<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For Quarterly Period Ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
Commission File Number: 0-28900
Rogue Wave Software, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 93-1064214
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5500 Flatiron Parkway, Boulder, Colorado 80301
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(Address of principal executive offices) (Zip Code)
(303) 473-9118
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(Registrant's telephone number, including area code)
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 period that 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
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 2000
----- -------------------------------
Common Stock, $0.001 par value 10,480,224
1.
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ROGUE WAVE SOFTWARE, INC.
FORM 10-Q
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION,
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1999...................................... 3
Consolidated Statements of Operations for the three months
ended December 31, 1998 and 1999........................... 4
Consolidated Statements of Cash Flows for the three months
ended December 31, 1998 and 1999........................... 5
Notes to Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk... 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 20
SIGNATURES.............................................................. 22
2.
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ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
------------- ------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash, cash equivalents and short term investments................. $ 27,664 $ 30,698
Accounts receivable, net.......................................... 10,176 7,704
Prepaid expenses and other current assets......................... 2,660 2,761
------------- ------------
Total current assets............................................ 40,500 41,163
Equipment, net....................................................... 4,310 4,098
Goodwill, net........................................................ 11,922 11,569
Other assets, net.................................................... 2,738 2,459
------------- ------------
Total assets.................................................... $ 59,470 $ 59,289
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 423 $ 368
Accrued expenses.................................................. 5,399 4,790
Deferred revenue.................................................. 11,306 11,252
------------- ------------
Total current liabilities....................................... 17,128 16,410
Stockholders' equity:
Common stock...................................................... 10 10
Additional paid-in capital........................................ 34,994 36,465
Retained earnings................................................. 7,084 6,577
Accumulated other comprehensive income (loss)..................... 254 (173)
------------- ------------
Total stockholders' equity...................................... 42,342 42,879
------------- ------------
Total liabilities and stockholders' equity...................... $ 59,470 $ 59,289
============= ============
</TABLE>
See accompanying notes.
3.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31,
-----------------------
1998 1999
---------- -----------
Revenue:
<S> <C> <C>
License revenue............................................................... $ 7,809 $ 6,812
Service and maintenance revenue............................................... 4,376 5,804
------- -------
Total revenue............................................................... 12,185 12,616
------- -------
Cost of revenue:
Cost of license revenue....................................................... 496 444
Cost of service and maintenance revenue....................................... 1,574 1,927
------- -------
Total cost of revenue....................................................... 2,070 2,371
------- -------
Gross profit.................................................................. 10,115 10,245
------- -------
Operating expenses:
Product development........................................................... 2,241 3,655
Sales and marketing........................................................... 5,408 5,572
General and administrative.................................................... 1,213 1,348
Goodwill amortization and severance costs..................................... - 601
------- -------
Total operating expenses.................................................... 8,862 11,176
------- -------
Income (loss) from operations............................................... 1,253 (931)
Other income, net................................................................ 115 335
------- -------
Income (loss) before income taxes........................................... 1,368 (596)
Income tax expense (benefit)..................................................... 479 (89)
------- -------
Net income (loss)........................................................... $ 889 $ (507)
======= =======
Basic earnings (loss) per share.................................................. $0.09 $(0.05)
======= =======
Diluted earnings (loss) per share................................................ $0.08 $(0.05)
======= =======
Shares used in basic per share calculation....................................... 10,444 10,195
Shares used in diluted per share calculation..................................... 10,970 10,195
</TABLE>
See accompanying notes.
4.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------
December 31,
------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ 889 $ (507)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization............................................. 779 1,239
Loss on disposal of assets................................................ 58 --
Changes in assets and liabilities:
Accounts receivable..................................................... (547) 2,319
Prepaid expenses and other current assets............................... 136 (101)
Other noncurrent assets................................................. (588) 14
Accounts payable and accrued expenses................................... 332 (773)
Deferred revenue........................................................ 877 (53)
------- -------
Net cash from operating activities.................................... 1,936 2,138
------- -------
Cash flows from investing activities - equipment acquisitions................. (288) (409)
------- -------
Net cash from investing activities.................................... (288) (409)
------- -------
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations.................... (31) --
Purchase of treasury stock.................................................. (815) --
Proceeds from exercise of stock options..................................... 160 1,471
------- -------
Net cash from financing activities.................................... (686) 1,471
------- -------
Effect of exchange rate changes on cash........................................ 94 (165)
------- -------
Net change in cash and cash equivalents................................ 1,056 3,035
Cash, cash equivalents and short term investments at beginning of period....... 35,264 27,664
------- -------
Cash, cash equivalents and short term investments at end of period............. $36,320 $30,699
======= =======
</TABLE>
See accompanying notes.
5.
<PAGE>
ROGUE WAVE SOFTWARE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements and notes
thereto (the Consolidated Financial Statements) for the year ended September
30, 1999, as included in the Company's annual report on Form 10-K.
2. Revenue Recognition
The Company's revenue is recognized according to the criteria of the
American Institute of Certified Public Accountants Statements of Position
97-2, 98-4 and 98-9, relating to Software Revenue Recognition. License
revenue is booked upon the execution of a license agreement or signed
written contract with fixed or determinable fees, shipment or electronic
delivery of the product, and determination that collection of the resulting
receivable is probable. Maintenance and service revenue includes maintenance
revenue that is deferred and recognized over the maintenance period and
service revenue that includes training and consulting, recognized as
services are performed.
3. Common Stock Repurchase
In October 1998, the Board of directors authorized the Company to repurchase
up to the lesser of 500,000 shares of the Company's common stock or
$10,000,000. In July 1999, the Board of Directors further authorized the
Company to repurchase the lesser of an additional 500,000 shares, or a
cumulative total of $8,500,000 for the full 1,000,000 shares. The Company
has purchased a total of 358,300 shares and has subsequently issued 241,090
of the repurchased shares for employee benefit plans as of December 31,
1999.
