<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1996
REGISTRATION NO. 333-13517
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
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 NOVEMBER 20, 1996
PROSPECTUS
2,086,110 SHARES
[LOGO]
COMMON STOCK
Of the 2,086,110 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by the Company and 86,110 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 312,916 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........ 86,110 shares
Common Stock to be outstanding after the offering....... 7,198,308 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)........................................ $ 0.04 $ 0.14 $ 0.02 $ 0.01
Shares used in per share calculation (2)............................... 3,914 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; DECLINE IN NET INCOME. 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. In
fiscal 1995 and fiscal 1996, the Company experienced significant declines in net
income. The declines were primarily the result of two factors, 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 Inmark
Merger had a significant adverse impact on the Company's net income because,
prior to the time of the Inmark Merger, Inmark was engaged in a new product
development effort that resulted in substantial operating losses. The increase
in resources devoted to the Company's product development, sales and marketing
and technical support organization were part of the Company's strategy to expand
market share. The strategy represented a shift away from the Company's earlier
focus on achieving profitability and the short term result was the decrease in
net income. 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
5
<PAGE>
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 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."
DEPENDENCE ON EMERGING MARKET FOR C++ AND JAVA. 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 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 multiple software environments, many
of which are not supported by the Company's products, 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 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."
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,
6
<PAGE>
"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 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
7
<PAGE>
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."
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. Such delays were primarily associated with increasing product
functionality and implementing new customer requirements. To date, such delays
have not resulted in a material adverse effect on the Company's business,
financial condition and results of operations. 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,
8
<PAGE>
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 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
9
<PAGE>
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."
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, the payment of monetary
damages, 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 5% stockholders 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
10
<PAGE>
approximately 22.1% of the outstanding shares of Common Stock (21.4% 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. If an active public
market for the Common Stock does not develop or is not sustained, stockholders
could experience difficulty selling the Common Stock at a price at or above the
initial public offering price, or at all. The initial public offering price will
be 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, or the
potential for sales, whether or not such sales actually occur, 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 7,198,308
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 2,086,110
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, 583,054 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 4,529,144 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 4,793,090 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
11
<PAGE>
the 583,054 shares issued in connection with the Inmark Merger, approximately
475,441 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."
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 operated as an unincorporated business
until its incorporation 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 subsidiaries. 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. The Company has received
notice from Eugene O. Cho, a stockholder of the Company, indicating his intent
to exercise his dissenters' rights in connection with the Company's
reincorporation into Delaware. In the event Mr. Cho perfects his dissenters'
rights, the Company would be required to repurchase all of his shares, the
number of which is in dispute, at a price per share equal to the fair value of
the shares on the day of the reincorporation, which is expected to occur one day
prior to the date of this offering. See "Legal Proceedings." Pending the uses
described above, the Company plans to invest the net proceeds in short-term,
interest-bearing, investment-grade securities. 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.
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. In addition, pursuant to the terms of the Company's secured
equipment term loan, the Company is and will be restricted in its ability to pay
dividends on its capital stock, except for dividends payable solely in its
capital stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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 per share.
<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; 3,655,000 shares issued
and outstanding, actual; 5,198,000 shares
issued and outstanding, pro forma; and
7,198,000 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 $1.01 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
$2.16 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.............................................................. $ 1.01
Increase per share attributable to new investors................... 2.16
---------
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).......... 5,198,308 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.......................... 7,198,308 100.0% $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. If all outstanding options were exercised, the dilution per
share to new investors would be $6.96. 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 5,112,198 shares or approximately
71% of the total shares of Common Stock outstanding after this offering and
will increase the number of shares held by new investors to 2,086,110 shares
or approximately 29% 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.
See Note 2 of Notes to Consolidated Financial Statements. 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. During 1995, the Company shifted its focus from achieving profitability
to expanding its sales channels, marketing efforts and product development
capacity. The shift resulted in expenses growing faster than revenue, causing a
substantial decrease in net income in fiscal 1995 and fiscal 1996. As part of
the shift toward expanding its product development capacity, the Company
acquired Inmark. The Inmark Merger also contributed to the Company's higher
product development expenses as a percentage of total revenue because, prior to
the time of the Inmark Merger, Inmark was engaged in a new product development
effort that resulted in increased product development expenses.
In recent periods, the Company has begun to refocus its attention on
improving profitability while continuing to expand its sales channels, marketing
efforts and product development capacity. The Company's recent efforts have
included a reorganization designed to focus its marketing and product
development efforts and a reduction in the number and amount of discounts
granted on volume product purchases.
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.
17
<PAGE>
International revenue accounted for approximately 19% of total revenue in
fiscal 1996. The Company does not track the percentage of total profits
represented by international revenue. 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 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 increased 58% to $18.8 million in fiscal 1996
from $11.9 million in fiscal 1995. Total revenue in fiscal 1995 increased 65%
from $7.2 million in fiscal 1994. License revenue increased 44% to $15.0 million
in 1996 from $10.4 million in fiscal 1995. License revenue in fiscal 1995
increased 55% from $6.7 million in fiscal 1994. 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.
18
<PAGE>
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. License revenue decreased as a percentage of total
revenue due to the relatively faster growth in service and maintenance revenue.
Service and maintenance revenue increased 160% to $3.9 million in fiscal
1996 from $1.5 million in fiscal 1995. Service and maintenance revenue in fiscal
1995 increased 169% from $557,000 in fiscal 1994. 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. The increase in service and maintenance revenue as percentage
of total revenue during the periods fiscal 1994 to fiscal 1996 is primarily due
to in 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.
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. Such delays were primarily associated with increasing product
functionality and implementing new customer requirements. To date, such delays
have not resulted in a material adverse effect on the Cost. 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.
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 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 and 32.3%, 51.7% and 56.6% of total cost of
revenue for each such 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. The
increases in cost of service and maintenance revenue as a percentage of total
cost of revenue during the respective periods reflect the fact that license
revenue grew at a lower percentage rate than did service and maintenance revenue
during such periods, and the gross profit margin on service and maintenance
revenue is lower than the gross profit margin on license revenue.
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
19
<PAGE>
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 as
the Company continues to increase its product development capacity, although the
Company does not believe such expenses will increase as a percentage of total
revenue. All costs incurred in the research and development of software products
and enhancements to existing products have been expensed as incurred. See Note 1
of Notes to Consolidated Financial Statements.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and bonuses earned by sales and marketing personnel, field
office expenses, and travel, entertainment and promotional expenses. Sales and
marketing expenses were $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. The Company does not expect sales and marketing expenses
to change as a percentage of total revenue in fiscal 1997.
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. The Company does not expect
general and administrative expenses to change as a percentage of total revenue
in fiscal 1997.
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 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.
NET INCOME
The Company's net income was $568,000, $79,000, and $35,000 in fiscal 1994,
1995 and 1996, respectively. The decrease in net income is primarily a result in
an increase in operating expenses from $5.5 million and 76.9% of total revenue
in fiscal 1994 to $9.6 million and 80.2% of total revenue in fiscal 1995, and to
$16.0 million and 84.8% of total revenue in fiscal 1996 associated with a shift
in focus away from achieving profitability toward expanding the Company's sales
channels, marketing efforts and product development capacity. While the Company
plans to continue to invest in expanding its sales channels, marketing efforts
and product development capacity, it expects operating expenses to represent a
lower percentage of total revenue in the near term, and accordingly expects net
income to increase in fiscal 1997 over fiscal 1996. However, 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."
20
<PAGE>
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>
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
21
<PAGE>
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. In October 1996, the Company entered into a
secured equipment term loan for $1.0 million. The loan bears an interest rate
equal to the prime rate. Interest is payable monthly and principal is payable in
42 equal monthly installments beginning in March 1997. The loan contains certain
financial covenants that require the Company to maintain a specified minimum
tangible net worth and term liquidity coverage ratios and restrict the Company's
ability to incur additional indebtedness, pay cash dividends on its capital
stock and merge or consolidate with another corporation.
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 increased significantly in fiscal 1996 primarily due to the
purchase of computer and telecommunications equipment for over 60 new employees
and due to the costs associated with the purchase of Internet infrastructure
hardware and new 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.
22
<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 (capable of
growing to support additional users) 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.
23
<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.
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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.
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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.
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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.
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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.
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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. The Company
sells perpetual use, non-exclusive licenses to use its products for an up front
fee. The licenses generally include a 30 day right of return policy.
TELESALES. As of September 30, 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.
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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.
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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. The Company currently estimates that this new product will be
introduced by the third quarter of fiscal 1997.
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. The technology covered by the pending
patent application currently is not included in any of the Company's products.
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.
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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, 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.
32
<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 rents
space on a month-to-month basis for its international office in Germany. Note 4
of Notes to Financial Statements describes the amount of the Company's lease
obligations. 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.
33
<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.
34
<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 served as a general partner of Menlo Ventures, a venture capital
firm, from 1984 until December 1995. 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. Upon the closing of this offering, the Certificate of
Incorporation will provide for the election of directors by a majority of the
outstanding shares of capital stock. 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.
35
<PAGE>
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."
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)........................................ 101,844 -- $ 43,052(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
36
<PAGE>
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 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.
37
<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.
38
<PAGE>
AGGREGATE 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 $ 1,103,866 $ 934,039
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.
39
<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
Thomas Peterson, a director of the Company, is a general partner of El
Dorado Venture Partners III, the general partner of El Dorado Ventures III, L.P.
("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 limited partner of MV
Management VI, L.P., the general partner of Menlo Ventures VI.
In July 1994, the Company issued an aggregate of 666,666 shares of Series A
Preferred Stock for cash consideration of $1.0 million to entities affiliated
with El Dorado III. The purchase price of the Series A Preferred Stock was
determined through arms-length bargaining between the Company and El Dorado III.
At the time of the negotiations, Mr. Peterson was not a director of the Company.
Some of the factors that the Company and El Dorado III used to determine the
price for the Series A Preferred Stock were the Company's current revenue level,
its prospects for revenue growth, the status of its product development efforts,
the size of the perceived market for the Company's products, El Dorado III's
experience in valuing private companies and the market values of comparable
companies, both public and private. The entities affiliated with El Dorado III
were the only purchasers of Series A Preferred Stock in the transaction. Each
share of Series A Preferred Stock will convert into one share of Common Stock
upon the closing of this offering. In connection with the purchase, the Company
granted El Dorado III an option to purchase up to an additional 133,333 shares
of the Company's Series A Preferred Stock at the same price per share for six
months.
In December 1994, the Company issued an aggregate of 133,333 shares of
Series A Preferred Stock for cash consideration of $200,000 to entities
affiliated with El Dorado III upon the exercise of their option to purchase such
shares. The entities affiliated with El Dorado III were the only purchasers of
Series A Preferred Stock in the transaction. Each share of Series A Preferred
Stock will convert into one share of Common Stock upon the closing of this
offering.
In November 1995, the Company issued an aggregate of 742,533 shares of
Series B Preferred Stock for cash 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 in
the amount of $1,175,563 and (ii) 453,248 shares of Series B Preferred Stock to
entities affiliated with Menlo Ventures VI, L.P. ("Menlo Ventures VI") for cash
in the amount of $2,155,197. The purchase price of the Series B Preferred Stock
was determined through arms-length bargaining between the Company and Menlo
Ventures VI. At the time of the negotiations, Mr. Magnuson was not a director of
the Company. Some of the factors that the Company and Menlo Ventures VI used to
determine the price for the Series B Preferred Stock were the Company's record
of revenue growth, its prospects for future revenue growth, the status of its
product development efforts, Menlo Ventures VI's experience in valuing private
companies and the market values of comparable companies, both public and
private. The entities affiliated with El Dorado III and Menlo Ventures purchased
94.3% of the Series B Preferred Stock sold in the transaction. Each share of
Series B Preferred Stock will convert into one share of Common Stock upon the
closing of this offering.
40
<PAGE>
As part of the Inmark Merger, Howard M. Love, Jr., exchanged all of his
outstanding shares of Common Stock of Inmark for 284,233 shares of Common Stock
of the Company. The exchange ratio was determined through arms-length bargaining
between the Boards of Directors of Inmark and the Company. Some of the factors
that the respective Boards used to calculate the exchange ratio were the
relative revenue levels of the two companies, the relative prospects for revenue
growth and the number and types of products offered and under development by
each company. Mr. Love held approximately 33% of the outstanding shares of
Common Stock of Inmark. In connection with the Inmark Merger, Mr. Love was
elected a director 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, officers of the Company, 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 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.
41
<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 21.8 -- 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)........................................ 61,110 1.2 61,110 -- --
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 21.8 -- 1,130,984 15.7
Richard P. Magnuson (9)................................... 6,666 * -- 6,666 *
Howard M. Love, Jr. (10).................................. 303,725 5.8 -- 303,725 4.2
Thomas M. Atwood (11)..................................... 6,944 * -- 6,944 *
Peter Handsman (12)....................................... 46,695 * 7,000 39,695 *
Mark Richards (13)........................................ 12,994 * 5,000 7,994 *
All directors and executive officers as a group (9
persons) (14)............................................ 3,667,783 67.5 -- 3,667,783 49.3
</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 5,198,308 shares of Common
Stock outstanding as of September 30, 1996 and 7,198,308 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
312,916 shares of Common Stock of the Company, and 7,202,058 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
42
<PAGE>
534,809 shares, or 7.4% of the Company's Common Stock, after completion of
this offering, (iv) Thomas Keffer will sell 49,166 shares and will
beneficially own 1,542,034 shares, or 21.4% 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.
(5) Includes 162,069 shares subject to stock options exercisable within 60 days
of September 30, 1996.
(6) Includes 12,846 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) Represents 6,666 shares held by Richard P. and Amy C. Magnuson, Trustees of
the Magnuson Revocable Trust dated 1/14/94. Does not include 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 limited 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.
(10) Includes 3,300 shares held by Howard M. Love, Sr., Trustee of the Cynthia
Annabel Love 1996 Trust dated 10/8/96.
(11) Represents 6,944 shares subject to stock options exercisable within 60 days
of September 30, 1996.
(12) Includes 37,346 shares subject to stock options exerciable within 60 days
of September 30, 1996.
(13) Includes 2,598 shares subject to stock options exercisable within 60 days
of September 30, 1996.
(14) Includes 236,374 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 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
43
<PAGE>
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
The Preferred Stockholders have elected to convert their Preferred Stock
into Common 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
ChaseMellon 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.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales, or the potential for sales, whether or not such sales
actually occur, 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 7,198,308 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, 583,054 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 4,529,144 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 4,793,090 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 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.
45
<PAGE>
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
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.
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.
On October 30, 1996, Mark Anthony Pinone, a former employee of the Company,
filed a Complaint in Santa Clara Superior Court, alleging cause for claims
against the Company and Mr. Nora of breach of contract, breach of the implied
covenant of good faith and fair dealing, unlawful disability discrimination,
wrongful termination in violation of public policy, and intentional and
negligent infliction of emotional distress. The Company denies the material
allegations in the Complaint and is defending the lawsuit.
46
<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............................................................................. 2,086,110
----------
----------
</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.
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 21,030 shares of
Series B Preferred Stock to WA & H Investments, L.L.C. ("WA & H"), an entity
affiliated with Wessels, Arnold & Henderson, L.L.C. for cash consideration of
approximately $100,000. In January 1996, certain officers of the Company sold an
aggregate of 251,573 shares of Common Stock for an aggregate
47
<PAGE>
consideration of approximately $1.0 million. In connection with such sale,
certain officers of the Company sold 7,125 shares of Common Stock to WA & H for
cash consideration of approximately $28,000. The prices of the Series B
Preferred Stock and the Common Stock were the same paid by all other purchasers
in such transactions. Each share of Series B Preferred Stock will convert into
one share of Common Stock upon the closing of the offering.
The Company, the Selling Stockholders and certain other stockholders of the
Company, including the executive officers, directors and WA & H, 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 such additional
options shall not be transferable 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.
48
<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 3,655 shares at September 30, 1995
and 1996, respectively; pro forma 5,198 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............... 230 1 36 -- -- -- 37
Net income.............................. -- -- -- -- 35 -- 35
Foreign currency translation
adjustment............................. -- -- -- -- -- (23) (23)
------ ------ ---------- ----------- --------- ----------- -----
Balance at September 30, 1996........... 3,655 $ 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 75% 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.................................... (230) -- (230) .15-1.94
Canceled..................................... (255) -- (255) .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 EVENTS
The Company approved a 2 for 3 reverse stock split in October 1996. All
share and per share amounts have been restated to reflect the reverse split.
