<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 0-19682
------------------------------
CAYENNE SOFTWARE, INC.
----------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2784044
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 NEW ENGLAND EXECUTIVE PARK, BURLINGTON,
-----------------------------------------
MASSACHUSETTS 01803
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(781) 273-9003
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed
since last report.)
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 issuer's classes of common stock, as of the latest
practicable date:
SHARES OUTSTANDING
TITLE OF CLASS AT NOVEMBER 3, 1997
---------------------------- -------------------
Common Stock, $.01 par value 18,900,729
<PAGE> 2
CAYENNE SOFTWARE, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-
as of September 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CAYENNE SOFTWARE, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
SEPTEMBER 30 DECEMBER 31
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------ ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................... $ 10,212 $ 4,150
Trade accounts receivable, less allowance for sales returns
and doubtful accounts of $535 and $820 at
September 30, 1997 and December 31, 1996, respectively ............................ 10,400 13,320
Prepaid expenses and other current assets ........................................... 1,790 1,375
--------- ---------
Total current assets ........................................................... 22,402 18,845
Property and equipment, less accumulated depreciation and
amortization ........................................................................... 2,558 2,256
Capitalized software costs, less accumulated amortization of
$386 and $266 at September 30, 1997 and December 31, 1996,
respectively ........................................................................... 414 534
Other assets ............................................................................. 526 601
--------- ---------
Total assets ............................................................................. $ 25,900 $ 22,236
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short term debt ..................................................................... $ 2,559 $ 2,820
Accounts payable .................................................................... 1,624 2,363
Accrued expenses .................................................................... 851 1,422
Accrued compensation and benefits ................................................... 2,973 3,415
Accrued restructuring costs ......................................................... 474 1,703
Income and other taxes payable ...................................................... 740 909
Obligations under capital lease ..................................................... 384 561
Deferred revenue .................................................................... 8,275 9,592
--------- ---------
Total current liabilities ...................................................... 17,880 22,785
Obligations under capital lease .......................................................... 258 106
Commitment and contingencies (Note 8)
Stockholders' equity (deficit):
Series C Convertible Preferred stock, $1.00 par value per share; 150 shares
authorized; 100 and 0 shares issued and outstanding at September 30, 1997
and December 31, 1996, respectively ............................................... 100 --
Series D Convertible Preferred stock, $1.00 par value per share; 300 shares
authorized; 250 and 0 shares issued and outstanding at September 30, 1997
and December 31, 1996, respectively ............................................... 250 --
Common stock $.01 par value per share; 52,400 shares authorized;
18,807 and 17,695 shares issued and outstanding at September 30, 1997
and December 31, 1996, respectively ............................................... 188 177
Additional paid-in capital .......................................................... 113,029 102,935
Accumulated deficit ................................................................. (105,523) (103,706)
Accumulated translation adjustments ................................................. (282) (61)
--------- ---------
Stockholders' equity (deficit) ...................................................... 7,762 (655)
--------- ---------
Total liabilities and stockholders' equity (deficit) ..................................... $ 25,900 $ 22,236
--------- ---------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
3
<PAGE> 4
<TABLE>
CAYENNE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Software license.................................... $ 4,514 $ 4,180 $13,404 $ 14,511
Consulting and education services................... 1,919 2,164 6,830 8,616
Maintenance......................................... 4,915 6,854 16,185 19,725
------- ------- ------- --------
Total revenues................................... 11,348 13,198 36,419 42,852
Costs and expenses:
Cost of revenues
Cost of software licenses........................... 274 812 1,415 2,570
Cost of consulting and education services and
maintenance........................................ 1,889 2,467 6,206 8,333
Sales and marketing................................... 5,140 5,812 17,612 21,448
Research and development.............................. 2,310 2,778 7,909 9,269
General and administrative............................ 1,368 1,775 4,465 5,935
Restructuring and other costs......................... -- 6,300 (375) 7,425
------- ------- ------- --------
Total costs and expenses.............................. 10,981 19,944 37,232 54,980
Income (loss) from operations......................... 367 (6,746) (813) (12,128)
Interest expense, net................................. 169 65 444 508
------- ------- ------- --------
Income (loss) before provision for income taxes....... 198 (6,811) (1,257) (12,636)
Provision for income taxes............................ 137 49 455 769
------- ------- ------- --------
Net income (loss)..................................... 61 (6,860) (1,712) (13,405)
Dividends on Preferred Stock......................... 41 -- 105 --
------- ------- ------- --------
Income (loss) applicable to common shares............. $ 20 $(6,860) $(1,817) $(13,405)
------- ------- ------- --------
Income (loss) per common share:
Net income (loss)................................ $ 0.00 $ (0.39) $ (0.10) $ (0.79)
Weighted average number of common and common
equivalent shares outstanding......................... 18,886 17,509 18,202 17,053
------- ------- ------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
4
<PAGE> 5
<TABLE>
CAYENNE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................................ $(1,712) $(13,405)