4. Acquisition
On March 1, 1999, the Company acquired 100% of the outstanding stock of
NobleNet,Inc. (NobleNet) for $11.8 million in cash. The acquisition was
accounted for under the purchase method 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
net identifiable assets acquired approximated $12.0 million and is being
amortized over 10 years. The pro forma information that follows assumes that
the acquisition of NobleNet took place as of October 1, 1998. 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
period presented or the future results of the combined operations.
Three Months Ended
December 31,
1998
Revenue..................................................$12,656
Net loss..................................................(1,024)
Basic earnings per share...................................(0.14)
Diluted earnings per share.................................(0.14)
6.
<PAGE>
5. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings (loss) per
share is computed on the basis of the weighted average number of common
shares outstanding plus the effect of outstanding stock options using the
"treasury stock" method unless the impact is anti-dilutive. The difference
between basic earnings per share and diluted earnings per share is due to
the effect of outstanding stock options.
6. Comprehensive Income
During fiscal year 1999 the Company adopted Financial Accounting Standards
Board Statement No. 130 ("FASB 130"), "Reporting Comprehensive Income." FASB
130 establishes new rules for reporting and displaying comprehensive income
and its components; however, the adoption has no impact on the Company's net
income or stockholders' equity. "Comprehensive Income" includes foreign
translation adjustments which, prior to the adoption of FASB 130, were
reported separately in stockholders' equity.
Three Months Ended
December 31,
------------------
1998 1999
------------------
Net income (loss).............................. $ 889 $ (507)
Foreign currency translation gains (losses).... 68 (173)
-------- -------
Comprehensive income (loss).................... $ 957 $ (680)
======== =======
7.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as in
the section "Risk Factors" and "Business" in the Company's Annual Report on Form
10-K for the year ended September 30, 1999. Readers are cautioned not to place
undue reliance on these forward-looking statements which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
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 ("Inmark"), a privately held
corporation specializing in the development, distribution and support of an
object-oriented graphical user interface library written in the C++ programming
language. In February 1998, the Company merged with Stingray Software, Inc.
("Stingray"), a privately held corporation specializing in the development and
distribution of object-oriented development tools for Windows programmers and a
leading provider of Visual C++ class libraries. Both transactions were
accounted for as pooling-of-interests business combinations. In March 1999, the
Company merged with NobleNet, Inc. (NobleNet) in a purchase business
combination. NobleNet specialized in building and marketing software products
that allow existing information technology (IT) systems to communicate and
interoperate across corporate networks and the Internet. The products are used
to build sophisticated, enterprise-wide, distributed applications that run on
more than forty platforms.
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 booked upon execution of a license agreement or signed
written contract with fixed or determinable fees, shipment or electronic
delivery of the product if no significant contractual obligations remain and
collection of the resulting receivable is probable. Allowances for credit risks
and for estimated future returns are provided upon shipment. Returns to date
have not been material. Service and maintenance revenue consists of fees that
are charged separately from product licenses. Maintenance revenue consists of
fees for ongoing support and product updates and is recognized ratably over the
term of the contract, which is typically 12 months. Service revenue consists of
training and consulting services and is recognized upon completion of the
related activity. The Company's revenue recognition policies are in compliance
with American Institute of Certified Public Accountants Statements of Position
97-2, 98-4, and 98-9 relating to Software Revenue Recognition.
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 most 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.
8.
<PAGE>
International revenue accounted for approximately 28%, 24% and 27% of total
revenue in fiscal 1998, 1999 and the three months ended December 31, 1999,
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. 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.
The majority of the Company's international revenue is generated by the
Company's European subsidiaries and is denominated in local currencies. The
Company may enter into forward foreign exchange contracts to reduce the risk
associated with currency fluctuations. Although exposure to currency
fluctuations to date has been insignificant, to the extent international revenue
is denominated in local currencies, foreign currency translations may contribute
to significant fluctuations in, and could have a material adverse effect upon,
the Company's business, financial condition and results of operations. See
"Risk Factors- Risks Inherent in International Operations."
The Company acquired a controlling interest in HotData, Inc. ("HotData")
for $1.3 million on October 1, 1997. HotData began operations during 1997 and
has developed technology relating to the collection and verification of data
across the Internet. On September 1, 1998, HotData issued common stock to
additional investors thereby reducing the Company's percentage ownership from
78% to 42%. The HotData investment was accounted for using the equity method
of accounting for fiscal 1998 and 1999. As of December 31, 1999, the Company's
share of HotData's losses had reduced the Company's investment balance to zero.
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 develops and distributes development
tools for Windows programmers. The merger added several new product lines to
Rogue Wave's current slate of object-oriented C++ and Java TM class libraries
and builders. Stingray offers an extensive line of add-on libraries that extend
and enhance the Microsoft Foundation Classes (MFC), providing additional,
prebuilt functionality for creating sophisticated GUI controls, grids, diagrams
and charts. Stingray also offers ActiveX components, and several Java class
libraries that will further strengthen Rogue Wave's offerings in the Java
marketplace. The financial results for all periods presented include the
accounts of the Company and Stingray.
In March 1999, the Company acquired all of the outstanding shares of NobleNet
common stock which were accounted for under the purchase method for
approximately $11.8 million in cash. NobleNet's Nouveau technology, expanded
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.
9.
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage of
net revenue represented by certain line items in the Company's Consolidated
Statements of Operations.
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------
1998 1999
---------- ----------
Revenue:
<S> <C> <C>
License revenue................................................................... 64% 54%
Service and maintenance revenue................................................... 36 46
---- ----
Total revenue................................................................... 100 100
---- ----
Cost of revenue:
Cost of license revenue........................................................... 4 4
Cost of service and maintenance revenue........................................... 13 15
---- ----
Total cost of revenue........................................................... 17 19
---- ----
Gross profit 83 81
---- ----
Operating expenses:
Product development............................................................... 19 29
Sales and marketing............................................................... 44 44
General and administrative........................................................ 10 11
Goodwill amortization, and severance costs........................................ -- 5
---- ----
Total operating expenses........................................................ 73 89
---- ----
Income (loss) from operations................................................... 10 (8)
Other income, net.................................................................... 1 3
---- ----
Income (loss) before income taxes............................................... 11 (5)
Income tax expense (benefit)......................................................... 4 (1)
---- ----
Net income (loss)............................................................... 7% (4)%
==== ====
</TABLE>
Revenue
Total revenue for the three months ended December 31, 1999 was $12.6
million versus $12.2 million for the three months ended December 31, 1998,
representing an increase of 4%. License revenue for the three months ended
December 31, 1999 was $6.8 million versus $7.8 million for the three months
ended December 31, 1998, representing a decrease of 13%. License revenue
decreased primarily as a result of a decrease in the number of licenses sold to
existing and new customers, reflecting a lack of additional product offerings
and turnover in the sales organization.
