-----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, OvRgHvxi14Xq9Srs2xZsHBbW/eavyDFnpS6oHVRRAXN9q96uYbxBpnK4uoDvnIl1 j+dj9T8zkFU1g4foiuOEPQ== 0000950135-98-004817.txt : 19980817 0000950135-98-004817.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950135-98-004817 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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-Q SEC ACT: SEC FILE NUMBER: 000-19682 FILM NUMBER: 98691619 BUSINESS ADDRESS: STREET 1: 14 CROSBY DRIVE CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 6172739003 MAIL ADDRESS: STREET 1: 14 CROSBY DRIVE CITY: BEDFORD STATE: MA ZIP: 01730 FORMER COMPANY: FORMER CONFORMED NAME: BACHMAN INFORMATION SYSTEMS INC /MA/ DATE OF NAME CHANGE: 19921111 10-Q 1 CAYENNE SOFTWARE, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-19682 CAYENNE SOFTWARE, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2784044 State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730 (Address of principal executive offices) (Zip Code) (781) 280-0505 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
SHARES OUTSTANDING TITLE OF CLASS AT AUGUST 11, 1998 -------------- ------------------ Common Stock, $.01 par value 21,333,398
2 CAYENNE SOFTWARE, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 TABLE OF CONTENTS PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets (unaudited) as of June 30, 1998 and December 31, 1997 3 Consolidated Statements of Operations (unaudited) For the three and six months ended June 30 1998 and 1997 4 Consolidated Statements of Cash Flows (unaudited) For the six months ended June 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II OTHER INFORMATION Item 1. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security 16 Holders Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CAYENNE SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
JUNE 30, DECEMBER 31, 1998 1997 -------- ----------- ASSETS Current assets: Cash and cash equivalents ............................................. $ 5,346 $ 9,225 Trade accounts receivable, less allowance for sales returns and doubtful accounts of $469 and $583 at June 30, 1998 and December 31, 1997, respectively ..................................... 11,468 12,200 Prepaid expenses and other current assets ............................. 2,230 1,667 --------- --------- Total current assets ............................................ 19,044 23,092 Property and equipment, less accumulated depreciation and amortization ... 2,763 2,918 Other assets ............................................................. 301 314 --------- --------- Total assets ............................................................. $ 22,108 $ 26,324 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short term debt ....................................................... $ 3,200 $ 2,359 Accounts payable ...................................................... 1,487 2,456 Accrued expenses ...................................................... 1,819 1,617 Accrued compensation and benefits ..................................... 3,002 3,233 Accrued restructuring and other costs ................................. 413 1,152 Income and other taxes payable ........................................ 577 1,121 Obligations under capital lease ....................................... 284 327 Deferred revenue ...................................................... 7,158 7,914 --------- --------- Total current liabilities ....................................... 17,940 20,179 Obligations under capital lease .......................................... 147 124 Commitments and contingencies (Note 4) Stockholders' equity: Series C Convertible Preferred Stock, $1.00 par value; (liquidation preference $20.00 per share) 150 shares authorized; 0 and 100 outstanding shares at June 30, 1998 and December 31, 1997, respectively ........................................................ -- 100 Series D Convertible Preferred Stock, $1.00 par value; (liquidation preference $20.00 per share) 300 shares authorized; 170 and 210 outstanding shares at June 30, 1998 and December 31, 1997, respectively .................................................. 170 210 Common stock, $.01 par value; 52,400 shares authorized; 21,318 and 19,179 shares issued and outstanding shares at June 30, 1998 and December 31, 1997, respectively ............................ 213 192 Additional paid-in capital ............................................ 113,316 113,089 Accumulated deficit ................................................... (109,190) (107,125) Accumulated other comprehensive loss .................................. (488) (445) --------- --------- Total stockholders' equity ...................................... 4,021 6,021 --------- --------- Total liabilities and stockholders' equity ............................... $ 22,108 $ 26,324 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 CAYENNE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 -------- -------- -------- -------- Revenue: Software license .............................. $ 2,662 $ 3,819 $ 7,577 $ 8,890 Consulting and educational services ........... 