In October 1996, the Company entered into a secured equipment term loan for
$1.0 million. The loan bears an interest rate equal to the prime rate. Interest
is payable monthly and principal is payable in 42 equal monthly installments
beginning in March 1997. The loan contains certain financial covenants that
require the Company to maintain a specified minimum tangible net worth and term
liquidity coverage ratios and restrict the Company's ability to incur additional
indebtedness, pay cash dividends on its capital stock and merge or consolidate
with another corporation.
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............................................. 23
Management........................................... 34
Certain Transactions................................. 40
Principal and Selling Stockholders................... 42
Description of Capital Stock......................... 43
Shares Eligible for Future Sale...................... 45
Legal Proceedings.................................... 46
Underwriting......................................... 47
Legal Matters........................................ 48
Experts.............................................. 48
Additional Information............................... 48
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.
2,086,110 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 31 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 made to "Accredited Investors" as such
term is defined under Rule 501 of the Securities Act and were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2) and
Rule 506 of 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 securities described in paragraph (4) above were issued pursuant to a
fairness hearing held by the California Department of Corporations and 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 Form of Agreement and Plan of Merger between the Registrant and Rogue Wave Software, Inc., an Oregon
corporation, expected to be dated prior to the effectiveness of this offering.
+3.1 Form of Certificate of Incorporation of Rogue Wave Software, Inc., a Delaware corporation, expected to
be in effect prior to the effectiveness of this offering.
+3.2 Form of Amended and Restated Certificate of Incorporation of Rogue Wave Software, Inc., a Delaware
corporation, expected to be in effect immediately following the closing of the offering.
+3.3 Form of 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.
+10.2 Registrant's Employee Stock Purchase Plan.
+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.
10.6 Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated October 16, 1996.
10.7 Collateral Assignment, Patent Mortgage and Security Agreement between the Registrant and Silicon Valley
Bank, dated October 16, 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.
II-3
<PAGE>
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 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 19th day of
November, 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 November 19, 1996
Thomas Keffer (PRINCIPAL EXECUTIVE OFFICER)
*/s/DAN WHITAKER
--------------------------------- Executive Vice President, Marketing and November 19, 1996
Dan Whitaker Director
/s/ROBERT M. HOLBURN, JR. Chief Financial Officer and Secretary
--------------------------------- (PRINCIPAL FINANCIAL AND ACCOUNTING November 19, 1996
Robert M. Holburn, Jr. OFFICER)
*/s/THOMAS M. ATWOOD
--------------------------------- Director November 19, 1996
Thomas M. Atwood
*/s/HOWARD M. LOVE, JR.
--------------------------------- Director November 19, 1996
Howard M. Love, Jr.
*/s/RICHARD P. MAGNUSON
--------------------------------- Director November 19, 1996
Richard P. Magnuson
*/s/THOMAS H. PETERSON
--------------------------------- Director November 19, 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
November 19, 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 Form of Agreement and Plan of Merger between the Registrant and Rogue Wave Software, Inc., an Oregon
corporation, expected to be dated prior to the effectiveness of this offering.
+3.1 Form of Certificate of Incorporation of Rogue Wave Software, Inc., a Delaware corporation, expected to
be in effect prior to the effectiveness of this offering.
+3.2 Form of Amended and Restated Certificate of Incorporation of Rogue Wave Software, Inc., a Delaware
corporation, expected to be in effect immediately following the offering.
+3.3 Form of 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.
+10.2 Registrant's Employee Stock Purchase Plan.
+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.
10.6 Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated October 16, 1996.
10.7 Collateral Assignment, Patent Mortgage and Security Agreement between the Registrant and Silicon Valley
Bank, dated October 16, 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>
ROGUE WAVE SOFTWARE, INC.
2,086,110 SHARES(1)
COMMON STOCK
UNDERWRITING AGREEMENT
________ __, 1996
HAMBRECHT & QUIST LLC
WESSELS, ARNOLD & HENDERSON, L.L.C.
As Representatives of the Several
Underwriters Named on Schedule I hereto
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Rogue Wave Software, Inc., a Delaware corporation (herein called the
Company), proposes to issue and sell 2,000,000 shares of its authorized but
unissued Common Stock, $.001 par value, and certain stockholders of the Company
named in Schedule II hereto propose to sell an aggregate of 86,110 shares of
Common Stock, $.001 par value per share of the Company (herein called the Common
Stock) (said 2,086,110 shares of Common Stock being herein called the
Underwritten Stock). The Company and certain other stockholders of the Company
named in Schedule II hereto (said stockholders, together with the stockholders
selling the Underwritten Stock, herein collectively called the Selling
Securityholders) propose to grant to the Underwriters (as hereinafter defined)
an option to purchase up to 312,916 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned.
The Company and the Selling Securityholders severally hereby confirm the
agreements made with respect to the purchase of the Stock by the several
underwriters, for whom you are acting, named in Schedule I hereto (herein
collectively called the Underwriters, which term shall also include any
underwriter purchasing Stock pursuant to Section 3(b) hereof). You represent
and warrant that you have been authorized by each of the other Underwriters to
enter into this Agreement on its behalf and to act for it in the manner herein
provided.
- -------------------
(1) Plus an option to purchase from the Company and certain of the Selling
Securityholders of up to 312,916 additional shares to cover
over-allotments.
<PAGE>
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form SB-2 (No. 333-13517), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act), of the Stock. Copies of such registration statement and of
each amendment thereto, if any, including the related preliminary prospectus
(meeting the requirements of Rule 430A of the rules and regulations of the
Commission) heretofore filed by the Company with the Commission have been
delivered to you.
The term Registration Statement as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Stock first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to such
prospectus after the Effective Date, shall also mean (from and after the filing
with the Commission of such supplement or the effectiveness of such amendment)
such prospectus as so supplemented or amended. The term Preliminary Prospectus
as used in this Agreement shall mean each preliminary prospectus included in
such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES
(a) The Company hereby represents and warrants as follows:
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the
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condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries, taken as a whole).
The execution and delivery of the Agreement and Plan of Merger dated as of
__________, 1996 (herein called the Merger Agreement) between Rogue Wave
Software, Inc., an Oregon corporation (herein called the Oregon
Corporation), and the Company, which effected the reincorporation of the
Oregon Corporation under the laws of the State of Delaware on __________,
1996, was duly authorized by all necessary corporate action on the part of
each of the Oregon Corporation and the Company. Each of the Oregon
Corporation and the Company had all corporate power and authority to
execute and deliver the Merger Agreement, to file the Merger Agreement with
the Secretary of State of Oregon and the Secretary of State of Delaware and
to consummate the reincorporation contemplated by the Merger Agreement, and
the Merger Agreement, at the time of execution and filing, constituted a
valid and binding obligation of each of the Oregon Corporation and the
Company, enforceable in accordance with its terms. The Company does not
own or control, directly or indirectly, any corporation, association or
other entity other than Inmark Development Corporation, a California
corporation (hereinafter called Inmark), and Rogue Wave Software GmbH, a
German corporation.
(ii) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company or any of its subsidiaries, taken
as a whole, whether or not arising from transactions in the ordinary course
of business, other than as set forth in the Registration Statement and the
Prospectus, and since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has entered into
any material transaction not referred to in the Registration Statement and
the Prospectus.
(iii) The Registration Statement and the Prospectus comply,
and on the Closing Date (as hereinafter defined) and any later date on
which Option Stock is to be purchased, the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules
and regulations of the Commission thereunder. On the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
PROVIDED, HOWEVER, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
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(iv) The Company's outstanding capital stock has been validly
authorized, is fully paid and nonassessable, was issued in compliance with
the registration and qualification provisions of applicable federal and
state securities laws and was issued free of any preemptive right, right of
first refusal or similar right. The Stock is duly and validly authorized,
is (or, in the case of shares of the Stock to be sold by the Company, will
be, when issued and sold to the Underwriters as provided herein) duly and
validly issued, fully paid and nonassessable and conforms to the
description thereof in the Prospectus. No further approval or authority of
the stockholders or the Board of Directors of the Company will be required
for the transfer and sale of the Stock to be sold by the Selling
Securityholders or the issuance and sale of the Stock as contemplated
herein. No preemptive right, or right of first refusal in favor of
stockholders, exists with respect to the Stock, or the issue and sale
thereof, pursuant to the Certificate of Incorporation or Bylaws of the
Company, and there is no contractual preemptive right, right of first
refusal, right of co-sale or similar right which exists and has not been
waived with respect to the Stock being sold by the Selling Securityholders
or the issue and sale of the Stock.
(v) The Registration Statement has become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement or suspending or preventing the use of the
Prospectus is in effect and, to the Company's knowledge after inquiry, no
proceeding for that purpose has been instituted or is contemplated by the
Commission.
(vi) This Agreement has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution and
delivery by the Representatives, constitutes a valid and binding obligation
of the Company enforceable in accordance with its terms, except as rights
to indemnity or contribution may be limited by federal or state securities
laws and except as enforcement (A) may be limited by the effect of
bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent
conveyance and other similar laws relating to or affecting the rights of
creditors generally, (B) is subject to general principles of equity and
similar principles, including, without limitation, concepts of materiality,
reasonableness, unconscionability, good faith and fair dealing and the
possible unavailability of specific performance, injunctive relief or other
equitable remedies, regardless of whether considered in a proceeding in
equity or at law or (C) is subject to the effect of public policy.
(vii) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement, and
the issue and sale by the Company of the shares of Stock to be sold by the
Company as provided herein will not conflict with, or result in a breach
of, the Certificate of Incorporation or Bylaws of the Company or any
material agreement or instrument to which the Company is a party or any
applicable law or regulation, or any judgment, order, writ, injunction or
decree, of any jurisdiction, court or governmental instrumentality.
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<PAGE>
(viii) All holders of securities of the Company having rights
to the registration of shares of Common Stock, or other securities, because
of the filing of the Registration Statement by the Company have waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement.
(ix) The "lock-up" agreements between you and all of the
Company's executive officers, directors and substantially all of the
Company's stockholders and optionees whose options will vest, in whole or
in part, prior to the date that is 180 days following the Effective Date,
delivered to you before the date hereof, and the "lock-up" provisions
imposed in connection with the Inmark Option Plan, the Inmark Merger and
the Investors Rights Agreement, shall be in full force and effect on the
Closing Date.
(x) The Company has (A) notified each holder of a currently
outstanding option issued under Inmark's stock option plan (herein called
in the Inmark Option Plan), and each person who has acquired shares of
Common Stock pursuant to the exercise of any option granted under the
Inmark Option Plan that, pursuant to the terms of the Inmark Option Plan,
none of such options or shares may be sold or otherwise disposed of for a
period of 180 days following the commencement of the public offering of the
Stock by the Underwriters; (B) notified each holder of Common Stock who
acquired such stock pursuant to the merger between the Company and Inmark
(herein called the Inmark Merger) that, pursuant to the Inmark Merger, none
of such shares may be sold or otherwise disposed of for a period of 180
days following the commencement of the public offering of the Stock by the
Underwriters; (C) notified each party to that certain Amended and Restated
Investor Rights Agreement between the Company and certain investors, dated
June __, 1996 (herein called the Investors Rights Agreement), that,
pursuant to the Investors Rights Agreement, none of such shares may be sold
or otherwise disposed of for a period of 180 days following the
commencement of the public offering of the Stock by the Underwriters; and
(D) imposed a stop-transfer instruction with the Company's transfer agent
in order to enforce the foregoing "lock-up" provisions. Each of the
foregoing "lock-up" provisions shall be in full force and effect on the
Closing Date.
(xi) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated herein, except such as have been (or will before
the Closing Date have been) obtained under the Securities Act and such as
may be required under state securities or blue sky laws in connection with
the purchase and distribution of the Stock by the Underwriters.
(xii) The Company has timely filed all necessary federal,
state and foreign income and franchise tax returns and has paid all taxes
shown thereon as due, and there is no tax deficiency that has been or, to
the Company's knowledge, might be asserted against the Company that could
have a material adverse effect on the condition
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<PAGE>
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries, taken as a whole; and all
tax liabilities are adequately provided for on the books of the Company.
(xiii) To the Company's knowledge, no labor disturbance by the
employees of the Company exists or is imminent; and the Company is not
aware of any existing or imminent labor disturbance by the employees of any
of its principal value added resellers, subcontractors, original equipment
manufacturers, authorized dealers or international distributors that might
be expected to result in a material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries, taken as a whole. No
collective bargaining agreement exists with any of the Company's employees
and, to the Company's knowledge, no such agreement is imminent.
(xiv) The consolidated financial statements, including the
notes thereto, and supporting schedules included in the Registration
Statement and the Prospectus present fairly the financial position of the
Company and Inmark as of the dates indicated and the results of its
operations for the periods specified; except as otherwise stated in the
Registration Statement, said consolidated financial statements have been
prepared in conformity with generally accepted accounting principles
applied on a consistent basis; and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. Such consolidated financial statements have been prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods involved, are correct and complete, and are
in accordance with the books and records of the Company in all material
respects. The unaudited pro forma combined financial information
(including the related notes and supporting schedules) contained in the
Prospectus complies as to form in all material respects to the accounting
requirements of the Securities Act and the rules and regulations of the
Commission thereunder, and management of the Company believes that the
assumptions underlying the pro forma adjustments are reasonable. All
necessary pro forma adjustments have been properly applied to the
historical amounts in the compilation of the information and such
information presents fairly with respect to the respective combined
entities presented therein the financial position, results of operations,
and other information purported to be shown therein at the respective dates
and for the respective periods specified on a basis consistent with the
audited financial statements included in the Registration Statement and
Prospectus. No other financial statements are required by Form SB-2 or
otherwise to be included in the Registration Statement or Prospectus.
(xv) Except as set forth in the Registration Statement, the
Company has good and marketable title to all the properties and assets
reflected as owned by it in the financial statements (or elsewhere in the
Prospectus), free and clear of all liens, mortgages, pledges, charges or
encumbrances of any kind except (A) those, if any, reflected in the
financial statements (or elsewhere in the Prospectus), or (B) those which
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are not material in amount and do not materially adversely affect the use
made and proposed to be made of such property by the Company. The Company
holds its leased properties under valid and binding leases and licenses,
with such exceptions as are not materially significant in relation to the
business of the Company, and enjoys peaceful and undisturbed possession
under all such leases and licenses. Except as disclosed in the Prospectus,
the Company owns or leases all such properties as are necessary to its
operations as now conducted or as proposed to be conducted.
(xvi) Neither the Company, any of its subsidiaries nor, to
the Company's knowledge, any other party is in violation or breach of, or
in default with respect to, complying with any material provision of any
contract, agreement, instrument, lease, license, arrangement or
understanding which is material to the Company, and each such contract,
agreement, instrument, lease, license, arrangement and understanding is in
full force and is the legal, valid and binding obligation of the Company
and, to the Company's knowledge, the other parties thereto and is
enforceable against the Company and, to the Company's knowledge, against
the other parties thereto in accordance with its terms. The Company enjoys
peaceful and undisturbed possession under all leases and licenses under
which it is operating. The Company is not in violation or breach of, or in
default with respect to, any term of its Certificate of Incorporation or
Bylaws.
(xvii) To the Company's knowledge, the Company is not
infringing or otherwise violating any patent, copyright, trade secret,
trademark, service mark, trade name, technology, know-how or other
proprietary information or material of others. The Company has not
received any notice of infringement or conflict with (and the Company knows
of no conflict or infringement with) asserted rights of others with respect
to any patents, copyrights, trademarks, service marks, trade names,
technology or know-how, which could have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries, taken as a whole.
(xviii) The Company owns or possesses sufficient licenses or
other rights to use all patents, copyrights, trade secrets, trademarks,
service marks, trade names, technology, know-how or other proprietary
information or materials necessary to conduct the business now being
conducted by the Company as described in the Prospectus.
(xix) The Company (A) is in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous
or toxic substances or wastes, pollutants or contaminants (herein called
Environmental Laws), (B) has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
business and (C) is in compliance with all terms and conditions of any such
permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals would not, singly or in the
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<PAGE>
aggregate, have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries, taken as a whole.
(xx) Except as described in the Registration Statement,
there is no legal or governmental proceeding pending or threatened to which
the Company or any of its subsidiaries is a party or to which any of the
properties of the Company is subject that is required to be described in
the Registration Statement or the Prospectus and is not so described, nor
is there any statute, regulation, contract or other document that is
required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement that is not
described or filed.
(xxi) The Company has all necessary consents, authorizations,
approvals, orders, certificates and permits of and from, and has made all
declarations and filings with, all governmental authorities, to own, lease,
license and use its properties and assets and to conduct its business in
the manner described in the Prospectus, except to the extent that the
failure to obtain or file such would not have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries, taken as a whole.
(xxii) The Common Stock has been approved for listing on the
National Association of Securities Dealers Automated Quotation (Nasdaq)
National Market.