Service and maintenance revenue for the three months ended December 31,
1999 was $5.8 million versus $4.4 million for the three months ended December
31,1998, representing an increase of 33%. The increase in service and
maintenance revenue was primarily attributable to increased sales volume of the
Company's support and maintenance services during the last twelve months which
are recognized ratably over the term of the support agreement.
10.
<PAGE>
Cost of Revenue
Cost of license revenue for the three months ended December 31, 1999 was
$444,000 versus $496,000 for the three months ended December 31, 1998,
representing a decrease of 10%. As a percentage of total revenue, cost of
license revenue was 4% for the three months ended December 31, 1999, and 1998.
The decrease in cost of license revenue is primarily the result of reduced
royalties paid. The Company expects that the cost of license revenue as a
percentage of total revenue will remain constant in fiscal 2000.
Cost of service and maintenance revenue for the three months ended December
31, 1999 was $1.9 million versus $1.6 million for the three months ended
December 31, 1998 representing an increase of 22%. As a percentage of total
revenue, cost of service and maintenance revenue was 15% for the three months
ended December 31, 1999 versus 13% for the three months ended December 31, 1998.
The increase in cost of service and maintenance revenue was due primarily to
additional product support personnel. While the Company expects that service and
maintenance revenue will continue to grow, the Company does not believe the cost
of such revenue will increase as a percentage of total revenue.
Operating Expenses
Product development expense for the three months ended December 31, 1999
was $3.7 million versus $2.2 million for the three months ended December 31,
1998 representing an increase of 63%. As a percentage of total revenue, product
development expenses were 29% for the three months ended December 31, 1999
versus 18% for the three months ended December 31, 1998. The increase in
product development expenses was primarily attributable to the expense of
additional 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 development. The Company anticipates that it will continue to devote
substantial resources to product development and that product development
expenses will increase throughout fiscal 2000.
Sales and marketing expense for the three months ended December 31, 1999
were $5.6 million versus $5.4 million for the three months ended December 31,
1998 representing an increase of 3%. As a percentage of total revenue, sales
and marketing expenses were 44% for the three months ended December 31, 1999,
and 1998. The increase in sales and marketing expense was primarily due to
continued investment in systems and personnel to expand the Company's sales
channels and the addition of marketing personnel. While the Company expects
that sales and marketing expenses will continue to grow, the Company does not
believe such expenses will increase as a percentage of total revenue.
General and administrative expense for the three months ended December 31,
1999 were $1.3 million versus $1.2 million for the three months ended December
31, 1998 representing an increase of 11%. The increase 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.
Goodwill amortization and severance costs were $601,000 for the three
months ended December 31, 1999. Approximately half of these costs relate to
goodwill amortization associated with the acquisition of NobleNet.
11.
<PAGE>
Other Income, Net
The increase in other income for the three months ended December 31, 1999
versus the three months ended December 31, 1998 is due primarily to the
Company's minority share in the loss of an equity investment in HotData of
$197,000 during 1998. The majority of other income consists of interest income
on the Company's short-term investments which did not significantly change from
the quarter ended December 1999 compared to December 1998.
Income Tax Expense
The Company's effective tax rate for the three months ended December 31,
1999 was 15% versus 35% for the three months ended December 31, 1998. The
effective rate for the quarter ended December 31, 1999, reflects the exclusion
of non-deductible goodwill amortization. The Company expects the effective tax
rate to increase during fiscal year 2000.
Liquidity and Capital Resources
The increase in cash flows from operations was due primarily to an increase
in working capital. The Company's investing activities consist primarily of the
purchase and sale of short-term investments and purchases of equipment. Short-
term investments primarily consist of commercial paper with original maturities
of 180 days or less which are held as securities available for sale. The Company
believes that expected cash flow from operations combined with existing cash and
cash equivalents and short-term investments will be sufficient to meet its cash
requirements for the foreseeable future. See "Risk Factors - Uncertainty of
Future Operating Results"; "Fluctuations in Quarterly Operating Results," and
"Future Acquisitions."
Factors That May Affect Future Results
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the other information
presented in this report.
Uncertainty of Future Operating Results. Our future operating results are
difficult to predict due to a variety of factors, many of which are outside of
our control. These factors include:
. the demand for our products and services;
. the level of product and price competition;
. the size, type and timing of individual license transactions;
. the delay or deferral of customer implementations;
. our success in expanding our direct sales force and indirect
distribution channels;
. the timing of new product introductions and product enhancements;
levels of international sales;
. changes in our pricing policy or that of our competitors;
. publication of opinions about us, our products and object-oriented,
component technology by industry analysts;
. our ability to retain key employees and hire new employees; and
. our ability to develop and market new products and control costs.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue and
operating results to fluctuate
12.
<PAGE>
significantly. Based on the preceding factors, we may experience a shortfall in
revenue or earnings or otherwise fail to meet public market expectations, which
could materially adversely affect our business, financial condition and the
market price of our common stock. For example, our financial results for the
second fiscal quarter of 1998 and the third and fourth fiscal quarter of 1999
were below the expectations of public market financial analysts. The primary
factors leading to the lower than expected results were (1) a longer sales cycle
and product learning curve for the newly acquired Nouveau products, (2) lower
than expected European sales and (3) distractions associated with mergers and
reorganization. After each such announcement of financial results, the price of
our common stock declined materially.