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation and amortization ................................... 1,390 2,236
Write-down of intangibles asset ................................. 986
Changes in operating assets and liabilities
Trade accounts receivable ....................................... 2,920 6,994
Prepaid expenses and other assets ............................... (415) (32)
Accrued expenses ................................................ (676) (470)
Accrued restructuring costs ..................................... (1,229) 1,335
Accounts payable ................................................ (739) (1,275)
Accrued compensation and benefits ............................... (442) (105)
Income and other taxes payable .................................. (169) (284)
Deferred revenue ................................................ (1,317) (1,317)
------- --------
Net cash used in operating activities ................................. (2,389) (5,337)
Cash flows from investing activities:
Purchases of property and equipment ............................. (1,075) (900)
Proceeds from sale of property and equipment .................... 43 56
------- --------
Net cash used in investing activities ................................. (1,032) (844)
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock and warrants, net ..... 9,940 472
Proceeds from issuance of common stock, net ..................... 306 1,228
Proceeds from factoring agreement ............................... -- 9,275
Proceeds from line of credit facility ........................... -- 2,821
Proceeds from payment of employee loan .......................... -- 200
Payments under factoring agreement .............................. -- (9,902)
Payments under line of credit facility .......................... (261) (2,480)
Payments under capital lease obligations ........................ (557) (221)
------- --------
Net cash provided by financing activities ............................. 9,428 1,393
Effect of foreign exchange rates on cash and cash equivalents ......... 55 655
------- --------
Net increase and (decrease) in cash and cash equivalents .............. 6,062 (4,133)
Cash and cash equivalents at beginning of period ...................... 4,150 12,889
------- --------
Cash and cash equivalents at end of period ............................ $10,212 $ 8,756
------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, and have been prepared by the
Company without audit in accordance with the Company's accounting policies, as
described in its latest annual report filed with the Securities and Exchange
Commission on Form 10-K. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's Annual Report on Form 10-K for the
transition period ended December 31, 1996
2. INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is computed based on the weighted average
number of common shares and dilutive common share equivalents outstanding
during each period except in loss periods. Dilutive common equivalents shares
consist of warrants and stock options (calculated using the Treasury Stock
method). For the three months ended September 30, 1997 there were 86,227 shares
included in dilutive common share equivalents. For the nine months ended
September 30, 1997 and the three and nine months ended September 30, 1996
common equivalent shares are excluded from primary earnings per share
calculation as they are antidilutive. Fully diluted and primary earnings per
share are the same amounts for the three and nine months ended September 30,
1997 and 1996, respectively.
3. BUSINESS COMBINATIONS
On March 27, 1997, the Company acquired certain of the assets and
liabilities of Multiquest Corporation ("Multiquest") in a transaction accounted
for as a purchase. The Company acquired such assets and liabilities in exchange
for 50,000 shares of the Company's common stock. The purchase price for
Multiquest was approximately $209,000 based upon a stock price of $4.1875 per
share (which approximated the fair market value of a share of the Company's
common stock at the closing of the acquisition). The net tangible assets and
liabilities of Multiquest acquired by the Company were insignificant. The
purchase price was allocated to the fair value of the technology acquired and
customer lists, and is being amortized over three years. The Company's results
reflect the allocation of the purchase price in accordance with generally
accepted accounting principles and the results of operations reflect the impact
of the acquisition since the date of closing. The pro-forma results of
Multiquest prior to the acquisition would be immaterial to the Company's
reported results and are therefore not presented.
4. LINE OF CREDIT
On November 6, 1996, the Company amended and restated its revolving credit
agreement with a bank to borrow up to $5.0 million, to extend its term through
October 4, 1997, and to amend certain of the financial and operating covenants
and other provisions thereunder. In connection with the amendment, the Company
issued to the bank a three-year warrant to purchase 25,000 shares of the
Company's common stock at an exercise price of $4.25. The loan is contingent
upon meeting certain financial and operating covenants at the time of any
borrowing and over the life of the loan. The loan is secured by all of the
assets of the Company and any borrowing amounts are tied to a percentage of
qualified accounts receivable outstanding at the time of any borrowing. The
financial covenants, which were further amended on April 1, 1997, include the
attainment of certain specified levels of consolidated net income (loss) at the
end of each quarter, including profitability of $250,000 for the quarter ending
June 30, 1997 and each quarter thereafter, and liquidity (generally defined as
cash and cash equivalents plus eligible domestic accounts receivable and
eligible international accounts receivable less any indebtedness to the bank) at
the end of each month. The Company was in compliance with all covenants, as
amended, except for the profitability covenant for which the Company obtained a
waiver, at September 30, 1997. The borrowing base under the revolving credit
agreement was approximately $3.3 million at September 30, 1997 with
approximately $2.6 million outstanding against the line of credit at September
30, 1997.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. CAPITAL STOCK
On January 2, 1997, the Company raised approximately $3.0 million through the
private placement of 150,000 shares of Series B Convertible Preferred Stock,
designated from its "blank check" preferred stock. Each share of Series B
Convertible Preferred Stock is entitled to earn dividends at a rate of 5% per
annum, payable upon conversion, in cash or stock, at the option of the Company.