1,826 2,408 3,849 4,911 Maintenance ................................... 4,109 5,447 8,130 11,270 -------- -------- -------- -------- Total revenues .......................... 8,597 11,674 19,556 25,071 Cost and expenses: Cost of revenues Cost of software licenses .................... 369 563 737 1,141 Cost of consulting, educational services, and maintenance ............................ 2,092 2,198 4,079 4,317 Sales and marketing .......................... 4,659 6,150 9,915 12,472 Research and development ..................... 2,082 2,782 3,914 5,599 General and administrative ................... 1,252 1,636 2,655 3,097 Non-recurring costs .......................... -- -- -- (375) -------- -------- -------- -------- Total costs and expenses ................ 10,454 13,329 21,300 26,251 Loss from operations ............................. (1,857) (1,655) (1,744) (1,180) Interest income (expense), net ................... 21 (13) (5) (275) -------- -------- -------- -------- Loss before provision for income taxes ........... (1,836) (1,668) (1,749) (1,455) Provision for income taxes ....................... 146 205 209 318 -------- -------- -------- -------- Net loss ......................................... (1,982) (1,873) (1,958) (1,773) Dividends on preferred stock ..................... 45 26 107 64 -------- -------- -------- -------- Loss applicable to common shareholders .. $ (2,027) $ (1,899) $ (2,065) $ (1,837) -------- -------- -------- -------- Other comprehensive loss: Foreign currency translation adjustment ...... 41 (172) (43) (283) -------- -------- -------- -------- Total Comprehensive loss ................ $ (1,986) $ (2,071) $ (2,108) $ (2,120) ======== ======== ======== ======== Basic earnings per share ......................... $ (0.10) $ (0.11) $ (0.10) $ (0.10) ======== ======== ======== ======== Weighted average number of common shares outstanding-basic ................................ 21,312 18,079 20,697 17,897 Diluted earnings per share ....................... $ (0.10) $ (0.11) $ (0.10) $ (0.10) ======== ======== ======== ======== Weighted average number of common shares outstanding-dilutive ............................. 21,312 18,079 20,697 17,897
The accompanying notes are an integral part of the consolidated financial statements. 4 5 CAYENNE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (unaudited)
SIX MONTHS ENDED JUNE 30, 1998 1997 ------- ------- Cash flows from operating activities: Net (loss) ....................................................... $(1,958) $(1,773) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ................................. 738 947 Changes in operating assets and liabilities: Trade accounts receivable ................................... 732 360 Prepaid expenses and other current assets ................... (563) (525) Accrued expenses ............................................ 95 (334) Accrued restructuring and other costs ....................... (739) (975) Accounts payable ............................................ (969) 180 Accrued compensation and benefits ........................... (231) (562) Income and other taxes payable .............................. (544) 207 Deferred revenue ............................................ (756) 364 ------- ------- Net cash used in operating activities ............................... (4,195) (2,111) Cash flows from investing activities: Proceeds from sale of property and equipment ................... 0 43 Purchases of property and equipment ............................ (412) (850) ------- ------- Net cash used in investing activities ............................... (412) (807) Cash flows from financing activities: Proceeds from issuance of preferred stock and warrants, net .... 2,965 Proceeds from line of credit facility .......................... 841 0 Proceeds from issuance of common stock, net .................... 107 274 Payments under capital lease obligations ....................... (164) (179) ------- ------- Net cash provided by financing activities ........................... 784 3,060 Effect of foreign exchange rates on cash and cash equivalents ....... (56) (201) ------- ------- Net increase (decrease) in cash and cash equivalents ................ (3,879) (59) Cash and cash equivalents at beginning of period .................... 9,225 4,150 ------- ------- Cash and cash equivalents at end of period .......................... $ 5,346 $ 4,091 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. 5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, and have been prepared by the Company without audit in accordance with the Company's accounting policies, as described in its latest annual report filed with the Securities and Exchange Commission on Form 10-K. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. While the Company believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the financial statements and related notes included in the Company's Annual Report on Form 10-K for the period ended December 31, 1997. 