred thousand dollars ($100,000)
annual limitation on exercisability of Incentive Stock Options described in
subsection 13(d) of the Plan and in Section 422(d) of the Code. There shall be
no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be
subject to the availability of sufficient shares under subsection 4(a) and shall
be subject to such other terms and conditions as the Board or Committee may
determine which are not inconsistent with the express provisions of the Plan
regarding the terms of Options.
7. OPTION GRANTS FOR NON-EMPLOYEE DIRECTORS. Unless otherwise explicitly
provided by the Board, Non-Employee Directors shall not be eligible for any
Stock Awards under the Plan other than the nonstatutory stock options provided
under this Section 7 on the following terms and conditions:
(a) INITIAL GRANT FOR NON-EMPLOYEE DIRECTORS. Each person who is a Non-
Employee Director at the date the Company's initial public offering of shares of
common stock is effective or who becomes a Non-Employee Director as of any date
thereafter shall, upon such date, be granted an option to purchase fifteen
thousand (15,000) shares of Common Stock (determined without giving effect to
any stock split that may be made in anticipation of the Company's initial public
offering of the Common Stock) on the terms and conditions set forth herein.
(b) ANNUAL GRANT. Following each annual meeting of the Company's
stockholders occuring after the effectiveness of the initial public offering of
the Common Stock, (i) each person who continuously has been a Non-Employee
Director for a full year since the last annual meeting of the Company's
stockholders automatically shall be granted an option to purchase five thousand
two hundred fifty (5,250) shares of Common Stock (determined without giving
effect to any stock split that may be made in anticipation of the Company's
initial public offering of the Common Stock) on the terms and conditions set
forth herein, and (ii) each other person who is then a Non-Employee Director
automatically shall be granted an option to purchase, on the terms and
conditions set forth herein, the number of shares of common stock of the
Company (rounded up to the nearest whole share) determined by multiplying
five thousand two hundred fifty (5,250) shares (determined without giving
effect to any stock split that may be made in anticipation of the Company's
initial public offering of the Common Stock) by a fraction, the numerator of
which is the number of days the person continuously has been a Non-Employee
Director as of the date of such grant and the denominator of which is 365.
(c) TERM. The term of each Non-Employee Director's option commences on
the date it is granted and, unless sooner terminated as set forth herein,
expires on the date ("Expiration Date") ten (10) years from the date of grant.
If the Non-Employee Director's Continuous Status as an Employee, Director or
Consultant terminates, the option shall terminate on the earlier of the
Expiration Date or the date three (3) months following the date of termination
of such Continuous Status (twelve (12) months if such termination is due to
death or disability). In any and all
<PAGE>
circumstances, a Non-Employee Director's option may be exercised following
termination of his or her Continuous Status as an Employee, Director or
Consultant only as to that number of shares as to which it was exercisable on
the date of termination of such status under the provisions of subsection 7(g).
(d) PRICE. The exercise price of each Non-Employee Director's option
shall be one hundred percent (100%) of the fair market value of the stock
subject to such option on the date such option is granted.
(e) CONSIDERATION. Payment of the exercise price of each option is due in
full in cash upon any exercise when the number of shares being purchased upon
such exercise is less than 1,000 shares. However, when the number of shares
being purchased upon an exercise is 1,000 or more shares, the Non-Employee
Director may elect to make payment of the exercise price under one of the
following alternatives:
(1) Payment of the exercise price per share in cash or by check
at the time of exercise; or
(2) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in the Wall Street Journal,
payment by delivery of shares of common stock of the Company already owned by
the optionee, held for the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens, claims, encumbrances
or security interest, which common stock shall be valued at its fair market
value on the date preceding the date of exercise; or
(3) Payment by a combination of the methods of payment specified
in paragraphs (1) and (2) above.
Notwithstanding the foregoing, a Non-Employee Director's option may be
exercised pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board which results in the receipt of cash (or check) by the
Company prior to the issuance of shares of the Company's common stock.
