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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended November 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 0-21921
TEMPLATE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 52-1042793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45365 VINTAGE PARK PLAZA
DULLES, VIRGINIA 20166
(Address of principal executive offices) (Zip code)
(703) 318-1000
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock Nasdaq National Market
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant on February 23, 1998, based on the closing price on that date of
$14.875 on the Nasdaq National Market was $47,951,517.*
The number of shares outstanding of the Registrant's Common Stock as of February
23, 1998: 4,950,525.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the Registrant's 1998
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
* The aggregate market value of the voting stock held by non-affiliates was
estimated by excluding only those shares held by directors, officers and
principal shareholders filing schedule 13D and/or 13G.
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TEMPLATE SOFTWARE, INC.
1997 REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I 4
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 10
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II 10
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 10
ITEM 6. SELECTED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 17
PART III 17
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 17
ITEM 11. EXECUTIVE COMPENSATION 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 18
PART IV 18
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K 18
SIGNATURES 21
</TABLE>
This Report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. In this report, the words "anticipate,"
"believes," "expects," "intends," "future," and other similar expressions
identify forward-looking statements. Investors are cautioned that all forward-
looking statements involve risks and uncertainty, including without limitation,
the ability of the Company to develop its products and market it services, as
well as general market conditions, competition and pricing. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included in this Report will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
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PART I
ITEM 1. BUSINESS
GENERAL
Template Software, Inc. (the "Company") was incorporated in Maryland in
1975 and reincorporated in Virginia in 1996. The Company provides enterprise-
wide software solutions to organizations that require large-scale, distributed
computing systems. To date, substantially all of the Company's revenues have
been derived from license fees for use of the Company's products and fees for
software-related services, which include software development, training,
maintenance, systems integration and systems planning. The Company's products
consist of a set of integrated, off-the-shelf packages, called templates which
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 its
reusable template products, along with its software-related services, allow a
mass customization approach to software solution delivery that is superior to
the historical alternatives of buying a packaged solution or developing a custom
application. The Company's current templates can provide up to 90% of the code
necessary for a 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. The Company markets its solutions world-wide through a direct sales
force, distributors, value added resellers and systems integrators. In an
effort to solidify its presence world-wide, the Company maintains the following
wholly-owned subsidiaries: (1) England: Template Software, U.K. Limited and
Template Software, Limited; (2) France: Template Software S.A., which the
Company acquired on March 4, 1997; (3) Germany: Template Software Holding GmbH
("Template Holding"), Template Software Geschaftsfuhrungs GmbH ("Template
Management"), which the Company formed to acquire milestone software GmbH
("Milestone") and (4) Mexico: Template Software de Mexico, S.A. de C.V. The
Company also owns 44% of milestone software G.m.b.H., an Austrian corporation
("Milestone Austria") and 20% of milestone software AG, a Swiss corporation
("Milestone Switzerland"), which it acquired in connection with its acquisition
of Milestone.
PRODUCTS AND SERVICES
The Company's products consists of a family of templates which the Company
uses to build custom, enterprise-wide solutions. The templates are divided into
three layers. The first layer is the Foundation Template which consists of
SNAP and several optional components (Web Component, Process Monitoring
Component and the Graphical Mapping Component). The second layer consists of
Process Templates, which include the System Management Template and the Workflow
Template. The third layer is comprised of several Business Templates at
differing levels of maturity. 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.
Foundation Template.
The basic capability of the Foundation Template is creating complex, scalable,
distributed enterprise-wide solutions. The Foundation Template, which is based
on an object-oriented fifth generation specification language, is designed to
promote large-scale code reuse and provide knowledge-based inferencing and
dynamic event handling. The base reusable software in the Foundation Template
provides for up to 65%-75% of the code for distributed, multi-process
applications, including two and three tier client-server and peer-to-peer
applications. The Foundation Template includes built-in components and
functionality including dynamic graphical user interfaces, storage capabilities
for database and file access, facilities to integrate with class libraries and
legacy applications and advanced communications protocols. The Foundation
Template also provides 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, the Foundation
Template provides a facility called the Shared Information Base ("SIB") which
enables interprocess communication among applications running on a single
hardware platform
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or multiple heterogeneous platforms. Because multiple Foundation Template
application processes can communicate on a peer-to-peer basis through a shared
information base, a developer can easily scale an application up from a single
workstation to a dispersed network of multiple workstations.
The following are optional components of the Foundation Template:
WEB COMPONENT. Web Component is an extension to the Foundation Template for
creating Web-based, enterprise-wide solutions. Web Template incorporates the
Foundation Template'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 Component supports leading web browsers and
servers, including those developed by Netscape Communications Corporation and
Microsoft Corporation. Web Component also takes advantage of emerging standards
such as HTML 3.0 and Java.
PROCESS MONITORING COMPONENT ("PMC"). PMC provides for the management of a
highly distributed, multi-process solution from a single location. Failure of
processes can be detected remotely and in remotely and in real time. Failure of
processes can be detected remotely an in real time. Processes can be restarted
remotely. This type of sophisticated capability is essential for the
operational deployment of enterprise distributed solutions.
GEOGRAPHIC MAPPING COMPONENT ("GMC"). GMC allows the display of data overlaid
on geographic maps. The data overlays are "live" and can be changed in real
time. This type of display is essential for enterprise solutions such as fleet
monitoring and management.
Process Templates
The Process Templates, formerly referred to as Cross-Industry Templates, consist
of the Workflow Template and the System Management Template.
WORKFLOW TEMPLATE ("WFT"). WFT is a template for creating workflow solutions
that automate and provide real-time management and control of the functions and
tasks involved in a business process, such as claims processing and order
fulfillment. WFT incorporates the Foundation Template's functionality and
provides the basis for up to 90% of the code for most workflow solutions. WFT is
based on a business operations model which enables easy development of a rules-
based, process oriented workflow system. WFT provides the versatility to develop
workflow solutions that range from departmental systems to production and
enterprise-wide systems. WFT includes nine high-level editors which provide the
visual tools for workflow business process engineering, analysis and design.
SYSTEM MANAGEMENT TEMPLATE ("SMT"). SMT is a template for creating system
management solutions that provide real-time monitoring and control of complex
physical processes, such as pipeline management and computer network management.
SMT enables solutions that monitor the status of complex systems and gives
people in an organization the ability to rapidly change the elements of the
system. SMT incorporates the Foundation Template's functionality and provides
the basis 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.
Business Templates
The Company is in the process of adding to its family of templates by
developing Business Templates, formerly referred to as Industry-Specific
Templates. Business Templates build upon the Foundation Template and Process
Templates to create partially completed solutions for specific business
problems. The Company has several Business Templates under development. Four
of these templates are being used in a limited manner today to support sales of
solutions. These Business Templates are supporting sales activities in the
following four industry sectors:
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Telecommunications - order handling
Government - personnel systems
Manufacturing - factory floor control
Transportation - automatic vehicle location
Services
The Company has a comprehensive service organization that is designed to
ensure successful mass customization of solutions for its customers. The Company
provides its customers with software-related services to specify, design,
customize, and deploy the software solutions necessary to meet its customers'
business process needs. The Company believes that the availability of its
software-related services is a key factor in customer purchasing decisions. The
Company's services have been and are expected to continue to be an important
source of revenues. The fees for the Company's solutions services are typically
fixed in advance of each stage of the delivery process for which the Company has
been engaged.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary rights. The Company's products are generally licensed to
end users pursuant to a license agreement that restricts the use of the
products. In addition, the Company generally enters into confidentiality
agreements with its employees and consultants that limit access to and
distribution of its proprietary information. The degree and scope of legal
protection available for the Company's software products may vary in certain
foreign countries.
The Company has entered into source code escrow agreements with a limited
number of its customers and resellers requiring release of source code in
certain circumstances. Such agreements generally provide that such parties will
have a limited, non-exclusive right to use such code in the event that there is
a bankruptcy proceeding by or against the Company, if the Company ceases to do
business or if the Company fails to meet its support obligations.
SEASONALITY
The operating results of many software and business solutions
companies reflect seasonal trends, and the Company expects to be affected by
such trends in the future. Although the Company has not experienced consistent
seasonal fluctuations in operational results to date, the Company believes that
it is likely that it will experience relatively higher revenues in the Company's
fiscal quarters ending on 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.
BACKLOG
A number of the Company's client projects are performed on a fixed-
price basis and, therefore, the Company bears the risk of cost overruns and
inflation. A portion of net revenues are recognized on the percentage-of-
completion method which requires revenues to be recorded over the term of a
client contract. Revenues attributable to the sale of software tools are
recognized upon shipment and revenues attributable to services are recognized
upon completion. A loss is recorded at the time when current estimates of
project costs exceed unrecognized revenues. Quarterly revenues and operating
results can depend on the significance of client engagements commenced and
completed during a quarter, the number of working days in a quarter and employee
utilization rates. The timing of revenues is difficult to forecast because the
Company's sales cycle is relatively long in the case of new clients and may
depend on factors such as the size and scope of assignments and general
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economic conditions. The Company's software products are typically used to
develop applications that are critical to a customer's business and the purchase
of the Company's products is often part of a customer's larger business process
reengineering initiative or implementation of distributed computing. As a
result, the license and implementation of the Company's software products and
business solutions generally involves a significant commitment of management
attention and resources by prospective customers. Accordingly, the Company's
sales process is often subject to delays associated with a long approval process
that typically accompanies significant initiatives or capital expenditures.
Because a high percentage of the Company's expenses are relatively fixed, a
variation in the timing of the initiation or the completion of client
assignments, particularly at or near the end of any quarter, can cause
significant variations in operating results from quarter to quarter and could
result in losses. The Company attempts to manage its personnel utilization rates
by closely monitoring project timetables and staffing requirements for new
projects. On a typical project, a significant number of personnel are provided
by the Company's clients or third parties. While professional staff must be
adjusted to reflect active projects, the Company must maintain a sufficient
number of senior professionals to oversee existing client projects and
participate with the Company's sales force in securing new client assignments.
In addition, many of the Company's engagements are, and may be in the future,
terminable without client penalty. An unanticipated termination of a major
project could require the Company to maintain or terminate under-utilized
employees, resulting in a higher than expected number of unassigned persons or
higher severance expenses.
A significant portion of the Company's revenues 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. For the fiscal year
ended November 30, 1996, each of First Data Resources, Inc., Wellspring
Resources and the federal government accounted for more than 10% of the
Company's total revenue, representing an aggregate of approximately 67% of total
revenue, or 19%, 28% and 20% of total revenue, respectively. For the fiscal
year ended November 30, 1997, WinStar Telecommunications, Inc. and the federal
government in aggregate accounted for more that 10% of the Company's total
revenue, representing an aggregate of approximately 36% of total revenue, or 13%
and 23% of total revenue, respectively.
GOVERNMENT CONTRACTS
The Company has a government business unit comprised of approximately 30
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
technical design and software development which the Company has been performing
for the federal government since 1977. Approximately 20% and 23% of the
Company's total revenues in fiscal years 1996 and 1997, respectively, were
derived from contracts with the government. Government contracts, by their
terms, generally can be terminated at any time by the government, without cause,
for the convenience of the government. If a government contract is so
terminated, the Company would be entitled to receive compensation for the
services provided or costs incurred at the time of termination and a negotiated
amount of the profit on the contract to the date of termination. In addition,
all government contracts require compliance with various contract provisions and
procurement regulations. The adoption of new or modified procurement regulations
could adversely affect the Company or increase its costs of competing for or
performing government contracts. Any violation (intentional or otherwise) of
these regulations could result in the termination of such government contracts,
imposition of fines, and/or debarment from award of additional government
contracts. The termination of any of the Company's significant government
contracts or the imposition of fines, damages, or suspension from bidding on
additional government contracts could have a material adverse effect on the
Company.
COMPETITION
The information technology consulting, software development and business
solution markets include a large number of participants, are subject to rapid
changes and are highly competitive. These markets are highly fragmented and
served by numerous firms, many of which serve only their respective local
markets. Clients may elect to use their internal information systems resources
to satisfy their needs for software development and
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technical consulting services, rather than using those offered by the Company.
In the software development tools market, representative competitors of the
Company include, among others, Forte Software, Inc., ViewStar Corporation, ILOG
S.A. and SEER Technologies, Inc. In the 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, Integrated Systems Solutions Corporation (a subsidiary of IBM) and the
consulting departments of the "Big Six" accounting firms, among others.
The Company believes that its ability to compete depends in part on a
number of competitive factors outside its control, including the ability of its
competitors to hire, retain and motivate senior project managers, the ownership
by competitors of software used by potential clients, the development by others
of software that is competitive with the Company's products and services, the
price at which others offer comparable services and the extent of its
competitor's responsiveness to customer needs.
SALES AND MARKETING
To reach a broad potential customer base, the Company has pursued multiple
distribution channels, including a direct sales force, as well as third party
relationships with distributors, value added resellers and systems integrators.
The Company's direct sales force focuses on large customers and leverages its
industry experience to access target organizations within particular vertical
markets. These markets are characterized by business areas to which the
Company's services and technology are particularly well-suited, and by
participants who possess the financial resources and scale of operations
necessary to support the engagement of solution providers such as the Company.
The Company identifies leading organizations in each industry and seeks to
provide an initial solution that builds on one of the Company's reusable
software templates. Once an initial project has been successfully completed, the
Company seeks to offer additional solutions that automate and enhance other
business processes for the client. The Company intends to target additional
industries in which its business area experience and advanced software
technology expertise can be applied. An important element of the Company's
sales and marketing strategy is to expand its relationships with third parties
to increase market awareness and acceptance of the Company's software solutions.
The relationships with each of these groups generally provide for training and
other support necessary to promote the market acceptance of the Company's
products.
The Company has organized worldwide into three major geographic divisions
for sales and distribution of its solutions: North America, Europe and
Americas/Pacific. Within each geographic division the Company intends to
establish industry specific groups to focus on solutions within each targeted
area. In 1997, the Company significantly increased its presence in Europe
through two acquisitions. These acquisitions have resulted in 126 additional
employees, 21 additional direct sales people and over 200 new customer/prospects
in Germany, Austria, Switzerland and France. In 1997, the Company expanded its
Marketing operation by hiring a Vice-President of Marketing and five additional
staff. This added marketing resource will focus on expanding the Company's
image and market recognition both with prospective buyers and investors
worldwide.
PRODUCT DEVELOPMENT
The Company believes that its future success will depend in large part on
its ability to enhance its current family of software products, develop new
products, maintain technological leadership and satisfy an evolving range of
customer requirements for enterprise-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 the Company's software templates
to operate with the leading hardware platforms, operating systems, relational
database management systems and networking and communication protocols. This
organization is also responsible for new product development. In fiscal year
1997, product development expenses were $1.3 million. Management expects that,
as a result of its product development strategy, internally funded research and
development costs may increase significantly in future periods. There can be no
assurance that such increased research and development costs will result in the
successful introduction of new products.
