-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BpRq292tsjPpp7rtePB97oI1J9Af9mcu3WjfEuDe8Mrli6CiZTqMyGXc0FIAyEN7 S2Gds1os2nlq7FfLTtuPOw== 0000928385-99-001065.txt : 19990402 0000928385-99-001065.hdr.sgml : 19990402 ACCESSION NUMBER: 0000928385-99-001065 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLATE SOFTWARE INC CENTRAL INDEX KEY: 0001024752 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 521042793 STATE OF INCORPORATION: VA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21921 FILM NUMBER: 99582159 BUSINESS ADDRESS: STREET 1: 45365 VINTAGE PARK PLAZA CITY: DULLES STATE: VA ZIP: 20166 BUSINESS PHONE: 7033181000 MAIL ADDRESS: STREET 1: 45365 VINTAGE PARK PLAZA STREET 2: SUITE 100 CITY: DULLES STATE: VA ZIP: 20166 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ____________________ FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____ to _____ Commission file number 0-21921 TEMPLATE SOFTWARE, INC. (Exact name of registrant as specified in its charter) Virginia 52-1042793 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 45365 Vintage Park Plaza Dulles, Virginia 20166 (Address of principal executive offices) (Zip code) (703) 318-1000 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock Nasdaq Stock Market(R) 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 1, 1999 based on the closing price on that date of $4.125 on the Nasdaq National Market was $16,616,807.* The number of shares outstanding of the Registrant's Common Stock as of March 1, 1999: 4,991,505 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement relating to the Registrant's 1999 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. * The aggregate market value of the voting stock held by non-affiliates was estimated by excluding only those shares actually held by directors and executive officers of the Registrant (without considering stock options held by such individuals). TEMPLATE SOFTWARE, INC. 1998 ANNUAL REPORT ON FORM 10-K Table of Contents
PART I ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 4 ITEM 3. LEGAL PROCEEDINGS 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10 PART II 10 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 11 ITEM 6. SELECTED FINANCIAL DATA 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 27 PART III 28 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF 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 29 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 29 SIGNATURES 33
This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. In this report, the words "anticipate," "believes," "expects," "intends," "future," and other similar expressions identify forward-looking statements. Investors are cautioned that all forward- looking statements involve risks and uncertainty, including without limitation, the ability of the Company to develop its products and market its services, as well as general market conditions, competition and pricing. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. PART I ------ ITEM 1. BUSINESS GENERAL Template Software, Inc. (the "Company") was incorporated in Maryland in 1975 and reincorporated in Virginia in 1996. The Company provides enterprise- wide software solutions to organizations that require the integration of their operations and systems in an effort to better automate their critical business processes. To date, most of the Company's revenues have been derived from license fees for use of the Company's products and fees for software services related to the customization of its products, which services include software development, training, maintenance, systems integration and systems planning. The Company's products consist of a set of off-the-shelf packages, in the form of templates. Templates are largely completed applications supporting enterprise application integration ("EAI") and business process automation. The Company believes that its reusable template products, along with its software- related services, allow a mass customization approach to software solution delivery that is superior to the historical alternatives of buying a packaged solution or developing a custom application. The Company's current templates can provide up to 90% of the code necessary for a complex integration problem or implementation of an automated business process. The Company's solutions are targeted at large-scale, enterprise integration opportunities and mission-critical applications, such as order handling and fulfillment, human resource management, and network monitoring systems primarily in the telecommunications, finance/insurance and government industries. The Company markets its solutions world-wide through its direct sales force, distributors, value added resellers and systems integrators. In an effort to solidify its presence world-wide, the Company maintains the following wholly- owned subsidiaries: (1) England: Template Software, U.K. Limited and Template Software, Limited; (2) France: Template Software S.A.; (3) Germany: Template Software Holding GmbH ("Template Holding") and Template Software Geschaftsfuhrungs GmbH ("Template Management"), which the Company formed to acquire milestone software GmbH ("Milestone"), (4) Austria: milestone software Ges. mbH; (5) Australia: Template Software Pty., Ltd.; and (6) Mexico: Template Software de Mexico, S.A. de C.V. (which is in the process of having its operations wound up). The Company also owns 20% of milestone software AG, a Swiss corporation ("Milestone Switzerland"), which it acquired in connection with its acquisition of Milestone. PRODUCTS AND SERVICES The Company's products are a family of templates which the Company uses to implement complex EAI solutions and/or business process automation extensions to existing departmental systems. The Company's aim is to provide solutions to its customers that support applications in e-commerce, customer-centric process reengineering, or other market-driven business thrusts. The primary integration product is the Enterprise Integration Template ("EIT"). EIT supports the rapid integration of legacy systems, commercial off-the-shelf ("COTS") packages and other custom applications into a coherent whole able to support enterprise business processes. The Company's other primary products -- the Foundation Template and its optional components, and the Process Templates -- provide the basis to rapidly automate complex business processes. These templates have been designed to interoperate seamlessly and each includes an integrated suite of visual development tools to enhance the functionality and rapid development of specific business solutions. Enterprise Integration Template - ------------------------------- The Enterprise Integration Template ("EIT") addresses the broadest spectrum of enterprise integration requirements. It can bring together existing systems and databases under a common business representation in the form of objects and present these resources as a service to any other application or business process. EIT is designed to integrate any type of system or database. It provides the means to "encapsulate" an application or database and make the encapsulated data or functions available to other systems that might need to make use of them. Most competitive offerings in the marketplace attempt to provide this means of encapsulation in one way or another. The Company believes that EIT is unique and provides more utility because it goes beyond its competitors and allows the encapsulated services to be included in object classes that model part or all of the elements of a business process or enterprise. Business rules and business events can also be modeled. EIT also provides for the export of the services provided by the object representations to end-user applications that can be written in any language that conforms to industry and open system standards for object communication such as Microsoft's DCOM or the Object Management Group's CORBA standard. The Company's process automation templates described below integrate seamlessly with EIT allowing the automation of critical business processes with the integration of pre-existing systems. The Company believes that this combination of technologies is well suited to the implementation of e-commerce applications, re-engineered business processes (e.g. customer-centric processes), and internet enabled legacy systems. The Company anticipates that specialized versions of EIT will be created for certain industries. One such thrust has been initiated in the telecommunications industry, called Telco Integration in a Box ("TIIB"). The Company expects that these specialized versions will include, at a minimum, EIT and packaged connectors to market-leading software packages in the targeted industry. Foundation Template - ------------------- The basic use of the Company's Foundation Template is in the rapid automation of part or all of an enterprise business process. The Foundation Template, which is based on distributed object technology, is designed to promote large-scale code reuse and the capture of business rules and events. The base reusable software in the Foundation Template provides for up to 65%-75% of the code for distributed, multi-process applications, including two and three tier client- server and peer-to-peer applications. The Foundation Template includes built-in components and functionality, including dynamic graphical user interfaces, storage capabilities for database and file access, facilities to integrate with class libraries and legacy applications and advanced communications protocols. The Foundation Template also provides inter-process communications that provide dynamic object sharing and updating which allow the reconfiguration or scaling of distributed applications with little or no code changes. To achieve this reconfiguration or scaling, the Foundation Template provides a facility called the Shared Information Base ("SIB") which provides for inter-process communication among applications running on a single hardware platform or multiple heterogeneous platforms. Because multiple Foundation Template application processes can communicate on a peer-to-peer basis through a shared information base, a developer can easily scale an application up from a single workstation to a dispersed network of multiple workstations. The following are optional components of the Foundation Template: Web Component. Web Component is an extension to the Foundation Template for creating Web-based, enterprise-wide solutions. Web Component incorporates the Foundation Template's functionality and provides for the dynamic generation in real-time of Hypertext Markup Language ("HTML"). As a result, solutions developed with the Foundation Template can be deployed across the Internet and Intranets using Internet protocol with HTML coding. Web Component supports leading web browsers and servers, including those developed by Netscape Communications Corporation and Microsoft Corporation. Web Component also takes advantage of emerging standards such as HTML 3.0 and Java. Process Monitoring Component ("PMC"). PMC provides for the management of a highly distributed, multi-process solution from a single location. A multi- process application can be monitored and managed remotely. Failure of processes can be detected remotely and in real time. Processes can be restarted remotely. This type of sophisticated capability is essential for the operational deployment of enterprise distributed solutions. Geographic Mapping Component ("GMC"). GMC allows the display of data overlaid on geographic maps. The data overlays are "live" and can be changed in real time. This type of display is important for enterprise solutions such as fleet monitoring and management. Process Templates - ----------------- The Process Templates consist of the Workflow Template and the System Management Template. Workflow Template ("WFT"). WFT is a template for creating workflow solutions that automate and provide real-time management and control of the functions and tasks involved in a business process, such as claims processing and order fulfillment. WFT incorporates the Foundation Template's functionality and provides the basis for up to 90% of the code for most workflow solutions. WFT is based on a business operations model which enables easy development of a rules- based, process oriented workflow system. WFT provides the versatility to develop workflow solutions that range from departmental systems to production and enterprise-wide systems. WFT includes nine high-level editors which provide the visual tools for workflow business process engineering, analysis and design. System Management Template ("SMT"). SMT is a template for creating solutions that provide real-time monitoring and control of complex physical processes, such as pipeline management and computer network management. SMT enables solutions that monitor the status of complex systems and gives people in an organization the ability to rapidly change the elements of the system. SMT tightly integrates key management and operation services for system management with built-in components for managing and routing commands, monitoring and managing the system management application, filtering and routing system problems and providing and regulating access control. SMT also provides a comprehensive list of class libraries, configuration tools and a base application for system management application development. Services - -------- The Company has a comprehensive service organization that helps to ensure successful mass customization of solutions for its customers based on the Company's products. The Company provides its customers with software-related services to specify, design, customize, and deploy the software solutions necessary to meet its customers' integration and business process automation needs. The Company believes that the availability of its software-related services is a key factor in customer purchasing decisions. The Company's services have been and are expected to continue to be an important source of revenues. The fees for the Company's solutions services can be fixed in advance of each stage of the delivery process for which the Company has been engaged. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company's products are generally licensed to end users pursuant to a license agreement that restricts the use of the products. In addition, the Company generally enters into confidentiality agreements with its employees and consultants that limit access to and distribution of its proprietary information. The degree and scope of legal protection available for the Company's software products may vary in certain foreign countries. The Company has entered into source code escrow agreements with a limited number of its customers and resellers requiring release of source code in certain circumstances. Such agreements generally provide that such parties will have a limited, non-exclusive right to use such code in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to do business or if the Company fails to meet its support obligations. SEASONALITY The operating results of many software and business solutions companies reflect seasonal trends, and the Company expects to be affected by such trends in the future. Although the Company has not experienced consistent seasonal fluctuations in operational results to date, the Company believes that it is likely that it will experience relatively higher revenues in the Company's fiscal quarters ending on December 31, and relatively lower revenues in its fiscal quarters ending on March 31, as a result of efforts by its direct sales force to meet fiscal year-end sales quotas, assuming the projects can be completed and the corresponding revenue recognized. To the extent future international operations constitute a higher percentage of the Company's total revenues, the Company anticipates that it may also experience relatively weaker demand in the fiscal quarters ending on September 30 as a result of reduced sales activity in Europe during the summer months. BACKLOG A number of the Company's client projects are performed on a fixed- price basis and, therefore, the Company bears the risk of cost overruns and inflation. A portion of net revenues are recognized on the percentage-of- completion method which requires revenues to be recorded over the term of a client contract. Revenues attributable to the sale of software products are recognized upon shipment and revenues attributable to services are recognized upon completion. A loss is recorded at the time when current estimates of project costs exceed unrecognized revenues. Quarterly revenues and operating results can depend on the significance of client engagements commenced and completed during a quarter, the number of working days in a quarter and employee utilization rates. The timing of revenues is difficult to forecast because the Company's sales cycle is relatively long in the case of new clients and may depend on factors such as the size and scope of assignments and general economic conditions. The Company's software products are typically used to develop applications that are critical to a customer's business and the purchase of the Company's products is often part of a customer's larger business process reengineering initiative or implementation of distributed computing. As a result, the license and implementation of the Company's software products and business solutions generally involves a significant commitment of management attention and resources by prospective customers. Accordingly, the Company's sales process is often subject to delays associated with a long approval process that typically accompanies significant initiatives or capital expenditures. Because a high percentage of the Company's expenses are relatively fixed, a variation in the timing of the initiation or the completion of client assignments, particularly at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter and could result in losses. The Company attempts to manage its personnel utilization rates by closely monitoring project timetables and staffing requirements for new projects. On a typical project, a significant number of personnel are provided by the Company's clients or third parties. While professional staff must be adjusted to reflect active projects, the Company must maintain a sufficient number of senior professionals to oversee existing client projects and participate with the Company's sales force in securing new client assignments. In addition, many of the Company's engagements are, and may be in the future, terminable without client penalty. An unanticipated termination of a major project could require the Company to maintain or terminate under-utilized employees, resulting in a higher than expected number of unassigned persons or higher severance expenses. A significant portion of the Company's revenues has been, and the Company believes will continue to be, derived from a limited number of orders placed by large organizations, and the timing and fulfillment of such orders have caused and are expected to continue to cause material fluctuations in the Company's operating results, particularly on a quarterly basis. Historically, with the exception of the federal government, organizations that provide in excess of 10% of the Company's revenues have changed from year to year. For the fiscal year ended November 30, 1997, Winstar Telecommunications, Inc. and the federal government in aggregate accounted for more that 10% of the Company's total revenue, representing an aggregate of approximately 36% of total revenue, or 13% and 23% of total revenue, respectively. For the fiscal year ended December 31, 1998, each of Winstar Telecommunications, Inc. and the federal government (comprising three different agencies and contracts) accounted for more than 10% of the Company's total revenue, representing an aggregate of approximately 40% of total revenue, or 11% and 29% of total revenue, respectively. GOVERNMENT CONTRACTS The Company has a government business unit comprised of approximately 50 people who provide technical services to government agencies. The principal function of this group is to administer certain contracts, some of them classified, between the Company and agencies of the federal government. The nature of this work is technical design and software development which the Company has been performing for the federal government since 1977. Approximately 23% and 29% of the Company's total revenues in fiscal years 1997 and 1998, respectively, were derived from contracts with the government. Government contracts, by their terms, generally can be terminated at any time by the government, without cause, for the convenience of the government. If a government contract is so terminated, the Company would be entitled to receive compensation for the services provided or costs incurred at the time of termination and a negotiated amount of the profit on the contract to the date of termination. In addition, all government contracts require compliance with various contract provisions and procurement regulations. The adoption of new or modified procurement regulations could adversely affect the Company or increase its costs of competing for or performing government contracts. Any violation (intentional or otherwise) of these regulations could result in the termination of such government contracts, imposition of fines, and/or debarment from award of additional government contracts. The termination of any of the Company's significant government contracts or the imposition of fines, damages, or suspension from bidding on additional government contracts could have a material adverse effect on the Company. COMPETITION The information technology consulting, software development, enterprise application integration and business solution markets include a large number of participants, are subject to rapid changes and are highly competitive. These markets are highly fragmented and served by numerous firms, many of which serve only their respective local markets. Clients may elect to use their internal information systems resources to satisfy their needs for software development and technical consulting services, rather than using those offered by the Company. In the software development tools market, representative competitors of the Company include, among others, Forte Software, Inc., ViewStar Corporation, ILOG S.A. and SEER Technologies, Inc. In the enterprise application integration market, representative competitors of the Company include, among others, Crossworlds Software, Inc., Vitria Technology, Inc., and Active Software, Inc. In the information technology consulting market, representative competitors of the Company include, among others, Cambridge Technology Partners, Inc. and TCSI Corporation. In the business solutions market, representative competitors of the Company include, among others, Electronic Data Systems and the consulting departments of the "Big Five" accounting firms. The Company believes that its ability to compete depends in part on a number of competitive factors outside its control, including the ability of its competitors to hire, retain and motivate senior project managers, the ownership by competitors of software used by potential clients, the development by others of software that is competitive with the Company's products and services, the price at which others offer comparable services and the extent of its competitor's responsiveness to customer needs. SALES AND MARKETING To reach a broad potential customer base, the Company has pursued multiple distribution channels, including a direct sales force, as well as third party relationships with distributors, value added resellers and systems integrators. The Company's direct sales force focuses on large customers and leverages its industry experience to access target organizations within particular vertical markets. These markets are characterized by business areas to which the Company's services and technology are particularly well-suited, and by participants who possess the financial resources and scale of operations necessary to support the engagement of solution providers such as the Company. The Company identifies leading organizations in each industry and seeks to provide an initial solution that builds on one of the Company's reusable software templates. Once an initial project has been successfully completed, the Company seeks to offer additional solutions that automate and enhance other business processes for the client. The Company intends to target additional industries in which its business area experience and advanced software technology expertise can be applied. An important element of the Company's sales and marketing strategy is to expand its relationships with third parties to increase market awareness and acceptance of the Company's software solutions. The relationships with each of these groups generally provide for training and other support necessary to promote the market acceptance of the Company's products. The Company has organized worldwide into two major geographic divisions for sales and distribution of its solutions: the Americas and Europe/International. The Company previously had an Asia/Pacific geographic division for sales and distribution, which was discontinued in 1998 and consolidated with Europe/International until such time as the markets in those areas improve and stabilize. Within each geographic division, the Company intends to establish industry specific groups to focus on solutions within each targeted area. In the Americas, the Company has a strong telecommunications industry group and a well-established federal government industry group. In Europe, the Company has an established presence, with over half of the manpower resources of the Company located in western Europe. The Company has a customer base in telecommunications, insurance and other industries in Europe. PRODUCT DEVELOPMENT The Company believes that its future success will depend in large part on its ability to enhance its current family of software products, develop new products, maintain technological leadership and satisfy an evolving range of customer requirements for enterprise application integration and business process automation. The Company's product development organization is responsible for product architecture, core technology and functionality, product testing, visual tool development and expanding the ability of the Company's software templates to operate with the leading hardware platforms, operating systems, relational database management systems and networking and communication protocols. This organization is also responsible for new product development. In fiscal year 1998, product development expenses were $1.4 million. Management expects that, as a result of its product development strategy, internally funded research and development costs may increase significantly in future periods. There can be no assurance that such increased research and development costs will result in the successful introduction of new products. The Company attempts to continuously improve its existing products in two ways. In response to market demands, the Company seeks to enhance its current family of software templates through planned releases. At the same time, the Company tries, on an ongoing basis, to expand its existing family of products by periodically introducing new template-based products. This effort to enhance existing products falls into three categories. First, the Company adds new visual development tools to increase the productivity of those using its templates. Second, the Company adds new functionality to its existing templates in the form of reusable code. Third, as new platforms and standards are introduced into the market, the Company ports its templates to new platforms and standards to enhance interoperability. The Company usually retains the right to enhancements of its products. However, the Company generally assigns ownership of the custom software components to its clients. In 1998, the Company introduced one new product -- the Enterprise Integration Template -- and two new components -- PMC and GMC. The Company believes that it is advantageously positioned to introduce new products which exploit market opportunities in a timely fashion due to the modular reuseability of its core technology. This building block approach allows the Company to create new products very rapidly. EIT is representative of this ability, in that it was conceived and brought to market in its first version in less than one year. This agile reaction has positioned the Company to be an important competitor in the EAI market. ACQUISITIONS AND ALLIANCES In 1998, the Company acquired the remaining 56% of the issued and outstanding equity interest of Milestone Austria. The Company had previously acquired 44% of Milestone Austria in 1997. The Company constantly seeks strategic relationships with development partners, systems integrators, value added resellers and independent software vendors as a part of its strategy to promote the widespread use of its products and services. The company believes that these alliances will enhance and increase its market visibility and penetration. In this regard, the company has entered into relationships with the following companies: Alcatel. The Company fosters a relationship with Alcatel Alsthom Compagnie ------- Generale d'Electricite S.A. ("Alcatel"), one of the worlds largest telecommunications, energy and transport systems suppliers. Alcatel employs the Company's products and services in a number of its internal projects and customer engagements. Computer Associates. In October 1997, the Company announced a partnership ------------------- with Computer Associates International, Inc. to pursue opportunities in the enterprise computing solutions market. Precise. In March 1998, the Company entered into a relationship, including ------- a $500,000 investment, in Precise Connectivity Solutions, Ltd. ("Precise"). Precise creates software connectors for IBM mainframe and AS/400 computers, and the Company's investment in Precise gave the Company access to this software, which will aid in the upcoming release of the Company's EIT software. Eagle Eye. In September 1998, the Company entered into a relationship, --------- including a $1,000,000 investment, in Eagle Eye Technologies, Inc. ("Eagle Eye"). As part of this relationship, the Company is helping Eagle Eye develop a service operations center, which the Company anticipates will help give the Company access to new markets for its products, including transportation and tracking. BULL. In December 1998, the Company entered into an agreement with BULL, a ---- large worldwide systems integrator, whereby BULL will have the right to use and sublicense the Company's technology products for use in worldwide customer engagements. ManTech Systems Engineering Corporation ("ManTech"). In April, 1998, the --------------------------------------------------- Company entered into a relationship with ManTech for the purpose of co-marketing and teaming on selected projects where the Company's technology would be proposed. EMPLOYEES As of December 31, 1998, the Company had a total of 314 full-time employees, of which 264 were technical and technical support personnel. None of the Company's employees are subject to a collective bargaining agreement. The Company believes that its relations with its employees are excellent. YEAR 2000 COMPLIANCE See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this Annual Report on Form 10-K. FINANCIAL INFORMATION ABOUT INTERNATIONAL OPERATIONS AND EXPORT SALES Revenues from foreign subsidiaries and export sales accounted for 49.0% and 51.9% of the Company's total revenues in fiscal years 1997 and 1998, respectively. The Company believes that in order to increase sales opportunities and profitability, it will be required to continue to expand its international operations. The Company has committed and continues to commit significant management time and financial resources to developing direct and indirect international sales and support channels. There can be no assurance, however, that the Company will be able to maintain or increase international market demand for the Company's software products and services. To the extent that the Company is unable to do so in a timely manner, the Company's international sales will be limited, and the Company's business, operating results and financial condition would be materially and adversely affected. ITEM 2. PROPERTIES The Company's principal administrative, sales, marketing, and product development facility occupies approximately 63,000 square feet in Dulles, Virginia pursuant to a lease which expires in December 2006. The Company also leases sales and support offices in Georgia, Louisiana, Maryland and Pennsylvania. It maintains an office in Arlington, Virginia for its government business unit and maintains one international office in each of the United Kingdom, France and Austria and four international offices in Germany. The Company believes that its existing facilities are adequate for its current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed. ITEM 3. LEGAL PROCEEDINGS On December 23, 1998, the Company filed an action against Automated Financial Systems, Inc. ("AFS") in the United States District Court for the Eastern District of Virginia seeking compensatory damages of approximately $950,000 resulting from AFS' failure to pay fees to the Company pursuant to a February 1998 consulting agreement. AFS has filed a counterclaim against the Company, asserting breach of contract, deceit and fraud, seeking an unspecified amount of money damages for lost profits, loss of business and other economic damages. The Company has filed a motion to dismiss the counterclaim, which is pending. Discovery has commenced in the action. The Company cannot currently predict the outcome of this litigation. If the Company is not successful in pursuing these claims, there could be a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company is and may from time to time be involved in ordinary routine litigation incidental to its business. Other than as described above, the Company is not aware of any pending or threatened litigation that could have a material adverse effect on the Company's business, results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1998. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on The Nasdaq Stock Market(R) under the symbol "TMPL." The Company commenced its initial public offering of Common Stock on January 29, 1997 at a price of $16 per share. Prior to such date, there was no public market for the Common Stock. The following table sets forth the high and low closing sale prices for the Common Stock for the periods indicated, as reported on The Nasdaq Stock Market(R).
High Low ---- --- Fiscal Year 1998 ended December 31, 1998: - ----------------------------------------- First Quarter of fiscal year 1998 $15.250 $11.250 Second Quarter of fiscal year 1998 $14.000 $ 9.250 Third Quarter of fiscal year 1998 $12.000 $ 3.875 Fourth Quarter of fiscal year 1998 $ 6.750 $ 3.000 Fiscal Year 1997 ended November 30, 1997: - ----------------------------------------- First Quarter of fiscal year 1997 (from January 29, 1997) $16.250 $13.625 Second Quarter of fiscal year 1997 $13.125 $ 7.750 Third Quarter of fiscal year 1997 $19.125 $11.625 Fourth Quarter of fiscal year 1997 $14.875 $ 9.750
As of March 23, 1999, there were 60 record holders and approximately 1,400 beneficial stockholders of the Company's common stock, as shown in the records of the Company's transfer agent. The Company has never declared or paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Company's bank line of credit currently prohibits the payment of cash dividends. Use of Proceeds In the Company's Registration Statement on Form S-1 (Registration No. 333- 17063) effective January 28, 1997, 1,400,000 shares of Common Stock were registered for the account of the Company and 700,000 shares of Common Stock were registered for the accounts of selling security holders with an aggregate offering price of $16.00 per share registered. The expenses incurred for the Company's account in connection with the issuance and distribution of the securities were $1,568,000 of underwriting discounts and commissions and $1,068,641 of other expenses for a total expense of $2,636,641. The net offering proceeds for the account of the Company were $19,763,359. From the effective date of the Registration Statement, through the end date of the period covered by this report, the Company used $7,414,387 to acquire other businesses, $8,211,006 to purchase temporary investments in marketable securities, $1,500,000 to invest in convertible promissory notes of other businesses, and the remaining amount of $2,637,966 in property, plant and equipment. There has not been a material change in the use of proceeds described in the Company's prospectus. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto and "Item 7 --Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K. The following selected consolidated financial data of the Company as of November 30, 1997 and December 31, 1998 and for the years ended November 30, 1996, November 30, 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998, have been derived from the Company's consolidated financial statements audited by PricewaterhouseCoopers LLP, independent accountants, included elsewhere herein. The balance sheet data as of November 30, 1994, 1995 and 1996 and the statement of operations data for the years ended November 30, 1994 and 1995 have been derived from the Company's audited consolidated financial statements not included herein.
