-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A4POmDlilgLqHIttJT5hR/AEJSqG0185KtB2RBi4D12AS5juckJfs5uVoRV+qEuL xWWVKqqMLdXvS+aeo8b0jA== 0000950135-97-001571.txt : 19970401 0000950135-97-001571.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950135-97-001571 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAYENNE SOFTWARE INC CENTRAL INDEX KEY: 0000880229 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042784044 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19682 FILM NUMBER: 97570666 BUSINESS ADDRESS: STREET 1: 8 NEW ENGLAND EXECUTIVE PARK CITY: BURLINGTON STATE: MA ZIP: 01803 BUSINESS PHONE: 6172739003 FORMER COMPANY: FORMER CONFORMED NAME: BACHMAN INFORMATION SYSTEMS INC /MA/ DATE OF NAME CHANGE: 19921111 10-K 1 CAYENNE SOFTWARE 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM JULY 1, 1996 THROUGH DECEMBER 31, 1996 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 TELEPHONE NUMBER (617) 273-9003 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.01 PAR VALUE NAME OF EACH EXCHANGE ON WHICH REGISTERED: NONE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes. No X. As of March 26, 1997, there were 17,741,616 shares outstanding of the registrant's common stock, $0.01 par value. As of that date, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $65,308,796. 2 CAYENNE SOFTWARE, INC. FORM 10-K FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 1996 TABLE OF CONTENTS PART I
Page ---- Item 1. Business................................................................. 3 Item 2. Properties............................................................... 16 Item 3. Legal Proceedings........................................................ 16 Item 4. Submission of Matters to a Vote of Security Holders...................... 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ... 17 Item 6. Selected Financial Data.................................................. 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 20 Item 8. Financial Statements and Supplementary Data.............................. 36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 56 PART III Item 10. Directors and Executive Officers of the Registrant...................... 56 Item 11. Executive Compensation.................................................. 56 Item 12. Security Ownership of Certain Beneficial Owners and Management ......... 57 Item 13. Certain Relationships and Related Transactions.......................... 57 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....... 57 Signatures....................................................................... 61
- 2 - 3 PART I ITEM 1. BUSINESS GENERAL Cayenne Software, Inc. (formerly Bachman Information Systems, Inc.) ("Cayenne(TM)"or the "Company"), organized as a corporation in 1983, develops, markets and supports a comprehensive suite of workgroup-to-enterprise analysis and design solutions for the real-world challenges software developers face every day. Fortune 1000 companies and government agencies around the world use Cayenne products as they develop, implement, and maintain enterprise-wide, business-critical information systems. Cayenne's products are designed around an innovative open architecture that enables organizations to create applications that integrate diverse information sources into new high-performance computing environments, to modify applications as business and technology change, and to run those applications on a variety of platforms. Cayenne's approach to reusability and its open architecture directly support mainframe computer aided software engineering and structured modeling in addition to client/server modeling and database design and object-oriented modeling and facilitates technology partnerships with other leading software vendors. Cayenne targets its products to Fortune 1000 companies, government agencies, and organizations of similar size throughout the world that use workstations, mid-range and mainframe computers and relational database management systems for data-intensive applications. In July, 1996, the Company acquired Cadre Technologies Inc. ("Cadre") thereby expanding its product offerings and customer base. Cadre develops, markets and supports software tools for the creation of complex computer software. Most of the products sold by Cadre help to automate the process of requirements analysis and software design by groups of software engineers. Customers use the tools to capture, traverse, and analyze abstract models of the system to be built. These models assist users, and sometimes their customers, in understanding a software system, planning its implementation and making engineering trade-offs. Additional Cadre products address document generation, model configuration management, software construction, and the "reverse engineering" (understanding) of existing software. Cadre's customers are generally developers of complex software systems, in both the information system ("IS") and the "technical" sectors. While most of Cadre's current customers consider themselves in the technical sector, the Company expects a shift toward IS customers as it concentrates on "object-oriented" ("OO") technology. The Company's strategy is to maintain Cadre's position as a leading provider of tools to the technical market, while introducing new products and enhancements for Cadre's OO product line. In October 1996, the Company elected to change its year end to December 31st. As a result, the period from July 1, 1996 through December 31, 1996 was designated as the "Transition Period." As the Company continues its migration toward providing customers a more open and flexible set of solutions, it faces many challenges. The Company has addressed some of these challenges over the past several years by introducing additional products through internal development and acquisitions targeted at the client/server and object-oriented 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 execute this transition have had an adverse effect on the Company's operating results during the transition period from July 1, 1996 through December 31, 1996 and prior fiscal years ended June 30, 1996, 1995 and 1994, respectively, and may continue to adversely affect operating results in the future. ACQUISITIONS On July 18, 1996, the Company completed its acquisition of Cadre under an Agreement and Plan of Merger (the "Merger Agreement") dated as of March 25, 1996. Cadre is now a wholly-owned subsidiary of the Company. The acquisition was accounted for as a "pooling of interests" during the six-month transition period ended - 3 - 4 December 31, 1996. Pursuant to the Merger Agreement, the amount of Company shares of common stock issued was 4,716,442 and the exchange ratio was determined to be 0.3088 Company share for each outstanding Cadre share. The fair market value of a share of the Company's common stock at the time of the merger was $5.625 per share. INDUSTRY BACKGROUND Organizations have found in recent years that good information systems supporting well-designed business processes can provide a substantial competitive edge. The growth of business process re-engineering is an attempt to re-think business processes and work flow from the ground up in order to achieve the dramatic improvements in productivity required to reduce costs, improve service to customers and gain competitive advantage. This re-thinking of the business process creates challenges for IS professionals by creating many new processes to support, and by rendering existing systems partially or completely obsolete. As a result, there is an increasing demand for new application development as well as a need for better integration among existing information resources. While in the past a majority of information-intensive applications were built using large, centralized mainframe computers (such as those built by IBM), with mainframe database management technology and very simple user interaction, the proliferation of personal computers, networks and related technology over the last ten to fifteen years has made a variety of new computing configurations possible. New technologies promise systems that are easier to use and provide better real-time access to information. After an initial investment, they also promise a more rational cost structure over time. Today, several very different types of technology coexist in large organizations, each serving the needs of specific user constituencies. This diversity of technology creates serious challenges for information systems professionals, as they work to build new applications, maintain older mainframe "legacy" applications, incorporate new client/server and communications technology, integrate a variety of databases and applications for improved access, and grow staff skills to meet overall requirements. To alleviate some of these pressures, recent technology developments have emphasized systems of hardware and software that are scaleable, meaning they can be sized to meet the small or large demands of the organizational units they support. Scaleable systems allow growing organizations to build on the investment they have made in infrastructure and staff development, adding capacity incrementally, rather than acquiring an entirely new system that might be very different from its predecessor. The primary goal of these changes is to make the organization more productive by making more information available to the people who need it. This improves the organization's ability to conduct its business. A related goal is to create a more flexible infrastructure in which incremental growth results in incremental cost, not a complete system redesign. With the acquisition of Cadre, the Company has entered into an additional industry segment focused on the creation and maintenance of complex software systems, the problem addressed by Computer Aided Software Engineering ("CASE") products. During the 1970s, a number of "structured" techniques and methods were invented to replace earlier ad-hoc approaches to software development. The analysis and design (as opposed to implementation) techniques emphasize the building of abstract models to assist in the understanding, planning, and implementation of a system. The rationale for modeling is the same in software as it is in any engineering discipline; money and effort are saved if problems are identified and dealt with early in the engineering process. STRUCTURED ANALYSIS AND STRUCTURED DESIGN. In the early eighties, networks of computer workstations made it feasible to partially automate the capture, traversal, and analysis of engineering models by work groups. This technology was rapidly adopted in the civil, mechanical, and electrical engineering domains. The CASE market expanded quickly in the mid-to late-eighties, as did the number of companies formed to service it. The high end of the market, with its multi-user networked UNIX engineering workstation solution, found a home in technically-oriented organizations, such as those in telecommunications, aerospace and defense. The other end of the market focused on single-user, personal computer ("PC") based products. These found early success in corporate IS organizations, where PCs were widely used. - 4 - 5 The IS CASE market declined in the early nineties for a number of reasons. While the IS software development market is large, commitment to structured methods (and the attendant engineering discipline) was weak. Some CASE companies made claims which the products were unable to deliver and soured the market. Others were slow to respond to technology changes such as the shift to client/server application development and object orientation (discussed further below). The decline resulted in a number of market leaders closing or being acquired. The technical market, where Cadre derived the majority of its business, was affected by the contraction and consolidation in the defense industry. Consequently, Cadre diversified its product line into the software development process, including debugging, measurement and verification tools. OBJECT ORIENTED TECHNOLOGY. In the meantime, the software development community began to experiment with "object-oriented" technology, and in particular, OO analysis, design and implementation techniques. The structured techniques mentioned previously generally partition a system purely along functional lines, i.e. in terms of what the system does. The OO approach partitions a system into "objects," where each object encapsulates information and those functions that operate on that information. The benefit of the OO approach is that systems partitioned this way are more robust, more amenable to change, and the objects are easier to reuse in other systems. Cadre started selling its first OO analysis and design products (based on the method of developing software created by Shlaer-Mellor) in 1989. In 1993 when market momentum began to build around a related method called the Object Modeling Technique ("OMT"), Cadre entered the market by reselling an OMT product. This was later replaced by the OMT tool developed by Westmount Technology B.V., acquired by Cadre in 1995. As the structured tools market matures, the Company expects a transition to the OMT tool and related products. These products run on both UNIX-based platforms and Windows 95 and NT-based platforms. THE TRANSITION TO CLIENT/SERVER COMPUTING New technology configurations combine personal computers, from which information or processing is requested by users or "clients", with small, medium, or large "server" machines that service those requests for information or processing, and often perform additional tasks that are triggered by these requests. The desired result is a network of information stores that contains the knowledge base of the business (sometimes called an "information warehouse"), and is queried and updated by a variety of applications that serve specific departments and goals. This type of configuration is loosely referred to as "client/server" computing. Centralized IS groups have become accustomed over time to the issues and strategies which arise when a large amount of data must be managed and a large number of users supported. Concerns about controlled access, controlled redundancy, management of application changes, large team development, application performance and system documentation have been part of the IS specialist's role for quite some time. Smaller departmental computing groups can sometimes be unaware of the implications of under managing these issues, and unaware of the techniques that can help control risk, if they have not had to confront the problems that can result when such controls are not in place. Today, forward-thinking organizations seek to combine the best of all worlds, and apply the new, productive tools that have been created for rapid development of small applications to larger, more ambitious, mission-critical projects. At the same time, IS specialists in these organizations want to ensure that applications, corporate data, and the infrastructure that supports them are treated as important corporate assets and managed with the necessary controls. APPLICATION DEVELOPMENT STRATEGIES In the past, companies that have worked to provide state-of-the art application development products have seemed to focus on one or the other of these worlds -- automation of the rapid application development ("code it and go") approach, or automation of the techniques pioneered by early methodologists in largely mainframe environments. Again, the trend had been toward diverse techniques being used in organizations and projects of - 5 - 6 different sizes or technologies. But Cayenne and many of Cayenne's customers see significant value in creating a scaleable development approach, one that provides the productivity of rapid, visual development with the reliability of a robust environment. Some techniques commonly associated with mainframe-oriented development in the past, such as data and process modeling, automated database design, and performance analysis, can be applied with equal success to the development of client/server applications; they need only be adapted to the characteristics of specific technology environments. As IS organizations seek productivity tools that will help them make these difficult transitions, they prefer to work with vendors who understand their special challenges. In exploring the various tools available to them, they are confronted by a wide variety of claims, prices, and function. Cayenne believes it can provide a unique and critical service as a company that understands the challenges of both the traditional IS environment and the new technologies and methods. Many organizations have recently invested heavily in the hardware and connectivity infrastructures that will form the foundation of their new client/server systems. Components of these infrastructures include computers, network-related hardware and software, database management systems, gateways, and other enabling technologies. These organizations are now turning their attention to the applications that will be built using this new technology infrastructure, and which will support the newly-designed business processes. Applications fall into several different categories, based on their complexity and on the user constituency they serve. Cayenne focuses on solutions that enable development, deployment, and maintenance of the more complex applications that impact multiple departments or the entire enterprise. Many of these applications are considered to be "business-critical," meaning that their continued operation and effectiveness is critical to the execution of day-to-day business. Many other application development tools on the market today provide productivity benefits for smaller, less complex applications, but these tools lack the robust features that allow an organization to continue using those same tools to address more complex requirements for applications that are central to the business. Cayenne's strategy is to produce solutions to a number of different problems relating to the development of business-critical applications in mainframe, structured, object-oriented and client/server technologies. As the Company continues its migration toward providing customers a more open and flexible set of solutions aimed at the growing object-oriented and client/server markets, it faces many challenges. To address some of these challenges the Company has introduced a suite of additional products targeted at the object-oriented and client/server 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 execute this transition have had an adverse effect on the Company's operating results during the six-month transition period ended December 31, 1996, and during fiscal years ended June 30, 1996, 1995 and 1994, respectively. CAYENNE'S APPROACH CAYENNE PROVIDES PRODUCTS AND SERVICES IN THE FOLLOWING SOLUTION AREAS: -- Modeling business requirements -- Designing and re-engineering databases -- Developing and deploying applications -- Work group support -- Leveraging legacy systems -- Structured analysis and design -- Object-Oriented technology Cayenne takes the following unique approach to these areas, which provides a number of benefits to organizations seeking strategic solutions to their information systems challenges. - 6 - 7 SEPARATION BETWEEN CONCEPTUAL AND PHYSICAL CONCERNS. Cayenne solutions enforce a separation between conceptual business requirements, where organizations capture information about what data needs to be available and what happens to it, and physical implementation, where technology-specific concerns are addressed in an implementation design. This separation provides flexibility. Changes to the business requirements or policies and changes to the technology environment can be addressed independently, allowing organizations to leverage investments in each. The technology-independent approach helps organizations focus on business requirements, increasing the likelihood that the finished application will meet those requirements. FLEXIBILITY TO ENTER THE DEVELOPMENT PROCESS AT ANY STAGE. Cayenne solutions address the entire life cycle of application development, and many of them can be used at multiple stages of the life cycle. For example, database design products can capture existing database structures from applications that have already been developed, allowing database designers to view and optimize the data structures. Design can begin with a new project or with an existing system already in production. This flexibility supports an iterative development process, and allows incorporation of formal analysis and modeling where needed. INTEGRATION OF PRODUCTS ON MULTIPLE PLATFORMS. Used individually, Cayenne products provide users with sophisticated solutions to application development problems. Cayenne enhances their utility by offering total system integration across products on both Windows and OS/2 platforms. Product integration enhances communication, efficiency, and productivity, and it increases the return on the investment in time and effort expended throughout the application development life cycle. Using Cayenne products, systems analysts, application developers, and database designers can work in concert, using the same model from the conceptual phase through to physical database implementation. Over time, this cycle can be reversed as business requirements change or migration to new platforms requires redesign. ABILITY TO ACHIEVE PRODUCTIVITY BY REUSING PREVIOUS WORK. The technology-independent approach, combined with the use of object-oriented techniques, allows for the reuse of valuable work -- a very important contributor to productivity. Cayenne supports reuse by: - Providing development tools that help build scaleable applications, minimizing the need for redevelopment. - Modeling applications at a business level, so that requirements are implemented consistently across platforms and applications. - Employing object-oriented techniques such as inheritance and encapsulation in application development, business modeling, and database design. - Re-engineering legacy systems, so data structures and business rules can be captured from existing implementations and reused in models and new implementations. - Providing open interfaces, so information captured in Cayenne products can be reused with best-in-class tools or custom solutions. STRATEGIC DIRECTION Cayenne continues to invest in robust solutions that facilitate development of the most critical applications, are applicable across multiple platforms, can be used throughout the application development life cycle, and will stand the test of time, justifying customer investments. These solutions result from a combination of Cayenne-built software products, joint development efforts with partners, acquired technology, and services provided by Cayenne's highly experienced trainers and consultants. Cayenne has invested in its client/server, object-oriented mainframe and structured analysis solutions, recognizing that many organizations will need to maintain multiple types of environments for some time to come. The Company is positioned in the midst of several industry megatrends. Trends towards data warehousing, the internet and intranet, the use of the object-oriented software - 7 - 8 development approach, and year 2000 data field initiatives are fueling market demand for the Company's products that address these trends. CAYENNE'S SOLUTIONS Cayenne's diverse solutions, composed of software products and services, assisted information systems specialists in the following areas: modeling business requirements; designing and re-engineering databases; developing and deploying applications; work group support; designing for performance; leveraging legacy systems; structured analysis and design; and object-oriented technology. The suite of products and services provided by Cayenne and its partners allows customers to choose from the wide variety of application development tools on the market that best meet their needs. Except for designing for performance, Cayenne offers products and services today in each of the following solution areas. MODELING BUSINESS REQUIREMENTS Cayenne offers tools on both Windows and OS/2 platforms that enable data analysts, system analysts, and other business analysts to model information systems more quickly and thoroughly than they can using conventional techniques. GROUNDWORKS for Windows and GroundWorks for OS/2 (formerly, the BACHMAN/Analyst) are tools for analysts that incorporate the data, logic, and process requirements into a unified model. Further, they can be used to generate implementation components for a variety of database and software environments. These data modeling tools incorporate a rule-based expert system that places Cayenne's modeling expertise in the hands of users, helping them to improve the quality and effectiveness of the resulting models. GroundWorks integrates process and data models. This integration streamlines the modeling process, reduces opportunities for error, and promotes an object-oriented approach to analysis -- all of which facilitate reuse. One important goal of GroundWorks is to help user teams, analysts, and application developers communicate business requirements. Models created using one product are fully compatible with the other, providing organizations with greater platform flexibility. DESIGNING AND RE-ENGINEERING DATABASES Cayenne offers tools on both Windows and OS/2 platforms that allow data analysts, application developers, and database designers to design, implement, and maintain high-performance relational databases. TERRAIN is Cayenne's family of database design tools that offers a comprehensive, scaleable database design environment for business-critical client/server databases. TERRAIN 500 provides graphical support for basic design tasks, such as object creation and maintenance, reporting, and database documentation. Open Connectivity tasks support Microsoft Open Database Connectivity (ODBC), allowing Terrain 500 users to import and export designs from over 40 popular Database Management Systems (DMBSs), including Microsoft and SYBASE SQL Server, ORACLE, Informix, and DB2/6000. TERRAIN 1000 was designed specifically for users of Microsoft and SYBASE SQL Server, with built-in expertise appropriate to users of Version 4.2, 4.9, and System 10. Terrain 1000 has all the functionality of Terrain 500, but with greater depth and breadth (version-specific Design task rules to help users evaluate their designs, advisors for performance optimization, and support for all SQL Server objects, for example). When used with the optional TERRAIN 100/S module, users can connect directly to a Microsoft or SYBASE SQL Server catalog in order to capture existing databases and generate DDL based on their Terrain designs. Another optional module, TERRAIN 100/O, provides similar functionality for ORACLE databases. Designs created using Terrain 1000 are compatible with Terrain 500, and vice versa. TERRAIN FOR OS/2 (formerly, the BACHMAN/DBA), is optimized through expert-systems technology for IBM's DB2 database management system. Terrain for OS/2, in combination with DDL GENERATOR products, allows database administrators to design relational databases and create data definitions for a number of different relational databases, including DB2, DB2/6000, SYBASE SQL Server, Microsoft SQL Server, ORACLE, Ingres, - 8 - 9 INFORMIX, ADABAS, and the OS/2 databases (Extended Services Database Manager (DBM) and DB2/2). These products also capture existing database designs to facilitate the re-engineering of database definitions to one or more technologies. Organizations seeking an integrated application development solution can use TERRAINMAP to translate GroundWorks data models into Terrain 1000 designs. Once in Terrain, the design can be implemented in any ODBC-compliant DBMS. This integration makes it possible to completely re-engineer existing production systems, and to maintain a single data model and deploy it across any number of database platforms. Organizations can start in either place --with an existing data model or an existing database-- and use TerrainMap to help ensure both optimal design and optimal performance. DEVELOPING AND DEPLOYING APPLICATIONS ELLIPSE provided a comprehensive solution for building and maintaining business-critical client/server applications. It combined a productive, visual development environment with a robust production system and integrated life cycle management. This combination allowed organizations to build reliable and scaleable multi-platform client/server applications. Teams of developers on the Sun Solaris platform could use Ellipse to build small or large database applications, and deploy those applications to one or more production sites. Ellipse helped organizations take advantage of the special benefits of client/server computing by automatically partitioning the application between clients and servers. Ellipse's automatic recovery and restart features ensured that applications and information would be available when needed by business users, thereby reducing the risk of bringing run-the-business applications to new client/server technology. Ellipse was based on a shared object repository and incorporated configuration management and version control features which facilitate ease of maintenance and a smooth transition to new software releases. In July 1996, the Company entered into an agreement with Seer Technologies, Inc. ("Seer") providing for the sale of its Ellipse product in exchange for certain royalties payable under the terms of the joint development and distribution agreement described below if the Company's former Ellipse customers migrate to Seer's HPS product. GENERATOR FOR POWERBUILDER allows an organization that uses both GroundWorks or Terrain for DB2 and Powersoft Corporation's PowerBuilder to directly take advantage of modeling work in designing a new application. The Generator creates several different types of PowerBuilder application components using information specified in Groundworks or Terrain for DB2, offering time savings and improved application consistency and quality. COMBINED CAYENNE-NETRON SOLUTION. Cayenne's open architecture allows customers to take advantage of the implementation tools that meet their needs. Netron Inc.'s CAP/Link provides a link between Groundworks for OS/2 and Netron's multi-platform COBOL construction product, NETRON/CAP. This combined solution is used today by a number of organizations who are committed to COBOL development, want to evolve toward a reusable code base, and want integration with high-level modeling in order to ensure that new applications meet business requirements. Cayenne sells Netron's application development products in Italy, Ireland and the United Kingdom. WORK GROUP SUPPORT REPORTS provides over 100 standard reports on CAYENNE model and design information. Taking advantage of easy-to-use database technology --Microsoft Access-- Reports provides Windows-based access to GroundWorks - 9 - 10 model information, and to Terrain design information. Reports are standard across all products, enhancing communication among members of application development teams. SHARED WORK MANAGER allows groups of analysts to share models and integrate the results of their work. Shared Work Manager is the first work group modeling product that takes an intelligent approach to resolving modeling conflicts that arise in a multi-user environment. It enables groups to interact in a manner consistent with their organization's culture and work-flow methods. The product helps users achieve a shortened development cycle without sacrificing application quality because it supports parallel development, increases consistency across applications, streamlines work flow, and simplifies and encourages teamwork. MANAGING THE PROCESS SERVEYOR is a multi-platform client/server product that integrates process and project management to enable information systems development teams to work more efficiently and effectively. Organizations that have adopted a development methodology can use Serveyor to adapt that methodology for specific projects, assign tasks and deliverables, launch the tool appropriate for performing each task, track progress, and manage resources within and across projects. Serveyor incorporates a large knowledge base of information relevant to information systems processes and tasks, enabling staff members to learn on the job. Overall, this product serves as an umbrella over the other tools, tasks, and deliverables that make up the development process. Serveyor is distributed by Cayenne under the terms of a worldwide technology and marketing agreement with Rapid Systems Development, Inc. which owns certain rights to the technology for the product. The Company no longer actively sells and markets Serveyor. LEVERAGING LEGACY SYSTEMS BUSINESS RULE CAPTURE lets users exploit the valuable information in legacy systems --their logic and objects-- and use that information to re-engineer applications as they migrate from traditional host-based systems to distributed systems. By enabling organizations to quickly summarize the business logic in legacy COBOL applications, Business Rule Capture shortens the cycle for maintenance, system integration, and new development. And once existing business rules are clearly understood, database managers can better understand how programs access data and then optimize the supporting data structures accordingly. LEGACY CAPTURE products facilitate the re-engineering of IMS data structures to create an implementation-independent model where they can be reused in new relational database structures. In addition, flat file data structures from existing COBOL applications can also be re-engineered using these products. Reverse engineering products support the needs of IS departments that manage multiple databases, and they also help accelerate business process re-engineering projects by allowing organizations to take advantage of business information that is available in existing systems. PRODUCTION DBA provides a seamless interface between Cayenne's database modeling and design products and BMC Software's CHANGE MANAGER, a mainframe-based product which coordinates data structure changes among multiple DB2 subsystems. CAYENNE 2000 is a tool to help diagnose Year 2000 challenges. It can detect date dependencies in single or across multiple COBOL programs, generate reports on the changes needed and the impact of those changes, and provide an estimate of the time required to fix the problems. It can also correct certain date dependency problems in the COBOL source code. STRUCTURED ANALYSIS AND DESIGN TEAMWORK is a family of structured methods products, used by both C++ and Ada developers, which help software engineers improve software quality, streamline the software development process, and reduce development costs. Specific Teamwork tools address aspects of development including requirements analysis, real-time systems development, dynamic verification, structured design, testcase generation, and document generation. - 10 - 11 VANTAGETEAM is a family of structured method products that enable relational database developers to build and maintain enterprise client/server systems. Its integrated, model-driven environment offers developers a choice of either structured or object-oriented modeling approach. VantageTeam features extensive code-generation capabilities for popular 3GLs and 4GLs, and supports the leading relational database management systems, including CA-Ingres, Informix, Oracle and Sybase. OBJECT ORIENTED TECHNOLOGY OBJECTTEAM FOR OMT automates and manages software construction using the Object Modeling Technique (OMT). It provides a multi-user repository with version and configuration management, supports the Rumbaugh et al. Object Modeling Technique, and generates incremental code. The Company has also developed a Java code generator for ObjectTeam. In August 1996, the Company entered into a strategic alliance with Project Technology, Inc., a provider of Schlaer Mellor based object technology for software development in order to provide current ObjectTeam for Schlaer Mellor customers an upgrade path to Project Technology's Bridgepoint tool set. INTERNATIONAL VERSIONS OF CAYENNE PRODUCTS The Cayenne product set is available worldwide. Products sold internationally typically include a hardware security key to prevent or reduce the use of illegally copied products. (Products for the domestic market use OEM software to enable concurrent licensing.) Many of Cayenne's products are enabled for double-byte character sets. This enablement is a prerequisite for translation into large-character-set languages such as Kanji. Kanji versions of Groundworks for OS/2, Groundworks Capture for COBOL, Groundworks Capture for IMS and Terrain for OS/2 have been created. RISKS OF INTERNATIONAL OPERATIONS Approximately 51%, 52%, 50% and 48% of Cayenne's revenues during the six-month transition period ended December 31, 1996 and fiscal 1996, 1995 and 1994, respectively, were attributable to international sales. Cayenne commenced operations of its German subsidiary, Bachman Information Systems, GmbH, in November 1990. Cayenne acquired the Cayenne-related business of Pro- Systems S.A., its distributor in France, in October 1991; all of the stock of its distributor in the United Kingdom, Bachman Information Systems Limited, in November 1991; and the Cayenne-related business of Bachman Italia, S.r.1., its distributor in Italy, in January 1992. The Company also commenced operations of its Spanish and Singapore subsidiaries in April 1996 and February 1995, respectively. The future contribution of sales from the foreign subsidiaries to Cayenne's results of operations depends on Cayenne's success in maintaining cost-effective marketing and sales operations through these wholly-owned subsidiaries. In September 1994, as part of a restructuring to reduce expenses, Cayenne reorganized the operations of its German subsidiary. In connection with the Cadre merger, the Company has acquired subsidiaries in the Netherlands and Australia. Approximately 4%, 7%, 6% and 5%, of Cayenne's revenue during the six-month transition period ended December 31, 1996 and fiscal 1996, 1995 and 1994, respectively, was attributable to sales made to independent international distributors. Sales in countries in which Cayenne continues to use independent distributors will remain subject to the distributors' financial condition and success, which cannot be controlled by Cayenne. Risks inherent in Cayenne's international business generally include exposure to currency fluctuations, longer payment cycles, greater difficulties in accounts receivable collection and the requirement of complying with a wide variety of foreign laws. While Cayenne has not experienced any material delays, expenditures or other adverse consequences in complying with foreign laws to date, it has been necessary for Cayenne to take steps to protect its proprietary rights and license its products under local laws from country to country. - 11 - 12 CUSTOMERS AND APPLICATIONS Cayenne's products are used worldwide by information systems specialists in a wide variety of business, government, and non-profit organizations. Generally, the customers are users of computing environments for data-intensive applications. With the acquisition of Cadre, the Company has expanded its customer base to include customers that are generally developers of complex software systems, covering a wide range of applications in the IS and "technical" sectors. As of December 31, 1996, Cayenne had over 52,000 installations worldwide, and a customer base of nearly 2,000 large enterprises worldwide that include businesses in a wide variety of industries. Historically, Cayenne relied significantly on its relationship with IBM for development and marketing of Cayenne's products. IBM was Cayenne's single largest customer during the transition period ended December 31, 1996 and in each of fiscal 1996, 1995 and 1994 when revenue from IBM (including license fees paid by IBM in connection with its own use of Cayenne products, as well as amounts paid by IBM as a distributor and systems integrator) accounted for 16%, 15%, 9% and 6% of Cayenne's total revenue, respectively. In January 1993, Cayenne discontinued its membership in the IBM International Alliances for AD/Cycle, SystemView, and Information Warehouse. Cayenne and IBM entered into a settlement and release agreement dated June 30, 1993 (the "IBM Settlement Agreement") pursuant to which Cayenne and IBM severed certain of their remaining relationships. Each party released and discharged the other party from all known and unknown claims occurring on or prior to June 30, 1993. See, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further information. CUSTOMER SUPPORT AND SOFTWARE MAINTENANCE Cayenne believes that high-quality customer service and technical support are essential competitive factors in its marketplace. Through its training, consulting, maintenance, and support services, Cayenne listens to its customers' needs and provides services that will maximize the results achieved by customers using Cayenne's products. Maintenance, support, and training also provide valuable feedback that is used to refine, enhance, and develop Cayenne products. Customers receive maintenance support from a staff of customer specialists via a telephone "hot line". In the past, software maintenance and support were generally provided without extra charge for ninety days following the initial licensing of a product. The Company has changed this practice and generally no longer provides maintenance and support without charge. Annual maintenance contracts are available. The Company offers three types of maintenance support at three price points. Basic Support provides customers who do not desire "hot line" access only with periodic product upgrades and feature/function enhancements. Additionally, Basic Support includes access to all services delivered through Cayenne's computer bulletin board and internet site. Call Plus, available to those customers who purchase basic support, provides specified personnel access to the Company's "Hot Line" for an additional annual fee. In addition to including all of the benefits of the Company's Basic Support and Call Plus maintenance, Premium Support subscribers are provided access to Cayenne's "Hot Line" support and shipment of unscheduled, emergency patches for documented errors or defects in the latest unmodified release. In addition, Premium Support customers receive discounts off the list price of Cayenne's annual user conference, public training courses, and on-site training (based on availability). TRAINING AND CONSULTING Cayenne provides conceptual and product-oriented training courses for customers at education facilities in the United States in Atlanta, Burlington (Massachusetts) and New York City as well as in Toronto, Canada; Boulogne-Billancourt, France; Turin, Italy; Munich and Wiesbaden, Germany; Delft, Netherlands and Bracknell, England. Cayenne's international distributors provide training and consulting to customers in their territories. Courses are also available to be customized and delivered at customer sites. - 12 - 13 The Company provides professional services delivered by experienced consultants. These offerings are designed to promote customer success in the planning, implementation, and ongoing use of Cayenne's software products. Cayenne's consultants provide a number of services for organizations making transitions into client/server technology, including designing relational databases, establishing a client/server architecture, and facilitating the creation of productive development processes. MARKETING AND SALES Cayenne markets its products to Fortune 1000 companies, government agencies, and organizations of similar size worldwide that use computers and software for data-intensive and transaction-intensive applications. Cayenne seeks to promote acceptance of its products among technical personnel, as well as at the management level. Cayenne markets its products through a direct sales force in the United States and through wholly-owned subsidiaries in Australia, Canada, Germany, Italy, France, the Netherlands, Singapore, Spain and the United Kingdom. Distributors, agents and other resellers market Cayenne's products in over 60 other countries. Cayenne promotes a team selling approach in which telemarketing, corporate sales, and field sales representatives work together to identify, qualify, inform, and sell to prospective customers. In conjunction with its expansion into the client/server and object-oriented development marketplace and in an effort to promote distribution through alternate channels, Cayenne has been actively engaged in building alternate distribution channels such as value-added resellers ("VARs") and system integrators worldwide. Cayenne's marketing program includes advertising, public relations, promotional materials, direct mail, seminars, consultant briefings, user meetings, trade shows and telemarketing. The focus of these efforts is to position Cayenne and the value of Cayenne's solutions to customers as well as industry influencers. Cayenne's senior technical personnel frequently participate in industry conferences that increase customer awareness of Cayenne's products and its technological innovations. During the transition period ended December 31, 1996 and in fiscal 1996 and 1995, Cayenne pursued a focused marketing campaign to increase awareness of the value of Cayenne's solutions in client/server and object-oriented environments. Cayenne has also joined Sybase, Inc.'s Warehouse WORKS data warehouse program and will maintain compatibility with Sybase data warehouse offerings and participate in joint marketing activities. Cayenne regards its customer service and support organization as an integral complement to its corporate strategy. Cayenne believes that its reputation for strong after-sale support has helped the Company achieve additional sales, as well as contributing to a high level of customer satisfaction. PRODUCT DEVELOPMENT AND MANUFACTURING To date, a significant majority of Cayenne's software products have been developed internally by its employees and consultants. As a result of the Company's acquisition of Cadre in July 1996, Cayenne now supports development and manufacturing for a family of structured analysis and design and object-oriented products. In developing new products and enhancements, Cayenne uses an integrated engineering approach that emphasizes market-driven quality and customer satisfaction. This approach incorporates the perspectives of customers and functional experts, as well as personnel in the areas of marketing, sales, software engineering, quality assurance, documentation, and customer support. Cayenne's research and development staff has significant expertise in the technologies bearing on development of software tools, including personal workstations, mainframe systems, graphics, expert systems, database design, enterprise modeling, systems analysis, code generators, interface design, operating systems, networks, and language/compiler skills. Cayenne uses its product set in the design of future product enhancements and in the development and deployment of the Company's own internal information systems. In fiscal 1995, Cayenne entered into an agreement to develop, maintain and enhance certain of Cayenne's products in India, allowing Cayenne to realize savings in development costs while maintaining control over the product development process. In connection with the Cadre acquisition, the Company also supports development staff in the Netherlands. - 13 - 14 The products developed and enhancements added by Cayenne are determined by Cayenne's assessment of market revenue, growth opportunity, and return on investment, tempered by the technical feasibility of the innovation, and the need to maintain the highest levels of product quality and customer satisfaction. Market opportunity is assessed by a combination of direct market and customer research, by access to opinion leaders in technology, by working along side customers to define their most productive development methodologies, and by working with customer development partners to manage projects involving substantial innovation and requiring supplementary funding. The Company's future financial performance will depend in part on the successful development and introduction of new products and enhancements to existing products, and customer acceptance of these products. Many software companies have experienced delays in completing the development of new products and there can be no assurance that the Company will not encounter difficulties that could delay or prevent the successful introduction and marketing of new and enhanced versions of its products. During the six-month transition period ended December 31, 1996, and in fiscal 1996, 1995, and 1994, Cayenne spent $5.4 million, $14.4 million, $17.1 million and $20.1 million respectively, on internal product development. Also during fiscal 1995 and 1994, the Company recorded charges for purchased research and development of $7.3 million and $1.7 million upon the closing of the acquisitions of Westmount Technology B.V. and Cooperative Solutions, Inc., respectively. COMPETITION The market for application design and development products is highly competitive and characterized by continual change and improvement in technology. The list of Cayenne's principal competitors in sales situations depends on several factors including the solution area, whether the focus is mainframe or client/server development, and whether the customer seeks strategic or tactical solutions. Cayenne's principal competitors in the modeling and database design market include LogicWorks, Inc., Intersolv, Inc., and Texas Instruments, Incorporated. In the process management market, LBMS, Inc. serves similar needs to the Company's Serveyor product. Cayenne faces additional competition with its entry into the CASE market occupied by Cadre. The CASE market is characterized by rapid change and frequent introduction of new products. In the Structured technical market, Cayenne's primary competitor is Aonix (formerly, Interactive Development Environments, Inc.) In the object-oriented market, Cayenne's primary competitors are Rational Software Corp., Platinum Technology, Inc. and Aonix. Many other companies produce products that compete with Cayenne and still others might become competitors in the future. As Cayenne expands its product line into new solution areas it is encountering additional competitors. Many of Cayenne's existing and potential competitors have substantially greater financial, marketing, and technological resources than Cayenne. The principal competitive factors that have affected the market for Cayenne's products include responsiveness to customer needs, product function, product reliability, product ease of use, product openness, quality of customer training and support, vendor reputation, relationships with other vendors, and price. A variety of external and internal events and circumstances could adversely affect Cayenne's competitive capacity in the future. Cayenne's ability to be competitive will depend, to a great extent, on performance in product development and in sales and marketing. To be successful in the future, Cayenne must respond promptly and effectively to the challenges of technological change and its competitors' innovations by continually enhancing its own product offerings and ensuring that the market is aware of the solutions Cayenne offers. PROPRIETARY RIGHTS PROTECTION Cayenne relies on a combination of copyright, trade secret, patent and trademark laws and license agreements to protect its proprietary rights in technology. Cayenne distributes its products under signed software license agreements which grant customers a perpetual, non-exclusive license to Cayenne's products subject to restrictions on copying, disclosure, usage, decompiling and transferability. The source code for all of Cayenne's products is protected as a trade secret and as an unpublished copyrighted work. In addition, Cayenne has entered into nondisclosure and invention agreements with each of its key technical employees. All products are delivered as - 14 - 15 object code. International products are usually delivered with the addition of an electronic hardware "key" to hinder the use of unauthorized copies. Charles W. Bachman has assigned to Cayenne a patent on certain technology used in its products, United States Patent 4,631,664, "Partnership Data Base Management System and Method." This patent covers the unique internal formats used to store design information in many of Cayenne's products. Mr. Bachman and other inventors have also assigned to Cayenne patents with respect to the systems used in certain Cayenne products for dynamically modeling organizational information systems (United States Patent 5,146,591, "Dynamic Information Management System Utilizing Entity-Relationship Information Model in which the Attribute is Independent of an Entity") and for processing complex information representative of business transactions (United States Patent 5,179,698, "System for Transforming User Data in Accordance with an Algorithm Defined by Design Data and for Evaluating the Transformed Data Against Logical Criteria"). Seven additional patents have been granted by the United States Patent and Trademark Office (the "PTO") pertaining to technology used in Cayenne's products. In addition, patent applications filed in April and December 1991 (derived from filings under the Patent Cooperation Treaty) are pending before the Canadian, Japanese and European patent offices. These applications are directed to the subject matter of all of the above referenced Cayenne patents except U.S. Patent 4,631,664. Despite the steps taken by Cayenne to protect its proprietary rights, it may be possible for unauthorized third parties to copy aspects of Cayenne's products, to develop similar technology independently or to obtain and use information that Cayenne regards as proprietary. Cayenne believes that, because of the rapid pace of technological change in the software industry, patent, trade secret and copyright protection is less significant to Cayenne's competitive position than factors such as the knowledge, ability and experience of Cayenne's personnel, new product development, frequent product enhancements, name recognition and ongoing reliable product maintenance support. As of the date hereof, Cayenne has not received any claim alleging that any of Cayenne's products infringes proprietary rights of any third party seeking indemnification for such an infringement, and Cayenne does not know of any basis for such a claim. If any such claim were to be asserted, it might involve costly and protracted litigation. No assurance can be given that Cayenne would be successful in any such litigation or that, if it were not successful, it would be able to license the disputed proprietary rights on commercially reasonable terms. SEASONALITY AND BACKLOG The Company's quarterly results are subject to fluctuations resulting from a variety of factors, including the effects of domestic and international economic conditions, budgetary considerations and spending patterns of customers, the Company's sales compensation plan, the timing of large individual orders, new product introductions, and recognition of fees in connection with license, development and similar agreements. The Company typically realizes a larger percentage of its software product license revenues in the second and fourth quarters of each year, with traditionally its lowest product license revenues occurring in the third quarter of each year. This seasonality results in part from budgetary considerations and spending patterns of the Company's customer base and the Company's sales commission plan, which compensates sales personnel for achieving or exceeding annual quotas. In addition, a major portion of each quarter's product license revenues is typically realized in the last month of the quarter. As a result of the factors discussed above, the Company's operating results for any one quarter are not necessarily indicative of results for any future period. - 15 - 16 While the length of the sales cycle varies, Cayenne typically does not have a significant backlog, and substantially all of its product revenues in any quarter result from sales made in that quarter. EMPLOYEES As of February 28, 1997, Cayenne employed 344 people worldwide on a full time basis. No employees are represented by a labor union. Cayenne has not experienced any work stoppages and believes its relations with employees are good. Cayenne believes that its future success will depend in part on its continued ability to attract and retain highly qualified personnel in a competitive market for experienced and talented software developers and sales and marketing personnel. ITEM 2. PROPERTIES Cayenne's executive offices, principal research and development facilities, and principal marketing, customer service and support and production facilities are located in approximately 62,000 square feet of space in an executive office park in Burlington, Massachusetts. Cayenne occupies that space under a lease expiring October 31, 1997. Cayenne maintains its primary sales and support offices in nine locations in the United States, and its distribution subsidiaries have offices in Toronto, Canada; Bracknell, England; Boulogne-Billancourt, France; Wiesbaden and Munich, Germany; Singapore; Madrid, Spain; Delft, Netherlands; Canberra, Australia; and Florence, Milan, Rome, and Turin, Italy. Cayenne believes that its current facilities are sufficient for its current operations and that those facilities will continue to provide adequate space for Cayenne's operations in the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Cayenne is not aware of any material litigation or claim pending or threatened against Cayenne or any of its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 20, 1996, the Company held a special meeting of stockholders in lieu of annual meeting (the "Special Meeting"). The matters to be voted upon at the Special Meeting included the election of two members of the Board of Directors to serve as the Class B Directors of the Company and the approval of the Company's Amended 1996 Incentive and Nonqualified Stock Option Plan. R. John Fletcher and Peter J. Boni were elected as the Class B Directors at the Special Meeting. John J. Alexander, Allyn C. Woodward. Charles W. Bachman and William H.D. Goddard were the Company's other directors whose term of office continued after the meeting. Voting on the matters considered by the security-holders was as follows:
Broker Withheld For Against Abstain Non-Vote Authority ------------------------------------------------------------ Approval of Amended 1996 Incentive and Non-qualified Stock Option Plan 3,041,297 963,277 40,996 8,105,864 - Approval of Election of Class B Directors: Peter J. Boni 11,571,668 - - - 579,766 R. John Fletcher 11,572,953 - - - 578,481
- 16 - 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the periods indicated, the range of high and low sales prices for the Company's common stock, as reported by the NASDAQ National Market System. The Company's common stock is traded under the NASDAQ symbol "CAYN" (formerly "BACH") since the Company's initial public offering on November 26, 1991. These prices reflect interdealer prices, without retail mark-ups, mark-downs or commissions, and do not necessarily represent actual transactions. In October 1996, the Company changed its fiscal year from June 30 to December 31. Accordingly, the transition period only includes stock prices for the first and second quarters.
