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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 0-21921
TEMPLATE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 52-1042793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45365 VINTAGE PARK PLAZA
DULLES, VIRGINIA 20166
(Address of principal executive offices) (Zip code)
(703) 318-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES ___X___ NO _______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock October 12, 1998
--------------------- ----------------
Common Stock, $.01 par value per share 5,125,920
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TEMPLATE SOFTWARE, INC.
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to the Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 9
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K. 15
SIGNATURE 16
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This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
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amended (the "Exchange Act"), which are intended to be covered by the safe
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harbors created thereby. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, the
ability of the Company to develop its products, 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 Form 10-Q
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.
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AUGUST 31, 1998 NOVEMBER 30, 1997
(UNAUDITED) (AUDITED)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,608 $2,739
Marketable securities 10,166 13,318
Accounts receivable, net 10,837 10,474
Income tax receivable -- 201
Deferred income taxes 1,152 406
Inventory 443 58
Note receivable 500 --
Prepaid expenses 839 484
Other current assets 68 147
-----------------------------------
Total current assets 27,613 27,827
Property and equipment, net 5,035 2,194
Software development costs, net 2,258 1,491
Goodwill, net 10,728 10,710
Other assets 746 714
-----------------------------------
Total assets $46,380 $42,936
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,213 $4,149
Current portion of long-term debt 328 179
Income tax payable 607 --
Deferred income 988 795
-----------------------------------
Total current liabilities 6,136 5,123
-----------------------------------
Long-term liabilities:
Long-term debt, net of current portion 166 211
Other long-term liabilities 342 309
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Total liabilities 6,644 5,643
-----------------------------------
Shareholders' equity:
Common stock 51 47
Additional paid-in capital 35,691 33,911
Foreign currency translation 78 49
Retained earnings 3,916 3,286
-----------------------------------
Total shareholders' equity 39,736 37,293
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Total liabilities and shareholders' equity $46,380 $42,936
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
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TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED AUGUST 31,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Revenues:
Products $ 1,154 $ 1,929 $ 5,250 $ 4,654
Services 8,691 5,579 22,912 11,383
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Total Revenues 9,845 7,508 28,162 16,037
---------------------- -----------------------
Cost of revenues:
Products 383 657 1,130 1,020
Services 5,427 3,177 14,510 6,342
---------------------- -----------------------
Total cost of revenues 5,810 3,834 15,640 7,362
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Gross profit 4,035 3,674 12,522 8,675
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Operating expenses:
Selling and marketing 2,460 1,800 7,101 3,913
Product development 334 310 1,026 946
General and administrative 1,263 851 4,009 1,988
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Total operating expenses 4,057 2,961 12,136 6,847
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Income (loss) from operations (22) 713 386 1,828
Interest expense (22) (33) (75) (62)
Other income 310 205 683 686
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Net income before income taxes 266 885 994 2,452
Income tax provision 116 347 364 927
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Net income $ 150 $ 538 $ 630 $ 1,525
====================== =======================
Earnings per share - basic $ 0.03 $ 0.12 $ 0.13 $ 0.39
====================== =======================
Shares used in computing basic
earnings per share 5,116,920 4,468,470 4,971,860 3,906,855
====================== =======================
Earnings per share - diluted $ 0.03 $ 0.10 $ 0.11 $ 0.29
====================== =======================
Shares used in computing diluted
earnings per share 5,757,902 5,168,977 5,835,464 5,237,948
====================== =======================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
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TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED AUGUST 31,
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1998 1997
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Cash flows provided by (used in) by operating activities $1,264 $(3,387)
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Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities 8,367 --
Purchase of marketable securities (5,201) (8,276)
Purchase of convertible note (500) --
Capital expenditures and leasehold improvements (3,221) (690)
Capitalization of software development costs (1,155) (844)
Acquisition of business, net of cash acquired (193) (7,331)
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Net cash used in investing activities (1,903) (17,141)
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Cash flows from financing activities:
Revolving credit facility, net (50) 38
Note payable, net 123 (105)
Capital lease obligations (27) (37)
Income tax benefit related to stock options 637 --
Proceeds from sale of common stock under stock programs 856 --
Proceeds from issuance of capital stock, net of issuance costs -- 21,552
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Net cash provided by financing activities 1,539 21,448
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Effect of exchange rate changes on cash and cash equivalents (31) (10)
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Net increase in cash and cash equivalents 869 910
Cash and cash equivalents, beginning of period 2,739 8,397
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Cash and cash equivalents, end of period 3,608 9,307
Marketable securities, end of period 10,166 8,299
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Cash, cash equivalents and marketable securities, end of period $13,774 $17,606
=====================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
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TEMPLATE SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements of Template Software, Inc. and subsidiaries (the "Company")
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contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the Company's consolidated financial position as of August 31,
1998, and the results of operations and cash flows for the periods indicated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1997 Annual Report on
Form 10-K. The results of operations for the nine months ended August 31, 1998
are not necessarily indicative of the operating results to be expected for the
full year.
NOTE B -- ACQUISITIONS AND STRATEGIC VENTURES
MILESTONE SOFTWARE GES.MBH.
On March 30, 1998, the Company acquired the remaining 56% of the issued and
outstanding equity interests of milestone software Ges. mbH, an Austrian
corporation ("Milestone-Austria"), for an aggregate purchase price of $1,067,001
-----------------
which includes cash of $100,000, acquisition expenses of $170,000 and assumed
liabilities of $797,001. The excess of the purchase price over the fair value
of the net tangible assets acquired of $603,761 was allocated to goodwill and is
being amortized over the remainder of its estimated useful life of 15 years.
The final allocation of the purchase price is subject to the completion of
management's due diligence, however, that allocation is not expected to differ
materially from the initial allocation. As a result of this transaction, the
Company owns 100% of Milestone Austria.
The acquisition agreement also provides for additional contingent
consideration not to exceed $250,000 of equivalent shares of common stock to all
of the selling shareholders if certain revenue and profit objectives are met by
the Company's fiscal year end.
PRECISE CONNECTIVITY SOLUTIONS LTD.
On March 30, 1998, the Company entered into a Convertible Note Purchase
Agreement ("Note Agreement") with Precise Connectivity Solutions Ltd.
("Precise"), an Israeli limited corporation, pursuant to which the Company
purchased a Note from Precise for an aggregate purchase price of $500,000 due on
March 30, 1999 with a 9% percent interest rate per annum. The Note is
convertible at the option of the Company or Precise into that number of fully-
paid, non-assessable shares of Preferred Stock of Precise equal to eight percent
(8%) of the issued and outstanding capital stock of Precise, on a fully-diluted
basis, including such shares of Preferred Stock.
6
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EAGLE EYE TECHNOLOGIES STRATEGIC RELATIONSHIP
On September 1, 1998, the Company entered into a strategic relationship
with Eagle Eye Technologies, Inc. ("Eagle Eye") to sell software and related
services to Eagle Eye with respect to the creation by Eagle Eye of its Service
Operations Center (the "SOC"). The SOC supports the operations of the Global
Locating System, a satellite-based location and messaging system.
In connection therewith, the Company invested $1,000,000 in Eagle Eye in
return for (i) a promissory note (the "Convertible Promissory Note") that is
convertible, at the Company's option, into 66,695 shares of common stock of
Eagle Eye ("Eagle Eye Common Stock") and (ii) a warrant (the "Warrant") that
gives the Company the right to purchase an additional 66,695 shares of Eagle Eye
Common Stock for an additional $1,000,000. Interest on the Convertible
Promissory Note accrues at the rate of 12% per annum, payable together with
principal in a single lump sum on September 1, 2000, unless converted into Eagle
Eye Common Stock prior to that date. The Convertible Promissory Note is
prepayable by Eagle Eye in whole, but not in part, at any time prior to
maturity. The Convertible Promissory Note may be converted at any time prior to
the date that is 30 days after the date on which Eagle Eye notifies the Company
that the aggregate amount of payments made by Eagle Eye to the Company exceeds
$1,000,000 (the "Notification Date"). The Warrant is exercisable by the
Company, in whole or in part, at any time beginning on the Notification Date and
ending on the date that is 12 months after the Notification Date.
Furthermore, under the Financing Agreement, the Company also agreed to make
available to Eagle Eye an additional $500,000, which may be loaned to Eagle Eye
at Eagle Eye's request, on substantially the same terms as set forth in the
Convertible Promissory Note, except that such additional indebtedness would be
convertible, at the Company's option, into 33,348 shares of Eagle Eye Common
Stock.