2. 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. Diluted income per common share is computed based upon the weighted average number of common shares and common equivalent shares outstanding during each period. Dilutive common equivalent shares consist of Convertible Preferred Stock, warrants and stock options (calculated using the treasury stock method). For the three and six month periods ended June 30, 1998 and 1997 respectively, 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 represented 6,603,000 shares for the three and six months ended June 30, 1998. 3. 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 adopted the guidelines of SOP 97-2 as of January 1, 1998 and its adoption did not have a material impact on the Company's financial results. On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position. In March 1998, Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, and will result in the capitalization of certain qualifying costs incurred in the development of software for internal use. The adoption of SOP 98-1 is not expected to materially impact the Company's financial position or results of operations. 4. COMMITMENTS AND CONTINGENCIES The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position of the Company. The Company has received from Esprit Systems Consulting, Inc. a Notice of Intent to Arbitrate claiming that the Company is liable to Esprit for approximately $1.6 million under an extension to a contract for software training services to be rendered to Cadre Technologies Inc. Esprit subsequently withdrew its Notice of Intent to Arbitrate, but has stated that it intends to proceed with either arbitration or litigation. The Company 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. 6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q may contain forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Factors That May Affect Future Results." 7 8 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. For the three and six month periods ended June 30, 1998, the Company recorded a loss of $2.0 million compared to a loss of $1.9 million and $1.8 million for the same periods a year ago. Revenues and expenses both declined quarter over quarter as well as for both year to date periods. The Company's efforts to align expenses with revenues continues, but has generally fallen short as revenues declined faster than the reduction in expenses. During the three months ended June 30, 1998, the Company's revenue decreased $3.1 million to $8.6 million, from $11.7 million in revenues during the comparable period of a year ago. Revenues for the quarter was impacted by the deferral of purchasing decisions by a few major customers and a program delay by a major defense contractor. The Company's product license and maintenance revenue from both UNIX and mainframe (OS2) product lines continues to decline. The Company's continuing efforts to reduce costs and operating expenses resulted in total operating expenses of $10.5 million, a decrease of $2.9 million or 22% from the comparable three-month period a year ago. The Company's full time employees were reduced by 16% or 60 people, from the comparable period a year ago. The Company continues to have difficulty stabilizing its declining revenues. The Company is facing stronger competitive pressure brought on by industry consolidation, and many of the Company's competitors have significantly greater financial resources. Continuing operating losses, particularly the unanticipated and substantial loss experienced by the Company in the three months ended June 30, 1998, have eroded the Company's cash position and have made it more difficult for the Company to invest in technology and in the marketing of the Company's products and services (see Liquidity and Capital Resources below.) Earlier this year the Company retained the firm of Adams Harkness & Hill to assist it in evaluating strategic alternatives which include, without limitation, the sale of the Company, the sale of assets, and restructuring the Company to achieve a cash flow breakeven position and the Company is actively exploring these alternatives. There can be no assurance that any sale of assets or the restructuring of the Company to reduce expenses will achieve a cash flow breakeven position. Moreover, there can be no assurance that actions taken to reduce expenses will not have an adverse effect on the Company's ability to generate revenue or to successfully implement any of the strategic alternatives under consideration. REVENUES The Company's revenues are currently derived from three sources: (i) fees for the 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. 8 9 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth the amount of revenue derived by the Company, by geographic segment and source, for each period indicated ($000s):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30 --------------------- --------------------- 1998 1997 1998 1997 ------- ------- ------- ------- SOFTWARE LICENSE United States ..... $ 1,185 $ 1,580 $ 3,219 $ 4,400 Italy ............. 