Transition Period Ended December 31, 1996 Fiscal Year 1996 Fiscal Year 1995 ----------------------- ---------------- ---------------- High Low High Low High Low ---- --- ---- --- ---- --- First Quarter $7.125 $4.00 $ 7.875 $5.75 $2.75 $1.75 Second Quarter 5.6875 3.8125 10.25 4.625 4.1875 2.00 Third Quarter -- -- 11.875 8.25 5.375 3.50 Fourth Quarter -- -- 10.00 6.50 7.875 4.50
The Company has not declared or paid cash dividends on its common stock and does not plan to pay cash dividends to its stockholders in the near future. The Company presently intends to retain any earnings to finance further growth of its business. As of March 26, 1997, there were 622 stockholders of record of the Company's common stock. - 17 - 18 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Form 10-K: Statement of Operations Data (in thousands, except per share data)
Transition period Prior period Year ended June 30, ended ended December 31, December 31, 1996 1995 1996 1995 1994 1993 1992 --------------------------------------------------------------------------------- Revenues: Software license $ 10,131 $ 15,951 $ 26,282 $ 29,849 $ 36,171 $ 39,780 $ 64,729 Consulting and education services 4,684 5,915 12,367 14,306 13,590 13,473 10,389 Maintenance 13,161 14,366 27,237 28,634 27,317 24,245 19,609 Other -- -- -- -- -- 798 3,807 ------------------------------------------------------------------------------- Total revenues 27,976 36,232 65,886 72,789 77,078 78,296 98,534 Costs and expenses: Cost of revenues Cost of software licenses 1,521 2,241 3,999 6,105 5,688 4,464 5,886 Cost of consulting and education services and maintenance 4,975 7,044 12,910 15,953 13,728 13,219 9,900 Sales and marketing 12,488 16,978 32,614 37,656 41,375 47,055 51,394 Research and development 5,411 7,957 14,448 17,059 20,128 14,790 16,832 General and administrative 3,307 4,370 8,530 8,062 7,783 9,946 9,620 Restructuring and other costs 6,300 1,694 2,819 5,483 -- 9,744 1,495 Charge for purchased research and development -- 158 158 7,300 1,736 -- -- ------------------------------------------------------------------------------- Total Costs and expenses 34,002 40,442 75,478 97,618 90,438 99,218 95,127 ------------------------------------------------------------------------------- Income (loss) from operations (6,026) (4,210) (9,592) (24,829) (13,360) (20,922) 3,407 Interest income (expense), net (225) (77) (547) 202 485 669 688 Other income (expense), net 282 (111) (84) 34 80 273 (76) ------------------------------------------------------------------------------- Income (loss) before provision for income taxes and extraordinary item (5,969) (4,398) (10,223) (24,593) (12,795) (19,980) 4,019 Provision for income taxes 399 404 1,124 297 407 94 1,758 ------------------------------------------------------------------------------- Income (loss) before extraordinary item (6,368) (4,802) (11,347) (24,890) (13,202) (20,074) 2,261 Extraordinary item - reduction of income taxes due to utilization of prior years' net operating losses -- -- -- -- -- 41 909 ------------------------------------------------------------------------------- Net income (loss) $ (6,368) $ (4,802) $(11,347) $(24,890) $(13,202) $(20,033) $ 3,170 ------------------------------------------------------------------------------- Income (loss) per common share: Income (loss) before extraordinary item $ (0.36) $ (0.32) $ (0.71) $ (1.86) $ (1.06) $ (1.72) $ 0.20 Extraordinary item -- -- -- -- -- -- 0.08 ------------------------------------------------------------------------------- Net income (loss) per common share $ (0.36) $ (0.32) $ (0.71) $ (1.86) $ (1.06) $ (1.72) $ 0.28 =============================================================================== Weighted average number of common and common equivalent shares outstanding 17,590 15,103 15,914 13,350 12,484 11,647 11,506 ===============================================================================
BALANCE SHEET DATA (in thousands)
Transition Period Ended Year Ended June 30, December 31, ------------------------------------------------------ 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- Working capital $ (3,940) $ 499 $ (1,638) $ 8,193 $21,334 $37,233 Total assets 22,236 34,099 35,384 46,439 62,481 81,094 Long-term obligations 106 2,096 2,534 -- 2,551 3,049 Redeemable Series A Convertible Preferred Stock -- -- 5,493 -- -- -- Stockholders' equity (deficit) (655) 2,624 (2,753) 17,336 28,229 47,420
- -------------------- - 18 - 19 (1) The above tables reflect the results of the combined company. The Company's fiscal 1996 results have been combined with Cadre's results for the twelve months ended June 30, 1996. The Company's results for fiscal 1995, 1994, 1993 and 1992 have been combined with Cadre's calendar year end results for the same period. In this presentation, Cadre's financial data for the period July 1, 1995 to December 31, 1995 is included in both the periods ended June 30, 1996 and 1995. - 19 - 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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. On July 18, 1996, the Company completed its acquisition of Cadre Technologies, Inc. ("Cadre") under an Agreement and Plan of Merger dated March 25, 1996, by and among the Company, Cadre and B.C. Acquisition Corp., whereby the Company acquired all of the outstanding capital stock of Cadre in exchange for 4,716,442 shares of Cayenne common stock (the "merger"). The merger was accounted for as a pooling-of-interests during the transition period ended December 31, 1996. Additionally, effective upon the merger the Company changed its name to Cayenne Software, Inc. The Company acquired Cadre to expand its product offerings to include structured analysis and design and object-oriented technology as well as to expand its customer base. In October 1996, the Company changed its fiscal year end from June 30th to December 31st. As a result the period from July 1, 1996 through December 31, 1996 was designated as "the transition period." This Annual Report on Form 10-K may contain forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed 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 below under the caption "Factors That May Affect Future Results." - 20 - 21 RESULTS OF OPERATIONS Cayenne's operating results for the transition period ended December 31, 1996 and prior fiscal periods ended June 30 1996, 1995 and 1994, respectively, were significantly adversely affected by the market trends of the Company's customers moving from mainframe development and structured analysis towards client/server and object-oriented solutions, together with Cayenne's efforts to respond to those trends. Additionally, the contraction of federal defense programs has led to industry consolidation thereby reducing the Company's customer base for its technical embedded products. In particular, Cayenne's business operations in fiscal 1994 were significantly adversely affected by the severing of substantially all of its relationships with IBM. Cayenne historically relied heavily on its relationship with IBM for development and marketing of its products. Prior to fiscal 1993, Cayenne's products were designed primarily for organizations that employed IBM and IBM-compatible mainframe computers, MVS operating system and the DB2 relational database management system. As a result, the market for Cayenne's products has been directly affected by declines in the acceptance of those IBM and IBM-compatible products. Prior to January 1993, Cayenne was a member of IBM's International Alliances for AD/Cycle, SystemView and Information Warehouse. Cayenne also maintained a close technical relationship with IBM, which provided Cayenne with access to technical information concerning certain current and planned developments in IBM products and systems. IBM marketed Cayenne's products in the United States, Canada, Puerto Rico, and Austria prior to July 1993, and continues to be a non-exclusive distributor of Cayenne's products in certain Asia-Pacific countries and Switzerland. IBM was Cayenne's single largest customer during the transition period ended December 31, 1996 and in the previous fiscal years ended June 30, 1996, 1995 and 1994 when revenue from IBM (including license and maintenance fees paid by IBM in connection with its own use of Cayenne products, as well as amounts paid by IBM as a distributor and systems integrator) accounted for 16%, 15%, 9%, and 6% of Cayenne's total revenue, respectively. While Cayenne expects its broadened focus will benefit Cayenne in the long-term, there can be no assurance that the foregoing trends will not materially adversely affect either the success with which Cayenne develops, supports, and sells products for use with IBM and IBM-compatible computers and systems or the extent to which IBM continues to be a customer of Cayenne. The foregoing events may limit Cayenne's ability to compete as effectively in the IBM and IBM-compatible market, particularly with companies that continue to be members of IBM's International Alliances. - 21 - 22 REVENUES As the Company continues its migration to providing customers a more open and flexible set of solutions aimed at the growing client/server and object-oriented market, it faces many challenges. The Company has addressed some of these challenges through the acquisition of Cadre which provides the Company with broader product offerings and a significantly larger customer base from which to solicit new and additional business. Additionally, the Company has introduced several new products during the past three years through both internal development and acquisitions that are targeted at the client/server and object-oriented 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 execute this transition have had an adverse effect on the Company's operating performance during the six month transition period ended December 31, 1996 and fiscal years ended June 30, 1996, 1995 and 1994, respectively. 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 SIX MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1996 COMPARED TO 1995 SOFTWARE LICENSES. Software license revenue during the six month transition period ended December 31, 1996 amounted to $10.1 million compared to $16.0 million for the comparable period of 1995. The $5.9 million or 36% decrease in license revenues during the transition period resulted primarily from migration by the Company's customers from structured analysis and mainframe solutions toward object- - 22 - 23 oriented and client/server solutions. This migration resulted in a reduction of revenues from the Company's Analyst and Teamwork products. Additionally, contraction of federal defense programs led to industry consolidation, contributing to a reduction in the Company's technical embedded customer base and specifically reduced revenues from the Company's Teamwork and Teamwork-related products. As a result, the Company's worldwide revenue decreased from the comparable six months of the prior year. Also, a series of significant orders were received in the quarter ended December 31, 1995 from a major Italian systems integrator for the Company's mainframe based products. These orders accounted for approximately 15% of total software license revenue for the six months ended December 31, 1995 and were not duplicated during the transition period. Client/server and object-oriented products accounted for 50% of new license revenue during the six month transition period ended December 31, 1996, compared to 24% for the comparable period of the prior year. The Company expects this trend to continue during 1997 as both client/server and object-oriented solutions continue to gain global acceptance and installed customers elect to follow market trends and migrate from mainframe and structured tools to client/server and object-oriented solutions. Total license revenues in the United States and the United Kingdom declined 14% and 31%, respectively, due to the aforementioned migration trends. Total license revenue in Italy declined 59% during the period primarily due to a series of significant orders booked in the comparable period of 1995. No similar orders were booked during the transition period. CONSULTING AND EDUCATION SERVICES. Consulting and education services revenue during the six month transition period ended December 31, 1996 amounted to $4.7 million compared to $5.9 million for the comparable period of the prior year. The $1.2 million or 21% decrease in consulting and education service revenues is attributable to reduced software license revenue, lower customer demand and reduced staffing in this area. Consulting and education revenue in Italy increased by $0.2 million or 5%, while United States and United Kingdom revenues declined by $1.2 million or 57% and $0.2 million or 40% , respectively. Training courses are offered for each of Cayenne's major products. Typically, consulting and education revenue follows the trend of software license revenue and, therefore, consulting and education revenue during the transition period as compared to the same period ended 1995 has followed the decline in license revenue experienced in the United States and United Kingdom. The increase in consulting and education revenue in Italy is attributable to several long-term consulting contracts signed during fiscal 1996. MAINTENANCE. Maintenance revenue for annual maintenance contracts is deferred and recognized ratably over the term of the agreement. Maintenance revenue for the six month transition period ended December 31, 1996 amounted to $13.2 million compared to $14.4 million for the comparable period of the prior year. Maintenance revenue in Italy and the United Kingdom increased by $0.5 million and $0.2 million or 54% and 10%, respectively. Increased maintenance revenue in Italy and the United Kingdom resulted from 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 States declined $1.4 million or 17% due to industry consolidation in the technical embedded market place, and the aforementioned market place migration to client/server and object-oriented tools and fewer - 23 - 24 customers renewing their maintenance contracts on mainframe and structured analysis tools. Although maintenance revenue from the Company's client/server and object-oriented tools has not fully offset the decline in maintenance revenue from its mainframe and structured analysis and design tools to date, maintenance revenue from those products has grown in the transition period ended December 31, 1996 as compared to the comparable period of the prior year and the renewal rate has remained relatively constant. COST OF REVENUES. 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. Cost of software licenses were $1.5 million or 5% of revenue during the six month transition period ended December 31, 1996 compared with $2.2 million or 6% of revenue in the comparable period of 1995. The $.7 million decrease in 1996 expenses reflects reduced sales of third party product for which the Company pays a royalty to resell as well as reduced manufacturing costs consistent with lower revenues. Additionally, amortization related to WindTunnel was $0 in the transition period compared to $.2 million in the same period of the prior year. This reduction is directly related to the Company's determination in June 1996 that the WindTunnel product was no longer consistent with the Company's objectives. Cost of consulting, education and maintenance were $5.0 million or 18% of revenue during the six month transition period ended December 31, 1996 compared with $7.0 million or 19% of revenue in the comparable period of 1995. The $2.0 million decrease in 1996 expenses generally reflects 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 $12.5 million or 45% of revenue during the six month transition period ended December 31, 1996 compared with $17.0 million or 47% of revenue in the comparable period of 1995. The $4.5 million decrease in expenses during the transition period primarily reflects reduced marketing expenses including trade show attendance and advertising together with reduced staffing in North America and international subsidiary operations as a result of attrition and the merger. - 24 - 25 RESEARCH AND DEVELOPMENT. Cayenne's belief that product and technical leadership are critical to its success has resulted in a high level of expenditures for research and development. During the transition period ended December 31, 1996, the Company focused the majority of its research and development efforts on the release of new products and the refreshing of the existing product lines to prolong their lives. Research and development expenses were $5.4 million or 19% of revenue during the six month transition period ended December 31, 1996 compared with $8.0 million or 22% of revenue in the comparable period of 1995. The $2.6 million decrease in expenses during the transition period primarily reflects reduced staffing as a result of attrition and the merger. Additionally, during the quarter ended June 30, 1996, and in conjunction with the merger, 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 client/server and object-oriented products consistent with the Company's objectives. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.3 million or 12% of revenue during the six month transition period ended December 31, 1996 compared with $4.4 million or 12% of revenue in the comparable period of 1995. The $1.1 million decrease in expenses during the transition period primarily reflects lower levels of staffing which were the result of the merger and the elimination of redundant positions. RESTRUCTURING AND OTHER COSTS. On July 18, 1996, the Company acquired Rhode Island-based Cadre in a merger transaction accounted for as a pooling of interests. The Company acquired all of the outstanding capital stock of Cadre in exchange for 4,716,442 shares of its common stock. In conjunction with the merger, and to reflect costs associated with combining the operations of the two companies, transaction fees, and other costs, the Company recorded a restructuring charge of $6.3 million during the six month transition period ended December 31, 1996. Included in the charge is $1.6 million of employee related termination expenses, $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 miscellaneous expenses associated with the consolidation of the two companies and the company name change. This compares to a $1.7 million charge recorded in the comparable period of 1995 related to the Company's acquisition of Westmount Technologies B.V. ("Westmount") which included primarily employee related termination expenses. EFFECT OF INTERNATIONAL OPERATIONS ON INCOME (LOSS) FROM OPERATIONS
Transition Prior Period Period Ended Ended Year Ended December 31, December 31, June 30, 1996 1995 1996 1995 1994 ---- ---- ---- ---- ---- INCOME (LOSS) FROM OPERATIONS United States $(1,239) $(3,308) $ (3,497) $ (9,419) $ (8,771) Italy 113 1,317 336 (540) (452) United Kingdom (1,194) (481) (1,096) (2,044) (1,274) Rest of World (3,706) (1,738) (5,335) (12,826) (2,863) ---------------------------------------------------------------------- $(6,026) $(4,210) $ (9,592) $(24,829) $(13,360) ======================================================================
In addition to the factors listed above, the operations of the Company's international subsidiaries significantly affected results of operations during the six month transition period ended December 31, 1996 and the comparable period of 1995. - 25 - 26 The loss from operations -- United States and Rest of World --remained relatively flat during the transition period at $4.9 million compared to the corresponding period of the prior year due to reduced spending in the sales and marketing, research and development and general and administrative areas. These savings were offset by the aforementioned restructuring charge of approximately $5.6 million in the United States and $0.2 million in Rest of World. A similar charge of $1.7 million was recorded in the comparable period of 1995. The Company's Italian subsidiary reported income from operations of $0.1 million during the transition period compared to $1.3 million in the corresponding period in the prior year. The lower net income is principally due to a series of significant orders received from a large systems integrator during December 1995 which were not duplicated during the transition period. The loss from operations in the Company's United Kingdom subsidiary increased 148% during the six month transition period ended December 31, 1996 to $1.2 million compared to the corresponding period in the prior year principally due to lower software license, and consulting and education revenues during the period. Additionally, the United Kingdom recorded a restructuring charge of approximately $0.4 million during the transition period. OTHER INCOME (EXPENSE), NET. Other income during the six-month transition period ended December 31, 1996 increased slightly compared to the same period of the prior year primarily due to lower debt levels combined with reduced interest rates on outstanding balances. PROVISION FOR INCOME TAXES. Due to operating losses during the transition period ended December 31, 1996 and the comparable period of 1995, the tax provision for those periods is composed primarily of foreign withholding taxes and income taxes related to the profitability of certain foreign subsidiaries. At December 31, 1996, the Company has a deferred tax asset of approximately $39.0 million composed principally of net operating loss carryforwards, which was offset fully by a valuation allowance due to the uncertainty of realization. 1996 COMPARED TO 1995 SOFTWARE LICENSES. Software license revenue for fiscal 1996 amounted to $26.3 million compared to $29.8 million for fiscal 1995. The $3.5 million or 12% decrease resulted primarily from migration by the Company's customers from structured analysis and mainframe solutions toward object-oriented and client/server solutions. This migration resulted in a reduction of revenues from the Company's Analyst and Analyst related products. Additionally, contraction of federal defense programs led to industry consolidation, contributing to a reduction in the Company's technical embedded customer base, and specifically reducing revenues from the Company's Teamwork and related products. The decline was partially offset by a series of significant orders received in the quarter ended December 31, 1995 from a major Italian systems integrator for the Company's mainframe based products. These orders accounted for approximately 9% of total software license revenue for the fiscal year ended June 30, 1996. Client/server and object-oriented product license revenue accounted for 28% of license revenue for the year ended June 30, 1996, compared to 16% for the year ended June 30, 1995. These results reflect the continued market trend in the United States to migrate from structured and mainframe environments to object-oriented and client/server environments. The Company's suite of client/server products was available during the fourth quarter of fiscal 1995 and its own object-oriented products were introduced when the Company acquired Westmount in May 1995. Total license revenues in the United States and United Kingdom declined 24% and 36%, respectively due to the aforementioned migration trends. Total license revenue in Italy increased by 100% during fiscal 1996 due to a series of significant orders from a major systems integrator and increased market penetration. - 26 - 27 CONSULTING AND EDUCATION SERVICES. Total consulting and education revenue in fiscal 1996 amounted to $12.4 million compared to $14.3 million for the comparable period of the prior year. The $1.9 million or 14% decrease in consulting and education service revenue is attributable to reduced software license sales, lower customer demand and reduced staffing. Consulting and education revenue in Italy increased by $1.0 million or 19%, while United States and United Kingdom revenues declined by approximately $1.0 million and $1.1 million or 18% and 44%, respectively, for the year ended June 30, 1996 compared to the prior fiscal year. Training courses are offered for each of Cayenne's major products. Typically, consulting and education revenue follows the trend of software license revenue and, therefore, the decline in license revenue experienced in the United States and United Kingdom has caused the consulting and education revenue also to decline in fiscal 1996 from fiscal 1995. The increase in consulting and education revenue in Italy is attributable to increased demand for the Company's consulting services from its increased customer base and mainframe sales. MAINTENANCE. Maintenance revenue for annual maintenance contracts is deferred and recognized ratably over the term of the agreement. Maintenance revenue amounted to $27.2 million compared to $28.6 million for the comparable period of the prior fiscal year. Maintenance revenue in Italy and the United Kingdom increased by $0.5 million and $0.1 million or 42% and 2%, respectively. The increase in maintenance revenue in Italy and United Kingdom resulted from increased penetration of the international markets along with an increase in the portion of the customer base that renewed maintenance contracts. Maintenance revenue in the United States declined by $0.3 million or 2% primarily from the aforementioned market place migration to client/server and object-oriented tools and fewer customers renewing their maintenance contracts on mainframe and structured analysis based tools. Maintenance revenue, rest of world, declined $1.7 million or 22% due to a decrease in the portion of customers renewing maintenance contracts and a decline in new license revenues. The aggressive migration from mainframe and structured products to client/server and object-oriented products has resulted in an increased number of customers not renewing their maintenance contracts. The Company's client/server and object-oriented products were introduced late in fiscal 1995 and have not offset the declines in mainframe and structured revenues. COST OF REVENUE. Costs of software licenses were $4.0 million or 6% of revenue during fiscal 1996 compared with $6.1 million or 8% of revenue in the comparable period of fiscal 1995. The $2.1 million decrease in expenses reflects reduced sales of third party products for which the Company pays a royalty to sell as well as reduced manufacturing costs consistent with lower revenues. Cost of software licenses as a percentage of related software license revenue was 15% and 20% for fiscal 1996 and 1995, respectively. The cost of consulting, education and maintenance were $12.9 million or 20% of revenue during fiscal 1996 compared with $16.0 million or 22% of revenue in the comparable period of fiscal 1995. The $3.1 million decrease in the cost of consulting, education and maintenance was principally caused by decreased costs in North America as the Company adjusted staffing levels to more closely align with demand. SALES AND MARKETING. Sales and marketing expenses were $32.6 million or 50% of revenue during fiscal 1996 compared with $37.7 million or 52% of revenue in the comparable period of 1995. The $5.1 million decrease in sales and marketing expenses during the year resulted primarily because of reduced marketing activities and reduced headcount. During the fourth quarter of fiscal 1996, the Company had increased marketing costs of approximately $0.6 million principally related to advertising and promotion of the Company's new name and - 27 - 28 product strategy. This compares to $0.6 million of costs incurred in fiscal 1995 related to the launch of the Company's new products together with the Company's user conference held in September 1994. RESEARCH AND DEVELOPMENT. In fiscal 1996, the Company focused the majority of its research and development resources on porting its current products to new platforms and development of new products targeted at the client/server and object-oriented markets. Research and development expenses were $14.4 million or 22% of revenue during fiscal 1996 compared with $17.1 million or 23% in the comparable period of 1995. The $2.7 million decrease in research and development expenses is due primarily to the restructuring taken by the company in fiscal 1995 to reduce headcount and consolidate facilities. Additionally, reduced spending on the Company's Paradigm Plus product, which was replaced by ObjectTeam together with reduced spending on Ellipse and WindTunnel products, which are no longer considered strategic to the Company, contributed to lower expenses. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $8.5 million or 13% or revenue during fiscal 1996 compared with $8.1 million or 11% or revenue in the comparable period of 1995. RESTRUCTURING AND OTHER COSTS. During fiscal 1996, and 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 asset acquired as part of its acquisition of WindTunnel Software, Inc. ("WindTunnel"). (See, also, Note 13 to Notes to Consolidated Financial Statements.) In the quarter ended December 31, 1995, formal plans were adopted and approved by executive management to restructure operations related to the absence of Windows-based object-oriented products. After the Westmount acquisition, the Company had planned to introduce and sell object-oriented Windows 95 and NT-based products during the quarter ended December 31, 1995. When it became apparent that the product was not going to become available during the quarter, and as a result revenues would be less than expected, the Company needed to reduce expenses to an appropriate level. A charge of $1.7 million principally related to a reduction in force (approximately 47 employees) was recorded in December 1995. At December 31, 1996 the Company has met substantially all obligations with regard to this restructuring. Following the completion of certain significant development efforts and associated product introductions, the Company effected a restructuring on September 29, 1994 to streamline its operations and better align expenses with revenue. The Company recorded a restructuring charge of $2.0 million during the three months ended September 30, 1994. The restructuring included a charge of approximately $1.5 million in termination charges resulting from a 20% reduction in staff (approximately 70 employees). Prior to the execution of this restructuring, the Board of Directors of the Company approved a plan to terminate certain specified employees and close certain facilities. Such plan was communicated to the employees of the Company prior to the end of the quarter and such employees were specifically identified and terminated. The termination benefits to such employees were consistent with the Company's written severance policy and agreements. The restructuring also included approximately $0.3 million in related facilities expense associated with the closure of the Company's San Jose, California development facility. The Company also reorganized the operations of its German subsidiary by reducing its facilities and staff. As part of the restructuring, the Company also evaluated the value of certain contracts based on a number of factors including business plans, budgets, economic projections and market analysis. Based on a review of these factors, the Company determined to cancel certain contracts. The termination costs associated with those contracts amounted to approximately $0.2 million and are included in the restructuring charge. At December 31, 1996, the Company believes it has met all obligations with regard to the restructuring. - 28 - 29 During the quarter ended June 1995, formal plans were adopted and approved by executive management to restructure operations thereby eliminating redundant capitalized software development costs and reducing company-wide expenses. The purpose of the Westmount acquisition was to acquire Westmount's object-oriented technology, which essentially replaced the Company's existing object-oriented product line. The redundant software development cost write-off was $0.9 million and consisted of internally developed and capitalized costs related to the Company's old product. Additionally, the Company reduced expenses to better align them with revenues. Restructuring costs during the quarter ended June 1995 amounted to $1.8 million and included the previously mentioned $0.9 million write off of capitalized software development costs, $0.8 million of employee related costs and $0.1 million for other costs related to the restructuring. At December 31, 1996 the Company believes that it has met all obligations with regard to the restructuring. CHARGE FOR PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. On May 1, 1995, the Company acquired Westmount Technology, B.V. ("Westmount") in a transaction accounted for as a purchase for approximately 679,000 shares of common stock and 185,000 warrants to purchase additional shares. The purchase price was allocated to assets and liabilities based on their estimated fair values as of the date of acquisition. The cost in excess of net assets acquired of $8.1 million was identified as purchased research and development. The software technology was valued at $0.8 million and the technology in process was valued at $7.3 million. This technology had not reached technological feasibility and had no future alternative use, as a result, the technology in process was charged to earnings during the fourth quarter of fiscal 1995. EFFECT OF INTERNATIONAL OPERATIONS ON INCOME (LOSS) FROM OPERATIONS In addition to the factors listed above, the operations of Cayenne's international subsidiaries significantly affected its results of operations in fiscal 1996 and 1995. The loss from United States and Rest of World operations decreased by $13.4 million or 60% to $8.8 million primarily due to charges related to the 1995 acquisition of Westmount combined with reduced headcount and other cost control measures implemented by the Company. The loss from operations in the United Kingdom decreased by $0.9 million during fiscal 1996 to $1.1 million primarily due to headcount reductions and other cost control measures. For fiscal 1996, Italian operations reported a $0.3 million profit compared to a loss of $0.5 million in fiscal 1995. This increase in profitability of the Italian subsidiary is attributable to a series of significant orders from a large systems integrator received during the second quarter of fiscal year 1996. Included in income (loss) from operations in 1996 are $2.8 million of restructuring and other costs, $2.3 million in the United States and $0.5 million in rest of world. Results for 1995 include $5.5 million of restructuring and $7.3 million of in-process R&D charges, $4.1 million in the United States, $0.1 million in Italy, $0.1 million in United Kingdom and $8.5 million in Rest of World (primarily Netherlands). OTHER INCOME (EXPENSE), NET Interest expense, net increased in fiscal 1996 compared to fiscal 1995 primarily due to increased borrowings under a factoring agreement which was terminated at the time of the merger and lower levels of average invested cash. PROVISION FOR INCOME TAXES Because of the operating losses for fiscal 1996 and 1995, the tax provision for those periods are composed mostly of foreign withholding taxes and income taxes related to the profitability of certain foreign subsidiaries. 