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The Company attempts to continuously improve its existing products in two
ways. In response to market demands, the Company seeks to enhance its current
family of software templates through planned releases. At the same time, the
Company tries, on an ongoing basis, to expand its existing family of products by
periodically introducing new template-based products. This effort to enhance
existing products falls into three categories. First, the Company adds new
visual development tools to increase the productivity of those using its
templates. Second, the Company adds new functionality to its existing templates
in the form of reusable code. Third, as new platforms and standards are
introduced into the market, the Company ports its templates to new platforms and
standards to enhance interoperability. The Company usually retains the right to
enhancements of its products. However, the Company generally assigns ownership
of the custom software components to its clients.
In 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"), pursuant to which the Consortium participated in a federally-
funded technology reinvestment program ("TRP") 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. The term of the Agreement ran through November 30, 1997
and the Company received an aggregate of approximately $2.0 million. See Note
10 of the Notes to Consolidated Financial Statements.
ACQUISITIONS AND ALLIANCES
In 1997, the Company made two acquisitions to improve its presence in
Europe. On February 19, 1997, the Company acquired all of the issued and
outstanding capital stock of Krystal Ingenierie S.A. ("Krystal"). Krystal
subsequently changed its name to Template Software S.A. The acquisition of
Krystal provided the Company with an additional eleven employees in France. On
June 27, 1997, the Company acquired all of the issued and outstanding equity
interests of Milestone, which included 34% and 20% of the issued and outstanding
equity interests of Milestone Austria and Milestone Switzerland, respectively.
The Company contemporaneously acquired an additional 10% of Milestone Austria in
this same transaction. The Company formed two special purpose subsidiaries in
Germany, Template Holding and Template Management, in order to effectuate this
acquisition. The acquisition of Milestone provided the Company with an
additional 112 employees in Germany. The Company intends to continue its
acquisition strategy by focusing on acquisitions that will increase its market
presence or accelerate its entry into various market segments.
The Company constantly seeks strategic relationships with development
partners, systems integrators, value added resellers and independent software
vendors as a part of its strategy to promote the widespread use of its products
and services. The Company has a strategic a relationship with Alcatel Alsthom
Compagnie Generale d'Electricite S.A. ("Alcatel"), one of the worlds largest
telecommunications, energy and transport systems suppliers. Alcatel employs the
Company's products and services in a number of its internal projects and
customer engagements. In addition, in October 1997, the Company announced a
partnership with Computer Associates International, Inc. to pursue opportunities
in the enterprise computing solutions market. The Company believes that these
alliance will enhance and increase its market visibility in its industry
segments.
EMPLOYEES
As of November 30, 1997, the Company had a total of 275 full-time
employees, of which 204 were technical and technical support personnel. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are excellent.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain efforts to ensure that
its software systems and applications are year 2000 compliant. The Company
handles these efforts through its internal staff, without significant
contributions from outside contractors. The financial impact to the Company has
not been and is not anticipated to be material to the Company's financial
position or results of operations in any given year.
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FINANCIAL INFORMATION ABOUT INTERNATIONAL OPERATIONS AND EXPORT SALES
Revenues from foreign subsidiaries and export sales accounted for 15.8% and
49.0% of the Company's total revenues in fiscal years 1996 and 1997,
respectively. The Company believes that in order to increase sales
opportunities and profitability, it will be required to continue to expand its
international operations. The Company has committed and continues to commit
significant management time and financial resources to developing direct and
indirect international sales and support channels. There can be no assurance,
however, that the Company will be able to maintain or increase international
market demand for the Company's software 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.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, and product
development facility occupies approximately 50,000 square feet in Dulles,
Virginia pursuant to a lease which expires in December 2006. The Company also
leases sales and support offices in Georgia, Pennsylvania and Louisiana. It
maintains an office in Arlington, Virginia for its government business unit and
maintains one international office in each of the United Kingdom, France,
Mexico, and Canada and four international offices in Germany. The Company
believes that its existing facilities are adequate for its current needs and
that suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any pending or threatened litigation that could
have a material adverse effect upon the Company's business, operating results or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "TMPL." The Company commenced its initial public offering of Common
Stock on January 28, 1997 at a price $16 per share. Prior to such date, there
was no public market for the Common Stock. The following table sets forth the
high and low closing sale prices for the Common Stock for the periods indicated,
as reported on the Nasdaq National Market.
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<CAPTION>
High Low
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First Quarter of fiscal year 1997 (from January 29, 1997) $16.250 $13.625
Second Quarter of fiscal year 1997 $13.125 $ 7.750
Third Quarter of fiscal year 1997 $19.125 $11.625
Fourth Quarter of fiscal year 1997 $14.875 $ 9.750
</TABLE>
As of February 27, 1998, there were 54 stockholders of the Company's common
stock, as shown in the records of the Company's transfer agent. The Company
has never declared or paid any cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company's
bank line of credit currently prohibits the payment of cash dividends.
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Use of Proceeds
In the Company's Registration Statement on Form S-1 (Registration No. 333-
17063) effective January 28, 1997, 1,400,000 shares of Common Stock were
registered for the account of the Company and 700,000 shares of Common Stock
were registered for the accounts of selling security holders with an aggregate
offering price of $16.00 per share registered. The expenses incurred for the
Company's account in connection with the issuance and distribution of the
securities were $1,568,000 of underwriting discounts and commissions and
$1,068,641 of other expenses for a total expense of $2,636,641. The net
offering proceeds for the account of the Company were $19,763,359. From the
effective date of the Registration Statement through the end date of the period
covered by this report, the Company used $7,356,848 to acquire other businesses
and the remainder, $12,406,511, was applied toward the purchase of temporary
investments in marketable securities.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Report. The following selected
consolidated financial data of the Company as of November 30, 1996 and 1997 and
for each of the three years in the period ended November 30, 1997, 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, 1994 and 1995 has been derived from
the Company's audited consolidated financial statements not included herein.
<TABLE>
<CAPTION>
Year Ended November 30,
--------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Products $ 2,781 $ 2,893 $ 2,386 $ 1,918 $ 8,539
Services 3,172 3,420 4,705 11,612 18,371
---------- ---------- ---------- ---------- ----------
Total revenues 5,953 6,313 7,091 13,530 26,910
---------- ---------- ---------- ---------- ----------
Cost of revenues:
Products 990 978 896 783 2,145
Services 1,883 1,873 2,592 6,246 10,640
---------- ---------- ---------- ---------- ----------
Total cost of revenues 2,873 2,851 3,488 7,029 12,785
---------- ---------- ---------- ---------- ----------
Gross profit: 3,080 3,462 3,603 6,501 14,125
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling and marketing 1,904 1,510 1,181 2,362 6,271
Product development 436 924 272 966 1,315
General and administrative 1,533 1,446 1,479 1,473 3,163
---------- ---------- ---------- ---------- ----------
Total operating expenses 3,873 3,880 2,932 4,801 10,749
---------- ---------- ---------- ---------- ----------
Income (loss) from operations (793) (418) 671 1,700 3,376
Interest expense 72 75 108 43 88
Other income -- -- 1 33 860
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and cumulative effect of change
in accounting principle (865) (493) 564 1,690 4,148
Income tax benefit (provision) 378 218 (237) (645) (1,768)
---------- ---------- ---------- ---------- ----------
Net income (loss) before cumulative effect of change in accounting (487) (275) 327 1,045 2,380
principle
Cumulative effect of change in accounting principle (40) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (527) $ (275) $ 327 $ 1,045 $ 2,380
========== ========== ========== ========== ==========
Earnings (loss) per common share(1) $(0.17) $(0.09) $0.07 $0.23 $.41
========== ========== ========== ========== ==========
Weighted average number of common shares outstanding 3,173,503 3,186,331 4,655,824 4,643,919 5,818,216
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of November 30,
------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 26 $ 16 $ 63 $ 8,397 $ 2,739
Working capital 415 277 473 9,009 22,704
Total assets 2,898 3,021 3,461 13,985 42,791
Long-term liabilities 829 650 335 790 521
Total shareholders' equity 847 572 901 10,043 37,293
</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.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company provides enterprise-wide software solutions to organizations
that require 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") and 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 acquired Krystal in March 1997 and Milestone in June 1997
in transactions accounted for using the purchase method. The results of
operations for these two wholly owned subsidiaries are included beginning on the
date of their respective acquisitions. The Company also formed a wholly owned
subsidiary, Template Software de Mexico S.A. in September 1997.
12
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED NOVEMBER 30, 1997 AND NOVEMBER 30, 1996
Revenue. Total revenue was $26.9 million in 1997 compared to $13.5 million
in 1996, an increase of $13.4 million or 98.9%. This growth resulted principally
from an increase in the size of a customer engagement, the increase in the
Company's capacity to provide services through expansion in the number of
software professionals employed globally and acquisitions.
Product Revenue was $8.5 million in 1997 compared to $1.9 million in 1996,
an increase of $6.6 million or 345.0%. Approximately $4.7 million of this
increase was attributable to the sale of development and deployment licenses
associated with several large customer engagements with the remaining $1.9
million being attributable to product revenue realized from five months of
operations of Milestone which was acquired during fiscal 1997. Services
Revenue was $18.4 million in 1997 compared to $11.6 million in 1996, an increase
of $6.8 million or 58.2%. This increase was primarily attributable to added
service revenue from newly acquired European operations.
Cost of Revenue. Total cost of revenue consists primarily of salaries and
related benefits for personnel, and also includes an allocated portion of rent,
building services and computer equipment services and expenses. Total cost of
revenue was $12.8 million in 1997 compared to $7.0 million in 1996, an increase
of $5.8 million or 81.9%. This increase was primarily attributable to additional
professional staff hired and added through acquisitions to perform the increased
volume of software services. Total cost of revenue was 47.5% of total revenue in
1997, compared to 51.9% of total revenue in 1996. This percentage decrease was
primarily attributable to an increase in the product revenue to overall revenue
mix from 14.2% of total revenue in 1996 to 31.7% of total revenue in 1997.
Cost of Product Revenue was $2.1 million in 1997 compared to $0.8 million
in 1996, an increase of $1.3 million or 174.1%. This increase was primarily
attributable to the additional cost associated with the products sold by
Milestone which have a higher cost structure. Cost of Services Revenue was $10.6
million in 1997 compared to $6.2 million in 1996, an increase of $4.4 million or
70.3%. This increase resulted primarily from the cost associated with staffing
the growth in services contracts. Because such staffing is relatively fixed in
the short term, if any of the Company's engagements were to be terminated on
short notice, the Company would be unable to reduce the Cost of Services Revenue
commensurate with the associated decrease in Services Revenue. Any such
termination could have a material adverse effect on the Company's business,
operating results and financial condition.
Selling and Marketing. Selling and marketing expenses consist primarily of
expenses related to sales and marketing personnel, advertising, promotion, trade
show participation and public relations. Selling and marketing expenses were
$6.3 million in 1997 compared to $2.4 million in 1996, an increase of $3.9
million or 165.4%. This increase resulted primarily from the Company's
enlargement of its direct sales force and marketing department. The number of
sales and marketing staff increased from 8 to 35 in 1997, 19 of which were added
for the last five months of fiscal 1997 with the acquisition of Milestone.
Product Development. Product development expenses were $1.3 million in
1997 compared to $1.0 million in 1996, an increase of $0.3 million or 36.0%.
This increase resulted primarily from the development of the Company's Process
Monitoring and Geographic Mapping Components of the Foundation Template,
enhancements to its visual development tools and major new releases of the
Foundation Template and Workflow Template. Product development expenses in 1997
and in 1996 included offsets of $0.3 million and $0.4 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 $3.2 million in 1996 compared to $1.5 million in
1996, an increase of $1.7 million or 114.8%. This increase resulted primarily
from the additional administrative staff and expenses of the newly acquired
subsidiaries and the amortization of the purchase price of the subsidiaries in
excess of the net assets acquired of $374,237.
Income Tax Provision. The provision for income taxes was in $1,768,016 in
1997 compared to $644,502 in 1996, an increase of $1,123,514. This increase was
attributable to the Company's greater pretax profit level in 1997. The Company's
effective tax rate of 43% in 1997 was higher than the effective tax rate of 38%
in 1996 primarily as a result of the higher foreign statutory tax rates and an
increase in book-tax permanent differences.
13
<PAGE>
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.
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 which was primarily attributable to the Company's
inability to decrease the cost of Product Revenue commensurate with the decrease
in Product Revenue as 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 could have a
material adverse effect on the Company's business, operating results and
financial condition.
Selling and Marketing. Selling and marketing expenses consist primarily of
expenses related to sales and marketing personnel, advertising, promotion, trade
show participation and public relations. Selling and marketing expenses were
$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.
14
<PAGE>
Income Tax Benefit. 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.
QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly results of
operations for each of the eight quarters ended November 30, 1997, 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 Report 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
-------------------------------------------------------------------------------
Feb 29, May 31, Aug 31, Nov 30, Feb 28, May 31, Aug 31, Nov 30,
1996 1996 1996 1996 1997 1997 1997 1997
-------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products $ 511 $ 346 $ 189 $ 873 $1,489 $1,236 $1,929 $ 3,886
Services 2,000 2,867 3,704 3,040 2,465 3,339 5,579 6,987
------ ------ ------ ------ ------ ------ ------ -------
Total revenues 2,511 3,213 3,893 3,913 3,954 4,575 7,508 10,873
------ ------ ------ ------ ------ ------ ------ -------
Cost of revenues:
Products 160 227 214 182 182 181 657 1,126
Services 1,090 1,533 1,816 1,807 1,467 1,698 3,177 4,297
------ ------ ------ ------ ------ ------ ------ -------
Total cost of revenues 1,250 1,760 2,030 1,989 1,649 1,879 3,834 5,423
------ ------ ------ ------ ------ ------ ------ -------
Gross profit 1,261 1,453 1,863 1,924 2,305 2,696 3,674 5,450
------ ------ ------ ------ ------ ------ ------ -------
Operating expenses:
Selling and marketing 470 581 543 769 824 1,289 1,800 2,358
Product development 133 229 287 317 326 310 310 368
General and administrative 393 403 341 336 633 504 851 1,176
------ ------ ------ ------ ------ ------ ------ -------
Total operating expenses 996 1,213 1,171 1,422 1,783 2,103 2,961 3,902
------ ------ ------ ------ ------ ------ ------ -------
Income from operations 265 240 692 502 522 593 713 1,548
Interest expense 12 10 11 10 13 16 33 26
Other income -- 5 6 22 137 344 205 174
------ ------ ------ ------ ------ ------ ------ -------
Income before income taxes 253 235 687 514 646 921 885 1696
------ ------ ------ ------ ------ ------ ------ -------
Income tax provision 97 90 262 195 239 341 347 841
Net income 156 145 425 319 407 580 538 855
====== ====== ====== ====== ====== ====== ====== =======
Net income per share $0.03 $0.03 $0.09 $0.07 $0.08 $0.10 $0.09 $0.14
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
As a Percentage of Total Revenues
Quarter Ended
-------------------------------------------------------------------------------
Feb 29, May 31, Aug 31, Nov 30, Feb 28, May 31, Aug 31, Nov 30,
1996 1996 1996 1996 1997 1997 1997 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Products 20.4% 10.8% 4.8% 22.3% 37.7% 27.0% 25.7% 35.7%
Services 79.6 89.2 95.2 77.7 62.3 73.0 74.3 64.3
----- ----- ----- ----- ----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Products 6.4 7.1 5.5 4.6 4.6 4.0 8.8 10.4
Services 43.4 47.7 46.7 46.2 37.1 37.1 42.3 39.5
----- ----- ----- ----- ----- ----- ----- -----
Total cost of revenues 49.8 54.8 52.2 50.8 41.7 41.1 51.1 49.9
----- ----- ----- ----- ----- ----- ----- -----
Gross profit 50.2 45.2 47.8 49.2 58.3 58.9 48.9 50.1
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Selling and marketing 18.7 18.1 13.9 19.7 20.8 28.2 24.0 21.7
Product development 5.3 7.1 7.4 8.1 8.3 6.8 4.1 3.4
General and administrative 15.7 12.5 8.8 8.6 16.0 11.0 11.3 10.8
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 39.7 37.7 30.1 36.4 45.1 46.0 39.4 35.9
----- ----- ----- ----- ----- ----- ----- -----
Income from operations 10.5 7.5 17.7 12.8 13.2 12.9 9.5 14.2
Interest expense 0.4 0.3 0.3 0.3 0.3 0.3 0.4 0.2
Other income 0.0 0.1 0.2 0.6 3.4 7.5 2.7 1.6
----- ----- ----- ----- ----- ----- ----- -----
Income before income taxes 10.1 7.3 17.6 13.1 16.3 20.1 11.8 15.6
Income tax provision 3.9 2.8 6.7 4.9 6.0 7.4 4.6 7.7
----- ----- ----- ----- ----- ----- ----- -----
Net income 6.2% 4.5% 10.9% 8.2% 10.3% 12.7% 7.2% 7.9%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
15
<PAGE>
Because the Company's business is characterized by significant client
concentration and relatively large projects, individual client engagements can
have a significant impact on the Company's total revenue and total cost of
revenue from quarter to quarter. In addition, variations in the Company's
revenue and operating results occur as a result of a number of other factors,
such as employee hiring and utilization rates as well as the number of working
days in a quarter. The timing of revenue is difficult to forecast because the
Company's sales cycle is relatively long and may depend on factors such as the
size and scope of assignments and general economic conditions. Because a high
percentage of the Company's expenses, particularly employee compensation, is
relatively fixed, a variation in the timing of the initiation or completion of
client engagements, especially at or near the end of any quarter, can cause
significant variations in operating results from quarter to quarter and could
result in quarterly losses. See "Business Backlog."
The operating results of many software and business solutions companies
reflect seasonal trends, and the Company expects to be affected by such trends
in the future. Although the Company has not experienced consistent seasonal
fluctuations in operational results to date, the Company believes that it is
likely that it will experience relatively higher revenues in the Company's
fiscal quarters ending on 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.
LIQUIDITY AND CAPITAL RESOURCES
In 1997, operating activities used $4.2 million in cash which was the
result of a $6.2 million increase in accounts receivable. This increase was
partially offset by $2.4 million in net income in 1977. The increase in
accounts receivable was associated with the growth in revenue, combined with
increased billing activity in the last month of the year. The average number of
days outstanding with respect to accounts receivable increased from 67 days as
of November 30, 1996 to 88 days as of November 30, 1997, based upon annualized
fourth quarter revenue.
Cash used in investing activities totaled $22.7 million in 1997. The
Company invested its cash reserves in varying maturities, not to exceed one
year, of high investment grade marketable securities. In addition, the Company
used $7.4 million in cash to partially fund the acquisitions of Krystal and
Milestone in 1997.
Cash flow from financing activities was $21.2 million in 1997 relating
primarily to the $19.7 million of net proceeds from the Company's initial public
offering of its common stock consummated on January 28, 1997, the $0.7 million
of proceeds from employee stock option exercises and the $1.0 million tax
benefit related to the exercise of stock options.
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 the 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
16
<PAGE>
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, 1996 and 1997, and for certain compliance periods during the three years
ended November 30, 1997, the Company was not in compliance with the foregoing
financial covenants for which waivers were obtained. In October 1996, in
connection with a 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 and the acquisitions of both Krystal and Milestone.
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.
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 has disclosed the
effects of this pronouncement in the notes to the financial statements on a pro
forma basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the financial statements and supplementary
financial information which are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The Company will file with the Securities and Exchange Commission a
definitive Proxy Statement, pursuant to Regulation 14A, not later than 120 days
after the end of its fiscal year. Accordingly, certain information required by
Part III has been omitted under Item G of the General Instructions for Form 10-
K. Only those sections of the Proxy Statement which specifically address the
items set forth herein are incorporated by reference.
Item 10. Directors and Executive Officers of Registrant
The information required by Item 10 is hereby incorporated by reference
from the Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "1998 Proxy Statement") under the captions "Election of
-----------
Directors" and "Executive Officers"
- --------- ------------------
17
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from the 1998 Proxy Statement under the caption "Executive Compensation."
----------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from the 1998 Proxy Statement under the caption "Beneficial Ownership of Common
-------------------------------
Stock."
- -----
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from the 1998 Proxy Statement under the caption "Certain Transactions."
--------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants
Consolidated Balance Sheets as of November 30, 1996 and 1997
Consolidated Statements of Operations for the Years Ended November 30, 1995,
1996 and 1997
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
November 30, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the Years Ended November 30, 1995,
1996 and 1997
Notes to the Consolidated Financial Statements
2. Financial Statement Schedule
All schedules are omitted because they are not required or the required
information is included in the Consolidated Financial Statements and Notes
thereto.
3. Exhibits
The following exhibits are filed as part of this report or hereby
incorporated by reference to exhibits previously filed with the Commission:
3.1 Amended and Restated Articles of Incorporation/1/.
3.2 By-laws/1/.
4.1 Registration Rights Agreement, by and between the Company and Alcatel,
N.V., dated November 27, 1996/1/.
4.2 Shareholders' Agreement, by and between the Company, Messrs. Joseph M. Fox,
E. Linwood Pearce and Andrew B. Ferrentino and Alcatel, N.V., dated
November 27, 1996/1/.
18
<PAGE>
4.3 Registration Rights Agreement, dated as of March 3, 1997 by and between
the Company, and Alain Kuhner/2/.
4.4 Registration Rights Agreement, dated as of June 27, 1996, by and between
the Company and Heinz-Dieter Dietrich and Klaus-Dieter Jansen/5/.
10.1 1992 Incentive Stock Option Plan/1/.
10.2 1992 Incentive Stock Option Plan, Class B/1/.
10.3 1992 Non-Statutory Stock Option Plan/1/.
10.4 1996 Equity Incentive Plan/1/.
10.5 Employment Agreement, dated as of October 24, 1996, between the Company
and E. Linwood Pearce/1/.
10.6 Amendment to Employment Agreement, dated as of October 14, 1997, between
the Company and E. Linwood Pearce/5/.
10.7 Employment Agreement, dated as of October 24, 1996, between the Company
and Joseph M. Fox/1/.
10.8 Amendment to Employment Agreement, dated as of October 14, 1997, between
the Company and Joseph M. Fox/5/.
10.9 Employment Agreement, dated as of October 24, 1996, between the Company
and Andrew B. Ferrentino/1/.
10.10 Development Agreement, dated January 16, 1996, between the Company and
Wellspring Resources, L.L.C. (successor-in-interest to Wyatt Preferred
Choice, L.L.C.)/1/.
10.11 Cooperative Agreement, dated April 7, 1995, under 10 U.S.C. 2371 between
the Company and United States Department of Air Force, Rome Laboratory; as
amended by Modification No. P00002 dated February 28, 1996/1/.
10.12 Development Agreement, dated September 15, 1995, between the Company and
First Data Resources, Inc./1/.
10.13 Distributor Agreement, dated August 3, 1993, between the Company and
Contemplate B.V.I.O. (successor-in-interest to RCC Informatieservices,
b.v.); as amended by letter of agreement May 31, 1996/1/.
10.14 Office Building Lease, dated February 15, 1996, for Crystal Square Three,
Suite 700, Arlington, Virginia between the Company and Charles E. Smith
Management, Inc./1/.
10.15 Office Building Lease, dated February 15, 1996, for Crystal Square Three,
Suite 702, Arlington, Virginia between the Company and Charles E. Smith
Management, Inc./1/.
10.16 Office Lease Agreement, dated April 25, 1996, between the Company and
Vintage Park Two Limited Partnership/1/.
10.17 Amendment to Office Lease Agreement, dated August 18, 1997, between the
Company and Vintage Park Two Limited Partnership/5/.
10.18 First Amended and Restated Loan and Security Agreement, dated October 22,
1996, between the Company and Signet Bank/1/.
19
<PAGE>
10.19 Consulting Agreement, dated as of December 17, 1996, between the Company
and WinStar Telecommunications, Inc./3/.
10.20 License Agreement, dated as of February 28, 1997, between the Company
and WinStar Telecommunications, Inc., as amended by Amendment One to
License Agreement, dated as February 28, 1997/3/.
10.21 Sales and Purchase Agreement, dated April, 1997, between Template
Software (UK) Limited and British American Financial Services IT & Group
Services Limited/3/.
10.22 Share Purchase Agreement, dated June 27, 1997, between Template Holding
and Dietrich relating to the purchase of Milestone/4/.
10.23 Share Purchase Agreement, dated June 27, 1997, between Template Holding
and Jansen relating to the purchase of Milestone/4/.
10.24 Share Purchase Agreement, dated June 27, 1997, between Template Holding
and NeSBIC III, C.V. relating to the purchase of Milestone/4/.
10.25 Share Purchase Agreement, dated June 27, 1997, between Template
Management and Jansen relating to the purchase of .33% of Milestone/4/.
10.26 Share Purchase Agreement, dated June 27, 1997, between Template Holding
and Dietrich relating to the purchase of Milestone Austria/4/.
10.27 Share Purchase Agreement, dated June 27, 1997, between Template Holding
and Jansen relating to the purchase of Milestone Austria/4/.
10.28 Stock Purchase Agreement, dated as of February 19, 1997, between the
Company and Alain Kuhner/2/.
10.29 Assignment of Indebtedness, dated as of February 19, 1997, between the
Company and Alain Kuhner/2/.
11. Statements re: computation of per share earnings /5/
21. Subsidiaries of the Company/5/.
23. Consent of Coopers & Lybrand L.L.P./5/.
27. Financial Data Schedule/5/.
All other exhibits for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instruction or are inapplicable, and therefore have been omitted.
- ------------------
1 Incorporated by reference to the Company's Registration Statement on Form S-1
(Registration No. 333-17063), originally filed with the Securities and
Exchange Commission on November 27, 1996.
2 Incorporated by reference to the Company's Report on Form 8-K, dated March
19, 1997 (File No. 0-21921).
3 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended May 31, 1997 (File No. 0-21921).
4 Incorporated by reference to the Company's Report on Form 8-K, dated July 14,
1997 (File No. 0-21921)
5 Filed herewith.
20
<PAGE>
(b) Reports on form 8-K:
During the last fiscal quarter of the fiscal year ended November 30, 1997,
the Company did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEMPLATE SOFTWARE, INC.