(xxiii) The Company has not distributed and will not distribute
prior to the Closing Date any offering material in connection with the
offering and sale of the Shares other than the Preliminary Prospectus, the
Prospectus, the Registration Statement and the other materials permitted by
the Securities Act.
(xxiv) The Company maintains insurance of the types and in the
amounts generally deemed adequate for its business, including, but not
limited to, insurance covering real and personal property owned or leased
by the Company and its subsidiaries against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of
which insurance is in full force and effect. The Company has not been
refused any insurance coverage sought or applied for; and the Company has
no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its business
at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries, taken as a whole.
(xxv) Neither the Company nor any of its subsidiaries has at
any time during the last five (5) years in any jurisdiction (A) made any
unlawful contribution to any candidate for office, or failed to disclose
fully any contribution in violation of law, or (B) made any payment to any
governmental officer or official, or other person charged
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<PAGE>
with similar public or quasi-public duties other than payments required or
permitted by the laws of the United States.
(xxvi) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of
the officers or directors of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement
and the Prospectus.
(xxvii) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba.
(xxviii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions
are executed in accordance with management's general or specific
authorization; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (C) access
to its assets is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to differences.
(xxix) The accountants, KPMG Peat Marwick LLP, who have
certified or shall certify the financial statements included in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto) are independent public accountants with respect to the Company
within the meaning of the Securities Act.
(xxx) The Company is not now, and upon the Closing Date, and
after application of the net proceeds from the offering as described in the
Prospectus, will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(b) Each of the Selling Securityholders, severally and not jointly,
hereby represents and warrants as follows:
(i) Such Selling Securityholder has good and marketable title to
all the shares of Stock to be sold by such Selling Securityholder
hereunder, free and clear of all liens, encumbrances, equities, security
interests and claims whatsoever, with full right and authority to deliver
the same hereunder, subject, in the case of each Selling Securityholder, to
the rights of ChaseMellon Shareholder Services, as Custodian (herein called
the Custodian), and that upon the delivery of and payment for such shares
of the Stock hereunder, the several Underwriters will receive good and
marketable title thereto, free and clear of all liens, encumbrances,
equities, security interests and claims whatsoever.
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<PAGE>
(ii) Certificates in negotiable form for the shares of the Stock
to be sold by such Selling Securityholder have been placed in custody under
a Custody Agreement for delivery under this Agreement with the Custodian;
such Selling Securityholder specifically agrees that the shares of the
Stock represented by the certificates so held in custody for such Selling
Securityholder are subject to the interests of the several Underwriters and
the Company, that the arrangements made by such Selling Securityholder for
such custody, including the Power of Attorney provided for in such Custody
Agreement, are to that extent irrevocable, and that the obligations of such
Selling Securityholder shall not be terminated by any act of such Selling
Securityholder or by operation of law, whether by the death or incapacity
of such Selling Securityholder (or, in the case of a Selling Securityholder
that is not an individual, the dissolution or liquidation of such Selling
Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur
before the delivery of such shares of the Stock hereunder, certificates for
such shares of the Stock shall be delivered by the Custodian in accordance
with the terms and conditions of this Agreement as if such death,
incapacity, dissolution, liquidation or other event had not occurred,
regardless of whether the Custodian shall have received notice of such
death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder has reviewed the
Registration Statement and Prospectus and, although such Selling
Securityholder has not independently verified the accuracy or completeness
of all the information contained therein, nothing has come to the attention
of such Selling Securityholder that would lead such Selling Securityholder
to believe that on the Effective Date, the Registration Statement contained
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date the
Prospectus contained and, on the Closing Date and any later date on which
Option Stock is to be purchased, contains any untrue statement of a
material fact or omitted or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(iv) All information furnished in writing by or on behalf of such
Selling Securityholder for use in the Registration Statement and Prospectus
is, and on the Closing Date will be, true, correct, and complete, and does
not, and on the Closing Date will not, contain any untrue statement of a
material fact or omit to state any material fact necessary to make such
information not misleading.
(v) The sale of the Stock by such Selling Securityholder
pursuant hereto is not prompted by any adverse information concerning the
Company which is not set forth in the Registration Statement and
Prospectus.
(vi) The execution and delivery by such Selling Securityholder
of, and the performance by such Selling Securityholder of its obligations
under, this Agreement,
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the custody agreement signed by such Selling Securityholder and the
Custodian, relating to the deposit of the Stock to be sold by such Selling
Securityholder (herein called the Custody Agreement) and the power of
attorney appointing certain individuals as such Selling Securityholder's
attorneys-in-fact to the extent set forth therein, relating to the
transactions contemplated hereby and by the Registration Statement (herein
called the Power of Attorney) will not contravene any provision of
applicable law, or the certificate or articles of incorporation or by-laws
of such Selling Securityholder (if such Selling Securityholder is a
corporation), or any agreement or other instrument binding upon such
Selling Securityholder or any judgment, order or decree of any governmental
body, agency or court having jurisdiction over such Selling Securityholder,
and no consent, approval, authorization or order of or qualification with
any court or governmental body or agency is required for the performance by
such Selling Securityholder of its obligations under this Agreement, the
Custody Agreement or the Power of Attorney of such Selling Securityholder,
except such as may be required under the Securities Act or by the
securities or blue sky laws of various states in connection with the offer
and sale of the Stock by the Underwriters.
(vii) Such Selling Securityholder has, and on the Closing
Date will have, the legal right and power, and all authorization and
approval required by law, to enter into this Agreement, the Custody
Agreement and the Power of Attorney and to sell, transfer and deliver in
the manner provided in this Agreement the shares of Stock to be sold by
such Selling Securityholder.
(viii) Each of this Agreement, the Custody Agreement and the
Power of Attorney has been duly authorized, executed and delivered by or on
behalf of such Selling Securityholder and, assuming due authorization,
execution and delivery by the other parties thereto, constitutes a valid
and binding obligation of such Selling Securityholder enforceable in
accordance with its terms, except as rights to indemnity or contribution
may be limited by federal or state securities laws and except as
enforcement (i) may be limited by the effect of bankruptcy, insolvency,
reorganization, arrangement, moratorium, fraudulent conveyance and other
similar laws relating to or affecting the rights of creditors generally,
(ii) is subject to general principles of equity and similar principles,
including, without limitation, concepts of materiality, reasonableness,
unconscionability, good faith and fair dealing and the possible
unavailability of specific performance, injunctive relief or other
equitable remedies, regardless of whether considered in a proceeding in
equity or at law or (iii) is subject to the effect of public policy.
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3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
2,000,000 shares of the Underwritten Stock to the several Underwriters, each
Selling Securityholder agrees to sell to the several Underwriters the number of
shares of the Underwritten Stock set forth in Schedule II opposite the name of
such Selling Securityholder, and each of the Underwriters agrees to purchase
from the Company and the Selling Securityholders the respective aggregate number
of shares of Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the Company
and the Selling Securityholders and purchased by the several Underwriters shall
be $___ per share. The obligation of each Underwriter to the Company and each
of the Selling Securityholders shall be to purchase from the Company and the
Selling Securityholders that number of shares of the Underwritten Stock which
represents the same proportion of the total number of shares of the Underwritten
Stock to be sold by each of the Company and the Selling Securityholders pursuant
to this Agreement as the number of shares of the Underwritten Stock set forth
opposite the name of such Underwriter in Schedule I hereto represents of the
total number of shares of the Underwritten Stock to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of shares of the Underwritten Stock
specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company or the Selling Securityholders shall
immediately give notice thereof to you, and the non-defaulting Underwriters
shall have the right within 24 hours after the receipt by you of such notice to
purchase, or procure one or more other Underwriters to purchase, in such
proportions as may be agreed upon between you and such purchasing Underwriter or
Underwriters and upon the terms herein set forth, all or any part of the shares
of the Stock which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such arrangements
with respect to all such shares and portion, the number of shares of the Stock
which each non-defaulting Underwriter is otherwise obligated to purchase under
this Agreement shall be automatically increased on a pro rata basis to absorb
the remaining shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase; PROVIDED, HOWEVER, that the non-defaulting
Underwriters shall not be obligated to purchase the shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such shares of the Stock exceeds 10% of the total number of shares of
the Stock which all Underwriters agreed to purchase hereunder. If the total
number of shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase shall not be purchased or absorbed in accordance with the two
preceding sentences, the Company and the Selling Securityholders shall
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have the right, within 24 hours next succeeding the 24-hour period above
referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms
herein set forth. In any such case, either you or the Company and the
Selling Securityholders shall have the right to postpone the Closing Date
determined as provided in Section 5 hereof for not more than seven business
days after the date originally fixed as the Closing Date pursuant to said
Section 5 in order that any necessary changes in the Registration Statement,
the Prospectus or any other documents or arrangements may be made. If
neither the non-defaulting Underwriters nor the Company and the Selling
Securityholders shall make arrangements within the 24-hour periods stated
above for the purchase of all the shares of the Stock which the defaulting
Underwriter or Underwriters agreed to purchase hereunder, this Agreement
shall be terminated without further act or deed and without any liability on
the part of the Company or the Selling Securityholders to any non-defaulting
Underwriter and without any liability on the part of any non-defaulting
Underwriter to the Company or the Selling Securityholders. Nothing in this
paragraph (b), and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter
under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company and certain of the Selling Securityholders grant an option to the
several Underwriters to purchase, severally and not jointly, up to
312,916 shares in the aggregate of the Option Stock from the Company and certain
of the Selling Securityholders at the same price per share as the Underwriters
shall pay for the Underwritten Stock. Said option may be exercised only to
cover over-allotments in the sale of the Underwritten Stock by the Underwriters
and may be exercised in whole or in part at any time (but not more than once) on
or before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
shares of the Option Stock as to which the several Underwriters are exercising
the option. Delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made as provided in Section 5 hereof. The number of
shares of the Option Stock to be purchased by each Underwriter shall be the same
percentage of the total number of shares of the Option Stock to be purchased by
the several Underwriters as such Underwriter is purchasing of the Underwritten
Stock, as adjusted by you in such manner as you deem advisable to avoid
fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front
cover page and under "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating to the Stock filed by the
Company (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company for
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inclusion in the Registration Statement, any Preliminary Prospectus, and the
Prospectus, and you on behalf of the respective Underwriters represent and
warrant to the Company that the statements made therein are correct and do not
omit any material fact required to be stated therein or necessary to make the
statements therein not misleading.
5. DELIVERY OF AND PAYMENT FOR THE STOCK
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 A.M., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Cooley Godward LLP, 3000 Sand Hill Road, Bldg. 3, Suite 230,
Menlo Park, California 94025, at 7:00 a.m., San Francisco time, on the
[FOURTH](2) business day after the date of this Agreement, or at such time on
such other day, not later than seven full business days after such [FOURTH]
business day, as shall be agreed upon in writing by the Company, the Selling
Securityholders and you. The date and hour of such delivery and payment (which
may be postponed as provided in Section 3(b) hereof) are herein called the
Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Cooley Godward LLP, 3000 Sand
Hill Road, Bldg. 3, Suite 230, Menlo Park, California 94025, at 7:00 a.m., San
Francisco time, on the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order, and payment for the Stock purchased from the Selling
Securityholders shall be made to the Custodian, for the account of the Selling
Securityholders, in each case by one or more certified or official bank check or
checks in next day funds (and the Company and the Selling Securityholders agree
not to deposit any such check in the bank on which drawn until the day following
the date of its delivery to the Company or the Custodian, as the case may be).
Such payment shall be made upon delivery of certificates for the Stock to you
for the respective accounts of the several Underwriters against receipt therefor
signed by you. Certificates for the Stock to be delivered to you shall be
registered in such name or names and shall be in such denominations as you may
request at least one business day before the Closing Date, in the case of
Underwritten Stock, and at least one business day prior to the purchase thereof,
in the case of the Option Stock. Such certificates will be made available to
the Underwriters for inspection, checking and packaging at the offices of Lewco
Securities Corporation, 2 Broadway, New York,
- -----------------
(2) This assumes that the transaction will be priced after the close of market
and that T+4 will apply to the transaction. If the pricing took place
before or during market hours (which will generally not be the case), the
closing would be three business days after pricing.
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<PAGE>
New York 10004 on the business day prior to the Closing Date or, in the case of
the Option Stock, by 3:00 p.m., New York time, on the business day preceding the
date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose check shall not have been received by you on the Closing Date or any later
date on which Option Stock is purchased for the account of such Underwriter.
Any such payment by you shall not relieve such Underwriter from any of its
obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and, with respect to paragraphs (i), (j), (k), (l) and (m)
only, the Selling Securityholders, respectively, covenants and agrees as
follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the
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Underwriters as many additional copies of the Prospectus and as many copies of
any supplement to the Prospectus and of any amended prospectus, filed by the
Company with the Commission, as you may reasonably request for the purposes
contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the
initial public offering of the Stock by the Underwriters and during such period,
the Underwriters shall propose to vary the terms of offering thereof by reason
of changes in general market conditions or otherwise, you will advise the
Company in writing of the proposed variation, and, if in the opinion either of
counsel for the Company or of counsel for the Underwriters such proposed
variation requires that the Prospectus be supplemented or amended, the Company
will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended prospectus setting forth such variation. The Company
authorizes the Underwriters and all dealers to whom any of the Stock may be sold
by the several Underwriters to use the Prospectus, as from time to time amended
or supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; PROVIDED, HOWEVER, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information,
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<PAGE>
documents and reports filed with the Commission (including the Report on Form SR
required by Rule 463 of the Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company and the Selling Securityholders jointly and severally
agree to pay all costs and expenses incident to the performance of its
obligations under this Agreement, including all costs and expenses incident to
(i) the preparation, printing and filing with the Commission and the National
Association of Securities Dealers, Inc. of the Registration Statement, any
Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (c) of this Section 6 to be so furnished,
(iii) the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (d) of this Section 6,
(v) the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees. Each of
the Selling Securityholders will pay any transfer taxes incident to the transfer
to the Underwriters of the Shares of Stock being sold by each such Selling
Securityholder.
(j) The Company and the Selling Securityholders jointly and severally
agree to reimburse you, for the account of the several Underwriters, for blue
sky fees and related disbursements (including counsel fees and disbursements and
cost of printing memoranda for the Underwriters) paid by or for the account of
the Underwriters or their counsel in qualifying the Stock under state securities
or blue sky laws and in the review of the offering by the NASD.
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholders hereby agree to pay and shall
not affect any agreement which the Company and the Selling Securityholders may
make, or may have made, for the sharing of any such expenses and costs.
(l) The Company hereby agrees that, without the prior written consent
of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
for a period of 180 days following the commencement of the public offering of
the Stock by the Underwriters, 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 rights to purchase or acquire
Common Stock, whether any such transaction is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Stock to be sold to the Underwriters
pursuant to this Agreement, (B) shares of Common Stock issued by the Company
upon the exercise of options that are currently outstanding under the stock
option plans
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of the Company (the "Option Plans"), all as described in footnote (__) to the
table under the caption "Capitalization" in the Preliminary Prospectus,
(C) options to purchase Common Stock granted under the Option Plans, PROVIDED
THAT, without the prior written consent of Hambrecht & Quist LLC on behalf of
the Underwriters, such additional options shall not be transferable during such
180-day period, or (D) shares of Common Stock pursuant to a strategic
acquisition, so long as (1) such shares may not be sold by the holder thereof
during the 180-day period, (2) the purchase price for such shares is not less
than the fair market value of the Common Stock, and (3) such sale would not
result in the purchaser owning more than ten percent of the Company's
outstanding Common Stock.
(m) The Selling Securityholders agree that, without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Selling
Securityholders will not, for a period of 180 days following the commencement of
the public offering of the Stock by the Underwriters, 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 rights to
purchase or acquire Common Stock, whether any such transaction is to be settled
by delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to the Stock to be sold to the Underwriters
pursuant to this Agreement.
(n) If at any time during the 180-day period after the Registration
Statement becomes effective any person who is subject to any of the "lock-up"
agreements between you and all of the Company's executive officers, directors
and substantially all of the Company's stockholders and optionees whose options
will vest, in whole or in part, prior to [180 days following the Effective
Date], 1997, delivered to you before the date hereof, and the "lock-up"
provisions imposed in connection with the Inmark Option Plan, the Inmark Merger
and the Investors Rights Agreement, the Company will use its best efforts to
enforce such "lock-up" agreements and provisions, including but not limited to
instructing its legal counsel to refuse to issue an opinion of counsel in order
to restrict the transfer of such shares prior to the expiration of such 180-day
period.
(o) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above and, to the
extent deemed advisable by counsel to the Company, forthwith prepare, consult
with you concerning the substance of, and disseminate a press release or other
public statement, reasonably satisfactory to you, responding to or commenting on
such rumor, publication or event.
