<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ROGUE WAVE SOFTWARE, INC.
(Exact name of registrant as specified 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, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
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, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
Mark P. Tanoury, Esq. Laird H. Simons, III, Esq.
Vincent P. Pangrazio, Esq. Mark C. Stevens, Esq.
James F. Fulton, Jr., Esq. Edward M. Urschel, Esq.
COOLEY GODWARD LLP Michael J. McAdam, Esq.
3000 Sand Hill Road FENWICK & WEST LLP
Building 3, Suite 230 Two Palo Alto Square
Menlo Park, CA 94025-7116 Palo Alto, CA 94306
(415) 843-5000 (415) 494-0600
</TABLE>
--------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value............... 2,300,000 $11.50 $26,450,000 $8,015.15
</TABLE>
(1) Includes 300,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(a) under the Securities Act of
1933. Based on the average of the high and low sales prices of the Company's
Common Stock on the Nasdaq National Market on July 31, 1997.
--------------------------
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 AUGUST 1, 1997
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-13517
PROSPECTUS
2,000,000 SHARES
[LOGO]
COMMON STOCK
Of the 2,000,000 shares of Common Stock offered hereby, 205,000 shares are
being sold by the Company and 1,795,000 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol RWAV. On July 31, 1997, the last reported sale price of the Common Stock
was $11.50 per share. See "Price Range of Common Stock."
--------------
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 $300,000.
(3) The Company and certain stockholders of the Company have granted to the
Underwriters a 30-day option to purchase up to 300,000 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 , 1997 at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
COWEN & COMPANY
WESSELS, ARNOLD & HENDERSON
, 1997
<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]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE WITH
RULE 103 OF REGULATION M.
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 COMMON STOCK
OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
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, Internet and intranet 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.
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 develop strategic partnerships, 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 telesales and direct field sales
organization, and to a lesser extent through indirect channel partners. The
Company bundles its Tools.h++ and/or Standard C++ Library products with popular
compilers offered by leading vendors, including 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 3Com, Boeing,
Hewlett-Packard, IBM, MCI, Morgan Stanley, Motorola and Netscape.
The Company was founded in 1989 and operated as an unincorporated business
until its incorporation in Oregon in July 1991. The Company reincorporated into
Delaware on November 21, 1996. 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.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..................... 205,000 shares
Common Stock offered by the Selling Stockholders........ 1,795,000 shares
Common Stock to be outstanding after the offering....... 7,915,063 shares (1)
Use of proceeds......................................... Working capital and other corporate purposes. See
"Use of Proceeds."
Nasdaq National Market symbol........................... RWAV
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------------------ --------------------
1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue................................. $ 3,212 $ 7,209 $ 11,937 $ 18,845 $ 13,192 $ 21,043
Income (loss) from operations................. 180 644 195 (80) (255) 1,686
Net income (loss)............................. 175 568 79 35 (114) 1,728
Net income (loss) per common share (2)........ $ 0.04 $ 0.14 $ 0.02 $ 0.01 $ (0.03) $ 0.21
Shares used in per share calculation (2)...... 3,914 4,154 5,009 6,045 4,088 8,348
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................................... $ 30,540 $ 32,456
Total assets......................................................................... 42,175 44,091
Long-term obligations, less current portion.......................................... 370 370
Total stockholders' equity........................................................... 32,575 34,491
</TABLE>
- ------------------------
(1) Excludes 2,061,150 shares of the Company's Common Stock issuable upon
exercise of stock options outstanding as of June 30, 1997 at a weighted
average exercise price of $5.85 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) As adjusted to reflect the sale of the 205,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $11.50
per share. See "Capitalization."
------------------------
EXCEPT AS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE
"UNDERWRITING."
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, JChart, JDBTools,
DBTools, DBFactory and Object Factory are trademarks of the Company. All other
brand names or trademarks appearing in this Prospectus are the property of their
respective holders.
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 MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE WORDS "ANTICIPATE," "BELIEVE,"
"EFFECT," "ESTIMATE," "EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO THE
COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING
STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN OR IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE 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.
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
and services, 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 licensed or sold, levels
of international sales, activities of and acquisitions by competitors, changes
in pricing policy by the Company and its competitors, publication of opinions
about the Company, its products and object-oriented technology by industry
analysts, the hiring of new employees, changes in foreign currency exchange
rates, product lifecycles and the ability of the Company to develop and market
new products and control costs. 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.
Furthermore, due to all of the foregoing factors, it is possible that in some
future quarter the Company's operating results may 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.
Service and maintenance revenue tends to fluctuate as consulting contracts,
which may extend over several months, are undertaken, renewed, completed or
terminated. License fee revenue is difficult to forecast due to the fact that
the Company's sales cycle, from initial evaluation to purchase, varies
substantially from customer to customer. As a result of these and other factors,
revenue for any quarter is subject to significant variation, and the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indicators 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. The Company has
announced its intention to move its administrative operations from its current
location in Corvallis, Oregon to Boulder, Colorado during fiscal 1998. In
connection with this move, the Company expects to incur charges totaling
approximately $1.5 million during fiscal 1998. Such charges will have a material
adverse effect on the operating results for the quarters in which they are
incurred. Specifically, the Company anticipates that it will incur the
substantial majority of such charges during the second quarter of fiscal 1998.
Furthermore, the Company may incur additional charges associated with the move
which, if incurred, may have a material adverse effect on the Company's
operating results. In addition, the Company intends to create a majority-owned
subsidiary to develop technology relating to the collection and verification of
data across the Internet. The Company expects such subsidiary will be in the
development stage for at least one year. There can be no assurance that the
technology developed by such subsidiary will be commercialized, or even if it is
commercialized there can be no assurance of market acceptance due to such
subsidiary's new and untested business model. The financial results of such
subsidiary will be consolidated with the Company's financial results.
Accordingly,
5
<PAGE>
fluctuations in the operating results of such subsidiary may have a material
adverse effect on the Company's operating results. 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," "Business--Sales, Marketing and Customer Support" and
"--Product Development."
LIMITED OPERATING HISTORY. The Company was founded in September 1989 and
first shipped products in November 1989. Although the Company's total revenue
has increased in each of the last eight quarters and the Company had net income
in most of those quarters, the Company incurred net losses in the quarters ended
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."
DEPENDENCE ON EMERGING MARKET FOR C++ AND JAVA. The Company's product lines
are designed for use in object-oriented software application development,
specifically the C++ and Java programming languages, 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 number of software developers using the C++ programming language is
relatively small compared to the number of developers using more traditional
software development technology. The adoption of the C++ programming language by
software programmers who have traditionally used other technology requires
reorientation to significantly different programming methods, and there can be
no assurance that the acceptance of the C++ programming language will expand
beyond the early adopters of the technology. Furthermore, there can be no
assurance that potential corporate customers will be willing to make the
investment required to retrain programmers to build software using C++ rather
than structured or other object-oriented programming techniques. Many of the
Company's customers have purchased only small quantities of the Company's
products and there can be no assurance that these or new customers will broadly
implement C++ programming or purchase additional products.
6
<PAGE>
In addition, the Company has 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."
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. 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. In particular, the Company has recently
acquired a European distributor with offices and personnel in several European
countries. In addition, the Company recently established a consulting group in
Boulder, Colorado to help expand its ability to provide consulting services.
Such additions involve a number of risks, including risks related to the
integration of new businesses or business units, the substantial management time
devoted to such activities, the failure to achieve anticipated benefits, such as
cost savings and increased revenue, and the difficulties of managing additional
operations. The Company's acquisition of Inmark in October 1995 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. In addition, the Company recently
announced that it will move its administrative operations from Corvallis, Oregon
to Boulder, Colorado. This move will result in the distribution of the Company's
senior management team, which may make managing the Company's operations more
difficult. In particular, managing this transition will require a significant
amount of attention from management, particularly the Company's Chief Operating
Officer and Chief Financial Officer who will relocate as part of the move.
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, to a lesser extent, at the emerging Java market. The
Company's competitors offer a variety of products and services to address these
markets. 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 in the C++ market include Microsoft (with its
Microsoft Foundation Classes, "MFC"), IBM, ILOG and several privately held
companies. Microsoft is a particularly strong competitor due to its large
installed base and the fact that it bundles its MFC library with its own and
other C++ compilers. Microsoft may decide in the future to devote more resources
to or broaden the functions of MFC in order to address and more effectively
compete with the functionality of the Company's products. The Company faces
direct competition in the Java market from Borland, JavaSoft (a business unit of
Sun Microsystems), Microsoft, Sybase, 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. Software applications can also be developed using software parts and
programming tools in environments other than C++ or Java. Indirect competitors
with such offerings include Microsoft (with its ActiveX technology), 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.
7
<PAGE>
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.
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.
Furthermore, the Company believes that its ability to achieve significant
revenue growth in the future will depend in large part on its success in
recruiting and training sufficient direct sales personnel and establishing and
maintaining relationships with its outside sales representatives. Although the
Company is currently investing, and plans to continue to invest, significant
resources to expand its direct sales force and to develop distribution
relationships with outside sales representatives, the Company has at times
experienced and continues to experience difficulty in recruiting qualified sales
personnel and in establishing necessary sales representative relationships. The
Company believes that the hiring and retaining of qualified individuals at all
levels in the Company is essential to the Company's ability to manage growth
successfully, and there can be no assurance that the Company will be successful
in attracting and retaining the necessary personnel. If Company management is
unable to effectively manage growth, the Company's business, financial condition
and results of operations will be materially and adversely affected. See
"--Risks of Expanding International Sales and Marketing," "--Future
Acquisitions," "Business--The Rogue Wave Strategy" and "--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."