Date: February 27, 1998 /s/ Kimberly E. Osgood
-----------------------------------
Kimberly E. Osgood
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
/s/ E. Linwood Pearce
-------------------------------------
February 27, 1998 E. Linwood Pearce
Chief Executive Officer
/s/ Joseph M. Fox
----------------------------------
February 27, 1998 Joseph M. Fox
Chairman of the Board
/s/ Andrew B. Ferrentino
----------------------------------
February 27, 1998 Andrew B. Ferrentino
President and Secretary
/s/ Duane A. Adams
----------------------------------
February 27, 1998 Dr. Duane A. Adams
Director
/s/ Alan B. Salisbury
----------------------------------
February 27, 1998 Dr. Alan B. Salisbury
Director
/s/ Gerhard Barth
----------------------------------
February 27, 1998 Dr. Gerhard Barth
Director
21
<PAGE>
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, 1996 and 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended November 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of November 30, 1996 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended November
30, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
McLean, Virginia
January 8, 1998
22
<PAGE>
<TABLE>
<CAPTION>
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30,
------------------------------------
1996 1997
--------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,397,160 $ 2,739,075
Marketable securities -- 13,317,901
Accounts receivable, net 2,886,832 10,474,254
Income tax receivable -- 235,848
Deferred income taxes 373,957 406,172
Prepaid expenses and other current assets 503,762 688,577
----------- -----------
Total current assets 12,161,711 27,861,827
----------- -----------
Property and equipment, net 923,684 2,193,932
Software development costs, net 718,094 1,490,776
Goodwill, net -- 10,710,555
Deferred income taxes -- 408,328
Other assets 181,781 306,075
----------- -----------
Total assets $13,985,270 $42,971,493
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,209,531 $ 1,431,162
Accrued expenses 765,977 2,717,618
Revolving credit agreement -- 33,553
Current portion of long-term debt 91,667 91,667
Capital lease obligations 49,759 54,023
Income taxes payable 566,787 34,639
Deferred income 469,074 794,832
----------- -----------
Total current liabilities 3,152,795 5,157,494
----------- -----------
Long-term liabilities:
Long-term debt, net of current portion 175,694 84,028
Capital lease obligations, noncurrent 181,249 127,226
Deferred income taxes 281,448 --
Other liabilities 151,253 309,450
----------- -----------
Total liabilities 3,942,439 5,678,198
----------- -----------
Shareholders' equity:
Series A Convertible Preferred Stock; $0.01 par value; 3,000,000 shares
authorized; 500,000 shares and no shares issued and outstanding as of
November 30, 1996 and 1997, respectively 5,000 --
Common Stock, $0.01 par value; 17,000,000 shares authorized; 2,247,008
shares and 4,675,433 shares issued and outstanding, as of November 30, 1996
and 1997, respectively 22,470 46,755
Deferred compensation -- (1,177,920)
Additional paid-in capital 9,108,988 35,088,542
Foreign currency translation -- 49,752
Retained earnings 906,373 3,286,166
----------- -----------
Total shareholders' equity 10,042,831 37,293,295
----------- -----------
Total liabilities and shareholders' equity $13,985,270 $42,971,493
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------------
1995 1996 1997
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Revenues:
Products $2,386,112 $ 1,918,568 $ 8,539,387
Services 4,704,994 11,611,543 18,371,005
---------- ----------- -----------
Total revenues 7,091,106 13,530,111 26,910,392
---------- ----------- -----------
Cost of revenues:
Products 896,297 782,804 2,145,552
Services 2,591,839 6,245,888 10,639,845
---------- ----------- -----------
Total cost of revenues 3,488,136 7,028,692 12,785,397
---------- ----------- -----------
Gross profit 3,602,970 6,501,419 14,124,995
---------- ----------- -----------
Operating expenses:
Selling and marketing 1,180,810 2,362,648 6,270,769
Product development 271,620 966,088 1,314,770
General and administrative 1,479,385 1,473,062 3,163,587
---------- ----------- -----------
Total operating expenses 2,931,815 4,801,798 10,749.126
---------- ----------- -----------
Income from operations 671,155 1,699,621 3,375,869
Interest income (expense) (107,450) (22,130) 872,613
Other income (expense) 676 12,079 (100,673)
---------- ----------- -----------
Net income before income taxes 564,381 1,689,570 4,147,809
Income tax provision 237,289 644,502 1,768,016
---------- ----------- -----------
Net income $ 327,092 $ 1,045,068 $ 2,379,793
========== =========== ===========
Earnings per common share $0.07 $0.23 $0.41
========== =========== ===========
Weighted average number of common shares outstanding 4,655,824 4,643,919 5,818,216
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
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, 1994 232,403 457,694 0 0
Retirement of stock held in treasury (36,556) (71,993) 0 0
Issuance of Class B Common Stock 0 0 0 0
Net income 0 0 0 0
------------------------------------------------------
Balance, November 30, 1995 195,847 385,701 0 0
Retirement of stock held in treasury (195,847) (385,701) 0 0
Issuance of Class B Common Stock 0 0 0 0
Issuance of Convertible Preferred Stock Series A 0 0 500,000 5,000
Exchange of Class A and Class B Common Stock 0 0 0 0
Net income 0 0 0 0
------------------------------------------------------
Balance, November 30, 1996 0 0 500,000 5,000
Conversion of Series A Convertible Preferred Stock 0 0 (500,000) (5,000)
Initial public offering of common stock, $16.00
per share, net of expenses 0 0 0 0
Exercise of stock options, $1.98 - $6.00 per share 0 0 0 0
Common Stock issued in connection with business
acquisitions, $12.18 - $14.90 per share 0 0 0 0
Translation Adjustment 0 0 0 0
Deferred compensation related to stock options
granted below fair market value 0 0 0 0
Amortization of Deferred Compensation 0 0 0 0
Expenses related to issuance of Series A
Convertible Preferred Stock in 1996 0 0 0 0
Tax benefit associated with exercise of stock 0 0 0 0
options
Net Income 0 0 0 0
------------------------------------------------------
Balance, November 30, 1997 0 0 0 0
======================================================
</TABLE>
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
------------- -------- -------------- -------
<S> <C> <C> <C> <C>
Balance, November 30, 1994 1,818,064 18,181 422,006 4,220
Retirement of stock held in treasury (9,140) (92) 0 0
Issuance of Class B Common Stock 0 0 1,000 10
Net income 0 0 0 0
------------------------------------------------
Balance, November 30, 1995 1,808,924 18,089 423,006 4,230
Retirement of stock held in treasury (48,936) (489) 0 0
Issuance of Class B Common Stock 0 0 64,014 640
Issuance of Convertible Preferred Stock Series A 0 0 0 0
Exchange of Class A and Class B Common Stock (1,759,988) (17,600) (487,020) (4,870)
Net income 0 0 0 0
------------------------------------------------
Balance, November 30, 1996 0 0 0 0
Conversion of Series A Convertible Preferred Stock 0 0 0 0
Initial public offering of common stock, $16.00
per share, net of expenses 0 0 0 0
Exercise of stock options, $1.98 - $6.00 per share 0 0 0 0
Common Stock issued in connection with business
acquisitions, $12.18 - $14.90 per share 0 0 0 0
Translation Adjustment 0 0 0 0
Deferred compensation related to stock options
granted below fair market value 0 0 0 0
Amortization of Deferred Compensation 0 0 0 0
Expenses related to issuance of Series A
Convertible Preferred Stock in 1996 0 0 0 0
Tax benefit associated with exercise of stock 0 0 0 0
options
Net Income 0 0 0 0
------------------------------------------------
Balance, November 30, 1997 0 0 0 0
================================================
</TABLE>
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED CURRENCY
COMMON STOCK PAID-IN COMPEN- TRANSLATION
SHARES AMOUNT CAPITAL SATION ADJUSTMENTS
--------- ------ ----------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Balance, November 30, 1994 0 0 958,495 0 0
Retirement of stock held in treasury 0 0 9,026 0 0
Issuance of Class B Common Stock 0 0 1,970 0 0
Net income 0 0 0 0 0
------------------------------------------------------------------------
Balance, November 30, 1995 0 0 969,491 0 0
Retirement of stock held in treasury 0 0 48,389 0 0
Issuance of Class B Common Stock 0 0 96,108 0 0
Issuance of Convertible Preferred Stock Series A 0 0 7,995,000 0 0
Exchange of Class A and Class B Common Stock 2,247,008 22,470 0 0 0
Net income 0 0 0 0 0
------------------------------------------------------------------------
Balance, November 30, 1996 2,247,008 22,470 9,108,988 0 0
Conversion of Series A Convertible Preferred 500,000 5,000 0 0 0
Stock
Initial public offering of common stock, $16.00
per share, net of expenses 1,400,000 14,000 19,749,359 0 0
Exercise of stock options, $1.98 - $6.00 per 344,675 3,447 684,035 0 0
share
Common Stock issued in connection with business
acquisitions, $12.18 - $14.90 per share 183,750 1,838 2,997,144 0 0
Translation Adjustment 0 0 0 0 49,752
Deferred compensation related to stock options
granted below fair market value 0 0 1,584,905 (1,584,905) 0
Amortization of Deferred Compensation 0 0 0 406,985 0
Expenses related to issuance of Series A
Convertible Preferred Stock in 1996 0 0 (75,096) 0 0
Tax benefit associated with exercise of stock 0 0 1,038,207 0 0
options
Net Income 0 0 0 0 0
------------------------------------------------------------------------
Balance, November 30, 1997 4,675,433 46,755 35,088,542 (1,177,920) 49,752
========================================================================
</TABLE>
<TABLE>
<CAPTION>
RETAINED
EARNINGS TREASURY
(ACCUM. STOCK AT
DEFICIT) COST TOTAL
-------------- -------------- -----------
<S> <C> <C> <C>
Balance, November 30, 1994 (465,787) (400,860) 571,943
Retirement of stock held in treasury 0 63,059 0
Issuance of Class B Common Stock 0 0 1,980
Net income 327,092 0 327,092
---------------------------------------------
Balance, November 30, 1995 (138,695) (337,801) 901,015
Retirement of stock held in treasury 0 337,801 0
Issuance of Class B Common Stock 0 0 96,748
Issuance of Convertible Preferred Stock Series A 0 0 8,000,000
Exchange of Class A and Class B Common Stock 0 0 0
Net income 1,045,068 0 1,045,068
---------------------------------------------
Balance, November 30, 1996 906,373 0 10,042,831
Conversion of Series A Convertible Preferred 0 0 0
Stock
Initial public offering of common stock, $16.00
per share, net of expenses 0 0 19,763,359
Exercise of stock options, $1.98 - $6.00 per 0 0 687,482
share
Common Stock issued in connection with business
acquisitions, $12.18 - $14.90 per share 0 0 2,999,982
Translation Adjustment 0 0 49,752
Deferred compensation related to stock options
granted below fair market value 0 0 0
Amortization of Deferred Compensation 0 0 406,985
Expenses related to issuance of Series A
Convertible Preferred Stock in 1996 0 0 (75,096)
Tax benefit associated with exercise of stock 0 0 1,038,207
options
Net Income 2,379,793 0 2,379,793
---------------------------------------------
Balance, November 30, 1997 3,286,166 0 37,293,295
=============================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------
1995 1996 1997
--------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities: $ 327,092 $ 1,045,068 $ 2,379,793
Net income
Adjustments to reconcile net income (loss) to net cash and cash
equivalents provided by operating activities:
Amortization of discounts on marketable securities -- -- (76,608)
Depreciation and amortization of property, plant and equipment 92,555 117,121 354,569
Provision for losses on accounts receivable 183,758 -- 98,026
Deferred rent amortization (169,337) 2,272 89,569
Deferred compensation amortization -- -- 406,985
Amortization of capital software development costs 438,871 252,260 394,770
Goodwill amortization -- -- 374,237
Deferred tax provision 138,887 61,410 632,240
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (655,280) (708,163) (6,156,891)
Current year income tax receivable -- -- (235,848)
Prepaid expenses and other assets (42,837) (521,911) (195,754)
Accounts payable and accrued liabilities 280,725 920,907 (1,449,207)
Income taxes payable 74,289 492,498 (532,097)
Deferred income 133,844 (104,870) (276,327)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 802,567 1,556,592 (4,192,543)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of marketable securities -- -- (43,169,673)
Proceeds from sales and maturities of marketable securities -- -- 29,928,380
Capital expenditures and leasehold improvements (69,700) (652,359) (933,403)
Capitalization of software development costs (294,042) (395,303) (1,167,452)
Acquisitions of businesses, net of cash acquired -- -- (7,356,848)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (363,742) (1,047,662) (22,698,996)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable 24,240 275,000 --
Payments on notes payable (69,107) (363,632) (91,667)
Revolving credit facility, net (337,312) (161,330) (47,839)
Income tax benefit related to stock options -- -- 1,038,207
Payments on Capital lease obligations (11,524) (21,340) (49,759)
Proceeds from issuance of capital stock, net of expenses -- 8,000,000 19,688,264
Proceeds from sale of common stock under stock programs 1,980 96,748 687,482
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (391,723) 7,825,446 21,224,687
- --------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash -- -- 8,766
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 47,102 8,334,376 (5,658,085)
Cash and cash equivalents at beginning of period 15,682 62,784 8,397,160
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 62,784 $ 8,397,160 $ 2,739,075
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Cash paid for interest $ 107,557 $ 46,668 $ 91,367
Cash paid for income taxes $ 24,113 $ 90,594 $ 810,140
Noncash investing and financing activities:
Property and equipment acquired through capital leases $ -- $ 247,086 $ --
Retirement of treasury stock:
Class A Common Stock $ 12,612 $ 67,560 $ --
Preferred Stock $ 50,447 $ 270,241 $ --
Conversion of Series A Convertible Preferred Stock:
Series A Convertible Preferred Stock $ -- $ -- $ (5,000)
Common Stock $ -- $ -- $ 5,000
Business acquisitions, net of cash acquired
Working capital, other than cash acquired $ -- $ -- $ 2,714,547
Property and equipment $ -- $ -- $ (699,939)
Cost in excess of net assets of companies acquired, net $ -- $ -- $(11,084,792)
Other non-current assets $ -- $ -- $ (1,356,073)
Non-current liabilities $ -- $ -- $ 69,428
Fair market value of common stock issued $ -- $ -- $ 2,999,981
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
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.
RECAPITALIZATION OF COMMON STOCK
The Company, formerly a Maryland corporation, elected to change its capital
structure in October 1996, and reincorporated into Template Software, Inc., a
Virginia corporation (the "Recapitalization"). Pursuant to the Recapitalization,
the Company (i) exchanged its Class A and Class B Common Stock for an equal
amount of shares of a single class of $0.01 par value, common stock ("Common
Stock") and (ii) increased the Company's authorized capital stock to 20,000,000
shares, which consisted of 17,000,000 shares of Common Stock and 3,000,000
shares of a new class of preferred stock ("Preferred Stock"). The preferences,
limitations and relative rights of the Preferred Stock, which is issuable in
series, is determined by the Board of Directors upon designation.
REGISTRATION STATEMENT
In January 1997, the Company completed an underwritten public offering of
2,100,000 shares of its common stock; 1,400,000 shares of Common Stock for the
account of the Company and 700,000 shares of Common Stock for the accounts of
selling security holders, with an aggregate offering price of $16.00 per share
registered. The expenses incurred for the Company's account in connection with
the issuance and distribution of the securities were $1,568,000 of underwriting
discounts and commissions and $1,068,641 of other expenses for a total expense
of $2,636,641. The net offering proceeds for the account of the Company were
$19,763,359. From the effective date of the Registration Statement, through the
end date of the period covered by this report, the Company used $7,356,848 to
acquire other businesses and the remainder, $12,406,511, was applied toward the
purchase of temporary investments in marketable securities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Template
Software, Inc. and its wholly-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
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, generally, upon delivery and acceptance of the software 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
27
<PAGE>
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.
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, 1997, the Company has not experienced any losses on these
investments.
MARKETABLE SECURITIES
Marketable securities at November 30, 1997, are carried at amortized cost
and consist of direct obligations of the United States Government,
municipalities and commercial paper with strong credit ratings. These
investments are considered available-for-sale as defined by Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's investments are held for an
unspecified period of time and are sold to meet its liquidity needs.
Accordingly, the Company has classified these investments as current assets.
Amortized cost of marketable securities approximates market; therefore, no
adjustment has been made to stockholders equity as a result of changes in market
value to these securities. Interest income is accrued as earned.
<TABLE>
<CAPTION>
Fair Value
-----------
<S> <C>
U.S. Government and its agencies (due within one year) $ 4,986,146
U.S. Corporate debt securities (due within one year) 3,366,755
Municipal obligations (maturities of 25-27 years with 7 day call feature) 4,965,000
-----------
Total $13,317,901
===========
</TABLE>
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash equivalents, marketable
securities and accounts receivable. The Company limits the amount of investment
exposure in any one financial instrument and minimizes the amount of cash it
maintains in foreign currencies by maintaining sufficient cash in U.S. dollars.
To date, the impact of exchange rates on foreign cash balances has been
immaterial. The Company sells products and services to customers without
requiring collateral, however, the Company routinely assesses the financial
strength of its customers and maintains allowances for anticipated losses.
For the years ended November 30, 1995, 1996 and 1997, revenues from federal
government agencies represent 28%, 20% and 23%, respectively, of total
consolidated revenues. With the exception of federal government agencies, there
was one customer (13% from Customer A) during the year ended November 30, 1997,
two customers (28% from Customer B and 20% from Customer C) during the year
ended November 30, 1996 and one customer (11% from Customer D) during the year
ended November 30, 1995 that accounted for more than 10% of total consolidated
revenues.
With the exception of federal government agencies, there were three
customers at November 30, 1996 and one customer at November 30, 1997 that
accounted for 48% and 11%, respectively, of total consolidated accounts
receivable.
28
<PAGE>
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, marketable securities, 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.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences of temporary differences and income tax credits. Temporary
differences are primarily the result of the differences between the tax bases of
assets and liabilities and their financial reporting amounts. Deferred tax
assets and liabilities are measured by applying enacted statutory tax rates
applicable to the future years in which deferred tax assets or liabilities are
expected to be settled or realized. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense consists of the taxes payable for the current period and the
change during the period in deferred tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION
Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and an average exchange rate for each period for revenues, expenses,
gains and losses. Where the local currency is the functional currency,
translation adjustments are recorded as a separate component of shareholders'
equity. Transaction gains and losses, which are included in net income, are
immaterial for all periods presented.
