SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
( x ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File Number 1-9189
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CHEYENNE SOFTWARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3175893
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(State or other jurisdiction of organization)(I.R.S.Employer Identification No.)
3 Expressway Plaza, Roslyn Heights, NY 11577
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 484-5110
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.01 per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
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:
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As of September 20, 1995, the aggregate market value of Common Stock
held by non-affiliates of the Registrant, computed by reference to the closing
price as reported by the American Stock Exchange on September 20, 1995 was
$756,861,323.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form, 10-K or any amendment of this Form 10-K. [ ]
The aggregate number of Registrant`s outstanding shares on
September 20, 1995 was 37,423,426 shares of Common Stock, $0.01 par value
(excluding 2,035,000 shares of treasury stock).
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant's definitive proxy statement for its 1995 Annual Meeting of
Stockholders will be filed with the Securities and Exchange Commission
on or before October 30, 1995 (incorporated by reference under Part 111).
TABLE OF CONTENTS
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Part I
Item 1 - Business .............................................................3
Item 2 - Properties ..........................................................15
Item 3 - Legal Proceedings ...................................................15
Item 4 - Submission of Matters to a Vote of Security Holders .................17
Part II
Item 5 - Market for Registrant's Common Stock and Related Matters ............18
Item 6 - Selected Financial Data .............................................19
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................20
Item 8 - Financial Statements and Supplementary Data .........................27
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................27
Part III
Item 10- Directors and Executive Officers of the Registrant...................28
Item 11- Executive Compensation...............................................28
Item 12- Security Ownership of Certain Beneficial Owners
and Management.....................................................28
Item 13- Certain Relationships and Related Transactions.......................28
Part IV
Item 14- Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................29
2
P A R T I
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Item 1 Business
Cheyenne Software, Inc. ("Cheyenne", the "Registrant" or the
"Company"), formed in 1983, is engaged in the development, sale and support of
software products for use in microcomputers and computer systems mainly for
Local Area Network (LAN) and, more recently, Wide Area Network (WAN)
applications. Cheyenne's key technical product strategy is to employ the network
file server's high performance capabilities based on the client/server model.
The Company's products provide key services to administrators and users
of computer networks, in the following categories:
a) Network Data Storage Management - includes ARCserve, HSM and
JETserve
b) Network Security - includes InocuLAN
c) Network Management - includes Monitrix
d) Network Communications - includes FAXserve and Bit products
In July, 1995, Cheyenne established three divisions based upon
operating system platforms, a NetWare division, a Windows/NT division and a
UNIX division. By focusing on serving the needs of each platform, the Company
expects to align its activities closer to its channels of distribution,
strategic partners and customers. Cheyenne has network data storage
management products for these major and other platforms. With respect to other
product categories, Cheyenne has products which support some of these major
and other platforms.
Software Products
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A brief description of key Cheyenne software products follows below.
Network Data Storage Management
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Approximately 88.6% of Cheyenne's revenues for the fiscal year ended
June 30, 1995 ("FY95") relate to the ARCserve(R) product line. The last major
enhancement for the NetWare platform was at the end of the fourth quarter of the
fiscal year ended June 30, 1993 ("FY93"). A major enhancement for the NetWare
platform is anticipated by the end of calendar year 1995. A Microsoft NT version
was released in FQ395. ARCserve/Open for UNIX was extended in FY95 to support
additional UNIX operating systems.
ARCserve(R) for NetWare Version 4.x
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ARCserve DOS Edition provides fully automated data management services
for Novell networks. ARCserve consists of the ARCserve Server, a VAP or NLM
(NetWare Loadable Module) that resides on a computer server. It also includes
ARCserve Manager, a workstation front-end that lets the user execute or schedule
services to be performed by the VAP or NLM. This client/server architecture lets
the user perform centralized data backup without a dedicated workstation and
gives users simultaneous access to data management services while it enhances
security for the network. The VAP or NLM performs backup and restore for the
entire network while remaining completely in the background. ARCserve allows
hardware to operate at its optimum speed. Data is sent directly from the file
server to attached storage devices without traveling over the network. ARCserve
offers flexibility in media and device selection. It supports most available
SCSI and QIC-02 tape drives, disk and optical hardware, and a wide variety of
host adapters.
ARCserve includes Auto Pilot Tape Management, an invisible operator
which guides the user through tape management, rotation, and labeling. The Disk
Grooming option frees up valuable disk space by moving outdated files to tape
automatically. For disaster recovery, AutoPilot's Quick Recover feature restores
the system or a designated file to any specified date. Also
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included is a File Tracking System and Quick File Access. The user queries the
system to locate a backup session or specific file, and ARCserve prompts the
user to mount the tapes needed to perform the restore. For preventive
maintenance, ARCserve's Tape Usage Database gives the user factual information
on the condition of tapes. This enables the user to make educated decisions
about tape usage and tape retirement. ARCserve 4.x is compatible with NetWare
3.X and 4.X.
ARCserve(R) for NetWare Version 5.x
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ARCserve Windows Edition maintains the same innovative functions as
ARCserve 4.x DOS Edition and adds new functionality. Whether the user has a
small single-server or a large multiserver network environment, ARCserve Windows
Edition will back up all NetWare servers, DOS, Windows, OS/2, and MacIntosh
workstations and certain UNIX workstations, as well as certain database servers.
Using the Microsoft Windows 3.1 Graphical User Interface (GUI),
ARCserve Windows Edition manages backup easily. Parallel Streaming
simultaneously processes backup and/or restore operations to seven devices
chained on one SCSI adapter. ARCserve supports most industry standard SCSI and
QIC-02 tape drivers and a wide variety of host adapters. Messages notify the
user in a timely manner if any problems occur, and are configurable on a per job
basis using the ARCserve Manager. ARCserve integrates with Cheyenne's InocuLAN
to ensure virus-free backups and sends alert messages and reports via facsimile
with Cheyenne's FAXserve.
ARCserve(R) for Windows NT Version 2.x
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In FQ3/95, Cheyenne began to ship ARCserve for NT Version 1.0. The
product offers the same comprehensive, high performance features found in
ARCserve for NetWare Windows Edition. It functions as an operating system
service, rather than as an application, permitting system-wide backups to be
scheduled and performed, regardless of user log-in. Once ARCserve for NT
schedules the backup, the control is given to the Windows NT operating system. A
maximum level of security is therefore obtained because the need to remain
connected to the server during the backup process is eliminated. This product
also includes a virus scanning engine for Cheyenne's InocuLAN for Windows NT
anti-virus software to further provide high data integrity.
Version 2.x began to ship in late FQ4/95.
ARCserve(R)/Open
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ARCserve(R)/Open provides fully automated data management services for
certain UNIX environments. The software operates natively in a UNIX environment
that does not include a Novell network. It offers automation, reliability and
performance to the UNIX back-up operation, which can be performed in the
background or in real time. ARCserve(R)/Open has been available since September
1992. The product line was extended to include platform support for additional
UNIX operating systems in FY95.
ARCserve(R) for MacIntosh
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In the third quarter of the fiscal year ended June 30, 1994 ("FY94"),
Cheyenne began to ship ARCserve for MacIntosh. The product offers backup and
restore for stand-alone and networked MacIntosh computers.
ARCserve(R) Options
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Shipments of the Tape Changer and Stacker software modules for ARCserve
(NLM only), providing fully automated, high capacity NetWare data storage and
management commenced toward the end of the fiscal year ended June 30, 1992
("FY92").
Agent options for MacIntosh and UNIX workstations including IBM AIX,
HP/UX, DEC Ultrix, SunSoft Solaris, Univel and Unixware are available for
ARCserve (NLM only). They give the user a single source for effective data
management in multiple operating system environments.
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The DBagent options for ARCserve (including agents for NetWare Btrieve,
SQL, Oracle and Gupta) provide on-line backup of mission critical databases on
the network. Traditionally, databases that are continuously on-line or "active"
have been difficult to backup completely, as they are constantly being modified.
HSM
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Cheyenne HSM Hierarchical Storage Management is a process of
automatically and transparently migrating data across a hierarchy of storage
media. Infrequently accessed files typically are moved from primary storage on a
server hard drive to more cost effective storage media, including optical and
tape storage. While HSM systems have been available for mainframe environments,
they are just now being recognized as critical to managing storage in large
networked environments.
In FQ3/95, Cheyenne began to ship Cheyenne Hierarchical Storage Manager
1.0, a fully automated storage product for NetWare 3.11, 3.12 and 4.x servers.
In FQ2/95, Cheyenne acquired an HSM for UNIX product from NETstor, discussed
below. The NetWare and UNIX HSM products are used in combination with ARCserve
for NetWare and ARCserve/Open.
JETserve(TM)
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JETserve is a high-performance data disaster recovery solution that
provides fast, image-based backup and data restore services. Combined with RAID
fault tolerance, the product offers a high level of data protection for large
volumes of mission-critical data residing on NetWare superservers. The product
is based on technology purchased from NetFrame, discussed below. Cheyenne is
currently developing versions of JETserve for the NT and UNIX markets. The
JETserve product can be used in combination with ARCserve, as well as an
independent product.
ARCsolo(R)
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ARCsolo for DOS backs up and restores a workstation and, if necessary,
the file server. The user can also back up and restore other network
workstations by using any mapping facility. ARCsolo for Windows was introduced
in FQ2/94, with similar features as ARCsolo for DOS, but it has a "Windows"
front end. ARCsolo for OS/2 was introduced in late FY94. It provides reliable
backup and restore for OS/2 workstations and LAN servers. ARCsolo supplements
ARCserve and maintains the same tape format.
Network Security
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InocuLAN(R) for NetWare
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InocuLAN protects a file server, networked PC's, and stand-alone PC's
from computer viruses. Shipments of the product started during June 1992.
Version 3.0 with a Windows front end began shipping in FQ1/95.
The server-based module of InocuLAN is an NLM. This NLM scans servers
for known viruses, completely in the background at user-defined intervals. Small
resident programs (TSR's) in workstations or stand-alone PCs provide immunity
and prevention from known and unknown viruses. The hard drive, floppy disk, and
other storage media are scanned for viruses by InocuLAN.
InocuLAN enforces security from the file server; a user cannot access
the network on an unprotected workstation. Since the user can distribute
InocuLAN software updates from the file server, the tedious process of updating
each workstation individually is eliminated. When InocuLAN detects a virus, it
alerts the user by network broadcast, MHS message, or pager. The user often may
be able to remove the virus from the infected file and restore that file to its
original state. Backup, restore, and notification of corruption of critical hard
disk area is also provided.
5
InocuLAN(R) for NT
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In FQ4/95, Cheyenne began to ship InocuLAN for Windows NT Version 1.x.
The product has been optimized for Windows NT and functions as a 32-bit
operating system service. The product offers anti-virus protection for all files
residing on Windows NT, as well as the PC's and MacIntosh workstation attached
to the network.
Network Management
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Monitrix(R)
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Monitrix is an intuitive inventory, monitoring and documenting solution
for network management. Running NetWare 3.11, 3.12, and 4.x, Monitrix takes
advantage of the MSWindows 3.1 interface and provides the centralized tools
which enable effective LAN/WAN management.
Asset Management accurately tracks and accounts computer hardware and
software assets; supporting both networked nodes and isolated workstations
without a TSR. Monitrix automatically inventories NetWare file servers and DOS,
Window, OS/2, and MacIntosh workstations, offering analysis of current and
future computing needs. Administrators can easily construct network sensors to
identify vital system thresholds, including file server utilization, network
traffic, volume status and disk space, and buffer and memory usage. If any
threshold is crossed, specified users are notified through a Robust Alert
System. Monitrix also obtains and graphs IPX, SPC, System and CPU trends for
timely network analysis. All statistics can be documented via built-in or
customized reports.
Network Communications
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FAXserve(TM)
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FAXserve provides secure, easy-to-use, economical facsimile services
for a Novell network operating system. The user prepares a document at the
workstation in DOS, Windows, or E-Mail applications, and schedules where and
when it should be sent. FAXserve also lets the user create and send documents
with any CAS application. Shipments of this product started during the first
quarter of FY93. Shipments of the latest version, V3.0, commenced in FQ4/95.
FAXserve takes full advantage of the server's power. It eliminates the
need for a dedicated workstation or proprietary hardware. In addition, the fax
device can be shared by all users. FAXserve improves the quality of outgoing
faxes and sends documents electronically to the destination's fax device. With
FAXserve, the user can reduce communication costs by scheduling unattended fax
transmissions during less costly off-peak hours.
Bit Products
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This product line was acquired from Bit Software, Inc. and has been
significantly modified. It consists of stand-alone communications (voice, data,
fax) products with peer-to-peer networking capabilities aimed at the work group
computing market.
In connection with its adoption of a divisional structure (NetWare, NT
and Unix) described above, the FAXserve and Bit products, which previously
formed the product line for Cheyenne Communications, Inc., a wholly-owned
subsidiary of Cheyenne, were recently consolidated with Cheyenne's operations.
Channels of Distribution
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A. DISTRIBUTORS - Cheyenne's distributors are independent companies
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with multiple sales and stocking locations, which sell computer-related hardware
and software products, principally to value-added-resellers (VAR's). Cheyenne
provides sales and technical training to its distributors; such distributors
cooperatively advertise and promote Cheyenne's products. Cheyenne has entered
into non-exclusive agreements with each distributor. Most distributor agreements
have one year
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terms, may be canceled by either party upon 30-60 days' notice, provide for the
exchange of inventory by Cheyenne within 90 days of delivery and contain no
minimum purchase requirements by the distributor. Presently, Cheyenne's key
distributors and their territories include (listed alphabetically):
North America
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1) Ameriquest
2) Dallas Digital
3) Gates/FA Distributing, Inc.
4) GBC
5) Globelle (formerly Canadian Computer Brokers)
6) Ingram Micro D, Inc.
7) Intelligent Electronics
8) Law Cypress Distributing
9) Merisel and Merisel Canada, Inc.
10) MicroAge
11) Synnex Information Systems
12) Tech Data Corporation
13) Tenex
14) Value Added Distribution
15) Vitek System Distribution
Europe Rest of World (ROW)
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1) Actebis Computer (Germany) 1) Abcom (Brazil)
2) Adcomp Data Systems (Holland) 2) Com Tech Communications (Australia)
3) Akam Data (Holland, Belgium) 3) Eden (Brazil)
4) Azlan (UK, Ireland) 4) Laser (Hong Kong)
5) CCG (Holland) 5) Peridata Communications PTY Ltd. (Australia)
6) Computer 2000 (Germany, Belgium, Austria
UK, Holland, Finland, Hungary & Dubai, Switzerland)
7) C.O.S. (Switzerland)
8) Frontline (UK, Ireland)
9) Ideal Hardware (UK)
10) Interquad (France, Morocco, Tunisia, Algeria)
11) Megabyte (Germany)
12) Omnilogic (Belgium, Luxembourg, France, Morocco, Tunisia, Algeria)
13) Peacock (Germany)
14) Persona (UK)
15) Tallgrass (Norway, Denmark)
In FY95, one distributor accounted for more than 10% of Cheyenne's
total sales. Such distributor accounted for 14.4% of revenues by purchasing
$18,393,000 of standard products from the Company.