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<PAGE>
7. INDEMNIFICATION AND CONTRIBUTION
(a) (i) Subject to the provisions of paragraph (f) of this Section
7, the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless each Underwriter and each person (including each
partner or officer thereof) who controls any Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Securities Exchange
Act of 1934, as amended (herein called the Exchange Act), or the common law or
otherwise, and the Company and the Selling Securityholders jointly and severally
agree to reimburse each such Underwriter and controlling person for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that (1) the indemnity agreements of the Company
and the Selling Securityholders contained in this paragraph (a)(i) shall not
apply to any such losses, claims, damages, liabilities or expenses if such
statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto, (2) the indemnity agreement contained in this
paragraph (a)(i) with respect to any Preliminary Prospectus shall not inure to
the benefit of any Underwriter from whom the person asserting any such losses,
claims, damages, liabilities or expenses purchased the Stock which is the
subject thereof (or to the benefit of any person controlling such Underwriter)
if at or prior to the written confirmation of the sale of such Stock a copy of
the Prospectus (or the Prospectus as amended or supplemented) was not sent or
delivered to such person and the untrue statement or omission of a material fact
contained in such Preliminary Prospectus was corrected in the Prospectus (or the
Prospectus as amended or supplemented) unless the failure is the result of
noncompliance by the Company with paragraph (c) of Section 6 hereof, and (3)
each Selling Securityholder shall be only liable under this paragraph with
respect to (A) information pertaining to such Selling Securityholder furnished
by or on behalf of such Selling Securityholder expressly for use in any
Preliminary Prospectus or the Registration Statement or the Prospectus or any
such amendment thereof or
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<PAGE>
supplement thereto or (B) facts that would constitute a breach of any
representation or warranty of such Selling Securityholder set forth in Section
2(b) hereof.
(ii) The indemnity agreements of the Company and the Selling
Securityholders contained in paragraph (a)(i) of this Section 7 and the
representations and warranties of the Company and the Selling Securityholders
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter, each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of
Section 15 of the Securities Act, and the Selling Securityholders from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act, or the common law or otherwise and to
reimburse each of them for any legal or other expenses (including, except as
otherwise hereinafter provided, reasonable fees and disbursements of counsel)
incurred by the respective indemnified parties in connection with defending
against any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be brought
against, the respective indemnified parties, in each case arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any Rule 462(b) registration statement) or any post-effective
amendment thereto (including any Rule 462(b) registration statement) or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto. The indemnity agreement of
each Underwriter contained in this paragraph (b) shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.
(c) Each party indemnified under the provision of paragraphs (a)(i)
and (b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
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indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its
own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (herein called the Notice of Defense) to
the indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; PROVIDED, HOWEVER, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a)(i) of this Section 7 or under paragraph (b) of this Section 7,
then each indemnifying party, in lieu of indemnifying such
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indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a)(i) of this Section 7 or in paragraph (b) of this
Section 7 (i) in such proportion as is appropriate to reflect the relative
benefits received by each indemnifying party from the offering of the Stock or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
each indemnifying party in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, or actions in respect
thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Securityholders on the one hand
and the Underwriters on the other shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Stock received by
the Company and the Selling Securityholders and the total underwriting discount
received by the Underwriters, as set forth in the table on the cover page of the
Prospectus, bear to the aggregate public offering price of the Stock. Relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Stock purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service
of a summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 7).
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(e) Neither the Company nor the Selling Securityholders, without the
prior written consent of each Underwriter, will settle or compromise or consent
to the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding.
(f) The liability of each Selling Securityholder under the indemnity,
contribution and reimbursement agreements contained in the provisions of this
Section 7 and Section 11 hereof shall be limited to an amount equal to the
respective net proceeds received by each such Selling Securityholder from the
sale to the Underwriters of the Stock in the initial public offering. The
Company and the Selling Securityholders may agree, as among themselves and
without limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be responsible.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company and the
Selling Securityholders if after the date of this Agreement trading in the
Common Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States on
or after the date hereof, (ii) any outbreak of hostilities or other national or
international calamity or crisis or change in economic or political conditions
if the effect of such outbreak, calamity, crisis or change in economic or
political conditions in the financial markets of the United States would, in the
Underwriters' reasonable judgment, make the offering or delivery of the Stock
impracticable, (iii) suspension of trading in securities generally or a material
adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company,
(v) declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company or the Selling
Securityholders to the Underwriters and no liability of the Underwriters to the
Company or the Selling Securityholders; PROVIDED, HOWEVER, that in the event of
any such termination the Company and the Selling Securityholders agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the
-23-
<PAGE>
Selling Securityholders under this Agreement, including all costs and expenses
referred to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Fenwick & West LLP, counsel for the Underwriters.
(c) You shall have received from Cooley Godward LLP, counsel for the
Company and the Selling Securityholders, an opinion, addressed to the
Underwriters and dated the Closing Date, covering the matters set forth in
Annex A hereto, and if Option Stock is purchased at any date after the Closing
Date, additional opinions from each such counsel, addressed to the Underwriters
and dated such later date, confirming that the statements expressed as of the
Closing Date in such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein,
(iv) neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
-24-
<PAGE>
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus,
(vi) there are not any franchises, contracts, leases or other documents which
are required to be filed as exhibits to the Registration Statement which have
not been filed as required, (vii) the representations and warranties of the
Company herein are true and correct in all material respects as of the Closing
Date or any later date on which Option Stock is to be purchased, as the case may
be, and (viii) there has not been any material change in the market for
securities in general or in political, financial or economic conditions from
those reasonably foreseeable as to render it impracticable in your reasonable
judgment to make a public offering of the Stock, or a material adverse change in
market levels for securities in general (or those of companies in particular) or
financial or economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from KPMG Peat Marwick LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date, as the case may be, and (ii) setting forth any revisions and additions to
the statements and conclusions set forth in the Original Letter which are
necessary to reflect any changes in the facts described in the Original Letter
since the date of the Original Letter or to reflect the availability of more
recent financial statements, data or information. The letters shall not
disclose any change, or any development involving a prospective change, in or
affecting the business or properties of the Company or any of its subsidiaries
which, in your sole judgment, makes it impractical or inadvisable to proceed
with the public offering of the Stock or the purchase of the Option Stock as
contemplated by the Prospectus.
(g) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
-25-
<PAGE>
(h) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(i) On or prior to the Closing Date, you shall have received from all
of the Company's executive officers, directors and substantially all of the
Company's stockholders and optionees whose options will vest, in whole or in
part, prior to the date that is 180 days following the Effective Date, "lock-up"
agreements, in form reasonably satisfactory to Hambrecht & Quist LLC, stating
that without the prior written consent of Hambrecht & Quist LLC on behalf of the
Underwriters, such person or entity will not, for a period of 180 days following
the commencement of the public offering of the Stock by the Underwriters,
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 rights to purchase or acquire Common Stock, whether any
such transaction is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to the
Stock to be sold by the Selling Securityholders to the Underwriters pursuant to
this Agreement.
(j) Prior to the Closing Date, the Company shall have furnished to
the Underwriters such further information, certificates and documents as the
Underwriters may reasonably request.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Fenwick & West LLP, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; PROVIDED, HOWEVER, that (i) in the event of such
termination, the Company and the Selling Securityholders jointly and severally
agree to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement, including all costs and expenses referred
to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is
terminated by you because of any refusal, inability or failure on the part of
the Company or the Selling Securityholders to perform any agreement herein, to
fulfill any of the conditions herein, or to comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the transactions contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the
-26-
<PAGE>
Stock shall be subject to the conditions that (a) the Registration Statement
shall have become effective and (b) no stop order suspending the effectiveness
thereof shall be in effect and no proceedings therefor shall be pending or
threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company and the Selling
Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; PROVIDED, HOWEVER, that in the event of any such termination
the Company and the Selling Securityholders agree to indemnify and hold harmless
the Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Securityholders under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement (and subject, in the case of a
Selling Securityholder, to the provisions of paragraph (f) of Section 7), the
Company and the Selling Securityholders hereby jointly and severally agree to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; PROVIDED, HOWEVER, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 7 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush Street,
San Francisco, California 94104, Attn.: Cristina M. Morgan (with a copy to the
General Counsel); and if to the Company or the Selling Securityholders, shall be
mailed, telegraphed or delivered to the Company or the Selling Securityholders
at the Company's office, 850 SW 35th Street, Corvallis, OR 97333
-27-
<PAGE>
Attn.: Thomas Keffer, Ph.D. (with a copy to Cooley Godward LLP). All notices
given by telegraph shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or the Selling Securityholders or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
PROVIDED, HOWEVER, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraphs (g), (h), (l) and (m) of Section 6 hereof
shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-28-
<PAGE>
Please sign and return to the Company and the Selling Securityholders the
enclosed duplicates of this letter, whereupon this letter will become a binding
agreement among the Company, the Selling Securityholders and the several
Underwriters in accordance with its terms.
Very truly yours,
ROGUE WAVE SOFTWARE, INC.
By:_____________________________________
Thomas Keffer, President
SELLING SECURITYHOLDERS:
________________________________________
Robert M. Holburn, Jr., Attorney-in-Fact
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
WESSELS, ARNOLD & HENDERSON L.L.C.
By Hambrecht & Quist LLC
By:____________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
-29-
<PAGE>
SCHEDULE I
UNDERWRITERS
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
- ------------ ---------
Hambrecht & Quist LLC . . . . . . . . . . . . . .
Wessels, Arnold & Henderson L.L.C.. . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . 2,086,110
---------
---------
<PAGE>
SCHEDULE II
SELLING SECURITYHOLDERS
NUMBER OF NUMBER OF
SHARES OF SHARES OF
UNDERWRITTEN OPTION
STOCK TO BE STOCK TO BE
NAME OF SELLING SECURITYHOLDER SOLD SOLD
- ------------------------------ ---- ----
Total . . . . . . . . . . . . . . . 86,110 309,166
------ -------
------ -------
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF COOLEY GODWARD LLP
COUNSEL FOR THE COMPANY AND THE SELLING SECURITYHOLDERS
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which its ownership or
leasing of property makes qualification necessary except for such jurisdictions
in which the failure to be so qualified would not have a material adverse effect
on the financial condition, earnings, operations or business of the Company and
its subsidiaries, taken as a whole, and has full corporate power and authority
to own or lease its properties and conduct its business as described in the
Registration Statement; all the issued and outstanding capital stock of each of
the subsidiaries of the Company has been duly authorized and validly issued and
is fully paid and nonassessable, and is owned of record, to the best of such
counsel's knowledge, by the Company free and clear of all liens, encumbrances
and security interests, and to the knowledge of such counsel, no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in such subsidiaries are outstanding;
(ii) the execution and delivery of the Agreement and Plan of Merger
dated as of November __, 1996 (herein called the Merger Agreement) between Rogue
Wave Software, Inc., an Oregon corporation (herein called the Oregon
Corporation), and the Company, which effected the reincorporation of the Oregon
Corporation under the laws of the State of Delaware on November __, 1996, was
duly authorized by all necessary corporate action on the part of each of the
Oregon Corporation and the Company. Each of the Oregon Corporation and the
Company had all corporate power and authority to execute and deliver the Merger
Agreement, to file the Merger Agreement with the Secretary of State of Oregon
and the Secretary of State of Delaware and to consummate the reincorporation
contemplated by the Merger Agreement, and the Merger Agreement at the time of
execution and filing constituted a valid and binding obligation of each of the
Oregon Corporation and the Company, enforceable in accordance with its terms,
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium or other similar laws affecting
creditors' rights, and subject to general equity principles and to limitations
on availability of equitable relief, including specific performance;
(iii) upon the closing of the sale of the Underwritten Stock, the
authorized capital stock of the Company consists of 5,000,000 shares of
Preferred Stock, of which there are no shares outstanding, and 35,000,000 shares
of Common Stock, $0.001 par value, of which there are outstanding 7,201,641
shares (including the Underwritten Stock [AND THE OPTION STOCK] issued on the
closing date); proper corporate proceedings have been taken validly to authorize
such authorized capital stock; all of the outstanding shares of such capital
stock (including the Underwritten Stock [AND THE SHARES OF OPTION STOCK] issued
on the closing date) have been duly and validly issued and are fully paid and
nonassessable; and no preemptive rights of, or rights of refusal in favor of,
stockholders exist with respect to the Stock, or the issue and sale thereof,
<PAGE>
pursuant to the Certificate of Incorporation or Bylaws of the Company and, to
the knowledge of such counsel, there are no contractual preemptive rights that
have not been waived, rights of first refusal or rights of co-sale which exist
with respect to the Stock being sold by the Selling Securityholders pursuant to
any agreement to which the Company is a party or the issue and sale of the Stock
by the Company;
(iv) the Registration Statement has become effective under the
Securities Act and, to the knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or suspending or preventing the
use of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission;
(v) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 12 and 13 (insofar as it relates to such
counsel) of Form SB-2, to such counsel's best knowledge, accurately and
adequately set forth therein in all material respects to the extent required by
the Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder (the "Rules") or no response is required with respect to
such Items, and the description of the Company's stock option plans and the
options granted and which may be granted thereunder set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to said plans and options to the extent required by the Securities Act, the
Exchange Act and the Rules;
(vii) such counsel does not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required by the Securities Act,
the Exchange Act and the Rules;
(viii) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(ix) (A) the Underwriting Agreement has been duly executed and
delivered by or on behalf of each of the Selling Securityholders; (B) the
Custody Agreement between such Selling Securityholders and Chemical Mellon
Shareholder Services LLC, as Custodian, and the Power of Attorney referred to in
such Custody Agreement have been duly executed and delivered by the several
Selling Securityholders; (C) the Custody Agreement entered into by, and the
Power of Attorney given by, such Selling Securityholder is valid and binding on
such Selling Securityholder; and (D) each Selling Securityholder has full legal
right and authority to enter into the Underwriting Agreement and to sell,
transfer and deliver in the manner provided in the Underwriting Agreement the
shares of Stock sold by such Selling Securityholder hereunder,
<PAGE>
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, moratorium or other similar laws affecting
creditors' rights, and subject to general equity principles and to limitations
on availability of equitable relief, including specific performance;
(x) the issue and sale by the Company of the shares of Stock sold by
the Company as contemplated by the Underwriting Agreement do not conflict with,
or result in a breach of, the Certificate of Incorporation or Bylaws of the
Company or any agreement or instrument filed as an exhibit to the Registration
Statement to which the Company is a party or any applicable law or regulation
(other than as may be required under state securities or blue sky laws), or so
far as is known to such counsel, any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality binding upon the Company;
(xi) to the best of such counsel's knowledge, all holders of
securities of the Company having rights to the registration of shares of Common
Stock, or other securities, because of the filing of the Registration Statement
by the Company have waived such rights or such rights have expired by reason of
lapse of time following notification of the Company's intent to file the
Registration Statement;
(xii) good and marketable title to the shares of Stock sold by the
Selling Securityholders under the Underwriting Agreement, free and clear of all
liens, encumbrances, equities, security interests and claims (other than any
liens, encumbrances, equities, security interests and claims that result from
actions taken against the Underwriters), has been transferred to the
Underwriters who have severally purchased such shares of Stock for the purchase
price under the Underwriting Agreement, assuming for the purpose of this opinion
that the Underwriters purchased the same in good faith without any notice of any
liens, encumbrances, equities, security interests or adverse claims;
(xiii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company or,
to the best of such counsel's knowledge, the Selling Securityholders of the
offer and sale of the Stock contemplated in the Underwriting Agreement, except
such as have been obtained under the Securities Act and such as may be required
under state securities or blue sky laws in connection with the purchase and
distribution of the Stock by the Underwriters; and
(xiv) the Company is not now, and upon the Closing Date, and after
application of the net proceeds from the offering as described in the
Prospectus, will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
In addition to the matters set forth above, counsel rendering the foregoing
opinion shall also include a statement to the effect that nothing has come to
the attention of such counsel that leads such counsel to believe that the
Registration Statement (except as to the financial statements and schedules and
other financial and statistical data contained or incorporated by reference
therein, as to which such counsel need not express any opinion or belief) at the
<PAGE>
Effective Date contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, that the Prospectus (except as to the
financial statements and schedules and other financial and statistical data
contained or incorporated by reference therein, as to which such counsel need
not express any opinion or belief) as of its date or at the Closing Date (or any
later date on which Option Stock is purchased), contained or contains any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. In making such statements, such
counsel may state that such counsel's negative assurance is based upon such
counsel's participation in the preparation of the Registration Statement and
Prospectus, and any amendments or supplements thereto, and its review and
discussion of the contents thereof, but is without independent check or
verification.