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. For the years
ended November 30, 1995 and 1996, common stock and common stock equivalent
shares issued by the Company at prices below the public offering price during
the twelve month period prior to the initial public offering date have been
included in the calculation of common and common stock equivalent shares as if
they were outstanding for these periods. Differences between primary and fully-
diluted earnings per share are insignificant.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("Statement 128"), which specifies the
computation, presentation, and disclosure requirements for earnings per share.
Statement 128 is effective for financial statements ending after December 15,
1997. Had earnings per share been determined consistent with the provisions of
Statement 128, the Company's basic and diluted earnings per share for the year
ended November 30, 1997 would have been $0.58 and $0.43, respectively.
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, five
years for office furniture and equipment and three years for computer equipment
and software. 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.
29
<PAGE>
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes the direct costs associated with the development of
software products in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." Research costs are charged to product development expense
prior to the development of a detailed program design or a working model. Costs
incurred subsequent to the product release, and research and development
performed under contract are charged to operations.
Capitalized costs are amortized over the estimated product life using the
greater of the straight-line method or the ratio of current product revenues to
total projected future revenues. Software development costs at November 30, 1996
and 1997 are presented net of accumulated amortization of $3,012,041 and
$3,406,811, respectively. Amortization expense related to software development
costs was $438,871, $252,260 and $394,770 respectively for the years ended
November 30, 1995, 1996 and 1997.
GOODWILL
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase business combinations. Goodwill
is being amortized on a straight-line basis over periods ranging from 10 to 15
years. Goodwill at November 30, 1997 is presented net of accumulated
amortization of $374,237.
LONG-LIVED ASSETS
The Company evaluates the recoverability of the carrying value of property
and equipment and intangible assets in accordance with the provisions of
Statement of Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of". The Company considers historical
performance and anticipated future results in its evaluation of potential
impairment. Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of these assets in relation to the operating
performance of the business and future and undiscounted cash flows expected to
result from the use of these assets. Impairment losses are recognized when the
sum of expected future cash flows are less than the assets' carrying value. No
such impairment losses have been recognized to date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
The financial Accounting Standards Board has issued two new standards
which become effective for reporting periods beginning after December 15, 1997.
SFAS No. 130, Reporting Comprehensive Income, requires additional disclosures
with respect to certain changes in assets and liabilities that previously were
not required to be reported as results of operations for the period. The
Company will begin making the additional disclosures required by SFAS No. 130 in
the first quarter of fiscal 1999. SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, requires financial and descriptive
information with respect to "operating segments" of an entity based on the way
management disaggregates the entity for making internal operating decisions.
The Company will begin making the disclosures required by SFAS No. 131 with
financial statements for the period ending November 30, 1999.
RECLASSIFICATIONS
Certain reclassifications have been made in the 1996 financial statements
to conform to the 1997 financial statement presentation.
30
<PAGE>
3. AQUISITIONS OF BUSINESSES
KRYSTAL INGENIERIE S.A.
On March 4, 1997, the Company consummated its acquisition of all of the
issued and outstanding capital stock of Krystal Ingenierie S.A. ("Krystal"), a
-------
corporation organized under the laws of the Republic of France in a transaction
accounted for as a purchase business combination. The total consideration of
$1,460,005 consisted of: (1) the exchange of an aggregate of 48,064 shares of
the Company's common stock (the "Common Stock") for 2,500 shares of Krystal held
------------
by Kuhner, representing all of the issued and outstanding capital stock of
Krystal; (2) the exchange an aggregate of 45,686 additional shares of the
Company's Common Stock for certain indebtedness of Krystal owed to Kuhner in the
aggregate amount of FF 3,914,331 ($677,179 at March 4, 1997); and (3)
acquisition costs of $63,224. The shares of common stock issued were valued at
the approximate weighted average price per share of $14.90 (based on volume of
shares traded during the period from February 24, 1997 to February 28, 1997).
Concurrently with the closing of the Krystal acquisition, Krystal's name was
formally changed to Template Software S.A. The excess of the purchase price
over the fair value of the net tangible liabilities acquired of $1,306,511 was
allocated to goodwill and will be amortized over its estimated useful life of 10
years.
MILESTONE SOFTWARE GMBH AND MILESTONE SOFTWARE G.M.B.H.
On June 27, 1997, the Company acquired all of the issued and outstanding
equity interests of milestone software GmbH, a German limited liability company
("Milestone"), which included 34% of the issued and outstanding equity interests
---------
of milestone software, G.m.b.H., an Austrian corporation ("Milestone-Austria"),
-----------------
from Milestone's three owners, Klaus Dieter Jansen ("Jansen"), Heinz-Dieter
------
Dietrich ("Dietrich") and NeSBIC III, C.V., for an aggregate cash purchase price
--------
of DM 12,000,000 ($6,970,800 at June 27, 1997) plus acquisition costs of
$480,567. This transaction was accounted for as a purchase business
combination. An additional 10% interest of Milestone-Austria was acquired from
Dietrich and Jansen in exchange for 90,000 shares of the Company's Common Stock.
The shares of common stock issued were valued at the approximate weighted price
per share of $12.18 (based on the volume of shares traded during the period June
10, 1997 to June 16, 1997. The excess of the purchase price over the fair value
of the net tangible liabilities acquired of $9,271,281 was allocated to
goodwill at the acquisition date and will to be amortized over its estimated
useful life of 15 years.
The acquisition agreement also provides for the Company to issue $507,000
of equivalent shares of common stock to Dietrich and Jansen on both November 30,
1997 and 1998 if certain profit objectives are met over the five month and
twelve month periods ended November 30, 1997 and 1998, respectively. The profit
objective for the five month period ended November 30, 1997 was met.
Consequently, the Company will issue an additional 51,342 shares of common stock
to Dietrich and Jansen in February 1998. The fair value of these shares of
$507,000 has been allocated to goodwill as of November 30, 1997.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and Krystal and Milestone as if the
acquisitions had occurred December 1, 1995:
<TABLE>
<CAPTION>
(in thousands except per share amounts) 1996 1997
- ----------------------------------------- -------- -------
<S> <C> <C>
Net sales $23,917 $32,507
Net income (loss) (288) 1,707
Earnings per common share ($.06) $ .28
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only. They do not purport to be indicative of the results of operations which
actually would have resulted had the combinations been in effect on December 1,
1995. In addition, they do not purport to be indicative of future results of
operations on the consolidated entities.
31
<PAGE>
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Government:
Billed $ 660,826 $ 3,109,725
Unbilled 13,341 65,798
Retainage 80,542 87,652
---------- -----------
754,709 3,263,175
---------- -----------
Domestic:
Billed 1,901,179 1,690,101
Unbilled 24,376 4,971
Other -- --
---------- -----------
1,925,555 1,695,071
---------- -----------
Foreign:
Billed. 368,883 5,534,199
Unbilled 21,443 530,525
---------- -----------
390,326 6,064,725
---------- -----------
Total 3,070,590 11,022,971
Less: allowance for doubtful accounts (183,758) (548,717)
---------- -----------
$2,886,832 $10,474,254
========== ===========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
Data processing equipment $ 498,783 $ 1,526,474
Office furniture and equipment 857,268 1,240,335
Leasehold improvements 223,747 453,533
---------- -----------
1,579,798 3,220,342
Less: accumulated depreciation (656,114) (1,026,410)
---------- -----------
$ 923,684 $ 2,193,932
========== ===========
</TABLE>
6. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
--------------------
1996 1997
--------- --------
<S> <C> <C>
Revolving credit facility $ -- $ 33,553
======== ========
Long-term debt consists of the following:
Term Loan $267,361 $175,695
Less current portion (91,667) (91,667)
-------- --------
Long-term portion $175,694 $ 84,028
======== ========
</TABLE>
32
<PAGE>
REVOLVING CREDIT FACILITIES
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, 1997, 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. On March 5, 1997, the letter of credit of $300,000 related to the
noncancelable operating lease for its new office space was terminated. The
Facility expires on April 30, 1998. As of November 30, 1996 and 1997, no
amounts were due under the Facility.
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, 1996 and 1997, and for certain compliance periods during the three
years ended November 30, 1997, 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.
In addition, the Company's French subsidiary maintains an unsecured line of
credit with Banque Hervet for 500,000FF for overdraft protection at an interest
rate of 8.3%. As of November 30, 1997, 198,186FF ($33,553) was outstanding
under this line of credit.
SUBORDINATED NOTE PAYABLE
In December 1991, the Company repurchased 101,554 shares of Class A Common
Stock and 406,316 shares of Convertible Preferred Stock from a minority
shareholder for $300,000 in cash and a subordinated note in the amount of
$400,860 (the "Subordinated Note"). The Subordinated Note, as amended, requires
annual interest payments through March 1995 and quarterly principal and interest
payments of $31,000, beginning in April 1995. The Subordinated Note bears
interest at 2% above the prime rate. Any remaining balance is due January 1,
1999. Stock representing the unpaid portion of the note is held in treasury, and
is being retired as the principal is repaid.
In October 1996, the balance of the Subordinated Note was paid in full and
all of the remaining, underlying shares of Preferred Stock and Class A Common
Stock held in treasury were retired. The repayment of the Subordinated Note was
financed with a $275,000, three year term loan pursuant to the Loan Agreement
from the Company's commercial bank (the "Term Loan"). The Term Loan bears
interest at the prime rate plus 1/4% (8.75% at November 30, 1997) and requires
monthly principal payments of $7,639, beginning in November 1996.
7. CAPITAL STOCK
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. The Series A Stock contains certain
registration rights with respect to the shares of Common Stock received upon
conversion. Each share of Series A Stock automatically converted into one share
of Common Stock upon the Company's Initial Public Offering in January 1997.
STOCK OPTION PLANS
The Company has three Stock Option Plans, the 1992 Incentive Stock Option
Plan, the 1992 Non-Statutory Stock Option Plan and the 1996 Equity Incentive
Plan. The 1992 Plans replace the Company's former 1986
33
<PAGE>
Incentive Stock Option Plan and the 1984 Incentive Stock Option Plan. No further
grants may be made under the 1992 plans.
In October 1996, the Company established the 1996 Equity Incentive Plan
(1996 Equity Plan). Under the 1996 Equity Plan, which is administered by the
Compensation Committee of the Board of Directors, a variety of awards, including
stock options, stock appreciation rights, stock awards and incentive awards may
be made to the Company's employees and directors. Initially, 1,000,000 shares
of Common Stock were reserved for issuance under the 1996 Equity plan. As of
November 30, 1997, The Company granted 176,712 shares in excess of the reserved
allotment. Such excess options were granted contingent upon the passing of a
shareholder resolution to reserve an additional 5,000,000 shares at the next
annual meeting.
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 1,207,740 were vested and exercisable at November 30, 1997.
Stock option activity for the three years ended November 30, 1997 is
summarized as follows:
<TABLE>
<CAPTION>
1984 1986 1992 1996
INCENTIVE INCENTIVE INCENTIVE INCENTIVE Weighted Average
STOCK PLAN STOCK PLAN STOCK PLAN STOCK PLANs Total Exercise Price
---------- ---------- ---------- ----------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, November 30, 1994 219,455 157,749 925,531 -- 1,302,735 $ 1.81
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 $ 1.84
Granted -- -- 618,300 -- 618,300 $ 4.58
Exercised (14,014) -- (50,000) -- (64,014) $ 1.51
Forfeited (13,106) -- (23,500) -- (36,606) $ 1.98
------- ------- --------- ----------- ---------
Outstanding, November 30, 1996 93,000 156,749 1,931,166 -- 2,180,915 $ 2.63
Granted -- -- -- 1,190,712 1,190,712 $12.38
Exercised (81,000) (70,249) (193,426) -- (344,675) $ 1.99
Forfeited -- -- (32,750) (14,000) (46,750) $ 5.03
------- ------- --------- ----------- ---------
Outstanding, November 30, 1997 12,000 86,500 1,704,990 1,176,712 2,980,202 $ 6.56
======= ======= ========= =========== =========
</TABLE>
The range of exercise prices for options outstanding at November 30,
1997 was $1.38 to $16.00. The following table summarizes additional information
about stock options outstanding at November 30, 1997:
<TABLE>
<CAPTION>
Weighted Weighted
Average Weighted Average
Remaining Average Exercise
Range of Number Contractual Exercise Number Price of
Exercise Prices Outstanding Life Price Exercisable Exercisable
- ----------------- ----------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 1.380-$ 1.980 1,404,740 6 years $ 1.841 1,066,490 $ 1.797
$ 6.000-$ 9.000 721,962 9 years $ 7.343 98,750 $ 6.000
$10.125-$12.750 264,000 10 years $10.861 30,000 $12.750
$14.000-$16.000 589,500 10 years $14.915 12,500 $16.000
--------- ---------
2,980,202 1,207,740
========= =========
</TABLE>
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation". In accordance with SFAS No. 123, the Company applies APB Opinion
25 and related Interpretations in accounting for its stock option plans. If the
Company had elected to recognize compensation cost based on the fair value of
the options granted at grant date as prescribed by SFAS No. 123, net income and
net income per common share would have been reduced to the pro forma amounts
shown below (in thousands, except per-share amounts):
34
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net income--as reported $2,379,793 $1,045,068
Net income--pro forma $1,956,444 $ 988,901
Net income per common share--as reported $ .41 $ .23
Net income per common share--pro forma $ .34 $ .21
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected dividend yield 0.0% 0.0%
Risk-free interest rate 6.5% 6.4%
Expected volatility 70.0% 70.0%
Expected life (in years) 5 5
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's options. The weighted average
estimated fair values of employee stock options granted during fiscal 1997 and
1996 were $7.83 and $2.90 per share, respectively.
The above pro forma disclosures are not likely to be representative of the
effects on net income and net income per common share in future years, because
they do not take into consideration pro forma compensation expense related to
grants made prior to the Company's fiscal year 1996.
Prior to the initial public offering of the Company's Common Stock, the
fair value of the Company's Common Stock was determined through an independent
valuation. The Company calculated deferred compensation expense of $1,634,527
related to certain options granted during the year ended November 30, 1995 and
1996 and will recognize compensation expense over the vesting period of those
stock options. The Company did not record any adjustments for deferred
compensation expense as of November 30, 1995 and 1996 since it did not have a
material effect on total shareholders' equity. During the year ended November
30, 1997 the company recorded $406,985 of deferred compensation expense.
8. INCOME TAXES
Foreign (loss) income before income taxes was $112,217, ($13,819) and
$1,017,199 for the years ended November 30, 1995, 1996 and 1997.