Sales through distributors (excluding Japan) have increased in FY92,
FY93, FY94 and FY95 as follows:
Distribution Sales ($ Thousands)
Territory FY92 FY93 FY94 FY95
------------- -------- -------- -------- --------
North America $ 5,040 $ 15,785 $ 37,028 $ 41,089
Europe 4,158 16,792 33,696 45,394
ROW 510 1,888 4,097 7,640
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$ 9,708 $ 34,465 $ 74,821 $ 94,123
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The above increases were mainly due to:
a) An expanding LAN market;
b) Better recognition and acceptance of Cheyenne's products in the LAN
marketplace;
c) Increased advertising, training, sales and customer support;
d) A broader product line;
e) The increased availability of foreign language-translated products;
and
f) The addition of new distributors, particularly outside the United
States.
To support the growing sales in North America, the Company added 15
sales and marketing personnel in FY95. Cheyenne now has regional sales offices
in Atlanta, Chicago, Dallas, Seattle and San Diego and Ontario, Canada.
In Europe, sales and service centers were added in the U.K. and Germany
during FY93 to augment the Company's European presence and to support sales
efforts out of its French office. The number of full time European employees
grew from 40 to 76 in FY95.
The Company rapidly expanded sales in the rest of the world (ROW) by
adding new distributors during FY95. Sales and service centers were added in
FY95 in Australia, Brazil, Mexico, Singapore and Taiwan, in addition to Miami,
FL (the U.S. base for Cheyenne's ROW sales), added in FY94. Singapore now serves
as the Company's base for Asia (excluding Japan) and the Company has relocated
there a key manager from the United States to oversee expansion in this area.
Employees directly supporting ROW sales increased to 10 in FY95 from 2 in FY94
(the Company also has retained 2 sales consultants in ROW).
Although the Japanese networking market is still relatively small,
Cheyenne's management believes the potential is significant. In February 1993,
the Company formed a subsidiary in Tokyo (Cheyenne KK) which now has 21 full
time employees. Subsequent to June 30, 1995, Cheyenne repurchased the 40 shares
(5%) of capital stock of Cheyenne KK it did not own for an immaterial amount. In
FY95, Cheyenne entered into OEM agreements with Fujitsu LTD. and Mitsubishi and
a letter of intent with NEC in Japan. Sales in Japan have increased in FY92,
FY93, FY94 and FY95 as follows:
Japan Sales (In Thousands)
--------------------------
FY92 FY93 FY94 FY95
---- ---- ---- ----
$65 $725 $2,341 $7,828
B. ORIGINAL EQUIPMENT MANUFACTURERS (OEM) - Since Cheyenne's products
--------------------------------------
have the ability to add value and capability to hardware products such as
computers, tape drives, data storage devices, etc., a number of hardware
producers have bundled Cheyenne products with their products. As a consequence,
Cheyenne has entered into many OEM agreements with producers of computer and
computer-related equipment.
Management believes that its OEM agreements have made a significant
contribution to the growth in the Company's unit sales, because of the enhanced
market penetration and visibility that resulted from the investments in
advertising and promotion that OEM companies normally undertake. There are more
than 20 OEM agreements currently in force. No one OEM relationship produced more
than 5% of Cheyenne's revenues in FY95. Total OEM revenues, excluding those of
Bit, were $7.9 million or about 35% of total revenues in FY92, were $13.3
million or about 23% of total revenues in FY93, were $13.3 million or about 14%
of total revenues in FY94, and were $15.3 million or about 12% of total revenues
in FY95. During the last two years, as Cheyenne's ARCserve product has become
more readily available throughout the world via Distribution, the need for OEM
customers to bundle the product has lessened. Distributors now bundle ARCserve
with many different hardware devices and provide the value-added services to
customers that were previously the responsibility of the OEM. As a result of
this change in the marketplace, Distributor sales have grown more rapidly than
OEM sales.
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Below is a brief description of Cheyenne's major OEM agreements listed
alphabetically.
1) Compaq - In FY93, Cheyenne optimized ARCserve 4.0 for use with
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Compaq's full family of System Pro/XL network servers. Shipments to Compaq
started in FQ4/93. This enhanced the relationship between Cheyenne and Compaq,
which began in FY92 when the two companies created a Technical Support Alliance.
In FQ1/95 Cheyenne announced an agreement with Compaq which provides
for the distribution of ARCserve 4.x and 5.x on Smartstart CD-ROM. During
FQ1/95, Compaq began shipping software CD's with each ProLiant and ProSignia
server. The Smartstart CD includes ARCserve 5.01 for NetWare, Windows Edition
and ARCserve 4.05 for NetWare, DOS Edition. This agreement represents the first
CD-ROM distribution of ARCserve and appears to mark the beginning of a general
change in the way the Company's software will be distributed throughout the
world. In FQ395, Compaq also began distribution of ARCserve for NT on SmartStart
CD-ROM.
2) Computer Associates - A technology and marketing partnership with
-------------------
Computer Associates ("CA") was established in FQ4/93 which enables CA to employ
Cheyenne's extensive LAN storage technology with all CA's OS/2 based network
backup and archiving systems. Cheyenne's agent technology provides common access
to a diverse list of network clients such as Windows, DOS, OS/2 and UNIX.
Cheyenne is providing CA-Unicenter with complete support for the storage media
that clients depend upon in networks of PCs. In FQ1/96, Cheyenne announced the
expansion of its relationship with CA by establishing a technology partnership
to integrate Cheyenne's multi-platform storage management software with the
CA-Unicenter environment. As a result, CA-Unicenter users will have access to a
wide variety of essential data and storage services including disaster recovery,
data protection, hierarchical storage management, and on-line database
backup/restore for the NetWare, Windows NT and UNIX operating system
environments. The final terms of the expanded relationship will be subject to a
definitive agreement, currently being negotiated.
3) Hewlett Packard - In FY95, HP's Bristol division and Cheyenne
---------------
entered into an agreement to bundle ARCserve with HP's SureStore tape drives as
HP's premier solution. HP offers ARCserve for NetWare, ARCsolo for Windows and
ARCsolo for OS/2 under the agreement. HP has offered Cheyenne products in
previous years under earlier agreements.
4) IBM - In FQ3/93, Cheyenne and EduQuest, the IBM Educational Systems
---
Company entered into an OEM relationship in which ARCserve is being bundled with
IBM's 4mm and 8mm DAT Tape drives. EduQuest specializes in the development and
marketing of technology solutions designed for elementary and secondary school
levels (K-12) which assist teachers and administrators in improving the quality
of education for America's children. During FY94, Cheyenne furthered its
relationship with IBM by becoming a Business Partner with the Personal Software
Products group although no significant revenues have resulted from this
relationship.
5) Intel - An agreement was signed during June 1991 jointly to develop
-----
a specialized LAN storage management system entitled Storage Express in which
Cheyenne's ARCserve technology is included. The product was introduced to the
marketplace during September 1992. A non-refundable advance against future
royalties was earned by Cheyenne. Additional royalties were earned during FY94
and FY95 when ongoing shipments of Storage Express exceeded those covered by the
original advance. Also, additional small non-recurring fees were earned by
Cheyenne as Intel incorporated Cheyenne's most current technology in its Storage
Express product.
C. MAJOR ACCOUNTS - During FY92, the Company initiated a Major Account
--------------
sales program in which Cheyenne sales employees directly call on LAN
administrators of Fortune 1000 companies. These potential customers can buy
Cheyenne product through local value-added resellers (VAR's), distributors or
directly from Cheyenne. Many large companies have found it convenient to deal
directly with Cheyenne on a "site license" basis in which the Company provides a
"golden master" disk that enables the customer to produce Cheyenne's software
product, as needed.
Revenues from these type of sales in FY94 were $1,534,000 and grew to
$3,108,000 in FY95.
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D. DIRECT SALES - The Company in FY95 expanded its work force focusing
------------
on direct sales of upgrades and other products. The Company also has contracted
with outside third parties to assist in this direct marketing and sales project.
This project, initiated with an outside company, began in FQ494. The project
increased sales of Cheyenne's secondary products, as well as upgrades and sales
directly to end-users. The costs associated with this project are relatively
high compared to revenues thus far.
FY95 Acquisitions
- -----------------
On December 19, 1994, the Company acquired certain assets and assumed
certain liabilities of NETstor, Inc. (NETstor), a developer of Hierarchical
Storage Management software products for the UNIX computer platform in the
network storage management market, for $1,150,000 of cash and $200,000 of
additional future contingent payments. The acquisition has been accounted for as
a purchase and the operating results of NETstor are included in the consolidated
statement of earnings from the date of acquisition. In connection with the
acquisition, the Company in FQ295 recorded a $547,000 expense for purchased
research and development and $94,000 of capitalized software, which is included
in other assets and is being amortized on a straight line basis over two years.
On March 30, 1995, the Company acquired the DataJET product line and
certain other assets and assumed certain liabilities of NetFRAME Systems, Inc.
(NetFRAME). DataJET is an image based, high performance software backup product
for NetWare file servers. Cheyenne made an $801,000 cash payment for DataJET and
will pay royalties to NetFRAME based on the Company's sales of products
utilizing the DataJET technology. The acquisition has been accounted for as a
purchase. In connection with the acquisition, the Company in FQ395 recorded a
$704,000 expense for purchased research and development.
The technological feasibility of the in-process technology related to
the NETstor and DataJET product acquisitions was not yet established at the
dates of acquisition and the technology has no alternative use.
Research & Development
- ----------------------
Cheyenne primarily develops its software products internally. However,
outside contractors and third party publishers are used for the development or
supply of software that provides certain aspects of some products.
Cheyenne's industry is characterized by rapid technological change,
resulting in continuing pressure for price/performance improvements in response
to advances in computer software and hardware technology. Cheyenne believes that
its future success will depend, in large part, on its ability to enhance and
develop its software products satisfactorily to meet specific market needs and
to maintain its technological leadership. As noted above, Cheyenne has
introduced products that function in many different operating system
environments. ARCserve(R) and related Cheyenne software products currently offer
users the ability to back up the data from Microsoft DOS, Windows and NT,
MacIntosh and certain UNIX workstations connected to a Novell NetWare network. A
substantial portion of Cheyenne revenues are derived from products that work in
the Novell NetWare network operating system environment. Novell faces increasing
competition from a number of sources in the network environment, including
Microsoft. Microsoft may enjoy certain competitive advantages over Novell, which
may enable Microsoft to compete effectively against Novell in the market for
network operating systems. As a result, sales of Cheyenne products into the
Novell network marketplace may be affected.
In FY95, Cheyenne began to ship a version of ARCserve(R) that operates
natively in the Microsoft NT environment, which offers users the ability to back
up data from Microsoft NT servers and workstations not connected to a Novell
NetWare network. Some of Cheyenne's competitors also offer native Microsoft NT
backup. The market for Microsoft NT backup products is in the early stages of
development and it is too soon to predict whether Cheyenne will obtain market
share in the NT market similar to the Company's market share in the NetWare
market. Cheyenne is also developing anti-virus and communications software
products for the NT marketplace. Failure to succeed in the NT market could have
a material adverse affect on Cheyenne's operating results, especially if NT
becomes the dominant network operating system.
10
Cheyenne has developed hierarchical storage management products for the
NetWare and UNIX markets. Cheyenne also continues to develop backup products
directed at the UNIX operating system environment, some of which natively
operate in those environments. UNIX operating systems are now increasingly
competitive with Novell NetWare and Microsoft NT operating systems. Cheyenne's
competitive position in these markets is presently insignificant, but is
expected by the Company to improve during the next few years.
There can be no assurance that Cheyenne's efforts to develop Microsoft
NT, additional UNIX and other products will be technologically successful, that
any resulting products will achieve market acceptance or that Cheyenne will
elect to develop software products for the operating environments that
ultimately are accepted by the marketplace. The failure to do so may have a
materially adverse affect on the Company.
The computer software industry has experienced delays in its product
development and 'debugging' efforts, and Cheyenne has experienced such delays
and could experience additional delays in the future. Significant delays in
developing, completing or shipping new or enhanced products and/or the inability
of such products to perform as expected could adversely affect Cheyenne in a
number of ways, including a loss of competitiveness of Cheyenne's products,
negative publicity and delayed purchasing decisions, and could, therefore,
adversely affect Cheyenne's financial results. Furthermore, it can be expected
that as products become more complex, development cycles will become longer and
more expensive.
Cheyenne intends to continue the use of strategic acquisitions to
provide certain technology for its overall product strategy. Cheyenne completed
two acquisitions during FY95 and anticipates the acquisition of other companies
and products in the future. In addition to the significant business risks
associated with acquisitions, which include the failure to combine the companies
in an efficient and timely manner, the failure to coordinate research and
development and sales efforts, the failure to retain key personnel and the
failure to integrate the acquired products into Cheyenne's product mix, Cheyenne
may incur significant acquisition expenses for legal, accounting and financial
advisory services and other costs related to the combination of the companies.
These costs, when added to the consideration paid to the Sellers, may have a
significant adverse impact on Cheyenne's profitability and financial resources.
The R&D staff at the end of FY95 increased to 130 engineers,
programmers and documentation specialists from 94 at the end of FY94. This group
is responsible for developing new software products and enhancing, documenting
and supporting existing software products. In addition, a group of 55
engineers/testers are employed in testing and quality control of Cheyenne
software products versus 32 last year.
Technical Support
- -----------------
The technical and customer support staff that is responsible for
training OEM customers, distributors, resellers and end-users, as well as
responding to all technical questions from customers throughout the world, now
numbers 136 employees versus 80 last year. The expenses associated with
technical support were reclassified at the end of FY95 from Research and
Development to cost of goods sold. Prior periods have been restated.
Sales and Marketing
- -------------------
Fluctuations in Purchasing Patterns
- -----------------------------------
Changes in purchasing patterns of one or more of Cheyenne's major
customers could result in material fluctuations in quarterly operating results.
