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Filed Pursuant to Rule 424(b)(2)
Registration No. 333-17063
2,100,000 SHARES
[TEMPLATE SOFTWARE, INC. LOGO]
COMMON STOCK
------------------------
Of the 2,100,000 shares of Common Stock offered hereby, 1,400,000 shares
are being offered by Template Software, Inc. ("Template" or the "Company") and
700,000 shares are being offered by certain selling shareholders (the "Selling
Shareholders"). The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
Prior to this offering, there has been no public market for the Common Stock of
the Company. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. The Company's Common Stock has
been approved for listing on the Nasdaq National Market under the symbol "TMPL,"
subject to official notice of issuance.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5 THROUGH 13.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share............... $16.00 $1.12 $14.88 $14.88
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Total(3)................ $33,600,000 $2,352,000 $20,832,000 $10,416,000
- ------------------------------------------------------------------------------------------------
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</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 315,000 additional shares of Common Stock on
the same terms and conditions as set forth above to cover over-allotments,
if any. If the Underwriters exercise this option in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholders will be $38,640,000, $2,704,800,
$23,956,800, and $11,978,400, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the certificates for the shares of Common Stock will be available for delivery
at the offices of Volpe, Welty & Company LLC, One Maritime Plaza, San Francisco,
California, on or about February 3, 1997.
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VOLPE, WELTY & COMPANY LLC PIPER JAFFRAY INC.
The date of this Prospectus is January 29, 1997.
<PAGE> 2
[Chart]
Prior to this offering, the Company has not been a reporting company under
the Securities Act of 1934. The Company intends to furnish its shareholders
annual reports containing audited financial statements examined by its
independent auditors and quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET
(INCLUDING THE NASDAQ STOCK MARKET) OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. Prospective investors should consider carefully
the information discussed under "Risk Factors." Except as set forth in the
Consolidated Financial Statements and unless otherwise indicated, all
information in the Prospectus (i) assumes no exercise of the Underwriters' over-
allotment option, (ii) reflects the conversion of all outstanding shares of
Series A Convertible Preferred Stock (the "Preferred Stock") into Common Stock
effective upon consummation of the offering and (iii) gives effect to the
Recapitalization (as defined in "Description of Capital Stock"). See
"Underwriting" and "Description of Capital Stock."
THE COMPANY
Template Software, Inc. provides enterprise-wide software solutions to
organizations that require large-scale, distributed computing systems through
its reusable software templates, robust software development environment and
staff of software development professionals. The Company believes that, by
combining its reusable software templates, consisting of over one million lines
of reusable object code, and its family of visual development tools, its clients
can obtain solutions in less time and at lower cost than with traditional
software development techniques. The Company's current templates can provide up
to 90% of the code necessary for a complete, functioning application. The
Company's solutions are targeted at large-scale, mission-critical applications,
such as securities trading, telecommunications service management, aircraft
maintenance scheduling, air traffic control and network monitoring systems.
According to a recent industry study, more than $250 billion is currently spent
each year in the United States on information technology application
development.
In an effort to gain a competitive advantage in today's global markets, many
companies are automating business processes by employing flexible, open and
distributed computing architectures, rather than relying on traditional
centralized systems. These distributed computing environments typically consist
of a mix of complex new and legacy hardware and software systems, which must be
integrated to allow enterprise-wide business processes to function. Despite the
increased complexity and sophistication required to meet these new distributed
computing challenges, businesses are demanding faster development and deployment
times, as well as lower prices, for information technology solutions. These
businesses are also demanding solutions which are adaptable and proven to work
in mission-critical operational settings. To address these needs, the Company
has developed a family of broadly targeted foundation templates which are used
to build custom, enterprise-wide, distributed applications. The Company's
foundation templates provide up to 75% of the code required for a complete
application. In addition, the Company has developed cross-industry templates,
and is currently developing industry-specific templates, each of which is
designed to be layered on top of the Company's foundation templates to provide
even more pre-written code for specific business solutions. The Company's
cross-industry templates provide an additional 10-30% of completed application
code, and the Company believes its industry-specific templates will provide
5-15% more of such code. Using the Company's templates, distributed applications
can be rapidly developed either by the Company's professional software
developers, or by a client's staff. The Company believes that its family of
proven, reusable templates gives it a competitive advantage by permitting its
clients to obtain highly adaptable, mission-critical solutions, generally on a
fixed-price basis and in six to twelve months.
The Company's products are designed to eliminate low-level programming by
providing platform-independent templates which can be developed into functioning
applications by adding client-specific business process knowledge. The Company
believes that this capability will ultimately result in systems being built by
those who best understand the challenges of the business. In addition, the
Company believes that the architecture upon which its products are based is
highly adaptable to new and emerging technologies. For example, because the
Company has incorporated Internet, internal corporate intranet ("Intranet") and
World Wide Web ("Web") technologies into its products, business processes
automated with the Company's solutions can be accessed from anywhere in the
world by customers, suppliers and employees of an enterprise. The Company
believes that the combination of Internet and Web accessibility, large-scale
business process automation and integration inherent in the Company's products
position it to exploit the extension of information technology to new markets,
such as electronic commerce.
The Company markets its solutions in North America and Europe through the
Company's direct sales force, distributors, value added resellers and systems
integrators, such as Electronic Data Systems Corporation ("EDS"), International
Business Machines Corporation ("IBM"), Unisys Corporation, GTE Government
Systems and Siemens Corporation. The Company's solutions have been successfully
developed and deployed for over 300 clients including Northwest Airlines
Corporation, First Data Resources, Inc. ("First Data"), United Parcel Service
("UPS"), United HealthCare Corporation and ENRON Corp.
Recent Developments
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. See "Certain
Transactions." Alcatel is a worldwide supplier of high technology systems for
the telecommunications, energy and transportation industries. In connection with
this investment, the Company and Alcatel agreed to enter
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into a business relationship whereby Alcatel and the Company will design and
develop solutions based on the Company's templates and Alcatel's expertise in
the telecommunications, energy and transportation industries. Alcatel and the
Company have already completed successful pilot projects.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company................................................ 1,400,000 shares
The Selling Shareholders................................... 700,000 shares
Common Stock to be outstanding after this offering:
Actual..................................................... 4,222,008 shares(1)
Fully-diluted.............................................. 6,410,423 shares(2)
Use of proceeds.............................................. For general corporate
purposes, including working
capital and future
acquisitions.
Nasdaq National Market symbol................................ TMPL
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
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YEAR ENDED NOVEMBER 30,
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1992 1993 1994 1995 1996
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<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................................ $ 7,283 $ 5,953 $ 6,313 $ 7,091 $ 13,530
Income (loss) from operations................ (234) (793) (418) 671 1,700
Net income (loss)............................ (242) (527) (275) 327 1,045
Earnings (loss) per common share(3).......... $ (0.12) $ (0.17) $ (0.09) $ 0.07 $ 0.23
Weighted average number of common shares
outstanding................................ 2,080,474 3,173,503 3,186,331 4,655,824 4,643,919
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
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ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................... $ 8,397 $ 28,629
Working capital............................................................. 9,009 29,241
Total assets................................................................ 13,985 34,217
Long-term debt, less current portion........................................ 357 357
Total shareholders' equity.................................................. 10,043 30,275
</TABLE>
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(1) Includes 75,000 shares to be issued upon the exercise of options and sold in
this offering by certain Selling Shareholders. See "Principal and Selling
Shareholders." Excludes: (i) shares of Common Stock issuable upon the
exercise of options to purchase an aggregate of 2,188,415 shares of Common
Stock (the "Outstanding Options") outstanding as of December 31, 1996 (not
including options to purchase 75,000 shares referred to above) at a weighted
average exercise price of $3.13 per share; and (ii) 917,500 additional
shares of Common Stock reserved for issuance pursuant to the Company's 1996
Equity Incentive Plan.
(2) Includes Outstanding Options, but excludes the shares reserved for issuance
under the Company's 1996 Equity Incentive Plan.
(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of shares used in computing earnings (loss) per share.
(4) Adjusted to reflect the sale of 1,400,000 shares of Common Stock offered by
the Company hereby at the initial public offering price of $16.00 per share,
and assumes the conversion of all outstanding shares of Preferred Stock into
Common Stock upon the consummation of this offering. See "Use of Proceeds"
and "Capitalization."
SNAP(R) is a registered trademark and Template Software(TM), Workflow
Template(TM), System Management Template(TM) and Web Template(TM) are trademarks
of Template. This Prospectus also includes trade names, trademarks and
references to intellectual property owned by other companies.
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RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
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 nonrenewal 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. Revenue accounted for
by the federal government has remained relatively constant in recent years
although, as a percentage of revenue, this business has declined in recent years
and is expected to decline further as a result of the growth of revenue from
non-government sources. For the fiscal year ended November 30, 1996, each of
First Data, Wellspring Resources ("Wellspring") and the federal government
accounted for more than 10% of the Company's total revenue, representing an
aggregate of approximately 67.3% of total revenue, or 19.5%, 27.8% and 20.0% of
total revenue, respectively. Based on a recent restructuring of the Company's
agreement with Wellspring, the Company does not anticipate that Wellspring will
account for 10% of the Company's total revenue in 1997.
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 client-server and peer-to-peer application
development 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. See "-- Emerging Market; Product Concentration; Rapid
Technological Change."
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
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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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 November 30, and relatively lower revenues in its
fiscal quarters ending on February 28, 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 August 31 as a result of reduced sales
activity in Europe during the summer months. See "Selected Consolidated
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Emerging Market; Product Concentration; Rapid Technological Change. The
market for information technology consulting and software development services
utilizing client-server and peer-to-peer architectures 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 client-server and peer-to-peer architectures. While the
Company believes that corporations and government agencies will continue to
accept the use of client-server and peer-to-peer architectures for
enterprise-wide information processing systems, a decline in this trend would
have a material adverse effect on the Company's business and prospects.
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, operating results 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 of object-oriented, template-based software products and
tools on many of such platforms and to develop and introduce enhancements to
such object-oriented, template-based software products and tools and new
products on a timely basis that keep pace with such technological developments
and 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
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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
services 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, operating results and financial
condition. See "Business -- Product Development."
Lack of Experience with the Internet, Intranets and Other Markets;
Uncertain Commercial Adoption of the Internet and Intranets. The Company's
future success will depend, in part, on the acceptance of the Company's products
for use in new markets, such as in the Internet and in Intranets, and in new
applications, such as electronic commerce. To date, the Company has had
relatively limited experience in these markets. In addition to the engineering
expenses associated with modifying its products to be useful in a new market,
the Company must devote considerable resources to identifying potential
customers and their specific needs, building relationships with strategic
partners and establishing credibility in the market. There can be no assurance
that the Company will be successful in developing and introducing new products
or product enhancements that may be required to address new markets and achieve
market acceptance. See "Business -- Customers and Markets" and
"Business -- Product Development."
Demand for and market acceptance of the Company's products and services in
the Internet and Intranet markets are subject to a high level of uncertainty.
The Company has only recently begun marketing and product development efforts
directed specifically to the Internet and Intranet markets. It is difficult to
predict with any assurance whether the Internet or Intranet markets will prove
to be viable for the Company's products, or whether there will be significant
demand for the Company's Internet or Intranet-related products and services. See
"Business -- Products and Services." The market for applications and commercial
products for the Internet and Intranets has only recently begun to develop, is
rapidly changing and is characterized by an increasing number of new entrants
whose products may compete with those of the Company. As a result, it is
difficult to predict the future growth of this market, and there can be no
assurance that a viable Internet or Intranet market for the Company's products
and services will develop or be sustainable.
Competition. The information technology consulting, software development
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. In the software development
tools market, representative competitors of the Company include, among others,
Forte Software, Inc., Viewstar Corporation, NeXT Software, Inc. and Dynasty
Technologies, 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 Oracle Corporation,
Integrated Systems Solutions Corporation (a subsidiary of IBM) and Andersen
Consulting, among others. Clients may also 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 addition, complex client-server and peer-to-peer applications 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 or C++ programming, along with the integration of
networking and database middleware to connect the various components. As such,
the Company also effectively experiences
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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, operating results 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 client-server application development 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, operating
results and financial condition. See "Business -- Competition."
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 would have a material adverse effect on its
business, operating results and financial condition.
See "Business -- Products and Services -- Industry-Specific Templates."
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
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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.
The Company's business includes the development of custom software in
connection with specific client engagements. This custom software generally uses
the Company's core software technology, reusable software templates and certain
software tools which remain the property of the Company. In the past, the
Company has generally assigned the custom software components to its clients.
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 (including
the parties for whom the Company has been engaged to develop solutions, from
which its reusable software templates have been derived) 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, operating results and financial condition
would be materially adversely affected. See "Business -- Intellectual Property
and Other Proprietary Rights."
Management of Growth. The Company has recently experienced a period of
significant revenue growth and an expansion in the number of its employees, the
scope of its operating and financial systems and the geographic area of its
operations. This growth has resulted in new and increased responsibility for
management personnel and has placed significant strain upon the Company's
management, operating and financial systems and resources. To accommodate recent
growth, compete effectively and manage potential future growth, the Company must
continue to implement and improve information systems, procedures and controls
and expand, train, motivate and manage its work force. These demands will
require the addition of new management personnel. The Company's future success
will depend to a significant extent on the ability of its current and future
management personnel to operate effectively, both independently and as a group.
There can be no assurance that the Company's personnel, systems, procedures and
controls will be adequate to support the Company's future operations. Any
failure to implement and improve the Company's operational, financial and
management systems or to expand, train, motivate or manage employees could have
a material adverse effect on the Company's business, operating results and
financial condition. See "-- Dependence on Key Personnel,"
"Business -- Employees" and "Management."
9
<PAGE> 10
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, operating
results and financial condition. See "-- Dependence on Key Personnel,"
"Business -- Strategy" and "Business -- Sales and Marketing."
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continuing contributions of its key management,
sales, marketing, customer support and product development personnel. The loss
of key management or technical personnel could adversely affect the Company.
Only a few of the Company's employees are subject to employment agreements with
the Company. The Company believes that its future success will depend in large
part upon its ability to attract and retain highly-skilled managerial, sales,
customer support and product development personnel. The Company has at times
experienced and continues to experience difficulty in recruiting qualified
personnel. Competition for qualified software development, sales and other
personnel is intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel. Qualified project
managers are in particularly great demand and are likely to remain a limited
resource for the foreseeable future. Competitors and others have in the past and
may in the future attempt to recruit the Company's employees. Failure to attract
and retain key personnel could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business -- Product
Development," "Business -- Employees" and "Management."
Risks Associated with International Operations. Revenues from a foreign
subsidiary and export sales accounted for 15.8% of the Company's total revenues
in fiscal year 1996. The Company currently has an international sales office
located in the United Kingdom and distribution arrangements with third parties
in France and the Netherlands, which have generated substantially all direct
international revenues recognized by the Company to date. In November 1996, the
Company entered into a non-binding letter of intent pursuant to which the
Company agreed to acquire Krystal Ingenierie S.A., the Company's existing
distributor in France. In addition, the Company has entered into a non-binding
letter of intent to distribute its products and solutions in Germany through a
joint venture, 51% owned by the Company, and 49% owned by a German software
distributor. 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 tools 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. See "Business -- Sales and Marketing."
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. 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,
operating results and financial condition. The Company's direct
10
<PAGE> 11
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, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Customers and Markets" and
"Business -- Sales and Marketing."
Government Contracting Risks. Approximately 20.0% of the Company's total
revenues in fiscal year 1996 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. 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.
Requirement to Maintain Security Clearances. As of December 31, 1996,
approximately 30% of the Company's employees had security clearances permitting
the Company to obtain and perform classified work under certain government
contracts. In addition, certain of the Company's government contracts require
the Company to maintain a facility security clearance complying with Department
of Defense ("DoD") and other requirements. In connection with the purchase of
Preferred Stock by Alcatel in November 1996, due to the classified nature of
certain of the Company's federal government contracts, the Company was required
to notify the Defense Investigative Service of the U.S. Department of Defense
("DIS") that a foreign company had acquired an equity interest in the Company.
DIS will review this investment to ensure that sufficient safeguards are in
place to permit the Company to maintain its facility security clearance. While
the Company expects that its facility security clearance will be maintained
following completion of this review, no assurance can be given that DIS will not
invalidate this clearance. If such clearance were invalidated, the Company's
government contracts which are dependant on such clearance, representing
approximately $2,730,000 of the Company's revenues during fiscal year 1996,
would be terminated. The loss of these contracts would have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, if the Company's present clearance was invalidated, the Company would
not be able to obtain new contracts requiring a security clearance.
Risk of Software Defects. Software products as internally complex as those
developed by the Company frequently contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Although the
Company has not experienced material adverse effects resulting from any such
defects or errors to date, there can be no assurance that, despite testing by
the Company and by current and potential customers, defects and errors will not
be found in current versions, new versions or enhancements after commencement of
commercial shipments, resulting in loss of revenues or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition. See "Business -- Product
Development."
Product Liability. The Company markets to its customers complex,
business-critical, distributed applications. The Company's license agreements
with its customers typically contain provisions designed to limit the Company's
exposure to potential product liability claims. It is possible, however, that
the limitation
11
<PAGE> 12
of liability provisions contained in the Company's license agreements may not be
effective as a result of existing or future federal, state or local laws or
ordinances or unfavorable judicial decisions. Although the Company has not
experienced any product liability claims to date, the sale and support of
Template software tools by the Company may entail the risk of such claims, which
are likely to be substantial in light of the use of Template software tools in
complex, business-critical applications. A successful product liability claim
brought against the Company could have a material adverse effect upon the
Company's business, operating results and financial condition.
Shares Eligible for Future Sale; Registration Rights; Possible Adverse
Effect on Future Market Prices. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely affect
the market price of the Common Stock. Upon completion of this offering and
assuming no exercise of outstanding stock options, the Company will have
outstanding 4,222,008 shares of Common Stock (based upon the number of shares
outstanding as of December 31, 1996), of which the 2,100,000 shares sold in this
offering will be freely tradeable. Immediately prior to the completion of the
offering, it is expected that 2,747,008 shares of Common Stock will be
outstanding (based upon the number of shares outstanding as of December 31,
1996), of which 700,000 shares will be sold in this offering by the Selling
Shareholders. Of the 2,047,008 such currently outstanding shares not being sold
in this offering, 2,039,257 shares are subject to agreements with the
Underwriters under which such shares may not be offered, sold or otherwise
disposed of for a period of 180 days after the date of this Prospectus without
the prior written consent of Volpe, Welty & Company LLC. Of the 8,751 shares not
subject to such lock-up agreements: (i) 7,500 shares will be eligible for sale
without restriction in the public market pursuant to Rule 144(k) of the
Securities Act of 1933, as amended ("Securities Act") commencing immediately
upon the date of this Prospectus; and (ii) the remaining 1,251 shares will first
become eligible for resale under Rule 144 of the Securities Act ("Rule 144") in
September 1997 and August 1998. In addition, outstanding options to purchase
1,221,540 shares of Common Stock were fully vested as of December 31, 1996, all
of which options are subject to 180-day lock-up agreements. In recent offerings
in which it has served as lead manager of underwriters, Volpe, Welty & Company
LLC has consented to early releases from lock-up agreements only in a limited
number of circumstances, after considering all circumstances that it deemed to
be relevant. Volpe, Welty & Company LLC will, however, have complete discretion
in determining whether to consent to early releases from the lock-up agreements
delivered in connection with this offering, and no assurance can be given that
it will not consent to the early release of all or a portion of the shares of
Common Stock and options covered by such lock-up agreements. Alcatel is entitled
to certain rights with respect to the registration of the sale of its 500,000
shares of Common Stock under the Securities Act beginning one year after the
effective date of the offering. In addition, promptly after the date of this
Prospectus, the Company intends to register the Common Stock issued or to be
issued under the Company's stock option plans. See "Shares Eligible for Future
Sale" and "Description of Capital Stock -- Registration Rights."
No Prior Trading Market for Common Stock; Potential Volatility of Stock
Price. Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after this offering. The initial public offering price was
determined through negotiations among the Company and the representatives of the
Underwriters based on several factors and may not be indicative of the market
price of the Common Stock after this offering. The market price of the shares of
Common Stock is likely to be highly volatile and may be significantly affected
by factors such as actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations, new products or new
contracts by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, conditions and trends in the software
and other technology industries, adoption of new accounting standards affecting
the software industry, changes in financial estimates by securities analysts,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stock of technology
companies. These broad market fluctuations may adversely affect the market price
of the Common Stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has often been brought against the company. There can be no assurance that such
litigation will not occur in the future with respect to the Company; such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a
12
<PAGE> 13
material adverse effect upon the Company's business, operating results and
financial condition. See "Underwriting."
Control by Principal Shareholders, Officers and Directors. Upon completion
of this offering, the present directors, executive officers and principal
shareholders of the Company and their affiliates will beneficially own
approximately 47.7% of the outstanding Common Stock. As a result, these
shareholders will be able to exercise control over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may have the
effect of delaying or preventing a change in control of the Company. See
"Principal and Selling Shareholders."
Effect of Certain Charter and Bylaw Provisions; Antitakeover Effects of
Virginia Law. Upon completion of this offering, the Company's Board of
Directors will have the authority to issue up to 3,000,000 shares of Preferred
Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting and conversion rights of such shares, without any
further vote or action by the Company's shareholders. The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue shares of Preferred Stock. Further, certain provisions of the Company's
Amended and Restated Articles of Incorporation (the "Articles") and Bylaws and
of Virginia law could delay or make more difficult a merger, tender offer or
proxy contest involving the Company. In addition, in connection with the
purchase of Preferred Stock by Alcatel in November 1996, the Company and certain
principal shareholders of the Company entered into a Shareholders' Agreement
pursuant to which the Company and such shareholders agreed to give Alcatel prior
notice in the event the Company plans to sell certain assets or capital stock of
the Company. Specifically, the Company and such principal shareholders agreed to
give Alcatel written and oral notice prior to soliciting any proposal, or
participating in any negotiations, regarding a sale of any significant portion
of the Company's assets or any sale of Common Stock representing 5% or more of
the Common Stock of the Company issued and outstanding immediately prior to such
sale. The Company and such principal shareholders also agreed to promptly advise
Alcatel of any request for information or any proposal by a third party with
respect to the foregoing. These principal shareholders also granted to Alcatel
the right to join in certain sales of Common Stock held by such shareholders.