NOTE C -- NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued four new standards
which become effective for reporting periods beginning after December 15, 1997:
SFAS No. 130, Reporting Comprehensive Income, SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, SFAS No. 132, Employer's
Disclosures about Pensions and Other Postretirement Benefits, and SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Management
believes the adoption of these statements will not have a material effect on the
Company's financial statements.
In October 1997, the AICPA issued Statement of Position (SOP) 97-2,
Software Revenue Recognition, which supersedes SOP 91-1. Management has elected
early adoption of this statement effective December 1, 1997. The adoption of
this statement did not have a material effect on the Company's financial
statements.
7
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NOTE D -- INCOME TAXES
The Company's effective tax rate of 44% for the quarter ended August 31,
1998 increased from 39% for the quarter ended August 31, 1997. This increase is
primarily attributable to increases in permanent differences, substantially
goodwill related to acquisitions of the Company's German subsidiary in July
1997. The Company's effective tax rate of 37% for the nine month period ended
August 31, 1998 decreased from 38% for the nine month period ended August 31,
1997. This decrease is primarily attributable to losses sustained in higher tax
jurisdictions in 1998 as compared to 1997.
The Company recognized a tax benefit of approximately $32,000 and $637,000
from disqualifying dispositions of stock options for the three and nine month
periods ended August 31, 1998, respectively. The benefit is the difference
between the market value of the stock issued at the time of exercise and the
option price tax effected at the Company's effective tax rate. This benefit was
first applied to federal and state income taxes payable with the remainder
recorded as a deferred tax asset. The tax benefit is credited directly to
additional paid in capital.
NOTE E -- EARNINGS PER SHARE
Earnings per share is presented in accordance with SFAS No. 128, Earnings
per Share. Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income available to common shareholders by the weighted average of
common shares outstanding after giving effect to all dilutive potential common
shares that were outstanding during the period.
The following table reconciles the weighted average number of common shares
outstanding during each period for basic earnings per share with the comparable
amount for diluted earnings per share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
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August 31, August 31,
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1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Weighted average shares outstanding basic 5,116,920 4,468,470 4,971,860 3,906,855
Potential common shares 640,982 700,507 863,604 1,331,093
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Weighted average shares outstanding diluted 5,757,902 5,168,977 5,835,464 5,237,948
========= ========= ========= =========
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NOTE F -- ASSET ACQUISITION
In June 1998, the Company purchased office building and land to relocate
its expanding UK operations. The purchase price of this acquisition was
(Pounds)1,160,000 (approximately $1,939,000) and leasehold improvements are
estimated to be approximately (Pounds)500,000 (approximately $815,000). The
Company is reviewing alternative financing opportunities for this transaction.
The estimated useful life of the building is 40 years and the leasehold
improvements are being amortized over 10 years.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations
Revenue. Total Revenue was $9.8 million for the quarter ended August 31,
1998 compared to $7.5 million for the quarter ended August 31, 1997, an increase
of $2.3 million or 31.1%. Total Revenue
8
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for the nine month period ended August 31, 1998 was $28.2 million compared to
$16.0 million for the nine month period ended August 31, 1997, an increase of
$12.2 million or 75.6%. This growth resulted principally from volume increases
in sales of software-related services.
Product Revenue was $1.2 million for the quarter ended August 31, 1998
compared to $1.9 million for the quarter ended August 31, 1997, a decrease of
$0.7 million or 40.2%. This decrease was attributable to the reduction in sales
of third party software products in the Company's German subsidiary resulting
from the transition of its customer base and sales force to Company products.
For the nine month period ended August 31, 1998, Product Revenue was $5.3
million compared to $4.7 million for the nine month period ended August 31,
1997, an increase of $0.6 million or 12.8%. This increase was primarily
attributable to the increasing order size for Company products which was
partially offset by the decrease in sales of third party software products in
the Company's German subsidiary. Services Revenue was $8.7 million for the
quarter ended August 31, 1998 compared to $5.6 million for the quarter ended
August 31, 1997, an increase of $3.1 million or 55.8%. Services Revenue was
$22.9 million for the nine month period ended August 31, 1998, compared to $11.4
million for the nine month period ended August 31, 1997, an increase of $11.5
million or 101.3%. These increases were primarily attributable to the
implementation of larger scale client engagements for complete solutions and
additional service revenue resulting from the Company's acquisition of its
German subsidiary.
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 $5.8 million for the quarter ended August 31, 1998 compared to $3.8
million for the quarter ended August 31, 1997, an increase of $2.0 million or
51.5%. Total cost of revenue was $15.6 million for the nine month period ended
August 31, 1998 compared to $7.4 million for the nine month period ended August
31, 1997, an increase of $8.2 million or 112.4%. This increase was primarily
attributable to additional professional staff hired and added through
acquisition to perform the increased volume of software services. Total Cost of
Revenue was 59.0% of total revenue for the quarter ended August 31, 1998
compared to 51.1% of total revenue for the quarter ended August 31, 1997. For
the nine month period ended August 31, 1998, total cost of revenue increased to
55.5% of total revenue compared to 45.9% for the comparable period last year.
This percentage increase was primarily attributable to the Company's increase in
service revenue with related lower gross margin.
Cost of Product Revenue was $0.4 million for the quarter ended August 31,
1998 compared to $0.7 million for the quarter ended August 31, 1997, a decrease
of $0.3 million or 41.7%. This decrease is primarily attributable to the
decrease in the sales of third party software which have lower gross margins
than the Company's cost of products. Cost of Product Revenue was $1.1 million
for the nine months ended August 31, 1998 compared to $1.0 million for the
quarter ended August 31, 1997, an increase of $0.1 million or 10.7%. This
increase is due to the increase in amortization of software development expenses
related to the release of new products. Consequently, Product Revenue gross
margins have decreased for the quarter as the cost of the Company's products is
relatively fixed and third quarter Product Revenues have decreased. Cost of
Services Revenue was $5.4 million for the quarter ended August 31, 1998 compared
to $3.2 million for the quarter ended August 31, 1997, an increase of $2.2
million or 70.8%. Cost of Services Revenue was $14.5 million for the nine month
period ended August 31, 1998, compared to $6.3 million for the nine month period
ended August 31, 1997, an increase of $8.2 million or 128.8%. This increase
resulted primarily from the cost associated with staffing the growth in services
contracts and the additional Cost of Services Revenue resulting from the
Company's acquisition of its German subsidiary. Service Revenue gross margins
have decreased due to lower service gross margins attributable to the Company's
German subsidiary acquired in July of 1997 and due to the cost of hiring and
training new staff to accomodate the growth in Service Revenue. The Company
expects the service gross margin from its German subsidiary to increase as it
implements new projects including those projects leveraged with the Company's
products. If any of the Company's engagements were to be
9
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terminated on short notice, the Company would be unable to reduce Cost of
Services Revenue commensurate with the associated decrease in Services Revenue
because staffing is relatively fixed in the short term. Any such termination
would have a material adverse effect on the Company's business, operating
results and financial condition.
Selling and Marketing. Selling and Marketing expenses consist primarily of
expenses related to sales and marketing personnel, advertising, promotion, trade
show participation and public relations. Selling and Marketing expenses were
$2.5 million for the quarter ended August 31, 1998 compared to $1.8 million for
the quarter ended August 31, 1997, an increase of $0.7 million or 36.7%.
Selling and marketing expenses were $7.1 million for the nine month period ended
August 31, 1998, compared to $3.9 million for the nine month period ended August
31, 1997, an increase of $3.2 million or 81.5%. These increases resulted
primarily from additional expenditures targeted towards increasing market
awareness such as Solutions '98 and the consolidation of sales and marketing
expenditures of the newly acquired entities described in Note B to the Company's
Consolidated Financial Statements set forth above.
Product Development. Product Development expenses were $0.3 million for
the quarter ended August 31, 1998, unchanged from the quarter ended August 31,
1997. Product development expenses were $1.0 million for the nine month period
ended August 31, 1998, compared to $0.9 million for the nine month period ended
August 31, 1997, an increase of $0.1 million or 8.5%. This increase resulted
primarily from the development of enhancements to the Company's Foundation
Template, including the Process Monitor Component and the Geographic Mapping
Components and the development of the Company's new integration product,
Enterprise Integration Template(TM) (EIT). Product Development expenses in the
three and nine month periods ended August 31, 1997 included offsets of $0.05
million and $0.3 million, respectively, as a result of the Company's
participation in a Federal Technology Reinvestment Program. The offsets
generated by this program ended in the third quarter of 1997.