<PAGE>
(f) TRANSFERABILITY. A Non-Employee Director's option shall not be
transferable except by will or by the laws of descent and distribution, or
pursuant to a domestic relations order satisfying the requirements of Rule 16b-3
and shall be exercisable during the lifetime of the Non-Employee Director only
by such person (or by his guardian or legal representative) or transferee
pursuant to such an order. Notwithstanding the foregoing, a Non-Employee
Director may, by delivering written notice to the Company in a form satisfactory
to the Company, designate a third party who, in the event of the death of the
Non-Employee Director, shall thereafter be entitled to exercise the option.
(g) VESTING. A Non-Employee Director's initial grant under Section 7(a)
shall become exercisable in installments over a period of three (3) years at the
rate of one thirty-sixth (1/36th) per month; provided that the optionee has,
during the entire period prior to such vesting date, continuously served as a
Non-Employee Director or employee of or consultant to the Company or any
Affiliate, whereupon such option shall become fully exercisable in accordance
with its terms with respect to that portion of the shares represented by that
installment. A Non-Employee Director's annual grant under Section 7(b) shall be
fully vested at all times.
8. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or the Committee
shall deem appropriate. The terms and conditions of stock bonus or restricted
stock purchase agreements may change from time to time, and the terms and
conditions of separate agreements need not be identical, but each stock bonus or
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such agreement but in no event shall the purchase
price be less than eighty-five percent (85%) of the stock's Fair Market Value on
the date such award is made. Notwithstanding the foregoing, the Board or the
Committee may determine that eligible participants in the Plan may be awarded
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company for its benefit.
(b) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution or, if the agreement so provides, pursuant to a domestic
relations order satisfying the requirements of Rule 16b-3, so long as stock
awarded under such agreement remains subject to the terms of the agreement.
<PAGE>
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment or other arrangement with the person to whom the stock is sold;
or (iii) in any other form of legal consideration that may be acceptable to the
Board or the Committee in its discretion. Notwithstanding the foregoing, the
Board or the Committee to which administration of the Plan has been delegated
may award stock pursuant to a stock bonus agreement in consideration for past
services actually rendered to the Company or for its benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but need
not, be subject to a repurchase option in favor of the Company in accordance
with a vesting schedule to be determined by the Board or the Committee.
(e) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire any or all of the shares of stock held by that person which have not
vested as of the date of termination under the terms of the stock bonus or
restricted stock purchase agreement between the Company and such person.
9. STOCK APPRECIATION RIGHTS.
(a) The Board or Committee shall have full power and authority,
exercisable in its sole discretion, to grant Stock Appreciation Rights under the
Plan to Employees, Directors and Consultants. To exercise any outstanding Stock
Appreciation Right, the holder must provide written notice of exercise to the
Company in compliance with the provisions of the Stock Award Agreement
evidencing such right. Except as provided in subsection 5(c), no limitation
shall exist on the aggregate amount of cash payments the Company may make under
the Plan in connection with the exercise of a Stock Appreciation Right.
(b) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:
(1) TANDEM STOCK APPRECIATION RIGHTS. Tandem Stock Appreciation
Rights will be granted appurtenant to an Option, and shall, except as
specifically set forth in this Section 9, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains.
Tandem Stock Appreciation Rights will require the holder to elect between the
exercise of the underlying Option for shares of stock and the surrender, in
whole or in part, of such Option for an appreciation distribution. The
appreciation distribution payable on the exercised Tandem Right shall be in cash
(or, if so provided, in an equivalent number of shares of stock based on Fair
<PAGE>
Market Value on the date of the Option surrender) in an amount up to the excess
of (A) the Fair Market Value (on the date of the Option surrender) of the number
of shares of stock covered by that portion of the surrendered Option in which
the Optionee is vested over (B) the aggregate exercise price payable for such
vested shares.
(2) CONCURRENT STOCK APPRECIATION RIGHTS. Concurrent Rights will be
granted appurtenant to an Option and may apply to all or any portion of the
shares of stock subject to the underlying Option and shall, except as
specifically set forth in this Section 9, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains. A
Concurrent Right shall be exercised automatically at the same time the
underlying Option is exercised with respect to the particular shares of stock to
which the Concurrent Right pertains. The appreciation distribution payable on
an exercised Concurrent Right shall be in cash (or, if so provided, in an
equivalent number of shares of stock based on Fair Market Value on the date of
the exercise of the Concurrent Right) in an amount equal to such portion as
shall be determined by the Board or the Committee at the time of the grant of
the excess of (A) the aggregate Fair Market Value (on the date of the exercise
of the Concurrent Right) of the vested shares of stock purchased under the
underlying Option which have Concurrent Rights appurtenant to them over (B) the
aggregate exercise price paid for such shares.