8
<PAGE>
FUTURE ACQUISITIONS. 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.
RISKS OF EXPANDING INTERNATIONAL SALES AND MARKETING. The Company opened
its first international sales office in Germany in January 1996. In February
1997, the Company expanded its European operations by acquiring PVI Precision
Software GmbH ("Precision"). Precision is a distributor of the Company's
software products in Germany, the United Kingdom, France and the Benelux
countries. International revenue accounted for approximately 19% and 23% of the
Company's total revenue in fiscal 1996 and the first nine months of fiscal 1997,
respectively. As of June 30, 1997, the Company had 31 employees located outside
of the United States. The Company believes that in order to increase sales
opportunities and profitability it will be required to expand its international
operations. The Company has committed and continues to commit significant
management time and financial resources to developing direct and indirect
international sales and support channels. There can be no assurance, however,
that the Company will be able to maintain or increase international market
demand for its products. To the extent that the Company is unable to do so in a
timely manner, the Company's international revenue would be limited, and the
Company's business, financial condition and results of operations would be
materially and adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales, Marketing
and Customer Support."
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. As a result
of recent fluctuations in international exchange rates, the Company's Board of
Directors has authorized the Company to enter into forward exchange contracts to
minimize the risks associated with such fluctuations. Although exposure to
currency fluctuations to date has not been material, 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."
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 and Michael
Scally, the Company's President and Chief Executive Officer, 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 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 July 1997, Dan Whitaker, the Company's former Executive Vice
President, Marketing, resigned to devote full time to the management of a
Company
9
<PAGE>
subsidiary. Although Mr. Whitaker has agreed to serve as a consultant to the
Company through July 1998, there can be no assurance that the Company will be
able to hire a qualified replacement. In the past, the Company has experienced
some difficulty in attracting key personnel to work at its facilities in
Corvallis, Oregon. Competition for such personnel is intense, and there can be
no assurance that the Company can retain its key technical, sales and managerial
employees or that it can attract, assimilate or retain other highly qualified
technical, sales and managerial personnel in the future. See "Business--Sales,
Marketing and Customer Support" and "Management."
VARIABILITY OF SALES CYCLES. The Company distributes its products through
two different direct sales channels, a telesales force and a field sales force,
each of which is subject to a variable sales cycle. Products sold by the
Company's telesales force may be sold after a single phone call or may require
several weeks of education and negotiation before a sale is made. As such, the
sales cycle associated with telesales typically ranges from a few days to two
months. On the other hand, the purchase of products from the Company's field
sales force is often an enterprise-wide decision and may require the sales
person to provide a significant level of education to 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
10
<PAGE>
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.
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."
POSSIBLE VOLATILITY OF STOCK PRICE. The Company's stock price has
fluctuated substantially since its initial public offering in November 1996.
There can be no assurance that the market price of the Common Stock will not
decline below the public offering price set forth on the cover page of this
Prospectus. The trading price of the Company's Common Stock is 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. See "Price Range of 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."
11
<PAGE>
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 7,915,063
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 June 30, 1997. Of these shares, the 2,000,000 shares
sold in this offering and approximately 3,847,179 additional shares already
outstanding will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"). Holders of
an aggregate of 2,412,194 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 90-day period commencing on the date of this
Prospectus. Upon expiration of the lock-up period, all such shares will be
eligible for sale, subject to compliance with Rule 144 or Rule 701. In addition,
as of June 30, 1997, 2,061,150 shares were subject to outstanding options and,
approximately 637,949 shares subject to such options were vested. In addition,
2,266,920 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. 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."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 205,000 shares of
Common Stock offered by the Company hereby are estimated to be $1,916,000
($3,484,000 if the Underwriters' over-allotment option is exercised in full) at
an assumed public offering price of $11.50 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 Company intends to use the net proceeds of this offering primarily for
working capital and other general corporate purposes, including expansion of
general sales and customer support activities to accommodate growth in the
Company's business and customer base. The amounts actually expended by the
Company for working capital purposes will vary significantly depending upon a
number of factors, including future revenue growth, the amount of cash generated
by the Company's operations and the progress of the Company's product
development efforts, and hence the Company's management will retain broad
discretion in the allocation of the proceeds from this offering. In addition,
the Company may make one or more acquisitions of technologies, products or
businesses that broaden or enhance the Company's current product offerings. The
Company has no specific agreements or commitments, however, and is not currently
engaged in any negotiations for any such acquisition. Pending the uses described
above, the Company plans to invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company commenced trading publicly on the Nasdaq
National Market on November 22, 1996 and is traded under the symbol RWAV. The
following table sets forth for the periods indicated the high and low daily
closing prices for the Common Stock:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR ENDING SEPTEMBER 30, 1997
1st Quarter (from November 22, 1996).................................. $ 17.000 $ 12.875
2nd Quarter........................................................... 23.500 9.000
3rd Quarter........................................................... 14.375 8.375
4th Quarter (through July 31, 1997)................................... 14.000 11.125
</TABLE>
On July 31, 1997, the reported last sale price for the Common Stock on the
Nasdaq National Market was $11.50 per share. As of June 30, 1997, there were
approximately 141 holders of record of the Common Stock.
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. 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
June 30, 1997, and (ii) the capitalization as adjusted to reflect the sale by
the Company of the 205,000 shares of the Common Stock offered hereby at the
assumed public offering price of $11.50 per share.
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, less current portion
(1)........................................... $ 370 $ 370
Stockholders' equity:
Common Stock, $.001 par value; 35,000,000
shares authorized; 7,710,063 shares issued
and outstanding, actual; and 7,915,063
shares issued and outstanding, as adjusted
(2)......................................... 8 8
Additional paid-in capital.................... 30,823 32,739
Stockholder note receivable................... -- --
Retained earnings............................. 1,752 1,752
Cumulative translation adjustment............. (8) (8)
------ -----------
Total stockholders' equity................ 32,575 34,491
------ -----------
Total capitalization.................... $32,945 $34,861
------ -----------
------ -----------
</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 2,626,269 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 2,061,150 shares of Common Stock were
outstanding as of June 30, 1997 at a weighted average exercise price of
$5.85. 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>
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
statement of operations 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. The consolidated
balance sheet data at June 30, 1997, and the consolidated statements of
operations data for the nine months ended June 30, 1996 and 1997 are derived
from unaudited consolidated financial statements included elsewhere in this
Prospectus. The unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the nine months
ended June 30, 1997 are not necessarily indicative of the results that may be
expected for the entire year ending September 30, 1997.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------------------ ---------
1993 1994 1995 1996 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License revenue................................................... $ 2,949 $ 6,652 $ 10,417 $ 14,986 $ 10,605
Service and maintenance revenue................................... 263 557 1,520 3,859 2,587
--------- --------- --------- --------- ---------
Total revenue................................................... 3,212 7,209 11,937 18,845 13,192
--------- --------- --------- --------- ---------
Cost of revenue:
Cost of license revenue........................................... 301 693 1,048 1,276 873
Cost of service and maintenance revenue........................... 166 331 1,123 1,663 1,025
--------- --------- --------- --------- ---------
Total cost of revenue........................................... 467 1,024 2,171 2,939 1,898
--------- --------- --------- --------- ---------
Gross profit.................................................... 2,745 6,185 9,766 15,906 11,294
--------- --------- --------- --------- ---------
Operating expenses:
Product development............................................... 893 2,109 3,204 5,548 3,984
Sales and marketing............................................... 1,330 2,652 4,880 8,234 5,969
General and administrative........................................ 342 780 1,487 2,204 1,596
--------- --------- --------- --------- ---------
Total operating expenses........................................ 2,565 5,541 9,571 15,986 11,549
--------- --------- --------- --------- ---------
Income (loss) from operations................................... 180 644 195 (80) (255)
Other income (expense), net......................................... (5) 4 (10) 91 68
--------- --------- --------- --------- ---------
Income (loss) before income taxes............................... 175 648 185 11 (187)
Income tax expense (benefit)........................................ -- 80 106 (24) (73)
--------- --------- --------- --------- ---------
Net income (loss)............................................... $ 175 $ 568 $ 79 $ 35 $ (114)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per common share (1).............................. $ 0.04 $ 0.14 $ 0.02 $ 0.01 $ (0.03)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculation (1)............................ 3,914 4,154 5,009 6,045 4,088
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
--------- ---------
--------- ---------
<CAPTION>
1997
---------
<S> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
License revenue................................................... $ 15,240
Service and maintenance revenue................................... 5,803
---------
Total revenue................................................... 21,043
---------
Cost of revenue:
Cost of license revenue........................................... 1,262
Cost of service and maintenance revenue........................... 1,969
---------
Total cost of revenue........................................... 3,231
---------
Gross profit.................................................... 17,812
---------
Operating expenses:
Product development............................................... 4,782
Sales and marketing............................................... 9,103
General and administrative........................................ 2,241
---------
Total operating expenses........................................ 16,126
---------
Income (loss) from operations................................... 1,686
Other income (expense), net......................................... 925
---------
Income (loss) before income taxes............................... 2,611
Income tax expense (benefit)........................................ 883
---------
Net income (loss)............................................... $ 1,728
---------
---------
Net income (loss) per common share (1).............................. $ 0.21
---------
---------
Shares used in per share calculation (1)............................ 8,348
Pro forma net income data (2):
Income before income taxes, as reported...........................
Pro forma income tax expense......................................
Pro forma net income............................................
Pro forma net income per common share...............................