413 1,201 1,970 1,908 United Kingdom .... 544 286 889 519 Rest of World ..... 520 752 1,499 2,063 ------- ------- ------- ------- 2,662 3,819 7,577 8,890 CONSULTING AND EDUCATION United States ..... 435 665 949 1,371 Italy ............. 1,136 1,455 2,398 2,854 United Kingdom .... 159 119 279 291 Rest of World ..... 96 169 223 395 ------- ------- ------- ------- 1,826 2,408 3,849 4,911 MAINTENANCE United States ..... 2,356 2,895 4,766 5,981 Italy ............. 381 661 654 1,336 United Kingdom .... 624 818 1,280 1,715 Rest of World ..... 748 1,073 1,430 2,238 ------- ------- ------- ------- 4,109 5,447 8,130 11,270 ------- ------- ------- ------- TOTAL ........ $ 8,597 $11,674 $19,556 $25,071 ------- ------- ------- -------
SOFTWARE LICENSES. Software license revenue for the three and six months ended June 30, 1998 was $2.7 million and $7.6 million compared to $3.8 million and $8.9 million for the comparable period of 1997. The $1.2 million or 30% decrease in license revenues for the quarter resulted primarily from migration by the Company's customers from mature, structured UNIX tools to new, Windows-based and object oriented tools, with sales of the newer products not completely offsetting the decline in the mature products. Additionally, contraction of federal defense programs has 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 product line. Windows-based and object oriented products accounted for 68% and 74% of new license revenue for the three and six months ended June 30, 1998 compared to 63% and 67% for the comparable periods of the prior year. License revenue in the United States dropped 26% and 27% in the three and six month periods, along with a 35% and 4% drop in international license revenue for the same periods. CONSULTING AND EDUCATION SERVICES. Consulting and education revenue for the three and six months ended June 30, 1998 were $1.8 million and $3.8 million compared to $2.4 million and $4.9 million for the comparable periods of the prior year. The decrease in consulting and education revenue during the three and six month periods was attributable to: 1) lower software license revenue in the United States where consulting and education revenue tends to follow trends in license revenue, 2) the Company's new products, which are based on Windows NT/95 platforms and are easier to use and therefore require less training, and 3) the sale of many of the Company's software licenses into existing sites where companies use in-house training. MAINTENANCE. Maintenance revenue for annual maintenance contracts is deferred and recognized ratably over the term of the agreement. Maintenance revenue for the three and six months ended June 30, 1998 was $4.1 million and $8.1 million compared to $5.4 million and $11.3 million for 1997 for a decrease of 25% and 28%, respectively. Maintenance revenue decreased $0.5 million in the United States and $0.8 million internationally as a result of industry consolidation in the technical embedded market reducing the customer base for structured maintenance. In addition, fewer customers renewed their maintenance contracts on mainframe/OS2 platforms as these customers migrate to lower priced Windows-based platforms and object oriented tools. 9 10 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COSTS AND EXPENSES The following table sets forth the amount of expense by category for the periods indicated ($000s):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, COST OF REVENUES 1998 1997 1998 1997 ------- ------- ------- ------- Cost of software licenses ....... $ 369 $ 563 $ 737 $ 1,141 Cost of consulting, education and 2,092 2,198 4,079 4,317 maintenance .................. ------- ------- ------- ------- Total cost of revenues ...... 2,461 2,761 4,816 5,458 Sales and marketing ................ 4,659 6,150 9,915 12,472 Research and development ........... 2,082 2,782 3,914 5,599 General and administrative ......... 1,252 1,636 2,655 3,097 Restructuring and other costs ...... -- (375) ------- ------- ------- ------- Total costs and expenses ...... $10,454 $13,329 $21,300 $26,251 ======= ======= ======= =======