Cheyenne's major customers are large, sophisticated businesses which make their
own independent purchasing decisions. The timing of new product announcements
and introductions by Cheyenne could also have an impact on the purchasing
patterns of Cheyenne's major customers. Typically, the personal computer
industry experiences some seasonal variations in demand, with weaker sales in
the summer months (FQ1) because of customers' vacations and planned shutdowns.
This seasonality is more pronounced in Europe.
11
Quarterly results are difficult to predict until the end of each
quarter and may fluctuate significantly from quarter to quarter. Substantially
all of Cheyenne's revenue in each quarter results from orders booked in that
quarter because lead times for delivery of Cheyenne's products are typically
very short. The difficulty in predicting quarterly revenues is also increased by
the fact that a high percentage of Cheyenne's revenues are earned in the third
month of each fiscal quarter and tend to be concentrated in the latter half of
that month.
Significant Customers
- ---------------------
One distributor accounted for greater than 10% of the Company's
revenues in FY95 (14%), FY94 (17%) and FY93 (14%). At June 30, 1995, this
customer accounted for 26% of Cheyenne's outstanding net trade accounts
receivable. The loss of this customer, or any of the other major distributors of
Cheyenne's products or their failure to pay for products purchased, could have a
material adverse affect on Cheyenne's operating results.
Returns and Exchanges; Price Protection
- ---------------------------------------
Like other manufacturers of computer software and hardware products,
Cheyenne is exposed to the risk of product returns and exchanges from its
distributors. Cheyenne's exchange policy generally allows its distributors,
subject to certain limitations, to exchange purchased products. Although certain
major distributors and OEM's have return rights, most of Cheyenne's contracts
provide for no or only limited return rights.
The risk of product returns and exchanges may increase if the demand
for new products introduced by Cheyenne is lower than Cheyenne anticipates at
the time of introduction. Should any new product experience a high rate of bugs
or performance difficulties, Cheyenne could experience product returns and
exchanges, unexpected warranty expenses and lower than expected revenues in a
particular quarter.
Individual end users may return products to Cheyenne through dealers
and distributors within 90 days from the date of purchase. Cheyenne offers a 30
day money back guarantee for certain direct purchases from Cheyenne by
individual end users. Such returns have historically been minimal.
Although Cheyenne believes that it provides an adequate allowance for
sales returns and exchanges in its financial statements, there can be no
assurance that actual sales returns and exchanges in the future will not exceed
Cheyenne's allowance. Product returns or exchanges materially in excess of
recorded allowances could result in a material adverse affect on operating
results. In FY95, Cheyenne increased the allowance for sales returns and
exchanges due to, among other things, new product releases and product upgrades
in FY95.
Cheyenne is also exposed to the impact on its distributors of list
price reductions by Cheyenne of its products. As with many other suppliers,
Cheyenne provides many of its distributors with some price protection in the
event that Cheyenne reduces the list price of its products. Distributors are
usually offered some credit for the impact of a list price reduction on the
expected revenue from Cheyenne's products in the distributors' inventories at
the time of the price reduction. Through June 30, 1995, there have been no price
reductions on Cheyenne products and therefore no credits have been issued for
list price reductions. However, there can be no assurance that in the future
there will not be credits for price protection.
New Channels
- ------------
As noted above, a substantial portion of Cheyenne's revenues are
derived from products that function in a Novell NetWare operating environment.
Cheyenne has introduced products that work in different operating environments,
such as Microsoft NT, UNIX and MacIntosh. Some of these type products are not
sold in Cheyenne's traditional channel of distribution. The success of these
products will therefore in part be determined by Cheyenne's ability to develop
and maintain relationships with new channels of distribution. There can be no
assurance that Cheyenne will be able to develop these relationships or that such
relationships, if developed, will be successful.
12
Cheyenne at the end of FY95 had 205 full time employees devoted to its
worldwide sales and marketing activities versus 153 people last year. In
addition, four of the Company's senior executives spend a significant portion of
their time supporting this activity.
Cheyenne participated in more than 200 trade shows and similar events
around the world in FY95 and advertised in many of the industry trade journals.
New brochures, new product packaging designs and direct mail advertising
programs were also developed and utilized to support the sales campaigns during
FY95.
Competition
- -----------
Cheyenne operates in a highly competitive market for computer software
products. The success of a product depends upon two factors: (i) the fundamental
quality of the product, i.e., whether it carries out the functions that the user
expects, smoothly and efficiently; and (ii) the strength of the company
marketing and supporting the product. Management is confident that Cheyenne
produces high quality products, as demonstrated by the fact that the products
which have come to market continue to be favorably reviewed by trade
publications and to achieve growing acceptance by major OEM accounts,
distributors and end-users.
The market for network backup computer software is becoming more
competitive. This competition is likely to intensify as current competitors
expand their product lines and/or enter into relationships with large companies
and new companies enter the market. While the Company believes its products are
still technologically superior to the competition, many competitors now offer
features once only offered by Cheyenne and offer some features not offered by
Cheyenne. Novell, Microsoft, IBM and other network operating systems vendors may
also offer increased backup functionality in future versions of their respective
products. In such event, the market for Cheyenne's ARCserve(R) could be
materially adversely impacted.
While discounts are typically granted from the suggested retail price
for most computer software, price competition has not been a major factor to
date in the high performance end of the network backup software business in
which Cheyenne primarily competes, although price competition in that segment of
the market has increased. Significant price competition currently exists in the
low performance sector of that market. In FY94, Cheyenne introduced an OEM
network backup product into the low performance sector. The introduction of this
product into the low performance sector may have adversely affected sales of
Cheyenne's high performance product. Cheyenne believes that price competition,
with its attendant reduced profit margins, may also emerge as a more significant
factor in the high performance sector. Some of Cheyenne's competitors also have
significantly greater financial resources, research and development, marketing
resources and customer support organizations than Cheyenne.
The competitors of Cheyenne include computer companies which develop
software for use with their own equipment and software development companies
such as Novell, Inc., Computer Associates International, Inc., IBM, Palindrome,
a subsidiary of Seagate Corporation, Sterling Software, Symantec Corporation,
Tecmar, EMC Corp., Microsoft Corp., Arcada Software, a subsidiary of Connor
Peripherals, Intel, Legato Systems, Inc. and other software developers. Some of
these competitors license and distribute Cheyenne technology.
Proprietary Information, Patents and Trademarks
- -----------------------------------------------
Cheyenne currently relies on copyright, trade secret and trademark law,
as well as provisions in its license, distribution and other agreements in order
to protect its intellectual property rights. Cheyenne has registered certain
patents in the United States and has other United States patents pending and
intends to file further patent applications. No assurance can be given that any
Cheyenne patent will provide protection for Cheyenne's competitive position or
that the patents pending will be issued or, if issued, will provide protection
for Cheyenne's competitive position. Although Cheyenne intends to protect patent
rights vigorously, there can be no assurance that these measures will be
successful. Additionally, no assurance can be given that the claims on any
patents held by Cheyenne will be sufficiently broad to protect Cheyenne's
technology.
In addition, no assurance can be given that any patents issued to
Cheyenne will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide competitive advantages to Cheyenne. The loss of
patent protection
13
on Cheyenne's technology or the circumvention of its patent protection by
competitors could have a material adverse effect on Cheyenne's ability to
compete successfully in its business.
The software industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. Cheyenne believes that
its products, trademarks and other proprietary rights do not infringe on the
proprietary rights of third parties. There can, however, be no assurance that
third parties will not assert claims against Cheyenne with respect to existing
or future products or that licenses will be available on reasonable terms, or at
all, with respect to any third party technology. Cheyenne receives such claims
from time to time. In the event of litigation to determine the validity of any
third party claims, such litigation could result in significant expense to
Cheyenne and divert the efforts of Cheyenne's technical and management
personnel, whether or not such litigation is determined in favor of Cheyenne.
In the event of an adverse result in any such litigation, Cheyenne
could be required to expend significant resources to develop non-infringing
technology or to obtain licenses to the technology which is the subject of the
litigation. There can be no assurance that Cheyenne would be successful in such
development or that any such licenses would be available. In addition, the laws
of certain countries in which Cheyenne's products are or may be developed,
manufactured or sold may not protect Cheyenne's products and intellectual
property rights to the same extent as the laws of the United States.
As set forth and further disclosed in Item 3 (Legal Proceedings),
Cheyenne (along with some of its competitors) is the subject of a patent
litigation suit.
Executive officers and employees have agreed to assign to Cheyenne
certain technical and other information and patent rights, if any, acquired by
them during their employment by Cheyenne. Executive officers and employees have
also agreed not to use or disclose any confidential information for a period of
at least one year following the termination of their employment.
Cheyenne applied for and received Federal Trademark Registrations for
Cheyenne(R) in 1986, for ARCserve(R) and Monitrix(R) in FY90, for InocuLAN(R) in
FY94 and for ARCsolo(R) in FY95. Certain other Cheyenne marks have been
registered or applied for registration in the United States and other countries.
Employees
- ---------
As of June 30, 1995, Cheyenne employed 621 persons, consisting of 15 in
production, shipping and receiving, 130 engineers, programmers and documentation
specialists, 55 engineers/testers responsible for quality assurance, 136
employees providing technical and customer support, 205 in Sales and Marketing
(including Europe), 59 in administration and accounting and 21 full time
employees at Cheyenne KK in Tokyo. Last year, the Company employed a total of
430 persons on a worldwide basis. None of Cheyenne's employees are represented
by a labor union. Cheyenne considers its relations with its employees to be
satisfactory.
Past Relationships
- ------------------
Cheyenne entered into the microcomputer distribution business in
July 1987 via the acquisition of F.A. Computer Technologies, Inc. which then
sold shares to the public in 1988 and then merged with Gates Distributing,
Inc., forming Gates/FA Distributing, Inc. ("Gates/FA").
In a secondary offering, Cheyenne sold 801,710 common shares of
Gates/FA on June 17, 1992. The Company sold an additional 100,000 common shares
of Gates/FA on February 3, 1993. At that time, Cheyenne's ownership of Gates/FA
was reduced from 49% to 21.35% of the outstanding shares of common stock of
Gates/FA. Thereafter, Cheyenne reflected its investment in Gates/FA in its
consolidated financial statements using the equity method of accounting. On
August 29, 1994, Cheyenne exchanged its remaining 1,348,290 shares of Gates/FA
common stock for 798,996 common shares of Arrow Electronics, Inc. ("Arrow"), a
public company. In FY95, the contribution to net income from the Gates/FA equity
ownership was therefore only approximately 0.2% of net income.
14
The Arrow transaction qualified as a tax-free exchange and resulted in
a pre-tax gain of $21,232,000 for financial reporting purposes. After the
transaction, Cheyenne owned approximately 2% of Arrow's outstanding common
stock. The Company therefore accounted for its investment in Arrow common stock
under the cost method of accounting. In FY95, Cheyenne sold its 798,996 shares
of Arrow common stock for $30,324,000, which resulted in a net loss of $11,000.
Item 2 Properties
- ----------------------
The main offices of Cheyenne were moved from 55 Bryant Avenue, Roslyn,
New York to 3 Expressway Plaza, Roslyn Heights, New York during FY93. Due to the
Company's rapid expansion, the original lease at 3 Expressway Plaza for 33,000
square feet has been expanded to 44,000 square feet. The basis of the new master
lease for 3 Expressway Plaza started January 1, 1993. As of June 30, 1994, the
average annual rental expense for the remaining four and a half year term is
approximately $1,049,000 per year, exclusive of electricity, certain real estate
tax escalations and other related costs.
In FY95, Cheyenne entered into a lease for a building located at 2000
Marcus Avenue, Lakes Success, New York. The facility is 100,000 square feet. The
lease commenced on June 1, 1995 and the average annual rental expense for the
seven year term is $1,316,000 per year, exclusive of electricity, certain real
estate taxes, escalations and other related costs.
The Company leases additional facilities, including facilities in
Atlanta, Chicago, Austin, Dallas, Miami, Seattle, San Diego, Fremont,
Minneapolis, and Canada, France, Germany, the United Kingdom, Japan, Brazil,
Mexico, Taiwan and Singapore.
Item 3 Legal Proceedings
- ----------------------------
Neither Cheyenne nor any of its subsidiaries is a party to any material
pending legal proceedings, other than routine litigation incidental to the
business, and other than as set forth below:
1) Coldata, Incorporated v. Cheyenne Software, Inc.
------------------------------------------------
An action was commenced in July 1991, in the Supreme Court of the State
of New York, County of Nassau, entitled "Coldata, Incorporated v. Cheyenne
Software, Inc." Coldata, Incorporated ("Coldata") alleged, among other things,
that Cheyenne failed to complete the detailed design specifications and
implementation schedule for the development of a particular computer program
(called "CAAMS"), and therefore, breached the agreement between the parties.
Coldata also alleged that Cheyenne breached its fiduciary duties to Coldata by
failing to develop and market CAAMS and by its participation in other unrelated
software projects to the exclusion of Coldata.
On February 17, 1995, the parties settled this lawsuit and Cheyenne, in
connection therewith, paid Coldata $170,000. Neither party admitted any
liability in connection with the settlement.
2) In re Cheyenne Software, Inc. Securities Litigation
---------------------------------------------------
Master File No. 94 Civ. 2771 (TCP)
On or about June 11, 1994, a securities fraud class action complaint,
entitled Bell v. Cheyenne Software, Inc., et al., was filed in the United States
---------------------------------------
District Court for the Eastern District of New York. The lawsuit names as
defendants the Company and several of its officers and directors. In the
following weeks, several other similar lawsuits were filed in the Eastern
District of New York. The actions allege securities fraud claims under Sections
10(b) and 20 of the Securities Exchange Act of 1934, and seek compensatory
damages on behalf of all the shareholders who purchased shares between
approximately January 24, 1994 and approximately June 17, 1994, as well as
attorneys' fees and costs. The gravamen of the actions is that the Company and
the individual defendants made misrepresentations and omissions to the public,
which caused the Company's stock to be artificially inflated. The suits rely on
what is known as the "fraud on the market" theory of liability.
On July 20, 1994, the Court ordered that all of the actions be
consolidated under the caption of In re Cheyenne Software, Inc. Securities
----------------------------------------
Litigation. On March 8, 1995, plaintiffs filed an Amended Complaint. On
- ----------
March 23, 1995, plaintiffs served a Motion
15
for Class Certification. The Company has contested certain aspects of that
Motion, and the Court has yet to issue a ruling. On April 11, 1995, the Company
served a Motion to Dismiss certain of the claims alleged in the Amended
Complaint. The Motion to Dismiss is expected to be heard in Fall, 1995.
The defendants deny any and all liability and intend to vigorously defend
against the claims.