Although Alcatel does not have a right of first refusal with respect to sales of
assets or issuances of Common Stock, the foregoing provisions could have the
effect of making it more difficult for a third party to acquire the assets of
the Company or a majority of the outstanding voting stock of the Company. See
"Description of Capital Stock -- Preferred Stock," "Description of Capital
Stock -- Certain Provisions of Virginia Law and the Company's Articles of
Incorporation and Bylaws" and "Certain Transactions."
Uncertainty as to Use of Proceeds. The principal purposes of this offering
are to obtain working capital, to create a public market for the Company's
Common Stock and to facilitate future access to public equity markets and to
obtain additional working capital. The Company expects to use the net proceeds
from this offering for working capital and general corporate purposes. A portion
of the net proceeds of the offering may also be used to invest in products,
technologies or businesses that broaden or enhance the Company's current product
or service offerings. Accordingly, the Company's management will retain broad
discretion as to the allocation of a substantial portion of the net proceeds
from this offering. Pending such uses, the Company intends to invest the net
proceeds in short-term, investment-grade, interest-bearing securities. See "Use
of Proceeds."
Immediate and Substantial Dilution. Investors participating in this
offering will incur immediate, substantial dilution of $8.87 per share. To the
extent outstanding options to purchase the Company's Common Stock are exercised,
there will be further dilution. If the net proceeds of this offering, together
with available funds and cash generated from operations, are insufficient to
satisfy the Company's cash needs, the Company may be required to sell additional
equity or convertible debt securities. The sale of additional equity or
convertible debt securities could result in additional dilution to the Company's
shareholders. See "Dilution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
13
<PAGE> 14
THE COMPANY
The Company was incorporated in Maryland in 1975 and reincorporated in
Virginia in 1996. The Company was reorganized into its current line of business
in 1978 by Joseph M. Fox, the Chairman of the Company's Board of Directors. The
Company's home page is located on the Web at http://www.template.com. The
Company's principal executive offices are located at 45365 Vintage Park Plaza,
Dulles, Virginia 20166 and its telephone number is (703) 318-1000.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company are estimated to be approximately $20,232,000
(approximately $23,356,800 if the Underwriters exercise their overallotment
option in full) after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company and excluding any proceeds
from the exercise of options to acquire Common Stock by certain Selling
Shareholders of the Company. The Company will not receive any of the proceeds
from the sale of shares of Common Stock by the Selling Shareholders.
The principal purposes of this offering are to obtain additional working
capital, to create a public market for the Company's Common Stock and to
facilitate the Company's future access to public equity markets. The Company
expects to use the net proceeds of this offering for working capital and general
corporate purposes. A portion of the net proceeds of the offering may also be
used to acquire or invest in products, technologies or businesses that broaden
or enhance the Company's current product or service offerings. Other than as set
forth herein, there are no current agreements or negotiations with respect to
any acquisitions, investments or other transactions. Pending such uses, the
Company intends to invest the net proceeds in short-term, investment grade,
interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain its future earnings, if any, to
fund the development and growth of its business and, therefore, 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.
14
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
November 30, 1996, and as adjusted to give effect to the sale of the 1,400,000
shares of Common Stock offered hereby by the Company at the initial public
offering price of $16.00 per share, after deducting estimated offering expenses
and underwriting discounts. See "Use of Proceeds." This information should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
-----------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
<S> <C> <C> <C>
Long-term debt........................................... $ 357 $ 357 $ 357
------- ------------ --------------
Shareholders' equity
Series A Convertible Preferred Stock, $0.01 par value;
3,000,000 shares authorized, 500,000 issued and
outstanding, actual; none issued or outstanding, pro
forma and as adjusted (liquidation preference of
$8,000,000 at November 30, 1996).................... 5 -- --
Common Stock, $0.01 par value; 17,000,000 shares
authorized, 2,247,008 shares issued and outstanding,
actual; 2,747,008 issued and outstanding, pro forma;
4,222,008 issued and outstanding, as adjusted....... 23 28 42
Additional paid-in capital............................. 9,109 9,109 29,327
Retained earnings...................................... 906 906 906
------- ------------ --------------
Total shareholders' equity........................ 10,043 10,043 30,275
------- ------------ --------------
Total capitalization........................... $10,379 $ 10,379 $ 30,632
======= ========== ===========
</TABLE>
- ---------------
(1) Gives effect to the conversion of 500,000 shares of Preferred Stock issued
to Alcatel in November 1996 at $16.00 per share into an equal number of
shares of Common Stock. See Notes 2 and 6 of Notes to Consolidated Financial
Statements.
(2) Based on the number of shares outstanding as of December 31, 1996. Excludes
shares of Common Stock issuable upon the exercise of outstanding options to
purchase an aggregate of 2,188,415 shares of Common Stock, as of December
31, 1996, at prices between $1.38 and $16.00 per share and 917,500
additional shares of Common Stock reserved for issuance pursuant to the
Company's 1996 Equity Incentive Plan. See "Management -- Stock Option
Plans," "Management -- 1996 Equity Incentive Plan" and Note 7 of Notes to
Consolidated Financial Statements.
15
<PAGE> 16
DILUTION
At November 30, 1996, the Company had a pro forma net tangible book value
of $9,324,737 or $3.39 per share. After giving effect to the sale of the
1,400,000 shares of Common Stock offered hereby by the Company at the initial
public offering price of $16.00 per share, and after deducting estimated
offering expenses and underwriting discounts, the pro forma net tangible book
value of the Company as of November 30, 1996 would have been approximately $29.6
million or $7.13 per share of Common Stock. This represents an immediate and
substantial dilution to new investors purchasing shares in this offering.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $16.00
Pro forma net tangible book value per share as of November 30,
1996............................................................ $3.39
Increase in pro forma net tangible book value per share
attributable to this offering and use of proceeds therefrom..... 3.74
-----
Pro forma net tangible book value per share after this offering...... 7.13
------
Dilution per share to new investors.................................. $ 8.87
======
</TABLE>
The following table summarizes as of November 30, 1996, after giving effect
to this offering, the number of shares of Common Stock purchased from the
Company, the total consideration paid therefor (using the initial public
offering price of $16.00 per share for the new investors) and the average price
per share paid by the existing shareholders and by the new investors purchasing
shares of Common Stock in this offering before deduction of the estimated
underwriting discounts and commissions and offering expenses payable by the
Company.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)................. 2,747,008 66.2% $ 9,136,458 29.0% $ 3.33
New investors(1)......................... 1,400,000 33.8 22,400,000 71.0 16.00
--------- ------- ----------- -------
Total.................................. 4,147,008 100.0% $31,536,458 100.0%
======== ======= ========== =======
</TABLE>
- ---------------
(1) Excludes 75,000 shares to be issued upon the exercise of options and sold in
the offering by certain Selling Shareholders. See "Principal and Selling
Shareholders." Sales by Selling Shareholders in this offering will reduce
the number of shares held by existing shareholders to 2,122,008, or
approximately 50.3% of the total number of shares of Common Stock to be
outstanding after this offering (approximately 45.5% if the Underwriters'
over-allotment option is exercised in full), and will increase the number of
shares held by new investors to 2,100,000, or approximately 49.7% of the
total number of shares of Common Stock to be outstanding after this offering
(2,415,000 shares or approximately 54.5% if the Underwriters' over-allotment
option is exercised in full).
The above computations assume (i) no exercise of the Underwriters'
over-allotment option, and (ii) no exercise of options outstanding as of
November 30, 1996. At November 30, 1996, the Company had options outstanding to
purchase 2,180,915 shares of Common Stock at a weighted average exercise price
of $2.63 per share. If all outstanding options as of November 30, 1996 are
exercised, there would be dilution of $11.33 per share to new investors.
16
<PAGE> 17
SELECTED CONSOLIDATED 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The following
selected consolidated financial data of the Company as of November 30, 1994,
1995 and 1996 and for each of the three years in the period ended November 30,
1996, have been derived from the Company's consolidated financial statements
audited by Coopers & Lybrand L.L.P., independent accountants, included elsewhere
herein. The balance sheet data as of November 30, 1993 has been derived from the
Company's audited consolidated financial statements not included herein. The
financial data as of November 30, 1992, and for the year then ended, have been
derived from the Company's unaudited consolidated financial statements not
included herein. Management believes that the unaudited consolidated financial
statements from which the financial data below have been derived include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the financial data as of November 30, 1992 and for the year
then ended.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Products.................................................. $ 2,859 $ 2,781 $ 2,893 $ 2,386 $ 1,918
Services.................................................. 4,424 3,172 3,420 4,705 11,612
---------- ---------- ---------- ---------- ----------
Total revenues.......................................... 7,283 5,953 6,313 7,091 13,530
---------- ---------- ---------- ---------- ----------
Cost of revenues:
Products.................................................. 1,033 990 978 896 783
Services.................................................. 1,994 1,883 1,873 2,592 6,246
---------- ---------- ---------- ---------- ----------
Total cost of revenues.................................. 3,027 2,873 2,851 3,488 7,029
---------- ---------- ---------- ---------- ----------
Gross profit:............................................... 4,256 3,080 3,462 3,603 6,501
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling and marketing..................................... 1,953 1,904 1,510 1,181 2,362
Product development....................................... 994 436 924 272 966
General and administrative................................ 1,543 1,533 1,446 1,479 1,473
---------- ---------- ---------- ---------- ----------
Total operating expenses................................ 4,490 3,873 3,880 2,932 4,801
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............................... (234) (793) (418) 671 1,700
Interest expense.......................................... 47 72 75 108 43
Other income.............................................. -- -- -- 1 33
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and cumulative effect of
change in accounting principle............................ (281) (865) (493) 564 1,690
Income tax benefit (provision).............................. 39 378 218 (237) (645)
---------- ---------- ---------- ---------- ----------
Net income (loss) before cumulative effect of change in
accounting principle...................................... (242) (487) (275) 327 1,045
Cumulative effect of change in accounting principle......... -- (40) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)........................................... $ (242) $ (527) $ (275) $ 327 $ 1,045
========= ========= ========= ========= =========
Earnings (loss) per common share(1)......................... $ (0.12) $ (0.17) $ (0.09) $ 0.07 $ 0.23
========= ========= ========= ========= =========
Weighted average number of common shares outstanding........ 2,080,474 3,173,503 3,186,331 4,655,824 4,643,919
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 27 $ 26 $ 16 $ 63 $ 8,397
Working capital............................................. 504 415 277 473 9,009
Total assets................................................ 3,125 2,898 3,021 3,461 13,985
Long-term liabilities....................................... 658 829 650 335 790
Total shareholders' equity.................................. 874 847 572 901 10,043
</TABLE>
- ---------------
(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.
17
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainty. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors" as well as those discussed
elsewhere in this Prospectus.
OVERVIEW
The Company provides enterprise-wide software solutions to organizations
that require large-scale, distributed computing systems through its reusable
software templates, robust software development environment and its staff of
software development professionals. To date, substantially all of the Company's
revenues have been derived from license fees for use of the Company's products
("Product Revenue") or fees from software-related services ("Services Revenue").
These services include software development, training, maintenance, systems
integration and systems planning, among others.
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, although the Company also provides certain software services
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 has recently shifted its marketing emphasis toward complete
business solutions, which require the Company's software development services in
addition to product licenses. Consequently, the Company expects Services Revenue
to continue to comprise a significant component of total revenue in the future.
In early 1996, the Company began to implement its strategy of developing
industry-specific templates and contemplates that it will ship its first such
product, an order handling application for a telecommunications service
management system, in the first half of 1997. As the Company implements this
strategy, it expects Product Revenue to increase because solutions incorporating
industry-specific templates will contain a larger product license component.
Historically, the Company has relied principally on distributors, systems
integrators and value added resellers for the sale of its product licenses.
However, the Company has recently begun to expand its internal sales force to
market directly to clients and prospective clients. The Company expects this
trend toward direct sales to continue in the future.
18
<PAGE> 19
The Company's clients consist primarily of Fortune 1000 companies, agencies
of the federal government and other large organizations. Because the Company's
business is characterized by significant customer 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 period to period.
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. Revenue accounted for by the federal government has remained relatively
constant in recent years although, as a percentage of revenue, this business has
declined in recent years and is expected to decline further as a result of the
growth of revenue from non-government sources. For the fiscal year ended
November 30, 1996, each of First Data, Wellspring and the federal government
accounted for more than 10% of the Company's total revenue, representing an
aggregate of approximately 67.3% of total revenue, or 19.5%, 27.8% and 20.0% of
total revenue, respectively. Based on a recent restructuring of the Company's
agreement with Wellspring, the Company does not anticipate that Wellspring will
account for 10% of the Company's total revenue in 1997.
Over the past five years, product development expenses have increased as
the Company has designed and developed cross-industry templates which seamlessly
integrate with the Company's existing templates to provide a more complete
solution for specialized applications. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," the Company capitalizes the
required direct costs and allocated overhead associated with the development of
software products. Initial research costs are charged to product development
prior to the development of a detailed program design or a working model. Costs
incurred subsequent to the product release, and product development under
contract are charged to operations. Capitalized costs are amortized at the
higher of the sales ratio method or straight-line basis. Any unamortized costs
are carried at the lower of book value or the net realizable value. See Note 2
of Notes to Consolidated Financial Statements.
The Company is currently a member of a software development consortium that
includes IBM, Honeywell Corporation and ISX, Inc. This consortium is
participating in a federally-funded technology reinvestment program (the "TRP"),
which began in 1995, through which the Company is expected to receive an
aggregate of approximately $2.0 million. See Note 10 of Notes to Consolidated
Financial Statements. The Company is accounting for funds received from the TRP
as an offset to product development expense and selling and marketing expense.
For the fiscal years ended November 30, 1995 and 1996, these offsets totaled
$1.1 million and $0.5 million, respectively. The Company expects this program to
be completed in the second half of 1997, at which time the Company will have
received all funds it is expected to receive pursuant to this program.
Revenue derived from the Company's foreign customers is recorded in United
States dollars using the exchange rate at the time of the transaction. Gains and
losses due to changes in the exchange rate are recorded when payment is made.
19
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to total revenue of certain items in the Company's consolidated
statement of operations.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
1993 1994 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Products................................................ 46.7% 45.8% 33.6% 14.2%
Services................................................ 53.3 54.2 66.4 85.8
----- ----- ----- -----
Total revenues....................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Products(1)............................................. 35.6 33.8 37.6 40.8
Services(2) ............................................ 59.4 54.8 55.1 53.8
----- ----- ----- -----
Total cost of revenues............................... 48.3 45.2 49.2 51.9
----- ----- ----- -----
Gross profit.............................................. 51.7 54.8 50.8 48.1
----- ----- ----- -----
Operating expenses:
Selling and marketing................................... 32.0 23.9 16.7 17.5
Product development..................................... 7.3 14.6 3.8 7.1
General and administrative.............................. 25.7 22.9 20.8 10.9
----- ----- ----- -----
Total operating expenses............................. 65.0 61.4 41.3 35.5
----- ----- ----- -----
Income (loss) from operations............................. (13.3) (6.6) 9.5 12.6
Interest expense........................................ 1.2 1.2 1.5 0.3
Other income............................................ -- -- -- 0.2
----- ----- ----- -----
Income (loss) before income taxes and cumulative effect of
change in accounting principle.......................... (14.5) (7.8) 8.0 12.5
Income tax benefit (provision)............................ 6.3 3.4 (3.4) (4.8)
----- ----- ----- -----
Net income (loss) before cumulative effect of change in
accounting principle.................................... (8.2) (4.4) 4.6 7.7
Cumulative effect of change in accounting principle....... 0.7 -- -- --
----- ----- ----- -----
Net income (loss)......................................... (8.9)% (4.4)% 4.6% 7.7%
===== ===== ===== =====
</TABLE>
- ---------------
(1) Shown as a percentage of Product Revenue.
(2) Shown as a percentage of Services Revenue.
COMPARISON OF YEARS ENDED NOVEMBER 30, 1996 AND NOVEMBER 30, 1995
Revenue. Total revenue was $13.5 million in 1996 compared to $7.1 million
in 1995, an increase of $6.4 million or 90.8%. This growth resulted principally
from volume increases in sales of software-related services due to the Company's
shift in emphasis toward selling complete solutions.
Product Revenue was $1.9 million in 1996 compared to $2.4 million in 1995,
a decrease of $0.5 million or 19.6%. This decrease was primarily attributable to
lower product sales by the Company's distributors, value added resellers and
systems integrators as a result of the Company's recent shift from a sales and
marketing strategy that relied primarily on indirect sales of its products by
these third-parties toward direct sales of complete solutions by the Company's
internal sales force. Services Revenue was $11.6 million in 1996 compared to
$4.7 million in 1995, an increase of $6.9 million or 146.8%. This increase was
primarily attributable to the implementation of three significant client
engagements for complete solutions. Contracts for complete solutions obtained by
the Company through its direct sales force typically contain a larger service
component than those obtained through the Company's distributors, value added
resellers and systems integrators, as the Company is engaged to develop a
customized solution in addition to providing software products.
20
<PAGE> 21
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 $7.0 million in 1996 compared to $3.5 million in 1995, an increase
of $3.5 million or 101.5%. This increase was primarily attributable to
additional professional staff hired to perform the increased volume of software
services. Total cost of revenue was 51.9% of total revenue in 1996, compared to
49.2% of total revenue in 1995. This percentage increase was primarily
attributable to the Company's inability to decrease the cost of Product Revenue
commensurate with the decrease in Product Revenue for the period because certain
product-related expenses, such as salaries for customer-support personnel, are
relatively fixed in the short term.
Cost of Product Revenue was $0.8 million in 1996 compared to $0.9 million
in 1995, a decrease of $0.1 million or 12.7%. This decrease was attributable to
a decrease in amortization of capitalized software costs related to the decrease
in Product Revenue. Cost of Services Revenue was $6.2 million in 1996 compared
to $2.6 million in 1995, an increase of $3.6 million or 141.0%. 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 cost of Services Revenue commensurate with the
associated decrease in Services Revenue. Any such termination would 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
$2.4 million in 1996 compared to $1.2 million in 1995, an increase of $1.2
million or 100.1%. This increase resulted primarily from the Company's strategic
shift toward direct sales. The Company anticipates that selling and marketing
expenses will increase in the near future due to such shift.
Product Development. Product development expenses were $1.0 million in
1996 compared to $0.3 million in 1995, an increase of $0.7 million or 255.8%.
This increase resulted primarily from the development of the Company's Web
Template product and enhancements to its visual development tools. Product
development expenses in 1996 and in 1995 included offsets of $0.4 million and
$0.9 million, respectively, as a result of the Company's participation in the
TRP.
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 $1.5 million in 1996 unchanged from $1.5 million in
1995. The Company anticipates general and administrative expenses to increase in
the future due to increases in staffing.
Income Tax Benefit (Provision). The provision for income taxes was
$644,502 in 1996 compared to $237,289 in 1995, an increase of $407,213. This
increase was attributable to the Company's greater pretax profit level in 1996.
The Company's effective tax rate of 38% in 1996 was lower than the effective tax
rate of 42% in 1995 primarily as a result of a reduction in book-tax permanent
differences.
21
<PAGE> 22
COMPARISON OF YEARS ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994
Revenue. Total revenue was $7.1 million in 1995 compared to $6.3 million
in 1994, an increase of $0.8 million or 12.3%. This growth resulted from volume
increases in software-related services for clients. Product Revenue was $2.4
million in 1995 compared to $2.9 million in 1994, a decrease of $0.5 million or
17.5%. This decrease was primarily attributable to the decreased sales of
software licenses to distributors, value added resellers and systems
integrators. Services Revenue was $4.7 million in 1995 compared to $3.4 million
in 1994, an increase of $1.3 million or 37.6%. This increase was attributable to
increases in software-related services for clients in the government, financial
services and manufacturing industries.
Cost of Revenue. Total cost of revenue was $3.5 million in 1995 compared
to $2.9 million in 1994, an increase of $0.6 million or 22.3%. This increase was
primarily attributable to additional professional staff hired to perform the
increased volume of software services. Total cost of revenue was 49.2% of total
revenue in 1995 compared to 45.2% of total revenue in 1994.
Cost of Product Revenue was $0.9 million in 1995 compared to $1.0 million
in 1994, a decrease of $0.1 million or 8.3%. This decrease was attributable to a
decrease in amortization of capitalized software costs related to the lower
Product Revenue. Cost of Services Revenue was $2.6 million in 1995 compared to
$1.9 million in 1994, an increase of $0.7 million or 38.3%. This increase was
primarily attributable to additional professional staff hired to perform the
increased volume of software-related services.
Selling and Marketing. Selling and marketing expenses were $1.2 million in
1995 compared to $1.5 million in 1994, a decrease of $0.3 million or 21.8%. This
decrease was primarily attributable to an offset to selling and marketing
expense related to the TRP, as well as a temporary vacancy in a sales position.
Product Development. Product development expenses were $0.3 million in
1995 compared to $0.9 million in 1994, a decrease of $0.7 million or 70.6%.
However, prior to an offset of $0.9 million due to the Company's participation
in the TRP, the Company's investment in product development increased in 1995.
During 1995, the Company's product development efforts were focused on
developing the Company's Workflow Template product.
General and Administrative. General and administrative expenses were $1.5
million in 1995 compared to $1.4 million in 1994, an increase of $0.1 million or
2.3%. This increase was attributable to higher performance-related compensation
to existing employees.
Income Tax Benefit (Provision). The provision for income taxes was
$237,289 in 1995 based on the Company's pretax income in 1995. This compares to
an income tax benefit of $217,798 in 1994 based on the Company's pretax loss in
1994. The Company's effective tax rate of 42% in 1995 reflects the utilization,
during 1995, of research and development tax credits created in prior years.
COMPARISON OF YEARS ENDED NOVEMBER 30, 1994 AND NOVEMBER 30, 1993
Revenue. Total revenue was $6.3 million in 1994 compared to $6.0 million
in 1993, an increase of $0.3 million or 6.0%. Product Revenue was $2.9 million
in 1994 compared to $2.8 million in 1993, an increase of $0.1 million or 4.0%.
This increase was primarily attributable to volume increases in sales of
software licenses to distributors, value added resellers and systems
integrators. Services Revenue was $3.4 million in 1994 compared to $3.2 million
in 1993, an increase of $0.2 million or 7.8%. This increase was primarily
attributable to an increase in revenue from software maintenance.
Cost of Revenue. Total cost of revenue was $2.9 million in 1994 unchanged
from $2.9 million in 1993. Cost of Product Revenue was $1.0 million in 1994
unchanged from $1.0 million in 1993. Cost of Services Revenue was $1.9 million
in 1994 unchanged from $1.9 million in 1993.