COST OF REVENUE. The Company's cost of software licenses includes product packaging, documentation, media and royalties to third parties. In 1998, there was no cost associated with the amortization of capitalized software development as the Company reviewed its product strategy in 1997 and determined that purchased software costs no longer had a net realizable value. Costs of consulting and education services and maintenance includes personnel, travel and occupancy costs connected with providing such services. Cost of software licenses were $0.4 million and $0.7 million or 4% of revenue for the three and six months ended June 30,1998 compared with $0.6 million and $1.1 million or 5% of revenue in the comparable periods of 1997. The decrease in 1998 expenses reflects reduced sales of third party products for which the Company pays a royalty to resell as well as reduced manufacturing costs consistent with reduced revenues. Cost of consulting, education and maintenance was $2.1 million and $4.1 million or 24% and 21% of revenue in the three and six months ended June 30, 1998 compared with $2.2 million and $4.3 million or 19% and 17% of revenue in the comparable periods of 1997. The decrease in 1998 expenses is primarily attributable to reduced staffing levels as a result of the Company's efforts to better align staffing with demand and as a result of attrition. SALES AND MARKETING. Sales and marketing expenses were $4.7 million and $9.9 million or 54% and 51% of revenue in the three and six months ended June 30, 1998 compared with $6.1 million and $12.5 million or 53% and 50% of revenue in the comparable period of 1997. The decrease in 1998 expenses generally reflects reduced staffing in North America and international subsidiary operations as a result of attrition. In addition, a reduction in promotional programs spending also contributed to the overall decline in expenses for the quarter. RESEARCH AND DEVELOPMENT. Research and development expenses were $2.1 million and $3.9 million or 24% and 20% of revenue in the three and six months ended June 30, 1998 compared with $2.8 million and $5.6 million or 24% and 22% of revenue in the comparable period of 1997. The decrease in 1998 expenses primarily reflects reduced staffing as a result of attrition. In addition, the Company curtailed some of its research and development effort from a third party developer during the first quarter of 1998. Other discretionary cost containment measures were in place during the current quarter to further reduce expenses. GENERAL AND ADMINISTRATIVE. General and administrative expenses were $1.3 million and $2.7 million or 15% and 14% of revenue in the three and six months ended June 30, 1998 compared with $1.6 million and $3.1 million or 14% and 12% of revenue in the comparable periods of 1997. The decrease in 1998 expenses primarily reflects lower levels of staffing and the elimination of positions. Administrative headcount is down 27% from the comparable period of a year ago. The Company incurred recruiting expenses in the on-going search for a new president and chief executive officer during the first quarter of 1998. RESTRUCTURING AND OTHER COSTS. During the quarter ended March 31, 1997, the Company evaluated its restructuring reserve and determined that certain amounts provided for in previous restructuring actions were no longer required. As a result, the Company recorded a benefit of approximately $0.4 million. 10 11 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) EFFECT OF INTERNATIONAL OPERATIONS ON LOSS FROM OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, LOSS FROM OPERATIONS: 1998 1997 1998 1997 ------- ------- ------- ------- United States ................ $ 850 $ 1,408 $ 1,667 $ 4,156 Italy ........................ (1,237) (540) (263) (473) United Kingdom ............... (182) (547) (480) (1,162) Rest of World ................ (1,288) (1,976) (2,668) (3,701) ------- ------- ------- ------- $(1,857) $(1,655) $(1,744) $(1,180)
In addition to factors listed above, the operations of the Company's international subsidiaries significantly affected results of operations in the three and six months ended June 30, 1998. The income from operations in the United States declined to $0.8 million and $1.7 million for the three and six months ended June 30, 1998 from $1.4 million and $4.1 million for the corresponding period in the prior year. The decline was primarily a result of revenue declining in the United States. The Company's Italian subsidiary reported a loss from operations of $1.2 million and $0.3 million for the three and six months ended June 30, 1998 compared to $0.5 million for the same periods in 1997. The increased loss in the second quarter was attributable to a decrease in revenue during the quarter, along with expense reductions taken since March 31, 1997. The decrease in the loss in the six month period was attributable to stronger revenues in the first quarter of 1998. The loss from operations in the Company's United Kingdom subsidiary decreased to $0.2 million and $0.5 for the three and six months ended June 30, 1998 from $0.5 million and $1.2 million during the corresponding period in the prior year. The decrease was principally due to reduction in expenses for the three and six month periods over the corresponding periods of a year ago. Rest of World loss from operations declined $0.7 million and $1.0 for the three and six month periods and was attributable to both a decline in revenue and expenses with expenses decreasing at a greater rate. INTEREST INCOME (EXPENSE), NET. Interest expense, net decreased by $0.2 million for the six month period ending June 30, 1998 versus the same period of a year ago. Most of the change was attributable to an increase in interest income earned and a reduction in foreign exchange currency losses incurred during the first quarter of 1997. The effects of foreign exchange rate changes for the three and six months ended June 30, 1998 was immaterial. PROVISION FOR INCOME TAXES. Due to the Company's recent history of operating losses and the existence of significant net operating loss carryforwards, the tax provisions for the three and six months ended June 30, 1998 and 1997 are primarily composed of foreign income and withholding taxes. 