3) Rand v. Oxenhorn, et al.
------------------------
Delaware Chancery Court (New Castle County) No. 13583
On or about June 27, 1994, a shareholder derivative complaint, entitled
Rand v. Oxenhorn, et al., was filed in the Court of Chancery for the State of
- ------------------------
Delaware in and for New Castle County. The lawsuit, purportedly filed
derivatively on behalf of the Company, names as defendants eleven of its present
or former officers and directors. The complaint's factual allegations are
similar to those of In re Cheyenne Software, Inc. Securities Litigation
---------------------------------------------------
described above. However, instead of securities fraud claims, the action alleges
that the defendants breached their fiduciary obligations to the Company. The
suit seeks a variety of compensatory damages as well as attorneys fees.
On August 19, 1994, the defendants filed a motion to dismiss on the
grounds that (1) the plaintiff failed to comply with the pleading and demand
requirements of a derivative action and (2) the pleadings fail to state a claim
upon which relief may be granted. On October 14, 1994, and before defendants'
motion to dismiss was ruled on, an amended complaint was filed only naming as
defendants six of Cheyenne's officers or directors. Cheyenne filed a motion to
dismiss the Amended Complaint on the same grounds listed above on February 16,
1995.
The defendants deny any and all liability and intend to vigorously defend
against the claims.
4) SEC Formal Private Investigation
--------------------------------
On June 28, 1994, the SEC commenced an informal inquiry into Cheyenne.
On or about April 14, 1995, the SEC advised the Company that it had issued a
Formal Order of Private Investigation of the Company. The Private Investigation
is a continuation of the informal inquiry. The Formal Order, among other things,
enables the SEC to utilize its subpoena powers to obtain relevant information
from third parties as well as the Company. The Private Investigation relates to
possible violations of federal securities laws. The Company has been cooperating
and will continue to cooperate fully with the SEC.
5) JWANCO, Inc., et al. v. Cheyenne Software, Inc. et al.
------------------------------------------------------
California Superior Court (County of Alameda) No. H-183331-1
On or about May 2, 1995, plaintiffs JWANCO, Inc. (formerly known as Bit
Software, Inc.), Jonathan Wan, Yau Ki Chuck, Norman Chan, David Law and David
Wong filed an action in the Superior Court of California in and for the County
of Alameda against the Company, Cheyenne Communications, Inc., a wholly owned
subsidiary of the Company, and several of its officers, directors and employees.
The action alleges breach of contract, fraud, wrongful termination, negligent
infliction of emotional distress, and a number of other related torts. The
essence of the allegations is that the defendants breached agreements and
defrauded JWANCO, Inc., and the individual plaintiffs in connection with the
Company's acquisition of certain assets and assumption of certain liabilities of
Bit Software, Inc. on May 19, 1994. These allegations are substantially similar
to those In re Cheyenne Software, Inc. Securities Litigation described above. In
---------------------------------------------------
addition, the Complaint alleges, on behalf of plaintiff Jonathan Wan only,
wrongful termination and a variety of other causes of action relating to the
employment and termination of the employment of Jonathan Wan by Cheyenne
Communications. The defendants have removed the action to the United States
District Court, and have moved to transfer it to New York. Management of the
Company, based on advice of outside legal counsel, does not believe that the
ultimate resolution of this lawsuit will have a material adverse affect on the
financial position or results of operations of the Company.
Although no answer has yet been filed, the defendants deny any and all
liability and intend to vigorously defend against the claims.
16
6) PCPC v. Cheyenne Software, Inc.
-------------------------------
United States District Court (District of Delaware) Case No.
On May 19, 1995, Personal Computer Peripherals Corporation ("PCPC")
filed a lawsuit in the United States District Court for the District of
Delaware, Case No. 95-301(SLR), naming Cheyenne, Legato Systems, Inc., Arcada
Software, Artisoft, Palindrome (a subsidiary of Seagate) and Symantec as
defendants. PCPC alleges infringement of patent No. 5,135,065, entitled "Backup
Computer Program for Networks" issued to PCPC on July 21, 1992. PCPC is seeking
an injunction against infringement of its patent, treble damages, attorneys'
fees and other damages. On July 10, 1995, Cheyenne answered the complaint and
denied any and all liability. Cheyenne intends to vigorously defend against the
claims. Management of the Company, based on advice of outside legal counsel,
does not believe that the ultimate resolution of this lawsuit will have a
material adverse affect on the financial position or results of operations of
the Company.
Item 4 Submission of Matters to a Vote of Security Holders.
- ----------------------------------------------------------------
None.
17
PART II
-------
Item 5 Market for Registrant's Common Stock and Related Matters
- -------------------------------------------------------------------
(a) Commencing March 20, 1990, the Registrant's common stock was traded
on the American Stock Exchange (the "AMEX") under the symbol of "CYE". From July
7, 1986, through the opening of business on March 28, 1994, the common stock was
listed on the Pacific Stock Exchange under the symbol "CYE". From October 3,
1985 through March 20, 1990, the common stock was quoted on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) under the
symbol "CHEY".
The following table sets forth the high and low sales prices for the
period July 1, 1993 through June 30, 1995, as reported by the AMEX. The high and
low sales prices for the period July 1, 1993 through June 30, 1995 have been
adjusted to reflect the 1994 Stock Split paid on March 29, 1994 (as described
below).
QUARTER ENDED HIGH LOW
------------- ---- ---
September 30, 1993 $ 26.83 $ 19.25
December 31, 1993 25.58 17.67
March 31, 1994 30.33 16.92
June 30, 1994 28.38 7.00
September 30, 1994 $ 13.38 $ 7.75
December 31, 1994 13.88 9.13
March 31, 1995 17.75 13.25
June 30, 1995 20.00 12.38
At a meeting held on February 10, 1994 (the "1994 Stock Split") and a
meeting held on February 23, 1993 (the "1993 Stock Split"), the Board of
Directors of Cheyenne declared separate three-for two stock splits payable in
the form of 50% stock dividends with respect to the issued and outstanding
shares of common stock. The 1994 Stock Split was paid on March 29, 1994 to
stockholders of record at the close of business on March 1, 1994 and the 1993
Stock Split was paid on April 8, 1993 to stockholders of record at the close of
business on March 12, 1993.
No fractional shares were distributed in connection with either stock
split. Each stockholder of record whose total number of shares was not exactly
divisible by two, received cash in lieu of fractional shares. The cash was in an
amount equal to one-half of the fair market value of a share of common stock
after giving effect to the stock split. Such market value was determined on the
basis of 66-2/3% of the closing price of Cheyenne's Common Stock reported for
the American Stock Exchange composite transactions on each record date.
(b) As of September 20, 1995, the number of holders of record of the
Company was 877.
(c) Cheyenne has never paid a cash dividend on its common stock. The
declaration and payment of future cash dividends by Cheyenne will be determined
by the Board of Directors in light of conditions then existing, including
Cheyenne's earnings, financial condition, capital requirements, and other
circumstances. It is the present policy of Cheyenne's Board of Directors to
retain cash and any earnings for the operation and expansion of the Company and,
therefore, it is not anticipated that cash dividends will be paid on its common
stock in the foreseeable future even if legally permissible.
(d) On February 23, 1995, Cheyenne announced that the Board of
Directors had authorized management to purchase up to 4,000,000 shares of the
Company's outstanding common stock. Purchases are dictated by overall financial
and market conditions and other factors affecting the operations of the Company.
18
During FY95, Cheyenne purchased 2,035,000 shares of its common
stock for approximately $30,458,000, at prices ranging from approximately $13.50
to $17.25 per share.
Item 6 Selected Financial Data (2)
- --------------------------------------
The following information has been summarized from the Registrant's
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K and should be read in connection with such consolidated financial
statements and the related notes thereto.
Year Ended June 30
-------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)
Statement of Operations Data (1)
Revenues $127,927 $97,737 $56,694 $22,353 $ 8,193
Net Income (3) $38,504 $32,538 $20,650 $ 8,833 $ 2,089
Income Before Extraordinary Credit
Per Share (3) .97 .82 .53 .17 .05
Net Income Per Share (3) .97 .82 .53 .24 . 06
June 30
-------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data
- ------------------
Total Assets $129,394 $115,387 $65,741 $29,743 $14,461
Working Capital $57,786 $87,378 $48,589 $18,695 $ 3,998
Shareholders' Equity $116,310 $105,071 $61,262 $26,825 $13,106
(1) All per share data have been restated for all periods
presented to reflect the payment on March 29, 1994, April 8,
1993 and March 25, 1992 of three-for-two stock splits.
(2) The acquisition of the net assets of Bit Software, Inc.
("Bit") in May, 1994 for 140,590 shares of common stock was
accounted for under the pooling of interests method and,
accordingly, prior year financial data have been restated to
include Bit's financial data.
(3) FY95 net income per share includes a one-time gain, net of
income taxes, of $.28 per share in connection with the
Company's exchange of 1,348,290 shares of Gates/FA common
stock for 798,996 shares of Arrow Electronics common stock.
19
Item 7 Management's Discussion and Analysis of Financial Condition and
- ----------------------------------------------------------------------------
Results of Operations
---------------------
Despite lower than expected sales in FQ195, sales for FY95 increased
31%. Operating income as a percentage of sales in FY95 (30%) fell from FY94
(46%). This decrease resulted from an increase in operating expenses of 68% over
the same time period, primarily consisting of increased expenditures for
research and development and selling and marketing. The Company views these
expenditures as strategic investments necessary to expand product offerings and
to increase market acceptance and penetration of its products.
Such investments are further necessitated by increased competition.
Cheyenne has several key competitors, many of which compete with Cheyenne only
in specific segments of the market for network essentials. Cheyenne competes
across many segments of the network data storage management market, as well as
certain segments of the network security and network communications markets.
Development of these markets requires significant resources. The Company
believes these investments in broader market segments will result in long term
competitive advantages and establish Cheyenne as a leader in this overall market
and further establish Cheyenne as the leader in the enterprise network backup
market.
One of the greatest challenges for Cheyenne is to respond quickly and
effectively to market changes. The expected significant growth of Microsoft
NT network operating systems will affect the market for Cheyenne's products.
The Company has proven itself as the leader in the NetWare network operating
systems backup market. The Company now intends to be a major factor in the NT
market and also to increase its presence in the UNIX markets as well as
maintaining its leadership position in the NetWare market.
An important change in the software industry also continues. Presently,
almost all software products are delivered in shrink-wrapped packages. New
techniques, such as electronic distribution (bulletin boards) and CD-ROM are
being increasingly considered as the mechanism to deliver software products to
the end-user. It is possible that, during this potential transition phase,
software revenues may be negatively affected on a short-term basis. Cheyenne
experienced such a negative affect on revenues in the first quarter of FY95 when
one of its key OEM customers began distribution of Cheyenne and other software
products on CD-ROM. Other customers are considering such methods which could
create further short-term fluctuations in revenue.
Market changes create opportunity for the Company. It also creates
increased volatility as success is dictated by successful development and market
acceptance of new products and responding to changes in distribution mechanisms.
Cheyenne is confident that its strong technology and market acceptance will
result in continued long term success.
Results of Operation
- --------------------
The following table includes a summary of each item from the consolidated
statements of earnings as a percentage of revenues. Please refer to this table
while reading the following discussion.
20
TABLE 1
-------
Comparison FY95 v FY94 v FY93
(in thousands except per share data)
FY95 FY94 FY93
---- ---- ----
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Revenues $127,927 100% $ 97,737 100% $ 56,694 100%
Cost of Sales 21,690 16.95% 11,641 11.91% 6,850 12.08%
------ ------ ------ ------ ----- ------
Gross Profit 106,237 83.05% 86,096 88.09% 49,844 87.92%
Operating Expenses
Research & Development 15,174 11.86% 8,981 9.19% 4,805 8.48%
Sales & Marketing 41,222 32.22% 23,747 24.30% 9,891 17.45%
General & Administrative 10,784 8.43% 8,066 8.25% 6,658 11.74%
Charge for purchased R&D 1,251 0.98% 0 0.00% 0 0.00%
----- ----- - ----- - -----
Total Operating Expenses 68,431 53.49% 40,794 41.74% 21,354 37.67%
------- ------ ------- ------ ------- ------
Operating Income 37,806 29.55% 45,302 46.35% 28,490 50.25%
Non Operating Income:
Interest Income 3,437 2.69% 1,668 1.71% 871 1.54%
Other gains, net 21,431 16.75% 738 0.76% 400 0.71%
------ ------ --- ----- --- -----
Total Non-Operating Income 24,868 19.44% 2,406 2.46% 1,271 2.24%
Income before income taxes &
Equity in earnings of Gates/FA 62,674 48.99% 47,708 48.81% 29,761 52.49%
Provision for Income Taxes 24,255 18.96% 16,742 17.13% 10,510 18.54%
Equity in Earnings of Gates/FA 85 0.07% 1,572 1.61% 1,399 2.47%
-- ----- ----- ----- ----- -----
Net Income $38,504 30.10% $32,538 33.29% $20,650 36.42%
======= ====== ======= ====== ======= ======
Net Income per share* $0.97 $0.82 $0.53
===== ===== =====
Weighted average number of common shares and
equivalents outstanding 39,617 39,877 38,992
====== ====== ======
*All per share data has been restated for all periods presented to reflect
the payments on (i) April 8, 1993 of a three-for-two stock split and (ii)
March 29, 1994 of a three-for-two stock split.
21
Year Ended June 30, 1995 Compared to Year Ended June 30, 1994*
- --------------------------------------------------------------
Revenues
- --------
Cheyenne's revenues increased 31% in FY95 over FY94 to $127,927,000
from $97,737,000.
A detailed breakdown of sales is shown in Table 2
TABLE 2
-------
SOFTWARE SALES BREAKDOWN
FY95 % FY94 % FY93 % FY92 %
---- - ---- - ---- - ---- -
Distribution:
North America $41,089 32.1 $37,028 37.9 $15,785 27.8 $5,040 22.5
Europe 45,394 35.5 33,696 34.5 16,792 29.6 4,158 18.6
Rest of World 7,640 6.0 4,097 4.2 1,888 3.4 510 2.3
-------- --- -------- ----- ----- ----- ------ -----
Total Distribution $94,123 73.6 $74,821 76.6 $34,465 60.8 9,708 43.4
------- ---- ------- ---- ------- ---- ----- ----
Japan 7,828 6.0 2,341 2.4 725 1.3 65 0.3
OEM 15,295 12.0 13,335 13.6 13,308 23.5 7,890 35.3
Major Accounts 3,108 2.4 1,534 1.6 1,316 2.3 ----- -----
Direct and Other (US) 7,573 6.0 5,706 5.8 6,880 12.1 4,690 21.0
-------- --- --------- ----- -------- ------ -------- ------
Total $127,927 100% $97,737 100% $56,694 100% $22,353 100%
======== ==== ======= ==== ======= ==== ======= ====
As shown, North America Distribution sales increased 11% in FY95,
European Distribution sales increased 35%, Rest of World Distribution sales
increased 86% (from a low base) and sales to Japan grew 234% (from a low base).