Fluctuations in Quarterly Operating Results. We generally ship orders as
received and as a result typically have little or no backlog. The lack of
significant backlog means that quarterly revenue and operating results depend
substantially on the volume and timing of orders we receive during the quarter,
which are difficult to forecast due to a number of reasons, many of which are
outside our control. Such reasons include:
. lack of a reliable means to assess overall customer demand;
. historically we have earned a substantial portion of our revenue in the last
weeks, or even days, of each quarter;
. larger customer orders are subject to long sales cycles and are frequently
delayed; and
. our service and maintenance revenue tends to fluctuate as consulting
contracts are undertaken, renewed, completed or terminated.
We base operating expenses on anticipated revenue trends and a high
percentage of these expenses are relatively fixed. As a result, a delay in the
recognition of revenue from a limited number of transactions could cause
significant variations in operating results from quarter to quarter and could
lead to significant losses. As a result of these factors, operating results and
growth rates for any particular quarter or other fiscal period may not be
indicative of future operating results. Furthermore, fluctuations in our
quarterly operating results will likely result in volatility in the price of our
Common Stock in the future.
Management of Growth. Our business has grown in recent years. This growth
has placed a significant strain on our management systems and resources. To
manage future growth we must continue to (1) improve our financial and
management controls, reporting systems and procedures on a timely basis and (2)
expand, train and manage our employee work force. If we fail to manage our
growth effectively, our business, financial condition and results of operations
could be materially and adversely affected.
For example, the acquisition of Stingray Software, Inc. resulted in our
product development team being distributed in four separate sites across the
country. The difficulty of managing this distribution contributed to our
decision during 1998 to close two of our four development sites. The closures
resulted in one-time charges of approximately $580,000 and caused disruption to
our development efforts. In addition, in 1998 we moved our administrative
operations from Corvallis, Oregon, to Boulder, Colorado. This move resulted in
the distribution of our senior management team, which may make managing our
operations in the future more difficult. More recently, we completed the
acquisition of NobleNet in the Boston, Massachusetts area, and established a
development team in Boulder, Colorado, again adding to the number of development
sites and distribution of senior management.
Dependence on Emerging Market for C++, Visual C++/MFC and Java. Our
product lines are designed for use in object-oriented software application
development, specifically the C++, Visual
13.
<PAGE>
C++/MFC and Java programming languages. To date, a substantial majority of our
revenue has been attributable to sales of products and related maintenance and
consulting services related to C++ programming and development. We believe that
while the market for object-oriented technology is growing, our growth depends
upon broader market acceptance of object-oriented technology. Object-oriented
programming languages are very complex and the number of software developers
using them is relatively small compared to the number of developers using other
software development technology. Our financial performance will depend in part
upon continued growth in object-oriented technology and markets and the
development of standards that our products address. There can be no assurance
that the market will continue to grow or that we will be able to respond
effectively to the evolving requirements of the market.
We have also developed several products for use in the Java market. We
have spent and will continue to devote resources to the development of new and
enhanced products that address the Java market. There can be no assurance that
we will be successful in marketing our Java products or that the market for Java
products will grow. If the Java market fails to grow, or grows more slowly than
we currently anticipate, our business could be adversely affected.
Competition. Our products target the emerging market for network-based
applications, C++, Visual C++/MFC, Visual Basic/ActiveX and Java software parts
and programming tools. Direct competitors in the network based application and
C++ market include Microsoft (with its Microsoft Foundation Classes, "MFC"),
IBM, ILOG, IONA Technologies, BEA Systems, and Inprise and several privately
held companies. Microsoft is a particularly strong competitor due to its large
installed base and the fact that it bundles its MFC library with its own and
other C++ compilers. Microsoft may decide in the future to devote more
resources to or broaden the functions of MFC in order to address and more
effectively compete with the functionality of our products. We face direct
competition in the Java market from Inprise, JavaSoft (a business unit of Sun
Microsystems), Microsoft, Sybase, Symantec and other companies for our Java
products and expect to face significant competition in the future from such
companies with respect to other Java products we may introduce.
Software applications can also be developed using our components in
environments other than C++ or Java. Indirect competitors with such offerings
include Microsoft (with its ActiveX technology), Inprise, Oracle, and Powersoft
(a subsidiary of Sybase). Many of these competitors have significantly greater
resources, name recognition and larger installed bases of customers than we do.
In addition, several database vendors, such as Informix, Oracle and Sybase are
increasingly developing robust software parts for inclusion with their database
products and may begin to compete with us in the future. These potential
competitors have well-established relationships with current and potential
customers and have the resources to enable them to more easily offer a single
vendor solution. Like our current competitors, many of these companies have
longer operating histories, significantly greater resources and name recognition
and larger installed bases of customers than we do. As a result, these
potential competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than we may.
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.
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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.
Risks Associated with New Versions and New Products; Rapid Technological
Change. The software market in which we compete is characterized by (1) rapid
technological change, (2) frequent introductions of new products, (3) changing
customer needs and (4) evolving industry standards. To keep pace with
technological developments, evolving industry standards and changing customer
needs, we must support existing products and develop new products. We may not
be successful in developing, marketing and releasing new products or new
versions of our products that respond to technological developments, evolving
industry standards or changing customer requirements. We may also experience
difficulties that could delay or prevent the successful development,
introduction and sale of these enhancements. In addition, these enhancements
may not adequately meet the requirements of the marketplace and may not achieve
any significant degree of market acceptance. If release dates of any future
products or enhancements are delayed, or if these products or enhancements fail
to achieve market acceptance when released, our business, operating results and
financial condition could be materially and adversely affected. In addition,
new products or enhancements by our competitors may cause customers to defer or
forgo purchases of our products, which could have a material adverse effect on
our business, financial condition and results of operations.
Risks of Future Acquisitions. 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 may 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 expense 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.
