-----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, WmbEWCb4DIR7dgD3MR+TTmwA92OIK7TQc619f2Y3kwJaxowUssm4ynCu3XUDUgGE QAgkqYMvMSUQYtAATNjtWQ== 0000950135-98-002109.txt : 19980401 0000950135-98-002109.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950135-98-002109 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19682 FILM NUMBER: 98583326 BUSINESS ADDRESS: STREET 1: 8 NEW ENGLAND EXECUTIVE PARK CITY: BURLINGTON STATE: MA ZIP: 01803 BUSINESS PHONE: 6172739003 MAIL ADDRESS: STREET 1: 8 NEW ENGLAND EXECUTIVE PARK CITY: BURLINGTON STATE: MA ZIP: 01803 FORMER COMPANY: FORMER CONFORMED NAME: BACHMAN INFORMATION SYSTEMS INC /MA/ DATE OF NAME CHANGE: 19921111 10-K 1 CAYENNE SOFTWARE, INC. 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 FISCAL YEAR ENDED DECEMBER 31, 1997 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.) 14 CROSBY DRIVE BEDFORD, MASSACHUSETTS 01730 TELEPHONE NUMBER (781) 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. As of March 18, 1998, there were 21,299,545 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 $46,154,086. 1 2 CAYENNE SOFTWARE, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 TABLE OF CONTENTS PART I
PAGE Item 1. Business....................................................... 3 Item 2. Properties..................................................... 12 Item 3. Legal Proceedings.............................................. 13 Item 4. Submission of Matters to a Vote of Security Holders............ 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................... 13 Item 6. Selected Financial Data........................................ 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 15 Item 8. Financial Statements and Supplementary Data.................... 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................ 47 PART III Item 10. Directors and Executive Officers of the Registrant............ 48 Item 11. Executive Compensation........................................ 48 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. 48 Item 13. Certain Relationships and Related Transactions................ 48 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... 48 Signatures............................................................. 51
2 3 PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Cayenne Software, Inc. (formerly Bachman Information Systems, Inc.) ("Cayenne" or the "Company"), organized as a Massachusetts corporation in 1983, develops, markets and supports a suite of workgroup-to-enterprise analysis and design solutions for the practical challenges software developers face every day. Global 2000 companies and government agencies around the world use Cayenne products as they develop, implement, and maintain enterprise-wide, business-critical information systems, such as billing, trading, and customer support applications, as well as mission-critical technical embedded systems such as telecommunications switching software, aeronautics, and navigation systems. These companies and agencies are using computing platforms ranging from Intel-based computers running Microsoft operating systems, to UNIX workstations, mid-range, and mainframe computers. Cayenne's products are designed around an open architecture that enables organizations to create applications that integrate diverse information sources into new high-performance computing environments, to modify applications as business requirements and technologies change, and to run those applications on a variety of platforms. Cayenne's approach to reusability and its open architecture support applications being developed using business modeling, data modeling and database design, structured modeling, and object-oriented modeling, with target computing architectures ranging from mainframe to client-server to n-tiered to inter/intranet. The Company faces many challenges in providing customers with a more open and flexible set of solutions. The Company has addressed some of these challenges over the past several years by introducing additional products targeted at the client/server and object-oriented markets both through internal development and by means of acquisitions. The actions necessary to execute this transition have had an adverse effect on the Company's operating results for the year ended December 31, 1997 and for the transition period from July 1, 1996 through December 31, 1996 and fiscal years ended June 30, 1996 and 1995, respectively, and may continue to adversely affect operating results in the future. 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." ACQUISITIONS On March 27, 1997, the Company acquired the assets and liabilities of Multiquest Corporation ("Multiquest") in a transaction accounted for as a purchase. The Company acquired such assets and liabilities in exchange for 50,000 shares of the Company's common stock. The purchase price for Multiquest was approximately $209,000 based upon a stock price of $4.1875 (which approximated the fair market value of the Company's common stock at the closing of the acquisition). The net tangible assets and liabilities of Multiquest acquired by the Company were insignificant. The purchase price was allocated to the fair value of the technology acquired and customer lists. The Company's results reflect the allocation of the purchase price in accordance with generally accepted accounting principles and the results of operations reflect the impact of the acquisition since the closing date. The pro-forma results of Multiquest prior to the acquisition would be immaterial to the Company's reported results and are therefore not presented. The acquisition resulted in Cayenne Software having rights to a low-cost, entry level Object Oriented design tool named "S-Case", renamed "PepperSeed" and subsequently "ClassDesigner" by Cayenne. (See, Also Note 13 to the Consolidated Financial Statements) On July 18, 1996, the Company completed its acquisition of Cadre Technologies Inc. ("Cadre") under an Agreement and Plan of Merger (the "Merger Agreement") dated as of March 25, 1996 by and among the Company, Cadre and B.C. Acquisition Corp. ("Acquisition Corp"), a wholly-owned subsidiary of the Company. The Merger Agreement provided that upon the terms and subject to the conditions specified therein that, effective on the closing, Acquisition Corp. would be merged with and into Cadre, the separate corporate existence of Acquisition Corp. would cease, and Cadre would continue as the surviving corporation in the merger and as a wholly-owned subsidiary of the Company. The acquisition was accounted for as a "pooling of interests" during the six-month transition period ended 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. Stratagem Partnering Inc. acted as the Company's financial advisor in connection with the Cadre acquisition. This acquisition added a number of products to Cayenne's tool suite, including "Teamwork", a structured modeling tool, "Ensemble", a C language reverse engineering and modeling tool, and products resulting from Cadre's earlier acquisition of Westmount BV. 3 4 INDUSTRY BACKGROUND SOFTWARE DEVELOPMENT IN THE LATE 1990'S For most software development teams, the task of developing systems and applications continues to become more complicated. The business climate of the late 1990's is one of increasing pressure on organizations to react quickly to change, to rapidly offer new services and products to remain competitive, and to find greater economies in their operations. This requires supporting software to be more flexible, user friendly, and more reusable, while holding to high quality standards. Newly emerging technologies must be exploited, yet the systems being developed must work side-by-side with systems build or acquired over the last three decades. To remain competitive in this business climate, commercial business managers, systems analysts, and project managers, as well as technical systems engineers and product managers need to redefine goals, involve users, understand their requirements and take the time to plan and design their systems carefully. Most software project costs are committed in the early stages of analysis and system design. In projects that are not carefully planned, a significant percent of software defects are introduced before the first line of code is written. If they are corrected at this point, the costs are low. If corrections are delayed until the implementation phase, however, the price tag can be significantly higher. THE NEED FOR MODELING Software modeling tools encourage teams to spend the necessary time to understand project requirements and to design applications which directly address those requirements in a well-architected manner. This alone can reduce software errors, their associated costs and possibly months of development time devoted to correcting those errors. Modeling also allows software designers and developers to improve their development lifecycle and reduce costs as a result of other product features as well. By planning ahead, they can design components to be reusable by others, reducing errors and increasing productivity. Reusability permits them to construct new products from proven components - shortening the testing time of a new product (thus allowing them to deliver more quickly to market), and raising confidence in the product's overall quality (making the product more competitive). With well-defined, graphical models of their systems, designers can communicate easily with team members, avoiding errors, misunderstanding, and duplication of efforts. Certain features built into modeling tools, such as code generation and DDL (data definition language) generation, can automate much of the work to save time and ensure accuracy. In these ways, modeling tools allow developers to work more efficiently, and to generate higher quality, more supportable software - ultimately improving their return on investment. An additional and important byproduct of modeling is the automatic generation of complete and accurate systems documentation, improving software supportability, and improving the expertise of developers for existing applications. Modeling provides a mechanism whereby teams of engineers may communicate using a common language and notation - reducing costly misunderstandings or design conflicts. Up-to-date system documentation reflecting that common language provides a means for that communication. CAYENNE'S MARKET SEGMENTATION Cayenne Software groups its customers and prospects into three market segments: IS/IT, Market-driven, and Bid-driven. The sales approach, product features, and support requirements differ from segment to segment, as explained below. IS/IT MARKET SEGMENT Software development organizations in the IS/IT (Information Systems / Information Technology ) market segment develop software primarily for in-house use. They are development groups within an IS organization who, for example, develop software to generate reports against a corporate database, develop customer billing applications, general ledger programs, and payroll applications. IS/IT 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 4 5 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. Today, several very different types of technology coexist in large organizations, each serving the needs of a specific user constituency. This diversity of technology creates serious challenges for information systems professionals, as they work to build new applications, maintain "legacy" applications, incorporate and support new computing platforms (Client/Server, Inter/Intranet), and integrate a growing variety of database technologies and applications for improved access to information. To manage and evolve their data-based systems, IS/IT organizations will use a variety of modeling techniques. They will use business and data modeling to design the processes that should be followed and the data which must flow between organizations in order to keep the business operational. They will also use database design tools to design the actual databases and database tables that will store that data. For the applications or systems which must operate on that data, IS/IT organization will either use traditional, structured programming, or will be using more modern object-oriented programming techniques. In the latter case, they may be well served with object modeling tools to aid in their design. The IS/IT market segment uses a variety of modeling tools to manage data and develop software today: business modeling, tools, data modeling and database design tools, and application (recently object oriented) modeling tools. Cayenne's Groundworks, Terrain, and ObjectTeam, respectively, are examples of modeling tools used in IS/IT. MARKET-DRIVEN SEGMENT Software developers in the market-driven segment are creating software applications for the purpose of resale. These applications may be packaged applications (such as off-the-shelf MRP-II applications and accounts payable programs), tools (such as development tools, compilers, operating systems, CAD/CAM systems), or software embedded in consumer and commercial devices (such as controller software in laser printers, anti-lock braking systems, and heart monitors). The challenge for market-driven companies is to deliver superior, commercially acceptable and competitive software quickly. In packaged software, time to market is a key differentiator. Additionally, market-driven applications need to take full advantage of the latest technologies, platforms, and methodologies. Increasingly, packaged applications are being used to augment legacy systems in IS/IT organizations. These organizations will want to replace their mainframe based systems with client-server or web-based applications, running on modern PC or UNIX workstation based computers. The applications provided by market-driven developers will need to support more complex, heterogeneous computing environments, using the appropriate programming languages, tools, and methodologies on those environments. For packaged applications the choice of development technology today is object orientation. Modeling tools are required which support the analysis and design of object classes, associations, and components, facilitating object reuse and better design. Cayenne's ObjectTeam and ClassDesigner products are object modeling tools. ObjectTeam is designed for teams of developers working on complex applications, needing to do in-depth analysis and design of object oriented systems; ClassDesigner is an entry-level object design product for individuals just beginning with object oriented development. For embedded software, object oriented techniques are gradually replacing more traditional structured modeling techniques, but the latter is still prevalent. Structured modeling provides analysis and design for software development following the industry standard software development process of the 1980's, and is still widely in use today. For many organizations developing technical embedded software, there is a perceived value to the deterministic nature of structured design and there is no perceived advantage of object orientation over structured design which would justify the investment to migrate to a new methodology. These organizations continue to use structured techniques, aided by structured modeling tools, such as Cayenne's TeamWork product. BID-DRIVEN MARKET SEGMENT Software developers in the bid-driven segment are creating software applications on contract, in response to a detailed requirements specification. These software applications may be technical in nature (such as embedded navigation software for a fighter plane being developed for the federal government) or commercial in nature (such as a financial management system being developed for an insurance company). The software they develop can be as technical as that of the market-driven segment, with all of the technical challenges. Since many of the systems and applications being developed in this market segments are mission- or life-critical, the 5 6 quality and reliability of the system is extremely important, further emphasizing the need to design them well from the start. Unique to the bid-driven segment, it is usually necessary to prove that all the original requirements specified during the bid process were met, and which sections of software directly addressed them. Integration with requirements definition and traceability tools is therefore important. Also unique to the bid-driven segment, it is as important to deliver systems documentation for the delivered software as the software itself. Many of these systems must be maintained for decades, also contributing to the need for accurate and complete systems documentation. Cayenne's analysis and design products, in addition to complementary products supported through strategic partnerships, directly address the additional requirements of the bid-driven market segment. Both TeamWork and ObjectTeam provide solutions for generating complete, accurate systems documentation from the actual model of the system - "model-driven documentation". Integration with leading requirements definition and traceability tools satisfy the need to prove compliance to contact. Cayenne's Groundworks and Terrain products provide detailed, up to date models of the data and processes which define the information necessary to operate an enterprise. CAYENNE'S STRATEGIC DIFFERENTIATORS Cayenne takes the following approach to these areas, which provides a number of benefits to organizations seeking strategic solutions to their information systems challenges. ANALYSIS AND DESIGN SOLUTIONS FOR A WIDE VARIETY OF MODELING APPROACHES. Cayenne's products support analysis and design for every major approach to modeling: business process modeling (ProcessTeam), data modeling (Groundworks), database design (Terrain), structured modeling (TeamWork), and object oriented modeling (ObjectTeam and ClassDesigner). One market in which this breadth is particularly useful is the IS/IT segment, where developers wish to develop applications using latest object oriented techniques, but must have those applications access legacy or traditional relational database systems. The integration of Cayenne's ObjectTeam (object oriented modeling) with Groundworks (traditional data modeling) and Terrain (relational database design) provides a unique, single-vendor solutions to this "coexistence" challenge. Having access to a variety of analysis and design tools is also important to developers of technical applications, whether in the market or bid-driven segment. Since most development is an iterative process, development organizations will want to reuse designs used with earlier technology while they implement new designs with newer technology. For these technical developers, access to Teamwork for structured modeling and ObjectTeam for object oriented modeling, may be highly desirable. TECHNOLOGY INDEPENDENCE. Cayenne solutions enforce a separation between conceptual business requirements or systems analysis, 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 to focus on business requirements, increasing the likelihood that the finished application will meet those requirements. This separation is evidenced in the areas of business modeling and database design (ProcessTeam and Groundworks - conceptual, Terrain - physical), structured modeling (Teamwork - conceptual, Ensemble - physical), and ObjectTeam (analysis and higher level design phases - conceptual, object design and code generation phases - physical). SUPPORT FOR AN ITERATIVE DEVELOPMENT PROCESS. Software development projects often do not have the luxury of "starting from scratch". Typically, software will be developed starting from a foundation of pre-existing software. The challenge for software project managers is to continue to innovate and enhance subsequent versions of software. While Cayenne solutions address the entire life cycle of application development, there is no assumption that the software is being designed "from scratch". 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. The structured and object modeling products allow the reverse engineering of legacy software into models, which can then be reworked and enhanced to generate new systems or subsequent versions of an existing system. This inherent support for an iterative development process is a key factor in the value added by analysis and design modeling tools. SUPPORT FOR HETEROGENEOUS COMPUTING ENVIRONMENTS. Used individually, Cayenne products provide users with sophisticated solutions to application development problems. Cayenne enhances their utility by providing these tools on a variety of 6 7 computing platforms - from PC Windows to NT to a variety of UNIX systems. 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, software developers, and database designers can work in concert. 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 facilitating the development of data and application models, so that existing solutions are well documented and understood and easily accessible for use in other systems. Additionally, the support in ObjectTeam, ClassDesigner, Ensemble, and Terrain to reverse engineer legacy systems (code and databases) directly enables reuse. Also, both ClassDesigner and ObjectTeam include models of industry-standard class libraries of components, such as the Java JDK and the Microsoft Foundation Classes. By providing built-in models of these components, developers have easier access to standard components that may fit their purpose. In ObjectTeam, a corporate grouping mechanism allows software developers to populate a publicly accessible area with components designed and intended for reuse. SUPPORT FOR TEAM DEVELOPMENT. Cayenne's ObjectTeam and TeamWork tools have built-in mechanisms (repositories) which specifically provide advance support for large teams of developers working on the same project or projects simultaneously. Cayenne's tool, Shared Work Manager, provides similar team support for teams of business and process designers. STRATEGIC DIRECTION Cayenne continues to invest in solutions that facilitate development of critical applications that are applicable across multiple platforms and can be used throughout the application development life cycle. These solutions result from a combination of Cayenne-built software products, joint development efforts with partners, acquired technology, and services provided by Cayenne's experienced trainers and consultants. Cayenne has invested in its client/server, object-oriented, and structured analysis solutions, recognizing that many organizations will need to maintain multiple types of environments for some time to come. Although, the Company is well positioned in the midst of several industry megatrends, towards data warehousing, the internet and intranet, the use of the object-oriented software development approach, and Year 2000 reengineering initiatives, it has not yet seen rising demand that has translated to positive operating results CAYENNE'S SOLUTIONS Cayenne's diverse solutions, composed of software products and services, assist complex systems designers and information systems specialists in the following areas: modeling systems and business requirements; designing and re-engineering legacy code and databases; developing and deploying embedded systems, IT systems, and packaged applications. Cayenne products provide a team-based structured analysis and design, object-oriented analysis and design, and business process and data modeling. The suite of products and services provided by Cayenne and its complementary tool partners allows customers to choose from the wide variety of application development tools on the market that best meet their needs. Cayenne offers products and services today in each of the following solution areas. OBJECT ORIENTED TECHNOLOGY Cayenne's OBJECTTEAM is an analysis and design tool which automates and manages object oriented software construction using industry standard modeling notations such as the Unified Modeling Language (OMG UML) and Object Modeling Technique (OMT). It provides a multi-user repository with version and configuration management for large teams of developers, and supports the forward and reverse engineering of a dozen programming languages, including Ada 83, Ada 95, C++, Delphi, Forte, Java, Powerbuilder, and Smalltalk. Forward engineering of programming languages refers to the ability of OBJECTTEAM to generate from an object oriented model, source code files which are the basis for object oriented applications and systems. Reverse engineering of programming languages refers to the ability of ObjectTeam to parse existing (legacy) code, and to construct a model representing the application or system that code comprises. From there, the application or system can be modified, evolved, and enhanced. With OBJECTTEAM, a developer can make logical (model) or physical (code) changes to the application or system, and keep the code and models in sync - referred to as "synchronous engineering". 7 8 Additionally, OBJECTTEAM supports a function named ObjectLoad which integrates OBJECTTEAM's object oriented models with GROUNDWORKS business data models. This allows teams of data systems analysts to work in sync with teams of object oriented software analysts and developers. MODELING BUSINESS REQUIREMENTS Cayenne GROUNDWORKS enables data analysts, system analysts, and other business analysts to model information systems more quickly and thoroughly than they can using conventional techniques. GROUNDWORKS incorporates the data, logic, and process requirements into a unified model. Further, it 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. Cayenne PROCESSTEAM is a business process modeling tool, for process domain experts to model "as is" business processes, and to design "to be" processes for the future. These process models increase process understanding, and are a basis for new systems design using Cayenne's Groundworks or ObjectTeam. Increasingly, IS/IT organizations are looking to more closely couple their business modeling and systems design functions. The ability to pass business models directly to the systems development team, and to keep the business model and systems model in sync, may result in support systems which better match the desires of the business itself, and may allow that business to provide new and better services to their customer in a more timely fashion. DESIGNING AND RE-ENGINEERING DATABASES Cayenne's TERRAIN family of products allows 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. They provide graphical support for basic design tasks, such as object creation and maintenance, reporting, and database documentation for databases such as Sybase SQL Server, Oracle, Informix, DB2, DB2/6000, and ODBC-supporting databases. Cayenne's GROUNDWORKS and TERRAIN products are integrated through TERRAINMAP, a product which translates GroundWorks data models into Terrain database designs. This integration makes it possible to 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 achieve optimal design and performance. SHARED WORK MANAGER allows groups of analysts to share models and integrate the results of their work. Shared Work Manager is a 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 workflow 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. 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. Included in the TEAMWORK family is ENSEMBLE, a tool suite ancillary to TEAMWORK for reverse engineering, modeling, and generating C language code. 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. INTERNATIONAL VERSIONS OF CAYENNE PRODUCTS 8 9 The Cayenne product set is available worldwide. Some of Cayenne's products are enabled for double-byte character sets. This enablement is a prerequisite for translation into languages utilitizing ideographic character sets: Chinese (Simplified and Traditional), Japanese, and Korean. TeamWork and ClassDesigner are currently double byte enabled, with a localized Japanese version of Teamwork available for some versions. RISKS OF INTERNATIONAL OPERATIONS Approximately 53%, 51%, 52%, and 50%, of Cayenne's revenues during the year ended December 31, 1997, the six-month transition period ended December 31, 1996 and fiscal 1996, and 1995, respectively, were attributable to international sales. Approximately 9%, 4%, 7%, and 6%, of Cayenne's revenue during the year ended December 31, 1997, the six-month transition period ended December 31, 1996 and fiscal 1996, and 1995, 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. The Company maintains wholly-owned operating subsidiaries in the following countries; Germany, United Kingdom, Netherlands, Italy, Singapore, and Spain. All subsidiaries are selling and marketing organizations, while the Netherlands subsidiary also conducts product development. 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, sales and development operations (Netherlands) through these subsidiaries. Cayenne's international sales are denominated primarily in local currencies. Any material adverse effect on the Company's international business would likely effect the financial condition of the Company. 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. CUSTOMERS AND APPLICATIONS Cayenne's products are used worldwide by systems analysts and engineers in a wide variety of businesses. Generally, the customers of Groundworks and Terrain are users of computing environments for data-intensive applications, in the IS/IT market segment. Customers of Teamwork are developing software to be used embedded in complex systems, largely in the bid-driven market, but also in the market-driven segment. Customers of ObjectTeam develop software for a wide variety of systems and applications, spanning IS/IT, Bid-driven, and Market-driven segments. IBM was Cayenne's single largest customer during the year ended December 31, 1997, the transition period ended December 31, 1996 and in each of fiscal 1996 and 1995 when revenue from IBM accounted for 17%, 16%, 15%, and 9% of Cayenne's total revenue, respectively. Cayenne receives revenue from IBM in the form of license fees in connection with its own use of Cayenne products, as well as amounts generated by IBM as a distributor and systems integrator. 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 is aware of customers' needs and strives to provide 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 experienced 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 for a fixed price per copy. Customers with annual maintenance contracts also receive periodic product upgrades and feature/function enhancements. 9 10 TRAINING AND CONSULTING Cayenne provides conceptual and product-oriented training courses for customers at education facilities in the United States in Bedford (Massachusetts) and New York City as well as Turin, Italy; Munich and Wiesbaden, Germany; Delft, Netherlands and Wokingham, 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. The Company has access to training facilities throughout the United States through an arrangement with a partnering vendor. 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 provides consulting services in the following areas: data warehouse services, object oriented development, embedded systems, structured analysis and design, data base design, re-engineering, and package implementations. MARKETING AND SALES Cayenne markets its products to Global 2000 companies, government agencies, and organizations of similar size worldwide that use computers and software for complex or enterprise-level 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 Germany, Italy, the Netherlands, Singapore, and the United Kingdom. Distributors, agents and other resellers market Cayenne's products in over 40 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 is evaluating 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, analyst 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 technical personnel frequently participate in industry conferences that increase customer awareness of Cayenne's products and its technological innovations. In 1997, Cayenne greatly increased its use of the world wide web for its marketing efforts, providing collateral, communication, evaluation products, and purchasing capability to its web site, www.cayennesoft.com. 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 portion of Cayenne's software products have been developed internally by its employees and consultants. Cayenne has development staff in Bedford, Massachusetts and in Delft, Netherlands. Cayenne continues to develop, maintain and enhance certain of Cayenne's products through an agreement with a development organization in India, allowing Cayenne to realize savings in development costs while maintaining control over the product development process. Cayenne 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 object oriented development, personal workstations, 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 10 11 systems. For example, Cayenne uses ObjectTeam to design future revisions of ObjectTeam itself. Cayenne uses ClassDesigner to design and develop Terrain. 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. 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 year ended December 31, 1997, the six-month transition period ended December 31, 1996, and in fiscal 1996 and 1995, Cayenne spent $10.3 million, $5.4 million, $14.4 million, and $17.1 million, respectively, on internal product development. Also during fiscal 1995, the Company recorded a charge for purchased research and development of $7.3 million upon the closing of the acquisition of Westmount Technology B.V. 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, and whether the customer seeks strategic or tactical solutions. Cayenne's principal competitor in the modeling and database design market is LogicWorks, Inc., which offers the ERWin database design product with some data modeling capabilities built in. It also offers BPWin, a business process modeling product. In the Structured technical market, Cayenne's primary competitor is Aonix, formerly Interactive Development Environments, Inc. ("IDE") which was recently purchased by Thomson S.A. The product is now called StP (Software thru Pictures). In the object-oriented market, Cayenne's primary competitors are Rational Software (with its Rose product), Platinum Technology (with Paradigm Plus), and Select Software Tools (with Select/SE). 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. Most notable is Rational Software, which holds the leadership position in the object modeling market, as recently quantified by the International Data Corporation. Although Cayenne was placed second by International Data Corporation, its percentage of the object modeling market was considerably lower than that of Rational Software. 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 that 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 11 12 has entered into nondisclosure and invention agreements with each of its key technical employees. All products are delivered as object code. All products are protected by a software license module to prevent or reduce the use of illegally copied products. Charles W. Bachman has assigned to Cayenne 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 several 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"). Several additional patents have been granted by the United States Patent and Trademark Office (the "PTO") pertaining to technology used in certain Cayenne's products. 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. 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, 1998, Cayenne employed 324 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 93,000 square feet of space in a business park in Bedford, Massachusetts. Cayenne occupies that space under a lease expiring April 30, 2005. Cayenne maintains its primary sales and support offices in seven locations 12 13 in the United States, and its distribution subsidiaries have offices in Wokingham, England; Wiesbaden and Munich, Germany; Singapore; Madrid, Spain; Delft, Netherlands; 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 The Company is subject to legal proceedings and claims that arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially effect the financial position of the Company. Cayenne has received from Esprit Systems Consulting, Inc. ("Esprit") a Notice of Intent to Arbitrate, claiming that Cayenne is liable to Esprit for approximately $1.6 million under an extension to a contract for software training services to be rendered to Cadre. Esprit subsequently withdrew its Notice of Intent to Arbitrate, but has stated that it intends to proceed with either arbitration or litigation. Cayenne believes that the claim is without merit because, among other things, the contract in question terminated without extension. However, there can be no assurance as to the claim's future course or likely result. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable 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"). 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.
