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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-28900
ROGUE WAVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-1064214
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5500 Flatiron Parkway, Boulder, Colorado 80301
(Address of principal executive offices) (Zip code)
(303) 473-9118
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of October 31, 2000, there were 10,909,166 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was approximately $54,545,830 based upon the closing price of
the Common Stock on October 31, 2000 on the NASDAQ National Market System.
Shares of Common Stock held by each officer, director and holder of five percent
or more of the Common Stock outstanding as of October 31, 2000 have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for Registrant's 2000 Annual Meeting
of Stockholders to be held on January 18, 2001, are incorporated by reference in
Part III of this Form 10-K.
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FORM 10-K
INDEX
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PART I..................................................................................... Page 2
Item 1. Business....................................................................... Page 2
Item 2. Properties..................................................................... Page 13
Item 3. Legal Proceedings.............................................................. Page 13
Item 4. Submission of Matters to a Vote of Security Holders............................ Page 13
PART II.................................................................................... Page 14
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters....... Page 14
Item 6. Selected Consolidated Financial Data........................................... Page 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... Page 16
Item 7A Quantitative and Qualitative Disclosures about Market Risk..................... Page 21
Item 8. Consolidated Financial Statements and Supplementary Data....................... Page 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................... Page 21
PART III................................................................................... Page 22
Item 10. Directors and Executive Officers of the Registrant............................. Page 22
Item 11. Executive Compensation......................................................... Page 22
Item 12. Security Ownership of Certain Beneficial Owners and Management................. Page 22
Item 13. Certain Relationships and Related Transactions................................. Page 22
PART IV.................................................................................... Page 23
Item 14. Exhibits, Consolidated Financial Statements, Schedules, and Reports on Form 8-K Page 23
SIGNATURES................................................................................. Page 24
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PART I
ITEM 1. BUSINESS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
risks and uncertainties posed by many factors and events that could cause the
Company's actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed herein as well as those discussed under the captions
"risk factors" and "management's discussion and analysis of financial condition
and results of operations" as well as those discussed elsewhere in this Form 10-
K. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
Overview
Rogue Wave Software Inc. ("Rogue Wave" or the "Company") is a leading
provider of object-oriented software solutions, including component technology,
upon which customers around the world build enterprise systems. The Company
offers C++ components for building distributed enterprise, Intranet and Internet
applications, which scale, honor legacy investments, and are highly
customizable. Rogue Wave's products, which allow customers to build business
software solutions in a more expeditious manner, are designed to be general
purpose in nature, supporting both back-end and user interface development. The
Company's products also provide customers with proven object-oriented frameworks
and development services so that they can realize better performance,
reliability and maintainability as well as apply the principles of software
reuse in their own development efforts.
Rogue Wave's products are marketed to information technology and
information systems development managers, independent software vendors ("ISV"),
value added resellers ("VAR"), original-equipment-manufacturers ("OEM") and
professional programmers in all industry segments and in all geographic
locations through direct sales and multiple distribution channels. The Company's
products are designed to enable customers to construct robust applications
quickly, with higher quality. They provide a common development foundation for
various operating system platforms including Windows, Unix and OS/390. Cross
platform foundation components both reduce complexity and speed the development
process. All of Rogue Wave's components enable a company to efficiently migrate
to additional platforms with minimal cost.
Industry Background
Software pervades business, increasing dependence on integrated systems.
Businesses are increasingly relying on information systems, both back-end and
Internet, as strategic resources increasing efficiency and differentiating
themselves from their competitors. Integration of enterprise-wide information
systems can allow a company to take advantage of new markets, reduce operating
expenses and increase ties with suppliers, customers and other alliance
partners. Software systems require effective developers, flexible technology and
interoperable components.
Demands are for faster deployment of more efficient and flexible developed
software. Software developers are expected to create increasingly robust
business-critical systems more quickly than ever before.
Speed and quality are forcing the requirement that development teams start
with third party solution components. Software development time can be improved
significantly through the use of pre-built, industry-standard objects. Pre-built
components provide for time-to-market opportunities while increasing the
reliability and maintainability of complex software systems. Organizations
purchase from independent vendors pre-written objects for fundamental operations
including simple functions such as date handling to more complex functions such
as network communications. Using off the shelf parts for such tasks allows
development programmers to focus on the business specific functionality of the
systems being designed.
The Rogue Wave Solution and Strategy
Rapid technological developments coupled with the introduction of new
products by competitors have caused certain Rogue Wave products to reach a
maturity phase. During fiscal 2000, Rogue Wave identified a need to reposition
itself in the marketplace; and, therefore, developed a new comprehensive
business strategy to aggressively address this changing environment.
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Rogue Wave's strategic objective is to become a leading provider of
products and services in a key future technology market while consolidating its
position as a leading provider of object oriented solutions. Primary areas of
focus necessary to successfully implement this strategy include:
. Optimizing the current C++ tools and services, our core product line, by
providing solutions to our customers based on the way they currently
utilize our products.
. Developing new products with a focus on providing an "end-to-end pervasive
computing solution", allowing for front-end, back-end or in the middle of
the end-to-end solutions for customers.
. Becoming a player in the broader "e-business" world through building or
partnering to interface to the .net environment, non-Microsoft and wireless
devices, Java applications, XML resources and back-end systems.
During fiscal year 2000, several actions were taken to begin implementation
of this strategy.
. First, a new Senior Management team was engaged and three members of the
Board of Directors were replaced. The new Senior Management team and the
Board members bring extensive software and business development expertise
to Rogue Wave. The new members of the Senior Management team include the
Chief Executive Officer, Chief Financial Officer, Chief Technical Officer,
Vice President of Marketing and Business Development, and Vice President of
Worldwide Sales.
. Second, Rogue Wave continued to solidify its worldwide presence in fiscal
year 2000. The direct sales team in North America was staffed to provide
optimal focus in each of the six major geographic regions. The Company
began to utilize alternate channels for distributing its products and
services such as ISVs, VARs and systems integrators. European operations
were reorganized into four major regions and staffed to focus on large
accounts. A presence in the Asian marketplace was established by opening a
new office in Japan and, most recently, an office in Hong Kong.
. Third, Rogue Wave restructured its product mix to continue to provide
technologies that are widely acknowledged as an industry leader in
reusable, customizable component architectures that scale to the
enterprise, while leveraging existing system investments. Certain products
of the Company were consolidated and those products that no longer align
with the new product strategy and were not profitable, were eliminated.
Products and Services
The Company's products and services provide customers with the following
benefits:
Distributed Applications. Programmers who are developing complicated large
and distributed applications can use the Company's products to make their
application work in concert, across systems and interface seamlessly. The
result is applications that are simpler and contain better tested code resulting
in fewer bugs and higher quality overall.
Scale to the Enterprise. Customers who are working on large systems depend
on scalability. Scalability and performance are great strengths of C++ and are
core parts of the Company's product line. Rogue Wave's components and tools are
designed to reduce overall maintenance and support costs over the life of an
application. The use of the Company's products helps programmers develop
flexible, modular applications that can be more easily updated, modified and
refined.
Honor Legacy Investments. The Company's components and tools can easily
work with legacy systems, being all or part of the solution. This is a great
strength of modular design, reverse engineering tools and architectural
approaches such as stateless design and functions. Rogue Wave honors legacy
investments, not just systems. Part of a customer's legacy investment is the
training and skills it has invested in its employees. Rogue Wave leverages that
investment by using standard languages such as C++ across its products.
Highly Customizable. Most of the Company's software parts have been
written to allow programmers to "Build It Your Way." Customers can customize by
substituting components or by sub-classing.
Multi-platform Support. Most of the Company's products are cross-platform,
and the database products can be used with a wide variety of databases. This
flexibility allows programmers to develop applications with minimal regard to
the environments in which they will be deployed. Businesses gain the ability to
deploy software systems in a wide variety of
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environments with minimal redevelopment. Rogue Wave's products encapsulate
fundamental operations within software components, allowing developers to focus
on creating the critical business logic within their applications rather than
the arcane features of their development environments.
Rogue Wave's products, which are described below, are designed to be used
individually, together, or with other industry standard products.
Foundation
Cross platform foundations are constructed with Tools.h++, Standard C++ Library
and Threads.h++.
. Tools.h++ complements the Standard C++ Library with an easy-to-use
interface and contains 130 fundamental programming building blocks such as
string, collection, date and time internationalization and streaming
classes.
. Standard C++ Library conforms to the ANSI/ISO standard and includes
fundamental data structures, as well as string, numeric limits, complex,
allocator, valarray, iostream and locale classes.
. Threads.h++, which is built on top of the Tools.h++ foundation class
library, is a C++ class library for developing multi-threaded applications.
Database Access
. DBTools.h++, which is built on top of Tools.h++, provides a common, object-
oriented interface to relational databases. Applications can be written
once to the DBTools.h++ API and then deployed to any of the supported
databases, regardless of the differences in data structures and function
calls between the different databases. DBTools.h++ provides native access
to Informix, Microsoft SQL Server, Oracle and Sybase, plus general
connectivity to these and other relational databases through the ODBC
standard.
Networking
. Tools.h++Professional is an expanded tool set that includes network
communication classes and thread-hot Internet classes.
Analysis
Rogue Wave's analysis tools consist of Analytics.h++, Math.h++, Money.h++ and
LAPACK.h++.
. Analytics.h++ is a solution for development teams building custom, in-house
applications that perform sophisticated data analysis. Example applications
include decision support, data warehousing, data mining, financial risk
management, electronic design automation and clinical trial testing.
. Math.h++ is a C++ class library that combines power and ease of use in a
set of classes designed to improve the performance and reliability of any
code that manipulates arrays of numbers.
. Money.h++ is a C++ class library for representing and manipulating exact
decimal fractions, currency conversions and monetary representations.
. LAPACK.h++ is a C++ class library that is designed to solve numerical
linear algebra problems by managing the details of data representation,
enabling the programmer to concentrate on application development.
Windows GUI Components
. Objective Toolkit is the de facto standard library used by Microsoft Visual
C++ 6.0 developers. Objective Toolkit is a collection of MFC user interface
extensions, with over 70 distinct features such as Office 2000-style
customizable toolbars and menu bars, masked and currency edit controls,
word wrap and MDI alternatives.
. Objective ToolkitPro includes Advanced Docking Window ("ADW") architecture
that supports the software development industry's first and only generic
docking mechanism. ADW includes advanced features such as nested Docking
Windows, container-independent docking, real-time Microsoft Office-style
dragging, alternate docking layout logic and fixed size dockable windows.
. Objective Grid & Grid Lite are MFC tools with grid layout design
capability, data source binding and provides more that 200 built-in Excel-
like formulas. Objective Grid Lite is geared for the beginning MFC
developer or the developer concerned with the footprint impact of a class
library.
. Objective Views allows the developer to create drag-and-drop programs
giving users the ability to add objects, create hierarchies, connections
and containers.
. Objective Edit is an MFC extension embeddable source code editor. This
full-featured editor provides automatic syntax highlighting and coloring,
as well as a complete test-editing environment.
. Objective Chart is an extension allowing the developer to add graphs and
charts to any CWnd-based class, including views, dialogs and controls.
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Modeling Tools
. RW-UML Studio uses UML (Unified Modeling Language) to let programmers see
their code graphically and is the industry's only object-oriented design
and modeling tool that is fully integrated with Microsoft's Visual C++ 6.0
IDE. RW-UML Studio enables Visual C++/MFC developers to design, develop,
test and edit code for cutting-edge applications without ever having to
leave the Visual C++ development environment.
Enterprise Services and Object Frameworks
. Technology frameworks for XML message delivery, integrating heterogeneous
distributed computing architectures, object-to-relational mapping form the
intellectual property behind a specialized offering of application
integration services.
Customers
The Company's products are used by programmers to develop software
applications for organizations around the world in a wide variety of industries.
To date, the Company has sold over 185,000 end-user licenses to individual
programmers and customers in industries such as telecommunications, computers
and electronics, software and information systems, transportation, consulting
services, financial services and other industrial and consumer products
companies.
Sales and Marketing
The Company's marketing efforts are directed at broadening the market for
its products by increasing awareness among development managers, corporate
programmers and chief information officers. In support of its sales efforts,
the Company's marketing department conducts comprehensive programs that include
advertising, direct mail, public relations, trade shows, seminars and ongoing
customer communications programs. The Company also keeps its customers informed
of advances in the field through technical papers and other mailings. The
Company maintains a Web site on the Internet (www.roguewave.com) that provides
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Company and product information and handles sales and distribution for its
products.
The Company markets its software primarily through its direct sales
organization and, to a lesser extent, through outside sales representatives and
indirect channel partners. As of September 30, 2000, the Company's sales and
marketing organization consisted of 109 individuals. The Company primarily
sells perpetual use, non-exclusive licenses to use its products for an up front
fee and to a lesser extent, distribution licenses for up front fees, quarterly
payments or a royalty stream. The licenses generally include a 30-day right of
return policy.
Telesales. As of September 30, 2000, the Company employed 45 domestic and
international telesales representatives. The Company's telesales force targets
individuals and small to medium sized groups of programmers. Sales through this
channel are typically less than $50,000 per order and the sales cycle is
generally less than two months. The Company maintains telesales operations in
Colorado, North Carolina and the Netherlands.