Each share of Series B Convertible Preferred Stock is convertible into shares of
Common Stock at a rate determined by the lower of the average quoted market
price of the common stock for either (i) the ten trading days preceding the date
of issuance or (ii) any five trading days during any period of thirty days
before the conversion. In conjunction with the closing of the private placement,
the Company issued warrants to purchase 350,000 shares of the Company's Common
Stock at exercise prices ranging from 120% to 150% of the price set forth in
clause (i) above and having varying expiration dates from three to five years.
The shares of Common Stock underlying the Series B convertible Preferred stock
and Warrants were registered pursuant to the terms of the registration rights
agreement dated January 3, 1997. These shares were fully converted into 937,500
shares of common stock on June 6, 1997.
On July 18, 1997, the Company raised approximately $2.0 million through the
private placement of 100,000 shares of Series C Convertible Preferred Stock,
designated from its "blank check" preferred stock. Each share of Series C
Convertible Preferred Stock is entitled to earn dividends at a rate of 5% per
annum, payable upon conversion, in cash or stock, at the option of the Company.
Each share of Series C Convertible Preferred Stock is convertible into shares of
Common Stock at a rate determined by the lower of the average quoted market
price of the common stock for either (i) the ten trading days preceding the date
of issuance or (ii) any five trading days during any period of thirty days
before the conversion. In conjunction with the closing of the private placement,
the Company issued warrants to purchase 233,332 shares of the Company's Common
Stock at exercise prices ranging from 125% to 150% of the price set forth in
clause (i) above and having varying expiration dates from three to five years.
The shares of Common Stock underlying the Series C convertible Preferred stock
and Warrants were registered pursuant to the terms of the registration rights
agreement dated July 18, 1997.
On August 28, 1997, the Company raised approximately $5.0 million through the
private placement of 250,000 shares of Series D Convertible Preferred Stock,
designated from its "blank check" preferred stock. Each share of Series D
Convertible Preferred Stock is entitled to earn dividends at a rate of 5% per
annum, payable upon conversion, in cash or stock, at the option of the Company.
Each share of Series D Convertible Preferred Stock is convertible into shares of
Common Stock at a rate determined by the lower of the average quoted market
price of the common stock for either (i) the ten trading days preceding the date
of issuance or (ii) any five trading days during any period of thirty days
before the conversion. In conjunction with the closing of the private placement,
the Company issued warrants to purchase 583,332 shares of the Company's Common
Stock at exercise prices ranging from 125% to 150% of the price set forth in
clause (i) above and having varying expiration dates from three to five years.
The shares of Common Stock underlying the Series D convertible Preferred stock
and Warrants were registered pursuant to the terms of the registration rights
agreement dated August 28, 1997.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share", which will require adoption during the year ended
December 31, 1997. This statement specifies the computation, presentation and
disclosure requirements of earnings per share. The Company is in the process of
determining the effect of adoption of this statement on its consolidated
financial statements and related disclosures.
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth in "Management's
Discussion and Analysis of Final Condition and Results of Operations" under the
caption "Factors That May Affect Future Results."
8. COMMITMENT AND CONTINGENCIES
The company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially effect the
financial position of the Company.
Cayenne has received from Esprit Systems Consulting, Inc. a Notice of
Intent to Arbitrate, claiming that Cayenne is liable to Esprit for
approximately $1.6 million under an extension to a contract for services to be
rendered to Cadre. Cayenne believes that the claim is without merit because,
among other things, the contract in question terminated without extension.
However, there can be no assurance as to the claim's future course or likely
result.
9. SUBSEQUENT EVENTS
On November 3, 1997, the Company amended and restated its revolving credit
agreement with a bank to borrow up to $5.0 million, to extend its term
through October 5, 1998 and to amend certain of the financial and operating
covenants and other provisions thereunder. The loan is contingent upon meeting
certain financial and operating covenants at the time of any borrowing and over
the life of the loan. The loan is secured by all of the assets of the Company
and any borrowing amounts are tied to a percentage of qualified accounts
receivable outstanding at the time of any borrowing. The financial covenants,
which were amended, include a monthly minimum net worth covenant of $5.5 million
and liquidity (generally defined as cash and cash equivalents plus eligible
domestic accounts receivable and eligible international accounts receivable less
any indebtedness to the bank) at the end of each month. The Company was in
compliance with the covenants as of September 30, 1997.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Cayenne Software, Inc. is one of the largest global suppliers of analysis
and design solutions for commercial and technical application and database
development. Cayenne offers development teams a scaleable,
workgroup-to-enterprise product family for object-oriented, data driven and
structured application development approaches.