Selling and Marketing. Selling expenses were $1.5 million in 1994 compared
to $1.9 million in 1993, a decrease of $0.4 million or 20.7%. This decrease was
primarily attributable to the elimination of two regional sales offices in an
effort to centralize certain sales and marketing activities at the Company's
headquarters.
22
<PAGE> 23
Product Development. Product development expenses were $0.9 million in
1994 compared to $0.4 million in 1993, an increase of $0.5 million or 111.9%.
This increase was primarily attributable to increased expenses related to the
development of the Company's first cross-industry templates, Workflow Template
and System Management Template. The development of such products was initiated
in late 1993.
General and Administrative. General and administrative expenses were $1.4
million in 1994 compared to $1.5 million in 1993, a decrease of $0.1 million or
5.7%. This decrease was primarily attributable to performance-based compensation
reductions and certain cost reductions instituted at the Company's headquarters.
Income Tax Benefit (Provision). The Company had income tax benefits of
$217,798 and $377,542 respectively, in 1994 and 1993, based on pretax losses
during those years. The Company's effective tax rate was a benefit of 44% in
both 1993 and 1994.
23
<PAGE> 24
QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly results of
operations for each of the eleven quarters ended November 30, 1996, 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 Prospectus 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.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------------------------
MAY 31, AUG 31, NOV 30, FEB 28, MAY 31, AUG 31, NOV 30, FEB 29, MAY 31, AUG 31, NOV 30,
1994 1994 1994 1995 1995 1995 1995 1996 1996 1996 1996
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products........... $ 752 $ 942 $ 515 $ 626 $ 394 $ 622 $ 744 $ 511 $ 346 $ 189 $ 873
Services........... 746 725 1,023 998 1,014 1,072 1,621 2,000 2,867 3,704 3,040
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues... 1,498 1,667 1,538 1,624 1,408 1,694 2,365 2,511 3,213 3,893 3,913
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Products........... 230 271 262 235 187 239 235 160 227 214 182
Services........... 454 434 547 538 596 594 864 1,090 1,533 1,816 1,807
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues....... 684 705 809 773 783 833 1,099 1,250 1,760 2,030 1,989
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit........ 814 962 729 851 625 861 1,266 1,261 1,453 1,863 1,924
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling and
marketing........ 366 397 424 248 303 272 358 470 581 543 769
Product
development...... 229 208 269 (247) 199 185 135 133 229 287 317
General and
administrative... 374 389 356 276 342 352 509 393 403 341 336
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 969 994 1,049 277 844 809 1,002 996 1,213 1,171 1,422
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations......... (155) (32) (320) 574 (219) 52 264 265 240 692 502
Interest expense... 17 19 19 24 30 28 26 12 10 11 10
Other income
(expense)........ -- -- -- -- 1 -- -- -- 5 6 22
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes....... (172) (51) (339) 550 (248) 24 238 253 235 687 514
Income tax benefit
(provision)........ 76 22 149 (231) 104 (10) (100) (97) (90) (262) (195)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)... $ (96) $ (29) $ (190) $ 319 $ (144) $ 14 $ 138 $ 156 $ 145 $ 425 $ 319
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------------------------------------------------------------
QUARTER ENDED
-----------------------------------------------------------------------------------------------------------
MAY 31, AUG 31, NOV 30, FEB 28, MAY 31, AUG 31, NOV 30, FEB 29, MAY 31, AUG 31, NOV 30,
1994 1994 1994 1995 1995 1995 1995 1996 1996 1996 1996
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products........... 50.2% 56.5% 33.5% 38.5% 28.0% 36.7% 31.4% 20.4% 10.8% 4.8% 22.3%
Services........... 49.8 43.5 66.5 61.5 72.0 63.3 68.6 79.6 89.2 95.2 77.7
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Products........... 15.4 16.3 17.0 14.5 13.3 14.1 10.0 6.4 7.1 5.5 4.6
Services........... 30.3 26.0 35.6 33.1 42.3 35.1 36.5 43.4 47.7 46.7 46.2
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues....... 45.7 42.3 52.6 47.6 55.6 49.2 46.5 49.8 54.8 52.2 50.8
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit........ 54.3 57.7 47.4 52.4 44.4 50.8 53.5 50.2 45.2 47.8 49.2
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling and
marketing........ 24.4 23.8 27.6 15.3 21.5 16.1 15.1 18.7 18.1 13.9 19.7
Product
development...... 15.3 12.5 17.5 (15.2) 14.1 10.9 5.7 5.3 7.1 7.4 8.1
General and
administrative... 25.0 23.3 23.1 17.0 24.4 20.7 21.5 15.7 12.5 8.8 8.6
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 64.7 59.6 68.2 17.1 60.0 47.7 42.3 39.7 37.7 30.1 36.4
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations......... (10.4) (1.9) (20.8) 35.3 (15.6) 3.1 11.2 10.5 7.5 17.7 12.8
Interest expense... 1.1 1.2 1.2 1.5 2.2 1.6 1.1 0.4 0.3 0.3 0.3
Other income
(expense)........ 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.1 0.2 0.6
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes....... (11.5) (3.1) (22.0) 33.8 (17.7) 1.4 10.1 10.1 7.3 17.6 13.1
Income tax benefit
(provision)........ 5.1 1.4 9.6 (14.2) 7.5 (0.6) (4.3) (3.9) (2.8) (6.7) (4.9)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)... (6.4)% (1.7)% (12.4)% 19.6% (10.2)% 0.8% 5.8% 6.2% 4.5% 10.9% 8.2%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
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
24
<PAGE> 25
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 "Risk Factors -- Variability
of Quarterly Results; Uncertainty of Future Operating Results."
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 November 30 and relatively lower revenues in its
fiscal quarters ending on February 28 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 August 31 as a result of reduced sales activity in
Europe during the summer months. See "Selected Consolidated Financial Data."
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations primarily through cash
generated from operations, supplemented by borrowings under a bank line of
credit. Cash flow provided by operating activities was $802,567 and $1,556,592
for the fiscal years ended November 30, 1995 and 1996 on net income of $327,092
and $1,045,068, respectively. In 1996, cash flow provided by operating
activities reflected increases in accounts payable and deferred taxes which were
partially offset by increases in accounts receivable and prepaid expenses.
Cash used in investing activities (capital expenditures and software
development investments) totaled $363,742 and $1,047,662 in the fiscal years
ended November 30, 1995 and 1996, respectively. Capital expenditures were
primarily comprised of the Company's investments in office space, telephones and
furniture necessitated by recent increases in staffing.
Cash flow from financing activities was $7,825,446 in 1996 relating
primarily to the $8.0 million investment by Alcatel in 500,000 shares of the
Company's Preferred Stock in November 1996. See "Prospectus Summary -- Recent
Developments" and "Certain Transactions."
The Company also recently expanded its available borrowing capacity. On
October 22, 1996, the Company entered into a Loan and Security Agreement (the
"Loan Agreement") with Signet Bank (the "Bank"), which consists of a line of
credit and a term loan. The line of credit has a maximum borrowing amount of
$3,000,000 with an expiration date of April 30, 1998 and the term loan is in the
amount of $275,000 with an expiration date of October 31, 1999. The line of
credit permits the Company to borrow amounts in aggregate not to exceed the
lesser of the Maximum Borrowing Amount or the Borrowing Base as those terms are
defined in the Loan Agreement. Borrowings under the Loan Agreement are
collateralized by accounts receivable, equipment, furniture and fixtures. The
line of credit bears interest at the Bank's prime interest rate 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, 1995 and
1996, and for certain compliance periods during the three years ended
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November 30, 1996, the Company was not in compliance with the foregoing
financial covenants for which waivers were obtained. In October 1996, in
connection with the restructuring of the Loan Agreement, the financial covenant
for the ratio of total liabilities to tangible net worth was removed. In
addition, the Company obtained the Bank's consent in connection with the sale of
Preferred Stock to Alcatel.
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. Such sources of liquidity may include
additional equity offerings or debt financings. In the normal course of
business, the Company evaluates acquisitions of businesses, products and
technologies that complement the Company's business. Other than as set forth
herein, the Company has no present commitments or agreements with respect to any
such transaction. However, the Company may acquire businesses, products or
technologies in the future.
IMPACT OF INFLATION
Inflation has not had any significant effect on the Company's operations.
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 will disclose the
effects of this pronouncement in the notes to the financial statements on a pro
forma basis beginning in fiscal 1997.
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BUSINESS
OVERVIEW
The Company provides enterprise-wide software solutions to organizations
that require large-scale, distributed computing systems through its reusable
software templates, robust software development environment and staff of
software development professionals. The Company believes that, by combining its
reusable templates, consisting of over one million lines of reusable object
code, and visual development tools, its clients can obtain solutions in less
time and at lower cost than with traditional software development techniques.
The Company's current templates can provide up to 90% of the code necessary for
a complete, functioning application. The Company's solutions are targeted at
large-scale, mission-critical applications, such as securities trading,
telecommunications service management, aircraft maintenance scheduling, air
traffic control, and network monitoring systems. According to a recent industry
study, more than $250 billion is currently spent each year in the United States
on information technology application development.
The Company has developed a family of broadly targeted foundation templates
which are used to build custom, enterprise-wide, distributed applications. The
Company's foundation templates provide up to 75% of the code required for a
complete application. In addition, the Company has developed cross-industry
templates, and is currently developing industry-specific templates, each of
which is designed to be layered on top of the Company's foundation templates to
provide even more pre-written code for specific business solutions. The
Company's cross-industry templates provide an additional 10-30% of completed
application code, and the Company believes its industry-specific templates will
provide 5-15% more of such code. Using the Company's templates, distributed
applications can be rapidly developed either by the Company's professional
software developers, or by a client's staff. The Company believes that its
family of proven, reusable templates gives it a competitive advantage by
permitting its clients to obtain highly adaptable, mission-critical solutions,
generally on a fixed-price basis and in six to twelve months.
INDUSTRY BACKGROUND
The combined demands of global competition, deregulation, organizational
restructuring and rapid changes in products and markets are increasing the
competitive pressures on businesses. Many organizations are responding by
improving the efficiency and effectiveness of their operations through the
enhancement and reengineering of fundamental business processes. In this
context, automation of real-time, event driven processes, including the
integration of an organization's various business functions, can be a
significant component of achieving competitive advantage and responding to
rapidly changing market conditions.
In order to better operate their business, many organizations are deploying
powerful client-server and peer-to-peer distributed computing environments
connected by local and wide area networks that permit information and business
functions to be distributed globally. These distributed computing environments
typically consist of a heterogeneous mix of complex new and legacy hardware and
software platforms, which require highly sophisticated software in order to
address this complexity, support distributed operations, provide access via the
Internet and Intranets, and manage diverse, interrelated and dynamic
information.
Traditional software development techniques which involve line-by-line
construction of large, monolithic software programs are inefficient in
responding to the challenges created by the emergence of business process
automation using distributed computing environments. The Company believes that
such methods are time consuming, error prone and are difficult to adapt to
rapidly changing business demands.
A newer approach to software development, object-oriented programming,
responds to many of these limitations. Object-oriented programming languages,
such as C++, enable software developers to realistically model the complexities
of large-scale, dynamic systems, and to develop, maintain and evolve complex
programs more quickly and with a higher level of reliability than is often
possible using traditional software development methodologies. While
object-oriented technology can address many software development problems, it is
a relatively new and sophisticated approach which many in-house information
technology departments are not yet capable of exploiting.
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In order to obtain business solutions that utilize state-of-the-art
technologies, some organizations have hired information technology services
providers to develop customized software applications. However, this approach is
relatively expensive, time consuming and labor intensive, and has a relatively
low success rate. In addition, many customized software development solutions
require that an organization obtain numerous software development tools, often
from several vendors, such as a graphical user interface ("GUI") tool, a
relational database management system ("RDBMS") and a networking communication
tool. The integration of these technologies into customized solutions often
presents additional complexity and challenges and contributes to project
failure.
Another approach is to purchase pre-packaged off-the-shelf software
applications. These pre-developed applications provide a fixed set of
functionality that is quickly deployable. However, by their nature, off-the-
shelf solutions allow only a limited amount of customization which may require
an organization to change the way it operates in order to fit the business model
inherent in the pre-developed solution. Moreover, as an organization's business
processes change, it can be difficult to modify an information system that
relies on an off-the-shelf solution.
As a result of the limitations of these traditional approaches to
information technology development and the increased complexity and
sophistication required to meet new distributed computing challenges, businesses
are increasingly demanding customizable, robust solutions to business processing
needs which can be quickly developed and deployed in a cost effective manner.
They are also demanding solutions which are adaptable and proven to work in
mission-critical operational settings. Moreover, these organizations require
solutions that are capable of integration with existing legacy systems and
databases, as well as pre-packaged software. Organizations require
business-critical solutions that support group collaborative analysis or
decision making within a department or spanning many departments in a company.
Such solutions are driven by, and must be responsive to, real-time events
governing critical business processes and must provide GUIs that are easy to use
and make information analysis more intuitive. While these solutions often reside
on multiple computers dispersed throughout a network of heterogeneous hardware
and software environments, they must provide immediate access to databases or
real-time sources.
THE TEMPLATE SOLUTION
The Company's enterprise-wide, business solutions combine the best features
of customized solutions with those of off-the-shelf solutions by providing the
following:
Proven Reusable Templates. With over one million lines of reusable code
already developed into templates, the Company and its customers begin each
project with up to 90% of the code necessary for a complete, customized
functioning application already complete. This pre-developed code typically
represents the part of the application that is the most difficult to build and
maintain. By requiring only company-specific knowledge and processes on any
given project, the Company believes that its solutions are faster and less
expensive to develop than customized software development solutions and more
flexible and tailored than off-the-shelf software applications.
The Company's templates are essentially collections of integrated object
frameworks which represent largely completed applications and have been used to
develop mission-critical applications for over 300 customers. The Company's
templates differ from a framework in two ways: first, they require minimal
development to produce a completed application because they contain
significantly more pre-written code than a single framework and second, they
embody a pre-developed integrated architecture which allows functionality,
including that of an organization's legacy systems to be added or adapted with
very little time-consuming low level programming. Thus, use of these templates
speeds application development, allows very large-scale code reuse, eliminates
errors of omission and simplifies the automation of complex business processes.
The Company's templates provide increased gains in productivity over a
component-based approach to code reuse because they provide an integrated
structure, common data representation, dynamic operations and architectural
integrity.
Simple Automation of Complex Business Processes. The Company's visual
development environment allows clients to focus on incorporating business logic
into a solution rather than on complex technical details.
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With the Company's visual, object-oriented development environment, developers
and end-users can rapidly build applications that automate and integrate
business processes such as credit checking, order handling and inventory
management. From its history of working closely with its many clients, the
Company believes that it has gained a high level of expertise in complex
business processes and such expertise is embedded in the Company's templates for
the benefit of its clients. The close mapping between a business process and the
application architecture embodied in the Company's templates enables developers
and end-users to more easily design, maintain and reuse applications. This also
enables end-users to participate in the development of business process
solutions resulting in more successful implementations.
Iterative Design Approach. To more effectively accomplish a client's
business process objectives, the Company applies an iterative approach to
software design and deployment that permits refinement of the Company's
solutions through successive variations of the completed application. Given the
complexity associated with the modeling of enterprise-wide business processes,
large-scale solution designs are typically altered substantially between the
concept stage and the finished product. The Company's iterative design approach
facilitates this process while allowing delivery of a working application at
each iterative stage. The Company believes this approach encourages client
feedback, enables end-users to participate in the application development
process and leads to greater congruence with client needs and expectations.
Fixed Price, Fixed Timetable. The market for information technology
solutions has been characterized by significant delays and cost overruns. By
contrast, the Company's iterative design approach permits the Company and its
clients to agree on the nature of project deliverables and a fixed price, as
well as a fixed timetable for the project at the commencement, and at each
successive stage of a project engagement. The Company believes that its
willingness to offer a fixed price and a fixed timetable for complex business
solutions differentiates the Company from many of its competitors.
Scalability. The Company's templates employ a more powerful distributed
architecture than many current client-server systems. The Company's technology
supports both client-server and peer-to-peer distributed architectures. Together
these two architectures more closely model an organization's actual
enterprise-wide business processes. This allows automated systems to scale
rapidly through a replication methodology as the volume of users and
transactions increases.
Platform Independent Solutions. The Company's powerful and easy to use
family of templates provides organizations with an efficient and cost-effective
method for developing new applications and can be easily integrated with
disparate new and legacy systems, existing business applications and emerging
technologies. The Company's templates support a variety of industry standards
for operating systems, RDBMSs, GUI tools, Web browsers, communication protocols
and compilers. This gives both the Company and its clients the flexibility to
utilize multiple suppliers and enables the integration of new systems and legacy
systems.
STRATEGY
The Company's objective is to be the leading provider of mission-critical,
distributed business solutions. The Company's strategy incorporates the
following key elements:
Focus on Large and Growing Market for Enterprise-Wide, Mission-Critical
Solutions. The Company intends to leverage its comprehensive family of proven,
reusable templates to offer robust, complete solutions that address large-scale,
mission-critical applications. The Company believes that global trends toward
enterprise-wide business process automation will cause the large market for such
applications to grow rapidly. The flexible, open architecture and reusable code
of the Company's templates enable the rapid development and deployment, at
relatively low cost, of enterprise-wide solutions that are interoperable and
scale from small working groups and departments to an entire organization with
thousands of users over a distributed network. The Company believes that its
family of proven, reusable templates, which contain the Company's significant
business process knowledge, gives it an advantage over most of its competitors
by permitting its clients to obtain robust solutions for mission-critical
applications generally at a fixed and relatively low cost and on a fixed and
relatively rapid timetable (typically six to twelve months).
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Continue Development of Specialized Templates. The Company has introduced
two cross-industry templates which, when added to the Company's foundation
templates, provide a more complete solution for specialized applications such as
workflow management or systems management. The Company also intends to introduce
new cross-industry templates, such as a customer care template. In addition, the
Company intends to leverage its industry knowledge and expertise in selected
markets to develop various industry-specific templates, which will provide
specialized features and functions to address special needs of vertical markets,
such as integrated order handling for telecommunications companies.
Concentrate on Selected Vertical Markets. The Company has identified
strategic vertical markets with business-critical needs which can be addressed
by the Company's enterprise-wide, mission-critical solutions. These are
information intensive industries with large, distributed business processes and
complex legacy application development environments. The Company has targeted
its sales and marketing efforts on the telecommunications, financial services,
manufacturing, energy and transportation industries, as well as on government
agencies. The Company intends to leverage its existing relationships and expand
its sales and marketing efforts to further increase market share in these
industries, as well as in other selected vertical markets.
Expand Distribution Channels. The Company's distribution strategy involves
a combination of direct sales and sales through systems integrators, value added
resellers, distributors and independent software vendors to reach the broadest
customer base in its targeted markets. The Company's strategic relationships
with development partners, systems integrators, value added resellers and
independent software vendors are a key part of its strategy to quickly establish
the widespread use of the Company's templates. In particular, the Company
intends to work closely with its strategic partners to develop new solutions of
which the Company's reusable templates and visual development tools are an
integral part. The Company will continue to strengthen its existing strategic
relationships while forging new relationships with key industry participants.
The Company has begun to complement its indirect distribution channels with
greater direct sales resources in certain vertical industries and markets.
Capitalize on the Emerging Internet/Intranet Market Opportunity. The
Company believes that the Internet and the Web will become increasingly
important to organizations utilizing distributed computing. Because the Company
incorporated Internet and Web technologies into its products, business processes
automated with the Company's solutions can be accessed from anywhere in the
world by the customers, suppliers and employees of an enterprise. The Company
believes that the combination of Internet and Web accessibility, large-scale
business process automation and integration inherent in the Company's products
position it to exploit the extension of information technology to new markets,
such as electronic commerce.
TECHNOLOGY
Advanced Technologies
Over the past two decades, a series of highly publicized new technologies,
such as object-oriented programming and the Internet, have been introduced or
widely adopted in the software industry each of which was expected to
revolutionize the way software is developed or used. Although valuable advances,
none of these technologies alone can solve all of the challenges associated with
the explosive growth of distributed computing. Rather, in the Company's view, a
combination of technologies is required to develop effective enterprise-wide
business solutions for organizations with complex information processing needs.
The Company believes that its template technology seamlessly combines the
best of these emerging technologies into an architecture suited to complex,
distributed, enterprise-wide solutions. These technologies include
object-oriented technology, knowledge-based systems, distributed processing,
GUIs, visual development, object frameworks, database technology, the Internet,
the Web and Intranets. While many other software development companies and
solutions providers are relying on some or even many of these advanced
technologies, the Company believes that it is one of the few to integrate all of
them into its solutions approach.
All of the Company's products are designed for multi-platform hosting and
broadbased interoperability. The Company's products are also designed to enable
accessibility, automate business processes and integrate
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existing and legacy systems which the Company believes is critical in developing
enterprise-wide solutions such as Internet and Web-based electronic commerce
solutions. Application developers using the Company's products do not need to
address the complexity of underlying heterogeneous standards because the
products hide these details allowing the developer to work at a higher level. An
application built for one set of standards will operate in another simply by
recompiling the application.
All of the Company's templates support Windows 95, Windows NT, Presentation
Manager and Motif windowing systems for both development and deployment. The
Company's templates also support standard Web browsers such as Netscape's
Navigator and Microsoft's Explorer. In addition, the Company's templates support
a range of operating systems, including Open VMS, UNIX, OS/2, Windows 95 and
Windows NT and most popular hardware platforms, including DEC, Hewlett Packard,
IBM, Pyramid, Sequent, Sun and Unisys. The Company's templates also operate in
conjunction with the leading RDBMSs including Oracle, Sybase, DB2 and Informix,
as well as the Microsoft ODBC interface.
Network Computing and Electronic Commerce
The Company has been building large-scale distributed systems that operate
in networked environments since 1984. The Company believes that this experience
has afforded it the opportunity to try many technical approaches to implementing
such systems under real world conditions. For example, the Company recognized
early in its development process the value of TCP/IP as a standard protocol for
integrating heterogeneous computer hardware and operating systems. As a result,
the Company's products and solutions have been capable of exploiting this
standard protocol for the Internet and Intranets since their emergence. In
addition, the Web, which is an extension of the Internet, offers a standard, low
cost graphic access device for customers and suppliers to directly interact with
the automated processes of an enterprise. The Company has integrated this
technology into its products so that a standard Web browser can be used to
access any application built with the Company's products.