YEAR ENDED TRANSITION PERIOD YEAR ENDED DECEMBER 31 1997 ENDED DECEMBER 31, 1996 JUNE 30, 1996 ---------------- ----------------------- ------------- HIGH LOW HIGH LOW HIGH LOW -------- --------- --------- --------- --------- ------ First Quarter $ 5.875 $ 3.937 $ 7.125 $ 4.00 $ 7.875 $ 5.75 Second Quarter 4.188 3.250 5.6875 3.8125 10.25 4.625 Third Quarter 3.313 2.125 -- -- 11.875 8.25 Fourth Quarter 3.438 1.813 -- -- 10.00 6.50
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 18, 1998, there were 498 stockholders of record of the Company's common stock. 13 14 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 PRIOR YEAR YEAR PERIOD PERIOD ENDED ENDED ENDED ENDED DECEMBER DECEMBER DECEMBER DECEMBER YEAR ENDED JUNE 30, 31, 31, 31, 31, 1997 1996 1996 1995 1996 1995 1994 1993 ------- -------- ------- ------- -------- -------- -------- -------- (UNAUDITED) (UNAUDITED) Revenues: Software license $19,474 $ 20,462 $10,131 $15,951 $ 26,282 $ 29,849 $ 36,171 $ 39,780 Consulting and education services 8,844 11,136 4,684 5,915 12,367 14,306 13,590 13,473 Maintenance 21,284 26,032 13,161 14,366 27,237 28,634 27,317 24,245 Other -- -- -- -- -- -- -- 798 ------- -------- ------- ------- -------- -------- -------- -------- Total revenues 49,602 57,630 27,976 36,232 65,886 72,789 77,078 78,296 Costs and expenses: Cost of revenues Cost of software licenses 1,960 3,279 1,521 2,241 3,999 6,105 5,688 4,464 Cost of consulting and education services and maintenance 8,217 10,841 4,975 7,044 12,910 15,953 13,728 13,219 Sales and marketing 23,636 28,124 12,488 16,978 32,614 37,656 41,375 47,055 Research and development 10,290 11,902 5,411 7,957 14,448 17,059 20,128 14,790 General and administrative 5,960 7,467 3,307 4,370 8,530 8,062 7,783 9,946 Restructuring and other costs 1,544 7,425 6,300 1,694 2,819 5,483 -- 9,744 Charge for purchased research and development -- -- -- 158 158 7,300 1,736 -- ------- -------- ------- ------- -------- -------- -------- -------- Total costs and expenses 51,607 69,038 34,002 40,442 75,478 97,618 90,438 99,218 ------- -------- ------- ------- -------- -------- -------- -------- Loss from operations (2,005) (11,408) (6,026) (4,210) (9,592) (24,829) (13,360) (20,922) Interest income (expense), net (215) (695) (225) (77) (547) 202 485 669 Other income (expense), net (287) 309 282 (111) (84) 34 80 273 ------- -------- ------- ------- -------- -------- -------- -------- Loss before provision for income taxes (2,507) (11,794) (5,969) (4,398) (10,223) (24,593) (12,795) (19,980) Provision for income taxes 726 1,119 399 404 1,124 297 407 94 ------- -------- ------- ------- -------- -------- -------- -------- Net loss $(3,233) $(12,913) $(6,368) $(4,802) $(11,347) $(24,890) $(13,202) $(20,033) ------- -------- ------- ------- -------- -------- -------- -------- Dividends on Preferred stock 186 -- -- -- -- -- -- -- ------- -------- ------- ------- -------- -------- -------- -------- Loss applicable to common shareholders: $(3,419) $(12,913) $(6,368) $(4,802) $(11,347) $(24,890) $(13,202) $(20,033) ------- -------- ------- ------- -------- -------- -------- -------- - --------------------------------------------------------------------------------------------------------------------------------- Basic and diluted earnings per share $ (0.19) $ (0.75) $ (0.36) $ (0.32) $ (0.71) $ (1.86) $ (1.06) $ (1.72) ------- -------- ------- ------- -------- -------- -------- -------- Weighted average number of common shares outstanding 18,410 17,139 17,590 15,103 15,914 13,350 12,484 11,647 ------- -------- ------- ------- -------- -------- -------- --------
14 15 BALANCE SHEET DATA (in thousands)
YEAR TRANSITION PERIOD ENDED ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30, 1997 1996 1996 1995 1994 1993 ------- -------- ------- -------- ------- ------- Working capital $ 2,913 $ (3,940) $ 499 $ (1,638) $ 8,193 $21,334 Total assets 26,324 22,236 34,099 35,384 46,439 62,481 Long-term obligations 124 106 2,096 2,534 -- 2,551 Preferred Stock 310 -- -- 5,493 -- -- Stockholders' equity (deficit) 6,021 (655) 2,624 (2,753) 17,336 28,229
- -------------------- 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 and 1993 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cayenne Software, Inc. (formerly Bachman Information Systems, Inc.) ("Cayenne" 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 practical challenges software developers face every day. Global 2000 companies and government agencies around the world use Cayenne products as they develop, implement, and maintain enterprise-wide, business-critical information systems, such as billing, trading, and customer support applications, as well as mission-critical technical embedded systems such as telecommunications switching software, aeronautics, and navigation systems. 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." For presentation and comparative purposes the year ended December 31, 1996 is presented as unaudited and represents the period from January 1 st to December 31st. This Annual Report 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." 15 16 RESULTS OF OPERATIONS OVERVIEW To be competitive in a changing technological market, Cayenne has continued to develop its own technology as well as acquire technology through acquisition. As a result of acquiring technology through merger and acquisitions, the Company has been burdened with larger expense structures. Consequently, it became necessary to align expense levels with the revenue generated from operations. Therefore, expenses have been reduced in each of the last three years either through cost cutting or restructuring activities. Product lines that have not been in line with the strategic direction of the Company have been dropped. Dropping certain product lines has also caused revenue to decline. Revenue generated from new product development and technology has increased over the past year, but this increase has not offset the decline in revenues from older product lines. The Company has incurred substantial net losses in the transition period ended December 31, 1996 and fiscal periods ended June 30, 1996 and 1995. Although a loss has been recorded in the current year ended December 31, 1997, the loss has decreased from the levels of the previous two years. IBM was Cayenne's single largest customer during the year ended December 31, 1997, the transition period ended December 31, 1996 and in the previous fiscal years ended June 30, 1996 and 1995 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 17%, 16%, 15%, and 9% 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. REVENUES The Company has seen its revenue decline for several years. In general, the drop in revenue was the result of: 1) the merger of Bachman and Cadre, where some product lines were dropped in order to better focus development resources, 2) reduced defense spending which led to consolidation of large defense contractors where the Company has a large presence in the technical embedded market for its TeamWork products, and 3) a delay in getting its object oriented products to market. These three issues have been partially addressed due to the fact the merger of Bachman and Cadre to form Cayenne is complete, non-producing product lines have been dropped and the Company's resources are focused on products such as ObjectTeam. The Company plans to continue to enhance its product offerings through development efforts, strategic alliances and acquisitions to improve its competitive position. 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. TWELVE MONTHS ENDING DECEMBER 31, 1997 COMPARED TO 1996 SOFTWARE LICENSES. Software license revenue in 1997 was $19.5 million compared to $20.5 million for 1996. Although there was a drop in revenues of $1.0 million, or 5%, year to year, this compares to the software license revenue drop from calendar year 1995 to 1996 of 38%. In prior years license revenues were decreasing in response to two main factors: 1) a transition from mature OS/2 platform and structured (UNIX) tools to new Windows based and object oriented tools with sales of the newer products not offsetting the decline in mature products, and 2) industry consolidation in the technical embedded markets (military/aerospace) where the Company's structured products on UNIX platforms had large market presence. While these two factors also contributed to the software license decline of 5% in 1997, the impact was significantly reduced from 1996. Total license revenues in the United States and the United Kingdom declined 3% and 23%, respectively; the drop in the United Kingdom revenue was mainly attributable to personnel turnover. Total license revenue in Italy increased 20% from 1996 to 1997 and is attributable to strong customer acceptance of the Company's Windows based business modeling and database design products. CONSULTING AND EDUCATION SERVICES. Consulting and education services revenue was $8.8 million in 1997 compared to $11.1 million in 1996 for a decrease of $2.3 million. The $2.3 million drop was attributable to: 1) the Company's new products which 16 17 are based on Windows NT/95 platforms and are easier to use and therefore require less training, 2) many of the Company's software licenses were sold into existing sites where companies use in-house training, and 3) certain Cayenne product lines that required extensive training are being phased out. Consulting and education revenue in Italy decreased 17% due mainly to customers transitioning from mainframe products to Windows based products while in the United States, where training and consulting revenue dropped 26%, the decline was due mainly to the selling of licenses to existing customers. MAINTENANCE. Maintenance revenue for annual maintenance contracts is deferred and recognized ratably over the term of the agreement. Maintenance revenue for 1997 was $21.3 million compared to $26.0 million for 1996. This was a $4.7 million, or 18% drop. In general, maintenance revenue trends follow software license revenue trends. Because maintenance revenue is recognized ratably over the life of the contract, the change in maintenance revenue, year over year, relative to the change in software license revenue, lags by as much as year. The 38% decline in software license revenue from calendar 1995 to 1996 resulted in reduced maintenance revenue in 1997. 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 was $2.0 million or 4% of revenue for 1997 compared with $3.3 million or 6% of revenue in 1996. The $1.3 million decrease in 1997 expenses reflects reduced sales of third party product for which the Company pays a royalty to resell as well as reduced manufacturing costs through improved efficiencies. Additionally, amortization related to WindTunnel was $0.2 million in 1996 compared to $0 in 1997. The Company's determined in June 1996 that the WindTunnel product was no longer consistent with the Company's objectives. Cost of consulting, education and maintenance was $8.2 million or 17% of revenue for 1997 compared with $10.8 million or 19% of revenue in 1996. The $2.6 million decrease in 1997 correlates to the direct effort of the Company to reduce training and consulting requirements as reflected in the drop in training and consulting revenue. SALES AND MARKETING. Sales and marketing expenses were $23.6 million or 48% of revenue in 1997 compared with $28.1 million or 49% of revenue in 1996. The $4.5 million decrease in expenses during 1997 reflects reduced marketing expenses including trade show attendance and advertising together with reduced staffing in North America and international subsidiary operations. 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 1997, 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 $10.3 million or 21% of revenue in 1997 compared with $11.9 million or 21% of revenue in 1996. The $1.6 million decrease in expenses during 1997 reflects reduced staffing as a result of attrition and reduced software development from third party developers. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $6.0 million or 12% of revenue in 1997 compared with $7.5 million or 13% of revenue in the 1996. The $1.5 million decrease in expenses during 1997 reflects lower levels of staffing which were the result of both attrition and the elimination of redundant positions. NON-RECURRING COSTS. The Company recorded a non-recurring charge of $1.9 million in the fourth quarter of 1997 related to management changes and realignment of the sales organization, moving the corporate headquarters to another facility, and the write-off of purchased software. Included in the $1.9 million was a charge of $1.0 million related to management changes and other initiatives taken to improve sales and operating efficiencies. Also, included in the charge was $.3 million related to the move of its headquarters and principal facilities from Burlington to Bedford, Massachusetts. Additionally the Company reviewed its product strategy and determined that purchased software principally related to the Westmount acquisition no longer matched the current strategic direction of the Company. As a result of the subsequent review of the purchased software's net realizable value the Company recorded a charge of $.6 million to appropriately reflect the purchased software's net realizable value. During the quarter ended March 31, 1997 the Company evaluated its restructuring reserve and determined that amounts provided for in previous restructuring actions were no longer required. As a result, the Company recorded a benefit of approximately $.4 million. During the year ended December 31, 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 17 18 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 addition, the Company recorded a restructuring charge of $6.3 million during year ended December 31, 1996. Included in the charge was $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. EFFECT OF INTERNATIONAL OPERATIONS ON INCOME (LOSS) FROM OPERATIONS
TRANSITION PRIOR YEAR YEAR PERIOD PERIOD YEAR ENDED ENDED ENDED ENDED ENDED DECEMBER DECEMBER DECEMBER DECEMBER JUNE 30, 31, 31, 31, 31, --------------------- 1997 1996 1996 1995 1996 1995 ----------- ----------- ----------- ----------- ---------- --------- INCOME (LOSS) FROM OPERATIONS United States $ 6,663 $ (1,428) $ (1,239) $ (3,308) $ (3,497) $ (9,419) Italy (873) (868) 113 1,317 336 (540) United Kingdom (1,345) (1,809) (1,194) (481) (1,096) (2,044) Rest of World (6,450) (7,303) (3,706) (1,738) (5,335) (12,826) $ (2,005) $(11,408) $ (6,026) $ (4,210) $ (9,592) $ (24,829)
Year over year improvement was achieved in the United States operations when the result was improved from a loss of $(1.4) million to a profit of $6.7 million. This improvement is attributable to cost containment and expense reduction measures across all areas of functional spending. In the United Kingdom and rest of world the revenue decline in 1997 from 1996 was greater than the reduction in expenses. OTHER INCOME (EXPENSE), NET. Interest expense decreased in 1997 over 1996 primarily due to the termination of a factoring agreement in 1996 and lower levels of borrowing. Interest income also declined in 1997 as the cash available for investment purposes declined during the early portion of 1997. Other income decreased in 1997 as the Company recorded a currency loss for the year of $504,000. PROVISIONS FOR INCOME TAXES. The tax provision for the years ended December 31, 1997 and 1996, was composed primarily of foreign withholding taxes and income taxes related to the profitability of certain foreign subsidiaries. At December 31, 1997, the Company has a deferred tax asset of approximately $40.0 million composed principally of net operating loss carryforwards, which was offset fully by a valuation allowance due to the uncertainty of realization. See note 5 in the Notes to Consolidated Financial Statements and factors that may effect future results. 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-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. 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. 18 19 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 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 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 grew 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. 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. 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. 19 20 NON-RECURRING COSTS. On July 18, 1996, the Company acquired Rhode Island-based Cadre in a merger transaction accounted for as a pooling of interests. 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 was $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 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. The loss from operations -- United States and rest of world --was $4.9 million during the transition period versus $5.0 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. TWELVE MONTHS ENDING JUNE 30, 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 20 21 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. 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 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 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% of revenue during fiscal 1996 compared with $8.1 million or 11% or revenue in the comparable period of 1995. 21 22 NON-RECURRING 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. 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). 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 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. 22 23 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. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued (SFAS No. 131) "Disclosures About Segments of an Enterprise and Related Information", which will require adoption during the year ended December 31, 1998. This statement established standards for the way public enterprises report information about operating segments in annual reports. The Company is in the process of determining the effect of adoption of this statement on its consolidated financial statement disclosures. In October 1997, Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), was issued which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company will adopt the guidelines of SOP 97-2 as of January 1, 1998 and its adoption is not expected to have a material impact on the Company's financial results. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1997 the Company's principal sources of liquidity included cash and cash equivalents aggregating $9.2 million and a secured bank line of credit in the amount of $5.0 million discussed below. At December 31, 1997, cash and cash equivalents increased $5.1 million from the previous year ended December 31, 1996. Cash was principally impacted by the private placement of $9.9 million of Convertible Preferred Stock which was offset by the decline in customer maintenance contracts, increased capital spending, and the loss from operations during the year. The Company's principal long-term cash commitments are for office space operating leases. On December 31, 1997, Cayenne had no material commitments for capital expenditures. On November 3, 1997, the Company renewed its revolving credit agreement with a bank to borrow up to $5.0 million in order to extend its term through October 5, 1998 and to amend financial and operating covenants and other provisions of the agreement. The loan is contingent upon meeting certain financial and operating covenants at the time of any borrowing and over the life of the loan. The loan is secured by all of the assets of the Company and any borrowing amounts are tied to a percentage of qualified accounts receivable outstanding at the time of any borrowing. The financial covenants, which were amended, include a quarterly minimum net worth covenant of $5.5 million and liquidity (generally defined as cash and cash equivalents plus eligible domestic accounts receivable and eligible international accounts receivable less any indebtedness to the bank) at the end of each quarter. The Company was in compliance with the covenants as of December 31, 1997. At December 31, 1997, the borrowing base under the revolving credit agreement was approximately $3.7 million. The Company had approximately $2.4 million outstanding against the line of credit at December 31, 1997. On January 2, 1997, the Company raised approximately $3.0 million in a private placement of 150,000 shares of Series B Convertible Preferred Stock and the issuance of 350,000 warrants to purchase the Company's Common Stock. On July 18, 1997, the Company raised approximately $2.0 million in a private placement of 100,000 shares of Series C Convertible Preferred Stock and the issuance of warrants to purchase 233,332 shares of the Company's Common Stock. On August 28, 1997, the Company raised approximately $5.0 million in a private placement of 250,000 shares of Series D Convertible Preferred Stock and the issuance of 583,332 warrants to purchase the Company's Common Stock. Each share of 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 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 trading days before the conversion. All outstanding and unconverted shares of preferred stock may be converted, at the option of the Company, two 23 24 years from the date the securities were declared effective and at a specified conversion price. The warrants issued by the Company in conjunction with the closing of each of the private placements, are for the purchase of 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 warrants issued with these offerings were valued at $1,724,000 and are included in additional paid in capital. The shares of Common Stock underlying the Convertible Preferred stock and warrants are entitled to registration rights under terms of the registration rights agreement dated for each of the offering dates. As of December 31, 1997 all shares of the Series B and 40,000 shares of the Series D Convertible Preferred Stock had been converted into common stock. All shares of Series C Convertible Preferred Stock were converted in 1998. 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 restructuring effected by Cadre prior to the merger. The Company currently estimates that cash expenditures for previous restructuring actions in 1998 will be approximately $0.1 million. Cash expenditures related to the one time charge taken in 1997 will be approximately $.7 million in 1998. The Company believes that it has adequately provided for all restructuring actions taken to date. With the additional $10.0 million the Company raised in 1997 through the private placement and with 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 1998. Thereafter, the Company's cash requirements will depend upon the results of future operations, which cannot be foreseen. There can be no assurance that the Company will be able to meet its loan covenants, achieve its operating plan and return to profitability, and the failure to do so may have a material adverse impact on the Company's business and operations. FOREIGN CURRENCY All of Cayenne's foreign sales, other than those of its foreign subsidiaries, are invoiced and collected in United States dollars. Early in 1997 the dollar experienced a significant rise in value against other currencies in which the Company does business. This increase resulted in a foreign currency exposure and Cayenne recorded a foreign exchange loss for the year ended December 31, 1997 in the amount of $504,000 (most of the loss was incurred in the first quarter). Cayenne is trying to mitigate the effect of changes in foreign currency rates by entering into foreign exchange contracts. On December 31, 1997 the Company held approximately $2.6 million in foreign exchange contracts. The Company had 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 and 1995. No assurance can be given, however, that it will not experience such material effects in 1998. 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. 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. To the extent that this pattern continues, the failure to achieve such revenue in the last weeks of the quarter may result in a adverse material impact on revenue. 