During the three and nine months ended September 30, 1997, the Company's
revenue decreased $1.8 million and $6.4 million, respectively. Revenue from
Cayenne's mature products declined year-over-year; this includes revenue from
mainframe (OS2) and UNIX-based structured analysis and design products. New
license revenue derived from (client/server) Windows based and object oriented
solutions accounted for 57% and 64% of the Company's license revenue for the
three and nine months ended September 30, 1997 compared to 43% and 41% from the
comparable periods of a year ago. Reduced sale of third party products and
consulting and education services, which have lower profit margins, and expense
management during the three and nine months ended September 30, 1997, resulted
in improved gross margins. Continued efforts to reduce costs and operating
expenses resulted in a decrease of 20% and 21% excluding restructuring charges
from the three and nine months periods of a year ago. The company was at
breakeven for the quarter while recording a loss of $1.7 million for the nine
months ending September 30, 1997. Since the Company derives a significant
portion of its business overseas, the Company's results continue to be impacted
by the strong dollar. The Company continues to invest heavily in its
object-oriented and (client/server) Windows based products. In addition, the
Company is actively engaged in building alternate channels such as value-added
resellers ("VARs") and systems integrators worldwide to promote distribution
through alternate channels which can leverage its expanded product offerings.
On March 27, 1997, the Company acquired certain assets and liabilities of
Multiquest Corporation ("Multiquest") in a transaction accounted for as a
purchase. The Company acquired those assets and liabilities from Multiquest in
exchange for 50,000 shares of the Company's common stock. The purchase price for
Multiquest was approximately $209,000 based upon a stock price of $4.1875 (which
approximated the fair market value of a share of the Company's common stock at
the closing of the acquisition). The product acquired by the Company from
Multiquest, Pepperseed (formerly named S-Case) provides users with a low priced,
entry level object-oriented solution that is fully scaleable to the Company's
Object-Team product. The Company intends to market Pepperseed through its direct
sales force, VARs, channel partners and on the world wide web.
On March 29, 1997, the Company sold certain of the assets and liabilities
of its French subsidiary, Cayenne Software S.A.R.L., to Case Associates France
S.A. ("Case"). Under the terms of the acquisition Case assumed Cayenne
S.A.R.L.'s then remaining maintenance obligations to customers and certain other
liabilities, acquired its customer list and certain personal property and
entered into a distribution agreement with the Company to distribute its
products in France. In connection with the transaction, the Company issued a
warrant to purchase up to 20,000 shares of the Company's common stock at an
exercise price of $4.32 per share to an affiliate of Case. The costs related to
the transaction were immaterial.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
As the Company continues to expand its product offerings to provide
customers a more open and flexible set of solutions aimed at the growing (client
server) Windows and object-oriented market, it faces many challenges. The
Company has addressed some of these challenges through the acquisition (the
"Merger") of Cadre Technologies Inc. ("Cadre") which provides the Company with
broader product offerings and a larger customer base from which to solicit new
and additional business. Also, the Company has introduced additional products
during the past three years through both internal development and acquisitions
targeted at the object-oriented (client/server) Windows based markets. The
Company plans to continue to enhance its product offerings through development
efforts, strategic alliances and acquisitions to improve its competitive
position. The actions necessary to expand product offerings and reposition the
Company have had an adverse effect on the Company's operating results during the
first nine months of 1997, and may continue to effect operating results
throughout the remainder of 1997.
REVENUES
The Company's revenues are currently derived from three sources: (i) fees
for the perpetual license of the Company's proprietary software products, (ii)
fees from sales of consulting and education services, and (iii) maintenance fees
for maintaining, supporting and providing periodic upgrades of the Company's
software products.
The following table sets forth the amount of revenue derived by the
Company, by geographic segment and source, for each period indicated ($000s):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- ------
<S> <C> <C> <C> <C>
SOFTWARE LICENSE
United States.......................... $ 2,700 $ 2,857 $ 7,100 $ 7,806
Italy.................................. 610 432 2,518 2,010
United Kingdom......................... 501 122 1,020 1,648
Rest of World.......................... 703 769 2,766 3,047
------- ------- ------- -------
4,514 4,180 13,404 14,511
CONSULTING AND EDUCATION
United States.......................... 585 400 1,956 2,705
Italy.................................. 1,260 1,479 4,114 4,928
United Kingdom......................... 55 192 346 1,058
Rest of World.......................... 19 93 414 (75)
------- ------- ------- -------
1,919 2,164 6,830 8,616
MAINTENANCE
United States.......................... 2,566 3,699 8,547 10,940
Italy.................................. 631 632 1,967 1,625
United Kingdom......................... 703 1,065 2,418 2,930
Rest of World.......................... 1,015 1,458 3,253 4,230
------- ------- ------- -------
4,915 6,854 16,185 19,725
TOTAL............................. $11,348 $13,198 $36,419 $42,852
------- ------- ------- -------
</TABLE>
SOFTWARE LICENSES. Software license revenue for the three and nine
months ended September 30, 1997 amounted to $4.5 million and $13.4 million,
respectively compared to $4.2 million and $14.5 million in the comparable
periods of 1996, an increase of 8% for the quarter and a decrease of 8% for the
nine month period. The increase in license revenues for the three months
reflects the growth of new product revenue, which although increasing is not
enough to offset the decline in revenue from mature products for the nine
month period. Additionally, a reorganization of the Company's sales force during
June 1997 resulted in orders and revenue being delayed until the third quarter.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Windows (client/server) based and object-oriented products accounted for
57% and 64% of license revenue for the three and nine months ended September 30,
1997 compared to 43% and 41% for the comparable periods of the prior year. The
Company expects this trend to continue during 1997 as newer product offerings
continue to gain global acceptance and installed customers elect to follow
market trends and migrate from mainframe (OS2) and structured analysis and
design (UNIX) tools to Windows (client/server) based and object-oriented
solutions. License revenues in the United States declined by 5% and 9% due to
the aforementioned product mix shift. License revenue in Italy increased by 41%
and 25% primarily due to several large orders received in September of 1997.