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 $1.3 million for the quarter ended August 31, 1998
compared to $0.9 million for the quarter ended August 31, 1997 an increase of
$0.4 million or 48.4%. General and administrative expenses were $4.0 million
for the nine month period ended August 31, 1998, compared to $2.0 million for
the nine month period ended August 31, 1997, an increase of $2.0 million or
101.7%. This increase is primarily attributable to the goodwill amortization
for the Company's French subsidiary acquired in March 1997 and the Company's
German subsidiary acquired in June 1997 and an increase in corporate
administrative staff.
Income Tax Provision. The Income Tax Provision was $0.1 million for the
quarter ended August 31, 1998 compared to $0.3 million for the quarter ended
August 31, 1997, a decrease of $0.2 million or 66.6%. The Company's effective
tax rate of 44% for the quarter ended August 31, 1998 was an increase from 39%
for the three months ended August 31, 1997. The decrease in the provision was
attributable to the decrease in the Company's pretax profits and the increase in
the effective tax rate was attributable to the increased permanent differences,
substantially goodwill related to acquisitions of the Company's German
subsidiary in July 1997. The Income Tax Provision for the nine months ended
August 31, 1998 was $0.4 million compared to $0.9 million for the nine month
period ended August 31, 1997, a decrease of $0.5 million or 60.7%. The Company's
effective tax rate of 37% for the nine month period ended August 31, 1998,
decreased from 38% for the nine month period ended August 31, 1997 primarily due
to the losses sustained in higher tax jurisdictions in 1998. If the operating
profits increase in the higher tax jurisdictions during the three months ending
November 30, 1998 the effective tax rate will increase accordingly.
10
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LIQUIDITY AND CAPITAL RESOURCES
The Company's overall cash and cash equivalents were $3.6 million at
August 31, 1998, which is an increase of approximately $0.9 million from $2.7
million as of November 30, 1997. The Company's operating activities provided
cash of $1.3 million for the nine month period ended August 31, 1998. During the
nine month period ended August 31, 1998, cash flow provided by operating
activities reflected the net income, depreciation and amortization partially
offset by the deferred tax provision and increases in accounts payable and
accrued liabilities.
Cash used in investing activities totaled $1.9 million during the nine
month period ended August 31, 1998. During the nine months ended August 31,
1998, $3.2 million of the Company's investments in short-term, investment grade
marketable securities with maturities of less than one year were converted to
cash and cash equivalents. The Company also invested $3.2 million in property
and equipment, comprised primarily by the acquisition of the land and office
building in Windsor, England.
Cash flow provided from financing activities totaled $1.5 million for the
nine month period ended August 31, 1998 primarily relating to the net proceeds
from the issuance of the Company's Common Stock under stock programs and the tax
benefit related to the disqualifying dispositions of incentive stock options.
The Company has a line of credit under a Loan and Security Agreement (the
"Loan Agreement") with First Union National Bank , previously Signet Bank, (the
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"Bank") in the aggregate principal amount of $3.0 million. As of August 31,
----
1998, there were no amounts outstanding under this line of credit. The Company
has been in compliance with all financial and non-financial covenants of the
Loan Agreement. Effective June 30, 1998, the Company and the Bank entered into
a new Loan Agreement which modified the original Loan Agreement. Such
modifications included, but were not limited to, the release of the collateral
as defined in the Loan Agreement, the modification of the termination date to
June 30, 1999 and the reduction of the interest rate from prime rate to LIBOR
Market Index Rate (for the United States Dollar quoted by the British Bankers
Association) plus 1.85%. On August 3, 1998, the Bank issued a letter of credit
on the Company's behalf as a performance guarantee for a German customer in the
amount of DEM 1,700,000 (approximately $1.0 million). In addition, the
Company's French subsidiary maintains an unsecured line of credit with Banque
Hervet for 500,000FF (approximately $85,000) for overdraft protection at an
interest rate of 8.3%. As of August 31, 1998, 179,466FF (approximately $30,545)
was outstanding under this line of credit.
On September 18, 1998, the Company announced that its Board of Directors
authorized the repurchase of up to five hundred thousand (500,000) shares of the
Company's Common Stock in open market transactions effected in accordance with
Rule 10b-18 of the Securities Exchange Act of 1934, as amended. Any such
repurchases will be made using the Company's cash balances and cash generated
from operation.
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. There are no assurances that
such sources of financing will be available to the Company and if they are, that
they will be sufficient to meet the Company's liquidity needs at such time.
11
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IMPACT OF YEAR 2000 ISSUE
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year. If the Company's
computer programs with date-sensitive functions are not Year 2000 compliant,
they may recognize a date using "00" as the Year 1900 rather than the Year 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Several of the Company's systems have been confirmed as Year 2000 compliant.
However, the Company is conducting a Year 2000 compliance program to identify
and correct any non-compliant software or systems that would cause a significant
detrimental effect on the Company. This program is expected to be complete by
April 30, 1999. The Company has identified its Year 2000 risk in four
categories: internal administrative software; internal operational software and
imbedded chip technology; external noncompliance by customers and suppliers; and
Company products.
INTERNAL ADMINISTRATIVE SOFTWARE. All of the Company's internal administrative
software is "off-the-shelf' commercially available software. The Company is
currently gathering data to assess the impact of the Year 2000 on its
administrative systems such as the accounting and human resources systems, with
Year 2000 compliance scheduled for April 30, 1999. Based on this schedule, the
Company expects to be in full compliance with its internal administrative
financial systems before the Year 2000. However, if due to unforeseen
circumstances, the implementation is not completed on a timely basis, the Year
2000 could have a material impact on the operations of the Company. Contingency
plans are being developed where the Company feels there is some risk that a non-
compliant system cannot be implemented before Year 2000.
INTERNAL OPERATIONS SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. The Company is
currently gathering data to assess the impact of the Year 2000 on its
operational systems such as production systems and communication systems, with
Year 2000 compliance scheduled for April 30, 1999. The Company believes it can
achieve compliance in this timeframe because all systems involved were bought as
commercial packages and can be replaced by alternatives in short timeframe. The
Company does not, at this time, have sufficient data to estimate the cost of
achieving Year 2000 compliance for its operational systems. While the Company
does not believe there is any material non-compliance in the production or
communication systems, the Company is in the information-gathering phase.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is in the process
of identifying and contacting its critical suppliers, service providers and
contractors to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remedy their own Year 2000 issues.
It is expected that full identification will be completed by April 30, 1999. To
the extent that responses to Year 2000 readiness are unsatisfactory, the Company
intends to change suppliers, service providers or contractors to those who have
demonstrated Year 2000 readiness but cannot be assured that it will be
successful in finding such alternative suppliers, service providers and
contractors. The Company does not currently have any formal information
concerning the Year 2000 compliance status of its customers but has received
indications that most of its customers are working on Year 2000 compliance. In
the event that any of the Company's significant customers and suppliers do not
successfully and timely achieve Year 2000 compliance, and the Company is unable
to replace them with new customers or alternate suppliers, the Company's
business or operations could be adversely affected.
12
<PAGE>
COMPANY PRODUCTS. The Company provides its customers with licensed software
products that are manufactured and developed internally and licensed software
products that are obtained from third party software vendors and resold. The
following compliance statement covers the Company's internally produced software
products and is provided to the general public on the Company's website.
YEAR 2000 COMPLIANCE STATEMENT
Template Software, Inc. recognizes that most customers use Template software
products in business-critical applications and that customers want to know if
its products are "Year 2000 Compliant". The compliance statements below cover
Template's software products: Foundation Template (including the SNAP Template,
Web Component, Geographic Mapping Component and Process Monitoring Component),
Workflow Template (WFT), System Management Template (SMT) and the Enterprise
Integration Template (EIT).
DEFINITION:
There is no single definition of the term "Year 2000 Compliant" that is
generally accepted in the industry. Template Software, Inc. has created the
definition below which we believe meets the letter and the spirit of a notice of
compliance that meets our customer's requirements.
A software product is "Year 2000 Compliant" when: (1) the software product
itself does not fail at or near January 1, 2000, and (2) the software product
provides documented time and date facilities that allow developers to build
software that does not fail at or near January 1, 2000. The phrase at or near
January 1, 2000 specifically includes treating the Year 2000 as a leap year.
COMPLIANCE STATEMENTS:
The Foundation Template (including the SNAP Template, Web Component, Geographic
Mapping Component and Process Monitoring Component) provided by Template
Software, Inc. is Year 2000 Compliant.
The Workflow Template (WFT) provided by Template Software, Inc. is Year 2000
Compliant.