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............................ $ 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
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............................ $ 30,540
Total assets................................................................. 42,175
Long-term obligations, less current portion.................................. 370
Mandatorily redeemable preferred stock....................................... --
Total stockholders' equity................................................... 32,575
</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.
15
<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. See "Risk Factors--Limited
Operating History" and "--Uncertainty of Future Operating Results; Fluctuations
in Quarterly Operating Results."
The Company has experienced significant revenue growth over the last several
years. During fiscal 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 during
fiscal years 1994, 1995 and 1996 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.
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. Revenue through this channel has not been significant to date, and
there can be no assurance that the Company will be successful in marketing its
products through this channel.
International revenue accounted for approximately 19% of total revenue in
fiscal 1996 and 23% of total revenue for the nine months ended June 30, 1997.
The Company does not monitor the percentage of its net income 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. In February 1997, the Company expanded its European
operations by acquiring Precision, a distributor of Rogue Wave software products
in Germany, the United Kingdom, France and the Benelux countries. The Company
anticipates further expansion in foreign countries and expects that
international license and service and maintenance revenue will account for an
increasing portion of its total revenue in the future. The Company has committed
and continues to commit significant management time and financial resources to
developing direct and indirect international sales and support channels. There
can be no assurance, however, that the Company will be able to maintain or
increase international market demand for its products. To date, other than
16
<PAGE>
revenue generated by the Company's European subsidiaries, the Company's
international revenue has been denominated in United States dollars. The Company
may enter into forward foreign exchange contracts to reduce the risk associated
with currency fluctuations. Although exposure to currency fluctuations to date
has been insignificant, to the extent international revenue is denominated in
local currencies, foreign currency translations may contribute to significant
fluctuations in, and could have a material adverse effect upon, the Company's
business, financial condition and results of operations. See "Risk
Factors--Risks Inherent in International Operations."
The Company has developed technology relating to the collection and
verification of data across the Internet. The Company intends to contribute such
technology, and to make a funding commitment of up to $2.0 million over the next
six to 18 months, to a majority-owned subsidiary for further development and
possible commercialization of this technology. The Company will have the option
to purchase the minority interest of the subsidiary during a specified time
period in the future. Dan Whitaker, the Company's former Executive Vice
President, Marketing, resigned his office and his position on the Company's
Board of Directors to devote full time to the management of this subsidiary, but
has agreed to serve as a consultant to the Company through July 1998. The
Company expects that such subsidiary will be in the development stage for at
least one year. There can be no assurance that the technology developed by such
subsidiary will be commercialized, and even if it is commercialized there can be
no assurance that the technology will receive market acceptance due to the
subsidiary's new and untested business model. The financial results of such
subsidiary will be consolidated with the Company's financial results.
Accordingly, fluctuations in the operating results of such subsidiary may have a
material adverse effect on the Company's operating results.
In April 1997, the Company established a consulting group in Boulder,
Colorado consisting of 15 employees. The addition of these employees has
resulted in an increase in service and maintenance revenue and a corresponding
increase in the cost of service and maintenance revenue. The gross margin
associated with such consulting work has been and is expected to continue to be
lower than the Company's historical gross margin on service and maintenance
revenue. More recently, the Company announced its intention to move its
administrative operations from its current location in Corvallis, Oregon to
Boulder, Colorado during fiscal 1998. The Company expects to incur charges
totaling approximately $1.5 million during fiscal 1998 in connection with this
move. Such charges will have a material adverse effect on the operating results
for the quarters in which they are incurred. Specifically, the Company
anticipates that it will incur the substantial majority of such charges during
the second quarter of fiscal 1998. Furthermore, the Company may incur additional
charges associated with the move which, if incurred, may have a material adverse
effect on the Company's operating results.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data expressed as a
percentage of total revenue for each period indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenue:
License revenue........................................... 92.3% 87.3% 79.5% 80.4% 72.4%
Service and maintenance revenue........................... 7.7 12.7 20.5 19.6 27.6
----- ----- ----- ----- -----
Total revenue........................................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenue:
Cost of license revenue................................... 9.6 8.8 6.8 6.6 6.0
Cost of service and maintenance revenue................... 4.6 9.4 8.8 7.8 9.4
----- ----- ----- ----- -----
Total cost of revenue................................... 14.2 18.2 15.6 14.4 15.4
----- ----- ----- ----- -----
Gross profit............................................ 85.8 81.8 84.4 85.6 84.6
----- ----- ----- ----- -----
Operating expenses:
Product development....................................... 29.3 26.8 29.4 30.2 22.7
Sales and marketing....................................... 36.8 40.9 43.7 45.2 43.3
General and administrative................................ 10.8 12.5 11.7 12.1 10.6
----- ----- ----- ----- -----
Total operating expenses................................ 76.9 80.2 84.8 87.5 76.6
----- ----- ----- ----- -----
Income (loss) from operations........................... 8.9 1.6 (0.4) (1.9) 8.0
Other income (expense), net................................. 0.1 (0.1) 0.5 0.5 4.4
----- ----- ----- ----- -----
Income (loss) before income taxes....................... 9.0 1.5 0.1 (1.4) 12.4
Income tax expense (benefit)................................ 1.1 0.8 (0.1) (0.5) 4.2
----- ----- ----- ----- -----
Net income (loss)....................................... 7.9% 0.7% 0.2% (0.9)% 8.2%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
REVENUE. Total revenue increased 59% to $21.0 million for the nine months
ended June 30, 1997 from $13.2 million for the nine months ended June 30, 1996.
License revenue increased 43% to $15.2 million for the nine months ended June
30, 1997 from $10.6 million for the nine months ended June 30, 1996. License
revenue increased primarily as a result of an increase in the number of licenses
sold to existing and new customers, reflecting additional product offerings, an
expanding market, increased market awareness and expansion of the Company's
telesales organization and international presence.
Service and maintenance revenue increased 123% to $5.8 million for the nine
months ended June 30, 1997 from $2.6 million for the nine months ended June 30,
1996. The increase in service and maintenance revenue was primarily attributable
to increased sales volume of the Company's support and maintenance services, as
well as an increase in consulting revenue as a result of the establishment of
the Company's consulting business group in Boulder, Colorado in April 1997.
COST OF REVENUE. Cost of license revenue increased 49% to $1.3 million for
the nine months ended June 30, 1997 from $873,000 for the nine months ended June
30, 1996, representing 8.3% and 8.2% of the license revenue for the respective
periods.
Cost of service and maintenance revenue increased 100% to $2.0 million for
the nine months ended June 30, 1997 from $1.0 million for the nine months ended
June 30, 1996, representing 33.9% and 39.6% of the service and maintenance
revenue for the respective periods. The period to period dollar increase in cost
of service and maintenance revenue was primarily the result of adding additional
personnel and the establishment of the Company's consulting business group in
Boulder, Colorado in April 1997. The period to period decrease in the cost of
service and maintenance revenue as a percentage of service and maintenance
revenue is primarily the result of economies of scale resulting from increasing
maintenance revenue.
18
<PAGE>
PRODUCT DEVELOPMENT. Product development expenses increased 20% to $4.8
million for the nine months ended June 30, 1997 from $4.0 million for the nine
months ended June 30, 1996. As a percentage of total revenue, product
development expenses were 22.7% and 30.2% for the respective periods. The
increase in product development expenses was primarily attributable to the
hiring of additional product development personnel. The decrease in product
development expenses as a percentage of total revenue was primarily due to the
higher growth in total revenue relative to the growth of product development
expenses. The Company anticipates that it will continue to devote substantial
resources to product development and that product development expenses will
increase in dollar amount through fiscal 1998 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.
SALES AND MARKETING. Sales and marketing expenses increased 52% to $9.1
million for the nine months ended June 30, 1997 from $6.0 million for the nine
months ended June 30, 1996. As a percentage of total revenue, sales and
marketing expenses were 43.3% and 45.2% for the respective periods. The increase
in sales and marketing expenses was primarily due to continued investment in
systems and personnel to expand the Company's sales channels and the addition of
sales personnel through the acquisition of Precision during the second quarter
of fiscal 1997. While the Company expects that sales and marketing expenses will
continue to grow in dollar amount through fiscal 1998, the Company does not
expect such expenses to increase as a percentage of total revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
38% to $2.2 million for the nine months ended June 30, 1997 from $1.6 million
for the nine months ended June 30, 1996. As a percentage of total revenue,
general and administrative expenses were 10.6% and 12.1% for the respective
periods. The increase in general and administrative expenses was 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 general and administrative expenses will continue to grow in
dollar amount through fiscal 1998 as a result of additional anticipated
expansion and the Company's scheduled move of its administrative operations to
Boulder, Colorado.
OTHER INCOME, NET. Other income increased during the nine months ended June
30, 1997 as compared with the nine months ended June 30, 1996 as a result of
higher interest income due to a higher investment portfolio generated by cash
from the Company's initial public offering and operations.
INCOME TAX EXPENSE. The Company's effective tax rate for the nine months
ended June 30, 1997 was 34%. The Company anticipates its fiscal 1997 effective
tax rate will be approximately 34%; however, this rate could change based on a
change in the percentage of total income derived from international sources.
COMPARISON OF FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
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. 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
19
<PAGE>
primarily due to an increased focus on marketing support and maintenance
services, which include upgrades and telephone support, as well as the
introduction of mentoring services, also contributed to increased service and
maintenance revenue for fiscal 1995 and fiscal 1996.
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.
COST OF 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 and the timing of large site license sales.