One month ended Year Ended December December Year Ended November 30, 31, 31, ---------------------------------------------- ---------- ---------- 1994 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- ---------- (in thousands, except per share amounts) Statement of Operations Data: Revenues: Products $ 2,893 $ 2,386 $ 1,918 $ 8,539 $ 95 $ 8,014 Services 3,420 4,705 11,612 18,371 2,050 34,625 ---------- ---------- ---------- ---------- ---------- ---------- Total revenues 6,313 7,091 13,530 26,910 2,145 42,639 ---------- ---------- ---------- ---------- ---------- ---------- Cost of revenues: Products 978 896 783 2,145 162 1,686 Services 1,873 2,592 6,246 10,640 1,647 22,491 ---------- ---------- ---------- ---------- ---------- ---------- Total cost of revenues 2,851 3,488 7,029 12,785 1,809 24,177 ---------- ---------- ---------- ---------- ---------- ---------- Gross profit: 3,462 3,603 6,501 14,125 336 18,462 ---------- ---------- ---------- ---------- ---------- ---------- Operating expenses: Selling and marketing 1,510 1,181 2,362 6,271 707 9,758 Product development 924 272 966 1,315 128 1,445 General and administrative 1,446 1,479 1,473 3,163 403 6,139 ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses 3,880 2,932 4,801 10,749 1,238 17,342 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations (418) 671 1,700 3,376 (902) 1,120 Interest income (expense), net (75) (108) (22) 873 45 615 Other income (expense), net - 1 12 (101) (38) 143 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes (493) 564 1,690 4,148 (895) 1,878 Income tax benefit (provision) 218 (237) (645) (1,768) 272 (748) ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss) $ (275) $ 327 $ 1,045 $ 2,380 $ (623) $ 1,130 Earnings (loss) per common share-diluted(1) $ (0.09) $ 0.07 $ 0.23 $ 0.44 $ (0.13) $ 0.20 ========== ========== ========== ========== ========== ========== Weighted average number of common shares outstanding 3,186,331 4,655,824 4,643,919 5,419,150 4,676,304 5,708,932 ========== ========== ========== ========== ========== ==========
As of December As of November 30, 31, ------------------------------------------------------- 1994 1995 1996 1997 1998 ------------------------------------------------------- (in thousands) Balance Sheet Data: Cash and cash equivalents $ 16 $ 63 $ 8,397 $ 2,739 $ 1,831 Working capital 277 473 9,009 22,704 20,716 Total assets 3,021 3,461 13,985 42,971 49,084 Long-term liabilities 650 335 790 521 1,325 Total shareholders' equity $ 572 $ 901 $10,043 $37,293 $39,081
___________________ (1) See Note 2 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute per share amounts. See "Item 7 - - Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of acquisition activity in 1997 and 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company provides enterprise-wide software solutions to organizations that require the integration of their operations and systems in an effort to better automate their critical business processes. To date, substantially all of the Company's revenues have been derived from license fees for use of the Company's products ("Product Revenue") and fees from software-related services ("Services Revenue"). These services primarily relate to the customization of the Company's products which includes software development, training, maintenance, systems integration and systems planning. The Company provides its software products and business solutions to customers in both domestic and foreign markets under license agreements, service contracts and purchase orders. Fees for solutions, consisting of a combination of software-development services provided by the Company and licenses to use the Company's products, are typically based on staffing requirements and the overall scope and timing of the project as agreed upon with the client. The Company's software templates, tools and reusable solutions are typically licensed separately for development and deployment. Development license fees are primarily based upon the number of developers who will be using the Company's products. Deployment license fees are based upon the number of end-users, or the number and power of computing platforms (servers) that execute the specialized application created with Template technology. The Company recognizes revenue from software products when the related license agreement has been executed and the software has been shipped to and accepted by the client. The Company recognizes revenue for software-related services based on the type of contractual arrangement under which the services are performed. In its commercial business, the Company typically contracts on a fixed-price basis or on a time-and-material basis, depending on the overall project scope, project risks and client requirements. In its government business, the Company typically contracts on a cost-plus-fixed-fee basis. The Company recognizes revenue from fixed-price contracts using the percentage of completion method. Revenue from time-and-material contracts is recognized when the services are performed. The Company recognizes revenue from cost-plus-fixed-fee contracts on the basis of reimbursable contract costs incurred during the period at provisional billing rates, and year-end adjustments for actual costs are shown as under (over) billed costs. Management believes that these cost adjustments are fully allowable under their respective cost-plus contracts and prevailing government regulations. The Company acquired Template Software S.A. in March 1997 and Milestone in June 1997 in transactions accounted for using the purchase method. The results of operations for these two wholly owned subsidiaries are included beginning on the date of their respective acquisitions. At the date of the acquisition of Milestone by the Company in June 1997, Milestone owned 34% and 20% of the issued and outstanding equity interests of Milestone Austria and Milestone Switzerland, respectively. As part of this same transaction, the Company contemporaneously acquired an additional 10% of the issued and outstanding equity interests Milestone Austria. In March 1998, the Company acquired the remaining 56% of the issued and outstanding equity interests of Milestone Austria. In December 1998, the Company liquidated its wholly owned subsidiary, Template Software de Mexico S.A. de C.V. RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 Revenue. Total revenue was $42.6 million in 1998 compared to $26.9 million ------- in 1997, an increase of $15.7 million or 58.5%. This growth resulted principally from implementing large scale solutions to customers such as Allied Dunbar, BULL, Motorola Center Computersysteme ("Motorola"), the National Imagery and Mapping Agency ("NIMA"), U.S. Department of the Navy and Winstar Telecommunications. Additionally, this growth is the result of consolidating 12 months of revenue, or $14.0 million, and 9 months of revenue, or $2.1 million, from the Company's German and Austrian subsidiaries, respectively, in 1998 versus 5 months of revenue, or $6.9 million, from the Company's German subsidiary in 1997. Product Revenue was $8.0 million in 1998 compared to $8.5 million in 1997, a decrease of $0.5 million or 6.2%. Approximately $0.2 million of the decrease was attributable to a decline in sales of third party software products by the Company's German subsidiary. Such decline was primarily due to the shift in the focus of the German sales force to Company products. Approximately $0.3 million of the decrease was attributable to sales of the Company's products. The Company believes this decline is due to a shift in the marketplace to products that address integration challenges facing companies today as well as the budget constraints created by the Year 2000 Issue. The Company has positioned its newest technology, EIT, to address this market shift. The Company has also made organizational changes in its sales operations and its incentive structures to better focus its resources on product sales in 1999. Services Revenue was $34.6 million in 1998 compared to $18.4 million in 1997, an increase of $16.2 million or 88.5%. This increase was primarily attributable to the implementation of solutions for BULL, Allied Dunbar, Motorola, NIMA and the U.S. Department of the Navy described above. Cost of Revenue. Total cost of revenue consists primarily of salaries and --------------- related benefits for personnel, and also includes an allocated portion of rent, building services and computer equipment services and expenses. Total cost of revenue was $24.2 million in 1998 compared to $12.8 million in 1997, an increase of $11.4 million or 89.0%. This increase was primarily attributable to additional staff hired to perform services for customers, and the effect of the consolidation of 12 and 9 months of the German and Austrian subsidiaries, respectively in 1998 versus 5 and no months in 1997. Additionally, approximately $1.6 million of subcontract costs were expended in the fourth quarter attributable to materials costs for the NIMA contract of which minimal markup was applied. Total cost of revenue was 56.7% of total revenue in 1998, compared to 47.5% of total revenue in 1997. This percentage increase was primarily attributable to a decrease in product revenue to overall revenue mix from 31.7% of total revenue in 1997 to 18.8% of total revenue in 1998. Cost of Product Revenue was $1.7 million in 1998 compared to $2.1 million in 1997, a decrease of $0.4 million or 21.2%. This decrease was primarily attributable to the reduction in the higher royalties incurred upon the sale of third party software products due to the decrease in the sales of such products. Cost of Services Revenue was $22.5 million in 1998 compared to $10.6 million in 1997, an increase of $11.8 million or 111.2%. This increase resulted primarily from the cost associated with staffing the growth in service contracts and the $1.6 million of third party products and services associated with the NIMA agreement. Because such staffing is relatively fixed in the short term, if any of the Company's engagements were to be terminated on short notice the Company would be unable to reduce cost of Services Revenue commensurate with the associated decrease in Services Revenue. Any such termination could have a material adverse effect on the Company's business, operating results and financial condition. Selling and Marketing. Selling and marketing expenses consist primarily of --------------------- expenses related to sales and marketing personnel, advertising, promotion, trade show participation and public relations. Selling and marketing expenses were $9.8 million in 1998 compared to $6.3 million in 1997, an increase of $3.5 million or 55.6%. This increase resulted primarily from increased trade show participation, advertising and the full twelve months consolidation of the Company's 1997 acquisitions in Europe. The Company anticipates that selling and marketing expenses will increase in 1999 as continued emphasis is placed on increasing the name recognition of the Company and its products in the marketplace. Product Development. Product development expenses were $1.4 million in ------------------- 1998 compared to $1.3 million in 1997, an increase of $0.1 million or 9.9%. This increase resulted primarily from the development of the Company's EIT product. General and Administrative. General and administrative expenses include -------------------------- costs of corporate services functions including accounting, human resources and legal services, as well as the corporate executive staff. General and administrative expenses were $6.1 million in 1998 compared to $3.2 million in 1997, an increase of $2.9 million or 94.1%. This increase resulted primarily from increased goodwill amortization, increased staff, liquidation costs for the wind up of the Company's Mexican subsidiary and increased professional fees. The amortization of goodwill increased by $0.3 million in 1998 as the result of consolidating 12 months of the German and French subsidiaries in 1998 compared to 5 months and 9 months in 1997, respectively. Similarly, the administrative costs associated with those acquired subsidiaries increased by $0.9 million resulting from consolidation of those expenses for part of 1997 compared to the full year of consolidation in 1998. Professional fees increased as the result of tax planning initiatives and professional advise regarding strategic investments. Additionally, the Company added administrative positions such as a Contracts Manager and a European Controller in the fourth quarter of 1997. Income Tax Provision (Benefit). The provision for income taxes was ------------------------------- $748,117 in 1998 compared to $1,768,016 in 1997, a decrease of $1,019,899. This decrease was attributable to lower pretax earnings in 1998 compared to 1997. The Company's effective tax rate of 40% in 1998 was lower than the effective tax rate of 43% in 1997 primarily as a result of research and development tax credits obtained in 1998 that were not applied for in 1997. The Company intends to amend its previous years tax returns to recapture these credits for all open tax years. The Company expects the tax rate to be in the range of 40% to 45% in 1999. COMPARISON OF YEARS ENDED NOVEMBER 30, 1997 AND NOVEMBER 30, 1996 Revenue. Total revenue was $26.9 million in 1997 compared to $13.5 million ------- in 1996, an increase of $13.4 million or 98.9%. This growth resulted principally from an increase in the size of a customer engagement, the increase in the Company's capacity to provide services through expansion in the number of software professionals employed globally and acquisitions. Product Revenue was $8.5 million in 1997 compared to $1.9 million in 1996, an increase of $6.6 million or 345.0%. Approximately $4.7 million of this increase was attributable to the sale of development and deployment licenses associated with several large customer engagements with the remaining $1.9 million being attributable to product revenue realized from five months of operations of Milestone which was acquired during fiscal 1997. Services Revenue was $18.4 million in 1997 compared to $11.6 million in 1996, an increase of $6.8 million or 58.2%. This increase was primarily attributable to added service revenue from newly acquired European operations. Cost of Revenue. Total cost of revenue consists primarily of salaries and --------------- related benefits for personnel, and also includes an allocated portion of rent, building services and computer equipment services and expenses. Total cost of revenue was $12.8 million in 1997 compared to $7.0 million in 1996, an increase of $5.8 million or 81.9%. This increase was primarily attributable to additional professional staff hired and added through acquisitions to perform the increased volume of software services. Total cost of revenue was 47.5% of total revenue in 1997, compared to 51.9% of total revenue in 1996. This percentage decrease was primarily attributable to an increase in the product revenue to overall revenue mix from 14.2% of total revenue in 1996 to 31.7% of total revenue in 1997. Cost of Product Revenue was $2.1 million in 1997 compared to $0.8 million in 1996, an increase of $1.3 million or 174.1%. This increase was primarily attributable to the additional cost associated with the products sold by Milestone which have a higher cost structure. Cost of Services Revenue was $10.6 million in 1997 compared to $6.2 million in 1996, an increase of $4.4 million or 70.3%. This increase resulted primarily from the cost associated with staffing the growth in services contracts. Because such staffing is relatively fixed in the short term, if any of the Company's engagements were to be terminated on short notice, the Company would be unable to reduce the Cost of Services Revenue commensurate with the associated decrease in Services Revenue. Any such termination could have a material adverse effect on the Company's business, operating results and financial condition. Selling and Marketing. Selling and marketing expenses consist primarily of --------------------- expenses related to sales and marketing personnel, advertising, promotion, trade show participation and public relations. Selling and marketing expenses were $6.3 million in 1997 compared to $2.4 million in 1996, an increase of $3.9 million or 165.4%. This increase resulted primarily from the Company's enlargement of its direct sales force and marketing department. The number of sales and marketing staff increased from 8 to 35 in 1997, 19 of which were added for the last five months of fiscal 1997 with the acquisition of Milestone. Product Development. Product development expenses were $1.3 million in ------------------- 1997 compared to $1.0 million in 1996, an increase of $0.3 million or 36.0%. This increase resulted primarily from the development of the Company's Process Monitoring and Geographic Mapping Components of the Foundation Template, enhancements to its visual development tools and major new releases of the Foundation Template and Workflow Template. General and Administrative. General and administrative expenses include -------------------------- costs of corporate services functions including accounting, human resources and legal services, as well as the corporate executive staff. General and administrative expenses were $3.2 million in 1996 compared to $1.5 million in 1996, an increase of $1.7 million or 114.8%. This increase resulted primarily from the additional administrative staff and expenses of the newly acquired subsidiaries and the amortization of the purchase price of the subsidiaries in excess of the net assets acquired of $374,237. Income Tax Provision. The provision for income taxes was in $1,768,016 in -------------------- 1997 compared to $644,502 in 1996, an increase of $1,123,514. This increase was attributable to the Company's greater pretax profit level in 1997. The Company's effective tax rate of 43% in 1997 was higher than the effective tax rate of 38% in 1996 primarily as a result of the higher foreign statutory tax rates and an increase in book-tax permanent differences. QUARTERLY OPERATING RESULTS The following tables set forth certain unaudited quarterly results of operations for each of the four quarters ended November 30, 1997, one month ended December 31, 1997 and the four quarters ended December 31, 1998, together with such data as a percentage of total revenue. In the opinion of management, this quarterly information has been prepared on the same basis as the annual Consolidated Financial Statements presented elsewhere in this Annual Report on Form 10-K and includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the information for the periods presented when read in conjunction with the Consolidated Financial Statements and the Notes thereto. The operating results for any quarter are not necessarily indicative of results of the full year or of any future quarter.
One Month Quarter Ended Ended Quarter Ended ---------------------------------------------------------------------------------------------- Feb 28, May 31, Aug 31, Nov 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, 1997 1997 1997 1997 1997 1998 1998 1998 1998 ---------------------------------------------------------------------------------------------- (in thousands) Revenues: Products $1,489 $1,236 $1,929 $3,886 95 1,325 2,568 1,214 2,907 Services 2,465 3,339 5,579 6,987 2,050 7,233 7,680 8,646 11,066 ----- ----- ----- ----- ------ ------ ----- ----- ------ Total revenues 3,954 4,575 7,508 10,873 2,145 8,558 10,248 9,860 13,973 ----- ----- ----- ----- ------ ------ ----- ----- ------ Cost of revenues: Products 182 181 657 1,126 162 335 418 349 584 Services 1,467 1,698 3,177 4,297 1,647 4,484 4,796 5,447 7,764 ----- ----- ----- ----- ------ ------ ----- ----- ------ Total cost of revenues 1,649 1,879 3,834 5,423 1,809 4,819 5,214 5,796 8,348 ----- ----- ----- ----- ------ ------ ----- ----- ------ Gross profit 2,305 2,696 3,674 5,450 336 3,739 5,034 4,064 5,625 ----- ----- ----- ----- ------ ------ ----- ----- ------ Operating expenses: Selling and marketing 824 1,289 1,800 2,358 707 2,247 2,561 2,348 2,602 Product development 326 310 310 368 128 345 322 355 423 General and administrative 633 504 851 1,176 402 1,294 1,516 1,288 2,041 ----- ----- ----- ----- ------ ------ ----- ----- ------ Total operating expenses 1,783 2,103 2,961 3,902 1,237 3,886 4,399 3,991 5,066 ----- ----- ----- ----- ------ ------ ----- ----- ------ Income (loss) from operations 522 593 713 1,548 (901) (147) 635 73 559 Interest expense 13 16 33 26 6 32 24 23 44 Other income (loss) 137 344 205 174 13 214 324 187 156 ----- ----- ----- ----- ------ ------ ----- ----- ------ Income (loss) before income 646 921 885 1,696 (894) 35 935 237 671 taxes ----- ----- ----- ----- ------ ------ ----- ----- ------ Income tax benefit (provision) (239) (341) (347) (841) 271 (54) (296) (207) (191) ----- ----- ----- ----- ------ ------ ----- ----- ------ Net income (loss) 407 580 538 855 (623) (19) 639 30 480 ===== ===== ===== ===== ====== ====== ===== ===== ====== Earnings (loss) per $0.08 $0.11 $0.10 $0.16 $(0.13) $ 0.00 $0.11 $0.01 $ 0.09 share-diluted ===== ===== ===== ===== ====== ====== ===== ===== ======
As a Percentage of Total Revenues One Month Quarter Ended Ended Quarter Ended ---------------------------------------------------------------------------------------------- Feb 28, May 31, Aug 31, Nov 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, 1997 1997 1997 1997 1997 1998 1998 1998 1998 ---------------------------------------------------------------------------------------------- Revenues: Products 37.7% 27.0% 25.7% 35.7% 4.4% 15.5% 25.1% 12.3% 20.8% Services 62.3 73.0 74.3 64.3 95.6 84.5 74.9 87.7 79.2 ----- ----- ----- ----- ------ ------ ----- ----- ------ Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ----- ----- ----- ----- ------ ------ ----- ----- ------ Cost of revenues: Products 4.6 4.0 8.8 10.4 165.3 25.3 16.3 28.7 20.1 Services 37.1 37.1 42.3 39.5 80.6 62.0 62.4 63.0 70.2 ----- ----- ----- ----- ------ ------ ----- ----- ------ Total cost of revenues 41.7 41.1 51.1 49.9 84.3 56.3 50.9 58.8 59.7 ----- ----- ----- ----- ------ ------ ----- ----- ------ Gross profit 58.3 58.9 48.9 50.1 15.7 43.7 49.1 41.2 40.3 ----- ----- ----- ----- ------ ------ ----- ----- ------ Operating expenses: Selling and marketing 20.8 28.2 24.0 21.7 33.0 26.3 25.0 23.8 18.6 Product development 8.3 6.8 4.1 3.4 6.0 4.0 3.1 3.6 3.0 General and administrative 16.0 11.0 11.3 10.8 18.7 15.1 14.8 13.1 14.7 ----- ----- ----- ----- ------ ------ ----- ----- ------ Total operating expenses 45.1 46.0 39.4 35.9 57.7 45.4 42.9 40.5 36.3 ----- ----- ----- ----- ------ ------ ----- ----- ------ Income (loss) from operations 13.2 12.9 9.5 14.2 (42.0) (1.7) 6.2 0.7 4.0 Interest expense 0.3 0.3 0.4 0.2 0.3 0.4 0.2 0.2 0.3 Other income (loss) 3.4 7.5 2.7 1.6 0.6 2.5 3.1 1.9 1.1 ----- ----- ----- ----- ------ ------ ----- ----- ------ Income (loss) before income 16.3 20.1 11.8 15.6 (41.7) 0.4 9.1 2.4 4.8 taxes Income tax benefit (provision) (6.0) (7.4) (4.6) (7.7) 12.7 (0.6) (2.9) (2.1) (1.4) ----- ----- ----- ----- ------ ------ ----- ----- ------ Net income (loss) 10.3% 12.7% 7.2% 7.9% (29.0)% (0.2)% 6.2% 0.3% 3.4% ===== ===== ===== ===== ====== ====== ===== ===== ======
Because the Company's business is characterized by significant client concentration and relatively large projects, individual client engagements can have a significant impact on the Company's total revenue and total cost of revenue from quarter to quarter. In addition, variations in the Company's revenue and operating results occur as a result of a number of other factors, such as employee hiring and utilization rates as well as the number of working days in a quarter. The timing of revenue is difficult to forecast because the Company's sales cycle is relatively long and may depend on factors such as the size and scope of assignments and general economic conditions. Because a high percentage of the Company's expenses, particularly employee compensation, is relatively fixed, a variation in the timing of the initiation or completion of client engagements, especially at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter and could result in quarterly losses. See "Business Backlog." The operating results of many software and business solutions companies reflect seasonal trends, and the Company expects to be affected by such trends in the future. Although the Company has not experienced consistent seasonal fluctuations in operational results to date, the Company believes that it is likely that it will experience relatively higher revenues in the Company's fiscal quarters ending on December 31 and relatively lower revenues in its fiscal quarters ending on March 31 as a result of efforts by its direct sales force to meet fiscal year-end sales quotas. To the extent future international operations constitute a higher percentage of the Company's total revenues, the Company anticipates that it may also experience relatively weaker demand in the fiscal quarters ending on September 30 as a result of reduced sales activity in Europe during the summer months. See "Business Seasonality." LIQUIDITY AND CAPITAL RESOURCES In 1998, operating activities used $0.4 million in cash which was the result of an increase in accounts receivable which was partially offset by a net income of $1.1 million, $1.9 million of depreciation and amortization, $0.4 million of deferred compensation, an increase in accounts payable and accrued liabilities of $1.4 million, and an increase in deferred income of $0.8 million. The increase in accounts receivable was associated with the growth in revenue, combined with increased billing activity in the last month of the year. The number of days outstanding with respect to accounts receivable increased from 88 days as of November 30, 1997 to 103 days as of December 31, 1998, based upon annualized fourth quarter revenue. Cash used in investing activities totaled $1.8 million in 1998. The net change in the Company's marketable securities resulting from maturations, liquidations and reinvestments provided $5.0 million. This cash was invested in $3.6 million of property and equipment, $1.6 million of developed software and $1.5 million of convertible notes of two companies with which the Company has strategic relationships. Cash provided by financing activities was $0.5 million in 1998 relating primarily to the $0.9 million of proceeds from employee stock option exercises and the $0.7 million of tax benefits which were partially offset by the $0.2 million increase in debt and $0.8 million used to purchase Common Stock of the Company. On June 30, 1998, the Company entered into a Loan and Security Agreement (the "Loan Agreement") with First Union National Bank, successor by merger to Signet Bank (the "Bank"), which consists of a revolving credit facility (the "Facility") and a term loan. The Facility has a maximum borrowing amount of $3,000,000 with an expiration date of June 30, 1999 and the term loan is in the amount of $275,000 with an expiration date of October 31, 1999. The Facility bears interest at the LIBOR Market Index Rate (for the United States Dollar quoted by the British Bankers Association) plus 1.85% per annum and the term loan bears interest at the Bank's prime interest rate plus 1/4% per annum. Availability of the funds under the Loan Agreement is also subject to the Company's compliance with certain covenants customary with commercial loans, including covenants related to maintenance of certain levels of tangible net worth. The Loan Agreement further imposes restrictions on creation of debt, merger, sale of assets, loans or advances, guarantees, payment of dividends or repurchase of capital stock without the Bank's consent. The Loan Agreement contains certain financial and non-financial covenants, the most restrictive of which requires the Company to maintain defined levels of tangible net worth and a ratio of total liabilities to tangible net worth. As of November 30, 1997, and for certain compliance periods during the two years ended November 30, 1997, the Company was not in compliance with the foregoing financial covenants for which waivers were obtained. The Company was in compliance with all financial and non-financial covenants during the one month ended December 31, 1997 and the year ended December 31, 1998. In addition, the Company obtained the Bank's consent in connection with the Board of Directors approved stock repurchase program. On September 18, 1998, the Company announced that its Board of Directors authorized the repurchase of up to 500,000 shares of the Company's Common Stock in open market transactions effected in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. As of December 31, 1998, the Company had repurchased 184,000 shares of its Common Stock in such transactions. The Company has, and expects to continue to make, such repurchases using the Company's cash balances and cash generated from operations. The Company believes its cash balances, cash generated from operations and borrowings available under its line of credit, will satisfy the Company's working capital and capital expenditure requirements for at least the next twelve months. In the longer term, the Company may require additional sources of liquidity to fund future growth. In addition, in the normal course of business, the Company evaluates acquisitions of businesses, products and technologies that complement the Company's business, and such acquisitions also require liquidity. Sources of liquidity for future growth and acquisitions may include additional equity offerings or debt financings. There are no assurances that such sources of financing will be available to the Company and, if they are, that they will be sufficient to meet the Company's capital needs at such time. IMPACT OF INFLATION Inflation has not had any significant impact on the Company's operations. IMPACT OF YEAR 2000 ISSUE The "Year 2000 Issue" is the result of computer programs that were written using two digits rather than four to define the applicable year. If the Company's computer programs with date-sensitive functions are not Year 2000 compliant, they may recognize a date using "00" as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. Several of the Company's systems have been confirmed as Year 2000 compliant. However, the Company is conducting a Year 2000 compliance program to identify and correct any non-compliant software or systems that would cause a significant detrimental effect on the Company. This program is expected to be complete by August 31, 1999. The Company has identified its Year 2000 risk in four categories: internal administrative software; internal operational software and embedded chip technology; external noncompliance by customers and suppliers; and Company products. INTERNAL ADMINISTRATIVE SOFTWARE. All of the Company's internal administrative software is "off-the-shelf' commercially available software. The Company is currently gathering data to assess the impact of the Year 2000 on its administrative systems such as the accounting and human resources systems. The Company's main domestic accounting system has been determined to be non- compliant and will be replaced with the compliant version of the same software or, schedule permitting, replaced with new software. The Company expects to be in full compliance with its internal administrative financial systems before the Year 2000. However, if due to unforeseen circumstances, the implementation is not completed on a timely basis, the Year 2000 could have a material impact on the operations of the Company. Contingency plans are being developed where the Company feels there is some risk that a non-compliant system cannot be implemented before Year 2000. INTERNAL OPERATIONS SOFTWARE AND EMBEDDED CHIP TECHNOLOGY. The Company is currently gathering data to assess the impact of the Year 2000 on its operational systems such as production systems and communication systems, with Year 2000 compliance scheduled for August 31, 1999. The Company believes it can achieve compliance in this timeframe because all systems involved were bought as commercial packages and can be replaced by alternatives in short timeframe. The Company does not, at this time, have sufficient data to estimate the cost of achieving Year 2000 compliance for its operational systems. While the Company does not believe there is any material non-compliance in the production or communication systems, the Company is in the information-gathering phase. EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is in the process of identifying and contacting its critical suppliers, service providers and contractors to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remedy their own Year 2000 issues. It is expected that full identification will be completed by April 30, 1999. To the extent that responses to Year 2000 readiness are unsatisfactory, the Company intends to change suppliers, service providers or contractors to those who have demonstrated Year 2000 readiness but cannot be assured that it will be successful in finding such alternative suppliers, service providers and contractors. The Company does not currently have any formal information concerning the Year 2000 compliance status of its customers but has received indications that most of its customers are working on Year 2000 compliance. In the event that any of the Company's significant customers and suppliers do not successfully and timely achieve Year 2000 compliance, and the Company is unable to replace them with new customers or alternate suppliers, the Company's business or operations could be adversely affected. COMPANY PRODUCTS. The Company provides its customers with licensed software products that are manufactured and developed internally and licensed software products that are obtained from third party software vendors and resold. The following compliance statement covers the Company's internally produced software products and is provided to the general public on the Company's website. Year 2000 Compliance Statement The Company recognizes that most customers use Company software products in business-critical applications and that customers want to know if its products are "Year 2000 Compliant". The compliance statements below cover the Company's software products: Foundation Template (including the SNAP Template, Web Component, Geographic Mapping Component and Process Monitoring Component), Workflow Template ("WFT"), System Management Template ("SMT") and the Enterprise Integration Template ("EIT"). Definition: There is no single definition of the term "Year 2000 Compliant" that is generally accepted in the industry. The Company has created the definition below which we believe meets the letter and the spirit of a notice of compliance that meets our customer's requirements. A software product is "Year 2000 Compliant" when: (1) the software product itself does not fail at or near January 1, 2000 and (2) the software product provides documented time and date facilities that allow developers to build software that does not fail at or near January 1, 2000. The phrase at or near January 1, 2000 specifically includes treating the Year 2000 as a leap year. Compliance Statements: The Foundation Template (including the SNAP Template, Web Component, Geographic Mapping Component and Process Monitoring Component) provided by the Company is Year 2000 Compliant. The Workflow Template ("WFT") provided by the Company is Year 2000 Compliant. The Systems Management Template ("SMT") provided by the Company is Year 2000 Compliant. The Enterprise Integration Template ("EIT") provided by the Company is Year 2000 Compliant. How Compliance is Achieved: The Foundation Template, WFT, SMT and EIT meet the first criterion because they employ a single module to obtain or provide time and date information. This module has been extensively tested in many product development cycles and in many customer solutions. It handles the Year 2000 as a leap year. The Foundation Template, WFT, SMT and EIT meet the second criterion because they use a common data structure for time and date information. All time requests start by getting the operating system time, then developers use one function to convert operating system time to a single portable SNAP environment data structure. Developers use this data structure in applications to obtain time and date information. All time and date information is supplied as integer values. To provide a portable data structure the conversion algorithm is different for different operating system environments. The integer value returned for `year' is a number representing the number of years since 1900. The year value can be very large (over 10,000). The integer value will increment continuously at the turn of the century and beyond. The algorithm used to determine the current year (1900 + year) remains constant before and after the turn of the century. When using Company products that are Year 2000 Compliant it is still possible for application developers to introduce code that will make the overall application non-compliant. End of Company Year 2000 Compliance Statement The Company is in the process of contacting each third party software vendor whose software products the Company resells regarding Year 2000 compliance of those products. It is expected that this investigation will be completed by April 30, 1999. In all cases the third party software vendor's license agreement is passed on to the Customer and the Company is not a party thereto. The Company intends to discontinue reselling any third party software product that is deemed to be Year 2000 non-compliant as the result of this investigation. OTHER The Company does not intend to adopt the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" as they pertain to financial statement recognition of compensation expense attributable to option grants, however, the Company has disclosed the effects of this pronouncement in the notes to the financial statements on a pro forma basis. CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS (Cautionary Statements under the Private Securities Litigation Reform Act of 1995) The Company's disclosure and analysis in this Annual Report on Form 10-K and in its 1998 Annual Report to Shareholders contain certain forward-looking statements. Forward-looking statements give the Company's current expectations or forecasts of future events. Investors can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts, and use words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes" and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product releases, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. From time to time, the Company may also provide oral or written forward-looking statements in other materials released to the public. Any or all of the forward-looking statements made by the Company may turn out to be wrong. The statements can be affected by inaccurate assumptions the Company might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion above will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Investors are advised to consult any further disclosures made by the Company in its periodic reports filed with the Securities and Exchange Commission. The Company also provides the following cautionary discussion of risks and uncertainties relevant to its business. These are factors that the Company believes could cause actual results to differ materially from expected and historical results. Other factors besides those listed below could also materially adversely affect the Company. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. Variability of Quarterly Results; Uncertainty of Future Operating Results. The Company's quarterly operating results have varied significantly in the past and are likely to vary significantly in the future. This variability is due to a variety of factors including, without limitation, the size and timing of significant orders and their fulfillment; demand for the Company's products; changes in pricing policies by the Company or its competitors; the number, timing and significance of product enhancements and new product announcements by the Company and its competitors; the ability of the Company to develop, introduce and market new and enhanced versions of the Company's products on a timely basis; changes in the level of operating expenses; budgeting cycles of the Company's customers; customer order deferrals in anticipation of enhancements or new products offered by the Company or its competitors; the cancellation of licenses during the warranty period or non-renewal of maintenance agreements; product life cycles, software bugs and other product quality problems; personnel changes; changes in the Company's strategy; the level of international expansion; seasonal trends; and general domestic and international economic and political conditions. A significant portion of the Company's revenues have been, and the Company believes will continue to be, derived from a limited number of orders placed by large organizations, and the timing and fulfillment of such orders have caused and are expected to continue to cause material fluctuations in the Company's operating results, particularly on a quarterly basis. Historically, with the exception of the federal government, organizations that provide in excess of 10% of the Company's revenues have changed from year to year. The Company intends to continue to expand its domestic and international direct sales force. The timing of such expansion and the rate at which new sales people become productive could also cause material fluctuations in the Company's quarterly operating results. Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast. Revenues are also difficult to forecast because the market for enterprise application integration software is rapidly evolving, and the Company's sales cycle, from initial evaluation to purchase and the provision of support services, is lengthy and varies substantially from customer to customer. Due to the foregoing, revenues for any future quarter are not predictable with any significant degree of accuracy. Accordingly, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and should not be relied upon as indications of future performance. Although the Company has recently experienced revenue growth, such growth should not be considered indicative of future revenue growth, if any, or as an indication of future operating results. Failure by the Company, for any reason, to increase revenues would have a material adverse effect on the Company's business, operating results and financial condition. A significant number of the Company's client projects are performed on a fixed-price basis and, therefore, the Company bears the risk of cost overruns and inflation. A significant portion of net revenues are recognized on the percentage-of-completion method which requires revenues to be recorded over the term of a client contract. Revenues attributable to the sale of software tools are recognized upon shipment and revenues attributable to services are recognized upon completion. A loss is recorded at the time when current estimates of project costs exceed unrecognized revenues. Quarterly revenues and operating results can depend on the significance of client engagements commenced and completed during a quarter, the number of working days in a quarter and employee utilization rates. The timing of revenues is difficult to forecast because the Company's sales cycle is relatively long in the case of new clients and may depend on factors such as the size and scope of assignments and general economic conditions. The Company's software products are typically used to develop applications that are critical to a customer's business and the purchase of the Company's products is often part of a customer's larger business process reengineering initiative or implementation of distributed computing. As a result, the license and implementation of the Company's software products and business solutions generally involves a significant commitment of management attention and resources by prospective customers. Accordingly, the Company's sales process is often subject to delays associated with a long approval process that typically accompanies significant initiatives or capital expenditures. Because a high percentage of the Company's expenses are relatively fixed, a variation in the timing of the initiation or the completion of client assignments, particularly at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter and could result in losses. The Company attempts to manage its personnel utilization rates by closely monitoring project timetables and staffing requirements for new projects. On a typical project, a significant number of personnel are provided by the Company's clients or third parties. While professional staff must be adjusted to reflect active projects, the Company must maintain a sufficient number of senior professionals to oversee existing client projects and participate with the Company's sales force in securing new client assignments. In addition, many of the Company's engagements are, and may be in the future, terminable without client penalty. An unanticipated termination of a major project could require the Company to maintain or terminate under-utilized employees, resulting in a higher than expected number of unassigned persons or higher severance expenses. The operating results of many software and business solutions companies reflect seasonal trends, and the Company expects to be affected by such trends in the future. Although the Company has not experienced consistent seasonal fluctuations in operational results to date, the Company believes that it is likely that it will experience relatively higher revenues in the Company's fiscal quarters ending on December 31, and relatively lower revenues in its fiscal quarters ending on March 31, as a result of efforts by its direct sales force to meet fiscal year-end sales quotas, assuming the projects can be completed and the corresponding revenue recognized. To the extent future international operations constitute a higher percentage of the Company's total revenues, the Company anticipates that it may also experience relatively weaker demand in the fiscal quarters ending on September 30 as a result of reduced sales activity in Europe during the summer months. Emerging Market; Product Concentration; Rapid Technological Change. The market for information technology consulting and software development services utilizing enterprise application integration software is continuing to develop. Many of the Company's potential clients currently employ information processing systems that run on mainframe-based or centralized computer systems. The Company's success is dependent on the acceptance of information processing systems utilizing enterprise application integration software. While the Company believes that corporations and government agencies will continue to accept the use of enterprise application integration software for enterprise-wide information processing systems, a decline in this trend would have a material adverse effect on the Company's business, results of operations and financial condition. The Company's revenues have been attributable to a limited number of products and related services. As a result, factors adversely affecting the pricing of or demand for such products and services could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's success will depend in part on its ability to develop strategic information technology solutions which keep pace with continuing changes in information processing technology, evolving industry standards and changing client preferences. For example, the Company's customers have adopted a wide variety of hardware, software, database and networking platforms, and as a result, to gain broad market acceptance, the Company is and will be required to support its family software products on many of such platforms and to develop and introduce enhancements to such software products on a timely basis that keep pace with such technological developments, emerging industry standards and customer requirements. There can be no assurance that the Company will be successful in addressing these developments on a timely basis or that if addressed the Company will be successful in the marketplace. The Company's delay or failure to address these developments would have a material adverse effect on the Company's business. In addition, there can be no assurance that products or technologies developed by others will not render the Company's products noncompetitive or obsolete. The Company has in the past experienced delays in the release dates of enhancements to its software. If release dates of any future Template software enhancements or new products are delayed or if when released they fail to achieve market acceptance, the Company's business, operating results and financial condition would be materially adversely affected. In addition, the introduction or announcement of new product offerings or enhancements by the Company or the Company's competitors may cause customers to defer or forgo purchases of current versions of Template software, which could have a material adverse effect on the Company's business, results of operations and financial condition. Competition. The information technology consulting, software development, enterprise application integration and business solution markets include a large number of participants, are subject to rapid changes and are highly competitive. The Company competes with and faces potential competition for client assignments and experienced personnel from a number of companies that have significantly greater financial, technical and marketing resources and which generate greater revenues than does the Company. These markets are highly fragmented and served by numerous firms, many of which serve only their respective local markets. Clients may elect to use their internal information systems resources to satisfy their needs for software development and technical consulting services, rather than using those offered by the Company. In the software development tools market, representative competitors of the Company include, among others, Forte Software, Inc., ViewStar Corporation, ILOG S.A. and SEER Technologies, Inc. In the enterprise application integration market, representative competitors of the Company include, among others, Crossworlds Software, Inc., Vitria Technology, Inc., and Active Software, Inc. In the information technology consulting market, representative competitors of the Company include, among others, Cambridge Technology Partners, Inc. and TCSI Corporation. In the business solutions market, representative competitors of the Company include, among others, Electronic Data Systems and the consulting departments of the "Big Five" accounting firms. In addition, complex enterprise application integration software that can be developed and deployed using the Company's template-based solutions can also be implemented using a combination of first generation application development tools and more powerful server programming techniques such as stored procedures in relational databases and C, C++ or Java programming, along with the integration of networking and database middleware to connect the various components. As such, the Company also effectively experiences competition from potential customers' decisions to pursue internally developed solutions as opposed to utilizing an application environment such as the template-based technology offered by the Company. As a result, the Company must continuously educate existing and prospective customers as to the advantages of the Company's products and services. There can be no assurance that these customers or potential customers will perceive sufficient value in the Company's products and services to justify purchasing them. The Company's clients primarily consist of Fortune 1000 companies, agencies of the federal government and other large organizations, and there are an increasing number of professional services firms seeking information technology consulting and software development engagements from that client base. The Company believes that the principal competitive factors in the information technology consulting and software development industry include responsiveness to client needs, quality of service, price, project management capability and technical expertise. The Company believes that its ability to compete also depends in part on a number of competitive factors outside its control, including the ability of its competitors to hire, retain and motivate senior project managers, the ownership by competitors of software used by potential clients, the development by others of software that is competitive with the Company's products and services, the price at which others offer comparable services and the extent of its competitor's responsiveness to customer needs. There can be no assurance that the Company will be able to compete successfully against current and future competitors on the basis of these factors or others and the failure to do so successfully would have a material adverse effect upon the Company's business, results of operations and financial condition. The Company's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than the Company. Also, many current and potential competitors have greater name recognition and more extensive customer bases that could be leveraged, thereby increasing such competitors' market share to the Company's detriment. The Company expects to face additional competition as other established and emerging companies enter the enterprise application development and business process automation market and new products and technologies are introduced. Increased competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which could materially adversely affect the Company's business, operating results and financial condition. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Further, competitive pressures could require the Company to reduce the price of its software licenses and related services, which could materially adversely affect the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so would have a material adverse effect upon the Company's business, results of operations and financial condition. Risks Associated with Transition to Industry-Specific Templates. A component of the Company's strategy involves the development and introduction of industry-specific templates designed to be layered on top of its existing software templates to provide additional pre-written code for specific business solutions. In order to do so successfully, the Company will be required, among other things, to develop substantial knowledge it does not currently have about the function of business processes in its target industries and to successfully incorporate such knowledge into reusable software templates. There can be no assurance that the Company will be able to develop such knowledge or that, if developed, it will ultimately lead to software templates which the Company is able to market successfully. The failure of the Company's strategy of developing industry-specific templates to lead to software products which can be successfully marketed by the Company could have a material adverse effect on its business, results of operations and financial condition. Proprietary Rights; Risks of Infringement and Source Code Release. The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company generally enters into confidentiality agreements with its employees, consultants, clients and potential clients and limits access to and distribution of its proprietary information. The Company also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technology leadership position. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. There can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or design around the proprietary rights owned by the Company. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competition will not independently develop similar technology. The Company has entered into source code escrow agreements with a limited number of its customers and resellers requiring release of source code in certain circumstances. Such agreements generally provide that such parties will have a limited, non-exclusive right to use such code in the event that there is a bankruptcy proceeding by or against the Company, if the Company ceases to do business or if the Company fails to meet its support obligations. The Company is not aware that it is infringing any proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company of their intellectual property rights. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all. In the event of a successful claim of product infringement against the Company and failure or inability of the Company to license the infringed or similar technology, the Company's business, results of operations and financial condition would be materially adversely affected. Management of Growth. The Company's future operating results will depend on management's ability to manage growth, continuously hire and retain significant numbers of qualified employees, accurately forecast revenues and control expenses. A decline in the growth rate of revenues without a corresponding and timely slowdown in expense growth could have a material adverse effect on the Company's business, results of operations and financial condition. Risks Associated with Expanding Distribution. To date, the Company has sold its products and services through its direct sales force, distributors, value added resellers, and systems integrators. The Company's ability to achieve significant revenue growth in the future will depend in large part on its success in recruiting and training sufficient direct sales personnel and establishing and maintaining relationships with distributors, resellers and system integrators. Although the Company is currently investing, and plans to continue to invest significant resources to expand its direct sales force and to develop distribution relationships with third-party distributors and resellers, the Company has at times experienced and continues to experience difficulty in recruiting qualified sales personnel and in establishing necessary third-party relationships. There can be no assurance that the Company will be able to successfully expand its direct sales force or other distribution channels or that any such expansion will result in an increase in revenues. Any failure by the Company to expand its direct sales force or other distribution channels would materially adversely affect the Company's business, results of operations and financial condition. Need to Recruit Additional Skilled Personnel; Dependence on Key Personnel. The Company's future success depends on its continuing ability to attract, train, assimilate and retain highly qualified personnel. Competition for this personnel is intense due to lower overall unemployment rates and the boom in information technology spending. The Company may not be able to retain its current key employees or attract, train, assimilate or retain other highly qualified personnel in the future. Furthermore, the Company may experience increased compensation costs that may not be offset either through improved productivity or higher prices. There can be no assurances that the Company will be successful in continuously recruiting new personnel or in retaining existing personnel. None of the Company's employees is subject to a long-term employment or non-competition agreement. The loss of one or more key employees or the Company's inability to attract additional qualified employees or retain other employees could have a material adverse effect on the Company's business, results of operations and financial condition. Risk of Software Defects; Potential Product Liability for Software Defects. Software products as internally complex as the Company's frequently contain errors or defects, especially when first introduced or when subsequent versions or enhancements are released. While the Company has not experienced material adverse effects from any such errors to date, the Company cannot be certain that, despite testing by the Company and by current and potential customers, errors will not be found in new products or releases after commercial shipments begin. This could result in lost revenue or delays in market acceptance, which could have a material adverse effect upon the Company's business, results of operations and financial condition. The Company's license agreements with customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that these limitations of liability provisions may not be effective under existing or future laws of certain domestic or international jurisdictions. Although there have been no product liability claims against the Company to date, the Company's license and support of products may involve the risk of these claims, which are likely to be substantial in light of the use of the Company's products in complex, business- critical applications. A successful product liability claim against the Company could have a material adverse effect on the Company's business, results of operations and financial condition. Risks of International Operations. A significant portion of the Company's revenues arise from international operations. The Company believes that in order to increase sales opportunities and profitability, it will be required to expand its international operations. The Company has committed and continues to commit significant management time and financial resources to developing direct and indirect international sales and support channels. There can be no assurance, however, that the Company will be able to maintain or increase international market demand for Template software products and services. To the extent that the Company is unable to do so in a timely manner, the Company's international sales will be limited, and the Company's business, results of operations and financial condition would be materially and adversely affected. International operations are subject to inherent risks, including the impact of possible recessionary environments in economies outside the United States, costs of localizing products for foreign markets, longer receivables collection periods and greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, difficulties and costs of staffing and managing foreign operations, reduced protection for intellectual property rights in some countries, potentially adverse tax consequences and political and economic instability. The Company's international service engagement contracts are, and may be in the future, also subject to differing laws and regulations, the impact of which could have a material adverse effect on the Company's business, results of operations and financial condition. There can be no assurance that the Company or its distributors or resellers will be able to sustain or increase international revenues from licenses or from maintenance and service, or that the foregoing factors will not have a material adverse effect on the Company's future international revenues and, consequently, on the Company's business, results of operations and financial condition. The Company's direct international revenues are generally denominated in local currencies. The Company does not currently engage in hedging activities. Revenues generated by the Company's distributors and resellers are generally paid to the Company in United States dollars. Although exposure to currency fluctuations to date has been insignificant, there can be no assurance that fluctuations in currency exchange rates in the future will not have a material adverse impact on revenues from international sales and thus, the Company's business, results of operations and financial condition. Government Contracting Risks. A portion of the Company's revenues are derived from contracts with the government. Government contracts, by their terms, generally can be terminated at any time by the government, without cause, for the convenience of the government. If a government contract is so terminated, the Company would be entitled to receive compensation for the services provided or costs incurred at the time of termination and a negotiated amount of the profit on the contract to the date of termination. In addition, all government contracts require compliance with various contract provisions and procurement regulations. The adoption of new or modified procurement regulations could adversely affect the Company or increase its costs of competing for or performing government contracts. Any violation (intentional or otherwise) of these regulations could result in the termination of such government contracts, imposition of fines, and/or debarment from award of additional government contracts. The termination of any of the Company's significant government contracts or the imposition of fines, damages or suspension from bidding on additional government contracts could have a material adverse effect on the Company. Most government contracts are also subject to modification in the event of changes in funding, and the Company's contractual costs and revenue are subject to adjustment as a result of audits by the Defense Contract Audit Agency ("DCAA") and other government auditors. The DCAA routinely audits cost reimbursement contracts to verify that costs have been properly charged to the government. Further, most government contract awards are subject to protest by competitors. Investments. To date, the Company has made strategic investments in certain companies that the Company believes have the potential to grow and become important partners of the Company, and the Company may continue to make strategic investments in the future. Historically, the Company has made these investments in the form of debt that is convertible into equity of the company that is receiving the investment. There can be no assurance that these investments will bring the Company a return on its investment. In addition, because the strategic investments tend to be in small, start-up technology companies, there is a greater risk that the Company could lose some or all of its investment. Any of these results could have a material adverse effect on the Company's business, results of operations and financial condition. Year 2000. As described in further detail elsewhere in this Annual Report on Form 10-K, the Company is working to address "Year 2000" problems. There are several aspects of the Year 2000 issue that could have an impact on the Company's business, results of operations and financial condition. Impact on Revenues. The Company believes that the purchasing patterns ------------------ of customers and potential customers may be affected by Year 2000 issues. Many companies are expending significant resources to correct current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. Certain customers may also have accelerated software expenditures recently to replace and upgrade applications in order to accommodate the Year 2000 issue. Once these customers have completed their preparations, the software industry and the Company may experience a significant deceleration in revenues from these customers. Either of these results could have a material adverse effect on the Company's business, results of operations and financial condition. Year 2000 Compliance. If the Company should fail to identify or fix -------------------- all Year 2000 problems in its own software, or if the Company is affected by the inability of a sole-source supplier or major customer to continue operations due to such a problem, the Company's business, results of operations and financial condition could be adversely affected. Internal Systems. Although the Company is not aware of any material ---------------- operational issues or costs associated with preparing its internal systems for the Year 2000, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal systems, which include third-party software and hardware technology. Year 2000 Litigation. Since the Company is in the business of selling -------------------- software, its risk of lawsuits relating to Year 2000 issues with respect to its products is likely to be greater than that of companies in other industries. Because computer systems may incorporate components from different manufacturers, it may be difficult to determine which component in a computer system may cause a Year 2000 problem. As a result, the Company may be subjected to Year 2000-related lawsuits whether or not its products and services are Year 2000 compliant. The Company cannot be certain at this time what the outcome or impact of any such lawsuits may be. Government Regulation and Other Legal Uncertainties. Although it is not directly regulated by any governmental agency, the Company is subject to the laws and regulations that generally apply to businesses. Furthermore, claims have been brought against the Company and its subsidiaries for various matters, and additional claims may arise from time to time. It is possible that the Company's business, results of operations and financial condition could be materially adversely affected by the impact of current or new laws and regulations or the resolution of any of these claims. Euro Conversion. A new European currency, the Euro, was introduced in January 1999 to replace the separate currencies of certain western European countries. The change will require changes in the Company's operations as it modifies systems and commercial arrangements to deal with the new currency. Because a three-year transition period is expected during which transactions may be made in the old currencies, the Company will be required to maintain dual currency processes for its operations. The Company has identified issues involved and is developing and implementing solutions. The cost of this effort is not expected to have a material adverse effect on the Company's business, results of operations and financial condition. There can be no guarantee, however, that all problems will be foreseen or corrected, or that no material disruption will occur. Volatility of Stock Price. The Company's Common Stock has experienced significant price volatility, and such volatility may occur in the future. Factors, such as announcements of the introduction of new products by the Company or its competitors and quarter-to-quarter variations in the Company's operating results, as well as market conditions in the technology and emerging growth company sectors and generally, may have a significant impact on the market price of the Company's Common Stock. Furthermore, the stock market has experienced extreme volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated or disproportionate to the operating performance of such companies. These market fluctuations may adversely affect the price of the Common Stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the financial position of the Company is routinely subjected to a variety of risks. Though the Company faces and manages other types of risks, such as credit and liquidity risks, the Company's market risk arises primarily from risks inherent in currency rate movements and from risk inherent in the Company's marketable securities. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. A substantial portion of the Company's revenues are generated from international operations. Revenues from foreign subsidiaries and export sales accounted for 49.0% and 51.9% of the Company's total revenues in fiscal years 1997 and 1998 respectively, or $12.3 million and $21.2 million, respectively. As a result, the Company is subject to numerous international risks. These risks include unexpected changes in regulatory requirements, export limitations on encryption technologies, tariffs and other trade barriers, political and economic instability in foreign markets, difficulty in the staffing, management and integration of foreign operations, longer payment cycles, greater difficulty in accounts receivable collection, currency fluctuations and potentially adverse tax consequences. The uncertainty of the monetary exchange values has caused, and may in the future cause, some foreign customers to delay new orders or delay payment for existing orders. These factors may, in the future, contribute to fluctuations in the Company's financial condition and results of operations. The Company believes that the Company's currency exchange risk is mitigated somewhat by the fact that the Company conducts operations from international as well as domestic locations, allowing it to minimize the impact of any currency movements by, for example, paying its German debtors in German deutsche marks. Although the Company's results of operations have not been materially adversely affected to date as a result of currency fluctuations, the long-term impact of currency fluctuations, including any possible effect on the business outlook in other developing countries, cannot be predicted. The fair value of the Company's investments in marketable securities at December 31, 1998 was $8.2 million. The Company's investment policy is to manage its marketable securities portfolio to preserve principal and liquidity while maximizing the return on the investment portfolio through the full investment of available funds. The Company diversifies the marketable securities portfolio by investing primarily in multiple types of investment- grade securities. The Company's marketable securities portfolio is invested primarily in short-term securities with at least an investment grade rating to minimize interest rate and credit risk as well as to provide for an immediate source of funds. The Company is aware that it has gross unrealized losses of approximately $197,000 from certain of its longer-term marketable securities, and there can be no assurance that the Company will be able to recoup these losses if realized. Although changes in interest rates may affect the fair value of the marketable securities portfolio and cause unrealized gains or losses, such gains or losses would not be realized unless the investments are liquidated. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K" contained in this Annual Report on Form 10-K for an index to the financial statements and supplementary financial information which are attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III -------- The Company will file with the Securities and Exchange Commission a definitive Proxy Statement, pursuant to Regulation 14A, not later than 120 days after the end of its fiscal year. Accordingly, certain information required by Part III has been omitted under Item G of the General Instructions for Form 10-K. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required by Item 10 is hereby incorporated by reference from the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement") under the captions "Election of ----------- Directors" and "Executive Officers" - --------- ------------------ ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is hereby incorporated by reference from the 1999 Proxy Statement under the caption "Executive Compensation." ---------------------- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is hereby incorporated by reference from the 1999 Proxy Statement under the caption "Beneficial Ownership of Common ------------------------------- Stock." - ----- ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is hereby incorporated by reference from the 1999 Proxy Statement under the caption "Certain Transactions." -------------------- 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. Financial Statements INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Accountants Consolidated Balance Sheets as of November 30, 1997 and December 31, 1998. Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the Year ended December 31, 1998 Consolidated Statements of Changes in Shareholders' Equity for the Years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the Year ended December 31, 1998 Consolidated Statements of Cash Flows for the Years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the Year ended December 31, 1998 Notes to the Consolidated Financial Statements 2. Financial Statement Schedule All schedules are omitted because they are not required or the required information is included in the Consolidated Financial Statements and Notes thereto. 3. Exhibits The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the Commission: 3.1 Amended and Restated Articles of Incorporation of Template Software, Inc./1/. 3.2 Bylaws of Template Software, Inc. /1/. 4.1 Registration Rights Agreement, by and between Template Software, Inc. and Alcatel, N.V., dated November 27, 1996 /1/ 4.2 Shareholders' Agreement, by and between Template Software, Inc., Messrs. Joseph M. Fox, E. Linwood Pearce and Andrew B. Ferrentino and Alcatel, N.V., dated November 27, 1996 /1/ 4.3 Registration Rights Agreement, dated as of March 3, 1997 by and between Template Software, Inc., and Alain Kuhner /2/ 4.4 Registration Rights Agreement, dated as of June 27, 1996, by and between Template Software, Inc. and Heinz-Dieter Dietrich and Klaus-Dieter Jansen /5/ 10.1 Template Software, Inc. 1992 Incentive Stock Option Plan. * /1/ 10.2 Template Software, Inc. 1992 Incentive Stock Option Plan, Class B. * /1/ 10.3 Template Software, Inc.1992 Non-Statutory Stock Option Plan. * /1/ 10.4 Template Software, Inc. 1996 Equity Incentive Plan, as amended. * /8/ 10.5 Employment Agreement, dated as of October 24, 1996, between Template Software, Inc. and E. Linwood Pearce. * /1/ 10.6 Amendment to Employment Agreement, dated as of October 14, 1997, between Template Software, Inc. and E. Linwood Pearce. * /5/ 10.7 Office Lease Agreement, dated April 25, 1996, between Template Software, Inc. and Vintage Park Two Limited Partnership /1/ 10.8 Amendment to Office Lease Agreement, dated August 18, 1997, between Template Software, Inc. and Vintage Park Two Limited Partnership /5/ 10.9 First Amended and Restated Loan and Security Agreement, dated October 22, 1996, between Template Software, Inc. and Signet Bank /1/ 10.10 Consulting Agreement, dated as of December 17, 1996, between Template Software, Inc. and WinStar Telecommunications, Inc. /3/ 10.11 License Agreement, dated as of February 28, 1997, between Template Software, Inc. and WinStar Telecommunications, Inc., as amended by Amendment One to License Agreement, dated as February 28, 1997 /3/ 10.12 Sales and Purchase Agreement, dated April, 1997, between Template Software (UK) Limited and British American Financial Services IT & Group Services Limited /3/ 10.13 Share Purchase Agreement, dated June 27, 1997, between Template Holding and Dietrich relating to the purchase of Milestone /4/ 10.14 Share Purchase Agreement, dated June 27, 1997, between Template Holding and Jansen relating to the purchase of Milestone /4/ 10.15 Share Purchase Agreement, dated June 27, 1997, between Template Holding and NeSBIC III, C.V. relating to the purchase of Milestone /4/ 10.16 Share Purchase Agreement, dated June 27, 1997, between Template Management and Jansen relating to the purchase of .33% Milestone /4/ 10.17 Share Purchase Agreement, dated June 27, 1997, between Template Holding and Dietrich relating to the purchase of Milestone Austria /4/ 10.18 Share Purchase Agreement, dated June 27, 1997, between Template Holding and Jansen relating to the purchase of Milestone Austria /4/ 10.19 Stock Purchase Agreement, dated as of February 19, 1997, between Template Software, Inc. and Alain Kuhner /2/ 10.20 Assignment of Indebtedness, dated as of February 19, 1997, between Template Software, Inc. and Alain Kuhner /2/ 10.21 Service Agreement between Template Software, Inc. and Richard Collard executed March 20, 1998. * /6/ 10.22 Share Purchase Agreement dated March 27, 1998 between Template Software Holding Ges. MbH and Christian Hofer, Irene Hofer and Michael Hofer, shareholders of Milestone Software Ges. MbH /7/ 10.23 Rights Agreement, dated as of July 3, 1998, by and between Template Software, Inc. and First Union National Bank, as Rights Agent. /9/ 10.24 Financing Agreement, dated September 1, 1998, between Template Software, Inc. and Eagle Eye Technologies, Inc. (see agreement for omitted exhibits) /10/ 10.25 Convertible Promissory Note, dated September 1, 1998, of Eagle Eye Technologies, Inc. /10/ 10.26 Warrant to Purchase Common Stock, dated September 1, 1998, between Template Software, Inc. and Eagle Eye Technologies, Inc. /10/ 10.27 Loan Agreement, dated June 30, 1998, between Template Software, Inc. and First Union Nation Bank (see table of contents for list of omitted schedules and exhibits). /10/ 10.28 License Agreement, dated as of December 17, 1998, between BULL and Template Software, Inc. (see agreement for list of omitted schedules and exhibits). /11/ 10.29 Employment Agreement, dated as February 25, 1999 and effective as of January 1, 1999, between Template Software, Inc. and Joseph M. Fox. */11/ 10.30 Employment Agreement, dated as of December 21, 1998, between Template Software, Inc. and Andrew B. Ferrentino. * /11/ 10.31 Consultant Agreement, dated as of January 1, 1999, between Template Software, Inc. and Dr. Alan B. Salisbury. * /11/ 21 Subsidiaries of Template Software, Inc. /11/ 23 Consent of PricewaterhouseCoopers LLP. /11/ 27 Financial Data Schedule. /11/ All other exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instruction or are inapplicable, and therefore have been omitted. ______________________ 1 Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-17063), originally filed with the Securities and Exchange Commission on November 27, 1996. 2 Incorporated by reference to the Company's Report on Form 8-K, dated March 4, 1997 and filed March 19, 1997 (File No. 0-21921). 3 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended May 31, 1997 (File No. 0-21921). 4 Incorporated by reference to the Company's Report on Form 8-K, dated June 27, 1997 and filed July 14, 1997 (File No. 0-21921). 5 Incorporated by reference to the Company's Report on Form 10-K, dated March 2, 1998 (File No. 0-21921). 6 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended February 28, 1998 (File No. 0-21921). 7 Incorporated by reference to the Company's Report on Form 8-K, dated March 30, 1997 and filed April 6, 1998 (File No. 0-21921). 8 Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 333-52241), filed with the Securities and Exchange Commission on May 8, 1998. 9 Incorporated by reference to the Company's Report on Form 8-K, dated July 3, 1997 and filed July 10, 1998 (File No. 0-21921). 10 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended August 31, 1998 (File No. 0-21921). 11 Filed herewith. * Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: On October 15, 1998, the Company filed a Report on Form 8-K (Commission file no: 0-21921) regarding the change of the Company's fiscal year from the twelve months ending November 30 to the twelve months ending December 31. 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. TEMPLATE SOFTWARE, INC. Date: March 30, 1999 /s/ Kimberly E. Osgood ------------------------------------- Kimberly E. Osgood Chief Financial Officer, Secretary and Treasurer 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 capacity and on the dates indicated. /s/ E. Linwood Pearce ------------------------------------- March 30, 1999 E. Linwood Pearce Chief Executive Officer and President /s/ Joseph M. Fox ------------------------------------- March 30, 1999 Joseph M. Fox Chairman of the Board /s/ Andrew B. Ferrentino ------------------------------------- March 30, 1999 Andrew B. Ferrentino Director /s/ Dr. Duane A. Adams ------------------------------------- March 30, 1999 Dr. Duane A. Adams Director /s/ Dr. Alan B. Salisbury ------------------------------------- March 30, 1999 Dr. Alan B. Salisbury Director /s/ Dr. Gerhard Barth ------------------------------------- March 30, 1999 Dr. Gerhard Barth Director REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of Template Software, Inc. In our opinion the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity and cash flows, present fairly, in all material respects, the financial position of Template Software, Inc. and its subsidiaries (the "Company") at November 30, 1997 and December 31, 1998, and the results of their operations and their cash flows for the years ended November 30, 1996 and 1997, for the one month ended December 31, 1997, and for the year ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP McLean, VA March 17, 1999 TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, DECEMBER 31, ------------ ------------ 1997 1998 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 2,739,075 $ 1,830,806 Marketable securities 13,317,901 8,221,300 Accounts receivable, net 10,474,254 15,751,823 Income tax receivable 235,848 19,780 Deferred income taxes 406,172 1,872,580 Prepaid expenses and other current assets 688,577 1,698,639 ----------- ----------- Total current assets 27,861,827 29,394,928 ----------- ----------- Property, plant and equipment, net 2,193,932 5,422,931 Software development costs, net 1,490,776 2,601,474 Goodwill, net 10,710,555 10,298,088 Deferred income taxes 408,328 -- Note receivable -- 1,040,667 Other assets 306,075 326,018 ----------- ----------- Total assets $42,971,493 $49,084,106 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,431,162 $ 2,642,350 Accrued expenses 2,717,618 4,101,615 Revolving credit agreement 33,553 166,797 Current portion of long-term debt 91,667 229,373 Capital lease obligations 54,023 55,209 Income taxes payable 34,639 46,465 Deferred income 794,832 1,437,014 ----------- ----------- Total current liabilities 5,157,494 8,678,823 ----------- ----------- Long-term liabilities: Long-term debt, net of current portion 84,028 -- Capital lease obligations, noncurrent 127,226 76,602 Deferred income taxes -- 827,030 Other liabilities 309,450 421,083 ----------- ----------- Total liabilities 5,678,198 10,003,538 ----------- ----------- Commitments and contingencies (See Note 10) Shareholders' equity: Preferred Stock, $0.01 par value per share; 3,000,000 shares authorized; no shares issued and outstanding as of November 30, 1997 and December 31, 1998, respectively -- -- Common Stock, $0.01 par value per share; 17,000,000 shares authorized; 4,675,433 shares issued and outstanding as of November 30, 1997 and 5,153,755 shares issued and 4,969,755 shares outstanding, as of December 31, 1998 46,755 51,538 Additional paid-in capital 35,088,542 36,619,503 Deferred compensation (1,177,920) (727,243) Accumulated other comprehensive income 49,752 154,156 Retained earnings 3,286,166 3,793,839 Common stock in treasury, at cost no shares and 184,000 shares as of November 30, 1997 and December 31, 1998 -- (811,225) ----------- ----------- Total shareholders' equity 37,293,295 39,080,568 ----------- ----------- Total liabilities and shareholders' equity $42,971,493 $49,084,106 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
YEAR ENDED MONTH ENDED YEAR ENDED ---------- ----------- ---------- NOVEMBER 30, DECEMBER 31, DECEMBER 31, ------------ ------------ ------------ 1996 1997 1997 1998 ---- ---- ---- ---- Revenues: Products $ 1,918,568 $ 8,539,387 $ 95,292 $ 8,014,139 Services 11,611,543 18,371,005 2,050,140 34,625,087 ----------- ----------- ---------- ----------- Total revenues 13,530,111 26,910,392 2,145,432 42,639,226 ----------- ----------- ---------- ----------- Cost of revenues: Products 782,804 2,145,552 162,509 1,685,913 Services 6,245,888 10,639,845 1,646,626 22,491,322 ----------- ----------- ---------- ----------- Total cost of revenues 7,028,692 12,785,397 1,809,135 24,177,235 ----------- ----------- ---------- ----------- Gross profit 6,501,419 14,124,995 336,297 18,461,991 ----------- ----------- ---------- ----------- Operating expenses: Selling and marketing 2,362,648 6,270,769 706,861 9,758,355 Product development 966,088 1,314,770 127,694 1,444,474 General and administrative 1,473,062 3,163,587 403,096 6,139,040 ----------- ----------- ---------- ----------- Total operating expenses 4,801,798 10,749.126 1,237,651 17,341,869 ----------- ----------- ---------- ----------- Income (loss) from operations 1,699,621 3,375,869 (901,354) 1,120,122 Interest income (expense), net (22,130) 872,613 45,477 615,300 Other income (expense), net 12,079 (100,673) (38,515) 142,905 ----------- ----------- ---------- ----------- Net income (loss) before income taxes 1,689,570 4,147,809 (894,392) 1,878,327 Income tax benefit (provision) (644,502) (1,768,016) 271,855 (748,117) ----------- ----------- ---------- ----------- Net income (loss) $ 1,045,068 $ 2,379,793 $ (622,537) $ 1,130,210 =========== =========== ========== =========== Other comprehensive income (loss): Foreign currency translation adjustment -- 49,752 (46,029) 272,846 Unrealized loss on marketable securities, net of taxes -- -- -- (122,413) ----------- ----------- ---------- ----------- Comprehensive income (loss) $ 1,045,068 $ 2,429,545 $ (668,566) $ 1,280,643 =========== =========== ========== =========== Earnings (loss) per share basic $ 0.48 $ 0.58 $ (0.13) $ 0.23 =========== =========== ========== =========== Shares used in computing basic earnings (loss) per share 2,182,260 4,091,566 4,676,304 5,013,528 =========== =========== ========== =========== Earnings (loss) per share diluted $ 0.23 $ 0.44 $ (0.13) $ 0.20 =========== =========== ========== =========== Shares used in computing diluted earnings (loss) per 4,643,919 5,419,150 4,676,304 5,708,932 share =========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES A CONVERTIBLE CONVERTIBLE CLASS A CLASS B PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ ------ ------ ------ ------ Balance, November 30, 1995 195,847 $ 385,701 0 $ 0 1,808,924 $ 18,089 423,006 $ 4,230 Retirement of stock held in treasury (195,847) (385,701) 0 0 (48,936) (489) 0 0 Issuance of Class B Common Stock 0 0 0 0 0 0 64,014 640 Issuance of Convertible Preferred Stock Series A 0 0 500,000 5,000 0 0 0 0 Exchange of Class A and Class B Common Stock 0 0 0 0 (1,759,988) (17,600) (487,020) (4,870) Net income 0 0 0 0 0 0 0 0 --------------------------------------------------------------------------------- Balance, November 30, 1996 0 0 500,000 5,000 0 0 0 0 Conversion of Series A Convertible Preferred Stock 0 0 (500,000) (5,000) 0 0 0 0 Initial public offering of common stock, $16.00 per share, net of expenses 0 0 0 0 0 0 0 0 Exercise of stock options 0 0 0 0 0 0 0 0 Common Stock issued in connection with business acquisitions, $12.18 - $14.90 per share 0 0 0 0 0 0 0 0 Translation Adjustment 0 0 0 0 0 0 0 0 Deferred compensation related to stock options granted below fair market value 0 0 0 0 0 0 0 0 Amortization of Deferred Compensation 0 0 0 0 0 0 0 0 Expenses related to issuance of Series A Convertible Preferred Stock in 1996 0 0 0 0 0 0 0 0 Tax benefit associated with exercise of stock 0 0 0 0 0 0 0 0 options Net Income 0 0 0 0 0 0 0 0 --------------------------------------------------------------------------------- Balance, November 30, 1997 0 0 0 0 0 0 0 0 Exercise of stock options 0 0 0 0 0 0 0 0 Translation Adjustment 0 0 0 0 0 0 0 0 Forfeitures of stock options 0 0 0 0 0 0 0 0 Amortization of Deferred Compensation 0 0 0 0 0 0 0 0 Tax benefit associated with exercise of stock 0 0 0 0 0 0 0 0 options Net Loss 0 0 0 0 0 0 0 0 --------------------------------------------------------------------------------- Balance, December 31, 1997 0 0 0 0 0 0 0 0 Exercise of stock options 0 0 0 0 0 0 0 0 Issue Stock related to FY97 contingent 0 0 0 0 0 0 0 0 consideration Translation Adjustment 0 0 0 0 0 0 0 0 Gain on investment 0 0 0 0 0 0 0 0 Forfeitures of stock options 0 0 0 0 0 0 0 0 Amortization of Deferred Compensation 0 0 0 0 0 0 0 0 Purchase of Treasury Shares 0 0 0 0 0 0 0 0 Tax benefit associated with exercise of stock 0 0 0 0 0 0 0 0 options Net Income 0 0 0 0 0 0 0 0 --------------------------------------------------------------------------------- Balance, December 31, 1998 0 $ 0 0 $ 0 0 $ 0 0 $ 0 =================================================================================
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ADDITIONAL DEFERRED COMMON STOCK PAID-IN COMPEN- SHARES AMOUNT CAPITAL SATION -------- -------- ------------ ---------- Balance, November 30, 1995 0 $ 0 $ 969,491 $ 0 Retirement of stock held in treasury 0 0 48,389 0 Issuance of Class B Common Stock 0 0 96,108 0 Issuance of Convertible Preferred Stock Series A 0 0 7,995,000 0 Exchange of Class A and Class B Common Stock 2,247,008 22,470 0 0 Net income 0 0 0 0 --------------------------------------------- Balance, November 30, 1996 2,247,008 22,470 9,108,988 0 Conversion of Series A Convertible Preferred Stock 500,000 5,000 0 0 Initial public offering of common stock, $16.00 per share, net of expenses 1,400,000 14,000 19,749,359 0 Exercise of stock options 344,675 3,447 684,035 0 Common Stock issued in connection with business acquisitions, $12.18 - $14.90 per share 183,750 1,838 2,998,114 0 Translation Adjustment 0 0 0 0 Deferred compensation related to stock options granted below fair market value 0 0 1,584,905 (1,584,905) Amortization of Deferred Compensation 0 0 0 406,985 Expenses related to issuance of Series A Convertible Preferred Stock in 1996 0 0 (75,096) 0 Tax benefit associated with exercise of stock options 0 0 1,038,207 0 Net Income 0 0 0 0 --------------------------------------------- Balance, November 30, 1997 4,675,433 46,755 35,088,542 (1,177,920) Exercise of stock options 2,250 23 898,181 0 Translation Adjustment 0 0 0 0 Forfeitures of stock options 0 0 (14,400) 14,400 Amortization of Deferred Compensation 0 0 0 32,483 Tax benefit associated with exercise of stock options 0 0 2,500 0 Net Loss 0 0 0 0 --------------------------------------------- Balance, December 31, 1997 4,677,683 46,778 35,081,074 (1,131,037) Exercise of stock options 424,730 4,247 898,181 0 Common stock issued in connection with 1997 business acquisitions 51,342 513 (513) 0 Translation Adjustment 0 0 0 0 Gain on investment 0 0 0 0 Forfeitures of stock options 0 0 (14,651) 14,651 Amortization of Deferred Compensation 0 0 0 389,143 Purchase of treasury shares (184,000) 0 0 0 Tax benefit associated with exercise of stock options 0 0 655,412 0 Net Income 0 0 0 0 --------------------------------------------- Balance, December 31, 1998 4,969,755 $ 51,538 $36,619,503 $ (727,243) ============================================= RETAINED ACCUMULATED EARNINGS TREASURY COMPREHENSIVE (ACCUM. STOCK AT INCOME. DEFICIT) COST TOTAL -------------- ----------- -------- -------- Balance, November 30, 1995 $ 0 $ (138,695) $(337,801) $ 901,015 Retirement of stock held in treasury 0 0 337,801 0 Issuance of Class B Common Stock 0 0 0 96,748 Issuance of Convertible Preferred Stock Series A 0 0 0 8,000,000 Exchange of Class A and Class B Common Stock 0 0 0 0 Net income 0 1,045,068 0 1,045,068 -------------------------------------------------- Balance, November 30, 1996 0 906,373 0 10,042,831 Conversion of Series A Convertible Preferred Stock 0 0 0 0 Initial public offering of common stock, $16.00 per share, net of expenses 0 0 0 19,763,359 Exercise of stock options 0 0 0 687,482 Common Stock issued in connection with business acquisitions, $12.18 - $14.90 per share 0 0 0 2,999,982 Translation Adjustment 49,752 0 0 49,752 Deferred compensation related to stock options granted below fair market value 0 0 0 0 Amortization of Deferred Compensation 0 0 0 406,985 Expenses related to issuance of Series A Convertible Preferred Stock in 1996 0 0 0 (75,096) Tax benefit associated with exercise of stock options 0 0 0 1,038,207 Net Income 0 2,379,793 0 2,379,793 -------------------------------------------------- Balance, November 30, 1997 49,752 3,286,166 0 37,293,295 Exercise of stock options 0 0 0 4,455 Translation Adjustment (46,029) 0 0 (46,029) Forfeitures of stock options 0 0 0 0 Amortization of Deferred Compensation 0 0 0 32,483 Tax benefit associated with exercise of stock options 0 0 0 2,500 Net Loss 0 (622,537) 0 (622,537) -------------------------------------------------- Balance, December 31, 1997 3,723 2,663,629 0 36,664,167 Exercise of stock options 0 0 0 902,428 Common stock issued in connection with 1997 business acquisitions 0 0 0 0 Translation Adjustment 272,846 0 0 272,846 Gain on investment (122,413) 0 0 (122,413) Forfeitures of stock options 0 0 0 0 Amortization of Deferred Compensation 0 0 0 389,143 Purchase of treasury shares 0 0 (811,225) (811,225) Tax benefit associated with exercise of stock options 0 0 0 655,412 Net Income 0 1,130,210 0 1,130,210 -------------------------------------------------- Balance, December 31, 1998 $ 154,156 $3,793,839 $(811,225) $39,080,568 ==================================================
The accompanying notes are an integral part of these consolidated financial statements.
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS MONTH YEAR ENDED ENDED DECEMBER DECEMBER YEAR ENDED NOVEMBER 30, 31, 31, 1996 1997 1997 1998 ------------ ------------- ----------- ------------ Cash flows from operating activities: Net income (loss) $ 1,045,068 $ 2,379,793 $ (622,537) $ 1,130,210 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of discounts on marketable securities -- (76,608) (18,463) (112,664) Depreciation and amortization of property, plant and equipment 117,121 354,569 59,137 559,048 Provision for losses on accounts receivable -- 98,026 (3,831) 114,910 Deferred rent amortization 2,272 89,569 4,947 96,519 Deferred compensation amortization -- 406,985 32,483 389,143 Amortization of capitalized software development costs 252,260 394,770 37,874 584,738 Goodwill amortization -- 374,237 46,579 803,701 Deferred tax provision 61,410 632,240 (294,603) 169,261 Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (708,163) (6,156,891) 1,077,883 (6,056,081) Current year income tax receivable -- (235,848) -- 216,092 Prepaid expenses and other assets (521,911) (195,754) 108,426 (462,611) Accounts payable and accrued liabilities 920,907 (1,449,207) 311,579 1,402,352 Income taxes payable 492,498 (532,097) 16,520 (6,557) Deferred income (104,870) (276,327) (140,323) 758,179 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 1,556,592 (4,192,543) 615,671 (413,760) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of marketable securities -- (43,169,673) -- (5,201,293) Proceeds from sales and maturities of marketable securities -- 29,928,380 -- 10,231,580 Capital expenditures and leasehold improvements (652,359) (933,403) (166,063) (3,566,909) Capitalization of software development costs (395,303) (1,167,452) (84,194) (1,649,114) Issuance of note receivable -- -- -- (1,540,667) Acquisitions of businesses, net of cash acquired -- (7,356,848) -- (57,539) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1,047,662) (22,698,996) (250,257) (1,783,942) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from notes payable 275,000 -- -- 269,123 Payments on notes payable (363,632) (91,667) (7,639) (214,515) Revolving credit facility, net (161,330) (47,839) 310,282 (233,592) Income tax benefit related to stock options -- 1,038,207 2,500 655,413 Payments on capital lease obligations (21,340) (49,759) (4,334) (62,176) Proceeds from issuance of capital stock, net of expenses 8,000,000 19,688,264 -- -- Proceeds from sale of common stock under stock programs 96,748 687,482 4,455 902,428 Purchase of treasury shares -- -- -- (811,225) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 7,825,446 21,224,688 305,264 505,456 - ---------------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash -- 8,766 15,543 97,756 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 8,334,376 (5,658,085) 686,221 (1,594,490) Cash and cash equivalents at beginning of period 62,784 8,397,160 2,739,075 3,425,296 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 8,397,160 $ 2,739,075 $3,425,296 $ 1,830,806 - ---------------------------------------------------------------------------------------------------------------------------------- Supplemental cash flow disclosures: Cash paid for interest $ 46,668 $ 91,367 $ 5,944 $ 123,404 Cash paid for income taxes $ 90,594 $ 810,140 $ 2,099 $ 91,598 Non cash investing and financing activities: Property and equipment acquired through capital leases $ 247,086 $ -- $ -- $ 17,073 Retirement of treasury stock: Class A Common Stock $ 67,560 $ -- $ -- $ -- Preferred Stock $ 270,241 $ -- $ -- $ -- Conversion of Series A Convertible Preferred Stock: Series A Convertible Preferred Stock $ -- $ (5,000) $ -- $ -- Common Stock $ -- $ 5,000 $ -- $ -- Business acquisitions, net of cash acquired: Working capital, other than cash acquired $ -- $ 2,714,547 $ -- $ 374,129 Property and equipment $ -- $ (699,939) $ -- $ (43,985) Cost in excess of net assets of companies acquired, net $ -- $(11,084,792) $ -- $ (383,774) Other non-current assets $ -- $ (1,356,073) $ -- $ (3,909) Non-current liabilities $ -- $ 69,428 $ -- $ -- Fair market value of common stock issued $ -- $ 2,999,981 $ -- $ -- Non cash investing activities Fair value adjustment to deferred tax asset acquired $ -- $ -- $ -- $ (54,039)
The accompanying notes are an integral part of these consolidated financial statements. TEMPLATE SOFTWARE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Business Template Software, Inc. (the "Company") provides enterprise-wide software solutions to organizations that require the integration of their operations and systems in an effort to better automate their critical business processes. The Company's solutions are targeted at large-scale, mission-critical applications, such as order handling and fulfillment, human resource management, and network monitoring systems primarily in the telecommunications, finance/insurance and government industries. Recapitalization of Common Stock The Company, formerly a Maryland corporation, elected to change its capital structure in October 1996, and reincorporated into Template Software, Inc., a Virginia corporation (the "Recapitalization"). Pursuant to the Recapitalization, the Company (i) exchanged its Class A and Class B Common Stock for an equal amount of shares of a single class of $0.01 par value, common stock ("Common Stock") and (ii) increased the Company's authorized capital stock to 20,000,000 shares, which consisted of 17,000,000 shares of Common Stock and 3,000,000 shares of a new class of preferred stock ("Preferred Stock"). The preferences, limitations and relative rights of the Preferred Stock, which is issuable in series, are determined by the Board of Directors upon designation. Registration statement In January 1997, the Company completed an underwritten public offering of 2,100,000 shares of its common stock; 1,400,000 shares of Common Stock for the account of the Company and 700,000 shares of Common Stock for the accounts of selling security holders, with an aggregate offering price of $16.00 per share registered. The expenses incurred for the Company's account in connection with the issuance and distribution of the securities were $1,568,000 of underwriting discounts and commissions and $1,068,641 of other expenses for a total expense of $2,636,641. The net offering proceeds to the Company were $19,763,359. From the effective date of the Registration Statement, through the end date of the period covered by this report, the Company used $7,414,387 to acquire other businesses, $8,211,006 to purchase temporary investments in marketable securities, $1,500,000 to invest in convertible promissory notes of other businesses, and the remaining $2,637,966 in property, plant and equipment. There has not been a material change in the use of proceeds described in the Company's prospectus. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of Template Software, Inc. and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Revenue recognition Prior to December 15, 1997, the Company recognized revenue in accordance with the American Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP) 91-1, "Software Revenue Recognition." Subsequent to December 15, 1997, the Company began recognizing revenue in accordance with SOP 97-2, "Software Revenue Recognition." SOP 97-2 was amended on March 31, 1998 by SOP 98-4 "Deferral of the effective date of a provision of SOP 97-2." In December 1998, the AICPA issued SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition," which amends SOP 98-4, and is effective after December 31, 1998. Management has assessed these new statements and believes that their adoption will not have a material effect on the timing of the Company's revenue recognition or cause changes to its revenue recognition policies. The Company licenses the rights to use its software products to customers under perpetual license agreements, and provides product support and enhancements under annual maintenance agreements. Revenue from product licensing arrangements is generally recognized after execution of a licensing agreement and shipment of the product, provided that no significant Company obligations remain and the resulting receivable is deemed collectible by management. Services revenue includes consulting, product support and maintenance and training. The Company defers and recognizes product support and maintenance revenue ratably over the terms of the contract period, which is generally one year. The Company recognizes training and consulting revenue as the services are provided. Customization is sometimes involved in the development of a software solution by the Company. Under these circumstances, the Company's revenues are derived from contracts of various types. Revenue from federal government agency cost-plus-award-fee contracts is recognized to the extent of costs incurred plus a proportionate amount of the fee. Revenues from fixed-price contracts is recognized using the percentage-of-completion method based on the relationship of actual costs incurred to total costs estimated to be incurred over the duration of the contract. Fees under federal government agency contracts may be increased or decreased in accordance with certain provisions which measure actual performance against established targets or other criteria. Such fee adjustments are included in revenues at the time the amounts can be reasonably determined. Provisions for anticipated contract losses are recognized at the time they become evident. Cash and cash equivalents Cash and cash equivalents consist of demand deposits and short-term repurchase agreements which have original maturities of three months or less. As of December 31, 1998 the Company has not experienced any losses on these investments. Marketable Securities Marketable securities at November 30, 1997 and December 31, 1998 consisted of direct obligations of the United States Government, municipalities and commercial paper with strong credit ratings. These investments are considered available-for-sale as defined by Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's investments are held for an unspecified period of time and are sold to meet its liquidity needs. Accordingly, the Company has classified these investments as current assets. Available-for-sale securities are reported at fair value based generally on quoted market prices with unrealized gains and losses, net of taxes, recorded in shareholders equity until realized. At November 30, 1997, amortized cost of marketable securities approximated market; therefore, no adjustment was made to shareholders equity as a result of changes in market value to these securities. At December 31, 1998, unrealized loss from marketable securities was $197,441, net of taxes of $75,028. Interest income is accrued as earned.
FAIR VALUE YEAR ENDED NOVEMBER 30, DECEMBER 31, 1997 1998 ------------ ------------ U.S. government securities (maturity of less than 1 year) $ 4,986,146 $ -- U.S. government securities (maturity of 29 years) -- 4,056,300 U.S. corporate debt securities (maturities of less than 1 year) 3,366,755 -- Municipal obligations (maturities of 23-27 years with 7 day call feature) 4,965,000 4,165,000 ----------- ---------- Total $13,317,901 $8,221,300 =========== ==========
Inventory The Company's European subsidiaries maintain an inventory of various third party software licenses for resale. The inventory is recorded at cost and is accounted for using the FIFO method. The inventory balance, which is included in prepaid expenses and other current assets in the consolidated balance sheet, was $57,711 and $358,253 as of November 30, 1997 and December 31, 1998, respectively. Concentration of credit risk Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. The Company limits the amount of investment exposure in any one financial instrument and minimizes the amount of cash it maintains in foreign currencies by maintaining sufficient cash in U.S. dollars. To date, the impact of exchange rates on foreign cash balances has been immaterial. The Company sells products and services to customers without requiring collateral, however, the Company routinely assesses the financial strength of its customers and maintains allowances for anticipated losses. For the years ended November 30, 1996 and 1997, for the one month period ended December 31, 1997 and for the year ended December 31, 1998, revenues from federal government agencies represent 20%, 23%, 20% and 29%, respectively, of total consolidated revenues. With the exception of federal government agencies, there were two customers (28% from Customer A and 20% from Customer B) for the year ended November 30, 1996, one customer (13% from Customer C) for the year ended November 30, 1997, one customer for the one month ended December 31, 1997 (13% from Customer D) and one customer (11% from Customer E) for the year ended December 31, 1998, that accounted for more than 10% of total consolidated revenues. With the exception of federal government agencies, there was one customer at November 30, 1997 that accounted for 11% of total consolidated accounts receivable and no customers at December 31, 1998 that accounted for greater than 10% of total consolidated accounts receivable. Fair value of financial instruments The Company believes that the carrying amount of certain of its financial instruments, which include cash, cash equivalents, accounts receivable, notes receivable, accounts payable and accrued expenses, and obligations under capital leases approximate fair value due to the relatively short maturity of these instruments. Marketable securities held as available-for-sale have been adjusted to fair market value with any unrealized gain or loss included as a component of shareholders equity until realized. The carrying amounts of the revolving credit agreement and notes payable approximate fair value because these financial instruments contain variable interest rates which reprice frequently. Income taxes Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences and income tax credits. Temporary differences are primarily the result of the differences between the tax bases of assets and liabilities and their financial reporting amounts. Deferred tax assets and liabilities are measured by applying enacted statutory tax rates applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense consists of the taxes payable for the current period and the change during the period in deferred tax assets and liabilities. Foreign currency translation Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for revenues, expenses, gains and losses. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of shareholders' equity. Transaction gains and losses, which are included in the statement of operations, are immaterial for all periods presented. Earnings per share Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average of common shares outstanding assuming conversion of dilutive common stock equivalent shares from common stock options. The following table reconciles the weighted average number of common shares outstanding during each period for basic and diluted earnings (loss) per share.