1995 COMPARED TO 1994 SOFTWARE LICENSES. Software license revenue during fiscal 1995 amounted to $29.8 million compared to $36.2 during the comparable period of 1994. The $6.4 million or 17% decrease in license revenues during fiscal - 29 - 30 1995 resulted primarily from migration by the Company's customers from structured analysis and mainframe solutions toward object-oriented and client/server solutions. The Company's suite of client/server solutions was available in late fiscal 1995 and was not a significant portion of the Company's revenue in 1995. The lack of a set of client/server solutions impacted the Company's ability to attract new customers and retain existing customers contributing to the decline. Additionally, during 1995, the Company's transition from selling third party object-oriented tools to internally developed tools was delayed and resulted in the Company's inability to offer certain object-oriented solutions for several months. Client/server and object-oriented product license revenue accounted for 16% of license revenue for the year ended June 30, 1995, compared to 8% for the year ended June 30, 1994. The increase in Client/server and object-oriented product license revenue is primarily attributable to the release in late 1995 of the Company's client/server products. Total license revenues in the United States and United Kingdom declined 13% and 25% , respectively, due to the aforementioned market trends. Total license revenue in Italy declined 16% due to lower than expected revenues from large customers. CONSULTING AND EDUCATION SERVICES. Total consulting and education services revenue in fiscal 1995 amounted to $14.3 million compared to $13.6 million for the comparable period of the prior fiscal year. The $0.7 million or 5% increase in consulting and education service revenue is primarily attributable to the increased number and use of courses and services available to Cayenne's large customer base in the Company's international subsidiaries combined with the addition of several long-term consulting contracts. Consulting and education revenue in Italy and the United Kingdom increased by $1.7 million and $1.1 million or 45% and 84%, respectively while United States revenues declined $1.5 million or 22% during the fiscal year. Typically, consulting and education revenue follows the trend of software license revenue and, therefore, the decline in the consulting and education revenue in fiscal 1995 from fiscal 1994 has followed the decline in software license revenue during such periods. MAINTENANCE. Maintenance revenue for annual maintenance contracts is deferred and recognized ratably over the term of the agreement. Maintenance revenue for fiscal year 1995 amounted to $28.6 million compared to $27.3 million for the comparable period of 1994. Maintenance revenue in Italy and United Kingdom increased $0.5 million and $0.7 million or 60% and 23% , respectively. These increases resulted from increased penetration of the international markets along with an increase in the portion of the customer base that renewed maintenance contracts. Maintenance revenue in the United States remained flat due to an increased customer base which was offset by a reduction in the percentage of customers renewing maintenance contracts. COST OF REVENUE. Costs of software licenses were $6.1 million or 8% of revenue during fiscal 1995 compared with $5.7 million or 7% of revenue in the comparable period of 1994. The $0.4 million increase in Fiscal 1995 expenses reflects increased sales of third party products for which the Company pays a royalty to resell. Included in the cost of licenses during fiscal 1995 and 1994 is amortization of approximately $0.5 million and $0.4 million of purchased software related to the September 1993 acquisition of WindTunnel. Fiscal 1994, included the write-off of $0.3 million of certain prepaid software royalties. Included in cost of software licenses was amortization of capitalized software development costs of $0.7 million and $1.0 million for fiscal 1995 and 1994, respectively. Cost of software licenses as a percentage of related software license revenue was 20% and 16% for fiscal 1995 and 1994, respectively. - 30 - 31 The cost of consulting, education and maintenance were $16.0 million or 22% of revenue during the fiscal year ended June 1995 compared with $13.7 million or 18% of revenue in the comparable period of 1994. The $2.3 million increase in expenses was principally caused by increased international costs as the international subsidiaries increased staff and the use of third party consultants to meet the demand from several long-term consulting contracts. SALES AND MARKETING. Sales and marketing expenses were $37.7 million or 52% of revenue during fiscal 1995 compared with $41.4 million or 54% in the comparable period of 1994. The $3.7 million decrease in sales and marketing expenses during the year was due principally to reduced headcount effected through the restructuring in the first quarter of fiscal 1995 along with a move in North America towards telesales and away from direct field sales efforts. In fiscal 1995 and 1994, Cayenne began promoting a team selling approach in which telemarketing, corporate sales, and field sales representatives work together to identify, qualify, inform, and sell to prospective customers. RESEARCH AND DEVELOPMENT. In fiscal 1995, the Company focused its research and development resources on porting its current products to new platforms, continued development of the WindTunnel and Ellipse products and development of new products targeted at the object-oriented and client/server markets. Research and development expense were $17.1 million or 23% of revenue during fiscal 1995 compared with $20.1 million or 26% of revenue in the comparable period of 1994. The $3.0 million decrease is due primarily to actions taken by the Company to reduce the value of capitalized software development costs associated with a technology license. This action resulted in a $1.1 million charge to research and development expense in fiscal 1994. No similar charge was recorded in fiscal 1995. In addition, the Company reduced spending on the Ellipse product, and entered into agreements with certain development partners whose funding offset approximately $0.5 million of development expense. During fiscal 1995, the Company closed its San Jose facility and consolidated all research and development in Burlington, Massachusetts. Expenses were also reduced in other areas of research and development effected through the restructuring in September 1994. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $8.1 million or 11% of revenue during fiscal 1995 compared with $7.8 million or 10% of revenue during the comparable period of 1994. The increase is due primarily to additional staffing from the Westmount transaction. These expenses have been partially offset by a decrease in goodwill amortization of approximately $0.4 million, along with expense controls in the Company's administrative areas. RESTRUCTURING AND OTHER COSTS. Following the completion of certain significant development efforts and associated product introductions, the Company effected a restructuring on September 29, 1994 to streamline its operations and better align expenses with revenue. The Company recorded a restructuring charge of $2 million during the three months ended September 30, 1994. The restructuring included a charge of approximately $1.5 million in termination charges resulting from a 20% reduction in staff (approximately 70 employees). Prior to the execution of this restructuring, the Board of Directors of the Company approved a plan to terminate certain specified employees and close certain facilities. Such plan was communicated to the employees of the Company prior to the end of the quarter and such employees were specifically identified and terminated. The termination benefits to such employees were consistent with the Company's written severance policy and agreements. The restructuring also included approximately $0.3 million in related facilities expense associated with the closure of the Company's San Jose, California development facility. The Company also reorganized the operations of its German subsidiary by reducing its facilities and staff. As part of the restructuring, the Company also evaluated the value of certain contracts based on a number of factors including business plans, budgets, economic projections and market analysis. Based on a review of these factors, the Company determined to cancel certain contracts. The termination costs associated with those contracts amounted to approximately $0.2 million and are included in the restructuring charge. During the quarter ended June 1995, formal plans were adopted and approved by executive management to restructure operations thereby eliminating redundant capitalized software development costs and reducing company-wide expenses. The purpose of the Westmount acquisition was to acquire Westmount's object-oriented technology, which essentially replaced the Company's existing object-oriented product line. The redundant software development cost write-off was $0.9 million and consisted of internally developed and capitalized costs related to the Company's old product. Additionally, the Company reduced expenses to better align them with revenues. Restructuring costs during the quarter ended June 1995 amounted to $1.8 million and included the previously mentioned $0.9 million write-off of capitalized software development costs, $0.8 million of - 31 - 32 employee related costs and $0.1 million for other costs related to the restructuring. In the quarter ended December 31, 1995, formal plans were adopted and approved by executive management to restructure operations related to the absence of Windows-based object-oriented products. After the Westmount acquisition, the Company had planned to introduce and sell object-oriented Windows 95 and NT-based products during the quarter ended December 31, 1995. When it became apparent that the product was not going to become available during the quarter, and as a result revenues would be less than expected, the Company needed to reduce expenses to an appropriate level. A charge of $1.7 million principally related to a reduction in force (approximately 47 employees) was recorded in December 1995. CHARGE FOR PURCHASED RESEARCH AND DEVELOPMENT. In November 1993, the Company acquired substantially all the assets of Cooperative Solutions, Inc. ("CSI") of San Jose, California, including its product line, research and development efforts, and employee and customer bases in exchange for assuming certain liabilities. The purchase price, which was equal to the liabilities assumed, was approximately $2.2 million. The acquisition was accounted for as a purchase. The purchase price first was allocated to tangible assets based on their fair market values. The remaining purchase price was allocated to purchased research and development for software which has not reached technological feasibility and has no alternative future use. A charge for purchased research and development of $1.7 million was recorded upon the closing of the acquisition in the Company's fiscal quarter ended December 31, 1993. EFFECT OF INTERNATIONAL OPERATIONS ON INCOME (LOSS) FROM OPERATIONS In addition to the factors listed above, the operations of Cayenne's international subsidiaries significantly affected its results of operations in fiscal 1995 and 1994. The loss from operations -- United States and Rest of World increased by approximately 91% to $22.2 million compared to the corresponding period of the prior year. The $10.6 million increase in loss from operations is primarily due to costs associated with the acquisition of Westmount and various restructuring actions taken by the Company during fiscal 1995. The loss from Italian operations increased by $0.1 million to $0.5 million during fiscal 1995. This increase is attributable to reduced software license revenue and start up costs associated with several long-term consulting contracts. The loss from operations in the United Kingdom increased by $0.7 million to $2.0 million during fiscal 1995. This increase is attributable to among other things increased sales and marketing expenses. Included in income (loss) from operations in 1995 are $5.5 million of restructuring and $7.3 million of in-process R&D charges, $4.1 million in the United States, $0.1 million in Italy, $0.1 million in United Kingdom, and $8.5 million in Rest of World (primarily in Netherlands). Results for 1994 include a $1.7 million in-process research and development charge. OTHER INCOME (EXPENSE), NET Interest income, net decreased in fiscal 1995 compared to fiscal 1994 due primarily to increased borrowings. These costs were somewhat offset by higher rates earned on balances available for investment. PROVISION FOR INCOME TAXES Because of the operating losses for fiscal 1995 and 1994, the tax provision for those periods are composed mostly of foreign withholding taxes and income taxes related to the profitability of certain subsidiaries. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996 the Company's principal sources of liquidity included cash and cash equivalents aggregating $4.2 million and a secured bank line of credit in the amount of $5.0 million discussed below. At December 31, 1996, cash and cash equivalents decreased by $10.5 million from the end of fiscal 1996. During the six month transition period ended December 31, 1996, cash flows were principally affected by the loss from - 32 - 33 operations and a decline in the number of maintenance contracts renewed. The Company's principal long-term cash commitments are for office space operating leases. On December 31, 1996, Cayenne had no material commitments for capital expenditures. On November 6, 1996, the Company amended and restated its revolving credit agreement with a bank to borrow up to $5.0 million. The Company extended the term of such agreement through October 4, 1997 and revised certain of the financial and operating covenants as well as the borrowing base thereunder. In connection with the amendment, the Company issued the bank a three-year warrant to purchase 25,000 shares of the Company's Common Stock at an exercise price of $4.25 per share. The loan is contingent upon meeting certain financial and operating covenants at the time of any borrowing and over the life of the loan, including profitability of $0.25 million during the quarter ended December 31, 1996 and $1.0 million during the quarter ending June 30, 1997. 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 include the attainment of certain specified levels of consolidated net income (loss) at the end of each quarter, tangible net worth (generally defined as the excess of tangible net assets of the Company over total liabilities (excluding any outstanding redeemable preferred stock)) at the end of each quarter and month, 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 at December 31, 1996. At December 31, 1996, the borrowing base under the revolving credit agreement was approximately $4.5 million. 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 recorded charges to operations of $6.3 million 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 $5.2 million during the six-month transition period ended December 31, 1996, including $0.5 million related to restructurings effected by Cadre prior to the merger. The Company currently estimates that cash expenditures for restructuring actions for 1997 will be approximately $1.4 million. The Company believes that it has adequately provided for all restructuring actions taken to date. On January 2, 1997, the Company raised approximately $3.0 million in a private placement of 150,000 shares of Redeemable Series B Convertible Preferred Stock and issuance of warrants. 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 the investors 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. With the additional $3.0 million the Company raised in its January 1997 private placement and its revolving credit agreement, the Company anticipates that existing cash balances and funds generated from operations will provide sufficient cash resources to finance its current operations, and projected capital expenditures through 1997. 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 return to profitability, and the failure to do so may have a material adverse impact on the Company's business and operations. - 33 - 34 FOREIGN CURRENCY All of Cayenne's foreign sales, other than those of its foreign subsidiaries, are invoiced and collected in United States dollars. Cayenne experienced no significant gains or losses on foreign currency transactions or translations during the six month transition period ended December 31, 1996 or in fiscal 1996, 1995 or 1994. No assurance can be given, however, that it will not experience such material affects subsequent to December 31, 1996. INFLATION To date, inflation has not had a material impact on Cayenne's revenues or income. QUARTERLY PERFORMANCE Cayenne's revenues vary from quarter to quarter; historically, the largest portion of Cayenne's revenue has been recognized during the December quarter. The September quarter is traditionally Cayenne's slowest. In the normal course of events, Cayenne may realize lower revenue in the September quarter than in the preceding quarter and also could realize lower revenue in the March quarter than in the preceding quarter. Cayenne has also frequently recognized more revenue in the last month of each quarter than in either of the preceding two months. Cayenne believes these quarterly and monthly patterns have been partly attributable to Cayenne's sales commission policies, which compensate sales personnel for meeting or exceeding annual quotas, and to the budgeting and purchasing cycles of customers. In addition, Cayenne's revenue and earnings have fluctuated historically, and may fluctuate in the future, due to the timing of large individual orders. In the second quarter of fiscal 1996, the Company had a series of significant orders from a major systems integrator totaling $2.4 million. The Company completed an order for approximately $1.1 million from an international customer in the third quarter of fiscal 1995. 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 product and market new and innovative products and services. There are numerous risks inherent in this complex process, including rapid technological change and the requirement that the Company bring to market in a timely fashion new products and services which meet customers' changing needs. 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 at any time. In addition, the Company's operating results historically have varied from fiscal period to fiscal period; accordingly, the 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. - 34 - 35 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 fluctuations, 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 fluctuations 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. - 35 - 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CAYENNE SOFTWARE, INC. INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Independent Accountants ..................................... 37 Report of Independent Accountants ..................................... 38 Consolidated Balance Sheets as of December 31, 1996 and June 30, 1996 and 1995 ......................................................... 39 Consolidated Statements of Operations for the transition period from July 1, 1996 to December 31, 1996, the six-month period ended December 31, 1995 and for the years ended June 30, 1996, 1995 and 1994 .................................................................. 40 Consolidated Statements of Stockholders' Equity (Deficit) for the transition period from July 1, 1996 to December 31, 1996, and for the years ended June 30, 1996, 1995 and 1994 .......................... 41 Consolidated Statements of Cash Flows for the transition period from July 1, 1996 to December 31, 1996, the six-month period ended December 31, 1995 and for the years ended June 30, 1996, 1995 and 1994 .................................................................. 42 Notes to Consolidated Financial Statements ............................ 43 - 36 - 37 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Cayenne Software, Inc.: We have audited the accompanying consolidated balance sheets of Cayenne Software, Inc. (formerly Bachman Information Systems, Inc.) as of December 31, 1996 and June 30, 1996 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the six month period ended December 31, 1996 and the year ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cayenne Software, Inc. as of December 31, 1996 and June 30, 1996 and the consolidated results of its operations and its cash flows for the six month period ended December 31, 1996 and the year ended June 30, 1996 in conformity with generally accepted accounting principles. The financial statements give retroactive effect to the merger of Cayenne Software, Inc. and Cadre Technologies Inc. on July 18, 1996, which has been accounted for as a pooling of interests as described in Note 2 of notes to the consolidated financial statements. We previously audited and reported on the consolidated balance sheet of Cayenne Software, Inc. as of June 30, 1995 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended June 30, 1995 and 1994, prior to their restatement for the 1996 pooling of interests. The contribution of Cayenne Software, Inc. to total assets represented 60 percent of the restated total as of June 30, 1995 and to total revenues represented 46 percent and 47 percent and to net loss represented 41 percent and 87 percent of the respective restated totals for the years ended June 30, 1995 and 1994. Separate financial statements of Cadre Technologies Inc. included in the restated consolidated balance sheet as of June 30, 1995 and the restated consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended June 30, 1995 and 1994 were audited and reported on separately by other auditors. We also audited the combination of the accompanying consolidated balance sheet as of June 30, 1995 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years ended June 30, 1995 and 1994, after restatement for the 1996 pooling of interests, and, in our opinion, such consolidated statements have been properly combined on the basis described in Note 2 of notes to the consolidated financial statements. COOPERS & LYBRAND L.L.P. Boston, Massachusetts February 25, 1997 - 37 - 38 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders' of Cadre Technologies Inc.: We have audited the consolidated balance sheets of Cadre Technologies Inc. and its subsidiaries (the "Company") as of December 31, 1995 and the related consolidated statements of operations, stockholders' (deficiency) equity, and cash flows for each of the two years in the period ended December 31, 1995 (none of which are presented herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Cadre Technologies Inc. and its subsidiaries at December 31, 1995 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations, cash used in operating activities, deficiency in working capital and stockholders' deficiency raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are outlined in Note 16. The financial statements do not include any adjustments that might result from the outcome on this uncertainty. Boston, Massachusetts DELOITTE & TOUCHE LLP February 2, 1996 - 38 - 39 CAYENNE SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1995 ----------------- ------------- ------------- ASSETS Current assets: Cash and cash equivalents (including securities purchased under agreements to resell of $700, $699 and $2,148 at December 31, 1996, June 30, 1996 and 1995, respectively) $ 4,150 $ 14,690 $11,170 Trade accounts receivable, less allowance for sales returns and doubtful accounts of $820, $868 and $942 at December 31, 1996 and June 30, 1996 and 1995, respectively 13,320 12,445 15,299 Prepaid expenses and other current assets 1,375 2,743 2,003 --------------------------------------- Total current assets 18,845 29,878 28,472 Property and equipment, less accumulated depreciation and amortization 2,256 2,723 3,916 Capitalized software costs, less accumulated amortization of $266, $186 and $3,265 at December 31, 1996 and June 30, 1996 and 1995, respectively 534 614 2,134 Other assets 601 884 862 --------------------------------------- Total assets $ 22,236 $ 34,099 $35,384 ======================================= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Short term debt $ 2,820 $ 3,852 $ 3,000 Accounts payable 2,363 3,093 3,804 Accrued expenses 1,422 2,077 2,202 Accrued compensation and benefits 3,415 3,317 3,747 Accrued restructuring costs (Note 13) 1,703 779 1,580 Income and other taxes payable 909 1,967 1,113 Obligations under capital lease 561 580 490 Deferred revenue 9,592 13,714 14,070 --------------------------------------- Total current liabilities 22,785 29,379 30,006 Convertible long term debt -- 1,789 2,110 Redeemable Series A Convertible Preferred Stock, $1.00 par value; 5.000 shares authorized; 0,0, and 1.787 shares outstanding at December 31, 1996, June 30, 1996 and 1995, respectively (aggregate liquidation preference of $5,493 at June 30, 1995) -- -- 5,493 Obligations under capital lease 106 307 528 Commitments and contingencies (Note 7) Stockholders' equity (deficit): Common stock, $.01 par value 52,400 shares authorized; 17,695, 17,225 and 13,812 shares issued and outstanding at December 31 and June 30, 1996 and 1995, respectively 177 172 138 Additional paid-in capital 102,935 100,301 86,972 Accumulated deficit (103,706) (97,338) (89,151) Accumulated translation adjustments (61) (511) (712) -------------------------------------- Stockholders' equity (deficit) (655) 2,624 (2,753) -------------------------------------- Total liabilities and stockholders' equity (deficit) $ 22,236 $ 34,099 $ 35,384 ======================================
The accompanying notes are an integral part of the consolidated financial statements. - 39 - 40 CAYENNE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)
Transition Period Prior Period Ended Ended Year Ended June 30, December 31, December 31, ------------------- 1996 1995 1996 1995 1994 ---- ---- ---- ---- ---- (unaudited) Revenues: Software license $10,131 $15,951 $ 26,282 $ 29,849 $ 36,171 Consulting and education services 4,684 5,915 12,367 14,306 13,590 Maintenance 13,161 14,366 27,237 28,634 27,317 ---------------------------------------------------------------------- Total revenues 27,976 36,232 65,886 72,789 77,078 Costs and expenses: Cost of revenues Cost of software licenses 1,521 2,241 3,999 6,105 5,688 Cost of consulting and education services and maintenance 4,975 7,044 12,910 15,953 13,728 Sales and marketing 12,488 16,978 32,614 37,656 41,375 Research and development 5,411 7,957 14,448 17,059 20,128 General and administrative 3,307 4,370 8,530 8,062 7,783 Restructuring and other costs (Note 13) 6,300 1,694 2,819 5,483 -- Charge for purchased research and development (Note 2) -- 158 158 7,300 1,736 ---------------------------------------------------------------------- Total costs and expenses 34,002 40,442 75,478 97,618 90,438 ---------------------------------------------------------------------- Loss from operations (6,026) (4,210) (9,592) (24,829) (13,360) Interest income 71 212 596 758 809 Other income (expense) 282 (111) (84) 34 80 Interest expense 296 289 1,143 556 324 ---------------------------------------------------------------------- Loss before provision for income taxes (5,969) (4,398) (10,223) (24,593) (12,795) Provision for income taxes 399 404 1,124 297 407 ---------------------------------------------------------------------- Net loss $(6,368) $(4,802) $(11,347) $(24,890) $(13,202) ====================================================================== Loss per common share (Note 1) $ (0.36) $ (0.32) $ (0.71) $ (1.86) $ (1.06) ---------------------------------------------------------------------- Weighted average number of common and common equivalent shares outstanding 17,590 15,103 15,914 13,350 12,484 ======================================================================
The accompanying notes are an integral part of the consolidated financial statements -40- 41 CAYENNE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 1996 AND THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994 (IN THOUSANDS)
Additional Accumulated Common Stock Paid-In Translation Accumulated Stockholders' Shares Amount Capital Adjustments Deficit Equity (Deficit) -------------------------------------------------------------------------------------- Balance, June 30, 1993 11,798 $ 118 $ 79,317 $ (147) $ (51,059) $28,229 Stock options exercised 288 3 295 298 Issuance of common stock under Employee Stock Purchase Plan 39 97 97 Issuance of common stock in acquisition of business 650 7 2,268 2,275 Currency translation adjustment (361) (361) Net loss for the year (13,202) (13,202) -------------------------------------------------------------------------------- Balance, June 30, 1994 12,775 128 81,977 (508) (64,261) 17,336 Stock options exercised 331 3 888 891 Issuance of common stock under Employee Stock Purchase Plan 35 76 76 Issuance of warrants in conjunction with the preferred stock 348 348 Proceeds from Section 16(b) profits 352 352 Repurchase of stock/warrants (8) (42) (42) Issuance of common stock in acquisition of business 679 7 3,373 3,380 Currency translation adjustment (204) (204) Net loss for the year (24,890) (24,890) -------------------------------------------------------------------------------- Balance, June 30, 1995 13,812 138 86,972 (712) (89,151) (2,753) Stock options exercised 311 3 1,509 1,512 Issuance of common stock under Employee Stock Purchase Plan 14 82 82 Conversion of Series A Preferred Stock 1,787 18 5,475 5,493 Exercise of warrants 187 2 498 500 Issuance of common stock through private placement 1,114 11 5,765 5,776 Pooling adjustment (Note 2) 3,160 3,160 Currency translation adjustment 201 201 Net loss for the year (11,347) (11,347) -------------------------------------------------------------------------------- Balance, June 30, 1996 17,225 172 100,301 (511) (97,338) 2,624 Stock options exercised 95 1 342 343 Issuance of common stock under Employee Stock Purchase Plan 9 35 35 Exercise of warrants 144 2 470 472 Conversion of convertible long term debt 222 2 1,787 1,789 Currency translation adjustment 450 450 Net loss for the year (6,368) (6,368) -------------------------------------------------------------------------------- Balance, December 31, 1996 17,695 $ 177 $102,935 $ (61) $(103,706) $ (655) ================================================================================
The accompanying notes are an integral part of the consolidated financial statements -41- 42 CAYENNE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Transition Period Prior Period Ended Ended December 31, December 31, Year Ended June 30, 1996 1995 1996 1995 1994 ---- ---- ---- ---- ---- (unaudited) Cash flows from operating activities: Net loss $ (6,368) $(4,802) $(11,347) $(24,890) $(13,202) Adjustments to reconcile net loss to net cash used in operating activities: Charge for purchased research and development -- 158 158 7,300 1,736 Depreciation and amortization 1,262 1,552 3,142 4,431 6,001 Write-down of intangible asset -- -- 986 945 1,150 Loss on disposal of equipment 201 -- 10 -- 14 Change in operating assets and liabilities, net of effects of acquisitions, Trade accounts receivable (875) (1,318) 3,831 900 1,367 Prepaid expenses and other current assets 1,368 (164) (762) 590 227 Accrued expenses (655) (188) (442) (2,387) (750) Accrued restructuring costs 924 601 (333) 255 (4,354) Accounts payable (730) (1,384) (1,978) (1,849) 1,672 Accrued compensation and benefits 98 (496) (102) (639) 349 Income and other taxes payable (1,058) 377 806 397 (306) Deferred revenue (4,122) (2,896) (2,261) 61 (2,402) ----------------------------------------------------------------------- Net cash used in operating activities (9,955) (8,560) (8,292) (14,886) (8,498) Cash flows from investing activities: Purchases of property and equipment (777) (330) (786) (1,392) (3,105) Proceeds from sale of property -- -- 56 -- -- Acquisition of businesses -- -- -- (508) (1,511) Software development costs -- -- -- (420) (1,025) Other, net -- -- -- (114) (160) ----------------------------------------------------------------------- Net cash used in investing activities (777) (330) (730) (2,434) (5,801) Cash flows from financing activities: Proceeds from issuance of common stock, net 850 6,896 7,925 925 395 Proceeds from issuance of preferred stock and warrants (net of issuance costs) -- -- -- 5,812 -- Proceeds from Section 16(b) profits -- -- -- 352 -- Proceeds from line of credit facility 1,321 600 2,100 3,200 -- Proceeds from sale-leaseback transaction -- 933 987 -- -- Proceeds from factoring agreement 82 -- 9,195 -- -- Proceeds from repayment of employee loans 200 -- -- -- -- Payments under factoring agreement (2,431) -- (7,471) -- -- Payment under line of credit facility -- -- (2,480) (720) -- Payments under capital lease obligations (280) (30) (169) (174) (356) ----------------------------------------------------------------------- Net cash provided by (used in) financing activities (258) 8,399 10,087 9,395 39 Effect of foreign exchange rates on cash and cash equivalents 450 108 353 93 110 ----------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (10,540) (383) 1,418 (7,832) (14,150) Adjustment to conform fiscal year of Cadre -- 2,102 2,102 -- -- Cash and cash equivalents at beginning of period 14,690 11,170 11,170 19,002 33,152 ----------------------------------------------------------------------- Cash and cash equivalents at end of period $ 4,150 $12,889 $ 14,690 $ 11,170 $ 19,002 =======================================================================
The accompanying notes are an integral part of the consolidated financial statements -42- 43 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Cayenne Software, Inc. (formerly Bachman Information Systems, Inc.) ("the Company" or "Cayenne") and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated from the consolidated financial statements. The consolidated financial statements and all financial data contained herein include the accounts of Cadre Technologies Inc. ("Cadre") for all periods presented (Note 2). In October 1996, the Company changed its fiscal year end from June 30th to December 31st. As a result the period from July 1, 1996 through December 31, 1996 was designated as "the transition period." The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s). Actual results could differ from those estimates. The Company develops, markets and supports an integrated suite of software products and services. Many Fortune 1000 companies and government agencies around the world use Cayenne products as they develop, implement, and maintain business-critical information systems. Cayenne's products are designed around an innovative open architecture that enables organizations to create applications that integrate diverse information sources into new high-performance computing environments, to modify applications as business and technology change, and to run those applications on a variety of platforms. Cayenne's approach to reusability and its open architecture directly support client/server initiatives and partnerships with other leading software vendors. TRANSLATION OF FOREIGN CURRENCIES The local currencies of the Company's foreign subsidiaries are predominantly determined to be the functional currencies. Assets and liabilities of all foreign subsidiaries are translated at period-end rates of exchange, and income statement accounts are translated at average rates of exchange. Resulting translation adjustments are recorded as a separate component of stockholders' equity, "Accumulated Translation Adjustments." Transaction gains and losses, primarily related to foreign currency denominated intercompany payables and receivables recorded in the financial statements of the Company's foreign subsidiaries, are reflected in income. Gains and losses resulting from foreign currency transactions were immaterial for all periods presented. REVENUE RECOGNITION Revenue from product license fees is recognized upon shipment. At the time the Company recognizes revenue from the sale of software products, no significant vendor obligations remain and the costs of insignificant support obligations are accrued. The Company typically does not grant to its customers a contractual right to return software products. Accordingly, no provision for estimated returns is generally recorded at the time of the sale. When approved by management, however, the Company has accepted returns of certain software products and has provided an allowance for those specific products. Maintenance revenue for annual maintenance contracts is deferred and recognized ratably over the term of agreement. Revenue from consulting and education services is recognized as the related services are performed. ACCOUNTS RECEIVABLE Accounts receivable are presented net of an allowance for doubtful accounts and sales returns of approximately $820,000, $868,000 and $942,000 at December 31, 1996 and June 30, 1996 and 1995, respectively. The provisions charged to the statement of operations were $0, $350,000, $122,000 and $232,000 in the six month transition period ended December 31, 1996 and the fiscal years ended June 30, 1996, 1995 and 1994, respectively, and deductions against the allowances were $48,000, $424,000, $839,000 and $360,000 in the six month transition period ended December 31, 1996 and the fiscal years ended June 30, 1996, 1995 and 1994, respectively. COST OF REVENUE Cost of software licenses includes capitalized software amortization expense and other costs principally related to the duplication and distribution of licensed software products. Cost of consulting and education services and maintenance includes personnel, travel and occupancy costs connected with providing such services. -43- 44 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) DEFERRED REVENUE Maintenance revenue which is not yet earned is included in deferred revenue. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with maturities of less than ninety days when acquired. These investments are stated at cost plus accrued interest, which approximates market value. Included in cash and cash equivalents at December 31, 1996, and June 30, 1996 and 1995, respectively, are $700,000, $699,000 and $2,148,000 in United States Treasury Securities under agreement to resell in January 1997, and July 1996 and 1995, respectively. Treasury securities purchased under agreements to resell are held in safekeeping by the Company's bank. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. At disposition, the cost of property and related accumulated depreciation are removed from the balance sheet and any gain or loss is included in the statement of operations. Depreciation and amortization are provided on the straight-line method over the estimated useful life of the related assets as follows: Computer and related equipment.. 3 to 5 years Equipment under capital lease... Shorter of life of lease or useful life Office furniture and fixtures... 5 to 7 years Leasehold improvements.......... Shorter of life of lease or useful life