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 adopted the guidelines of SOP 97-2 as of 11 12 January 1, 1998 and its adoption did not have a material impact on the Company's financial results. 12 13 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In March 1998,Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, and will result in the capitalization of certain qualifying costs incurred in the development of software for internal use. This adoption of SOP 98-1 is not expected to impact the Company's financial statements. On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, the Company's principal sources of liquidity included cash and cash equivalents aggregating $5.3 million and a secured revolving credit agreement in the amount of $5.0 million discussed below. In addition, the Company's Italian subsidiary has an uncommitted secured working capital line of credit for approximately $1.0 million. Cash and cash equivalents decreased by $3.9 million compared to December 31, 1997. For the six months ended June 30, 1998, cash flows were principally affected by the net loss of $2.0 million, decreases in trade and taxes payable, deferred revenue, and accrued restructuring and other costs which in the aggregate totaled $3.0 million. Trade accounts receivable decreased by $0.7 million as billings for the first six months declined. Short term borrowings of $0.8 million in Italy offset some of the decline. The Company has no material commitments for capital expenditures. The Company currently estimates that cash expenditures for restructuring actions taken to date will be approximately $0.2 million. The Company believes that it has adequately provided for all restructuring actions taken to date. However, the Company is considering taking additional restructuring actions during the remainder of 1998. The Company's $5.0 million revolving bank credit agreement has a stated maturity of October 5, 1998, and is secured by all of the assets of the Company. Availability under the credit agreement is limited to a borrowing base which equals a percentage of qualified accounts receivable outstanding at the time. Financial covenants require the Company to maintain a minimum net worth of $5.5 million at the end of the quarter. At June 30, 1998, the borrowing base was approximately $2.1 million, and there was approximately $2.4 million outstanding under the revolving credit agreement. The Company has provided a $1.0 million certificate of deposit with the bank and pledged $0.3 million to make up this shortfall. In addition, the Company's net worth at June 30, 1998 was $4.0 million and consequently did not satisfy the minimum net worth covenant. The Company does not expect to be able to comply with this covenant for the remainder of the term of the credit agreement. The Company is currently in discussions with the bank regarding its failure to comply with the terms of the credit agreement. There can be no assurance that the Company will be able to negotiate a satisfactory resolution of these defaults or obtain an extension of availability beyond the stated maturity of October 5, 1998, or, failing that, to obtain replacement financing. Earlier this year the Company retained the firm of Adams Harkness & Hill to assist it in evaluating strategic alternatives which include, without limitation, sale of the Company, the sale of assets, and restructuring the Company to achieve a cash flow breakeven position. There can be no assurance that the sale of assets or the restructuring of the Company to reduce expenses will achieve a cash breakeven position. Moreover, there can be no assurance that actions taken to reduce expenses will not have an adverse effect on the Company's ability to generate revenue or to successfully implement any of the strategic alternatives under consideration. Due to the unanticipated magnitude of losses in the second quarter, the uncertainty as to whether the Company can achieve significantly better results of operations during the third quarter, and the uncertainty regarding the outcome of negotiations with the bank over continued availability of revolving credit and the extension of the credit agreement beyond October 5, 1998, the Company cannot now determine whether existing cash balances and funds generated from operations and borrowings will be sufficient to satisfy cash requirements and other cash needs through the end of 1998. Failure to establish a positive cash flow or successfully implement any of the strategic alternatives under consideration raises the possibility that the Company will not be able to continue as a going concern. 