Direct Field Sales. As of September 30, 2000, the Company employed 11 domestic
direct field sales representatives supported by six technical sales
representatives. The Company's domestic field sales force targets Fortune 1000
customers. The field sales force typically focuses on enterprise-wide
technology purchasers. The sales cycle for this "top down" approach typically
ranges from two to six months. The Company maintains domestic direct sales
offices in California, Colorado, Georgia, New York, Texas and Virginia.
The Company's international sales channel development efforts are focused on two
regions:
. Europe. The Company established a German sales and support office in
January 1996 and acquired PVI Precision Software, GmbH ("Precision"),
a European distributor with offices in Germany, the United Kingdom,
France and the Benelux countries, in February 1997. As of September
30, 2000, the Company's European sales, support and consulting
organization consisted of 32 individuals. The Company maintains
European sales and support offices in France, Germany, Italy, the
Netherlands and the United Kingdom.
. Asia. In 2000, Rogue Wave opened an office in Tokyo, and most
recently, Hong Kong, and began to deliver localized products and
services to these markets.
Strategic Alliances and Business Partnerships
The world's leading hardware and software vendors, system integrators,
software developers and distributors have chosen Rogue Wave Software as a
strategic partner because Rogue Wave offers the products to build the e-business
solutions
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and develop applications for the future. We are continually driven to offer our
partners a premier framework to help build powerful Internet, Intranet and
extranet applications. Rogue Wave Software partners with vendors such as
Microsoft, IBM, Sun Microsystems, Intel, Oracle, HP, SGI, BEA Systems and
Sybase. These relationships may include technology licensing agreements,
cooperative marketing relationships as well as exchange of development plans and
strategic direction.
As new markets open, Rogue Wave will be partnering with leading vendors to
offer solutions to the marketplace. Rogue Wave has a very strong relationship
with Microsoft and is a charter member of both the Visual Studio Integrator
Program and Embedded Tool Partner program.
Product Support
The Company believes that a high level of customer support is important to
the successful marketing and sale of its products. As of September 30, 2000,
there were 49 employees in the Company's product support group. The Company
offers telephone, electronic mail, fax and Internet-based customer support
through its support services staff. The Company also offers annual maintenance
agreements that include technical support and upgrades, and offers introductory
and advanced classes and training programs.
Professional Services
In April 1997, the Company established a domestic consulting and training
services group in Boulder, Colorado, to provide services to the Company's
Fortune 1000 customers. As of September 30, 2000, there were 11 employees in
the professional services group. The professional services group specializes in
object-oriented programming in C++ and Java. The group helps customers assess
needs and develop solutions, with a particular expertise in mixed language
environments that use both C++ and Java.
Product Development
As of September 30, 2000, there were 92 employees on the Company's product
development staff. The Company's product development expenditures in fiscal,
1998, 1999, and 2000 were $9.5 million, $11.5 million and $14.1 million,
respectively, and represented 21.4%, 21.7%, and 25.9% of total revenue,
respectively. The Company expects that it will continue to commit substantial
resources to product development in the future. Although Rogue Wave has
primarily developed products internally, it may, based on timing and cost
considerations, acquire technologies or products from third parties.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products that keep pace with competitive product introductions and technological
developments, satisfy diverse and evolving customer requirements and otherwise
achieve market acceptance. There can be no assurance that the Company will be
successful in continuing to develop and market on a timely and cost-effective
basis fully functional product enhancements or new products that respond to
technological advances by others, or that its enhanced and new products will
achieve market acceptance. In addition, the Company has in the past experienced
delays in the development, introduction and marketing of new or enhanced
products, and there can be no assurance that the Company will not experience
similar delays in the future. Any failure by the Company to anticipate or
respond adequately to changes in technology and customer preferences, or any
significant delays in product development or introduction, would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Competition
Our products target the maturing market for C++, Visual C++/MFC, and Visual
Basic/ActiveX software components. Direct competitors in the C++ market include
Microsoft (with its Microsoft Foundation Classes, "MFC"), IBM, ILOG, several
privately held companies, and the open source development community.
For development on the Windows platforms, 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 abandon MFC in order to facilitate the shift to C++, which may
result in a long-term shift away from the MFC components across the software
industry, possibly obsoleting the GUI business line.
Competition for the cross-platform foundation C++ components is primarily
from an organization's internal development, specialized foundation C++
component vendors or increasingly, open source projects that produce freely
available source code upon which companies can build enterprise software.
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Products and services that are indirectly competitive include components
from Microsoft, Powersoft, Oracle, Sybase and Informix. Each of these companies
provides or may provide in the future solutions that may compete with Rogue
Wave's foundation, distributed computing and database access products.
Additional indirect competition comes from the emergence of Java as a
viable object-oriented cross-platform enterprise development language. The Java
Development Kit is freely distributed by Sun and contains a comprehensive set of
foundation and GUI components upon which a developer may begin development.
Many of these potential competitors have well-established relationships
with current and potential customers and have the resources to enable them to
more easily offer a single vendor solution. Like our current competitors, many
of these companies have longer operating histories, significantly greater
resources and name recognition and larger installed bases of customers than we
do. As a result, these potential competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
products than us.
We face competition from systems integrators and our customers' internal
information technology departments. Many systems integrators possess industry
specific expertise that may enable them to offer a single vendor solution more
easily, and already have a reputation among potential customers for offering
enterprise-wide solutions to software programming needs. Systems integrators
may market competitive software products in the future.
There are many factors that may increase competition in the market for
object-oriented software components, programming tools and distributed
application development products, including (1) entry of new competitors, (2)
alliances among existing competitors and (3) consolidation in the software
industry. Increased competition may result in price reductions, reduced gross
margins or loss of market share, any of which could materially adversely affect
our business, operating results and financial condition. If we cannot compete
successfully against current and future competitors or overcome competitive
pressures, our business, operating results and financial condition may be
adversely affected.
Employees
As of September 30, 2000, the Company had a total of 325 employees, of
which 268 were based in the United States, 51 were based in Europe and 6 were
based in Japan and Hong Kong. Of the total, 109 were in sales and marketing, 92
were in product development, 49 were in customer support, 11 were in consulting
services and 64 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 will 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.
Risks Related To Our Business
Our future operating results are difficult to predict and actual financial
results may vary from our expectations, which could have an adverse effect on
our stock price.
Our future operating results are difficult to predict due to a variety of
factors, many of which are outside of our control. These factors include:
. the demand for our products and services;
. the level of product and price competition;
. the size, type and timing of individual license transactions;
. the delay or deferral of customer implementations;
. our success in expanding our direct sales force and indirect distribution
channels;
. the timing of new product introductions and product enhancements;
. levels of international sales;
. changes in our pricing policy or that of our competitors;
. publication of opinions about us, our products and object-oriented, component
technology by industry analysts;
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. our ability to retain key employees and hire new employees;
. our ability to develop and market new products and control costs; and
. our ability to effectively deploy our new strategy.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue and
operating results to fluctuate significantly. Based on the preceding factors,
we may experience a shortfall in revenue or earnings or otherwise fail to meet
public market expectations, which could materially adversely affect our
business, financial condition and the market price of our common stock.
Our operating results in one or more future periods may fluctuate significantly
and could cause our stock price to be volatile.
We generally ship orders as received which means that quarterly revenue and
operating results depend substantially on the volume and timing of orders we
receive during the quarter. Sales volume is difficult to forecast due to a
number of reasons, many of which are outside our control. Such reasons include:
. lack of a reliable means to assess overall customer demand;
. historically we have earned a substantial portion of our revenue in the last
weeks, or even days, of each quarter;
. larger customer orders are subject to long sales cycles and are frequently
delayed; and
. our service and maintenance revenue tends to fluctuate as consulting
contracts are undertaken, renewed, completed or terminated.
We base operating expenses on anticipated revenue trends and a high
percentage of these expenses are relatively fixed. As a result, a delay in the
recognition of revenue from a limited number of transactions could cause
significant variations in operating results from quarter to quarter and could
lead to significant losses. Accordingly, operating results and growth rates for
any particular quarter or other fiscal period may not be indicative of future
operating results. Furthermore, fluctuations in our quarterly operating results
will likely result in volatility in the price of our Common Stock in the future.
Our failure to manage planned growth could adversely affect our ability to
increase revenue.
Our business has evolved significantly in the recent years placing a strain
on our management systems and resources. To manage future growth we must
continue to (1) improve our financial and management controls, reporting systems
and procedures on a timely basis and (2) expand, train and manage our employee
work force. If we fail to manage our growth effectively, our business,
financial condition and results of operations could be materially and adversely
affected.
Failure to attract and retain key employees will adversely affect our business.
Our business is highly dependent on the ability of our management team to
work effectively to meet the demands of our anticipated growth. Several members
of our senior management, including our Chief Executive Officer, Chief Technical
Officer, Marketing and Business Development Vice President, Managing Director of
Europe, and our Vice President of Worldwide Sales have been employed by us for a
relatively short period of time. These individuals have not previously worked
together as a management team. The failure of our management team to work
together effectively could prevent efficient decision-making by our executive
team, affecting product development and sales and marketing efforts, which would
negatively impact our operating results.
Our future performance depends significantly upon the continued service of
our key technical, sales and senior management personnel, none of whom is bound
by an employment agreement. We believe that the technological and creative
skills of our personnel are essential to establishing and maintaining a
leadership position, particularly in light of the fact that our intellectual
property, once sold to the public market, is easily replicated. The loss of the
services of one or more of our executive officers or key technical personnel may
have a material adverse effect on our business.
Our future success also depends on our continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. In the past,
we have experienced some difficulty in attracting key personnel. Competition
for such personnel is intense and there can be no assurance that we can retain
key employees or that we can attract, assimilate or retain other highly
qualified personnel in the future.
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Variability of our sales cycles makes it difficult to forecast quarterly revenue
and operating results, making it likely that period-to-period comparisons are
not necessarily meaningful as an indicator of future results.
We distribute our products primarily through two different direct sales
channels, a telesales force and a field sales force, each of which is subject to
a variable sales cycle. Products sold by our telesales force may be sold after
a single phone call or may require several weeks of education and negotiation
before a sale is made. As such, the sales cycle associated with telesales
typically ranges from a few days to two months. On the other hand, the purchase
of products from our field sales force is often an enterprise-wide decision and
may require the sales person to provide a significant level of education to
prospective customers regarding the use and benefits of our products. For these
and other reasons, the sales cycle associated with the sale of our products
through our field sales force typically ranges from two to six months and is
subject to a number of significant delays over which we have little or no
control. As a result, quarterly revenue and operating results are variable and
are difficult to forecast, and we believe that period-to-period comparisons of
quarterly revenue are not necessarily meaningful and should not be relied upon
as an indicator of future revenue.
We face risks involving future business acquisitions.
We frequently evaluate strategic opportunities available to us and may in
the future pursue additional acquisitions of complementary technologies,
products or businesses. Future acquisitions of complementary technologies,
products or businesses will result in the diversion of management's attention
from the day-to-day operations of our business and may include numerous other
risks, including difficulties in the integration of the operations, products and
personnel of the acquired companies. Future acquisitions may also result in
dilutive issuance of equity securities, the incurrence of debt and amortization
expenses related to goodwill and other intangible assets. Our failure to
successfully manage future acquisitions may have a material adverse effect on
our business and financial results.
Doing business outside the United States involves numerous factors that could
negatively affect our financial results.
A significant portion of our revenue is derived from international sources.
To service the needs of these companies, we must provide worldwide product
support services. We have expanded, and intend to continue expanding, our
international operations and enter additional international markets. This will
require significant management attention and financial resources that could
adversely affect our operating margins and earnings. We may not be able to
maintain or increase international market demand for our products. If we do
not, our international sales will be limited, and our business, operating
results and financial condition could be materially and adversely affected.
Our international operations are subject to a variety of risks, including
(1) foreign currency fluctuations, (2) economic or political instability, (3)
shipping delays and (4) various trade restrictions. Any of these risks could
have a significant impact on our ability to deliver products on a competitive
and timely basis. Significant increases in the level of customs duties, export
quotas or other trade restrictions could also have an adverse effect on our
business, financial condition and results of operations. In situations where
direct sales are denominated in foreign currency, any fluctuation in foreign
currency or the exchange rate may adversely affect our business, financial
condition and results of operations.
We may not be able to adequately protect our intellectual property or operate
our business without infringing on the intellectual property rights of others.
We rely primarily on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and contractual provisions to protect our
proprietary rights. We also believe that factors such as the technological and
creative skills of our personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential to
establishing and maintaining a technological leadership position. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. The nature of many of our products requires the release of the
source code to customers. As such, policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our products exists, software piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States. There can be no assurance
that our means of protecting its proprietary rights in the United States or
abroad will be adequate or that competition will not independently develop
similar technology.