(3) INDEPENDENT STOCK APPRECIATION RIGHTS. Independent Rights will
be granted independently of any Option and shall, except as specifically set
forth in this Section 9, be subject to the same terms and conditions applicable
to Nonstatutory Stock Options as set forth in Section 6. They shall be
denominated in share equivalents. The appreciation distribution payable on the
exercised Independent Right shall be not greater than an amount equal to the
excess of (A) the aggregate Fair Market Value (on the date of the exercise of
the Independent Right) of a number of shares of Company stock equal to the
number of share equivalents in which the holder is vested under such Independent
Right, and with respect to which the holder is exercising the Independent Right
on such date, over (B) the aggregate Fair Market Value (on the date of the grant
of the Independent Right) of such number of shares of Company stock. The
appreciation distribution payable on the exercised Independent Right shall be in
cash or, if so provided, in an equivalent number of shares of stock based on
Fair Market Value on the date of the exercise of the Independent Right.
10. CANCELLATION AND RE-GRANT OF OPTIONS.
(a) The Board or the Committee shall have the authority to effect, at
any time and from time to time, (i) the repricing of any outstanding Options
and/or any Stock Appreciation Rights under the Plan and/or (ii) with the
consent of any adversely affected holders of Options and/or Stock
Appreciation Rights, the cancellation of any outstanding Options and/or any
Stock Appreciation Rights under the Plan and the grant in substitution
therefor of new Options and/or
<PAGE>
Stock Appreciation Rights under the Plan covering the same or different
numbers of shares of stock, but having an exercise price per share not less
than: eighty-five percent (85%) of the Fair Market Value for a Nonstatutory
Stock Option, one hundred percent (100%) of the Fair Market Value in the case
of an Incentive Stock Option or, in the case of an Incentive Stock Option
held by a 10% stockholder (as described in subsection 5(b)), not less than
one hundred ten percent (110%) of the Fair Market Value per share of stock on
the new grant date. Notwithstanding the foregoing, the Board or the
Committee may grant an Option and/or Stock Appreciation Right with an
exercise price lower than that set forth above if such Option and/or Stock
Appreciation Right is granted as part of a transaction to which section
424(a) of the Code applies.
(b) Shares subject to an Option or Stock Appreciation Right canceled under
this Section 10 shall continue to be counted against the maximum award of
Options and Stock Appreciation Rights permitted to be granted pursuant to the
Plan. The repricing of an Option and/or Stock Appreciation Right hereunder
resulting in a reduction of the exercise price, shall be deemed to be a
cancellation of the original Option and/or Stock Appreciation Right and the
grant of a substitute Option and/or Stock Appreciation Right; in the event of
such repricing, both the original and the substituted Options and Stock
Appreciation Rights shall be counted against the maximum awards of Options and
Stock Appreciation Rights permitted to be granted pursuant to the Plan, to the
extent required by Section 162(m) of the Code.
11. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep available
at all times the number of shares of stock required to satisfy such Stock
Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or
any stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of
such Stock Awards unless and until such authority is obtained.
12. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall constitute
general funds of the Company.
<PAGE>
13. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a Stock
Award may first be exercised or the time during which a Stock Award or any part
thereof will vest, notwithstanding the provisions in the Stock Award stating the
time at which it may first be exercised or the time during which it will vest.
(b) Neither an Employee, Director nor a Consultant nor any person to whom
a Stock Award is transferred in accordance with the Plan shall be deemed to be
the holder of, or to have any of the rights of a holder with respect to, any
shares subject to such Stock Award unless and until such person has satisfied
all requirements for exercise of the Stock Award pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Stock Award granted
pursuant thereto shall confer upon any Employee, Consultant or other holder of
Stock Awards any right to continue in the employ of the Company or any
Affiliate, or to continue serving as a Consultant and Director, or shall affect
the right of the Company or any Affiliate to terminate the employment of any
Employee with or without notice and with or without cause, or the right to
terminate the relationship of any Consultant pursuant to the terms of such
Consultant's agreement with the Company or Affiliate or service as a Director
pursuant to the Company's By-Laws.