SOFTWARE COSTS AND OTHER INTANGIBLE ASSETS In accordance with Statement of Financial Accounting Standards No. 86 ("SFAS 86"), "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed," the Company capitalizes certain software costs after technological feasibility of the product has been established. Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Software costs are amortized, on a product by product basis, ratably over the estimated economic life of the product (generally two years, five years in the case of WindTunnel), or the ratio of current gross revenues to total current and expected future gross revenues of the product, whichever is greater. The Company evaluates the net realizable value of capitalized software costs in accordance with paragraph 10 of SFAS 86. The Company evaluates the net realizable value of capitalized software and other intangible assets on an ongoing basis relying on a number of factors including operating results, business plans, budgets and economic projections and undiscounted cash flows. In addition, the Company's evaluation considers non-financial data such as market trends, product development cycles and changes in management's market emphasis. Costs in excess of net assets of acquired companies are amortized on a straight-line basis over a ten-year period. Goodwill totaled $581,000 before accumulated amortization of approximately $275,000, $246,000 and $188,000 at December 31, 1996, and June 30, 1996 and 1995, respectively. -44- 45 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) INCOME TAXES Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation reserve against deferred assets is required if based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. INCOME (LOSS) PER COMMON SHARE Income (loss) per common share is computed based on the weighted average number of common shares and dilutive common equivalent shares outstanding during each period except in loss years. Dilutive common equivalent shares consist of preferred stock, warrants and stock options (calculated using the treasury stock method). For the transition period ended December 31, 1996, prior period ended December 31, 1995 and fiscal years ended June 30, 1996, 1995 and 1994, common equivalent shares are excluded from the primary earnings per share calculation as they are antidilutive. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist of temporary cash investments and trade receivables. The Company invests its cash in deposits with major banks and in money market investments and obligations of the United States Government and Federal agencies. The Company has not experienced any significant losses on its investments. Concentrations of credit risk with respect to trade receivables include receivables from a significant customer (see, also, Note 8.) and are otherwise limited due to the large number of customers comprising the Company's customer base and their dispersion across many different industries and geographies. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses. Such losses to date have been within management's expectations. 2. BUSINESS COMBINATIONS On July 18, 1996, the Company completed its acquisition of Cadre Technologies Inc. ("Cadre") under an Agreement and Plan of Merger dated March 25, 1996, by and among the Company, Cadre and B.C. Acquisition Corp., whereby the Company agreed to acquire all of the outstanding capital stock of Cadre in exchange for 4,716,442 shares of Cayenne common stock (the "merger"). The merger has been accounted for as a pooling-of-interests beginning in the first quarter of the transition period ended December 31, 1996. Accordingly, all financial data contained herein include the accounts of Cadre for all periods presented. The Company's fiscal 1996 results have been combined with Cadre's results for the twelve months ended June 30, 1996. The Company's results for fiscal 1995 and 1994 have been combined with Cadre's calendar year end results for the same period. In this presentation, Cadre's financial data for the period July 1, 1995 to December 31, 1995 is included in both the periods ended June 30, 1996 and 1995. The six month period includes a net loss of $3,160,000. Additionally, effective upon the merger, the Company changed its name to Cayenne Software, Inc. The Company acquired Cadre to expand its product offerings to include structured analysis and design and object-oriented technology and to expand its customer base. -45- 46 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) During the transition period ended December 31, 1996 the Company incurred a $6.3 million charge to operations to reflect costs associated with combining the operations of the two companies, transaction fees, and other costs. The Board of Directors of the Company approved a restructuring plan to terminate certain specified employees and close certain facilities. Such plan was communicated to the employees prior to the end of the quarter and such employees were specifically identified and terminated. Included in the charge is $1.6 million of employee related termination expenses, $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 name change. On May 1, 1995, the Company acquired Westmount Technology, B.V. ("Westmount") in a transaction accounted for as a purchase. The Company acquired Westmount for approximately 679,000 shares of common stock and a warrant to purchase an additional 185,000 shares. The purchase price for Westmount was approximately $3.8 million. In conjunction with this transaction, the Company recorded assets purchased of approximately $8.1 million and liabilities assumed of $4.3 million. $7.3 million of the recorded assets were attributed to in-process research and development and was charged to operations during 1995. The software had not reached technological feasibility and had no future alternative use. In connection with the purchase of Westmount, a shareholder trust of former Westmount shareholders granted the Company a $1.6 million subordinated, convertible loan. The note accrued interest at a simple rate of 10%, payable annually in arrears. Effective upon the merger and resulting change of control, the debt and accrued interest were automatically converted into 220,000 common shares of the Company. On November 16, 1993, the Company acquired substantially all the assets of Cooperative Solutions, Inc. ("CSI") of San Jose, California, including its product line, research and development efforts, and employee and customer bases in exchange for assuming certain liabilities. The acquisition was accounted for as a purchase. The purchase price, which was equal to the liabilities assumed, was approximately $2.2 million. The purchase price was first allocated to tangible assets based on their fair market values. The remaining purchase price was allocated to the fair value of purchased research and development for software which had not reached technological feasibility and had no alternative future use. A charge for purchased research and development of $1.7 million was recorded upon the closing of the acquisition in the Company's fiscal quarter ended December 31, 1993. On September 10, 1993, the Company acquired Chicago-based WindTunnel Software, Inc. ("WindTunnel") in a merger transaction accounted for as a purchase. The Company acquired WindTunnel in exchange for 650,000 shares of the Company's common stock. The purchase price of WindTunnel was approximately $2.5 million, based upon a stock price of $3.50 (which approximated the fair market value of the Company's common stock at the time of the merger) for each of the 650,000 shares of the Company's common stock issued in the merger and the direct costs of the acquisition. The net tangible assets of WindTunnel acquired by the Company were insignificant. The purchase price was allocated to the fair value of WindTunnel's software, and is being amortized over five years. (See, also, Note 13.) -46- 47 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31 JUNE 30 JUNE 30 1996 1996 1995 ---- ---- ---- Property and Equipment Computer and related equipment $12,415 $16,642 $24,565 Equipment under capital leases 1,241 1,179 97 Office furniture and fixtures 2,838 2,745 3,321 Leasehold improvements 507 506 713 ------- ------- ------- Total 17,001 21,072 28,696 Less accumulated depreciation and amortization 14,745 18,349 24,780 ------- ------- ------- $ 2,256 $ 2,723 $ 3,916 ======= ======= =======
Accumulated amortization for equipment under capital leases was $0.6 million, $0.4 million and $0 as of December 31, 1996, June 30, 1996 and 1995, respectively. During the transition period ended December 31, 1996 and fiscal 1996, the Company wrote-off $4.4 million and $8 million of fully depreciated assets. 4. CAPITALIZED SOFTWARE COSTS Amortization expenses for previously capitalized software costs for the transition period ended December 31, 1996, and the fiscal years ended June 30, 1996, 1995, and 1994 was approximately $80,000, $160,000 $723,000 and $1.0 million respectively. The Company also amortized $0, $456,000, $456,000 and $379,000 of purchased software acquired in the WindTunnel transaction. 5. INCOME TAXES The components of net deferred tax assets were as follows:
December 31 June 30, 1996 1996 ----------- -------- Deferred tax assets: Net operating loss carryforwards $ 29,979 $ 27,953 Tax credit carryforwards 3,789 3,619 Other 5,290 5,050 --------- -------- Gross deferred tax asset 39,058 36,622 Valuation allowance (39,058) (36,622) --------- -------- Net deferred tax asset $ 0 $ 0 --------- --------
The entire deferred tax asset has been fully reserved with a valuation allowance due to the uncertainty of realization. The Company has historically not generated taxable income sufficient to ensure usage of the deferred tax asset. At December 31, 1996, the Company had remaining tax net operating loss ("NOL") carryforwards of approximately $76,000,000, including approximately $5,800,000 for international operations, currently available -47- 48 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) to offset future taxable income and unused federal tax credits of approximately $3,800,000. If not utilized, these credits and carryforwards will expire between the years 2001 and 2011. Due to the Company's issuances of stock, the Tax Reform Act of 1986 has restricted the Company's use of approximately $19,300,000 of its existing NOL carryforwards. The provision for income taxes recorded in the transition period ended December 31, 1996, and the years ended June 30, 1996, 1995 and 1994 consists of the following:
TRANSITION PERIOD ENDED YEAR ENDED JUNE 30, DEC. 31, 1996 1996 1995 1994 ------------- ---- ---- ---- Federal-current -- -- -- -- State -- $ 120 -- -- Foreign taxes $399 1,004 $297 $407 ---- ------ ---- ---- Total provision $399 $1,124 $297 $407 ==== ====== ==== ====
The effective tax rates for the transition period ended December 31, 1996 and fiscal years ended June 30, 1996, 1995 and 1994 are not meaningful, as the Company was in a net loss position. 6. EMPLOYEE BENEFIT PLANS The Company has a 401(k) defined contribution plan which is available to all U.S. employees. The Company made no contributions to the plan during the transition period ended December 31, 1996 or in the years ended June 30, 1996, 1995, and 1994. Cadre also had a qualified defined contribution plan and made matching contributions of $213,000, $213,000 and $290,000 in the years ended June 30, 1996, 1995 and 1994. The Company's 1992 Employee Stock Purchase Plan (the "Plan") permits eligible employees to purchase up to a maximum of 625 shares of stock quarterly on October 31, January 31, April 30, and July 31 at a purchase price equal to 85% of the market price of the Company's common stock on either the first or last day of each quarterly period, whichever price is lower, through accumulation of payroll deductions of up to 20% of each participating employee's qualifying compensation during such quarterly period. The Plan commenced operations on May 1, 1992. At December 31, 1996, 400,000 shares were reserved for issuance under the Plan of which approximately 191,000 shares have been purchased by employees. 7. COMMITMENTS AND CONTINGENCIES The Company leases office space under cancelable and non-cancelable operating leases. Rent expense in the transition period ended December 31, 1996 and the fiscal years ended June 30, 1996, 1995 and 1994 under such arrangements totaled $1,483,000, $4,664,000, $4,848,000, and $4,466,000, respectively. -48- 49 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) The Company also leases certain equipment under long-term leases. At December 31, 1996, long-term lease commitments were as follows:
EQUIPMENT OPERATING CAPITAL LEASES LEASES ------ ------ Year ended December 31, 1997......... $2,846 $691 Year ended December 31, 1998......... 1,243 72 Year ended December 31, 1999......... 537 44 Year ended December 31, 2000......... 235 17 Year ended December 31, 2001......... 114 -- ------ ---- Total........................... $4,975 824 Less amount representing interest.... 157 ---- Present value of minimum lease payments............................. 667 Less current portion................. 561 ---- Long-term portion.................... $106 ----
8. BUSINESS SEGMENT AND GEOGRAPHIC DATA The Company operates in one business segment: development, marketing and support of an integrated suite of software products and services. The Company markets and services its products in the United States and in foreign countries through its direct sales organization and distributors (which are independent representatives). The Company's foreign operations include a research and development center together with numerous sales and customer service organizations. Geographic information for the transition period ended December 31, 1996, and fiscal years ended June 30, 1996, 1995 and 1994 is as follows:
TRANSITION PERIOD YEAR ENDED JUNE 30, ENDED ------------------- DECEMBER 31, 1996 1996 1995 1994 ----------------- ---- ---- ---- SALES TO UNAFFILIATED CUSTOMERS United States $13,641 $ 31,696 $36,634 $ 40,198 Italy 6,118 13,937 9,519 7,913 United Kingdom 3,108 7,748 10,224 9,801 Rest of World 3,879 7,802 12,274 14,943 Export sales from United States 1,230 4,703 4,138 4,223 Intra-company transfers 2,649 10,278 9,603 10,715 Intra-company eliminations (2,649) (10,278) (9,603) (10,715) ------------------------------------------------------ $27,976 $ 65,886 $72,789 $ 77,078 ======================================================
-49- 50 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)
TRANSITION PERIOD ENDED DECEMBER 31, YEAR ENDED JUNE 30, 1996 1996 1995 1994 ---- ---- ---- ---- INCOME (LOSS) FROM OPERATIONS United States $(1,239) $(3,497) $ (9,419) $ (8,771) Italy 113 336 (540) (452) United Kingdom (1,194) (1,096) (2,044) (1,274) Rest of World (3,706) (5,335) (12,826) (2,863) ------------------------------------------------------ $(6,026) $(9,592) $(24,829) $(13,360) ======================================================
DECEMBER 31, JUNE 30, 1996 1996 1995 1994 ---- ---- ---- ---- IDENTIFIABLE ASSETS United States $ 23,655 $ 36,797 $ 34,449 $ 46,390 Italy 6,645 7,894 7,502 5,895 United Kingdom 3,528 4,428 4,537 4,247 Rest of World 6,159 4,438 3,989 4,723 Eliminations (17,751) (19,458) (15,093) (14,816) -------------------------------------------------------- $ 22,236 $ 34,099 $ 35,384 $ 46,439 ========================================================
Revenues from a major customer as a percentage of total revenue for the transition period ended December 31, 1996, and in fiscal years ended June 30, 1996, 1995 and 1994 were 16%, 15%, 9% and 6%, respectively. Included in the results of operations for the transition period ended December 31, 1996 is $6.3 million of merger and other costs, approximately $5.6 million in the United States, $0.1 million in Italy, $0.5 million in the United Kingdom, and $0.1 million in rest of world. Additional restructurings during fiscal 1996 and 1995 together with a $7.3 million write-off of in-process research and development related to the Westmount purchase adversely impacted the results of operations. Fiscal 1996 results include charges of $2.8 million allocated primarily to the United States. Fiscal 1995 results include charges of $5.5 million of which approximately $4.1 million was allocated to the United States, $0.1 million to the United Kingdom, $0.1 million to Italy and $1.2 million to rest of world. The $7.3 million write-off related to Westmount was charged to rest of world operations during 1995. 9. CAPITAL STOCK The Company has 1,600,000 shares of $1.00 par value "blank check" preferred stock authorized. Such shares may be issued in one or more future series by the Board of Directors and, subject to certain limitations so as not to adversely effect other holders of preferred stock, if any, are to have such rights and preferences as the Board of Directors establishes before issuance. On November 21, 1994, the Company issued 1,787.073 shares of redeemable Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is initially convertible into 1,000 shares of common stock and is entitled to cast votes equal to the number of shares of common stock into which such preferred stock is convertible. In connection with the issuance of the Series A preferred stock, the Company issued to the Series A preferred stockholders three-year warrants to purchase 357,415 shares of the Company common stock (with Registration Rights) at an exercise price of $3.28 per share. These warrants were valued at $319,000 and are included in additional paid in capital. As of December 31, 1996, all shares of Series A Convertible Preferred Stock have been converted to common stock. During the transition period ended December 31, 1996 and in fiscal year 1996, the Company received $472,000 and $500,000 in connection with the exercise of warrants. Warrants for 60,976 shares of common stock remain outstanding at December 31, 1996. -50- 51 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 10. STOCK OPTIONS Under the Company's amended 1996 incentive and nonqualified stock option plan (the "1996 Plan"), incentive stock options can be granted to employees and consultants entitling them to purchase shares of common stock within one to ten years from the date of grant at option prices equal to the fair market value at the date of grant. Nonqualified stock options are generally granted under the same terms. The vesting period for stock options is generally four years. The exercise price for incentive stock options may not be less than the fair market value of the common stock on the date of the grant (or 110% of fair market value in the case of employees or officers holding 10% or more of the total combined voting power of all classes of stock of the Company). At December 31, 1996, the number of shares issuable under the 1996 Plan is 2,000,000. Employees of the Company currently hold stock options under three additional plans: the Amended and Restated 1986 Incentive and Non Qualified Stock Option Plan, the Cadre 1988 Incentive and Non-Statutory Stock Option Plan, and the Cadre 1989 Non-Statutory Stock Option Plan. For the future, the Company expects to grant additional options only under the 1996 Plan. In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 is effective for periods beginning after December 15, 1995. SFAS 123 requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. The Company adopted the disclosure provisions of SFAS 123 in 1996 and has continued to apply APB Opinion 25 and related Interpretations in accounting for its plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates as calculated in accordance with SFAS 123, the Company's net loss and earnings per share for the transition period ended December 31, 1996 and the fiscal year ended June 30, 1996 would have been reduced to the pro forma amounts indicated below:
TRANSITION PERIOD 1996 ----------------- ---- EARNINGS EARNINGS NET LOSS PER SHARE NET LOSS PER SHARE -------- --------- -------- --------- As Reported $(6,368) $(0.36) $(11,347) $(0.71) Pro Forma $(6,975) $(0.40) $(11,568) $(0.73)
The effects of applying SFAS 123 in this pro forma disclosure are not likely to be representative of effects on reported net income for future years. SFAS 123 does not apply to awards prior to 1996 and additional awards in future years are anticipated. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: an expected life of five years, expected volatility of 67%, a dividend yield of 0% and a risk-free interest rate between 5.2% and 7.6%. In management's opinion existing stock option valuation models do not provide a reliable single measure of the fair value of employee stock options that have vesting provisions and are not transferable. In addition, option pricing models require the input of highly subjective assumptions, including expected stock price volatility. Management has elected to project expected volatility based upon the stock's actual historical performance to date. -51- 52 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) A summary of the status of the Company's stock option plans as of December 31, 1996 and June 30, 1996, 1995 and 1994 and changes during the years ending on those dates is presented below:
WEIGHTED AVERAGE NUMBER PRICE OF SHARES PER SHARE --------- --------- Options outstanding on June 30, 1993 2,023,651 $2.89 ---------- ----- Options granted ............... 2,025,869 3.66 Options exercised ............. (288,414) 1.43 Options canceled .............. (879,500) 5.84 ---------- ----- Options outstanding on June 30, 1994 2,881,606 2.68 Options granted ............... 662,052 4.62 Options exercised ............. (330,518) 2.77 Options canceled .............. (641,519) 3.18 ---------- ----- Options outstanding on June 30, 1995 2,571,621 3.04 Options granted ............... 810,973 6.32 Options exercised ............. (310,870) 3.60 Options canceled .............. (454,803) 4.50 ---------- ----- Options outstanding on June 30, 1996 2,616,921 3.73 Options granted ............... 1,239,424 5.51 Options exercised ............. (95,270) 3.69 Options canceled .............. (550,803) 5.27 ---------- ----- Options outstanding on Dec. 31, 1996 3,210,272 4.90 Shares exercisable at Dec. 31, 1996 1,326,910 4.16
The weighted-average fair value of options granted during the six month transition period ended December 31, 1996 and the fiscal year ended June 30, 1996 was $3.39 and $3.94, respectively. The following summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ----------------------------------------------- -------------------------------- Weighted Average Remaining Range of Number Contractual Weighted-Average Number Weighted-Average Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price - --------------- ----------- ----------- ---------------- ----------- ---------------- $1.20 - $3.00 185,588 4.18 $1.81 150,217 $1.70 $3.25 - $5.18 1,338,646 4.95 4.07 953,059 4.00 $5.625 - $7.75 1,662,314 9.13 5.86 221,534 6.34 $8.75 - $9.19 23,724 9.16 9.05 2,100 8.75 - -------------- --------- ---- ---- --------- ---- $1.20 - $9.19 3,210,272 7.10 $4.90 1,326,910 $4.16
-52- 53 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
TRANSITION PRIOR PERIOD PERIOD ENDED ENDED YEAR ENDED JUNE 30, DEC. 31, 1996 DEC. 31, 1995 1996 1995 1994 ------------- ------------- ---- ---- ---- Cash Paid For: Interest $ 276 $269 $1,121 $402 $237 Income Taxes 1,457 -- 395 432 350 Non Cash Investing and Financing Activity: Increase in capital lease obligations 61 -- 81 97 -- Conversion of Redeemable Series A Preferred Stock -- -- 5,493 -- -- Disposal of Property included in restructuring accrual -- -- -- -- 222
-53- 54 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
TRANSITION PERIOD ENDED DECEMBER 31, 1996 -------------------- FIRST SECOND QUARTER QUARTER -------------------- Revenues $13,198 $14,778 Cost of Revenues 3,279 3,217 Income (loss) from operations (6,746) 720 Net income (loss) (6,860) 492 Net income (loss) per common share $(0.39) $0.03
FISCAL YEAR 1996 ---------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------------------------------------------------- Revenues $16,437 $19,795 $14,832 $14,822 Cost of Revenues 4,790 4,495 4,031 3,593 Income (loss) from operations (3,220) (990) (2,731) (2,651) Net income (loss) (3,471) (1,331) (3,131) (3,414) Net income (loss) per common share $(0.24) $(0.08) $(0.19) $(0.20)
FISCAL YEAR 1995 ----------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------------------------------------------------- Revenues $16,139 19,410 18,128 19,112 Cost of Revenues 5,474 5,933 5,284 5,367 Income (loss) from operations (8,822) (11,542) (2,257) (2,208) Net income (loss) (8,702) (11,572) (2,309) (2,307) Net income (loss) per common share (0.68) (0.87) (0.17) (0.17)
13. RESTRUCTURING AND OTHER COSTS On July 18, 1996, the Company completed its acquisition of Cadre Technologies, Inc. ("Cadre") and effective upon the merger, the Company changed its name to Cayenne Software, Inc. -54- 55 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) During the transition period ended December 31, 1996, the Company incurred a $6.3 million charge to operations to reflect costs associated with combining the operations of the two companies, transactions fees, and other costs. The Board of Directors of the Company approved a restructuring plan to terminate certain specified employees and close certain facilities. Such a plan was communicated to the employees prior to the end of the quarter and such employees we specifically identified and terminated. Included in the charge is $1.6 million of employee related termination expenses, $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 name change. Based on the results of fiscal 1996 and in conjunction with the contemplated merger with 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 asset acquired as part of its acquisition of WindTunnel. Also during fiscal 1996, the Company restructured its operations to reduce costs and utilize resources more effectively. During 1995, following the Westmount Technology, B.V. acquisition and the completion of certain significant development efforts and associated product introduction, the Company restructured its operations and wrote off redundant software investments. The Company recorded restructuring charges of $2.0 million, $1.8 million and $1.7 million during the quarters ended September 30, 1994, June 30, 1995 and December 31, 1995. The aggregate $5.5 million charge to operations reflects costs associated with termination benefits, the write off of redundant software investments and facility restructuring. Prior to the execution of this restructuring, the Board of Directors of the Company approved a restructuring plan to terminate certain specified employees and close certain facilities. Such a plan was communicated to the employees prior to the end of the quarter and such employees we specifically identified and terminated. Included in the charge is $3.9 million of employee related termination expenses, $0.9 million of redundant software investments and $0.7 million of facilities and other expenses associated with the restructurings. At December 31, 1996, the Company believes that it has adequately provided for all restructuring actions taken to date. Additionally, except for the Cadre merger, for which the Company maintains a $1.7 million obligation at December 31, 1996, the Company has met substantially all obligations with regard to the restructurings. 14. BORROWINGS 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 per share. 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 include the attainment of certain specified levels of consolidated net income at the end of each quarter including profitability of $1.0 million for the quarter ending June 30, 1997, and liquidity (generally defined as cash and cash equivalents plus eligible domestic and 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 at December 31, 1996. At December 31, 1996, the borrowing base under the revolving credit agreement was approximately $4.5 million. The Company had approximately $2.8 million and $1.5 million outstanding against the line of credit at December 31, 1996 and June 30, 1996, respectively. -55- 56 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) The Company also had a bank agreement that consisted of a $3.0 million revolving line loan which was outstanding at June 30, 1995. The loan was collateralized by general intangibles, accounts receivable and inventory. A new financing arrangement ("Factoring Agreement") was used to repay the loan of $3.0 million in 1996. The factoring agreement had a financing limit of $5.6 million based on qualified accounts receivable. At June 30, 1996, the Company had approximately $2.4 million outstanding under the factoring agreement. The Company repaid the entire amount during the transition period and terminated the agreement. 15. SUBSEQUENT EVENTS On January 2, 1997, the Company raised approximately $3.0 million in a private placement of 150,000 shares of Redeemable Series B Convertible Preferred Stock and issuance of warrants. 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 the investors 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 are entitled to registration rights under terms of the registration rights agreement dated January 3, 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This information will either be incorporated by reference to a proxy statement filed by the Company not later than 120 days after December 31, 1996 or be included in an amendment to this form 10-K within such period. ITEM 11. EXECUTIVE COMPENSATION This information will either be incorporated by reference to a proxy statement filed by the Company not later than 120 days after December 31, 1996 or be included in an amendment to this form 10-K within such period. -56- 57 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information will either be incorporated by reference to a proxy statement filed by the Company not later than 120 days after December 31, 1996 or be included in an amendment to this form 10-K within such period. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information will either be incorporated by reference to a proxy statement filed by the Company not later than 120 days after December 31, 1996 or be included in an amendment to this form 10-K within such period. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements on page 36. (2) FINANCIAL STATEMENT SCHEDULES All schedules are omitted as they are either not required, not applicable or otherwise included in this Form 10-K. (3) EXHIBITS Documents listed below, except for documents identified by footnotes, are being filed as exhibits herewith. Documents identified by asterisks are not being filed herewith and, pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934 (the "Act") reference is made to such documents as previously filed as exhibits with the Commission. The Company's file number under the Act is 0-19682. 2.1(4) Asset Purchase Agreement among CSI Acquisition Corporation, Cayenne and Cooperative Solutions, Inc. dated November 16, 1993 2.2(5) Agreement and Plan of Merger by and among Cayenne, BI Acquisition Corp. and WindTunnel Software, Inc. dated April 27, 1993 2.3(11) Agreement and Plan of Merger among Cayenne, B.C. Acquisition Corp. and Cadre Technologies Inc. dated as of March 25, 1996 3.1(1)2 Amendment to Restated Articles of Organization of Cayenne 3.2(2) Restated Articles of Organization of Cayenne 3.3(1) Amended and Restated By-Laws of Cayenne 3.4 Statement of Rights and Preferences of Series B Convertible Preferred Stock 4.1(1) Specimen Certificate for Common Stock of Cayenne 4.2(8) Statement of Rights and Preferences of Series A Convertible Preferred Stock -57- 58 4.3(8) Form of Warrant Agreement dated as of November 21, 1994 by and among Cayenne and purchasers of Series A Convertible Preferred Stock 4.4(7) Warrant Agreement dated as of October 28, 1994 by and between Cayenne and Silicon Valley Bank 4.5 Convertible Preferred Stock Purchase Agreement dated as of January 2, 1997 between the Company and Southbrook International Investments, Ltd. 4.6 Registration Rights Agreement dated as of January 2, 1997 4.7 Form of Warrant Agreement dated as of January 2, 1997 4.8 Warrant Agreement dated as of December 20, 1996 between the Company and Silicon Valley Bank 10.1(1) General License and Maintenance Agreement dated January 30, 1987 between Cayenne and American Telephone & Telegraph Communications, Inc. 10.2(1) Lease with New England Mutual Life Insurance Company 10.3(3) Lease dated August 12, 1992 between Cayenne and Spaulding Investment Co. 10.4(2) Agreement for Partial Sale of Going Concern dated as of October 25, 1992 between Pro Systems and Cayenne France 10.5(2) Sale and Purchase Agreement relating to Cayenne Information Systems Limited, dated November 16, 1991, among Abacus Trustees (Jersey) Limited, Cayenne and others, as amended by Amendment Consent dated February 18, 1992 10.6(2) Agreement dated as of November 1, 1991, between Cayenne and Cayenne Italia S.r.l., as amended by letter dated December 9, 1991 and as further amended by amendment dated December 31, 1991 10.7(3) Fiscal Year 1993 Bonus Pool Plan 10.8(1) Amended and Restated 1986 Incentive and Nonqualified Stock Option Plan of Cayenne 10.92 1992 Employee Stock Purchase Plan 10.10(1) Savings/Retirement Plan and Trust of Cayenne 10.116 Employment agreement dated as of January 1, 1994 by and between Cayenne and Charles W. Bachman 10.12(6) Employment Agreement dated as of August 4, 1993 by and between Cayenne and Peter J. Boni 10.13(6) 1994 Bonus Pool Plan of Cayenne, as amended 10.14(7) 1995 Bonus Pool Plan of Cayenne, as amended. 10.15(7) Revolving Credit Agreement and Warrant Agreement dated as of October 28, 1994 by and between Cayenne and Silicon Valley Bank 10.16(8) Series A Convertible Preferred Stock Purchase Agreement dated as of November 21, 1994 by and among Cayenne and purchasers of Series A Convertible Preferred Stock 10.17(8) Registration Rights Agreement dated as of November 21, 1994 by and among Cayenne and purchasers of Series A Convertible Preferred Stock 10.18(9) Form of Common Stock Purchase Agreement dated as of September 15, 1995 by and among Cayenne and certain purchasers of Common Stock 10.19(9) Form of Registration Rights Agreement dated as of September 15, 1995 by and among Cayenne and certain purchasers of Common Stock 10.20(10) 1996 Bonus Pool Plan of Cayenne 10.21(12) Amendment No. 1 to Employment Agreement dated as of August 4, 1993 by and between Cayenne and Peter J. Boni 10.22(12) Amended and Restated Revolving Credit Agreement dated as of June 6, 1996 by and between Cayenne and Silicon Valley Bank 10.23 1997 Bonus Plan of Cayenne 10.24(13) Amended 1996 Incentive and Nonqualified Stock Option Plan 21.1 List of Subsidiaries of Cayenne 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Deloitte & Touche LLP 27.1 Financial Data Schedules - ----------------- -58- 59 (1) Incorporated by reference to the exhibits filed with Cayenne's Registration Statement on Form S-1, File No. 33-43401, as amended. (2) Incorporated by reference to the exhibits filed with Cayenne's Registration Statement on Form S-1, File No. 33-45841, as amended. (3) Incorporated by reference to the exhibits filed with Cayenne's Annual Report on Form 10-K for the year ended June 30, 1992, File No. 0-19682. (4) Incorporated by reference to the exhibit filed with Cayenne's Current Report on Form 8-K dated November 16, 1993, as amended. (5) Incorporated by reference to Cayenne's Registration Statement on Form S-4, File No. 33-62650, as amended. (6) Incorporated by reference to the exhibits filed with Cayenne's Quarterly Report on Form 10-Q dated May 13, 1994. (7) Incorporated by reference to the exhibits filed with Cayenne's Quarterly Report on Form 10-Q dated November 11, 1994. (8) Incorporated by reference to the exhibits filed with Cayenne's Quarterly Report on Form 10-Q dated February 13, 1995, as amended. (9) Incorporated by reference to the exhibits filed with Cayenne's Annual Report on Form 10-K, as amended, for the year ended June 30, 1995, File No. 0-19682 (10) Incorporated by reference to the exhibits filed with Cayenne's Quarterly Report on Form 10-Q dated February 13, 1996. (11) Incorporated by reference to exhibits filed with Cayenne's Registration Statement on Form S-4, File No. 333-6087, as amended. (12) Incorporated by reference to exhibits filed with Cayenne's Annual Report on Form 10-K dated September 27, 1996. (13) Incorporated by reference to Cayenne's Proxy Statement dated November 20, 1996. -59- 60 (b) REPORTS ON FORM 8-K: A Current Report on Form 8-K was filed by the Company on October 23, 1996. The Company reported that its Board of Directors approved a change in its fiscal year from June 30 to December 31. -60- 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Burlington, Commonwealth of Massachusetts on the 29 day of March, 1997. CAYENNE SOFTWARE, INC. By: /s/ Peter J. Boni --------------------------------- Peter J. Boni President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Peter J. Boni President, Chief Executive March 29, 1997 - -------------------------- Office and Director Peter J. Boni /s/ Frederick H. Phillips Vice President, Finance and March 29, 1997 - -------------------------- Administration, Treasurer Frederick H. Phillips and Chief Financial and Accounting Officer /s/ Charles W. Bachman Chairman of the Board March 23, 1997 - -------------------------- of Directors Charles W. Bachman * Director March , 1997 - -------------------------- John J. Alexander * Director March , 1997 - -------------------------- R. John Fletcher /s/ William H.D. Goddard Director March 21, 1997 - -------------------------- William H.D. Goddard /s/ Roland D. Pampel Director March 23, 1997 - -------------------------- Roland D. Pampel /s/ Allyn C. Woodward, Jr. Director March 29, 1997 - -------------------------- Allyn C. Woodward, Jr.