The Systems Management Template (SMT) provided by Template Software, Inc. is
Year 2000 Compliant.
The Enterprise Integration Template (EIT) provided by Template Software, Inc. is
Year 2000 Compliant.
HOW COMPLIANCE IS ACHIEVED:
The Foundation Template, WFT, SMT and EIT meet the first criterion (1) because
they employ a single module to obtain or provide time and date information.
This module has been extensively tested in many product development cycles and
in many customer solutions. It handles the Year 2000 as a leap year.
The Foundation Template, WFT, SMT and EIT meet the second criterion (2) because
they use a common data structure for time and date information. All time
requests start by getting the operating system time. Then developers use one
function to convert operating system time to a single portable SNAP environment
data structure. Developers use this data structure in applications to obtain
time and date information. All time and date information is supplied as
integer values. To provide a portable data structure the conversion algorithm
is different for different operating system environments. The integer
13
<PAGE>
value returned for `year' is a number representing the number of years since
1900. The year value can be very large, more than 10,000. The integer value will
increment continuously at the turn of the century and well beyond. The algorithm
used to determine the current year (1900 + year) remains constant before and
after the turn of the century.
When using Template products that are Year 2000 Compliant it is still possible
for application developers to introduce code that will make the overall
application non-compliant.
END COMPANY YEAR 2000 COMPLIANCE STATEMENT
The Company is in the process of contacting each third party software vendor
whose software products the Company resells regarding Year 2000 compliance of
those products. It is expected that this investigation will be completed by
April 30, 1999. In all cases the third party software vendor's license agreement
is passed on to the Customer and the Company is not a party thereto. The Company
intends to discontinue reselling any third party software product that is deemed
to be Year 2000 non-compliant as the result of this investigation.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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 $7,549,550 to acquire other businesses,
$10,166,294 to purchase temporary investments in marketable securities and
$2,047,515 remains unused as cash and cash equivalents. There has not been a
material change in the use of proceeds described in the Company's prospectus.
ITEM 5. OTHER INFORMATION.
14
<PAGE>
EAGLE EYE TECHNOLOGIES STRATEGIC RELATIONSHIP
On September 1, 1998, the Company entered into a strategic relationship
with Eagle Eye Technologies, Inc. ("Eagle Eye"). In this regard, the Company
agreed to provide software and services to Eagle Eye with respect to the
creation by Eagle Eye of its Service Operations Center (the "SOC"). The SOC
supports the operations of the Global Locating System, a satellite-based
location and messaging system. To evidence their relationship, the Company and
Eagle Eye entered into a Software Development and Sale Agreement (the
"Development Agreement").
In connection with this relationship, the Company entered into a Financing
Agreement with Eagle Eye (the "Financing Agreement"). Pursuant to the Financing
Agreement, the Company invested $1,000,000 in Eagle Eye in return for (i) a
promissory note (the "Convertible Promissory Note") that is convertible, at the
Company's option, into 66,695 shares of common stock of Eagle Eye ("Eagle Eye
Common Stock") and (ii) a warrant (the "Warrant") that gives the Company the
right to purchase an additional 66,695 shares of Eagle Eye Common Stock for an
additional $1,000,000. Interest on the Convertible Promissory Note accrues at
the rate of 12% per annum, payable together with principal in a single lump sum
on September 1, 2000, unless converted into Eagle Eye Common Stock prior to that
date. The Convertible Promissory Note is prepayable by Eagle Eye in whole, but
not in part, at any time prior to maturity. The Convertible Promissory Note may
be converted into 66,695 shares of Eagle Eye Common Stock at any time prior to
the date that is 30 days after the date on which Eagle Eye notifies the Company
that the aggregate amount of payments made by Eagle Eye to the Company under the
Development Agreement exceeds $1,000,000 (the "Notification Date"). The Warrant
is exercisable by the Company, in whole or in part, at any time beginning on the
Notification Date and ending on the date that is 12 months after the
Notification Date.
Furthermore, under the Financing Agreement, the Company also agreed to make
available to Eagle Eye an additional $500,000, which may be loaned to Eagle Eye
at Eagle Eye's request, on substantially the same terms as set forth in the
Convertible Promissory Note, except that such additional indebtedness would be
convertible, at the Company's option, into 33,348 shares of Eagle Eye Common
Stock.
STOCK REPURCHASE PROGRAM
On September 18, 1998, the Company announced that its Board of Directors
authorized the repurchase of up to five hundred thousand (500,000) shares of the
Company's Common Stock in open market transactions effected in accordance with
Rule 10b-18 of the Securities Exchange Act of 1934, as amended. Any such
repurchases will be made using the Company's cash balances and cash generated
from operation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed herewith:
Exhibit
Number Exhibit Title
------ -------------
10.1 Financing Agreement, dated September 1, 1998, between
Template Software, Inc. and Eagle Eye Technologies, Inc.
(see agreement for omitted exhibits).
15
<PAGE>
10.2 Convertible Promissory Note, dated September 1, 1998, of
Eagle Eye Technologies, Inc.
10.3 Warrant to Purchase Common Stock, dated September 1, 1998,
between Template Software, Inc. and Eagle Eye Technologies,
Inc.
10.4 Loan Agreement, dated June 30, 1998, between Template
Software, Inc. and First Union Nation Bank (see table of
contents for list of omitted schedules and exhibits).
27.1 Financial Data Schedule for the nine month period ended
August 31, 1998.
27.2 Restated Financial Data Schedule for the nine month period
ended August 31, 1997.
______________
(b) Reports on Form 8-K
On July 10, 1998, the Company filed a report on Form 8-K (Commission file
no: 0-21921) regarding the adoption of a Shareholder Rights Plan.
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 15, 1998 TEMPLATE SOFTWARE, INC.
By: /s/ Kimberly E. Osgood
---------------------------
Kimberly E. Osgood
Chief Financial Officer and
Chief Accounting Officer
16
<PAGE>
EXHIBIT 10.1
FINANCING AGREEMENT
-------------------
THIS FINANCING AGREEMENT (this "Agreement") is made as of September 1, 1998,
---------
by and among EAGLE EYE TECHNOLOGIES, INC., a Virginia corporation (the
"Company") and Template Software, Inc., a Virginia ("Template").
------- --------
RECITALS
--------
A. In connection with the Software Development and Sale Agreement
(and related license agreement) of even date herewith between the parties (the
"Development Agreement") pursuant to which Template will provide software and
- ----------------------
services to the Company with respect to the creation and maintenance of the
Company's Service Operations Center ("SOC"), Template has agreed to extend funds
---
to the Company in the aggregate amount of $1,000,000, evidenced by a convertible
promissory note made to Template (the "First Loan") and convertible into 66,695
----------
shares of the Company's Common Stock, no par value.
B. In an effort to induce each other to enter into the transactions
contemplated hereby, the Company has agreed to issue Template a warrant to
purchase an additional 66,695 shares of Common Stock, for an aggregate purchase
price of $1,000,000 and Template has agreed to make available to the Company an
additional $500,000, which Template will loan to the Company upon the written
request of the Company on substantially the same terms as the First Loan (with
the exception that such loan shall be convertible into 33,348 shares of Common
Stock) (the "Second Loan").
-----------
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. NOTE AND WARRANT.
-- ----------------
1.1 On the date hereof, in exchange for the issuance of (i) a convertible
promissory note, in the form of Exhibit A hereto (the "Note"); and (ii) a
--------- ----
Warrant, in the form of Exhibit B hereto (the "Warrant"), Template shall pay to
--------- -------
the Company, by wire transfer of immediately available funds, the aggregate
amount of $1,000,000. In connection with the issuance of the Note, the Company
shall execute a security agreement, in the form of Exhibit C hereto (the
---------
"Security Agreement") and a financing statement, in the form of Exhibit D hereto
- ------------------- ---------
(the "Financing Statement"). This Agreement, the Note, the Security
-------------------
Agreement, the Financing Statement and any other document executed or delivered
by the Company in connection herewith shall be referred to herein as the "Loan
----
Documents."
- ---------
<PAGE>
1.2 The Company may, in its sole discretion, request in writing that
Template fund the Second Loan, and Template shall promptly advance the Company
the aggregate amount of $500,000 by wire transfer of immediately available
funds. In the event the Company requests, in writing, the Second Loan, the
Company shall execute a note, security agreement and financing statement, in
substantially the form attached hereto, and such documents, when executed, shall
become part of the Loan Documents, as defined herein.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
-- ---------------------------------------------
represents and warrants to Template that the statements in the following
paragraphs of this Section 2 are all true and correct:
---------
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a
--- ---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the Commonwealth of Virginia and has all requisite corporate power and
authority to own its properties and assets and to carry on its business as now
conducted and as presently proposed to be conducted.