Although we do not believe that we are infringing any proprietary rights of
others, third parties may claim that we have infringed their intellectual
property rights. Furthermore, former employers of our former, current or future
employees may assert claims that such employees have improperly disclosed to us
the confidential or proprietary information of such
9
<PAGE>
former employers. Any such claims, with or without merit, could (1) be time
consuming to defend, (2) result in costly litigation, (3) divert management's
attention and resources, (4) cause product shipment delays and (5) require us to
pay money damages or enter into royalty or licensing agreements. A successful
claim of intellectual property infringement against us and our failure or
inability to license or create a workaround for such infringed or similar
technology may materially and adversely affect our business, operating results
and financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in our
license agreements may not be effective under the laws of certain jurisdictions.
A successful product liability claim brought against us could have a material
adverse effect upon our business, operating results and financial condition.
Our business will suffer if our products contain defects or do not function as
intended, which would cause our revenues to decline.
Software products frequently contain errors or failures, especially when
first introduced or when new versions are released. Also, new products or
enhancements may contain undetected errors, or "bugs," or performance problems
that, despite testing, are discovered only after a product has been installed
and used by customers. Errors or performance problems could cause delays in
product introduction and shipments or require design modifications, either of
which could lead to a loss in revenue. Our products are typically intended for
use in applications that may be critical to a customer's business. As a result,
we expect that our customers and potential customers have a greater sensitivity
to product defects than the market for software products generally. Despite
extensive testing by us and by current and potential customers, errors may be
found in new products or releases after commencement of commercial shipments,
resulting in loss of revenue or delay in market acceptance, diversion of
development resources, the payment of monetary damages, damage to our
reputation, or increased service and warranty costs, any of which could have a
material adverse effect upon our business and results of operations.
Risk Related To Our Industry
We cannot predict whether the market acceptance for C++ and Visual C++/MFC will
continue to grow.
Our product lines are designed for use in object-oriented software
application development, specifically the C++, Visual C++/MFC language. To
date, a substantial majority of our revenue has been attributable to sales of
products and related maintenance and consulting services related to C++
programming and development. We believe that while the market for object-
oriented technology is maturing, optimization of the C++ solutions through
realignment of products and services coupled with the pursuit of unsaturated
markets in Asia, Europe and Latin America, will serve to enhance future revenue.
Object-oriented programming languages are very complex and the number of
software developers using them is relatively small compared to the number of
developers using other software development technology. Our financial
performance will depend in part upon continued growth in object-oriented
technology and markets and the development of standards that our products
address. There can be no assurance that the market will continue to grow or
that we will be able to respond effectively to the evolving requirements of the
market.
Our market is highly competitive and, if we are unable to compete successfully,
our ability to grow our business or even maintain revenues and earnings at
current levels will be impaired.
Our products target the markets for C++, Visual C++/MFC and Visual
Basic/ActiveX software parts and programming tools. Direct competitors in the
C++ market include Microsoft (with its Microsoft Foundation Classes, "MFC"),
IBM, ILOG and several privately held companies. Microsoft is a particularly
strong competitor due to its large installed base and the fact that it bundles
its MFC library with its own and other C++ compilers. Microsoft may decide in
the future to devote more resources to or broaden the functions of MFC in order
to address and more effectively compete with the functionality of our products.
In the distributed application development market, we face competition from
a variety of CORBA vendors; including Iona, Inprise, BEA, IBM, and others. In
this market, we expect basic connectivity to be bundled with a variety of
offerings from these vendors, as well as Sun (with a free Java ORB) and
Microsoft (with connectivity bundled into its offerings).
Software applications can also be developed using software parts and
programming tools in environments other than C++. Indirect competitors with
such offerings include Microsoft (with its ActiveX technology), Inprise, Oracle
and Powersoft (a subsidiary of Sybase). Many of these competitors have
significantly greater resources, name recognition and
10
<PAGE>
larger installed bases of customers than we do. In addition, several database
vendors, such as Informix, Oracle and Sybase are increasingly developing robust
software parts for inclusion with their database products and may begin to
compete with us in the future. These potential competitors have well-established
relationships with current and potential customers and have the resources to
enable them to more easily offer a single vendor solution. Like our current
competitors, many of these companies have longer operating histories,
significantly greater resources and name recognition and larger installed bases
of customers than we do. As a result, these potential competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than us.
We also face competition from systems integrators and our customers'
internal information technology departments. Many systems integrators possess
industry specific expertise that may enable them to offer a single vendor
solution more easily, and already have a reputation among potential customers
for offering enterprise-wide solutions to software programming needs. Systems
integrators may market competitive software products in the future.
There are many factors that may increase competition in the market for
object-oriented software parts and programming tools, including (1) entry of new
competitors, (2) alliances among existing competitors and (3) consolidation in
the software industry. Increased competition may result in price reductions,
reduced gross margins or loss of market share, any of which could materially
adversely affect our business, operating results and financial condition. If we
cannot compete successfully against current and future competitors or overcome
competitive pressures, our business, operating results and financial condition
may be adversely affected.
We operate in an industry with rapidly changing technology and, if we do not
successfully modify our products to incorporate new technologies, they may
become obsolete and sales will suffer.
The software market in which we compete is characterized by (1) rapid
technological change, (2) frequent introductions of new products, (3) changing
customer needs and (4) evolving industry standards. To keep pace with
technological developments, evolving industry standards and changing customer
needs, we must support existing products and develop new products. We may not
be successful in developing, marketing and releasing new products or new
versions of our products that respond to technological developments, evolving
industry standards or changing customer requirements. We may also experience
difficulties that could delay or prevent the successful development,
introduction and sale of these enhancements. In addition, these enhancements
may not adequately meet the requirements of the marketplace and may not achieve
any significant degree of market acceptance. If release dates of any future
products or enhancements are delayed, or if these products or enhancements fail
to achieve market acceptance when released, our business, operating results and
financial condition could be materially adversely affected. In addition, new
products or enhancements by our competitors may cause customers to defer or
forgo purchases of our products, which could have a material adverse effect on
our business, financial condition and results of operations.
Executive Officers of the Company
The executive officers of the Company and their ages and positions as of
November 30, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John D. Iacobucci...... 60 President, Chief Executive Officer and Director
Merle A. Waterman...... 37 Vice President, Chief Financial Officer and Secretary
Harold E. Julsen....... 60 Vice President, Worldwide Sales
James M.Smith.......... 57 Vice President, Marketing and Business Development
Robert Marcus.......... 57 Vice President, Chief Technical Officer
Charles O'Neill........ 49 Vice President, Professional Services
Peter J. Weyman........ 45 Vice President, General Manager, Fornova
David Rice............. 36 Vice President, General Manager, Infrastructure Products Division
Gregory J. Schumacher.. 41 Vice President, General Manager, Stingray Division
</TABLE>
John D. Iacobucci, President, Chief Executive Officer and Director, has
served as CEO of the Company since May 2000. Prior to joining Rogue Wave, Mr.
Iacobucci was Chairman, President and CEO of Line 4, Inc. (formerly Aristacome
International Inc.). Prior to Line 4, he was employed by Harris Corporation
from 1988 to 1993 where he served as Vice President and General Manager of their
Digital Telephone Systems Division and later as Vice President of Business
Development for their Communications sector. Mr. Iacobucci was also employed
for seven years at Northern Telecom, Inc., where he last served as Vice
President of their Integrated Office Systems group, having financial
responsibility for their
11
<PAGE>
private network products and services for the Central Region. He also served as
General Manager of Northern Telecom's Data Systems Division (formerly Data 100
and Sycor). Mr. Iacobucci joined Northern Telecom, Inc. in 1980 as Corporate
Controller. From 1977 to 1979, Mr. Iacobucci worked at Sandvik, Inc., as Vice
President of Finance and Administration. Between 1975 and 1976, Mr. Iacobucci
was also Corporate Controller of Hasbro and Division Controller of certain
International Telephone and Telegraph divisions from 1965 to 1974. Mr. Iacobucci
completed the Penn State Executive Management Program and received his B.A. from
Central New England College of Massachusetts.
Merle A. Waterman, Vice President, Chief Financial Officer and Secretary of
the Company, has been with the Company since January 1996. Between January 1996
and December 1999, he served as the Corporate Controller of the Company. Prior
to joining Rogue Wave, Mr. Waterman was employed for nine years as a Certified
Public Accountant with KPMG LLP. Mr. Waterman received his B.S. from Oregon
State University.
Harold E. Julsen, Vice President, Worldwide Sales, has been with the
Company since May 2000. Prior to joining Rogue Wave, Mr. Julsen served as
Executive Vice President of Worldwide Sales for VeriBest, Inc. from 1997 to
1999. Between 1995 and 1997, he served as Senior Vice President of Worldwide
Sales for ViewLogic Systems Corporation. From 1993 to 1995, Mr. Julsen was
employed at Frame Technology Corporation as Senior Vice President of Worldwide
Sales. Prior to joining Frame Technology, he held the position of Senior Vice
President of Sales and Marketing for Iomega Corporation from 1989 to 1993. Mr.
Julsen also worked for Control Data Corporation in various sales and marketing
positions. Mr. Julsen holds a B.S. in Electronic Engineering from Northwest
Technical Institute in Minneapolis.
James M. Smith, Vice President, Marketing and Business Development, has
been with the Company since July 2000. Prior to joining Rogue Wave, Mr. Smith
served as Vice President and co-founder of Electran Corporation from 1998 to
2000. Between 1997 and 1998, he was employed as Vice President of Nexgen
Software Technologies. From 1993 to 1997, he served as President of the YCHANGE
Group. Prior to joining YCHANGE, Mr. Smith was employed by Synon Corporation
between 1989 and 1993, and was employed for 16 years at IBM in various sales and
marketing positions. Mr. Smith received a M.S. degree from the University of
Miami, and his B.S. from the Hebrew University of Jerusalem.
Robert Marcus, Vice President, Chief Technical Officer, has been with the
Company since July 2000. Prior to joining Rogue Wave, Mr. Marcus served as Vice
President of Technical Strategy and Business Development for Microelectronics
and Computer Technology Consortium. From 1997 to 2000, he was employed at
General Motors as Chief Architect for Information Systems Engineering and
Director of Technology Transformation and Deployment. Prior to General Motors,
he was employed for two years as Director of Object Technology for American
Management Systems. Between 1986 and 1995, Mr. Marcus worked for Boeing
Computer Services as coordinator of Object-oriented Technology. Prior to
joining Boeing Computer Services, he served as Expert System Developer for
Hewlett-Packard. Mr. Marcus received his Ph.D. from the Mathematics Courant
Institute of New York University and his B.S. from Massachusetts Institute of
Technology.
Charles O'Neill, Vice President, Professional Services, has been with the
Company since March 1999. Prior to joining Rogue Wave, Mr. O'Neill served as
Vice President for Vality Technology, Inc. from 1997 to 1998. Prior to joining
Vality Technology, he was employed by VMARK Software, Inc. from 1993 to 1997
where he held the position of Vice President of Professional Services. Prior to
joining VMARK, he was employed for 6 years at Prime Computer, Inc., where he
last served as Director of Consulting Services. Mr. O'Neill also worked for the
Boston Globe Newspaper. Mr. O'Neill received his B.A. from the College of the
Holy Cross.
Peter J. Weyman, Vice President, Division General Manager, has been with
the Company since its acquisition of NobleNet, Inc., in March 1999. Between
August 1998 and March 1999, he was President and CEO of NobleNet. Prior to his
nomination as CEO, he was NobleNet's Vice President of Engineering from March
1997 through August 1998. Prior to joining NobleNet, he was at VMARK Software,
Inc. from February 1994 through March 1997 where he held the positions of Vice
President, Engineering and Vice President, Strategic Marketing. Prior to joining
VMARK, he was President and CEO of Blackstone Valley Software, Inc., and was
employed for eight years at Prime Computer, Inc., where he last served as Vice
President, Engineering. Mr. Weyman holds a B.S. degree from Massachusetts
Institute of Technology and a D.C.S degree from Sir George Williams University
in Montreal, Canada.
David Rice, Vice President, Division General Manager of Infrastructure
Products, has been with the Company since May 1995. Between August 1993 and
April 1995, he served as Brand Manager of Sierra On-Line. Prior to joining
Sierra On-Line, he was employed from December 1989 to March 1991 at Relevant
Business Systems where he held the position of Account Manager. Prior to
joining Relevant Business Systems, he was Buyer/Planner of Unisys/Convergent
Technologies, and was employed from 1986 to 1988 at Pacific Consulting Group,
where he served as Research Analyst. Mr. Rice holds a MBA from the University
of Oregon and a B.A. from Stanford University.
12
<PAGE>
Gregory J. Schumacher, Vice President, Division General Manager, has been
with the Company since January 2000. Between 1998 and 1999, he was at Compaq
Computer Corporation in various executive marketing positions. Prior to joining
Compaq Computer Corporation, he was employed for six years at Lotus Development
Corporation in various sales and marketing roles. Prior to joining Lotus
Development Corporation, Mr. Schumacher worked for Diebold, Inc. from 1983 to
1989 where he served in marketing and sales positions. During 1982 to 1983, he
served as an Account Administrator for IBM. Mr. Schumacher holds a MBA from Kent
State University and a B.A. from Ohio Northern University.