The Company believes that solutions in the area of electronic commerce must
have three fundamental characteristics: broadbased accessibility, the ability to
automate business processes and the ability to integrate legacy systems. The
Company believes its solutions offer all three of these characteristics. First,
because the Company incorporated Internet and Web technologies into its
products, business processes automated with the Company's solutions can be
accessed from anywhere in the world by customers, suppliers and employees of an
enterprise. Second, the Company's products are specifically targeted at the
development of large-scale, enterprise-wide solutions making them ideal
candidates for business process automation. Third, the Company's products are
designed to integrate existing systems, such as an organization's legacy
systems, or systems external to an organization such as a credit check reporting
service. The Company believes that the combination of Web accessibility,
large-scale business process automation and integration inherent in the
Company's products position it to provide solutions to companies seeking to
exploit the extension of information technology to new markets, such as
electronic commerce.
Template-Based Code Reuse
The software industry in general is pursuing a strategy of software reuse.
Reuse is important because building large and complex systems that automate
multiple business processes may otherwise be economically impractical to develop
using traditional methodologies. Recently, the industry has attempted to reuse
software code principally through the use of objects and object frameworks. An
object is a small piece of code that encapsulates the data and logic associated
with some function or service, such as formatting the current date. If properly
conceived and implemented, objects can be reused in many different applications.
Object frameworks are collections of related objects that perform some function
or service on a larger scale such as providing the mechanism for all graphic
displays for an application.
This component-based approach to reuse works well with small, less complex
applications. However, its effectiveness is limited when applied to large,
complex applications because the number of objects required to attain
large-scale reuse can number in the thousands. The Company believes that this
large number becomes logistically difficult, particularly with respect to
maintenance and training requirements. Moreover, an
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organization relying on objects and object frameworks to develop a solution must
still resort to traditional line-by-line software programming to integrate the
components in a way that results in a customized solution. Through its early
research in the mid-1980s, the Company learned of these inherent limitations of
software reuse based solely on objects and object frameworks. From this
research, the Company began to develop what it believes is the next logical step
in the evolution of software reuse technology: templates.
The Company's templates are essentially collections of integrated object
frameworks which represent largely completed applications. The Company's
templates differ from a framework in two ways: first, they require minimal
development to produce a completed application because they contain
significantly more pre-written code than a single framework and second, they
embody a pre-developed integrated architecture which allows functionality,
including that of an organization's legacy system to be added or adapted with
very little time-consuming low level programming. Thus, use of the Company's
templates speeds application development, allows very large scale code reuse,
eliminates errors of omission and simplifies the automation of complex business
processes. The Company's templates provide increased gains in productivity over
a component-based approach to code reuse because they provide an integrated
structure, common data representation, dynamic operations and architectural
integrity. In addition, code reuse with a template is implicit and, therefore, a
developer relying on templates to construct an application is not required to
know the attributes of the framework being reused. By contrast, with a
components-based approach, a developer must explicitly design the application
with specific reusable frameworks in mind, write code to integrate the
frameworks and understand the complex semantics associated with each object in
the framework.
Visual Development Environment
The Template approach consists of using its template-based technology
combined with its visual development environment to produce applications through
an iterative process. Rather than programming at a detailed language level to
fill in a template, the Company's products include a visual development
environment that allows developers to accomplish this task using visual editors
thereby limiting greatly the need to resort to line-by-line programming. Thus,
many of the development activities associated with constructing an application,
such as process definition, object modeling and GUI implementation, can be
accomplished through the use of visual editors. With the Template approach,
developers need to employ traditional line-by-line programming only when
specialized behavior must be modeled that has not already been defined through
the Company's visual editors. The Company is currently enhancing and plans to
continue to enhance its visual development environment with new releases of its
products.
Visual development is important for two reasons. First, it enhances the
high productivity associated with template-based development. Second, and
perhaps more importantly, it greatly expands the types of people in an
organization capable of developing software applications. Currently, large-scale
or complex software systems are generally developed for organizations by highly
trained software engineers. In the Company's view, this greatly inhibits the use
of information technology as a competitive tool for many organizations. Visual
development enables non-programmers to participate in the development of
software applications. Through the use of properly designed visual development
environments, the Company believes that the people who actually run the business
(so-called "knowledge workers"), can directly incorporate their knowledge into
the automation of business processes. The Company believes that this capability
will ultimately result in systems being built by those who best understand the
challenges of the business.
Integrated Family of Reusable Templates
The Company has developed a robust family of general, broadly targeted
"foundation" templates that it uses to build custom, enterprise-wide business
solutions. These general foundation templates support the development of any
distributed application (client-server or peer-to-peer). On top of these
foundation templates, the Company has developed several specialized, more
narrowly focused cross-industry templates that address common types of business
processes, including workflow processes characterized by complex routing and
processing of information and systems management processes characterized by
real-time monitor
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and control of complex systems. The Company expects that its cross-industry
templates will substantially reduce development time by permitting even greater
code reuse than is achievable using a foundation template alone. The Company is
also currently developing a library of industry-specific templates designed to
be layered on top of the cross-industry templates in order to provide targeted
industries with nearly completed applications requiring very little final
development. The Company expects to deliver its first industry-specific
template, an order handling application for a telecommunications service
management system, in the first half of 1997.
As one moves up the hierarchy of templates, the Company's visual tools
become increasingly accessible to knowledge workers, rather than only to
developers or software engineers. The amount of code that remains to be
developed for a complete solution diminishes as one ascends the hierarchy. If an
application is built using only the Company's foundation templates,
approximately 65-75% of the code would typically be provided as reusable code
and the remaining 25-35% of the code would typically be developed by software
engineers. However, if one of the Company's cross-industry templates and an
industry-specific template of the type currently being developed by the Company
are used, the Company believes that only approximately 10% of the ultimate code
would have to be produced and most of this would be done by knowledge workers.
The following diagram illustrates the Company's hierarchy of templates and
how they are designed to be used together to provide as much prewritten software
code as possible in developing customized applications:
[TEMPLATE HIERARCHY PYRAMID]
CUSTOMIZED
CODE
Approximately 10%
INDUSTRY-SPECIFIED
TEMPLATES*
Approximately 5-15%
CROSS-INDUSTRY
TEMPLATES
Approximately 10-30%
FOUNDATION TEMPLATES
Approximately 65-75%
of Required Code
- ------------------
* Under Development
Template Hierarchy
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PRODUCTS AND SERVICES
The Company's product portfolio currently includes two foundation templates
(SNAP and Web Template) and two cross-industry templates (System Management
Template and Workflow Template). 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. The Company also intends to introduce new specialized
templates which are complementary to its existing family of templates and which
address both existing and emerging market needs.
Foundation Templates
SNAP. SNAP is an application development template for creating complex,
scalable, distributed enterprise-wide solutions. SNAP, which is based on an
object-oriented fifth generation specification language, is designed to promote
large-scale code reuse and provides knowledge-based inferencing and dynamic
event handling. The reusable software in SNAP provides the foundation 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. SNAP 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. SNAP also provides interprocess communications that
provide dynamic object sharing and updating which enable the reconfiguration or
scaling of distributed applications with little or no code changes. To achieve
this, SNAP provides a facility called the Shared Information Base ("SIB") which
enables interprocess communication among applications running on a single
hardware platform or multiple heterogeneous platforms. Because multiple SNAP
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 Company believes that SNAP offers several performance advantages. Since
the object model of an application developed with SNAP resides in memory, access
and processing time are more rapid and efficient than traditional
database-centered applications which expend significant time in input/output
operations. SNAP provides the option to use C or C++ code (or any code that will
link with C code) for any particular time-critical process, while retaining the
advantages of the SNAP environment for all other aspects of the application.
Since processes can be distributed, any time-critical elements or system
bottlenecks can be moved to a platform with suitable CPU performance. The SIB
facility provides a mechanism for isolating and relocating those elements.
Web Template. Web Template is an application development template for
creating Web-based, enterprise-wide solutions. Web Template incorporates SNAP's
functionality and enables the dynamic generation in real-time of Hypertext
Markup Language ("HTML"). As a result, solutions developed with SNAP can be
deployed across the Internet and Intranets using Internet protocol with HTML
coding. Web Template supports leading web browsers and servers, including those
developed by Netscape Communications Corporation and Microsoft Corporation. Web
Template also takes advantage of emerging standards such as HTML 3.0 and Java.
Cross-Industry Templates
Workflow Template ("WFT"). WFT is an application development 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 SNAP's functionality
and provides the foundation 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 an application development
template for creating system management solutions that provide real-time
monitoring and control of complex physical processes,
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such as pipeline management and computer network management. SMT enables
organizations to develop 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 incorporates SNAP's functionality and provides the foundation
for up to 90% of the code for most system management solutions. 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.
Customer Care Template ("CCT"). The Company intends to develop CCT, a new
cross-industry template for customer care functions. Customer care is a broad
set of business process applications aimed at across-the-board improvement in
the delivery of services and products to customers. Customer care touches nearly
all aspects of an organization's business processes and the Company believes
that organizations with advanced customer care functions will be better
positioned to capitalize on the trend toward electronic commerce. CCT will be
capable of incorporating SNAP, SMT, WFT and Web Template functionality and
provide a customer service solution that integrates customer care processes,
such as order handling, invoicing and collection, and problem handling, with
service and product development and maintenance processes, as well as network
and systems management processes.
Industry-Specific Templates
The Company intends to extend its family of foundation templates and
cross-industry templates to include industry-specific templates. The Company is
currently developing a customer care template for the telecommunications
industry ("Telco-CCT"). In the future, the Company intends to generalize these
components to develop other templates such as customer care for the electric
power industry. The Company has designed its proposed Telco-CCT template on a
model for customer care based on standards established by the Network Management
Forum ("NMF"), a consortium of over 180 companies in the telecommunications
industry. As a result, Telco-CCT is being developed from the start based on
common industry terminology and standards. The Company has incorporated into the
Telco-CCT the Customer Care model of the NMF using the Company's visual tools.
To date, the Company has completed a working model of the order handling
function of Telco-CCT based on the NMF model. By basing Telco-CCT on the NMF
standard, the Company believes that this product will give it an advantage over
competitors. First, a telecommunications system that is developed with Telco-CCT
will be capable of interoperating with systems owned by other telecommunications
companies. Also, new entrants in the industry will be able to use the systems
created with these templates with the confidence that they will be in
conformance with industry standards.
Services
The Company has a comprehensive service organization that is designed to
ensure successful implementation and use of its family of templates. The Company
believes its customers' success in implementing and using the Company's
templates is critical to sustaining its reference customer base. The Company
provides its customers with software-related services to specify, design,
develop, and deploy the software applications necessary to meet its customers'
business process needs. These services may be performed by third-party
integrators, independent consultants or Company personnel, depending on the
nature and complexity of the request. 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 and software development projects. The fees for the
Company's services are typically fixed in advance of each stage of the software
development process for which the Company has been engaged.
The Company also has a government business unit comprised of approximately
25 people who provide technical services to government agencies. The principal
function of this group is to administer certain classified contracts between the
Company and an agency of the federal government. The nature of this work is
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<PAGE> 36
technical design and software development which the Company has been performing
for the federal government since 1977. 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.
CUSTOMERS AND MARKETS
As of December 31, 1996, the Company has licensed its technology or
provided software-related services to over 300 customers in a wide variety of
industries worldwide. To date, the Company's marketing efforts have been
directed toward a diverse group of industries, including manufacturing, energy,
telecommunications, transportation, healthcare and financial services, as well
as federal government agencies.
The Company believes that the following is a representative list of the
Company's recent or current customers:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
INDUSTRY CUSTOMER APPLICATION
<S> <C> <C>
- -
Energy ENRON Corp. Gas pipeline control and management
Electronic Power Power monitoring and personnel training
Research Institute
Siemens Corporation Power distribution management
Financial Valores Mexicanos Brokerage trading
Soluciones
First Data Resources Consumer promotion data analysis
Healthcare United HealthCare Claims adjudication and processing
Corporation
Government United States Air Force Visual tool development
NASA Jet Propulsion Control and monitoring of a deep space probe
Laboratory
Various other agencies Systems engineering
Transportation Northwest Airlines Maintenance scheduling
Corporation
Northrop-Grumman Air traffic control
Corporation
S.N.C.B. (Belgium Control of high speed trains
National Railways
Company)
UPS Scheduling of airplane maintenance and repair
Telecommunications Unisys Corporation Network monitoring and control
Vyvx, Inc. Management of terrestrial video transport
networks
</TABLE>
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<PAGE> 37
Because of the costs involved in implementing a solution, clients undertake
projects on an irregular basis and the amount of work performed for clients may
vary from year to year. There can be no assurance that the Company will perform
additional projects for any client.
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. Revenue accounted for by the federal government has remained relatively
constant in recent years although, as a percentage of revenue, this business has
declined in recent years and is expected to decline further as a result of the
growth of revenue from non-government sources. For the fiscal year ended
November 30, 1996, each of First Data, Wellspring and the federal government
accounted for more than 10% of the Company's total revenue representing an
aggregate of approximately 67.3% of total revenue, or 19.5%, 27.8% and 20.0% of
total revenue, respectively. Based on a recent restructuring of the Company's
agreement with Wellspring, the Company does not anticipate that Wellspring will
account for 10% of the Company's total revenue in 1997.
The following examples illustrate how selected organizations are using the
Company's products and services:
UPS, one of the largest transportation companies in the world, needed an
application to help manage the maintenance of its extensive aircraft fleet. UPS
used the Company's technology to develop a set of business processes designed to
assist with maintenance work to be performed, schedule qualified personnel,
interface with existing inventory management and tool control systems, and help
improve data accuracy, consistency and timeliness. UPS selected the Company's
technology for this complex, distributed system because of its functionality,
integrated tool set and sophisticated communications infrastructure. The Company
and UPS completed development of this complex, heterogeneous, distributed
application and deployed it in several dozen cities in less than one year.
S.N.C.B. (Belgium National Railways Company), a major railway company in
Europe, needed a software system to automate railroad traffic control systems.
The Company's technology enabled a real-time, distributed traffic management
system for high-speed trains. The system provided a graphic representation of
rail lines for estimated and real-time train schedules, mapped rail routes from
data and developed dispatcher dialogue modules for traffic management. The
application was created with six people in approximately 21 months.
Unisys Corporation used the Company's technology to create Single Point
Operations ("SPO"), a commercial product which provides a single console for
managing multiple computer systems. SPO provides a logical means of automating
and centralizing system operations so that one operator can monitor and control
multiple systems. SPO allows a user to manipulate the system console from a
window in the workstation. In addition, applications which are running remotely
on mainframes can interact with the SPO platform. SPO provides high level
displays which depict the activity and status of each system being monitored.
Unisys has installed this system in over 150 locations to automate and
centralize the running of clients' data centers.
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 service 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 services 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.
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<PAGE> 38
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 Template software solutions. To enhance marketing and distribution
channels, the Company has established strategic relationships with distributors,
value added resellers and systems integrators. 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 also
formed business alliances with certain distributors, value added resellers or
systems integrators through which these parties include Template products and
services in bids they submit for systems projects.
Internationally, the Company's sales and marketing efforts have been
focused on the European market. The Company has a direct sales force which
operates from the Company's wholly-owned subsidiary in the United Kingdom.
Recently, the Company has also taken several steps to significantly expand its
distribution capabilities in Europe. In November 1996, in connection with an
investment in Preferred Stock of the Company, the Company and Alcatel agreed to
enter into a business relationship. See "Prospectus Summary -- Recent
Developments" and "Certain Transactions." In November 1996, the Company entered
into a non-binding letter of intent pursuant to which the Company agreed to
acquire Krystal Ingenierie S.A. ("Krystal"), the Company's existing distributor
in France. The letter of intent provides that the Company will issue up to
93,750 shares of Common Stock to the shareholders of Krystal in exchange for all
of the capital stock of Krystal and cancellation of certain indebtedness of
Krystal to its principal shareholder. In addition, the Company has entered into
a non-binding letter of intent to distribute its products and solutions in
Germany through a joint venture 51% owned by the Company, and 49% owned by a
German software distributor. The Company intends to continue to expand its
international sales and marketing efforts to include areas beyond Europe.
As of December 31, 1996, over 20 such distributors, value added resellers
and systems integrators employ or resell the Company's technology, including:
<TABLE>
<S> <C> <C>
DISTRIBUTORS VALUE ADDED RESELLERS SYSTEMS INTEGRATORS
Krystal Ingenierie(1) EDS Daxus Corporation
Contemplate B.V.I.O. Northrop-Grumman Corporation EDS
Template Software, GmbH(2) Siemens Corporation Groupa Solucinos
Unisys Corporation GTE Government Systems
Hernandez Albin, S.C.
IBM
WILOGS Company
</TABLE>
(1) The Company has entered into a non-binding letter of intent to acquire this
distributor.
(2) Pending consummation of distributorship joint venture which is currently
subject to a non-binding letter of intent.
The Company employs a variety of business development and marketing
techniques to communicate directly with current and prospective clients. These
techniques include exhibiting at trade shows, authoring articles and presenting
papers regarding the Company's solutions and technology, holding seminars for
clients and prospective clients on technology and industry issues and direct
mail marketing. In accordance with government contracting requirements, the
Company's marketing and sales efforts toward defense industry clients that are
governmental agencies or instrumentalities are limited to responding to requests
for proposals and participating in competitive bidding.
Existing clients are also an important component of the Company's marketing
strategy. The Company's process of building open systems applications on an
incremental basis results in flexible systems which can support additional
applications as a client's needs develop or change. Follow-on projects leverage
sales and marketing resources and strengthen the Company's client relationships.
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<PAGE> 39
CUSTOMER TRAINING AND SUPPORT
The Company believes that a high level of customer support is important to
the successful marketing and sale of the Company's solutions. The Company
employs a team of technical specialists to provide support services ranging from
design and application engineering support to full-scale application development
and turnkey solutions. The typical direct sale to a client includes initial
maintenance, training and consulting services. In addition, substantially all of
the clients for whom the Company has developed an application elect to enter
into an ongoing maintenance and support contract with the Company, which is
typically for twelve months and entitles the customer to upgrades, and technical
support. The Company also offers introductory and advanced classes and training
programs available at the Company's headquarters and at customer sites. In
addition, users of Template software can attend an annual technology forum, at
which knowledge of Template software skills and customer solutions are
exchanged.
On a worldwide basis, the Company's authorized distributors, value added
resellers and systems integrators also provide customers with training, product
support and consulting services. Each of the Company's software distributors is
capable of providing training in its respective country. In addition, many
international partners and distributors, particularly independent software
vendors, operate their own technology training programs.
BACKLOG
The Company includes in backlog only signed contracts that either have
milestones yet to be attained or for which the Company can make a reasonable
estimate of work yet to be performed. The Company's backlog totaled
approximately $2.3 million at November 30, 1996, compared to approximately $2.0
million at November 30, 1995. There can be no assurance that contracts reflected
in backlog will not be canceled or delayed. Accordingly, the Company believes
that backlog is not a reliable measure of future revenue.
EMPLOYEES
As of December 31, 1996, the Company had a total of 102 full-time
employees, of which 79 were technical and technical support personnel.
The Company's success will depend in large part upon its ability to
attract, retain and motivate highly-skilled employees, particularly project
managers and client managers and other senior technical personnel. Qualified
personnel are in particularly great demand and are likely to remain a limited
resource for the foreseeable future. However, the Company believes that it has
been successful in its efforts to attract and retain the number and quality of
professionals needed to support present operations and future growth, in part
because of its emphasis on training, its policy of promoting from within, and
its methodology, which allows its personnel to progress with one client through
multiple phases of a project, thereby maximizing the learning process and
maintaining the professional challenge. Although the Company expects to continue
to attract sufficient numbers of highly skilled employees and to retain its
existing project managers and other senior personnel for the foreseeable future,
there can be no assurance that the Company will be able to do so.
None of the Company's employees is subject to a collective bargaining
agreement. The Company believes that its relations with its employees are
excellent.
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 generally enters into
confidentiality agreements with its employees and consultants that limit 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
39
<PAGE> 40
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.
The Company's business includes the development of custom software in
connection with specific client engagements. This custom software generally uses
the Company's core software technology, reusable software templates and certain
software tools, which remain the property of the Company. However, in the past,
the Company has generally assigned the custom software components to its
clients.
The Company is not aware that it is infringing any proprietary rights of
third parties. There can be no assurance, however, that third parties (including
the parties for whom the Company has been engaged to develop solutions, from
which its reusable software templates have been derived) 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, operating results and financial condition
would be materially adversely affected.
PRODUCT DEVELOPMENT
Since inception, the Company has made substantial investments in product
development and related activities. 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-wide,
mission-critical distributed applications. 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 Template software 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 1996, product development expenses were $966,088. To
date, the Company has capitalized certain software development costs, but in the
future, as a result of the Company's change in product development, the Company
anticipates capitalizing an insignificant amount of such costs. See Note 2 of
Notes to Consolidated Financial Statements. 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 Template products 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
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<PAGE> 41
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. The Company is currently a member of a software
development consortium that includes IBM, Honeywell Corporation and ISX, Inc.
This consortium is participating in the TRP, which began in 1995, through which
the Company is expected to receive an aggregate of approximately $2.0 million.
COMPETITION
The information technology consulting, software development 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 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,
NeXT Software, Inc. and Dynasty Technologies, 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, Oracle Corporation, Integrated Systems Solutions Corporation (a
subsidiary of IBM) and Andersen Consulting, among others.
In addition, complex client-server and peer-to-peer applications that can
be developed and deployed using the Company's object-oriented, 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 or C++ 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 such an approach 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, project completion time, quality of service, price, project
management capability and technical expertise. The Company believes it presently
competes favorably with respect to each of these factors. However, the Company's
market is still evolving and 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 successfully will have a material adverse effect upon the
Company's business, operating results and financial condition. 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.
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<PAGE> 42
CERTAIN REGULATORY MATTERS
The nature of certain government contracts to which the Company is a party
subjects the Company to various regulatory restrictions and limitations,
including those set forth below.