In the second fiscal quarter of 1998 we completed a business combination
with Stingray Software, Inc. Completing the acquisition and commencing the
integration of the acquired business required significant attention from our
management and caused disruption to our ongoing business. We believe that such
disruption had a material adverse effect on the Company's financial results for
the second fiscal quarter of 1998. In the second fiscal quarter of 1999, we
completed the acquisition of NobleNet, Inc. We believe that the longer sales
cycle and product learning curve had a material adverse effect on our financial
results for the third and fourth fiscal quarters of 1999. In addition, the
continued integration of these acquisitions may result in material adverse
results in future quarters.
Risks Associated with International Operations. 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.
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Our international operations are subject to a variety of risks, including
(1) foreign currency fluctuations, (2) economic or political instability, (3)
shipping delays and (4) various trade restrictions. Any of these risks could
have a significant impact on our ability to deliver products on a competitive
and timely basis. Significant increases in the level of customs duties, export
quotas or other trade restrictions could also have an adverse effect on our
business, financial condition and results of operations. In situations where
direct sales are denominated in foreign currency, any fluctuation in foreign
currency or the exchange rate may adversely affect our business, financial
condition and results of operations.
Dependence Upon Key Personnel. Our future performance depends in
significant part upon the continued service of our key technical, sales and
senior management personnel, none of whom is bound by an employment agreement.
We believe that the technological and creative skills of our personnel are
essential to establishing and maintaining a leadership position, particularly in
light of the fact that our intellectual property, once sold to the public
market, is easily replicated. The loss of the services of one or more of our
executive officers or key technical personnel could have a material adverse
effect on our business. The Company views the services of Thomas Keffer, the
Company's Chairman of the Board, as difficult to replace and maintains a key
person life insurance policy in the amount of $2.0 million for Dr. Keffer.
Our future success also depends on our continuing ability to attract and
retain highly qualified technical, sales and managerial personnel. In the past,
we have experienced some difficulty in attracting key personnel. Competition
for such personnel is intense, and there can be no assurance that we can retain
key employees or that we can attract, assimilate or retain other highly
qualified personnel in the future.
Variability of Sales Cycles. We distribute our products through two
different direct sales channels, a telesales force and a field sales force, each
of which is subject to a variable sales cycle. Products sold by our telesales
force may be sold after a single phone call or may require several weeks of
education and negotiation before a sale is made. As such, the sales cycle
associated with telesales typically ranges from a few days to two months. On
the other hand, the purchase of products from our field sales force is often an
enterprise-wide decision and may require the sales person to provide a
significant level of education to prospective customers regarding the use and
benefits of our products. For these and other reasons, the sales cycle
associated with the sale of our products through our field sales force typically
ranges from two to six months and is subject to a number of significant delays
over which we have little or no control. As a result, quarterly revenue and
operating results can be variable and are difficult to forecast, and we believe
that period-to-period comparisons of quarterly revenue are not necessarily
meaningful and should not be relied upon as an indicator of future revenue.
Proprietary Rights, Risks of Infringement and Source Code Release. We rely
primarily on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We also believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential to
establishing and maintaining a technological leadership position. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. The nature of many of our products requires the release of the
source code to all customers. As such, policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
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protect our proprietary rights as fully as do the laws of the United States.
There can be no assurance that our means of protecting our proprietary rights in
the United States or abroad will be adequate or that competition will not
independently develop similar technology.
Although we do not believe that we are infringing any proprietary rights of
others, third parties may claim that we have infringed their intellectual
property rights. Furthermore, former employers of our former, current or future
employees may assert claims that such employees have improperly disclosed to us
the confidential or proprietary information of such former employers. Any such
claims, with or without merit, could (1) be time consuming to defend, (2) result
in costly litigation, (3) divert management's attention and resources, (4) cause
product shipment delays, and (5) require us to pay money damages or enter into
royalty or licensing agreements. A successful claim of intellectual property
infringement against us and our failure or inability to license or create a
workaround for such infringed or similar technology may materially and adversely
affect our business, operating results and financial condition.
Product Liability. Our license agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims. It is possible, however, that the limitation of liability provisions
contained in our license agreements may not be effective under the laws of
certain jurisdictions. A successful product liability claim brought against us
could have a material adverse effect upon our business, operating results and
financial condition.
Risk Of Product Defects. Software products frequently contain errors or
failures, especially when first introduced or when new versions are released.
Also, new products or enhancements may contain undetected errors, or "bugs", or
performance problems that, despite testing, are discovered only after a product
has been installed and used by customers. Errors or performance problems could
cause delays in product introduction and shipments or require design
modifications, either of which could lead to a loss in revenue. Our products
are typically intended for use in applications that may be critical to a
customer's business. As a result, we expect that our customers and potential
customers have a greater sensitivity to product defects than the market for
software products generally. Despite extensive testing by us and by current and
potential customers, errors may be found in new products or releases after
commencement of commercial shipments, resulting in loss of revenue or delay in
market acceptance, diversion of development resources, the payment of monetary
damages, damage to our reputation, or increased service and warranty costs, any
of which could have a material adverse effect upon our business and results of
operations.
Year 2000 Readiness
In preparation for the year 2000, we engaged in efforts to ensure that our
products and critical business systems properly recognize date-sensitive
information in the year 2000 and beyond. These efforts and their costs are
described below. We have not experienced any significant "year 2000 problems"
with our products and critical business systems and do not expect that we will
do so in the future.
State of Readiness. In 1999, we assessed the ability of our software and
critical business systems to operate properly in the year 2000 and beyond. We
investigated the year 2000 readiness of our software and hardware vendors and
conducted internal tests of the operation of our products and critical business
systems. The only year 2000-related issues we identified were some date
handling issues with five of our currently supported products: NobleNet RPC and
EZ-RPC, Tools.h++, Objective Grid and Objective Toolkit. These issues have all
been addressed in subsequent releases of those products and we
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are not aware that the earlier versions of the products resulted in any material
disruptions for our customers.
Cost of Assessment and Remidiation. We have incurred direct costs of
approximately $160,000 in assessing and remediating year 2000 problems, and we
do not expect to spend more than $50,000 in the aggregate to complete the
process.