ITEM 2. PROPERTIES
The Company's principal domestic administrative, sales, marketing, support,
consulting and product development offices are located in facilities consisting
of approximately 37,000 square feet in Boulder, Colorado; 33,000 square feet in
Corvallis, Oregon; 16,000 square feet in Raleigh, North Carolina, and 12,000
square feet in Southboro, Massachusetts. The leases on the Boulder, Corvallis,
Raleigh and Southboro facilities expire on various dates from 2000 through 2005.
The Company currently leases other domestic sales, development and support
offices in California, New York, Texas and Virginia. The Company also rents
space for its international offices in Europe, Japan and Hong Kong. Note 4 of
Notes to Consolidated Financial Statements describes the amount of the Company's
lease obligations. The Company believes that these facilities are adequate for
its current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's common stock trades on the NASDAQ National Market ("NASDAQ")
under the symbol "RWAV". The following table sets forth the high and low
closing sales prices for the Company's Common Stock for the quarters ended in
fiscal years 1999 and 2000,as furnished by NASDAQ. These prices reflect prices
between dealers, without retail markups, markdowns or commissions, and may not
represent actual transactions.
High Low
------ ------
Year ended September 30, 2000
1st Quarter................................... $ 9.88 $ 4.44
2nd Quarter................................... 12.00 7.63
3rd Quarter................................... 7.63 4.17
4th Quarter................................... 7.13 4.67
Year ended September 30, 1999
1st Quarter................................... $10.00 $ 5.13
2nd Quarter................................... 12.38 6.56
3rd Quarter................................... 9.38 6.75
4th Quarter................................... 9.25 5.56
As of October 31, 2000, there were approximately 144 stockholders of record
of the Company's Common Stock (which number does not include the number of
stockholders whose shares are held of record by a brokerage house or clearing
agency but does include such brokerage house or clearing agency as one record
holder). The Company believes it has in excess of 6,000 beneficial holders of
the Company's Common Stock.
Dividend Policy
The Company has not historically paid cash dividends and currently intends
to retain any future earnings for use in its business for the foreseeable
future.
14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue:
License revenue................................................ $15,968 $24,096 $28,663 $32,394 $ 30,724
Service and maintenance revenue................................ 3,916 9,313 15,776 20,710 23,718
------- ------- ------- ------- --------
Total revenue................................................. 19,884 33,409 44,439 53,104 54,442
------- ------- ------- ------- --------
Cost of revenue:
Cost of license revenue........................................ 1,390 1,973 2,377 2,149 1,710
Cost of service and maintenance revenue........................ 1,663 2,963 4,920 7,306 7,981
------- ------- ------- ------- --------
Total cost of revenue......................................... 3,053 4,936 7,297 9,455 9,691
------- ------- ------- ------- --------
Gross profit.................................................. 16,831 28,473 37,142 43,649 44,751
------- ------- ------- ------- --------
Operating expenses:
Product development............................................ 5,766 7,619 9,532 11,512 14,072
Sales and marketing............................................ 8,367 14,338 19,313 23,510 24,668
General and administrative..................................... 2,277 3,620 4,164 5,354 5,491
Acquisition, relocation and goodwill amortization.............. -- -- 1,789 1,170 1,661
Goodwill impairment charge/(1)/................................ -- -- -- -- 10,493
------- ------- ------- ------- --------
Total operating expenses...................................... 16,410 25,577 34,798 41,546 56,385
------- ------- ------- ------- --------
Income (loss) from operations................................. 421 2,896 2,344 2,103 (11,634)
Other income (expense), net..................................... 94 1,396 794 1,182 1,877
------- ------- ------- ------- --------
Income (loss) before income taxes............................. 515 4,292 3,138 3,285 (9,757)
Income tax expense (benefit).................................... (24) 1,459 961 1,274 746
------- ------- ------- ------- --------
Net income (loss)............................................. $ 539 $ 2,833 $ 2,177 $ 2,011 $(10,503)
======= ======= ======= ======= ========
Pro forma net income data/(2)/:
Income before income taxes..................................... $ 515 $ 4,292 $ 3,138
Pro forma income tax expense................................... 147 1,471 1,098
------- ------- -------
Pro forma net income.......................................... $ 368 $ 2,821 $ 2,040
======= ======= =======
Pro forma basic earnings per share............................. $ 0.07 $ 0.32 $ 0.20
======= ======= =======
Pro forma diluted earnings per share........................... $ 0.05 $ 0.27 $ 0.19
======= ======= =======
Basic earnings (loss) per share................................. $ 0.11 $ 0.32 $ 0.21 $ 0.19 $ (1.00)
======= ======= ======= ======= ========
Diluted earnings (loss) per share............................... $ 0.07 $ 0.27 $ 0.20 $ 0.19 $ (1.00)
======= ======= ======= ======= ========
Basic shares outstanding........................................ 5,077 8,807 10,209 10,383 10,512
Diluted shares outstanding...................................... 7,593 10,419 10,670 10,860 10,512
<CAPTION>
September 30,
-------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments.............. $ 2,113 $35,737 $35,264 $27,664 $ 33,526
Total assets................................................... 10,722 50,018 54,527 59,470 55,619
Long-term obligations, less current portion.................... 322 351 -- -- --
Mandatorily redeemable preferred stock......................... 4,664 -- -- -- --
Total stockholders' equity..................................... 1,184 39,920 42,905 42,342 37,293
</TABLE>
--------------------------------------------------------------------------------
(1) Represents the impairment of goodwill associated with the NobleNet
acquisition, following the decision by the Company to discontinue the
Nouveau product line.
(2) Stingray, which was acquired utilizing the pooling of interests accounting
method, was a Subchapter S corporation since inception (July 10, 1995)
until December 31, 1997 and, accordingly, not subject to federal and state
income taxes during the years 1996, 1997 and a portion of fiscal 1998. Pro
forma net income reflects federal and state income taxes as if the Company
and Stingray had been a C corporation, based on effective tax rates during
the periods indicated.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
risks and uncertainties posed by many factors and events that could cause the
Company's actual business, prospects and results of operations to differ
materially from those that may be anticipated by such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed herein as well as those discussed under the captions
"risk factors" and "business" as well as those discussed elsewhere in this
prospectus. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of the date of this report. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made by the Company in
this report and in the Company's other reports filed with the Securities and
Exchange Commission that attempt to advise interested parties of the risks and
factors that may affect the Company's business.
Overview
Rogue Wave was founded in 1989 to provide reusable software components 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, a privately held corporation
specializing in the development, distribution and support of an object-oriented
graphical user interface library written in the C++ programming language. In
February 1998, the Company merged with Stingray Software, Inc., a privately held
corporation specializing in the development and distribution of object-oriented
development tools for Windows programmers and is a leading provider of Visual
C++ class libraries. Both transactions were accounted for using the pooling-of-
interests method of accounting. In March 1999, the Company merged with NobleNet,
Inc., in a transaction utilizing the purchase method of accounting. NobleNet
specialized in building and marketing software products that allow existing
information technology systems to communicate and interoperate across corporate
networks and the Internet. The products were used to build sophisticated,
enterprise-wide, distributed applications that run on more than 40 platforms.
Following the fourth quarter 2000 decision to discontinue marketing of the
Nouveau product line, the investment in NobleNet, which consisted primarily of
goodwill, was written off. See Note 2 of Notes to Consolidated Financial
Statements.
To date, the Company's revenue has been derived from licenses of its
software products and related maintenance, training and consulting services.
License revenue is recognized according to the criteria of SOP 97-2, as amended.
License revenue is recognized upon execution of a license agreement or signed
written contract with fixed or determinable fees, shipment or electronic
delivery of the product, and when collection of the resulting receivable is
probable. Allowances for credit risks and for estimated future returns are
provided upon shipment. Returns to date have not been material. Service and
maintenance revenue consists of fees that are charged separately from the
product licenses. Maintenance revenue consists of fees for ongoing support and
product updates and is recognized ratably over the term of the contract, which
is typically 12 months. Service revenue consists of training and consulting
services and is recognized upon completion of the related activity. The
Company's revenue recognition policies are in compliance with the American
Institute of Certified Public Accountants Statements of Position 97-2 and 98-9,
relating to Software Revenue Recognition. See Note 1 of Notes to Consolidated
Financial Statements.
The Company markets its products primarily through its direct sales force,
and to a lesser extent through the Internet and an indirect channel consisting
of OEMs, VARs, dealers and distributors. The Company's direct sales force
consists of an inside telesales group that focuses on smaller orders ($50,000 or
less), and an outside sales force that focuses on larger site licenses. The
Company makes all of its products available for sale and distribution over the
Internet. Revenue through this channel has not been significant to date, and
there can be no assurance that the Company will be successful in marketing its
products through this channel.
International revenue accounted for approximately 28%, 24%, and 24% of
total revenue in fiscal 1998, 1999 and 2000, respectively. In January 1996, the
Company established a wholly-owned subsidiary in Germany to market and support
the Company's products in Germany and neighboring countries. In February 1997,
the Company expanded its European operations by acquiring Precision, a
distributor of Rogue Wave software products in Germany, the United Kingdom,
France and the Benelux countries. In 1998, the Company established a subsidiary
in Italy. In 2000, the Company established offices in Japan and Hong Kong. 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. The
Company has initiated a management reorganization that is expected to support
accelerated European growth. There can be no assurance, however, that the
Company will be able to maintain or increase international market demand for its
products.
16
<PAGE>
The majority of the Company's international revenue is generated by the
Company's European subsidiaries. To date, other than revenue generated by the
Company's European subsidiaries, the Company's international revenue has been
denominated in the 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
Related To Our Business - Doing business outside the United States involves
numerous factors that could negatively affect our financial results."
The Company acquired a controlling interest in HotData Inc. for $1.3
million on October 1, 1997. HotData began operations during 1997 and has
developed technology relating to the collection and verification of data across
the Internet. On September 1, 1998, and on January 11, 1999, HotData sold
capital stock to additional investors thereby reducing the Company's percentage
ownership from 78% to 42% and 42% to 21%, respectively. The HotData investment
has been accounted for using the equity method of accounting for fiscal 1998,
1999 and 2000. As of September 30, 2000, the Company's recorded investment
balance in HotData is zero as a result of the Company's recognition of its share
of HotData's losses.
The Company moved its administrative operations from its previous location
in Corvallis, Oregon, to Boulder, Colorado, during fiscal 1998. The Company
incurred charges totaling approximately $500,000 during fiscal 1998 in
connection with this relocation.
In February 1998, the Company acquired all of the outstanding shares of
Stingray common stock in a business combination accounted for as a pooling of
interests for approximately 1.65 million shares of Rogue Wave common stock.
Stingray was a privately held company that developed and distributed development
tools for Windows programmers. The merger added several new product lines to
Rogue Wave's current slate of object-oriented C++ libraries and builders.
Stingray offers an extensive line of add-on libraries that extend and enhance
the Microsoft Foundation Classes (MFC), providing additional, prebuilt
functionality for creating sophisticated GUI controls, grids, diagrams and
charts. The Company incurred approximately $700,000 in merger related costs
during fiscal 1998. The financial results for all periods presented include the
accounts of the Company and Stingray.
In June 1998, the Company implemented a reorganization and realignment of
its product strategy. Cost saving actions were taken which resulted in the
closing of its Mountain View, California, and Charlotte, North Carolina,
development operations, reducing its domestic administration staff and began the
process of consolidating the Oregon operations into one facility. In connection
with these actions, the Company incurred a $589,000 reorganization charge
primarily consisting of severance and lease termination costs.
In March 1999, the Company acquired all of the outstanding shares of
NobleNet common stock in a transaction accounted for under the purchase method
of accounting for approximately $11.8 million in cash. NobleNet's Nouveau
technology, an Internet-generation Object Request Broker (ORB), was expected to
expand Rogue Wave's product offering by providing a unified architecture for
building high performance, distributed applications that interoperate across an
enterprise or over the Internet. In August 2000, the Company concluded that the
penetration of the ORB market, with the Nouveau product, had been unsuccessful
and determined that the Nouveau product had become obsolete, mitigating all
future revenue opportunities. Based on the obsolescence of the Nouveau product,
the Company recorded an impairment charge of $10.5 million to write-off the
remaining goodwill related to the NobleNet acquisition.
During fiscal 2000, certain of the Company's primary products reached a
maturity phase due to rapid technological developments coupled with the
introduction of new products by competitors. The Company identified a need to
reposition itself in the marketplace and, therefore, developed a new
comprehensive business strategy to aggressively address this new environment.
The Company will focus on optimizing the current C++ tools and services, develop
new products with a focus on an "end-to-end pervasive computing solution", and
become a player in the broader "e-business" world. For a discussion of the
Company's new business strategy, see "Business", Part I, "The Rogue Wave
Solution and Strategy".