<PAGE>
COMMON STOCK COMMON STOCK
RWC [LOGO] ROGUE WAVE
SOFTWARE
SEE REVERSE SIDE FOR CERTAIN
DEFINITIONS AND A STATEMENT OF
RIGHTS, PREFERENCES, AND PRIVILEGES
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.001, OF
ROGUE WAVE SOFTWARE, INC.
transferable on the books of the Corporation by the record holder hereof, in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED:
[SEAL]
CHIEF FINANCIAL OFFICER AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The Corporation is authorized to issue Common Stock and Preferred Stock.
The Board of Directors has authority to fix the number of shares and the
designation of any series of Preferred Stock and to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon
any unissued shares of Preferred Stock.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the
Certificate of Incorporation of the Corporation and by any certificate of
determination, the number of shares constituting each class and series, and
the designations thereof, may be obtained by the holder hereof upon request
and without charge at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______________ Custodian ___________________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ________________________________________
in common (State)
UNIF TRF MIN ACT - ______________ Custodian (until age________)
(Cust)
______________ under Uniform Transfers
(Minor)
to Minors Act _____________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________________________________ hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________
________________________________________
______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
______________________________________________________________________________
______________________________________________________________________________
_______________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_____________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________
_______________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
__________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE
GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
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SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWER: Rogue Wave Software, Inc.
ADDRESS: 260 Madison Avenue
Corvallis, OR 97339
DATE: October 16, 1996
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive, Santa
Clara, California 95054 and the borrower named above (the "Borrower"), whose
chief executive office is located at the above address ("Borrower's Address").
1. LOANS.
1.1 LOANS. Silicon will make one or more loans to the Borrower (the
"Loans") up to the amounts (the "Credit Limits") shown on the Schedule to this
Agreement (the "Schedule") as the Credit Limit for such loans. The terms of the
Loans are stated in this Agreement and in the Schedule. The terms of the
Schedule are incorporated into this Agreement. The Borrower is responsible for
monitoring the total amount of Loans and other Obligations outstanding from time
to time, and the Borrower shall not permit the amount of any Loan to exceed at
any time the applicable Credit Limit for such Loan. The Borrower shall not
permit the total amount of Loans and all other obligations to exceed at any time
the aggregate Credit Limit for the Loans. If at any time the total of all
outstanding Loans and all other Obligations exceeds the aggregate Credit Limit,
the Borrower shall immediately pay the amount of the excess to Silicon, without
notice or demand. Borrower may prepay the Loans in whole or in part at any time
without premium or penalty.
1.2 INTEREST; DEBIT TO DEPOSIT ACCOUNTS. All Loans and all other monetary
Obligations shall bear interest at the applicable rates shown on the Schedule.
Interest shall be payable monthly, on the due date shown on the monthly billing
from Silicon to the Borrower. The Borrower shall regularly deposit all funds
received from its business activities in accounts maintained by the Borrower at
Silicon. The Borrower hereby requests and authorizes Silicon to debit any of
the Borrower's accounts, including without limitation account no. ___________,
for payments of interest and principal due on the Loans and all other
obligations owing by the Borrower to Silicon. Silicon shall promptly notify
the Borrower of all debits which Silicon
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makes against the Borrower's accounts. Any such debit against the Borrower's
accounts shall in no way be deemed a setoff by Silicon.
1.3 FEES. The Borrower shall pay to Silicon at closing a commitment fee
and other fees in the amounts shown on the Schedule. These fees are in addition
to all interest and other sums payable to Silicon and are not refundable.
1.4 ADDITIONAL COSTS. In case of any law, regulation, treaty or official
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any guideline or request of any central bank or other governmental
authority (whether or not having the force of law) which:
(a) subjects Silicon to any tax with respect to payments of principal
or interest or any other amounts payable hereunder by the Borrower or otherwise
with respect to the transactions contemplated hereby (except for taxes on the
overall net income of Silicon imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, Silicon; or
(c) imposes upon Silicon any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to hereafter increase the cost to
Silicon, reduce the income receivable by Silicon or impose any expense upon
Silicon with respect to any loans, Silicon shall notify the Borrower thereof.
Borrower agrees to pay to Silicon the amount of such increase in cost, reduction
in income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by Silicon of a statement of the
amount and setting forth Silicon's calculation thereof, all in reasonable
detail, which statement shall be deemed true and correct absent manifest error.
Notwithstanding anything to the contrary contained in this SECTION 1.4, Borrower
shall not be obligated to indemnify or reimburse Silicon for any reduction in
Silicon's rate of return on its capital as a consequence of Silicon's
obligations hereunder which arose or was incurred during or is otherwise
attributable to any period of time more than 180 days prior to the date on which
Silicon shall have delivered its written statement for indemnification or
reimbursement for such reduction.
2. GRANT OF SECURITY INTEREST.
2.1 OBLIGATIONS. The term "Obligations" as used in this Agreement means
the following: the obligation to pay all Loans and all interest on the Loans
when due, and to pay and perform when due all other present and future
indebtedness, liabilities, obligations, guarantees, covenants, agreements,
warranties and representations of the Borrower to Silicon, whether joint or
several, monetary or non-monetary, and which are created pursuant to this
Agreement. Silicon may, in its discretion, charge monetary Obligations to the
Borrower's Loan account, in which event they shall bear interest at the rates
applicable to the Loan to which
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such amounts are charged, or, with reasonable notice to Borrower, require
that Borrower pay monetary Obligations in cash.
2.2 COLLATERAL. As security for all Obligations, the Borrower hereby
grants Silicon a continuing security interest in all of the Borrower's
assets, including but not limited to all of the Borrower's interest in the
types of property described below, whether now owned or hereafter acquired,
and wherever located (collectively, the "Collateral"): (a) all accounts,
contract rights, chattel paper, letters of credit, documents, securities,
money, and instruments, and all other obligations now or in the future owing
to the Borrower; (b) all inventory, goods, merchandise, materials, raw
materials, work in process, finished goods, farm products, advertising,
packaging and shipping materials, supplies, and all other tangible personal
property which is held for sale or lease or furnished under contracts of
service or consumed in the Borrower's business, and all warehouse receipts
and other documents; (c) all equipment, including without limitation all
machinery, fixtures, trade fixtures, vehicles, furnishings, furniture,
materials, tools, machine tools, office equipment, computers and peripheral
devices, appliances, apparatus, parts, dies, and jigs; (d) all general
intangibles including, but not limited to, deposit accounts, goodwill, names,
trade names, trademarks and the goodwill of the business symbolized thereby,
trademark applications, trade secrets, drawings, blueprints, customer lists,
patents, patent applications, copyrights, copyright applications, security
deposits, loan commitment fees, federal, state and local tax refunds and
claims, all rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments
now or hereafter arising therefrom, all rights to purchase or sell real or
personal property, all rights as a licensor or licensee of any kind, all
royalties, licenses, processes, telephone numbers, proprietary information,
purchase orders, and all insurance policies and claims (including without
limitation credit, liability, property and other insurance), and all other
rights, privileges and franchises of every kind; (e) all books and records,
whether stored on computers or otherwise maintained; (f) all of the
Borrower's cash; and (g) all substitutions, additions and accessions to any
of the foregoing, and all products, proceeds and insurance proceeds of the
foregoing, and all guaranties of and security for the foregoing; and all
books and records relating to any of the foregoing. Silicon's security
interest in any present or future technology (including patents, trade
secrets, and other technology) shall be subject to any licenses or rights now
or in the future granted by the Borrower to any third parties in the ordinary
course of the Borrower's business; provided that if the Borrower proposes to
sell, license or grant any other rights with respect to any technology in a
transaction that, in substance, conveys substantially all of the economic
value of that technology, Silicon shall first be requested to release its
security interest, and Silicon may withhold such release in its reasonable
discretion. The Borrower shall not, either directly or through any agent,
employee, licensee or designee, (a) file an application for the registration
of any patent, trademark, or copyright with the U.S. Patent and Trademark
Office, the U.S. Copyright Office, or any similar office or agency in any
other country, state, or any political subdivision (the "Offices"), or (b)
file any assignment of any patent, trademark, or copyright which the Borrower
may acquire from a third party with any one of the Offices unless the
Borrower shall, on or prior to the date of such filing, notify Silicon of
such filing, and, upon request of Silicon, execute and deliver any and all
assignments, agreements, instruments, documents and papers as Silicon may
request to evidence Silicon's interest in such patents, trademarks, or
copyrights, as the case may be, including the goodwill and general
intangibles of the Borrower relating thereto or represented thereby. If an
Event of Default has occurred and is
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continuing, the Borrower authorizes Silicon to amend any applicable notice of
security interest or assignment executed pursuant to SECTION 4.9 of this
Agreement without first obtaining the Borrower's approval of or signature to
such amendment and to record such assignment with one or more of the Offices,
with prompt subsequent notice to the Borrower.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
The Borrower represents and warrants to Silicon as follows, and the
Borrower covenants that the following representations shall continue to be true,
and that the Borrower shall comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. The Borrower is and shall
continue to be duly authorized, validly existing and in good standing under the
laws of the state of its incorporation, as identified on the copy of the
Borrower's Articles of Incorporation delivered to Silicon. The Borrower is and
shall continue to be qualified and licensed to do business in all jurisdictions
in which any failure to do so would have a material adverse effect on the
Borrower. The execution, delivery and performance by the Borrower of this
Agreement, and all other documents executed by the Borrower in connection with
the Loans have been duly and validly authorized, are enforceable against the
Borrower in accordance with their terms, and do not violate any law or any
provision of, and are not grounds for acceleration under, any material agreement
or instrument that is binding upon the Borrower.
3.2 NAME, TRADE NAMES AND STYLES. The name of the Borrower set forth in
the heading to this Agreement is its correct name. Listed on an Exhibit to the
Schedule are all prior names of the Borrower and all of the Borrower's present
and prior trade names. The Borrower shall give Silicon 15 days' prior written
notice before changing its name or doing business under any other name. The
Borrower has complied, and shall in the future comply, with all laws relating to
the conduct of business under a fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is the chief executive office for the Borrower.
In addition, the Borrower has places of business only at, and Collateral of the
Borrower is located only at, the locations set forth on the Schedule or as
specified by the Borrower in writing from time to time. The Borrower shall give
Silicon at least 15 days' prior written notice before changing its chief
executive office or moving Collateral (other than inventory sold in the ordinary
course of business) to any location other than a location listed on the
Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. The Borrower is now, and shall
at all times in the future be, the sole owner of all the Collateral, except for
items of equipment that are leased by the Borrower. The Collateral now is and
shall remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for the following ("Permitted Liens"):
(a) purchase money security interests in specific items of equipment and liens
existing on the equipment at the time of its acquisition, other than equipment
financed by the Loans; (b) leases of specific items of equipment; (c) liens for
taxes fees, assessments or other governmental charges or levies, that are either
(i) being contested in good faith by appropriate proceedings (provided that any
such liens do not have priority over any of Silicon's
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security interests) or (ii) not delinquent; (d) additional security interests
and liens consented to in writing by Silicon in its sole discretion; (e)
security interests being terminated substantially concurrently with this
Agreement; (f) any liens existing as of the date hereof and disclosed in the
Schedule or arising under this Agreement or the Loan Documents; (g) liens
securing capital lease obligations limited to the assets subject to such
capital leases; (h) liens arising from judgments, decrees or attachments to
the extent and only so long as such judgment, decree or attachment has not
caused or resulted in an Event of Default; (i) liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (j) liens arising solely
by virtue of any statutory or common law provision relating to banker's
liens, rights of setoff or similar rights and remedies as to deposit accounts
or other funds maintained with a creditor depository institution; and (k)
liens incurred in connection with the extension, renewal or refinancing of
the indebtedness secured in liens of the type described in clauses (a)
through (j) above, provided that any extension, renewal or replacement lien
shall be limited to the property encumbered by the existing lien and the
principal amount of the indebtedness being extended, renewed or refinanced
does not increase. Silicon shall have the right to require, as a condition
to its consent under subparagraph (d) above, that the holder of the
additional security interest or lien sign an intercreditor agreement on terms
satisfactory to Silicon in its sole discretion, acknowledge that the holder's
security interest is subordinate to Silicon's security interest. Silicon now
has, and shall continue to have, a first priority, perfected and enforceable
security interest in all of the Collateral. The Collateral shall not be
subject to any other liens or security interests of any type except for the
Permitted Liens. The Borrower shall at all times defend Silicon and the
Collateral against all claims of others. None of the Collateral now is or
shall be affixed to any real property in such a manner, or with such intent,
as to become a fixture.
3.5 MAINTENANCE OF COLLATERAL. The Borrower shall maintain the Collateral
in the condition received, less reasonable wear and tear. The Borrower shall
not use the Collateral for any unlawful purpose. The Borrower shall immediately
advise Silicon in writing of any material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. The Borrower has maintained and shall maintain at
the Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or
in the future delivered to Silicon have been, and shall be, prepared in
conformity with generally accepted accounting principles and now and in the
future shall fairly reflect the financial condition of the Borrower, at the
times and for the periods therein stated. Since the last date covered by any
such statement, there has been no material adverse change in the financial
condition or business of the Borrower. The Borrower is now and shall continue
to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. The Borrower has
timely filed, and shall timely file, all tax returns and reports required by
foreign, federal, state and local law. The Borrower has timely paid, and shall
timely pay, all material foreign, federal, state and local taxes, assessments,
deposits and contributions now or in the future owed by the Borrower. The
Borrower may, however, defer payment of any contested taxes, provided that the
Borrower
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(a) in good faith contests the Borrower's obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted, (b)
notifies Silicon in writing of the commencement of, and any material
development in, the proceedings, and (c) posts bonds or takes any other steps
required to keep the contested taxes from becoming a lien upon any of the
Collateral. The Borrower is unaware of any claims or adjustments proposed
for any of the Borrower's prior tax years which could result in additional
taxes becoming due and payable by the Borrower. The Borrower has paid, and
shall continue to pay all amounts necessary to fund all present and future
pension, profit sharing and deferred compensation plans in accordance with
their terms. The Borrower has not and shall not withdraw from participation
in, permit partial or complete termination of, or permit the occurrence of
any other event with respect to, any such plan which could result in any
liability of the Borrower, including, without limitation, any liability to
the Pension Benefit Guaranty Corporation or its successors or any other
governmental agency.
3.9 COMPLIANCE WITH LAW. The Borrower has complied, and shall comply, in
all material respects, with all provisions of all foreign, federal, state and
local laws and regulations relating to the Borrower, including, but not limited
to, those relating to ownership of real or personal property, conduct and
licensing of the Borrower's business, and environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of the
Borrower's knowledge) threatened by or against or affecting the Borrower in any
court or before any governmental agency (or any basis therefor known to the
Borrower) which may result, either separately or in the aggregate, in any
material adverse change in the financial condition or business of the Borrower,
or in any material impairment in the ability of the Borrower to carry on its
business in substantially the same manner as it is now being conducted. The
Borrower shall promptly inform Silicon in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
the Borrower involving amounts in excess of $100,000.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes.
3.12 NO PATENTS OR TRADEMARKS. The Borrower does not own, and the Borrower
does not have pending any application for the registration of, any patent or
trademark with the U.S. Patent and Trademark Office or any similar office or
agency of any state, of the United States of America or of any foreign
jurisdiction except as disclosed in the Schedule.
3.13 HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in this
Agreement, shall have the same meanings as set forth in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended,
42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to
any of the foregoing. The Borrower represents and warrants that: (a) the
Borrower has no knowledge of (i) any use, generation, manufacture, storage,
treatment,
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disposal, release, or threatened release of any hazardous waste or substance by
any prior owners or occupants of any of the real properties owned or operated by
the Borrower, or (ii) any actual or threatened litigation or claims of any kind
by any person relating to such matters; (b) neither the Borrower nor any
subtenant, contractor, agent or other user authorized by Borrower of any of the
real properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, or about any of the real
properties owned or operated by the Borrower except in compliance with all
applicable federal, state, and local laws, regulations, and ordinances,
including without limitation those laws, regulations and ordinances described
above. The Borrower authorizes Silicon and its agents, upon 24 hours prior
notice (which need not be in writing), to enter upon the real properties to make
such inspections and tests as Silicon may deem appropriate to determine
compliance of the real properties owned or operated by the Borrower with this
Section of the Agreement. Any inspections or tests made by Silicon shall be for
Silicon's purposes only and shall not be construed to create any responsibility
or liability on the part of Silicon to the Borrower or to any other person. The
Borrower hereby (a) releases and waives any future claims against Silicon for
indemnity or contribution in the event the Borrower becomes liable for cleanup
or other costs under any such laws, and (b) agrees to indemnify and hold
harmless Silicon against any and all claims, losses, liabilities, damages,
penalties, and expenses which Silicon may directly or indirectly sustain or
suffer resulting from a breach of this Section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal, release or
threatened release occurring prior to the Borrower's ownership or interest in
the real properties, whether or not the same was or should have been known to
the Borrower. The provisions of this Section of the Agreement, including the
obligation to indemnify, shall survive the payment of the obligations and the
termination or expiration of this Agreement and shall not be affected by
Silicon's acquisition of any interest in any of the real properties, whether by
foreclosure or otherwise.