Risks. We could be exposed to a loss of revenues and our operating
expenses could increase if our products or critical business systems have year
2000 problems. Our potential areas of exposure include products purchased from
third parties, information technology, including computers and software, and
non-information technology, including telephone systems and other equipment used
internally. The reasonably likely worst case scenario for year 2000 problems
would be if a significant defect exists in key hardware or software and if a
solution for such a problem were not immediately available.
Contingency Plan. Although we have not experienced any year 2000-related
problems affecting our internal systems, we have developed contingency plans to
be implemented if our efforts to identify and correct year 2000 problems are not
effective. Depending on the systems affected, these plans include:
- - accelerated replacement of affected equipment or software;
- - short to medium-term use of back-up equipment and software or other redundant
systems;
- - increased work hours for our personnel or the hiring of additional
information technology staff; and
- - the use of contract personnel to correct, on an accelerated basis, any year
2000 problems that arise or to provide interim alternate solutions for
information system deficiencies.
The discussion of our efforts and expectations relating to year 2000
compliance are forward-looking statements. Our ability to achieve year 2000
compliance, and the level of incremental costs associated with compliance, could
be adversely affected by, among other things, the availability and cost of
contract personnel and external resources, third party suppliers' ability to
modify proprietary software, and unanticipated problems not identified in our
ongoing review.
ITEM 3. - 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 December 31, 1999, short-term investments of $14.2 million were held
available for sale with maturities of less than 180 days. Short-term
investments consist primarily of high credit and highly liquid corporate
commercial paper and money market funds. A substantial change in overall
interest rates would not have a material affect on the financial position of the
Company.
Exposure to variability in foreign currency exchange rates is managed
primarily through the use of natural hedges, whereby funding obligations and
assets are both managed in the local currency. In addition, the Company will
from time to time enter into foreign currency exchange agreements to manage its
exposure arising from fluctuating exchange rates, primarily in the 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 December 31, 1999, movements in
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foreign currency rates would not materially affect the financial position of the
Company. As of December 31, 1999, the Company had outstanding short-term forward
exchange contracts to exchange Euros for U.S. dollars in the amount of $2.3
million.
19.
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PART II - OTHER INFORMATION
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
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.
10.1(1) Registrant's 1996 Equity Incentive Plan.
10.2 Amended and Restated Employee Stock Purchase Plan, dated June 6, 1996,
as amended January 25, 2000.
10.3(1) Form of Indemnity Agreement 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.
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10.5(1) Lease Agreement between the Registrant and the Landmark, dated April
22, 1996.
10.6(1) Loan and Security Agreement between the Registrant and Silicon Valley
Bank, dated October 16, 1996.
10.7(1) Collateral Assignment, Patent Mortgage and Security Agreement between
the Registrant and Silicon Valley Bank, dated October 16, 1996.
27 Financial Data Schedule.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form SB-
2, as amended (No. 333 -13517)
(2) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1996.
(3) Filed as Exhibit 2.1 to the Registrant's Form 8-K dated February 27, 1998
and filed on March 9, 1998.
(4) Filed as Exhibit 2.2 to the Registrant's Form 8-K dated February 27, 1998
and filed on March 9, 1998.
(5) Filed as Exhibit 4.1 to the Registrant's Form 8-K dated February 27, 1998
and filed on March 9, 1998.
(6) Filed as an exhibit to the Registrant's Form 8-K dated March 1, 1999 and
filed on March 9, 1999.
Items 1, 2, 3, 4, and 5 are not applicable and have been omitted.
21.
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SIGNATURES
Pursuant to the requirements 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.
(Registrant)
Date: February 14, 2000
/s/ Merle Waterman
------------------------------
MERLE WATERMAN
CHIEF FINANCIAL OFFICER
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Exhibit 10.2
ROGUE WAVE SOFTWARE, INC.
EMPLOYEE STOCK PURCHASE PLAN
Adopted June 6, 1996
Approved By Stockholders October 30, 1996
Amended October 13, 1998
Approved By Stockholders January 21, 1999
Amended October 21, 1999
Approved by Stockholders January 25, 2000
Termination Date: None
1. Purpose.
(a) The purpose of the Employee Stock Purchase Plan (the "Plan") is to
provide a means by which employees of Rogue Wave Software, Inc., a Delaware
corporation (the "Company"), and its Affiliates, as defined in subparagraph
1(b), which are designated as provided in subparagraph 2(b), may be given an
opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent corporation
or subsidiary corporation of the Company, as those terms are defined in Sections
424(e) and (f), respectively, of the Internal Revenue Code of 1986, as amended
(the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of its
employees, to secure and retain the services of new employees, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
(d) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code.
2. Administration.
(a) The Plan shall be administered by the Board of Directors (the "Board")
of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the
<PAGE>
exercise of this power, may correct any defect, omission or inconsistency in the
Plan, in a manner and to the extent it shall deem necessary or expedient to make
the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company and its Affiliates and to carry out the intent that the Plan be treated
as an "employee stock purchase plan" within the meaning of Section 423 of the
Code.
(c) The Board may delegate administration of the Plan to a Committee
composed of not fewer than two (2) members of the Board (the "Committee")
constituted in accordance with the requirements of Rule 16b-3 under the
Securities Exchange Act of 1934 (the "Exchange Act" and "Rule 16b-3"); provided
that the Committee shall be required to satisfy the foregoing requirements only
to the extent required to exempt transactions under the Plan pursuant to Rule
16b-3. If administration is delegated to a Committee, the Committee shall have,
in connection with the administration of the Plan, the powers theretofore
possessed by the Board, subject, however, to such resolutions, not inconsistent
with the provisions of the Plan, as may be adopted from time to time by the
Board. The Board may abolish the Committee at any time and revest in the Board
the administration of the Plan.