2.2 CAPITALIZATION. Immediately prior to the closing of this transaction,
--- --------------
the capitalization of the Company consists of a total of 2,000,000 authorized
shares of common stock without par value (the "Common Stock"), of which
------------
1,267,197 shares are issued and outstanding. There are no options, warrants or
similar rights to purchase or acquire equity interests in the Company
outstanding.
2.3 DUE AUTHORIZATION. All corporate action on the part of the Company,
--- -----------------
its officers, directors and stockholders necessary for the authorization,
execution, delivery of, and the performance of all obligations of the Company
under the Loan Documents and the Warrant has been taken or will be taken prior
to the Closing, and the Loan Documents and the Warrant, when executed, will
constitute, valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except as may be limited by (i)
applicable bankruptcy, insolvency, reorganization or others laws of general
application relating to or affecting the enforcement of creditors' rights
generally and (ii) the effect of rules of law governing the availability of
equitable remedies.
2.4 VALID ISSUANCE OF STOCK.
--- -----------------------
(a) Any shares issued upon the conversion of the Note and exercise of
the Warrant (the "Conversion Shares"), have been duly and validly reserved
-----------------
for issuance and, upon issuance in accordance with the terms of the Note, will
be duly and validly issued, fully paid and nonassessable.
(b) Based in part on the representations made by Template in Section
---------
3 hereof, the Conversion Shares (assuming no change in applicable law and no
unlawful distribution of the Conversion Shares by Template or other parties)
will be issued in full compliance with the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended (the "1933 Act");
--------
provided that, with respect to the Conversion Shares, no
- -------------
2
<PAGE>
commission or other remuneration is paid or given, directly or indirectly, for
soliciting the issuance of Conversion Shares upon conversion and no additional
consideration is paid for the Conversion Shares other than surrender of the Note
in accordance with the Note or exercise of the Warrant in accordance with the
terms of the Warrant, as the case may be.
(c) The outstanding shares of the capital stock and the Company are
duly and validly issued, fully paid and nonassessable, and such shares of
capital stock, and all outstanding options, warrants, convertible notes and
other securities of the Company, have been issued in full compliance with the
registration and prospectus delivery requirements of the 1933 Act or in
compliance with applicable exemptions therefrom, the registration and
qualification requirements of all applicable securities laws of states of the
United States and all other provisions of applicable securities laws of states
of the United States, including, without limitation, anti-fraud provisions. The
Conversion Shares will be free of any liens or encumbrances other than any liens
or encumbrances created by or imposed upon the holders; provided, however, that
--------- -------
the Conversion Shares may be subject to restrictions on transfer under state
and/or federal securities laws as set forth herein. The Conversion Shares will
not be subject to any preemptive rights or rights of first refusal which have
not been waived.
2.5 FINANCIAL STATEMENTS. All financial statements and information
--- --------------------
delivered to Template by the Company (including, without limitation, the balance
sheets and income statements of the Company for the six-month period ended June
30, 1998) were prepared in accordance with generally accepted accounting
principles, are correct and complete and present fairly the Company's financial
condition, and reflect all of the Company's known liabilities, contingent or
otherwise, as of the date of such statement and information, and since such date
no material adverse change in the Company's assets, liabilities, financial
condition, business or operations has occurred.
2.6 TAXES. All tax returns and reports of each the Company required by law
--- -----
to be filed have been duly filed, and all taxes, assessments, other governmental
charges or levies (other than those presently payable without penalty or
interest and those that are being contested in good faith in appropriate
proceedings) upon the Company and upon any of its properties, assets, income or
franchises, that are due and payable have been paid.
2.7 LITIGATION. There is no action, suit or proceeding pending or, to the
--- ----------
knowledge of the Company, threatened against or affecting it that, either in any
case or in the aggregate, may result in any material adverse change in the
business, properties or assets or in the condition, financial or otherwise, of
the Company, or that may result in any material liability on its part, or that
questions the validity of any of the Loan Documents or any action taken or to be
taken in connection with the Loan Documents.
2.8 NO BREACH. The execution and delivery of the Loan Documents, and
--- ---------
compliance with the provisions of the Loan Documents, will not conflict with or
violate any provisions of law or conflict with, result in a breach of, or
constitute a default under a the
3
<PAGE>
Company's charter and bylaws, or any judgment, order or decree binding on it, or
any other agreements to which it is a party.
2.9 NO DEFAULTS. The Company is not in default with respect to any debt,
--- -----------
direct or indirect.
2.10 COMPLIANCE. The Company is in compliance in all material respects
---- ----------
with all applicable laws and regulations, including, without limitation, the
Employee Retirement Income Security Act of 1974, as amended.
2.11 APPROVALS. No authorizations, approvals or consents of, and no filings
---- ---------
and registrations with, any governmental or regulatory authority or agency are
necessary for the execution, delivery or performance of the Loan Documents by
the Company.
2.12 TITLE TO ASSETS. The Company has good and marketable title to all of
---- ---------------
its assets, subject only to the liens and security interests permitted by the
Loan Documents.
2.13 INSURANCE. The Company has in full force and effect fire and casualty
---- ---------
insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow it to replace any of its properties or assets
that might be damaged or destroyed.
2.14 USE OF PROCEEDS. The Company shall use the proceeds of the First
---- ---------------
Loan and the Second Loan, as the case may be, solely for construction of the SOC
and to make other expenditures in connection with the creation, establishment or
staffing of the SOC.
3. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF TEMPLATE.
-- --------------------------------------------------------------
Template hereby represents and warrants to the Company that:
3.1 AUTHORIZATION. This Agreement, the Loan Documents and the Warrant
--- -------------
constitute Template's valid and legally binding obligation, enforceable in
accordance with its terms except as may be limited by (i) applicable bankruptcy,
insolvency, reorganization or other laws of general application relating to or
affecting the enforcement of creditors' rights generally and (ii) the effect of
rules of law governing the availability of equitable remedies. Template
represents that it has full power and authority to enter into this Agreement,
the Loan Documents and the Warrant.
3.2 DISCLOSURE OF INFORMATION. Template has received or has had full
--- -------------------------
access to all the information it considers necessary or appropriate to make an
informed investment decision with respect to the Note and Warrant to be
purchased by Template under this Agreement. Template further has had an
opportunity to ask questions and receive answers from the Company regarding the
terms and conditions of the offering of the Note and Warrant and to obtain
additional information (to the extent the Company possessed such information or
could acquire it without unreasonable effort or expense) necessary to verify any
information furnished
4
<PAGE>
to Template or to which Template had access. The foregoing, however, does not in
any way limit or modify the representations and warranties made by the Company
in Section 2.
---------
3.3 ACCREDITED INVESTOR STATUS. Template certifies that it is an
--- --------------------------
"accredited investor" within the meaning of Regulation D promulgated under the
1933 Act and that any transfer or resale of the Conversion Shares will be in
accordance with the registration requirements of the 1933 Act or pursuant to an
available exemption therefrom.
3.4 PURCHASE FOR OWN ACCOUNT. The Note, the Warrant and the Conversion
--- ------------------------
Shares (collectively the "Securities") to be issued upon conversion of the Note
----------
and exercise of the Warrant will be acquired for investment for Template's own
account, not as a nominee or agent or for the account or benefit of any U.S.
person, and not with a view to the public resale or distribution thereof within
the meaning of the 1933 Act, and each Investor has no present intention of
selling, granting any participation in, or otherwise distributing the same.
Template also represents that it has not been formed for the specific purpose of
acquiring the Securities.
3.5 INVESTMENT EXPERIENCE. Template understands that the acquisition of
--- ---------------------
the Securities involves substantial risk. Template: (i) has experience as an
investor in securities of companies in the development stage and acknowledges
that it is able to fend for itself, can bear the economic risk of its
acquisition of the Securities and has such knowledge and experience in financial
or business matters that it is capable of evaluating the merits and risks of
this acquisition of the Securities and protecting its own interests in
connection with this acquisition and/or (ii) has a preexisting personal or
business relationship with the Company and certain of its officers, directors or
controlling persons of a nature and duration that enables it to be aware of the
character, business acumen and financial circumstances of such persons.