License revenues from the Company's United Kingdom subsidiary increased 311% for
the three month period while for the nine month periods decreased 38%. The
increase in the current quarter can be attributable to an unusually slow quarter
for the prior year in the UK, as July of 1996 was the merger period for Cadre
and Bachman operations. The 38% decrease for the nine month period is related to
the lower demand for mature products.
CONSULTING AND EDUCATION SERVICES. Consulting and education revenue for the
three and nine months ended September 30, 1997 amounted to $1.9 million and $6.8
million, respectively compared to $2.2 million and $8.6 million for the
comparable period of the prior year, a decrease of 11% and 21%, respectively.
The decrease in consulting and education services revenue during the three and
nine month periods reflects lower demand for these services as revenues tend to
follow the trend of software license revenue. Consulting and education revenue
in United States increased by 46% for the three months reflecting an increase in
training associated with the object oriented products and decreased 28% for the
nine months due to a drop off of long term consulting contracts. Revenues in
Italy decreased by 15% and 17% primarily due to the expiration of several long
term consulting contracts in the comparable periods of 1996 and the impact of
the strong dollar. Consulting and education revenue in the United Kingdom
decreased by 71% and 67% due to lower demand and staffing in these areas and the
completion of a several consulting projects that occurred in the previous year.
MAINTENANCE. Maintenance revenue for annual maintenance contracts is
deferred and recognized ratably over the term of the agreement. Maintenance
revenue for the three and nine months ended September 30, 1997 amounted to $4.9
million and $16.2 million, respectively compared to $6.9 million and $19.7
million for the comparable periods of the prior year, a decrease of 28% and 18%,
respectively. Maintenance revenue in the United States declined by 31% and 22%
due to the aforementioned market place migration to client/server and
object-oriented tools and fewer customers renewing their maintenance contracts
on mainframe and structured analysis and design tools. Maintenance revenue in
Italy increased by 0% and 21% primarily due to increased penetration of
international markets in the prior year combined with an increased portion of
the customer base that renewed maintenance contracts. Maintenance revenue in the
United Kingdom declined by 34% and 17% primarily due to declines in new license
revenue and fewer customers renewing their maintenance contracts on mainframe
and structured analysis and design tools.
COSTS AND EXPENSES
The following table sets forth the amount of expense by category for the
periods indicated ($000s):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
COST OF REVENUES 1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cost of software licenses................ $ 274 $ 812 $ 1,415 $ 2,570
Cost of consulting, education and
maintenance............................ 1889 2,467 6,206 8,333
------- ------- ------- -------
Total cost of revenues............... 2,163 3,279 7,621 10,903
Sales and marketing......................... 5,140 5,812 17,612 21,448
Research and development.................... 2,310 2,778 7,909 9,269
General and administrative.................. 1,368 1,775 4,465 5,935
Restructuring and other costs............... 6,300 (375) 7,425
------- ------- ------- -------
Total costs and expenses............... $10,981 $19,944 $37,232 $54,980
------- ------- ------- -------
</TABLE>
COST OF REVENUE. The Company's cost of software licenses includes product
packaging, documentation, media and royalties to third parties, as well as the
amortization of capitalized software development costs. Costs of consulting and
education services and maintenance includes personnel, travel and occupancy
costs connected with providing such services.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Cost of software licenses were $0.3 million and $1.4 million or 2% and 4%
of revenue for the three and nine months ended September 30, 1997 compared with
$0.8 million and $2.6 million or 6% of revenue in the comparable periods of
1996. The decrease in 1997 expenses reflects reduced sales of third party
products for which the Company pays a royalty to resell as well as reduced
manufacturing costs consistent with reduced revenues.
Cost of consulting, education and maintenance was $1.9 million and $6.2
million or 17% of revenue in the three and nine months ended September 30,1997
compared with $2.5 million and $8.3 million or 19% of revenue in the comparable
periods of 1996. The decrease in 1997 expenses is primarily attributable to
reduced staffing levels as a result of company efforts to better align staffing
with demand, attrition and the merger.