3. Shares Subject to the Plan.
(a) Subject to the provisions of paragraph 12 relating to adjustments upon
changes in stock and subject to the increase in the number of reserved shares
described below, the stock that may be sold pursuant to rights granted under the
Plan shall not exceed in the aggregate six hundred fifty thousand (650,000)
shares of Common Stock (the "Reserved Shares"). As of each January 1, beginning
with January 1, 2001, and continuing through and including January 1, 2009, the
number of Reserved Shares will be increased automatically by the lesser of (i)
three percent (3%) of the total number of shares of Common Stock outstanding on
such January 1, or (ii) three hundred thousand (300,000) shares. If any right
granted under the Plan shall for any reason terminate without having been
exercised, the Common Stock not purchased under such right shall again become
available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. Grant of Rights; Offering.
The Board or the Committee may from time to time grant or provide for the
grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate, which shall comply with the requirements of Section 423(b)(5) of
the Code that all employees granted rights to purchase stock under the Plan
shall have the same rights and privileges. The terms and conditions of an
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-
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seven (27) months beginning with the Offering Date, and the substance of the
provisions contained in paragraphs 5 through 8, inclusive.
5. Eligibility.
(a) Rights may be granted only to employees of the Company or, as the Board
or the Committee may designate as provided in subparagraph 2(b), to employees of
any Affiliate of the Company. Except as provided in subparagraph 5(b), an
employee of the Company or any Affiliate shall not be eligible to be granted
rights under the Plan, unless, on the Offering Date, such employee has been in
the employ of the Company or any Affiliate for such continuous period preceding
such grant as the Board or the Committee may require, but in no event shall the
required period of continuous employment be equal to or greater than two (2)
years. In addition, unless otherwise determined by the Board or the Committee
and set forth in the terms of the applicable Offering, no employee of the
Company or any Affiliate shall be eligible to be granted rights under the Plan,
unless, on the Offering Date, such employee's customary employment with the
Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(b) The Board or the Committee may provide that, each person who, during
the course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible employee or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(i) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right;
(ii) the period of the Offering with respect to such right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board or the Committee may provide that if such person first
becomes an eligible employee within a specified period of time before the end of
the Offering, he or she will not receive any right under that Offering.
(c) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of
this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee, and stock which such employee
may purchase under all outstanding rights and options shall be treated as stock
owned by such employee.
(d) An eligible employee may be granted rights under the Plan only if such
rights, together with any other rights granted under "employee stock purchase
plans" of the Company and any Affiliates, as specified by Section 423(b)(8) of
the Code, do not permit such employee's rights to purchase stock of the Company
or any Affiliate to accrue at a rate which exceeds twenty-five thousand dollars
($25,000) of fair market value of such stock (determined at the time such rights
are granted) for each calendar year in which such rights are outstanding at any
time.
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(e) Officers of the Company and any designated Affiliate shall be eligible
to participate in Offerings under the Plan, provided, however, that the Board
may provide in an Offering that certain employees who are highly compensated
employees within the meaning of Section 423(b)(4)(D) of the Code shall not be
eligible to participate.
6. Rights; Purchase Price.
(a) On each Offering Date, each eligible employee, pursuant to an Offering
made under the Plan, shall be granted the right to purchase up to the number of
shares of Common Stock of the Company purchasable with a percentage designated
by the Board or the Committee not exceeding fifteen percent (15%) of such
employee's Earnings (as defined by the Board or the Committee in each Offering)
during the period which begins on the Offering Date (or such later date as the
Board or the Committee determines for a particular Offering) and ends on the
date stated in the Offering, which date shall be no later than the end of the
Offering. The Board or the Committee shall establish one or more dates during
an Offering (the "Purchase Date(s)") on which rights granted under the Plan
shall be exercised and purchases of Common Stock carried out in accordance with
such Offering.
(b) In connection with each Offering made under the Plan, the Board or the
Committee may specify a maximum number of shares that may be purchased by any
employee as well as a maximum aggregate number of shares that may be purchased
by all eligible employees pursuant to such Offering. In addition, in connection
with each Offering that contains more than one Purchase Date, the Board or the
Committee may specify a maximum aggregate number of shares which may be
purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(c) The purchase price of stock acquired pursuant to rights granted under
the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Purchase Date.
7. Participation; Withdrawal; Termination.
(a) An eligible employee may become a participant in the Plan pursuant to
an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings during the
Offering (as defined by the Board or Committee in each Offering). The payroll
deductions made for each participant shall be credited to an account for such
participant under the Plan and shall be deposited with the general funds of the
Company. A participant may reduce (including to zero) or increase such payroll
deductions, and an eligible employee may begin such payroll deductions, after
the beginning of any Offering only as provided for in the Offering. A
participant may make additional payments into his or her
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account only if specifically provided for in the Offering and only if the
participant has not had the maximum amount withheld during the Offering.
(b) At any time during an Offering, a participant may terminate his or her
payroll deductions under the Plan and withdraw from the Offering by delivering
to the Company a notice of withdrawal in such form as the Company provides.
Such withdrawal may be elected at any time prior to the end of the Offering
except as provided by the Board or the Committee in the Offering. Upon such
withdrawal from the Offering by a participant, the Company shall distribute to
such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's
interest in that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to participate in any other Offerings under the Plan but such
participant will be required to deliver a new participation agreement in order
to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall terminate
immediately upon cessation of any participating employee's employment with the
Company and any designated Affiliate, for any reason, and the Company shall
distribute to such terminated employee all of his or her accumulated payroll
deductions (reduced to the extent, if any, such deductions have been used to
acquire stock for the terminated employee) under the Offering, without interest.
(d) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 14 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such rights
are granted.