ONE MONTH YEAR ENDED YEAR ENDED ENDED YEAR ENDED NOVEMBER 30, NOVEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1997 1997 1998 ------------ ------------ ------------ ------------ Weighted average shares outstanding basic 2,182,260 4,091,566 4,676,304 5,013,528 Diluted impact of common shares issuable on exercise of stock options 2,461,659 1,327,584 -- 695,404 Weighted average shares outstanding diluted 4,643,919 5,419,150 4,676,304 5,708,932
Common stock equivalents are included in the computation of diluted net income (loss) per share using the treasury stock method. For the one month ended December 31, 1997, stock options granted by the Company to purchase 1,089,091 common shares, were not included in the computation because the effect was anti-dilutive. Property, plant and equipment Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, five years for office furniture and equipment, three years for computer equipment and software and forty years for office buildings. Amortization of leasehold improvements is computed using the straight line method over the shorter of the assets useful life or the lease term. When assets are retired or sold, the cost and related accumulated depreciation and amortization are removed from the accounts, and any gain or loss is reflected in operations. Maintenance and repairs are charged to expense when incurred, and the cost of significant additions and improvements is capitalized. Software development costs The Company capitalizes the direct costs associated with the development of software products in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Research costs are charged to product development expense prior to the development of a detailed program design or a working model. Costs incurred subsequent to the product release, and research and development performed under contract are charged to operations. Capitalized costs are amortized over the estimated product life using the greater of the straight-line method or the ratio of current product revenues to total projected future revenues. Software development costs at November 30, 1997 and December 31, 1998 are presented net of accumulated amortization of $3,401,811 and $4,024,423, respectively. Amortization expense related to software development costs was $252,260, $394,770, $37,874 and $584,738, respectively, for the years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998, respectively. Goodwill The Company has classified as goodwill the cost in excess of fair value of the net assets of companies acquired in purchase business combinations. Goodwill is being amortized on a straight-line basis over periods ranging from 10 to 15 years. Goodwill at November 30, 1997 and December 31, 1998 is presented net of accumulated amortization of $374,237 and $1,224,517, respectively. Long-lived Assets The Company evaluates the recoverability of the carrying value of property and equipment and intangible assets in accordance with the provisions of Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of". The Company considers historical performance and anticipated future results in its evaluation of potential impairment. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of these assets in relation to the operating performance of the business and future and undiscounted cash flows expected to result from the use of these assets. Impairment losses are recognized when the sum of expected future cash flows are less than the assets' carrying value. No such impairment losses have been recognized to date. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Standards As of December 31, 1998, the Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which requires additional disclosures with respect to certain changes in assets and liabilities that previously were not required to be reported as results of operations for the period. In addition, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the manner in which public companies report information about operating segments, products and services, geographic areas and major customers in annual and interim financial statements. The Company accounts for all operations under one segment. In 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company has not determined the effort of adopting this standard. 3. CHANGE IN FISCAL YEAR In the fourth quarter of 1998, the Company changed its fiscal year end from November 30 to December 31 effective with the fiscal year ending December 31, 1998. The accompanying financial statements include audited statements of operations and comprehensive income (loss), shareholders' equity and cash flows for the one month transition period ended December 31, 1997. 4. AQUISITIONS OF BUSINESSES AND STRATEGIC VENTURES KRYSTAL INGENIERIE S.A. On March 4, 1997, the Company consummated its acquisition of all of the issued and outstanding capital stock of Krystal Ingenierie S.A. ("Krystal"), a ------- corporation organized under the laws of the Republic of France in a transaction accounted for as a purchase business combination. The total consideration of $1,460,005 consisted of: (1) the exchange of an aggregate of 48,064 shares of the Company's common stock (the "Common Stock") for 2,500 shares of Krystal held ------------ by Kuhner, representing all of the issued and outstanding capital stock of Krystal; (2) the exchange an aggregate of 45,686 additional shares of the Company's Common Stock for certain indebtedness of Krystal owed to Kuhner in the aggregate amount of FF 3,914,331 ($677,179 at March 4, 1997); and (3) acquisition costs of $63,224. The shares of common stock issued were valued at the approximate weighted average price per share of $14.90 (based on volume of shares traded during the period from February 24, 1997 to February 28, 1997). Concurrently with the closing of the Krystal acquisition, Krystal's name was formally changed to Template Software S.A. The excess of the purchase price over the fair value of the net tangible liabilities acquired of $1,306,511 was allocated to goodwill and will be amortized over its estimated useful life of 10 years. MILESTONE SOFTWARE GMBH AND MILESTONE SOFTWARE Ges. mbH On June 27, 1997, the Company acquired all of the issued and outstanding equity interests of milestone software GmbH, a German limited liability company ("Milestone"), which included 34% of the issued and outstanding equity interests --------- of milestone software, Ges. mbH, an Austrian corporation ("Milestone-Austria"), ----------------- from Milestone's three owners, Klaus Dieter Jansen ("Jansen"), Heinz-Dieter ------ Dietrich ("Dietrich") and NeSBIC III, C.V., for an aggregate cash purchase price -------- of DM 12,000,000 ($6,970,800 at June 27, 1997) plus acquisition costs of $480,567. This transaction was accounted for as a purchase business combination. An additional 10% interest of Milestone-Austria was acquired from Dietrich and Jansen in exchange for 90,000 shares of the Company's Common Stock. The shares of common stock issued were valued at the approximate weighted price per share of $12.18 (based on the volume of shares traded during the period June 10, 1997 to June 16, 1997. The excess of the purchase price over the fair value of the net tangible liabilities acquired of $9,271,281 was allocated to goodwill at the acquisition date and will to be amortized over its estimated useful life of 15 years. The acquisition agreement also provides for the Company to issue $507,000 of equivalent shares of common stock to Dietrich and Jansen on both November 30, 1997 and 1998 if certain profit objectives are met over the five month and twelve month periods ended November 30, 1997 and 1998, respectively. The profit objective for the five month period ended November 30, 1997 was met. Consequently, the company issued an additional 51,342 shares of common stock to Dietrich and Jansen in February 1998. The fair value of these shares of $507,000 has been allocated to goodwill as of November 30, 1997. The profit objective for the twelve month period ended November 30, 1998 was not met; therefore, no contingent consideration was provided. MILESTONE SOFTWARE Ges. mbH On March 30, 1998, the Company acquired the remaining 56% of the issued and outstanding equity interests of milestone software Ges. mbH, an Austrian corporation, for an aggregate cash purchase price of $100,000 plus acquisition expenses of $34,837. The Company assumed liabilities of $248,937. The excess of the purchase price over the fair value of the net liabilities acquired of $383,774 was allocated to goodwill and is being amortized over its estimated useful life of 14.2 years. The final allocation of the purchase price is subject to the completion of management's due diligence, however, that allocation is not expected to differ materially from the initial allocation. As a result of this transaction, the Company owns 100% of Milestone Austria. The acquisition agreement also provides for additional contingent consideration not to exceed $250,000 of equivalent shares of common stock to all of the selling shareholders if certain revenue and profit objectives are met by the Company's fiscal year end. The profit objectives were not met; therefore, no contingent consideration was provided. The following unaudited pro forma information presents a summary of consolidated results of operations of the Company and Milestone-Austria as if the acquisition had occurred December 1, 1996:
Year Ended November 30, December 31, (in thousands except per share amounts) 1997 1998 - ----------------------------------------- ------------ ------------ Net sales $28,091,901 $42,954,754 Net income (loss) 2,385,353 1,058,069 Earnings per common share -diluted $ 0.44 $ 0.19
These unaudited pro forma results have been prepared for comparative purposes only. They do not purport to be indicative of the results of operations which actually would have resulted had the combinations been in effect on December 1, 1996. In addition, they do not purport to be indicative of future results of operations on the consolidated entities. PRECISE CONNECTIVITY SOLUTIONS LTD. On March 30, 1998, the Company entered into a Convertible Note Purchase Agreement ("Note Agreement") with Precise Connectivity Solutions ltd. ("Precise"), an Israeli limited corporation, pursuant to which the Company purchased a Note from Precise for an aggregate purchase price of $500,000 due on March 30, 1999 with a 9% percent interest rate per annum. The Note is convertible at the option of the Company or Precise into that number of fully- paid, non-assessable shares of Preferred Stock of Precise equal to eight percent (8%) of the issued and outstanding capital stock of Precise, on a fully-diluted basis, including such shares of Preferred Stock. The note receivable is included in prepaid expenses and other current assets in the consolidated balance sheet as of December 31, 1998. EAGLE EYE TECHNOLOGIES STRATEGIC RELATIONSHIP On September 1, 1998, the Company entered into a strategic relationship with Eagle Eye Technologies, Inc. ("Eagle Eye") to sell software and related services to Eagle Eye with respect to the creation by Eagle Eye of its Service Operations Center (the "SOC"). The SOC supports the operations of the Global Locating System, a satellite-based location and messaging system. In connection therewith, the Company invested $1,000,000 in Eagle Eye in return for (i) a promissory note (the "Convertible Promissory Note") that is convertible, at the Company's option, into 66,695 shares of common stock of Eagle Eye ("Eagle Eye Common Stock") and (ii) a warrant (the "Warrant") that gives the Company the right to purchase an additional 66,695 shares of Eagle Eye Common Stock for an additional $1,000,000. Interest on the Convertible Promissory Note accrues at the rate of 12% per annum, payable together with principal in a single lump sum on September 1, 2000, unless converted into Eagle Eye Common Stock prior to that date. The Convertible Promissory Note is prepayable by Eagle Eye in whole, but not in part, at any time prior to maturity. The Convertible Promissory Note may be converted at any time prior to the date that is 30 days after the date on which Eagle Eye notifies the Company that the aggregate amount of payments made by Eagle Eye to the Company exceeds $1,000,000 (the "Notification Date"). The Warrant is exercisable by the Company, in whole or in part, at any time beginning on the Notification Date and ending on the date that is 12 months after the Notification Date. Furthermore, under the Financing Agreement, the Company also agreed to make available to Eagle Eye an additional $500,000, which may be loaned to Eagle Eye at Eagle Eye's request, on substantially the same terms as set forth in the Convertible Promissory Note, except that such additional indebtedness would be convertible, at the Company's option, into 33,348 shares of Eagle Eye Common Stock. As of December 31, 1998, no amounts were loaned to Eagle Eye under this provision. 5. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following:
YEAR ENDED NOVEMBER 30, DECEMBER 31 ------------- ------------ 1997 1998 ------------- ------------ Government: Billed $ 3,109,725 $ 4,864,392 Unbilled 65,798 2,244,649 Retainage 87,652 97,013 ----------- ----------- 3,263,175 7,206,054 ----------- ----------- Domestic: Billed 1,690,101 $ 2,494,031 Unbilled 4,971 -- ----------- ----------- 1,695,072 2,494,031 ----------- ----------- Foreign: Billed. 5,534,199 5,255,038 Unbilled 530,525 1,474,056 ----------- ----------- 6,064,724 6,729,094 ----------- ----------- Total 11,022,971 16,429,179 Less: allowance for doubtful accounts (548,717) (677,356) ----------- ----------- $10,474,254 $15,751,823 =========== ===========
6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
YEAR ENDED NOVEMBER 30, DECEMBER 31, ------------- ------------- 1997 1998 ------------- ------------- Data processing equipment $ 1,526,474 $ 2,205,576 Office furniture and equipment 1,240,335 2,231,512 Leasehold improvements 453,533 645,934 Building -- 2,050,808 ----------- ----------- 3,220,342 7,133,830 Less: accumulated depreciation (1,026,410) (1,710,899) ----------- ----------- $ 2,193,932 $ 5,422,931 =========== ===========
7. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
YEAR ENDED NOVEMBER 30, DECEMBER 31 ------------- ------------ 1997 1998 ------------- ------------ Revolving credit facility $ 33,553 $ 166,797 ======== ========= Long-term debt consists of the following: Term Loan $175,695 $ 229,373 Less current portion (91,667) (229,373) -------- --------- Long-term portion $ 84,028 $ -- ======== =========
Revolving credit facilities The Company has a revolving credit facility (the "Facility") under a Loan Agreement (the "Loan Agreement") with First Union National Bank, successor by -------------- merger to Signet Bank, (the "Bank") in the aggregate principal amount of ---- $3.0 million with an expiration date of June 30, 1999. As of December 31, 1998, there were no amounts outstanding under this Facility. Availability of the funds under the Loan Agreement is also subject to the Company's compliance with certain covenants customary with commercial loans, including covenants related to maintenance of certain levels of tangible net worth and a certain ratio of current assets to current liabilities. The Loan Agreement further imposes restrictions on creation of debt, merger, sale of assets, loans or advances, guarantees, payment of dividends or repurchase of capital stock without the Bank's consent. As of November 30, 1997 and for certain compliance periods during the two years ended November 30, 1997, the Company was not in compliance with the foregoing financial covenants for which waivers were obtained. During the year ended December 31, 1998, the Company was in compliance with all financial and non-financial covenants. The Company obtained the Bank's consent in connection with the Board of Directors approved stock repurchase program. The Facility bears interest at the LIBOR Market Index Rate (for the United States Dollar quoted by the British Bankers Association) plus 1.85%. On August 3, 1998, the Bank issued a letter of credit on the Company's behalf as a performance guarantee for a German customer in the amount of DEM 1,700,000 (approximately $1.0 million). The Company's French subsidiary maintains with Banque Hervet an unsecured line of credit for 500,000FF plus an additional 500,000FF of credit collateralized by 70% of accounts receivable (approximately $180,000 in aggregate) at an interest rate of 8.3%. The Company's Austrian subsidiary maintains a line of credit with Raiffeisen Bank for 1,000,000ATS (approximately $85,000), collateralized by 100% of accounts receivable at an interest rate of 5%. As of December 31, 1998, 568,845FF (approximately $101,596) and 765,005ATS (approximately $65,201), was outstanding under the French and Austrian lines of credit, respectively. Subordinated note payable In December 1991, the Company repurchased 101,554 shares of Class A Common Stock and 406,316 shares of Convertible Preferred Stock from a minority shareholder for $300,000 in cash and a subordinated note in the amount of $400,860 (the "Subordinated Note"). The Subordinated Note, as amended, requires annual interest payments through March 1995 and quarterly principal and interest payments of $31,000, beginning in April 1995. The Subordinated Note bears interest at 2% above the prime rate. Any remaining balance is due January 1, 1999. Stock representing the unpaid portion of the note is held in treasury, and is being retired as the principal is repaid. In October 1996, the balance of the Subordinated Note was paid in full and all of the remaining, underlying shares of Preferred Stock and Class A Common Stock held in treasury were retired. The repayment of the Subordinated Note was financed with a $275,000, three year term loan pursuant to the Loan Agreement from the Company's commercial bank (the "Term Loan"). The Term Loan bears interest at the prime rate plus 1/4% (8.75% at November 30, 1997 and 8.00% at December 31, 1998) and requires monthly principal payments of $7,639, beginning in November 1996. The balance of the Subordinated Note was $76,389 as of December 31, 1998. In January 1998, the Company financed its Directors and Officers insurance premiums with AI Credit Corporation in the amount of $269,123 at an annual percentage rate of 9.16%. The Company makes monthly payments of $12,803 with the note maturing in December 1999. The balance of this note was $152,984 as of December 31, 1998. 8. CAPITAL STOCK Stock Option Plans The Company has three Stock Option Plans, the 1992 Incentive Stock Option Plan, the 1992 Non-Statutory Stock Option Plan and the 1996 Equity Incentive Plan. The 1992 Plans replace the Company's former 1986 Incentive Stock Option Plan and the 1984 Incentive Stock Option Plan. No further grants may be made under the 1992 plans. In October 1996, the Company established the 1996 Equity Incentive Plan (1996 Equity Plan). Under the 1996 Equity Plan, which is administered by the Compensation Committee of the Board of Directors, a variety of awards, including stock options, stock appreciation rights, stock awards and incentive awards may be made to the Company's employees and directors. Initially, 1,000,000 shares of Common Stock were reserved for issuance under the 1996 Equity plan. On April 28, 1998, the shareholders voted to increase the number of authorized shares under such plan from 1,000,000 to 2,500,000. Options granted under the Company's stock option plans generally vest over a four year period and expire either three months after termination of employment, or seven to ten years after date of grant. Options to purchase 1,309,313 shares were vested and exercisable at December 31, 1998. Stock option activity for the years ended November 30, 1996 and 1997, for the one month ended December 31, 1997, and for the year ended December 31, 1998 is summarized as follows:
1984 1986 1992 1996 INCENTIVE INCENTIVE INCENTIVE INCENTIVE Weighted Average STOCK PLAN STOCK PLAN STOCK PLAN STOCK PLANs Total Exercise Price ---------- ---------- ---------- ----------- --------- ---------------- Outstanding, November 30, 1995 120,120 156,749 1,386,366 -- 1,663,235 $ 1.84 Granted -- -- 618,300 -- 618,300 $ 4.58 Exercised (14,014) -- (50,000) -- (64,014) $ 1.51 Forfeited (13,106) -- (23,500) -- (36,606) $ 1.98 ------- ------- --------- --------- --------- ------ Outstanding, November 30, 1996 93,000 156,749 1,931,166 -- 2,180,915 $ 2.63 Granted -- -- -- 1,190,712 1,190,712 $12.38 Exercised (81,000) (70,249) (193,426) -- (344,675) $ 1.99 Forfeited -- -- (32,750) (14,000) (46,750) $ 5.03 ------- ------- --------- --------- --------- ------ Outstanding, November 30, 1997 12,000 86,500 1,704,990 1,176,712 2,980,202 $ 6.56 Granted -- -- -- -- -- -- Exercised -- (1,500) (750) -- (2,250) $ 1.98 Forfeited -- -- (4,500) (48,000) (52,500) $ 1.96 ------- ------- --------- --------- --------- ------ Outstanding, December 31, 1997 12,000 85,000 1,699,740 1,128,712 2,925,452 $ 6.47 Granted -- -- -- 583,000 583,000 $ 9.80 Exercised (12,000) (55,500) (350,980) (6,250) (424,730) $ 2.12 Forfeited -- -- (13,000) (274,875) (287,875) $11.38 ------- ------- --------- --------- --------- ------ Outstanding, December 31, 1998 -- 29,500 1,335,760 1,430,587 2,795,847 $ 7.31 ======= ======= ========= ========= ========= ======
The range of exercise prices for options outstanding at December 31, 1998 was $1.38 to $16.00. The following table summarizes additional information about stock options outstanding at December 31, 1998:
Weighted Weighted Average Weighted Average Remaining Average Exercise Range of Number Contractual Exercise Number Price of Exercise Prices Outstanding Life Price Exercisable Exercisable - ------------------ ----------- ----------- -------- ----------- ----------- $ 1.3800-$ 1.980 970,885 5 years $ 1.779 820,260 $ 1.743 $ 4.0625-$ 6.000 587,875 8 years $ 5.362 194,375 $ 6.000 $ 9.0000-$12.875 534,712 9 years $ 9.837 123,219 $ 9.696 $14.0000-$16.000 702,375 9 years $ 14.680 171,459 $15.134 --------- --------- 2,795,847 1,309,313 ========= =========
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation". In accordance with SFAS No. 123, the Company applies APB Opinion 25 and related Interpretations in accounting for its stock option plans. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income (loss) and net income (loss) per common share would have been reduced to the pro forma amounts shown below (in thousands, except per-share amounts):
YEAR ONE MONTH YEAR ENDED ENDED ENDED NOVEMBER 30, DECEMBER 31, DECEMBER 31 ----------------------- ------------ ----------- 1996 1997 1997 1998 ---------- ---------- ------------ ------------- Net income (loss)--as reported $1,045,068 $2,379,793 $(622,537) $1,130,210 Net income (loss)--pro forma $ 988,901 $1,956,444 $(657,816) $ (876,785) Earnings (loss) per common share--as reported $ 0.23 $ 0.44 $ (0.13) $ 0.20 Earnings (loss) per common share--pro forma $ 0.21 $ 0.34 $ (0.14) $ (0.17)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
YEAR ONE MONTH YEAR ENDED ENDED ENDED NOVEMBER 30, DECEMBER 31, DECEMBER 31 ----------------------- ------------ ----------- 1996 1997 1997 1998 ---------- ---------- ------------ ------------- Expected dividend yield 0.0% 0.0% -- 0.0% Risk-free interest rate 6.4% 6.5% -- 5.1% Expected volatility 70.0% 70.0% -- 70.0% Expected life (in years) 5 5 -- 5
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion the existing models do not necessarily provide a reliable single measure of the fair value of the Company's options. The weighted average estimated fair values of employee stock options granted during the years ended November 30, 1996 and 1997, for the one month period ended December 31, 1997 and for the year ended December 31, 1998 were $2.90, $7.83, $0 and $6.09 per share, respectively. Prior to the initial public offering of the Company's Common Stock, the fair value of the Company's Common Stock was determined through an independent valuation. The Company calculated deferred compensation expense of $1,634,527 related to certain options granted during the years ended November 30, 1995 and 1996 and will recognize compensation expense over the vesting period of those stock options. The Company did not record any adjustments for deferred compensation expense as of November 30, 1995 and 1996 since it did not have a material effect on total shareholders' equity. During the year ended November 30, 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998, the company recorded $406,985, $32,483 and $389,143 of deferred compensation expense, respectively. 9. INCOME TAXES Foreign (loss) income before income taxes was ($13,819), $1,017,199, ($390,203) and $173,926 for the years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998, respectively. The benefit (provision) for income taxes for the years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998 is summarized as follows:
YEAR ONE MONTH YEAR ENDED ENDED ENDED NOVEMBER 30, DECEMBER 31, DECEMBER 31 ------------------------- ------------ ----------- 1996 1997 1997 1998 ---------- ---------- ------------ ------------- Current: Federal $ (485,853) $ (981,736) $ -- $ (83,150) State (97,239) (118,808) -- (58,688) Foreign -- (35,232) (20,249) (62,543) ----------- ----------- --------- --------- (583,092) (1,135,776) (20,249) (204,381) ----------- ----------- --------- --------- Deferred: Federal (54,670) (91,042) 169,781 (319,370) State (2,179) (3,473) 18,864 (29,663) Foreign (4,561) (537,725) 103,459 (194,703) ----------- ----------- --------- --------- (61,410) (632,240) 292,104 (543,736) ----------- ----------- --------- --------- Total benefit (provision) $ (644,502) $(1,768,016) $ 271,855 $(748,117) =========== =========== ========= =========
The source and tax effects of the temporary differences giving rise to the Company's net deferred tax assets (liabilities) at November 30, 1997 and December 31, 1998 are as follows:
YEAR ENDED NOVEMBER 30, DECEMBER 31, ------------- ------------- 1997 1998 ------------- ------------- Capitalized software $(563,439) $ (988,560) Deferred revenue 165,153 297,459 Allowance for doubtful accounts 99,800 79,354 Accrued liabilities 141,219 336,375 Deferred compensation 154,663 -- Net operating loss carryforward 733,859 1,120,750 Goodwill 47,844 196,598 Research and development credits -- 100,000 Other 35,401 (56,426) --------- ---------- $ 814,500 $1,085,550 Valuation allowance -- (40,000) --------- ---------- Total $ 814,500 $1,045,550 ========= ==========
During 1998, the Company recorded a valuation allowance of $40,000. The valuation allowance at December 31, 1998 relates to the future utilization of foreign net operating loss carryforwards that the Company has determined are not realizable at this time. As of December 31, 1998, the Company has research and development tax credits of $100,000 which will be utilized to offset future taxes payable. In addition, as of November 30, 1997 and December 31, 1998, the Company had net operating loss carryforwards of approximately $1.9 million and $1.7 million, respectively, related to its foreign operations. The research and development tax credits and the net operating loss carryforwards begin to expire in 1999. The Company's tax provision for the years ended November 30, 1996 and 1997, the one month ended December 31, 1997 and the year ended December 31, 1998 differs from the statutory rate for Federal income taxes as a result of the tax effect of the following factors:
YEAR ENDED MONTH ENDED YEAR ENDED NOVEMBER 30, NOVEMBER 30 DECEMBER 31, DECEMBER 31, 1996 1997 1997 1998 ------------- ------------ ------------- ------------- Statutory rate (34)% (34)% 34% (34)% State income taxes, net of federal benefit (4)% (4) 2 (5) Permanent differences (1)% (2) (1) 4 Foreign rate differential -- (3) (5) (10) Research and development credits -- -- -- 5 Other 1 % -- -- -- ---- ---- ---- ---- Effective tax rate (38)% (43)% 30% (40)% ==== ==== ==== ====
10. COMMITMENTS AND CONTINGENCIES Pending Litigation On December 23, 1998, the Company filed an action against Automated Financial System, Inc, ("AFS") in the United States District Court for the Eastern District of Virginia seeking compensatory damages of approximately $950,000 resulting from AFS's failure to pay fees to the Company pursuant to a February, 1998 consulting agreement. AFS has filed a counterclaim against the Company, asserting breach of contract, deceit and fraud, seeking an unspecified amount of money damages for lost profits, loss of business and other economic damages. The Company has filed a motion to dismiss the counterclaim, which is pending. Discovery has commenced in the action. The Company cannot currently predict the outcome of this litigation. If the Company is not successful in pursuing these claims, there could be a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company is and may from time to time be involved in ordinary routine litigation incidental to its business. Other than is described above, the Company is not aware of any pending or threatened litigation that could have a material adverse effect on the Company's business, results of operation or financial condition. Operating leases During September 1996, the Company entered into a noncancelable operating lease for the corporate headquarters that expires in December 2006. As an incentive to lease this space, the landlord provided a rent abatement through December 1996. Additionally, the lease contains an escalation clause that provides for an increase in base rent beginning in December 1997 and a renewal clause whereby the Company has the option to renew the lease for a period of five additional years. During 1997, the Company entered into a sublease agreement for a portion of its leased office space that continued through December 31, 1998. Rent expense was reduced by approximately $56,000, $8,000 and $206,000 for the year ended November 30, 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998, respectively, due to this rental income. The Company also leases certain office equipment and other office space under noncancelable operating leases which expire at various dates through 2008. Certain operating leases provide for adjustments relating to changes in real estate taxes and other operating expenses. Rent expense under all leases is recognized ratably over the lease terms. Rent expense under all operating leases was approximately $706,902, $1,508,707, $188,500 and $2,123,435, respectively, for the years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998. Capital leases The company leases certain office equipment under arrangements that meet the criteria requiring capitalization as prescribed by Statement of Financial Accounting Standards No. 13, "Accounting for Leases" ("SFAS No. 13"). Included in the balance sheets are the following amounts at November 30, 1997 and December 31, 1998:
YEAR ENDED NOVEMBER 30, DECEMBER 31 ------------- ------------ 1997 1998 ------------- ------------ Office furniture and equipment $ 210,042 $ 210,042 Data processing equipment 37,044 54,117 Less: accumulated amortization (69,372) (131,052) ---------- --------- $ 177,714 $ 133,107 ========== =========
Future minimum lease payments, under all leases, at December 31, are as follows:
OPERATING CAPITAL ---------- --------- 1999 $1,329,295 $ 63,884 2000 1,135,430 49,333 2001 1,149,910 32,916 2002 1,180,751 -- 2003 1,216,176 -- Thereafter 3,773,210 -- ---------- --------- Total minimum payments $9,784,772 146,134 ========== Less: portion representing interest 14,322 --------- Present value of capital lease obligations $ 131,811 =========
11. ACCRUED EXPENSES Accrued expenses consisted of the following:
YEAR ENDED NOVEMBER 30, DECEMBER 31, ------------ ------------ 1997 1998 ------------ ------------ Accrued payroll, bonus and vacation $1,871,569 $2,314,890 Accrued commissions 106,553 92,713 Accrued subcontractor's fees 22,857 461,309 Accrued value added tax 371,339 624,107 Accrued acquisition costs 160,872 -- Other accrued expenses 184,428 608,596 ---------- ---------- $2,717,618 $4,101,615 ========== ==========
12. RELATED PARTY TRANSACTIONS In November 1996, Alcatel Alsthom Compagnie Generale d'Electricite S.A. ("Alcatel") invested $8.0 million in the Company in the form of Preferred Stock at the equivalent of $16.00 per share of Common Stock. The costs related with the issuance of the Preferred Stock was $75,096. Coincident with the Company's initial public offering of stock, the Preferred Stock converted to Common Stock at a one to one conversion rate. During 1997, Alcatel and the Company entered into agreements whereby the Company provides products and services to Alcatel for their internal use and for resale to their customers. For the year ended November 30, 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998, the Company earned $1,712,683, $145,802 and $556,081 of revenue from Alcatel, respectively. Accounts receivable from Alcatel as of November 30, 1997 and December 31, 1998 were $785,314 and $31,177, respectively. 13. EMPLOYEE BENEFIT PLANS Deferred compensation plan The Company maintains a deferred compensation profit-sharing plan under section 401(k) of the Internal Revenue Code. Under the plan, domestic employees may elect to defer up to 12% of their salary, subject to Internal Revenue Service limits. The Company contributes a matching 50% of the first 4% of employee contributions. In addition, the plan allows for the Company to make discretionary contributions based on the participants salary. Total Company contributions to the plan were $100,003, $129,917, $16,815 and $196,972 for the years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998, respectively. Incentive bonus plan The Company has an incentive bonus plan whereby the Board of Directors authorized the officers to grant awards to nominated employees in recognition of exceptional contributions. Awards totaling $50,850, $101,375, $0 and $27,833, were given to employees (excluding executives) for the years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998, respectively. 14. SEGMENT INFORMATION The Company provides software products and services worldwide. Revenue from foreign operations and identifiable assets of foreign operations were less than 10% of consolidated revenue and assets in 1996. Summarized financial information by geographic region for 1997 and 1998 is as follows (in thousands):
Sales Sales to Between Income Identifiable Unaffiliated Geographic from Assets at Capital Depreciation/ Customers Areas Operations Year End Expenditures Amortization ------------- ----------- ----------- ------------- ------------ ------------- Year ended November 30, 1997: United States $14,630 $ 2,745 $2,266 $ 39,790 $ 461 $204 Europe 12,188 606 1,103 18,733 432 145 Americas/Pacific 92 60 7 133 40 6 Eliminations -- (3,411) -- (15,685) -- -- Consolidated $26,910 $ -- $3,376 $ 42,971 $ 933 $355 Month ended December 31, 1997: United States $ 937 $ 121 $ (549) $ 40,679 $ 119 $ 29 Europe 1,231 193 (293) 18,333 47 29 Americas/Pacific (23) 11 (59) 134 0 1 Eliminations -- (325) -- (15,827) -- -- Consolidated $42,639 $ -- $ (901) $ 43,319 $ 166 $ 59 Year ended December 31, 1998: United States $21,345 $ 1,519 $1,103 $ 45,649 $ 516 $280 Europe 21,235 1,045 (15) 24,467 3,041 267 Americas/Pacific 59 95 32 52 10 12 Eliminations -- 2,659 -- (20,792) -- -- Consolidated $42,639 $ -- $1,120 $ 49,376 $3,567 $559