13 14 FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company or statements made by its employees may contain "forward-looking" information, as that term is defined in the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including but not limited to the following: Failure to Achieve Cash Flow Breakeven/Strategic Alternatives The Company's ability to achieve a cash flow breakeven position during the remainder of 1998 will be critical for achieving financial stability. Reductions in expenses or the sale of assets may not be adequate to bring the Company to a cash breakeven position. In addition, there can be no assurance that actions taken to sell assets or reduce expenses will not have an adverse effect on the Company's ability to generate revenue or to successfully implement any of the strategic alternatives under consideration. Bank Financing There can be no assurance that the Company will be able to successfully renegotiate its revolving credit agreement and extend the agreement's stated maturity of October 5, 1998. If payment of the loan is demanded by the bank, there can be no assurance that the Company will have available cash to make such a payment. National Market Listing The Nasdaq Stock Market, Inc. has several requirements for listing on the Nasdaq National Market or the Nasdaq SmallCap Market. Failure to meet listing requirements may result in the Company being moved from the National Market to the SmallCap Market or being de-listed. De-listing of the Company from the National Market and the SmallCap Market could permit the shareholders of Series D Convertible Preferred Stock to exercise a special redemption right. Under this provision, the holders of the Series D Convertible Preferred Stock may demand that the Company redeem for cash all shares then held at an aggregate purchase price equal to a prescribed formula. There can be no assurance that the Company will not be de-listed. 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 includes 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. 14 15 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 of these customers, through industry consolidation or otherwise, will materially affect operating results. 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. There can be no assurance that these new products will be accepted by customers and will generate revenues sufficient to offset the continued decline in revenues from the OS/2 and Unix products. 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. 15 16 ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PART II. OTHER INFORMATION (CONTINUED) ITEM 1. LEGAL PROCEEDINGS The Company has received from Esprit Systems Consulting, Inc. a Notice of Intent to Arbitrate claiming that the Company is liable to Esprit for approximately $1.6 million under an extension to a contract for software training services to be rendered to Cadre Technologies Inc. Esprit subsequently withdrew its Notice of Intent to Arbitrate, but has stated that it intends to proceed with either arbitration or litigation. The Company believes that the claim is without merit because, among other things, the contract in question terminated without extension. However, there can be no assurance as to the claim's future course or likely result. The Company is not aware of any other material litigation or claim pending or threatened against the Company or any of its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 18, 1998, the Company held a special meeting in lieu of annual meeting of stockholders. The result of the proposals submitted for vote were as follows: 1. Election of Class A Directors;
Number of Shares ---------------- For Withhold Authority --- ------------------ John J. Alexander 19,543,955 649,385 Allyn C. Woodward 18,638,029 1,555,311
2. Amendment of the Amended 1996 Incentive and Nonqualified Stock Option Plan to increase the number of shares of Common Stock available for issuance thereunder from 2,000,000 shares to 3,000,000.
Number of Shares ---------------- For 16,714,871 Against 3,293,518 Abstain 60,971 Broker non-votes 123,980
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits Ex-27 Financial Data Schedules 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CAYENNE SOFTWARE, INC. DATED: August 14, 1998 BY: /S/ Frederick H. Phillips ------------------------- Frederick H. Phillips Vice President, Finance and Administration, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 17 EX-27 2 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, 10-KA, AND 10-Q. 0000880229 CAYENNE SOFTWARE, INC. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 5,346 0 11,468 469 0 19,044 18,753 15,990 22,108 17,940 0 0 170 213 3,638 22,108 7,577 19,556 737 4,079 16,484 0 (5) (1,749) 209 (1,958) 0 0 0 (1,958) (0.10) (0.10)
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