The significant increase in distribution sales is attributed to an expanding LAN
market, better recognition and acceptance of Cheyenne products in the LAN
marketplace, a broader product line, the addition of new distributors,
particularly international distributors, and the increased availability of
foreign language-translated products. OEM sales increased 15% in FY95, but
decreased as a percentage of consolidated sales to 12.0% in FY95 from 13.6% in
FY94. Cheyenne distributors around the world are now offering the Company's
software products in configurations similar to, and competitive with, those
offered by the OEM channel. This trend resulted in increased sales to Cheyenne
distributors at the expense of OEM sales. Major Account sales were up 103%, as a
result of increased penetration into Fortune 1000 companies. The Company
believes that its salespersons also initiated significant sales to Major Account
customers that were booked and handled by Cheyenne resellers and distributors
and thus were classified as Distribution sales.
Please Refer to Table 1
- -----------------------
Gross Profit
- ------------
Gross profit represents revenues less cost of sales. In FY95, technical
support costs were reflected in cost of sales rather than Research & Development
as in previous periods. All past periods have been restated to make them
comparable with FY95. Cost of sales consists primarily of technical support
costs, production costs, manuals, packaging, order fulfillment, product costs,
shipping costs and royalties paid (when applicable) to third parties under
licensing agreements. The gross profit margin decreased to 83.0% in FY95 from
88.1% in FY94, primarily due to a significant increase in technical support
costs. Excluding technical support costs, FY95 versus FY94 gross margins would
have been 90.3% versus 91.0%.
22
Purchased Research and Development
- ----------------------------------
In connection with the acquisition of NETstor, Inc., the Company
recorded a $547,000 expense for purchased research and development in FQ295. In
connection with the acquisition of the DataJET product line from NetFRAME
Systems, Inc., the Company recorded a $704,000 expense for purchased research
and development in FQ395. The technological feasibility of the in-process
technology was not yet established at the dates of acquisition and the
technology had no alternative use.
Research & Development ("R&D")
- ------------------------------
R&D expenses increased 69% in FY95 versus FY94. Since sales only
increased 31%, R&D as a percentage of sales increased from 9.2% in FY94 to 11.9%
in FY95. The increase was due to the Company's significantly broader product
line that must be further developed and supported by Cheyenne's engineering and
technical personnel. Therefore, additional engineers were added during FY95. The
percentage increase in R&D was much greater than the percentage sales increase
since developing new and enhancing existing products has become an increasingly
more sophisticated and complicated task, requiring even higher manpower levels.
The Company believes this investment in a large R&D staff will provide a
long-term competitive advantage.
Selling and Marketing Expenses
- ------------------------------
Selling expenses increased 74% in FY95 over FY94 and increased as a
percentage of sales to 32.2% from 24.3%. The increase was mainly due to
additional sales and marketing personnel, particularly in Europe, where less
sales support from the Company's traditional distributors is anticipated as new
distributors enter this market competing more on price and less on service.
Also, expanded marketing programs and promotions and increased expenditures on
direct sales to end-users of upgrades, etc. were factors in the increase.
General and Administrative Expenses (G&A)
- -----------------------------------------
G&A expenses include the costs of the finance department, human
resources, legal, audit, reception, office and facilities management, rent,
utilities, employee benefits, depreciation and amortization, etc. G&A expenses
increased 34% in FY95 over FY94, and slightly increased as a percentage of sales
to 8.4% from 8.3%. The main factor was increases in legal fees arising from the
class action securities litigation and the SEC Formal Private Investigation.
Higher depreciation costs were also incurred, due to increases in investments
in capital equipment and facilities throughout the world. The cost of an
expanded intellectual property protection program and start-up costs in new
countries were also factors in increased G&A expenses.
Interest Income
- ---------------
Interest income for the year increased to $3,437,000 up from $1,668,000
in FY94. The gain was due to increased cash, cash equivalents and investment
balances, most of which was generated from operations, and the exercise of stock
options. Cash, cash equivalents and investments grew to $71,435,000 at June 30,
1995 from $69,431,000 at the end of FY94. The Company employs the services of
three outside fixed income investment managers to manage its portfolio of mainly
tax exempt bonds.
23
Other Gains
- -----------
In connection with its sale of Gates F/A shares, Cheyenne realized
a pre-tax gain of $21,232,000 in FQ195 for financial reporting purposes.
Provision for Income Taxes
- --------------------------
The provision for income taxes for FY95 was $24,255,000 or 38.6% of
pretax income. Excluding the Federal and State increases in the rate due to
the excess tax gain on the sale of Gates/FA shares, the effective income tax
rate for FY95 would have been approximately 34%. Such rate is lower than the
combined Federal and State statutory rate due mainly to the benefits from the
Company's Foreign Sales Corp. (FSC), tax exempt investment income and R&D tax
credits.
Equity in Earnings of Gates/FA
- ------------------------------
The equity in earnings of Gates/FA in FY95 was $85,000 versus
$1,572,000 in FY94, because in FQ195, Cheyenne exchanged its 1,348,290 shares of
Gates/FA common stock for 798,996 shares of Arrow common stock. Prior to its
sale of the Arrow shares, Cheyenne accounted for its Arrow investment under the
cost method of accounting.
Per Share Data
- --------------
The net income per share in FY95 was $0.97 per share, including a one
time net gain, net of income taxes, of 26 cents per share, as a result of the
exchange of Gates/FA shares for Arrow shares and the write-off of purchased R &
D related to the two acquisitions in FY95, versus $0.82 per share in FY94. The
weighted average number of common shares and equivalents outstanding decreased
to 39,617,000 shares versus 39,877,000 shares last year. The number of shares
decreased mainly due to the share repurchase program discussed above, although
this was offset by an increase in shares due to stock option exercises, new
stock option grants and the increase in share price in FY95.
Year Ended June 30, 1994 Compared to Year Ended June 30, 1993*
- --------------------------------------------------------------
Please refer to Table 1 and Table 2.
Revenues
- --------
Cheyenne's revenues increased 72% in FY94 over FY93 to $97,737,000 from
$56,694,000. As previously mentioned, the Company's results have been restated
for the acquisition in May, 1994 of Bit Software, Inc. accounted for as a
pooling of interests. The increase in revenues in FY94 was primarily for the
same reasons noted for FY95.
Gross Profit
- ------------
After reclassification of technical support expenses to cost of sales
in FY94 and FY93, the gross profit margin increased to 88.1% in FY94 from 87.9%
in FY93.
Research & Development
- ----------------------
After reclassification of technical support expenses to cost of sales
in FY94 and FY93, R&D expenses increased 87% in FY94 versus FY93. Since sales
only increased 72%, R&D as a percentage of sales increased from 8.5% in FY93 to
9.1% in FY94. The increase was due to the Company's significantly broader
product line that must be further developed and supported by Cheyenne's
engineering and technical personnel. Therefore, additional engineers were added
during FY94. The percentage increase in R&D and technical personnel was much
greater than the percentage sales increase since developing new and enhancing
existing products has become an increasingly more sophisticated and complicated
task, requiring even higher manpower levels.
Selling and Marketing Expenses
- ------------------------------
Selling expenses increased 140% in FY94 over FY93 and increased as a
percentage of sales to 24.3% from 17.4%. The increase was mainly due to
additional sales and marketing personnel.
24
General and Administrative Expenses (G&A)
- -----------------------------------------
G&A expenses increased 21% in FY94 over FY93, but decreased as a
percentage of sales to 8.2% from 11.7%. The main reason for the decrease was
that many G&A expense items such as rent, telephone and utilities which were
fully charged to G&A in past years, were also allocated to R&D and Selling and
Marketing expenses in FY94 due to the increased significance of these functions.
If this expense allocation change was also made to FY93 amounts, the G&A
percentage for FY93 would have been similar to the percentage for FY94. Legal
and accounting expenses relative to the Bit acquisition are included in FY94
expenses, and depreciation and amortization in FY94 increased to $1,792,000
versus $802,000 in FY93. The increase was due to expenditures relating mainly to
the purchase of computers, test equipment and furniture and fixtures in expanded
offices throughout the world.
Interest Income
- ---------------
Interest income for FY94 increased to $1,668,000 up from $871,000 in
FY93. The gain was due to increased cash, cash equivalents and investment
balances, most of which was generated from operations, and the exercise of stock
options. Cash, cash equivalents and investments grew to $69,431,000 at June 30,
1994 from $36,101,000 at the end of FY93.
Other Gains
- -----------
During FQ494, the Company settled a lawsuit with Legato Systems, Inc.
for $649,000, net of related expenses, arising out of an advertisement placed by
Legato. In addition, the Company had an insignificant gain from the sale of
shares in a minor investment. The gain in FY93 relates to the gain on the sale
of a portion of the Company's investment in Gates/FA.
Provision for Income Taxes
- --------------------------
The provision for income taxes for FY94 was $16,742,000 or 34.0% of
pretax income. This effective income tax rate was lower than the expected
Federal and State effective rate of approximately 38% due mainly to the benefit
from the Foreign Sales Corp. (FSC) the Company formed on July 1, 1992, tax
exempt investment income and R&D tax credits.
Equity in Earnings of Gates/FA
- ------------------------------
The equity in earnings of Gates/FA in FY94 was $1,572,000 versus
$1,399,000 in FY93.
Per Share Data
- --------------
The net income per share in FY94 was $0.82 per share versus $0.53 per
share in FY93. The weighted average number of common shares and equivalents
outstanding increased to 39,877,000 shares in FY94 versus 38,992,000 shares in
FY93. The number of shares increased mainly due to stock option exercises plus
shares issued in the Bit Software acquisition.
25
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company has no debt and $71,202,000 in cash, cash equivalents and
investments as of June 30, 1995. Cash, cash equivalents and investments
increased during FY95 due to cash generated from operations of $13,326,000
(net of an approximate $12,000,000 income tax payment related to the
sale of Arrow common stock) and $1,520,000 of cash received from the exercise
of employee stock options. All accounts payable are current, and accounts
receivable collections average about 77 days, versus 72 days at the end of
FY94. Net accounts receivables increased 34% versus FY94 on a sales increase
of 31%. Cheyenne received approximately $30,324,000 in cash in connection with
the sale of 798,996 shares of Arrow common stock in FY95. Cheyenne paid out
approximately $30,458,000 of cash in connection with the repurchase of
2,035,000 of its shares in FY95.
Capital expenditures were $10,974,000 in FY95 versus $5,290,000 in
FY94. The largest type of capital expenditure was for computers and software for
the Company's increased number of personnel. Cheyenne also made significant
investments in equipment, furniture, fixtures, test equipment, new computers,
new communications and MIS equipment on a worldwide basis. Further increases in
capital expenditures are expected in FY96 as the Company adds additional office
space and begins to utilize the facility at 2000 Marcus Avenue noted above.
Management believes its current cash and investment position coupled with
anticipated cash flow from operations, will be more than adequate to meet
anticipated cash requirements in FY96. No financing for current operations will
be required during the near future.
26
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 14 (a))
The following financial statements of the Registrant are
included in Item 8 and appear following Item 14:
Page
----
Report of Independent Auditors F - 1
Consolidated Balance Sheets:
June 30, 1995 and 1994 F - 2
Consolidated Statements of Earnings:
Years ended June 30, 1995, 1994 and 1993 F - 3
Consolidated Statements of Shareholders' Equity:
Years ended June 30, 1995, 1994 and 1993 F - 4
Consolidated Statements of Cash Flows:
Years ended June 30, 1995, 1994 and 1993 F - 5
Notes to Consolidated Financial Statements F - 6
The following Schedules are included in Part IV of this Report. Other
schedules are omitted because of (i) the absence of conditions
requiring the filing of such Schedules or (ii) the inclusion of the
applicable information in the consolidated financial statements
included in this Report.
Schedule II - Valuation and Qualifying Accounts S - 1
Item 9. Changes in and Disagreements with Accountants on
- ------- ------------------------------------------------
Accounting and Financial Disclosure.
------------------------------------
None.
27
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
- -------- ---------------------------------------------------
Incorporated herein by reference is the information to appear under the
caption "Election of Directors" in the Registrant's definitive proxy statement
for its Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission not later than October 30, 1995.
Item 11. Executive Compensation.
- -------- -----------------------
Incorporated herein by reference is the information to appear under the
caption "Executive Compensation" in the Registrant's definitive proxy statement
for its Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission not later than October 30, 1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------- ---------------------------------------------------------------
Incorporated herein by reference is the information to appear under the
caption "Principal Stockholders; Shares Held by Management" in the Registrant's
definitive proxy statement for its Annual Meeting of Stockholders, which will be
filed with the Securities and Exchange Commission not later than October 30,
1995.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
Incorporated herein by reference is the information to appear under the
caption "Certain Transactions" in the Registrant's definitive proxy statement
for its Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission not later than October 30, 1995.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- ------- ---------------------------------------------------------------
(a) The following documents are filed as part of this
Report:
1. Consolidated Financial Statements
---------------------------------
See the Index to Consolidated Financial
Statements included in Item 8 of this Report for a description of the
consolidated financial statements filed as part of this Report.
2. Financial Statement Schedules
-----------------------------
See the Index to Consolidated Financial
Statements included in Item 8 of this Report for a description of the financial
statement schedules filed as part of this Report.
3. Exhibits incorporated by reference or filed
with this Report:
Number Exhibits
- ----- --------
3.1 Certificate of Incorporation of Cheyenne, as amended. (See
Exhibit 4.1).
3.2 Restated By-laws of the Registrant, incorporated herein by
reference to Exhibit 2 to Cheyenne's Current Report on Form
8-K, dated December 2, 1986.
3.3 Restated By-Laws of Cheyenne as of October 7, 1993.
4.1 Certificate of Incorporation of Cheyenne, incorporated
herein by reference to Exhibit 3.1 to Cheyenne's
Registration Statement on Form S-1, No. 33-8113
("Cheyenne's 1986 Registration Statement").
4.2 Certificate of Amendment of the Certificate of
Incorporation of Cheyenne (increase in authorized
capital stock), incorporated herein by reference to
Exhibit 3.1 to Cheyenne's 1986 Registration Statement.