4. ADDITIONAL DUTIES OF THE BORROWER.
4.1 FINANCIAL AND OTHER COVENANTS. The Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
4.2 OVERADVANCE; PROCEEDS OF ACCOUNTS. If for any reason the total of all
outstanding Loans and all other Obligations exceeds the total Credit Limit, as
stated in the Schedule, without limiting Silicon's other remedies, and whether
or not Silicon declares an Event of Default, the Borrower shall remit to Silicon
all checks and other proceeds of the Borrower's accounts and general
intangibles, in the same form as received by the Borrower, within one day after
the Borrower's receipt of the same, to be applied to the Obligations in such
order as Silicon shall determine in its discretion until such overadvance has
been paid.
4.3 INSURANCE. The Borrower shall at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as are
customary in the Borrower's business. All such insurance policies shall name
Silicon as an additional loss payee, and shall contain a lenders loss payee
endorsement in form reasonably acceptable to Silicon. Upon receipt of the
proceeds of any such insurance, Silicon shall apply such proceeds in reduction
of the Obligations as Silicon shall determine in its sole and absolute
discretion, except that, provided no Event of
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Default has occurred, Silicon shall release to the Borrower insurance
proceeds with respect to equipment totaling less than $100,000, which shall
be utilized by the Borrower for the replacement of the equipment with respect
to which the insurance proceeds were paid. Silicon may require reasonable
assurance that the insurance proceeds so released shall be so used. If the
Borrower fails to provide or pay for any insurance, Silicon may, but is not
obligated to, obtain the same at the Borrower's expense. The Borrower shall
promptly deliver to Silicon copies of all reports made to insurance
companies. Statutory notice regarding insurance:
WARNING
Unless you provide us with evidence of the insurance coverage as required
by our contract or loan agreement, we may purchase insurance at your expense to
protect our interest. This insurance may, but need not, also protect your
interest. If the collateral becomes damaged, the coverage we purchase may not
pay any claim you make or any claim made against you. You may later cancel this
coverage by providing evidence that you have obtained property coverage
elsewhere.
You are responsible for the cost of any insurance purchased by us. The
cost of this insurance may be added to your contract or loan balance. If the
cost is added to your contract or loan balance, the interest rate on the
underlying contract or loan will apply to this added amount. The effective date
of coverage may be the date your prior coverage lapsed or the date you failed to
provide proof of coverage.
This coverage we purchase may be considerably more expensive than insurance
you can obtain on your own and may not satisfy any need for property damage
coverage or any mandatory liability insurance requirements imposed by applicable
law.
4.4 REPORT. The Borrower shall provide Silicon with such written reports
with respect to the Borrower as Silicon shall from time to time reasonably
specify, including but not limited to the financial reports required as stated
in the Schedule.
4.5 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At all reasonable times, and
upon one business day notice, Silicon, or its agents, shall have the right to
inspect the Collateral, and the right to audit and copy the Borrower's
accounting books, records, ledgers, journals, or registers and the Borrower's
books and records relating to the Collateral at Silicon's expense, provided that
no prior notice is required upon the occurrence and continuation of an Event of
Default. Silicon shall take reasonable steps to keep confidential all
information obtained in any such inspection or audit, but Silicon shall have the
right to disclose any such information to its auditors, regulatory agencies and
attorneys, and pursuant to any subpoena or other legal process. The Borrower
shall reimburse Silicon for Silicon's actual costs for conducting two such
audits per year. Silicon may debit the Borrower's deposit accounts with Silicon
for the cost of such audits, in which event Silicon shall send notification
thereof to the Borrower.
4.6 NEGATIVE COVENANTS. Except as may be expressly permitted in the
Schedule, the Borrower shall not, without Silicon's prior written consent, do
any of the following:
(a) merge or consolidate with another corporation, except that the
Borrower may merge or consolidate with another corporation if the
Borrower is the surviving corporation in the merger and the
aggregate value of the assets
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acquired in the merger does not exceed 25% of the Borrower's
Tangible Net Worth (as defined in the Schedule) as of the end
of the month prior to the effective date of the merger, and
the assets of the corporation acquired in the merger are not
subject to any liens or encumbrances, except Permitted Liens;
(b) acquire any assets, including stock of any other entity, outside
the ordinary course of business for an aggregate purchase price
(whether paid in cash, in stock of the Borrower or other
consideration) exceeding 25% of the Borrower's Tangible Net Worth
(as defined in the Schedule) as of the end of the month prior to
the effective date of the acquisition;
(c) enter into any other transaction outside the ordinary course of
business (except as permitted by the other provisions of this
Section);
(d) sell or transfer any Collateral, except for the sale of finished
inventory in the ordinary course of the Borrower's business;
provided, that notwithstanding the foregoing, the Borrower may
abandon any Collateral if Borrower determines that reasonable
business practices suggest that abandonment is appropriate;
(e) make any loans of any money or any other assets ("Investments")
to shareholders, employees or any other person except in the
ordinary course of business, other than:
(1) extensions of credit in the nature of accounts receivable or
notes receivable arising from the sale or lease of goods or
services in the ordinary course of business;
(2) Investments consisting of the endorsement of negotiable
instruments for deposit or collection or similar transactions in
the ordinary course of business;
(3) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or
suppliers and in settlement of delinquent obligations of, and
other disputes with, customers or suppliers arising in the
ordinary course of business;
(4) Investments consisting of (i) compensation of employees,
officers and directors of Borrower so long as the Board of
Directors of Borrower determines that such compensation is in the
best interests of Borrower, (ii) travel advances, employee
relocation loans and other employee loans and advances in the
ordinary course of business, (iii) loans to employees officers or
directors relating to the purchase of equity securities of
Borrower pursuant to employee stock purchase plans approved by
Borrower's Board of Directors, (iv) other loans to officers and
employees
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approved by the Board of Directors in an amount not in excess
of $100,000;
(5) other Investments aggregating not in excess of $100,000 at
any time;
(6) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of
acquisition thereof, (ii) commercial paper maturing no more than
one (1) year from the date of creation thereof and currently
having the highest rating obtainable from either Standard &
Poor's Corporation or Moody's Investors Service, Inc., and
(iii) certificate of deposit maturing no more than one (1) year
from the date of investment therein issued by Silicon;
(f) incur any debts that are outside the ordinary course of business
or that would have a material, adverse effect on the Borrower or
on the prospect of repayment of the Obligations;
(g) guarantee or otherwise become liable with respect to the
obligations of another party or entity;
(h) pay or declare any dividends on the stock of the Borrower (except
for dividends payable solely in stock of the Borrower);
(i) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of the stock of the Borrower; provided, that the
Borrower may redeem or repurchase its securities in an amount in
any fiscal year not exceeding $100,000 in connection with any
agreement between the Borrower and any officer, director or
employee of the Borrower entered into in the ordinary course of
business wherein the Borrower is obligated or entitled to
repurchase from such officer, director or employee shares of
equity securities of the Borrower upon such person's termination
of employment or services or other event.
(j) make any change in the Borrower's capital structure which has a
material adverse effect on that Borrower or on the prospect of
repayment of the Obligations; or
(k) dissolve or elect to dissolve. Transactions permitted by the
foregoing provisions of this Section are only permitted if no
Event of Default and no event which (with notice or passage of
time or both) would constitute an Event of Default would occur as
a result of such transaction.
4.7 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to the Borrower, the Borrower shall, without expense to Silicon, make
available the Borrower and its officers,
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<PAGE>
employees and agents and the Borrower's books and records to the extent that
Silicon may deem them reasonably necessary in order to prosecute or defend
any such suit or proceeding.
4.8 VERIFICATION. If an Event of Default has occurred and is continuing,
Silicon may, from time to time, verify directly with the respective account
debtors the validity, amount and other matters relating to the Borrower's
accounts, by means of mail, telephone or otherwise, either in the name of the
Borrower or Silicon or such other name as Silicon may reasonably choose.
Silicon shall not be required to obtain the Borrower's consent prior to any such
verification of accounts if an Event of Default has occurred. Borrower shall
not unreasonably withhold its consent to such verification of accounts by
Silicon in a fictitious name if requested by Silicon, even if no Event of
Default is pending at the time.
4.9 EXECUTE ADDITIONAL DOCUMENTATION. The Borrower agrees, at its
expense, on request by Silicon, to execute from time to time all documents in
form satisfactory to Silicon, as Silicon may deem reasonably necessary or useful
in order to perfect and maintain Silicon's perfected security interest in the
Collateral, and in order to fully consummate all of the transactions
contemplated by this Agreement.
4.10 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS. The Borrower shall
register or cause to be registered (to the extent not already registered) with
the United States Patent and Trademark Office or the United States Copyright
Office, as applicable, those intellectual property rights listed on an exhibit
to the Collateral Assignment, Patent Mortgage and Security Agreement delivered
to Silicon by the Borrower in connection with this Agreement within thirty (30)
days of the date of this Agreement. Borrower shall register or cause to be
registered with the United States Patent and Trademark Office or the United
States Copyright Office, as applicable, those additional intellectual property
rights developed or acquired by Borrower from time to time in connection with
any product prior to the sale or licensing of such product to any third party,
including without limitation revisions or additions to the intellectual property
rights listed on such exhibit to the Collateral Assignment, Patent Mortgage and
Security Agreement. Borrower shall execute and deliver such additional
instruments and documents from time to time as Silicon shall reasonably request
to perfect Silicon's security interest in such additional intellectual property
rights.
5. TERM.
5.1 MATURITY DATE. This Agreement shall continue in effect until the
payment in full of the Obligations, provided, however, that the Borrower shall
repay in full each Loan described on the Schedule, with all accrued but unpaid
interest on that Loan, on or before the Maturity Date stated on the Schedule for
such Loan.
5.2 EARLY TERMINATION. Subject to SECTION 5.3, this Agreement may be
terminated, without penalty, prior to the Maturity Date as follows: (a) by the
Borrower, effective three business days after written notice of termination is
given to Silicon; or (b) by Silicon at any time after the occurrence and during
the continuance of an Event of Default, with prompt subsequent notice, effective
immediately.
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<PAGE>
5.3 PAYMENT OF OBLIGATIONS. On the due dates stated in the Schedule, or
on any earlier effective date of termination, the Borrower shall pay and perform
in full all Obligations, whether evidenced by installment notes or otherwise,
and whether or not all or any part of such Obligations are otherwise then due
and payable. Notwithstanding any termination of this Agreement, all of
Silicon's security interests in all of the Collateral and all of the terms and
provisions of this Agreement shall continue in full force and effect until all
Obligations have been paid and performed in full; provided that Silicon may, in
its sole discretion, refuse to make any further Loans after termination. No
termination shall in any way affect or impair any right or remedy of Silicon,
nor shall any such termination relieve the Borrower of any Obligation to
Silicon, until all of the Obligations have been paid and performed in full.
Upon payment and performance in full of all the Obligations, Silicon shall
promptly deliver to the Borrower termination statements, requests for
reconveyances and such other documents as may be required to fully terminate any
of Silicon's security interests.
6. EVENTS OF DEFAULT AND REMEDIES.
6.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and the Borrower
shall give Silicon immediate written notice thereof: (a)any warranty,
representation, statement, report or certificate made or delivered to Silicon by
the Borrower or any of the Borrower's officers or employees, now or in the
future, shall be untrue or misleading in any material respect when made; or (b)
the Borrower shall fail to pay when due any Loan or any interest thereon or any
other monetary Obligation (including but not limited to any amount necessary for
the balance of the Loan not to exceed the applicable Credit Limit); or (c) the
Borrower shall fail to comply with any of the financial covenants set forth in
the Schedule or shall fail to perform any other non-monetary Obligation which by
its nature cannot be cured; or (d) the Borrower shall fail to pay or perform any
other non-monetary Obligation, under this Agreement or any other agreement or
document relating to the Loans; or (e) any levy, assessment, attachment,
seizure, lien or encumbrance is made on all or any material part of the
Collateral; or (f) dissolution, termination of existence, insolvency or business
failure of the Borrower, or appointment of a receiver, trustee or custodian for
all or any part of the property of, assignment for the benefit of creditors by,
or the commencement of any proceeding by the Borrower under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect;
or (g) the commencement of any proceeding against the Borrower or any guarantor
of any of the Obligations under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect, which is not cured by the
dismissal thereof within 60 days after the date commenced; or (h) revocation or
termination of, or limitation of liability upon, any guaranty of the
Obligations; or (i) commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or (j) the Borrower makes
any payment on account of any indebtedness or obligation which has been
subordinated to the Obligations, unless such payment is permitted in the
applicable subordination agreement, or if any person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination
agreement; or (k) the Borrower shall generally not pay its debts as they become
due; or the Borrower shall conceal, remove or transfer any part of its property,
with intent to hinder, delay or defraud its creditors, or make or suffer any
transfer of any of its
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<PAGE>
property which may be fraudulent under any bankruptcy, fraudulent conveyance
or similar law; or (l) either the Borrower or any other party thereto shall
breach any subordination agreement executed in connection with the Loans; or
(m) the current shareholders of the Borrower shall cease to own more than 50%
of the outstanding common stock of the Borrower. If any of the foregoing
defaults, other than a failure to pay money and breach of an financial
covenant set forth in the Schedule, is curable, it may be cured (and no Event
of Default shall have occurred) if the Borrower cures the default within
thirty days (or within sixty days in the case of clause (g) of this SECTION
6.1). Silicon may cease making any Loans hereunder during the above cure
periods, and thereafter if an Event of Default has occurred and is continuing.
6.2 REMEDIES. Upon the occurrence and during the continuance of any
Event of Default and the expiration of any applicable cure period under
SECTION 6.1, Silicon, at its option, with prompt subsequent notice, may do
any one or more of the following: (a) cease making Loans or otherwise
extending credit to the Borrower under this Agreement or any other document
or agreement; (b) accelerate and declare all or any part of the Obligations
to be immediately due, payable, and performable, notwithstanding any deferred
or installment payments allowed by any instrument evidencing or relating to
any Obligation; (c) take possession of any or all of the Collateral wherever
it may be found, and for that purpose the Borrower hereby authorizes Silicon
without judicial process to enter onto any of the Borrower's premises without
interference to search for, take possession of, keep, store, or remove any of
the Collateral, and remain on the premises or cause a custodian to remain on
the premises in exclusive control thereof without charge for so long as
Silicon deems it reasonably necessary in order to complete the enforcement of
its rights under this Agreement or any other agreement; provided, however,
that should Silicon seek to take possession of any or all of the Collateral
by Court process, the Borrower hereby irrevocably waives: (i) any bond and
any surety or security relating thereto required by any statute, court rule
or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover
possession thereof; and (iii)any requirement that Silicon retain possession
of and not dispose of any such Collateral until after trial or final
judgment; (d) require the Borrower to assemble any or all of the Collateral
and make it available to Silicon at places designated by Silicon which are
reasonably convenient to Silicon and the Borrower, and to remove the
Collateral to such locations as Silicon may deem advisable;(e) require the
Borrower to deliver to Silicon, in kind, all checks and other payments
received with respect to all accounts and general intangibles, together with
any necessary indorsements, within one day after the date received by the
Borrower; (f) complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use the Borrower's
premises, vehicles, hoists, lifts, cranes, equipment and all other property
without charge; (g) sell, lease or otherwise dispose of any of the Collateral
in its condition at the time Silicon obtains possession of it or after
further manufacturing, processing or repair, at any one or more public and/or
private sales, in lots or in bulk, for cash, exchange or other property, or
on credit, and to adjourn any such sale from time to time without notice
other than oral announcement at the time scheduled for sale; Silicon shall
have the right to conduct such disposition on the Borrower's premises without
charge, for such time or times as Silicon deems reasonable, or on Silicon's
premises, or elsewhere and the Collateral need not be located at the place of
disposition; Silicon may directly or through any affiliated company purchase
or lease any Collateral at any such public disposition, and if permissible
under
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<PAGE>
applicable law, at any private disposition; any sale or other disposition of
Collateral shall not relieve the Borrower of any liability the Borrower may
have if any Collateral is defective as to title or physical condition or
otherwise at the time of sale; (h) demand payment of, and collect any
accounts and general intangibles comprising Collateral and, in connection
therewith, the Borrower irrevocably authorizes Silicon to endorse or sign the
Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to the Borrower and
remove therefrom payments made with respect to any item of the Collateral or
proceeds thereof, and, in Silicon's sole discretion, to grant extensions of
time to pay, compromise claims and settle accounts and the like for less than
face value; (i) offset against any sums in any general, special or other
deposit accounts maintained by the Borrower with Silicon; and (j) demand and
receive possession of any of the Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto. All reasonable fees of professionals (including
reasonable attorneys' fees), expenses, costs, liabilities and obligations
incurred by Silicon with respect to the foregoing shall be added to and
become part of the Obligations, shall be due on demand, and shall bear
interest at a rate equal to the highest interest rate applicable to any of
the Obligations. Without limiting any of Silicon's rights and remedies, from
and after the occurrence of any Event of Default, the interest rate
applicable to the Obligations shall be increased by an additional two percent
per annum above the rate otherwise applicable.