Security Clearances. Certain of the Company's government contracts require
the Company to maintain facility security clearances complying with DoD
requirements, including for the performance of classified work under its
contracts. The Company believes that it is in compliance with these
requirements. As of December 31, 1996, approximately 30% of the Company's
employees possessed secret or top secret security clearances, which are required
for the performance of certain of the Company's contracts. The Company has never
had a contract terminated for security reasons. In connection with the purchase
of Preferred Stock by Alcatel in November 1996, due to the classified nature of
certain of the Company's federal government contracts, the Company was required
to notify DIS that a foreign company has acquired an equity interest in the
Company. DIS will review this investment to ensure that sufficient safeguards
are in place to permit the Company to maintain its facility security clearance.
While the Company expects that its facility security clearance will be
maintained following completion of this review, no assurance can be given that
DIS will not invalidate this clearance. If such clearance were invalidated, the
Company's government contracts which are dependant on such clearance,
representing approximately $2,730,000 of the Company's revenues during fiscal
year 1996, would be terminated. The loss of these contracts would have a
material adverse effect on the Company's business, operating results and
financial condition.
Government Contract Audits and Investigations. Government contractors are
commonly subject to various audits and investigations by government agencies.
These audits and investigations involve a review of a contractor's performance
on its contracts, as well as its pricing practices, costs and compliance with
applicable laws, regulations and standards. The DCAA generally audits
cost-reimbursable contracts to verify that costs have been properly charged to
the government. The Company has not experienced any material adverse effects as
a result of these completed audits.
FACILITIES
The Company's principal administrative, sales, marketing, and product
development facility occupies approximately 40,000 square feet in Dulles,
Virginia pursuant to a lease which expires in December 2006. In addition, the
Company also leases a sales and support office in Atlanta, Georgia maintains an
office in Arlington, Virginia for its government business unit and maintains an
international office in the United Kingdom. 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.
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<PAGE> 43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their respective
ages as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ----------------------------------------
<S> <C> <C>
Joseph M. Fox................................... 62 Chairman of the Board of Directors
E. Linwood Pearce............................... 51 Chief Executive Officer and Director
Andrew B. Ferrentino............................ 56 President, Secretary and Director
Kimberly E. Osgood.............................. 40 Chief Financial Officer
David L. Kiker.................................. 37 Vice President of Technology
J. Kelly Brown.................................. 42 Vice President of Federal Business Unit
Randall K. Maroney.............................. 48 Vice President of Business Development
Benjamin J. Martindale, II...................... 45 Vice President of Marketing
Richard H. Collard.............................. 47 Vice President of European Operations
Duane A. Adams(1)(2)............................ 58 Director
Alan B. Salisbury(1)(2)......................... 59 Director
</TABLE>
- ---------------
(1) Each of Drs. Adams and Salisbury have agreed to serve as a director upon
completion of this offering.
(2) Each of Drs. Adams and Salisbury have agreed to serve on the Compensation
Committee and Audit Committee upon completion of this offering.
Joseph M. Fox has served as Chairman of the Company since 1978. Mr. Fox
reorganized the Company into its current line of business in 1978. From 1956
until 1977, he was employed by IBM, the last seven years as Vice President of
its Federal Systems Division, where he oversaw a software development unit
comprised of over 4,000 employees and was responsible for many major projects
including the automation of the Air Traffic Control System in the United States
and the United Kingdom and the automation of the ground and on-board NASA
Shuttle control system.
E. Linwood Pearce joined the Company in November 1991 and since that time
has served as its Chief Executive Officer and as a director. From July 1988 to
April 1991, Mr. Pearce was Executive Vice President of Sales, Marketing and
Business Development for Sage Software, Inc. (the predecessor to Intersolv,
Inc.). From October 1985 to May 1988, Mr. Pearce was Executive Vice President
and Chief Operating Officer of Software AG of North America. From 1967 to
September 1985, Mr. Pearce was employed by Applied Data Research, a software
products and services company, most recently as Vice President of Field
Operations.
Andrew B. Ferrentino joined the Company in April 1979 as Vice President and
in 1984 was appointed President and a director. From November 1977 until April
1979, Mr. Ferrentino served as a Senior Technical Consultant to Satellite
Business Systems, Inc., a satellite communications company, where he was
responsible for new business development. From 1966 to November 1977, Mr.
Ferrentino served in various management capacities for IBM's Federal Systems
Division, most recently as a Manager of Advanced Technology.
Kimberly E. Osgood joined the Company in May 1983 as Controller and in
March 1993, was appointed to serve as Vice President of Finance and
Administration. Ms. Osgood was promoted to Chief Financial Officer of the
Company in September 1996. Prior to that time, Ms. Osgood was employed by the
Ralph M. Parsons Company for four years where she was responsible for government
contract oversight.
David L. Kiker joined the Company in November 1985 as a software engineer
and in June 1991, was appointed to serve as Vice President of Technology. Prior
to that time, Mr. Kiker was employed by the National Biomedical Research
Foundation for five years where he was responsible for developing software for
medical research applications.
J. Kelly Brown joined the Company in February 1990 and serves as Vice
President of the Company's Federal Business Unit. From December 1987 to February
1990, Mr. Brown was employed by Quality Systems, Inc., a government contractor,
most recently as Lead Systems Analyst. From July 1986 to December 1987, Mr.
Brown served as Senior Knowledge Engineer of Systems Designers International,
Inc., an International AI Company. From May 1979 to July 1986, Mr. Brown served
as Project Manager and
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<PAGE> 44
Systems Engineer of Vitro Corporation, a government contractor. Prior to that
time, Mr. Brown was employed by Westinghouse Corporation as a Field Engineer.
Randall K. Maroney joined the Company in December 1992 as Vice President of
Business Development. Prior to that time, Mr. Maroney served as the President of
WING Corporation, a document imaging company he founded in 1988. From 1968 until
1988, Mr. Maroney served as an officer in the United States Navy. At present,
Mr. Maroney is on a temporary medical leave of absence. However, the Company
expects Mr. Maroney to return to full-time status during 1997.
Richard H. Collard joined the Company in January 1995 as Managing Director
of the Company's United Kingdom subsidiary. Mr. Collard was promoted to Vice
President of European Operations for the Company in March 1996. Prior to that
time, he was a founder and spent 10 years with Instrumatic U.K., Limited, a
supplier of high technology products to professional customers throughout
Europe, the last three years as Executive Vice President. Prior to that, he
managed European Sales for a division of Gould Corporation and worked for
Tektronix, Inc. in the United Kingdom.
Benjamin J. Martindale, II joined the Company in December 1996 as Vice
President of Marketing. From October 1995 to December 1996, Mr. Martindale
served as Vice President of Worldwide Marketing for Visix Software, Inc. From
May 1995 to September 1995, Mr. Martindale was Vice President of Marketing with
IntelliSys Systems, Corp. From June 1988 to May 1995, Mr. Martindale served as
Director of North American Marketing for Sybase, Inc.
Duane A. Adams has consented to become a director of the Company upon the
completion of this offering. Dr. Adams is the Vice Provost for Research at
Carnegie Mellon University. From 1992 to 1996, Dr. Adams was the Deputy Director
of the Department of Defense's Advanced Research Projects Agency. Prior to that
time, Dr. Adams was an Associate Dean for Research at Carnegie Mellon
University's School of Computer Science.
Alan B. Salisbury has consented to become a director of the Company upon
the completion of this offering. Since 1993, Dr. Salisbury has served as the
President of Learning Tree International USA, Inc. From 1991 to 1993, Dr.
Salisbury served as Executive Vice President and Chief Operating Officer of the
Microelectronics and Computer Technology Corporation, a research and development
consortium owned by 22 companies. From 1987 to 1991, he served as President of
Contel Technology Center, the advanced research and development organization
serving Contel Corporation. Prior to that time, Dr. Salisbury served in the
United States Army as a Major General where he commanded the United States Army
Information Systems Engineering Command. Dr. Salisbury serves on the Board of
Directors of Learning Tree International, Inc., Sybase, Inc. and TelePad
Corporation.
The Company's Board of Directors currently consists of three directors and,
upon consummation of the offering, will consist of five directors. Each director
holds office until the next annual meeting of shareholders or until his
successor is duly elected and qualified. The officers serve at the discretion of
the Board of Directors. There are no family relationships between any of the
directors or executive officers of the Company.
Effective upon consummation of the offering, the Board of Directors will
consist of three classes, each of whose members will serve for a staggered
three-year term. The Board consists of two Class I Directors (Mr. Fox and Dr.
Salisbury), one Class II Director (Mr. Ferrentino), and two Class III Directors
(Mr. Pearce and Dr. Adams). At each annual meeting of shareholders, a class of
directors will be elected for a three-year term to succeed the directors of the
same class whose terms are then expiring. The terms of the Class I Directors,
Class II Director and Class III Directors will expire upon the election and
qualification of successor directors at the annual meetings of shareholders to
be held in 1997, 1998 and 1999, respectively.
The Company has agreed, if requested by Alcatel, to use all reasonable
efforts to nominate an Alcatel designee for election to the Company's Board of
Directors and certain principal shareholders of the Company have agreed to vote
all beneficially owned shares in support of such designee's election to the
Company's Board of Directors. See "Certain Transactions." The Company expects
that following consummation of this offering, the Board of Directors will be
expanded to add a Class II Director and an Alcatel designee will be assigned to
that position.
44
<PAGE> 45
BOARD COMMITTEES
Following the completion of this offering, the Board of Directors will have
a Compensation Committee, which will make recommendations concerning salaries
and incentive compensation for employees of and consultants to the Company and
administer and grant stock options and awards pursuant to the Company's equity
incentive plans, and an Audit Committee, which will review the results and scope
of the audit and other services provided by the Company's independent certified
public accountants.
COMPENSATION OF DIRECTORS
Effective on the date of consummation of this offering, the Company has
agreed to award options to acquire 25,000 shares of Common Stock to each of its
independent, outside directors. Such options will be granted at the fair market
value on such date and will vest over a three year period. Following completion
of this offering, each director who is not an employee of the Company will
receive reimbursement for expenses incurred in service of the Company as a
director and will participate in the 1996 Equity Incentive Plan.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
received for services rendered to the Company during the year ended November 30,
1996 by the Chief Executive Officer of the Company and the six other executive
officers who received at least $100,000 in compensation in 1996 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
--------------------- SECURITIES
NAME AND PRINCIPAL POSITION(S) SALARY($) BONUS($) UNDERLYING OPTIONS(#)
- ------------------------------------------------------ --------- -------- ---------------------
<S> <C> <C> <C>
Joseph M. Fox......................................... $ 170,000 $57,500 --
Chairman
E. Linwood Pearce..................................... 170,000 57,500 100,000
Chief Executive Officer
Andrew B. Ferrentino.................................. 170,000 57,500 --
President
Kimberly E. Osgood.................................... 87,312 13,000 43,000
Chief Financial Officer
David L. Kiker........................................ 128,000 16,000 50,000
Vice President of Technology
Randall K. Maroney.................................... 86,889 28,875 (1) --
Vice President of Business Development
J. Kelly Brown........................................ 100,894 4,000 30,000
Vice President of Federal Business Unit
</TABLE>
- ---------------
(1) Represents sales commission.
45
<PAGE> 46
The following table sets forth certain information with respect to the
grant of stock options by the Company to Named Executive Officers during the
fiscal year ended November 30, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
------------------------------------------------------------------ STOCK PRICE
PERCENT OF TOTAL APPRECIATION FOR
NUMBER OF SECURITIES OPTIONS GRANTED TO EXERCISE OR OPTION TERM(4)
UNDERLYING OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SHARE)(3) DATE 5%($) 10%($)
- ------------------------- -------------------- ------------------ ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Joseph M. Fox............ -- -- -- -- -- --
E. Linwood Pearce........ 100,000 16.2% $ 6.00 9/30/06 $377,337 $956,245
Andrew B. Ferrentino..... -- -- -- -- -- --
Kimberly E. Osgood....... 3,000 0.5% $ 1.98 12/13/05 $ 3,736 $ 9,467
40,000 6.5% $ 6.00 9/30/06 $150,935 $382,498
David L. Kiker........... 50,000 8.1% $ 6.00 9/30/06 $188,668 $478,123
Randall K. Maroney....... -- -- -- -- -- --
J. Kelly Brown........... 30,000 4.9% $ 6.00 9/30/06 $113,200 $286,874
</TABLE>
- ---------------
(1) The options granted are incentive stock options that become exercisable in
increments of 25% per year beginning on the first anniversary of the date of
grant.
(2) Based on an aggregate of 618,300 options granted to employees during the
fiscal year ended November 30, 1996.
(3) The exercise price per share equaled the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date and are not presented to forecast possible future
appreciation, if any, in the price of the Common Stock. The gains shown are
net of the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise of the options or the sale of
the underlying shares. The actual gains, if any, on the stock option
exercises will depend on the future performance of the Common Stock, the
optionee's continued employment through applicable vesting periods and the
date on which the options are exercised.
46
<PAGE> 47
The following table sets forth the number of shares covered by both
exercisable and unexercisable stock options as of November 30, 1996. Also
reported are the values for "in-the-money" options which represent the positive
spread between the exercise price of any such existing stock options and the
estimated price of the Common Stock as of November 30, 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#) AT FISCAL YEAR-END($)(1)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------------ ------------------------- -------------------------
<S> <C> <C>
Joseph M. Fox................................... -- / -- -- / --
E. Linwood Pearce............................... 324,680 / 100,000 $4,344,218 / $1,338,000
Andrew B. Ferrentino............................ -- / -- -- / --
Kimberly E. Osgood.............................. 37,250 / 69,000 $ 498,405 / $ 923,220
David L. Kiker.................................. 107,500 / 77,500 $1,438,350 / $1,036,950
Randall K. Maroney.............................. 41,250 / 48,750 $ 551,925 / $ 652,275
J. Kelly Brown.................................. 31,250 / 48,750 $ 418,125 / $ 652,275
</TABLE>
- ---------------
(1) Prior to this offering, the Common Stock of the Company has not been
publicly traded. The Board of Directors, in connection with grants of stock
options that it makes from time to time, determines the fair market value of
the Common Stock as of the grant date. For purposes of calculating the value
recognized at fiscal year-end, the Company has used the deemed fair market
value as of November 30, 1996, as determined by the Company's Board of
Directors, of $16.00 per share.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with E. Linwood Pearce
that provides that Mr. Pearce will serve as Chief Executive Officer of the
Company until October 23, 1998. Mr. Pearce is currently entitled to a base
salary of $170,000 per year, with bonuses and salary increases to be determined
from time to time by the Board of Directors. The Company may terminate the
employment agreement upon Mr. Pearce's death, disability or for cause. If the
Board of Directors terminates Mr. Pearce for cause, Mr. Pearce is not entitled
to severance pay. If the Board of Directors terminates Mr. Pearce without cause,
Mr. Pearce is entitled to receive compensation equal to the greater of (i) the
compensation due to Mr. Pearce through the end of the employment agreement; or
(ii) 12 months of salary and bonus. Mr. Pearce may terminate the agreement upon
30 days written notice to the Board of Directors.
The Company has entered into an employment agreement with Joseph M. Fox
that provides that Mr. Fox will serve as Chairman of the Board of the Company
until October 23, 1998. Mr. Fox is currently entitled to a base salary of
$170,000 per year, with bonuses and salary increases to be determined from time
to time by the Board of Directors. The Company may terminate the employment
agreement upon Mr. Fox's death, disability or for cause. If the Board of
Directors terminates Mr. Fox for cause, Mr. Fox is not entitled to severance
pay. If the Board of Directors terminates Mr. Fox without cause, Mr. Fox is
entitled to receive compensation equal to the greater of (i) the compensation
due to Mr. Fox through the end of the employment agreement; or (ii) 12 months of
salary and bonus. Mr. Fox may terminate the agreement upon 30 days written
notice to the Board of Directors.
The Company has entered into an employment agreement with Andrew B.
Ferrentino that provides that Mr. Ferrentino will serve as President of the
Company until October 23, 1998. Mr. Ferrentino is currently entitled to a base
salary of $170,000 per year, with bonuses and salary increases to be determined
from time to time by the Board of Directors. The Company may terminate the
employment agreement upon Mr. Ferrentino's death, disability or for cause. If
the Board of Directors terminates Mr. Ferrentino for cause, Mr. Ferrentino is
not entitled to severance pay. If the Board of Directors terminates Mr.
Ferrentino without cause, Mr. Ferrentino is entitled to receive compensation
equal to the greater of (i) the compensation due to Mr. Ferrentino through the
end of the employment agreement; or (ii) 12 months of salary and bonus. Mr.
Ferrentino may terminate the agreement upon 30 days written notice to the Board
of Directors.
47
<PAGE> 48
STOCK OPTION PLANS
1986 Incentive Stock Option Plan. In 1986, the Company adopted the
Company's 1986 Incentive Stock Option Plan (the "1986 ISO Plan"). The 1986 ISO
Plan was amended effective January 1, 1987, and January 1, 1992. The 1986 ISO
Plan provided that stock option awards could be made to eligible employees of
the Company owning less than ten percent of the combined voting power of the
Company's stock. The 1986 ISO Plan provided that it was to be administered by
the Board of Directors. The purpose of the 1986 ISO Plan was to provide an
increased incentive for the Company's employees to own the Company's stock and
to put forth maximum effort to achieve long-term corporate objectives. The 1986
ISO Plan was terminated according to its terms, as amended, as of December 31,
1991, but such termination did not effect the rights of optionees under options
granted pursuant to the 1986 ISO Plan.
1992 Stock Option Plans. In 1992, the Company adopted two Incentive Stock
Option Plans (the "1992 ISO Plans"), and one Nonqualified Stock Option Plan (the
"1992 Nonqualified Plan"). The 1992 ISO Plans and the 1992 Nonqualified Plan
(collectively, the "1992 Stock Option Plans"), were the successor equity
incentive plans to the 1986 ISO Plan. The 1992 Stock Option Plans were
substantially identical, except that one of the 1992 ISO Plans permitted the
grant of options to acquire shares of the Company's former Class B Common Stock
while the other 1992 ISO Plan and the 1992 Nonqualified Plan permitted the grant
of options to acquire shares of the Company's former Class A Common Stock. See
"Description of Common Stock -- Recapitalization." The 1992 ISO Plans require
that the Board of Directors grant options at an exercise price not less than the
fair market value per share on the date of such grant; the 1992 Nonqualified
Plan has no such requirement. The 1992 Stock Option Plans were terminated
effective September 30, 1996, but such termination did not affect the rights of
optionees under options granted pursuant to the 1992 Stock Option Plans.
Terms of Awards Under the 1986 ISO Plan and the 1992 Stock Option
Plans. The following is a description of the provisions of the 1986 ISO Plan,
the 1992 ISO Stock Option Plans (collectively, the "Prior Plans"), and the 1992
Nonqualified Plan that apply to awards made thereunder prior to the termination
of such plans. Awards to employees under the Prior Plans were made in the form
of stock options meeting the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended ("Incentive Stock Options") while awards to employees
under the 1992 Nonqualified Plan did not meet such requirements ("Nonqualified
Stock Options"). The term of each option was determined by the Board of
Directors, provided that (i) the term of an option could not exceed ten years
from the date of grant and (ii) effective January 1, 1987, the aggregate fair
market value (as determined by the Board of Directors of the Company on the date
of grant) of Common Stock with respect to which Incentive Stock Options granted
a participant become exercisable for the first time in any single calendar year
could not exceed $100,000. The exercise price for Incentive Stock Options must
have at least equaled 100% of the fair market value of the Common Stock on the
date of grant of such option. The exercise price of Nonqualified Stock Options
was established by the Board of Directors at the time of grant. The exercise
price is payable in cash or in such other form as the Board of Directors may
determine. Stock options granted under the Prior Plans and the 1992 Nonqualified
Plan are not transferable except by will or the laws of descent and distribution
and may be exercised only by a participant during his or her lifetime. Unless
otherwise determined by the Board of Directors, all rights to exercise or
surrender options shall terminate immediately upon termination of employment if
such termination results from any cause other than death, disability or
retirement with the consent of the Company.
As of December 31, 1996, options to acquire an aggregate of 2,180,915
shares of the Company's Common Stock were outstanding pursuant to the Prior
Plans and the 1992 Nonqualified Plan.
1996 EQUITY INCENTIVE PLAN
In October 1996, the Board of Directors adopted and the Company's
shareholders approved the Company's 1996 Equity Incentive Plan (the "1996 Equity
Incentive Plan"). The 1996 Equity Incentive Plan will serve as the successor
equity incentive program to the 1992 Stock Option Plans. Options granted under
the 1992 Stock Option Plans before their termination will remain outstanding in
accordance with their terms, but no further options will be granted under the
1992 Stock Option Plans after this offering. The Company has
48
<PAGE> 49
reserved an additional 1,000,000 shares of Common Stock for issuance under the
1996 Equity Incentive Plan. Shares that (i) are subject to an option under the
1996 Equity Incentive Plan but cease to be subject to such option for any reason
other than exercise of such option or a corresponding stock appreciation right,
(ii) are awarded under the 1996 Equity Incentive Plan but are forfeited or are
repurchased by the Company or (iii) are subject to an award that otherwise
terminates without shares being issued will be available for grant or issuance
under the 1996 Equity Incentive Plan.
The 1996 Equity Incentive Plan provides for the grant of stock options,
stock appreciation rights, stock awards and incentive awards by the Company to
its employees (including directors) and other persons who provide services to
the Company or an affiliate. The maximum aggregate number of shares that may be
issued under the 1996 Equity Incentive Plan pursuant to the exercise of SARs and
options and the grant of stock awards is 1,000,000. The number of shares subject
to the 1996 Equity Incentive Plan may be adjusted in certain circumstances as
determined by the Compensation Committee of the Board. The 1996 Equity Incentive
Plan is administered by the Compensation Committee of the Board, consisting of
Duane A. Adams and Alan B. Salisbury, each of whom are "non-employee directors"
as that term is defined under the Securities Exchange Act of 1934, as amended
and "outside directors" as that term is defined in Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Compensation
Committee, within the parameters of the 1996 Equity Incentive Plan, determines
the type and terms of all stock option awards, the exercise price of stock
options, employee eligibility for stock option awards and the exercise period of
stock option awards. The 1996 Equity Incentive Plan permits the Compensation
Committee to grant options that are either incentive stock options (as defined
in Section 422 of the Code) or nonqualified stock options, on terms (including
the exercise price, which may not be less than 100% of the fair market value of
Common Stock on the date of grant, and the vesting schedule) determined by the
Compensation Committee, subject to certain statutory and other limitations in
the 1996 Equity Incentive Plan. In addition to, or in tandem with, awards of
stock options, the Compensation Committee may grant participants restricted
stock awards to purchase Common Stock. The terms of such restricted stock awards
may be determined by the Compensation Committee. The Compensation Committee may
also grant incentive awards either in addition to, or in tandem with, other
awards under the 1996 Equity Incentive Plan, under such terms, conditions and
restrictions as the Compensation Committee may determine, subject to limitations
imposed by the 1996 Equity Incentive Plan. Awards of stock appreciation rights
also may be made by the Compensation Committee. Under the 1996 Equity Incentive
Plan, incentive awards may be made for the satisfaction of performance goals
established in advance. The 1996 Equity Incentive Plan will terminate on October
17, 2006, unless terminated earlier in accordance with its provisions.