3.6 RESTRICTED SECURITIES. Template understands that the Securities are
--- ---------------------
characterized as "restricted securities" under the 1933 Act inasmuch as they are
being acquired from the Company in a transaction not involving a public offering
and that under the 1933 Act and applicable regulations thereunder such
securities may be resold without registration under the 1933 Act only in certain
limited circumstances. In this connection, Template represents that it is
familiar with the resale limitations imposed by Rule 144 of the rules and
regulations promulgated under the 1933 Act. Template understands that the
Company is under no obligation to register any of the securities sold hereunder.
Template understands that no public market now exists for any of the Securities
and that it is uncertain whether a public market will ever exist for the
Securities.
4. MISCELLANEOUS.
-- -------------
4.1 PRESS RELEASES. The parties agree that there will be no press release
--- --------------
or other public statement issued by either party relating to this Agreement or
the transactions contemplated hereby unless required by law or mutually agreed
to and further agree to keep the terms and conditions of the Loan Documents and
the Warrant in strictest confidence, it being understood that this restriction
shall not prohibit disclosure to the parties counsel, accountants and
professional advisors.
5
<PAGE>
4.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
--- ----------------------
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties.
4.3 GOVERNING LAW. This Agreement shall be governed by and construed under
--- -------------
the internal laws of the Commonwealth of Virginia, without reference to
principles of conflict of laws or choice of laws.
4.4 COUNTERPARTS. This Agreement may be executed in two or more
--- ------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.5 NOTICES. Any notice, request or other communication required or
--- -------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or if deposited in the U.S. mail by registered or
certified mail, return receipt requested, postage prepaid, as follows:
If to the Company at:
Eagle Eye Technologies, Inc.
950 Herndon Parkway, Suite 230
Herndon, Virginia 20170
Attention: President
with a copy to: Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, D.C. 20036-5612
Attention: Thomas J. Knox, Esquire
or, in the case of Template Software, Inc.
Template, at: 45365 Vintage Park Plaza
Dulles, Virginia 20166
Attn.: Mr. E. Linwood Pearce
with a copy to: Hunton & Williams
1751 Pinnacle Drive, Suite 1700
McLean, Virginia 22102
Attention: Joseph W. Conroy, Esquire
Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. Notice shall conclusively be
deemed to have been given when personally delivered or when deposited in the
mail in the mail in the manner set forth above.
6
<PAGE>
4.6 ENTIRE AGREEMENT. This Agreement, together with all exhibits and
--- ----------------
schedules hereto, constitutes the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior negotiations, correspondence, agreements, understandings duties or
obligations between the parties with respect to the subject matter hereof.
4.7 FURTHER ASSURANCES. From and after the date of this Agreement, upon
--- ------------------
the request of Template or the Company, the Company and Template shall execute
and deliver such instruments, documents or other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.
4.8 RESERVATION OF SHARES. The Company shall at all times reserve enough
--- ---------------------
shares of Common Stock to accommodate conversion of the Note and exercise of the
Warrant.
[SIGNATURE PAGE FOLLOWS]
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
COMPANY:
-------
EAGLE EYE TECHNOLOGIES, INC., a Virginia
corporation
By: /s/ Michael H. Stone
--------------------------
Name: Michael H. Stone
Title: Vice President
TEMPLATE:
--------
TEMPLATE SOFTWARE, INC., a Virginia corporation
By: /s/ E. Linwood Pearce
------------------------
E. Linwood Pearce
Chief Executive Officer
8
<PAGE>
EXHIBIT A
---------
FORM OF CONVERTIBLE PROMISSORY NOTE
-----------------------------------
9
<PAGE>
EXHIBIT B
---------
FORM OF WARRANT
---------------
10
<PAGE>
EXHIBIT C
---------
FORM OF SECURITY AGREEMENT
--------------------------
11
<PAGE>
EXHIBIT D
---------
FORM OF FINANCING STATEMENT
---------------------------
12
<PAGE>
Exhibit 10.2
NEITHER THIS NOTE NOR THE SECURITIES TO BE ACQUIRED UPON ITS CONVERSION HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OR APPLICABLE STATE SECURITIES
LAWS. NO SALE OR DISPOSITION OF THIS NOTE OR THOSE SECURITIES MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS
NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, OR APPLICABLE STATE SECURITIES
LAWS OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE
COMMISSION.
THIS CONVERTIBLE PROMISSORY NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF A
FINANCING AGREEMENT DATED SEPTEMBER 1, 1998 BY AND AMONG EAGLE EYE TECHNOLOGIES,
INC. AND TEMPLATE SOFTWARE, INC.
EAGLE EYE TECHNOLOGIES, INC.
12% CONVERTIBLE PROMISSORY NOTE
DUE SEPTEMBER 1, 2000
$1,000,000.00 September 1, 1998
Herndon, Virginia
FOR VALUE RECEIVED, EAGLE EYE TECHNOLOGIES, INC., a VIRGINIA corporation (the
"Company"), promises to pay to the order of TEMPLATE SOFTWARE, INC., a Virginia
-------
corporation ("Template"), at 45365 Vintage Park Plaza, Dulles, Virginia 20166,
--------
or at such other place as the holder hereof may from time to time designate in
writing, in lawful money of the United States of America, without defense,
offset or counterclaim, the principal sum of ONE MILLION AND NO/100 DOLLARS
($1,000,000.00), together with interest as described below and in accordance
with the following terms and provisions:
1. INTEREST RATE. The unpaid principal balance of this Convertible
-------------
Promissory Note (as the same may be amended, modified, supplemented, renewed or
replaced from time to time, the "Note") outstanding from time to time shall bear
----
interest at 12% per annum. Interest shall be calculated using a 360-day year,
based upon the actual number of days for which the calculation is being made.
<PAGE>
2. PAYMENTS. Unless this Note shall be converted in its entirety as
--------
hereinafter provided, this Note shall be repaid in one installment of combined
principal and interest on September 1, 2000 (as extended from time to time, the
"Maturity Date") and the entire unpaid principal balance of this Note, together
-------------
with all accrued and unpaid interest, shall be due and payable in full on the
Maturity Date.
3. PREPAYMENT. This Note may be prepaid in whole, but not in part, at any
----------
time without penalty.
4. CONVERSION.
----------
4.1. SURRENDER AND NOTICE BY TEMPLATE. Template shall have the right at
--------------------------------
any time prior to and including the Conversion Date (as defined below), at its
option, to convert the outstanding principal amount of the Note (and all accrued
interest) into 66,695 shares of fully-paid and non-assessable shares of the
Company's Common Stock, without par value , following written notice to the
Company at the address set forth in Section 14 below dated on or before the
----------
Conversion Date; it being expressly understood, that Template shall have the
-----------------------------
right to convert this Note at all times prior to and including the Conversion
Date regardless of whether, prior to or following such exercise, the Company
makes available or tenders sufficient funds to pay the unpaid principal balance
of this Note, together with all accrued and unpaid interest. For purposes of
this Note, the "Conversion Date" shall be the day which is thirty (30) days
following the date on which the Company notifies Template, in writing, (the
"Notification Date") that the aggregate amount of payments made by the Company
- ------------------
to Template pursuant to the Software Development and Sales Agreement (and
related license) of even date herewith exceeds the total amount of funds
advanced pursuant to this Note.
4.2. RIGHTS UPON CONVERSION. As promptly as practicable after the
----------------------
notice of Template's intent to convert the Note into the Conversion Shares (as
defined below), the Company shall deliver or cause to be delivered to Template
certificates representing the number of fully paid and non-assessable shares of
Common Stock or other securities into which the Note is converted in accordance
with the provisions of this Section 4 (the "Conversion Shares"). Such
--------- -----------------
conversion shall be deemed to have been made at the close of business on the
Conversion Date, so that the rights of Template with respect to the principal
amount of the Note shall cease at such time and the person or persons entitled
to receive the Conversion Shares shall be treated for all purposes as having
become the record holder or holders of such shares at such time.
4.3. CONVERSION OF ACCRUED INTEREST. All accrued but unpaid interest
-------------------------------
on the Note surrendered for conversion shall be converted to Conversion Shares
along with the principal amount of the Note.
2
<PAGE>
4.4. ISSUANCE OF CERTIFICATES. The issuance of certificates for the
------------------------
Conversion Shares, shall be made without charge to Template for any tax in
respect of the issuance of such certificates, and such certificates shall be
issued in the name of, or in such names as may be directed by, Template.
5. RESERVATION OF SHARES. The Company covenants that it shall at all
---------------------
times reserve for issuance or delivery upon the conversion of the Note such
number of shares of Common Stock as shall be required for issuance or delivery
upon conversion of the Note.