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 fourth quarter of 1997 the Company received an order totaling $1.0 million. 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 24 25 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: Technological Change 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. Fluctuations in Operating Results 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. Competition The Company operates in a highly competitive environment and in a highly competitive industry, which include intense competition for skilled employees. Because of the complexity of the Company's products, the Company relies heavily on experienced and skilled employees both in the technical area and the sales area. The loss of any experienced and skilled employee could impact the Company's actual operating results or future results of operations. Risk of Distribution Channels 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. Economic Uncertainty and Currency Risk 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. Volatility of Stock Price 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. Year 2000 Compliance The Company recognizes the importance of meeting year 2000 compliance for its software products and internal operations. All of the Company's software products are year 2000 compliant. The operational issues associated with meeting year 2000 compliance are being addressed with the installation of a new software business information system. The new installation is planned to be operational in all United States and subsidiary locations at or around year-end 1998. The Company is continuing to assess the impact of year 2000 on its suppliers and vendors. Problems in meeting year 2000 compliance could impact the Company's actual operating results or future results of operation. Significant Customer Risk Cayenne has several large customers. The loss of any these customers, through industry consolidation or otherwise, will materially affect operating results. 25 26 Revenue Risk The Company's strategy to stem revenue decline is based on the transition from the Company's OS/2 platform and Structured Unix tools to new windows-based and object oriented products. If revenues from the OS/2 and Unix products continue to decline, there can be no assurance that these new products will be accepted by customers and will generate revenues sufficient to offset any decline. Litigation Risk The future course of a current large claim against the Company could impact the Company's actual operating results or future results of operations. Industry Consolidation Many of the Company's competitors have significantly greater financial resources than the Company. In addition, the trend towards industry consolidation among the Company's competitors has given these competitors the ability to offer a wider range of products and services than those available from the Company. This ability may give these competitors marketing and discounting advantages not available to the Company. 26 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CAYENNE SOFTWARE, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Report of Independent Accountants................................................ 28 Report of Independent Accountants................................................ 29 Consolidated Balance Sheets as of December 31, 1997 and 1996 and June 30, 1996.................................................................... 30 Consolidated Statements of Operations for the years ended December 31, 1997 and 1996, the transition period from July 1, 1996 to December 31, 1996, the six-month period ended December 31, 1995 and the years ended June 30, 1996 and 1995........................................................... 31 Consolidated Statements of Stockholders' Equity (Deficit) for the year ended December 31, 1997, the transition period from July 1, 1996 to December 31, 1996 and the years ended June 30, 1996, and 1995...................................... 32 Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996, the transition period from July 1, 1996 to December 31, 1996, the six-month period ended December 31, 1995 and the years ended June 30, 1996 and 1995........................................................... 33 Notes to Consolidated Financial Statements....................................... 34
27 28 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. as of December 31, 1997 and 1996 and June 30, 1996 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended December 31, 1997, 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, 1997 and 1996 and June 30, 1996 and the consolidated results of its operations and its cash flows for the year ended December 31, 1997, 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 statements of operations, stockholders' equity (deficit) and cash flows of Cayenne Software, Inc. for the year ended June 30, 1995, prior to their restatement for the 1996 pooling of interests. The contribution of Cayenne Software, Inc. to revenues represented 46 percent and to net loss represented 41 percent of the respective restated totals for the year ended June 30, 1995. Separate financial statements of Cadre Technologies Inc. included in the restated consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended June 30, 1995 were audited and reported on separately by other auditors. We also audited the combination of the accompanying consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year ended June 30, 1995, 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. /s/ COOPERS & LYBRAND L.L.P. BOSTON, MASSACHUSETTS FEBRUARY 18, 1998 28 29 REPORT OF INDEPENDENT ACCOUNTANTS TO THE STOCKHOLDERS' OF CADRE TECHNOLOGIES INC.: We have audited Cadre Technologies Inc. and its subsidiaries' (the "Company") consolidated statements of operations, stockholders' (deficiency) equity, and cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Cadre Technologies Inc. and its subsidiaries for the year 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 /s/ DELOITTE & TOUCHE LLP FEBRUARY 2, 1996 29 30 CAYENNE SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1996 1996 --------- --------- --------- ASSETS Current assets: Cash and cash equivalents $ 9,225 $ 4,150 $ 14,690 Trade accounts receivable, less allowance for sales returns and doubtful accounts 12,200 13,320 12,445 Prepaid expenses and other current assets 1,667 1,375 2,743 --------- --------- --------- Total current assets 23,092 18,845 29,878 Property and equipment, less accumulated depreciation and amortization 2,918 2,256 2,723 Capitalized software costs, less accumulated amortization of $0, $266 and $186 at December 31, 1997 and 1996, and June 30, 1996, respectively, -- 534 614 Other assets 314 601 884 --------- --------- --------- Total assets $ 26,324 $ 22,236 $ 34,099 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Short term debt $ 2,359 $ 2,820 $ 3,852 Accounts payable 2,456 2,363 3,093 Accrued expenses 1,617 1,422 2,077 Accrued compensation and benefits 3,233 3,415 3,317 Accrued restructuring and other costs (Note 13) 1,152 1,703 779 Income and other taxes payable 1,121 909 1,967 Obligations under capital lease 327 561 580 Deferred revenue 7,914 9,592 13,714 --------- --------- --------- Total current liabilities 20,179 22,785 29,379 Convertible long-term debt -- -- 1,789 Obligation under capital lease 124 106 307 Commitments and contingencies (Note 7) Total stockholders' equity (deficit): Series C Convertible Preferred Stock, $1.00 par value; (liquidation preference $20.00 per share) 150 shares authorized; 100 shares outstanding at December 31, 1997 100 -- -- Series D Convertible Preferred Stock, $1.00 par value; (liquidation preference $20.00 per share) 300 shares authorized; 210 shares outstanding at December 31, 1997 210 -- -- Common stock, $.01 par value; 52,400 shares authorized; 19,179, 17,695 and 17,225 shares issued and outstanding at December 31, 1997 and 1996, and June 30, 1996, respectively 192 177 172 Additional paid-in capital 113,089 102,935 100,301 Accumulated deficit (107,125) (103,706) (97,338) Accumulated other comprehensive (loss) (445) (61) (511) --------- --------- --------- Total stockholders' equity (deficit) 6,021 (655) 2,624 --------- --------- --------- Total liabilities and stockholders' equity (deficit) $ 26,324 $ 22,236 $ 34,099 ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 30 31 CAYENNE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
TRANSITION PRIOR YEAR YEAR PERIOD PERIOD ENDED ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1996 1996 1995 1996 1995 -------- -------- -------- -------- -------- -------- (UNAUDITED) (UNAUDITED) Revenues: Software license $ 19,474 $ 20,462 $ 10,131 $ 15,951 $ 26,282 $ 29,849 Consulting and education services 8,844 11,136 4,684 5,915 12,367 14,306 Maintenance 21,284 26,032 13,161 14,366 27,237 28,634 -------- -------- -------- -------- -------- -------- Total revenues 49,602 57,630 27,976 36,232 65,886 72,789 Costs and expenses: Cost of revenues Cost of software licenses 1,960 3,279 1,521 2,241 3,999 6,105 Cost of consulting and education services and maintenance 8,217 10,841 4,975 7,044 12,910 15,953 Sales and marketing 23,636 28,124 12,488 16,978 32,614 37,656 Research and development 10,290 11,902 5,411 7,957 14,448 17,059 General and administrative 5,960 7,467 3,307 4,370 8,530 8,062 Non-recurring costs (Note 13) 1,544 7,425 6,300 1,694 2,819 5,483 Charge for purchased research and development (Note 2) -- -- -- 158 158 7,300 -------- -------- -------- -------- -------- -------- Total costs and expenses 51,607 69,038 34,002 40,442 75,478 97,618 -------- -------- -------- -------- -------- -------- Loss from operations (2,005) (11,408) (6,026) (4,210) (9,592) (24,829) Interest income 193 455 71 212 596 758 Other income (expense), net (287) 309 282 (111) (84) 34 Interest expense 408 1,150 296 289 1,143 556 -------- -------- -------- -------- -------- -------- Loss before provision for income taxes (2,507) (11,794) (5,969) (4,398) (10,223) (24,593) Provision for income taxes 726 1,119 399 404 1,124 297 -------- -------- -------- -------- -------- -------- Net loss (3,233) (12,913) (6,368) (4,802) (11,347) (24,890) Dividends on preferred stock 186 -- -- -- -- -- -------- -------- -------- -------- -------- -------- Loss applicable to common shareholders (3,419) (12,913) (6,368) (4,802) (11,347) (24,890) Other comprehensive loss: Foreign currency translation adjustment (384) 769 450 (118) 201 (204) -------- -------- -------- -------- -------- -------- Comprehensive loss $ (3,803) $(12,144) $ (5,918) $ (4,920) $(11,146) $(25,094) -------- -------- -------- -------- -------- -------- Basic and diluted earnings per share $ (0.19) $ (0.75) $ (0.36) $ (0.32) $ (0.71) $ (1.86) -------- -------- -------- -------- -------- -------- Weighted average number of common shares outstanding 18,410 17,139 17,590 15,103 15,914 13,350 -------- -------- -------- -------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 31 32 CAYENNE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEAR ENDED DECEMBER 31, 1997, THE TRANSITION PERIOD ENDED DECEMBER 31, 1996 AND THE YEARS ENDED JUNE 30, 1996 AND 1995 (IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON STOCK PREFERRED STOCK PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS DEFICIT EQUITY (DEFICIT) --------------- --------------- -------- ------------- --------- ---------------- 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 period (6,368) (6,368) ------ ---- ----- ----- -------- ----- --------- -------- Balance, December 31, 1996 17,695 177 102,935 (61) (103,706) (655) Stock options exercised 78 1 173 174 Issuance of common stock under Employee Stock Purchase Plan 68 1 193 194 Issuance of preferred stock 500 500 7,678 8,178 Conversion of preferred stock 1,288 13 (190) (190) 177 0 Issuance of common stock in acquisition 50 209 209 Issuance of warrants in conjunction with preferred stock 1,724 1,724 Currency translation adjustment (384) (384) Dividends on preferred stock (186) (186) Net loss for the year (3,233) (3,233) ------ ---- ----- ----- -------- ----- --------- -------- Balance, December 31, 1997 19,179 $192 310 $ 310 $113,089 $(445) $(107,125) $ 6,021 ====== ==== ===== ===== ======== ===== ========= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 32 33 CAYENNE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
TRANSITION PRIOR YEAR YEAR PERIOD PERIOD ENDED ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1996 1996 1995 1996 1995 ------- -------- -------- -------- --------------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss $(3,233) $(12,913) $ (6,368) $ (4,802) $(11,347) $(24,890) Adjustments to reconcile net loss to net cash used in operating activities: Charge for purchased research and development -- -- -- 158 158 7,300 Depreciation and amortization 1,754 2,852 1,262 1,552 3,142 4,431 Write-down of intangible asset 602 986 -- -- 986 945 Loss on disposal of equipment -- 211 201 -- 10 -- Change in operating assets and liabilities, net of effects of acquisitions: Trade accounts receivable 1,120 4,274 (875) (1,318) 3,831 900 Prepaid expenses and other current assets (292) 770 1,368 (164) (762) 590 Accrued expenses 9 (909) (655) (188) (442) (2,387) Accrued restructuring and other costs (551) (10) 924 601 (333) 255 Accounts payable 93 (1,324) (730) (1,384) (1,978) (1,849) Accrued compensation and benefits (182) 492 98 (496) (102) (639) Income and other taxes payable 212 (629) (1,058) 377 806 397 Deferred revenue (1,678) (3,487) (4,122) (2,896) (2,261) 61 ------- -------- -------- -------- -------- -------- Net cash used in operating activities (2,146) (9,687) (9,955) (8,560) (8,292) (14,886) Cash flows from investing activities: Purchases of property and equipment net (1,783) (1,177) (777) (330) (730) (1,506) Acquisition of businesses -- -- -- -- -- (508) Software development costs -- -- -- -- -- (420) ------- -------- -------- -------- -------- -------- Net cash used in investing activities (1,783) (1,177) (777) (330) (730) (2,434) Cash flows from financing activities: Proceeds from issuance of common stock, net 356 1,879 850 6,896 7,925 925 Proceeds from issuance of preferred stock and warrants (net of issuance costs) 9,902 -- -- -- -- 5,812 Proceeds from Section 16(b) profits -- -- -- -- -- 352 Proceeds from line of credit facility -- 2,821 1,321 600 2,100 3,200 Proceeds from sale-leaseback transaction -- 54 -- 933 987 -- Proceeds from factoring agreement -- 9,277 82 -- 9,195 -- Proceeds from repayment of employee loans -- 200 200 -- -- -- Payments under factoring agreement -- (9,902) (2,431) -- (7,471) -- Payment under line of credit facility (461) (2,480) -- -- (2,480) (720) Payments under capital lease obligations (696) (419) (280) (30) (169) (174) ------- -------- -------- -------- -------- -------- Net cash provided by (used in) financing 9,101 1,430 (258) 8,399 10,087 9,395 activities Effect of foreign exchange rates on cash and cash equivalents (97) 695 450 108 353 93 ------- -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 5,075 (8,739) (10,540) (383) 1,418 (7,832) Adjustment to conform fiscal year of Cadre -- -- -- 2,102 2,102 -- Cash and cash equivalents at beginning of period 4,150 12,889 14,690 11,170 11,170 19,002 ------- -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ 9,225 $ 4,150 $ 4,150 $ 12,889 $ 14,690 $ 11,170 ======= ======== ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 33 34 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. Cayenne organized as a corporation in 1983, develops, markets and supports a comprehensive suite of workgroup-to-enterprise analysis and design solutions for the practical challenges software developers face every day. 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. Translation adjustments are recorded as a separate component of stockholders' equity, "Accumulated Other Comprehensive Income". Transaction gains and losses, primarily related to foreign currency denominated intercompany payables and receivables are included in the results of operations. FOREIGN EXCHANGE CONTRACTS Beginning in 1997, the Company enters into foreign exchange contracts to mitigate the effect of changes in foreign currency rates on the intercompany payable and receivable positions of Non-U.S. subsidiaries. The contracts are principally in European currencies and generally have maturities of 120 days or less. Gains and losses associated with currency rate changes on the contracts are recorded in results of operations, offsetting losses and gains on the related assets and liabilities. The cash flows related to the gains and losses of foreign currency forward contracts are classified in the statement of cash flows as part of cash flows from operations. The market risk exposure from forward contracts is assessed in light of the underlying currency exposures and is limited by the term of the Company's contracts, generally less than 120 days. Credit risk from forward contracts is minimized through the placement of contracts with multiple financial institutions. Forward contracts are revalued monthly by comparing contract rates to month-end exchange rates. For the year ended December 31, 1997 the Company recorded a foreign exchange loss of $504,000. For all other periods, the foreign exchange gain (loss) was immaterial. At December 31, 1997 the Company held foreign currency contracts of approximately $2.6 million. The fair value of these forward exchange contracts as of December 31, 1997 approximate the contract amounts. 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, if any, 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. 34 35 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) ACCOUNTS RECEIVABLE Accounts receivable are presented net of an allowance for doubtful accounts and sales returns of approximately $583,000, $820,000 and $868,000 at December 31, 1997 and 1996, and June 30, 1996, respectively. The provisions charged to the statement of operations were $37,000, $0, $350,000, and $122,000 in the year ended December 31, 1997, the six month transition period ended December 31, 1996 and the fiscal years ended June 30, 1996 and 1995, respectively, and deductions against the allowances were $274,000 $48,000, $424,000, and $839,000 in the year ending December 31, 1997, the six month transition period ended December 31, 1996 and the fiscal years ended June 30, 1996 and 1995, 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. 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, 1997 and 1996, and June 30, 1996, respectively, are $0, $700,000 and $699,000 in United States Treasury Securities under agreement to resell in January 1997, and July 1996, 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 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. 35 36 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 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 $296,000, $275,000, and $246,000 at December 31, 1997 and 1996, and June 30, 1996, respectively. 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 recorded 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. BASIC INCOME (LOSS) PER COMMON SHARE In February 1997, the Financial Accounting Standards Board issued (SFAS No. 128), "Earnings Per Share" which required adoption during the year ending December 31, 1997. Earnings per share are stated for all periods presented in accordance with the new guideline. Basic income (loss) per common share is computed based on the weighted average number of common shares outstanding during each period. Dilutive common equivalent shares consist of preferred stock, warrants and stock options (calculated using the treasury stock method). For the year ended December 31, 1997, the transition period ended December 31 1996, and fiscal years ended June 30, 1996, and 1995, common equivalent shares are excluded from the diluted earnings per share calculation as they are antidilutive. Securities that could potentially dilute earnings per share in the future that were not included in the computation of diluted earnings per share because they would have been antidilutive were 7,784,000 shares, 3,721,000 shares, 3,247,000 shares, and 5,130,000 shares, for the year ended December 31, 1997, the transition period ended December 31, 1996 and fiscal years ended June 30, 1996 and 1995, respectively. 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. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued (SFAS 130) "Reporting Comprehensive Income", for fiscal years beginning after December 15, 1997. The Company has elected early adoption of the standard. Comprehensive income is the term used to describe the change in equity from events or transactions from non-owners sources. All periods presented have been restated to reflect the impact of non-owner transactions in the financial statements. 36 37 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 2. BUSINESS COMBINATIONS On March 27, 1997, the Company acquired the assets and liabilities of Multiquest Corporation ("Multiquest") in a transaction accounted for as a purchase. The Company acquired the assets and liabilities in exchange for 50,000 shares of the Company's common stock. The purchase price for Multiquest was approximately $209,000 based upon a stock price of 4.1875 (which approximated the fair market value of the Company's common stock at the closing of the acquisition). The net tangible assets and liabilities of Multiquest acquired by the Company were insignificant. The purchase price was allocated to the fair value of the technology acquired and customer lists. The Company's results reflect the allocation of the purchase price in accordance with generally accepted accounting principles and the results of operations reflect the impact of the acquisition since the closing date. The pro-forma results of Multiquest prior to the acquisition would be immaterial to the Company's reported results and are therefore not presented. (See, also note 13.) 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 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. 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. 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. 37 38 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1996 1996 -------------- ---------- --------- Computer and related equipment $ 13,652 $ 12,415 $ 16,642 Equipment under capital leases 721 1,241 1,179 Office furniture and fixtures 2,775 2,838 2,745 Leasehold improvements 1,182 507 506 --------- --------- --------- Total 18,330 17,001 21,072 Less accumulated depreciation and amortization 15,412 14,745 18,349 --------- --------- --------- $ 2,918 $ 2,256 $ 2,723 ========= ========= =========
Accumulated amortization for equipment under capital leases was $.2 million, $.6 million and $.4 million as of December 31, 1997 and 1996, and June 30, 1996, respectively. During the year ended December 31, 1997, the transition period ended December 31, 1996 and fiscal 1996, the Company wrote-off $.3million, $4.4 million and $8 million of fully depreciated assets. 4. CAPITALIZED SOFTWARE COSTS Amortization expenses for previously capitalized software costs for the year ended December 31, 1997, the transition period ended December 31, 1996, and fiscal years ended June 30, 1996 and 1995, was approximately $120,000, $80,000, $160,000 and $723,000, respectively. The Company also amortized $456,000 in both periods ended June 30, 1996 and 1995 related to purchased software acquired in the WindTunnel transaction. 5. INCOME TAXES The components of net deferred tax assets were as follows:
DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1996 1996 ----------- ----------- -------- Deferred tax assets: Net operating loss carryforwards $ 32,131 $ 29,979 $ 27,953 Tax credit carryforwards 4,104 3,789 3,619 Other 4,252 5,290 5,050 ---------- ---------- ---------- Gross deferred tax asset 40,487 39,058 36,622 Valuation allowance (40,487) (39,058) (36,622) ---------- ---------- ---------- Net deferred tax asset $ 0 $ 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. 38 39 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) At December 31, 1997, the Company had remaining net operating loss ("NOL") carryforwards of approximately $81,000,000, including approximately $6,900,000 for international operations, currently available to offset future taxable income and unused federal tax credits of approximately $4,100,000. If not utilized, these credits and carryforwards will expire between the years 2001 and 2012. 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 year ended December 31, 1997, the transition period ended December 31, 1996, and the years ended June 30, 1996 and 1995 consisted of the following:
TRANSITION YEAR PERIOD ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1996 1996 1995 ---- ---- ---- ---- Federal -- -- -- -- State -- -- $ 120 -- Foreign taxes $ 726 $ 399 1,004 $ 297 ----- ----- ------- ------ Total provision $ 726 $ 399 $ 1,124 $ 297 ===== ===== ======= ======
The effective tax rates for the year ended December, 31, 1997, the transition period ended December 31, 1996 and fiscal years ended June 30, 1996 and 1995 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 year ended December 31, 1997, the transition period ended December 31, 1996 or in the years ended June 30, 1996, and 1995. Cadre also had a qualified defined contribution plan and made matching contributions of $0, $213,000 and $213,000 in the transition period ended December 31, 1996 and years ended June 30, 1996, and 1995. 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, 1997, 400,000 shares were reserved for issuance under the Plan of which approximately 259,000 shares have been purchased by employees. 39 40 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 7. COMMITMENTS AND CONTINGENCIES The Company leases office space under cancelable and non-cancelable operating leases. Rent expense for the year ended December 31, 1997, the transition period ended December 31, 1996 and the fiscal years ended June 30, 1996 and 1995 under such arrangements totaled $3,795,000, $1,483,000, $4,664,000,and $4,848,000, respectively. The Company also leases certain equipment under long-term leases. At December 31, 1997, long-term lease commitments were as follows:
EQUIPMENT OPERATING CAPITAL LEASES LEASES --------- --------- Year ended December 31, 1998............... $ 2,491 $ 289 Year ended December 31, 1999............... 2,279 190 Year ended December 31, 2000............... 1,866 24 Year ended December 31, 2001............... 1,663 Year ended December 31, 2002............... 114 -------- ------ Total................................. $ 8,413 503 ======== Less amount representing interest.......... 52 ------ Present value of minimum lease payments.... 451 Less current portion....................... 327 ------ Long-term portion.......................... $ 124 ======
The company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially effect the financial position of the Company. Cayenne has received from Esprit Systems Consulting, Inc. ("Esprit") a Notice of Intent to Arbitrate, claiming that Cayenne is liable to Esprit for approximately $1.6 million under an extension to a contract for software training services to be rendered to Cadre. Esprit subsequently withdrew its Notice of Intent to Arbitrate, but has stated that it intends to proceed with either arbitration or litigation. Cayenne believes that the claim is without merit because, among other things, the contract in question terminated without extension. However, there can be no assurance as to the claim's future course or likely result. 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 year ended December 31, 1997, the transition period ended December 31, 1996, and fiscal years ended June 30, 1996 and 1995 was as follows:
TRANSITION YEAR PERIOD ENDED ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30, 1997 1996 1996 1995 ---------- ---------- ---------- -------- SALES TO UNAFFILIATED CUSTOMERS United States $ 23,402 $ 13,641 $ 31,696 $ 36,634 Italy 11,875 6,118 13,937 9,519 United Kingdom 5,379 3,108 7,748 10,224 Rest of World 6,798 3,879 7,802 12,274 Export sales from United States 2,148 1,230 4,703 4,138 Intra-company transfers 6,742 2,649 10,278 9,603 Intra-company eliminations (6,742) (2,649) (10,278) (9,603) ---------- ---------- ---------- -------- $ 49,602 $ 27,976 $ 65,886 $ 72,789 ========== ========== ========== ========
40 41 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA)
TRANSITION YEAR PERIOD ENDED ENDED DECEMBER 31, DECEMBER 31, YEAR ENDED JUNE 30, 1997 1996 1996 1995 -------- -------- -------- -------- INCOME (LOSS) FROM OPERATIONS United States $ 6,663 $ (1,239) $ (3,497) $ (9,419) Italy (873) 113 336 (540) United Kingdom (1,345) (1,194) (1,096) (2,044) Rest of World (6,450) (3,706) (5,335) (12,826) -------- -------- -------- -------- $ (2,005) $ (6,026) $ (9,592) $(24,829) ======== ======== ======== ======== IDENTIFIABLE ASSETS United States $ 30,185 $ 23,665 $ 36,797 $ 34,449 Italy 5,816 6,645 7,894 7,502 United Kingdom 3,102 3,528 4,428 4,537 Rest of World 1,871 6,159 4,438 3,989 Eliminations (14,650) (17,751) (19,458) (15,093) -------- -------- -------- -------- $ 26,324 $ 22,236 $ 34,099 $ 35,384 ======== ======== ======== ========
Revenues from a major customer as a percentage of total revenue for the year ended December 31, 1997, the transition period ended December 31, 1996, and in fiscal years ended June 30, 1996 and 1995 were 17%, 16%, 15%, and 9%, respectively. Included in the results of operations for December 31, 1997 is a $1.9 million non-recurring charge related to management changes and the realignment of the sales organization, moving the corporate headquarters to another facility, and the write-off of purchased software, approximately $1.5 million in the United States, $.2 million in the United Kingdom, and $.1 million in both Italy and rest of world. During the quarter ended March 31, 1997 the Company evaluated its restructuring reserve and determined that amounts provided for in previous restructuring actions were no longer required. As a result, the Company recorded a benefit of approximately $.4 million in the United States. Also, 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 Series A Convertible Preferred Stock. 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, 1997, all shares of Series A Convertible Preferred Stock had been converted to Common Stock. 41 42 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) On January 2, 1997, the Company raised approximately $3.0 million in a private placement of 150,000 shares of Series B Convertible Preferred Stock and the issuance of 350,000 warrants to purchase the Company's Common Stock. On July 18, 1997, the Company raised approximately $2.0 million in a private placement of 100,000 shares of Series C Convertible Preferred Stock and the issuance of warrants to purchase 233,332 shares of the Company's Common stock. On August 28, 1997, the Company raised approximately $5.0 million in a private placement of 250,000 shares of Series D Convertible Preferred Stock and the issuance of 583,332 warrants to purchase the Company's Common Stock. Each share of 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 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 trading days before the conversion. All outstanding and unconverted shares of preferred stock may be converted, at the option of the Company, two years from the date the securities were declared effective and at a specified conversion price. The warrants issued by the Company in conjunction with the closing of each of the private placements, are for the purchase of 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 Convertible Preferred stock and warrants are entitled to registration rights under terms of the registration rights agreement dated for each of the offering dates. The warrants issued with these offerings were valued at $1,724,000 and are included in additional paid in capital. As of December 31, 1997 all shares of the Series B and 40,000 shares of the Series D Convertible Preferred Stock had been converted into common stock. During the year ended December 31, 1997, the transition period ended December 31, 1996 and in fiscal year 1996, the Company received $0, $472,000 and $500,000 in connection with the exercise of warrants. Warrants for 1,504,461 shares of common stock remain outstanding at December 31, 1997. 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, 1997, 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. 42 43 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) The Company adopted the disclosure provisions of Financial Accounting Standards Board (SFAS 123) "Accounting For Stock Based Compensation" 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 year ended December 31, 1997, the transition period ended December 31, 1996, and the year ended June 30, 1996 would have been reduced to the pro forma amounts indicated below:
TRANSITION YEAR ENDED PERIOD YEAR ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 JUNE 30, 1996 ----------------- ----------------- ------------ Net loss - As Reported $ (3,419) $ (6,368) $ (11,347) Net loss - Pro Forma $ (4,724) $ (6,975) $ (11,568) Loss Per Share -As Reported $ (0.19) $ (0.36) $ (0.71) Loss Per Share - Pro Forma $ (0.26) $ (0.40) $ (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 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1997 and for both periods in 1996: an expected life of 3.6 years and 5.0 years; expected volatility of 67% in both years; a dividend yield of 0%; and a risk-free interest rate between (5.2% and 7.8%) and (5.2%. and 7.6%). All forfeitures of options under the plan are accounted for as they occur. During 1997 the Company cancelled and reissued stock options previously granted to employees. Old options were cancelled under all three of the plans and new options were issued under the 1996 plan in the amount of 576,662 options at a price of $2.50 and 7,900 options in the amount of $2.75. 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. 43 44 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, 1997 and 1996 and June 30, 1996 and 1995 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, 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 Options granted................... 2,217,262 2.87 Options exercised................. (77,504) 2.31 Options canceled.................. 1,789,631) 4.58 --------- ------- Options outstanding at Dec. 31, 1997... 3,560,399 3.83 Shares exercisable at Dec. 31, 1997.... 1,536,075 $ 4.32
The weighted-average fair value of options granted during for the year ended December 31, 1997, the six month transition period ended December 31, 1996 and the fiscal year ended June 30, 1996 was $2.75, $3.39, and $3.94, respectively. The following summarizes information about stock options outstanding at December 31, 1997:
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 - $ 2.56 1,387,020 7.89 $ 2.47 96,836 $ 1.65 2.563 - 4.75 1,000,289 3.26 3.47 798,477 3.49 4.88 - 6.00 858,740 8.18 5.54 455,686 5.48 6.25 - 7.50 308,850 3.93 6.35 182,501 6.43 8.75 - 9.19 5,500 8.19 9.11 2,575 9.09 - - ------ ------ ----- ---- ---- ----- ---- $ 1.20 - $ 9.19 3,560,399 6.310 $ 3.83 1,536,075 $ 4.32
44 45 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 YEAR YEAR PERIOD PERIOD ENDED ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, 1997 1996 1996 1995 1996 1995 ---- ---- ---- ---- ---- ---- Cash Paid For: Interest $387 $1,128 $ 276 $269 $1,121 $402 Income taxes 620 1,852 1,457 -- 395 432 Non Cash Investing and Financing Activities: Increase in capital lease obligations 480 142 61 -- 81 97 Conversion of Redeemable Series A Preferred Stock 5,493 -- -- 5,493 --
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
DECEMBER 31, 1997 FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Revenues $13,397 $11,674 $11,348 $13,183 Cost of revenues 2,697 2,761 2,163 2,556 Income (loss) from operations 475 (1,655) 367 (1,192) Net income (loss) 100 (1,873) 61 (1,521) Basic and diluted earnings per share $ (0.00) $ (0.11) $ (0.00) $ (0.08) 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 Basic and diluted earnings per share $ (0.39) $ 0.03 FISCAL YEAR JUNE 30, 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) Basic and diluted earnings per share $ (0.24) $ (0.08) $ (0.19) $ (0.20)
45 46 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 13. NON-RECURRING COSTS NON-RECURRING COSTS. The Company recorded a non-recurring charge of $1.9 million in the fourth quarter of 1997 related to management changes and realignment of the sales organization, costs associated with moving the corporate headquarters to another facility, and the write-off of purchased software. Included in the $1.9 million was a charge of $1.0 million related to management changes and other initiatives taken to improve sales and operating efficiencies. Also, included in the charge was $.3 million related to the move of its headquarters and principal facilities from Burlington to Bedford, Massachusetts. Additionally the Company reviewed its product strategy and determined that purchased software principally related to the Westmount acquisition no longer matched the strategic direction of the Company. As a result of the subsequent review of the purchased software's net realizable value the Company incurred a charge of $.6 million to appropriately reflect the purchased software's net realizable value. During the quarter ended March 31, 1997 the Company evaluated its restructuring reserve and determined that amounts provided for in previous restructuring actions were no longer required. As a result, the Company recorded a benefit of approximately $.4 million. 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 were specifically identified and terminated. Included in the charge was $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 reflected costs associated with termination benefits, the write off of redundant software investments and facility restructuring. 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 restructuring. At December 31, 1997, the Company believes that it has adequately provided for all restructuring actions taken to date. 46 47 CAYENNE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (TABLES IN THOUSANDS EXCEPT PER SHARE DATA) 14. BORROWINGS On November 3, 1997, the Company renewed its revolving credit agreement with a bank to borrow up to $5.0 million and to extend its term through October 5, 1998 and to amend financial and operating covenants and other provisions of the agreement. 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 loan carries an interest rate at bank prime plus two percent. The financial covenants, which were amended, include a quarterly minimum net worth covenant of $5.5 million and liquidity (generally defined as cash and cash equivalents plus eligible domestic accounts receivable and eligible international accounts receivable less any indebtedness to the bank) at the end of each quarter. The Company was in compliance with the covenants as of December 31, 1997. At December 31, 1997, the borrowing base under the revolving credit agreement was approximately $3.7 million. The Company had approximately $2.4 million, $2.8 million, and $1.5 million outstanding against the line of credit at December 31, 1997 and 1996, and June 30, 1996, respectively. On November 6, 1996 and in connection with the renewal of the bank agreement 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 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. In addition, 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. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued (SFAS No. 131) "Disclosures About Segments of an Enterprise and Related Information", which will require adoption during the year ended December 31, 1998. This statement established standards for the way public enterprises report information about operating segments in annual reports. The Company is in the process of determining the effect of adoption of this statement on its consolidated financial statement disclosures. In October 1997, Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), was issued which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The Company will adopt the guidelines of SOP 97-2 as of January 1, 1998 and its adoption is not expected to have a material impact on the Company's financial results. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 47 48 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, 1997 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, 1997 or be included in an amendment to this Form 10-K within such period. 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, 1997 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, 1997 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 27. (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 footnotes 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. 2.2(3) Agreement and Plan of Merger by and among Cayenne, BI Acquisition Corp. and WindTunnel Software, Inc. dated April 27, 1993 2.3(8) Agreement and Plan of Merger among Cayenne, B.C. Acquisition Corp. and Cadre Technologies Inc. dated as of March 25, 1996 3.1(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 4.1(1) Specimen Certificate for Common Stock of Cayenne 4.3(6) Form of Warrant Agreement dated as of November 21, 1994 by and among Cayenne and purchasers of Series A Convertible Preferred Stock 4.4(5) Warrant Agreement dated as of October 28, 1994 by and between Cayenne and Silicon Valley Bank 4.5(11) Series B Convertible Preferred Stock Purchase Agreement dated as of January 2, 1997 between the Company and Southbrook 48 49 International Investments, Ltd. 4.6(11) Registration Rights Agreement dated as of January 2, 1997 4.7(11) Form of Warrant Agreement dated as of January 2, 1997 4.8(11) Warrant Agreement dated as of December 20, 1996 between the Company and Silicon Valley Bank 4.9(13) Statement of Rights and Preferences of Series C Convertible Preferred Stock 4.10(13) Convertible Preferred Stock Purchase Agreement dated as of July 18, 1997 between the Company and Southbrook International Investments, Ltd. 4.11(13) Registration Rights Agreement dated as of July 18, 1997 4.12(13) Form of Warrant Agreement dated as of July 18, 1997 4.13(14) Statement of Rights and Preferences of Series D Convertible Preferred Stock 4.14(14) Convertible Preferred Stock Purchase Agreement dated as of August 28, 1997 between the Company and purchasers of Series D Convertible Preferred Stock 4.15(14) Registration Rights Agreement dated as of August 28, 1997 4.16(14) Form of Warrant Agreement dated as of August 28, 1997 10.1(1) General License and Maintenance Agreement dated January 30, 1987 between Cayenne and American Telephone & Telegraph Communications, Inc. 10.6(2) Agreement dated as of November 1, 1991, between Cayenne and Cayenne Italia S.r.1., as amended by letter dated December 9, 1991 and as further amended by amendment dated December 31, 1991 10.8(1) Amended and Restated 1986 Incentive and Nonqualified Stock Option Plan of Cayenne 10.9(2) 1992 Employee Stock Purchase Plan 10.10(1) Savings/Retirement Plan and Trust of Cayenne 10.11(4) Employment agreement dated as of January 1, 1994 by and between Cayenne and Charles W. Bachman 10.15(5) Revolving Credit Agreement and Warrant Agreement dated as of October 28, 1994 by and between Cayenne and Silicon Valley Bank 10.16(6) 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(6) Registration Rights Agreement dated as of November 21, 1994 by and among Cayenne and purchasers of Series A Convertible Preferred Stock 10.18(7) Form of Common Stock Purchase Agreement dated as of September 15, 1995 by and among Cayenne and certain purchasers of Common Stock 10.19(7) Form of Registration Rights Agreement dated as of September 15, 1995 by and among Cayenne and certain purchasers of Common Stock 10.22(9) Amended and Restated Revolving Credit Agreement dated as of June 6, 1996 by and between Cayenne and Silicon Valley Bank 10.23(11) 1997 Bonus Plan of Cayenne 10.24(10) Amended 1996 Incentive and Nonqualified Stock Option 10.25(12) Calendar Year 1997 Bonus Pool of Cayenne 10.26 Lease between ComputerVision Corporation and Cayenne dated October 1, 1997 10.27 Amendment as of October 4, 1997 to Revolving Credit Agreement and Warrant Agreement dated as of October 28, 1994 by and between Cayenne and Silicon Valley Bank 10.28 Agreement with Peter J. Boni made as of December 31, 1997 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 - ------------- 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 Cayenne's Registration Statement on Form S-4, File No. 33-62650, as amended. 49 50 4) Incorporated by reference to the exhibits filed with Cayenne's Quarterly Report on Form 10-Q dated May 13, 1994. 5) Incorporated by reference to the exhibits filed with Cayenne's Quarterly Report on Form 10-Q dated November 11, 1994. 6) Incorporated by reference to the exhibits filed with Cayenne's Quarterly Report on Form 10-Q dated February 13, 1995, as amended. 7) 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 8) Incorporated by reference to exhibits filed with Cayenne's Registration Statement on Form S-4, File No. 333-6087, as amended. 9) Incorporated by reference to exhibits filed with Cayenne's Annual Report on Form 10-K dated September 27, 1996, File No. 0-19682. 