SALES AND MARKETING. Sales and marketing expenses were $5.1 million and
$17.6 million or 45% and 48% of revenue in the three and nine months ended
September 30, 1997 compared with $5.8 million and $21.4 million or 44% and 50%
of revenue in the comparable periods of 1996. The decrease in 1997 expenses
generally reflects reduced staffing in North America and international
subsidiary operations as a result of attrition and the merger. Further reduction
in expenses were achieved as a result of the sale of the Cayenne France
subsidiary to our distributor Case Associates on March 29, 1997. In addition, a
reduction in promotional programs spending also contributed to the overall
decline in expenses for the quarter.
RESEARCH AND DEVELOPMENT. Research and development expenses were $2.3
million and $7.9 million or 20% and 22% of revenue in the three and six months
ended September 30, 1997 compared with $2.8 million and $9.3 million or 21% and
22% of revenue in the comparable period of 1996. The decrease in 1997 expenses
primarily reflects reduced staffing as a result of attrition and the merger.
Additionally, during June of 1996, the Company reviewed its product strategy and
determined that several products including WindTunnel were no longer consistent
with the Company's objectives. These efforts shifted resources toward developing
and or refining core client/server and object oriented products consistent with
the Company's objectives.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.4
million and $4.5 million or 12% of revenue in the three and nine months ended
September 30, 1997 compared with $1.8 million and $5.9 million or 13% and 14% of
revenue in the comparable periods of 1996. The decrease in 1997 expenses
primarily reflects lower levels of staffing which were the result of the merger
and the elimination of redundant positions. Administrative headcount is down 24%
from the comparable quarter of a year ago.
RESTRUCTURING AND OTHER COSTS. During the quarter ended March 31, 1997, the
Company evaluated its restructuring reserve and determined that certain amounts
provided for in previous restructuring actions were no longer required. As a
result, the Company recorded a benefit of approximately $0.4 million. During
June of 1996, in conjunction with the contemplated merger between Cayenne and
Cadre, the Company reviewed its product strategy and determined that several
products including WindTunnel were no longer consistent with the Company's
objectives. Accordingly the company evaluated the net realizable value of the
related intangible assets and recorded a charge of approximately $1.1 million
principally related to the write-off of the intangible assets acquired as part
of its acquisition of WindTunnel Software, Inc. Also, in conjunction with the
merger, and to reflect the costs associated with combining the operations of the
two companies, transaction fees and other costs, the Company recorded a charge
of $6.3 million during the three months ended September 30, 1996. Included in
the charge is $1.6 million of employee related termination expenses for
approximately 45 employees, $1.3 million of legal, accounting, investment
banking and other professional fees, $1.4 million of facility closure and
consolidation expenses, and $ 2.0 million of other expenses associated with the
consolidation of the two companies and the company name change.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
EFFECT OF INTERNATIONAL OPERATIONS ON INCOME (LOSS) FROM OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
INCOME (LOSS) FROM OPERATIONS: 1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
United States......................... $ 2,098 $(3,836) $ 6,254 $ (4,025)
Italy................................. (35) (75) (508) (1,056)
United Kingdom........................ (277) (742) (1,439) (1,357)
Rest of World......................... (1,419) (2,093) (5,120) (5,690)
------- ------- ------- --------
$ 367 $(6,746) $ (813) $(12,128)
</TABLE>
In addition to factors listed above, the operations of the Company's
international subsidiaries significantly affected results of operations in the
three and nine months ended September 30, 1997 and 1996.
The income (loss) from operations -- United States and Rest of World --
improved to $0.7 million and $1.1 million during the three and nine months ended
September 30, 1997 from $(5.9) million and $(9.7) million in the corresponding
periods of the prior year. The improved results are primarily attributable to
actions taken by the Company in previous quarters to better align expenses with
revenues and improved efficiencies gained in the merger with Cadre. In addition
a restructuring charge of $5.6 for the United States and $.2 for Rest of World
was recorded in the comparable quarter of 1996.
The Company's Italian subsidiary reported a loss from operations of $(0.0)
and (0.5) million for the three and nine months ended September 30, 1997
compared to losses of $(0.1) million and $(1.1) million in the corresponding
periods in the prior year principally due to increased revenue on software
licenses that contribute to larger profit margins.
The loss from operations in the Company's United Kingdom subsidiary
decreased to $(0.3) million for the three months and increased to $(1.4) million
for the nine months ended September 30, 1997 from $(0.7) million and $(1.4)
million in the corresponding periods in the prior year. The decrease was
principally due to changes in the management team operations in connection with
the merger.
PROVISION FOR INCOME TAXES. Due to the Company's recent history of
operating losses and the existence of significant net operating loss
carryforwards, the tax provision for the three and nine months ended September
30, 1997 and 1996 is primarily composed of foreign income and withholding taxes.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 "Earnings Per Share", which will require adoption during the year ended
December 31, 1997. This statement specifies the computation, presentation and
disclosure requirements of earnings per share. The Company is in the process of
determining the effect of adoption of this statement on its consolidated
financial statements and related disclosures.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's principal sources of liquidity
included cash and cash equivalents aggregating $10.2 million and a secured bank
line of credit in the amount of $5.0 million discussed below. Cash and cash
equivalents increased by $6.1 million compared to December 31, 1996. For the
nine months ended September 30, 1997, cash flows were principally affected by
the loss from operations and capital spending related to the implementation of a
new worldwide information system. This spending was offset by the private
placement of Series B, C, & D Preferred Stock, discussed below. The Company's
principal long-term cash commitments are for office space and operating leases.