As of December 31, 1996, options to acquire 82,500 shares of the Company's
Common Stock were outstanding pursuant to the 1996 Equity Incentive Plan.
401(K) PLAN
The Company currently has in place a 401(k) Plan (the "401(k) Plan").
Participants in the 401(k) Plan may contribute a percentage of their current
compensation, up to the statutorily prescribed annual limit. The salary deferral
contributions are made on a pre-tax basis. The Company provides a matching
contribution equal to 50% of the first 4% of each employee's salary deferral.
The 401(k) Plan also includes provisions which authorize the Company to make
discretionary contributions. Such contributions, if made, would be allocated
among all eligible employees as determined under the 401(k) Plan. Each
participant is subject to a vesting schedule with respect to such matching
contributions made by the Company. Distributions may be made from a
participant's account in the form of a lump sum distribution upon termination of
employment, retirement, disability, death, upon reaching age 59 1/2, or in the
event of a financial hardship. The 401(k) Plan is intended to qualify under
Section 401 of the Code so that income earned on an employee's salary deferral
contributions to the 401(k) Plan are not taxable to the participants until
withdrawn from the 401(k) Plan.
BONUS PLAN
The Company has an annual cash bonus plan for executive officers and
certain other employees under which bonuses are paid based upon a combination of
the Company achieving performance objectives and the employee meeting individual
performance objectives.
49
<PAGE> 50
CHANGE OF CONTROL ARRANGEMENTS
The Compensation Committee, as administrator of the 1996 Equity Incentive
Plan, will have the authority to accelerate the time at which an option or stock
appreciation right may be exercised, the time at which a stock award becomes
transferable or nonforfeitable, or the time at which an incentive award may be
settled, including in connection with changes in control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to consummation of this offering, the Company did not have a
Compensation Committee and all matters concerning executive officer compensation
were addressed by the entire Board of Directors, which consisted of Messrs. Fox,
Pearce and Ferrentino. Upon consummation of this offering, the Company will
establish a Compensation Committee comprised of Drs. Adams and Salisbury.
CERTAIN TRANSACTIONS
In September 1996, in connection with an increase to the Company's
then-outstanding line of credit, the Bank released personal guarantees of the
line of credit which had been given by Messrs. Fox, Ferrentino and Pearce, all
of whom are directors and executive officers of the Company.
In November 1996, Alcatel purchased 500,000 shares of Preferred Stock of
the Company for an aggregate of $8.0 million. All outstanding shares of
Preferred Stock will convert automatically into Common Stock upon consummation
of this offering. Each share of Preferred Stock will initially convert into one
share of Common Stock, but is subject to adjustment if the Company issues
additional securities at a price per share of less than $13.00. Upon conversion
of all the outstanding shares of Preferred Stock into Common Stock upon
consummation of this offering, Alcatel will beneficially own more than 5% of the
Company's outstanding Common Stock. Under agreements entered into in connection
with this purchase of Preferred Stock, the Company granted certain registration
rights to Alcatel with respect to sales of securities of the Company held by it.
See "Description of Capital Stock -- Registration Rights." Alcatel also agreed
to a "standstill" provision whereby Alcatel and any of its affiliates would not
acquire beneficial ownership of Common Stock or any securities convertible into,
or exchangeable or exercisable for, shares of Common Stock, that when added to
the Common Stock beneficially owned by Alcatel or its affiliates would exceed
19.9% of the then outstanding shares of Common Stock. In connection with this
investment, the Company and certain principal shareholders of the Company also
entered into a Shareholders' Agreement with Alcatel. Pursuant to this Agreement,
the Company agreed, among other things, to use all reasonable efforts to
nominate an Alcatel designee for election to the Company's Board of Directors
and certain principal shareholders of the Company agreed to vote all
beneficially owned shares in support of such designee's election to the
Company's Board of Directors. The Company and these principal shareholders also
agreed to give Alcatel prior notice in the event the Company plans to sell
certain assets or capital stock of the Company. Specifically, the Company and
such principal shareholders agreed to give Alcatel written and oral notice prior
to soliciting any proposal, or participating in any negotiations, regarding a
sale of any significant portion of the Company's assets or any sale of Common
Stock representing 5% or more of the Common Stock of the Company issued and
outstanding immediately prior to such sale. The Company and such principal
shareholders also agreed to promptly advise Alcatel of any request for
information or any proposal by a third party with respect to the foregoing.
These principal shareholders also granted to Alcatel the right to join in
certain sales of Common Stock held by such shareholders. Although Alcatel does
not have a right of first refusal with respect to sales of assets or issuances
of Common Stock, the foregoing provisions could have the effect of making it
more difficult for a third party to acquire the assets of the Company or a
majority of the outstanding voting stock of the Company. The Company also
granted to Alcatel the right to appoint an observer to attend meetings of the
Company's Board of Directors in the event a representative designated by Alcatel
is not then serving on the Company's Board of Directors. All rights and
obligations under the terms of the agreements with Alcatel (except registration
rights with respect to Alcatel's Common Stock) will terminate if Alcatel ceases
to own in the aggregate at least 3% of the Company's fully-diluted Common Stock.
In connection with this purchase of Preferred Stock, the Company and Alcatel
agreed to enter into a business relationship. See "Prospectus Summary -- Recent
Developments."
50
<PAGE> 51
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of Common Stock as of the date of this offering and as
adjusted to reflect the sale of the Common Stock offered hereby by (i) each
person who is known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors, (iii)
each of the Named Executive Officers, (iv) the Selling Shareholders and (v) all
directors and executive officers as a group. Unless otherwise indicated in the
footnotes to the table, each person or entity has sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
such person or entity:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING(1)
-------------------- SHARES BEING --------------------
NAMES OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ----------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Joseph M. Fox+........................... 1,226,667(2) 44.7% 323,000 886,667(3) 21.0%
E. Linwood Pearce+....................... 447,144(4) 16.2 75,000 372,144 8.8
Andrew B. Ferrentino+.................... 640,857(5) 23.3 150,000 490,857 11.6
Alcatel++................................ 500,000 18.2 -- 500,000 11.8
Kimberly E. Osgood+...................... 48,250(6) 1.5 10,000 38,250 *
David L. Kiker+.......................... 117,500(7) 4.5 20,000 97,500 2.3
J. Kelly Brown+.......................... 36,250(8) 1.3 8,000 28,250 *
Randall K. Maroney+...................... 66,250(9) 2.0 9,000 57,250 1.4
Richard H. Collard+...................... 37,500(10) 1.4 8,000 29,500 *
Duane A. Adams+.......................... -- -- -- -- --
Alan B. Salisbury+....................... -- -- -- -- --
All Executive Officers and Directors as a
group (11 persons)..................... 2,632,918 78.0 603,000 2,012,918 47.7
OTHER SELLING SHAREHOLDERS
- -----------------------------------------
Robert H. Krieble........................ 83,333 3.0% 28,000 55,333 1.3%
Robert H. Krieble Associates
1 Gold Street, #24 H
Hartford, CT 06103
J. William Middendorf.................... 50,000 1.8 17,000 33,000 *
565 West Main Road
Little Creek, RI 02837
James Reggia............................. 100,922 3.7 15,000 85,922 2.0
7238 Dockside Lane
Columbia, MD 21045
John J. Collins, Jr...................... 80,000(11) 2.9 20,000 60,000 1.4
24362 3 Widgeon Place
St. Michaels, MD 21663
William J. Fox........................... 20,000 * 7,000 13,000 *
174 R. Mystic Valley Parkway
Winchester, MA 01890
Paul D. Fox.............................. 20,000 * 5,000 15,000 *
7000 Tilden Lane
Rockville, MD 20852
Lucy E. Fox.............................. 20,000 * 5,000 15,000 *
7000 Tilden Lane
Rockville, MD 20852
</TABLE>
- ---------------
* Less than 1%
+ c/o Template Software, Inc., 45365 Vintage Park Plaza, Dulles, Virginia
20166.
++ 33 rue Emeriau, 75725 Paris Cedex 15, France.
51
<PAGE> 52
(1) The number of shares of Common Stock outstanding used in calculating the
percentage for each listed person (i) assumes conversion of all of the
Company's outstanding shares of Preferred Stock into shares of Common
Stock, and (ii) includes the shares of Common Stock underlying the options
held by such person or entity that are exercisable within 60 days of
December 31, 1996 but excludes shares of Common Stock underlying options
held by any other person.
(2) Includes 5,000 shares held by Mr. Fox's spouse and 120,000 shares held by
Mr. Fox's six children. Mr. Fox disclaims beneficial ownership of all
125,000 such shares. In the event that the Underwriters' over-allotment
option is exercised in full, Mr. Fox will sell an additional 48,450 shares
of Common Stock. In the event of such sale, Mr. Fox will beneficially own
838,217 shares, which will represent 18.5% of the outstanding Common Stock.
(3) Excludes 17,000 shares of Common Stock which certain of Mr. Fox's children
will sell in the offering.
(4) Includes 324,680 shares issuable upon the exercise of options exercisable
within 60 days of December 31, 1996 and 10,000 shares held by Mr. Pearce's
two children. Mr. Pearce disclaims beneficial ownership of all 10,000 such
shares. In the event that the Underwriters' over-allotment option is
exercised in full, Mr. Pearce will sell an additional 11,250 shares of
Common Stock. In the event of such sale, Mr. Pearce will beneficially own
360,894 shares, which will represent 8.0% of the outstanding Common Stock.
(5) Includes 30,000 shares held by Mr. Ferrentino's spouse and 25,000 shares
held by Mr. Ferrentino's brother, Peter S. Ferrentino, as trustee for the
benefit of Allison J. Ferrentino. Mr. Ferrentino disclaims beneficial
ownership of all 55,000 such shares. In the event that the Underwriters'
over-allotment option is exercised in full, Mr. Ferrentino will sell an
additional 22,500 shares of Common Stock. In the event of such sale, Mr.
Ferrentino will beneficially own 468,357 shares, which will represent 10.3%
of the outstanding Common Stock.
(6) Includes 46,500 shares issuable upon the exercise of options which have
fully vested and are exercisable within 60 days of December 31, 1996. In
the event that the Underwriters' over-allotment option is exercised in
full, Ms. Osgood will sell an additional 1,500 shares of Common Stock. In
the event of such sale, Ms. Osgood will beneficially own 36,750 shares,
which will represent less than 1% of the outstanding Common Stock.
(7) Includes 112,500 shares issuable upon the exercise of options which have
fully vested and are exercisable within 60 days of December 31, 1996. In
the event that the Underwriters' over-allotment option is exercised in
full, Mr. Kiker will sell an additional 3,000 shares of Common Stock. In
the event of such sale, Mr. Kiker will beneficially own 94,500 shares,
which will represent 2.1% of the outstanding Common Stock.
(8) Consists of shares issuable upon the exercise of options which have fully
vested and are exercisable within 60 days of December 31, 1996. In the
event that the Underwriters' over-allotment option is exercised in full,
Mr. Brown will sell an additional 1,200 shares of Common Stock. In the
event of such sale, Mr. Brown will beneficially own 27,050 shares, which
will represent less than 1% of the outstanding Common Stock.
(9) Consists of shares issuable upon the exercise of options which have fully
vested and are exercisable within 60 days of December 31, 1996. In the
event that the Underwriters' over-allotment option is exercised in full,
Mr. Maroney will sell an additional 1,350 shares of Common Stock. In the
event of such sale, Mr. Maroney will beneficially own 55,900 shares, which
will represent 1.2% of the outstanding Common Stock.
(10) Consists of shares issuable upon the exercise of options which have fully
vested and are exercisable within 60 days of December 31, 1996. In the
event that the Underwriters' over-allotment option is exercised in full,
Mr. Collard will sell an additional 1,200 shares of Common Stock. In the
event of such sale, Mr. Collard will beneficially own 29,500 shares, which
will represent less than 1% of the outstanding Common Stock.
(11) Consists of shares issuable upon the exercise of options which have fully
vested and are exercisable within 60 days of December 31, 1996. In the
event that the Underwriters' over-allotment option is exercised in full,
Mr. Collins will sell an additional 3,000 shares of Common Stock. In the
event of such sale, Mr. Collins will beneficially own 57,000 shares, which
will represent 1.3% of the outstanding Common Stock.
52
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
Upon consummation of the offering, the Company's authorized capital stock
will consist of 17,000,000 shares of Common Stock, par value $0.01 per share,
and 3,000,000 shares of preferred stock, par value $0.01 per share (the
"Preferred Stock") of which 4,222,008 shares of Common Stock and no shares of
Preferred Stock will be issued and outstanding. All of the issued and
outstanding shares of Common Stock will be fully paid and nonassessable.
The following summary description of the Company's capital stock does not
purport to be complete and is qualified in its entirety by this reference to the
Company's Articles and Bylaws, copies of which have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part.
RECAPITALIZATION
In connection with the Company's reincorporation in Virginia in October
1996, each share of the Company's previously outstanding Class A Common Stock
and Class B Common Stock was converted into one share of Common Stock of the
Company (the "Recapitalization").
COMMON STOCK
The holders of validly issued and outstanding shares of Common Stock are
entitled to one vote per share of record on all matters to be voted upon by
shareholders. At a meeting of shareholders at which a quorum is present, a
majority of the votes cast decides all questions, unless the matter is one upon
which a different vote is required by express provision of law or the Company's
Articles or Bylaws. There is no cumulative voting with respect to the election
of directors (or any other matter).
The holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities.
Subject to the rights of holders of Preferred Stock, if any, in the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to participate equally, share for share, in all assets
remaining after payment of liabilities.
Subject to the rights of holders of Preferred Stock, if any, the holders of
Common Stock are entitled to receive ratably such dividends as the Board of
Directors may declare out of funds legally available therefor, when and if so
declared. The payment by the Company of dividends, if any, rests within the
discretion of its Board of Directors and will depend upon the Company's results
of operations, financial condition and capital expenditure plans, as well as
other factors considered relevant by the Board of Directors. The Company has
entered into a bank credit agreement which includes financial covenants
restricting the payment of dividends. See "Dividend Policy."
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into shares of Common Stock. See Note 6 of Notes to
Consolidated Financial Statements. Following the conversion, the Company's
Articles of Incorporation will be amended and restated to delete all references
to the prior series of Preferred Stock and to authorize the Board of Directors
to issue up to 3,000,000 shares of Preferred Stock in one or more series and to
establish such relative voting, dividend, redemption, liquidation, conversion
and other powers, preferences, rights, qualifications, limitations and
restrictions as the Board of Directors may determine without further approval of
the shareholders of the Company. The issuance of Preferred Stock by the Board of
Directors could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a person or group to gain control of the Company.
The issuance of any series of Preferred Stock, and the relative powers,
preferences, rights, qualifications, limitations and restrictions of such
series, if and when established, will depend upon, among other things, the
53
<PAGE> 54
future capital needs of the Company, the then-existing market conditions and
other factors that, in the judgment of the Board of Directors, might warrant the
issuance of Preferred Stock. At the date of this Prospectus, there are no plans,
agreements or understandings relative to the issuance of any shares of Preferred
Stock.
REGISTRATION RIGHTS
Following the consummation of the offering, Alcatel will hold 500,000
shares of Common Stock issued upon conversion of the Preferred Stock and will be
entitled to certain rights with respect to the registration of such shares under
the Securities Act. Under the terms of the Registration Rights Agreement between
the Company and Alcatel, after the earlier of (i) the third anniversary of the
date of the Registration Rights Agreement or (ii) the first anniversary after
the effectiveness of this offering, Alcatel has the right to require the Company
to file a registration statement under the Securities Act in order to register
the sale of all or any part of its shares of Common Stock. See "Shares Eligible
For Future Sale." The Company may in certain circumstances defer such
registrations, and the underwriters with respect to such sale have the right,
subject to certain limitations, to limit the number of shares included in such
registrations. Further, Alcatel may require the Company to register the sale
from time to time of all or a portion of its shares on Form S-3, when such form
becomes available to the Company, subject to certain conditions and limitations.
In the event that the Company proposes to register the sale of any of its
securities under the Securities Act, or in connection with a public offering of
such securities solely for cash, the Company is required to promptly give
Alcatel written notice, at which point Alcatel will have twenty days to make a
written request of the Company to include Alcatel's shares of Common Stock in
such registration, subject to the underwriter's right to limit such shares
described above, and certain other limitations. Generally, the Company is
required to bear the expense of all such registrations. The Company intends to
file a registration statement under the Securities Act approximately 180 days
after the effective date of this offering covering the shares of Common Stock
reserved for issuance under the 1996 Equity Incentive Plan.
CERTAIN PROVISIONS OF VIRGINIA LAW, THE COMPANY'S ARTICLES OF INCORPORATION AND
BYLAWS AND CERTAIN AGREEMENTS
Certain provisions of the Virginia Stock Corporation Act of the
Commonwealth of Virginia, of the Company's Articles and Bylaws and in certain
agreements, summarized in the following paragraphs, may be considered to have an
anti-takeover effect and may delay, deter or prevent a tender offer, proxy
contest or other takeover attempt that a shareholder might consider to be in
such shareholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by shareholders.
Affiliated Transactions. The Virginia Affiliated Transactions statute
imposes restrictions on certain transactions between a public Virginia
corporation and a 10% beneficial shareholder of the corporation (the "Interested
Shareholder"). Under this statute, significant transactions (such as a merger, a
transfer to the Interested Shareholder of corporate assets worth more than 5% of
net worth, or a reclassification of securities having the effect of increasing
by 5% or more the corporation's outstanding voting shares held by any Interested
Shareholder) between the corporation and an Interested Shareholder must receive
the approval of both a majority of disinterested directors and the holders of
two-thirds of the corporation's voting shares (not including the Interested
Shareholder's shares). After an Interested Shareholder has held the stock for
three years, the transaction may proceed upon the approval of either the
disinterested directors or the holders of two-thirds of the voting shares or
upon compliance with certain statutory fair price provisions. The corporation
may avoid application of the statute if a majority of the disinterested
directors approves the initial 10% stock acquisition by the Interested
Shareholder. In addition, this statute does not apply to an Interested
Shareholder who has been such continuously since the date the corporation first
became subject to the statute because it had more than 300 shareholders of
record.
Special Meetings of Shareholders. The Company's Bylaws provide that
special meetings of shareholders may be called only by the Chairman, the
Vice-Chairman, the Chief Executive Officer or the President (if he is also the
Chief Executive Officer) or by a majority of the Board of Directors.
54
<PAGE> 55
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Company's Bylaws provide that shareholders seeking to bring
business before an annual meeting of shareholders, or to nominate candidates for
election as directors at an annual or a special meeting of shareholders, must
provide timely notice thereof in writing. To be timely, a shareholder's notice
must be delivered to, or mailed and received at, the principal executive office
of the Company, (i) in the case of an annual meeting that is called for a date
that is within 30 days before or after the anniversary date of the immediately
preceding annual meeting of shareholders, not less than 60 days nor more than 90
days prior to such anniversary date, and, (ii) in the case of an annual meeting
that is called for a date that is not within 30 days before or after the
anniversary date of the immediately preceding annual meeting, or in the case of
a special meeting of shareholders called for the purpose of electing directors,
not later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever occurs first. The Bylaws also specify certain
requirements for a shareholder's notice to be in proper written form. These
provisions may preclude some shareholders from making nominations for directors
at an annual or special meeting or from bringing other matters before the
shareholders at a meeting.
The Articles divide the Board of Directors of the Company into three
classes, each class to be as nearly equal in number of directors as possible. At
each annual meeting of shareholders, directors in each class will be elected for
three-year terms to succeed the directors of that class whose terms are
expiring. Mr. Fox and Dr. Salisbury are Class I directors whose terms of office
will expire in 1997. Mr. Ferrentino is a Class II director whose terms will
expire in 1998. Mr. Pearce and Dr. Adams are Class III directors whose term will
expire in 1999.
Certain Agreements. In connection with the purchase of Preferred Stock by
Alcatel in November 1996, the Company agreed to give Alcatel prior notice in the
event the Company plans to sell certain assets or capital stock of the Company.
See "Prospectus Summary -- Recent Developments" and "Certain Transactions."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is First Union
National Bank Shareholder Services.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and assuming no exercise of outstanding
options, the Company will have 4,222,008 shares of Common Stock outstanding,
based upon the number of shares outstanding as of December 31, 1996. The
2,100,000 shares sold in the offering will be freely tradeable without
restriction or further registration under the Securities Act, unless acquired by
an "affiliate" of the Company as that term is defined in Rule 144, which shares
will be subject to the resale limitations of Rule 144 described below.
Immediately prior to the completion of the offering, it is expected that
2,747,008 shares of Common Stock will be outstanding (based upon the number of
shares outstanding as of December 31, 1996), of which 700,000 shares will be
sold in this offering by the Selling Shareholders. Of the 2,047,008 currently
outstanding shares not being sold in this offering, 2,039,257 shares are subject
to agreements with the Underwriters under which such shares may not be offered,
sold or otherwise disposed of for a period of 180 days after the date of this
Prospectus without the prior written consent of Volpe, Welty & Company LLC. Of
the 8,751 shares not subject to such lock-up agreements: (i) 7,500 shares will
be eligible for sale without restriction in the public market pursuant to Rule
144(k), commencing immediately upon the date of this Prospectus; and (ii) the
remaining 1,251 shares will first become eligible for resale under Rule 144 in
September 1997 and August 1998.
In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned, for at least two years, shares privately acquired directly
or indirectly from the Company or from an affiliate of the Company, and persons
who are affiliates of the Company who have acquired the shares in registered
55
<PAGE> 56
transactions, will be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) 1% of the outstanding shares of
Common Stock (approximately 4,222 shares immediately after completion of the
offering); or (ii) the average weekly trading volume in the Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain requirements relating to the manner and notice of sale and
the availability of current public information about the Company.