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>
Year Ended September 30,
------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Statements of Operations:
Revenue:
License revenue........................................... 64.5% 61.0% 56.4%
Service and maintenance revenue........................... 35.5 39.0 43.6
----- ----- ------
Total revenue............................................ 100.0 100.0 100.0
Cost of revenue:
Cost of license revenue................................... 5.4 4.0 3.1
Cost of service and maintenance revenue................... 11.1 13.8 14.7
----- ----- ------
Total cost of revenue.................................... 16.5 17.8 17.8
----- ----- ------
Gross profit............................................. 83.5 82.2 82.2
Operating expenses:
Product development....................................... 21.4 21.7 25.9
Sales and marketing....................................... 43.4 44.3 45.3
General and administrative................................ 9.4 10.0 10.1
Acquisition, relocation and goodwill amortization......... 4.0 2.2 3.0
Goodwill impairment charge................................ -- -- 19.3
----- ----- ------
Total operating expenses................................. 78.2 78.2 103.6
----- ----- ------
Income (loss) from operations............................ 5.3 4.0 (21.4)
Other income, net.......................................... 1.8 2.2 3.5
----- ----- ------
Income (loss) before income taxes........................ 7.1 6.2 (17.9)
Income tax expense......................................... 2.2 2.4 1.4
----- ----- ------
Net income (loss)........................................ 4.9% 3.8% (19.3)%
===== ===== ======
</TABLE>
Revenue. The Company's total revenue increased 3% to $54.4 million in fiscal
2000 from $53.1 million in fiscal 1999. Total revenue in fiscal 1999 increased
19.5% from $44.4 million in fiscal 1998. License revenue decreased 5.2% to $30.7
million in 2000 from $32.4 million in fiscal 1999. License revenue in fiscal
1999 increased 13% from $28.7 million in fiscal 1998. Fiscal 2000 revenues
remained relatively flat compared to 1999 revenues. During fiscal year 2000, a
decline in the sale of Stingray products was more than offset by increases in
license revenue from "cross platform distribution rights" sales. The lower
Stingray sales were attributable to increased sales force turnover and the
devaluation of the European currency. The increase in 1999 compared to 1998, is
a result of an increase in the number of licenses sold to existing and new
customers which reflected additional product offerings and an increased market
awareness and expansion of the Company's telesales and international sales
organizations.
Service and maintenance revenue increased 14.5% to $23.7 million in fiscal
2000 from $20.7 million in fiscal 1999. Service and maintenance revenue in
fiscal 1999 increased 31.3% from $15.8 million in fiscal 1998. These increases
in service and maintenance revenue were primarily attributable to increased
sales volume of the Company's support and maintenance services related to the
Company's core products.
Cost of Revenue. Cost of license revenue consists primarily of amortization of
purchased software, materials, packaging and freight expenses. Cost of license
revenue was $2.4 million, $2.1 million, and $1.7 million in fiscal 1998, 1999,
and 2000, respectively, representing 8.3%, 6.6% and 5.6% of the license revenue
for the respective years. 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 $4.9 million, $7.3 million and $8.0
million in fiscal 1998, 1999 and 2000, respectively, representing 31.2%, 35.3%
and 33.7%, of service and maintenance revenue for the respective years.
Fluctuations in cost of service and maintenance revenue as a percentage of
service and maintenance revenue are primarily the result of expenses associated
with the development of training programs, utilization of training and mentoring
consultants, additional product support personnel and the timing of product
upgrades. The increase as a percentage of service and maintenance revenue for
fiscal 1999 was primarily the result of the utilization of third-party resources
in providing training and consulting services.
18
<PAGE>
The decrease as a percentage of service and maintenance revenue for fiscal 2000
was primarily the result of a decreased usage of outside contractors that
provided training and mentoring consulting services.
Product Development. Product development expenses consist primarily of
personnel related expenses. Product development expenses were $9.5 million,
$11.5 million and $14.1 million in fiscal, 1998, 1999 and 2000, respectively.
As a percentage of total revenue, product development expenses were 21.4%, 21.7%
and 25.9%, in each respective year. The increase in product development expense
in 2000 was primarily attributable to the addition of product development
personnel as a result of the acquisition of NobleNet. The increase in product
development expenses as a percentage of revenue is due primarily to the slower
growth of revenue relative to the growth in product development activities.
The Company anticipates that it will continue to devote substantial resources to
product development and that product development expenses will increase in both
absolute dollars and as a percentage of revenue for fiscal 2001 as the Company
continues to increase its product development capacity. All costs incurred in
the research and development of software products and enhancements to existing
products have been expensed as incurred. See Note 1 of Notes to Consolidated
Financial Statements.
Sales and Marketing. Sales and marketing expenses consist primarily of salaries,
commissions and bonuses earned by sales and marketing personnel, field office
expenses and travel, entertainment and promotional expenses. Sales and marketing
expenses were $19.3 million, $23.5 million and $24.7 million in fiscal 1998,
1999 and 2000, respectively. As a percentage of total revenue, sales and
marketing expenses were 43.4%, 44.3% and 45.3% in each respective year. 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 both absolute dollars and as a percentage of
revenue for fiscal 2001 as the Company continues to hire additional sales and
marketing personnel and increase promotional activities.
General and Administrative. General and administrative expenses were $4.2
million, $5.4 million and $5.5 million, in fiscal 1998, 1999 and 2000,
respectively. As a percentage of total revenue, general and administrative
expenses were 9.4%, 10.0% and 10.1% in each respective year. The fluctuations
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. Although the Company believes that
its general and administrative expenses will increase in absolute dollars, such
expenses are not expected to significantly vary as a percentage of total
revenues for fiscal 2001.
Acquisition, Relocation and Goodwill Amortization. Merger, reorganization and
relocation costs were $1.8 million, $1.2 million and $1.7 million, in 1998, 1999
and 2000, respectively. As a percentage of total revenue, merger and
acquisition costs were 4.0%, 2.2% and 3.0% in the respective years. These costs
related to the legal and professional fees, initial organizational costs and
goodwill amortization associated with the merger of Stingray in 1998 and the
acquisition of NobleNet in 1999. The reorganization costs in 1998 consist of the
closure of development operations in Mountain View, California, and Charlotte,
North Carolina, and moving the corporate headquarters from Oregon to Colorado.
The Company has no immediate plans to acquire complementary businesses as of
September 2000, but expects that these costs could continue if favorable
business opportunities were to arise in fiscal year 2001.
Goodwill Impairment Charge. The goodwill impairment charge of $10.5 million
relates to the obsolescence of the Nouveau product line, which was acquired as
part of the business acquisition of NobleNet during March 1999, for $11.8
million in cash. In August 2000, the Company concluded that the penetration of
the ORB market, with the Nouveau product, had been unsuccessful and determined
that the Nouveau product had become obsolete, mitigating all future revenue
opportunities.
Other Income, Net. Other income, net consists of interest income earned on the
Company's cash, cash equivalents and short-term investments. Other income, net
was $794,000, $1.2 million and $1.9 million in 1998, 1999 and 2000,
respectively. As a percentage of total revenue, other income, net was 1.8%, 2.2%
and 3.5%, in the respective years. The general increase in other income, net is
a result of an increase in short-term investments as well as general increases
in interest rates.
Income Tax Expense. The Company's effective tax rates were 30.6%, 38.8% and
107.6%, for fiscal 1998, 1999 and 2000. The increase in the rate for 1999 is
primarily attributable to the termination of the research and experimentation
tax credit on June 30, 1999. The increase in the rate for 2000 is primarily
related to the recognition of a goodwill impairment charge of $10.5 million,
which is non-deductible for tax purposes, that contributed to the Company's loss
before income taxes of $9.8 million. The Company expects the effective tax rate
to decrease during the fiscal year 2001.
As of September 30, 1999 and 2000, the Company had net operating loss
carryforwards for federal and foreign income tax purposes of $133,000 and $1.3
million and $66,000 and $756,000, respectively. The federal losses expire in
2007 to 2011 and are limited as a result of the merger with Inmark. Utilization
of the acquired foreign net operating loss carryforwards will first be offset
against goodwill associated with the acquisition of Precision before being
recorded as a tax benefit.
19
<PAGE>
Under Statement of Financial Accounting Standards ("SFAS") No. 109,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. SFAS No. 109 provides for the recognition of deferred
tax assets if realization of such assets is more likely than not. Based upon
management's estimates, the Company has provided a valuation allowance against
certain deferred tax assets. The Company intends to evaluate the realizability
of the deferred tax assets on a quarterly basis. See Note 5 of Notes to
Consolidated Financial Statements.
Liquidity and Capital Resources
As of September 30, 2000, the Company had cash, cash equivalents and short-
term investments of $33.5 million. Net cash provided by operating activities
was $4.0 million for fiscal 2000 compared to $8.8 million recognized in fiscal
1999. While a $10.5 million net loss was recognized in the current year, it was
primarily the result of the recognition of certain non-cash charges of $12.2
million, which primarily consisted of a goodwill impairment charge, depreciation
and amortization (see Note 2 of Notes to Consolidated Financial Statements). The
overall decline in cash from operating activities was attributable to lower
deferred revenue recognized in fiscal 2000 compared to fiscal 1999. Net cash
provided by operating activities was $8.8 million in 1999 and was composed
primarily of net income that was increased by non-cash charges for depreciation
and amortization, plus an increase in accounts payable and accrued expenses, and
deferred revenue offset by an increase in accounts receivable and other
noncurrent assets. Deferred revenue consists primarily of the unrecognized
portion of revenue under maintenance and support contracts, which revenue is
deferred and recognized ratably over the term of such contracts and for the
unrecognized portion of revenue associated with product license subscription
contracts (see Note 1 of Notes to Consolidated Financial Statements).
The Company's investing activities consisted primarily of purchases of
equipment including those under capital leases and purchases and maturities of
short-term investments. During fiscal year 1998, net cash provided by investing
activities was $1.3 million. Net cash used by investing activities was $6.1
million in 1999, which included the purchase of NobleNet for $11.8 million in
cash (see Note 2 of Notes to Consolidated Financial Statements), short-term
maturities of $7.5 million and capital expenditures of $1.7 million. Net cash
used by investing activities in 2000 was for the purchase of equipment, net of
proceeds from maturities of investments.
Cash provided by financing activities of $5.5 million during fiscal 2000
included $1.5 million from the reissuance of common stock, $4.0 million provided
by the issuance of common stock in connection with the exercise of stock
options. Cash used by financing activities of $3.1 million in 1999, primarily
consisted of the repurchase of the Company's common stock.
The Company believes that expected cash flows from operations combined with
existing cash and cash equivalents and short-term investments will be sufficient
to meet its cash requirements for the on-going operation of the Company.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedging accounting when certain conditions are met. SFAS No. 133,
which has been amended by SFAS No. 137 and No. 138, is effective for the
Company's fiscal year ending September 30, 2001. The Company does not believe
adoption of SFAS No. 133, as amended, will have a material impact on the
Company's financial position, results of operations, or cash flows.
In December 1999, the SEC released Staff Accounting Bulletin No. 101
("SAB 101") "Revenue Recognition in Financial Statements", which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Subsequently, the SEC released SAB No. 101B,
which delayed the implementation date of SAB No. 101 for registrants with fiscal
years beginning between December 16, 1999 and March 15, 2000. The Company does
not believe adoption of SAB No. 101 will have a material impact on the Company's
financial position, results of operations, or cash flows.
In March 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN 44") which is an
interpretation of APB Opinion No. 25. This interpretation provides guidance on
the accounting for certain stock option transactions and subsequent amendments
to stock option transactions. FIN 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. To the extent that FIN 44 covers events occurring during the
period from December 15, 1998 and January 12, 2000, but before
20
<PAGE>
July 1, 2000, the effect of applying this Interpretation are to be recognized on
a prospective basis. The Company does not expect the impact on its financial
position or results of operations to be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk exposure is the potential loss arising from
changes in interest rates and its impact on short-term investments and foreign
currency exchange rate fluctuations.
As of September 30, 2000, short-term investments of $25.6 million were held
available for sale with acquired maturities of less than 180 days. Short-term
investments consist primarily of high credit and highly liquid corporate
commercial paper. A reasonable reduction in overall interest rates would not
have a material affect on the fair value of the investments or the financial
position of the Company.
Exposure to variability in foreign currency exchange rates is managed
primarily through the use of natural hedges, whereby funding obligations and
assets are both managed in the local currency. In addition, the Company will
from time to time enter into foreign currency exchange agreements to manage its
exposure arising from fluctuating exchange rates, primarily in the Euro. The
Company does not enter into any derivative transactions for speculative
purposes. The sensitivity of earnings and cash flows to variability in exchange
rates is assessed by applying an appropriate range of potential rate
fluctuations to the Company's assets, obligations and projected results of
operations denominated in foreign currencies. Based on the Company's overall
foreign currency rate exposure at September 30, 2000, movements in foreign
currency rates would not materially affect the financial position of the
Company. As of September 30, 1999, the Company had outstanding short-term
forward exchange contracts to exchange Euros for U.S. dollars in the amount of
$816,000. As of September 30, 2000, the Company had outstanding short-term
forward exchange contracts to exchange Euros for U.S. dollars in the amount of
$1.3 million.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and
supplementary financial information, which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Registrant's directors will be set forth under the
caption "Election of Directors - Nominees" in Registrant's proxy statement for
use in connection with the Annual Meeting of Stockholders to be January 18, 2001
(the "2000 Proxy Statement") and is incorporated herein by reference. The 2000
Proxy Statement will be filed with the Securities and Exchange Commission within
120 days after the end of the Registrant's fiscal year.