-61- EX-3.4 2 STATEMENT OF RIGHTS & PREFERENCES 1 EXHIBIT 3.4 STATEMENT OF RIGHTS AND PREFERENCES OF SERIES B CONVERTIBLE PREFERRED STOCK OF CAYENNE SOFTWARE, INC. Section 1. Designation, Amount and Par Value. The series of preferred stock shall be designated as the Series B Convertible Preferred Stock (the "Preferred Stock"), and the number of shares so designated shall be 150,000 (which shall not be subject to increase). Each share of Preferred Stock shall have a par value of $1.00 per share and a stated value of $20 per share (the "Stated Value"). Section 2. Dividends. (a) Holders of Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Company (the "Board of Directors") out of funds legally available therefor, and the Company shall pay, cumulative dividends at the rate per share (as a percentage of the Stated Value per share) equal to 5% per annum, payable, at the Company's option, in cash or shares of Common Stock, in arrears at such time as the Company shall determine, but in no event later than the Conversion Date (as hereinafter defined). Dividends on the Preferred Stock shall accrue daily commencing the Original Issue Date (as defined in Section 7), and shall be deemed to accrue on such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Company legally available for the payment of dividends. The party that holds the Preferred Stock on an applicable record date for any dividend payment will be entitled to receive such dividend payment and any other accrued and unpaid dividends which accrued prior to such dividend payment date, without regard to any sale or disposition of such Preferred Stock subsequent to the applicable record date but prior to the applicable dividend payment date. Except as otherwise provided herein, if at any time the Company pays less than the total amount of dividends then accrued on account of the Preferred Stock, such payment shall be distributed ratably among the holders of the Preferred Stock based upon the number of shares held by each holder. Payment of dividends on the Preferred Stock is further subject to the provisions of Section 5(c)(i). (b) Notwithstanding anything to the contrary contained herein, the Company may not issue shares of Common Stock in payment of dividends on the Preferred Stock if: (i) the number of shares of Common Stock at the time authorized, unissued and unreserved for all purposes, or held as treasury stock, is insufficient to issue such dividends to be paid in shares of Common Stock; (ii) the shares of Common Stock to be issued in respect of such dividends are not registered for resale pursuant to an effective registration statement that names the recipient of such dividend as a selling stockholder thereunder; E-2 2 (iii) the shares of Common Stock to be issued in respect of such dividends are not listed on the Nasdaq National Market, and any other exchange on which the Common Stock is then listed for trading; or (iv) the issuance of such shares would result in the recipient thereof beneficially owning more than 4.9% of the issued and outstanding shares of Common Stock. (c) So long as any Preferred Stock shall remain outstanding, neither the Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities (as defined in Section 7), nor shall the Company directly or indirectly pay or declare any dividend or make any distribution (other than a dividend or distribution described in Section 5) upon, nor shall any distribution be made in respect of, any Junior Securities, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities unless all dividends on the Preferred Stock for all past dividend periods shall have been paid. Section 3. Voting Rights. Except as otherwise provided herein and as otherwise required by law, each holder of Preferred Stock shall be entitled to vote on all matters submitted to the shareholders of the Corporation for their consideration and shall be entitled to cast that number of votes equal to the largest number of whole shares of Common Stock into which such holder's shares of Preferred Stock could be converted, pursuant to the provisions of Section 5 hereof, at the record date for the determination of shareholders entitled to vote on such matter. Except as otherwise required by law or expressly provided herein, the holders of shares of Preferred Stock, Series A Preferred Stock and Common Stock shall vote together as a single class on all matters submitted to the shareholders of the Corporation for their consideration. So long as any shares of Preferred Stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority of the shares of the Preferred Stock then outstanding, (a) alter or change adversely the powers, preferences or rights given to the Preferred Stock or (b) authorize or create any class of stock ranking as to dividends or distribution of assets upon a Liquidation (as defined in Section 4) senior to, prior to or pari passu with the Preferred Stock. Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a "Liquidation"), the holders of Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value plus all accrued but unpaid dividends per share, whether declared or not, before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Company shall be insufficient to pay in full such amounts, then the entire assets to be distributed shall be distributed among the holders of Preferred Stock ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. A sale, conveyance or disposition of all or substantially all of the assets of the Company or the effectuation by the Company of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or a consolidation or merger of the Company with or into any other company or E-3 3 companies shall not be treated as a Liquidation, but instead shall be subject to the provisions of Section 5. The Company shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each record holder of Preferred Stock. Section 5. Conversion. (a) (i) Each share of Preferred Stock shall be convertible into shares of Common Stock (subject to reduction pursuant to Section 5(a)(iv)) at the Conversion Ratio (as defined in Section 7) at the option of the holder in whole or in part at any time after the Original Issue Date. The holder shall effect conversions by surrendering the certificate or certificates representing the shares of Preferred Stock to be converted to the Company, together with the form of conversion notice attached hereto as Exhibit A (the "Holder Conversion Notice"). Each Holder Conversion Notice shall specify the number of shares of Preferred Stock to be converted and the date on which such conversion is to be effected, which date may not be prior to the date the holder delivers such Holder Conversion Notice by facsimile (the "Holder Conversion Date"). If no Holder Conversion Date is specified in a Holder Conversion Notice, the Holder Conversion Date shall be the date that the Holder Conversion Notice is deemed delivered pursuant to Section 5(h). Subject to Sections 5(b) and 5(a)(iv) and, as to the original holder (or its designee), subject to Section 4.13 of the Purchase Agreement (as defined in Section 7), each Holder Conversion Notice, once given, shall be irrevocable. If the holder is converting less than all shares of Preferred Stock represented by the certificate or certificates tendered by the holder with the Holder Conversion Notice, the Company shall promptly deliver to such holder a certificate for such number of shares as have not been converted. (ii) Subject to the conditions set forth in this Section 5(a)(ii), all outstanding and unconverted shares of Preferred Stock may be converted, at the option of the Company, into shares of Common Stock at the Conversion Ratio (subject to reduction pursuant to Section 5(a)(iv)) on or after the second anniversary of the date on which the Underlying Shares Registration Statement (defined in Section 7) has been declared effective by the Securities and Exchange Commission (the "Commission"), provided, that such Underlying Shares Registration Statement is effective on the Company Conversion Date (defined below) and that the Underlying Shares are then listed on the Nasdaq National Market, Nasdaq SmallCap Market and each other securities exchange or market on which the Common Stock is then listed. The conversion date for any conversion pursuant to this Section 5(a)(ii) (the "Company Conversion Date") shall be not earlier than 20 days nor later than 5 days prior to the date on which the Company shall deliver to the holders of such outstanding and unconverted shares of Preferred Stock a notice of such conversion in the form attached hereto as Exhibit B (the "Company Conversion Notice"). A Holder Conversion Date and a Company Conversion Date are sometimes collectively referred to herein as the "Conversion Date" and a Holder Conversion Notice and a Company Conversion Notice are sometimes collectively referred to as a "Conversion Notice." Any conversion pursuant to this Section 5(a)(ii) shall be subject to Section 5(b) with respect to consequences of the Company's failure to deliver shares of Common Stock in respect of a conversion under this Section, to Section 5(a)(iv), and, as to the original holder (or its designee), Section 4.13 of the Purchase Agreement. E-4 4 (iii) (A) If the Company has satisfied the conditions set forth in (B) below, then upon the first closing of a public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the primary offer and sale of Common Stock for the account of the Company to the public, which closing is at a price of at least $7.00 per share and which public offering results in net proceeds to the Company of at least $10,000,000, each share of Preferred Stock shall automatically be converted into the number of shares of Common Stock at the Conversion Ratio, provided, however, that for purposes of determining the Conversion Ratio, the Conversion Price shall be determined as of the date of the first closing of the public offering hereunder. (B) Conversion under Section 5(a)(iii)(A) shall only be permitted if (I) the Company shall have provided all of the holders of Preferred Stock with written notice of the filing of the registration statement contemplated under Section 5(a)(iii)(A); (II) such registration statement shall not have been declared effective (and the Company shall not have filed an acceleration request with the Commission requesting such effectiveness) for a period not less than sixty (60) days from the date the Company delivers the notice set forth in (I) above; and (III) at all times from the date the Company delivers the notice set forth in (I) above until the date of conversion hereunder, an Underlying Shares Registration Statement covering all Underlying Shares and Warrant Shares shall be effective. (iv) Certain Regulatory Approval. If on the Conversion Date applicable to any conversion under this Section 5(a), (A) the Common Stock is then listed for trading on the Nasdaq National Market and (B) the Conversion Price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion of all outstanding shares of Preferred Stock, together with any shares of Common Stock previously issued upon conversion of Preferred Stock, would exceed 20% of the number of shares of Common Stock outstanding on the Original Issue Date (the "Issuable Maximum"), and the Company has not previously obtained "Shareholder Approval" (as defined below), then the Company shall issue to the converting holder of the Preferred Stock an amount of shares of Common Stock equal to the Issuable Maximum and, with respect to any shares of Common Stock that would be issuable to such holder in respect of the Conversion Notice at issue in excess of the Issuable Maximum, (I) if the Conversion Price is equal to or less than $1.00 per share, the Company shall have the option or (II) if the Conversion Price is greater than $1.00 per share, the converting holder shall have the option to require the Company, to either (1) as promptly as possible, but in no event later than 60 days after such Conversion Date, convene a meeting of the holders of the Common Stock and obtain the Shareholder Approval or (2) redeem, from funds legally available therefor at the time of such redemption, the balance of the Preferred Stock subject to such Conversion Notice at a price per share equal to the product of (i) the average Per Share Market Value for the ten (10) Trading Days immediately preceding (1) the Conversion Date or (2) the date of payment in full by the Company of such redemption price, whichever is greater, and (ii) the Conversion Ratio calculated on (1) the Conversion Date or (2) calculated as if the Conversion Date (for purposes of determining the Conversion Price) were the date of payment by the Company of such redemption price, whichever date yields a lower Conversion Price denominator for the determination of the Conversion Ratio; E-5 5 provided, however, that if the Company shall elect to obtain Shareholder Approval under paragraph (1) above and the Company fails for any reason to obtain such Shareholder Approval within the time period set forth in (1) above, the Company shall be obligated to redeem the Preferred Stock not converted as a result of the provisions of this Section in accordance with the provisions of paragraph (2) above, and in such case the interest contemplated by the immediately succeeding sentence shall be deemed to accrue from the Conversion Date. If the Company shall elect to redeem shares of Preferred Stock pursuant to this Section and fails for any reason to pay the redemption price under (2) above within seven days after the Conversion Date, the Company will pay interest on such redemption price at a rate of 15% per annum to the converting holder of Preferred Stock, accruing from the Conversion Date until the redemption price plus any accrued interest thereon is paid in full. The entire redemption price, including interest thereon, shall be paid in cash. "Shareholder Approval" means the approval by a majority of the total votes cast on the proposal, in person or by proxy, at a meeting of the shareholders of the Company held in accordance with the Company's Articles of Organization and by-laws, of the issuance by the Company of shares of Common Stock exceeding the Issuable Maximum as a consequence of the conversion of Preferred Stock into Common Stock at a price less than the greater of the book or market value on the Original Issue Date as and to the extent required pursuant to Rule 4460(i) of the Nasdaq Stock Market (or any successor or replacement provision thereof). (b) Not later than three Trading Days after the Conversion Date, the Company will deliver to the holder (i) a certificate or certificates which shall be free of restrictive legends and trading restrictions (other than those then required by law and as set forth in the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of shares of Preferred Stock (subject to reduction pursuant to Section 5(a)(iv)) and (ii) one or more certificates representing the number of shares of Preferred Stock not converted; provided, however, that the Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon conversion of any shares of Preferred Stock until certificates evidencing such shares of Preferred Stock are either delivered for conversion to the Company or any transfer agent for the Preferred Stock or Common Stock, or the holder of such Preferred Stock notifies the Company that such certificates have been lost, stolen or destroyed and provides a bond (or other adequate security reasonably acceptable to the Company) reasonably satisfactory to the Company to indemnify the Company from any loss incurred by it in connection therewith. The Company shall, upon request of the holder of the Preferred Stock, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section. If such certificate or certificates are not delivered by the date required under this Section 5(b), the holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the shares of Preferred Stock tendered for conversion. If the Company fails to deliver to the holder such certificate or certificates pursuant to this Section, including for purposes hereof, any shares of Common Stock to be issued on the Conversion Date on account of accrued but unpaid dividends hereunder, by the 7th Trading Day after the Conversion Date, the Company shall pay to such holder, in cash, as liquidated damages and not as a penalty, $1,500 for each such Subsequent Trading Day after the Conversion Date until such certificates are delivered. If the Company fails to deliver to the E-6 6 holder such certificate or certificates pursuant to this Section prior to the 30th day after the Conversion Date, the Company shall, at the holder's option (i) redeem, from funds legally available therefor at the time of such redemption, such number of shares of Preferred Stock then held by such holder, as requested by such holder, and (ii) pay all accrued but unpaid dividends on account of the Preferred Stock for which the Company shall have failed to issue Common Stock certificates hereunder, in cash. The redemption price per share shall be equal to the product of (A) the average Per Share Market Value for the ten (10) Trading Days immediately preceding (1) the Conversion Date or (2) the date of payment in full by the Company of such redemption price, whichever is greater, and (ii) the Conversion Ratio calculated on (1) the Conversion Date or (2) calculated as if the Conversion Date (for purposes of determining the Conversion Price) were the date of payment by the Company of such redemption price, whichever date yields a lower Conversion Price denominator for the determination of the Conversion Ratio. If the holder has requested that the Company redeem shares of Preferred Stock pursuant to this Section and the Company fails for any reason to pay the redemption price under (2) above within seven days after such notice, the Company will pay interest on the redemption price at a rate of 15% per annum, in cash to such holder, accruing from such seventh day until the redemption price and any accrued interest thereon is paid in full. (c) (i) The conversion price for each share of Preferred Stock (the "Conversion Price") in effect on any Conversion Date shall be the lesser of (a) the average Per Share Market Value for the ten (10) Trading Days immediately preceding the Original Issue Date (the "Initial Conversion Price") and (b) the average of the five (5) lowest closing bid prices of the Common Stock for the thirty (30) consecutive Trading Day period immediately preceding the Conversion Date. (ii) If the Company, at any time while any shares of Preferred Stock are outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, (c) combine outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of shares of Common Stock any shares of capital stock of the Company, the Initial Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section 5(c)(ii) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification. (iii) If the Company, at any time while any shares of Preferred Stock are outstanding, shall issue rights or warrants to all holders of Common Stock entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Per Share Market Value of Common Stock at the record date mentioned below, the Initial Conversion Price shall be multiplied by a fraction, of which the denominator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number E-7 7 of additional shares of Common Stock offered for subscription or purchase, and of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding on the date of issuance of such rights or warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Per Share Market Value. Such adjustment shall be made whenever such rights or warrants are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive such rights or warrants. However, upon the expiration of any right or warrant to purchase Common Stock the issuance of which resulted in an adjustment in the Initial Conversion Price pursuant to this Section 5(c)(iii), if any such right or warrant shall expire and shall not have been exercised, the Initial Conversion Price shall immediately upon such expiration be recomputed and effective immediately upon such expiration be increased to the price which it would have been (but reflecting any other adjustments in the Initial Conversion Price made pursuant to the provisions of this Section 5 after the issuance of such rights or warrants) had the adjustment of the Initial Conversion Price made upon the issuance of such rights or warrants been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such rights or warrants actually exercised. (iv) If the Company, at any time while shares of Preferred Stock are outstanding, shall distribute to all holders of Common Stock (and not to holders of Preferred Stock) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in Sections 5(c)(ii) and (iii) above), then in each such case the Initial Conversion Price at which each share of Preferred Stock shall thereafter be convertible shall be determined by multiplying the Initial Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Per Share Market Value of Common Stock determined as of the record date mentioned above, and of which the numerator shall be such Per Share Market Value of the Common Stock on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by the Board of Directors in good faith; provided, however, that in the event of a distribution exceeding ten percent (10%) of the net assets of the Company, such fair market value shall be determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "Appraiser") selected in good faith by the holders of a majority in interest of the shares of Preferred Stock then outstanding; and provided, further, that the Company, after receipt of the determination by such Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the fair market value shall be equal to the average of the determinations by each such Appraiser. In either case the adjustments shall be described in a statement provided to the holders of Preferred Stock of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above. E-8 8 (v) All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (vi) Whenever the Initial Conversion Price is adjusted pursuant to Section 5(c)(ii),(iii) or (iv), the Company shall promptly mail to each holder of Preferred Stock, a notice setting forth the Initial Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. (vii) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person pursuant to which the Company will not be the surviving entity, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, the holders of the Preferred Stock then outstanding shall have the right thereafter to, at their option, (A) convert such shares only into the shares of stock and other securities, cash and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the holders of the Preferred Stock shall be entitled upon such event to receive such amount of securities, cash or property as the shares of the Common Stock of the Company into which such shares of Preferred Stock could have been converted immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange would have been entitled. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the holder of Preferred Stock the right to receive the securities, cash or property set forth in this Section 5(c)(vii) upon any conversion following such consolidation, merger, sale, transfer or share exchange. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. (viii) If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock; or B. the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or C. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; or D. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any E-9 9 compulsory share of exchange whereby the Common Stock is converted into other securities, cash or property; or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Preferred Stock, and shall cause to be mailed to the holders of Preferred Stock at their last addresses as they shall appear upon the stock books of the Company, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, however, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert shares of Preferred Stock during the 30-day period commencing the date of such notice to the effective date of the event triggering such notice. (d) The Company covenants that it will at all times reserve and keep available out of its authorized and unissued Common Stock solely for the purpose of issuance upon conversion of Preferred Stock and payment of dividends on Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the holders of Preferred Stock, such number of shares of Common Stock as shall be issuable (taking into account the adjustments and restrictions of Section 5(c)) upon the conversion of all outstanding shares of Preferred Stock and payment of dividends hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and freely tradeable. (e) Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the Per Share Market Value at such time. If the Company elects not, or is unable, to make such a cash payment, the holder of a share of Preferred Stock shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock. (f) The issuance of certificates for shares of Common Stock on conversion of Preferred Stock shall be made without charge to the holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that E-10 10 the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the holder of such shares of Preferred Stock so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. (g) Shares of Preferred Stock converted into Common Stock shall be canceled and shall have the status of authorized but unissued shares of undesignated stock. (h) Any and all notices or other communications or deliveries to be provided by the holders of the Preferred Stock hereunder, including, without limitation, any Conversion Notice, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to the attention of the Chief Financial Officer of the Company at the facsimile telephone number or address of the principal place of business of the Company as set forth in the Purchase Agreement. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by certified or registered mail, postage prepaid, addressed to each holder of Preferred Stock at the facsimile telephone number or address of such holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 4:30 p.m. (Eastern Time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 4:30 p.m. (Eastern Time) on any date and earlier than 11:59 p.m. (Eastern Time) on such date, (iii) four days after deposit in the United States mails, (iv) the Business Day following the date of mailing, if send by nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given. Section 6. Redemptions. (a) The Company shall have the right, exercisable at any time upon 30 Trading Days notice to the holders of the Preferred Stock given at any time on or after the third anniversary after the Original Issue Date, to redeem, from funds legally available therefor at the time of such redemption, all or any portion of the shares of Preferred Stock which have not previously been converted or redeemed, at a price per share equal to the product of (i) the average Per Share Market Value for the ten (10) Trading Days immediately preceding (1) the date of the redemption notice referenced above or (2) the date of payment in full by the Company of the redemption price hereunder, whichever is greater, and (ii) the Conversion Ratio calculated as if the Conversion Date (for purposes of determining the Conversion Price) were (1) the date of such redemption notice or (2) the date of payment by the Company of such redemption price, whichever date yields a lower E-11 11 Conversion Price denominator for the determination of the Conversion Ratio. The entire redemption price shall be paid in cash. Holders of Preferred Stock may convert any shares of Preferred Stock, including shares subject to a redemption notice given under this Section, during the period from the date of such redemption notice through the 30th Trading Day thereafter. (b) The Company shall have the right, exercisable at any time upon 30 Trading Days notice to the Purchaser, given at any time after the Company has announced publicly a merger or consolidation in which the Company will not be the surviving entity, to redeem, from funds legally available therefor at the time of such redemption, all (but not less than all) of the then outstanding and unconverted shares of Preferred Stock. The redemption price for shares of Preferred Stock to be redeemed pursuant to this Section will be determined in accordance with Section 6(a) above and the payment of such redemption price shall be subject to the provisions of Section 6(c) below. Holders of Preferred Stock may convert any shares of Preferred Stock, including shares subject to a redemption notice given under this Section, during the period from the date of such redemption notice through the 30th Trading Day thereafter. (c) If any portion of the redemption price under Section 6(a) or (b) shall not be paid by the Company within 7 calendar days after the date due under such Sections, such redemption price shall be increased by 15% per annum until paid (which amount shall be paid as liquidated damages and not as a penalty). In addition, if any portion of such redemption price remains unpaid for more than 7 calendar days after the date due, the holder of the Preferred Stock subject to such redemption may elect, by written notice to the Company given within 45 days after the date due, to either (i) demand conversion in accordance with the formula and the time frame therefor set forth in Section 5 of all of the shares of Preferred Stock for which such redemption price, plus accrued liquidated damages thereof, has not been paid in full (the "Unpaid Redemption Shares"), in which event the Per Share Market Value for such shares shall be the lower of the Per Share Market Value calculated on the date such redemption price was originally due and the Per Share Market Value as of the holder's written demand for conversion, or (ii) invalidate ab initio such redemption, notwithstanding anything herein contained to the contrary. If the holder elects option (i) above, the Company shall within five Trading Days of its receipt of such election deliver to the holder the shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares subject to such holder conversion demand and otherwise perform its obligations hereunder with respect thereto; or, if the Holder elects option (ii) above, the Company shall promptly, and in any event not later than five Trading Days from receipt of holder's notice of such election, return to the holder all of the Unpaid Redemption Shares. If, upon a holder election under option (i) above, the Company fails to deliver the shares of Common Stock issuable upon conversion of the Unpaid Redemption Shares within the time period set forth in this Section, the Company shall pay to the holder in cash, as liquidated damages and not as a penalty, $1,500 per day until the Company delivers such Common Stock to the holder. Section 7. Definitions. For the purposes hereof, the following terms shall have the following meanings: E-12 12 "Business Day" means any day of the year on which commercial banks are not required or authorized to be closed in New York, New York. "Common Stock" means shares now or hereafter authorized of the class of Common Stock, par value $0.01 per share, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed. "Conversion Ratio" means, at any time, a fraction, of which the numerator is Stated Value plus accrued but unpaid dividends (including any accrued but unpaid interest thereon), and of which the denominator is the Conversion Price at such time. "Junior Securities" means the Common Stock and all other equity securities of the Company, except the Series A Convertible Preferred Stock. "Original Issue Date" shall mean the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock. "Per Share Market Value" means on any particular date (a) the closing bid price per share of the Common Stock on such date on the Nasdaq National Market or other stock exchange on which the Common Stock has been listed or if there is no such price on such date, then the closing bid price on such exchange on the date nearest preceding such date, or (b) if the Common Stock is not listed on the Nasdaq National Market or any stock exchange, the closing bid price for a share of Common Stock in the over-the-counter market, as reported by the Nasdaq Stock Market at the close of business on such date, or (c) if the Common Stock is not quoted on the Nasdaq Stock Market, the closing bid price for a share of Common Stock in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), or (d) if the Common Stock is not reported by the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting prices), then the average of the "Pink Sheet" quotes for the relevant conversion period, as determined in good faith by the holder, or (e) if the Common Stock is not publicly traded the fair market value of a share of Common Stock as determined by an Appraiser selected in good faith by the holders of a majority in interest of the shares of the Preferred Stock; provided, however, that the Company, after receipt of the determination by such Appraiser, shall have the right to select an additional Appraiser, in which case, the fair market value shall be equal to the average of the determinations by each such Appraiser. "Person" means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency. "Purchase Agreement" means the Convertible Preferred Stock Purchase Agreement, dated as of the Original Issue Date, between the Company and the original holder of the Preferred Stock. E-13 13 "Registration Rights Agreement" means the Registration Rights Agreement, dated the Original Issue Date, by and between the Company and the original holder of Preferred Stock. "Trading Day" means (a) a day on which the Common Stock is traded on the Nasdaq National Market or principal national securities exchange or market on which the Common Stock has been listed, or (b) if the Common Stock is not listed on the Nasdaq National Market or any stock exchange or market, a day on which the Common Stock is traded in the over-the-counter market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices). "Underlying Shares" means the number of shares of Common Stock into which the Shares are convertible in accordance with the terms hereof and the Purchase Agreement. "Underlying Shares Registration Statement" means the registration statement filed by the Company, pursuant to the Registration Rights Agreement, covering the Underlying Shares and the Warrant Shares. "Warrant Shares" means the number of shares of Common Stock issuable upon the exercise in full of the Warrants. "Warrants" means the Common Stock purchase warrants issued by the Company to Southbrook International Investments, Ltd. ("Southbrook"), who intends to assign a portion of such Warrants to Brown Simpson, LLC ("Brown Simpson") simultaneously with the closing of the purchase of Preferred Stock under the Purchase Agreement, pursuant to which the holders of the Warrants shall, collectively, have the right to acquire an aggregate of 350,000 shares of Common Stock at the exercise price per share set forth in each of the Warrants. Section 8. Waiver. Any right or power of the holders of Preferred Stock may be waived with respect to any transaction by an instrument in writing signed by the holders of not less than two-thirds (2/3) of the then-outstanding shares of Preferred Stock (excluding any shares then held by the Company or any subsidiary of the Company). [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] E-14 14 EXHIBIT A NOTICE OF CONVERSION AT THE ELECTION OF HOLDER (To be Executed by the Registered Holder in order to Convert shares of Preferred Stock) The undersigned hereby irrevocably elects to convert the number of shares of Series B Convertible Preferred Stock indicated below, into shares of Common Stock, par value $[ ] per share (the "Common Stock"), of Cayenne Software, Inc. (the "Company") according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Conversion calculations: Date to Effect Conversion Number of shares of Preferred Stock to be Converted Number of shares of Common Stock to be Issued Applicable Conversion Price Signature Name: Address: The Company undertakes to promptly upon its receipt of this conversion notice (and, in any case prior to the time it effects the conversion requested hereby), notify the converting holder by facsimile of the number of shares of Common Stock outstanding on such date and the number of shares of Common Stock which would be issuable to the holder if the conversion requested in this conversion notice were effected in full, whereupon, the holder hereby consents to the revocation of the conversion requested hereby to the extent that it determines that such conversion would result in it owning in excess of 4.9% of the outstanding shares of Common Stock on such date, and the Company shall issue to the holder one or more certificates representing shares of Preferred Stock which have not been converted as a result of this provision. E-15 15 EXHIBIT B NOTICE OF CONVERSION AT THE ELECTION OF THE COMPANY The undersigned in the name and on behalf of Cayenne Software, Inc. (the "Company") hereby notifies the addressee hereof that the Company hereby elects to exercise its right to convert [ ] shares of its Series B Convertible Preferred Stock (the "Preferred Stock") held by the Holder into shares of Common Stock, par value $[ ] per share (the "Common Stock") of the Company according to the terms hereof, as of the date written below. No fee will be charged to the Holder for any conversion hereunder, except for such transfer taxes, if any which may be incurred by the Company if shares are to be issued in the name of a person other than the person to whom this notice is addressed. Conversion calculations: Date to effect Conversion Number of shares of Preferred Stock to be Converted Number of shares of Common Stock to be Issued Applicable Conversion Price Name of Holder: Address of Holder: E-16 EX-4.5 3 CONV. PREFERRED STOCK PURCHASE AGREEMENT 1 EXHIBIT 4.5 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT Between CAYENNE SOFTWARE, INC. and SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD. ------------------------------ Dated as of January 2, 1997 ------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- E-17 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I CERTAIN DEFINITIONS..................................................1 Section 1.1. Certain Definitions.........................................1 ARTICLE II PURCHASE OF SHARES...................................................3 Section 2.1. Purchase of Shares; Closing.................................3 ARTICLE III REPRESENTATIONS AND WARRANTIES.......................................4 Section 3.1. Representations and Warranties of the Company...............4 Section 3.2. Representations and Warranties of the Purchaser...................................................9 ARTICLE IV OTHER AGREEMENTS OF THE PARTIES.................................... 11 Section 4.1. Transfer Restrictions..................................... 11 Section 4.2. Stop Transfer Instruction................................. 12 Section 4.3. Furnishing of Information................................. 12 Section 4.4. Notice of Certain Events.................................. 13 Section 4.5. Copies and Use of Disclosure Materials.................... 13 Section 4.6. Modification to Disclosure Materials...................... 13 Section 4.7. Blue Sky Laws............................................. 14 Section 4.8. Integration............................................... 14 Section 4.9. Furnishing of Rule 144A Materials......................... 14 Section 4.10. Solicitation Materials.................................... 14 Section 4.11. Subsequent Financial Statements........................... 14 Section 4.12. Right of First Refusal; Certain Corporate Actions......................................... 15 Section 4.13. Purchaser Ownership of Common Stock....................... 16 Section 4.14. Availability of Common Stock.............................. 16 Section 4.15. Listing of Underlying Shares and Warrant Shares.................................................... 16 Section 4.16. Purchaser's Rights if Trading in Common Stock is Suspended or Delisted............................ 17 Section 4.17. No Violation of Applicable Law............................ 17 Section 4.18. Redemption Restrictions................................... 17 Section 4.19. Notice of Breaches........................................ 18 Section 4.20. Conversion Procedures..................................... 18 Section 4.21. The Warrants.............................................. 18 ARTICLE V CONDITIONS PRECEDENT TO CLOSING.................................... 19 Section 5.1. Conditions Precedent to Obligations of the Purchaser............................................. 19 Section 5.2. Conditions Precedent to Obligations of the Company............................................... 21
E-18 3 ARTICLE VI TERMINATION........................................................ 22 Section 6.1. Termination by Mutual Consent............................. 22 Section 6.2. Termination by the Company or the Purchaser................................................. 22 Section 6.3. Termination by the Company................................ 22 Section 6.4. Termination by the Purchaser.............................. 23 ARTICLE VII MISCELLANEOUS...................................................... 23 Section 7.1. Fees and Expenses......................................... 23 Section 7.2. Entire Agreement; Amendments.............................. 24 Section 7.3. Notices................................................... 24 Section 7.4. Amendments; Waivers....................................... 25 Section 7.5. Headings.................................................. 26 Section 7.6. Successors and Assigns.................................... 26 Section 7.7. No Third Party Beneficiaries.............................. 26 Section 7.8. Governing Law; Arbitration................................ 26 Section 7.9. Survival.................................................. 27 Section 7.10. Counterpart Signatures.................................... 27 Section 7.11. Publicity................................................. 27 Section 7.12. Severability.............................................. 27 Section 7.13. Remedies.................................................. 27 Exhibit A Form of Statement of Rights and Preferences Exhibit B Form of Registration Rights Agreement Exhibit C Form of Opinion of Foley, Hoag & Eliot, counsel for the Company Exhibit D Conversion Procedures Exhibit E(1) Form of Southbrook Warrants Exhibit E(2) Form of Brown Simpson Warrants Schedule 3.1(a) Subsidiaries Schedule 3.1(c) Capitalization Schedule 3.1(f) Required Consents and Approvals