The benefit (provision) for income taxes for the years ended November 30,
1995, 1996 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
-------------------------------------
1995 1996 1997
---------- ----------- ------------
<S> <C> <C> <C>
Current:
Federal $ (88,160) $(485,853) $ (981,736)
State (10,242) (97,239) (118,808)
Foreign -- -- (35,232)
--------- --------- -----------
(98,402) (583,092) (1,135,776)
--------- --------- -----------
Deferred:
Federal (157,609) (54,670) (91,042)
State (18,310) (2,179) (3,473)
Foreign 37,032 (4,561) (537,725)
--------- --------- -----------
(138,887) (61,410) (632,240)
--------- --------- -----------
Total benefit (provision) $(237,289) $(644,502) $(1,768,016)
========= ========= ===========
</TABLE>
35
<PAGE>
The source and tax effects of the temporary differences giving rise to the
Company's net deferred tax assets (liabilities) at November 30, 1996 and
November 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Capitalized software $(272,517) $(563,439)
Deferred revenue 176,742 165,153
Allowance for doubtful accounts 69,736 99,800
Accrued liabilities 127,479 141,219
Other (41,402) 35,401
Deferred compensation -- 154,663
Net operating loss carryforward 32,471 733,859
Goodwill -- 47,844
--------- ---------
Total $ 92,509 $ 814,500
========= =========
</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, 1995, the Company had general business credits of
$35,907 which were utilized to offset current taxes payable during the years
ended November 30, 1996. In addition, as of November 30, 1995, 1996 and 1997 the
Company had $112,218, $98,397 and $1,867,509, respectively, of net operating
loss carryforwards related to its foreign operations that may only be used to
offset foreign current taxes payable. Of the total foreign net operating loss
carryforwards remaining at November 30, 1997, $846,902 will expire in 2002 and
$1,020,607 can be carried forward without any time limit.
The Company's tax provision for the years ended November 30, 1995, 1996 and
1997 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,
--------------------------
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Statutory rate (34)% (34)% (34)%
State income taxes, net of federal benefit (4)% (4)% (4)
Permanent differences (3)% (1)% (2)
Foreign rate differential (1)% -- (3)
Other -- 1 % --
---- ---- ----
Effective tax rate (42)% (38)% (43)%
==== ==== ====
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
During September 1996, the Company entered into a noncancelable operating
lease for new office space that expires in December 2006. As an incentive to
lease this space, the landlord provided a rent abatement through December 1996.
Additionally, the lease contains an escalation clause that provides for an
increase in base rent beginning in December 1997 and a renewal clause whereby
the Company has the option to renew the lease for a period of five additional
years.
36
<PAGE>
The Company also leases certain office equipment and other office space
under noncancelable operating leases which expire at various dates through 2008.
Certain operating leases provide for adjustments relating to changes in real
estate taxes and other operating expenses. Rent expense under all leases is
recognized ratably over the lease terms. Rent expense under all operating leases
was approximately $539,826, $706,902 and $1,508,707, respectively, for the years
ended November 30, 1995, 1996, and 1997.
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, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Office furniture and equipment $ 210,042 $210,042
Data processing equipment 37,044 37,044
Less: accumulated amortization (15,016) (69,372)
---------- --------
$ 232,070 $177,714
========== ========
Future minimum lease payments, under all leases, at November 30, are as follows:
OPERATING CAPITAL
---------- --------
1998 1,770,089 66,964
1999 1,638,185 57,728
2000 1,371,306 47,232
2001 1,365,936 36,852
2002 1,392,805 --
Thereafter 6,308,810 --
--------
Total minimum payments 208,776
Less: portion representing interest 27,527
--------
Present value of capital lease obligations $181,249
========
</TABLE>
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
November 30, 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 $4,377,697, of which $2,049,498 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, 1996 and 1997, are costs incurred related to the
Agreement of $337,590, $608,812 and $610,663 respectively, which are net of
reimbursable amounts from the Air Force of $1,106,652, $545,680 and $397,078
respectively. The amount reimbursable in 1995 includes $420,000 related to the
product development expenses discussed above. The Company does not have a
continuing obligation to fund the Consortium beyond the termination date of the
Agreement.
37
<PAGE>
11. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
---------------------
1996 1997
-------- -----------
<S> <C> <C>
Accrued payroll, bonus and vacation $540,718 $1,871,569
Accrued commissions 112,180 106,553
Accrued interest 2,532 --
Accrued subcontractor's fees 68,744 22,857
Accrued value added tax -- 371,339
Accrued acquisition costs -- 160,872
Other accrued expenses 41,803 184,428
-------- ----------
$765,977 $2,717,618
======== ==========
</TABLE>
12. RELATED PARTY TRANSACTIONS
In November 1996, Alcatel Alsthom Compagnie Generale d'Electricite S.A.
("Alcatel") invested $8.0 million in the Company in the form of Preferred Stock
at the equivalent of $16.00 per share of Common Stock. The costs related with
the issuance of the Preferred Stock was $75,096. Coincident with the Company's
initial public offering of stock, the Preferred Stock converted to Common Stock
at a one to one conversion rate. During 1997, Alcatel and the Company entered
into agreements whereby the Company provides products and services to Alcatel
for their internal use and for resale to their customers. In the year ended
November 30, 1997, the Company earned $1,712,683 of revenue from Alcatel.
Accounts receivable from Alcatel as of November 30, 1997 was $785,314.
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 $101,596, $100,003 and $129,917 for the years
ended November 30, 1995, 1996 and 1997, respectively.
INCENTIVE BONUS PLAN
The Company has an incentive bonus plan whereby the Board of Directors
authorized the officers to grant awards to nominated employees in recognition of
exceptional contributions. Awards totaling $41,000, $50,850 and $101,375
respectively , were given to employees (excluding executives) for the years
ended November 30, 1995, 1996 and 1997, respectively.
14. SEGMENT INFORMATION
The company provides software products and services worldwide. Revenue from
foreign operations and identifiable assets of foreign operations were less than
10% of consolidated revenue and assets in 1995 and 1996. summarized financial
information by geographic region for 1997 is as follows (in thousands):
38
<PAGE>
<TABLE>
<CAPTION>
Sales
Sales to Between Income Identifiable
Unaffiliated Geographic from Assets at Capital Depreciation/
Customers Areas Operations Year End Expenditures Amortization
------------ ----------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
United States 14,630 2,745 2,266 39,790 461 204
Europe 12,188 606 1,103 18,733 432 145
Americas/Pacific 92 60 7 133 40 6
Eliminations -- (3,411) -- (15,685) -- --
Consolidated 26,910 -- 3,376 42,971 933 355
</TABLE>
Intercompany revenues between geographic areas are accounted for as transfer
fees which are intended to cover primarily software development and cost of
goods sold. The Company did not derive more than 10% of its total consolidated
revenue from export sales for the years 1995, 1996 and 1997.
39
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of June
---------
26, 1997, by and between TEMPLATE SOFTWARE, INC., a Virginia corporation (the
"Company"), HEINZ-DIETER DIETRICH and KLAUS-DIETER JANSEN (individually, the
- --------
"Investor" and collectively, the "Investors").
- --------- ---------
RECITALS
--------
A. Concurrently with the execution of this Agreement, the Investors are
acquiring from the Company shares of the Company's Common Stock, par value $0.01
per share, pursuant to certain stock purchase agreements of even date herewith
between the Company and each of the Investors (collectively, the "Purchase
--------
Agreements"). Capitalized terms used herein, but not otherwise defined, shall
- ----------
have the meaning ascribed to them in the Purchase Agreements.
B. By entering into this Agreement, the Company wishes to provide a further
inducement to the Investors to acquire the Company's Common Stock pursuant to
the Purchase Agreements.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
-----------
(a) "Common Shares" means shares of Common Stock, par value $0.01
-------------
per share of the Company.
(b) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(c) "Form S-3" means such form under the Securities Act as in effect
--------
on the date hereof or any registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.
(d) "Person" means any individual, partnership, limited liability
------
company, joint venture, corporation, association, trust or any other entity or
organization.
(e) "Register," "registered," and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement or
similar document in compliance with the
<PAGE>
Securities Act, and the declaration or ordering of effectiveness of such
registration statement or document.
(f) "Registrable Securities" means the 90,000 Common Shares issued to
----------------------
the Investors pursuant to the Purchase Agreements.
(g) "SEC" means the Securities and Exchange Commission.
---
(h) "Securities Act" means the Securities Act of 1933, as amended.
--------------
(i) "Violation" means any of the following statements, omissions or
---------
violations: (i) any untrue statement or alleged untrue statement of a material
fact contained in a registration statement under this Agreement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto or any documents filed under state securities or "blue
sky" laws in connection therewith, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law.
2. DEMAND REGISTRATION.
-------------------
(a) If, at any time following the one (1) year anniversary of the
Closing, the Company receives from the Investors a written request (the date of
such request being referred to herein as the "Notice Date") that the Company
-----------
file a registration statement under the Securities Act, then the Company shall,
subject to the limitations of Section 2(b) below, use its best efforts to
------------
effect as soon as practicable, and in any event within one hundred twenty (120)
days of the receipt of such request, the registration of all Registrable
Securities which the Investors request to be registered; provided, however, that
--------- -------
the Company shall not have any obligation to effect a registration statement
pursuant hereto unless the Investors seek registration of shares with an
aggregate public offering of at least $10,000,000.
(b) If the Investors intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 2 and such
---------
underwriter(s) shall be reasonably satisfactory to the Company. The Investors
shall (together with the Company as provided in Section 4(f)) enter
------------
into an underwriting agreement in customary form with the underwriter or
underwriters so selected for such underwriting. Notwithstanding any other
provision of this Section 2, if the underwriter advises the Investors
---------
that marketing factors require a limitation of the number of shares to be
underwritten, then the Investors shall so advise the Company, and the number of
shares of Registrable Securities that may be included in the underwriting shall
be allocated (i) first to the Investors; and (ii) thereafter, to the extent
additional securities may be included in the offering, to the Company.
2
<PAGE>
(c) The Company shall be obligated to effect only one (1)
registration pursuant to this Section 2, but an offering which is not
---------
consummated shall not be counted for this purpose. The Company's obligation to
register Common Shares under this Section 2 shall terminate on the second
---------
anniversary of the Closing Date.
(d) In the event of a registration of Registrable Securities pursuant
to this Section 2, the Company shall make available such officers and employees
---------
of the Company as the underwriters designated by the Investors in
accordance with this Agreement may reasonably request for purposes of
cooperating with such underwriter's marketing efforts.
(e) Notwithstanding the foregoing, if the Company shall furnish to the
Investors a certificate signed by the President of the Company stating that in
the good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its shareholders for such registration
statement to be filed by reason of a material pending transaction and it is
therefore essential to defer the filing of such registration statement, the
Company shall have the right to defer such filing for a period of not more than
one hundred twenty (120) days after receipt of the request of the Investors;
provided, however, that the Company may not utilize this right more than
- -------- -------
once in any twelve (12) month period.
3. PIGGY-BACK REGISTRATION.
-----------------------
(a) If (but without any obligation to do so) the Company proposes to
register (including for this purpose a registration effected by the Company for
shareholders other than the Investors) any of its securities under the
Securities Act in connection with the public offering of such securities solely
for cash, the Company shall, at such time, promptly give the Investors written
notice of such registration. Upon the written request of the Investors given
within twenty (20) days after mailing of such notice by the Company in
accordance with Section 17, the Company shall, subject to the provisions of
----------
Section 8, use its best efforts to cause to be registered under the Securities
- ---------
Act all of the Registrable Securities that the Investors have requested to be
registered. The Company shall have no obligation under this Section 3 to make
---------
any offering of its securities, or to complete an offering of its securities
that it proposes to make, and shall incur no liability to the Investors for its
failure to do so.
(b) The Company shall not have any obligations under Section 3(a) with
-----------
respect to any proposed registration of securities under a registration on Form
S-8 relating solely to the sale of securities to participants in a Company stock
plan or to other compensatory arrangements to the extent includable on Form S-8,
or a registration on Form S-4;
(c) The Company's obligation to register Common Shares under
Section 3(a) shall terminate on the earlier of the following: (i) the second
- ------------
anniversary of the Closing Date; or (ii) upon exercise of a demand registration
pursuant to Section 2 above.
---------
3
<PAGE>
4. OBLIGATIONS OF THE COMPANY. Whenever required under this Agreement to
--------------------------
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with respect
to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the
Investors, keep such registration statement effective for up to ninety (90) days
or until the Investors have completed the distribution referred to in such
registration statement, whichever occurs first (but in any event for at least
any period required under the Securities Act); provided, however,
-------- -------
that before filing such registration statement or any amendments thereto, the
Company will furnish to the Investors copies of all such documents proposed to
be filed. The running of the ninety (90) day period provided for in the
preceding sentence shall be tolled during any period of time in which any stop
order relating to such registration statement is in effect and during any period
from the date that the Company gives any notice provided for in Section 4(g)
------------
until such time as any amendment or supplement required in connection therewith
has been filed and is effective and adequate copies thereof have been
provided to the Investors for delivery under the Securities Act.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Investors such number of copies of such registration
statement and of each amendment and supplement thereto (in each case including
all exhibits), such number of copies of the prospectus contained in such
registration statement (including each preliminary prospectus and any summary
prospectus) and any other prospectus filed under Rule 424 under the Securities
Act, in conformity with the requirements of the Securities Act, and such other
documents as the Investors may reasonably request in order to facilitate the
disposition of Registrable Securities which he owns.
(d) Use its best efforts to register and qualify the securities covered
by such registration statement under such other securities or "blue sky" laws of
such states or jurisdictions as shall be reasonably requested by the Investors,
provided that the Company shall not be required in connection therewith or as a
condition thereto (i) to qualify to do business in any state or jurisdiction
where it would not otherwise be required to qualify but for the requirements of
this clause (d), or (ii) to file a general consent to service of process in any
such state or jurisdiction.
(e) Use its best efforts to cause all Registrable Securities covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
Company's business or operations to enable the seller or sellers thereof to
consummate the disposition of such Registrable Securities.
4
<PAGE>
(f) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering.
(g) Notify the Investors at any time when a prospectus is required to
be delivered under the Securities Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(h) Notify the Investors and the Investors' underwriters, if any, and
confirm such advice in writing: (i) when the registration statement has become
effective, (ii) when any post-effective amendment to the registration statement
becomes effective, and (iii) of any request by the SEC for any amendment or
supplement to the registration statement or prospectus or for additional
information.
(i) Notify the Investors if at any time the SEC should institute or
threaten to institute any proceedings for the purpose of issuing, or should
issue, a stop order suspending the effectiveness of the Registration Statement.
Upon the occurrence of any of the events mentioned in the preceding sentence,
the Company will use its best efforts to prevent the issuance of any such stop
order or to obtain the withdrawal thereof as soon as possible. The Company will
advise the Investors promptly of any order or communication of any public board
or body addressed to the Company suspending or threatening to suspend the
qualification of any Registrable Securities for sale in any jurisdiction.
(j) Furnish, at the request of the Investors, (i) on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Agreement, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in such form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Investors, and (ii)
on the date that the registration statement with respect to such securities
becomes effective, a "comfort" letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Investors, and, if such securities are being sold through underwriters, a
reaffirmation of such letter on the date that such Registrable Securities are
delivered to the underwriters for sale.
(k) As soon as practicable after the effective date of the registration
statement, and in any event within sixteen (16) months thereafter, have "made
generally available to its security holders" (within the meaning of Rule 158
under the Securities Act) an earnings statement (which need not be audited)
covering a period of at least twelve (12) months beginning
5
<PAGE>
after the effective date of the registration statement and otherwise complying
with Section 11(a) of the Securities Act.