10) Incorporated by reference to exhibits filed with Cayenne's Proxy Statement dated November 20, 1996 11) Incorporated by reference to exhibits filed with Cayenne's Annual Report on Form 10-K dated March 29, 1997, File No. 0-19682 12) Incorporated by reference to exhibits filed with Cayenne's Quarterly Report on Form 10-Q dated August 14, 1997, File No. 0-19682 13) Incorporated by reference from exhibits filed with Cayenne's Registration Statement on Form S-3 filed August, 19, 1997, File No. 333-33917 14) Incorporated by reference from exhibits filed with Cayenne's Registration Statement on Form S-3 filed September 26, 1997, File No. 333-36533 (b) REPORTS ON FORM 8-K: NONE 50 51 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 Bedford, Commonwealth of Massachusetts on the 30th day of March, 1998. CAYENNE SOFTWARE, INC. By: /s/ John J. Alexander Interim 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/ John J. Alexander Interim President, Chief March 26, 1998 - -------------------------- John J. Alexander Executive Officer and Chairman of the Board /s/ Frederick H. Phillips Vice President, Finance and March 26, 1998 - -------------------------- Frederick H. Phillips Administration, Treasurer and Chief Financial and Accounting Officer /s/ R. John Fletcher Director March 27, 1998 - -------------------------- R. John Fletcher /s/ Director - -------------------------- William H.D. Goddard /s/ Roland D. Pampel Director March 26, 1998 - -------------------------- Roland D. Pampel /s/ Allyn C. Woodward, Jr. Director March 26, 1998 - -------------------------- Allyn C. Woodward, Jr. 51 EX-10.26 2 LEASE BETWEEN COMPUTERVISION AND CAYENNE SOFTWARE 1 EXHIBIT 10.26 COMPUTERVISION CORPORATION SUBLANDLORD AND CAYENNE SOFTWARE, INC. SUBTENANT ---------------------- SUBLEASE ---------------------- October 1, 1997 2 TABLE OF CONTENTS Section Page 1. Term; Existing Sublease...................................................2 2. Minimum Rent..............................................................3 3. Use of the Sublease Premises..............................................4 4. Incorporation of Overlease Terms..........................................4 5. Additional Rent...........................................................8 6. Non-Applicability of Certain Overlease Provisions.........................10 7. Subleases, Assignments, etc...............................................12 8. Insurance.................................................................15 9. Indemnification...........................................................16 10. Payments.................................................................16 11. Brokerage................................................................17 12. Notices..................................................................17 13. Consent..................................................................17 14. Binding Effect...........................................................17 15. Modification, Waiver, etc................................................18 16. Acceptance of Rent; Surrender............................................18 17. WAIVER OF JURY TRIAL AND COUNTER CLAIMS..................................18 18. "As Is" Condition........................................................19 19. At End of Term...........................................................19 20. Alterations..............................................................19 21. Defaults and Remedies....................................................20 22. Holding Over.............................................................24 23. No Privity of Estate....................................................25 24. Consents and Approvals..................................................25 25. Inspection of and Access to the Sublease Premises.......................25 26. Environmental Compliance................................................25 27. Miscellaneous............................................................26 (i) 3 SUBLEASE COMPUTERVISION CORPORATION, a Delaware corporation having an office at 100 Crosby Drive, Bedford, Massachusetts 01730 ("Sublandlord") and CAYENNE SOFTWARE, INC., a Massachusetts corporation having an office at 8 New England Executive Park, Burlington, Massachusetts 01803 ("Subtenant"). W I T N E S S E T H : WHEREAS, pursuant to that certain Lease (the "Original Lease") dated August 31, 1974 between Space Realty Corp., predecessor in interest to Trustees of Bedford Z Trust (together with its successors and assigns "Overlandlord"), as landlord, and Sublandlord, as tenant, as such Original Lease was amended by that certain Amendment No. 1 dated May 31, 1977, that certain Amendment No. 2 dated January 10, 1978, that certain Amendment No. 3 dated August 23, 1978, that certain Amendment No. 4 dated October 16, 1978, that certain Amendment No. 5 dated October 16, 1978, that certain Amendment No. 6 dated April 17, 1979, that certain Amendment No. 7 dated November 12, 1979, that certain Amendment No. 8 dated November 12, 1979, that certain Amendment No. 9 dated May 28, 1980, that certain Amendment No. 10 dated April 18, 1980, that certain Amendment No. 11 dated April 22, 1981 and that certain Amendment No. 12 dated March 27, 1996 (the Original Lease, as so amended and as the same may be further amended from time to time, is hereinafter referred to as the "Overlease") Sublandlord leased from Overlandlord certain premises in a multi-building complex commonly known as Bedford Business Park, located on Crosby Drive, Bedford, Massachusetts and as more specifically described in the Overlease (the "Overlease Premises"); and WHEREAS, Subtenant desires to sublet from Sublandlord the entire three (3) story building located at 14 Crosby Drive containing approximately 92,648 rentable square feet (the "Sublease Premises") upon the terms and subject to the provisions and conditions hereinafter set forth. NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants, conditions and agreements hereinafter contained, do hereby agree as follows: (1) 4 W I T N E S S E T H : 1. Term; Existing Sublease (a) Sublandlord hereby sublets the Sublease Premises to Subtenant and Subtenant hereby hires the Sublease Premises from Sublandlord commencing on November 1, 1997 (the "Commencement Date"), subject to the terms of Section 1(b) below, and, unless earlier terminated in accordance with the terms hereof or the Overlease, shall terminate on April 30, 2005 (the "Expiration Date"). Subtenant acknowledges that if the Overlease terminates for any reason whatsoever (other than by reason of a default by Sublandlord as tenant thereunder or a default hereunder) prior to the expiration of the term hereof (as the same may be renewed or extended, the "Sublease Term" or "Term"), this Sublease shall terminate simultaneously therewith, and such termination date of the Overlease shall be the date on which the term of this Sublease shall expire. (b) This Sublease is made subject to that certain Sublease Agreement dated as of August 16, 1995 (the "Existing Sublease") between Sublandlord and Thinking Machines, Inc. (the "Existing Subtenant") and any and all leases, subleases and other matters caused or suffered by the Existing Subtenant, including, without limitation, that certain sublease dated as of April 22, 1996 (the "Existing Sub-Sublease") between the Existing Subtenant and Diagnostic Laboratory Medicine, Inc. Notwithstanding the foregoing, if Sublandlord shall fail to deliver possession of the Sublease Premises free and clear of the possession of the Existing Subtenant (but subject nevertheless to the possession and rights of the leasee under the Existing Sub-Sublease) on or before the Commencement Date, Subtenant shall have as its sole remedy the option to terminate the Sublease by notice to Sublandlord given on or before November 5, 1997. If Subtenant does not terminate the Sublease, then the Sublease Term shall commence on the Commencement Date, and Sublandlord shall assign, without recourse or representation, the Surrender Agreement (hereinafter defined) to Subtenant and thereupon be relieved entirely from any and all obligations to enforce the Surrender Agreement provided Sublandlord alone shall be liable for any payments due to the Existing Subtenant under the Surrender Agreement other than pursuant to the last paragraph thereof which shall be the responsibility of Subtenant if the Surrender Agreement is so assigned. (c) On or before the date hereof, Sublandlord and the Existing Subtenant have entered into a certain Surrender Agreement (the "Surrender Agreement") substantially in the form attached hereto as Exhibit A. Sublandlord shall use commercially reasonable efforts to enforce the Surrender Agreement, provided, however Sublandlord shall have no liability to Subtenant by reason of any failure by the Existing Subtenant to observe any of the terms of the Surrender Agreement. No such failure(s) shall reduce any of Subtenant's obligations hereunder, give rise to any defense, offset, claim or counterclaim or entitle Subtenant to extend the Term or terminate this Sublease (2) 5 except as expressly provided above. In accordance with the Surrender Agreement, Subtenant shall accept an assignment of the Existing Sub-Sublease from the Existing Subtenant and assume the Existing Subtenant's obligations thereunder. 2. Minimum Rent. (a) During the Sublease Term, Subtenant covenants to pay to Sublandlord, without any prior notice or demand therefor, and without any deduction, offset, abatement, defense, counterclaim or set-off whatsoever except as expressly provided in Sections 4(b) and 6(c) below, a fixed minimum annual rental ("Minimum Rent") as follows: (i) For the period commencing on the Commencement Date and ending on the day next preceding the first (1st) anniversary of the Commencement Date, $1,075,361.79 per annum in equal monthly installments of $89,613.49; (ii) For the period commencing on the first (1st) anniversary of the Commencement Date and ending on the day next preceding the second (2nd) anniversary of the Commencement Date $1,146,612.48 per annum in equal monthly installments of $95,551.04; (iii) For the period commencing on the second (2nd) anniversary of the Commencement Date and ending on the day next preceding the third (3rd) anniversary of the Commencement Date, $1,219,739.24 per annum in equal monthly installments of $101,644.94; (iv) For the period commencing on the third (3rd) anniversary of the Commencement Date and ending on the day next preceding the fourth (4th) anniversary of the Commencement Date, $1,320,234.00 per annum in equal monthly installments of $110,019.50; (v) For the period commencing on the fourth (4th) anniversary of the Commencement Date and ending on the day next preceding the fifth (5th) anniversary of the Commencement Date, $1,389,720.00 in equal monthly installments of $115,810.00; (vi) For the period commencing on the fifth (5th) anniversary of the Commencement Date and ending on the day next preceding the sixth (6th) anniversary of the Commencement Date, $1,459,206.00 in equal monthly installments of $121,600.50; (vii) For the period commencing on the sixth (6th) anniversary of the Commencement Date and ending on the day next preceding the seventh (7th) anniversary of the Commencement Date, $1,528,692.00 in equal monthly installments of $127,391.00; and (3) 6 (viii) For the period commencing on the seventh anniversary of the Commencement Date and ending on the Expiration Date, $1,598,178.00 per annum in equal monthly installments of $133,181.50. Such sums shall be payable by Subtenant in lawful money of the United States, in advance, on or before the 25th day of each and every calendar month during the Sublease Term, except that the first monthly installment due hereunder (after giving effect to the terms of Section 2(b) below) shall be paid upon the execution hereof. The Minimum Rent payable on account of any partial calendar month during the term, if any, shall be prorated. (b) Notwithstanding anything contained herein to the contrary, so long as Subtenant is not in default beyond any applicable notice and cure period which default is then continuing: (i) the first (1st), second (2nd), Third (3rd) and fourth (4th) monthly installments of Minimum Rent shall be abated; (ii) one-half (1/2) of each of the fifth (5th), sixth (6th), seventh (7th) and eighth (8th) monthly installments of Minimum Rent shall be abated and (iii) $38,603 of each of the ninth (9th), tenth (10th), eleventh (11th), twelfth (12th) and thirteenth (13th) monthly installments of Minimum Rent shall be abated. 3. Use of the Sublease Premises. Subtenant shall use and occupy, or cause to be used and occupied, the Sublease Premises solely for office use in accordance with the terms and conditions of the Overlease and for no other purpose, and subject to Section 4(f) below, Subtenant further covenants not to do, or permit any act in or about the Sublease Premises, which will result in a violation of the Overlease. During the Sublease Term, Subtenant shall be permitted to use up to 279 parking spaces at the Overlease Premises on an unreserved and non-exclusive basis. Notwithstanding anything contained in the first sentence of this Section 3 to the contrary, Subtenant may, after first obtaining Overlandlord's written consent, delivering a copy thereof to Sublandlord and for so long as such consent shall be effective, use the Sublease Premises for light manufacturing to the extent consented to by Overlandlord provided the same does not impose any cost, material risk or liability on Sublandlord and Subtenant complies in all respects with the terms of the Overlandlord's consent. 4. Incorporation of Overlease Terms. (a) Except as otherwise provided herein, words or terms which are capitalized herein shall have the meanings ascribed to them in the Original Lease unless the context clearly requires otherwise. (b) This subletting, except as inconsistent with the terms hereof or herein specifically to the contrary provided, is, to the extent applicable to the Sublease Premises, upon all the terms, covenants and conditions of the letting effected by the Original Lease (and Section 6.1 and the first paragraph of 6.2 of Amendment No. 8 to the (4) 7 Original Lease) which are hereby incorporated by reference herein, subject to Section 6 hereof, so that whenever the terms "Lessor" (or "Landlord"), "Lessee" (or "Tenant"), "this Lease," "the Premises," the "Term Commencement Date," "Term," and "Fixed Annual Rent" occur in the Original Lease, they shall be deemed to refer respectively to Sublandlord, Subtenant, this Sublease, the Sublease Premises, the Commencement Date, the Sublease Term and Minimum Rent. Throughout the Sublease Term, Subtenant will observe and perform all of the provisions of the Overlease to the extent applicable to the Sublease Premises (except for the payment of Annual Fixed Rent and other matters expressly excluded hereunder) on the part of Sublandlord to be performed as tenant thereunder and will not do, or permit to be done in or about the Sublease Premises, any act, manner or thing which will be, result in, or constitute a violation or breach of or a default under the Overlease (but only with respect to matters arising during the Sublease Term or while Subtenant is in occupancy of the Sublease Premises); any such violation, breach or default to constitute a breach by Subtenant of a substantial obligation under this Sublease. Subtenant hereby assumes the full, faithful and complete performance of the Overlease to the extent applicable to the Sublease Premises (but only with respect to matters arising during the Sublease Term or while Subtenant is in occupancy of the Sublease Premises) and, to the extent aforesaid, agrees that its occupancy shall be subject to, and that it will observe and perform, each and every term, covenant, provision, condition, agreement and obligation imposed upon Sublandlord in its capacity as tenant under the Overlease with respect to the Sublease Premises (but only with respect to matters arising during the Sublease Term or while Subtenant is in occupancy of the Sublease Premises), with the sole exception of provisions to the contrary herein contained. Subtenant hereby indemnifies and agrees to hold Sublandlord harmless from and against all claims, penalties, costs, losses and expenses, including, but not limited to, reasonable attorneys' fees, relocation expenses, rent differential expenses and obligations incurred by Sublandlord or owing to any other subtenant, assignee, or Overlandlord based upon any default by Subtenant or any sublessee or assignee of Subtenant in the performance of those terms, covenants and conditions of the Overlease which have been assumed by Subtenant (other than a payment default under the Overlease) except to the extent due to the wrongful acts or negligence of Sublandlord or of other sublessees or assignee of Sublandlord (other than Subtenant). Sublandlord hereby indemnifies and agrees to hold Subtenant harmless from and against all claims, penalties, costs, losses and expenses (including, without limitation, reasonable attorneys' fees, relocation expenses, rent differential expenses and obligations incurred by Subtenant or owing to any subtenant or assignee of Subtenant) based upon any default by Sublandlord or of other sublessees or assignee of Sublandlord (other than Subtenant) in the performance of those terms, covenants and conditions of the Overlease which have not been assumed by Subtenant except to the extent that Subtenant has indemnified Sublandlord with respect thereto or same is due to a default by Subtenant hereunder or the wrongful acts or negligence of Subtenant. Subtenant shall pay to Sublandlord, as Additional Rent hereunder, any and all sums which Sublandlord is required to pay to Overlandlord to the extent caused by Subtenant's failure to perform or observe any of the terms and conditions of the Overlease pertaining to the Sublease Premises or by any act or omission described in the sentence preceding the preceding (5) 8 sentence. Notwithstanding the above, Sublandlord shall not be liable to Subtenant for any failure in performance resulting from the failure in performance by the Overlandlord of the corresponding covenant of the Overlease and Sublandlord's obligations hereunder are accordingly conditional where such obligations require such parallel performance by Overlandlord. Subtenant recognizes that Sublandlord is not in a position to render any of the services or to perform any of the obligations required of Sublandlord by the terms of this Sublease; Sublandlord agrees, however, to use reasonable efforts to enforce the Overlease for the benefit of Subtenant upon Subtenant's request. Subtenant agrees to promptly reimburse Sublandlord for any and all reasonable costs it shall incur in expending any such efforts, and Subtenant does hereby indemnify and agree to hold Sublandlord harmless from and against any and all claims, liabilities, damages, costs and expenses (including, without limitation, reasonable attorneys' fees) incurred by Sublandlord in expending such efforts. Except as provided in Section 4(g), nothing contained in this Sublease shall require Sublandlord to institute any suit or action to enforce any such rights. In amplification, and not in limitation of the foregoing, and without any allowance to Subtenant or other reduction, abatement or adjustment of Minimum Rent or Additional Rent, Sublandlord shall not be responsible for furnishing elevator, electric, HVAC, cleaning, painting, window washing or other services, nor for any maintenance, repairs installation or alterations in or to the Premises or the Sublease Premises. In addition to the foregoing, no such failure or default on the part of Overlandlord shall constitute an actual or constructive total or partial eviction of Subtenant or entitle Subtenant to a reduction or abatement of Minimum Rent or Additional Rent hereunder except as expressly provided herein to the contrary. Notwithstanding anything contained herein to the contrary, to the extent that the failure in performance by the Overlandlord of its obligations under the Overlease results in a right to an abatement of rent under the Overlease with respect to the Sublease Premises, Subtenant shall be entitled to an abatement of rent hereunder; provided, however, the amount of such abatement shall not exceed the amount of abatement under the Overlease which Sublandlord has a right to receive with respect to the Sublease Premises. (c) In any case where the consent or approval of Overlandlord shall be required pursuant to the Overlease, Sublandlord's consent shall also be required hereunder; provided, however, Sublandlord agrees not to unreasonably withhold its consent under this Section 4(c) to any item which shall have been approved by Overlandlord. Sublandlord warrants and represents that a complete copy of the Overlease is attached hereto as Exhibit B and there are no rules or regulations promulgated under the Overlease. (d) If Subtenant shall default (beyond any applicable notice and cure period) in the payment of Minimum Rent or Additional Rent hereunder or in the performance or observance of any of the terms, covenants or conditions of this Sublease or the Overlease (to the extent applicable to the Sublease Premises) on the part of Subtenant to be performed or observed, Sublandlord shall have all rights available at law and/or equity and the right (but not the obligation) to exercise against Subtenant in connection with this Sublease all of the same rights and remedies provided to or reserved (6) 9 herein or by Overlandlord in the Overlease; provided, however, the foregoing shall in no way be deemed to limit or impair the rights and privileges of the Overlandlord under the Overlease or to impose any obligations on the part of Sublandlord by reason of the exercise by Overlandlord of any of such rights or privileges with respect to the Sublease Premises or to the use and occupation thereof by Subtenant. Without limitation of the foregoing or the terms and provisions of Section 21 hereof, Sublandlord shall have the same rights and remedies against Subtenant in the event of non-payment by Subtenant of Minimum Rent or Additional Rent hereunder as are available to Overlandlord under the Overlease, at law and/or in equity for the non-payment of rent or of any installment thereof. (e) Sublandlord and Subtenant shall each, promptly after receipt thereof, notify the other of any notice served by Overlandlord upon it pursuant to the terms, provisions and conditions of the Overlease or with reference to this Sublease or the Sublease Premises. Wherever Overlandlord requires Sublandlord (or Subtenant) to take any action or to cure any default (other than a default in the payment of Minimum Rent or Additional Rent pursuant to the Overlease or other default curable solely by Sublandlord) applicable to the Sublease Premises (but only with respect to matters arising during the Sublease Term or while Subtenant is in occupancy of the Sublease Premises) within a period of time stated in such notice or in the Overlease, Subtenant shall complete such action or cure such default not later than five (5) days prior to the expiration of such period and shall immediately furnish written notice of compliance to Sublandlord. If Subtenant fails to timely complete such cure, Sublandlord shall have the option, but not the obligation, to take any such action, on behalf of Subtenant and Subtenant shall pay to Sublandlord, upon demand, as Additional Rent the amount expended by Sublandlord in so doing together with interest at the rate set forth in Section IX of the Overlease. (f) Notwithstanding anything to the contrary herein, with respect to the physical condition of the Sublease Premises and the other portions of the Overlease Premises, Subtenant shall not be liable or responsible for any cost, expense, liability or obligation with respect to any matters arising or conditions existing prior to the earlier of the commencement date under the Existing Sublease or the date on which the Existing Subtenant took occupancy of the Sublease Premises. Subtenant shall not be responsible for any amounts due under the second paragraph of Section 6.2 of Amendment No. 8 to the Original Lease resulting from any request by Sublandlord for Overlandlord to undertake additional leasehold improvements unless such request corresponds to a request made by Subtenant. (g) Sublandlord agrees that if (i) Overlandlord is in default of its obligations under the Overlease after the expiration of any applicable cure period, (ii) such default materially adversely affects Subtenant, (iii) Sublandlord shall have exhausted all reasonable efforts to compel Overlandlord to cure such default (other than commencing appropriate legal action), (iv) no default shall exist in the payment of Minimum Rent, Additional Rent or any other sum or any other obligation of Subtenant hereunder beyond any applicable notice and cure period and (v) Subtenant shall have (7) 10 delivered to Sublandlord assurances, including security if reasonably required by Sublandlord, satisfactory in all respects to Sublandlord in the exercise of its reasonable judgment, for the performance of Subtenant's obligations under this Section 4(g), then Sublandlord shall institute such appropriate legal action to enforce Overlandlord's obligations with respect to the Sublease Premises as Subtenant may reasonably request in writing, at Subtenant's sole cost and expense, with counsel of Sublandlord's selection reasonably acceptable to Subtenant; provided, however, if the only premises demised under the Overlease are the Sublease Premises, Subtenant shall be entitled to commence and prosecute in a manner reasonably acceptable to Sublandlord such action. Subtenant shall within five (5) days after demand reimburse Sublandlord for any and all costs which Sublandlord shall incur in connection with any such action, and Subtenant does hereby indemnify and agree to hold Sublandlord harmless from and against any and all claims, liabilities, damages, costs and expenses (including without limitation reasonable attorneys' fees and disbursements) incurred or suffered by Sublandlord by reason of or in connection with such action. (h) Sublandlord shall not do, or permit to be done in or about the Overlease Premises (exclusive of the areas in and about the Sublease Premises), any act, manner or thing that will result in, be or constitute a violation, breach or default on the part of Sublandlord under the Overlease. Sublandlord shall not modify or terminate the Overlease in any manner that would adversely affect Subtenant's rights and obligations hereunder or reduce Overlandlord's obligations with respect to the Subleased Premises and in no event shall Subtenant be obligated to perform any additional obligation by reason of any amendment made to the Original Lease after the date hereof; provided, however, Sublandlord may terminate the Overlease to the extent permitted by applicable law or as provided in the Original Lease and Amendments Nos. 1 through No. 12, inclusive, to the Original Lease. Nothing contained herein is intended to reduce Sublandlord's liability by reason of Sublandlord's rejection or termination of the Overlease in connection with any of the events or circumstances described in Section 21(a)(v) occurring with respect to Sublandlord. 