The lease for the Company's executive offices, principal research and
development facilities, and headquarters operations expired on October 31, 1997.
The Company has secured a new lease with similar terms and conditions in the
general vacinity which run through April 30, 2005.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
On September 30, 1997, the Company had a commitment of approximately $0.2
million related to the implementation of a new worldwide information system. The
Company plans to introduce the system in phases commencing in August of 1997 and
scheduled for completion in early 1998. The Company has no other material
commitments for capital expenditures.
On January 2, 1997, the Company raised approximately $3.0 million through
the private placement of 150,000 shares of Series B Convertible Preferred Stock,
designated from its "blank check" preferred stock. Each share of Series B
Convertible Preferred Stock is entitled to earn dividends at a rate of 5% per
annum, payable upon conversion, in cash or stock, at the option of the Company.
Each share of Series B Convertible Preferred Stock is convertible into shares of
Common Stock at a rate determined by the lower of the average quoted market
price of the common stock for either (i) the ten trading days preceding the date
of issuance or (ii) any five trading days during any period of thirty days
before the conversion. In conjunction with the closing of the private placement,
the Company issued warrants to purchase 350,000 shares of the Company's Common
Stock at exercise prices ranging from 120% to 150% of the price set forth in
clause (i) above and having varying expiration dates from three to five years.
The shares of Common Stock underlying the Series B convertible Preferred stock
and Warrants were registered pursuant to the terms of the registration rights
agreement dated January 3, 1997. These shares were fully converted into 937,500
shares of common stock on June 6, 1997.
On July 18, 1997, the Company raised approximately $2.0 million through the
private placement of 100,000 shares of Series C Convertible Preferred Stock,
designated from its "blank check" preferred stock. Each share of Series C
Convertible Preferred Stock is entitled to earn dividends at a rate of 5% per
annum, payable upon conversion, in cash or stock, at the option of the Company.
Each share of Series C Convertible Preferred Stock is convertible into shares of
Common Stock at a rate determined by the lower of the average quoted market
price of the common stock for either (i) the ten trading days preceding the date
of issuance or (ii) any five trading days during any period of thirty days
before the conversion. In conjunction with the closing of the private placement,
the Company issued warrants to purchase 233,332 shares of the Company's Common
Stock at exercise prices ranging from 125% to 150% of the price set forth in
clause (i) above and having varying expiration dates from three to five years.
The shares of Common Stock underlying the Series C convertible Preferred stock
and Warrants are subject to registration pursuant to the terms of the
registration rights agreement dated July 18, 1997.
On August 28, 1997, the Company raised approximately $5.0 million through the
private placement of 250,000 shares of Series D Convertible Preferred Stock,
designated from its "blank check" preferred stock. Each share of Series D
Convertible Preferred Stock is entitled to earn dividends at a rate of 5% per
annum, payable upon conversion, in cash or stock, at the option of the Company.
Each share of Series C Convertible Preferred Stock is convertible into shares of
Common Stock at a rate determined by the lower of the average quoted market
price of the common stock for either (i) the ten trading days preceding the date
of issuance or (ii) any five trading days during any period of thirty days
before the conversion. In conjunction with the closing of the private placement,
the Company issued warrants to purchase 583,332 shares of the Company's Common
Stock at exercise prices ranging from 125% to 150% of the price set forth in
clause (i) above and having varying expiration dates from three to five years.
The shares of Common Stock underlying the Series C convertible Preferred stock
and Warrants are subject to registration pursuant to the terms of the
registration rights agreement dated August 28, 1997.
On November 3, 1997, the Company amended and restated its revolving credit
agreement with a bank to borrow up to $5.0 million and to extend its term
through October 5, 1998 and to amend certain of the financial and operating
covenants and other provisions thereunder. The loan is contingent upon meeting
certain financial and operating covenants at the time of any borrowing and over
the life of the loan. The loan is secured by all of the assets of the Company
and any borrowing amounts are tied to a percentage of qualified accounts
receivable outstanding at the time of any borrowing. The financial covenants,
which were amended, include a monthly minimum net worth covenant of $5.5 million
and liquidity (generally defined as cash and cash equivalents plus eligible
domestic accounts receivable and eligible international accounts receivable less
any indebtedness to the bank) at the end of each month.. At September 30, 1997,
the borrowing base under the revolving credit agreement was approximately $3.3
million. The Company had approximately $2.6 million outstanding against the line
of credit at September 30, 1997. The Company was in compliance with the
covenants as of September 30, 1997.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
On July 18, 1996, the Company completed its merger with Cadre of
Providence, Rhode Island. In connection with the merger, the Company issued
4,716,442 shares of Cayenne common stock for all of the outstanding capital
stock of Cadre. The transaction was accounted for as a pooling-of-interests for
accounting purposes beginning in the transition period. The Company incurred a
$6.3 million charge to operations during the transition period to reflect costs
associated with combining the operations of the two companies, transaction fees,
and other costs incident to the merger.