(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) The Company may require any person to whom a Stock Award is granted,
or any person to whom a Stock Award is transferred in accordance with the Plan,
as a condition of exercising or acquiring stock under any Stock Award, (1) to
give written assurances satisfactory to the Company as to such person's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (2) to
give written assurances satisfactory to the Company stating that such person is
acquiring the stock subject to the Stock Award for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as
<PAGE>
to any particular requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the Common Stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the Common Stock
of the Company.
14. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the maximum number of shares subject to
award to any person during any calendar year, and the outstanding Stock Awards
will be appropriately adjusted in the class(es) and number of shares and price
per share of stock subject to such outstanding Stock Awards. Such adjustments
shall be made by the Board or the Committee, the determination of which shall be
final, binding and conclusive. (The conversion of any convertible securities of
the Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company".)
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then to the extent permitted by applicable law: (i) any surviving
corporation or an Affiliate of such surviving corporation shall assume any Stock
Awards outstanding under the Plan or shall substitute similar Stock Awards for
those outstanding under the Plan, or (ii) such Stock Awards shall continue in
full force and effect. In the event any surviving corporation and its
Affiliates refuse to assume or continue such Stock Awards, or to substitute
similar options for those outstanding under the Plan, then, with respect to
Stock Awards held by persons then performing services as Employees,
<PAGE>
Directors or Consultants, the time during which such Stock Awards may be
exercised shall be accelerated and the Stock Awards terminated if not exercised
prior to such event.
15. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 14 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder is necessary for the Plan to satisfy the
requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities
exchange listing requirements.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations thereunder regarding the exclusion of performance-based compensation
from the limit on corporate deductibility of compensation paid to certain
executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide eligible Employees,
Directors or Consultants with the maximum benefits provided or to be provided
under the provisions of the Code and the regulations promulgated thereunder
relating to Incentive Stock Options and/or to bring the Plan and/or Incentive
Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Stock Award granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
16. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years from the date the
Plan is adopted by the Board or approved by the stockholders of the Company,
whichever is earlier. No Stock Awards may be granted under the Plan while the
Plan is suspended or after it is terminated.
<PAGE>
(b) Rights and obligations under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the Stock Award was granted.
17. EFFECTIVE DATE OF PLAN.
This amendment and restatement of the Plan shall become effective on the
date of closing of the initial public offering pursuant to an effective
registration statement covering the offer and sale of Common Stock to the
public, but no Stock Awards granted under the Plan shall be exercised unless and
until the Plan has been approved by the stockholders of the Company, which
approval shall be within twelve (12) months before or after the date the Plan is
adopted by the Board.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
EMPLOYEE STOCK PURCHASE PLAN
ADOPTED JUNE 6, 1996
APPROVED BY STOCKHOLDERS _____________, 1996
1. PURPOSE.
(a) The purpose of the Employee Stock Purchase Plan (the "Plan") is to
provide a means by which employees of Rogue Wave Software, Inc., a Delaware
corporation (the "Company"), and its Affiliates, as defined in subparagraph
1(b), which are designated as provided in subparagraph 2(b), may be given an
opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of its
employees, to secure and retain the services of new employees, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
(d) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the "Board")
of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
<PAGE>
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company and its Affiliates and to carry out the intent that the Plan be treated
as an "employee stock purchase plan" within the meaning of Section 423 of the
Code.