Information regarding Registrant's executive officers is set forth in this
Form 10-K in Part I, Item 1.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
from the information set forth under the caption "Compensation of Executive
Officers" in the Registrant's 2000 Proxy Statement that will be filed in
December 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Registrant's 2000
Proxy Statement that will be filed in December 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
from the information set forth under the caption "Certain Transactions" in the
Registrant's 2000 Proxy Statement that will be filed in December 2000.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
(1) Index To Consolidated Financial Statements Page
----
<S> <C>
Report of KPMG LLP.................................................. F-1
Consolidated Balance Sheets......................................... F-2
Consolidated Statements of Operations............................... F-3
Consolidated Statements of Stockholders' Equity..................... F-4
Consolidated Statements of Cash Flows............................... F-5
Notes to Consolidated Financial Statements.......................... F-6
(2) Report of KPMG LLP on Schedule...................................... S-1
Schedule II - Valuation and Qualifying Accounts..................... S-2
</TABLE>
(b) Reports on Form 8-K:
None
(c) See Exhibits Listed under Exhibit Index.
(d) The financial statement schedules required by this Item are listed under
Item 14(a)(2).
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ROGUE WAVE SOFTWARE, INC.
Date: November 27, 2000 /s/ MERLE A. WATERMAN
-----------------------------------------
Merle A. Waterman
Chief Financial Officer and Secretary
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John D. Iacobucci and Merle A.Waterman and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said attorneys-in-
fact and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ THOMAS KEFFER Chairman of the Board November 27, 2000
--------------------------
Thomas Keffer
/s/ JOHN D. IACOBUCCI President, Chief Executive Officer and Director November 27, 2000
-------------------------- (Principal Executive Officer)
John D. Iacobucci
/s/ MERLE A. WATERMAN Vice President, Chief Financial Officer and Secretary November 27, 2000
-------------------------- (Principal Financial and Accounting Officer)
Merle A. Waterman
/s/ THOMAS M. ATWOOD Director November 27, 2000
--------------------------
Thomas M. Atwood
/s/ LOUIS C. COLE Director November 27, 2000
--------------------------
Louis C. Cole
/s/ JOHN FLOISAND Director November 27, 2000
--------------------------
John Floisand
/s/ MARGARET M. NORTON Director November 27, 2000
---------------------------
Margaret M. Norton
</TABLE>
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rogue Wave Software, Inc.:
We have audited the accompanying consolidated balance sheets of Rogue Wave
Software, Inc. and subsidiaries as of September 30, 1999 and 2000, 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, 2000.
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 auditing standards generally
accepted in the United States of America. 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, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended September 30, 2000 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Boulder, Colorado
October 20, 2000
F-1
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30,
-----------------
1999 2000
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................... $13,875 $21,823
Short-term investments available for sale....................... 13,789 11,703
Accounts receivable, net........................................ 10,176 12,101
Prepaid expenses and other current assets....................... 1,420 1,499
Deferred income taxes........................................... 1,240 1,603
------- -------
Total current assets........................................... 40,500 48,729
Equipment, net................................................... 4,310 5,208
Intangibles resulting from business acquisitions, net............ 11,620 822
Other assets, net................................................ 3,040 860
------- -------
Total assets................................................... $59,470 $55,619
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ 423 880
Accrued expenses................................................ 5,399 5,746
Deferred revenue................................................ 11,306 11,700
------- -------
Total liabilities.............................................. 17,128 18,326
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value. Authorized 35,000 shares; issued
and outstanding 10,475 and 10,909 shares at September 30, 1999
and 2000, respectively......................................... 10 11
Additional paid-in capital...................................... 38,053 40,801
Retained earnings (accumulated deficit)......................... 7,084 (3,419)
Accumulated other comprehensive income (loss)................... 254 (100)
Treasury stock at cost, 358 shares in 1999...................... (3,059) -
------- -------
Total stockholders' equity..................................... 42,342 37,293
------- -------
Total liabilities and stockholders' equity..................... $59,470 $55,619
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Revenue:
License revenue.................................... $28,663 $32,394 $ 30,724
Service and maintenance revenue.................... 15,776 20,710 23,718
------- ------- --------
Total revenue..................................... 44,439 53,104 54,442
------- ------- --------
Cost of revenue:
Cost of license revenue............................ 2,377 2,149 1,710
Cost of service and maintenance revenue............ 4,920 7,306 7,981
------- ------- --------
Total cost of revenue............................. 7,297 9,455 9,691
------- ------- --------
Gross profit...................................... 37,142 43,649 44,751
------- ------- --------
Operating expenses:
Product development................................ 9,532 11,512 14,072
Sales and marketing................................ 19,313 23,510 24,668
General and administrative......................... 4,164 5,354 5,491
Acquisition, relocation and goodwill amortization.. 1,789 1,170 1,661
Goodwill impairment charge......................... -- -- 10,493
------- ------- --------
Total operating expenses.......................... 34,798 41,546 56,385
------- ------- --------
Income (loss) from operations..................... 2,344 2,103 (11,634)
Other income, net................................... 794 1,182 1,877
------- ------- --------
Income (loss) before income taxes................. 3,138 3,285 ( 9,757)
Income tax expense.................................. 961 1,274 746
------- ------- --------
Net income (loss)................................. $ 2,177 $ 2,011 $(10,503)
======= ======= ========
Pro forma net income data (unaudited):
Income before income taxes, as reported............ $ 3,138
Pro forma income tax expense....................... 1,098
-------
Pro forma net income.............................. $ 2,040
=======
Pro forma basic earnings per share................. $ 0.20
=======
Pro forma diluted earnings per share............... $ 0.19
=======
Basic earnings (loss) per share..................... $ 0.21 $ 0.19 $ (1.00)
======= ======= ========
Diluted earnings (loss) per share................... $ 0.20 $ 0.19 $ (1.00)
======= ======= ========
Shares used in basic per share calculation.......... 10,209 10,383 10,512
Shares used in diluted per share calculation........ 10,670 10,860 10,512
Net income (loss)................................. $ 2,177 $ 2,011 $(10,503)
Other comprehensive income (loss)
Foreign currency translation gain (loss)........ 94 280 (354)
------- ------- --------
Total other comprehensive income (loss)........... $ 2,271 $ 2,291 $(10,857)
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Retained Accumulated Total
Common stock Paid-in Earnings Comprehensive Treasury Stock Stockholders'
------------ --------------
Shares Amount Capital (Deficit) Income (Loss) Shares Amount Equity
------ ------ ------- --------- -------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997.............. 10,024 $ 9 $36,709 $ 3,322 $(120) -- $ -- $ 39,920
Issuance of common stock, net............. 97 1 587 -- -- -- -- 588
Exercise of stock options................. 336 -- 341 -- -- -- -- 341
Tax benefit from stock option exercises... -- -- 211 -- -- -- -- 211
Net income................................ -- -- -- 2,177 -- -- -- 2,177
Dividends paid............................ -- -- -- (426) -- -- -- (426)
Foreign currency translation adjustment... -- -- -- -- 94 -- -- 94
------ --- ------- -------- ----- ---- ------- --------
Balance at September 30, 1998.............. 10,457 10 37,848 5,073 (26) -- -- 42,905
Purchase of common stock.................. -- -- -- -- -- 595 (4,011) (4,011)
Issuance of common stock, net............. -- -- -- -- -- (87) 596 596
Exercise of stock options................. 18 -- 53 -- -- (150) 356 409
Tax benefit from stock option exercises... -- -- 152 -- -- -- -- 152
Net income................................ -- -- -- 2,011 -- -- -- 2,011
Foreign currency translation adjustment... -- -- -- -- 280 -- -- 280
------ --- ------- -------- ----- ---- ------- --------
Balance at September 30, 1999.............. 10,475 10 38,053 7,084 254 358 (3,059) 42,342
Issuance of common stock, net............. 123 -- 1,200 -- -- (51) 260 1,460
Exercise of stock options................. 311 1 1,201 -- -- (307) 2,799 4,001
Tax benefit from stock option
exercises................................ -- -- 347 -- -- -- -- 347
Net loss.................................. -- -- -- (10,503) -- -- -- (10,503)
Foreign currency translation
adjustment.............................. -- -- -- -- (354) -- -- (354)
------ --- ------- -------- ----- ---- ------- --------
Balance at September 30, 2000.............. 10,909 $11 $40,801 $ (3,419) $(100) -- $ -- $ 37,293
====== === ======= ======== ===== ==== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................................................. $ 2,177 $ 2,011 $(10,503)
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization..................................................... 3,115 4,050 15,292
Tax benefit from stock options.................................................... 211 152 347
Loss on disposal of equipment..................................................... 247 58 --
Changes in assets and liabilities:
Accounts receivable.............................................................. (756) (2,805) (1,925)
Prepaid expenses and other current assets........................................ (1,110) 1,079 (79)
Deferred income taxes............................................................ (434) (425) (365)
Other assets, net................................................................ (2,901) (77) 70
Accounts payable and accrued expenses............................................ 489 1,332 808
Deferred revenue................................................................. 1,472 3,436 394
------- -------- --------
Net cash from operating activities............................................. 2,510 8,811 4,039
------- -------- --------
Cash flows from investing activities:
Purchase of equipment.............................................................. (3,143) (1,743) (3,283)
Maturities of short-term investments available for sale............................ 4,456 7,494 2,086
Purchase of business, net of cash acquired......................................... -- (11,840) --
------- -------- --------
Net cash from (used in) investing activities................................... 1,313 (6,089) (1,197)
------- -------- --------
Cash flows from financing activities:
Payments on long-term obligations.................................................. (438) (112) --
Dividends paid..................................................................... (426) -- --
Treasury stock purchases........................................................... -- (4,011) --
Net proceeds from issuance of common stock......................................... -- -- 1,460
Proceeds from Employee Stock Purchase Plan......................................... 588 596 364
Proceeds from exercise of stock options............................................ 341 409 3,636
------- -------- --------
Net cash from (used in) financing activities................................... 65 (3,118) 5,460
------- -------- --------
Effect of exchange rate changes on cash and cash equivalents........................ 94 290 (354)
------- -------- --------
Net change in cash and cash equivalents........................................ 3,982 (106) 7,948
Cash and cash equivalents at beginning of year...................................... 9,999 13,981 13,875
------- -------- --------
Cash and cash equivalents at end of year............................................ $13,981 $ 13,875 $ 21,823
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest............................................................. $ 35 $ 28 $ 2
Cash paid for income taxes......................................................... 1,601 1,597 547
Supplemental disclosure of non-cash investing and financing activities:
Purchase of business, net of cash acquired:
Working capital, other than cash................................................... $ -- $ (655) $ --
Equipment.......................................................................... -- 345 --
Cost in excess of net assets acquired, net......................................... -- 12,150 --
Other.............................................................................. -- -- --
------- -------- --------
Net cash used to acquire businesses............................................ $ -- $ 11,840 $ --
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
Rogue Wave Software, Inc. and subsidiaries (the "Company") is primarily
engaged in the development, sale and support of object-oriented software
solutions. The Company markets its products primarily through its direct sales
organization and, to a lesser extent, through outside sales representatives and
indirect channel partners to business and government customers. The Company's
customers operate in many industry segments across geographically diverse
markets.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Intercompany accounts and transactions have
been eliminated. Investments in 20% to 50% owned affiliates are accounted for
using the equity method. The Company's share of affiliates' activities, if any,
is reflected in other income, net.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Currency Translation
The Company translates the assets and liabilities of its non-U.S.
functional currency subsidiaries into dollars at the rates of exchange in effect
at the end of the period. Revenue and expenses are translated using rates that
approximate those in effect during the period. Gains and losses from currency
translation are recognized as other comprehensive income or loss and are
included in stockholders' equity in the consolidated balance sheet.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of investments in highly liquid investment
instruments with maturities of less than three months at date of acquisition.
Short-term investments consist primarily of commercial paper with acquired
maturities of 180 days or less. Short-term investments are held as securities
available for sale and are carried at their fair value as of the balance sheet
date, which approximates cost.
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.
Intangible Assets
Intangible assets include purchased software rights, a covenant not to
compete and goodwill, which are amortized over estimated useful lives of three
to ten years using the straight-line method. The Company reviews its long-lived
assets including goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets including goodwill held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets, including goodwill,
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of their carrying
amount or fair value less cost to sell. Original cost of these intangibles was
$17,249 and $17,310 at September 30, 1999 and 2000, respectively. Accumulated
F-6
<PAGE>
amortization at September 30, 1999 and 2000, was $3,705 and $16,583,
respectively. Amortization charged to expense was $853 and $2,068 for the years
ended September 30, 1998 and 1999, respectively. Amortization charged to expense
in fiscal 2000 was $12,154 of which $10,493 was related to the goodwill
impairment charge associated with the write-off of the NobleNet intangible
assets.