Intercompany revenues between geographic areas are accounted for as transfer fees which are intended to cover primarily software development and cost of goods sold. The Company did not derive more than 10% of its total consolidated revenue from export sales for the years 1996, 1997 and 1998. 15. LIQUIDATION OF MEXICAN SUBSIDIARY On December 1, 1998, the Company commenced liquidation of its Mexican subsidiary formed in 1997. The Company pursued this course of action as the result of the losses incurred since the inception of that operation coupled with the instability of Mexico's economic environment. The total cost related to the liquidation of this subsidiary was approximately $175,000 as of December 31, 1998. The Company has accrued the remaining costs associated with this liquidation in the amount of $83,127 as of December 31, 1998. Management believes these accrued costs represent all remaining obligations of the Company with regard to the liquidation of this subsidiary. EX-10.28 2 EXHIBIT 10.28 EXHIBIT 10.28 License Agreement between BULL a French Company 68 route de Versailles 78340 LOUVECIENNES, France (hereinafter "BULL") and Template Software, Inc. A United States Corporation 45365 Vintage Park Plaza Dulles, Virginia 20166 (hereinafter "LICENSOR") RECITALS -------- WHEREAS, LICENSOR is the owner of, or has the rights to market certain software referred to as Template Telco Integration in a Box which includes, Enterprise Integration Template (EIT), Workflow Template (WFT), Business Process Template (BPT), and SNAP; and Systems Management Template (SMT), Web Component, Geo-Map Component (GMC) and Process Monitoring Component (PMC); and WHEREAS, BULL desires to be granted a license to use and to market such software. NOW THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, BULL and LICENSOR agree that such a license shall be granted in accordance with the provisions of this Agreement to be effective as of December 17th, 1998 (hereinafter "EFFECTIVE DATE"). ARTICLE I - DEFINITIONS ----------------------- As used in this Agreement, the following terms shall have the following respective meanings: 1.1 BULL shall mean BULL, a French company, which will act as the representative of BULL's SUBSIDIARIES for the purpose of implementing this Agreement. 1.2 BULL COMPANIES shall mean BULL and BULL's SUBSIDIARIES. 1.3 CHANGES shall mean improvements, enhancements, modifications, upgrades, corrections, alterations, revisions, adaptations, updates, translations, versions, releases, derivations and extensions which are made to COMPUTER PROGRAMS and to materials related thereto. 1.4 COMPUTER PROGRAM(S) shall mean an ordered series of instructions or statements, in any form, for controlling the operation of a data processor to execute a process to be performed on data, including all data associated therewith. 1.5 CUSTOMER shall mean an end-user or a prospective end-user of LICENSED PRODUCTS marketed by a BULL COMPANY. 1 1.6 LICENSE FEE shall mean the applicable fee set forth on Exhibit C payable by a BULL COMPANY upon each sale of a LICENSED PRODUCT. 1.7 LICENSED PRODUCTS shall mean LICENSED SOFTWARE and RELATED MATERIALS collectively. 1.8 LICENSED SOFTWARE shall mean the COMPUTER PROGRAM(S) described in greater detail in Exhibit A which operate according to USER DOCUMENTATION. Such LICENSED SOFTWARE includes, but is not limited to, any version running on any computer system, in object code forms on magnetic media and in human readable form, and all CHANGES to LICENSED SOFTWARE developed or acquired by LICENSOR during the TERM. LICENSED SOFTWARE shall also include COMPUTER PROGRAM(s) which are developed or acquired by LICENSOR to provide equivalent or added functionality, to supplement or to replace the COMPUTER PROGRAM(s) in whole or in part which comprise the LICENSED SOFTWARE and any CHANGES made thereto. 1.9 LICENSOR INTELLECTUAL PROPERTY RIGHTS shall mean all rights, title and interests, including patent, trade secret, trademark, mask works and copyrights rights, which LICENSOR has or acquires in the LICENSED PRODUCTS. 1.10 PARTY, in singular or plural usage, shall mean BULL and/or LICENSOR as indicated by the context. 1.11 RELATED MATERIALS shall mean information in written or documentary form, human readable form or machine readable form in any media, used or useful in or relating to the installation, design, use, operation, testing, debugging, support, maintenance, demonstration or marketing of the LICENSED SOFTWARE, all of which are more completely identified in Exhibit B of this Agreement. 1.12 SUBSIDIARY of a PARTY shall mean a corporation, company, or other entity, regardless of tier, 50% or more of whose outstanding securities representing the right, other than as affected by events of default, to vote for the election of directors or other governing authorities, which are now or hereafter owned or controlled, directly or indirectly, by such PARTY or by another SUBSIDIARY of such PARTY regardless of tier; but such corporation, company, or other entity shall be deemed to be a SUBSIDIARY only so long as such ownership or control exists. 1.13 TERM shall mean the period of 2 years commencing on the EFFECTIVE DATE and continuing thereafter from year to year until this Agreement is terminated in accordance with its provisions. 1.14 TERRITORY shall mean worldwide. 1.15 USER DOCUMENTATION shall mean the user documentation that LICENSOR customarily distributes with the LICENSED SOFTWARE. ARTICLE II - LICENSE GRANT -------------------------- 2.1 LICENSOR hereby grants to BULL COMPANIES a non-exclusive license in the TERRITORY to use the LICENSED PRODUCTS for non-production use in accordance with the terms of this Agreement. Non-production environment shall be limited to use by BULL COMPANIES for CUSTOMER demonstration, CUSTOMER maintenance support and benchmark purposes. Such use shall be limited to six (6) copies for marketing, demonstration and prototyping purposes and six (6) copies for maintenance support purposes. 2.2 LICENSOR grants to BULL COMPANIES the right to sublicense and the right to use the LICENSED PRODUCTS to CUSTOMERS only if (a) the LICENSED PRODUCTS are included in a Systems Integration project, (b) such CUSTOMER executes a license agreement containing at least the Minimum User Terms listed in Exhibit G, and BULL COMPANIES pay the applicable LICENSE FEE set forth in Exhibit C. No CUSTOMER shall be permitted to re-license the LICENSED 2 PRODUCTS. For purposes of this Agreement, Systems Integration project shall mean a project whereby a BULL COMPANY has provided a custom solution to address specific requirements using the LICENSED PRODUCTS. 2.3 It is specifically agreed that BULL COMPANIES will reproduce on any copy of the LICENSED PRODUCTS, LICENSOR's copyright and trademark notice. BULL COMPANIES also will include the appropriate trademark notices when referring to the LICENSED SOFTWARE in advertising and promotional materials. 2.4 LICENSOR authorises BULL to use the six (6) copies of the LICENSED PRODUCTS granted in Article 2.1 for marketing purposes to create prototypes for the purpose of demonstrating the LICENSED PRODUCTS' capabilities with respect to a specific CUSTOMER project or engagement. Such use shall be free of charge provided that each prototype shall last no longer than 60 consecutive days and BULL companies receive no compensation for such prototypes from their CUSTOMER. Any prototyping activity which shall exceed 60 consecutive days shall be deemed to be a sub-license to BULL or BULL's CUSTOMER in accordance with article 2.2 above. ARTICLE III - ORDERING, DELIVERY AND PAYMENT REQUIREMENTS --------------------------------------------------------- 3.1 Order for the supply of the LICENSED PRODUCT and/or provision of maintenance support will mention: - the reference or name of the LICENSED SOFTWARE, - the LICENSE FEES to be paid for the licence or sublicense, - the maintenance support fees and applicable maintenance period if the support of the LICENSED PRODUCT is ordered, - the designated machine for the LICENSED PRODUCT, - the designated platform for the LICENSED PRODUCT, - the server class for the LICENSED PRODUCT, if applicable, - the number of users or clients, if and as applicable, - the name, address, and authorised contact of CUSTOMER, - the place of delivery. Any special provision in connection with a specific order from a CUSTOMER will be negotiated in good faith between the PARTIES. Except for said specific provision, each order is deemed to be under the terms and conditions of this Agreement. 3.2 Orders for the supply of the LICENSED PRODUCTS shall be processed by LICENSOR upon receipt of a written order from any BULL COMPANY. LICENSOR commits itself to deliver the LICENSED PRODUCTS ordered within fifteen (15) working days from order receipt date. Upon receipt of an order from a BULL COMPANY, LICENSOR will check its technical availability. LICENSOR may within five (5) working days refuse a technically invalid order. In such case, it shall notify within the above period, the BULL COMPANY involved, in writing with mention of the technical reasons which lead to rejection. LICENSOR shall provide the ordering BULL COMPANY and the BULL contact referenced in Article 19.1 a copy of the packing list via facsimile transmission within one (1) business day of shipment of the LICENSED PRODUCTS. BULL shall be entitled to liquidated damages for late deliveries equal to one and one half percent (1 1/2%) per month, or the maximum rate of interest allowed by law, if less, times the applicable LICENSE FEES for late deliveries. Such interest shall accrue from the sixteenth (16th) business day until the delivery date. 3.3 BULL COMPANIES shall be liable for all duties payable in connection with shipment of the LICENSED PRODUCTS to the place of delivery mentioned in the purchase order as described in Article 3.1. 3.4 BULL COMPANIES may at no cost upon written notice to LICENSOR cancel an order for standard LICENSED PRODUCTS previously issued and not yet shipped. 3 3.5 If a BULL COMPANY has been delivered a copy of the LICENSED SOFTWARE by LICENSOR for a specific CUSTOMER and should such CUSTOMER for any reason elect to cancel or to postpone its integration project within one (1) year of the shipment of the LICENSED PRODUCT, BULL COMPANIES shall have the right to re- allocate such sub-license to any other CUSTOMER subject to the terms of this Agreement or to ask for a product exchange in case the new CUSTOMER request is different from the original one, but only up to the amount of the original order. BULL COMPANIES shall provide LICENSOR a copy of the cancellation notification from the CUSTOMER and applicable ordering information pursuant to Article 3.1 for the new CUSTOMER. In no event shall BULL COMPANIES re-allocate LICENSED SOFTWARE more than once. 3.6 BULL COMPANIES will pay to LICENSOR all fees owing hereunder within sixty (60) calendar days after the invoice date. If fees owing by BULL COMPANIES at any time are more than sixty (60) days past due, LICENSOR may discontinue taking any further orders until all past due amounts have been paid in full. Late payments shall accrue interest at one and one half percent (1 1/2 %) per month, or the maximum rate of interest allowed by law, if less unless specifically waived by LICENSOR in writing. 3.7 Except as otherwise expressly agreed, each PARTY is solely responsible for any expenses it incurs in the performance of its responsibilities under this Agreement. 3.8 LICENSOR may direct, upon reasonable notice, an audit during business hours of the use of the LICENSED SOFTWARE by BULL COMPANIES or as sublicensed, not more frequently than once annually. The audit shall be performed by independent auditors selected by LICENSOR. LICENSOR shall bear the cost of the audit, except the BULL COMPANIES shall bear the cost of the audit if the audit findings result in an underpayment of LICENSE FEES greater than ten percent (10%) of the LICENCE FEES reported and paid for the period audited. The scope of any audit shall be limited to this Agreement and transactions occurring in the immediately preceding (i) two (2) years for North American and European transactions and (ii) three (3) years for all other transactions. If the number of copies of LICENSED SOFTWARE sublicensed is found to be greater than the amount for which BULL COMPANIES paid, BULL COMPANIES will be invoiced for the underreported sublicense fees and the audit fees, if applicable, which shall be payable within thirty (30) days of such invoice. The auditors shall protect the confidentiality of BULL COMPANIES' and CUSTOMERS' confidential information and abide by those PARTIES' reasonable security regulations. ARTICLE IV LICENSE AND MAINTENANCE SUPPORT FEES ------------------------------------------------ 4.1 BULL COMPANIES shall pay LICENSOR the LICENSE FEES and MAINTENANCE SUPPORT FEES, set forth in Exhibit C, for the LICENSED PRODUCTS sublicensed to CUSTOMERS. There are no minimum fees guaranteed by BULL COMPANIES under this Agreement. 4.2 LICENSE FEES are payable upon shipment by LICENSOR of LICENSED PRODUCTS as directed by an order in accordance with Article III and this Article. 4.3 LICENSOR shall be entitled to raise an invoice upon shipment. BULL COMPANIES shall be entitled to refuse an incorrect or invalid invoice within ten (10) days of receipt of such invoice. 4.4 If BULL COMPANIES or CUSTOMERS would like to reinstate maintenance support after failing to pay maintenance support fees for any period of time, such BULL COMPANY or CUSTOMER shall pay the current fee for maintenance support and a reinstatement fee equal to the cumulative annual maintenance support fees that would have been due and payable during the period maintenance support fees were not paid. 4.5 Any BULL COMPANY, may at its option make payments directly to LICENSOR, or with the approval of LICENSOR, such approval not to be unreasonably withheld, to a SUBSIDIARY of LICENSOR. 4 4.6 LICENSOR shall be responsible for all income related-taxes imposed on, or withheld from, LICENSE FEES earned by LICENSOR pursuant to this Agreement. In the event that payments to LICENSOR pursuant to this Agreement originate from a different country than that country where payments are to be made, payments shall be made by a BULL COMPANY to LICENSOR gross of withholding taxes due under the originating country's law. 4.7 Unless otherwise mutually agreed to in writing, all payments required under this Agreement shall be made in United States currency. If a currency -------------- conversion is necessary the conversion rate shall be that rate quoted in the London Financial Time on the date of LICENSOR's invoice. ARTICLE V - MARKETING --------------------- 5.1 Although BULL COMPANIES intend to use reasonable efforts in marketing the LICENSED PRODUCTS, the extent and nature of any such marketing efforts shall be determined solely by BULL COMPANIES in the exercise of their business judgement. It is understood that there are no minimum marketing obligations under this Agreement. BULL COMPANIES shall provide sales credit and payment of commissions to BULL COMPANIES' sales organisations in charge of selling package solutions in the designated territory, the expense of which shall be borne by BULL COMPANIES. 5.2 LICENSOR agrees to provide upon request of a BULL COMPANY, marketing co- operation and assistance, the extent and nature of any such marketing efforts shall be determined solely by LICENSOR in the exercise of their business judgement. LICENSOR shall provide sales credit to such local sales organisations for revenues generated by BULL COMPANIES for the LICENSED PRODUCTS in each such country. 5.3 LICENSOR shall not sell the LICENSED PRODUCTS directly to any CUSTOMER for a project if (a) a BULL COMPANY has notified LICENSOR in writing of a CUSTOMER proposal for such project as required by Article 5.6, unless such proposal is formally rejected by CUSTOMER and (b) LICENSOR and its SUBSIDIARIES has had no demonstrable direct relationship with such CUSTOMER. . if a direct sale is made to such CUSTOMER, contrary to the foregoing provision, LICENSOR will pay a referral fee to BULL COMPANIES defined in Exhibit C. 5.4 During the TERM of this Agreement, BULL and LICENSOR will organize at least annually a meeting during which LICENSOR will inform BULL about its plans for CHANGES to the LICENSED SOFTWARE. LICENSOR will in particular provide BULL with its roadmap for new releases or new versions of the LICENSED SOFTWARE which LICENSOR plans to make generally available during the following twelve (12) months. LICENSOR will also provide BULL with information on products phasing out planning. LICENSOR will make its reasonable efforts to inform BULL of changes to the roadmap for such LICENSED SOFTWARE. 5.5 During the TERM of this Agreement, BULL and LICENSOR will organize at least every six (6) months a meeting during which each PARTY will inform the other PARTY about its marketing efforts. 5.6 BULL COMPANIES shall notify LICENSOR upon submission of a proposal for a specific integration project/solution which proposes installation and use of LICENSED SOFTWARE. 5.7 If a BULL COMPANY bids the LICENSED PRODUCTS to a CUSTOMER and is awarded a contract from such CUSTOMER and CUSTOMER chooses to the LICENSES PRODUCT for the systems integration project, then such BULL COMPANY shall be obligated to use the LICENSED PRODUCTS for such contract. If such CUSTOMER does not choose the LICENSED PRODUCTS for the systems integration project, BULL shall not replace the LICENSED PRODUCT with an equivalent product for the CUSTOMER. Notwithstanding the foregoing, the BULL COMPANY shall not be restricted from using other software products included in such proposal. 5 ARTICLE VI - DELIVERY OF LICENSED PRODUCTS FOR NON-PRODUCTION USE ----------------------------------------------------------------- 6.1 LICENSOR shall within 10 days following the receipt of a purchase order, deliver the LICENSED PRODUCTS specified in Exhibits A and B, to a designated BULL COMPANY at the location(s) specified subject to the terms and conditions of this Agreement. 6.2 LICENSOR shall also promptly deliver to a designated BULL COMPANY all CHANGES to the LICENSED PRODUCTS made or acquired by LICENSOR during the TERM. 6.3 LICENSOR will promptly provide to BULL in writing LICENSOR' Product Quality Assurance Plan, if any. Such Plan should describe actions to be taken at the different stages of the LICENSED PRODUCTS life cycle to ensure that the LICENSED PRODUCTS conform to the USER DOCUMENTATION and should include test specifications and results of the test set as well as the process for correcting anomalies. If LICENSOR obtains IS0 9001 certification, or if LICENSED PRODUCTS have obtained such certification, LICENSOR shall forward to BULL a copy of the latest certificate. 6.4 LICENSOR agrees that during the TERM, LICENSOR shall, at LICENSOR's expense maintain, at a minimum, the current release of the LICENSED SOFTWARE in conformance with the USER DOCUMENTATION. For six months after the introduction of a new generally available release of a LICENSED SOFTWARE, LICENSOR will use reasonable efforts to maintenance support the previously released version of such LICENSED SOFTWARE. Should LICENSOR become aware of any errors or be notified by BULL and/or a designated BULL COMPANY of any errors in the LICENSED PRODUCTS, LICENSOR will make all reasonable efforts to correct such errors and provide corrections and assistance to BULL or any such BULL COMPANY. Such maintenance support and assistance shall include, but not be limited to, correction of errors, defects and malfunctions in the LICENSED PRODUCTS, through replacements, updates, revisions and new releases of LICENSED PRODUCTS, and through consultation as required. LICENSOR shall also maintain records thereof, which shall be open for inspection by BULL and/or a designated BULL COMPANY. ARTICLE VII - MAINTENANCE SUPPORT AND INSTALLATION OF LICENSED SOFTWARE ----------------------------------------------------------------------- 7.1 After expiration of the warranty period as defined in Article 10.1 CUSTOMER may contract for maintenance support services with a BULL COMPANY. Provided the involved BULL COMPANY has paid the applicable maintenance support fees defined in Exhibit E, the maintenance support of the LICENSED SOFTWARE to CUSTOMERS shall be provided by BULL COMPANIES and LICENSOR in accordance with the following division of responsibility: 7.1.1 BULL COMPANIES or contracted third PARTY maintenance support providers, expressly bound by the terms and conditions of this Agreement, in countries designated by BULL COMPANIES shall be responsible for providing First Level Maintenance Support to CUSTOMERS with staff trained by LICENSOR. For the purposes of this Paragraph "First Level Maintenance Support" shall mean direct contact with such CUSTOMERS, handling inquiries, routine problem diagnosis and resolution or, in the event a problem cannot be resolved, the obtaining of appropriate documentation of such inquiry or problem for referral to LICENSOR. 7.1.2 LICENSOR shall be responsible for providing Second and Third Level Maintenance Support. "Second Level Maintenance Support" shall mean the provision of personnel with such special training and experience as may be, on a best efforts basis, appropriate to handle CUSTOMER inquiries, non-routine problem diagnosis and resolution, etc., upon referral by First Level Maintenance Support personnel. Second Level Maintenance Support may also mean direct contact with a CUSTOMER in certain instances. "Third Level Maintenance Support" shall mean the provision of personnel with such special 6 training and experience as may be, on a best efforts basis, appropriate to handle fixes to the source code upon referral by the second level maintenance support personnel. 7.2 Subject to Article 7.1, upon receipt from BULL COMPANIES of notice of a CUSTOMER problem caused by errors or defects attributable to the LICENSED PRODUCTS (which problem can be reproduced at a LICENSOR maintenance support facility or via remote access to BULL COMPANIES' facility), LICENSOR shall promptly take appropriate measures to correct such errors and provide corrections according to the following : (i) Class A (Emergency) Problems: In the case of significant errors or ---------------------------- problems, such as total loss of functionality or loss of saved data for which no workaround is available, LICENSOR will use its best efforts to provide the work around solution within 1 business day after becoming aware of such problems, and provide a permanent correction to BULL within 20 business days thereafter. (ii) Class B (Critical) Problems: In the case of lesser errors or problems, --------------------------- such as a partial loss of functionality for which there is a known work around or loss of saved data, LICENSOR will use all reasonable efforts to provide the work around within 5 business days after becoming aware of such problem and provide a permanent correction within 30 business days thereafter or at a later time as may be agreed to in writing by BULL or such BULL COMPANY specified by BULL. (iii) Class C (Non-Critical) Problems: In the case of minor problems, such as -------------------------------- improper program action without loss of functionality or data, LICENSOR will verify and respond to such problems within 20 business days after becoming aware of such problem and a correction by LICENSOR shall be provided. LICENSOR shall use reasonable efforts to provide corrections in a future release of the LICENSED SOFTWARE. A procedure for the implementation of the above maintenance support is incorporated into this Agreement as Exhibit E. 7.3 BULL COMPANIES may terminate maintenance support of the LICENSED SOFTWARE for a specific CUSTOMER at any time and there shall be no obligation for CUSTOMERS to contract for maintenance support of the LICENSED SOFTWARE. BULL COMPANIES shall not offer services in lieu of maintenance support services to CUSTOMERS. If any BULL COMPANY fails to purchase maintenance support services from LICENSOR on behalf of a CUSTOMER within four (4) months of the applicable expiration of the CUSTOMER's maintenance period, LICENSOR may, at its option, contact CUSTOMERS directly and offer to provide maintenance support services. In such event, LICENSOR shall not be liable to any such BULL COMPANY for any payments, fees or royalties. 7.4 LICENSOR shall, assist BULL COMPANIES in three (3) installations for no more than five (5) business days in each case of the LICENSED SOFTWARE at CUSTOMER sites in the United States and Europe only at no charge to BULL COMPANIES provided such BULL COMPANIES are not being paid for such installation services. ARTICLE VIII - TRAINING ----------------------- 8.1 LICENSOR shall train BULL COMPANIES' personnel pursuant to Exhibit D. Such training shall be during normal business hours and shall commence within thirty (30) days of LICENSOR's receipt of a written request from BULL. Training fees are set forth in Exhibit D. 7 ARTICLE IX - LIABILITY AND INSURANCE ------------------------------------ 9.1 - Liability --------- When either PARTY is required to perform services at the other PARTY's premises, such PARTY shall take all reasonable precautions to avoid injury or damage to any person or property. Each PARTY will assume all risks of injury to its employees, contractors, representatives or agents while on the other PARTY's premises, except where the other PARTY acts negligently 9.2 - Insurance --------- Types of Insurance : LICENSOR shall procure and maintain insurance in connection - ------------------ with the services performed and products provided hereunder as set forth in EXHIBIT H: BULL will be named as an additional insured in the policy described above, and such policy will require that BULL be given at least thirty (30) days prior written notice of any cancellation thereof or material change therein. Each PARTY shall duly insure, according to the provisions herein, its property values when not located in its own premises. Policy Requirements: All insurance policies required under the Paragraph "Types - ------------------- of Insurance" above shall be primary insurance without the right to contribution by any other insurance maintained by BULL. LICENSOR will submit duly signed certificates of insurance to BULL for the aforementioned insurance coverage or upon BULL's request, copies of the applicable insurance policies. 9.3 EXCEPT FOR LICENSOR'S LIABILITY UNDER SECTION 10.5 AND ANY LIABILITY OF BULL TO LICENSOR FOR GROSS NEGLIGENCE OR WILFUL MISCONDUCT IN CONNECTION WITH THE USE OF THE LICENSED PRODUCTS IN CONTRAVENTION OF THE TERMS HEREOF OR ANY MISAPPROPRIATION OF THE LICENSOR'S INTELLECTUAL PROPERTY RIGHTS, THE TOTAL LIABILITY, IF ANY, OF EITHER PARTY AND THEIR SUBSIDIARIES TO THE OTHER PARTY, INCLUDING, WITHOUT LIMITATION, LIABILITY ARISING OUT OF CONTRACT, TORT, BREACH OF WARRANTY, OR OTHERWISE, SHALL NOT IN ANY EVENT EXCEED TWICE THE VALUE OF THE SOFTWARE LICENSE FEES FOR EACH SEPARATE PROJECT. NEITHER PARTY WILL BE LIABLE FOR ANY LOST PROFITS OR FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR OTHER SPECIAL DAMAGES SUFFERED BY THE OTHER PARTY, THEIR CUSTOMERS OR OTHERS ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THEIR PRODUCTS, FOR ALL CAUSES OF ACTION OF ANY KIND (INCLUDING TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY AND BREACH OF WARRANTY) EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. ARTICLE X - WARRANTIES ---------------------- 10.1 LICENSOR represents and warrants that the LICENSED SOFTWARE shall operate in conformity with the USER DOCUMENTATION during a period of 90 days from the installation of the LICENSED SOFTWARE at CUSTOMER site. The sole obligation of LICENSOR in case of breach of the warranty set forth hereabove shall be to provide corrections under the terms and conditions of Article 7.2 except that those corrections will be provided by LICENSOR at no charge. 10.2 LICENSOR further represents and warrants that LICENSOR has good and clear title to the LICENSED PRODUCTS free and clear of all liens and encumbrances, and to all rights and licenses with respect thereto granted to BULL COMPANIES. LICENSOR further warrants that LICENSOR has not made and will not make any commitments to others inconsistent with or in derogation of the rights and licenses granted to BULL COMPANIES, and that LICENSOR is free of any obligation that would prevent it from entering into this Agreement. 10.3 BULL COMPANIES shall use reasonable efforts to notify LICENSOR of: 10.3.1 Any actual threatened or suspected infringement by any CUSTOMER in the Territory of any Intellectual Property of LICENSOR which comes to BULL COMPANIES' notice; and 10.3.2 Any claim by any third PARTY coming to its notice that the promotion or licensing of the LICENSED SOFTWARE in the Territory infringes the rights of any other person. 8 10.4 LICENSOR further warrants that the LICENSED PRODUCTS do not infringe any patent, copyright, trade secret, mask work, trademark or other legal or equitable rights of any third PARTY. 10.5 LICENSOR agrees to indemnify, hold harmless and defend BULL COMPANIES and their CUSTOMERS from and against any and all suits, proceedings at law or in equity, and any and all liability, loss, claims, costs, damages or expenses, including reasonable attorney's fees, arising out of or in connection with any claim by any person that the exercise of any right granted by LICENSOR hereunder to the LICENSED PRODUCTS infringes any right, title, or interest, including patent, copyright, trade secret, trademark, mask work or other proprietary rights of third PARTIES. In the event that LICENSOR believes that the LICENSED PRODUCT is likely to lead to a claim for infringement of a third PARTY's intellectual property right, LICENSOR further agrees, at LICENSOR's option to : 10.5.1 replace the LICENSED SOFTWARE or item by a LICENSED SOFTWARE or item which does not infringe any rights, but provides substantially the same functionality; or 10.5.2 modify the LICENSED SOFTWARE or the item in order to eliminate any infringing part without materially affecting its functionality; or 10.5.3 obtain for the CUSTOMER the right to continue using the infringing LICENSED SOFTWARE or item. If options 10.5.1,10.5.2, 10.5.3, are not viable in LICENSOR's opinion, refund the original value of the infringing or allegedly infringing software for any license that is less than five years old. 10.6 BULL COMPANIES shall at the request and expense of LICENSOR provide any reasonable assistance to settle and/or defend any claim or action on the issue of infringement of any patent copyright other intellectual property right within the scope of this Agreement. 10.7 LICENSOR shall have no liability under clause 10.3 to 10.5 if the alleged infringement is caused by the combination of the LICENSED PRODUCT with hardware or software not provided by LICENSOR. 10.8 LICENSOR represents and warrants that the LICENSED SOFTWARE may be used prior to, during, and after the calendar year 2000, and that the LICENSED SOFTWARE will operate during each such time period without error relating to date data, specifically including any error relating to, or resulting from, date data which represents or references different centuries or more than one century. The LICENSED SOFTWARE will not abnormally end or provide invalid or incorrect results as a result of date data, specifically including date data which represents or references different centuries or more than one century. The LICENSED SOFTWARE has been designed to ensure year 2000 compatibility, including, but not limited to, date data century recognition, calculations which accommodate same century and multi-century formulas and date values, and date data interface values that reflect the century; provided however, this warranty shall not apply if the LICENSED SOFTWARE has been modified other than by the LICENSOR or is an error that occurs in outside programs (e.g. the exchange with the LICENSED SOFTWARE of non Year 2000 compliant software or calculations based on dates.) In the event that the LICENSED SOFTWARE fails to comply with the warranty set forth in this Article 10.8, BULL shall provide LICENSOR with written notice of the claimed defect and information sufficient to permit LICENSOR to recreate the defect. LICENSOR shall use its best efforts to correct said failure promptly. 10.9 EXCEPT AS EXPRESSLY PROVIDED HEREIN, LICENSOR MAKES NO WARRANTIES OR REPRESENTATIONS AS TO PERFORMANCE OF THE LICENSED SOFTWARE TO BULL COMPANIES OR TO ANY OTHER PERSON. LICENSOR DISCLAIMS ANY AND ALL PROMISES, REPRESENTATIONS, AND WARRANTIES WITH RESPECT TO THE LICENSED SOFTWARE, INCLUDING THEIR CONDITION, CONFORMITY TO ANY REPRESENTATION OR DESCRIPTION, THE EXISTENCE OF ANY LATENT OR PATENT DEFECTS, AND THEIR MERCHANTABILITY OR 9 FITNESS FOR A PARTICULAR PURPOSE. NEITHER LICENSOR NOR ANY OF ITS SUBSIDIARIES OR AFFILIATES MAKES ANY WARRANTY OR CONDITION RESPECTING THE RESULTS OF ANY LICENSED SOFTWARE OR SERVICES OR THAT ALL ERRORS IN THE LICENSED SOFTWARE WILL BE CORRECTED, OR THAT THE LICENSED SOFTWARE FUNCTIONALITY WILL MEET BULL COMPANIES' OR THEIR CUSTOMERS' REQUIREMENTS. BULL COMPANIES ACKNOWLEDGE THEIR OBLIGATION TO INFORM THEIR CUSTOMERS TO REGULARLY BACK-UP DATA MAINTAINED ON ANY COMPUTER SYSTEM USING THE LICENSED SOFTWARE, AND THEIR RESPONSIBILITY TO ADEQUATELY TEST PRIOR TO DEPLOYMENT EACH PRODUCTION VERSION OF THE LICENSED SOFTWARE IN A CONFIGURATION WHICH REASONABLY SIMULATES BULL COMPANIES' OR CUSTOMER'S PLANNED PRODUCTION ENVIRONMENT. 10.10 Each PARTY acknowledges that the other PARTY has entered into this Agreement in reliance on the disclaimers of liability, the disclaimers of warranty and the limitations of liability set forth in this Agreement and that the same form an essential basis of the bargain between the PARTIES. 10.11 BULL COMPANIES agree to indemnify LICENSOR and to hold LICENSOR and its directors, employees and agents harmless from all costs, loss, liability and expense (including court costs and reasonable fees of attorneys and expert witnesses) incurred as a result of (i) any claims or demands brought against or incurred by LICENSOR or its directors, employees or agents, arising from or in connection with any breach by BULL COMPANIES of the terms of this Agreement or any sublicense agreement with a CUSTOMER or (ii) any claims or demands arising out of any use by BULL COMPANIES or its CUSTOMERS of any product not provided by LICENSOR. 10.12 BULL COMPANIES shall not make any warranty, guarantee or representation, whether written or oral, on behalf of LICENSOR. ARTICLE XI - TERM AND TERMINATION OF AGREEMENT ---------------------------------------------- 11.1 BULL or LICENSOR may terminate this Agreement at the end of the initial 2 years TERM or at the end of any 1 year extension thereof by written notice to the other at least 90 days prior to such termination becoming effective. However, notwithstanding the above paragraph, BULL shall have the right to complete, pursuant to the terms of this Agreement, including but not limited to deploying or implementing the LICENSED SOFTWARE to CUSTOMERS, any written commitment made by it in good faith (a) prior to the date of expiration of this Agreement or (b) prior to the date of receipt of the termination notice if this Agreement is terminated prior to its expiration. 11.2 If either PARTY hereto shall fail to perform or observe adequately any of the terms and conditions to be performed or observed under this Agreement, the other PARTY may, (subject to the provisions of Article XIX), give written notice to the defaulting PARTY specifying the respects in which the defaulting PARTY has so failed to perform or observe the terms and conditions of this Agreement, and in the event that any defaults so indicated shall not be remedied by the defaulting PARTY within 45 days after such notice, the PARTY not in default within 15 days thereafter may by written notice to the defaulting PARTY terminate this Agreement, and, except as provided herein, this Agreement and all the rights herein granted to the defaulting PARTY shall terminate 5 days after the defaulting PARTY's receipt of such notice of termination. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any other breach of the same or other provisions of this Agreement, and no waiver shall be effective unless made in writing. 