The Company, each of its directors and officers, and certain other holders
(representing an aggregate of approximately 48.6%) of the Company's currently
outstanding securities (based upon the number of shares outstanding as of
December 31, 1996) and of the options exercisable by such persons within 60 days
of such date have agreed with the Underwriters not to offer, sell or otherwise
dispose of any shares of Common Stock or securities convertible into or
exercisable or exchangeable for such shares for a period of 180 days after the
date of this Prospectus without the prior written consent of Volpe, Welty &
Company LLC.
In addition, outstanding options to purchase 1,221,540 shares of Common
Stock were fully vested as of December 31, 1996, all of which are subject to
180-day lock-up agreements. After the expiration of such lock-up agreements,
these shares will become available for resale in the public market pursuant to
Rule 701.
Under Rule 701 of the Securities Act, certain persons who are issued shares
of Common Stock upon exercise of options or warrants granted pursuant to
employee benefit plans or consulting or advisory contracts relating to
compensation prior to the effective date of this offering are entitled to sell
such shares 90 days after the effective date of the offering in reliance on Rule
144, without compliance with the public information, volume limitation or notice
provisions of Rule 144. In addition, Alcatel is entitled to certain rights with
respect to the registration of the sale of its 500,000 shares of Common Stock
under the Securities Act beginning one year after the effective date of this
offering. Approximately 180 days after the date of this Prospectus, the Company
intends to file registration statements under the Securities Act to register the
issuance of Common Stock under the 1986 Incentive Stock Option Plan, the 1992
Incentive Stock Option Plans and the 1996 Equity Incentive Plan. After the
effective dates of such registration statements, shares issued under these plans
will be freely tradeable without restriction under the Securities Act, unless
acquired by affiliates of the Company.
In recent offerings in which it has served as lead manager of underwriters,
Volpe, Welty & Company LLC has consented to early releases from lock-up
agreements only in a limited number of circumstances, after considering all
circumstances that it deemed to be relevant. Volpe, Welty & Company LLC will,
however, have complete discretion in determining whether to consent to early
releases from the lock-up agreements delivered in connection with this offering,
and no assurance can be given that it will not consent to the early release of
all or a portion of the shares of Common Stock and options covered by such
lock-up agreements.
Prior to this offering, there has been no market for the Common Stock. No
predictions can be made with respect to the effect, if any, that public sales of
shares of the Common Stock or the availability of shares for sale will have on
the market price of the Common Stock after the completion of the offering. Sales
of substantial amounts of Common Stock in the public market following the
offering, or the perception that such sales may occur, could adversely affect
the market price of the Common Stock or the ability of the Company to raise
capital through sales of its equity securities. See "Risk Factors Shares
Eligible for Future Sale."
56
<PAGE> 57
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholders have agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of such Underwriters,
for whom Volpe, Welty & Company LLC and Piper Jaffray Inc. (together, the
"Representatives") are acting as representatives, has agreed severally to
purchase from the Company and the Selling Shareholders, the respective number of
shares of Common Stock set forth opposite its name below. The Underwriters are
committed to purchase and pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------------- ---------
<S> <C>
Volpe, Welty & Company LLC............................................... 540,000
Piper Jaffray Inc. ...................................................... 540,000
Bear, Stearns & Co. Inc. ................................................ 100,000
Donaldson, Lufkin & Jenrette Securities Corporation...................... 100,000
Hambrecht & Quist LLC.................................................... 100,000
Montgomery Securities.................................................... 100,000
Robertson, Stephens & Company LLC........................................ 100,000
Smith Barney Inc. ....................................................... 100,000
UBS Securities LLC....................................................... 100,000
Adams, Harkness & Hill, Inc. ............................................ 40,000
First Albany Corporation................................................. 40,000
Gerard Klauer Mattison & Co., LLC........................................ 40,000
Legg Mason Wood Walker, Incorporated..................................... 40,000
Sanders Morris Mundy Inc. ............................................... 40,000
Sands Brothers & Co., Ltd. .............................................. 40,000
Soundview Financial Group................................................ 40,000
Wheat First Butcher Singer............................................... 40,000
---------
Total.......................................................... 2,100,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $0.67 per share, of which $0.10 may be reallocated to other dealers. After
the initial public offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such reduction
shall change the amount of proceeds to be received by the Company and the
Selling Shareholders as set forth on the cover page of this Prospectus.
The Company and the Selling Shareholders have granted the Underwriters an
option for thirty days after the date of this Prospectus to purchase, at the
initial public offering price, less the underwriting discounts and commissions
as set forth on the cover page of this Prospectus, up to 315,000 additional
shares of Common Stock at the same price per share as the Company and the
Selling Shareholders receive for the 2,100,000 shares of Common Stock offered
hereby, solely to cover over-allotments, if any. If the Underwriters exercise
their over-allotment option, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares of Common Stock to be purchased by each of them, as shown
in the foregoing table, bears to the 2,100,000 shares of Common Stock offered
hereby. The Underwriters may exercise such option only to cover the
over-allotments in connection with the sale of the 2,100,000 shares of Common
Stock offered hereby.
Each of the Company's directors and officers, and certain other employees
and security holders of the Company, have agreed not to offer, sell, contract to
sell or otherwise dispose of Common Stock or securities convertible into or
exchangeable for, or any rights to purchase or acquire, Common Stock for a
period of 180 days following the date of this Prospectus, without the prior
written consent of Volpe, Welty & Company LLC. The Company also has agreed not
to offer, sell, contract to sell or otherwise dispose of any shares of
57
<PAGE> 58
Common Stock or any securities convertible into or exchangeable for, or any
rights to purchase or acquire, Common Stock for a period of 180 days following
the date of this Prospectus without the prior written consent of Volpe, Welty &
Company LLC, except for the granting of options or the issuance of stock
pursuant to the Company's existing stock option plans. Volpe, Welty & Company
LLC, in its discretion, may waive the foregoing restrictions in whole or in
part, with or without a public announcement of such action. In recent offerings
in which it has served as lead manager of underwriters, Volpe, Welty & Company
LLC has consented to early releases from lock-up agreements only in a limited
number of circumstances, after considering all circumstances that it deemed to
be relevant. Volpe, Welty & Company LLC will, however, have complete discretion
in determining whether to consent to early releases from the lock-up agreements
delivered in connection with this offering, and no assurance can be given that
it will not consent to the early release of all or a portion of the shares of
Common Stock and options covered by such lock-up agreements.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which the Underwriters have
discretionary authority.
Prior to the offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock was determined by
negotiations between the Company, the Selling Shareholders and the
Representatives. Among the factors considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market conditions,
were the Company's historical performance, estimates of the business potential
and earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuations of
companies in related businesses.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
the offering, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Hunton & Williams, McLean, Virginia. Certain legal matters relating
to this offering will be passed upon for the Underwriters by Goodwin, Procter &
Hoar LLP, Boston, Massachusetts.
EXPERTS
The consolidated balance sheets of the Company as of November 30, 1995 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended November
30, 1996, and the related financial statement schedule included in this
Registration Statement have been included herein in reliance upon the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement"), pursuant to the provisions of the Securities Act, and the rules and
regulations promulgated thereunder, for the registration of the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and financial statements
and notes filed as a part thereof. Statements made in this Prospectus concerning
the contents of any contract or other document are not necessarily complete.
With respect to each such contract or other document filed with the Commission
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each
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<PAGE> 59
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits and schedules thereto filed by the
Company with the Commission may be inspected at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
may be obtained from the Public Reference Section of the Commission, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a website on the Internet that contains the Registration
Statement, including the exhibits thereto and financial statements and notes
filed as a part thereof; the address of such site is http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent public
accountants and quarterly reports containing unaudited consolidated financial
information for the first three quarters of each fiscal year.
59
<PAGE> 60
GLOSSARY
<TABLE>
<S> <C>
Client-server: A specialized distributed computing architecture, consisting of
client applications and related server applications in which
the client applications request and receive information and
computing services from the server applications.
Distributed computing: The process by which data and applications are distributed to
minicomputers, workstations and personal computers within a
network rather than maintained on a centralized main-frame.
Graphical user interface: A means of communicating with a computer by manipulating icons
and windows rather than using character-oriented displays.
Internet: An open global network of interconnected commercial,
educational and governmental computer networks which utilize a
common communications protocol, TCP/IP.
Intranet: An organization's private network which utilizes Internet data
formats and communications protocols and which may use the
Internet's facilities as the backbone for network
communications.
Network Management Forum: A consortium of over 180 companies in the telecommunications
industry addressing standards and other issues for that
industry.
Object: A small piece of code that encapsulates the data and logic
associated with some function or service, such as formatting
the current date.
Object frameworks: Collections of related objects that perform some function or
service on a larger scale such as providing the mechanism for
all graphic displays for an application.
Object-oriented Software development using methods and languages that support
programming: and utilize objects as the component building block of the
software.
Peer-to-peer: A specialized distributed processing architecture where the
information and computing capabilities of each computer on the
network can be shared by the other computers on the network.
Protocol: A formal description of message formats and the rules two or
more machines must follow in order to exchange such messages.
RDBMS: Relational database management system.
Reuse: The reuse of software code principally through the use of
objects and object frameworks.
TCP/IP: Transmission Control Protocol/Internet Protocol. A compilation
of network-and transport-level protocols that allow computers
with different architectures and operating system software to
communicate with other computers on the Internet.
Template: A collection of integrated object frameworks which represents a
largely completed application.
Visual development: Creating software using visual editors instead of programming
at a detailed language level using line-by-line programming.
Windows: A computer operating system developed by Microsoft Corporation
that provides a graphical user interface and multitasking
capabilities.
World Wide Web: A network of computer servers that uses a special
communications protocol to link different servers throughout
the Internet and permits communication of graphics, video and
sound.
</TABLE>
60
<PAGE> 61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets as of November 30, 1995 and 1996.......................... F-3
Consolidated Statements of Operations for the Years Ended November 30, 1994, 1995 and
1996................................................................................ F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years
Ended November 30, 1994, 1995 and 1996.............................................. F-5
Consolidated Statements of Cash Flows for the Years Ended November 30, 1994, 1995 and
1996................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Template Software, Inc.
We have audited the consolidated balance sheets of Template Software, Inc.
and its subsidiaries (the "Company") as of November 30, 1995 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended November 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of November 30, 1995 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
November 30, 1996, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
McLean, Virginia
January 2, 1997
F-2
<PAGE> 63
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> PRO FORMA
NOVEMBER 30, NOVEMBER 30,
------------------------- 1996
1995 1996 (NOTE 2)
---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 62,784 $ 8,397,160 $ 8,397,160
Accounts receivable, net....................................................... 2,178,669 2,886,832 2,886,832
Deferred income taxes.......................................................... 339,792 373,957 373,957
Prepaid expenses............................................................... 117,232 503,762 503,762
---------- ----------- ------------
Total current assets......................................................... 2,698,477 12,161,711 12,161,711
---------- ----------- ------------
Property and equipment, net...................................................... 141,360 923,684 923,684
Software development costs, net.................................................. 575,051 718,094 718,094
Other assets..................................................................... 46,400 181,781 181,781
---------- ----------- ------------
Total assets............................................................. $3,461,288 $13,985,270 $13,985,270
========= ========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 414,053 $ 1,209,531 $ 1,209,531
Accrued expenses............................................................... 640,548 765,977 765,977
Revolving credit agreement..................................................... 161,330 -- --
Current portion of long-term debt.............................................. 355,993 91,667 91,667
Capital lease obligations...................................................... 5,262 49,759 49,759
Income taxes payable........................................................... 74,289 566,787 566,787
Deferred income................................................................ 573,944 469,074 469,074
---------- ----------- ------------
Total current liabilities.................................................... 2,225,419 3,152,795 3,152,795
---------- ----------- ------------
Long-term liabilities:
Long-term debt, net of current portion......................................... -- 175,694 175,694
Capital lease obligations, noncurrent.......................................... -- 181,249 181,249
Deferred income taxes.......................................................... 185,873 281,448 281,448
Other liabilities.............................................................. 148,981 151,253 151,253
---------- ----------- ------------
Total liabilities........................................................ 2,560,273 3,942,439 3,942,439
---------- ----------- ------------
Commitments and contingencies (Note 9)
Shareholders' equity:
Convertible Preferred Stock, $1.9694 par value; 450,000 shares authorized,
195,847 shares and no shares issued and outstanding, as of November 30, 1995
and 1996, respectively; no shares (unaudited) outstanding, pro forma......... 385,701 -- --
Series A Convertible Preferred Stock; $0.01 par value; 3,000,000 shares
authorized; no shares and 500,000 shares issued and outstanding as of
November 30, 1995 and 1996, respectively; no shares (unaudited) issued and
outstanding, pro forma (liquidation preference of $8,000,000 at November 30,
1996)........................................................................ 5,000 --
Class A Common Stock, $0.01 par value; 5,000,000 shares authorized; 1,808,924
shares and no shares issued as of November 30, 1995 and 1996, respectively;
1,759,988 shares and no shares outstanding, as of November 30, 1995 and 1996,
respectively................................................................. 18,089 -- --
Class B Common Stock, $0.01 par value; 5,000,000 shares authorized; 423,006
shares and no shares issued and outstanding, as of November 30, 1995 and
1996, respectively........................................................... 4,230 -- --
Common Stock, $0.01 par value; 17,000,000 shares authorized; no shares and
2,247,008 shares issued and outstanding, as of November 30, 1995 and 1996,
respectively; 2,747,008 issued and outstanding (unaudited) shares pro
forma........................................................................ 22,470 27,470
Additional paid-in capital..................................................... 969,491 9,108,988 9,108,988
Retained earnings (Accumulated deficit)........................................ (138,695) 906,373 906,373
Less cost of treasury stock; Convertible Preferred Stock, 195,847 shares and no
shares; as of November 30, 1995 and 1996; no shares pro forma; Class A Common
Stock, 48,936 shares, and no shares as of November 30, 1995 and 1996; no
shares pro forma............................................................. (337,801) -- --
---------- ----------- ------------
Total shareholders' equity............................................... 901,015 10,042,831 10,042,831
---------- ----------- ------------
Total liabilities and shareholders' equity............................. $3,461,288 $13,985,270 $13,985,270
========= ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 64
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Products.............................................. $2,893,033 $2,386,112 $ 1,918,568
Services.............................................. 3,419,880 4,704,994 11,611,543
---------- ---------- -----------
Total revenues..................................... 6,312,913 7,091,106 13,530,111
---------- ---------- -----------
Cost of revenues:
Products.............................................. 977,795 896,297 782,804
Services.............................................. 1,873,593 2,591,839 6,245,888
---------- ---------- -----------
Total cost of revenues............................. 2,851,388 3,488,136 7,028,692
---------- ---------- -----------
Gross profit............................................ 3,461,525 3,602,970 6,501,419
---------- ---------- -----------
Operating expenses:
Selling and marketing................................. 1,510,071 1,180,810 2,362,648
Product development................................... 923,841 271,620 966,088
General and administrative............................ 1,445,976 1,479,385 1,473,062
---------- ---------- -----------
Total operating expenses........................... 3,879,888 2,931,815 4,801,798
---------- ---------- -----------
Income (loss) from operations........................... (418,363) 671,155 1,699,621
Interest expense...................................... 74,924 107,450 43,272
Other income.......................................... -- 676 33,221
---------- ---------- -----------
Net income (loss) before income taxes................... (493,287) 564,381 1,689,570
Income tax benefit (provision).......................... 217,798 (237,289) (644,502)
---------- ---------- -----------
Net income (loss)....................................... $ (275,489) $ 327,092 $ 1,045,068
========= ========= ==========
Earnings (loss) per common share........................ $ (0.09) $ 0.07 $ 0.23
========= ========= ==========
Weighted average number of common shares outstanding.... 3,186,331 4,655,824 4,643,919
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 65
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
--------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Balance, November 30,
1993...................... 232,403 $ 457,694 -- $ --
Issuance of Class B Common
Stock..................... -- -- -- --
Net loss................... -- -- -- --
-------- --------- -------- --------
Balance, November 30,
1994...................... 232,403 457,694 -- --
Retirement of stock held in
treasury.................. (36,556) (71,993) -- --
Issuance of Class B Common
Stock..................... -- -- -- --
Net income................. -- -- -- --
-------- --------- -------- --------
Balance, November 30,
1995...................... 195,847 385,701 -- --
Retirement of stock held in
treasury.................. (195,847) (385,701) -- --
Issuance of Class B Common
Stock..................... -- -- -- --
Issuance of Convertible
Preferred Stock Series
A......................... -- -- 500,000 5,000
Exchange of Class A and
Class B Common Stock...... -- -- -- --
Net income.................
-------- --------- -------- --------
Balance, November 30,
1996...................... -- -- 500,000 5,000
Pro forma conversion of
Series A Convertible
Preferred Stock
(unaudited)............... -- -- (500,000) (5,000)
-------- --------- -------- --------
Pro forma balance,
November 30, 1996
(unaudited)............... -- $ -- -- $ --
========== =========== ========== ==========
<CAPTION>
CLASS B COMMON
CLASS A COMMON STOCK STOCK COMMON STOCK
---------------------- ------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 30,
1993...................... 1,818,064 $ 18,181 421,755 $ 4,218 -- $ --
Issuance of Class B Common
Stock..................... -- -- 251 2 -- --
Net loss................... -- -- -- -- -- --
---------- -------- -------- ------- --------- -------
Balance, November 30,
1994...................... 1,818,064 18,181 422,006 4,220 -- --
Retirement of stock held in
treasury.................. (9,140) (92) -- -- -- --
Issuance of Class B Common
Stock..................... -- -- 1,000 10 -- --
Net income................. -- -- -- -- -- --
---------- -------- -------- ------- --------- -------
Balance, November 30,
1995...................... 1,808,924 18,089 423,006 4,230 -- --
Retirement of stock held in
treasury.................. (48,936) (489) -- -- -- --
Issuance of Class B Common
Stock..................... -- -- 64,014 640 -- --
Issuance of Convertible
Preferred Stock Series
A......................... -- -- -- -- -- --
Exchange of Class A and
Class B Common Stock...... (1,759,988) (17,600) (487,020) (4,870) 2,247,008 22,470
Net income.................
---------- -------- -------- ------- --------- -------
Balance, November 30,
1996...................... -- -- -- -- 2,247,008 22,470
Pro forma conversion of
Series A Convertible
Preferred Stock
(unaudited)............... -- -- -- -- 500,000 5,000
---------- -------- -------- ------- --------- -------
Pro forma balance,
November 30, 1996
(unaudited)............... -- $ -- -- $ -- 2,747,008 $27,470
=========== ========== ========== ======== ========== ========
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TREASURY
PAID-IN (ACCUMULATED STOCK
CAPITAL DEFICIT) AT COST TOTAL
----------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Balance, November 30,
1993...................... $ 958,000 $ (190,298) $(400,860) $ 846,935
Issuance of Class B Common
Stock..................... 495 -- -- 497
Net loss................... -- (275,489) -- (275,489)
----------- ------------ --------- -----------
Balance, November 30,
1994...................... 958,495 (465,787) (400,860) 571,943
Retirement of stock held in
treasury.................. 9,026 -- 63,059 --
Issuance of Class B Common
Stock..................... 1,970 -- -- 1,980
Net income................. -- 327,092 -- 327,092
----------- ------------ --------- -----------
Balance, November 30,
1995...................... 969,491 (138,695) (337,801) 901,015
Retirement of stock held in
treasury.................. 48,389 -- 337,801 --
Issuance of Class B Common
Stock..................... 96,108 -- -- 96,748
Issuance of Convertible
Preferred Stock Series
A......................... 7,995,000 -- -- 8,000,000
Exchange of Class A and
Class B Common Stock...... -- -- -- --
Net income................. 1,045,068 1,045,068
----------- ------------ --------- -----------
Balance, November 30,
1996...................... 9,108,988 906,373 -- 10,042,831
Pro forma conversion of
Series A Convertible
Preferred Stock
(unaudited)............... -- -- -- --
----------- ------------ --------- -----------
Pro forma balance,
November 30, 1996
(unaudited)............... $ 9,108,988 $ 906,373 $ -- $10,042,831
=========== ============== =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 66
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $(275,489) $ 327,092 $ 1,045,068
Adjustments to reconcile net income (loss) to net cash and cash
equivalents provided by operating activities:
Depreciation...................................................... 128,200 92,555 117,121
Amortization...................................................... 570,401 438,871 252,260
Deferred rent amortization........................................ 70,962 (169,337) 2,272
Bad debt expense.................................................. 181,223 183,758 --
Deferred tax benefit (provision).................................. (220,112) 138,887 61,410
Changes in assets and liabilities:
Accounts receivable............................................ (140,044) (655,280) (708,163)
Prepaid expenses and other..................................... 53,658 (40,436) (386,530)
Other assets................................................... (5,945) (2,401) (135,381)
Accounts payable and accrued liabilities....................... 41,856 280,725 920,907
Income taxes payable........................................... (394) 74,289 492,498
Deferred income................................................ 130,582 133,844 (104,870)
--------- --------- -----------
Net cash provided by operating activities......................... 534,898 802,567 1,556,592
--------- --------- -----------
Cash flows from investing activities:
Capital expenditures.................................................. (41,465) (69,700) (652,359)
Capitalization of software development costs.......................... (586,157) (294,042) (395,303)
--------- --------- -----------
Net cash used in investing activities............................. (627,622) (363,742) (1,047,662)
--------- --------- -----------
Cash flows from financing activities:
Proceeds from:
Revolving credit facility, net...................................... 103,752 -- --
Note payable........................................................ -- 24,240 275,000
Issuance of capital stock........................................... 497 1,980 8,096,748
Principal payments on:
Revolving credit facility, net...................................... -- (337,312) (161,330)
Note payable........................................................ -- (69,107) (363,632)
Capital lease obligations........................................... (21,607) (11,524) (21,340)
--------- --------- -----------
Net cash provided by (used in) financing activities............... 82,642 (391,723) 7,825,446
--------- --------- -----------
Net increase (decrease) in cash......................................... (10,082) 47,102 8,334,376
Cash and cash equivalents at beginning of period........................ 25,764 15,682 62,784
--------- --------- -----------
Cash and cash equivalents at end of period.............................. $ 15,682 $ 62,784 $ 8,397,160
========== ========== ============
Supplemental cash flow disclosures:
Cash paid for interest................................................ $ 72,179 $ 107,557 $ 46,668
========== ========== ============
Cash paid for income taxes............................................ $ -- $ 24,113 $ 90,594
========== ========== ============
Noncash investing and financing activities:
Retirement of treasury stock:
Class A Common Stock................................................ $ -- $ 12,612 $ 67,560
========== ========== ============
Preferred Stock..................................................... $ -- $ 50,447 $ 270,241
========== ========== ============
Property and equipment acquired through capital leases................ $ -- $ -- $ 247,086
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 67
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 large-scale, distributed computing
systems through its reusable software templates, robust software development
environment and its staff of software development professionals. The Company's
solutions are targeted at large-scale, mission-critical applications, such as
air traffic control, securities trading, telecommunications service management,
aircraft maintenance scheduling and network monitoring systems.