Cost of service and maintenance revenue consists primarily of
personnel-related and facilities costs incurred in providing customer support
and training services, as well as third-party costs incurred in providing
training services. Cost of service and maintenance revenue was $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, additional product support personnel and the timing of product
upgrades. The higher percentages of cost of service and maintenance revenue as a
percentage of service and maintenance revenue for fiscal 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.
PRODUCT DEVELOPMENT. Product development expenses consist primarily of
personnel related expenses. Product development expenses were $2.1 million, $3.2
million and $5.5 million in fiscal 1994, 1995 and 1996, respectively. As a
percentage of total revenue, product development expenses were 29.3%, 26.8% and
29.4% in each respective period. The increases in product development expenses
were primarily attributable to the hiring of additional product development
personnel. The Company anticipates that it will continue to devote substantial
resources to product development and that product development expenses will
increase in dollar amount for fiscal 1997 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%
20
<PAGE>
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.
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."
21
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth the quarterly financial data for the eight
quarters ended June 30, 1997, 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
----------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1996 1996 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue....................... $ 2,850 $ 2,733 $ 3,697 $ 4,175 $ 4,381 $ 4,485 $ 5,125
Service and maintenance revenue....... 558 804 950 833 1,272 1,394 1,787
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue....................... 3,408 3,537 4,647 5,008 5,653 5,879 6,912
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cost of revenue:
Cost of license revenue............... 262 219 242 412 403 342 438
Cost of service and maintenance
revenue.............................. 348 294 343 388 638 502 595
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenue............... 610 513 585 800 1,041 844 1,033
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........................ 2,798 3,024 4,062 4,208 4,612 5,035 5,879
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Product development................... 903 924 1,486 1,574 1,564 1,484 1,592
Sales and marketing................... 1,544 1,606 2,101 2,262 2,265 2,477 2,978
General and administrative............ 502 472 500 624 608 705 749
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses............ 2,949 3,002 4,087 4,460 4,437 4,666 5,319
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations....... (151) 22 (25) (252) 175 369 560
Other income, net....................... 9 14 43 11 23 110 342
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes... (142) 36 18 (241) 198 479 902
Income tax expense (benefit)............ (81) 7 4 (84) 49 158 298
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................... $ (61) $ 29 $ 14 $ (157) $ 149 $ 321 $ 604
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License revenue....................... 83.6% 77.3% 79.6% 83.4% 77.5% 76.3% 74.1%
Service and maintenance revenue....... 16.4 22.7 20.4 16.6 22.5 23.7 25.9
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue....................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of license revenue............... 7.7 6.2 5.2 8.3 7.1 5.9 6.3
Cost of service and maintenance
revenue.............................. 10.2 8.3 7.4 7.7 11.3 8.5 8.6
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of revenue............... 17.9 14.5 12.6 16.0 18.4 14.4 14.9
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit........................ 82.1 85.5 87.4 84.0 81.6 85.6 85.1
Operating expenses:
Product development................... 26.5 26.1 32.0 31.4 27.7 25.2 23.1
Sales and marketing................... 45.3 45.5 45.2 45.2 40.1 42.1 43.1
General and administrative............ 14.7 13.3 10.8 12.4 10.7 12.0 10.8
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating expenses............ 86.5 84.9 88.0 89.0 78.5 79.3 77.0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations....... (4.4) 0.6 (0.6) (5.0) 3.1 6.3 8.1
Other income, net....................... 0.3 0.4 0.9 0.2 0.4 1.9 4.9
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes... (4.1) 1.0 0.3 (4.8) 3.5 8.2 13.0
Income tax expense (benefit)............ (2.3) 0.2 0.0 (1.7) 0.9 2.7 4.3
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................... (1.8)% 0.8% 0.3% (3.1)% 2.6% 5.5% 8.7%
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
JUN. 30,
1997
----------
<S> <C>
Revenue:
License revenue....................... $ 5,630
Service and maintenance revenue....... 2,622
----------
Total revenue....................... 8,252
----------
Cost of revenue:
Cost of license revenue............... 482
Cost of service and maintenance
revenue.............................. 872
----------
Total cost of revenue............... 1,354
----------
Gross profit........................ 6,898
----------
Operating expenses:
Product development................... 1,706
Sales and marketing................... 3,648
General and administrative............ 787
----------
Total operating expenses............ 6,141
----------
Income (loss) from operations....... 757
Other income, net....................... 473
----------
Income (loss) before income taxes... 1,230
Income tax expense (benefit)............ 427
----------
Net income (loss)................... $ 803
----------
----------
<S> <C>
Revenue:
License revenue....................... 68.2%
Service and maintenance revenue....... 31.8
----------
Total revenue....................... 100.0
Cost of revenue:
Cost of license revenue............... 5.8
Cost of service and maintenance
revenue.............................. 10.6
----------
Total cost of revenue............... 16.4
----------
Gross profit........................ 83.6
Operating expenses:
Product development................... 20.7
Sales and marketing................... 44.2
General and administrative............ 9.5
----------
Total operating expenses............ 74.4
----------
Income (loss) from operations....... 9.2
Other income, net....................... 5.7
----------
Income (loss) before income taxes... 14.9
Income tax expense (benefit)............ 5.2
----------
Net income (loss)................... 9.7%
----------
----------
</TABLE>
22
<PAGE>
Prior growth rates in the Company's revenue and net income should not be
considered indicative of future operating results. Future operating results will
depend upon many factors, including the demand for the Company's products and
services, 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, changes in
pricing policy by the Company and its competitors, publication of opinions about
the Company, its products and object-oriented technology by industry analysts,
the hiring of new employees, changes in foreign currency exchange rates, product
lifecycles 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
As of June 30, 1997, the Company had cash, cash equivalents short-term
investments of $30.5 million. This was due primarily to the completion of the
Company's initial public offering of Common Stock on November 21, 1996 with net
proceeds of approximately $25.6 million. 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
generated cash flows from operating activities of $6.3 million in the nine
months ended June 30, 1997 as compared with cash used in operations of $243,000
for the nine months ended June 30, 1996. The increase in cash flows from
operations during the nine months ended June 30, 1997 was due primarily to
increases in net income, accrued expenses and deferred revenue.
The Company's primary investing activities have consisted of purchases of
equipment and the acquisition of Precision. 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.
During the nine months ended June 30, 1997, the Company's primary investing
activities consisted of purchases of equipment of $1.6 million and $1.2 million
for the acquisition of Precision.
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 existing sources of liquidity and cash flow will
be adequate to fund its operations through at least the end of 1998.
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
23
<PAGE>
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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS No. 128"), EARNINGS PER SHARE,
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 supersedes Accounting Principles Board Opinion
No. 15 and is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 requires restatement of all prior-period
earnings per share data presented after the effective date. SFAS No. 128 will
not have a material impact on the Company's financial position, results of
operations or cash flows.
24
<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.
To date, Rogue Wave has sold over 50,000 end-user licenses. Rogue Wave
markets its software primarily through its telesales and direct field sales
organization, and to a lesser extent through indirect channel partners. The
Company bundles its Tools.h++ and/or Standard C++ Library products with popular
compilers offered by leading vendors, including 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 3Com, Boeing,
Hewlett-Packard, IBM, MCI, Morgan Stanley, Motorola and Netscape.
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
25
<PAGE>
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.
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, and has more recently introduced a suite of Java-based
software parts and related tools.
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.
26
<PAGE>
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.
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 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.
DEVELOP STRATEGIC PARTNERSHIPS. The Company intends to continue to
establish close relationships with leading technology companies and systems
integrators through technology licensing and joint distribution and marketing
arrangements to promote the widespread acceptance and distribution of Rogue
Wave's products. In particular, the Company recently entered into a joint
marketing agreement with Rational Software under which Rational will embed
references to Rogue Wave products in the Rational Rose product. In addition, the
Company will port key products to the Rational Apex development environment.
This collaboration will enable the introduction of the Company's products to
Rational's customer base. In addition, the Company has signed agreements with
Object Design to provide DBTools.h++ with its ObjectStore development suite and
with HAHT Software to provide DBTools.h++ in their Web development tool.
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 and intends
to continue to leverage its C++ expertise to address the Java marketplace. The
Company's strategy is to continue to focus on the Java language in order to
expand its 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
27
<PAGE>
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
and various versions of UNIX such as Sun Solaris and Hewlett-Packard's HP/UX. 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. In February 1997, the Company expanded its European
operations by acquiring Precision, a distributor of the Company's software
products. The Company also plans to continue to increase its domestic sales
force in order to expand its market presence.
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 View.h++, which is for UNIX only.
28
<PAGE>
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 30% to 50% of the then applicable
list price. Rogue Wave offers multi-user pricing for 25, 50 and 100 users.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
LIST 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 2.2 October 1996 $ 195 $ 390
Tools.h++ 1990 7.0 July 1996 495 790
Threads.h++ 1996 1.1 September 1996 695 1,390
Serialize.h++ 1997 1.0 May 1997 995 1,990
DATABASE
DBTools.h++ 1994 2.2 August 1997* $ 2,490 $ 3,980
Object Factory 1997 1.0 February 1997 1,495 2,990
VISUAL USER INTERFACE
zApp Developers Suite 1994 3.0 July 1996 $ 1,995 $ 4,990
View.h++ 1993 1.3 February 1996 1,995 N/A
MATHEMATICAL
Money.h++ 1994 1.5 October 1995 $ 1,295 $ 2,590
Math.h++ 1989 6.1 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
Inter.Net.h++ 1996 1.0 August 1997* 495 990
JAVA
JFactory 1996 1.1 July 1996 $ 195 $ 390
JMoney 1996 2.0 September 1996 N/A 495
JTools 1996 2.0 July 1996 N/A 495
JWidgets 1996 3.0 September 1996 N/A 395
JChart 1997 2.0 June 1997 N/A 795
JDBTools 1997 2.0 July 1997 N/A 795
</TABLE>
* The Company anticipates release of these products in August 1997.