5. Additional Rent. (a) All amounts payable hereunder by Subtenant other than Minimum Rent are referred to as "Additional Rent." Sublandlord shall have the same rights and remedies with respect to the non-payment or late-payment of Minimum Rent as Sublandlord has with respect to the non-payment or late-payment (as applicable) of Minimum Rent. (b) As Additional Rent hereunder, Subtenant shall pay to Sublandlord all amounts payable by Sublandlord (as tenant under the Overlease) with respect to the Sublease Premises and its appurtenances attributable to the Sublease Term and/or any other period of occupancy by Subtenant other than Fixed Annual Rent and penalties, late charges, interest payable by Sublandlord by reason of its failure to timely pay such Fixed Annual Rent or to turn over to Overlandlord any items of Additional Rent payable to (8) 11 Overlandlord promptly after the payment thereof by Subtenant. Without limiting the generality of the foregoing, Subtenant shall pay all amounts payable by Sublandlord as tenant under the Overlease on account of Tax Expenses, Management Fees and Net Rental Operating Expenses and all other amounts payable under Sections 5.3, 5.4 and 5.5 of Amendment No. 8 to the Original Lease, attributable to the Sublease Premises and/or its appurtenances for the Sublease Term or while Subtenant is in occupancy. Sublandlord shall request that Overlandlord continue its current practices of reconciling payments based on estimates with actual expenses every twelve months. Sublandlord estimates that the annual Tax Expenses, Management Fee and Net Rental Operating Expenses for 1997 for the Subleased Premises will be $4.91 per rentable square foot. Such estimate shall not be binding on either party. The parties acknowledge that the Sublease Premises contain approximately 92,648 rentable square feet. (c) In the event that Additional Rent is due under the Overlease with respect to any period which includes the Commencement Date or the date of expiration of the Term, Subtenant's obligations hereunder on account of such Additional Rent shall be appropriately prorated. Subtenant's obligation to pay Additional Rent, pursuant to the terms of this Section 5, shall survive the expiration or earlier termination of the Term. (d) Subtenant shall pay Additional Rent, from time to time, within the periods specified in Section 10 hereof, without any deduction or offset whatsoever except as expressly set forth herein. Subtenant shall also pay any costs relating to repair or restoration of the Sublease Premises to the extent such obligation might otherwise rest on Sublandlord under the Overlease, other than with respect to matters existing prior to the earlier of the Commencement Date and the date on which Subtenant takes occupancy of the Sublease Premises. (e) If any commercial rent tax or occupancy tax shall be levied with regard to the Sublease Premises with respect to the Sublease Term or Subtenant's occupancy of the Sublease Premises, Subtenant shall pay the same either to the taxing authority, or, if appropriate, to Sublandlord as Additional Rent, on or before the due date of such payment. In the event that any such tax payment shall be made to Sublandlord, Sublandlord shall remit the amount of such payment to the taxing authority on Subtenant's behalf. (f) Subtenant shall pay directly to the landlord under the Overlease when due monetary obligations of any kind Subtenant incurs directly with the landlord under the Overlease, including, but not limited to, the cost of the lobby guard (if any) and any similar or other charges or obligations incurred from time to time by Subtenant or any sublessee or transferee of Subtenant. Such sums shall be deemed Additional Rent hereunder. (g) Subtenant shall pay from time to time to Sublandlord for all electricity used in the Sublease Premises during the Sublease Term or while Subtenant is in occupancy of the Sublease Premises, all amounts charged to Sublandlord for or on (9) 12 account of such electricity and the charges therefor (including, without limitation, taxes and/or surcharges thereon), all not later than five (5) days prior to the date on which Sublandlord is obligated to make the corresponding payment. Subtenant shall pay directly to the utility company(ies) when due any charges for, or on account of, utilities directly billed to Subtenant by such company(ies) for utilities consumed in the Sublease Premises during the Sublease Term or while Subtenant is in occupancy of the Sublease Premises. 6. Non-Applicability of Certain Overlease Provisions. The terms of the Overlease as incorporated herein so as to relate directly to the relationship between Sublandlord and Subtenant hereunder pursuant to the first sentence of Section 4(b) hereof are modified as follows; provided, however the following modifications of the provisions of the Overlease, are made solely as to the incorporation by reference of the Overlease herein and do not affect Subtenant's obligations under the second and third sentences of Section 4(b) hereof: (a) In all cases, if the Subtenant is required to submit to, exhibit to, provide or supply to Sublandlord (or if the Sublandlord hereunder is required to submit to, exhibit to, provide or supply Overlandlord pursuant to the terms of the Overlease, as the same relates to the Subleased Premises) with evidence, certificates or any other matter or thing, or to give Sublandlord (or Overlandlord, as aforesaid) notice, then Subtenant shall be required, absent Sublandlord's written consent to the contrary, to submit, exhibit, provide or supply such evidence, certificates or any other matter or thing simultaneously to Overlandlord and Sublandlord; (b) The following provisions of the Original Lease are deleted: Article I; Article III; Paragraphs IV (a), (b) and (g); Paragraphs VII (c), (d) and (f); Article V; Paragraph VI (b), (g)(iv) and (g)(v); Article X; Article XI; Paragraph XII (a); the first two sentences and the fourth sentence of Article XIII; and Exhibits A and B; (c) The terms of Article VIII of the Original Lease as incorporated herein are hereby modified so that: (i) Subtenant hereby acknowledges that Sublandlord and Overlandlord shall be entitled to construe the terms of Article VIII of the Overlease as though the Sublease Premises were the only premises demised by the Overlease. Sublandlord hereby acknowledges that Article VIII of the Overlease applies to the Sublease Premises. (ii) Paragraphs VIII(a)(ii) and VIII(b) of the Overlease are deleted in their entirety for purposes of incorporation herein and the following shall apply: (A) Subtenant shall have the following option, which it must exercise by written notice to Sublandlord within seven (7) days from the occurrence of a casualty. Unless such notice is given, the following option shall not operate. In (10) 13 the event of a casualty which deprives Subtenant of the use of more than 50% of the Sublease Premises and requires Sublandlord, subject to the terms of Section 4(b) and 4(g) of this Sublease, to rebuild in accordance with the provisions of Paragraph VIII(a)(i) of the Original Lease as incorporated herein, the following procedure shall be followed: An independent engineering firm shall promptly determine whether or not the Sublease Premises can be restored, within two hundred seventy (270) days from the date of the engineer's written report, to substantially the condition it was in immediately prior to the casualty. If the engineer's report (taking into consideration, among other relevant factors, availability of labor and materials and the time necessary to employ a contractor who is available to commence work) concludes that the restoration can reasonably be accomplished in 270 days or less, then the restoration shall proceed in accordance with the provisions of this Sublease. However, if the engineering report concludes that the restoration cannot reasonably be accomplished within 270 days from the date of the report, then Subtenant shall have seven (7) days from the issuance of the engineering report within which to notify Sublandlord in writing that it elects to terminate the term of this Sublease 270 days (or such shorter time during which the Subtenant's rent is abated in full under the provisions of Section 6(c)(ii)(B) below) from the date of receipt of the notice and this Sublease shall so terminate. In the event said notice is not received within seven (7) days from the date of the engineer's report, Subtenant shall be deemed to have consented to the restoration and shall have waived any rights to terminate the term of the Sublease hereunder. In the event the engineering report should estimate that 270 days or less are reasonably necessary to accomplish the restoration and for any reason the report is incorrect and the period of time necessary to accomplish the restoration exceeds 270 days, Subtenant agrees that it will continue to be bound according to the terms of this Sublease. The cost of the engineer's report shall be borne, subject to the terms of Section 4(b) and 4(g) of this Sublease, solely by Sublandlord. In the event this Section 6(c)(ii)(A) shall operate, and notwithstanding any provision to the contrary in Section VIII(a)(i) of the Original Lease as incorporated herein, Sublandlord, subject to the terms of Sections 4(b) and (g) above, shall commence the restoration as soon as reasonably practicable after the expiration of the second ten (10) day notice period set forth in Paragraph VIII(a)(ii) of the Overlease. Such engineering firm shall be acceptable to Overlandlord and Sublandlord; provided, however, Sublandlord shall not accept an engineering firm to which Subtenant has timely made a reasonable objection. In all events, the engineering firm of Charles T. Main, Inc., of Boston, Massachusetts shall be acceptable to Sublandlord and Subtenant. (B) In case the Sublease Premises or a part thereof are rendered untenantable by fire or other casualty or action of public authority in consequence thereof, a just proportion of the Minimum Rent and Additional Rent, according to the nature or extent of the injury, shall be abated until the repair is completed, but if the abatement would at any time exceed the sum of insurance against abatement or loss of rent under this Sublease in case of fire or other casualty similarly (11) 14 insured against, plus any abatement to which Sublandlord may be correspondingly entitled to under the Overlease, Sublandlord or Subtenant may terminate this Sublease by giving the other at least twenty (20) days notice specifying the termination date, unless Subtenant before the termination date waives abatement to the extent of such excess. (iv) Clause (i) of the first sentence of Paragraph VIII(d) of the Original Lease is deleted for purposes of incorporation herein. The phrase "96 unassigned . . . the term" in clause (ii) of the Original Lease is deleted for purposes of incorporation and is replaced with "eighty percent (80%) of the parking spaces under Section 3 of this Sublease remain available to Subtenant." (v) If the Overlease is terminated with respect to the Sublease Premises pursuant to Article VIII thereof, this Sublease shall also terminate as and when the Overlease is so terminated. In the event of a casualty or condemnation affecting all or any part of the Overlease Premises, Sublandlord shall have the right, in its sole discretion, to determine whether or not to terminate the Overlease (in whole or in part), and if it does so Subtenant (without waiving any of its rights against Overlandlord under the Recognition Agreement (as defined in Section 27(c) below)) shall have no claim against Sublandlord as a result thereof; and (d) The time limits contained in the Original Lease for the giving of notices, making of demands or performing of any act, condition or covenant on the part of the lessee thereunder, or for the exercise by the lessee thereunder of any right, remedy or option, are changed for the purposes of incorporation herein by reference by shortening the same in each instance by five days, so that in each instance Subtenant shall have five days less time to observe or perform hereunder than Sublandlord has as the lessee under the Overlease. 7. Subleases, Assignments, etc. (a) Subtenant, on its own behalf and on behalf of its heirs, distributees, executives, administrators, legal representatives, successors and assigns, covenants and agrees that Subtenant shall not, by operation of law or otherwise: (i) assign, mortgage or encumber its interest in this Sublease, in whole or in part, or (ii) sublet, or permit the subletting of, the Sublease Premises or any part thereof, or (iii) permit the Sublease Premises or any part thereof to be occupied or used for desk space, mailing privileges or otherwise by any person or entity other than Subtenant without the prior written consent of Sublandlord and Overlandlord in each instance. Any violation of the provisions of this Section 7(a) shall constitute a material default under this Sublease. (b) Provided that Subtenant is not in default (beyond any applicable notice and cure period) under any of the terms, covenants and conditions of this Sublease, Sublandlord shall not unreasonably withhold its consent to a proposed sublease of less (12) 15 than all or substantially all of the Sublease Premises, provided the following terms and conditions are first satisfied: (i) Subtenant shall have complied with the provisions of the Overlease and shall obtain, prior to the effective date of such sublease, any required consents of Overlandlord to such sublease; (ii) In Sublandlord's reasonable judgment, the proposed subtenant is engaged in a business, and the Sublease Premises will be used in a manner, which (A) is in keeping with the then standards of the Premises and (B) is limited to the use for the purposes set forth in this Sublease, and for no other purposes; (iii) The proposed subtenant shall be reputable and shall have, in the reasonable judgment of Sublandlord, sufficient financial worth to perform the obligations of the subtenant under the sublease as evidenced by the presentation to Sublandlord of financial and other information regarding the proposed subtenant including, without limitation, its business experience, a current financial statement, and such other information as Sublandlord may reasonably request; (iv) The sublease shall be subject and subordinate to all provisions of this Sublease and the Overlease and all of the rights of Sublandlord hereunder and of Overlandlord under the Overlease; (v) Subtenant shall deliver to Sublandlord a duplicate original of such sublease, duly executed and acknowledged by Subtenant and the subtenant, at the time Subtenant requests Sublandlord's consent thereto; (vi) The sublease shall provide that it is subject and subordinate to this Sublease and to the matters to which this Sublease is or shall be subordinate, and that, in the event of termination, re-entry or dispossession by Sublandlord under this Sublease, Sublandlord may, at its option, take over any of the right, title and interest of Subtenant, as sublessor, under such sublease, and the subtenant shall, at Sublandlord's option, attorn to Sublandlord pursuant to the then executory provisions of such sublease, except that Sublandlord shall not (A) be liable for any previous act or omission of Subtenant under such sublease, (B) be subject to any counterclaim, offset or defense, which theretofore accrued to such subtenant against Subtenant, or (C) be bound by any previous modification of such sublease or by any previous prepayment of more than one (1) month's rent (it being acknowledged and agreed, however, that the provisions of this Section 7(b)(vi) shall be self-operative, and that no further instrument shall be required to give effect to this provision); (vii) The Subtentant's subtenant shall have no right whatsoever to further sublet the Sublease Premises or any portion thereof or to assign its interest in the sublease; (13) 16 (viii) There shall not be more than three subtenants or occupants (including Subtenant and the Existing Sub-Subtenant) of the Sublease Premises; and (vix) No sublease shall be for less than 10,000 contiguous square feet of area and shall be of a shape or configuration such that each of the area proposed to be sublet and the remainder of the Sublease Premises shall in Sublandlord's reasonable judgment constitute commercially marketable separate rental units. (c) Subtenant shall reimburse Sublandlord on demand for all costs (including, without limitation, reasonable attorneys' fees, as well as the costs of making investigations as to the acceptability of the proposed assignee or subtenant) which may be incurred by Sublandlord in connection with a request by Subtenant that Sublandlord consent to any proposed assignment or sublease. (d) Subtenant hereby waives any claim against Sublandlord for money damages which Subtenant may have based upon any assertion that Sublandlord has unreasonably withheld or delayed any consent to a subletting pursuant to the provisions of this Sublease provided that Sublandlord has acted in good faith. Subtenant agrees that its sole remedy shall be an action or proceeding to enforce such provisions or for specific performance. (e) If Sublandlord shall give its consent to any sublease of the Sublease Premises, Subtenant shall pay to Sublandlord, as Additional Rent, 50% of any and all Sublease Profits (as hereinafter defined). Subtenant shall also pay to Overlandlord any and all amounts payable by Sublandlord under the Overlease by reason of such sublease. For purposes of this Sublease, the term "Sublease Profits" shall be deemed to mean the amount by which (i) all rents, additional charges or other consideration payable under the sublease to, or in connection with the subletting by, Subtenant (including, but not limited to, sums paid for the sale or rental of Subtenant's fixtures, leasehold improvements, equipment, furniture or other personal property less, in the case of the sale thereof, the then fair market value or fair rental value, as applicable, of any such fixtures, leasing improvements, equipment, furniture or other personal property) after deducting therefrom (other than in the case of the Existing Sub-Sublease) the amount of any reasonable brokerage commission, attorney's fees and advertising costs, and the reasonable cost of constructing demising walls and performing other customary tenant improvements in connection with the subletting actually incurred by Subtenant in connection with such subletting, exceed the (ii) Minimum Rent and regularly scheduled items of Additional Rent accruing during the term of such sublease pursuant to the terms hereof, in each case, with respect to the portion of the Sublease Premises to be subleased. Subtenant shall also pay to Sublandlord 50% of all amounts in excess of the amounts payable by the subtenant under the Existing Sub-Sublease by reason of any amendment, modification or extension of the Existing Sub-Sublease or any new sublease with such subtenant or its affiliates, successors or assigns. The sums payable under this Section (14) 17 7(e) to the extent corresponding to amounts payable by any such subtenant shall be paid to Sublandlord as and when payable by such subtenant to Subtenant. (f) Any attempted assignment or subletting made contrary to the provisions of this Section 7 shall be null and void. No consent by Sublandlord or Overlandlord to any assignment or subletting shall in any manner be considered to relieve Subtenant from obtaining Sublandlord's and Overlandlord's express written consent to any further assignment or subletting. The provisions of this Section 7 shall apply to each and every sublease Subtenant proposes to enter into during the Sublease Term. For the purposes of this Section 7, "sublettings" shall be deemed to include all sub-sublettings as well as sublettings. (g) The direct or indirect transfer and/or exchange of thirty (30%) percent or more (aggregating all prior transfers) of the shares or other capital interest of Subtenant or of the shares or other capital interest of any entity of which Subtenant is a direct or indirect subsidiary, including transfers by operation of law and including a related or unrelated series of transactions, shall be deemed an assignment of this Sublease for purposes of this Section 7; provided, however, the foregoing provisions of this Section 7(g) shall not apply to Subtenant if all the outstanding voting stock of Subtenant is then publicly traded. 8. Insurance. If the cost of any insurance carried by Sublandlord with respect to the Sublease Premises or any other part of the Premises shall be increased for any reason attributable to Subtenant, its use of the Sublease Premises, its acts or omissions, then Subtenant shall reimburse Sublandlord for all such additional cost as Additional Rent. Subtenant shall pay as Additional Rent hereunder Subtenant's pro rata share of Sublandlord's premiums for insurance maintained by Sublandlord under the Overlease, except for that portion, if any, of such premiums which is attributable to special uses or acts of other tenants or subtenants of the Sublease Premises or the Overlease Premises. Sublandlord shall not be liable for any damage to persons or property sustained by Subtenant or others by reason of Subtenant's use and occupancy of the Sublease Premises or by reason of any act, omission, accident or occurrence in the Sublease Premises. Subtenant agrees to indemnify and to hold Sublandlord harmless from and against any and all claims arising in connection with the Sublease Premises during the Sublease Term or while Subtenant is in occupancy hereunder, and except to the extent caused by the wrongful acts or negligence of Sublandlord or its agents, other subtenants, or assigns or Overlandlord; and Subtenant shall, at its own cost and expense, obtain and maintain throughout the term of this Sublease, insurance covering Sublandlord and Subtenant in the types and limits set forth on Exhibit C hereto and such other increased coverages as Sublandlord may from time to time reasonably require; such insurance to be issued by companies licensed to transact business within the state where the Sublease Premises are located and which are otherwise reasonably acceptable to Sublandlord. Subtenant shall deliver a certificate of such insurance to Sublandlord within five (5) business days prior to the Commencement Date; and certificates of renewal for such policies shall be delivered at least thirty (30) days prior to the expiration of the then (15) 18 current policies. Each insurance policy shall name Subtenant and Sublandlord as parties insured and shall contain a provision that the same may not be canceled without giving Sublandlord at least ten (10) days prior written notice. If Subtenant shall fail to obtain and deliver such policies in the manner herein provided, Sublandlord may, obtain such coverage and charge the cost thereof to Subtenant as Additional Rent hereunder, to be paid by Subtenant, as and when billed. Subtenant and Sublandlord, each, hereby releases and waives, any and all claims, damages, causes of action and the like that either of them may now or hereafter have against the other, its officers, directors, employees, agents, invitees and contractors to the extent same are covered by any insurance maintained by the releasing one or would have been covered had it maintained the insurance required by this Sublease. All policies of insurance obtained by each of Sublandlord and Subtenant shall contain a waiver of the insurer's right to be subrogated to its claims against the other, its officers, directors, employees, agents, invitees and contractors. 