(c) The Board may delegate administration of the Plan to a Committee
composed of not fewer than two (2) members of the Board (the "Committee")
constituted in accordance with the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934 (the "Exchange Act" and "Rule 16b-3"); provided
that the Committee shall be be required to satisfy the foregoing requirements
only to the extent required to exempt transactions under the Plan pursuant to
Rule 16b-3. If administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board, subject, however, to such resolutions, not inconsistent
with the provisions of the Plan, as may be adopted from time to time by the
Board. The Board may abolish the Committee at any time and revest in the Board
the administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 12 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to rights granted under
the Plan shall not exceed in the aggregate five hundred twenty five thousand
(525,000) shares (before giving effect to any stock split, stock dividend or the
like) of the Company's common stock (the "Common Stock"). If any
<PAGE>
right granted under the Plan shall for any reason terminate without having been
exercised, the Common Stock not purchased under such right shall again become
available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
The Board or the Committee may from time to time grant or provide for the
grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate, which shall comply with the requirements of Section 423(b)(5) of
the Code that all employees granted rights to purchase stock under the Plan
shall have the same rights and privileges. The terms and conditions of an
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-seven (27) months beginning with the Offering Date, and the substance of
the provisions contained in paragraphs 5 through 8, inclusive.
5. ELIGIBILITY.
(a) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan, unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be equal to or greater than
two (2) years. In addition, unless otherwise determined by the Board or the
Committee and set forth in the terms of the applicable Offering, no employee of
the Company or any Affiliate shall be eligible to be granted rights under the
Plan, unless, on the Offering Date, such employee's customary employment with
the Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(b) The Board or the Committee may provide that, each person who, during
the course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person
<PAGE>
becomes an eligible employee or occurs thereafter, receive a right under that
Offering, which right shall thereafter be deemed to be a part of that Offering.
Such right shall have the same characteristics as any rights originally granted
under that Offering, as described herein, except that:
(i) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right;
(ii) the period of the Offering with respect to such right shall begin
on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board or the Committee may provide that if such person
first becomes an eligible employee within a specified period of time before the
end of the Offering, he or she will not receive any right under that Offering.
(c) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of
this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee, and stock which such employee
may purchase under all outstanding rights and options shall be treated as stock
owned by such employee.
(d) An eligible employee may be granted rights under the Plan only if such
rights, together with any other rights granted under "employee stock purchase
plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of
the Code, do not permit such employee's rights to purchase stock of the Company
or any Affiliate to accrue at a rate which exceeds twenty-five thousand
($25,000) of fair market value of such stock (determined at the time such rights
are granted) for each calendar year in which such rights are outstanding at any
time.
(e) Officers of the Company and any designated Affiliate shall be eligible
to participate in Offerings under the Plan, provided, however, that the Board
may provide in an Offering that certain employees who are highly compensated
employees within the meaning of Section 423(b)(4)(D) of the Code shall not be
eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each eligible employee, pursuant to an Offering
made under the Plan, shall be granted the right to purchase up to the number of
shares of Common Stock of the Company purchasable with a percentage designated
by the Board or the Committee not exceeding
<PAGE>
fifteen percent (15%) of such employee's Earnings (as defined by the Board or
the Committee in each Offering) during the period which begins on the Offering
Date (or such later date as the Board or the Committee determines for a
particular Offering) and ends on the date stated in the Offering, which date
shall be no later than the end of the Offering. The Board or the Committee
shall establish one or more dates during an Offering (the "Purchase Date(s)") on
which rights granted under the Plan shall be exercised and purchases of Common
Stock carried out in accordance with such Offering.
(b) In connection with each Offering made under the Plan, the Board or the
Committee may specify a maximum number of shares that may be purchased by any
employee as well as a maximum aggregate number of shares that may be purchased
by all eligible employees pursuant to such Offering. In addition, in connection
with each Offering that contains more than one Purchase Date, the Board or the
Committee may specify a maximum aggregate number of shares which may be
purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(c) The purchase price of stock acquired pursuant to rights granted under
the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Purchase Date.
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An eligible employee may become a participant in the Plan pursuant to
an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings during the
Offering (as defined by the Board or Committee in each Offering). The payroll
deductions made for each participant shall be credited to an account for such
participant under the Plan and shall be deposited with the general funds of the
Company. A participant may reduce (including to zero) or increase such payroll
deductions, and an eligible employee may begin such payroll deductions, after
the beginning of any Offering only as provided for in the Offering. A
<PAGE>
participant may make additional payments into his or her account only if
specifically provided for in the Offering and only if the participant has not
had the maximum amount withheld during the Offering.
(b) At any time during an Offering, a participant may terminate his or her
payroll deductions under the Plan and withdraw from the Offering by delivering
to the Company a notice of withdrawal in such form as the Company provides.