4.3 Certificate of Amendment of the Certificate of Incorporation
of Cheyenne (limited personal liability for Directors for
monetary damages) incorporated herein by reference to
Exhibit 1 to Cheyenne's Current Report on Form 8-K, dated
December 2, 1986.
4.4 Certificate of Amendment of the Certificate of Incorporation
of Cheyenne.
_10.1.3 Employment Agreement between Cheyenne and Eli Oxenhorn, dated
October 1, 1991.
@10.1.4 Amendment to Employment Agreement between Cheyenne and Eli
Oxenhorn, dated October 7, 1993.
<10.5.2 Employment Agreement between Cheyenne and Alan Kaufman, dated
January 1, 1993.
@10.5.3 Amendment to Employment Agreement between Cheyenne and Alan
Kaufman, dated October 7, 1993.
10.10 Incentive Stock Option Plan, incorporated herein by reference
to Exhibit 10.9 to Cheyenne's 1986 Registration Statement.
10.11 Form of Non-Qualified Stock Option, incorporated herein by
reference to Exhibit 10.10 to Cheyenne's 1986 Registration
Statement.
+10.13.3 Letter Agreement, dated September 19, 1990, between Cheyenne
and Bartony Realty, for additional space at 55 Bryant
Avenue, Roslyn, New York.
^10.13.4 Letter Agreements, dated February 25, 1991 and June 3, 1991,
between Cheyenne and Dr. Richard Linchitz, for additional
space at 55 Bryant Avenue, Roslyn, New York.
_10.13.5 Lease, dated June 30, 1992, between Cheyenne and LKM
Expressway Plaza Limited Partnership, as amended.
29
<10.13.7 First Modification of Lease Agreement, dated February 1,
1993, between Cheyenne and LKM Expressway Plaza Limited
Partnership.
<10.13.8 Lease, dated August 31, 1993, between Cheyenne and Plaza
North Company.
@10.13.9 Second Modification of Lease Agreement, dated October 25,
1993, between Cheyenne and LKM Expressway Plaza Limited
Partnership.
<10.42.3 Employment Agreement between Cheyenne and Elliot Levine,
dated September 1, 1992.
@10.42.4 Amendment to Employment Agreement between Cheyenne and Elliot
Levine, dated October 7, 1993.
10.42.5 Amendment to Employment Agreement between Cheyenne and Elliot
Levine, dated October 24, 1994.
10.42.6 Amendment to Employment Agreement between Cheyenne and Elliot
Levine, dated August 30, 1995.
10.52 Cheyenne's 1987 Non-Qualified Stock Option Plan, incorporated
herein by reference to Cheyenne's Proxy Statement, Commission
File No. 1-9189, for the Annual Meeting of Stockholders held
on December 1, 1987.
10.53 Cheyenne's 1989 Incentive Stock Option Plan, incorporated
herein by reference to Cheyenne's Proxy Statement,
Commission File No. 1-9189, for the Annual Meeting of
Stockholders held on November 30, 1989.
^10.54 Employment Agreement between Cheyenne and ReiJane Huai,
dated September 5, 1991.
@10.54.1 Amendment to Employment Agreement between Cheyenne and
ReiJane Huai, dated October 7, 1993.
^10.55 Deferred Compensation Agreement between Cheyenne and Elliot
Levine.
^10.56 Cheyenne 401(K) Plan.
@10.57.1 Employment Agreement between Cheyenne and James P. McNiel,
dated May 4, 1992.
@10.57.2 Amendment to Employment Agreement between Cheyenne and James
P. McNiel, dated October 7, 1993.
<10.59 Deferred Compensation Agreement between Cheyenne and ReiJane
Huai.
<10.61 Employment Agreement between Cheyenne and Lisa Merkin, dated
September 27, 1993.
10.62 Cheyenne's 1992 Stock Option Plan for Outside Directors,
incorporated by reference to Exhibit C to Cheyenne's Proxy
Statement, dated November 5, 1992, Commission File No.
1-9189, for the Annual Meeting of Stockholders held on
December 16, 1992.
<10.63 Cheyenne's 1987 Non-Qualified Stock Option Plan, as amended.
<10.64 Cheyenne's 1989 Incentive Stock Option Plan, as amended.
@10.65 Cheyenne Communications, Inc. 1993 Stock Option Plan for
Directors.
@10.66 Consulting and Noncompetition Agreement between Cheyenne and
Eli Oxenhorn.
10.67 Employment Agreement between Cheyenne and Michael B. Adler,
Esq., dated July 1, 1995.
10.68 Employment Agreement between Cheyenne and Yuda Doron, dated
June 8, 1995.
10.69 Employment Agreement between Cheyenne and Doris Granatowski,
dated November 16, 1994.
30
10.70 Lease Agreement between Cheyenne and Elan Associates, dated
December 20, 1994.
10.71 Cheyenne's 1987 Non-Qualified Stock Option Plan, as amended
during the fiscal year ended June 30, 1995.
10.72 Cheyenne's 1989 Incentive Stock Option Plan, as amended
during the fiscal year ended June 30, 1995.
21. Subsidiaries of the Company.
23. Consent of KPMG Peat Marwick LLP.
27. Financial Data Schedule.
/ Option information reflects three-for-two stock splits
effected on March 25, 1992, April 8, 1993 and March 29, 1994
by Cheyenne.
+ Incorporated herein by reference to the correspondingly
numbered Exhibit to Cheyenne's Annual Report on Form 10-K,
for the year ended June 30, 1990.
^ Incorporated herein by reference to the correspondingly
numbered Exhibit to Cheyenne's Annual Report on Form 10-K, for
the year ended June 30, 1991.
_ Incorporated herein by reference to the correspondingly
numbered Exhibit to Cheyenne's Annual Report on Form 10-K,
for the year ended June 30, 1992.
< Incorporated herein by reference to the correspondingly
numbered Exhibit to Cheyenne's Annual Report on Form 10-K,
for the year ended June 30, 1993.
@ Incorporated herein by reference to the correspondingly
numbered Exhibit to Cheyenne's Annual Report on Form 10-K,
for the year ended June 30, 1994.
_________________
(b) Reports on Form 8-K:
None
31
Independent Auditors' Report
----------------------------
Shareholders and Board of Directors
Cheyenne Software, Inc. and Subsidiaries:
We have audited the consolidated financial statements of
Cheyenne Software, Inc. and subsidiaries as listed in the
accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedule listed in the accompanying
index. These consolidated financial statements and
financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and
financial statement schedule 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 consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Cheyenne Software, Inc. and
subsidiaries as of June 30, 1995 and 1994 and the results of
their operations and their cash flows for each of the years
in the three-year period ended June 30, 1995 in conformity
with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in note 11(b) to the consolidated financial
statements, the Company is a defendant in a class action
lawsuit. The ultimate outcome of the litigation cannot
presently be determined. Accordingly, no provision for any
liability that may result upon adjudication has been
recognized in the accompanying consolidated financial
statements.
KPMG PEAT MARWICK LLP
Jericho, New York
August 18, 1995
F-1
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1995 and 1994
Assets 1995 1994
------ ---- ----
(In thousands)
Current assets:
Cash and cash equivalents $ 15,592 11,629
Short-term investments 15,088 57,802
Accounts receivable, less allowance for doubtful accounts
of $1,302,000 and $611,000, respectively 31,201 23,231
Deferred income taxes 1,400 --
Prepaid expenses and other current assets 6,218 3,983
-------- --------
Total current assets 69,499 96,645
Investment in Gates/FA -- 9,019
Long-term investments 40,522 --
Fixed assets, net 16,511 8,567
Other assets 2,862 1,156
-------- --------
Total assets $ 129,394 115,387
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable 5,962 3,679
Accrued expenses 5,751 2,984
Income taxes payable -- 2,604
-------- --------
Total current liabilities 11,713 9,267
Deferred income taxes 1,352 1,030
----- -----
Total liabilities 13,065 10,297
------ ------
Minority interest in subsidiary 19 19
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued -- --
Common stock, par value $.01 per share; 75,000,000 shares authorized;
39,313,861 and 38,785,915 shares issued and outstanding 393 388
Additional paid-in capital 53,008 50,085
Retained earnings 93,046 54,542
Foreign currency translation adjustment 464 56
Net unrealized loss on investments (143) --
Treasury stock, at cost; 2,035,000 shares (30,458) --
-------- --------
Total shareholders' equity 116,310 105,071
------- -------
Total liabilities and shareholders' equity $ 129,394 115,387
======== ========
See accompanying notes to consolidated financial statements.
F-2
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended June 30, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
(In thousands, except per share data)
Revenues $ 127,927 97,737 56,694
Cost of sales 21,690 11,641 6,850
------- ------ ------
Gross profit 106,237 86,096 49,844
------- ------ ------
Operating expenses:
Research and development 15,174 8,981 4,805
Selling and marketing 41,222 23,747 9,891
General and administrative 10,784 8,066 6,658
Charge for purchased research and development 1,251 -- --
------- ------ ------
Total operating expenses 68,431 40,794 21,354
------- ------ ------
Operating income 37,806 45,302 28,490
Non-operating income:
Interest income 3,437 1,668 871
Other gains, net 21,431 738 400
------- ------ ------
Total non-operating income 24,868 2,406 1,271
------- ------ ------
Income before income taxes and equity in earnings of Gates/FA 62,674 47,708 29,761
Provision for income taxes 24,255 16,742 10,510
Equity in earnings of Gates/FA 85 1,572 1,399
------- ------ ------
Net income $ 38,504 32,538 20,650
======= ====== ======
Net income per share $ .97 .82 .53
======= ====== ======
Weighted average number of common shares and
equivalents outstanding 39,617 39,877 38,992
======= ====== ======
See accompanying notes to consolidated financial statements.
F-3
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended June 30, 1995, 1994 and 1993
Common stock Foreign
---------------------- Additional currency
Number paid-in Retained translation
of shares Amount capital earnings adjustment
--------- ------ ------- -------- ----------
(In thousands)
Balances at June 30, 1992 15,726 $ 157 25,314 1,354 --
Three-for-two common stock split 7,793 78 (78) -- --
Issuance of common stock on exercise of
stock options 1,455 15 4,682 -- --
Tax benefit from exercise of stock options -- -- 8,848 -- --
Transactions involving affiliate's common stock -- -- (23) -- --
Common stock issued in connection with acquisition 143 1 231 -- --
Foreign currency translation adjustment -- -- -- -- 33
Net income for the year ended June 30, 1993 -- -- -- 20,650 --
------- ------- ------- -------- ------
Balances at June 30, 1993 25,117 251 38,974 22,004 33
Three-for-two common stock split 12,812 128 (128) -- --
Issuance of common stock on exercise of
stock options 857 9 5,314 -- --
Tax benefit from exercise of stock options -- -- 5,975 -- --
Transactions involving affiliate's common stock -- -- (50) -- --
Foreign currency translation adjustment -- -- -- -- 23
Net income for the year ended June 30, 1994 -- -- -- 32,538 --
------- ------- ------- -------- ------
Balances at June 30, 1994 38,786 388 50,085 54,542 56
Issuance of common stock on exercise of
stock options 532 5 1,515 -- --
Tax benefit from exercise of stock options -- -- 1,882 -- --
Transactions involving affiliate's common stock -- -- (474) -- --
Adjustment to common stock issued in
connection with acquisition (4) -- -- -- --
Purchase of treasury stock -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- 408
Net unrealized loss on investments -- -- -- -- --
Net income for the year ended June 30, 1995 -- -- -- 38,504 --
------- ------- ------- -------- ------
Balances at June 30, 1995 39,314 $ 393 53,008 93,046 464
====== === ====== ====== ===
Net
unrealized Treasury stock
---------------------------
loss on Number
investments of shares Amount
----------- --------- ------
(In thousands)
Balances at June 30, 1992 -- -- $ --
Three-for-two common stock split -- -- --
Issuance of common stock on exercise of
stock options -- -- --
Tax benefit from exercise of stock options -- -- --
Transactions involving affiliate's common stock -- -- --
Common stock issued in connection with acquisition -- -- --
Foreign currency translation adjustment -- -- --
Net income for the year ended June 30, 1993 -- -- --
-- -- --
Balances at June 30, 1993 -- -- --
Three-for-two common stock split -- -- --
Issuance of common stock on exercise of
stock options -- -- --
Tax benefit from exercise of stock options -- -- --
Transactions involving affiliate's common stock -- -- --
Foreign currency translation adjustment -- -- --
Net income for the year ended June 30, 1994 -- -- --
-- -- --
Balances at June 30, 1994 -- -- --
Issuance of common stock on exercise of
stock options -- -- --
Tax benefit from exercise of stock options -- -- --
Transactions involving affiliate's common stock -- -- --
Adjustment to common stock issued in
connection with acquisition -- -- --
Purchase of treasury stock -- 2,035 (30,458)
Foreign currency translation adjustment -- -- --
Net unrealized loss on investments (143) -- --
Net income for the year ended June 30, 1995 -- -- --
----- ----- -------
Balances at June 30, 1995 (143) 2,035 $ (30,458)
==== ===== =======
See accompanying notes to consolidated financial statements.
F-4
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
(In thousands)
Operating activities:
Net income $ 38,504 32,538 20,650
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of Gates/FA common stock (21,232) -- (754)
Tax benefit from exercise of stock options 1,882 5,975 8,848
Equity in earnings of Gates/FA (85) (1,572) (1,399)
Loss on sale of Arrow Electronics common stock 11 -- --
Charge for purchased research and development 1,251 -- --
Depreciation and amortization 3,587 1,792 802
Minority interest in subsidiary -- -- 19
Change in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable (7,721) (9,073) (9,295)
Increase in prepaid expenses and other current assets (2,187) (2,071) (692)
Increase in other assets (1,211) (802) (189)
Increase in accounts payable, accrued expenses and
income taxes payable 1,605 5,685 1,323
Deferred income taxes (1,078) 802 (37)
-------- ------- -------
Net cash provided by operating activities 13,326 33,274 19,276
Investing activities:
Purchases of fixed assets (10,974) (5,290) (3,959)
Purchases of investments (29,265) (51,916) (26,631)
Proceeds from sales and maturities of investments 31,033 17,320 14,873
Net proceeds from sale of Arrow Electronics common stock 30,324 -- --
Payment for acquisition of NETstor (1,150) -- --
Payment for acquisition of DataJET technology (801) -- --
-------- ------- -------
Net cash provided by (used in) investing activities 19,167 (39,886) (15,717)
Financing activities:
Net cash proceeds from sale of Gates/FA common stock -- -- 1,236
Proceeds from exercise of stock options 1,520 5,323 4,697
Purchase of treasury stock (30,458) -- --
-------- ------- -------
Net cash (used in) provided by financing activities (28,938) 5,323 5,933
-------- ------- -------
Effect of exchange rate changes on cash 408 23 33
-------- ------- -------
Increase (decrease) in cash and cash equivalents 3,963 (1,266) 9,525
Cash and cash equivalents at beginning of year 11,629 12,895 3,370
-------- ------- -------
Cash and cash equivalents at end of year $ 15,592 11,629 12,895
======== ======= =======
Supplemental information
- ------------------------
Noncash investing and financing activities:
Issuances of and other transactions related to
affiliate's common stock $ (474) (50) (23)
======== ======= =======
Cash paid during the year for income taxes $ 26,723 6,949 1,201
======== ======= =======
See accompanying notes to consolidated financial statements.