5. FURNISH INFORMATION. It shall be a condition precedent to the
-------------------
obligations of the Company to take any action pursuant to this Agreement with
respect to the Registrable Securities that the Investors shall furnish to the
Company such information regarding themselves, the Registrable Securities held
by them, and the intended method of disposition of such securities as shall be
required to effect the registration of the Registrable Securities.
6. EXPENSES OF DEMAND REGISTRATION. All expenses, other than underwriting
-------------------------------
discounts and commissions relating to the Registrable Securities, incurred in
connection with registrations, filings or qualifications pursuant to Section 2,
---------
including without limitation all registration, filing and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the
Company, shall be borne by the Company.
7. EXPENSES OF PIGGY-BACK REGISTRATION. The Company shall bear and pay
-----------------------------------
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 3 for the Investors, including without limitation all
---------
registration, filing and qualification fees, printers' and accounting fees
relating or apportionable thereto and the fees and disbursements of one counsel
for the selling holders (selected by the holders of a majority of the
Registrable Securities being registered), but excluding underwriting discounts
and commissions relating to Registrable Securities.
8. UNDERWRITING REQUIREMENTS. In connection with any offering involving
-------------------------
an underwriting of shares being issued by the Company, the Company shall not be
required under Section 3 to include any Registrable Securities in such
---------
underwriting unless the Investors accept the terms of the underwriting as agreed
upon between the Company and the underwriters selected by the Company, and then
only in such quantity as will not, in the opinion of the underwriters,
jeopardize the success of the offering by the Company; provided, however, that
-------- -------
the Investors shall not be required to make any representations or warranties
except as they relate to the Investors' ownership of shares and authority to
enter into the underwriting agreement and to the Investors' intended method of
distribution, and the liability of the Investors shall be limited to an amount
equal to the net proceeds from the offering received by the Investors. If the
total amount of securities, including Registrable Securities, requested by
holders to be included in such offering (the "Secondary Securities") exceeds the
--------------------
amount of Secondary Securities that the underwriters reasonably believe
compatible with the success of the offering, then the Company shall be required
to include in the offering only that number of Secondary Securities, including
Registrable Securities, which the underwriters believe will not jeopardize the
success of the offering. The amount of Secondary Securities to be so included
in the offering shall be allocated among the holders of such securities pro rata
--- ----
according to the number of such securities held by each such holder or as may be
otherwise agreed upon among such holders.
9. INDEMNIFICATION. In the event any Registrable Securities are included
---------------
in a registration statement under this Agreement:
6
<PAGE>
(a) The Company will indemnify and hold harmless the Investors, their
heirs, personal representatives and assigns and any underwriter (as defined in
the Securities Act) for the Investors and each Person, if any, who controls the
Investors or underwriter within the meaning of the Securities Act or the
Exchange Act against any losses, claims, damages or liabilities (joint or
several) to which they may become subject under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon a
Violation; provided, however, that the Company will not be required to
--------- -------
indemnify any of the foregoing Persons on account of any losses, claims, damages
or liabilities arising from a Violation if and to the extent that such Violation
was made in a preliminary prospectus and was corrected in a subsequent
prospectus that was required by law to be delivered to the Person making the
claim with respect to which indemnification is sought hereunder (and such
subsequent prospectus was made available by the Company to permit delivery of
such prospectus in a timely manner), and such subsequent prospectus was not so
delivered to such Person); and the Company will pay to each such indemnified
party, as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement
-------- -------
contained in this Section 9(a) shall not apply to amounts paid in
------------
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
to a particular indemnified party for any such loss, claim, damage, liability or
action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by or on behalf of such
indemnified party.
(b) The Investors will indemnify and hold harmless the Company, each of
its directors, each of its officers who has signed the registration statement,
each Person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter, any other holder selling securities in such
registration statement and any controlling Person of any such underwriter or
other holder, against any losses, claims, damages or liabilities (joint or
several) to which any of the foregoing Persons may become subject, under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise out
of or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by or on behalf of the Investors expressly for use
in connection with such registration; and the Investors will pay, as incurred,
any legal or other expenses reasonably incurred by any Person intended to be
indemnified pursuant to this Section 9(b), in connection with investigating
------------
or defending any such loss, claim, damage, liability, or action; provided,
--------
however, that the indemnity agreement contained in this Section 9(b) shall
- ------- ------------
not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Investors, which consent shall not be unreasonably withheld; and provided
--------
further, however, that, in no event shall the liability of the
- ------- -------
Investors under this Section 9(b) exceed the net proceeds from the offering
------------
received by the Investors.
7
<PAGE>
(c) Promptly after receipt by an indemnified party under this Section 9 of
---------
notice of the commencement of any action (including any governmental action),
such indemnified party will, if a claim in respect thereof is to be made
against any indemnifying party under this Section 9, deliver to the
---------
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
-------- -------
shall have the right to retain its own counsel, with the fees and expenses to be
paid by the indemnifying party, if representation of such indemnified party by
the counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified party and any
other party represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the indemnified party under this Section 9 except if, and only to
---------
the extent that, the indemnifying party is actually prejudiced thereby; and such
failure to deliver written notice to the indemnifying party will not relieve it
of any liability that it may have to any indemnified party otherwise than under
this Section 9.
---------
(d) The obligations of the Company and the Investors under this
Section 9 shall survive the completion of any offering of Registrable
- ---------
Securities in a registration statement under this Agreement, and otherwise.
(e) Any indemnity agreements contained herein shall be in addition to
any other rights to indemnification or contribution which any indemnified party
may have pursuant to law or contract and shall remain operative and in full
force and effect regardless of any investigation made or omitted by or on behalf
of any indemnified party.
(f) If for any reason the foregoing indemnity is unavailable, then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (i) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying party on the one hand and the indemnified
party on the other (taking into consideration, among other things, the fact that
the provision of the registration rights and indemnification hereunder is a
material inducement to the Investors to acquire Common Shares pursuant to the
Purchase Agreements); or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law or provides a lesser sum to the indemnified
party than the amount hereinafter calculated, in such proportion as is
appropriate to reflect not only the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other
(taking into consideration, among other things, the fact that the provision of
the registration rights and indemnification hereunder is a material inducement
to the Investors to purchase Common Shares pursuant to the Purchase Agreements)
but also the relative fault of the indemnifying party and the indemnified party
as well as any other relevant equitable considerations. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by or on
8
<PAGE>
behalf of the indemnifying party or the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
10. REPORTS UNDER THE EXCHANGE ACT. With a view to making available to
------------------------------
the Investors the benefits of Rule 144 under the Securities Act and any other
rule or regulation of the SEC that may at any time permit the Investors to sell
securities of the Company to the public without registration, the Company agrees
to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date of the first registration statement filed by the Company for
the offering of its securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) furnish to the Investors, so long as the Investors own any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 under
the Securities Act (at any time after the effective date of the first
registration statement filed by the Company) and the Securities Act and Exchange
Act (at any time after it has become subject to such reporting requirements);
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company; and (iii) such other
information as may be reasonably requested in availing the Investors of any rule
or regulation of the SEC which permits the selling of any such securities
without registration.
11. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to
---------------------------------
register Registrable Securities pursuant to this Agreement may not be
transferred in whole or in part by the Investors.
12. MARKET STAND-OFF" AGREEMENT. The Investors hereby agree that, during
---------------------------
the period requested by the underwriters in the Company's initial public
offering (not to exceed 180 days following the effective date of the
registration statement of the Company filed under the Securities Act in
connection with such offering), he shall not sell or otherwise transfer or
dispose of any Common Shares or any securities of the Company convertible into
Common Shares held him.
13. AMENDMENT; WAIVER. Any provision of this Agreement may be amended
------------------
only with the written consent of the Company and the Investors. The observance
of any provision of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively) only with the
written consent of the party to be charged.
9
<PAGE>
14. CHANGES IN REGISTRABLE SECURITIES. If, and as often as, there are any
---------------------------------
changes in the Registrable Securities by way of stock split, stock dividend,
combination or reclassification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment shall be made in the provisions of this Agreement, as may be
required, so that the rights and privileges granted hereby shall continue with
respect to the Registrable Securities as so changed. Without limiting the
generality of the foregoing, the Company will require any successor by merger or
consolidation to assume and agree to be bound by the terms of this Agreement, as
a condition to any such merger or consolidation.
15. ENTIRE AGREEMENT. This Agreement constitutes the full and entire
----------------
understanding and agreement among the parties with regard to the subject matter
hereof. Nothing in this Agreement, express or implied, is intended to confer
upon any Person, other than the parties hereto and their respective successors
and assigns, any rights, remedies, obligations, or liabilities under or by
reason of this Agreement, except as expressly provided herein.
16. GOVERNING LAW. This Agreement and the transactions contemplated
-------------
hereby will be governed by the laws of the Commonwealth of Virginia.
17. NOTICES. Unless otherwise provided, any notice required or permitted
-------
under this Agreement shall be given in writing and shall be deemed effectively
given upon receipt by the party to be notified or on the second following
business day, if delivered by a recognized overnight courier service offering
overnight delivery, or on the third following business day, if such courier
offers second-day delivery, and addressed to the party to be notified (a) if to
the Investors, at the address set forth at the end of this Agreement or at such
other address as such party shall have furnished the Company in writing, or (b)
if to the Company, at its address set forth at the end of this Agreement, or at
such other address as the Company shall have furnished to the parties in
writing.
18. SEVERABILITY. Any invalidity, illegality or limitation on the
------------
enforceability of this Agreement or any part thereof, by any party whether
arising by reason of the law of the respective party's domicile or otherwise,
shall in no way affect or impair the validity, legality or enforceability of
this Agreement with respect to other parties. If any provision of this
Agreement shall be judicially determined to be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
19. TITLES AND SUBTITLES. The titles of the Sections of this Agreement
--------------------
are for convenience of reference only and are not to be considered in
construing this Agreement.
20. DELAYS OR OMISSIONS; REMEDIES CUMULATIVE. It is agreed that no
----------------------------------------
delay or omission to exercise any right, power or remedy accruing to the
parties, upon any breach or default of the Company under this Agreement, shall
impair any such right, power or remedy, nor shall it be construed to be a waiver
of any such breach or default, or any acquiescence therein, or of any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default theretofore
or thereafter occurring. It
10
<PAGE>
is further agreed that any waiver, permit, consent or approval of any kind or
character by a party of any breach or default under this Agreement, or any
waiver by a party of any provisions or conditions of this Agreement must be in
writing and shall be effective only to the extent specifically set forth in
writing and that all remedies, either under this Agreement, or by law or
otherwise afforded to a party, shall be cumulative and not alternative.
21. ATTORNEYS' FEES. If any action at law or in equity is necessary to
---------------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
22. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
[SIGNATURE PAGE FOLLOWS.]
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
-------
TEMPLATE SOFTWARE, INC.
By: /s/ E. Linwood Pearce
------------------------------
E. Linwood Pearce
Chief Executive Officer
Address:
-------
45365 Vintage Park Plaza
Dulles, Virginia 20166
Attn: Chief Executive Officer
INVESTORS:
---------
/s/ Heinz-Dieter Dietrich
----------------------------------
Heinz-Dieter Dietrich
Address:
-------
c/o Milestone Software, GmbH
Airport Center
Flughafenstrasse 52a
22335 Hamburg, Germany
Attn: Mr. Heinz-Dieter Dietrich
/s/ Klaus-Dieter Jansen
----------------------------------
Klaus-Dieter Jansen
Address:
-------
c/o Milestone Software, GmbH
Airport Center
Flughafenstrasse 52a
22335 Hamburg, Germany
Attn: Mr. Klaus-Dieter Jansen
12
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is made and
---------
entered into as of this 14th day of October, 1997 by and between TEMPLATE
SOFTWARE, INC., a Virginia corporation (the "Company"), and JOSEPH M. FOX (the
-------
"Executive").
- ----------
RECITALS
--------
A. The Company and the Executive are parties to that certain Employment
Agreement, dated as of October 24, 1996, (the "Agreement"), pursuant to which
---------
the Executive agreed to accept employment as Chairman of the Board of the
Company. Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed such terms in the Agreement.
B. The Agreement stipulates, among other things, the term, duties and
compensation of the Executive with respect to his employment with the Company.
C. Pursuant to Section 18 of the Agreement, the parties wish to amend the
----------
Agreement as provided herein.
AGREEMENT
---------
In consideration of the mutual promises contained herein, the parties
hereto agree as follows:
1. This Amendment shall become effective as of October 15, 1997.
2. Section 2 of the Agreement shall be deleted in its entirety and
---------
replaced with the following:
"2. COMPENSATION; BENEFITS. Subject to the terms and conditions of the
----------------------
Agreement, the Executive shall be paid a percentage of the base salary,
benefits and bonuses set forth on Schedule A, attached hereto and made a
----------
part hereof, based on the percentage of hours worked by the Executive for
each bi-monthly pay period, to be calculated each pay period in accordance
with the Company's regular payroll policies. In addition to this base
salary, the Executive shall be entitled to the benefits and bonuses
described on Schedule A, subject to the terms and conditions described
----------
therein. In addition, the Executive shall be entitled to receive such
other benefits including, but not limited to, vacation, holidays and sick
leave, as the Company generally provides to its employees holding similar
positions as that of the Executive. Notwithstanding the foregoing, the
Company reserves the right to adopt, amend or discontinue any employee
benefit plan or policy in accordance with then-applicable law."
<PAGE>
3. Section 3 of the Agreement shall be deleted in its entirety and
---------
replaced with the following:
"3. DUTIES. The Executive shall be employed as Chairman of the Company's
------
Board of Directors. The Executive will not be required to spend his full
time at the Company, but shall use his best efforts to conscientiously and
diligently perform the duties assigned to him by the Company. The
Executive also shall perform such duties as may be assigned to him from
time to time by the Company's Board of Directors."
4. All other terms and conditions of the Agreement shall remain in full
force and effect and be unaffected hereby.
5. Subject to satisfaction of all representations, warranties and
covenants set forth in this Amendment, each party hereby agrees to waive,
release and hold harmless the other party for any breach of the representations,
warranties or covenants in the Agreement that may have occurred prior to the
date of this Amendment.
[SIGNATURE PAGE FOLLOWS.]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
COMPANY:
--------
TEMPLATE SOFTWARE, INC.,
a Virginia corporation
By: /s/ E. Linwood Pearce
-----------------------
E. Linwood Pearce
EXECUTIVE:
----------
/s/ Joseph M. Fox
---------------------
Joseph M. Fox
3
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is made and
---------
entered into as of this 14th day of October, 1997 by and between TEMPLATE
SOFTWARE, INC., a Virginia corporation (the "Company"), and E. LINWOOD PEARCE
-------
(the "Executive").