Foreign Exchange Contracts
The Company enters into foreign exchange forward contracts to hedge certain
operational and balance sheet exposures from changes in foreign currency
exchange rates. Such exposures result from the portion of the Company's
operations, assets and liabilities that are denominated in currencies other than
the U.S. dollar. These transactions are entered in to hedge purchases, sales
and other normal recurring transactions and, accordingly, are not speculative in
nature. The Company does not hold or issue financial instruments for trading
purposes nor does it hold or issue leveraged derivative financial instruments.
Market value gains and losses on such contracts that result from fluctuations in
foreign exchange rates are recognized as offsets to the exchange gains or losses
on the hedged transactions. By their nature, these transactions generally
offset. The net gain or loss on such foreign currency contracts and underlying
transactions was not material during 1998, 1999 and 2000. The Company had
outstanding short-term forward exchange contracts to exchange Euros for U.S.
dollars in the amount of $1.314 million at September 30, 2000.
Revenue Recognition
License revenue is recognized according to the criteria of SOP 97-2, as
amended. Revenue is recognized upon execution of a license agreement or signed
written contract with fixed or determinable fees, shipment or electronic
delivery of the product, and collection of the resulting receivable is probable.
Maintenance and service revenue includes maintenance revenue that is deferred
and recognized ratably over the maintenance period. Service revenue, including
training and consulting services, is recognized upon completion of the related
activity. The Company generally provides a thirty-day right of return policy
for software sales. The allowance for returns was $432 and $575 at September
30, 1999 and 2000, respectively.
Advertising Costs
Advertising costs are charged to expense when incurred and amounted to
$2,341, $2,525, and $1,855 in 1998, 1999 and 2000, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents, short-
term investments and accounts receivable. The counter parties to the agreements
relating to the Company's cash equivalents and short-term investments consist of
various major corporations and financial institutions of high credit standing.
The Company's receivables are derived primarily from the sales of software
products and services to customers in diversified industries as well as
distributors in the U.S. and foreign markets. International revenue accounted
for approximately 28%, 24% and 24% of the Company's total revenue for the years
ended September 30, 1998, 1999 and 2000, respectively. The Company performs
ongoing credit evaluations of its customers' financial condition and limits the
amount of credit extended when deemed necessary, but generally requires no
collateral. The Company has provided an allowance for doubtful accounts of $470
and $575 at September 30, 1999 and 2000, respectively.
Research and Development
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed. Under the standard,
capitalization of software development costs begins upon the establishment of
technological feasibility, subject to net realizable value considerations. The
Company begins capitalization upon completion of a working model. To date, such
capitalizable costs have been de minims. Accordingly, the Company has charged
all such costs to product development expense.
Basic and Diluted Earnings Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, Earnings Per Share. Basic earnings per share is computed using the
weighted average number of shares outstanding while diluted earnings per share
includes the dilutive effect of stock options and other potential common stock
instruments or equivalents. Diluted earnings per share include 461 and 477
shares of dilutive stock options for 1998 and 1999, respectively.
F-7
<PAGE>
Due to the net loss in 2000, all options totaling 325 are anti-dilutive
and, accordingly, the shares used in computing the basic and diluted earnings
per share are the same. Calculation of basic and diluted earnings (loss) per
share is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income (loss) available to common stockholders........... $ 2,177 $ 2,011 $(10,503)
======= ======= ========
Denominator:
Historical common shares outstanding for basic income (loss)
per share at beginning of year.............................. 10,024 10,457 10,475
Weighted average of common equivalent shares issued during
the year.................................................... 185 163 395
Weighted average of common equivalent shares reissued during
the year.................................................... -- (237) (358)
------- ------- --------
Denominator for basic income (loss) per share - - weighted
average shares.............................................. 10,209 10,383 10,512
Incremental common shares attributable to shares issuable
under equity incentive plans (Treasury Stock Method)....... 461 477 --
------- ------- --------
Denominator for diluted net income (loss) per share - -
weighted average shares..................................... 10,670 10,860 10,512
======= ======= ========
Basic earnings (loss) per share.............................. $ 0.21 $ 0.19 $ (1.00)
======= ======= ========
Diluted earnings (loss) per share............................ $ 0.20 $ 0.19 $ (1.00)
======= ======= ========
</TABLE>
Accounting for Stock-Based Compensation
The Company has elected to account for its stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued To Employees ("APB 25"), with the Financial Accounting Standards Board
Interpretation No. 44 Accounting for Certain Transactions involving Stock
Compensation ("FIN 44") which is an interpretation of APB Opinion No. 25, and
has adopted the "disclosure only" alternative described in SFAS 123, Accounting
for Stock-Based Compensation.
Reclassifications
Certain prior-year amounts have been reclassified to conform to the current
year presentation.
Accounting for Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statements carrying amounts of existing assets and
liabilities and their respective tax bases. A valuation allowance is recorded to
reduce deferred tax assets to an amount where realization is more likely than
not.
(2) Mergers and Acquisitions
On October 1, 1997, the Company acquired a controlling interest in HotData,
Inc. ("HotData"). HotData began operations in 1997, and has developed
technology related to the collection and verification of data across the
Internet. On September 1, 1998, HotData issued capital stock to additional
investors thereby reducing the Company's percentage ownership from 78% to 42%
and from 42% to 21%. The HotData investment has been accounted for using the
equity method of accounting for fiscal 1999 and 1998. The Company recognized
$1,052 and $252 in HotData equity losses during fiscal years 1998 and 1999,
respectively. The Company's recorded investment in HotData was $252 and $0 at
September 30, 1998 and 1999, respectively.
On February 27, 1998, the Company acquired all of the capital stock of
Stingray Software, Inc. ("Stingray") in exchange for 1.65 million shares of the
Company's common stock in a transaction accounted for as a pooling of interests.
Stingray was a privately held company that develops and distributes development
tools for Windows programmers. The Company's consolidated
F-8
<PAGE>
financial statements and notes to consolidated financial statements have been
restated to include the results of Stingray for all periods presented. Prior to
January 1, 1998, Stingray was taxed under the S Corporation provisions of the
Internal Revenue Code. Under those provisions, Stingray did not pay federal or
state corporate income taxes on its income. Pro forma information for 1997 and
1998 are presented to show the impact as if Stingray's earnings had been subject
to federal and state income taxes as a C Corporation in those years.
Separate results of operations for the periods prior to the merger with
Stingray are as follows:
<TABLE>
<CAPTION>
The
Company Stingray Combined
------- -------- --------
<S> <C> <C> <C>
Year ended September 30, 1998:
Total revenue........................................................ $41,679 $2,760 $44,439
Net income........................................................... 1,823 354 2,177
</TABLE>
Merger costs of $700 were incurred and charged to expense during fiscal
1998 for services rendered to facilitate completion of the transaction.
On March 1, 1999, the Company acquired 100% of the outstanding stock of
NobleNet, Inc. ("NobleNet") for $11.8 million in cash ($10.8 million in cash at
closing and $1 million held in an escrow account, which was paid in January
2000). The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the accompanying financial statements include
NobleNet's results beginning with the acquisition date. The purchase price was
allocated to the assets of NobleNet based on their respective fair values. The
excess of the purchase price over assets acquired approximated $11.8 million and
was being amortized over 10 years. The pro forma information that follows
assumes that the acquisition of NobleNet took place as of October 1, 1997. The
unaudited pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been made during
the periods presented or the future results of the combined operations.
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1998 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenue......................................................... $46,653 $53,743
Net loss........................................................ (3,171) (873)
Basic loss per share............................................ (0.19) (0.08)
Diluted loss per share.......................................... (0.19) (0.08)
</TABLE>
NobleNet's Nouveau technology, an Internet-generation Object Request Broker
("ORB"), was expected to expand Rogue Wave's product offering by providing a
unified architecture for building high performance, distributed applications
that interoperate across an enterprise or over the Internet. In August 2000,
the Company concluded that the penetration of the ORB market, with the Nouveau
product, had been unsuccessful and determined that the Nouveau product had
become obsolete, eliminating all future revenue opportunities. Accordingly, the
Company recorded an impairment charge of $10,493 to write-off the remaining
goodwill related to the NobleNet investment.
(3) Balance Sheet Components
Equipment
Furniture, fixtures and equipment at September 30, 1999 and 2000, consist
of the following:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Computer equipment..................................................................... $ 7,895 $10,789
Furniture, fixtures and equipment...................................................... 3,181 3,460
------- -------
11,076 14,249
Less accumulated depreciation and amortization......................................... 6,766 9,041
------- -------
Furniture, fixtures and equipment, net.............................................. $ 4,310 $ 5,208
======= =======
</TABLE>
Depreciation and amortization expense for the years ended September 30,
1998, 1999 and 2000 was $2,262, $2,486 and $2,578, respectively.
F-9
<PAGE>
Accrued Expenses
The Company's accrued expenses at September 30, 1999 and 2000, include the
following:
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
Accrued payroll and related liabilities.......................................................... $2,423 $2,520
Funds held in escrow............................................................................. 1,000 --
Other accrued expenses........................................................................... 1,976 3,226
------ ------
Accrued expenses............................................................................... $5,399 $5,746
====== ======
</TABLE>
(4) Leases
The Company leases certain equipment and office space through noncancelable
operating lease arrangements. The leases expire in 2000 through 2005 and are
net leases with the Company paying all executory costs, including insurance,
utilities and maintenance. Rent expense for operating leases during the years
ended September 30, 1998, 1999 and 2000 was $1,532, $1,958 and $1,730,
respectively.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
Operating
---------
<S> <C>
Year ending September 30:
2001........................................................................................... $1,401
2002........................................................................................... 1,292
2003........................................................................................... 1,229
2004........................................................................................... 591
2005........................................................................................... 182
------
Total minimum lease payments................................................................. $4,695
======
</TABLE>
(5) Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Current:
Federal................................................................ $ 980 $1,470 $ 809
State and local........................................................ 415 229 302
------ ------ ------
1,395 1,699 1,111
------ ------ ------
Deferred:
Federal................................................................ (347) (333) (292)
State and local........................................................ (87) (92) ( 73)
------ ------ ------
(434) (425) (365)
------ ------ ------
Total............................................................... $ 961 $1,274 $ 746
====== ====== ======
</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>
Year Ended September 30,
------------------------
1998 1999 2000
------ ------ -------
<S> <C> <C> <C>
Computed expected income tax expense (benefit).......................... $1,067 $1,117 $(3,317)
Difference in income tax expense resulting from:
Subsidiary S-Corp earnings exclusion.................................... (156) -- --
State and other income tax expense (benefit)........................... 57 123 (366)
Research and experimentation credit..................................... (265) (560) (327)
Change in valuation allowance........................................... (374) 195 25
Foreign net operating loss applied as a reduction of goodwill........... 344 65 --
Non-deductible meals and entertainment.................................. 87 39 70
Non-deductible intangible asset amortization............................ 149 399 4,632
International rate difference........................................... 30 9 50
Other, net.............................................................. 22 (113) (21)
------ ------ -------
Income tax expense................................................... $ 961 $1,274 $ 746
====== ====== =======
</TABLE>
F-10
<PAGE>
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,
-------------
1999 2000
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable................................................................... $ 270 $ 375
Intangible assets..................................................................... (19) (139)
Accrued expenses...................................................................... 292 596
Fixed assets.......................................................................... 64 99
Foreign operating loss carryforwards.................................................. 511 310
Research and experimentation credit carryforward...................................... 353 641
Equity losses of unconsolidated subsidiary............................................ 503 503
Other................................................................................. 54 31
------ ------
Total gross deferred tax assets...................................................... 2,028 2,416
Valuation allowance................................................................... (788) (813)
------ ------
Net deferred tax assets.............................................................. $1,240 $1,603
====== ======
</TABLE>
At September 30, 2000, the Company had net operating loss carryforwards for
federal and foreign income tax purposes of $66 and $756, respectively. The
federal net operating loss expires 2007 to 2011. The Company also had $99 of tax
credit carryforwards that expire 2003 to 2015. The net federal operating loss
and $86 of the tax credit carryforwards were generated by Inmark prior to
Inmark's merger with the Company on October 27, 1995. Tax benefits resulting
from the utilization of the acquired foreign net operating loss carryforwards
will first be offset against goodwill associated with the acquisition of
Precision before being recorded as a tax benefit. Based upon management's
estimates, the Company has provided a valuation allowance against certain
deferred tax assets.
(6) Equity Incentive Plans
In June 1996, the Company's Board of Directors adopted the 1996 Equity
Incentive Plan (the "Equity Incentive Plan"). The Company has reserved 3,500
shares of common stock for issuance under the Equity Incentive Plan. The Equity
Incentive Plan replaced the Company's 1994 Stock Option Plan and the Inmark
Stock Option Plan. The Equity Incentive Plan provides for grants of incentive
stock options to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors), directors and consultants of the Company.
The Equity Incentive Plan and the Non-Officer Equity Incentive Plan are
administered by a committee appointed by the Board of Directors which determines
recipients, types of awards to be granted, including exercise price, number of
shares subject to the award and the exercisability thereof.
The terms of a stock option granted under the Equity Incentive Plan
generally may not exceed ten years (five years in the case of holders of more
than 10% of the Company's capital stock). The exercise price of options granted
under the Equity Incentive Plan is determined by the Board of Directors but, in
the case of an incentive stock option, cannot be less than 100% of the fair
market value of the common stock on the date of grant. Options granted under
the Equity Incentive Plan vest at the rate specified in the option agreement.