F-5
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1995
(1) Business and Significant Accounting Policies
--------------------------------------------
Business
--------
Cheyenne Software, Inc. and its subsidiaries (Cheyenne or the
Company) are engaged in the development, sale and support of
software products for use in microcomputers and computer systems
mainly for Local Area Network (LAN) and Wide Area Network (WAN)
applications.
On July 1, 1992, Cheyenne Software International, Inc., a
wholly-owned subsidiary operating as a foreign sales corporation
(FSC), was incorporated in the U.S. Virgin Islands. On February
1, 1993, the Company commenced operations of a 95% owned Japanese
subsidiary, Cheyenne Software KK, to produce and market certain of
the Company's products in Japan. Subsequent to June 30, 1995, the
Company acquired the 5% minority interest in Cheyenne Software KK
for a nominal amount. During fiscal 1995 and 1994, Cheyenne
established wholly owned subsidiaries in France, Germany, the
United Kingdom and Canada to provide sales and support of its
software products in those countries.
In February 1993, Cheyenne acquired the net assets of Applied
Programming Technologies, Inc. (APT) for 214,286 shares of the
Company's common stock. The acquisition was accounted for as a
pooling of interests. Revenues and net earnings of APT for years
prior to the acquisition are insignificant in relation to the
Company's consolidated results. Accordingly, prior year's
consolidated financial statements were not restated for this
acquisition.
On May 19, 1994, Cheyenne acquired the net assets of Bit Software
Inc. (Bit), which develops and markets communication software
products, for 140,590 shares of the Company's common stock. The
acquisition was accounted for as a pooling of interests.
Accordingly, the consolidated financial statements have been
restated for all periods prior to the merger. Prior to the
merger, Bit used a fiscal year ending December 31. Accordingly,
the restated financial statements combine the Company's June 30,
1994 and 1993 financial statements with Bit's June 30, 1994 and
December 31, 1993 financial statements, respectively. Bit's
revenue for the six months ended December 31, 1993 was $2,675,000,
Bit had no transactions during that period which changed
stockholders' equity and Bit's results of operations for that
period were approximately breakeven, thus there was no adjustment
to retained earnings from changing its fiscal year. There were no
intercompany transactions between Cheyenne and Bit.
Separate results of the combining entities for the years ended June
30, 1994 and 1993 are as follows (in thousands):
1994 1993
---- ----
Revenues:
Cheyenne $92,863 50,735
Bit 4,874 5,959
----- -----
$97,737 56,694
====== ======
Net income (loss):
Cheyenne 32,699 20,628
Bit (161) 22
------ ------
$32,538 20,650
======= ======
(Continued)
F-6
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
On December 19, 1994, the Company acquired certain assets and
assumed certain liabilities of NETstor, Inc. (NETstor), a developer
of Hierarchical Storage Management software products for the UNIX
computer platform in the network storage management market, for
$1,150,000 of cash and $200,000 of additional future contingent
payments. The acquisition has been accounted for as a purchase and
the operating results of NETstor are included in the consolidated
statement of earnings from the date of acquisition. In connection
with the acquisition, the Company recorded a $547,000 expense for
purchased research and development and $94,000 of capitalized
software which is included in other assets in the accompanying
balance sheet and is being amortized on a straight line basis over
two years.
On March 30, 1995, the Company acquired the DataJET product line and
certain other assets and assumed certain liabilities of NetFRAME
Systems, Inc. (NetFRAME). DataJET is an image based, high
performance software backup product for NetWare file servers.
Cheyenne made cash payments aggregating $801,000 for DataJET and
will pay royalties to NetFRAME based on the Company's sales of
products utilizing the DataJET technology. The acquisition has
been accounted for as a purchase. In connection with the
acquisition, the Company recorded a $704,000 expense for purchased
research and development.
The technological feasibility of the in-process technology related
to the NETstor and DataJET product acquisitions was not yet
established at the dates of acquisition and the technology had no
alternative use. The revenues and net earnings for NETstor and
the DataJET product for the years prior to the acquisition were
insignificant compared to the Company's consolidated results.
Consolidation Policy
--------------------
The consolidated financial statements include the accounts of
Cheyenne Software, Inc. and its majority-owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Revenue and Profit Recognition
------------------------------
The Company recognizes revenue from software licenses and sales and
the sale of upgrades or enhancements to customers at delivery
provided no significant vendor and post-contract customer support
(PCS) obligations remain and collectibility of the resulting
receivables is probable. Revenue attributable to PCS included in
site-license agreements, primarily consisting of free upgrades for
a specified period, is deferred and recognized over the period it
is earned. Development fee income is recognized ratably during
the software development period and royalty income is recognized
when earned. The Company provides a liability for future PCS
(primarily telephone customer support) related to revenue
recorded, which is included in accrued liabilities in the
accompanying balance sheets. The Company also provides for
estimated product returns and exchanges, rebates and co-op
advertising costs, which are reflected as reductions to accounts
receivable in the accompanying balance sheets since the Company
grants credits for such items. The provision for returns and
exchanges reduces revenues and the provision for co-op advertising
is included in sales and marketing expenses. Technical support
costs are included in cost of sales.
(continued)
F-7
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Cash Equivalents
----------------
The Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.
Investments
-----------
Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". This Statement
requires that investments in such securities be designated as
trading, held-to-maturity or available-for-sale. Trading
securities are reported at fair value with unrealized gains and
losses recognized in earnings. Available-for-sale securities are
reported at fair value with unrealized gains and losses included
in shareholders' equity. Securities which are classified as
held-to-maturity are reported at amortized cost. The adoption of
SFAS No.115 had no effect on the Company's consolidated statement
of earnings for the year ended June 30, 1995 and the prior years'
financial statements were not restated.
While it is the Company's general intent to hold securities until
maturity, management will occasionally sell particular securities
for cash flow purposes. Accordingly, at June 30, 1995, all the
Company's investments have been classified as available for sale.
Investment in Gates/FA
----------------------
As discussed in note 2(b), on August 29, 1994 Cheyenne sold its
remaining shares of Gates F/A common stock in exchange for Arrow
Electronics, Inc. (Arrow) common stock. Cheyenne accounted for
its investment in Gates/FA using the equity method of accounting,
which reflected the cost of the Company's investment adjusted for
its proportionate share of the net income or loss and capital
transactions of Gates/FA.
Fixed Assets
------------
Fixed assets are stated at cost. Amortization of leasehold
improvements is provided for over the lesser of the term of the
related leases or the estimated life of the assets, and
depreciation of equipment, furniture and fixtures, and purchased
computer software is provided for over their estimated useful
lives. The straight-line method is used for financial reporting
purposes, and an accelerated method is used, where applicable, for
income tax purposes.
Software Development Costs
--------------------------
Costs associated with the development and enhancement of proprietary
software are expensed as incurred. Such costs that could be
capitalized pursuant to FASB Statement No.86 are immaterial due to
the short period of time and minimal costs incurred between when
the Company's products reach technological feasibility and when
they are available for general release to the public.
Income Taxes
------------
Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires deferred tax assets and liabilities to
____
(Continued)
F-8
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
be recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be realized or settled.
Under SFAS 109, the effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date. Prior year's financial statements were
not restated to apply the provisions of SFAS 109 and its adoption
did not have a significant impact on the Company's net earnings for
the year ended June 30, 1994.
Pursuant to the deferred method under APB 11, which was applied in
fiscal 1993, deferred income taxes were recognized for income and
expense items that were reported in different years for financial
reporting purposes and income tax purposes using the tax rate
applicable for the year of the calculation. Under the deferred
method, deferred taxes were not adjusted for subsequent changes in
tax rates.
Common Stock
------------
Cheyenne's Certificate of Incorporation was amended on December 15,
1994 to increase the number of authorized shares of common stock
from 50,000,000 to 75,000,000.
Earnings Per Share
------------------
Net income per share is based on the weighted average number of
shares of common stock and common stock equivalents (stock
options) outstanding. All references to number of shares and per
share data have been restated for all periods presented to reflect
the three-for-two stock splits (note 6).
Foreign Currency Translation
----------------------------
Assets and liabilities of the Company's foreign subsidiaries have
been translated at rates of exchange at the end of the period.
Revenues and expenses have been translated at the weighted average
rates of exchange in effect during the period. Gains and losses
resulting from translation are accumulated as a separate component
of stockholders' equity.
Treasury Stock
--------------
On February 23, 1995, the Board of Directors of the Company
authorized management to purchase up to 4,000,000 shares of the
Company's outstanding common stock. Purchases are dictated by
overall financial and market conditions and other factors
affecting the operations of the Company. During fiscal 1995,
Cheyenne purchased 2,035,000 shares of its common stock for
approximately $30,458,000, at prices ranging from approximately
$13.50 to $17.25 per share. Treasury stock is recorded at cost.
Reclassification
----------------
Certain prior year information has been reclassified to conform with
the 1995 presentation format.
(Continued)
F-9
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Investment in Gates/FA Distributing, Inc. (Gates/FA) and Arrow Electronics, Inc.
--------------------------------------------------------------------------------
(a) At June 30, 1992, Cheyenne owned 24.2% (1,448,290 common
shares) of Gates/FA, a distributor of microcomputers, software and
computer peripheral equipment. On February 3, 1993, Cheyenne sold
100,000 shares of Gates/FA common stock and recognized a gain of
approximately $754,000. This transaction resulted in a reduction
of Cheyenne's ownership interest in Gates/FA to approximately
21.5% (1,348,290 common shares).
(b) On August 29, 1994, Cheyenne exchanged its remaining
1,348,290 shares of Gates/FA common stock for 798,996 common
shares of Arrow, a public company. The transaction qualified as a
tax-free exchange and resulted in a pre-tax gain of $21,232,000
for financial reporting purposes. After the transaction, Cheyenne
owned approximately 2% of Arrow's outstanding common stock.
Accordingly, the Company accounted for its investment in Arrow
common stock under the cost method of accounting.
(c) During the third and fourth quarters of fiscal 1995, Cheyenne
sold its Arrow common stock for $30,324,000, which resulted in a
net loss of approximately $11,000.
(3) Investments
-----------
At June 30, 1995, the amortized costs and related fair values of
investments are as follows (in thousands):
Gross Gross
Amortized Fair unrealized unrealized
cost value gains losses
---- ----- ----- ------
Available-for-sale:
Municipal debt $ 37,956 37,736 20 (240)
U.S. Treasury bills and notes 9,555 9,555 -- --
U.S. government agencies debt 4,841 4,829 20 (32)
Preferred securities 3,393 3,393 -- --
Corporate debt 98 97 -- (1)
Equity securities 150 240 90 --
-------- ------- ----- -------
$ 55,993 55,850 130 (273)
======== ======= ===== =======
Of the above investments, $15,088, $240 and $40,522 are included in
the balance sheet captions "short-term investments", "other
assets" and "long-term investments", respectively.
(Continued)
F-10
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The contractual maturities of debt securities at amortized cost are
as follows:
Within 1 1 to 5 5 to 10 After 10
year years years years Totals
---- ----- ----- ----- ------
(In thousands)
Municipal debt $ 5,190 24,360 1,306 7,100 37,956
U.S. Treasury bills and notes 5,564 3,991 -- -- 9,555
U.S. government agencies debt 1,934 2,907 -- -- 4,841
Preferred securities 2,400 993 -- -- 3,393
Corporate debt -- 98 -- -- 98
------ ------ ----- ----- ------
$ 15,088 32,349 1,306 7,100 55,843
====== ====== ===== ===== ======
At the time the Company implemented SFAS 115 during the first
quarter of fiscal 1995, management decided to classify certain
investments as held-to-maturity due to its having the positive
intent and ability to hold those securities to maturity. During
the fourth quarter of fiscal 1995, the Company sold a portion of
its securities classified as held-to-maturity prior to their
maturity dates to purchase treasury stock. The amortized cost of
these securities was approximately $16,683,000 and the net
realized gain amounted to approximately $5,000.
Proceeds from the sale of available-for-sale securities (Arrow
common stock; note 2(c)) was approximately $30,324,000 in fiscal
1995, which resulted in a net realized loss of approximately
$11,000.
Short-term investments at June 30, 1994 consisted of the following:
Fair
Cost value
---- -----
Municipal debt $ 39,509 38,887
U.S. Treasury bills and notes 5,849 5,849
Preferred securities 5,704 5,704
Corporate debt 4,485 4,480
Government agencies debt 2,255 2,173
----- -----
$ 57,802 57,093
====== ======
(Continued)
F-11
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Fixed Assets
------------
Fixed assets consist of the following:
June 30,
----------------
1995 1994
---- ----
(In thousands)
Computer equipment $ 14,143 6,871
Purchased computer software 3,083 818
Leasehold improvements 1,646 972
Office equipment 2,175 1,508
Furniture and fixtures 2,049 1,559
Trade show equipment 586 317
------- -------
23,682 12,045
Less accumulated depreciation
and amortization 7,171 3,478
------- -------
$ 16,511 8,567
======= =======
(5) Income Taxes
------------
Income tax expense consists of:
Current Deferred Total
------- -------- -----
(In thousands)
1995:
Federal $ 21,249 (906) 20,343
State 3,306 (172) 3,134
Foreign 778 -- 778
------- ------- -------
$ 25,333 (1,078) 24,255
======= ======= =======
1994:
Federal 13,714 720 14,434
State 2,226 82 2,308
------- ------- -------
$ 15,940 802 16,742
======= ======= =======
1993:
Federal 8,942 (34) 8,908
State 1,608 (6) 1,602
------- ------- -------
$ 10,550 (40) 10,510
======= ======= =======
(Continued)
F-12
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to
significant portions of the Company's deferred tax asset and
liability at June 30, 1995 and 1994 are as follows:
1995 1994
---- ----
(In thousands)
Deferred tax assets:
Allowance for doubtful accounts receivable $ 487 231
Accrual for product returns and exchanges 646 240
Other 267 70
------- ------
$ 1,400 541
===== ===
Deferred tax liabilities:
Fixed assets depreciation 853 518
Equity in earnings of Gates/FA -- 823
Other 499 230
------- ------
$ 1,352 1,571
===== =====
Management of the Company has determined, based upon historical
pre-tax earnings and expected taxable income in the future, that
it is more likely than not that the Company will realize its
deferred tax assets and therefore, no valuation allowance is
warranted.