6.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. The Borrower and
Silicon agree that a Sale or other disposition (collectively, "Sale") of any
Collateral which complies with the following standards shall conclusively be
deemed to be commercially reasonable: (a) notice of the Sale is given to the
Borrower at least 10 days prior to the Sale, and, in the case of a public Sale,
notice of the Sale is published at least 10 days before the Sale in a newspaper
of general circulation in the county where the Sale is to be conducted;
(b) notice of the Sale describes the Collateral in general, non-specific terms;
(c) the Sale is conducted at a place designated by Silicon, with or without the
Collateral being present; (d) the Sale commences at any time between 8:00 a.m.
and 6:00 p.m; (e) payment of the purchase price in cash or by cashier's check or
wire transfer is required; (f) with respect to any Sale of any of the
Collateral, Silicon may (but is not obligated to) direct any prospective
purchaser to ascertain directly from the Borrower any and all information
concerning the same. Silicon may employ other methods of noticing and selling
the Collateral, in its discretion, if they are commercially reasonable.
6.4 POWER OF ATTORNEY. Effective only upon the occurrence and during the
continuance of an Event of Default, the Borrower hereby irrevocably appoints
Silicon (and any of Silicon's designated officers, or employees) as the
Borrower's true and lawful attorney to: (a) send requests for verification of
accounts or notify account debtors of Silicon's security interest in the
accounts; (b) endorse the Borrower's name on any checks or other forms of
payment or security that may come into Silicon's possession; (c) sign the
Borrower's name on any invoice or bill of lading relating to any account, drafts
against account debtors, schedules and assignments of accounts, verifications of
accounts, and notices to account debtors; (d) make, settle, and adjust all
claims under and decisions with respect to the Borrower's policies of insurance;
and (e) settle and adjust disputes and claims respecting the accounts directly
with account debtors, for amounts and upon terms which Silicon determines to be
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<PAGE>
reasonable; provided Silicon may exercise such power of attorney to sign the
name of the Borrower on any of the documents described in SECTION 4.9 regardless
of whether an Event of Default has occurred. The appointment of Silicon as the
Borrower's attorney in fact, and each and every one of Silicon's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Silicon's obligation to
provide advances hereunder is terminated.
6.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Silicon first to the costs, expenses,
liabilities, obligations and reasonable attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due upon
any of the Obligations, and third to the principal of the Obligations, in such
order as Silicon shall determine in its sole discretion. Any surplus shall be
paid to the Borrower or other persons legally entitled thereto; the Borrower
shall remain liable to Silicon for any deficiency. If Silicon, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale or other disposition of
Collateral, Silicon shall have the option, exercisable at any time, in its sole
discretion, of either reducing the Obligations by the principal amount of
purchase price or deferring the reduction of the Obligations until the actual
receipt by Silicon of the cash therefor.
6.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, Silicon shall have all the other rights and remedies accorded
a secured party under the Uniform Commercial Code of Oregon and each state in
which any Collateral is located, and under all other applicable laws, and under
any other instrument or agreement now or in the future entered into between
Silicon and the Borrower, and all of such rights and remedies are cumulative and
none is exclusive. Exercise or partial exercise by Silicon of one or more of
its rights or remedies shall not be deemed an election, nor bar Silicon from
subsequent exercise or partial exercise of any other rights or remedies. The
failure or delay of Silicon to exercise any rights or remedies shall not operate
as a waiver thereof, but all rights and remedies shall continue in full force
and effect until all of the Obligations have been fully paid and performed.
7. GENERAL PROVISIONS.
7.1 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by regular first-class mail, or
certified mail return receipt requested, addressed to Silicon or the Borrower at
the addresses shown in the heading to this Agreement, or at any other address
designated in writing by one party to the other party. In addition, Borrower
shall send a copy of any notice to Silicon to the following address: 11000 S.W.
Stratus, Suite 170, Beaverton, OR 97008-7113, Attn: Art Hiemstra. All notices
shall be deemed to have been given upon delivery in the case of notices
personally delivered to the Borrower or to Silicon, or at the expiration of two
business days following the deposit thereof in the United States mail, with
postage prepaid.
7.2 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
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<PAGE>
7.3 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between the Borrower and Silicon and
supersede all prior and contemporaneous negotiations and oral representations
and agreements, all of which are merged and integrated in this Agreement. ORAL
AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR FORBEAR FROM
ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. UNDER
OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY SILICON AFTER
OCTOBER 3, 1989, CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR
PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY SILICON TO
BE ENFORCEABLE.
7.4 WAIVERS. The failure of Silicon at any time or times to require the
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between the Borrower and Silicon shall not
waive or diminish any right of Silicon later to demand and receive strict
compliance therewith. Any waiver of any default shall not waive or affect any
other default, whether prior or subsequent thereto. None of the provisions of
this Agreement or any other agreement now or in the future executed by the
Borrower and delivered to Silicon shall be deemed to have been waived by any act
or knowledge of Silicon or its agents or employees, but only by a specific
written waiver signed by an officer of Silicon and delivered to the Borrower.
The Borrower waives demand, protest, notice of protest and notice of default or
dishonor, notice of payment and nonpayment, release, compromise, settlement,
extension or renewal of any commercial paper, instrument, account, general
intangible, document or guaranty at any time held by Silicon on which the
Borrower is or may in any way be liable, and notice of any action taken by
Silicon, unless expressly required by this Agreement.
7.5 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by the
Borrower or any other party through the ordinary negligence of Silicon, or any
of its directors, officers, employees, agents, attorneys or any other person
affiliated with or representing Silicon.
7.6 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by the Borrower and a duly
authorized officer of Silicon.
7.7 TIME OF ESSENCE. Time is of the essence in the performance by the
Borrower of each and every obligation under this Agreement.
7.8 ATTORNEYS' FEES AND COSTS. The Borrower shall reimburse Silicon for
all reasonable attorneys' fees and fees of other professionals, and all filing,
recording, search, title insurance, appraisal, audit, and other reasonable costs
incurred by Silicon, pursuant to, or in connection with, or relating to this
Agreement (whether or not a lawsuit is filed), including, but not limited to,
any reasonable attorneys' fees and costs Silicon incurs in order to do the
following: prepare and negotiate this Agreement and the documents relating to
this Agreement; obtain legal advice in connection with this Agreement; enforce,
or seek to enforce, any of its
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<PAGE>
rights; prosecute actions against, or defend actions by, account debtors;
commence, intervene in, or defend any action or proceeding (including any
appeal or review); initiate any complaint to be relieved of the automatic
stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim,
third-party claim, or other claim; examine, audit, copy, and inspect any of
the Collateral or any of the Borrower's books and records; or protect, obtain
possession of, lease, dispose of, or otherwise enforce Silicon's security
interest in, the Collateral and otherwise represent Silicon in any litigation
relating to the Borrower. If either Silicon or the Borrower file any lawsuit
against the other predicated on a breach of this Agreement, the prevailing
party in such action shall be entitled to recover its reasonable costs and
professionals' fees, including (but not limited to) reasonable attorneys'
fees and costs incurred in the enforcement of, execution upon or defense of
any order, decree, award or judgment, and in any appeal or review by an
appellate court. All fees and costs to which Silicon may be entitled
pursuant to this Section shall immediately become part of the Borrower's
Obligations, shall be due on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations.
7.9 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of the parties hereto; provided,
however, that the Borrower may not assign or transfer any of its rights under
this Agreement without the prior written consent of Silicon, and any prohibited
assignment shall be void. No consent by Silicon to any assignment shall release
the Borrower from its liability for the Obligations. The Borrower agrees and
consents to Silicon's sale or transfer, whether now or later, of one or more
participation interests in the Loans to one or more purchasers, whether related
or unrelated to Silicon. Silicon may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Silicon may have about the Borrower or about any other
matter relating to the Loans, provided that the recipient is not a competitor of
Borrower and agrees to maintain the confidentiality thereof, and the Borrower
hereby waives any rights to privacy it may have with respect to such matters.
The Borrower additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such participation
interests. The Borrower also agrees that the purchasers of any such
participation interests shall be considered as the absolute owners of such
interests in the Loans and shall have all the rights granted under the
participation agreement or agreements governing the sale of such participation
interests.
7.10 SECTION HEADINGS; CONSTRUCTION. Section headings are only used in
this Agreement for convenience. The Borrower acknowledges that the headings may
not describe completely the subject matter of the applicable section, and the
headings shall not be used in any manner to construe, limit, define or interpret
any term or provision of this Agreement. This Agreement has been fully reviewed
and negotiated between the parties and no uncertainty or ambiguity in any term
or provision of this Agreement shall be construed strictly against Silicon or
the Borrower under any rule of construction or otherwise.
7.11 MUTUAL WAIVER OF JURY TRIAL. The Borrower and Silicon each hereby
waives the right to trial by jury in any action or proceeding based upon,
arising out of, or in any way relating to, this agreement or any conduct, acts
or omissions of Silicon or the Borrower or any of their directors, officers,
employees, agents, attorneys or any other persons affiliated with
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<PAGE>
Silicon or the Borrower, in all of the foregoing cases, whether sounding in
contract or tort or otherwise.
7.12 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and the
Borrower shall be governed by, and construed in accordance with, the laws of
the State of Oregon. Any undefined term used in this Agreement that is
defined in the Oregon Uniform Commercial Code shall have the meaning assigned
to that term in the Oregon Uniform Commercial Code. As a material part of
the consideration to Silicon to enter into this Agreement, the Borrower (i)
agrees that all actions and proceedings relating directly or indirectly
hereto shall at Silicon's option, be litigated in courts located within
Oregon, and that the exclusive venue therefor shall be, at Silicon's option,
Washington County or Multnomah County, Oregon; (ii) consents to the
jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (iii) waives any and all rights the Borrower may have
to object to the jurisdiction of any such court, or to transfer or change the
venue of any such action or proceeding.
BORROWER:
ROGUE WAVE SOFTWARE, INC.
By:
----------------------------------------
Title: CFO
-------------------------------------
SILICON:
SILICON VALLEY BANK
By:
----------------------------------------
Title: Vice President
-------------------------------------
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<PAGE>
SCHEDULE TO LOAN AND SECURITY AGREEMENT
Borrower: ROGUE WAVE SOFTWARE, INC.
SECURED EQUIPMENT TERM LOAN
CREDIT LIMIT: An amount not to exceed the lesser of (i) $1,000,000 at any
one time outstanding; or (ii) the amount of the "Equipment
Borrowing Base", as defined below. For purposes of this
Schedule, the "Equipment Borrowing Base" shall mean 60% of
the net book value of equipment purchased by Borrower on or
before March 31, 1996, plus 90% of the invoice value of
equipment purchased by Borrower after March 31, 1996.
Silicon shall have no obligation to advance against taxes,
freight charges, installation charges or other similar
amounts relating to Borrower's equipment, whether or not
such amounts are identified on the invoices submitted to
Silicon. Equipment to be included in the Equipment
Borrowing Base must be new equipment, at the time of
purchase by Borrower, owned by Borrower, in good working
order, must not be subject to any liens in favor of any
person or entity other than Silicon other than Permitted
Liens, and must be subject to a first priority, perfected
security interest in favor of Silicon. Silicon shall have
no obligation to make advances against non-standard
equipment, such as tooling and custom equipment. Silicon's
advances against software relating to Borrower's equipment
shall not exceed 25% of the outstanding balance of the
Secured Equipment Term Loan at any one time. Silicon shall
have no obligation to make advances on this Secured
Equipment Term Loan after March 31, 1997. Silicon shall
make advances under this Secured Equipment Term Loan from
time to time, based on invoices and other documentation as
shall be requested by Silicon to support such advances. The
Borrower's indebtedness to Silicon with respect to this
Secured Equipment Term Loan shall be evidenced by this
Schedule and the Loan Agreement, not by a separate
promissory note unless required by Silicon.
Borrower shall submit to Silicon such invoices, advance
requests and other information, in form acceptable to
Silicon, as Silicon shall reasonably require from time to
time.
Once the maximum amount of the principal has been advanced
under this Secured Equipment Term Loan, Borrower is no longer
entitled to further advances on this Loan. Borrower shall
not have the right to reborrow any amount on this Secured
Equipment Term Loan that has been repaid by Borrower.
Advances may be requested in writing by Borrower or an
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<PAGE>
authorized person. Silicon may, but need not, require that
all oral requests be confirmed in writing. The unpaid
principal balance owing on this Secured Equipment Term Loan
at any time may be evidenced by Silicon's internal records,
including daily computer print-outs (which Silicon shall
provide to Borrower periodically).
PURPOSE: Borrowers shall use the proceeds of this Secured Equipment
Term Loan to finance the purchase of new equipment.
INTEREST RATE: The interest rate applicable to the Secured Equipment Term
Loan shall be a rate equal to the "Prime Rate" (as defined
above) in effect from time to time. Interest calculations
shall be made on the basis of a 360-day year and the actual
number of days elapsed. The interest rate applicable to the
Obligations shall change on each date there is a change in
the Prime Rate.
AMORTIZATION: Borrower shall pay Silicon monthly payments of interest only
on the last day each month commencing with October 31, 1996.
In addition, Borrower shall pay Silicon on the last day of
each month, commencing with March 31, 1997, the amount
necessary to repay fully the amount of the Secured Equipment
Term Loan in 42 equal month payments.
MATURITY DATE: August 30, 2000, at which time all unpaid principal and
accrued but unpaid interest, fees and other charges shall be
due and payable.
COMMITMENT
FEE: $2,000, payable at closing. This fee is fully earned at
closing and is non-refundable. (Any Commitment Fee
previously paid by the Borrower in connection with this loan
shall be credited against this Fee.)
PRIOR NAMES OF
BORROWER: See attached Exhibit A
TRADE NAMES OF
BORROWER: See attached Exhibit A
TRADEMARKS OF
BORROWER: See attached Exhibit A
OTHER LOCATIONS
AND ADDRESSES: See attached Exhibit A
MATERIAL ADVERSE
LITIGATION: See attached Exhibit A
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<PAGE>
FINANCIAL
COVENANTS: The Borrower shall at all times comply with all of the
following covenants, all of which shall be determined and
measured on a quarterly basis (for Borrower's domestic
operations only) in accordance with generally accepted
accounting principles, on a consolidated basis with any
subsidiary of Borrower, except as otherwise stated below:
TANGIBLE NET
WORTH: Borrower shall at all times maintain a Tangible Net Worth
of not less than $4,500,000.
LIQUIDITY: Borrower shall at all times maintain a minimum Term
Liquidity Coverage of at least 2.0:1.0.
DEFINITIONS: "Tangible Net Worth" means stockholders' equity plus debt,
if any, that has been subordinated to the Loans in a written
subordination agreement on terms satisfactory to Silicon,
and accrued interest thereon, less goodwill, patents,
capitalized software costs, deferred organizational costs,
tradenames, trademarks, and all other assets which would be
classified as intangible assets under generally accepted
accounting principles.
"Term liquidity coverage" means (a) cash + cash equivalents
(readily marketable securities issued by the United States,
readily marketable commercial paper rated "A-I" by Standard &
Poors Corporation or a similar rating by a similar rating
organization, certificates of deposit and banker's
acceptances) + 50% of Borrower's accounts receivable divided
by (b) the outstanding Secured Equipment Term Loan balance.