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
Hewlett-Packard, Microware, Siemens-Nixdorf, Silicon Graphics, Sun Microsystems
and others.
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.
29
<PAGE>
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.
SERIALIZE.H++. Serialize.h++, which is built on top of the Tools.h++
foundation class library, is a C++ class library that allows objects that have
been saved using the Java "serial protocol" to be restored in C++. This allows
objects to be passed back and forth between Java and C++, providing an
interoperability solution between the two languages.
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, Microsoft SQL Server, 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.
OBJECT FACTORY. Object Factory is a development tool that automatically
creates business objects represented in the schemas held in a relational
database, as well as letting users design the visual elements of an application
through a "point and click" interface. Object Factory maps schema information,
stored procedure activation and query results into DBTools.h++ classes. Object
Factory also lets users drag and drop various user elements, such as push
buttons, edit boxes and drop down lists, onto a window, thereby building the
graphical user interface of an application more quickly. Code generation is
controlled through a point-and-click interface, which displays database and
schema information on the screen. Object Factory uses source drivers to control
code generation. Users can edit the source driver files to tailor output to
specific needs. Object Factory is being sold as a value added feature for
DBTools.h++.
VISUAL USER INTERFACE
ZAPP DEVELOPERS SUITE. The zApp Developers Suite consists of four different
products: the zApp Application Framework, Object Factory (described above),
zHelp 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 and various versions of UNIX such as Sun Solaris and Hewlett-Packard's HP/UX.
Users program once to the zApp API and are then able to deploy to any supported
platform with minimal changes. zHelp allows users to design a
platform-independent "Help" system. 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.
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.
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.
30
<PAGE>
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.
INTER.NET.H++. Inter.Net.h++, which is built on top of Net.h++, Threads.h++
and Tools.h++, is a C++ library that allows users to add FTP, HTTP, SMTP and
POP3 capabilities to C++ client applications in a platform independent manner.
It also automatically creates threads for users, increasing application
performance and responsiveness.
JAVA
JFACTORY. JFactory generates Java calls to the Abstract Windowing Toolkit
(from Sun Microsystems). 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. It also includes a Java version of Rogue Wave's proprietary
"virtual streams" persistence protocol, which allows users to save objects in
C++ and then restore them in Java. This provides a C++/Java interoperability
solution, similar to Serialize.h++.
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.
JCHART. JChart is a Java class library that allows programmers to
incorporate customizable, dynamic charts in Java applets and applications.
Possible chart types include: multi-row, multi-column and stacked bar charts;
multi-row and stacked area charts; and line, pie and scatter-plot charts. A
flexible set of properties gives programmers control over styles, color, font
size and types, scaling factors, titles, background patterns, axis labels and
legends.
JDBTOOLS. JDBTools is a Java class library that is similar to the
DBTools.h++ C++ class library. It provides a common, object-oriented interface
to relational databases. Applications can be written once to the JDBTools API
and then deployed to any of the supported databases, regardless of the
differences in data structures and function calls between the different
databases. JDBTools provides for flexible connection management, including
connection pools and named connections. Just-in-time binding enhances
performance, because implementations are created only when it comes time to
execute the object.
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 June 30, 1997.
31
<PAGE>
TELECOMMUNICATIONS
- ----------------------------------------
Ameritech Corporation
AT&T
Bell Atlantic
BellSouth Telecommunications
DSC Communications
LDDS WorldCom
Lucent Technologies
MCI
Motorola
Singapore Telecom
INFORMATION SYSTEMS/SOFTWARE
- ----------------------------------------
Asymetrix
EDS
Harbinger Net Services
Netscape
Oracle
Objective Systems Integrators
Spyglass
FINANCIAL INSTITUTIONS
- ----------------------------------------
Bank of America
Fidelity Investments
Goldman Sachs
Homeside Lending
JP Morgan
Morgan Stanley
Nationwide Insurance
The Options Clearing Corporation
Salomon Brothers
INDUSTRIAL, CONSUMER & OTHER
- ----------------------------------------
Boeing
Chevron
Chrysler
Lockheed Martin
NASA
Pinkerton Security
SAIC
COMPUTER/ELECTRONICS
- ----------------------------------------
3Com
ADP
Harris Corporation
IBM Canada
TRANSPORTATION
- ----------------------------------------
Sabre Decision Technologies
VARS AND OEMS
- ----------------------------------------
Hewlett-Packard
Object Design
Rational Software
Silicon Graphics
SYSTEMS INTEGRATORS
- ----------------------------------------
American Management Systems
Carnegie Group
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 June 30, 1997, the Company's sales and
marketing organization consisted of 95 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 June 30, 1997, the Company employed 35 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. As of June 30, 1997, the Company employed
five domestic direct field sales representatives supported by three technical
sales representatives. The Company's domestic 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.
The Company's international channel development efforts have initially
focused on Europe. The Company established a German sales and support office in
January 1996 and acquired Precision, a European distributor with offices in
Germany, the United Kingdom, France and the Benelux countries, in February 1997.
As of June 30, 1997, the Company's European sales, support and consulting
organization consisted of 31 individuals. The Company maintains European sales
and support offices in Germany, the United Kingdom, France and the Netherlands.
STRATEGIC PARTNERSHIPS. The Company has recently begun to establish
strategic partnerships with leading technology companies and systems integrators
through technology licensing agreements and joint distribution and marketing
arrangements. In addition, the Company offers all of its products for sale and
distribution through its Web site. Telesales representatives utilize this
channel to fulfill certain orders, increasing their productivity.
32
<PAGE>
ORIGINAL EQUIPMENT MANUFACTURERS AND VALUE ADDED RESELLERS. The Company's
foundation products are bundled with many leading C++ compilers and distributed
by major OEMs and VARs. Although this use of OEMs and VARs does not contribute
significantly to the Company's revenue, it does further the Company's "Tools.h++
Everywhere" strategy by increasing the exposure of C++ users to the Company's
products and providing name recognition for the Company.
The Company's marketing efforts are directed at broadening the market for
its products by increasing awareness among corporate programmers and chief
information officers. In support of its sales efforts, the Company's marketing
department conducts comprehensive programs that include advertising, direct
mail, public relations, trade shows, seminars and ongoing customer
communications programs. The Company also keeps its customers informed of
advances in the field through technical papers and other mailings. The Company
maintains a Web site on the Internet that provides Company and product
information and handles sales and distribution for its products.
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.
In April 1997, the Company established a consulting services group in
Boulder, Colorado to provide services to the Company's Fortune 1000 customers.
As of June 30, 1997, the Company's domestic consulting group consisted of 15
employees.
PRODUCT DEVELOPMENT
As of June 30, 1997, there were 65 employees on the Company's product
development staff. The Company's product development expenditures in fiscal
1994, 1995 and 1996 and the nine months ended June 30, 1997 were $2.1 million,
$3.2 million, $5.5 million and $4.8 million, respectively, and represented
29.3%, 26.8%, 29.4% and 22.7% 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
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 adopted ClearCase from Pure Atria Software for configuration
management. The Company performs synchronization between development sites using
the ClearCase "Remote Site" option. In addition, the Company uses Purify and
Quantify from Pure Atria 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.
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.
33
<PAGE>
C++ PRODUCTS. Rogue Wave is continuing to expand and enhance its catalogue
of C++ class libraries and related development tools. 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 new versions of Tools.h++.
JAVA PRODUCTS. The Company is working to solidify its place as a leader in
the newly developing Java tools market by developing additional products for
Java. Unlike C++, Java comes with a functional set of low-level class libraries.
Accordingly, the Company has chosen to focus on higher-value components. In
particular, the Company is developing software to allow its customers to write
multi-tiered applications in Java, as well as to write high-performance highly
concurrent applications in Java, using software parts.
The Company has developed technology relating to the collection and
verification of data across the Internet. The Company intends to contribute such
technology, and to make a funding commitment of up to $2.0 million over the next
six to 18 months, to a majority-owned subsidiary for further development and
possible commercialization of this technology. The Company will have the option
to purchase the minority interest of the subsidiary during a specified time
period in the future. Dan Whitaker, the Company's former Executive Vice
President, Marketing resigned his office and his position on the Company's Board
of Directors to devote full time to the management of this subsidiary, but has
agreed to serve as a consultant to the Company through July 1998.
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.
34
<PAGE>
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, to a
lesser extent, at the emerging Java market. The Company's competitors offer a
variety of products and services to address these markets. 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 in the
C++ market include Microsoft (with its MFC), IBM, ILOG and several privately
held companies. Microsoft is a particularly strong competitor due to its large
installed base and the fact that it bundles its MFC library with its own and
other C++ compilers. Microsoft may decide in the future to devote more resources
to or broaden the functions of MFC in order to address and more effectively
compete with the functionality of the Company's products. The Company faces
direct competition in the Java market from Borland, JavaSoft (a business unit of
Sun Microsystems), Microsoft, Sybase, 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. Software applications can also be developed using software parts and
programming tools in environments other than C++ or Java. Indirect competitors
with such offerings include Microsoft (with its ActiveX technology), 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.
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.