6. NO DILUTION OR IMPAIRMENT. The Company covenants that it shall not by
-------------------------
amendment of its Articles of Incorporation or through reorganization,
consolidation, merger, dissolution, issuance or sale of securities, sale of
assets, or by any other voluntary act or deed, avoid or seek to avoid the
observance or performance of any of the covenants, stipulations or conditions to
be observed or performed hereunder by it, but shall at all times in good faith
take all action which may be necessary in order to protect the rights of
Template against dilution. The number and kind of securities purchasable upon
the exercise of this Note shall be subject to adjustment from time to time upon
the happening of certain events, as follows:
(a) In case the Company shall at any time after the date of this Note
(i) declare or pay a dividend in shares of Common Stock or make a distribution
in shares of Common Stock, (ii) subdivide its outstanding shares of Common
Stock, (iii) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock or (iv) issue any shares of its capital stock
in a reclassification of the Common Stock (including any such reclassification
in connection with a consolidation or merger in which the Company is the
continuing entity), the kind and number of Conversion Shares purchasable upon
exercise of this Note immediately prior thereto shall be adjusted so that the
holder of this Note shall be entitled to receive the kind and number of
Conversion Shares or other securities of the Company which he would have owned
or have been entitled to receive after the happening of any of the events
described above, had this Note been exercised immediately prior to the happening
of such event or any record date with respect thereto. An adjustment made
pursuant to this paragraph (a) shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event.
(b) In case the Company shall issue rights, options or warrants to all
holders of its outstanding Common Stock entitling them to subscribe for or
purchase shares of Common Stock at a price per share which is lower at the
record date than $14.99 per share, the number of Conversion Shares thereafter
purchasable upon the exercise of this Note shall be determined by multiplying
the number of Conversion Shares theretofore purchasable upon exercise of this
Note by a fraction, of which the numerator shall be the number of shares of
Common Stock outstanding on the record date for determining stockholders
entitled to receive such rights,
3
<PAGE>
options or warrants plus the number of additional shares of Common Stock offered
for subscription or purchase, and of which the denominator shall be the number
of shares of Common Stock outstanding on the record date for determining
stockholders entitled to receive such rights, options or warrants plus the
number of shares which the aggregate offering price of the total number of
shares of Common Stock so offered would purchase at $14.99 per share at such
record date. Such adjustment shall be made whenever such rights, options or
warrants are issued, and shall become effective as of immediately after the
record date for the determination of stockholders entitled to receive such
rights, options or warrants.
(c) In case the Company shall distribute to all holders of its shares of
Common Stock evidences of its indebtedness or assets (including securities and
cash dividends not paid out of funds legally available for the payment of
dividends under the laws of the jurisdiction of incorporation of the Company or
not made in the ordinary course of business), but excluding dividends or
distributions referred to in paragraph (a) above or rights or options or
warrants referred to in paragraph (b) above, then in each case the number of
Conversion Shares thereafter purchasable upon the exercise of this Note shall be
determined by multiplying the number of Conversion Shares theretofore
purchasable upon the exercise of this Note by a fraction, of which the numerator
shall be the then current market price per share of Common Stock on the date of
such distribution, and of which the denominator shall be the then current market
price per share of Common Stock, less the then fair value (as reasonably
determined in good faith by the Board of Directors of the Company, whose
reasonable determination shall be conclusive) of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights or
securities or warrants applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made, and shall become effective
on the date of distribution retroactive to the record date for the determination
of shareholders entitled to receive such distribution.
(d) In case the Company shall sell and issue shares of Common Stock, or
rights, options, warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase shares of Common Stock (excluding
(i) shares, rights, options, warrants or convertible or exchangeable securities
issued in any of the transactions described in paragraphs (a) through (c) above,
(ii) shares issued upon conversion, exercise or exchange of rights, options,
warrants or convertible or exchangeable securities outstanding on the date
hereof, (iii) any shares issued upon exercise of this Note or any warrant or any
other convertible promissory note made by the Company to Template, (iv) shares
of Common Stock issued pursuant to a public firm commitment underwritten
offering and (v) options or shares of Common Stock issued to key employees of
the Company in an aggregate amount cumulated from and including the date of
original issuance of this Note not in excess of 250,000 shares of Common Stock,
but including shares, rights, options, warrants or convertible or exchangeable
4
<PAGE>
securities issued as consideration in any merger, consolidation or other
business combination) at a price per share of Common Stock (as determined in
accordance with this paragraph (d)) that is lower than $14.99 per share
immediately prior to such sale and issuance, then in each case the number of
Conversion Shares thereafter purchasable upon the exercise of this Note shall be
determined by multiplying the number of Conversion Shares theretofore
purchasable upon the exercise of this Note by a fraction, the numerator of which
shall be (I) the total number of shares of Common Stock outstanding immediately
after such sale and issuance, and the denominator of which shall be (II) an
amount equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such sale and issuance plus (B) the number of shares of
Common Stock that the aggregate consideration received (determined as provided
below) for such sale or issuance would purchase at $14.99 per share. Such
adjustment shall be made successively whenever such an issuance is made. For the
purposes of such adjustments, the shares of Common Stock that the holder of such
rights, options, warrants, or convertible or exchangeable securities shall be
entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such sale and issuance and the consideration
received by the Company therefor shall be deemed to be the consideration
received by the Company, plus the consideration or premiums stated in such
rights, options, warrants or convertible or exchangeable securities to be paid
for the shares of Common Stock covered thereby. In case the Company shall sell
and issue shares of Common Stock or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase Common
Stock, for a consideration consisting, in whole or in part, of property other
than cash or its equivalent, then in determining the "price per share of Common
-------------------------
Stock" and the "consideration received" by the Company for purposes of the first
- ----- ----------------------
sentence of this paragraph (d), the Board of Directors of the Company shall
determine, on a reasonable basis and in good faith, the fair value
of such property. In case the Company shall sell and issue rights, options,
warrants or convertible or exchangeable securities containing the right to
subscribe for or purchase shares of Common Stock together with one or more
other securities as part of a unit at a price per unit, then in determining
the "price per share of Common Stock" and the "consideration received" by
------------------------------- ----------------------
the Company for purposes of the first sentence of this paragraph (d), the Board
of Directors of the Company shall determine, on a reasonable basis and in good
faith, the fair value of the rights, options, warrants or convertible or
exchangeable securities then being sold as part of such unit.
(e) For the purpose of this Section 6, the term "shares of Common Stock"
--------- ----------------------
shall mean (i) the Common Stock of the Company, or (ii) any other class of stock
resulting from successive changes or reclassifications of such shares consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to paragraph (a) above, Template shall become entitled
to receive any securities of the Company other than shares of Common Stock,
thereafter the number of such other shares so receivable upon exercise of each
Note shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the
5
<PAGE>
provisions with respect to the Conversion Shares contained in paragraphs
(a) through (d) above, and the other provisions of this Section 6 shall apply
---------
on like terms to any such other securities.
(f) Except as provided in paragraphs (a) through (c) above, no adjustment
in respect of any dividends shall be made upon the conversion of this Note.
(g) Upon the expiration of any rights, options, warrants or conversion or
exchange privileges with respect to which an adjustment shall have been made
pursuant to paragraph (b) or (d) above, if any thereof have not been exercised,
the number of Conversion Shares purchasable upon the exercise of the Note will,
upon such expiration, be readjusted and will thereafter be such as it would have
been had it been originally adjusted (or had the original adjustment not been
required, as the case may be) as if (i) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options or warrants or conversion or exchange rights
and (ii) such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise, conversion or
exchange plus the aggregate consideration, if any actually received by the
Company for the issuance, sale or grant of all such rights, options or warrants,
whether or not exercised.
(h) In the event:
(A) the Company shall authorize the issuance to all holders
of its Common Stock of rights or warrants to subscribe for or
purchase Common Stock or of any other subscription rights or
warrants; or
(B) the Company shall authorize the distribution to all
holders of its Common Stock of evidences of its indebtedness or
assets (other than dividends paid in or distributions of the
Company's capital stock for which the number of shares
purchasable upon the exercise of this Note shall have been
adjusted pursuant to paragraph (a) above and cash dividends paid
out of retained earnings legally available for the payment of
dividends under the laws of the jurisdiction of incorporation of
the Company and made in the ordinary course of business); or
(C) of any capital reorganization or reclassification of
the Common Stock (other than a subdivision or combination of the
outstanding Common Stock and other than a change in par value of
the Common Stock) or of any consolidation or merger to which the
Company is a party and for which approval of any stockholders of
6
<PAGE>
the Company is required (other than a consolidation or merger in
which the Company is the continuing corporation and that does not
result in any reclassification or change of the Common Stock
outstanding), or of the conveyance or transfer of the properties
and assets of the Company substantially as an entirety; or
(D) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(E) the Company proposes to take any action (other than
actions of the character described in clause (ii) or (iii) of
paragraph (a) above) that would require an adjustment pursuant to
this Section 6 to the number of shares purchasable upon the
---------
exercise of this Note;
then the Company shall cause to be mailed by first-class mail to
Template, at least five days prior to the applicable record or effective
date hereinafter specified (10 days in the case of the events referred to
in clauses (C) and (D) above), a notice stating (x) the date as of which
the holders of Common Stock of record to be entitled to receive any such
rights, warrants or distributions are to be determined, or (y) the date on
which any such consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding-up is expected to become effective, and the date as
of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property, if any, deliverable upon such reorganization, reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding-up.