OTHER COVENANTS: Borrower shall at all times comply with all of the following
additional covenants:
FINANCIAL STATEMENTS AND REPORTS. The Borrower shall provide
Silicon: (a) within 30 days after the end of each month, a
monthly financial statement (consisting of a income statement
and a balance sheet) prepared by the Borrower in accordance
with generally accepted accounting principles; (b) within 30
days after the end of each quarter, a Compliance Certificate
in such form as Silicon shall reasonably specify, signed by
the Chief Financial Officer of the Borrower, setting forth
calculations showing compliance (at the end of each such
calendar quarter) with the financial covenants set forth on
the Schedule, and certifying that throughout such quarter the
Borrower was in full compliance with all other terms and
conditions of this Agreement and the Schedule, and providing
such other information as Silicon shall reasonably request;
and (c) within 90 days following the end of the Borrower's
fiscal year, complete annual CPA-audited financial
statements, such audit being conducted by independent
certified public accountants
Page 21 - LOAN AND SECURITY AGREEMENT
<PAGE>
reasonably acceptable to Silicon, together with an
unqualified opinion of such accountants.
CONDITIONS TO
CLOSING: Before requesting any such advance, the Borrower shall
satisfy each of the following conditions:
1. LOAN DOCUMENTS:
Silicon shall have received this Agreement, the Schedule, a
Collateral Assignment, Patent Mortgage and Security
Agreement, executed by the Borrower, and such other loan
documents as Silicon shall require, each duly executed and
delivered by the parties thereto.
2. DOCUMENTS RELATING
TO AUTHORITY, ETC.:
Silicon shall have received each of the following in form and
substance satisfactory to it:
(a) Certified Copies of the Articles of Incorporation and
Bylaws of the Borrower;
(b) A Certificate of Good Standing issued by the Secretary
of State of the Borrower's state of incorporation and such
other states as Silicon may reasonably request with respect
to the Borrower;
(c) A certified copy of a Resolution adopted by the Board of
Directors of the Borrower authorizing the execution, delivery
and performance of this Agreement, and any other documents or
certificates to be executed by the Borrower in connection
with this transaction; and
(d) Incumbency Certificates describing the office and
identifying the specimen signatures of the individuals
signing all such loan documents on behalf of the Borrower.
3. PERFECTION AND
PRIORITY OF SECURITY:
Silicon shall have received evidence satisfactory to it that
its security interest in the Collateral has been duly
perfected and that such security interest is prior to all
other liens, charges, security interests, encumbrances and
adverse claims in or to the Collateral other than Permitted
Liens, which evidence shall include, without limitation, a
certificate (to be requested directly by Silicon) from the
appropriate state
Page 22 - LOAN AND SECURITY AGREEMENT
<PAGE>
agencies showing the due filing and first priority of the
UCC Financing Statements to be signed by the Borrower
covering the Collateral, and evidence of the due filing of
the Collateral Assignment, Patent Mortgage and Security
Agreement with the appropriate governmental agencies or
other security documents required by Silicon.
4. INSURANCE: Silicon shall have received evidence satisfactory to it that
all insurance required by this Agreement is in full force
and effect, with loss payee designations and additional
insured designations as required by this Agreement.
5. OTHER INFORMATION:
Silicon shall have received such other statements, opinions,
certificates, documents and information with respect to
matters contemplated by this Agreement as it may reasonably
request, all of which must be acceptable to Silicon.
Silicon shall have conducted an examination of the Borrower's
books, records, ledgers, journals, and registers, as Silicon
may deem necessary, and shall be satisfied with the results
of such examination in its sole discretion.
Silicon and the Borrower agree that the terms of this Schedule supplement
the Loan and Security Agreement between Silicon and the Borrower and agree to be
bound by the terms of this Schedule.
BORROWER:
ROGUE WAVE SOFTWARE, INC.
By:
-----------------------------------------
Title: CFO
--------------------------------------
SILICON:
SILICON VALLEY BANK
By:
-----------------------------------------
Title: Vice President
--------------------------------------
Page 23 - LOAN AND SECURITY AGREEMENT
<PAGE>
COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
This Collateral Assignment, Patent Mortgage and Security Agreement is
made as of October 16, 1996, by and between Rogue Wave Software, Inc., an
Oregon corporation ("Assignor"), and SILICON VALLEY BANK, a California
banking corporation ("Assignee").
RECITALS
--------
A. Assignee has agreed to lend to assignor certain funds (the "Loan"),
and assignor desires to borrow such funds from Assignee pursuant to the terms
of a Loan and Security Agreement of even date herewith (the "Loan Agreement").
B. In order to induce Assignee to make the loan, Assignor has agreed to
assign certain intangible property to Assignee for purposes of securing the
obligations of Assignor to Assignee.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. ASSIGNMENT, PATENT MORTGAGE AND GRANT OF SECURITY INTEREST. As
collateral security for the prompt and complete payment and performance of
all of Assignor's present or future indebtedness, obligations and liabilities
to Assignee, Assignor hereby assigns, transfers, conveys and grants a
security interest and mortgage to Assignee, as security, in and to Assignor's
entire right, title and interest in, to and under the following (all of which
shall collectively be called the "Collateral"):
a. Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and derivative
work thereof, whether published or unpublished and whether or not the same also
constitutes a trade secret, now or hereafter existing, created, acquired or
held, including without limitation those set forth in EXHIBIT A attached
hereto (collectively, the "Copyrights");
b. Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
c. Any and all design rights which may be available to Assignor now
or hereafter existing, created, acquired or held;
d. All patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same, including without
limitation the patents and patent applications set forth on EXHIBIT B
attached hereof (collectively, the "Patents");
e. Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections,
and the entire goodwill of the business of Assignor connected with and
symbolized by such trademarks, including without limitation those set forth
on EXHIBIT C attached hereto (collectively, the "Trademarks");
Page 1 - COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
<PAGE>
f. Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
g. All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such
use to the extent permitted by such license or rights; and
h. All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
i. All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable
in respect of any of the foregoing.
THE INTEREST IN THE COLLATERAL BEING ASSIGNED HEREUNDER SHALL NOT BE
CONSTRUED AS A CURRENT ASSIGNMENT, BUT AS A CONTINGENT ASSIGNMENT TO SECURE
ASSIGNOR'S OBLIGATIONS TO ASSIGNEE UNDER THE LOAN AGREEMENT.
2. AUTHORIZATION OF REQUEST. Assignor authorizes and requests that the
Register of Copyrights and the Commission of Patents and Trademarks record
this conditional assignment.
3. COVENANTS AND WARRANTIES. Assignor represents, warrants, covenants
and agrees as follows:
a. Assignor is now the sole owner of the Collateral, except for
nonexclusive licenses granted by Assignor to its customers in the ordinary
course of business;
b. Performance of this assignment does not conflict with or result
in a breach of any agreement to which Assignor is party or by which Assignor
is bound, except to the extent that certain intellectual property agreements
prohibit the assignment of the rights thereunder to a third party without the
licensor's or other party's consent and this Assignment constitutes an
assignment;
c. During the term of this Assignment, Assignor will not transfer
or otherwise encumber any interest in the Collateral, except for
non-exclusive licenses granted by Assignor in the ordinary course of business
or as set forth in this Assignment;
d. To its knowledge, each of the Patents is valid and enforceable,
and no part of the Collateral has been judged invalid or unenforceable, in
whole or in part, and no claim has been made that any part of the Collateral
violates the rights of any third party;
e. Assignor shall promptly advise Assignee of any material change
in the composition of the Collateral, including but not limited to any
subsequent ownership right of the Assignor in or to any Trademark, Patent or
Copyright no specified in this Assignment;
f. Assignor shall (i) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect
Page 2 - COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
<PAGE>
infringements of the Trademarks, Patents and Copyrights and promptly advise
Assignee in writing of material infringements detected and (iii) not allow
any Trademarks, Patents or Copyrights to be abandoned, forfeited or
dedicated to the public without the written consent of Assignee, which shall
not be unreasonably withheld, unless Assignor determines that reasonable
business practices suggest that abandonment is appropriate;
g. Assignor shall promptly register the most recent version of any
of Assignor's Copyrights, if not so already registered, and shall, from time
to time, execute and file such other instruments, and take such further
actions as Assignee may reasonably request from time to time to perfect or
continue the perfection of Assignee's interest in the Collateral;
h. This Assignment creates, and in the case of after acquired
Collateral, this Assignment will create at the time Assignor first has rights
in such after acquired Collateral, in favor of Assignee a valid and perfected
first priority security interest in the Collateral in the United States
securing the payment and performance of the obligations evidenced by the Loan
Agreement upon making the filings referred to in clause (i) below;
i. To its knowledge, except for, and upon, the filing with the
United States Patent and Trademark office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests and assignment created hereunder,
and except as has been already made or obtained, no authorization, approval
or other action by, and no notice to or filing with, any U.S. governmental
authority or U.S. regulatory body is required either (i) for the grant by
Assignor of the security interest granted hereby or for the execution,
delivery or performance of this Assignment by Assignor in the U.S. or (ii)
for the perfection in the United States or the exercise by Assignee of its
rights and remedies hereunder;
j. All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is
accurate and complete in all material respects.
k. Assignor shall not enter into any agreement that would
materially impair or conflict with Assignor's obligations hereunder without
Assignee's prior written consent, which consent shall not be unreasonably
withheld. Assignor shall not permit the inclusion in any material contract to
which it becomes a party of any provisions that could or might in any way
prevent the creation of a security interest in Assignor's rights and
interests in any property included within the definition of the Collateral
acquired under such contracts, except that certain contracts may contain
anti-assignment provisions that could in effect prohibit the creation of a
security interest in such contracts.
l. Upon any executive officer of Assignor obtaining actual
knowledge thereof, Assignor will promptly notify Assignee in writing of any
event that materially adversely affects the value of any Collateral, the
ability of Assignor to dispose of any Collateral or the rights and remedies
of Assignee in relation thereto, including the levy of any legal process
against any of the Collateral.
4. ASSIGNEE'S RIGHTS. Assignee shall have the right, but not the
obligation, to take, at Assignor's sole expense, any actions that assignor is
required under this Assignment to take but which Assignor fails to take,
after fifteen (15) days' notice to Assignor. Assignor shall reimburse
Page 3 - COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
<PAGE>
and indemnify Assignee for all reasonable costs and reasonable expenses
incurred in the reasonable exercise of its rights under this Section 4.
5. INSPECTION RIGHTS. Assignor hereby grants to Assignee and its
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable written notice to Assignor, any of Assignor's
plants and facilities that manufacture, install or store products (or that
have done so during the prior six-month period) that are sold utilizing any
of the Collateral, and to inspect the products and quality control records
relating thereto upon reasonable written notice to Assignor and as often as
may be reasonable requested.
6. FURTHER ASSURANCES; ATTORNEY-IN-FACT.
a. On a continuing basis, Assignor will make, execute,
acknowledge and deliver, and file and record in the proper filing and
recording places in the United States, all such instruments, including
appropriate financing and continuation statements and collateral agreements
and filings with the United States Patent and Trademark office and the
Register of Copyrights, and take all such action as may reasonably be deemed
necessary or advisable, or as requested by Assignee, to perfect Assignee's
security interest in all Copyrights, Patents and Trademarks and otherwise to
carry out the intent and purposes of this Collateral Assignment, or for
assuring and confirming to Assignee the grant or perfection of a security
interest in all Collateral.
b. Assignor hereby irrevocably appoints Assignee as Assignor's
attorney-in-fact, with full authority in the place and stead of Assignor and
in the name of Assignor, from time to time in Assignee's discretion, to take
any action and to execute any instrument which Assignee may deem necessary
or advisable to accomplish the purposes of this Collateral Assignment,
including (i) to modify, in its sole discretion, this Collateral Assignment
without first obtaining Assignor's approval of or signature to such
modification solely by amending Exhibit A, Exhibit B and Exhibit C, thereof,
as appropriate, to include reference to any right, title or interest in any
Copyrights, Patents or Trademarks acquired by Assignor after the execution
hereof or to delete any reference to any right, title or interest in any
Copyrights, Patents or Trademarks in which Assignor no longer has or claims
any right, title or interest, (ii) to file, in its sole discretion, one or
more financing or continuation statements and amendments thereto, relative to
any of the Collateral without the signature of Assignor where permitted by
law and (iii) after the occurrence of an Event of Default, to transfer the
Collateral into the name of Bank or a third party to the extent permitted
under the Oregon Uniform Commercial Code.
7. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default under the Assignment:
a. An Event of Default occurs under the Loan Agreement; or
b. Assignor breaches any warranty or agreement made by Assignor in
this Assignment and, as to any breach that is capable of cure, Assignor fails
to cure such breach within five (5) days of the occurrence of such breach.
8. REMEDIES. Upon the occurrence and continuance of an Event of
Default, Assignee shall have the right to exercise all the remedies of a
secured party under the Loan Agreement and the Oregon Uniform Commercial
Code, including without limitation the right to require Assignor to assemble
the Collateral and any tangible property in which Assignee has a
Page 4 - COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
<PAGE>
security interest and to make it available to Assignee at a place designated
by Assignee. Assignee shall have a nonexclusive, royalty free license to use
the Copyrights, Patents and Trademarks to the extent reasonably necessary to
permit assignee to exercise its rights and remedies upon the occurrence of an
Event of Default. Assignor will pay any expenses (including reasonable
attorneys' fees) incurred by Assignee in connection with the exercise of any
of Assignee's rights hereunder, including without limitation any expense
incurred in disposing of the Collateral. All of Assignee's rights and
remedies with respect to the Collateral and shall be cumulative.
9. INDEMNIFY. Assignor agrees to indemnify, defend, protect and hold
harmless Assignee and its officers, employees, and agents against: (a) all
obligations, demands, claims and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement, and
(b) all losses or expenses in any way suffered, incurred, or paid by
Assignee as a result of or in any way arising out of, following or
consequential to transactions between Assignee and Assignor, whether under
this Assignment or otherwise (including without limitation reasonable
attorneys' fees and reasonable expenses), except for losses arising from or
out of Assignee's gross negligence or willful misconduct.
10. REASSIGNMENT. At such time as Assignor shall completely satisfy
all of the obligations secured hereunder, Assignee shall execute and deliver
to Assignor all deeds, assignments and other instruments as may be necessary
or proper to revest in assignor full title to the property assigned
hereunder, subject to any disposition thereof which may have been made by
Assignee pursuant hereto.
11. COURSE OF DEALING. No course of dealing, nor any failure to
exercise, nor any delay in exercising any right, power or privilege hereunder
shall operate as a waiver thereof.
12. ATTORNEYS' FEES. If any action relating to this Assignment is
brought by either party hereto against the other party, the prevailing party
shall be entitled to recover reasonable attorneys' fees (including but not
limited to attorneys' fees on appeal or review), costs and disbursements.
13. AMENDMENTS. This Assignment may be amended only by a written
instrument signed by both parties hereto.
14. COUNTERPARTS. This Assignment may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
15. OREGON LAW AND JURISDICTION; JURY WAIVER. This Assignment shall be
governed by the laws of the State of Oregon, without regard for choice of law
provisions. Assignor and Assignee consent to the exclusive jurisdiction of
any state or federal court located in Multnomah County or Washington County,
Oregon. ASSIGNOR AND ASSIGNEE EACH WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THE LOAN
AGREEMENT, THIS ASSIGNMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS.
Page 5 - COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on
the day and year first above written.
Address of Assignor: ASSIGNOR:
850 SW 35th Street ROGUE WAVE SOFTWARE, INC.
Corvallis, OR 97330
Attn: Robert Holburn By: /s/ illegible
-------------------------------
Title: CFO
---------------------------
STATE OF OREGON )
) ss.
County of Benton )
This instrument was acknowledged before me on this 22nd day of October,
1996, by Robert Holburn, as CFO of Rogue Wave Software, Inc., an Oregon
corporation.
[SEAL] /s/ Hazel W. Stratton
----------------------------------------------------
NOTARY PUBLIC FOR
----------------------------------
My Commission Expires: March 23, 1998
-----------------------------
Address of Assignee: ASSIGNEE:
11000 S.W. Stratus, Suite 170 SILICON VALLEY BANK
Beaverton, OR 97008-7113
Attn: Art Hiemstra By:
-------------------------------
Title:
---------------------------
STATE OF OREGON )
) ss.
County of ___________ )
This instrument was acknowledged before me on this ____ day of October,
1996, by _________________, as ________________ of Silicon Valley Bank, a
California banking corporation.
----------------------------------------------------
NOTARY PUBLIC FOR
----------------------------------
My Commission Expires:
-----------------------------
Page 6 - COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
<PAGE>
EXHIBIT A
COPYRIGHTS
Description Registration/ Registration/
Application Application
Number Date
Page 7 - COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
<PAGE>
EXHIBIT B
PATENTS
Description Registration/ Registration/
Application Application
Number Date
Page 8 - COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
<PAGE>
EXHIBIT C
TRADEMARKS
Description Registration/ Registration/
Application Application
Number Date
Page 9 - COLLATERAL ASSIGNMENT, PATENT MORTGAGE AND SECURITY AGREEMENT