E-19 4 CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT, dated as of January 2, 1997 (this "AGREEMENT"), by and among Cayenne Software, Inc., a Massachusetts corporation (the "COMPANY"), and Southbrook International Investments, Ltd., a corporation organized and existing under the laws of the British Virgin Islands (the "PURCHASER"). WHEREAS, the Company desires to issue and sell to the Purchaser and the Purchaser desires to acquire shares of the Company's Series B Convertible Preferred Stock, par value $1.00 per share (the "PREFERRED STOCK"). IN CONSIDERATION of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I CERTAIN DEFINITIONS ------------------- Section 1.1. CERTAIN DEFINITIONS. As used in this Agreement and unless the context requires a different meaning, the following terms have the meanings indicated: "AFFILIATE" means, with respect to any Person, any Person that, directly or indirectly, controls, is controlled by or is under common control with such Person. For the purposes of this definition, "CONTROL" (including, with correlative meanings, the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "BROWN SIMPSON WARRANTS" shall have the meaning set forth in Section 4.21. "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of New York are authorized or required by law or other government actions to close. "CLOSING" shall have the meaning set forth in Section 2.1(b). E-20 5 "CLOSING DATE" shall have the meaning set forth in Section 2.1(b). "CODE" means the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder as in effect on the date hereof. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Company's common stock, par value $0.01 per share. "DISCLOSURE MATERIALS" means, collectively, the SEC Documents, the disclosure package delivered to the Purchaser in connection with the offering by the Company of the Shares and the Schedules to this Agreement furnished by or on behalf of the Company pursuant to Section 3.1. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, encumbrance, right of first refusal, charge or security interest of any kind in or on such asset or the revenues or income thereon or therefrom. "MATERIAL ADVERSE EFFECT" shall have the meaning set forth in Section 3.1(a). "ORIGINAL ISSUE DATE" shall mean the first issuance of any Shares, regardless of the number of transfers of any particular Share and regardless of the number of certificates which may be issued to evidence any particular Share. "PERSON" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "PREFERRED STOCK" shall have the meaning set forth in the recitals hereto. "PURCHASE PRICE" shall have the meaning set forth in Section 2.1(a). E-21 6 "REGISTRATION RIGHTS AGREEMENT" means the registration rights agreement, dated as of the date hereof, by and between the Company and the Purchaser, substantially in the form of EXHIBIT B, as the same may be amended, supplemented or otherwise modified in accordance with its terms. "REQUIRED APPROVALS" shall have the meaning set forth in Section 3.1(f). "SEC DOCUMENTS" shall have the meaning set forth in Section 3.1(l). "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means the shares of Preferred Stock purchased by the Purchaser pursuant to this Agreement. "SOUTHBROOK WARRANTS" shall have the meaning set forth in Section 4.21. "STATED VALUE" shall have the meaning set forth in Section 2.1(a). "STATEMENT OF RIGHTS AND PREFERENCES" shall have the meaning set forth in Section 2.1(a). "SUBSEQUENT FINANCING NOTICE" shall have the meaning set forth in Section 4.11(a). "SUBSEQUENT SALE" shall have the meaning set forth in Section 4.11(a). "SUBSIDIARIES" shall have the meaning set forth in Section 3.1(a). "TRADING DAY" shall have the meaning set forth in the Statement of Rights and Preferences. "UNDERLYING SHARES" means the shares of Common Stock into which the Shares are convertible in accordance with the terms hereof and the Statement of Rights and Preferences. "UNDERLYING SHARES REGISTRATION STATEMENT" shall have the meaning set forth in Section 3.1(f). E-22 7 "WARRANTS" means, collectively, the Southbrook Warrants and the Brown Simpson Warrants. ARTICLE II. PURCHASE OF SHARES ------------------ Section 2.1. Purchase of Shares; Closing. --------------------------- (a) Subject to the terms and conditions herein set forth, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company on the Closing Date 150,000 Shares, which shall have the respective rights, preferences and privileges set forth in EXHIBIT A (the "STATEMENT OF RIGHTS AND PREFERENCES"), at a price per Share of $20 (the "STATED VALUE"). The "PURCHASE PRICE" for the Shares shall equal $3,000,000. (b) The closing of the purchase and sale of the Shares (the "CLOSING") shall take place at the offices of Robinson Silverman Pearce Aronsohn & Berman LLP ("RSPAB"), 1290 Avenue of the Americas, New York, New York 10104, immediately following the execution hereof, or at such other time and/or place as the Purchaser and the Company may agree, but not until the last of the conditions listed in ARTICLE V is satisfied or waived by the appropriate party. The date of the Closing is hereinafter referred to as the "CLOSING DATE." (c) At the Closing, (i) the Company shall deliver (1) to the Purchaser (A) one or more stock certificates representing the Shares purchased hereunder, registered in the name of the Purchaser (B) the Southbrook Warrants and (C) all documents, instruments and writings required to have been delivered at or prior to Closing by the Company pursuant to this Agreement and (2) to Brown Simpson, LLC ("BROWN SIMPSON"), the Brown Simpson Warrants, and (ii) the Purchaser shall deliver to the Company (A) the Purchase Price, less the fees and disbursements of the Purchaser's counsel contemplated in Section 7.1, in United States dollars in immediately available funds by wire transfer to an account designated in writing by the Company prior to the Closing, and (B) all documents, instruments and writings required to have been delivered at or prior to Closing by the Purchaser pursuant to this Agreement. E-23 8 ARTICLE III. REPRESENTATIONS AND WARRANTIES ------------------------------ Section 3.1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchaser as follows: (a) ORGANIZATION AND QUALIFICATION. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of The Commonwealth of Massachusetts, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than as set forth in the SEC Documents or in SCHEDULE 3.1(a) (collectively, the "SUBSIDIARIES"). Each of the Subsidiaries is a corporation, duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with the full corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualifica tion necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have, individually or in the aggregate, have a material adverse effect on the results of operations, assets, prospects, or financial condition of the Company and the Subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT"). (b) AUTHORIZATION; ENFORCEMENT. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated hereby, by the Warrants (as defined below), by the Statement of Rights and Preferences and by the Registration Rights Agreement, Statement of Rights and Preferences and otherwise to carry out its obligations hereunder and thereunder. This Agreement, the Registration Rights Agreement and the Warrants are collectively referred to as the "TRANSACTION DOCUMENTS". The execution and delivery of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company. Each of the Transaction Documents has been duly executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may E-24 9 be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective articles of organization, bylaws or other charter documents. (c) CAPITALIZATION. The authorized, issued and outstanding capital stock of the Company and each of the Subsidiaries is set forth in SCHEDULE 3.1(c). No shares of Common Stock are entitled to preemptive or similar rights. Except as specifically disclosed in SCHEDULE 3.1(c), there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or, except as a result of the purchase and sale of the Shares and Warrants hereunder, securities, rights or obligations convertible into or exchangeable for, or giving any person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. (d) ISSUANCE OF SHARES, WARRANTS, WARRANT SHARES AND UNDERLYING SHARES. The Shares and the Warrants are duly authorized and, when paid for in accordance with the terms hereof, shall be validly issued, fully paid and nonassessable, free and clear of any Liens. The Company has and at all times while the Shares and any Warrants are outstanding will maintain an adequate reserve of shares of Common Stock to enable it to perform its conversion and other obligations under this Agreement, the Warrants and the Statement of Rights and Preferences, which reserve shall be no less than the sum of (i) twice the number of shares of Common Stock issuable hereunder and pursuant to the terms of the Statement of Rights and Preferences, assuming a conversion in full of all of the Shares on the Original Issue Date and (ii) the number of shares of Common Stock issuable upon the exercise in full of the Warrants (the "WARRANT SHARES"). When issued in accordance with the terms hereof and the Statement of Rights and Preferences, the Underlying Shares and the Warrant Shares will be duly authorized, validly issued, fully paid and nonassessable, free and clear of all Liens. (e) NO CONFLICTS. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated E-25 10 thereby do not and will not (i) conflict with or violate any provision of its articles of organization or bylaws (each as amended through the date hereof) or (ii) subject to obtaining the consents specified in Section 3.1(f), conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or (iii) to the knowledge of the Company result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or govern mental authority to which the Company is subject (including Federal and State securities laws and regulations), or by which any property or asset of the Company is bound or affected, except in the case of each of clauses (ii) and (iii), such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of the Transaction Documents, (y) have a Material Adverse Effect or (z) adversely impair the Company's ability to perform fully on a timely basis its obligations under the Transaction Documents. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, the violation of which would have a Material Adverse Effect. (f) CONSENTS AND APPROVALS. Except as specifically set forth in SCHEDULE 3.1(f), neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, or make any filing or registration with, any court or other federal, state, local or other govern mental authority or other Person in connection with the execu tion, delivery and performance by the Company of the Transaction Documents, except for (i) the filing of the Statement of Rights and Preferences with respect to the Shares with the Secretary of State of The Commonwealth of Massachusetts, which filing shall be effected prior to the Closing Date, (ii) the filing of the registration statement covering the Underlying Shares and the Warrant Shares (the "UNDERLYING SHARES REGISTRATION STATEMENT") with the Commission and the making of the applicable blue-sky filings under state securities laws, each as contemplated by the Registration Rights Agreement and (iii) other than, in all other cases, where the failure to obtain such consent, waiver, authorization or order, or to give or make such notice or filing, could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of the Transaction Documents, (y) have a Material Adverse Effect or (z) adversely E-26 11 impair the Company's ability to perform fully on a timely basis its obligations under the Transaction Documents (together with the consents, waivers, authorizations, orders, notices and filings referred to in SCHEDULE 3.1(f), the "REQUIRED APPROVALS"). (g) LITIGATION; PROCEEDINGS. There is no action, suit, notice of violation, proceeding or investigation pending or, to the best knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries or any of their respective properties before or by any court, governmental or administrative agency or regulatory authority (Federal, state, county, local or foreign) which (i) relates to or challenges the legality, validity or enforceability of the Transaction Documents or the Shares (ii) could, individually or in the aggregate, have a Material Adverse Effect or (iii) could, individually or in the aggregate, adversely impair the ability of the Company to perform fully on a timely basis its obligations under the Transaction Documents. (h) NO DEFAULT OR VIOLATION. Neither the Company nor any Subsidiary (i) is in default under or in violation of any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, except such conflicts or defaults as do not have a Material Adverse Effect, (ii) is in violation of any order of any court, arbitrator or governmental body, except for such violations as do not have a Material Adverse Effect, or (iii) is in violation of any statute, rule or regulation of any gover nmental authority which could (individually or in the aggregate) (x) adversely affect the legality, validity or enforceability of the Transaction Documents, (y) have a Material Adverse Effect or (z) adversely impair the Company's ability or obligation to perform fully on a timely basis its obligations under the Transaction Documents. (i) CERTAIN FEES. No fees or commission will be payable by the Company to any broker, finder, investment banker or bank with respect to the consummation of the transactions contemplated hereby. (j) DISCLOSURE MATERIALS. The Disclosure Materials do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. E-27 12 (k) PRIVATE OFFERING. Neither the Company nor any Person acting on its behalf has taken or will take any action (including, without limitation, any offering of any securities of the Company under circumstances which would require the integration of such offering with the offering of the Shares, the Underlying Shares or the Warrant Shares under the Securities Act) which might subject the offering, issuance or sale of the Shares, the Underlying Shares or the Warrant Shares to the registration requirements of Section 5 of the Securities Act. (l) SEC DOCUMENTS. The Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the three years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials being collectively referred to herein as the "SEC DOCUMENTS") on a timely basis, or has received a valid extension of such time of filing. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved, except as may be otherwise indicated in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal year-end audit adjustments. Since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q, there has been no event, occurrence or development that has had a Material Adverse Effect which is not specifically disclosed in any of the Disclosure Materials. (m) SENIORITY. No class of equity securities of the Company is senior to the Shares in right of payment, whether upon liquidation, dissolution or otherwise. E-28 13 (n) EXCLUSIVITY. The Company shall not issue and sell the Preferred Stock to any Person other than the Purchaser. (o) FORM S-3 ELIGIBILITY. The Company is, and at the Closing Date will be, eligible to register securities for resale with the Commission under Form S-3 promulgated under the Securities Act. (p) INVESTMENT COMPANY. The Company is not and is not an Affiliate of an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Section 3.2. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company as follows: (a) ORGANIZATION; AUTHORITY. The Purchaser is a corporation duly and validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Purchaser has the requisite power and authority to enter into and to consummate the transactions contemplated hereby and by the other Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The purchase of the Shares and the Warrants by the Purchaser hereunder has been duly authorized by all necessary action on the part of the Purchaser. Each of the Transaction Documents has been duly executed and delivered by the Purchaser or on its behalf and constitutes the valid and legally binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity. (b) INVESTMENT INTENT. The Purchaser is acquiring the Shares, the Warrants, the Warrant Shares and the Underlying Shares for its own account for investment purposes only and not with a view to or for distributing or reselling such Shares, Warrants, Warrant Shares or Underlying Shares or any part thereof or interest therein, without prejudice, however, to the Purchaser's right, subject to the provisions of the Transaction Documents, at all times to sell or otherwise dispose of all or any part of such Shares, Warrants, Warrant Shares or Underlying Shares under an effective registration statement under the Securities Act and in compliance with applicable State securities laws or under an exemption from such registration. E-29 14 (c) PURCHASER STATUS. The Purchaser was not formed for the purpose of acquiring the Shares and the Warrants. At the time the Purchaser was offered the Shares and the Warrants, it was, and at the date hereof, it is, and at the Closing Date, it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act. (d) EXPERIENCE OF PURCHASER. The Purchaser has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Shares, the Warrants, the Underlying Shares and the Warrant Shares, and has so evaluated the merits and risks of such investment. (e) ABILITY OF PURCHASER TO BEAR RISK OF INVESTMENT. The Purchaser is able to bear the economic risk of an investment in the Shares, the Warrants, the Underlying Shares and the Warrant Shares and is able to afford a complete loss of such investment. (f) PROHIBITED TRANSACTIONS. The Shares and the Warrants are not being acquired, directly or indirectly, with the assets of any "employee benefit plan", within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. (g) ACCESS TO INFORMATION. The Purchaser acknowledges receipt of the Disclosure Materials and further acknowledges that it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Shares and the Warrants and the merits and risks of investing in the Shares and the Warrants; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment in the Company; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense and that is necessary to make an informed investment decision with respect to the Shares and the Warrants and to verify the accuracy and completeness of the information contained in the Disclosure Materials. (h) RELIANCE. The Purchaser understands and acknowledges that (i) the Shares and the Warrants are being offered and sold, and the Underlying Shares and the Warrant E-30 15 Shares are being offered to it without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption depends in part on, and that the Company will rely upon the accuracy and truthfulness of, the foregoing representations and the Purchaser hereby consents to such reliance. The Company acknowledges and agrees that the Purchaser makes no representation or warranty with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2. ARTICLE IV. OTHER AGREEMENTS OF THE PARTIES ------------------------------- Section 4.1. TRANSFER RESTRICTIONS. If the Purchaser should decide to dispose of any of the Shares or any portion of the Warrants to be purchased by it hereunder (and upon conversion or exercise thereof, any Underlying Shares or Warrant Shares), the Purchaser understands and agrees that it may do so only (i) pursuant to an effective the registration statement under the Securities Act, (ii) pursuant to an available exemption from the registration requirements of the Securities Act, (iii) to the Company or (iv) pursuant to an available exemption from registration under the Securities Act. In connection with any transfer of any Shares, Warrants, Underlying Shares or Warrant Shares other than pursuant to an effective registration statement or to the Company, the Company may require that the transferor provide to the Company an opinion of counsel experienced in the area of United States securities laws selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such Shares, Warrants, Underlying Shares or Warrant Shares under the Securities Act or any state securities laws. The Purchaser agrees to the imprinting, so long as is required by applicable law, of the following legend on certificates representing the Shares, Warrants, Underlying Shares or Warrant Shares: NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION E-31 16 OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, (B) TO CAYENNE SOFTWARE, INC. OR (C) PURSUANT TO AN AVAILABLE EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. The legend set forth above shall be removed upon the conversion of Shares or exercise of Warrants represented by such certificates at any time after the Underlying Shares Registration Statement has been declared effective under the Securities Act or upon any resale of Underlying Shares or Warrant Shares pursuant to an effective registration statement under the Securities Act or sooner if, in the opinion of counsel to the Company experienced in the area of United States securities laws such legend is no longer required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The certificates representing the Shares, Warrants, Underlying Shares or Warrant Shares shall also bear any other legends required by applicable Federal or state securities laws, which legends may be removed when, in the opinion of counsel to the Company experienced in the applicable securities laws, such legends are no longer required under the applicable requirements of such securities laws. The Company agrees that it will provide the Purchaser, upon request, with a substitute stock certificate or certificates or warrant certificates, free from such legend at such time as such legend is no longer applicable. The Purchaser agrees that, in connection with any transfer of Shares, Warrants, Underlying Shares or Warrant Shares by it pursuant to an effective registration statement under the Securities Act, it will comply with all prospectus delivery requirements of the Securities Act. The Company makes no representation, warranty or agreement as to the availability of any exemption from registration under the Securities Act with respect to any resale of Shares, Warrants, Underlying Shares or Warrant Shares. Section 4.2. STOP TRANSFER INSTRUCTION. The Purchaser agrees that the Company shall be entitled to make a notation on its records and give instructions to any transfer agent of the Company in order to implement the restrictions on transfer set forth in Section 4.1 above. Section 4.3. FURNISHING OF INFORMATION. For so long as the Purchaser owns Shares, Warrants, Underlying Shares or Warrant Shares, the Company covenants to timely file (or obtain E-32 17 valid extensions in respect thereof) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act and to promptly furnish the Purchaser with true and complete copies of all such filings. If the Company is not at the time required to file reports pursuant to such sections, it will prepare and furnish to the Purchaser annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act in the time period that such filings would have been required to have been made under the Exchange Act. Section 4.4. NOTICE OF CERTAIN EVENTS. The Company shall (i) advise the Purchaser promptly after obtaining knowledge thereof, and, if requested by the Purchaser, confirm such advice in writing, of (A) the issuance by any state securities commission of any stop order suspending the qualification or exemption from qualification of the Shares, Warrant Shares or Underlying Shares or the Common Stock for offering or sale in any jurisdiction, or the initiation of any proceeding for such purpose by any state securities commission or other regulatory authority, or (B) any event that makes any statement of a material fact made in the Disclosure Materials untrue or that requires the making of any additions to or changes in the Disclosure Materials in order to make the statements therein, in the light of the circumstances under which they are made, not misleading, (ii) use its best efforts to prevent the issuance of any stop order or order suspending the qualification or exemption from qualification of the Shares, Warrant Shares or Underlying Shares or the Common Stock under any state securities or Blue Sky laws, and (iii) if at any time any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Shares, Warrant Shares or Underlying Shares or the Common Stock under any such laws, use its best efforts to obtain the withdrawal or lifting of such order at the earliest possible time. Section 4.5. COPIES AND USE OF DISCLOSURE MATERIALS. The Company shall furnish the Purchaser, without charge, as many copies of the Disclosure Materials, and any amendments or supplements thereto, as the Purchaser may reasonably request. The Company consents to the use of the Disclosure Materials, and any amendments and supplements thereto, by the Purchaser in connection with resales of the Shares, the Warrant Shares or the E-33 18 Underlying Shares other than pursuant to an effective registration statement. Section 4.6. MODIFICATION TO DISCLOSURE MATERIALS. If any event shall occur as a result of which, in the reasonable judgment of the Company, it becomes necessary or advisable to amend or supplement the Disclosure Materials in order to make the statements therein, in the light of the circumstances at the time the Disclosure Materials were delivered to the Purchaser, not misleading, or if it is necessary to amend or supplement the Disclosure Materials to comply with applicable law, the Company shall promptly prepare an appropriate amendment or supplement to the Disclosure Materials so that (i) as so amended or supplemented the Disclosure Materials will not include an untrue statement of material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to Purchaser, not misleading and (ii) the Disclosure Materials will comply in all material respects with applicable law. Section 4.7. BLUE SKY LAWS. In accordance with the Registration Rights Agreement, the Company shall qualify the Shares, the Warrants, the Warrant Shares and the Underlying Shares under the securities or Blue Sky laws of such jurisdictions as the Purchaser may reasonably request and to continue such qualification at all times through the third anniversary of the Closing Date; PROVIDED, HOWEVER, that neither the Company nor its Subsidiaries shall be required in connection therewith to qualify as a foreign corporation where they are not now so qualified. Section 4.8. INTEGRATION. The Company shall not and shall use its best efforts to ensure that no Affiliate shall sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Shares, the Warrant Shares or the Underlying Shares in a manner that would require the registration under the Securities Act of the sale of the Shares, the Warrant Shares or Underlying Shares to the Purchaser. Section 4.9. FURNISHING OF RULE 144A MATERIALS. The Company shall, for so long as any of the Shares, Warrants, Warrant Shares or Underlying Shares remain outstanding and during any period in which it is not subject to Section 13 or 15(d) of the Exchange Act, make available to any registered holder of Shares or Underlying Shares in connection with any sale thereof E-34 19 and any prospective purchaser of such Shares, Warrants, Warrant Shares or Underlying Shares from such Person, the following information in accordance with Rule 144A(d)(4) under the Securities Act: a brief statement of the nature of the business of the Company and the products and services it offers and the Company's most recent audited balance sheet and profit and loss and retained earnings statements, and similar audited financial statements for such part of the two preceding fiscal years as the Company has been in operation. Section 4.10. SOLICITATION MATERIALS. The Company shall not (i) distribute any offering materials in connection with the offering and sale of the Shares, Warrants, Warrant Shares or Underlying Shares other than the Disclosure Materials and any amendments and supplements thereto prepared in compliance herewith or (ii) solicit any offer to buy or sell the Shares, Warrants, Warrant Shares or Underlying Shares by means of any form of general solicitation or advertising. Section 4.11. SUBSEQUENT FINANCIAL STATEMENTS. The Company shall furnish to the Purchaser, promptly after they are filed with the Commission, a copy of all financial statements for any period subsequent to the period covered by the financial statements included in the Disclosure Materials. Section 4.12. RIGHT OF FIRST REFUSAL; CERTAIN CORPORATE ACTIONS. (a) The Company shall not, directly or indirectly, without the prior written consent of the Purchaser, offer, sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant or any option to purchase or other disposition) of any of its or its Affiliates equity or equity equivalent securities (a "SUBSEQUENT SALE") for a period of 180 days after the Closing Date, except (i) upon conversion of any of the Preferred Stock or exercise of any of the Warrants, (ii) as a stock dividend or upon any subdivision of shares of Common Stock, provided that the securities issued pursuant to such stock dividend or subdivision are limited to additional shares of Common Stock, (iii) pursuant to subscriptions, warrants, options, convertible securities or other rights which are outstanding on the Closing Date, (iv) solely in consideration for the acquisition (whether by merger or otherwise) by the Company or any of its Subsidiaries of all or substantially all of the stock or assets of any other entity, (v) pursuant to a primary registered public offering under the Securities Act, (vi) pursuant to the exercise of options or purchase rights to purchase Common Stock granted to employees, consultants and directors of the Company pursuant to any stock purchase, stock E-35 20 option or employee stock bonus plan approved by the Board of Directors, (vii) securities issued to equipment lessors or institutional lenders in connection with lease of corporate equipment or borrowings by the Company as approved by the Company's Board of Directors, and (viii) upon the exercise of any right other than a right to purchase securities which was not itself in violation of the terms of this paragraph, unless (A) the Company delivers to the Purchaser a written notice (the "SUBSEQUENT FINANCING NOTICE") of its intention to effect such Subsequent Financing, which Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the identity of the Persons who proposes to provide such Subsequent Financing and the amount of proceeds intended to be raised thereunder and (B) the Purchaser shall not have notified the Company by 5:00 p.m. (Eastern Time) on the tenth Business Day after its receipt of the Subsequent Financing Notice of its willingness to enter into good faith negotiations to provide (or to cause its sole designee to provide) financing to the Company on substantially the terms set forth in the Subsequent Financing Notice. If the Purchaser shall fail to notify the Company of its intention to enter into such negotiations within such time period, the Company may effect the Subsequent Financing substantially upon the terms and to the Persons (or Affiliates of such Persons) set forth in the Subsequent Financing Notice; provided, that the Company shall provide the Purchaser with a second Subsequent Financing Notice, and the Purchaser shall again have the right of first refusal set forth above in this paragraph (a), subject to the exceptions set forth above in this paragraph (a), if the Subsequent Financing subject to the initial Subsequent Financing Notice shall not have been consummated for any reason on the terms set forth in such Subsequent Financing Notice within 90 days after the date of the initial Subsequent Financing Notice with the Person (or an Affiliate of such Person) identified in the Subsequent Financing Notice. (b) For as long as Preferred Stock or Warrants outstanding, the Company shall not and shall cause the Subsidiaries not to, without the consent of the Purchaser, (i) amend its Restated Articles of Organization, bylaws or other charter documents so as to adversely affect any rights provided in the Transaction Documents to the Preferred Stock and the Warrants; (ii) split, combine or reclassify its outstanding capital stock; (iii) redeem, repurchase or offer to repurchase or otherwise acquire shares of its Junior Securities (as defined in the Statement of Rights and Preferences); or (iv) enter into any agreement with respect to any of the foregoing. E-36 21 Section 4.13. PURCHASER OWNERSHIP OF COMMON STOCK. The Purchaser may not use its ability to convert Shares hereunder or under the terms of the Statement of Rights and Preferences or to use its ability to acquire Shares of Common Stock upon exercise of the Warrants to the extent that such conversion or exercise would result in the Purchaser owning more than 4.9% of the outstanding shares of the Common Stock. The Company shall, promptly upon its receipt of a Holder Conversion Notice tendered by the Purchaser (or its designee) under the Statement of Rights and Preferences, and upon its receipt of a notice of exercise under the terms of the Warrants notify the Purchaser of the number of shares of Common Stock outstanding on such date and the number of Underlying Shares and Warrant Shares which would be issuable to the Purchaser (or its designee, as the case may be) if the conversion requested in such Conversion Notice and the exercise requested in such notice of exercise were effected in full, whereupon, notwithstanding anything to the contrary set forth in the Statement of Rights and Preferences, the Purchaser shall revoke such conversion or exercise to the extent that it determines that such conversion or exercise would result in the Purchaser owning in excess of 4.9% of such outstanding shares of Common Stock. Section 4.14. AVAILABILITY OF COMMON STOCK. The Company has reserved 1,820,588 shares of authorized and unissued Common Stock at all times to provide for converting all of the Shares and exercising all of the Warrants. If at any time the Company does not have reserved 1,820,588 shares, the Company, at the option of the holders of Preferred Stock, shall redeem all Shares and Underlying Shares then held by such holders, pursuant to SECTION 4.16 hereto. Section 4.15. LISTING OF UNDERLYING SHARES AND WARRANT SHARES. Prior to the Closing, the Company shall have filed an additional listing application with the Nasdaq National Market (and each other national securities exchange on which the Common Stock is then listed) for the listing of the Underlying Shares and the Warrant Shares. The Company shall, as promptly as possible, take all steps necessary to cause the Underlying Shares and Warrant Shares to be approved for listing in the Nasdaq National Market (and each other national securities exchange or market on which the Common Stock is then listed), and shall provide to the Purchaser evidence of such listing when approved and shall maintain the listing of its Common Stock on such exchange. E-37 22 Section 4.16. PURCHASER'S RIGHTS IF TRADING IN COMMON STOCK IS SUSPENDED OR DELISTED. In the event that at any time within the three-year period after the Closing Date trading in the shares of the Common Stock is suspended, or if the Common Stock shall not listed for trading, on the Nasdaq National Market (other than as a result of the suspension of trading in securities on such market or exchange generally or temporary suspensions pending the release of material information and other than a suspension of trading on the Nasdaq National Market if the Common Stock is listed for trading, and not suspended, on the Nasdaq SmallCap Market within one Business Day after such suspension) for more than ten days, at the Purchaser's option exercisable by written notice to the Company, the Company shall redeem all Shares and all Underlying Shares then held by such Purchaser, at an aggregate purchase price equal to (A) the product of the average Per Share Market Value for the five Trading Days immediately preceding the day of such notice multiplied by the number of shares of Common Stock into which the Shares to be purchased are then convertible and exercisable (or in the case of Underlying Shares, the number of Underlying Shares to be purchased), plus (B) interest on such amount accruing from the 7th day after such notice at the rate of 15% per annum. Section 4.17. NO VIOLATION OF APPLICABLE LAW. Notwithstanding any provision of this Agreement to the contrary, if any redemption of Shares or Underlying Shares otherwise required under the Transaction Documents or the Statement of Rights and Preferences would be prohibited by the relevant provisions of the Massachusetts Business Corporation Law, such redemption shall be effected as soon as it is permitted under such law; PROVIDED, however, that, interest payable by the Company with respect to any such redemption shall continue to accrue in accordance with Section 4.16 during any such period. Section 4.18. REDEMPTION RESTRICTIONS. Notwith standing any provision of this Agreement to the contrary, if any redemption of Shares or Underlying Shares otherwise required under this Agreement would be prohibited in the absence of consent from any lender of the Company or of any Subsidiary, or by the holders of any class of securities of the Company, the Company shall use its best efforts to obtain such consent as promptly as practicable after the redemption is required. Interest payable by the Company with respect to any such redemption shall continue to accrue in accordance with Section 4.16 until such consent is obtained. Nothing contained in this Section shall be construed as a waiver by the Purchaser of any rights it may have by virtue of any breach of any representation E-38 23 or warranty of the Company herein as to the absence of any requirement to obtain any such consent. Section 4.19. NOTICE OF BREACHES. Each of the Company and the Purchaser shall give prompt written notice to the other of any breach of any representation, warranty or other agreement contained in the Transaction Documents, as well as any events or occurrences arising after the date hereof and prior to the Closing Date, which could reasonably be likely to cause any representation or warranty or other agreement of such party, as the case may be, contained herein or therein to be incorrect or breached as of such Closing Date. However, no disclosure by either party pursuant to this Section shall be deemed to cure any breach of any representation, warranty or other agreement contained herein or in the other Transaction Documents. Neither the Company, any Subsidiary nor the Purchaser will take, or agree to commit to take, any action that is intended to make any representation or warranty of the Company or the Purchaser, as the case may be, contained herein or in the other Transaction Documents or in the Statement of Rights and Preferences inaccurate in any respect at the Closing Date. Notwithstanding the generality of the foregoing, the Company shall promptly notify the Purchaser of any notice or claim (written or oral) that it receives from any lender of the Company to the effect that the consummation of the transactions contemplated by the Transaction Documents violates or would violate any written agreement or understanding between such lender and the Company, and the Company shall promptly furnish by facsimile to the holders of the Shares and Warrants a copy of any written statement in support of or relating to such claim or notice. Section 4.20. CONVERSION PROCEDURES. EXHIBIT D attached hereto sets forth the procedures with respect to the conversion of the Shares, including the forms of conversion notice to be provided upon conversion, instructions as to the procedures for conversion, the form of legal opinion, if necessary, that shall be rendered to the Company's transfer agent and such other information and instructions as may be reasonably necessary to enable the Purchaser to exercise its right of conversion smoothly and expeditiously. Section 4.21. THE WARRANTS. At the Closing, the Company will issue warrants to purchase an aggregate of 350,000 shares of Common Stock as follows: (i) to the Purchaser three Common Stock purchase warrants, each in the form of EXHIBIT E(1) E-39 24 (the "SOUTHBROOK WARRANTS"), pursuant to which Purchaser shall have the right at any time thereafter through the Expiration Date (as such term is defined in each of the Southbrook Warrants) thereof, to acquire an aggregate of 262,500 shares of Common Stock at the Exercise Price (as such term is defined in each of the Southbrook Warrants) per share, and (ii) to Brown Simpson three Common Stock purchase warrants, each in the form of EXHIBIT E(2) (the "BROWN SIMPSON WARRANTS"), pursuant to which Brown Simpson shall have the right at any time thereafter through the Expiration Date (as such term is defined in each of the Brown Simpson Warrants) thereof, to acquire an aggregate of 87,500 shares of Common Stock at the Exercise Price (as such term is defined in each of the Brown Simpson Warrants) per share. The Brown Simpson Warrants represent a portion of the aggregate warrants which will be issued to the Purchaser as contemplated hereby and will be assigned and transferred simultaneously with the Closing by the Purchaser to Brown Simpson. The Southbrook Warrants and the Brown Simpson Warrants are collectively known as the "WARRANTS." ARTICLE V. CONDITIONS PRECEDENT TO CLOSING ------------------------------- Section 5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER. The obligation of the Purchaser to purchase the Shares is subject to the satisfaction or waiver by the Purchaser, at or prior to the Closing, of each of the following conditions: (a) LEGAL OPINION. The Purchaser shall have received the legal opinion, addressed to it and dated the Closing Date, of Foley, Hoag & Eliot, counsel for the Company, substantially in the form of EXHIBIT C; (b) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained herein and in the Registration Rights Agreement (except as such representations and warranties relate to the Brown Simpson Warrants) shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time; (c) PERFORMANCE BY THE COMPANY. The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents and the Statement of Rights and Preferences E-40 25 to be performed, satisfied or complied with by the Company at or prior to the Closing; (d) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court of governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by the Transaction Documents; (e) NO MATERIAL ADVERSE EFFECT. Since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q, no event which in the judgment of the Purchaser has or could have a Material Adverse Effect and no material adverse change in the financial condition or business of the Company shall have occurred which is not disclosed in the Disclosure Materials (the Purchaser may consider changes in stock price in determining whether any such event or change has occurred); (f) NO PROHIBITIONS. The purchase of and payment for the Shares (and upon conversion thereof, the Underlying Shares) hereunder (i) shall not be prohibited or enjoined (temporarily or permanently) by any applicable law or governmental regulation and (ii) shall not subject the Purchaser to any penalty, or in its judgment, other onerous condition under or pursuant to any applicable law or governmental regulation that would materially reduce the benefits to the Purchaser of the purchase of the Shares or the Underlying Shares (PROVIDED, HOWEVER, that such regulation, law or onerous condition was not in effect in such form at the date of this Agreement); (g) COMPANY CERTIFICATES. The Purchaser shall have received a certificate, dated the Closing Date, signed by the Secretary or an Assistant Secretary of the Company and certifying (i) that attached thereto is a true, correct and complete copy of (A) the Company's Restated Articles of Organization, as amended to the date thereof, (B) the Company's By-Laws, as amended to the date thereof, and (C) resolutions duly adopted by the Board of Directors of the Company authorizing the execution and delivery of the Transaction Documents, the Statement of Rights and Preferences and the issuance and sale of the Shares, Warrants, Warrant Shares and the Underlying Shares and (ii) the incumbency of officers executing the Transaction Documents; (h) REGISTRATION RIGHTS AGREEMENT. The Company shall have executed the Registration Rights Agreement; E-41 26 (i) NO SUSPENSIONS OF TRADING IN COMMON STOCK. Trading in the Common Stock shall not have been suspended by the Commission or the Nasdaq National Market or any other national securities exchange or market on which the Common Stock is listed or quoted (except for any suspension of trading of limited duration at the direction of the Company solely to permit dissemination of material information regarding the Company); (j) LISTING OF COMMON STOCK. The Common Stock shall have at all times between the date hereof and the Closing Date been, and on the Closing Date be, listed for trading on the Nasdaq National Market; (k) LISTING OF UNDERLYING SHARES AND WARRANT SHARES. An additional listing application for the listing of 1,470,588 Underlying Shares and 350,000 Warrant Shares for trading on the Nasdaq National Market shall have been filed by the Company with the National Association of Securities Dealers; (l) REQUIRED APPROVALS. All Required Approvals shall have been obtained; (m) DELIVERY OF STOCK CERTIFICATES AND WARRANTS. The Company shall have (i) delivered to or at direction of the Purchaser the stock certificate(s) representing the Shares and the Southbrook Warrants, registered in the name of the Purchaser, each in form satisfactory to the Purchaser and (ii) delivered to or at direction of Brown Simpson the Brown Simpson Warrants; (n) SHARES OF COMMON STOCK. On the Closing Date, the Company shall have duly reserved for issuance to the Purchaser 1,470,588 Underlying Shares and 350,000 Warrant Shares; (o) STATEMENT OF RIGHTS AND PREFERENCES. The Statement of Rights and Preferences shall have been duly filed with the Secretary of State of The Commonwealth of Massachusetts, and the Company shall have delivered proof of such filing to the Purchaser, reasonably satisfactory to it; and (p) FORM S-3 ELIGIBILITY. The Company shall be eligible to register securities for resale under Form S-3 promulgated under the Securities Act. Section 5.2. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY. The obligation of the Company to issue and sell the Shares hereunder is subject to the satisfaction or waiver by the E-42 27 Company, at or prior to the Closing, of each of the following conditions: (a) ACCURACY OF THE PURCHASER'S REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except that representations and warranties that are made as of a specific date need be true in all material respects only as of such date); (b) PERFORMANCE BY THE PURCHASER. The Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by it at or prior to the Closing; (c) NO PROHIBITIONS. The sale of the Shares (and upon conversion thereof, the Underlying Shares) hereunder (i) shall not be prohibited or enjoined (temporarily or permanently) by any applicable law or governmental regulation and (ii) shall not subject the Company to any penalty, or in its reasonable judgment, any other onerous condition under or pursuant to any applicable law or governmental regulation that would materially reduce the benefits to the Company of the sale of Shares or the Underlying Shares to the Purchaser (PROVIDED, HOWEVER, that such regulation, law or onerous condition was not in effect in such form at the date of this Agreement); and (d) NO INJUNCTION. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court of governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by the Transaction Documents. ARTICLE VI. TERMINATION ----------- Section 6.1. TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated at any time prior to Closing by the mutual consent of the Company and the Purchaser. Section 6.2. TERMINATION BY THE COMPANY OR THE PURCHASER. This Agreement may be terminated prior to Closing by E-43 28 either the Company or the Purchaser, by giving written notice of such termination to the other party, if: (a) there shall be in effect any statute, rule, law or regulation that prohibits the consummation of the Closing or if the consummation of the Closing would violate any non-appealable final judgment, order, decree, ruling or injunction of any court of or governmental authority having competent jurisdiction; or (b) there shall have been an amendment to Regulation D or an interpretive release promulgated or issued thereunder, which, in the judgment of the terminating party, would materially adversely affect the transactions contemplated hereby and by the other Transaction Documents. Section 6.3. TERMINATION BY THE COMPANY. This Agreement may be terminated prior to Closing by the Company, by giving written notice of such termination to the Purchaser, if the Purchaser has materially breached any representation, warranty, covenant or agreement contained in the Transaction Documents and such breach is not cured within five Business Days following receipt by the Purchaser of notice of such breach. Section 6.4. TERMINATION BY THE PURCHASER. This Agreement may be terminated prior to Closing by the Purchaser, by giving written notice of such termination to the Company, if: (a) the Company has breached any representation, warranty, covenant or agreement contained in the Transaction Documents or the Statement of Rights and Preferences and such breach is not cured within five Business Days following receipt by the Company of notice of such breach; (b) there has occurred an event since the date of the financial statements included in the Company's last filed Quarterly Report on Form 10-Q which in the Purchaser's judgment has or could have a Material Adverse Effect and which is not disclosed in the Disclosure Materials; (c) trading in the Common Stock has been suspended by the Commission or the Nasdaq National Market or other national securities exchange or market on which the Common Stock is listed or quoted (except for any suspension of trading of limited duration solely to permit dissemination of material information regarding the Company); or E-44 29 (d) the Common Stock shall have failed to be listed for trading on the Nasdaq National Market and the Purchaser shall have exercised its termination right herein provided within 10 Business Days of obtaining knowledge of such delisting. ARTICLE VII. MISCELLANEOUS ------------- Section 7.1. FEES AND EXPENSES. Each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, except as provided in the Registration Rights Agreement and except that the Company shall reimburse the Purchaser $10,000 for its legal fees and disbursements. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Shares (and upon conversion thereof, the Underlying Shares) and the Warrants (and upon exercise thereof, the Warrant Shares) pursuant hereto. The Purchaser shall be responsible for its own tax liability that may arise as a result of the investment hereunder or the transactions contemplated by this Agreement. Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company shall pay (i) all costs, expenses, fees and all taxes incident to and in connection with: (A) the preparation, printing and distribution of the Disclosure Materials and all amendments and supplements thereto (including, without limitation, financial statements and exhibits), and all preliminary and final Blue Sky memoranda and all other agreements, memoranda, correspondence and other documents prepared and delivered in connection herewith (B) the issuance and delivery of the Shares and the Warrants and, upon conversion of the Shares, the Underlying Shares and upon exercise of the Warrants, the Warrant Shares, (C) the qualification of the Shares and the Warrants and, upon conversion of the Shares, the Underlying Shares and upon exercise of the Warrants, the Warrant Shares for offer and sale under the securities or Blue Sky laws of the several states (including, without limitation, the fees and disbursements of the Purchasers' counsel relating to such registration or qualification), (D) furnishing such copies of the Disclosure Materials and all amendments and supplements thereto, as may reasonably be requested for use in connection with resales of the Shares and the Warrants and, upon conversion of the Shares, the Underlying E-45 30 Shares and upon exercise of the Warrants, the Warrant Shares, and (E) the preparation of certificates for the Shares and the Warrants and, upon conversion of the Shares, the Underlying Shares and upon exercise of the Warrants, the Warrant Shares (including, without limitation, printing and engraving thereof), (ii) all fees and expenses of the counsel and accountants of the Company and (iii) all expenses and listing fees in connection with the application for quotation of the Underlying Shares and the Warrant Shares in the Nasdaq National Market. Section 7.2. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the Exhibits, and Schedules hereto, and the Registration Rights Agreement, the Statement of Rights and Preferences and the Warrants contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters. Section 7.3. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been received (a) upon hand delivery (receipt acknowledged) or delivery by telex (with correct answer back received), telecopy or facsimile (with transmission confirmation report) at the address or number designated below (if delivered on a Business Day during normal business hours where such notice is to be received), or the first Business Day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second Business Day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Company: Cayenne Software, Inc. 8 New England Executive Park Burlington, MA 01803 Facsimile No.: Attention: Frederick H. Phillips With copies to: Foley, Hoag & Eliot One Post Office Square Boston, MA 02109 Facsimile No.: (617) 832-7000 Attention: David W. Walker E-46 31 If to the Purchaser: Southbrook International Investments, Ltd. c/o Trippoak Advisors, Inc. 630 Fifth Avenue Suite 2000 New York, New York 10111 Facsimile: (212) 332-3256 Attention: Robert L. Miller With copies to: Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 Attn: Eric L. Cohen -and- Brown Simpson, LLC Carnegie Hall Tower 152 West 57th Street, 40th Floor New York, NY 10019 Facsimile: (212) 247-1329 Attention: James R. Simpson or such other address as may be designated in writing hereafter, in the same manner, by such person. Section 7.4. AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by both the Company and the Purchaser, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. Section 7.5. HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. E-47 32 Section 7.6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. Neither the Company nor the Purchaser may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other, except that the Purchaser may assign its rights hereunder and under the Registration Rights Agreement to an Affiliate thereof, provided, that such assignee demonstrates to the reasonable satisfaction of the Company its satisfaction of the representations and warranties set forth in Section 3.2 herein. The assignment by a party of this Agreement or any rights hereunder shall not affect the obligations of such party under this Agreement. Section 7.7. NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person, except that the representations, warranties and other agreements contained herein of the Company are intended for the benefit of and may be relied upon and enforced by Brown Simpson to the extent such representations, warranties and agreements relate to the Warrants. Section 7.8. GOVERNING LAW; ARBITRATION. (a) This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. (b) All disputes between the parties hereto arising under the terms of this Agreement and the other Transaction Documents shall be arbitrated in New York City under the rules of the American Arbitration Association then in effect in the City of New York. Judgment on any award made by the arbitrators hereunder may be rendered in any court having jurisdiction. The parties consent to the nonexclusive jurisdiction of the State and Federal Courts sitting in New York County, New York, in connection with the enforcement of such award. The parties agree to keep confidential any materials, documents and other information that is disclosed in connection with any arbitration proceeding. E-48 33 Section 7.9. SURVIVAL. The representations and warranties of the Company and the Purchaser contained in ARTICLE III and the agreements and covenants of the parties contained in ARTICLE IV and this ARTICLE VII shall survive the Closing (or any earlier termination of this Agreement) and any conversion of Shares and exercise of Warrants hereunder. Section 7.10. COUNTERPART SIGNATURES. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. Section 7.11. PUBLICITY. The Company and the Purchaser shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement. Section 7.12. SEVERABILITY. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. Section 7.13. REMEDIES. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Purchaser will be entitled to specific performance of the obligations of the Company under this Agreement and the Company will be entitled to specific performance of the obligations of the Purchaser hereunder with respect to the subsequent transfer of Shares, Warrants, Warrant E-49 34 Shares and Underlying Shares. Each of the Company and the Purchaser agrees that monetary damages would not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] E-50 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first indicated above. Company: CAYENNE SOFTWARE, INC. By: ----------------------------------- Name: Title: SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD. By: ----------------------------------- Name: Title: 36 Exhibit D --------- [To be provided by Company prior to the Closing] E-52 EX-4.6 4 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.6 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of January 2, 1997, by and among Cayenne Software, Inc., a Massachusetts corporation (the "COMPANY"), and Southbrook International Investments, Ltd. a corporation organized and existing under the laws of the British Virgin Islands (the "PURCHASER"). This Agreement is made pursuant to the Convertible Preferred Stock Purchase Agreement, dated as of the date hereof, by and among the Company and the Purchaser (the "PURCHASE AGREEMENT"). The execution of this Agreement is a condition to the closing of the transactions contemplated by the Purchase Agreement. The Company and the Purchaser hereby agree as follows: 8. DEFINITIONS Capitalized terms used and not otherwise defined herein shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "ADVICE" shall have meaning set forth in SECTION 3(O). "AFFILIATE" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "CONTROL," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "AFFILIATED," "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. "BUSINESS DAY" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of New York generally are authorized or required by law or other government actions to close. "CERTIFICATE OF VOTE" shall have the meaning set forth in SECTION 4. "CLOSING DATE" shall have the meaning set forth in the Purchase Agreement. "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means the Company's Common Stock, par value $0.01 per share. "EFFECTIVENESS DATE" means the 100th day following the Closing Date. "EFFECTIVENESS PERIOD" shall have the meaning set forth in SECTION 2(A). "EVENT" shall have the meaning set forth in SECTION 4. E-53 2 "EVENT DATE" shall have the meaning set forth in SECTION 4. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FILING DATE" means the 30th day following the Closing Date. "HOLDER" or "HOLDERS" means the holder or holders, as the case may be, from time to time of Registrable Securities. "INDEMNIFIED PARTY" shall have the meaning set forth in SECTION 6(C). "INDEMNIFYING PARTY" shall have the meaning set forth in SECTION 6(C). "LOSSES" shall have the meaning set forth in SECTION 6(A). "MANAGING UNDERWRITER" means any managing underwriter retained by a Holder in connection with the offer and sale of Registrable Securities. "PERSON" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "PREFERRED STOCK" means the shares of Series B Convertible Preferred Stock, par value $1.00 per share, of the Company issued to the Purchaser pursuant to the Purchase Agreement. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "PROSPECTUS" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "REGISTRABLE SECURITIES" means the shares of Common Stock issuable upon conversion of all shares of Preferred Stock and shares of Common Stock issuable upon exercise of the Warrants issued by the Company to the Purchaser and Brown Simpson, LLC ("BROWN SIMPSON") in connection with the transactions contemplated by the Purchase Agreement; PROVIDED, HOWEVER that in order to account for the fact that the number of shares of Common Stock that are issuable upon conversion of shares of Preferred Stock is determined in part upon the market price of the Common Stock at the time of conversion, Registrable Securities shall include a number of shares of Common Stock equal to no less than the sum of (1) two times the number of shares of Common Stock issuable upon conversion in full of the Preferred Stock, assuming such conversion occurred on the Closing Date and (2) the number of shares of Common Stock issuable upon exercise in full of the Warrants described herein, or such other number of shares of Common Stock as agreed to by the E-54 3 parties to the Purchase Agreement. Notwithstanding anything herein contained to the contrary, if the actual number of shares of Common Stock issuable upon conversion in full of the Preferred Stock and exercise in full of the Warrants exceeds twice the number of shares of Common Stock issuable if such conversion and exercise occurred on the Closing Date, the term "Registrable Securities" shall be deemed to include such additional shares of Common Stock and the Company shall promptly file appropriate amendments to the Registration Statement to evidence such increase or the Company shall file one or more additional Registration Statements covering such additional shares of Common Stock, in either case, in the time contemplated herein for filing of appropriate amendments or additional Registration Statements in accordance with the terms hereof. "REGISTRATION STATEMENT" means the registration statement, contemplated by SECTION 2(A), including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 158" means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SPECIAL COUNSEL" means any special counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to SECTION 4. "UNDERWRITER" means any underwriter retained by a Holder in connection with the offer and sale of Registrable Securities. "UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" means a registration in connection with which securities of the Company are sold to an underwriter for reoffering to the public pursuant to an effective registration statement. "WARRANTS" means the Common Stock purchase warrants issued to the Purchaser and to Brown Simpson on the Closing Date. IX. Shelf Registration ------------------ 1. On or prior to the Filing Date, the Company shall prepare and file with the Commission a "Shelf" Registration Statement covering all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (or another appropriate form approved by the Holders of a majority of the Registrable Securities that permit registration of Registrable Securities for resale by the Holders in the manner or manners E-55 4 designated by them (including, without limitation, public or private sales and one or more Underwritten Offerings)). The Company shall (i) not permit any securities other than the Registrable Securities and those securities specifically listed on SCHEDULE 8 attached hereto, to be included in the Registration Statement and (ii) use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as practicable after the filing thereof, but in any event prior to the Effectiveness Date, and to keep such Registration Statement continuously effective under the Securities Act until the date which is three years after the date that such Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold pursuant to Rule 144 as determined by the counsel to the Company pursuant to a written opinion letter, addressed to the Holders, to such effect (the "EFFECTIVENESS PERIOD"); PROVIDED, HOWEVER, that the Company shall not be deemed to have used its best efforts to keep the Registration Statement effective during the Effectiveness Period if it voluntarily takes any action that would result in the Holders not being able to sell the Registrable Securities covered by such Registration Statement during the Effectiveness Period, unless such action is required under applicable law or the Company has filed a post-effective amendment to the Registration Statement and the Commission has not declared it effective. 2. If the Holders of a majority of the Registrable Securities so elect, an offering of Registrable Securities pursuant to the Registration Statement may be effected in the form of an Underwritten Offering. In such event, and if the Managing Underwriters advise the Company and such Holders in writing that in their opinion the amount of Registrable Securities proposed to be sold in such Underwritten Offering exceeds the amount of Registrable Securities which can be sold in such Underwritten Offering, there shall be included in such Underwritten Offering the amount of such Registrable Securities which in the opinion of such Managing Underwriters can be sold, and such amount shall be allocated PRO RATA among the Holders proposing to sell Registrable Securities in such Underwritten Offering. 3. If any of the Registrable Securities are to be sold in an Underwritten Offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Holders of a majority of the Registrable Securities included in such offering. No Holder may participate in any Underwritten Offering hereunder unless such Person (i) agrees to sell its Registrable Securities on the basis provided in any underwriting agreements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such arrangements. X. Registration Procedures ----------------------- In connection with the Company's registration obligations hereunder, the Company shall: 1. Prepare and file with the Commission on or prior to the Filing Date a Registration Statement on Form S-3 in accordance with the method or methods of distribution thereof as specified by the Holders, and cause the Registration Statement to become effective and remain effective as provided herein; PROVIDED, HOWEVER, that not less than five (5) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be E-56 5 incorporated therein by reference), the Company shall (i) furnish to the Holders, their Special Counsel and any Managing Underwriters, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, their Special Counsel and such Managing Underwriters, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to such Holders and such Underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities, their Special Counsel, or any Managing Underwriters, shall object. 2. (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective for the applicable time period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iii) respond as promptly as practicable to any comments received from the Commission with respect to the Registration Statement or any amendment thereto; and (iv) comply with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. 3. Notify the Holders of Registrable Securities to be sold, their Special Counsel and any Managing Underwriters immediately (and, in the case of (i)(A) below, not less than five (5) days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than 3 Business Days following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; and (B) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Pro spectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement (including any underwriting agreement) contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Pro spectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. E-57 6 4. Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. 5. If requested by any Managing Underwriter or the Holders of a majority of the Registrable Securities to be sold in connection with an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as such Managing Underwriters and such Holders reasonably agree should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; PROVIDED, HOWEVER, that the Company shall not be required to take any action pursuant to this SECTION 3(E) that would, in the opinion of counsel for the Company, violate applicable law. 6. Furnish to each Holder, their Special Counsel and any Managing Underwriters, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. 7. Promptly deliver to each Holder, their Special Counsel, and any Underwriters, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders and any Underwriters in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. 8. Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders, any Underwriters and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder or Underwriter requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; PROVIDED, HOWEVER, that the Company shall not be required to qualify to do business or to file a general consent to service of process in any jurisdiction. 9. Cooperate with the Holders and any Managing Underwriters to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall be free of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Managing Underwriters or Holders may request at least two Business Days prior to any sale of Registrable Securities. 10. Upon the occurrence of any event contemplated by SECTION 3(c)(vi), as promptly as practicable, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document E-58 7 incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 11. Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on the Nasdaq National Market and any other securities exchange, market or over-the-counter bulletin board, if any, on which similar securities issued by the Company are then listed. 12. Enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in Underwritten Offerings) and take all such other actions in connection therewith (including those reasonably requested by any Managing Underwriters and the Holders of a majority of the Registrable Securities being sold) in order to expedite or facilitate the disposition of such Registrable Securities, and whether or not an underwriting agreement is entered into, (i) make such representations and warranties to such Holders and such Underwriters as are customarily made by issuers to underwriters in underwritten public offerings, and confirm the same if and when requested; (ii) obtain and deliver copies thereof to each Holder and the Managing Underwriters, if any, of opinions of counsel to the Company and updates thereof addressed to each selling Holder and each such Underwriter, in form, scope and substance reasonably satisfactory to any such Managing Underwriters and Special Counsel to the selling Holders covering the matters customarily covered in opinions requested in Underwritten Offerings and such other matters as may be reasonably requested by such Special Counsel and Underwriters; (iii) immediately prior to the effectiveness of the Registration Statement, and, in the case of an Underwritten Offering, at the time of delivery of any Registrable Securities sold pursuant thereto, obtain and deliver copies to the Holders and the Managing Underwriters, if any, of "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed to each selling Holder and each of the Underwriters, if any, in form and substance as are customary in connection with Underwritten Offerings; (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable to the selling Holders and the Under writers, if any, than those set forth in SECTION 7 (or such other provisions and procedures acceptable to the Managing Underwriters, if any, and holders of a majority of Registrable Securities participating in such Underwritten Offering); and (v) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registrable Securities being sold, their Special Counsel and any Managing Underwriters to evidence the continued validity of the representations and warranties made pursuant to clause 3(l)(i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. 13. Make available for inspection by the selling Holders, any representative of such Holders, any Underwriter participating in any disposition of Registrable Securities, and any attorney or accountant retained by such selling Holders or Underwriters, at the offices where normally kept, during reasonable business hours, all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries, and cause the officers, directors, agents and employees of the Company and its subsidiaries to supply all information in each case requested by any such Holder, representative, Underwriter, attorney or accountant in connection E-59 8 with the Registration Statement; PROVIDED, HOWEVER, that any information that is determined in good faith by the Company in writing to be of a confidential nature at the time of delivery of such information shall be kept confidential by such Persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities; (ii) disclosure of such information, in the opinion of counsel to such Person, is required by law; (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard by such Person; or (iv) such information becomes available to such Person from a source other than the Company and such source is not known by such Person to be bound by a confidentiality agreement with the Company. 14. Comply with all applicable rules and regulations of the Commission and make generally available to its security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to Underwriters in a firm commitment or best efforts Underwritten Offering and (ii) if not sold to Underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company after the effective date of the Registration Statement, which statement shall cover said 12-month period, or end shorter periods as is consistent with the requirements of Rule 158. 15. Provide a CUSIP number for all Registrable Securities, not later than the effective date of the Registration Statement. The Company may require each selling Holder to furnish to the Company such information regarding the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement and the Company may exclude from such registration the Registrable Securities of any such Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request. If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (i) the inclusion therein of language, in form and substance reasonably satisfactory to such Holder, to the effect that the ownership by such Holder of such securities is not to be construed as a rec ommendation by such Holder of the investment quality of the Company's securities covered thereby and that such ownership does not imply that such Holder will assist in meeting any future financial requirements of the Company, or (ii) if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar Federal statute then in force, the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. The Purchaser covenants and agrees that (i) it will not offer or sell any Registrable Securities under the Registration Statement until it has received copies of the Prospectus as then amended or supplemented as contemplated in SECTION 3(g) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by SECTION 3(c) and (ii) the Purchaser and its officers, directors or Affiliates, if any, will comply with the prospectus delivery requirements of the Securities Act as applicable to them in connection with sales of Registrable Securities pursuant to the Registration Statement. E-60 9 Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in SECTION 3(c)(ii), 3(c)(iii), 3(c)(iv), 3(c)(v) or 3(c)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by SECTION 3(j), or until it is advised in writing (the "ADVICE") by the Company that the use of the applicable Pro spectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. XI. LIQUIDATED DAMAGES. The Company acknowledges and agrees that the Holders will suffer damages, and that it would not be feasible to ascertain the extent of such damages with precision, if (a) a Registration Statement shall not have been filed with the Commission on or prior to the Filing Date, or (b) a Registration Statement is not declared effective by the Commission on or prior to the Effectiveness Date, or (c) a Registration Statement is filed with and declared effective by the Commission but thereafter ceases to be effective at any time prior to the expiration of the Effectiveness Period without being succeeded within 10 Business Days by a subsequent Registration Statement filed with and declared effective by the Commission, or (d) trading in the Common Stock shall be suspended for any reason for more than three Trading Days (as such term is defined under the Certificate of Vote of Directors Establishing A Series Of A Class Of Stock filed with the State of Massachusetts in respect of the Preferred Stock (the "CERTIFICATE OF VOTE")) or (e) if the conversion rights of the holders of the Preferred Stock as set forth in the Certificate of Vote are suspended for any reason (any such failure being referred to as an "EVENT," and for purposes of clauses (a), (b) and (e) the date on which such Event occurs, or for purposes of clause (c) the date which such 10 Business Day-period is exceeded, or for purposes of clause (d) the date on which such three Trading Day period is exceeded, being referred to as "EVENT DATE"), then the Company shall pay the Purchaser in cash, as liquidated damages and not as a penalty, 1.5% of the Purchase Price per month, payment thereof due on the day after such Event Date and thereafter on each monthly anniversary date of such Event Date, until such time as a subsequent Registration Statement is declared effective by the Commission, or until any Event contemplated by clause (d) or (e), as the case may be, is cured. The Company shall notify each Holder within five days of each Event and Event Date. The Company shall pay the liquidated damages due with respect to the Registrable Securities to each Holder of record as at the Event Date on a monthly basis, beginning with the date upon which such liquidated damages first accrue. XII. Registration Expenses --------------------- 1. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not the Registration State ment is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the National Association of Securities Dealers, Inc. and (B) in compliance with state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Underwriters or Holders in connection with Blue Sky qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the Managing Underwriters, if any, or Holders of a majority of Registrable Securities may designate)), (ii) printing E-61 10 expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is requested by the Managing Underwriters, if any, or by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) reasonable fees and disbursements of counsel for the Company and Special Counsel for the Holders, (v) fees and disbursements of all independent certified public accountants referred to in SECTION 3(l)(iii) (including, without limitation, the expenses of any special audit and "cold comfort" letters required by or incident to such performance), (vi) Securities Act liability insurance, if the Company so desires such insurance, and (vii) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange on which similar securities issued by the Company are then listed. 2. In connection with the Registration Statement, the Company shall reimburse the Holders for the fees and disbursements of one firm of attorneys chosen by the Holders of a majority of the Registrable Securities. XIII. Indemnification --------------- 1. INDEMNIFICATION BY THE COMPANY. The Company shall, notwithstanding termination of this Agreement and without limitation as to time, indemnify and hold harmless each Holder, the officers, directors, agents (including any Underwriters retained by such Holder in connection with the offer and sale of Registrable Securities), brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and reasonable attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by or on behalf of such Holder expressly for use therein, which information was reasonably relied on by the Company for use therein or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. E-62 11 2. INDEMNIFICATION BY HOLDERS. In connection with the Registration Statement, each Holder shall furnish to the Company in writing such information as the Company reasonably requests for use in connection with the Registration Statement or any Prospectus and agrees, severally and not jointly, to indemnify and hold harmless the Company, their directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses (as determined by a court of competent jurisdiction in a final judgment not subject to appeal or review) arising solely out of or based solely upon any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus and that such information was reasonably relied upon by the Company for use in the Registration Statement, such Prospectus or such form of prospectus or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus. In no event shall the lia bility of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. 3. CONDUCT OF INDEMNIFICATION PROCEEDINGS. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "INDEMNIFIED PARTY"), such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any E-63 12 settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within 10 Business Days of written notice thereof to the Indemnifying Party (regard less of whether it is ultimately determined that an Indemnified Party is not entitled to indemnifica tion hereunder; PROVIDED, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). 4. CONTRIBUTION. If a claim for indemnification under SECTION 6(a) or 6(b) is unavailable to an Indemnified Party or is insufficient to hold such Indemnified Party harmless for any Losses in respect of which this Section would apply by its terms (other than by reason of exceptions provided in this Section), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in SECTION 6(c), any attorneys' or other fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party. The parties hereto agree that it would not be just and equitable if contribution pursuant to this SECTION 6(d) were determined by PRO RATA allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this SECTION 6(d), the Purchaser shall not be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by the Purchaser from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that the Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. E-64 13 XIV. Rule 144 -------- The Company shall file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time the Company is not required to file such reports, they will, upon the request of any Holder, make publicly available other information so long as necessary to permit sales of its securities pursuant to Rule 144. The Company further covenants that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144. Upon the request of any Holder, the Company shall deliver to such Holder a written certification of a duly authorized officer as to whether it has complied with such requirements. XV. Miscellaneous ------------- 1. REMEDIES. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate com pensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. 2. NO INCONSISTENT AGREEMENTS. Except as set forth in SCHEDULE 8 hereto, neither the Company nor any of its subsidiaries has, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict or inconsistent with the provisions of this Agreement. 3. NO PIGGYBACK ON REGISTRATIONS. Except as set forth in SCHEDULE 8 hereto, neither of the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Common Stock to be issued under the Purchase Agreement, and the Company shall not enter into any agreement providing any such right to any of its securityholders. 4. PIGGY-BACK REGISTRATIONS. If at any time the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Company shall send to each holder of Registrable Securities written notice of such E-65 14 determination and, if within twenty (20) days after receipt of such notice, any such holder shall so request in writing, the Company shall include in such registration statement all or any part of the Registrable Securities such holder requests to be registered, except that if, in connection with any Underwritten Offering for the account of the Company the managing underwriter(s) thereof shall impose a limitation on the number of shares of Common Stock which may be included in the registration statement because, in such underwriter(s)' judgment, such limitation is necessary to effect an orderly public distribution of securities covered thereby, then the Company shall be obligated to include in such registration statement only such limited portion of the Registrable Securities for to which such holder has requested inclusion hereunder. Any exclusion of Registrable Securities shall be made pro rata among the holders seeking to include Registrable Securities, in proportion to the number of Registrable Securities sought to be included by such holders; PROVIDED, HOWEVER, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities the holders of which are not entitled by right to inclusion of securities in such registration statement; and PROVIDED, FURTHER, HOWEVER, that, after giving effect to the immediately preceding proviso, any exclusion of Registrable Securities shall be made pro rata with holders of other securities having the right to include such securities in such registration statement. No right to registration of Registrable Securities under this Section shall be construed to limit any registration otherwise required hereunder. This SECTION 8(d) shall apply only at such times when all of the Registrable Securities issued and outstanding cannot be sold pursuant to an effective Registration Statement on Form S-3 and for a period not to exceed three years after the date of this Agreement. 5. AMENDMENTS AND WAIVERS. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of at least a majority of the then outstanding Registrable Securities; PROVIDED, HOWEVER, that, for the purposes of this sentence, Registrable Securities that are owned, directly or indirectly, by the Company, or an Affiliate of the Company are not deemed outstanding. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; PROVIDED, HOWEVER, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. 6. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been received (a) upon hand delivery (receipt acknowledged) or delivery by telex (with correct answer back received), telecopy or facsimile (with transmission confirmation report) at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Company: Cayenne Software, Inc. 8 New England Executive Park E-66 15 Burlington, MA 01803 Facsimile No.: (617) 229-8124 Attention: Eugene J. DiDonato With copies to: Foley, Hoag & Eliot One Post Office Square Boston, MA 02109 Facsimile No.: (617) 832-7000 Attention: David W. Walker If to the Purchaser: Southbrook International Investments, Ltd. c/o Trippoak Advisors, Inc. 630 Fifth Avenue Suite 2000 New York, New York 10111 Facsimile No.: (212) 332-3256 Attention: Robert L. Miller with copies to: Brown Simpson, L.L.C. Carnegie Hall Tower 152 West 57th Street, 40th Floor New York, New York 10019 Facsimile No.: (212) 247-1329 Attn: James R. Simpson - and - Robinson Silverman Pearce Aronsohn & Berman LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 Attn: Eric L. Cohen If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. 7. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. 8. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which E-67 16 taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. 9. GOVERNING LAW; ARBITRATION;. (A) This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to principles of conflicts of law thereof. (B) All disputes between the parties hereto arising under the terms of this Agreement shall be arbitrated in New York City under the rules of the American Arbitration Association then in effect in the City of New York. Judgment on any award made by the arbitrators hereunder may be rendered in any court having jurisdiction. The parties consent to the nonexclusive jurisdiction of the Federal and State Courts sitting in New York County, New York, in connection with the enforcement of such award. The parties agree to keep confidential any materials, documents or other information that is disclosed in connection with any arbitration proceeding. 10. CUMULATIVE REMEDIES. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. 11. SEVERABILITY. If any term, provision, covenant or restriction of this Agree ment is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. 12. HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 13. SHARES HELD BY THE COMPANY AND ITS AFFILIATES. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than the Purchaser or transferees or successors or assigns thereof if such Persons are deemed to be Affiliates solely by reason of their holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] [SIGNATURE PAGE FOLLOWS] E-68 17 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. CAYENNE SOFTWARE, INC. By: -------------------------------- Name: Title: SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD. By: -------------------------------- Name: Title: EX-4.7 5 FORM OF WARRART AGREEMENT 1 EXHIBIT 4.7 NEITHER THIS WARRANT NOR THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE. THE SECURITIES REPRESENTED BY THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION, AND NEITHER SUCH SECURITIES NOR ANY INTEREST OR PARTICIPATION THEREIN MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED OR DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF AND IN COMPLIANCE WITH THE REGISTRATION PROVISIONS OF APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. CAYENNE SOFTWARE, INC. WARRANT Dated January 2, 1997 CAYENNE SOFTWARE, INC., a Massachusetts corporation (the "Company"), hereby certifies that, for value received, Southbrook International Investments, Ltd., a corporation organized and existing under the laws of the British Virgin Islands, or its registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from the Company from time to time up to a total of [ ](1) shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to the lower of (a) [ ](2) per share and (b) [120%, 125% and 150% for each Warrant issued, respectively] of the average Per Share Market Value for the thirty (30) trading days immediately following an announcement by or on behalf of the Company of an acquisition, merger or consolidation following the date hereof, in which the Company or an entity controlled by the Company will be the surviving entity; PROVIDED, HOWEVER, that the price per share derived in the calculation of this clause (b) shall only become the "Exercise Price" (defined below) upon the first such announcement of acquisition, merger or consolidation where (x) such announcement of acquisition, merger or consolidation occurs within one (1) year after the Original Issue Date and (y) if such price per share is less than or equal to 90% of the average Per Share Market Value for the thirty (30) trading days immediately preceding such announcement (the lower of (a) and (b), as adjusted from time to time as provided in SECTION 7, referred to herein as the "Exercise Price"), at any time after the date hereof - ---------------------------- (1) The number of shares per Warrant shall equal 75,000, 75,000, and 112,500, respectively. (2) Such exercise price shall equal [120%, 125% and 150% for each Warrant issued, respectively] of the average Per Share Market Value (as such term is defined in the Statement of Rights and Preferences, Exhibit A to the Convertible Preferred Stock Purchase Agreement, dated as of the date hereof between the Holder and the Company (the "Statement of Rights and Preferences")) for the ten (10) Trading Days (as such term is defined in the Statement of Rights and Preferences) immediately preceding the Original Issue Date (and in no event less than the par value of the Common Stock). E-70 2 and until and including January 2, [ ](1) (the "Expiration Date"), and in no event less than the par value of the Common Stock and subject to the following terms and conditions: XVI. REGISTRATION OF WARRANT. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, and the Company shall not be affected by notice to the contrary. XVII. REGISTRATION OF TRANSFERS AND EXCHANGES. --------------------------------------- 1. The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at the office specified in or pursuant to SECTION 3(b). Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. 2. This Warrant is exchangeable, upon the surrender hereof by the Holder at the office of the Company specified in or pursuant to SECTION 3(b) for one or more New Warrants, evidencing in the aggregate the right to purchase the number of Warrant Shares which may then be purchased hereunder. Any such New Warrant will be dated the date of such exchange. XVIII. DURATION AND EXERCISE OF WARRANTS. --------------------------------- 1. This Warrant shall be exercisable by the registered Holder on any business day before 5:00 P.M., New York time, at any time and from time to time on or after the date hereof to and including the Expiration Date. At 5:00 P.M., New York time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value. 2. Subject to SECTIONS 2(b), 4 and 8, upon surrender of this Warrant, with the Form of Election to Purchase attached hereto duly completed and signed, to the Company at its office at 8 New England Executive Park, Burlington, MA 01803, Attention: Chief Financial Officer, or at such other address as the Company may specify in writing to the then registered Holder, and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, in lawful money of the United States of America, in cash or by certified or official bank check or checks, all as specified by the Holder in the Form of Election to Purchase, the Company shall promptly (but in no event later than 3 days thereafter) issue and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends other than legends that may be required in the opinion of the Company's counsel in the event at such time there is not an effective Registration Statement. Any person so designated by the Holder to receive Warrant Shares shall be deemed to have become holder of record of such Warrant Shares as of the Date of Exercise of this Warrant. A "Date of Exercise" means the date on which the Company shall have received (i) this Warrant (or any New Warrant, as applicable), with the Form of Election to Purchase attached hereto (or attached to such - -------------------------- (1) 1999, 2000 and 2001 in each Warrant issued, respectively. E-71 3 New Warrant) appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares so indicated by the holder hereof to be purchased. 3. This Warrant shall be exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares so long as at least 10,000 Warrant Shares are purchased in any one exercise. If less than all of the Warrant Shares which may be purchased under this Warrant are exercised at any time, the Company shall issue, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares for which no exercise has been evidenced by this Warrant. XIX. PAYMENT OF TAXES. The Company will pay all documentary stamp taxes attributable to the issuance of Warrant Shares upon the exercise of this Warrant; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares in a name other than that of the Holder, and the Company shall not be required to issue or deliver the certificates for Warrant Shares unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. XX. REPLACEMENT OF WARRANT. If this Warrant is mutilated, lost, stolen or destroyed, the Company may in its discretion issue in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and indemnity, if requested, satisfactory to it. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. XXI. RESERVATION OF WARRANT SHARES. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders (taking into account the adjustments and restrictions of SECTION 7). The Company covenants that all Warrant Shares that shall be so issuable and deliverable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and freely tradeable. XXII. CERTAIN ADJUSTMENTS. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this SECTION 7. Upon each such adjustment of the Exercise Price pursuant to this SECTION 7, the Holder shall thereafter prior to the Expiration Date be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (i) If the Company, at any time while this Warrant is outstanding, (a) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Junior Securities (as such term is defined in the Statement of Rights and Preferences) payable in shares of Common Stock, (b) subdivide outstanding shares of Common Stock into a larger number of shares, or (c) combine outstanding shares of Common Stock into a smaller number of shares, the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the E-72 4 effective date in the case of a subdivision or combination, and shall apply to successive subdivisions and combinations. (ii) In case of any reclassification of the Common Stock, any consolidation or merger of the Company with or into another person, the sale or transfer of all or substantially all of the assets of the Company or any compulsory share exchange pursuant to which the Common Stock is converted into other securities, cash or property, then the Holder shall have the right thereafter to exercise this Warrant only into the shares of stock and other securities and property receivable upon or deemed to be held by holders of Common Stock following such reclassification, consolidation, merger, sale, transfer or share exchange, and the Holder shall be entitled upon such event to receive such amount of securities or property equal to the amount of Warrant Shares such Holder would have been entitled to had such Holder exercised this Warrant immediately prior to such reclassification, consolidation, merger, sale, transfer or share exchange. The terms of any such consolidation, merger, sale, transfer or share exchange shall include such terms so as to continue to give to the Holder the right to receive the securities or property set forth in this SECTION 7(b) upon any exercise following such consolidation, merger, sale, transfer or share exchange. This provision shall similarly apply to successive reclassifications, consolidations, mergers, sales, transfers or share exchanges. (iii) If the Company, at any time while outstanding, shall distribute to all holders of Common Stock (and not to holders of this Warrant) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security (excluding those referred to in SECTIONS 7(a) and (b) above), then in each such case the Exercise Price shall be determined by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Exercise Price determined as of the record date mentioned above, and of which the numerator shall be such Exercise Price on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of Common Stock as determined by a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Company) (an "APPRAISER") selected in good faith by the holders of a majority in interest of the Warrants then outstanding. (iv) For the purposes of this Section, the following clauses shall also be applicable: A. RECORD DATE. In case the Company shall take a record of the holders of its Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities, or (B) to subscribe for or purchase Common Stock or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. B. TREASURY SHARES. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this subsection (d). (v) All calculations under this SECTION 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. (vi) Whenever the Exercise Price is adjusted pursuant to SECTION 7(c) above, the Company, after receipt of the determination by the Appraiser shall have the right to select an additional Appraiser, in good faith, in which case the adjustment shall be equal to the average of the adjustments recommended by each E-73 5 Appraiser. The Company shall promptly mail to each Holder, a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Such adjustment shall become effective immediately after the record date mentioned above; PROVIDED, HOWEVER, that no such adjustment of the Exercise Price shall be made which in the opinion of the Appraiser(s) giving the aforesaid opinion or opinions would result in an increase of the Exercise Price to more than the Exercise Price then in effect. All determinations with respect to adjustments by the Company hereunder shall be made by the Board of Directors in good faith. (vii) If: A. the Company shall declare a dividend (or any other distribution) on its Common Stock; or B. the Company shall declare a special nonrecurring cash dividend on or a redemption of its Common Stock; or C. the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, or D. the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock of the Company, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or E. the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then the Company shall cause to be mailed to each Holder at their last addresses as they shall appear upon the Warrant Register, at least 30 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up; PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. XXIII. FRACTIONAL SHARES. The Company shall not be required to issue fractional Warrant Shares on the exercise of this Warrant. The number of full Warrant Shares which shall be issuable upon the exercise of this Warrant shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of this Warrant so presented. If any fraction of a Warrant Share would, except for the provisions of this SECTION 8, be issuable on the exercise of this Warrant, the Company shall, at its option, (a) pay an amount in cash equal to the Exercise Price multiplied by such fraction or (b) shall round the number of Warrant Shares issuable, up to the next whole number of such shares. E-74 6 XXIV. NOTICES. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be delivered personally, by facsimile, sent by a nationally recognized overnight courier service or sent by registered or certified mail, postage prepaid, addressed as follows: (1) if to the Company, to CAYENNE SOFTWARE, INC., 8 New England Executive Park, Burlington, MA 01803, Attention: Chief Financial Officer, or to facsimile no. (617) 229-8124; or (ii) if to the Holder, to the Holder at the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this SECTION 9. Any notice or other communications or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if delivered via facsimile at the facsimile number specified in this SECTION 9, (ii) four (4) days after deposit in the United States mails, (iii) the date when posted, if sent by nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be given. XXV. WARRANT AGENT. ------------- 1. The Company shall serve as warrant agent under this Warrant. Upon thirty (30) days' notice to the Holder, the Company and the Holder may appoint a new warrant agent. 2. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant E-75 7 agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act; provided that such corporation (i) would be eligible for appointment as successor to the warrant agent under the provisions of this SECTION 10 or (ii) is a wholly-owned subsidiary of the warrant agent. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the register maintained by the warrant agent pursuant to this Warrant. XXVI. MISCELLANEOUS. ------------- 1. This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Warrant may be amended only in writing signed by the Company and the Holder. 2. Subject to SECTION 11(a), above, nothing in this Warrant shall be construed to give to any person or corporation other than the Company, the Holder and any registered holder of Warrant Shares any legal or equitable right, remedy or cause under this Warrant; this Warrant shall be for the sole and exclusive benefit of the Company, the Holder and any other registered holder of Warrant Shares. 3. This Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof. 4. The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. 5. In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. CAYENNE SOFTWARE, INC. By:______________________________________ Name:____________________________________ Title:___________________________________ E-76 8 FORM OF ELECTION TO PURCHASE (To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant) To Cayenne Software, Inc.: In accordance with the Warrant enclosed with this Form of Election to Purchase, the undersigned hereby irrevocably elects to purchase _____________ shares of Common Stock ("Common Stock"), par value $.01 per share, of Cayenne Software, Inc. and encloses herewith $________ in cash (or encloses herewith evidence of payment of such sum), which sum represents the Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Form of Election to Purchase relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER ______________________________________ ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ ________________________________________________________________________________ If the number of shares of Common Stock issuable upon this exercise shall not be all of the shares of Common Stock which the undersigned is entitled to purchase in accordance with the enclosed Warrant, the undersigned requests that a New Warrant (as defined in the Warrant) evidencing the right to purchase the shares of Common Stock not issuable pursuant to the exercise evidenced hereby be issued in the name of and delivered to: ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ ________________________________________________________________________________ Dated: ______________, ____ Name of Holder: (Print)_______________________________ (By:)_________________________________ (Title:) E-77 9 [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of CAYENNE SOFTWARE, INC. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of CAYENNE SOFTWARE, INC. with full power of substitution in the premises. Dated: ______________, ____ __________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant) __________________________________ Address In the presence of: __________________________________ E-78 EX-4.8 6 WARRANT AGREEMENT DATED 12/20/96 1 EXHIBIT 4.8 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO A REGISTRATION UNDER THE ACT OR AN EXEMPTION THEREFROM. WARRANT AGREEMENT CAYENNE SOFTWARE, INC. Dated as of December 20, 1996 (the "Effective Date") WHEREAS, CAYENNE SOFTWARE, INC. (f/k/a Bachman Information Systems, Inc.) a Massachusetts corporation (the "Company"), has entered into a Letter Amendment, dated as of October 4, 1996, (the "Letter Amendment") to the Amended and Restated Revolving Credit Agreement (as amended, the "Revolving Credit Agreement") dated as of June 5, 1996, with SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office located at Wellesley Office Park, 40 William Street, Suite 350 Wellesley, Massachusetts 02181 doing business under the name "Silicon Valley East" (the "Warrantholder"); and WHEREAS, the Company desires to grant to the Warrantholder, in consideration for the execution of the Letter Agreement and the loans to be granted pursuant to the Revolving Credit Agreement, as amended, the right to purchase shares of the Company's Common Stock; NOW, THEREFORE, in consideration of the Warrantholder executing and delivering the Revolving Credit Agreement, as amended, and providing the loans to the Company thereunder and in consideration of the mutual covenants and agreements contained herein, the Company and the Warrantholder agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE STOCK. The Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, a Warrant to subscribe to and purchase from the Company, an aggregate of 25,000 fully paid and non-assessable shares ("Warrant Shares") of the Company's Common Stock, par value $.01 per share ("Common Stock"), at a purchase price of $4.25 per share, but in no event less than the par value per share of Common Stock acquired (the "Exercise Price"). The number and purchase price of such Warrant Shares are subject to adjustment as provided in Section 8 hereof. 2. TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Warrant Shares as granted herein shall commence on the Effective Date and shall be exercisable for a period of three (3) years therefrom. The Company shall provide notice to the Warrantholder in the form of Appendix I hereto within forty-five (45) days prior to the expiration of the Warrant. 3. EXERCISE OF THE PURCHASE RIGHTS. (a) The purchase rights set forth in this Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of E-79 2 exercise in the form attached hereto as APPENDIX II (the "Notice of Exercise"), duly completed and executed. Promptly upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, and in no event later than fifteen (15) days thereafter, the Company shall instruct its transfer agent to issue to the Warrantholder a certificate for the number of Warrant Shares purchased. The Exercise Price may be paid at the Warrantholder's election either (i) by cash or check, or (ii) by surrender of all or a portion of the Warrant ("Net Issuance") as determined below. If the Warrantholder elects the Net Issuance method, the Company will issue Warrant Shares in accordance with the following formula: X = (P)(A-B) -------- A Where: X = the number of Warrant Shares to be issued to the Warrantholder for the portion of the Warrant being exercised. P = the number of Warrant Shares requested to be exercised under this Warrant Agreement. A = the Fair Market Value (defined below) of one (1) share of the Company's Common Stock multiplied by the number of shares of Common Stock issuable upon conversion of one Warrant Share on this date of exercise. B = the Exercise Price. As used herein, "Fair Market Value" of Common Stock shall mean with respect to each share of Common Stock: (i) if actively traded over-the-counter, the Fair Market Value shall be deemed to be the average of the closing sale prices quoted on the NASDAQ system (or similar system) over the ten (10) day period ending the day before the Fair Market Value of the securities is being determined; (ii) if the Common Stock at any time becomes traded on a securities exchange, the Fair Market Value shall be deemed to be the average of the closing prices over a ten (10) day period ending the day before the day the Fair Market Value of the securities is being determined; or (iii) if at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the Fair Market Value of Common Stock shall be the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the Fair Market Value of Common Stock shall be deemed to be the value received by the holders of Common Stock pursuant to such merger or acquisition. The foregoing notwithstanding, if the Warrantholder advises the Board of Directors in writing that the Warrantholder disagrees with such determination, then the Company and the Warrantholder shall promptly agree upon a reputable investment banking firm to undertake such valuation. If the valuation of such investment banking firm is greater than that determined by the Board of Directors by at least ten percent (10%), then all fees and expenses of such investment banking firm shall be paid by the Company. In all other circumstances, such fees and expenses shall be paid by the Warrantholder. E-80 3 (b) Upon partial exercise by either cash or Net Issuance, the Company shall promptly issue an amended Warrant Agreement representing the remaining number of Warrant Shares purchasable hereunder. All other terms and conditions of such amended Warrant Agreement shall be identical to those contained herein, including, but not limited to the Effective Date hereof. 4. RESERVATION OF SHARES. (a) AUTHORIZATION AND RESERVATION OF SHARES. During the term of this Warrant Agreement, the Company will at all times have authorized and reserved a sufficient number of shares of its Common Stock to provide for the exercise of the rights to purchase Warrant Shares as provided for herein. (b) REGISTRATION OR LISTING. If any shares of Common Stock required to be reserved hereunder require registration with or approval of any governmental authority under any Federal or state law (other than any registration under the Securities Act of 1933, as then in effect ("1933 Act"), or any similar Federal statute then enforced, or any state securities law, required by reason of any transfer involved in such conversion), or listing on any domestic securities exchange, before such shares may be issued upon exercise of this Warrant, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered, listed or approved for listing on such domestic securities exchange, as the case may be. 5. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant Agreement, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 6. NO RIGHTS AS SHAREHOLDER. This Warrant Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of this Warrant. 7. WARRANTHOLDER REGISTRY. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 8. ADJUSTMENT RIGHTS. The Exercise Price per share and the number of Warrant Shares purchasable hereunder are subject to adjustment, as follows: (a) MERGER AND SALE OF ASSETS. If at any time there shall be a capital reorganization of the shares of the Company's stock (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person (hereinafter referred to as a "Merger Event"), then, as a part of such Merger Event, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive, upon exercise of the Warrant, the number of Warrant Shares or other marketable securities of the successor corporation resulting from such Merger Event, equivalent in rights and value to that which would have been issuable if the Warrantholder had exercised this Warrant immediately prior to the Merger Event. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interest of the Warrantholder after the Merger Event to the end that the provisions of this Warrant Agreement (including adjustments of the Exercise Price and number of Warrant Shares purchasable) shall be applicable as nearly as E-81 4 practicable in relation to any shares of stock, securities or assets thereafter deliverable upon exercise thereof. Notwithstanding the foregoing, at the election of the Warrantholder, the Company shall purchase the unexercised portion of this Warrant for cash upon the closing of any Merger Event in which the Warrantholder does not receive securities which are either (i) immediately publicly saleable without further registration or delay or (ii) immediately registrable on the same terms as set forth in Section 9(e) hereof in an amount equal to (x) the Fair Market Value of any consideration that would have been received by the Warrantholder had the Warrantholder exercised the unexercised portion of this Warrant immediately before the record date for determining the shareholders entitled to participate in the proceeds of the Merger Event, less (y) the aggregate Exercise Price, but in no event less than zero. (b) RECLASSIFICATION OF SHARES. If the Company at any time shall, by combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change. (c) SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time shall combine or subdivide its Common Stock, the Exercise Price shall be proportionately decreased in the case of a subdivision, or proportionately increased in the case of a combination. (d) STOCK DIVIDENDS. If the Company at any time shall pay a dividend payable in, or make any other distribution (except any distribution specifically provided for in the foregoing subsections (a) or (b)) of the Company's stock, then the Exercise Price shall be adjusted, from and after the record date of such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of all shares of the Company's stock outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of all shares of the Company's stock outstanding immediately after such dividend or distribution. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of Warrant Shares (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (e) ANTI-DILUTION RIGHTS. Except in connection with the Company's up to $5 million proposed private placement of Series B Preferred Stock and Warrants on or before January 31, 1997, if the Company at any time while this Warrant is outstanding shall grant to any holder of the Company's capital stock or to any holder of any security exchangeable or convertible into or exercisable for capital stock of the Company (each, a "Holder") any right (i) to adjust the number of shares of capital stock owned by such Holder or to be acquired by such Holder pursuant to any exchange, conversion or exercise, or (ii) to adjust the exercise, conversion or exchange price for shares of capital stock of the Company, upon the happening of certain events (the "Trigger Event") in order to maintain and preserve, without dilution, the value of such Holder's shares and the percentage of such Holder's ownership in the Company prior to the Trigger Event ("Anti-Dilution Rights"), then the Company shall also grant Anti-Dilution Rights to the Warrantholder on the same terms and conditions granted to such Holder. In the event the Company grants Anti-Dilution Rights to more than one Holder upon different terms and conditions, then the Company shall grant to Warrantholder the Anti-Dilution Rights granted to the Holder with the terms and conditions which the Warrantholder determines, in its sole discretion, to be most favorable to the Warrantholder. E-82 5 (f) NOTICE OF ADJUSTMENTS. If: (i) the Company shall declare any dividend or distribution upon its stock, whether in cash, property, stock or other securities; (ii) the Company shall offer for subscription pro rata to the holders of Common Stock or other stock any additional shares of stock of any class or other rights; (iii) there shall be any Merger Event; or (iv) there shall be any voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (A) at least twenty (20) days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of such Merger Event, dissolution, liquidation or winding up; and (B) in the case of any such Merger Event, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such Merger Event, dissolution, liquidation or winding up). In the case of a public offering, the Company shall give the Warrantholder at least twenty (20) days written notice prior to the effective date thereof. Each such written notice shall set forth, in reasonable detail, (i) the event requiring the adjustment, (ii) the amount of the adjustment, (iii) the method by which such adjustment was calculated, (iv) the Exercise Price, and (v) the number of shares subject to purchase hereunder after giving effect to such adjustment, and shall be given by first class mail, postage prepaid, addressed to the Warrantholder, at the address as shown on the books of the Company. 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. (a) RESERVATION OF WARRANT SHARES. The Warrant Shares issuable upon exercise of the Warrant granted under this Warrant Agreement have been duly and validly reserved and, when issued in accordance with the provisions of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever. The Company has made available to the Warrantholder true, correct and complete copies of its Articles of Organization and Bylaws, as amended to date. The issuance of certificates for shares of Common Stock upon exercise of the Warrant granted under this Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax or transfer tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of Warrant Shares. (b) DUE AUTHORITY. The execution and delivery by the Company of this Warrant Agreement and the performance of all obligations of the Company hereunder, including the issuance to Warrantholder of the right to acquire the Warrant Shares upon exercise of the Warrant granted hereby, have been duly authorized by all necessary corporate action on the part of the Company, and this Warrant Agreement is not inconsistent with the Company's Articles of Organization or Bylaws, each as amended to date, does not contravene any law or governmental rule, regulation or order applicable to it, does not and will not contravene any provision of, or constitute a default under, any material indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and this Warrant Agreement and the Warrant evidenced hereby constitute legal, valid and binding agreements of the Company, enforceable against it in accordance with their terms. (c) CONSENTS AND APPROVALS. No consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement. (d) ISSUED SECURITIES. All issued and outstanding shares of capital stock and other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding shares of capital stock and other securities of the Company were issued in full compliance with all applicable Federal and state securities laws. In addition, in E-83 6 accordance with the Company's Articles of Organization, no shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock. (e) REGISTRATION RIGHTS. The Company hereby acknowledges and agrees that the Warrantholder shall have, with respect to the Warrant Shares, the following registration rights: (i) CERTAIN DEFINITIONS. As used in this Section 9(e), the term "Registrable Securities" shall mean the Warrant Shares, and/or any or all of the shares of Common Stock issued or issuable upon exercise of this Warrant. (ii) "PIGGYBACK" REGISTRATION. From the date hereof until the expiration date of the Warrant set forth in Section 2 of this Warrant Agreement, the Company shall advise the Warrantholder, whether the Warrantholder holds this Warrant or has exercised this Warrant and holds any of the Common Stock, by written notice at least four weeks prior to the filing of any new registration statement or post-effective amendment thereto under the 1933 Act (other than a registration statement on Form S-8 or its counterpart), or any Notification on Form 1-A under the 1933 Act, covering any securities of the Company, whether for its own account or for the account of others, and shall, upon the request of the Warrantholder, include in any new registration statement such information as may be required to permit a public offering of any or all of the Registrable Securities of the Warrantholder subject to cutbacks imposed by underwriters or the Company in the same manner and to the same extent as applied to other selling securityholders, all at no expense whatsoever to the Warrantholder, except that the Warrantholder shall bear the fees of its own counsel and any underwriting discounts or commissions applicable to the Common Stock sold by it. (iii) Demand Registration. ------------------- (1) If the Warrantholder shall give notice to the Company,at any time prior to the expiration date of the Warrant set forth in Section 2 of this Agreement, to the effect that such Warrantholder desires to register under the 1933 Act any Registrable Securities representing at least one third of the Warrant Shares originally issuable hereunder under such circumstances that a public distribution (within the meaning of the 1933 Act) of any such securities shall be involved, then the Company shall promptly, but no later than ninety (90) days after receipt of such notice, file a new registration statement under the 1933 Act, to the end that Registrable Securities of such Warrantholder may be publicly sold under the 1933 Act as promptly as practicable thereafter, and the Company shall use its best efforts to cause such registration to become effective as soon as possible; PROVIDED, HOWEVER, that the Warrantholder shall furnish the Company with appropriate information in connection therewith as the Company may reasonably request in writing; and provided further that the Company shall then have available current financial statements (unless the unavailability of current financial statements results from the Company's fault or neglect). (2) All costs and expenses (including without limitation, legal, accounting, printing, mailing and filing fees) of such registration effected under this Section 9(e)(iii) shall be borne by the Company, except that the Warrantholder shall bear the fees of its own counsel and any underwriting discounts or commissions applicable to the securities sold by it. (3) The Company shall cause each registration statement filed pursuant to this Section 9(e)(iii) to remain current under the 1933 Act (including the taking of such steps as are necessary to obtain the removal of any stop order) for a period of at least ninety (90) days (and for up to an additional ninety (90) days if requested by Warrantholder) from the effective date thereof, or until all the Registrable Securities included in such registration have been sold, whichever is earlier. (iv) FURTHER RIGHTS. The registration rights provided by this Section 9 may be exercised by the Warrantholder either prior or subsequent to its exercise of this Warrant. The Warrantholder may, at its option, request registration pursuant to Section 9(e)(ii) E-84 7 and/or pursuant to Section 9(e)(iii), and its request for registration under one such Section shall not affect its right to request registration under the other. (v) FURTHER OBLIGATIONS OF COMPANy. With respect to all registrations under this Section 9, the Company shall: (i) supply prospectuses and such other documents as the Warrantholder may reasonably request in order to facilitate the public sale or other disposition of the Registrable Securities; (ii) use its best efforts to register and qualify the Registrable Securities for sale in such states as the Warrantholder designates (provided, however, that in no event shall the Company be required to qualify as a foreign corporation or a dealer in securities or to execute a general consent to service of process); and (iii) do any and all other acts and things which may be necessary to enable the Warrantholder to consummate the public sale or other disposition of the Registrable Securities. (f) EXEMPT TRANSACTION. Subject to the accuracy of the Warrantholder's representations in Section 10 hereof, the issuance of the Warrant Shares upon exercise of this Warrant will constitute a transaction exempt from (i) the registration requirements of Section 5 of the 1933 Act and (ii) the qualification requirements of applicable state securities laws. (g) COMPLIANCE WITH RULE 144. At the written request of the Warrantholder who proposes to sell Warrant Shares issuable upon the exercise of the Warrant in compliance with Rule 144 promulgated by the Securities and Exchange Commission, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. (i) INFORMATION RIGHTS. So long as the Warrantholder holds this Warrant and/or any of the Warrant Shares, the Company shall deliver to the Warrantholder (a) promptly after mailing, copies of all annual reports, notices or other written communications to the shareholders of the Company; (b) within ninety (90) days after the end of each fiscal year of the Company, the annual audited financial statements of the Company certified by independent public accountants of recognized standing and (c) within forty-five (45) days after the end of each of the first three quarters of each fiscal year, the Company's quarterly, unaudited financial statements. 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder: (a) INVESTMENT PURPOSE. The right to acquire Warrant Shares or the Warrant Shares issuable upon exercise of the Warrant granted hereby will be acquired for investment and not with a view to the sale or distribution of any part thereof in violation of applicable securities laws, and the Warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) PRIVATE ISSUE. The Warrantholder understands (i) that the Warrant Shares issuable upon exercise of this Warrant are not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) DISPOSITION OF WARRANTHOLDER'S RIGHTS. In no event will the Warrantholder make a disposition of any of its rights to acquire Warrant Shares or Warrant Shares issuable upon exercise of such rights unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an E-85 8 opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) reasonably satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act and applicable "blue sky" regulations has been taken, or (B) an exemption from the registration requirements of the 1933 Act and applicable "blue sky" regulations is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Warrant Shares or Warrant Shares issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular Warrant Share when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Warrantholder or holder of a Warrant Share then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such Warrant Shares not bearing any restrictive legend. (d) FINANCIAL RISK. The Warrantholder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment. 11. TRANSFERS. Subject to the terms and conditions contained in Section 10 hereof, this Warrant Agreement and all rights hereunder are transferable in whole or in part by the Warrantholder and any successor transferee. The transfer shall be recorded on the books of the Company upon receipt by the Company of a notice of transfer in the form attached hereto as APPENDIX III (the "Transfer Notice"), at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. 12. MISCELLANEOUS. (a) EFFECTIVE DATE. The provisions of this Warrant Agreement shall be construed and shall be given effect in all respects as if it had been executed and delivered by the Company on the date hereof. This Warrant Agreement and the Warrant granted hereunder and evidence hereby shall be binding upon any successors or assigns of the Company. (b) ATTORNEY'S FEES. In any litigation, arbitration or court proceeding between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to reasonable attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) GOVERNING LAW; JURISDICTION. This Warrant Agreement shall be governed by and construed for all purposes under and in accordance with the internal laws of the Commonwealth of Massachusetts. The Company hereby submits to the non-exclusive jurisdiction of any state or federal court of competent jurisdiction of the Commonwealth of Massachusetts or the State of California for the purpose of any suit, action or other proceeding arising out of, or with respect to this Warrant Agreement, and expressly waives any and all objections it may have as to venue in any of such courts or as to inconvenient forum. E-86 9 (d) COUNTERPARTS. This Warrant Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) NOTICES. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, upon confirmed receipt if sent by facsimile transmission, three (3) days after deposit in the United States mail, first class, postage prepaid or one (1) day after delivery by overnight courier, addressed (i) to the Warrantholder at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, Massachusetts 02181, Attention: David B. Fischer, Senior Vice President (and/or, if by facsimile, 617/431-9906) and (ii) to the Company at 8 New England Executive Park, Burlington, Massachusetts 01803, Attention: Frederick H. Phillips (and/or if by facsimile, 617/229-9864) or at such other address as any such party may subsequently designate by written notice to the other party). (f) REMEDIES. In the event of any default hereunder, the non-defaulting party may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including but not limited to an action for damages as a result of any such default, and/or an action for specific performance for any default where the Warrantholder will not have an adequate remedy at law and where damages will not be readily ascertainable. (g) NO IMPAIRMENT OF RIGHTS. The Company will not, by amendment of its Articles of Organization or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Warrantholder against impairment. (h) SURVIVAL. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) SEVERABILITY. In the event any one or more of the provisions of this Warrant Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. (j) AMENDMENTS. Any provision of this Warrant Agreement may be amended by a written instrument signed by the Company and by the Warrantholder. * * * * * * * E-87 10 CAYENNE SOFTWARE, INC. WARRANT AGREEMENT SIGNATURE PAGE -------------- IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its officers thereunto duly authorized as of the Effective Date. CAYENNE SOFTWARE, INC. By: ------------------------------------- Its Chief Financial Officer Warrantholder: SILICON VALLEY EAST By: ------------------------------------- David B. Fischer, Senior Vice President SILICON VALLEY BANK (signed at Santa Clara, CA) By: ------------------------------------- Name: S-1 11 APPENDIX I NOTICE THAT WARRANT IS ABOUT TO EXPIRE -------------------------------------- Silicon Valley Bank Wellesley Office Park 40 William Street, Suite 350 Wellesley, MA 02181 Attn: Chief Financial Officer Dear:______________________ This is to advise you that the Warrant issued to you described below will expire on ______________ __, ______. Issuer: Cayenne Software, Inc. Issue Date: December , 1996 Class of Security Issuable: Common Stock Exercise Price per Share: ____________________ Number of Shares Issuable: ___________________ Procedure for Exercise: ______________________ Please contact [name of contact person at (phone number)] with any questions you may have concerning exercise of the Warrant. This is your only notice of pending expiration. Cayenne Software, Inc. By: ------------------------------ Its: 12 APPENDIX II NOTICE OF EXERCISE ------------------ [Strike paragraph that does not apply.] 1. The undersigned hereby elects to purchase ________ shares of the Common Stock of Cayenne Software, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 1. The undersigned hereby elects to convert the attached Warrant into Shares/cash [strike one] in the manner specified in the Warrant. This conversion is exercised with respect to of the Shares covered by the Warrant. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name as is specified below: __________________________________________________________________________ (Name) __________________________________________________________________________ _____________________________________ (Address) 3. The undersigned represents it is acquiring the shares solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof except in compliance with applicable securities laws. _________________________ ____________________________________ (Date) (Signature) 13 ACKNOWLEDGMENT OF EXERCISE The undersigned ________, hereby acknowledges receipt of the "Notice of Exercise" from Warrantholder, to purchase ________shares of the Common Stock of Cayenne Software, Inc., pursuant to the terms of the Warrant Agreement, and further acknowledges that ________ shares remain subject to purchase under the terms of the Warrant Agreement. Company: Cayenne Software, Inc. By:_______________________________ Title:____________________________ Date:_____________________________ 14 APPENDIX III TRANSFER NOTICE --------------- (To transfer or assign the foregoing Warrant Agreement execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights evidenced thereby are hereby transferred and assigned to _________________________________________ (Please Print) whose address is ________________________ _________________________________________ Dated _______________________________________ Holder's Signature __________________________ Holder's Address ____________________________ ____________________________ Signature Guaranteed: _______________________________________ NOTE: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant Agreement, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant Agreement. EX-10.23 7 1997 BONUS PLAN OF CAYENNE 1 Exhibit 10.23 Cayenne Software, Inc. FY 97 Bonus Plan A portion or all of each executive officer's bonus will be based on the achievement of net income before taxes by Cayenne Software, Inc. (the "Company"). The bonus will be paid as follows: (A) For the Company's President: 4.0% of year-end total net income before taxes. (B) For the Company's Senior Vice President of Product Operations: (i) 33.3% of base salary for achievement versus plan of total worldwide software license and maintenance revenue (This incentive will be computed and paid quarterly in increments of 1% over 90% (up to 100%), maximum quarterly payout is the quarterly incentive target.), and (ii) 33.3% of base salary for year-end net income before taxes (This will result in 3.33% of base pay for every one (1) percentage of net income before taxes and is payable at year end). (C) For the Company's Senior Vice President of Worldwide Field Operations: (i) 40.0% of base salary for achievement of worldwide revenue versus plan will be computed and paid monthly, (ii) 30% of base salary for achievement of worldwide operations contribution margin versus plan will be computed and paid quarterly, and (iii) 30% of base salary for achievement of year-end company net income before taxes, wherein 3% of base pay will be paid for each one (1) percentage point of net income before taxes and is payable at year end. (D) For the Company's Vice President of North American Sales: (i) 45% of base salary for achievement of North American sales revenues versus plan will be computed and paid monthly, (ii) 34% of base salary for achievement of North American operations contribution margin versus plan will be computed and paid quarterly, and (iii) 11% of base salary for achievement of year-end company net income before taxes, wherein 1.1% of base pay will be paid for each one (1) percentage point of net income before taxes and is payable at year end. (E) For the Company's Vice President of Marketing: (i) 20% of base salary for achievement of worldwide license revenue achievement versus plan will be computed and paid monthly, and (ii) 20% of base salary for achievement of year-end company net income before taxes, wherein 2% of base pay will be paid for each one (1) percentage point of net income before taxes and is payable at year end. (F) For the Company's Vice President/General Counsel and Vice President/Chief Financial Officer: 36% of base salary for achievement of year-end company net income before taxes, wherein 3.6% of base pay will be paid for each one (1) percentage point of net income before taxes and is payable at year end. (G) For the Company's Vice President of Human Resources: 20% of base salary for achievement of year-end company net income before taxes, wherein 2.0% of base pay will be paid for each one (1) percentage point of net income before taxes and is payable at year end. Net income before taxes will be calculated excluding any restructuring charges taken for FY 1997. EX-21.1 8 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES
NAME OF JURISDICTION OF SUBSIDIARY INCORPORATION ---------- --------------- Cayenne Software GmbH ............................... Germany Bachman Information Systems Canada, Ltd. ............ Canada Bachman International Ltd. .......................... Delaware Cayenne Software S.A.R.L. ........................... France Cayenne Software S.R.L. ............................. Italy Bachman Information Systems Limited ................. United Kingdom Bachman Securities Corporation ...................... Massachusetts WindTunnel Software, Inc. ........................... Delaware CSI Acquisition Corporation ......................... Massachusetts Cayenne Software Asia Pacific Pte. LTD. ............. Singapore Cayenne Software Spain S.L. ......................... Spain Cadre Technologies, Inc. ............................ Delaware Cadre Technologies, International ................... Oregon Cadre Technologies S.A. ............................. Switzerland Cadre Technologies, France S.A. ..................... France Cadre Technologies GMBH ............................. Germany Cayenne Software Pty Limited ........................ Australia Cayenne Software Limited ............................ United Kingdom Westmount Technologies B.V. ......................... Netherlands Westmount U.S.A., Inc. .............................. Delaware Micro Case, Inc. .................................... Delaware
EX-23.1 9 CONSENT OF COOPERS & LYBRAND 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholders of Cayenne Software, Inc. We consent to the incorporation by reference in the Registration Statements of Cayenne Software, Inc. (formerly Bachman Information Systems, Inc.) on Form S-8 (File Nos. 33-87314, 33-53298, 33-48766, 33-71964 and 333-12139) and Form S-3 (File Nos. 33-99956 and 33-89940) of our report, which included an explanatory paragraph about the merger of Cayenne Software, Inc. and Cadre Technologies Inc. which has been accounted for as a pooling of interests, dated February 25, 1997, on our audits of the consolidated financial statements of Cayenne Software, Inc. as of December 31, 1996 and June 30, 1996, and for the six month period ended December 31, 1996 and the year ended June 30, 1996, which report is included in this Annual Report on Form 10-K. Boston, Massachusetts COOPERS & LYBRAND L.L.P. March 28, 1997 EX-23.2 10 CONSENT OF DELOITTE & TOUCHE 1 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-87314, 33-53298, 33-48766, 33-71964 and 333-12139 of Cayenne Software, Inc. on Form S-8 and Registration Statement No. 33-99956 and 33-89940 of Cayenne Software, Inc. on Form S-3 of our report dated February 2, 1996 (relating to the consolidated financial statements of Cadre Technologies Inc. and subsidiaries) appearing in this Annual Report on Form 10-K of Cayenne Software, Inc. for the transition period ended December 31, 1996. Deloitte & Touche LLP Boston, MA March 28, 1997 EX-27 11 FINANCIAL DATA SCHEDULE
5 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 FORM 10-K. 0000880229 CAYENNE SOFTWARE, INC. 1,000 U.S. DOLLARS 6-MOS DEC-31-1996 JUL-01-1996 DEC-31-1996 1 4,150 0 14,140 820 0 18,845 17,001 14,745 22,236 22,785 0 0 0 177 (832) 22,236 10,131 27,976 1,521 6,496 27,506 0 296 (5,969) 399 (6,368) 0 0 0 (6,368) (0.36) (0.36)
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