11.3 If a BULL COMPANY hereto shall fail to perform or observe adequately any of the terms and conditions to be performed or observed under this Agreement, LICENSOR may, (subject to the provisions of Article XIX), give written notice to such BULL COMPANY specifying the respects in which such BULL COMPANY has so failed to perform or observe the terms and conditions of this Agreement, and in the event that any defaults so indicated shall not be remedied by such BULL COMPANY or commence the remedy and proceed diligently within 45 days after such notice, then LICENSOR within 15 days thereafter may by written notice to such BULL COMPANY terminate this 10 Agreement with respect to such BULL COMPANY, and, except as provided herein, this Agreement and all the rights herein granted to such BULL COMPANY shall terminate 5 days after receipt of such notice of termination. Any such termination of this Agreement with respect to an individual BULL COMPANY pursuant to this paragraph 11.3 shall not affect the rights or obligations of BULL or any other BULL COMPANY under this Agreement. 11.4 Notwithstanding the provisions of 11.2 and 11.3, LICENSOR shall be entitled to terminate this Agreement with respect to a BULL COMPANY immediately upon receipt of written notice by such BULL COMPANY if such BULL COMPANY: 11.4.1 fails in five (5) or more instances to pay LICENSE FEES in accordance with Article IV; 11.4.2 violates the provisions of Article XII; 11.4.3 violates the provisions of Article XIII; or 11.4.4 exports LICENSED PRODUCTS in violation of Article XVIII hereof. Any such termination of this Agreement with respect to an individual BULL COMPANY pursuant to this paragraph 11.4 shall not affect the rights or obligations of BULL or any other BULL COMPANY under this Agreement. 11.5 All sublicenses granted to CUSTOMERS pursuant to this Agreement, and all obligations, including obligations to pay LICENSE FEES with respect thereto, shall survive any termination of this Agreement. BULL COMPANIES may continue to use the LICENSED SOFTWARE internally for maintenance support purpose following termination of this Agreement provided all maintenance support fees have been paid to LICENSOR. 11.6 Notwithstanding any termination of this Agreement, BULL COMPANIES shall continue to have those rights and licenses including the right to retain those LICENSED PRODUCTS which are reasonably necessary for BULL COMPANIES to fulfil obligations to CUSTOMERS under contracts entered into up to and including the date of such termination provided that all maintenance support fees have been paid. 11.7 LICENSOR has deposited and maintains with NCC Escrow International Limited and DSI Technology Escrow Services a current copy of the source code of the LICENSED PRODUCTS, under which BULL COMPANIES have specific rights to source code in certain events provided BULL COMPANIES have paid all maintenance support fees. Such escrow agreements are attached as Exhibit F. 11 ARTICLE XII - CONFIDENTIALITY ----------------------------- 12.1 A PARTY receiving Confidential and Proprietary Information from the other PARTY shall maintain such Confidential Proprietary Information in confidence for a period of 5 years following the TERM. The receiving PARTY shall treat the Confidential and Proprietary Information received hereunder with the same care the receiving PARTY uses in the protection of the receiving PARTY's own Confidential and Proprietary Information and take reasonable precautions to limit the disclosure of such Confidential and Proprietary Information only to its employees, employees of its SUBSIDIARIES, contractors and consultants with a need to know to fulfil the receiving PARTY's rights and obligations pursuant to this Agreement. The receiving PARTY shall not copy such Confidential and Proprietary Information in whole or in part, or make any other use of such Confidential and Proprietary Information without the prior written consent of the transmitting PARTY except as may be necessary to exercise its rights and fulfil its obligations pursuant to this Agreement. The receiving PARTY shall not divulge, in whole or in part, such Confidential and Proprietary Information to any other third PARTY except as provided herein without the prior written consent of the transmitting PARTY and shall reproduce and include the transmitting PARTY's copyright and trade secret notices on all copies of such confidential and proprietary information. 12.2 Confidential and Proprietary Information shall mean information in documented form or oral form the substance of which is promptly reduced to writing and marked thereon as Confidential and Proprietary. Such Confidential and Proprietary Information shall not include: (a) information which was in the public domain at the time of disclosure hereunder, or (b) information which was rightfully in the receiving PARTY's possession without binder of secrecy prior to the time of its disclosure hereunder, or (c) information which, though originally confidential and proprietary information, subsequently becomes part of the public knowledge or literature through no fault of the receiving PARTY, as of the date of its becoming part of the public knowledge or literature, or (d) information which, though originally confidential and proprietary information, subsequently is received by the receiving PARTY from a third PARTY who has disclosed the information without binder of secrecy, as of the date of such third PARTY disclosure, or (e) information independently developed by the receiving PARTY's employees or agents. Confidential and Proprietary Information disclosed under this Agreement shall not be deemed to be within the foregoing exceptions merely because such information is embraced by more general information in the public domain or within the receiving PARTY's possession. All information in connection with BULL's CUSTOMER is deemed to be confidential without any need to be identified as confidential. 12.3 All other information transmitted between the PARTIES shall be maintained in accordance with the copyright laws; provided that the transmitting PARTY shall mark such information with a proper copyright notice and the transmitting PARTY shall reproduce such copyright notice on all copies of such information. ARTICLE XIII - PROTECTION OF LICENSED PRODUCTS BY LICENSOR ---------------------------------------------------------- 13.1 The LICENSED SOFTWARE and materials included with the LICENSED SOFTWARE may not be decompiled, reverse engineered, reprinted, transcribed, extracted, or reproduced, in whole or in part, without the prior written consent of LICENSOR. BULL COMPANIES shall not in any way modify, alter, translate, or localise the LICENSED SOFTWARE without the prior written consent of LICENSOR. If LICENSOR consents to any modification, alteration, translation, or localisation (a "Modification") of the LICENSED SOFTWARE by BULL COMPANIES, BULL COMPANIES shall promptly furnish LICENSOR with copies of the Modification. LICENSOR shall be the sole owner of 12 all Modifications. At LICENSOR's request, BULL COMPANIES shall execute all instruments required to assign to LICENSOR all ownership rights in the Modifications. This Agreement does not provide BULL COMPANIES with title or ownership of the LICENSED SOFTWARE, but only a right to sublicense the LICENSED SOFTWARE in accordance with the terms of this Agreement. The LICENSED SOFTWARE is, and shall remain, the property of LICENSOR. 13.2 BULL COMPANIES will use LICENSOR's trademarks, trade names, services marks, logos, and designations (the "Marks") exclusively to identify the LICENSED SOFTWARE and shall not use the Marks in combination with any trademarks, service marks, or logos of BULL COMPANIES. Any such use of the Marks will clearly identify LICENSOR or its Licensor's as the owner of the Marks. At LICENSOR's request, BULL COMPANIES will deliver to LICENSOR for prior approval a sample of all advertisements or promotional materials bearing a Mark. If LICENSOR notifies BULL COMPANIES that the use of the Mark is inappropriate, BULL COMPANIES will not publish or otherwise disseminate the advertisement or promotional materials until they have been modified to LICENSOR's satisfaction. 13.3 BULL COMPANIES acknowledge that LICENSOR claims and reserves all rights and benefits afforded under all applicable laws in the source code, object code, software and user materials included in the LICENSED SOFTWARE as a copyrighted work. 13.4 BULL COMPANIES acknowledge that LICENSOR owns and retains all trademarks, trade names, logos, designations, copyrights and other proprietary rights in or associated with the LICENSED SOFTWARE. 13.5 Upon expiration or termination of this Agreement, BULL COMPANIES will immediately cease all display, advertising and use of LICENSOR's trademarks, trade names, logos and designations. 13.6 BULL COMPANIES agree to use their reasonable efforts to protect LICENSOR's proprietary rights and to co-operate in LICENSOR's efforts to protect its proprietary rights. BULL COMPANIES agree to promptly notify LICENSOR of any known or suspected breach of such PARTY's proprietary rights that comes to its attention. ARTICLE XIV - DEVELOPMENT OF SOFTWARE BY BULL --------------------------------------------- 14.1 Nothing contained in this Agreement shall prevent BULL COMPANIES from developing, acquiring or marketing, either through the use of its own personnel or through third PARTIES, products similar to the LICENSED PRODUCTS provided that none of LICENSOR'S intellectual property or Confidential and Proprietary Information is used for any such products. Nothing herein shall be construed to grant LICENSOR any rights in any such similar products so developed or acquired, or any rights to the revenues of any portion thereof derived by BULL COMPANIES from the use, sale, lease, sublicense or other disposal of any such products. ARTICLE XV - TRANSFERABILITY ---------------------------- 15.1 This Agreement shall be binding upon and to the benefit of any corporation or other legal entity with which LICENSOR may be merged or consolidated, or any entity that acquires substantially all of the assets of LICENSOR. This Agreement shall be binding upon and to the benefit of any corporation or other legal entity with which BULL may be merged or consolidated, or any entity that acquires substantially all of the assets of BULL. This Agreement shall not otherwise be assigned without the prior written consent of the other PARTY. 13 ARTICLE XVI - DISCLAIMER OF AGENCY ---------------------------------- 16.1 This Agreement shall not constitute either PARTY the legal representative, employee, partner, joint venture or agent of the other, nor shall either PARTY have the right or authority to assume, create, or incur any liability or any obligation of any kind, expressed or implied, against, or in the name of or on behalf of the other PARTY. Each PARTY assumes sole responsibility for the supervision, daily direction and control, payment of salary (including withholding of income taxes and social security), worker's compensation, disability benefits and the like of its employees. ARTICLE XVII - PUBLICITY ------------------------ 17.1 Each PARTY shall be entitled to publicise the existence of this in connection with the LICENSED PRODUCTS without consent of the other PARTY. Both PARTIES to this Agreement agree to co-operate with each other in the issuance of joint press releases and other such materials as appropriate. Further, each PARTY shall use its best efforts not to disclose the terms and conditions of this Agreement to any third PARTY, except as required by law, or by governmental regulation, requirement or order, or as may be necessary to establish or assert its rights hereunder. ARTICLE XVIII - EXPORT - REEXPORT --------------------------------- 18.1 BULL acknowledges that the transfer of the LICENSED PRODUCT to or for certain countries or person located therein may be prohibited or restricted or subject to prior approval of agencies of the government of the USA, of France and of the importing or exporting countries. BULL COMPANIES agree not to export, re-export, transfer or otherwise communicate any of the LICENSED PRODUCT to or for any country or any person located therein to which the export, re-export or transfer or other communication of such LICENSED PRODUCT is prohibited or restricted by the requirement of applicable laws and regulations of the USA, France or the importing or exporting countries except in strict compliance with all such laws and regulations. 18.2 LICENSOR shall determine and notify BULL COMPANIES (i) of the export classification number (ECCN) as listed in supplement No. 1 to part 774 of the US Export Administration Regulations (EAR), of the LICENSED PRODUCT or of their components, (ii) of any modification of the ECCN hereof, (iii) of the authorisations required from the department of commerce or from any other department or agency of the US Government for the re-export of the LICENSED PRODUCT to any country in country Groups D1 (national security), E2 (embargoed countries), as listed in the EAR, supplement No. 1 to part 740. (iv) of the end-use and end-users prohibited under part 744 of the EAR, and (v) of the names of the persons denied export privileges published in the Federal Register and included in Denied Persons List referenced in supplement No. 2 to part 764 of the EAR. 18.3 BULL COMPANIES shall not re-export the LICENSED PRODUCT to the counties in Exhibit I, where such Exhibit shall be updated by LICENSOR, from time to time as the U.S. Export Restrictions are modified, via written notice pursuant to Article 19.1. 18.4 BULL COMPANIES shall indemnify and hold harmless LICENSOR for all costs, loss, liability and expenses (including court costs and reasonable fees of attorneys and expert witnesses) incurred as a result of (a) any violation of this Article XVIII or (b) any re-export or re-shipment of LICENSED PRODUCTS directly by any BULL COMPANY or indirectly by any CUSTOMER to any country set forth in Exhibit I in violation of this Article XVIII. 14 ARTICLE XIX - REPRESENTATIVES - NOTICES --------------------------------------- 19.1 Any and all written notices, communications and deliveries between LICENSOR and BULL with reference to this Agreement shall be sufficiently made on the date of mailing if sent by registered or certified mail or by a reputable overnight delivery company to the respective designated representatives, subject to change upon written notice, of the other PARTY as follows: In the case of BULL: In the case of LICENSOR: BULL Template Software, Inc. Direction des Achats Contracts Department 68 Route de Versailles 45365 Vintage Park Plaza 78430 Louveciennes, France Dulles, VA 20166 Tel: 33 1 39 66 38 44 Tel: (703) 318-1000 FAX: 33 1 39 66 68 45 FAX: (703) 318-8325 With a copy to Legal Department at the same address. Tel: 33 1 39 66 78 50 FAX: 33 1 39 66 62 98 ARTICLE XX - GOVERNING LAW - DISPUTE RESOLUTION ----------------------------------------------- 20.1 This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to conflict of laws principles. This Agreement shall not be governed by the United Nations Convention on the International Sale of Goods, the application of which is expressly excluded. BULL COMPANIES submit to the jurisdiction of the state and federal courts for the State of New York. 20.2 If there is a dispute between the PARTIES, the PARTY alleging such dispute shall serve upon the other PARTY written notice setting forth the nature of the dispute. If the dispute relates to a breach alleged under paragraph 11.2, the PARTY receiving notice of breach shall give the other PARTY written notice of the dispute within 10 days of receipt of the notice of breach. If any dispute is not resolved to the satisfaction of the PARTY giving the notice of dispute within 30 days of such notice, then such PARTY may, by written notice to the other PARTY within an additional 30 days thereafter, request a meeting of representatives of senior management of the PARTIES to occur within 30 days of such written request. 20.3 All disputes, claims or controversies arising under this Agreement that are not promptly settled through mutual agreement under Paragraph 20.2 shall be submitted by the PARTY demanding arbitration to the International Chamber of Commerce. The submission shall contain a detailed statement of the matter. However, prior to submission to arbitration, the PARTY seeking arbitration shall give the other PARTY at least 10 days advance notice of intent to demand arbitration. 20.4 The Rules of Conciliation and Arbitration of the International Chamber of Commerce in effect on the EFFECTIVE DATE of this Agreement shall govern the arbitration except as otherwise may be set forth in this Article XX. The arbitration shall be conducted in the city of the initiating PARTY's choice. 20.5 Three arbitrators shall be selected. Each PARTY shall select one arbitrator. Each PARTY shall so notify the other PARTY in writing of its selection and the two arbitrators so chosen shall select the third arbitrator. If either PARTY fails to appoint an arbitrator within 30 days after the Demand for Arbitration, then the International Chamber of Commerce shall make the selection. Also, if the two arbitrators selected by or on behalf of each PARTY cannot agree on a third arbitrator within 30 days after the last of the two of them are selected, then the International Chamber of Commerce shall make the selection. 20.6 In deciding matters, the arbitrators shall be bound by the terms and conditions of this Agreement. 15 20.7 The arbitration award, if providing for damages, shall include interest from the date of any breach or other violation of this Agreement. 20.8 The arbitration award shall be final and binding on all PARTIES, not subject to appeal, and honoured by all PARTIES without having to resort to any court; however, if the award is not carried out voluntarily and without delay, it shall be entered in and enforced by any court having jurisdiction over the subject matter or any of the PARTIES or their assets. Each PARTY shall bear its own expenses incurred in utilising arbitration and the fees for arbitration shall be borne equally between the PARTIES. 20.9 The arbitration shall be conducted in the English language. Relevant documents in other languages shall be translated into English if the arbitrators so direct. The law of the State of New York, U.S.A., excluding the Convention on Contracts for the International Sale of Goods and that body of law known as conflicts of laws, shall be the applicable substantive law. The applicable procedural law shall be the law of the place of arbitration. The PARTIES agree that they will, before the hearing of any dispute, make discovery and disclosure of all materials relevant to the subject matter of such dispute. 20.10 A written transcript in English of the hearing will be made and furnished to the PARTIES. Examination of witnesses by the PARTIES and by the arbitrators will be permitted. 20.11 The arbitrators will decide in accordance with the terms of this Agreement and will take into account any appropriate international trade usages applicable to the transaction. The arbitrators will state the reasons upon which the award is based. ARTICLE XXI - EFFECT OF HEADINGS -------------------------------- 21.1 The Article headings in this Agreement are for convenience only and are not to be used to interpret this Agreement. ARTICLE XXII - SEVERABILITY --------------------------- 22.1 If any term, provision, covenant or condition of this Agreement is held invalid or unenforceable for any reason, the remainder of the provisions shall continue in full force and effect as if this Agreement had been executed with the invalid portion thereof eliminated. ARTICLE XXIII - INTEGRATION --------------------------- 23.1 This Agreement sets forth the complete and exclusive statement of the Agreement between the PARTIES relating to the subject matter contained herein, and merges all prior discussions and communications between them. Neither PARTY shall be bound by any definition, condition, warranty or representation other than as expressly set forth in this Agreement, or as subsequently set forth in writing signed by the PARTIES hereto. ARTICLE XXIV FREEDOM OF ACTION ------------------------------- 24.1 This Agreement shall not prevent either PARTY from (i) entering into any agreement similar to this Agreement with any other entity for the TERRITORY, or (ii) developing, manufacturing, marketing and/or selling any product or service that can compete with the LICENSED SOFTWARE in any industry segment. 16 ARTICLE XXV NO THIRD PARTY BENEFICIARIES 25.1 This Agreement is enforceable only by LICENSOR and BULL COMPANIES. There shall be no third PARTY beneficiaries under or pursuant to the terms of this Agreement. 17 IN WITNESS WHEREOF, the PARTIES hereto have duly executed this Agreement, including Exhibits A through G, which are incorporated herein and made a part hereof, in duplicate, by their respective duly authorised officers to be effective as of the EFFECTIVE DATE.
Template Software, Inc. BULL BY : /s/ E. Linwood Pearce BY : /s/ Philippe Monteax ------------------------- ------------------------------------------ NAME : E. Linwood Pearce NAME : Philippe Monteax ------------------------- ------------------------------------------ TITLE : Chief Executive Officer TITLE : Director, Software and Systems Purchasing ------------------------ ------------------------------------------ DATE : 12/17/98 DATE : 12/23/98 ------------------------- -------------------------------------------
18 EX-10.29 3 EXHIBIT 10.29 EXHIBIT 10.29 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, is made and entered into as of the 25th day of February, 1999 and effective as of January 1, 1999, by and between TEMPLATE SOFTWARE, INC., a Virginia corporation (the "Company") and Joseph M. Fox (the ------- "Executive"). - ---------- RECITALS A. The Company desires to retain Executive to provide the services hereinafter set forth. B. Executive is willing to provide such services to the Company on the terms and conditions hereinafter set forth. AGREEMENT In consideration of the promises and the terms and conditions set forth in this Agreement, the parties agree as follows: 1. EMPLOYMENT AND TERM. The Company agrees to employ the Executive and ------------------- the Executive agrees to work for the Company, subject to the terms and conditions below, for a term of one years, beginning January 1, 1999, and ending December 31, 1999. 2. COMPENSATION; BENEFITS. Subject to the terms and conditions of this ---------------------- Agreement, the Company shall pay to the Executive a base salary of Seventy-Five Thousand Dollars ($75,000), to be paid each pay period in accordance with the Company's regular payroll policies. In addition, the Executive shall be entitled to receive such benefits as are available generally to full-time employees of the Company, including, but not limited to, medical insurance, dental insurance, life insurance, vacation, holidays and sick leave, as the Company generally provides to its full-time employees holding similar positions as that of the Executive. Notwithstanding the foregoing, the Company reserves the right to adopt, amend or discontinue any employee benefit plan or policy in accordance with then-applicable law. 3. DUTIES. The Executive shall be employed as Chairman of the Company's ------ Board of Directors. The Executive will not be required to spend his full time at the Company, but shall use his best efforts to conscientiously and diligently perform the duties assigned to him by the Company. The Executive also shall perform such duties as may be assigned to him from time to time by the Company's Board of Directors. 4. RIGHT TO CONTRACT; CONFLICT OF INTEREST. The Executive hereby --------------------------------------- represents and warrants to the Company that (i) he has full right and authority to enter into this Agreement and to perform his obligations hereunder, and (ii) the execution and delivery of this Agreement by the Executive and the performance of the Executive's obligations hereunder 1 will not conflict with or breach any agreement, order or decree to which the Executive is a party or by which he is bound. During the term of this Agreement, the Executive shall not directly or indirectly consult, advise, be retained or employed by, or in any manner perform any service with any other business or entity engaged in a like or competing business to that of the Company without first obtaining consent in writing from the Company. 5. TRANSFER BY COMPANY. If at any time during the term of this Agreement, ------------------- the Company transfers the Executive to another location, the Company will reimburse the Executive for all reasonable moving expenses incurred as a result of such transfer. In the event that the Executive terminates this Agreement without cause pursuant to Section 8 hereof within one year after any such --------- transfer, the Executive shall refund to the Company all amounts paid to him by the Company as moving expenses (including temporary housing and incidental expenses) pursuant to this Section 5. The Executive agrees that any amounts --------- owing to the Company under this Section 5 may be deducted from any salary or --------- other amounts owed to him by the Company, consistent with applicable law. 6. TERMINATION BY THE COMPANY. -------------------------- (a) The Company shall have the right to terminate this Agreement with or without cause at any time during the term of this Agreement by giving written notice to the Executive. The termination shall become effective on the date specified in the notice, which termination date shall not be a date prior to the date 5 days following the date of the notice of termination itself. In the event that the Executive is terminated for cause, the Company shall pay the Executive salary through the day on which such termination is effective. In the event that the Executive is terminated without cause, the Company shall pay to the Executive compensation equal to the greater of (i) the compensation due to Executive through the end of the term of this Agreement, and (ii) twelve (12) months of the Executive's base salary on the effective date of termination. (b) For purposes of this Section 6, "cause" shall mean (i) a material --------- ----- breach by the Executive of any covenant or condition hereunder; (ii) a material neglect of duty by the Executive; or (iii) the commission by the Executive of any act or omission constituting gross negligence, dishonesty, fraud, immoral or disreputable conduct which is, or in the reasonable opinion of the Company's Board of Directors is likely to be, harmful to the Company or its reputation. 7. TERMINATION BY DEATH OR DISABILITY OF THE EXECUTIVE. --------------------------------------------------- (a) In the event of the Executive's death during the term of this Agreement, all obligations of the parties hereunder shall terminate immediately, and the Company shall pay to the Executive's beneficiary or estate, the salary and other compensation due the Executive through the day on which his death shall have occurred. (b) If the Executive is unable to perform his duties hereunder due to mental, physical or other disability for a period of 90 consecutive business days, as determined by the Company, or for 90 business days in any period of 12 consecutive months, this Agreement may 2 be terminated by the Company, at its option, by written notice to the Executive, effective on the termination date specified in such notice, provided such termination date shall not be a date prior to the date of the notice of termination itself. In this case, the Company will pay the Executive the salary and other compensation due him through the day on which such termination is effective. 8. TERMINATION BY THE EXECUTIVE. ----------------------------- (a) The Executive may voluntarily terminate this Agreement at any time, with or without cause, by giving 30 days written notice to the Company. Any such termination, if without cause, shall become effective on the date specified in such notice, provided that the Company may elect to have such termination become effective on a date after, but not more than 14 days after, the date of the notice. If such termination is with cause, it shall become effective on the 30 days after the date of such notice, provided the Company has failed to cure the cause specified in the notice. (b) After the date of any such termination, the Executive shall be entitled to the salary due him through the day on which such termination becomes effective, unless such termination was for cause, in which case he shall be entitled to receive from the Company compensation equal to the compensation the Executive would have received had the Company terminated this Agreement without cause pursuant to Section 6(a). ------------- (c) In the event the Executive terminates this Agreement without cause, or the Company terminates this Agreement with cause, in either case within one year after the commencement of the Executive's employment with the Company, the Executive shall refund to the Company all amounts, if any, paid him by the Company as moving expenses (including temporary housing and incidental expenses). The Executive agrees that any amounts owing to the Company as moving expenses under this Section 8 may be deducted from any salary owed to him by the --------- Company, consistent with applicable law. (d) For purposes of this Section 8, "cause" shall mean a material failure --------- ----- by the Company to perform its obligations under this Agreement. 9. SUSPENSION. In the event the Company has reasonable cause to believe ---------- that there exists cause for termination of this Agreement as defined in Section ------- 6, immediately upon written notice to the Executive, the Company may but shall - - not be obligated to suspend the Executive, with pay, for a period not to exceed four (4) weeks, either as a disciplinary measure or in order to investigate the Company's belief that such cause exists. No such suspension shall prevent the Company from thereafter exercising its rights to terminate this Agreement in accordance with its terms. 10. NON-COMPETITION AND NON-SOLICITATION. ------------------------------------- (a) Non-Competition. The Executive agrees that, during his employment --------------- hereunder, and for a period of two (2) months after the later of (i) the effective date of termination of this Agreement, (ii) the date on which the Executive's period of compensated 3 severance hereunder expires, or (iii) the date of entry by a court of competent jurisdiction of a final judgment enforcing this covenant, he will not, in any geographic area where the Company engages in its business or maintains sales or service representatives or employees: (A) compete with the Company, or any subsidiary or affiliate of the Company; (B) interfere with or disrupt, or attempt to interfere with or disrupt, the relationship, contractual or otherwise, between the Company, or any subsidiary or affiliate of the Company, and any customer, supplier or employee of the Company, or any such subsidiary or affiliate; (b) Non-Solicitation. The Executive agrees that, during his employment ---------------- hereunder, and for a period of two (2) years after the later of (i) the effective date of termination of this Agreement, (ii) the date on which the Executive's period of compensated severance hereunder expires, or (iii) the date of entry by a court of competent jurisdiction of a final judgment enforcing this covenant, he will not offer employment to any current employee of the Company or solicit (directly or indirectly, either individually or in connection with any employer or other business partner) any current employee of the Company to accept employment elsewhere. (c) The following terms, as used in this Section 10 shall have the meanings ---------- set forth below: (A) The term "compete" means to engage in competition, directly or ------- indirectly, individually or through a family member or other person acting on the Executive's behalf, as an employee, officer, director, proprietor, partner or stockholder or other security holder (other than of a corporation listed on a national securities exchange or the securities of which are regularly traded in the over-the-counter market, provided that the Executive at no time owns in excess of 5% of the outstanding securities of such corporation entitled to vote for the election of directors) of any firm, corporation or entity of any nature whatsoever. (B) The term "affiliate" means any person, firm or corporation, ----------- directly or indirectly through one or more intermediaries, controlling, controlled by or under common control with the Company. (d) The Executive further acknowledges that this Section 10 is an ---------- independent covenant within this Agreement, and that this covenant shall survive any termination of Agreement and shall be treated as an independent covenant for the purposes of enforcement. With respect to this covenant, the Executive hereby acknowledges receipt of Ten Dollars ($10.00) and other good and valuable consideration stated herein including the consideration of his continued employment by the Company. (e) The Executive shall, during the term of this Agreement and thereafter, notify any prospective employer of the terms and conditions of this Agreement regarding confidentiality, non-disclosure and non-competition. 4 11. CONFIDENTIALITY AND NON-DISCLOSURE. ----------------------------------- (a) The Executive shall hold in strict confidence and shall not, either during the term of this Agreement or after the termination hereof, disclose, directly or indirectly, to any third party, person, firm, corporation or other entity, irrespective of whether such person or entity is a competitor of the Company or is engaged in a business similar to that of the Company, any trade secrets or other proprietary or confidential information of the Company or any subsidiary or affiliate (as defined in Section 10) of the Company obtained by ---------- the Executive from or through his employment hereunder. The Executive hereby acknowledges and agrees that all proprietary information referred to in this Section 11 shall be deemed trade secrets of the Company and of its subsidiaries - ---------- and affiliates, as defined in Section 10, and that the Executive shall take such ---------- steps, undertake such actions and refrain from taking such other actions, as mandated by the provisions hereof and by the provisions of the Virginia Uniform Trade Secret Act. Executive further acknowledges that the Company's products and titles consist of copyrighted material, and Executive shall exercise his best efforts to prevent the use of such copyrighted material by any person or entity which has not prior thereto been authorized to use such information by the Company. (b) The Executive further hereby agrees and acknowledges that any disclosure of any proprietary information prohibited herein, or any breach of the provisions of Sections 4 or 10 of this Agreement, may result in irreparable ----------- -- injury and damage to the Company which will not be adequately compensable in monetary damages, that the Company will have no adequate remedy at law therefor, and that the Company may obtain such preliminary, temporary or permanent mandatory or restraining injunctions, orders or decrees as may be necessary to protect the company against, or on account of, any breach by the Executive of the provisions contained in Sections 4, 10 or 11. ---------- -- -- (c) The Executive further agrees that, upon termination of this Agreement, whether voluntary or involuntary or with or without cause, the Executive shall notify any new employer, partner, associate or any other firm or corporation with whom the Executive shall become associated in any capacity whatsoever of the provisions of this Section 11, and that the Company may give such notice to ---------- such firm, corporation or other person. 