35
<PAGE>
EMPLOYEES
As of June 30, 1997, the Company had a total of 237 employees, of which 206
were based in the United States and 31 were based in Europe. Of the total, 91
were in sales and marketing, 65 were in product development, 26 were in customer
support, 19 were in consulting services, and 36 were in finance, administration
and operations. The Company's future performance depends in significant part
upon the continued service of its key technical, sales and senior management
personnel, none of whom is bound by an employment agreement. The loss of the
services of one or more of the Company's key employees could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's future success also depends on its continuing ability
to attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key technical, sales and managerial
personnel in the future. The Company has not experienced any work stoppages and
considers relations with its employees to be good.
FACILITIES
The Company's principal administrative, sales, marketing, support,
consulting and product development offices are located in facilities consisting
of approximately 69,000 square feet in Corvallis, Oregon, 13,000 square feet in
Mountain View, California and 18,000 square feet in Boulder, Colorado. The
leases on the Corvallis facilities expire on various dates from 1998 through
2001, the lease on the Mountain View facility expires in 1999 and the lease on
the existing Boulder facility expires in 2000. The Company is currently seeking
additional space in Boulder in anticipation of the planned move of its
administrative operations to Boulder. The Company currently leases other
domestic sales, development and support offices in, New York and North Carolina.
The Company also rents space on a month-to-month basis for its international
office in Europe. Note 4 of Notes to Consolidated 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.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of
July 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------------- --- ------------------------------------
<S> <C> <C>
Thomas Keffer, Ph.D. 45 President, Chief Executive Officer
(1)...................... and Chairman of the Board of
Directors
Michael Scally............ 46 Chief Operating Officer
Robert M. Holburn, Jr..... 50 Chief Financial Officer and
Secretary
Michael A. Foreman........ 46 Vice President, Development
Thomas M. Atwood.......... 48 Director
Louis C. Cole............. 53 Director
Richard P. Magnuson 41 Director
(1)(2)...................
Thomas H. Peterson 41 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.
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.
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.
THOMAS M. ATWOOD has been a director of the Company since October 1994. From
June 1996 until June 1997, Mr. Atwood was 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.
LOUIS C. COLE has been a director of the Company since July 1997. Mr. Cole
is currently the President, Chief Executive Officer and Chairman of the Board of
Legato Systems, Inc., a network storage management software company. Prior to
that, from March 1987 until July 1988, Mr. Cole served as Executive Vice
President of Novell, Inc., a manufacturer of computer networking equipment and
software.
37
<PAGE>
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 seven directors. The current directors
were elected or appointed pursuant to the provisions of the Company's
Certificate of Incorporation and Bylaws. Each director holds office until the
next annual meeting of stockholders or until a successor is duly elected and
qualified. The Company's officers serve at the discretion of the Board of
Directors.
COMMITTEES
The Audit Committee consists of Mr. Magnuson and Mr. Peterson. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by the Company's independent auditors and reviews
and evaluates the Company's audit and control functions.
The Compensation Committee consists of Dr. Keffer, Mr. Magnuson and Mr.
Peterson. The Compensation Committee makes recommendations regarding the
Company's 1996 Equity Incentive Plan and Employee Stock Purchase Plan and makes
decisions concerning salaries and incentive compensation for employees and
consultants of the Company.
DIRECTORS' COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at Board and
committee meetings. In November 1996, Messrs. Atwood, Magnuson and Peterson were
each granted an option to purchase 10,000 shares of the Company's Common Stock
at an exercise price of $12.00 per share. In July 1997, Mr. Cole was granted an
option to purchase 10,000 shares of the Company's Common Stock at an exercise
price of $12.50 per share. Each such grant was made pursuant to 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.
38
<PAGE>
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 (2).......................................... 120,000 -- --
Former Executive Vice President, Marketing and Director
Robert M. Holburn, Jr..................................... 105,000 26,666 --
Chief Financial Officer and Secretary
Thomas A. Nora (3)........................................ 101,844 -- $ 43,052(4)
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. Whitaker served as the Company's Executive Vice President, Marketing
from January 1992 through July 1997.
(3) Mr. Nora served as the Company's Vice President of Sales from March 1994
until July 1996.
(4) 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
was 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 person who becomes a non-employee director will automatically be granted an
option to purchase 10,000 shares of Common Stock on the date of his or her
election to the Board. Such options will vest in 36 equal monthly installments.
Following each annual meeting of the Company's stockholders occuring after
September 30, 1997, each non-employee director who has continuously served as a
non-employee director since the last annual meeting will be granted an option to
purchase 3,500 shares of Common Stock, and each other person who 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.
39
<PAGE>
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 June 30, 1997, 373,731 shares of Common Stock had been issued upon the
exercise of options granted under the Equity Incentive Plan, options to purchase
2,061,150 shares of Common Stock at a weighted average exercise price of $5.85
were outstanding and 565,119 shares remained available for future grant. The
Equity Incentive Plan will terminate in June 2006 unless sooner terminated by
the Board of Directors.
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 was
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
40
<PAGE>
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. The initial offering period
commenced on November 21, 1996, the effective date of the Company's initial
public offering, and will terminate on January 31, 1999.
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.
41
<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 1997) 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 is
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.
42
<PAGE>
The Company has entered 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 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.
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.
In June 1996, the Board of Directors amended the terms of the stock option
held by Mr. Holburn, the Chief Financial Officer of the Company, to provide
that, upon a change in control of the Company, 50% of the unvested options of
Mr. Holburn would become immediately vested. The stock option was amended to
make it 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.
43
<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 June 30,
1997, 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. 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....................................... 1,487,450 19.3% 145,190 1,342,260 17.0%
Thomas H. Peterson (3).................................... 997,487 12.9 300,000 697,487 8.8
Entities affiliated with El Dorado Ventures III, 994,987 12.9 300,000 694,987 8.8
L.P. (4).................................................
851 Fremont Avenue
Suite 112
Los Altos, CA 94024
Dan Whitaker (5).......................................... 602,996 7.6 550,000 52,996 *
Entities affiliated with Menlo Ventures VI, L.P. (6)...... 534,810 6.9 534,810 -- --
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Howard M. Love, Jr. (7)................................... 287,926 3.7 150,000 137,926 1.7
Kevin Gartner (8)......................................... 233,958 3.0 45,000 188,958 2.4
Allan Vermeulen (9)....................................... 136,155 1.8 20,000 116,155 1.5
Michael Scally (10)....................................... 83,885 1.1 20,000 63,885 *
Robert M. Holburn, Jr. (11)............................... 50,416 * 20,000 30,416 *
Peter Handsman (12)....................................... 36,918 * 10,000 26,918 *
Thomas M. Atwood (13)..................................... 11,944 * -- 11,944 *
Richard P. Magnuson (14).................................. 9,166 * -- 9,166 *
Louis C. Cole............................................. -- -- -- -- --
All directors and executive officers as a group (8
persons) (15)............................................ 2,640,348 33.6 485,190 2,155,158 26.8
</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 7,710,063 shares of Common
Stock outstanding as of June 30, 1997 and 7,915,063 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
300,000 shares of Common Stock of the Company, and 8,060,063 shares of
Common Stock will be outstanding after the completion of this offering.
Specifically, (i) the Company will sell 145,000 shares, (ii) Kevin Gartner
will sell 100,000 shares and will beneficially own 88,958 shares, or 1.1% of
the Company's
44
<PAGE>
Common Stock, after the offering, (iii) Allan Vermeulen will sell 30,000
shares and will beneficially own 86,155 shares, or 1.1% of the Company's
Common Stock, after the offering and (iv) Thomas Keffer will sell 25,000
shares and will beneficially own 1,317,260 shares, or 16.3% of the Company's
Common Stock, after the offering.
(3) Includes all shares held by entities affiliated with El Dorado Ventures
III, L.P. ("El Dorado III"). Mr. Peterson, a director of the Company, is a
general partner of 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. Also includes
2,500 shares subject to stock options exercisable within 60 days of June 30,
1997.
(4) Represents 945,750 shares held by El Dorado III, 31,724 shares held by El
Dorado Technology IV, L.P., and 17,513 shares held by El Dorado C&L Fund,
L.P. Of these shares, 285,155 shares are being sold by El Dorado III, L.P.,
9,565 shares are being sold by El Dorado Technology IV, L.P. and 5,280
shares are being sold 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.
(5) Includes 300,000 shares held by the Whitaker Family Limited Partnership, of
which Mr. Whitaker is a general partner, and 214,163 shares subject to stock
options exercisable within 60 days of June 30, 1997. Mr. Whitaker is a
former director and former Executive Vice President, Marketing of the
Company.
(6) Represents 525,708 shares held by Menlo Ventures VI and 9,102 shares held
by Menlo Entrepreneurs Fund VI, L.P.
(7) Includes 2,500 shares subject to stock options exercisable within 60 days
of June 30, 1997. Mr. Love is a former director of the Company.
(8) Includes 58,667 shares subject to stock options exercisable within 60 days
of June 30, 1997. Mr. Gartner is a Company employee.
(9) Includes 44,929 shares subject to stock options exercisable within 60 days
of June 30, 1997. Mr. Vermeulen is the Company's Chief Technical Officer.
(10) Includes 83,885 shares subject to stock options exercisable within 60 days
of June 30, 1997.
(11) Includes 40,416 shares subject to stock options exercisable within 60 days
of June 30, 1997.
(12) Includes 26,236 shares subject to stock options exerciable within 60 days
of June 30, 1997. Mr. Handsman is an employee of the Company.
(13) Represents 11,944 shares subject to stock options exercisable within 60
days of June 30, 1997.