9. Indemnification. Subtenant hereby agrees to indemnify, hold harmless and defend Sublandlord, its partners, officers, directors, employees and agents from and against any and all claims, damages, liabilities, costs and expenses arising as a result of, in each case, to the extent not due to the wrongful acts or negligence of Sublandlord or other sublessees or assignee of Sublandlord (other than Subtenant): (a) any breach by Subtenant of any of the representations, warranties, covenants and agreements of Subtenant under this Sublease, or (b) the conduct of business in or management of the Sublease Premises during the Term or while Subtenant is in possession of, or otherwise occupies all or any part of, the Sublease Premises (excluding claims between Sublandlord and Subtenant arising solely from them being or becoming business competitors in the software business), or (c) any work or thing whatsoever done or any condition created in or about the Sublease Premises during the Term or while Subtenant is in possession of, or otherwise occupies all or any part of, the Sublease Premises, or (d) any negligent or willful act or omission of Subtenant or of any licensee or invitee or other occupant of, or person present at, the Sublease Premises or of any employee, agent or contractor of any of the foregoing during the Term or while Subtenant is in possession of or otherwise occupies all or any part of the Sublease Premises. 10. Payments. Except as expressly provided to the contrary, Subtenant shall make all payments hereunder directly to Sublandlord, and the due date of each such payment (except as otherwise provided herein) shall be deemed to be five (5) business days earlier than that provided in the Overlease or the statement of Overlandlord or, if later (where Subtenant has not previously received a statement for such amounts directly from Overlandlord), five (5) business days after Subtenant has received a statement for such amounts due from Sublandlord. In the case of payments not due under the Overlease and for which no date for payment is specified herein, such payments shall be due within ten (10) days after Sublandlord bills Subtenant therefor. 11. Brokerage. Each of Sublandlord and Subtenant represents that it has dealt with no other broker in connection with this transaction other than Cushman & Wakefield of Massachusetts, Inc. ("C&W") and Whittier Partners ("WP"). Each of (16) 19 Sublandlord and Subtenant agrees to indemnify and hold the other harmless from any claims for brokerage commissions or similar fees claimed by any person or entity (other than said brokers) arising as a result of the acts of the indemnifying party; it being understood and agreed that Subtenant shall pay any commission due to C&W and Sublandlord shall pay any commission owed to WP. 12. Notices. All notices hereunder to Sublandlord or Subtenant shall be given in writing and delivered by hand or national overnight courier to (a) if to Sublandlord, at its address set forth above, Attention: General Counsel and (b) if to Subtenant, if prior to the Commencement Date, at its address set forth above and if after the Commencement Date, to the Sublease Premises, in either case, Attention: General Counsel. By notice given in the aforesaid manner, either party hereto may notify the other as to any change as to where and to whom such party's notices are thereafter to be addressed. The effective date of any notice shall be the date such notice is delivered (if by hand or by national overnight courier). 13. Consent. This Sublease shall have no effect unless and until Overlandlord shall have given its written consent hereto in accordance with the terms of the Overlease and shall have waived its rights, if any, to terminate Sublandlord's rights to renew or extend the Overlease. Subtenant agrees immediately to provide to Overlandlord such financial and other information concerning Subtenant and its principals and business operations as Overlandlord may reasonably request. Sublandlord shall submit this Sublease upon execution or receipt (as the case may be) for Overlandlord's approval. If Overlandlord does not give its consent to this Sublease for any reason whatsoever within thirty (30) days after the date hereof, then either party may elect to cancel this Sublease by giving notice to the other party prior to the giving of said consent by Overlandlord to this Sublease. If either party shall have given notice of cancellation to the other party in accordance with the provision of this Section 13, then: (i) Sublandlord shall not be obligated to take any further action to obtain such consent, (ii) Sublandlord shall refund to Subtenant the installment of Minimum Rent paid by Subtenant, as well as the security (if any) deposited by Subtenant, at the execution of this Sublease, and (iii) this Sublease shall thereupon be deemed null and void and of no further force and effect, and neither of the parties hereto shall have any rights or claims against the other. 14. Binding Effect. The covenants, conditions and agreements contained in this Sublease shall bind and inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns (to the extent permitted hereunder). Without limiting the generality of the foregoing, this Sublease shall be binding on any trustee, receiver or similar party appointed to oversee the affairs of Subtenant or its liquidation. 15. Modification, Waiver, etc. No modification or waiver of any of the terms hereof shall be valid or binding on either party, unless in writing duly executed by (17) 20 both of the parties hereto. No waiver by either party hereto of any breach hereof or default or delinquency hereunder by the other and no failure by either party hereto to require performance or satisfaction of any provision of this Sublease, shall be deemed a waiver of any subsequent breach, default or delinquency of the same or similar nature by the other, or as a waiver of the provision itself or of the full right of the claiming party to require such performance or satisfaction at any time thereafter. No failure of either party hereto to exercise any right, privilege, discretion or power given it hereunder, or to insist upon strict compliance by the other party with any obligation in this Sublease, and no custom or practice of either party hereto (or otherwise) at variance with the terms hereof shall constitute a waiver or modification of its right to demand exact compliance with the terms hereof. 16. Acceptance of Rent; Surrender. The receipt by Sublandlord of Minimum Rent or Additional Rent with knowledge of the breach of any covenant of this Sublease shall not be deemed a waiver of such breach and no provision of this Sublease shall be deemed to have been waived by Sublandlord unless such waiver be in writing signed by Sublandlord. No payment by Subtenant or receipt by Sublandlord of a lesser amount than the Minimum Rent or Additional Rent then due hereunder shall be deemed to be other than on account of the earliest stipulated Minimum Rent or Additional Rent then due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Sublandlord may accept such check or payment without prejudice to Sublandlord's right to recover the balance of such Minimum Rent or Additional Rent or pursue any other remedy provided in this Sublease, at law, or in equity. No act or thing done by Sublandlord or Sublandlord's agents during the Sublease Term shall be deemed an acceptance of a surrender of the Sublease Premises and no agreement to accept such surrender shall be valid unless in writing signed by Sublandlord. No employee of Sublandlord or Sublandlord's agent shall have any power to accept the keys to the Sublease Premises prior to the termination of this Sublease, and the delivery of keys to any such agent or employee shall not operate as a termination of this Sublease or a surrender of the Sublease Premises. 17. WAIVER OF JURY TRIAL AND COUNTER CLAIMS. IT IS AGREED BY SUBLANDLORD AND SUBTENANT THAT THEY SHALL AND HEREBY DO WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THEM AGAINST THE OTHER ON ANY MATTER WHATSOEVER ARISING OUT OF, OR IN ANY WAY CONNECTED WITH, THIS SUBLEASE, THE RELATIONSHIP OF SUBLANDLORD AND SUBTENANT, OR SUBTENANT'S USE OR OCCUPANCY OF THE SUBLEASE PREMISES. SUBTENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM IN ANY SUMMARY PROCEEDING OR OTHER ACTION BROUGHT BY SUBLANDLORD HEREUNDER OR WITH RESPECT TO ANY MATTER ARISING HEREFROM. (18) 21 18. "As Is" Condition. Subtenant expressly acknowledges and agrees that Sublandlord has not made and is not making, and Subtenant, in executing and delivering this Sublease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Sublease. It is understood and agreed that all understandings and agreements heretofore between the parties are merged in this Sublease, which alone fully and completely expresses their agreements and that the same is entered into after full investigation, neither party relying upon any statement or representation not embodied in the Sublease, made by the other. Sublandlord is not required to perform work of any kind, nature or description to prepare the Sublease Premises for Subtenant's occupancy. 19. At End of Term. Upon the expiration or sooner termination of the term of this Sublease, Subtenant shall vacate and surrender the Sublease Premises in broom-clean condition, restore the Sublease Premises as may be required under the provisions of Section 20 hereof and repair any damage to the Sublease Premises caused by any permitted removal therefrom. 20. Alterations. Subtenant shall not make, or cause to be made, any alterations, repairs, additions or improvements in or to the Sublease Premises except with the prior written consent thereto by Sublandlord, which consent shall not be unreasonably withheld; provided, however, subject to the receipt of all required governmental approvals, permits, licenses and the like and any other required consents, Subtenant may make alterations, repairs, additions, improvements in or to the Sublease Premises provided same are non-structural in nature, do not affect (x) the outside of the Sublease Premises or (y) its structure, do not cost more than Ten Thousand Dollars ($10,000) (other than in the case of the initial alterations to prepare the Sublease Premises for Subtenant's initial occupancy thereof, which initial alterations are more particularly described in Exhibit D) and do not (actually or potentially) result in any additional obligations to Sublandlord. In the event Sublandlord grants such consent or Subtenant is otherwise entitled to make such alterations, repairs, additions or improvements, such alterations, repairs, additions or improvements shall be performed in a good and workmanlike manner, in accordance with all applicable legal and insurance requirements. Subtenant shall not make any repairs, alterations, additions or improvements or perform any work to or on the Sublease Premises, unless prior to the commencement of such work, Subtenant shall obtain or cause to be obtained (and during the performance of such work keep in force or cause to be kept in force) public liability and workmen's compensation insurance to cover every contractor to be employed. Such policy shall name Sublandlord and Subtenant as additional insureds, shall be non-cancelable without ten (10) days' prior written notice to Sublandlord and shall be in amounts and with companies satisfactory to Sublandlord. Prior to commencement of such work, Subtenant shall deliver (or cause to be delivered) certificates of such insurance policies to Sublandlord. All repairs, alterations, additions and improvements made by Subtenant to the Sublease Premises (or any portion thereof) shall be deemed to be attached to the leasehold and to have become the property of Sublandlord upon such attachment, and upon the expiration or earlier termination of this Sublease, Subtenant shall not remove (19) 22 any such alterations, additions or improvements; provided, that signs, trade fixtures and portable office equipment installed by Subtenant may be removed; provided further, however, that Sublandlord may designate by written notice to Subtenant those alterations, decorations, additions and improvements which were installed by Subtenant and shall be removed by Subtenant at the expiration or termination of this Sublease, in which event Subtenant shall promptly remove the same. Provided Subtenant fully and faithfully performs its obligations hereunder and the Term is not terminated prior to the expiration of the term of the Overlease, Sublandlord shall not require Subtenant to remove any alteration except as may be required of Sublandlord by Overlandlord pursuant to the Overlease. Subtenant shall repair any damage to the Sublease Premises caused by any required or permitted removal. Subject to Subtenant delivering to Sublandlord evidence reasonably acceptable to Sublandlord that Subtenant has obtained all applicable governmental approvals, permits, licenses and the like and any required consent of Overlandlord under the Overlease and all of the same are in full force and effect, Sublandlord hereby approves the installation of Subtenant's signs in the design and at the locations on the exterior of the Sublease Premises shown on Exhibit D; provided such signs are installed in a manner hereafter reasonably approved by Sublandlord. Nothing in this Section 20 shall be construed to permit Subtenant to make any repairs, alterations, decorations, additions or improvements without first fully complying with the terms of the Overlease relating thereto. 21. Defaults and Remedies. (a) Supplementing the applicable provisions of the Original Lease as incorporated herein, if any one of the following events (sometimes called "Default") shall happen: (i) If the Minimum Rent or Additional Rent or any part thereof or any other charges payable by Subtenant under this Sublease or any guarantor under its guarantee is not paid when and as the same are due and payable and shall remain unpaid for a period of five (5) business days after notice; (ii) If any of Subtenant's covenants, agreements, obligations or conditions set forth in Section 7 hereof are not performed or complied with in any material respect within twenty-four (24) hours after written notice from Sublandlord to Subtenant of same or if any breach of the terms of this Sublease shall result in a default on the part of Sublandlord under the Overlease and Subtenant does not cause such breach of Sublandlord to be cured no later than five (5) business days prior to the expiration of any cure period under the Overlease; (iii) If any other covenant, agreement, obligation, or condition of Subtenant under this Sublease (or as guarantor under its guarantee) shall not be performed or complied with by Subtenant (or guarantor) within fifteen (15) days after written notice of the same from Sublandlord to Subtenant; provided, however, that if such default is susceptible to cure but cannot be cured within such (20) 23 fifteen (15) day period, Subtenant shall have such additional time as is reasonably necessary to cure such default provided that Subtenant shall have commenced to cure such default within said fifteen (15) day period, is at all times diligently prosecuting the cure of said default and Subtenant shall have notified Sublandlord that it has commenced and is diligently prosecuting such cure; (iv) If Sublandlord shall give to Subtenant within any period of twelve (12) consecutive months during the Term, four (4) notices of default of the Subtenant's performance of its covenants, agreements, obligations or conditions under this Sublease pertaining to the payment of Minimum Rent, Additional Rent or any other sum or any other material obligation of Subtenant under this Sublease; (v) If the Subtenant or guarantor (if any) shall, file a voluntary petition in bankruptcy, make an assignment for the benefit of creditors, shall be adjudicated a bankrupt or insolvent, shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future bankruptcy act or laws of similar import, or shall seek to consent to or acquiesce in the appointment of any bankruptcy or insolvency trustee, receiver or liquidator of Subtenant or of all or any substantial part of its properties or of the Sublease Premises, or if any petition in bankruptcy is filed against Subtenant or guarantor and if such petition shall not be discharged or dismissed within ninety (90) days after the filing thereof; (vi) If Subtenant shall abandon the Sublease Premises; (vii) If Subtenant's interest in this Sublease be taken on execution or other process of law in any action against Subtenant, then, and in each such event, Sublandlord at any time thereafter may, at the Sublandlord's option, re-enter the Sublease premises or terminate this Sublease, without further demand or notice to Subtenant. In the event of such re-entry or termination, all of the right, title and interest of Subtenant under this Sublease, including any renewal or extension privileges, shall end. Subtenant's liability under all of the provisions of this Sublease shall continue notwithstanding any re-entry, termination or surrender, and notwithstanding the Sublandlord's pursuit of any other remedy under this Sublease. If this Sublease shall be so terminated or if Sublandlord shall so re-enter the Sublease Premises, Sublandlord, at Sublandlord's option, may relet the whole or any part or parts of the Sublease Premises from time to time, either in the name of Sublandlord or otherwise, to such subtenant or subtenants, for such term or terms ending before, on or after the date on which the Sublease Term was scheduled to expire, at such rental or rentals and upon such other conditions, which may include concessions and free rent periods, as Sublandlord, in its sole discretion, may determine; provided, however, that Sublandlord shall have no obligation to relet the Sublease Premises or any part thereof and shall in no event be liable for refusal or failure to relet the Sublease Premises or any part thereof, (21) 24 or, in the event of any such reletting, for refusal or failure to collect any rent due upon any such reletting, and no such refusal or failure shall operate to relieve Subtenant of any liability under this Sublease or otherwise affect any such liability, and Sublandlord, at Sublandlord's option, may make such repairs, replacements, alterations, additions, improvements, decorations and other physical changes in and to the Sublease Premises as Sublandlord, in its sole discretion, considers advisable or necessary in connection with any such reletting or proposed reletting, without relieving Subtenant of any liability under this Sublease or otherwise affecting any such liability. Subtenant hereby waives the service of any notice of intention to re-enter or to institute legal proceedings to that end which may otherwise be required to be given under any present or future law but not service of process. Subtenant, on its own behalf and on behalf of all persons claiming through or under Subtenant, including all creditors, does further hereby waive any and all rights which Subtenant and all such persons might otherwise have under any present or future law to redeem the Sublease Premises, or to re-enter or repossess the Sublease Premises, or to restore the operation of this Sublease, after (x) Subtenant shall have been dispossessed by a judgment or by warrant of any court or judge, or (y) any re-entry by Sublandlord, or (z) any expiration or termination of this Sublease and the Sublease Term, whether such dispossess, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this Sublease. The words "re-enter," "re-entry" and "re-entered" as used in this Sublease shall not be deemed to be restricted to their technical legal meanings. (b) Upon such re-entry or termination, Sublandlord may recover possession of the Sublease Premises by summary proceedings, by force, by any suitable action or proceeding at law, or otherwise. Sublandlord may also enter and re-enter the Sublease Premises at any time after such re-entry of termination of the Lease and remove all persons and property from the Sublease Premises without being deemed guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby and may have, hold and enjoy the Sublease Premises. (c) (i) If Sublandlord shall re-enter the Sublease Premises or if this Sublease is terminated pursuant to this Section 21, Subtenant shall pay to Sublandlord (in addition to all Minimum Rent, Additional Rent and other charges due and payable by Subtenant on the date of such re-entry or termination), as current damages for Subtenant's default, the equivalent of the amount of Minimum Rent, Additional Rent and all other charges Subtenant would have been required to pay until the date this Sublease would have expired had such termination not occurred, minus the proceeds of any reletting. (ii) Subtenant shall pay such current damages ("Deficiency Damages") to Sublandlord monthly on the days on which rent would have been payable under this Sublease if this Sublease were still in effect, and Sublandlord shall be entitled to recover each month from Subtenant Deficiency Damages as the same shall arise. (22) 25 (d) If Sublandlord re-enters the Sublease Premises or if this Sublease is terminated pursuant to this Section 21, and if Sublandlord so elects, Subtenant shall pay in addition to all Minimum Rent, Additional Rent and all other charges due and payable by Subtenant on the date of such termination, "Liquidated Final Damages." As used in this Sublease, "Liquidated Final Damages" means an amount equivalent to the present value of (x) the Minimum Rent, Additional Rent and other charges which would have been payable by Subtenant from the date of such election to the date this Sublease would have expired had it not been so terminated, minus (y) the fair and reasonable rental value of the Sublease Premises for the same period. Said present value shall be calculated by using a discount rate equal to the then Federal Reserve Discount Rate. Said Liquidated Final Damages shall become due and payable to Sublandlord immediately upon Sublandlord's notice of such election to Subtenant. (e) In the event of a Default, Subtenant shall indemnify Sublandlord for all of Sublandlord's expenses incurred or paid in connection with repossessing or reletting the Sublease Premises, including without limitation, the costs of removing and storing the property of Subtenant or of any other occupant; the costs of repairing, altering, remodeling or otherwise putting the Sublease Premises into condition acceptable to a new subtenant or subtenants, brokerage and management fees, operating and security expenses of the Sublease Premises, and reasonable attorneys' fees and the value of legal services which Sublandlord shall render to itself at its then standard rates and on it then standard terms. (f) In the event of any breach or threatened breach by Subtenant of any of the agreements, terms, covenants or conditions contained in this Sublease, Sublandlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise even if not specifically provided for in this Sublease. (g) The rights and remedies of Sublandlord set forth herein shall be in addition to any other right and remedy now or hereafter provided by law. All rights and remedies shall be cumulative and not exclusive of each other. Sublandlord may exercise its rights and remedies at any time, in any order, to any extent, and as often as Sublandlord deems advisable without regard to whether the exercise of one right or remedy, precedes, concurs with or succeeds the exercise of another. (h) A single or partial exercise of a right or remedy shall not preclude a further exercise thereof, or the exercise of another right or remedy from time to time. (i) No delay or omission by Sublandlord in exercising a right or remedy shall exhaust or impair the same or constitute a waiver of, or acquiescence to, a Default. (23) 26 (j) No waiver of a Default shall extend to or affect any other Default or impair any right or remedy with respect thereto. (k) No action or inaction by Sublandlord shall constitute a waiver of a Default. (l) No waiver of a Default shall be effective, unless it is in writing and signed by both Sublandlord and Subtenant. 