---------
RECITALS
--------
A. The Company and the Executive are parties to that certain Employment
Agreement, dated as of October 24, 1996, (the "Agreement"), pursuant to which
---------
the Executive agreed to accept employment as Chief Executive Officer of the
Company. Capitalized terms used herein and not otherwise defined shall have the
meaning ascribed such terms in the Agreement.
B. The Agreement stipulates, among other things, the term, duties and
compensation of the Executive with respect to his employment with the Company.
C. Pursuant to Section 18 of the Agreement, the parties wish to amend the
----------
Agreement as provided herein.
AGREEMENT
---------
In consideration of the mutual promises contained herein, the parties
hereto agree as follows:
1. This Amendment shall become effective as of October 15, 1997.
2. Section 1 of the Agreement shall be deleted in its entirety and replace
---------
with the following:
"1. EMPLOYMENT AND TERM. The Company agrees to employ the Executive
-------------------
and the Executive agrees to work for the Company, subject to the terms
and conditions below, for a term beginning the effective date hereof,
and ending October 23, 1999."
3. Schedule A to the Agreement shall be deleted in its entirety and
----------
replaced by Schedule A to this Amendment, attached hereto and made a part
----------
hereof.
<PAGE>
4. The following subsection (b) shall be inserted after the last sentence
---------------
of Section 2 of the Agreement:
---------
"(b) Vesting of Options. Unless forfeited, any options held by the
------------------
Executive during the term of this Agreement shall become fully vested
in the event of a Change-in-Control of the Company (as defined below).
For the purposes hereof, a "Change in Control" shall mean the
occurrence of one or more of the following events: (i) any direct or
indirect sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all or substantially all of
the assets of the Company to any unrelated third party person, entity
or group of persons or entities acting in concert ("Group") (within
-----
the meaning of Section 13(d) of the Securities Exchange Act of 1934
(the "Exchange Act")), together with any affiliates of such person or
------------
Group; or (ii) the acquisition, in one or more transactions, of
"beneficial ownership" (within the meaning of Rule 13d-3 and rule
13d-5 under the Exchange Act whether or not applicable), by any
unrelated third party person, entity or Group together with its or
their affiliates, in either case, of any securities of the Company such
that, as a result of such acquisition such person, entity or Group
beneficially owns, directly or indirectly, on a fully diluted basis, at
least a 51% equity ownership interest, on a fully diluted basis, in the
Company."
5. All other terms and conditions of the Agreement shall remain in full
force and effect and be unaffected hereby.
6. Subject to satisfaction of all representations, warranties and
covenants set forth in this Amendment, each party hereby agrees to waive,
release and hold harmless the other party for any breach of the representations,
warranties or covenants in the Agreement that may have occurred prior to the
date of this Amendment.
[SIGNATURE PAGE FOLLOWS.]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the day and year first above written.
COMPANY:
--------
TEMPLATE SOFTWARE, INC.,
a Virginia corporation
By: /s/ Joseph M. Fox
---------------------------
Joseph M. Fox
Chairman
EXECUTIVE:
----------
/s/ E. Linwood Pearce
------------------------------
E. Linwood Pearce
3
<PAGE>
SCHEDULE A
1. Bonus compensation will distributed in an amount to be determined annually
by the Company's Board of Directors.
2. Current annual salary is $185,000.
3. Effective October 15, 1997, the Company shall increase the Executive's base
salary by $25,000, to an annual base salary of $210,000.
4
<PAGE>
FIRST AMENDMENT TO LEASE
------------------------
This FIRST AMENDMENT TO LEASE (hereinafter, this "Amendment") dated as of
the 18th day of August, 1997, is by and between VINTAGE PARK TWO LIMITED
PARTNERSHIP, a Virginia limited partnership (hereinafter, "Landlord"); and
TEMPLATE SOFTWARE, INC., a Virginia corporation (hereinafter, "Tenant");
W I T N E S S E T H:
WHEREAS, Landlord and Tenant did previously enter into that certain Lease
dated April 25, 1996 (hereinafter, the "Lease") relating to the demise of 40,452
rentable square feet of office space designated as Suite No. 100 in the building
known as Two Vintage Park, 45365 Vintage Park Plaza, Dulles, Virginia
(hereinafter, the "Leased Premises");
WHEREAS, Tenant now desires to expand the Leased Premises to include the
7,227 and 2,456 rentable square feet on the second (2nd) floor as shown in
attached Exhibit A (hereinafter, the "Expansion Premises) as well as the 13,364
---------
rentable square feet shown in attached Exhibit B (hereinafter, the "Additional
---------
Expansion Premises"); and
WHEREAS, Landlord is agreeable to amending the Lease, subject to the
following terms and conditions.
NOW, THEREFORE, in consideration of the sum of TEN DOLLARS ($10.00) and
other valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Lease is hereby amended as follows:
1. a. EXPANSION OF LEASED PREMISES. Modifying the provisions of Section
----------------------------
1(a)(7) of the Lease, effective as of the earlier of the date Tenant
substantially completes the work required in the Expansion Premises under
Section 3 below or November 1, 1997 (hereinafter, the "Effective Date"), and co-
terminous with the Term, all references hereinafter and in the Lease to the
"Leased Premises" shall be deemed to include the Expansion Premises, subject to
all of the terms, covenants and conditions contained in the Lease, as modified
hereby. As of the Effective Date, the Leased Premises shall consist of 50,135
rentable square feet (the original 40,452 plus an additional 9,683 rentable
square feet).
b. ADDITIONAL EXPANSION OF LEASED PREMISES: Further modifying the
---------------------------------------
provisions of Section 1(a)(7) of the Lease, effective as of the earlier of the
date Tenant substantially completes the work required in the Additional
Expansion Premises under Section 3 below or sixty (60) days following the date
that the Additional Expansion Premises are vacated (hereinafter, the "Additional
Effective Date"), and co-terminous with the Term, all references hereinafter and
in the Lease to the "Leased Premises" shall be deemed to also include the
Additional Expansion Premises, subject to all of the terms, covenants and
conditions contained in the Lease, as modified hereby. As of the Additional
Effective Date, the Leased Premises shall consist of 63,499) rentable square
feet (the aforementioned 50,135 plus an additional 13,364 rentable square feet).
If Landlord is unable to deliver actual possession of the
<PAGE>
Additional Expansion Premises to Tenant by reason of the holding over or
retention of possession by the existing occupant, the Additional Effective Date
shall be extended for such period of time as may be reasonably necessary to
enable Landlord to evict such occupant and to deliver such possession of the
Additional Expansion Premises to Tenant, and Landlord's failure to deliver
possession shall not affect the validity of this Additional Expansion Premises
provision, the Lease or Tenant's obligations under the Lease as modified hereby.
2. a. BASIC RENT. Modifying the provisions of Section 1(a)(2)(A) of the
----------
Lease, from and after the Effective Date as relates to the Expansion Premises
and from and after the Additional Effective Date as relates to the Additional
Expansion Premises, Tenant shall pay annual Basic Rent for the Expansion
Premises and Additional Expansion Premises, respectively, net of electricity, at
the per rentable square foot rate in effect under said Section 1(a)(2)(A), as
adjusted annually thereunder each December 1st throughout the Term.
b. PROPORTIONATE SHARE. Modifying the provisions of Section 1(a)(9)
-------------------
of the Lease, from and after the Effective Date, Tenant is Proportionate Share
shall be 61.6% and, from and after the Additional Effective Date, Tenant's
proportionate Share shall be 78.4%.
c. ELECTRICITY. Modifying the provisions of Section 5(a)(1)(A) of the
-----------
Lease, in connection with electricity for the Expansion Premises and the
Additional Expansion Premises, the provisions of said Section 5(a)(1)(A)
relating to electricity shall apply to the Expansion Premises and the Additional
Expansion Premises, including meter costs.
d. PARKING. Modifying the provisions of Section 5(a)(8) of the Lease,
-------
from and after the Effective Date, Tenant shall be entitled to an additional
thirty five (35) surface parking spaces at the Building, at no charge; and, from
and after the Additional Effective Date, Tenant shall be entitled to an
additional forty eight (48) surface parking spaces at the Building (including
the spaces currently reserved for U.S. Customs) at no charge.
All rent and additional charges shall continue to be paid in the manner and
intervals required by the Lease.
3. a. IMPROVEMENTS. In connection with the Expansion Premises, Landlord
------------
shall provide Tenant with a prorata planning and construction allowance up to
eighteen dollars and thirty three cents ($18.33) per rentable square foot of the
Expansion Premises (i.e., $177,489.39) and an additional planning and
construction allowance up to eighteen dollars and thirty three cents ($18.33)
per rentable square foot of the Additional Expansion Premises (i.e.,
$255,962.12), for Tenant to diligently plan and complete construction of the
Expansion Premises and Additional Expansion Premises, respectively, all in
accordance with plans and specifications approved in advance and in writing by
Landlord (each such total planning and construction allowance to be referred to
herein as the "Construction Allowance"). Except as modified hereby, the
"Construction" and "Construction Procedures" provisions of Section 2(c) of
Exhibit B of the Lease shall apply to construction of the Expansion Premises,
the Additional Expansion Premises, and each Construction Allowance. Immediately
upon full execution hereof, the parties agree to
2
<PAGE>
cooperatively and diligently commence and complete plans for the Expansion
Premises and the Additional Expansion Premises.
b. SIGNAGE. In connection with the Expansion Premises and the
-------
Additional Expansion Premises, Tenant shall have the right to directory signage
and suite entry signage at Tenant's sole cost (or, if unused amounts remain
available, to be deducted from the aforesaid Construction Allowances).
c. KEYS. In connection with each of the Expansion Premises and the
----
Additional Expansion Premises, Tenant shall be entitled to ten (10) Building
access keys and ten (10) keys to each entry of the Expansion Premises and the
Additional Expansion Premises, at no cost.
4. a. ADVANCE DEPOSIT. Upon its execution hereof, Tenant shall be
---------------
required to post $12,910.67 (an amount equal to one (1) month's Basic Rent for
the Expansion Premises). This Advance Deposit shall be applied to the initial
Basic Rent due hereunder, as due, for the Expansion Premises.
b. SECURITY DEPOSIT. Upon its execution hereof, tenant shall also be
----------------
required to post $12,910.67 (an amount equal to one (1) month's Basic Rent for
the Expansion Premises) and Tenant shall also provide an additional $17,818.67
(an amount equal to one (1) month's Basic Rent for the Expansion Premises), to
be held as additional security Deposits pursuant to the terms of Section 18 of
the Lease.
5. RIGHT OF REFUSAL NOTICE. Modifying the provisions of Section 1(a)7(B)
-----------------------
of the Lease, each reference therein to "five (5) days" shall be changed to "ten
(10) days."
6. SUPPLEMENTAL HVAC. Modifying the provisions of Section 6 of the Lease,
-----------------
from and after the Effective Date and throughout the remaining Term, Landlord
shall assume responsibility for the maintenance and repair (but not replacement)
of the supplemental HVAC unit currently installed on the first (1st) floor of
the Building currently under sublease to "WinStar."
7. SUCCESSORS AND ASSIGNS. The terms and provisions of this Amendment
----------------------
shall be binding upon and inure to the benefit of the parties hereto, their
successors and assigns.
8. CONFIRMATION OF LEASE. Except as herein otherwise modified or amended,
---------------------
all of the terms, covenants and conditions of the Lease hare hereby ratified and
confirmed, and shall be and remain in full force and effect until the Lease
expires. Words and phrases not otherwise defined herein shall have the meaning
ascribed to them in the Lease.
WITNESS, the following signatures and seals are as of the day and year
first above written.
3
<PAGE>
WITNESS: VINTAGE PARK TWO LIMITED PARTNERSHIP
By its general partner:
Lerner Enterprises Limited Partnership
By: Taleco Partners, L.L.C.
its sole General Partner
___________________________ By: /s/ Mark D. Lerner
----------------------------
Mark D. Lerner
Executive Vice President
(Landlord)
ATTEST: TEMPLATE SOFTWARE, INC.
___________________________ By: /s/ E. Linwood Pearce
-----------------------------
Secretary E. Linwood Pearce
[corporate seal] Chief Executive Officer
(Tenant)
4
<PAGE>
Exhibit 11
----------
Template Software, Inc.
Computation of Earnings per Common Share
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net Income $2,379,793 $1,045,068 $327,092
=============================================
Weighted average shares of common shares outstanding 4,091,566 2,182,260 2,182,260
Weighted average effect of common shares equivalents (using the
treasury stock method) 1,726,650 1,883,754 1,469,018
Common shares issued within one year of initial filing 64,014 64,014
Common shares equivalents issued within one year of initial filing 940,532 940,532
5,818,216 4,643,919 4,655,824
=============================================
Primary net income per common share and common share equivalents $0.23 $0.07
=============================================
$0.41 $0.23 $0.07
FULLY DILUTED EARNINGS PER SHARE
Net income $2,379,793 $1,045,068 $327,092
=============================================
Weighted average shares of common shares outstanding 4,091,566 2,182,260 2,182,260
Weighted average effect of common shares equivalents (using the
treasury stock method) 1,768,947 1,883,754 1,469,018
Common shares issued within one year of initial filing 64,014 64,014
Common shares equivalents issued within one year of initial filing 940,532 940,532
---------------------------------------------
5,860,513 4,643,919 4,655,824
=============================================
Primary net income per common share and common share equivalents $0.41 $0.23 $0.07
=============================================
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT:
<TABLE>
<CAPTION>
PERCENTAGE OF COUNTRY
NAME OWNERSHIP OF INCORPORATION
- ---- ------------- ----------------
<S> <C> <C>
Template Software S.A. 100% France
Milestone Software GMBH 100% Germany
Template Software Holding GMBH 100% Germany
template software geschaftsfuhrungs gmbh 100% Germany
Milestone Software G.M.B.H. 44% Austria
Milestone Software AG 20% Switzerland
Template Software, UK Limited 100% England
Template Software Limited 100% England
Template Software de Mexico, 100% Mexico
S.A. de C.V.
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Template Software, Inc. on Form S-8 (File No. 333-24873) of our report dated
January 8, 1998, on our audits of the consolidated financial statements of
Template Software, Inc. as of November 30, 1996 and 1997 and for each of the
three years in the period ended November 30, 1997, which report is included in
the Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
McLean, Virginia
March 2, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of operations and
consolidated statement of cash flows included in the Company's Report for the
period ending November 30, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> NOV-30-1997
<CASH> 2,739
<SECURITIES> 13,318
<RECEIVABLES> 11,023
<ALLOWANCES> 549
<INVENTORY> 0
<CURRENT-ASSETS> 27,862
<PP&E> 3,220
<DEPRECIATION> 1,026
<TOTAL-ASSETS> 42,971
<CURRENT-LIABILITIES> 5,157
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> 37,246
<TOTAL-LIABILITY-AND-EQUITY> 42,971
<SALES> 0
<TOTAL-REVENUES> 26,910
<CGS> 0
<TOTAL-COSTS> 12,785
<OTHER-EXPENSES> 10,749
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 873
<INCOME-PRETAX> 4,148
<INCOME-TAX> 1,768
<INCOME-CONTINUING> 2,380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,380
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