Such withdrawal may be elected at any time prior to the end of the Offering
except as provided by the Board or the Committee in the Offering. Upon such
withdrawal from the Offering by a participant, the Company shall distribute to
such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's
interest in that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to participate in any other Offerings under the Plan but such
participant will be required to deliver a new participation agreement in order
to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon cessation of any participating employee's employment with the
Company and any designated Affiliate, for any reason, and the Company shall
distribute to such terminated employee all of his or her accumulated payroll
deductions (reduced to the extent, if any, such deductions have been used to
acquire stock for the terminated employee) under the Offering, without interest.
(d) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 14 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such rights
are granted.
<PAGE>
8. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant Offering,
each participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares shall be issued upon the exercise of rights granted under the
Plan. The amount, if any, of accumulated payroll deductions remaining in each
participant's account after the purchase of shares which is less than the amount
required to purchase one share of stock on the final Purchase Date of an
Offering shall be held in each such participant's account for the purchase of
shares under the next Offering under the Plan, unless such participant withdraws
from such next Offering, as provided in subparagraph 7(b), or is no longer
eligible to be granted rights under the Plan, as provided in paragraph 5, in
which case such amount shall be distributed to the participant after such final
Purchase Date, without interest. The amount, if any, of accumulated payroll
deductions remaining in any participant's account after the purchase of shares
which is equal to the amount required to purchase whole shares of stock on the
final Purchase Date of an Offering shall be distributed in full to the
participant after such Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent unless
the shares to be issued upon such exercise under the Plan (including rights
granted thereunder) are covered by an effective registration statement pursuant
to the Securities Act of 1933, as amended (the "Securities Act") and the Plan is
in material compliance with all applicable state, foreign and other securities
and other laws applicable to the Plan. If on a Purchase Date in any Offering
hereunder the Plan is not so registered or in such compliance, no rights granted
under the Plan or any Offering shall be exercised on such Purchase Date, and the
Purchase Date shall be delayed until the Plan is subject to such an effective
registration statement and such compliance, except that the Purchase Date shall
not be delayed more than twelve (12) months and the Purchase Date shall in no
event be more than twenty-seven (27) months from the Offering Date. If on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no rights
granted under the Plan or any Offering shall be exercised and all payroll
deductions accumulated during the Offering (reduced to the extent, if any, such
deductions have been used to acquire stock) shall be distributed to the
participants, without interest.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
<PAGE>
(b) The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the Plan
shall constitute general funds of the Company.
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights under the Plan are recorded in the books of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject to
any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, reincorporation, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or other transaction
not involving the receipt of consideration by the Company), the Plan and
outstanding rights will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the class(es) and number of shares and
price per share of stock subject to outstanding rights. Such adjustments shall
be made by the Board or the Committee, the determination of which shall be
final, binding and conclusive. (The conversion of any convertible securities of
the Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company.")
<PAGE>
(b) In the event of: (1) a dissolution or liquidation of the Company;
(2) a merger or consolidation in which the Company is not the surviving
corporation; (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise; or (4) the acquisition by
any person, entity or group within the meaning of Section 13(d) or 14(d) of the
Exchange Act or any comparable successor provisions (excluding any employee
benefit plan, or related trust, sponsored or maintained by the Company or any
Affiliate of the Company) of the beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule) of
securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors, then, as
determined by the Board in its sole discretion (i) any surviving or acquiring
corporation may assume outstanding rights or substitute similar rights for those
under the Plan, (ii) such rights may continue in full force and effect, or
(iii) participants' accumulated payroll deductions may be used to purchase
Common Stock immediately prior to the transaction described above and the
participants' rights under the ongoing Offering terminated.
13. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares reserved for rights under the Plan;
(ii) Modify the provisions as to eligibility for participation in the
Plan (to the extent such modification requires stockholder approval in
order for the Plan to obtain employee stock purchase plan treatment under
Section 423 of the Code or to comply with the requirements of Rule 16b-3);
or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee
stock purchase plan treatment under Section 423 of the Code or to comply
with the requirements of Rule 16b-3.