22. Holding Over. If Subtenant shall hold possession of the Sublease Premises after the expiration or earlier termination of the term of this Sublease, then if Sublandlord so desires, Subtenant shall be deemed to be occupying the Sublease Premises as a Subtenant from month-to-month, at 150% of the Minimum Rent and Additional Rent prescribed herein in effect during the lease year immediately preceding such holdover period prorated to a monthly basis and subject to all the other conditions, provisions and obligations of this Sublease insofar as the same are applicable, or as the same shall be adjusted, to a month-to-month tenancy. Notwithstanding anything contained herein to the contrary, Subtenant shall not be obligated to pay twice for the use and occupancy of the Sublease Premises after the expiration or earlier termination of the Term, once to Sublandlord and once to Overlandlord. 23. No Privity of Estate. Nothing contained in this Sublease shall be construed to create privity of estate or of contract between Subtenant and the lessor under the Overlease. 24. Consents and Approvals. If any instance when Sublandlord's consent or approval is required under this Sublease, Sublandlord's refusal to consent to or approve any matter or thing shall be deemed reasonable if, inter alia, such consent or approval has not been obtained from the lessor under the Overlease. In the event that Subtenant shall seek the approval by or consent of Sublandlord and Sublandlord shall fail or refuse to give such consent or approval, Sublessee shall not be entitled to any damages for any withholding or delay of such approval or consent by Sublandlord, it being intended that Subtenant's sole remedy shall be an action for injunction or specific performance. 25. Inspection of and Access to the Sublease Premises. Sublandlord hereby reserves to itself the right to enter onto the Sublease Premises in cases of emergency and otherwise at any reasonable time and on reasonable notice to ascertain whether Subtenant is in compliance with the provisions of this Sublease. 26. Environmental Compliance. (a) Subject to the terms of Section 4(f), during the Sublease Term or during the occupancy of Subtenant hereunder, Subtenant shall not cause or allow any hazardous waste, toxic substances, or toxic hazardous materials (collectively, "Hazardous Materials") to be present, used, generated, stored, or disposed of on, under or about, or (24) 27 transported to or from, the Sublease Premises (collectively, "Hazardous Materials Activities") except in strict compliance with all applicable Regulations (as hereinafter defined) and using all necessary and appropriate precautions. (b) Subject to the terms of Section 4(f), Subtenant hereby indemnifies and holds harmless Sublandlord from any liability, including reasonable counsel fees and litigation costs, with respect to any Hazardous Materials Activities conducted on or about the Sublease Premises during the Sublease Term or while Subtenant is in occupancy of any part of the Sublease Premises whether or not consented to by Sublandlord or Overlandlord. Subtenant shall indemnify, defend with counsel, and hold Sublessor harmless from and against any claims, damages, costs and liabilities arising out of any and all such Hazardous Materials Activities. (c) For purposes hereof, Hazardous Materials shall include but not be limited to substances defined as "hazardous substances", "toxic substances", or "hazardous wastes" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980; Resource Conservation and Recovery Act of 1976 ("RCRA"); Hazardous Materials Transportation Act; all other laws and ordinances governing similar matters; and any regulations adopted and publications promulgated pursuant thereto (collectively, "Regulations"), as they may be amended from time to time. (d) Subtenant shall immediately notify Sublandlord both by telephone and in writing of any spill or unauthorized discharge of Hazardous Materials or of any condition constituting an "imminent hazard" under RCRA. 27. Miscellaneous. (a) This Sublease is made in the state where the Sublease Premises are located and shall be governed by and construed under the laws thereof. This Sublease supersedes any and all other or prior understandings, agreements, covenants, promises, representations or warranties of or between the parties (which are fully merged herein). The headings in this Sublease are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. (b) Subtenant shall deposit with Sublandlord on each of July 1, 1998, October 1, 1998, January 1, 1999 and April 1, 1999 an amount equal to one-quarter (1/4) of the then monthly installment of Minimum Rent (without regard to Section 2(b) above) as security for the faithful performance and observance by Subtenant of the terms, covenants, conditions and provisions of this Sublease, including, without limitation, the surrender of possession of the Sublease Premises to Sublandlord as herein provided. Amounts so deposited shall (i) be held in trust by Sublandlord, (ii) deposited into a separate account and (iii) not be commingled with the other funds of Sublandlord. The interest earned on such deposited sums shall be for the benefit of Sublandlord. If a default beyond applicable notice and grace periods, if any, shall occur and be continuing, Sublandlord may apply the whole or any part of the amounts so deposited (i) toward the (25) 28 payment of any Minimum Rent, Additional Rent or any other item of rental as to which Subtenant is in default, (ii) toward any sum which Sublandlord may expend or be required to expend by reason of Subtenant's default in respect of any of the terms, covenants and conditions of this Sublease, including, without limitation, any damage, liability or expense (including, without limitation, reasonable attorneys' fees and disbursements) incurred or suffered by Sublandlord, and (iii) toward any damage or deficiency incurred or suffered by Sublandlord in the reletting of the Sublease Premises, whether such damages or deficiency accrue or accrues before or after summary proceedings or other re-entry by Sublandlord. If Sublandlord applies or retains any part of the amounts so deposited Subtenant, upon demand, shall deposit with Sublandlord the amount so applied or retained. If Subtenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Sublease, the amounts so deposited shall be returned to Subtenant after delivery of possession of the Sublease Premises to Sublandlord at the end of the Term. Sublandlord shall have the right to transfer the amounts so deposited to any assignee of Sublandlord's interest hereunder and Sublandlord shall thereupon be released by Subtenant from all liability for the return of such amounts. Subtenant shall look solely to the new Sublandlord for the return of thereof. The provisions hereof shall apply to every transfer or assignment. Subtenant shall not assign or encumber or attempt to assign or encumber the monies deposited herein as security (other than as part of a general assignment or pledge of all or substantially all of the assets of the Subtenant) and neither Sublandlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance whether or not permitted. (c) Notwithstanding anything herein to the contrary, Subtenant shall have the right to terminate this Sublease on notice given not later than October 5, 1997 if before that date (i) Overlandlord has not offered to enter into a so-called recognition agreement with Subtenant pursuant to which (x) Overlandlord agrees to recognize Subtenant's tenancy of the Sublease Premises in the event of the termination of the Overlease and (y) Subtenant shall attorn to Overlandlord in the event of the termination of the Overlease and (ii) Subtenant does not receive and estoppel certificate from the lessee under the Existing Sub-Sublease acceptable to Subtenant. Such recognition agreement shall be on terms satisfactory to Overlandlord and Subtenant. If this Sublease is terminated pursuant to this Section 27(c), Sublandlord shall refund any prepaid rent to Subtenant. (d) In the event of a dispute between Sublandlord and Subtenant with respect to the reasonableness of Sublandlord's decision to refuse to consent or approve a matter which Sublandlord has expressly agreed herein not to reasonably withhold its consent and approval, such dispute shall be settled and finally determined by arbitration in Boston, Massachusetts in accordance with the "expedited arbitration" procedures of the commercial arbitration rules then in effect of the American Arbitration Association (the "AAA"), or its successors, the arbitrator shall be a person having at least ten (10) years experience as to the subject matter in questions. If at the time such arbitration is to be held, the AAA is not in existence and has no successor, the arbitrator shall be appointed (26) 29 by the chief or senior judge of the United States District Court for the District of Massachusetts, upon application of Subtenant. After being duly appointed, the arbitrator shall proceed with all reasonable dispatch to determine the question submitted. The arbitrator shall have no power to alter, modify or amend the terms of this Sublease, but shall enforce the terms hereof as written. The decision of the arbitrator shall be in writing and in duplicate, one counterpart thereof to be delivered to each of the parties. In the event the arbitrators determine that Sublandlord unreasonably withheld its consent in violation of the terms of this Sublease, then, as the sole remedy of Subtenant (so long as Sublandlord has acted in good faith), Sublandlord shall be deemed to have given its consent as of the date of the arbitrator's determination. Any award of the arbitrators shall be limited to a determination as to whether Sublandlord acted reasonably in withholding any such consent. The costs of such arbitration (including all reasonable attorney's fees) shall be shared equally by the parties hereto, unless differently allocated in the arbitration award. (e) Provided this Sublease is in full force and effect, after November 6, 1997, Subtenant shall be entitled to record a notice hereof in the appropriate land records. IN WITNESS WHEREOF, Sublandlord and Subtenant have duly executed this Sublease as of the day and year first written above. Sublandlord: COMPUTERVISION CORPORATION By: /s/ Anthony N. Fiore, Jr. ------------------------------------------- Name: Anthony N. Fiore, Jr. Title: Vice President and General Counsel Subtenant: CAYENNE SOFTWARE, INC. By: /s/Peter J. Boni ------------------------------------------ Name: Peter J. Boni Title: President and CEO (27) EX-10.27 3 AMENDMENT TO REVOLVING CREDIT AGREEMENT 1 EXHIBIT 10.27 EXECUTION COPY Dated as of October 4, 1997 Cayenne Software, Inc. 14 Crosby Drive Bedford, MA 01730 Attention: Frederick H. Phillips RE: SECOND AMENDMENT (THE "SECOND LETTER AMENDMENT") TO THE AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT DATED AS OF JUNE 5, 1996 AMONG CAYENNE SOFTWARE, INC. (F/K/A BACHMAN INFORMATION SYSTEMS, INC.) (THE "BORROWER") AND SILICON VALLEY BANK, AS AMENDED BY THE LETTER AMENDMENT DATED OCTOBER 4, 1996 (THE "1996 AMENDMENT") (AS AMENDED, THE "CREDIT AGREEMENT") Ladies and Gentlemen: 1. Introduction. Silicon Valley Bank, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 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 "Bank") hereby confirms that, at the Borrower's request, the Bank has: (i) approved the extension of the expiration date of the revolving credit facility established in favor of the Borrower under the Credit Agreement (the "Revolving Credit Line"), and (ii) approved certain other changes with respect to the Revolving Credit Line, all as set forth in further detail below. Unless otherwise defined herein, capitalized terms used as defined terms herein shall have the respective meanings ascribed to such terms as set forth in the Credit Agreement. 2. Purpose. The purpose of this Second Letter Amendment is to evidence the acknowledgment of the Borrower that effective on the date that the conditions set forth in paragraph 3 below are satisfied, and notwithstanding anything to the contrary in the Credit Agreement, (i) the expiration date of the Revolving Credit Line shall be October 5, 1998; and (ii) the Credit Agreement shall be amended in the following additional respects as set forth on Annex I hereto (which Annex is hereby incorporated in this Letter Amendment by reference). 2 3. Conditions to Effectiveness. This Second Letter Amendment shall become effective upon the satisfaction of the following conditions, and on or before the date of execution hereof, all of the following conditions precedent shall have been satisfied: (a) Receipt of Bank Agreements. The receipt by the Bank of the following: (i) Three counterparts of this Second Letter Amendment, duly executed on behalf of the Borrower; (ii) An allonge to the Second Amended and Restated Revolving Credit Note in the form attached hereto as Exhibit A (the "Allonge"), duly executed on behalf of the Borrower; (iii) A certificate as of a recent date with respect to the legal existence and good standing of the Borrower issued by the Secretary of State of its jurisdiction of organization and from each jurisdiction in which the Borrower is qualified to do business as a foreign corporation; and (iv) A certificate of an Officer of the Borrower (a) certifying that, except as attached to the certificate, no amendments to its corporate charter or by-laws have been made since the June 5, 1996 closing of the Credit Agreement; (b) certifying the resolutions of its Boards of Directors approving this Second Letter Amendment and transactions contemplated hereby; and (c) certifying the incumbency of the officers authorized to sign these amendatory loan documents and request advances on behalf of the Borrower; (f) Payment of Fees. On or before the date hereof the Borrower shall have paid: (i) to the Bank, a closing fee in the amount of $25,000; and (ii) to Hutchins, Wheeler & Dittmar, an amount equal to its legal fees and expenses in connection with the preparation, negotiation, execution and delivery of this Second Letter Amendment and related amendatory credit facility documents. The Bank is hereby authorized to debit the Borrower's principal account or any other account maintained by the Borrower with the Bank for any principal, interest, fees or expenses then due under the terms of the Bank Agreements without prior notice. (g) Examination. The Bank shall have performed an examination of the books and records of the Borrower by an agent or representative of the Bank, and the results of such examination shall be acceptable to the Bank, in its sole and absolute discretion. The Borrower shall have paid for the reasonable cost of each such examination. 2 3 (h) Other Information. The Bank shall have received such other information or documents which the Bank or special counsel for the Bank may reasonably have requested in connection with the transactions contemplated by this Agreement (such information to be certified by the proper officers of the Borrower or governmental authority) and all actions the Bank may deem reasonably desirable in order to enable the Bank to exercise its rights and remedies hereunder shall have been duly provided or taken. 4. Representations and Warranties. By affixing its signature hereto, the Borrower hereby certifies that its representations and warranties set forth in the Bank Agreements (including those contained in the Credit Agreement, as amended by the 1996 Amendment and this Second Letter Amendment) are true and correct as of the date hereof as if made on and as of the date hereof. The Borrower hereby further represents and warrants that the Borrower is not in violation of any term or condition of the Credit Agreement, as amended, or the Bank Agreements. 5. Context; Waivers. Upon the effectiveness hereof, each reference in the previously executed Bank Agreements or any other document executed by or on behalf of the Borrower in connection with the Credit Agreement, as amended, to (i) "the Credit Agreement", "the Amended and Restated Credit Agreement", "thereunder", "thereof", "therein", or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended by the 1996 Amendment and as amended hereby, and (ii) the "Revolving Credit Note", the "Amended and Restated Revolving Credit Note", "thereunder", "thereof", "therein" or words of like import referring to the Revolving Credit Note shall mean and be a reference to the Revolving Credit Note as amended by the 1996 Amendment and as amended hereby. Except as specifically set forth herein, the Credit Agreement, as amended, (including each covenant set forth therein if not otherwise expressly amended hereby) and each of the other Bank Agreements shall remain in full force and effect and each is hereby ratified and confirmed. The amendments set forth above (a) do not constitute a waiver or modification of any term, condition or covenant of the Credit Agreement, as amended, or any other Bank Agreement, other than as expressly set forth above, and (b) shall not prejudice any rights which the Bank may now or hereafter have under or in connection with the Credit Agreement, as amended by the 1996 Amendment and as amended hereby, or the other Bank Agreements. 6. Counterparts. This Second Letter Amendment may be signed in one or more counterparts, each of which taken together shall constitute one and the same instrument. 7. Governing Law; Jurisdiction. THIS LETTER AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF. THE BORROWER, FOR ITSELF AND ITS PROPERTIES, HEREBY SUBMITS, UNCONDITIONALLY, TO THE NON-EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF, 3 4 OR WITH RESPECT TO, THIS SECOND LETTER AMENDMENT, THE CREDIT AGREEMENT, AS AMENDED, OR THE BANK AGREEMENTS; PROVIDED, HOWEVER, THAT IF FOR ANY REASON THE BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS, THEN VENUE SHALL LIE IN SANTA CLARA COUNTY, CALIFORNIA. THE BORROWER EXPRESSLY WAIVES ANY OBJECTIONS IT MAY HAVE AS TO THE VENUE IN ANY SUCH COURTS OR TO ANY CLAIM AS TO INCONVENIENT FORUM. THE BORROWER ALSO HEREBY INTENTIONALLY AND KNOWINGLY WAIVES, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED ARISING OUT OF THIS SECOND LETTER AMENDMENT, THE CREDIT AGREEMENT, AS AMENDED, OR THE BANK AGREEMENTS. 8. Effect of Headings. The section headings herein are for convenience only and shall not affect the construction hereof. We are pleased to continue our relationship with the Borrower. If the foregoing is in accordance with your understanding, please sign where indicated below. This Second Letter Amendment shall become effective only when it shall have been signed by the Borrower and the Bank (provided, however, in no event shall this Second Letter Amendment become effective until signed by an officer of the Bank in California). ********************************* 4 5 Cayenne Software, Inc. Second Letter Amendment to Credit Agreement Counterpart Signature Page IN WITNESS WHEREOF, this Second Letter Amendment has been executed under seal by or on behalf of each of the parties as of the day and year first written above. SILICON VALLEY EAST SILICON VALLEY BANK (signed at Santa Clara, California) By: /s/ Tim O'Loughlin By: /s/ Amy B. Young --------------------------------- -------------------------------- Name: Tim O'Loughlin Name: Amy B. Young ------------------------------- ------------------------------ Title: SVP Title: Vice President ------------------------------ ----------------------------- CAYENNE SOFTWARE, INC. By: /s/ Frederick H. Phillips -------------------------------- Name: Frederick H. Phillips ------------------------------ Title: VP, Finance & Administration ----------------------------- S-1 6 Annex I to Second Letter Amendment Effective upon and subject to the satisfaction of the conditions set forth in the foregoing Second Letter Amendment, the provisions of the Credit Agreement, as amended, referred to therein shall be hereby amended and restated in the following additional respects: 1. The following definition in Section 1.1 of the Credit Agreement is hereby deleted and amended and restated in its entirety as follows: (a) "Revolving Credit Facility Termination Date" shall mean the earlier of (a) the occurrence of an Event of Default, or (b) October 5, 1998. 2. The financial covenants at Section 7.2 of the Credit Agreement (as amended by the 1996 Amendment) are further amended by deleting the Profitability covenant set forth in paragraph (a) thereof and replacing it in its entirety with the Tangible Net Worth Covenant set forth below: (a) Tangible Net Worth (tested and reported quarterly). The Borrower shall maintain a Consolidated Tangible Net Worth of at least $5,500,000, tested at each quarter end. A-1 EX-10.28 4 AGREEMENT WITH PETER J. BONI 1 EXHIBIT 10.28 Cayenne Software, Inc. Roland D. Pampel, Cayenne Director December 31, 1997 Mr. Peter J. Boni 138 Marlborough Street Boston, MA 02116 Dear Peter, Confirming our prior conversations and agreement, the following are the details of what we agreed to: Mutual agreement of resignation of employment and from all board and officer positions of Cayenne and subsidiaries. Peter Boni agreed to participate in the employee announcement, discussions with analysts and shareholders and in the preparation of the Press Release. Terms Agreed to: All vested ISO option shares as of 12/31/97 will be exercisable for 90 days after 12/31/97. All non-qualified vested option shares as of 12/31/97 will be exercisable through the end of July 1998. After July 31, 1998, 300,000 of the above vested (12/31/97) non-qualified option shares will be exercisable through the end of year 2000. Peter Boni will be given one year base salary for the calendar year of 1998; the base salary of $278,000.00 is the salary to be used. Peter Boni will be given continuance of medical, dental, insurance benefits and car allowance for one year, until and including December 31, 1998. Peter Boni will not compete with the Company for one year. He will not use or disclose the Company's confidential information. He will not disparage the Company. I wish you success in your future endeavors. Sincerely, /s/ Roland D. Pampel Roland D. Pampel Cayenne Director EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES NAME OF JURISDICTION OF SUBSIDIARY INCORPORATION Cayenne Software GmbH..................... Germany Cayenne Software Canada, Ltd. ........... Canada Bachman International Ltd. .............. Delaware Cayenne Software S.A.R.L. ............... France Cayenne Software S.R.L. ................. Italy 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 Cayenne Software Pty Limited............. Australia Cayenne Software Limited................. United Kingdom Cayenne Software B.V. ................... Netherlands Westmount U.S.A., Inc. .................. Delaware EX-23.1 6 CONSENT OF COOPERS & LYBRAND LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Cayenne Software, 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, 33-89940, 333-33917,333-36533 and 333-24627) 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 18, 1998, on our audits of the consolidated financial statements of Cayenne Software, Inc. as of December 31, 1997 and 1996 and June 30, 1996, and for the year ended December 31, 1997, 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. /s/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts March 31, 1998 EX-23.2 7 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-87314, 33-53298, 33-48766, 33-71964 and 333-12139 of Cayenne Software, Inc. on Form S-8 and Registration Statements No. 33-99956, 33-89940, 333-33917, 333-36533 and 333-24627 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 not presented separately herein), appearing in the Annual Report on Form 10-K of Cayenne Software, Inc. for the year ended December 31, 1997. Deloitte & Touche LLP Boston, MA March 31, 1998 EX-27.1 8 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 FORMS 10-K, 10KA AND 10-Q. 0000880229 CAYENNE SOFTWARE, INC. 1,000 US DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 9,225 0 12,783 583 0 23,092 18,330 15,412 26,324 20,179 0 0 310 192 5,643 26,324 19,474 49,602 1,960 10,177 41,430 37 408 (2,507) 726 (3,233) 0 0 0 (3,233) (0.19) (0.19)
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