In October 1997, the Company's Board of Directors adopted the 1997 Non-
Officer Equity Incentive Plan. The Company has reserved 900,000 shares of
common stock for issuance under the plan. The Non-Officer Equity Incentive Plan
provides for grants of nonstatutory stock options to non-officer employees or
consultants.
The terms of a stock option granted under the 1997 Non-Officer Equity
Incentive Plan may not exceed ten years. The exercise price of options granted
under the plan shall not be less than 85% of the fair market value of the stock
subject to the option on the date the option is granted. Options granted under
the Non-officer Equity Incentive Plan vest at the rate specified in the option
agreement.
F-11
<PAGE>
The following table summarizes stock option activity for the three years
ended September 30, 2000:
<TABLE>
<CAPTION>
Weighted avg.
-------------
Shares price per share
------ ---------------
<S> <C> <C>
Outstanding options at September 30, 1997............................................. 1,889 $ 6.69
Granted.............................................................................. 1,141 10.59
Exercised............................................................................ (336) 1.01
Canceled............................................................................. (404) 9.41
------ ------
Outstanding options at September 30, 1998............................................. 2,290 8.97
Granted.............................................................................. 1,159 6.14
Exercised............................................................................ (167) 2.45
Canceled............................................................................. (594) 9.23
------ ------
Outstanding options at September 30, 1999............................................. 2,688 8.10
Granted.............................................................................. 2,409 5.58
Exercised............................................................................ (542) 6.71
Canceled............................................................................. (1,151) 8.55
------ ------
Outstanding options at September 30, 2000............................................. 3,404 $ 6.39
====== ======
</TABLE>
Options vested and exercisable were 798, 1,163 and 884 at September 30,
1998, 1999 and 2000, respectively. For various price ranges, weighted average
characteristics of outstanding stock options at September 30, 2000 were as
follows:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------- -------------------
Remaining Weighted Weighted
Exercise Price Shares life (years) avg. price Shares avg. price
-------------- ------ ------------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
$0.15-$4.69............................................... 573 9.1 $4.12 99 $ 1.50
$4.72-$5.00............................................... 966 9.4 $4.82 59 $ 4.74
$5.06-$7.75............................................... 877 9.0 $6.09 207 $ 5.55
$7.88-$17.00.............................................. 988 8.5 $9.51 520 $10.18
----- ---
3,404 9.0 $6.39 885 $ 7.77
===== ===
</TABLE>
The Company follows APB 25, to account for stock option and employee stock
purchase plans. No compensation cost is recognized because the option exercise
price is equal to the fair value of the underlying stock on the date of grant.
Had compensation cost for these plans been determined based on the Black-Scholes
value at the grant dates for awards as prescribed by SFAS 123, pro forma net
income (loss) and earnings (loss) per share would have been:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------
1998 1999 2000
----- ----- --------
<S> <C> <C> <C>
Pro forma net income (loss).......................................................... $ 198 $ 41 $(13,138)
Pro forma diluted earnings (loss) per share.......................................... $0.02 $0.00 $ (1.25)
</TABLE>
The pro forma disclosures above include the amortization of the fair value
of all options vested during 1998, 1999 and 2000. The effects of applying SFAS
123 in this pro forma disclosure may not be indicative of future amounts.
The weighted average Black-Scholes value of options granted under the stock
option plans during 1998, 1999 and 2000 was $6.97, $6.27 and $4.24
respectively. Such value was estimated using an expected life of five years, a
dividend factor of 0.48 in 1998, 1999 and 2000, volatility of 0.84 in 1998, 0.76
in 1999 and 1.02 in 2000 and risk-free interest rates of 4.2%, 5.0% and 5.7% in
1998, 1999 and 2000.
(7) Common Stock Repurchase
In October 1998, the Board of Directors authorized the Company to
repurchase up to the lesser of 500 shares of the Company's common stock or $10
million. In July 1999, the Board of Directors further authorized the Company to
repurchase the lesser of an additional 500 shares, or a cumulative total of
$8.5 million for the full 1,000 shares. The Company purchased 595 shares ($4.0
million) of its common shares during the year ended September 30, 1999. The
Company has purchased and subsequently issued a total of 358 shares for employee
benefit plans as of September 30, 2000.
F-12
<PAGE>
(8) Employee Stock Purchase Plan
In June 1996, the Board of Directors adopted the Employee Stock Purchase
Plan (the "Purchase Plan") covering an aggregate of 450 shares of common stock.
The Purchase Plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Internal Revenue Code. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the Purchase Plan. The offering period for any offering will be no more than 27
months.
Employees are eligible to participate if they are employed by the Company
or an affiliate of the Company designated by the Board of Directors. Employees
who participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan and applied, on specific dates determined by the
Board of Directors, to the purchase of shares of common stock. The price of
common stock purchased under the Purchase Plan will be equal to 85% of the lower
of the fair market value of the common stock on the commencement date of each
offering period or the relevant purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
During the years ended September 30, 1998, 1999 and 2000, 97, 87 and 51 shares
respectively, were purchased under this plan.
(9) Qualified Profit Sharing Plan
The Company has a 401(k) profit sharing plan which is offered to eligible
employees and calls for a discretionary employer match of employee
contributions, which is approved by the Board of Directors. To participate in
the plan, employees must be full-time employees and work a minimum of 1,000
hours during the plan year. The Company matches all employee contributions up
to 3% of earnings and half of employee contributions from 3% to 5%. Company
contributions paid in the years ended September 30, 1998, 1999 and 2000 were
$424, $466 and $448, respectively.
(10) Worldwide Operations
Revenue by geographic area for fiscal years 1998, 1999 and 2000 was 71%,
76% and 76% in the United States; 25%, 21% and 21% in Europe; 3%, 2% and 2% in
Asia and 1%, 1% and 1% in other, respectively.
Information regarding worldwide operations is as follows:
<TABLE>
<CAPTION>
United
States Europe Eliminations Total
--------- ------- ------------- ---------
<S> <C> <C> <C> <C>
September 30, 2000, and for the year then ended:
Revenue to unaffiliated customers...................................... $ 43,134 $11,308 $ -- $ 54,442
Intercompany transfers................................................. 3,896 -- (3,896) --
-------- ------- ------- --------
Net revenue........................................................... 47,030 11,308 (3,896) 54,442
Operating income (loss)................................................ (12,535) 892 -- (11,643)
Long-lived assets...................................................... 50,053 8,113 (2,547) 55,619
September 30, 1999, and for the year then ended:
Revenue to unaffiliated customers...................................... $ 41,852 $11,252 $ -- $ 53,104
Intercompany transfers................................................. 4,036 -- (4,036) --
-------- ------- ------- --------
Net revenue........................................................... 45,888 11,252 (4,036) 53,104
Operating income....................................................... 1,592 511 -- 2,103
Long-lived assets...................................................... 55,378 7,526 (3,434) 59,470
September 30, 1998, and for the year then ended:
Revenue to unaffiliated customers...................................... $ 34,227 $10,212 $ -- $ 44,439
Intercompany transfers................................................. 3,033 -- (3,033) --
-------- ------- ------- --------
Net revenue........................................................... 37,260 10,212 (3,033) 44,439
Operating income....................................................... 1,124 1,220 -- 2,344
Long-lived assets...................................................... 50,973 5,701 (2,147) 54,527
</TABLE>
F-13
<PAGE>
(11) 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.
(12) Quarterly Information (Unaudited)
The following table presents unaudited quarterly operating results for each
of the Company's eight quarters in the two-year period ended September 30, 2000.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sept. 30,
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Fiscal year 2000
Total revenue....................................................... $12,616 $13,042 $14,061 $ 14,723
Gross margin........................................................ 10,245 10,680 11,437 12,389
Income (loss) from operations....................................... (929) ( 338) 77 (10,444)
Net income (loss)................................................... (507) (112) 266 (10,150)
Basic earnings (loss) per share..................................... (0.05) (0.01) 0.02 (0.96)
Diluted earnings (loss) per share................................... (0.05) (0.01) 0.02 (0.96)
Fiscal year 1999
Total revenue....................................................... $12,185 $13,379 $14,031 $ 13,509
Gross margin........................................................ 10,115 11,054 11,473 11,007
Income (loss) from operations....................................... 1,253 1,283 428 (861)
Net income (loss)................................................... 889 1,099 434 (411)
Basic earnings (loss) per share..................................... 0.09 0.10 0.04 (0.04)
Diluted earnings (loss) per share................................... 0.08 0.10 0.04 (0.04)
===================================================================================================================
</TABLE>
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rogue Wave Software, Inc.:
Under date of October 20, 2000, we reported on the consolidated balance sheets
of Rogue Wave Software, Inc. and subsidiaries as of September 30, 1999 and 2000,
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,
2000, as contained in the annual report on Form 10-K for the fiscal year 2000.
In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule, as listed in the accompanying index. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Boulder, Colorado
October 20, 2000
S-1
<PAGE>
ROGUE WAVE SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Years ended September 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Balance Balance
at Beginning at End
of Year Additions Deductions of Year
-------- --------- ---------- -------
<S> <C> <C> <C> <C>
September 30, 2000:
Allowance for doubtful accounts....................... $470 $105 $ -- $ 575
Sales returns and allowance........................... 432 143 -- 575
Valuation allowance for deferred tax asset............ 788 25 -- 813
September 30, 1999:
Allowance for doubtful accounts....................... $259 $211 $ -- $ 470
Sales returns and allowance........................... 278 154 -- 432
Valuation allowance for deferred tax asset............ 593 195 -- 788
September 30, 1998:
Allowance for doubtful accounts....................... $243 $ 16 $ -- $ 259
Sales returns and allowance........................... 225 53 -- 278
Valuation allowance for deferred tax asset............ 967 -- 374 593
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-----------------------
2.1(1) Agreement and Plan of Reorganization between Registrant, Inmark
Development Corporation and RW Acquisitions, Inc. dated as of
September 19, 1995.
2.2(1) Agreement and Plan of Merger between the Registrant and Rogue Wave
Software, Inc., an Oregon corporation.
2.3(3) Agreement and Plan of Merger and Reorganization among Rogue Wave
Software, Inc., a Delaware corporation, SR Acquisition Corp., a North
Carolina corporation, Stingray Software, Inc., a North Carolina
corporation and the shareholders of Stingray Software, Inc., dated as
of January 19, 1998.
2.4(4) Articles of Merger and Plan of Merger dated February 27, 1998 filed
with the Secretary of State of North Carolina on February 27, 1998.
2.5(6) Agreement and Plan of Merger and Reorganization among Rogue Wave
Software, Inc., a Delaware corporation, NN Acquisition Corp., a
Delaware corporation, NobleNet, Inc., a Delaware corporation and Steve
Lemmo, as agent for the stockholders of NobleNet, dated as of February
11, 1999.
2.6(6) Certificate of Merger and Plan of Merger dated March 1,1998, filed
with the Secretary of State of the State of Delaware on March 1, 1999.
3.1(2) Amended and Restated Certificate of Incorporation of Rogue Wave
Software, Inc., a Delaware corporation.
3.2(1) Bylaws of Rogue Wave Software, Inc., a Delaware corporation.
4.1(1) Reference is made to Exhibits 3.1 and 3.2.
4.2(1) Specimen Stock Certificate.
4.3(1) Amended and Restated Investors' Rights Agreement between the
Registrant and certain investors, dated November 10, 1995, as amended
June 27, 1996.
4.4(7) Registration Rights Agreement between the Registrant and Intel 64 Fund
LLC, dated February 22, 2000.
10.1(1) Registrant's 1996 Equity Incentive Plan.
10.2(8) Amended and Restated Employee Stock Purchase Plan, dated June 6, 1996,
as amended January 25, 2000.
10.3(1) Form of Indemnity Agreement to be entered into between the Registrant
and its officers and directors.
10.4(1) Lease Agreement between Registrant and the State of Oregon dated May
1, 1996.
10.5(1) Lease Agreement between the Registrant and the Landmark dated April
22, 1996.
10.6(7) Home Loan Agreement between Registrant and Michael Scally dated
January 7,1998.
10.7(7) Home Loan Agreement between Registrant and Robert Holburn dated
February 2,1998.
21.1 List of Subsidiaries of Registrant.
23.1 Consent of KPMG LLP.
24.1 Power of Attorney (reference is made to signature page).
27.1 Financial Data Schedule.
_________________
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form SB-
2, as amended (No. 333 -13517)
(2) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1996.
<PAGE>
(3) Filed as Exhibit 2.1 to the Registrant's Form 8-K dated February 27, 1998,
and filed on March 9, 1998.
(4) Filed as Exhibit 2.2 to the Registrant's Form 8-K dated February 27, 1998,
and filed on March 9, 1998.
(5) Filed as an Exhibit to the Registrant's Form 8-K dated March 1, 1999 and
filed on March 9, 1999.
(6) Filed as an Exhibit to the Registrant's annual report on Form 10-K for the
year ended September 30, 1998.
(7) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1999.