Cash expenditures for restructuring activities were approximately $0.1
million and $0.7 million during the three and nine months ended September 30,
1997. The Company currently estimates that cash expenditures for restructuring
actions for the remainder of 1997 will be approximately $0.2 million. The
Company believes that it has adequately provided for all restructuring actions
taken to date.
The Company anticipates that existing cash balances combined with funds
generated from operations, will provide sufficient cash resources to finance its
current operations and projected capital expenditures through 1997 and into
1998. Thereafter, the Company's cash requirements will depend upon the results
of future operations, which cannot be foreseen. There can be no assurance that
the Company will be able to meet its loan covenants, achieve its operating plan
and sustain profitability, failure to do so may have a material adverse
impact on the Company's business and operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Company or statements made
by its employees may contain "forward-looking" information, as that term is
defined in the Private Securities Litigation Reform Act of 1995 (the "Act"). The
Company cautions investors that there can be no assurance that actual results or
business conditions will not differ materially from those projected or suggested
in such forward-looking statements as a result of various factors including but
not limited to the following:
The Company's future operating results are dependent on its ability to
develop, produce, and market new and innovative products and services
internally or through acquisitions including, without limitation, achieving
product market acceptance of its client/server and object oriented products
and services and maintaining relationships with software and hardware
vendors and consultants. There are numerous risks inherent in this complex
process, including rapid technological change the requirements that the
Company bring to market in a timely fashion new products and services which
meet customers' changing needs and the successful integration of products
and services as a result of acquisitions.
Historically the Company has generated a disproportionate amount of its
operating revenues toward the end of each quarter, making precise
prediction of revenues and earnings particularly difficult and resulting in
risk of variance of actual results from those forecast an any time. In
addition, the Company's operating results historically have varied from
fiscal period to fiscal period; accordingly, the
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Company's financial results in any particular fiscal period are not
necessarily indicative of results for future periods.
The Company operates in a highly competitive environment and in a highly
competitive industry, which include significant pricing pressures and
intense competition for skilled employees. From time to time, the Company
may experience unanticipated intense competitive pressure, possibly causing
operating results to vary from those expected.
The Company offers its products and services directly and through indirect
distribution channels. Changes in the financial condition of, or the
Company's relationship with, distributors and other indirect channel
partners could cause actual operating results to vary from those expected.
The Company does business worldwide. Global and/or regional economic
factors and potential changes in laws and regulations affecting the
Company's business, including without limitation, currency fluctuation,
changes in monetary policy and tariffs, and federal, state and
international laws could impact the Company's financial condition or future
results of operations.
The market price of the Company's securities could be subject to
fluctuation in response to quarter to quarter variations in operating
results, changes in analysts' earnings estimates, market conditions in the
information technology industry, as well as general economic conditions and
other factors external to the Company.
16
<PAGE> 17
PART II. OTHER INFORMATION (CONTINUED)
ITEM 1. LEGAL PROCEEDINGS
Cayenne has received from Esprit Systems Consulting, Inc. a Notice of
Intent to Arbitrate, claiming that Cayenne is liable to Esprit for approximately
$1.6 million under an extension to a contract for services to be rendered to
Cadre. Cayenne believes that the claim is without merit because, among other
things, the contract in question terminated without extension. However, there
can be no assurance as to the claim's future course or likely result.
The Company is not aware of any other material litigation or claim pending
or threatened against the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Ex-27 Financial Data Schedule
Report on Form 8-K
Report filed August 29, 1997, including Item 5.
17
<PAGE> 18
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.
CAYENNE SOFTWARE, INC.
DATED: November 14, 1997 By: /s/ Frederick H. Phillips
-------------------------
Frederick H. Phillips
Vice President, Finance and
Administration, Treasurer
and Chief Financial Officer (Principal
Financial and Accounting Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF CAYENNE SOFTWARE, INC.
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORMS 10-K, 10-KA AND
10-Q.
</LEGEND>
<CIK> 0000880229
<NAME> CAYENNE SOFTWARE, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 10,212
<SECURITIES> 0
<RECEIVABLES> 10,935
<ALLOWANCES> 535
<INVENTORY> 0
<CURRENT-ASSETS> 1,790
<PP&E> 17,630
<DEPRECIATION> 15,072
<TOTAL-ASSETS> 25,900
<CURRENT-LIABILITIES> 17,880
<BONDS> 0
0
350
<COMMON> 188
<OTHER-SE> 7,224
<TOTAL-LIABILITY-AND-EQUITY> 25,900
<SALES> 13,404
<TOTAL-REVENUES> 36,419
<CGS> 1,415
<TOTAL-COSTS> 7,621
<OTHER-EXPENSES> 29,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 444
<INCOME-PRETAX> (1,257)
<INCOME-TAX> 455
<INCOME-CONTINUING> (1,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,712)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