(14) Represents 6,666 shares held by Richard P. and Amy C. Magnuson, Trustees of
the Magnuson Revocable Trust dated 1/14/94 and 2,500 shares subject to stock
options exercisable within 60 days of June 30, 1997. Does not include
525,708 shares held by Menlo Ventures VI and 9,102 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.
(15) Includes 141,245 shares subject to stock options exercisable within 60 days
of June 30, 1997.
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.
The authorized capital stock of the Company consists of 35,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value. As of June 30, 1997, there were approximately 141 holders of record
of the Company's Common and Preferred Stock.
45
<PAGE>
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 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 Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 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 2,266,920 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 November 21, 2004.
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 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
46
<PAGE>
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. is the transfer agent and registrar
for the Company's Common Stock. Its telephone number is (206) 292-3696.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have outstanding an
aggregate of 7,915,063 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 June 30, 1997. Of these
shares, all of the shares sold in this offering and approximately 3,847,179
additional shares already outstanding will be freely tradable without
restriction or further registration under the Securities Act (unless such shares
are subject to an agreement not to sell described below). The remaining
2,067,884 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.
Upon completion of this offering, the holders of 2,266,920 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 2,412,194 shares of Common Stock after the offering, have agreed,
subject to certain limited exceptions, 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
90-day period commencing on the date of this Prospectus.
The Company has filed a registration statement under the Securities Act to
register shares of Common Stock reserved for issuance under the Option Plan and
the Directors Plan, thus permitting the resale of such shares by non-affiliates
and by affiliates, subject to Rule 144 volume limitations applicable thereto, in
the public market without restriction under the Securities Act.
48
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Cowen & Company 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.............................................................
Cowen & Company...................................................................
Wessels, Arnold & Henderson, L.L.C................................................
----------
Total....................................................................... 2,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the 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
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 300,000 additional shares of Common Stock at the 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 certain of 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 each of WA & H Investments, L.L.C. ("WA & H"), an
entity affiliated with Wessels, Arnold & Henderson, L.L.C., and Ronald Pillar, a
Vice President at Cowen & Company, for aggregate cash consideration of
approximately $200,000. In January 1996, certain officers of the Company sold an
aggregate of 251,573 shares of Common Stock for an aggregate consideration of
approximately $1.0 million. In connection with such sale, certain officers of
the Company sold 7,125 shares of Common Stock to each of WA & H and Mr. Pillar
for aggregate cash consideration of approximately $56,000. 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
converted into one share of Common Stock upon the closing of the Company's
initial public offering.
49
<PAGE>
The Company, the Selling Stockholders and certain other stockholders of the
Company, including the executive officers and directors, who will own in the
aggregate 2,412,194 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 90-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.
Certain persons participating in this offering may overallot or effect
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those that might otherwise prevail in the open
market, including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. 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.
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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facility maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60621. Copies of such material can be obtained in person at
prescribed rates from the Public Reference Section of the Commission at its
principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information filed with the
Commission. The address of the site is http://www.sec.gov. The Common Stock of
the Company is quoted on the Nasdaq National Market. Reports and other
information concerning the Company may be inspected at the National Association
of Securities Dealers, Inc. located at 1735 K Street, N.W., Washington, D.C.
20006.
50
<PAGE>
This Prospectus, which constitutes a part of a Registration Statement on
Form S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), omits certain of the
information set forth in the Registration Statement in accordance with the rules
and regulations of the Commission. Reference is hereby made to the Registration
Statement and to the exhibits thereto for further information with respect to
the Company and the securities offered hereby. Copies of the Registration
Statement and the exhibits thereto are on file at the offices of the Commission
and may be obtained upon payment of the prescribed fee or may be examined
without charge at the public reference facilities of the Commission described
above.
51
<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,
-------------------- JUNE 30,
ASSETS 1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 1,010 $ 1,714 $ 5,082
Short-term investments......................................... -- -- 25,458
Accounts receivable, net....................................... 2,164 4,527 5,164
Prepaid expenses and other current assets...................... 212 873 600
Deferred income taxes.......................................... 80 108 307
--------- --------- -----------
Total current assets......................................... 3,466 7,222 36,611
Furniture, fixtures and equipment, net........................... 889 2,718 3,395
Other noncurrent assets, net..................................... 403 254 2,169
--------- --------- -----------
Total assets................................................. $ 4,758 $ 10,194 $ 42,175
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... 520 637 600
Accrued expenses............................................... 668 805 3,411
Deferred revenue............................................... 1,351 2,881 4,977
Current portion of long-term obligations....................... 230 217 242
--------- --------- -----------
Total current liabilities.................................... 2,769 4,540 9,230
Long-term obligations, less current portion...................... 230 322 370
--------- --------- -----------
Total liabilities............................................ 2,999 4,862 9,600
--------- --------- -----------
Commitments and contingencies
Mandatorily redeemable preferred stock, $.001 par value.
Authorized 1,200, 2,350 and zero shares at September 30, 1995
and 1996 and June 30, 1997, respectively; issued and outstanding
800, 1,543 and zero shares at September 30, 1995 and 1996 and
June 30, 1997, respectively ($1,200, $4,731 and zero aggregate
liquidation and redemption preference at September 30, 1995 and
1996 and June 30, 1997, respectively)........................... 1,140 4,664 --
--------- --------- -----------
Stockholders' equity:
Common stock, $.001 par value. Authorized 35,000 shares; issued
and outstanding 3,425, 3,655 and 7,710 shares at September 30,
1995 and 1996 and June 30, 1997, respectively................. 3 4 8
Additional paid-in capital..................................... 640 676 30,823
Stockholder note receivable.................................... (13) (13) --
Retained earnings (deficit).................................... (11) 24 1,752
Cumulative translation adjustment.............................. -- (23) (8)
--------- --------- -----------
Total stockholders' equity................................... 619 668 32,575
--------- --------- -----------
Total liabilities and stockholders' equity................... $ 4,758 $ 10,194 $ 42,175
--------- --------- -----------
--------- --------- -----------
</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>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
License revenue................................ $ 6,652 $ 10,417 $ 14,986 $ 10,605 $ 15,240
Service and maintenance revenue................ 557 1,520 3,859 2,587 5,803
--------- --------- --------- --------- ---------
Total revenue................................ 7,209 11,937 18,845 13,192 21,043
--------- --------- --------- --------- ---------
Cost of revenue:
Cost of license revenue........................ 693 1,048 1,276 873 1,262
Cost of service and maintenance revenue........ 331 1,123 1,663 1,025 1,969
--------- --------- --------- --------- ---------
Total cost of revenue........................ 1,024 2,171 2,939 1,898 3,231
--------- --------- --------- --------- ---------
Gross profit................................. 6,185 9,766 15,906 11,294 17,812
--------- --------- --------- --------- ---------
Operating expenses:
Product development............................ 2,109 3,204 5,548 3,984 4,782
Sales and marketing............................ 2,652 4,880 8,234 5,969 9,103
General and administrative..................... 780 1,487 2,204 1,596 2,241
--------- --------- --------- --------- ---------
Total operating expenses..................... 5,541 9,571 15,986 11,549 16,126
--------- --------- --------- --------- ---------
Income (loss) from operations................ 644 195 (80) (255) 1,686
Other income (expense), net...................... 4 (10) 91 68 925
--------- --------- --------- --------- ---------
Income (loss) before income taxes............ 648 185 11 (187) 2,611
Income tax expense (benefit)..................... 80 106 (24) (73) 883
--------- --------- --------- --------- ---------
Net income (loss)............................ $ 568 $ 79 $ 35 $ (114) $ 1,728
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per common share............... $ 0.14 $ 0.02 $ 0.01 $ (0.03) $ 0.21
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in per share calculation............. 4,154 5,009 6,045 4,088 8,348
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
Issuance of common stock, net
(unaudited)............................ 3,910 4 30,010 -- -- -- 30,014
Exercise of stock options (unaudited)... 145 -- 137 -- -- -- 137
Net income (unaudited).................. -- -- -- -- 1,728 -- 1,728
Payment on shareholder note receivable
(unaudited)............................ -- -- -- 13 -- -- 13
Foreign currency translation adjustment
(unaudited)............................ -- -- -- -- -- 15 15
------ ------ ---------- ----------- --------- ----------- -------------
Balance at June 30, 1997 (unaudited).... 7,710 $ 8 $30,823 $ -- $ 1,752 $ (8) 3$2,575
------ ------ ---------- ----------- --------- ----------- -------------
------ ------ ---------- ----------- --------- ----------- -------------
</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>
NINE MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 568 $ 79 $ 35 $ (114) $ 1,728
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization...................... 266 514 807 577 1,236
Loss on disposal of equipment...................... -- 23 -- -- --
Changes in assets and liabilities:
Accounts receivable.............................. (618) (1,115) (2,385) (1,171) 416
Prepaid expenses and other current assets........ (105) (54) (661) (405) 471
Deferred income taxes............................ -- (80) (28) (76) (199)
Other noncurrent assets.......................... (54) (16) (72) (146) (223)
Accounts payable and accrued expenses............ 610 440 254 234 1,432
Deferred revenue................................. 462 702 1,530 858 1,405
--------- --------- --------- --------- ---------
Net cash from operating activities............. 1,129 493 (520) (243) 6,266
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of furniture, fixtures and equipment........ (368) (326) (2,040) (1,590) (1,559)
(Purchase) maturity of short-term investments........ (344) 344 -- -- (25,458)
Payments for software rights......................... (174) -- -- -- --
Purchase of business net of cash acquired............ -- -- -- -- (1,245)
--------- --------- --------- --------- ---------
Net cash from investing activities............. (886) 18 (2,040) (1,590) (28,262)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Payments on long-term obligations.................... (162) (313) (296) (121) (140)
Dividends paid....................................... (500) -- -- -- --
Net proceeds from issuance of mandatorily redeemable
preferred stock..................................... 941 199 3,524 3,524 --
Net proceeds from issuance of common stock........... 11 4 -- -- 25,380
Payment on shareholder note receivable............... -- -- -- -- 13
Proceeds from exercise of stock options.............. -- -- 37 35 107
--------- --------- --------- --------- ---------
Net cash from financing activities............. 290 (110) 3,265 3,438 25,360
--------- --------- --------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents........................................... -- -- (1) (4) 4
--------- --------- --------- --------- ---------
Net change in cash and cash equivalents........ 533 401 704 1,601 3,368
Cash and cash equivalents at beginning of period....... 76 609 1,010 1,010 1,714
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period............. $ 609 $ 1,010 $ 1,714 $ 2,611 $ 5,082
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid for interest............................... $ 9 $ 53 $ 37 $ 36 $ 31
Cash paid for taxes.................................. 18 258 106 63 10
Supplemental disclosure of non-cash investing and
financing activities:
Acquisition of equipment financed by capital lease
obligations......................................... 46 346 375 375 --
Purchase of software rights financed by long-term
debt................................................ 445 -- -- -- --
Common stock issued for conversion of mandatorily
redeemable preferred stock.......................... -- -- -- -- 4,663
</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)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(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. 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.