12. ASSIGNMENT AND DISCLOSURE OF INVENTIONS. ---------------------------------------- (a) From and after the date the Executive first became employed with the Company, the Executive hereby agrees to promptly disclose in confidence to the Company all inventions, improvements, designs, original works of authorship, formulas, processes, compositions of matter, computer software programs, databases, mask works, and trade secrets ("Inventions"), whether or not ---------- patentable, copyrightable or protectible as trade secrets, that are made or conceived or first reduced to practice or created by the Executive, either alone or jointly with others, during the period of the Executive's employment, whether or not in the course of the Executive's employment. 5 (b) The Executive hereby acknowledges that copyrightable works prepared by the Executive within the scope of the Executive's employment are "works for --------- hire" under the Copyright Act and that the Company will be considered the author thereof. The Executive hereby agrees that all Inventions that (a) are developed using equipment, supplies, facilities or trade secrets of the Company, (b) result from work performed by the Executive for the Company, or (c) relate to the Company's business or current or anticipated research and development, will be the sole and exclusive property of the Company and are hereby assigned by the Executive to the Company. 13. SEVERABILITY. The Company and the Executive recognize that the laws ------------ and public policies of the Commonwealth of Virginia are subject to varying interpretations and change. It is the intention of the Company and of the Executive that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies of the Commonwealth of Virginia, but that the unenforceability (to the modification to conform to such laws or public policies) of any provision or provisions hereof shall not render unenforceable, or impair, the remainder of this Agreement. Accordingly, if any provisions of this Agreement shall be determined to be invalid or unenforceable, either in whole or in part, this Agreement shall be deemed amended to delete or modify, as necessary, the offending provision or provisions and to alter the balance of this Agreement in order to render it valid and enforceable. 14. ASSIGNMENT. Neither the rights nor obligations under this Agreement ---------- may be assigned by either party, in whole or in part, by operation of law or otherwise, except that it shall be binding upon and inure to the benefit of any successor of the Company and its subsidiaries and affiliates, whether by merger, reorganization or otherwise, or any purchaser of all or substantially all of the assets of the Company. 15. NOTICES. Any notice expressly provided for under this Agreement shall ------- be in writing, shall be given either manually or by mail and shall be deemed sufficiently given when actually received by the party to be notified or when mailed, if mailed by certified or registered mail, postage prepaid, addressed to such party at their addresses as set forth below. Either party may, by notice to the other party, given in the manner provided for herein, change their address for receiving such notices. (a) If to the Company, to: Template Software, Inc. 45365 Vintage Park Plaza, Suite 100 Dulles, Virginia 20166 Attn: President with a copy to: Hunton & Williams 1751 Pinnacle Drive, Suite 1700 McLean, Virginia 22102 Attn: Joseph W. Conroy, Esquire 6 (b) If to the Executive, to Joseph M. Fox c/o Template Software, Inc. 45365 Vintage Park Plaza, Suite 100 Dulles, Virginia 20166 16. GOVERNING LAW. This Agreement shall be executed, construed and ------------- performed in accordance with the laws of the Commonwealth of Virginia without reference to conflict of laws principles. 17. HEADINGS. The section headings contained in this Agreement are for -------- reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 18. ENTIRE AGREEMENT, AMENDMENTS. This Agreement constitutes and embodies ---------------------------- the entire agreement between the parties in connection with the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings in connection with such subject matter. No covenant or condition not expressed in this Agreement shall affect or be effective to interpret, change or restrict this Agreement. In the event of a conflict or inconsistency between the terms of this Agreement and the Company's policies regarding employees, the terms of this Agreement shall supersede the conflicting or inconsistent Company policies. No change, termination or attempted waiver of any of the provisions of this Agreement shall be binding unless in writing signed by the Executive and on behalf of the Company by an officer thereunto duly authorized by the Company's Board of Directors. No modification, waiver, termination, rescission, discharge or cancellation of this Agreement shall affect the right of any party to enforce any other provision or to exercise any right or remedy in the event of any other default. [SIGNATURE PAGE FOLLOWS] 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TEMPLATE SOFTWARE, INC. By: /s/ E. Linwood Pearce -------------------------------------------- Name: E. Linwood Pearce Title: President / Chief Executive Officer EXECUTIVE /s/ Joseph M. Fox -------------------------------------------- Joseph M. Fox 8 EX-10.30 4 EXHIBIT 10.30 EXHIBIT 10.30 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, is made and entered into as of the 21st day of December, 1998, by and between TEMPLATE SOFTWARE, INC., a Virginia corporation (the "Company") and Andrew B. Ferrentino (the "Consultant"). ------- ---------- RECITALS A. The Company desires to retain Consultant to provide the services hereinafter set forth. B. Consultant is willing to provide such services to the Company on the terms and conditions hereinafter set forth. AGREEMENT In consideration of the promises and the terms and conditions set forth in this Agreement, the parties agree as follows: 1. EMPLOYMENT AND TERM. The Company agrees to employ the Consultant and ------------------- the Consultant agrees to work for the Company, subject to the terms and conditions below, for a term of one year, beginning January 1, 1999, and ending December 31, 1999. 2. COMPENSATION; BENEFITS. Subject to the terms and conditions of this ---------------------- Agreement, the Company shall pay to the Consultant an hourly rate of $175 for all hours worked, payable in accordance with the Company's regular payroll policies for part time employees. The Company shall use Consultant for a minimum of 75 days, and more upon mutual agreement of the parties. In the event that the Company does not assign tasks requiring a total of 75 days to perform throughout the term of the Agreement, Consultant may, at his sole discretion, work less than the 75 days minimum. The Consultant shall be reimbursed for all expenses incurred as a result of performing the tasks assigned by the Company. In addition to the hourly payments and expense reimbursement, the Consultant shall be entitled to the Company's standard medical and dental insurance coverage, inclusion in the Company 401k plan, use of a mobile telephone and continuation of the Consultant's life insurance policy in place as of the date of this Agreement. Notwithstanding the foregoing, the Company reserves the right to adopt, amend or discontinue any employee benefit plan or policy in accordance with then-applicable law. 3. DUTIES. The Consultant shall initially be employed as an executive ------ consultant. The Consultant shall diligently and conscientiously perform tasks mutually agreed and assigned to him by the CEO or his designate. Agreement on proposed tasks shall not be unreasonably withheld by Consultant so long as the tasks cause no conflict with previously committed activities of Consultant. Consultant shall endeavor to make a minimum of 75 working days available to the Company for agreed tasks in the timeframe requested by the 1 Company. Tasks assigned are expected to be in the following areas: (a) Due diligence on acquisitions or partnerships (on the company or its technology). (b) Account support sales strategies, project planning, or project audits. (c) Strategic and operational planning. (d) Operational audits regarding adherence to plan. (e) Product definition, creation, or re-engineering (for acquired technology) strategies. (f) Y2K readiness planning support. 4. RIGHT TO CONTRACT; CONFLICT OF INTEREST. The Consultant hereby --------------------------------------- represents and warrants to the Company that (i) he has full right and authority to enter into this Agreement and to perform his obligations hereunder, and (ii) the execution and delivery of this Agreement by the Consultant and the performance of the Consultant's obligations hereunder will not conflict with or breach any agreement, order or decree to which the Consultant is a party or by which he is bound. 5. TERMINATION BY THE COMPANY. -------------------------- (a) The Company shall have the right to terminate this Agreement with or without cause at any time during the term of this Agreement by giving written notice to the Consultant. The termination shall become effective on the date specified in the notice, which termination date shall not be a date prior to the date 5 days following the date of the notice of termination itself. In the event that the Consultant is terminated for cause, the Company shall pay the Consultant for hours worked through the effective date of termination. In the event that the Consultant is terminated without cause, the Company shall pay to the Consultant an amount equal to $1400 per day times the net of 75 days and the number of days worked under this Agreement through the date of notice of termination. (b) For purposes of this Section 6, "cause" shall mean (i) a material --------- ----- breach by the Consultant of any covenant or condition hereunder; (ii) a material neglect of duty by the Consultant; or (iii) the commission by the Consultant of any act or omission constituting gross negligence, dishonesty, fraud, immoral or disreputable conduct which is, or in the reasonable opinion of the Company's Board of Directors is likely to be, harmful to the Company or its reputation. 6. TERMINATION BY DEATH OR DISABILITY OF THE CONSULTANT. ---------------------------------------------------- (a) In the event of the Consultant's death during the term of this Agreement, all obligations of the parties hereunder shall terminate immediately, and the Company shall pay to the Consultant's beneficiary or estate, the salary and other compensation due the Consultant through the day on which his death shall have occurred. (b) If the Consultant is unable to perform his duties hereunder due to mental, 2 physical or other disability for a period of 90 consecutive business days, as determined by the Company, or for 90 business days in any period of 12 consecutive months, this Agreement may be terminated by the Company, at its option, by written notice to the Consultant, effective on the termination date specified in such notice, provided such termination date shall not be a date prior to the date of the notice of termination itself. In this case, the Company will pay the Consultant for hours worked and other compensation due him through the day on which such termination is effective. 7. TERMINATION BY THE CONSULTANT. ------------------------------ (a) The Consultant may voluntarily terminate this Agreement at any time, with or without cause, by giving 30 days written notice to the Company. Any such termination, if without cause, shall become effective on the date specified in such notice, provided that the Company may elect to have such termination become effective on a date after, but not more than 14 days after, the date of the notice. If such termination is with cause, it shall become effective on the 30 days after the date of such notice, provided the Company has failed to cure the cause specified in the notice. (b) After the date of any such termination, the Consultant shall be entitled to payment for hours worked due him through the day on which such termination becomes effective, unless such termination was for cause, in which case he shall be entitled to receive from the Company compensation equal to the compensation the Consultant would have received had the Company terminated this Agreement without cause pursuant to Section 5(a). ------------- (c) For purposes of this Section 7, "cause" shall mean a material --------- ----- failure by the Company to perform its obligations under this Agreement. 8. SUSPENSION. In the event the Company has reasonable cause to ---------- believe that there exists cause for termination of this Agreement as defined in Section 5, immediately upon written notice to the Consultant, the Company may - --------- but shall not be obligated to suspend the Consultant, with pay, for a period not to exceed four (4) weeks, either as a disciplinary measure or in order to investigate the Company's belief that such cause exists. No such suspension shall prevent the Company from thereafter exercising its rights to terminate this Agreement in accordance with its terms. 9. NON-COMPETITION AND NON-SOLICITATION. ------------------------------------- (a) Non-Competition. The Consultant agrees that, during his --------------- employment hereunder, and for a period of two (2) months after the later of (i) the effective date of termination of this Agreement, (ii) the date on which the Consultant's period of compensated severance hereunder expires, or (iii) the date of entry by a court of competent jurisdiction of a final judgment enforcing this covenant, he will not, in any geographic area where the Company engages in its Business (as defined below) or maintains sales or service representatives or employees interfere with or disrupt, or attempt to interfere with or disrupt, the relationship, contractual or otherwise, between the Company, or any subsidiary or affiliate of the Company, and any customer, supplier or employee of the Company, or any such subsidiary or affiliate; 3 (b) Non-Solicitation. The Consultant agrees that, during his ---------------- employment hereunder, and for a period of two (2) years after the later of (i) the effective date of termination of this Agreement, (ii) the date on which the Consultant's period of compensated severance hereunder expires, or (iii) the date of entry by a court of competent jurisdiction of a final judgment enforcing this covenant, he will not offer employment to any current employee of the Company or solicit (directly or indirectly, either individually or in connection with any employer or other business partner) any current employee of the Company to accept employment elsewhere. (c) The term "affiliate" means any person, firm or corporation, --------- directly or indirectly through one or more intermediaries, controlling, controlled by or under common control with the Company. 10. CONFIDENTIALITY AND NON-DISCLOSURE. ----------------------------------- (a) The Consultant shall hold in strict confidence and shall not, either during the term of this Agreement or after the termination hereof, disclose, directly or indirectly, to any third party, person, firm, corporation or other entity, irrespective of whether such person or entity is a competitor of the Company or is engaged in a business similar to that of the Company, any trade secrets or other proprietary or confidential information of the Company or any subsidiary or affiliate (as defined in Section 9) of the Company obtained by --------- the Consultant from or through his employment hereunder. The Consultant hereby acknowledges and agrees that all proprietary information referred to in this Section 10 shall be deemed trade secrets of the Company and of its subsidiaries - ----------- and affiliates, as defined in Section 9, and that the Consultant shall take such --------- steps, undertake such actions and refrain from taking such other actions, as mandated by the provisions hereof and by the provisions of the Virginia Uniform Trade Secret Act. Consultant further acknowledges that the Company's products and titles consist of copyrighted material, and Consultant shall exercise his best efforts to prevent the use of such copyrighted material by any person or entity which has not prior thereto been authorized to use such information by the Company. (b) The Consultant further hereby agrees and acknowledges that any disclosure of any proprietary information prohibited herein, or any breach of the provisions of Sections 4 or 9 of this Agreement, may result in irreparable ----------- - injury and damage to the Company which will not be adequately compensable in monetary damages, that the Company will have no adequate remedy at law therefor, and that the Company may obtain such preliminary, temporary or permanent mandatory or restraining injunctions, orders or decrees as may be necessary to protect the company against, or on account of, any breach by the Consultant of the provisions contained in Sections 4, 9 or 10. ---------- - -- (c) The Consultant further agrees that, upon termination of this Agreement, whether voluntary or involuntary or with or without cause, the Consultant shall notify any new employer, partner, associate or any other firm or corporation with whom the Consultant shall become associated in any capacity whatsoever of the provisions of this Section 10, and that the ---------- 4 Company may give such notice to such firm, corporation or other person. 11. ASSIGNMENT AND DISCLOSURE OF INVENTIONS. ---------------------------------------- (a) From and after the date the Consultant first became employed with the Company, the Consultant hereby agrees to promptly disclose in confidence to the Company all inventions, improvements, designs, original works of authorship, formulas, processes, compositions of matter, computer software programs, databases, mask works, and trade secrets ("Inventions"), whether or not ---------- patentable, copyrightable or protectible as trade secrets, that are made or conceived or first reduced to practice or created by the Consultant, either alone or jointly with others, during the period of the Consultant's employment and in the course of performing assigned tasks for the Company. (b) The Consultant hereby acknowledges that copyrightable works prepared by the Consultant within the scope of the Consultant's employment are "works for hire" under the Copyright Act and that the Company will be considered - --------------- the author thereof. The Consultant hereby agrees that all Inventions that (a) are developed using equipment, supplies, facilities or trade secrets of the Company, (b) result from work performed by the Consultant for the Company, or (c) relate to the Company's business or current or anticipated research and development, will be the sole and exclusive property of the Company and are hereby assigned by the Consultant to the Company. 12. SEVERABILITY. The Company and the Consultant recognize that the ------------ laws and public policies of the Commonwealth of Virginia are subject to varying interpretations and change. It is the intention of the Company and of the Consultant that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies of the Commonwealth of Virginia, but that the unenforceability (to the modification to conform to such laws or public policies) of any provision or provisions hereof shall not render unenforceable, or impair, the remainder of this Agreement. Accordingly, if any provisions of this Agreement shall be determined to be invalid or unenforceable, either in whole or in part, this Agreement shall be deemed amended to delete or modify, as necessary, the offending provision or provisions and to alter the balance of this Agreement in order to render it valid and enforceable. 13. ASSIGNMENT. Neither the rights nor obligations under this ---------- Agreement may be assigned by either party, in whole or in part, by operation of law or otherwise, except that it shall be binding upon and inure to the benefit of any successor of the Company and its subsidiaries and affiliates, whether by merger, reorganization or otherwise, or any purchaser of all or substantially all of the assets of the Company. 14. NOTICES. Any notice expressly provided for under this Agreement ------- shall be in writing, shall be given either manually or by mail and shall be deemed sufficiently given when actually received by the party to be notified or when mailed, if mailed by certified or registered mail, postage prepaid, addressed to such party at their addresses as set forth below. Either party may, by notice to the other party, given in the manner provided for herein, change their address for receiving such notices. 5 (a) If to the Company, to: Template Software, Inc. 45365 Vintage Park Plaza, Suite 100 Dulles, Virginia 20166 Attn: President with a copy to: Hunton & Williams 1751 Pinnacle Drive, Suite 1700 McLean, Virginia 22102 Attn: Joseph W. Conroy, Esquire (b) If to the Consultant, to Andrew B. Ferrentino c/o Template Software, Inc. 45365 Vintage Park Plaza, Suite 100 Dulles, Virginia 20166 15. GOVERNING LAW. This Agreement shall be executed, construed and ------------- performed in accordance with the laws of the Commonwealth of Virginia without reference to conflict of laws principles. 16. HEADINGS. The section headings contained in this Agreement are -------- for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. 17. ENTIRE AGREEMENT, AMENDMENTS. This Agreement constitutes and ---------------------------- embodies the entire agreement between the parties in connection with the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings in connection with such subject matter. No covenant or condition not expressed in this Agreement shall affect or be effective to interpret, change or restrict this Agreement. In the event of a conflict or inconsistency between the terms of this Agreement and the Company's policies regarding employees, the terms of this Agreement shall supersede the conflicting or inconsistent Company policies. No change, termination or attempted waiver of any of the provisions of this Agreement shall be binding unless in writing signed by the Consultant and on behalf of the Company by an officer thereunto duly authorized by the Company's Board of Directors. No modification, waiver, termination, rescission, discharge or cancellation of this Agreement shall affect the right of any party to enforce any other provision or to exercise any right or remedy in the event of any other default. [SIGNATURE PAGE FOLLOWS] 6 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TEMPLATE SOFTWARE, INC. By: /s/ E. Linwood Pearce --------------------- Name: E. Linwood Pearce Title: CEO Date: 2/12/99 CONSULTANT /s/ Andrew B. Ferrentino ------------------------ Andrew B. Ferrentino Date: 2/12/99 7 EX-10.31 5 EXHIBIT 10.31 EXHIBIT 10.31 CONSULTANT AGREEMENT This Agreement, effective as of January 1, 1999, is entered into by Template Software, Inc., hereinafter referred to as Template Software, located at 45365 Vintage Plaza Park, Suite 100, Dulles, Virginia 20166 and Alan B. Salisbury, 1831 Michael Faraday Drive, Reston, Virginia 20190, hereinafter referred to as the Consultant. Consultant's Social Security Number is 136-32- 7068. In consideration of the mutual covenants contained herein, the parties hereto, intending to be legally bound, agree as follows: ARTICLE I - TERM OF AGREEMENT The Term of this Agreement shall be from January 1, 1999 to December 31, 1999. This Term may be extended as mutually agreed to by Template Software and the Consultant. Consultant is not obligated to perform services or incur expenses and Template Software is not obligated to compensate Consultant for services or expenses incurred or commitments made before or after these dates and any extension thereof. ARTICLE II - STATEMENT OF SERVICES The Consultant agrees to perform professional services in the area of Template Software's government and telecommunications business units and with respect to marketing, public relations and strategic planning. Template Software shall utilize the professional services of the Consultant on an "as- tasked" basis, as mutually agreed to by the parties. It is estimated that the combination of all of the task statements hereunder shall require approximately 288 man-hours (approximately 36 days) for the Term. The Consultant shall not be obligated to perform and Template Software shall not be obligated to pay for any services without a written task statement and Consultant shall not be obligated to perform and Template Software shall not be obligated to pay for services in excess of the estimated man-hours of any task statement without a written modification thereto, signed by both parties. ARTICLE III - COMPENSATION Compensation for the Consultant's professional services set forth in Article II shall be on a monthly retainer basis at the rate set below. $4,800 per month, payable in accordance with Template Software's regular payroll policies. ARTICLE IV - EXPENSES While performing the professional services authorized hereunder, Template Software shall reimburse Consultant for all expenses incurred as a result of performing the tasks assigned by Template Software, including, without limitation, paying expenses incurred by the Consultant for non-local travel in accordance with the then current Federal Travel Regulations and local travel 1 from Consultant's facility to any other location specified herein at the rate currently in effect in accordance with the Joint Travel Regulation plus parking and tolls. ARTICLE V - LOCATION OF SERVICES It is agreed that the Consultant shall provide professional services primarily from Consultant's home at 2605 Geneva Hill Court, Oakton, VA 22124- 1534, but shall also be available to provide such services at Template Software's executive headquarters at 45365 Vintage Park Plaza, Dulles, VA 20166, or at other locations that from time to time as may reasonably be required for the performance of the services specified in Article II. ARTICLE VI - AUTHORIZED REPRESENTATIVES The authorized representatives of Template Software with respect to this Agreement are Joseph Fox, Chairman of the Board and Lin Pearce, President and Chief Executive Officer. In the course of performing services hereunder, Consultant agrees that any Vice President in charge of a business unit that Consultant is providing services for shall also be an authorized representative of Template Software with respect to this Agreement. ARTICLE VII - INVOICES AND PAYMENT The Consultant shall submit invoices on his own forms, no more frequently than once a month, to an authorized representative of Template Software for approval. Payment to the Consultant for the services and expenses specified herein shall be made within thirty days of receipt by Template Software. All expenses to be reimbursed hereunder shall be supported with a copy of the expense report and applicable receipts (hotel, car rental, airfare, etc.). ARTICLE VIII - MODIFICATION No modification of this Agreement shall be valid or binding unless it is in writing and signed by the Consultant and an authorized representative of Template Software. ARTICLE IX TERMINATION Either Template Software or the Consultant may terminate this Agreement at any time, for any reason, upon thirty (30) days prior written notice to the other party. Template Software's sole responsibility to Consultant, in the event of termination for any reason, is to compensate Consultant for actual hours worked and expenses incurred through the termination date. ARTICLE X ASSIGNMENT Neither this Agreement nor any interest thereunder shall be assignable by either Template Software or the Consultant unless such assignment is mutually agreed to, in writing, by the parties hereto. This Agreement shall be binding on Template Software and Consultant and their successors and permitted assigns. 2 ARTICLE XI - INDEPENDENT CONTRACTOR RELATIONSHIP This Agreement, including the right to compensation hereunder, is personal to the Consultant. The Consultant warrants that all required federal, state and local income taxes, self-employment taxes, and workman compensation, liability, health and disability insurance shall be the sole responsibility of the Consultant. The Consultant is not, for any purpose, an employee or agent of Template Software and the Consultant agrees not to make any representation to the contrary, either expressly or implied. The Consultant understands and agrees that as an independent contractor, he does not have any authority to sign contracts, notes, obligations, to make purchases, or to acquire or dispose of any property for, or on behalf, of Template Software. ARTICLE XII - CONFIDENTIAL INFORMATION AND CLASSIFIED INFORMATION; PROPRIETARY INFORMATION The Consultant hereby irrevocably transfers and assigns any and all of his right, title, and interest in and to Designs and Materials (as defined below), including but not limited to all copyrights, patent rights, trade secrets and trademarks, to Template Software. Designs and Materials will be the sole property of Template Software and Template Software will have the sole right to determine the treatment of any Designs and Materials, including the right to keep them as trade secrets, to file and execute patent applications on them, to use and disclose them without prior patent application, to file registrations for copyright or trademark on them in its own name, or to follow any other procedure that Template Software deems appropriate. "Designs and Materials" --------------------- shall mean all designs, discoveries, inventions, products, computer programs, procedures, improvements, developments, drawings, notes, documents, information and materials made, conceived or developed by the Consultant alone or with others which result from or relate directly to the services rendered hereunder. The Consultant acknowledges that the Consultant will acquire information and materials from Template Software and knowledge about the business, products, programming techniques, experimental work, customers, clients and suppliers of Template Software and that all such knowledge, information and materials acquired, the existence, terms and conditions of this Agreement, and the Designs and Materials, are and will be the trade secrets and confidential and proprietary information of Template Software (collectively, "Confidential ------------ Information"). Confidential Information will not include, however, any - ----------- information which is or becomes part of the public domain through no fault of the Consultant or that Template Software regularly gives to third parties without restriction on use or disclosure. The Consultant agrees to hold all such Confidential Information in strict confidence, not to disclose it to others or use it in any way, commercially or otherwise, except in performing the services, rendered hereunder, and not to allow any unauthorized person access to it, either before or after expiration or termination of this Agreement. The Consultant further agrees to take all action reasonably necessary and satisfactory to protect the confidentiality of the Confidential Information including, without limitation, implementing and enforcing operating procedures to minimize the possibility of unauthorized use or copying of the Confidential Information. Should the nature of the services provided hereunder necessitate access to classified 3 information and materials, the Consultant agrees to comply with all of applicable government rule, regulations and policies related to the access, handling and disposition of such classified information and materials. ARTICLE XIII - TITLE TO MATERIALS AND EQUIPMENT All materials and equipment furnished by Template Software, and all materials and equipment authorized by Template Software as an allowable expense hereunder, shall remain the sole property of Template Software. Any such materials and equipment shall be returned to Template Software within fifteen (15) days after the expiration of the Term or earlier termination of this Agreement. ARTICLE XIV - NON EXCLUSIVITY This Agreement shall in no way limit or restrict the Consultant from entering into similar agreements with other corporations, agencies, or individuals so long as Template Software protections under Article XII and Article XIII. ARTICLE XV COMPLIANCE The Consultant does agree to comply with all applicable laws, regulations, and standards in performing under this Agreement. ARTICLE XVI - GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without reference to conflict of laws principles. ARTICLE XVII HEADINGS The headings that precede the text of the articles are inserted solely for convenience of reference and shall not constitute a part of this Agreement, nor shall they affect the meaning, construction, interpretation or effect of this Agreement. ARTICLE XVIII - SERVICE OF NOTICE No notice, consent, waiver or other communication required or permitted to be sent under this Agreement shall be effective unless the same is in writing and is delivered by registered or certified mail, return receipt requested, first-class postage prepaid, to the address of the party first set forth in this Agreement. Such notices, if sent by registered or certified mail, shall be deemed to have been given at the time of mailing. ARTICLE XIX - ENTIRE AGREEMENT This document constitutes the entire Agreement between Buyer and Seller with respect to the subject matter hereof and supersedes any and all prior agreements, understandings and representations. 4 ARTICLE XX - PARTIAL INVALIDITY If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will nevertheless continue in full force without being impaired or invalidated in any way. 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BUYER CONSULTANT TEMPLATE SOFTWARE, INC. ALAN B. SALISBURY /s/ E. Linwood Pearce /s/ Alan B. Salisbury - ----------------------- ----------------------- E. Linwood Pearce - ----------------------- Name President and Chief Executive Officer - ------------------------------------- Title 6 EX-21 6 EXHIBIT 21 EXHIBIT 21 Subsidiaries of the Registrant:
Percentage of Country Name Ownership of Incorporation - ---- ------------- ---------------- Template Software S.A. 100% France milestone software GmbH 100% Germany Template Software Holding GmbH 100% Germany Template Software Geschaftsfuhrungs GmbH 100% Germany milestone software Ges. mbH 100% Austria milestone software AG 20% Switzerland Template Software, UK Limited 100% England Template Software Limited 100% England Template Software de Mexico, 100% Mexico S.A. de C.V. Template Software Pty., Ltd. 100% Australia
EX-23 7 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Template Software, Inc. on Form S-8 (File Nos. 333-24873 and 333-52241) of our report dated March 17, 1999, on our audits of the consolidated financial statements of Template Software, Inc. as of November 30, 1997 and December 31, 1998, for each of the years ended November 30, 1996 and 1997, for the one month ended December 31, 1997 and for the year ended December 31, 1998, which report is included in the Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP McLean, VA March 30, 1999 EX-27.1 8 EXHIBIT 27.1
5 This schedule contains summary financial information extracted from the consolidated balance sheet, consolidated statement of cash flows included in the Company's Report for the period ending December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1998 DEC-31-1998 1,831 82,213 16,429 677 358 29,395 7,134 1,711 49,084 8,679 0 0 0 52 39,028 49,084 0 42,639 0 24,177 17,342 0 (615) 1,878 748 1,130 0 0 0 1,130 0.23 0.20
EX-27.2 9 EXHIBIT 27.2
5 This scheduel contains summary financial information extracted from the consolidated balance sheet, consolidated statement of operations and consolidated statement of cash flows included in the Company's Report for the period ending November 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR NOV-30-1997 NOV-30-1997 2,739 13,318 11,023 549 0 27,862 3,220 1,026 42,971 5,157 0 0 0 47 37,246 42,971 0 26,910 0 12,785 10,749 0 (873) 4,148 1,768 2,380 0 0 0 2,380 0.58 0.44
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