The following is a reconciliation of the provision for income taxes
to the "expected" amounts computed by applying the statutory
Federal income tax rate to the Company's income before income
taxes:
1995 1994 1993
---- ---- ----
(In thousands)
Computed "expected" income tax
expense $ 21,966 35.0% $ 17,248 35.0% $ 10,594 34.0%
Increase (decrease) in income taxes
resulting from:
State income taxes, net of
Federal benefit 2,037 3.3 1,500 3.0 1,057 3.4
Foreign income tax rate differential 428 .7 -- -- -- --
Excess tax gain on sale of
Gates/FA common stock 1,779 2.8 -- -- 106 .3
Equity in earnings of Gates/FA -- -- -- -- (306) (1.0)
Foreign Sales Corporation
(FSC) benefit (809) (1.3) (1,244) (2.5) (862) (2.7)
Tax-exempt investment income (919) (1.5) (452) (.9) (26) (.1)
Research and development
tax credit (227) (.4) (374) (.8) -- --
Other -- -- 64 .2 (53) (.2)
------- ---- ------- ---- ------- ----
Provision for income taxes $ 24,255 38.6% $ 16,742 34.0% $ 10,510 33.7%
======= ==== ======= ==== ======= ====
(Continued)
F-13
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Stock Splits
------------
On February 10, 1994, the Company's Board of Directors declared a
three-for-two stock split, payable in the form of a 50% stock
dividend (1994 Stock Split) which was distributed on March 29,
1994 to holders of record on March 1, 1994. On February 23, 1993,
the Company's Board of Directors declared a three-for-two stock
split payable in the form of a 50% stock dividend (1993 Stock
Split) which was distributed on April 8, 1993 to holders of record
on March 12, 1993.
The par value of the additional 12,812,458 and 7,792,516 shares of
common stock issued in connection with the 1994 and 1993 Stock
Splits, respectively, was transferred to common stock from
additional paid-in capital. All references to number of shares
(except shares authorized), per share data and stock option plan
data have been restated for all periods presented to reflect the
stock splits.
(7) Stock Options
-------------
1984 Incentive Stock Option Plan
--------------------------------
Cheyenne adopted an incentive stock option plan (1984 Plan) and has
reserved 1,687,500 shares for issuance to key employees. Options
are not exercisable until two years after their grant and expire
if not exercised within five years. The number of shares that may
be exercised under the option are limited, on a cumulative basis,
to not more than 25% in the first year in which they become
exercisable, 50% in the second year, and 100% thereafter. Options
may not be granted at less than the fair market value of the
underlying shares at date of grant.
1989 Incentive Stock Option Plan
--------------------------------
Cheyenne has adopted an incentive stock option plan (1989 Plan) and
has reserved 4,806,250 shares, as amended, for issuance to key
employees. Options are not exercisable until two years after
their grant and expire if not exercised within five years. The
1989 Plan was amended during fiscal 1995 to increase the maximum
term for which options are exercisable from five to seven years.
The number of shares that may be exercised under the option are
limited, on a cumulative basis, to not more than 25% in the first
year in which they become exercisable, 50% in the second year, and
100% thereafter. Options may not be granted at less than the fair
market value of the underlying shares at the date of grant. The
option price may be paid in cash or with previously owned stock.
Nonqualified Stock Option Plan
------------------------------
In December 1987, a nonqualified stock option plan (1987 Plan) was
adopted and 4,237,500 common shares have been reserved, as
amended, for issuance to officers, directors and employees of the
Company at such exercise prices, in such amounts, and upon such
terms and conditions, as determined by the Option Committee of the
Board of Directors. Option prices may be paid in cash or with
previously owned common stock.
The 1987 Plan was amended in fiscal 1995 to include consultants as
eligible for grants under the 1987 Plan and the maximum term for
which options are exercisable was increased from five to seven
years.
F-14
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Directors' Plan
---------------
In fiscal 1993, a stock option plan for outside directors
(Directors' Plan) was adopted and 405,000 common shares have been
reserved for issuance to members of the Board of Directors who are
not employees (Outside Directors). Pursuant to the plan, each
Outside Director will receive options to purchase 16,875 shares of
common stock on January 1 of each calendar year that such director
serves the Company in such capacity, commencing January 1, 1993.
All stock options granted under the Directors' Plan are
immediately exercisable. The exercise price per share of each
option will be equal to the fair market value of the shares of
common stock on the date of grant. Each option granted under the
Directors' Plan expires upon the earlier of five years following
the date of grant or one year following the date an Outside
Director ceases to serve in such capacity, provided that the
option is exercised within the five years after the date of its
grant. No grants may be made under the Directors' Plan subsequent
to the earlier to occur of January 2, 1997 or the issuance of
common stock or exercise of options pursuant to the Directors'
Plan equal to the maximum number of shares of common stock
reserved for under the Directors' Plan.
Other Stock Options
-------------------
During the year ended June 30, 1993, certain key personnel exercised
nonqualified stock options to purchase 388,125 shares of common
stock at $1.19 per share. In addition, during the years ended
June 30, 1994 and 1993, certain directors exercised nonqualified
stock options to purchase 67,500 and 286,875 shares of common
stock, respectively, at $1.41 per share.
A summary of activity under the 1984 Plan, 1989 Plan, the 1987 Plan,
and the Directors' Plan, which have all been restated to reflect
the stock splits, is as follows:
Number of Option price
shares range per share
------ ---------------
Outstanding at June 30, 1992 3,579,075 $ 1.11-21.33
Granted 833,700 8.95-17.42
Exercised (1,508,412) 1.11-3.52
Canceled (27,000) 1.15-1.67
------------
Outstanding at June 30, 1993 2,877,363 1.11-21.33
Granted 1,171,951 18.58-21.33
Exercised (1,113,738) 1.11-8.95
Canceled (76,650) 1.67-21.33
------------
Outstanding at June 30, 1994 2,858,926 1.11-21.33
Granted 2,241,110 8.63-13.75
Exercised (531,844) 1.11-8.94
Canceled (125,526) 8.63-21.33
-----------
Outstanding at June 30, 1995 4,442,666 3.51-21.33
============
(Continued)
F-15
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At June 30, 1995, 1,129,151 options were exercisable and options to
purchase 1,831,728 shares were available for future grant under all
stock option arrangements. The exercise prices of all nonqualified
stock options were equal to the fair market value of the underlying
shares at date of grant.
(8) Operating Leases
----------------
Cheyenne leases office facilities under noncancellable operating
leases. The leases expire through 2003 and are subject to
escalation clauses for taxes and other expenses. Future minimum
rentals required as of June 30, 1995 are as follows:
Year ending June 30:
1996 $ 2,579,000
1997 3,368,000
1998 3,204,000
1999 2,920,000
2000 2,274,000
Thereafter 3,496,000
-----------
$ 17,841,000
===========
Rent expense was $1,995,000, $1,121,000 and $592,000 for the years
ended June 30, 1995, 1994 and 1993, respectively.
(9) Employee Benefit Plans
----------------------
Effective May 1, 1991, Cheyenne established a voluntary savings and
defined contribution plan under Section 401(k) of the Internal
Revenue Code. This plan covers all employees meeting certain
eligibility requirements. For the years ended June 30, 1995, 1994
and 1993, Cheyenne provided a matching contribution of $242,000,
$142,000 and $82,000, respectively, which was equal to 25% of each
participant's contribution up to a maximum of 16% of annual
compensation. Employees are 100% vested in their own
contributions and become fully vested in the employer
contributions after 3 years. The Company does not provide its
employees any other postretirement or postemployment benefits.
(10) Business and Credit Concentrations and Export Sales
---------------------------------------------------
The majority of the Company's customers are original equipment
manufacturers and distributors of computer equipment and software.
There was one customer that accounted for greater than 10% of the
Company's revenues in fiscal 1995 (14%), fiscal 1994 (17%) and
fiscal 1993 (14%). At June 30, 1995, there were four customers
which accounted for more than five percent of the Company's
outstanding accounts receivable, aggregating 40% of accounts
receivable.
(Continued)
F-16
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Export sales by geographic area are as follows (in thousands):
1995 1994 1993
---- ---- ----
Europe $48,802 35,156 20,584
Canada 2,219 3,159 2,052
Rest of World 8,580 4,099 1,900
------ ------ ------
$59,601 42,414 24,536
====== ====== ======
(11) Legal and Other Matters
-----------------------
(a) In fiscal 1994, the Company received $649,000 in settlement
of a lawsuit, net of related expenses, from Legato Corp. arising
out of an advertisement placed by Legato, which is included in
other gains in the accompanying consolidated statement of
earnings.
(b) In June 1994, a securities fraud class action complaint was
filed against the Company and several of its officers and
directors. The actions allege securities fraud claims under
Section 10(b) and 20 of the Securities Exchange Act of 1934
whereby it was alleged that the Company and the individual
defendants made misrepresentations and omissions to the public
which caused the Company's stock to be artificially inflated, and
seek compensatory damages on behalf of all the shareholders who
purchased shares between approximately January 24, 1994 and
approximately June 17, 1994, as well as attorneys' fees and costs.
In addition, there is a shareholder derivative complaint alleging
that certain officers and directors breached their fiduciary
obligations to the Company. The defendants deny any and all
liability and intend to vigorously defend against the claims. The
ultimate outcome of the litigation cannot presently be determined.
Accordingly, no provision for any liability that may result upon
adjudication has been recognized in the accompanying consolidated
financial statements.
On or about April 14, 1995, the Securities and Exchange Commission
(SEC) advised the Company that it had issued a Formal Order of
Private Investigation of the Company related to possible
violations of federal securities laws, which was the continuation
of an informal inquiry which began in June 1994. The Company has
been cooperating with the SEC.
(c) In May 1995, JWANCO, Inc. (formerly known as Bit Software,
Inc.), and various related individuals filed an action against the
Company, Cheyenne Communications, Inc., a wholly owned subsidiary
of the Company, and several of its officers, directors and
employees. The action alleges breach of contract, fraud, wrongful
termination, negligent infliction of emotional distress and a
number of other related torts. The essence of the allegations is
that the defendants breached agreements and defrauded JWANCO,
Inc., and the individual plaintiffs in connection with the
Company's acquisition of certain assets and assumption of certain
liabilities of Bit Software, Inc. on May 19, 1994. These
allegations are substantially similar to those described in note
11(b) above. In addition, the complaint alleges, on behalf of one
individual plaintiff only, wrongful termination and a variety of
other causes of action relating to his employment and termination
of the employment by the Company. Management of the Company,
based on advice from its legal counsel, does not believe that the
ultimate resolution of this lawsuit will have a material adverse
effect on the financial position or results of operations of the
Company.
F-17
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(d) In May 1995, Personal Computer Peripherals Corporation (PCPC)
filed an action against the Company and five other defendants
alleging patent infringement. Cheyenne has filed its answer to the
complaint in which it denied patent infringement on its part and in
which it asserted affirmative defenses and counterclaims. The relief
sought by the complaint is a preliminary and permanent injunction, a
judgment of willful infringement, an accounting of sales, revenues
and profits, unspecified damages to be trebled, reasonable attorney's
fees and other related costs. Management of the Company, based on
advice from its legal counsel, does not believe that the ultimate
resolution of this lawsuit will have a material adverse effect on the
financial position or results of operations of the Company.
(12) Interim Financial Information (Unaudited)
-----------------------------------------
The following is a summary of selected quarterly financial data for
the fiscal years ended June 30, 1995 and 1994 (in thousands,
except per share data):
September 30, December 31, March 31, June 30, Total
----------------- -------------- ------------ ----------------- ---------------
1994 1993 1994 1993 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Revenues $ 21,652 20,043 29,611 24,196 35,636 28,364 41,028 25,134 127,927 97,737
Operating income 5,062 9,946 9,585 12,487 10,770 14,839 12,389 8,030 37,806 45,302
Other gains, net 21,232 -- (379) 89 315 -- 263 649 21,431 738
Income taxes 12,108 3,606 3,406 4,502 4,116 5,512 4,625 3,122 24,255 16,742
Net income 14,938 7,057 6,613 8,706 7,975 10,258 8,978 6,517 38,504 32,538
------ ------- ------- ------- ------- ------ ------- ------- -------- -------
Net income
per share $ .38 .18 .17 .22 .20 .25 .23 .16 .97 .82
====== ======= ======= ======= ======= ====== ======= ======= ======== =======
F-18
Schedule II
-----------
CHEYENNE SOFTWARE, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Charged
Balance at Charged to to other Balance
beginning costs and accounts - Deductions - at end
Description of period expenses describe describe of period
----------- --------- -------- -------- -------- ---------
Year ended June 30, 1995:
Allowance for doubtful accounts $ 611,000 1,079,000 -- 388,000 (1) 1,302,000
======= ========= ======== ======= =========
Year ended June 30, 1994:
Allowance for doubtful accounts $ 436,500 634,800 -- 460,300 (1) 611,000
======= ========= ======== ======= =========
Year ended June 30, 1993:
Allowance for doubtful accounts $ 174,100 398,400 -- 136,000 (1) 436,500
======= ========= ======== ======= =========
(1) Uncollectible amounts written off, net of recoveries.
S-1
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.
CHEYENNE SOFTWARE, INC.
Date: September 27, 1995 By:/s/ ReiJane Huai
---------------------------------
ReiJane Huai, Chairman of the
Board, President and Chief
Executive Officer (principal
executive officer)
Date: September 27, 1995 By:/s/ Elliot Levine
---------------------------------
Elliot Levine, Executive Vice
President, Senior Financial Officer
and Treasurer (principal financial
and accounting 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.
September 27, 1995 /s/ Rino Bergonzi
--------------------------------------
Rino Bergonzi, Director
September 27, 1995 /s/ Richard F. Kramer
--------------------------------------
Richard F. Kramer, Director
September 27, 1995 /s/ Bernard D. Rubien
--------------------------------------
Bernard D. Rubien, Director
September 27, 1995 /s/ Ginette Wachtel
--------------------------------------
Ginette Wachtel, Director