SHORT-TERM INVESTMENTS (UNAUDITED)
Short-term investments consist primarily of commercial paper with acquired
maturities of 180 days or less. The carrying amount of short-term investments is
the cost plus interest earned as of June 30, 1997, which approximates market
value.
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, a covenant not to
compete and goodwill, which are amortized over estimated useful lives of three
to five years using the straight-line method. Original cost of these intangibles
was $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.
F-7
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
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
F-8
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
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.
F-9
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(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.
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.
F-10
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(4) LEASES (CONTINUED)
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>
(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
F-11
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(6) INCOME TAXES (CONTINUED)
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>
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>
F-12
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(6) INCOME TAXES (CONTINUED)
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.
(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
F-13
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(7) PREFERRED STOCK (CONTINUED)
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 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.
F-14
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(8) EQUITY INCENTIVE PLAN (CONTINUED)
The following table summarizes stock option activity through June 30, 1997:
<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
Granted...................................... 395 445 840 7.50-23.50
Exercised.................................... (139) (5) (144) .15-7.50
Canceled..................................... (85) -- (85) .15-15.50
--------- ----- ----- ---------------
Outstanding options at June 30, 1997......... 1,495 566 2,061 $ .15-23.50
--------- ----- ----- ---------------
--------- ----- ----- ---------------
</TABLE>
Of the 1,450 options outstanding at September 30, 1996, 446 options were
vested and exercisable. Of the 2,061 options outstanding as of June 30, 1997,
638 options were vested and exercisable.
(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.
F-15
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE NINE-MONTH PERIOD THEN ENDED IS
UNAUDITED)
(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).
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.
The secured equipment term loan was retired in December 1996 shortly after
the Company completed an initial public offering of Common Stock with net
proceeds of $25.6 million (unaudited).
In February 1997, the Company expanded its European operations by acquiring
PVI Precision Software GmbH, a distributor of the Company's software products in
Germany, the United Kingdom, France and the Benelux countries, for $1.2 million
in a transaction accounted for as a purchase (unaudited).
F-16
<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
Price Range of Common Stock.......................... 13
Dividend Policy...................................... 13
Capitalization....................................... 14
Selected Consolidated Financial Data................. 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 17
Business............................................. 24
Management........................................... 36
Certain Transactions................................. 42
Principal and Selling Stockholders................... 44
Description of Capital Stock......................... 45
Shares Eligible for Future Sale...................... 47
Underwriting......................................... 49
Legal Matters........................................ 50
Experts.............................................. 50
Available Information................................ 50
Index to Consolidated Financial Statements........... F-1
</TABLE>
2,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
COWEN & COMPANY
WESSELS, ARNOLD & HENDERSON
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. 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 ................................................. $ 8,015
NASD filing fee................................................... 3,145
Nasdaq application fee............................................ 17,500
Blue sky and NASD expenses........................................ 10,000
Printing and engraving expenses................................... 100,000
Legal fees and expenses........................................... 90,000
Accounting fees and expenses...................................... 40,000
Transfer agent and registrar fees................................. 5,000
Miscellaneous..................................................... 26,340
---------
Total......................................................... $ 300,000
---------
---------
</TABLE>
ITEM 14. 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.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 30, 1994, 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 Equity Incentive 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 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
+2.1 Agreement and Plan of Reorganization between Registrant, Inmark Development Corporation and RW
Acquisition, Inc., dated as of September 19, 1995.
+2.2 Agreement and Plan of Merger between the Registrant and Rogue Wave Software, Inc., an Oregon
corporation, dated as of November 21, 1996.
+3.2 Amended and Restated Certificate of Incorporation of the Registrant.
+3.3 Bylaws of the Registrant.
+4.1 Reference is made to Exhibits 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 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. Reference is made to page II-5.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+Incorporated by reference to an exhibit bearing the same number in the
Registrant's Registration Statement on Form SB-2 (No. 333-13517).
* To be filed by amendment.
(b) Financial Statement Schedules
All schedules are omitted because they are not required, are not
applicable, or the information is included in the financial
statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
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 14 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
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Corvallis, State of
Oregon, on the 31st day of July, 1997.
ROGUE WAVE SOFTWARE, INC.
By:_________/s/_THOMAS KEFFER_________
Thomas Keffer
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Thomas
Keffer and Robert M. Holburn, Jr., his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments (including post-effective amendments) to the Registration
Statement on Form S-1, and to any registration statement filed under Securities
and Exchange Commission Rule 462, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
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 July 31, 1997
Thomas Keffer (PRINCIPAL EXECUTIVE OFFICER)
/s/ROBERT M. HOLBURN, JR. Chief Financial Officer and Secretary
--------------------------------- (PRINCIPAL FINANCIAL AND ACCOUNTING July 31, 1997
Robert M. Holburn, Jr. OFFICER)
/s/THOMAS M. ATWOOD
--------------------------------- Director July 31, 1997
Thomas M. Atwood
/s/LOUIS C. COLE
--------------------------------- Director July 31, 1997
Louis C. Cole
/s/RICHARD P. MAGNUSON
--------------------------------- Director July 31, 1997
Richard P. Magnuson
/s/THOMAS H. PETERSON
--------------------------------- Director July 31, 1997
Thomas H. Peterson
</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
July 31, 1997
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
+2.1 Agreement and Plan of Reorganization between Registrant, Inmark Development Corporation and RW
Acquisition, Inc., dated as of September 19, 1995.
+2.2 Agreement and Plan of Merger between the Registrant and Rogue Wave Software, Inc., an Oregon
corporation, dated as of November 21, 1996.
+3.2 Amended and Restated Certificate of Incorporation of the Registrant.
+3.3 Bylaws of the Registrant.
+4.1 Reference is made to Exhibits 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 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 (reference is made to page II-5).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+Incorporated by reference to an exhibit bearing the same number in the
Registrant's Registration Statement on Form SB-2 (No. 333-13517).
* To be filed by amendment.
<PAGE>
[LETTERHEAD]
August 1, 1997
Rogue Wave Software, Inc.
850 SW 35th Street
Corvallis, OR 97333
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Rogue Wave Software, Inc. (the "Company") of a
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission (the "Commission"), including a prospectus
to be filed with the Commission pursuant to Rule 424(b) of Regulation C
promulgated under the Securities Act of 1933, as amended (the "Prospectus"),
and the underwritten public offering of up to 2,300,000 (including 300,000
shares of Common Stock for which the underwriters have been granted an
over-allotment option) shares of the Company's common stock (the "Common
Stock").
In connection with this opinion, we have (i) examined and relied upon the
Registration Statement and related Prospectus, the Company's Certificate of
Incorporation and Bylaws, as amended, and the originals or copies certified
to our satisfaction of such records, documents, certificates, memoranda and
other instruments as in our judgment are necessary or appropriate to enable
to render the opinion expressed below and (ii) assumed that the shares of the
Common Stock will be sold by the underwriters at a price established by the
Pricing Committee of the Board of Directors of the Company.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Common Stock, when sold and issued in accordance with the
Registration Statement and related Prospectus, will be validly issued, fully
paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters" in
the Prospectus included in the Registration Statement and to the filing of
this opinion as an exhibit to the Registration Statement.
Yours very truly,
COOLEY GODWARD LLP
By: /s/ Mark P. Tanoury
------------------------------------
Mark P. Tanoury
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-1 FILED WITH THE SEC ON
AUGUST 1, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 5,082
<SECURITIES> 25,458
<RECEIVABLES> 5,602
<ALLOWANCES> 438
<INVENTORY> 181
<CURRENT-ASSETS> 36,611
<PP&E> 5,492
<DEPRECIATION> 2,097
<TOTAL-ASSETS> 42,175
<CURRENT-LIABILITIES> 9,230
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 32,567
<TOTAL-LIABILITY-AND-EQUITY> 42,175
<SALES> 21,043
<TOTAL-REVENUES> 21,043
<CGS> 3,231
<TOTAL-COSTS> 3,231
<OTHER-EXPENSES> 16,126
<LOSS-PROVISION> 78
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 2,611
<INCOME-TAX> 883
<INCOME-CONTINUING> 1,728
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,728
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