The Company provides its products and services to federal government
agencies and commercial clients both domestically and abroad. Accordingly, the
Company's revenues are generated as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal government agencies................................ 31% 28% 20%
Domestic................................................... 56% 68% 65%
Foreign.................................................... 13% 4% 15%
</TABLE>
Recapitalization of Common Stock
The Company, formerly a Maryland corporation, elected to change its capital
structure in October 1996, and reincorporate 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 non-convertible preferred stock ("Preferred Stock").
Registration statement
In August 1996, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission for the
initial public offering of shares of the Company's Common Stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Template
Software, Inc. and its wholly-owned subsidiaries ("Subsidiaries"), Template
Software UK Limited and Template Software Limited. The Subsidiaries were
organized in the United Kingdom on November 22, 1994 to market the Company's
products and services in the United Kingdom. All material intercompany accounts
and transactions have been eliminated in consolidation.
Pro forma financial information
Unaudited pro forma financial information gives effect to the conversion of
500,000 shares of Series A Convertible Preferred Stock issued in November 1996
at $16.00 per share into an equal amount of shares of Common Stock (see Note 6).
F-7
<PAGE> 68
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue recognition
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. Product license revenues are
recognized upon acceptance of the software by the customer unless the Company
has significant future obligations to the customer, in which case revenues are
recognized when such obligations are satisfied. Insignificant vendor obligations
and service revenues obligations are accrued upon acceptance of the product by
the customer. Service revenues includes consulting, product support and
maintenance and training. The Company defers and recognizes product support and
maintenance revenue 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-fixed-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.
Software development costs
The Company capitalizes the direct costs and allocated overhead 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, 1995
and 1996 are presented net of accumulated amortization of $2,754,781 and
$3,007,041, respectively. Amortization expense related to software development
costs was $570,401, $438,871, and $252,260 respectively for the years ended
November 30, 1994, 1995 and 1996.
Earnings per share
Earnings per share is computed on a primary and fully-diluted basis using
the weighted average number of shares of Common Stock, assuming conversion of
dilutive common stock equivalent shares from common stock options. Pursuant to
the Securities and Exchange Commission's Staff Accounting Bulletin No. 83,
common stock and common stock equivalent shares issued by the Company at prices
below the public offering price during the 12 month period prior to the proposed
offering date and the conversion of 500,000 shares of Preferred Stock that were
issued in November 1996 into an equal number of shares of Common Stock (see Note
6), have been included in the calculation of common and common stock equivalent
shares as if they were outstanding for all periods presented. Stock options
granted by the Company have not been included in the calculation of earnings per
share for the year ended November 30, 1994 because such items were antidilutive.
F-8
<PAGE> 69
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of each balance sheet date. Revenue and
expense accounts of these operations are translated at average exchange rates
prevailing during the month the transaction occur. Translation and transaction
gains and losses are immaterial for all periods presented.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to five years. 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
expenses when incurred, and the cost of significant additions and improvements
is capitalized.
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 November 30, 1996, the Company has not experienced any losses on these
investments.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash equivalents 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, 1994, 1995 and 1996, revenues from federal
government agencies represent 31%, and 28%, and 20%, 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) during the year
ended November 30, 1996 and one customer (11% from Customer C) during the year
ended November 30, 1995 that accounted for more than 10% of total consolidated
revenues. No customers accounted for more than 10% of total consolidated
revenues during the year ended November 30, 1994.
As of November 30, 1995 and 1996, accounts receivable from federal
government agencies represent 30% and 26%, respectively, of total consolidated
accounts receivable. With the exception of federal government
F-9
<PAGE> 70
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
agencies, there were two customers at November 30, 1995 and three customers at
November 30, 1996 that accounted for 34% and 48%, respectively of total
consolidated accounts receivable.
Fair value of financial instruments
During 1995, the Company adopted Statement of Financial Accounting
Standards No. 107, "Disclosure About Fair Value of Financial Instruments." The
company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents, accounts receivable, accounts
payable and accrued expenses, and obligations under capital leases approximate
fair value due to the relatively short maturity of these instruments. 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.
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.
Reclassifications
Certain reclassifications have been made in the 1995 financial statements
to conform to the 1996 financial statement presentation.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Government:
Billed..................................................... $ 393,640 $ 660,826
Unbilled................................................... 209,568 13,341
Retainage.................................................. 58,920 80,542
---------- ----------
662,128 754,709
---------- ----------
Domestic:
Billed..................................................... 1,239,580 1,901,179
Unbilled................................................... -- 24,376
Other...................................................... 8,395 --
---------- ----------
1,247,975 1,925,555
---------- ----------
Foreign:
Billed..................................................... 408,202 368,883
Unbilled................................................... 44,122 21,443
---------- ----------
452,324 390,326
---------- ----------
Total................................................... 2,362,427 3,070,590
Less: allowance for doubtful accounts........................ (183,758) (183,758)
---------- ----------
$2,178,669 $2,886,832
========== ==========
</TABLE>
F-10
<PAGE> 71
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
-----------------------
1995 1996
---------- ---------
<S> <C> <C>
Data processing equipment.................................... $ 382,861 $ 498,783
Office furniture and equipment............................... 404,371 857,268
Leasehold improvements....................................... 62,326 223,747
---------- ---------
849,558 1,579,798
Less: accumulated depreciation (708,198) (656,114)
---------- ---------
$ 141,360 $ 923,684
========== =========
</TABLE>
5. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revolving credit facility.................................... $ 161,330 $ --
========= =========
Subordinated note payable.................................... $ 337,801 $ --
Term Loan.................................................... -- 267,361
Note payable -- officer (see Note 12)........................ 18,192 --
---------- ----------
Total........................................................ 355,993 267,361
Less current portion......................................... (355,993) (91,667)
---------- ----------
Long-term portion $ -- $ 175,694
========== ==========
</TABLE>
Revolving credit facility
The Company has a revolving credit facility (the "Facility") pursuant to a
Loan and Security Agreement, as amended in October 1996 (the "Loan Agreement")
with a commercial bank.
As of November 30, 1996, availability under the Facility was equal to the
lesser of $3,000,000 or a maximum amount, as defined in the Loan Agreement.
Borrowings under the Facility bear interest at the prime rate and are
collateralized up to $2,000,000 by substantially all of the Company's assets. In
addition, the restructured Facility provides for the issuance of letters of
credit by the bank on the Company's behalf up to the aggregate face amount of
$300,000. Currently, the Company has an outstanding letter of credit of $300,000
related to the noncancelable operating lease for its new office space (see Note
9). The Facility expires on April 30, 1998.
The Facility 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, 1995 and 1996, and for certain compliance periods during the three
years ended November 30, 1996, the Company was not in compliance with certain of
these covenants for which waivers were obtained. In October 1996, in connection
with the restructuring of the Facility, the financial covenant for the ratio of
total liabilities to tangible net worth was removed.
F-11
<PAGE> 72
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT (CONTINUED)
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 from a commercial bank (the "Term
Loan"). The Term Loan bears interest at the prime rate plus 1/4% (8.50% at
November 30, 1996) and requires monthly principal payments of $7,639, beginning
in November 1996.
6. CAPITAL STOCK
As of November 30, 1996, the Company's authorized capital stock consisted
of 17,000,000 shares of $0.01 par value Common Stock and 3,000,000 shares of
$0.01 par value Preferred Stock. The preferences, limitations and relative
rights of the Preferred Stock, which is issuable in series, will be determined
by the Board of Directors upon designation (see Note 1).
Preferred Stock
In November 1996, the Company designated 500,000 shares of Series A
Convertible Preferred Stock ("Series A Stock") which were issued to a subsidiary
of Alcatel Alsthom Compagnie Generale d'Electricite S.A., a worldwide supplier
of high technology systems in the telecommunications, energy and transportation
industries, for $16.00 per share. These shares are automatically convertible
into Common Stock upon consummation of a Qualifying Public Offering (as defined
in the Company's Articles of Incorporation). Each share of Series A Stock will
initially convert into one share of Common Stock and such conversion ratio shall
be subject to adjustment from time to time for issuances by the Company at a
price per share of less than $13.00. The Series A Stock contains certain
registration rights with respect to the shares of Common Stock received upon
conversion.
Series A Stock is eligible for dividends, if and when declared by the Board
of Directors, and is entitled to the number of votes equal to the number of full
shares of Common Stock that such shares could be converted. The liquidation
price per share for Series A Stock is equal to $16 per share, plus any unpaid
dividends, subject to adjustment in the event of any recapitalization affecting
such shares. In the event of liquidation, dissolution or winding up of the
Company, as defined in the Company's Articles of Incorporation, the holders of
Series A Stock shall be entitled to receive, prior to any distribution of assets
to the common shareholders, the liquidation price for each outstanding share
plus all declared but unpaid dividends, if any.
7. STOCK OPTION PLANS
Under the Company's 1992 Incentive Stock Option Plans (the "1992 ISO
Plans") and 1992 Non-Statutory Stock Option Plan (the "Non-Statutory Plan"),
2,180,915 shares have been reserved for issuance upon exercise of options
granted to employees of the Company (collectively, the "1992 Plans"). The 1992
Plans replace the Company's former 1986 Incentive Stock Option Plan and the 1984
Incentive Stock Option Plan and accordingly, no further grants may be made under
these plans.
F-12
<PAGE> 73
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION PLANS (CONTINUED)
The Board of Directors administers the 1992 Plans and determines the price
and other terms upon which awards shall be made. The 1992 ISO Plans consist of a
separate plan that provides for the grant of options to acquire shares of the
Company's former Class A Common Stock and a separate plan that provides for the
grant of options to acquire shares of the Company's former Class B Common Stock
(see Note 1). The Non-Statutory Plan provides for the grant of nonqualified
options to certain key employees of the Company's former Class A Common Stock.
All outstanding stock options were exchanged on a one-for-one basis for options
to purchase the newly authorized Common Stock in connection with the Company's
Recapitalization in October 1996 (see Note 1).
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. The 1996 Equity Plan will
serve as successor to the 1992 ISO Plan and will reserve an additional 1,000,000
shares of Common Stock for issuance.
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
approximately 1,175,040 were vested and exercisable and 1,000,000 were available
for future grant at November 30, 1996.
Stock option activity for the three years ended November 30, 1996 is
summarized as follows:
<TABLE>
<CAPTION>
1984 INCENTIVE 1986 INCENTIVE 1992 INCENTIVE OPTION PRICE
STOCK PLAN STOCK PLAN STOCK PLANS TOTAL PER SHARE
-------------- -------------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Outstanding, November 30, 1993... 237,255 158,000 694,031 1,089,286 $1.38-$1.98
Granted........................ -- -- 231,500 231,500 $1.98
Exercised...................... -- (251) -- (251) $1.98
Forfeited...................... (17,800) -- -- (17,800) $1.98
-------------- -------------- -------------- ---------
Outstanding, November 30, 1994... 219,455 157,749 925,531 1,302,735 $1.38-$1.98
Granted........................ -- -- 460,835 460,835 $1.98
Exercised...................... -- (1,000) -- (1,000) $1.98
Forfeited...................... (99,335) -- -- (99,335) $1.98
-------------- -------------- -------------- ---------
Outstanding, November 30, 1995... 120,120 156,749 1,386,366 1,663,235 $1.38-$1.98
Granted........................ -- -- 618,300 618,300 $1.98-$6.00
Exercised...................... (14,014) -- (50,000) (64,014) $1.38-$1.98
Forfeited...................... (13,106) -- (23,500) (36,606) $1.98
-------------- -------------- -------------- ---------
Outstanding, November 30, 1996... 93,000 156,749 1,931,166 2,180,915 $1.38-$6.00
========== ========== ========== ========
</TABLE>
In December 1996, the Board of Directors granted 82,500 options to purchase
shares of the Company's Common Stock under the 1996 Equity Plan at an exercise
price of $16.00.
The fair value of the Company's Common Stock was determined through an
independent valuation. The fair value of the Company's Common Stock was
confirmed at $2.07, as of November 30, 1995, and ranged from $3.34 to $7.80
during the year ended December 31, 1996. Accordingly, the Company calculated
deferred compensation expense of $31,395 and $1,603,132, respectively, related
to certain options granted during the year ended November 30, 1995 and 1996. The
Company will recognize compensation expense over the vesting period of those
stock options. However, the Company did not record any adjustments for deferred
compensation expense since it will not have a material effect on total
shareholders' equity as of November 30, 1995 and 1996.
F-13
<PAGE> 74
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTION PLANS (CONTINUED)
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 will be
required to disclose the effects of this pronouncement on a pro forma basis
beginning in fiscal 1997.
8. INCOME TAXES
Foreign (loss) income before income taxes was $112,217 and $(13,819) for
the years ended November 30, 1995 and 1996.
The benefit (provision) for income taxes for the years ended November 30,
1994, 1995 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
----------------------------------
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Current:
Federal........................................... $ -- $ (88,160) $(485,853)
State............................................. (2,314) (10,242) (97,239)
-------- --------- ---------
(2,314) (98,402) (583,092)
-------- --------- ---------
Deferred:
Federal........................................... 197,150 (157,609) (54,670)
State............................................. 22,962 (18,310) (2,179)
Foreign........................................... -- 37,032 (4,561)
-------- --------- ---------
220,112 (138,887) (61,410)
-------- --------- ---------
Total benefit (provision)................. $217,798 $(237,289) $(644,502)
======== ========= =========
</TABLE>
The source and tax effects of the temporary differences giving rise to the
Company's net deferred tax assets (liabilities) at November 30, 1995 and
November 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
----------------------
1995 1996
--------- ---------
<S> <C> <C>
Capitalized software.......................................... $(218,233) $(272,517)
Deferred revenue.............................................. 150,484 176,742
Allowance for doubtful accounts............................... 69,736 69,736
Accrued liabilities........................................... 119,572 127,479
Other......................................................... (40,579) (41,402)
General business credit carryforwards......................... 35,907 --
Net operating loss carryforward............................... 37,032 32,471
--------- ---------
Net deferred tax assets....................................... $ 153,919 $ 92,509
========= =========
</TABLE>
The Company has determined that a valuation allowance is not necessary due
to the existence of estimated future taxable income and the reversal of existing
temporary differences.
As of November 30, 1994 the Company had net operating loss carryforwards
from its U.S. operations of $287,583 which were fully utilized to offset current
taxes payable during the year ended November 30, 1995. As of November 30, 1994
and 1995, the Company had general business credits of $180,948 and $35,907,
F-14
<PAGE> 75
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
respectively, of which $145,041 and $35,907, respectively, were utilized to
offset current taxes payable during the years ended November 30, 1995 and 1996.
In addition, as of November 30, 1995 and 1996 the Company had $112,218 and
$98,397, respectively, of net operating loss carryforwards related to its
foreign operations that may only be used to offset foreign current taxes
payable.
The Company's tax provision for the years ended November 30, 1994, 1995 and
1996 differs from the statutory rate for Federal income taxes as a result of the
tax effect of the following factors:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate......................................... 34% (34)% (34)%
State income taxes, net of federal benefit............. 4% (4)% (4)%
Permanent differences.................................. (3)% (3)% (1)%
General business credits............................... 8% -- --
Foreign rate differential.............................. -- (1)% --
Other.................................................. 1% -- 1%
---- ---- ----
Effective tax rate..................................... 44% (42)% (38)%
==== ==== ====
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
Operating leases
The Company leased office space under a sixty-three month noncancelable
operating lease which expired in September 1996. During September 1996, the
Company entered into a noncancelable operating lease for new office space that
expires in December 2005. 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. The Company has provided additional security under
this lease in the form of an irrevocable letter of credit in the amount of
$300,000 (see Note 5). The letter of credit requirement expires upon the earlier
of October 1998 or the date the Company attains total shareholders' equity of at
least $3,000,000, as evidenced by audited financial statements.
The Company also leases certain office equipment and other office space
under noncancelable operating leases which expire at various dates through 1999.
Rent expense under all leases is recognized ratably over the lease terms. Rent
expense under all operating leases was approximately $578,294, $539,826 and
$706,902, respectively, for the years ended November 30, 1994, 1995, and 1996.
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, 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER
30,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Office furniture and equipment.................................. $ 52,213 $210,042
Data processing equipment....................................... -- 37,044
Less: accumulated amortization.................................. (46,123) (15,016)
-------- --------
$ 6,090 $232,070
======== ========
</TABLE>
F-15
<PAGE> 76
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments, under all leases, at November 30, are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- --------
<S> <C> <C>
1997.......................................................... $ 920,292 $ 66,964
1998.......................................................... 878,506 66,964
1999.......................................................... 744,905 57,609
2000.......................................................... 707,248 47,232
2001.......................................................... 728,465 36,693
Thereafter.................................................... 4,853,373 --
---------- --------
Total minimum payments........................................ $8,832,789 275,462
=========
Less: portion representing interest........................... 44,454
--------
Present value of capital lease obligations.................... $231,008
========
</TABLE>
Joint Venture Agreement
In October 1996, the Company signed a non-binding letter of intent (the
"Letter") to distribute its products in Germany and Austria through a joint
venture (the "Joint Venture") 51% owned by the Company, and 49% owned by a
German software distributor ("German Distributor"). Pursuant to the proposed
terms of the Letter, the Company will receive a 35% license fee on all license
sales to the Joint Venture and the German Distributor will receive a 20%
commission on license sales by the Joint Venture for sales initiated by the
German Distributor.
Acquisition of Krystal Ingenierie S.A.
In November 1996, the Company entered into a non-binding letter of intent
(the "Letter") under which the Company agreed to acquire Krystal Ingenierie S.A.
("Krystal"), the Company's existing distributor in France. Pursuant to the
Letter, the Company will issue up to 93,750 shares of Common Stock in exchange
for all of outstanding capital stock of Krystal and the cancellation of certain
indebtedness.
10. THE OBJECT TECHNOLOGY FOR RAPID SOFTWARE DEVELOPMENT CONSORTIUM
In October 1994, the Company, IBM, Honeywell Corporation and ISX, Inc.
formed a Consortium (the "Consortium"). The Consortium entered into a
collaborative agreement (the "Agreement") with the United States Air Force (the
"Air Force"), whereby the Consortium would participate in a federally-funded
technology reinvestment program to engage in research and development activities
on behalf of the Air Force to reduce the effort required to develop new software
applications through the development of reusable software components through the
first half of fiscal 1997. The cost sharing provisions of the Agreement provide
for an aggregate resource contribution by the Consortium of $11,903,054, of
which $5,897,817 will be reimbursed by the Air Force. The Company's total
resource contribution is $4,182,261, of which $1,976,780 will be reimbursed by
the Air Force. The Agreement provides for the inclusion of $897,000 of product
development expenses that were incurred by the Company prior to entering into
the Agreement. These expenses were included in the Company's total resource
contribution.
Included in product development and sales and marketing expenses for the
years ended November 30, 1995 and 1996, are costs incurred related to the
Agreement of $337,590, and $608,812, respectively, which are net of reimbursable
amounts from the Air Force of $1,106,652 and $545,680, respectively. The amount
reimbursable in 1995 includes $420,000 related to the product development
expenses discussed above. The Company's remaining resource contribution to the
Consortium at November 30, 1996 is $686,527. The Company does not have a
continuing obligation to fund the Consortium in the event of termination of the
Agreement.
F-16
<PAGE> 77
TEMPLATE SOFTWARE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1995 1996
-------- --------
<S> <C> <C>
Accrued payroll, bonus and vacation............................. $483,748 $540,718
Accrued commissions............................................. 63,602 112,180
Accrued interest................................................ 5,928 2,532
Accrued subcontractor's fees.................................... -- 68,744
Other accrued expenses.......................................... 87,270 41,803
-------- --------
$640,548 $765,977
======== ========
</TABLE>
12. RELATED PARTY TRANSACTIONS
In 1994, the Company agreed to accept a 10% interest in Template Software
International in exchange for a 20% reduction in royalties and training fees for
one year. Template Software International is a newly formed corporation created
to distribute products in the United Kingdom. No value was assigned to the
equity interest. During 1994, the Company recognized $140,148 of revenue from
the affiliate, of which $115,148 was in accounts receivable as of November 30,
1994. In 1995, the Company terminated the relationship, and wrote off the
receivable as bad debt expense.
In 1995, the Company financed the purchase of computer equipment with an
unsecured loan in the amount of $24,240 from an officer. The note was being
amortized by semi-monthly payments of $564, including interest at 11%. In March
1996, the balance of this note of $14,782 was paid in full.
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 $54,551, $101,596 and $100,003 for the years
ended November 30, 1994, 1995 and 1996, respectively.
Incentive bonus plan
The Company has an incentive bonus plan whereby the Board of Directors
authorize the officers to grant awards to nominated employees in recognition of
exceptional contributions. Awards totaling $4,500, $108,000 and $256,350,
respectively, were given to employees for the years ended November 30, 1994,
1995 and 1996, respectively.
F-17
<PAGE> 78
[This Page Intentionally Left Blank]
<PAGE> 79
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
COMMON STOCK OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE SUCH DATE.
---------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
The Company............................ 14
Use of Proceeds........................ 14
Dividend Policy........................ 14
Capitalization......................... 15
Dilution............................... 16
Selected Consolidated Financial Data... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business............................... 27
Management............................. 43
Certain Transactions................... 50
Principal and Selling Shareholders..... 51
Description of Capital Stock........... 53
Shares Eligible for Future Sale........ 55
Underwriting........................... 57
Legal Matters.......................... 58
Experts................................ 58
Additional Information................. 58
Glossary............................... 60
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
---------------------------
UNTIL FEBRUARY 23, 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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2,100,000 SHARES
[TEMPLATE SOFTWARE, INC. LOGO]
COMMON STOCK
--------------------
PROSPECTUS
JANUARY 29, 1997
--------------------
VOLPE, WELTY & COMPANY LLC
PIPER JAFFRAY INC.
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