8. Exercise.
(a) On each Purchase Date specified therefor in the relevant Offering, each
participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares shall be issued upon the exercise of rights granted under the
Plan. The amount, if any, of accumulated payroll deductions remaining in each
participant's account after the purchase of shares which is less than the amount
required to purchase one share of stock on the final Purchase Date of an
Offering shall be held in each such participant's account for the purchase of
shares under the next Offering under the Plan, unless such participant withdraws
from such next Offering, as provided in subparagraph 7(b), or is no longer
eligible to be granted rights under the Plan, as provided in paragraph 5, in
which case such amount shall be distributed to the participant after such final
Purchase Date, without interest. The amount, if any, of accumulated payroll
deductions remaining in any participant's account after the purchase of shares
which is equal to the amount required to purchase whole shares of stock on the
final Purchase Date of an Offering shall be distributed in full to the
participant after such Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent unless
the shares to be issued upon such exercise under the Plan (including rights
granted thereunder) are covered
5
<PAGE>
by an effective registration statement pursuant to the Securities Act of 1933,
as amended (the "Securities Act") and the Plan is in material compliance with
all applicable state, foreign and other securities and other laws applicable to
the Plan. If on a Purchase Date in any Offering hereunder the Plan is not so
registered or in such compliance, no rights granted under the Plan or any
Offering shall be exercised on such Purchase Date, and the Purchase Date shall
be delayed until the Plan is subject to such an effective registration statement
and such compliance, except that the Purchase Date shall not be delayed more
than twelve (12) months and the Purchase Date shall in no event be more than
twenty-seven (27) months from the Offering Date. If on the Purchase Date of any
Offering hereunder, as delayed to the maximum extent permissible, the Plan is
not registered and in such compliance, no rights granted under the Plan or any
Offering shall be exercised and all payroll deductions accumulated during the
Offering (reduced to the extent, if any, such deductions have been used to
acquire stock) shall be distributed to the participants, without interest.
9. Covenants of the Company.
(a) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
(b) The Company shall seek to obtain from each federal, state, foreign or
other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. Use of Proceeds from Stock.
Proceeds from the sale of stock pursuant to rights granted under the Plan
shall constitute general funds of the Company.
11. Rights as a Stockholder.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights under the Plan are recorded in the books of the Company.
12. Adjustments upon Changes in Stock.
(a) If any change is made in the stock subject to the Plan, or subject to
any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, reincorporation, stock dividend, dividend in
property other than cash, stock split, liquidating dividend, combination of
shares, exchange of shares, change in corporate structure or other transaction
not involving the receipt of consideration by the Company), the Plan and
outstanding rights will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the class(es) and number of shares and
price per share of stock subject to outstanding rights. Such adjustments shall
be made by the Board or the Committee, the determination of which shall be
final, binding and conclusive. (The conversion of any
6
<PAGE>
convertible securities of the Company shall not be treated as a "transaction not
involving the receipt of consideration by the Company.")
(b) In the event of: (1) a dissolution or liquidation of the Company; (2)
a merger or consolidation in which the Company is not the surviving corporation;
(3) a reverse merger in which the Company is the surviving corporation but the
shares of the Company's Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise; or (4) the acquisition by any person,
entity or group within the meaning of Section 13(d) or 14(d) of the Exchange Act
or any comparable successor provisions (excluding any employee benefit plan, or
related trust, sponsored or maintained by the Company or any Affiliate of the
Company) of the beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act, or comparable successor rule) of securities
of the Company representing at least fifty percent (50%) of the combined voting
power entitled to vote in the election of directors, then, as determined by the
Board in its sole discretion (i) any surviving or acquiring corporation may
assume outstanding rights or substitute similar rights for those under the Plan,
(ii) such rights may continue in full force and effect, or (iii) participants'
accumulated payroll deductions may be used to purchase Common Stock immediately
prior to the transaction described above and the participants' rights under the
ongoing Offering terminated.
13. Amendment of the Plan.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares reserved for rights under the
Plan;
(ii) Modify the provisions as to eligibility for participation in the
Plan (to the extent such modification requires stockholder approval in
order for the Plan to obtain employee stock purchase plan treatment under
Section 423 of the Code; or
(iii) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code.
It is expressly contemplated that the Board may amend the Plan in any respect
the Board deems necessary or advisable to provide eligible employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to employee stock purchase plans
and/or to bring the Plan and/or rights granted under it into compliance
therewith.
(b) Rights and obligations under any rights granted before amendment of the
Plan shall not be impaired by any amendment of the Plan, except with the consent
of the person to whom such rights were granted, or except as necessary to comply
with any laws or governmental regulations, or except as necessary to ensure that
the Plan and/or rights granted under the Plan comply with the requirements of
Section 423 of the Code.
14. Designation of Beneficiary.
7
<PAGE>
(a) A participant may file a written designation of a beneficiary who is to
receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such shares
and/or cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. Termination or Suspension of the Plan.
(a) The Board in its discretion, may suspend or terminate the Plan at any
time. No rights may be granted under the Plan while the Plan is suspended or
after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is in
effect shall not be impaired by suspension or termination of the Plan, except as
expressly provided in the Plan or with the consent of the person to whom such
rights were granted, or except as necessary to comply with any laws or
governmental regulation, or except as necessary to ensure that the Plan and/or
rights granted under the Plan comply with the requirements of Section 423 of the
Code.
16. Effective Date of Plan.
The Plan shall become effective on the same day that the Company's initial
public offering of shares of common stock becomes effective (the "Effective
Date"), but no rights granted under the Plan shall be exercised unless and until
the Plan has been approved by the stockholders of the Company within twelve (12)
months before or after the date the Plan is adopted by the Board or the
Committee, which date may be prior to the Effective Date.
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPANY'S
QUARTERLY REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-01-1999
<CASH> 16,471
<SECURITIES> 14,227
<RECEIVABLES> 8,756
<ALLOWANCES> 1,052
<INVENTORY> 89
<CURRENT-ASSETS> 41,163
<PP&E> 11,375
<DEPRECIATION> 7,277
<TOTAL-ASSETS> 59,289
<CURRENT-LIABILITIES> 16,410
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 42,869
<TOTAL-LIABILITY-AND-EQUITY> 59,289
<SALES> 12,616
<TOTAL-REVENUES> 12,616
<CGS> 2,371
<TOTAL-COSTS> 2,371
<OTHER-EXPENSES> 11,176
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> (596)
<INCOME-TAX> (89)
<INCOME-CONTINUING> (507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (507)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