It is expressly contemplated that the Board may amend the Plan in any respect
the Board deems necessary or advisable to provide eligible employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to
<PAGE>
employee stock purchase plans and/or to bring the Plan and/or rights granted
under it into compliance therewith.
(b) Rights and obligations under any rights granted before amendment of
the Plan shall not be impaired by any amendment of the Plan, except with the
consent of the person to whom such rights were granted, or except as necessary
to comply with any laws or governmental regulations, or except as necessary to
ensure that the Plan and/or rights granted under the Plan comply with the
requirements of Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such shares
and/or cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion, may suspend or terminate the Plan at any
time. No rights may be granted under the Plan while the Plan is suspended or
after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is in
effect shall not be impaired by suspension or termination of the Plan, except as
expressly provided in the Plan or with the consent of the person to whom such
rights were granted, or except as necessary to comply with any laws or
governmental regulation, or except as necessary to ensure that the Plan and/or
rights granted under the Plan comply with the requirements of Section 423 of the
Code.
16. EFFECTIVE DATE OF PLAN.
<PAGE>
The Plan shall become effective on the same day that the Company's initial
public offering of shares of common stock becomes effective (the "Effective
Date"), but no rights granted under the Plan shall be exercised unless and until
the Plan has been approved by the stockholders of the Company within twelve (12)
months before or after the date the Plan is adopted by the Board or the
Committee, which date may be prior to the Effective Date.
<PAGE>
EXHIBIT 11.1
ROGUE WAVE SOFTWARE, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares.................................................................. 3,363 3,425 3,530
Dilutive common stock options using the treasury stock method............................ -- 180 1,083
Weighted average shares assuming conversion of Series A preferred stock.................. 159 772 800
Weighted average shares assuming conversion of Series B preferred stock (1).............. -- -- --
Shares added pursuant to SAB 83 (2)...................................................... 632 632 632
--------- --------- ---------
Total shares used for per share calculations............................................. 4,154 5,009 6,045
--------- --------- ---------
--------- --------- ---------
Net income............................................................................... $ 568 $ 79 $ 35
--------- --------- ---------
--------- --------- ---------
Net income per common share.............................................................. $ 0.14 $ 0.02 $ 0.01
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) All shares of Series B preferred stock were issued in the one-year period
prior to the Company's filing of its registration statement on Form SB-2,
and, therefore, all 1,114 shares of such preferred stock are included in the
SAB 83 adjustment using the treasury stock method.
(2) Amount is calculated using the treasury stock method and the expected
initial offering price per share of the Company's common stock.
(3) Fully diluted earnings per share is not materially different from primary
earnings per share.
<PAGE>
ROGUEWAVE SOFTWARE, INC.
SCHEDULE OF VALUATION AND
QUALIFYING ACCOUNTS
EXHIBIT 22.1
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Additions
-------------------------
Balance at Charged to Charged to Balance at
beginning of costs and other end of
Descriptions period expenses accounts Deductions period
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1994
Allowance for Doubtful accounts $ 5 $ 29 $ -- $ -- $ 34
Sales Returns Reserve -- 252 -- (216) 36
September 30, 1995
Allowance for Doubtful accounts 34 539 -- (322) 251
Sales Returns Reserve 36 453 -- (378) 111
September 30, 1996
Allowance for Doubtful accounts 251 -- -- (144) 107
Sales Returns Reserve 111 598 -- (598) 111
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REGISTRATION STATEMENT ON FORM SB-2 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,714
<SECURITIES> 0
<RECEIVABLES> 4,634
<ALLOWANCES> 107
<INVENTORY> 0
<CURRENT-ASSETS> 7,222
<PP&E> 3,807
<DEPRECIATION> 1,089
<TOTAL-ASSETS> 10,194
<CURRENT-LIABILITIES> 4,540
<BONDS> 322
4,664
0
<COMMON> 4
<OTHER-SE> 664
<TOTAL-LIABILITY-AND-EQUITY> 10,194
<SALES> 18,845
<TOTAL-REVENUES> 18,845
<CGS> 2,939
<TOTAL-COSTS> 2,939
<OTHER-EXPENSES> 15,986
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11
<INCOME-TAX> (24)
<INCOME-CONTINUING> 35
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