7. TRANSFER OF NOTE AND CONVERSION SHARES. Neither this Note nor the
--------------------------------------
Conversion Share have been registered under the Securities Act of 1933 (the
"1933 Act") or under the securities laws of any state. This Note may not be
- ---------
assigned or negotiated without the express written consent of the Company.
Neither this Note nor the Conversion Shares, may be sold, transferred, pledged
or hypothecated in the absence of (1) an effective registration statement for
this Note, or the shares, as the case may be, under the 1933 Act, and such
registration or qualification as may be necessary under the securities laws of
any state, or (2) an opinion of counsel in form and substance reasonably
satisfactory to the Company that such registration or qualification is not
required.
7.1. The Company may cause the certificate or certificates
evidencing all or any of the shares issued upon exercise of the conversion
rights contained in this Note to bear the following legend:
7
<PAGE>
"The shares evidenced by this certificate have not been registered under
the Securities Act of 1933, as amended, or under the securities laws of any
state. The shares may not be sold, transferred, pledged or hypothecated in
the absence of an effective registration statement under the Securities Act
of 1933, as amended, and such registration or qualification as may be necessary
under the securities laws of any state, or an opinion of counsel satisfactory to
the Company that such registration or qualification is not required."
7.2. Notwithstanding the provisions set forth above, no such
registration statement or opinion of counsel shall be required: for any transfer
of any Conversion Shares in compliance with Rule 144 or Rule 144A.
7.3. This Note shall be registered on books of the Company kept at
its principal office for that purpose, and shall be transferable only on such
books by the registered owner hereof in person or by a duly authorized attorney
upon surrender of this Note properly endorsed, and only in compliance with
this Section 7.
---------
8. LOAN DOCUMENTS. The performance of the Company's obligations hereunder
--------------
are secured by the Security Agreement of even date herewith (the "Security
--------
Agreement") and the Financing Statement (the "Financing Statement"), each from
- --------- -------------------
the Company in favor of Template. This Note, the Financing Agreement, the
Security Agreement, the Financing Statement and any other document executed or
delivered by the Company in connection herewith shall be referred to herein as
the "Loan Documents."
--------------
9. EVENTS OF DEFAULT. Each of the following shall constitute an "Event of
----------------- --------
Default" under this Agreement:
- -------
9.1. FAILURE TO PAY. If the Company fails to make when due any
--------------
installment or other payment owing to Template under the terms of this Note and
such failure shall continue for a period of ten days after written notice of
such failure has been given to the Company by Template;
9.2. FAILURE TO OBSERVE OTHER COVENANTS. If the Company fails to
----------------------------------
perform or observe any other material term, covenant, warranty or agreement
contained in this Note or any other Loan Document and such failure shall
continue for a period of 30 days after written notice of such failure has been
given to the Company;
9.3. DEFAULTS UNDER LOAN DOCUMENT. If an event of default shall
----------------------------
occur under any other Loan Document shall not be cured within any applicable
grace period;
8
<PAGE>
9.4 VOLUNTARY BANKRUPTCY. If the Company makes an assignment for the
--------------------
benefit of creditors, files a petition in bankruptcy, petitions or applies
to any tribunal for any receiver or any trustee of the Company or any
substantial part of the property of the Company or commences any proceeding
relating to the Company under any reorganization, arrangement, composition,
readjustment, liquidation or dissolution law or statute of any
jurisdiction, whether in effect now or after this Note is executed;
9.5. INVOLUNTARY BANKRUPTCY. If, within 60 days after the filing of
----------------------
a bankruptcy petition or the commencement of any proceeding against the Company
seeking any reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, the proceeding shall not have been dismissed, or, if within 60 days,
after the appointment, without the consent or acquiescence of the Company of any
trustee, receiver or liquidator of the Company or all or any substantial part of
the properties of the Company, the appointment shall not have been vacated; or
9.6. DISSOLUTION. The dissolution, liquidation or termination of
-----------
existence of the Company.
10. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of Default
---------------------
hereunder, the entire principal balance hereof, all accrued interest thereon and
all other amounts payable hereunder shall become immediately due and payable at
the option of Template. Any delay by Template in exercising or any failure of
Template to exercise the aforesaid option to accelerate with respect to an Event
of Default shall not constitute a waiver of its right to exercise such option
with respect to that or any subsequent Event of Default. Acceleration of
maturity, once claimed hereunder by the holder hereof may be rescinded, at such
holder's option, by written acknowledgment to that effect, but the tender and
acceptance of partial payment or partial performance alone shall not in any way
affect or rescind such acceleration of maturity. After the occurrence of an
Event of Default, interest shall accrue on all amounts due hereunder at a rate
of 2% per annum above the rate or rates of interest then payable hereunder.
11. WAIVER; EXTENSIONS. Presentment, demand, notice of dishonor, protest
------------------
and the benefits of the homestead and all other exemptions provided debtors are
hereby waived. The Company agrees that it shall remain liable for the payment
hereof notwithstanding any agreement for the extension of the due date of any
amount payable hereunder made by Template after the Maturity Date.
12. COLLECTION COSTS AND EXPENSES. The Company shall pay all reasonable
-----------------------------
costs, fees and expenses (including court costs and reasonable attorneys' fees)
incurred by Template in
9
<PAGE>
collecting or attempting to collect any amount that becomes due hereunder or in
seeking legal advice with respect to such collection or an Event of Default
hereunder.
13. NOTICES. All notices, requests, demands and other communications with
-------
respect hereto or any other Loan Document shall be in writing and shall be
delivered by hand, sent prepaid by Federal Express (or a comparable overnight
delivery service) or sent by the United States mail, certified, postage prepaid,
return receipt requested, to the following addresses:
If to Template:
Template Software, Inc.
45365 Vintage Park Plaza
Dulles, Virginia 20166
Attn.: Mr. E. Linwood Pearce
with a copy to :
Hunton & Williams
1751 Pinnacle Drive
Suite 1700
McLean, Virginia 22102
Attn.: Joseph W. Conroy, Esq.
If to the Company,
Eagle Eye Technologies, Inc.
950 Herndon Parkway, Suite 230
Herndon, Virginia 20170
Attention: President
with a copy to :
Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, D.C. 20036-5612
Attention: Thomas J. Knox, Esquire
Any notice, request, demand or other communication delivered or sent in the
manner aforesaid shall be deemed given or made (as the case may be) upon the
earliest of (a) the date it is actually received, (b) the business day after the
day on which it is delivered by hand, (c) the business day after the day on
which it is properly delivered to Federal Express (or a comparable
10
<PAGE>
overnight delivery service), or (d) the third business day after the day on
which it is deposited in the United States mail. The Company or Template may
change its address by notifying the other party of the new address in any manner
permitted by this Section 14.
----------
14. SEVERABILITY. If any provision of this Note, or the application
------------
thereof to any person or circumstance, shall to any extent be invalid or
unenforceable, the remainder of the provisions of this Note, or the application
of such provision to other persons or circumstances, shall not be affected
thereby, and each provision of this Note shall be valid and enforceable to the
fullest extent permitted by law.
15. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to
----------------------
the benefit of the Company and Template, and their respective successors and
assigns; provided, however, that the Company may not assign or delegate its
obligations hereunder without the prior written consent of Template.
16. PAYMENTS. All payments due hereunder, if any, shall be made in
--------
immediately available funds.
17. OFFSET. If an Event of Default occurs hereunder and is not cured
------
within any applicable grace period, then Template shall have the right to offset
any amounts due hereunder against any amounts now or hereafter due from Template
to the Company.
18. GOVERNING LAW. This Note shall be governed by and construed in
-------------
accordance with the laws of the Commonwealth of Virginia, without reference to
conflict of laws principles.
[SIGNATURE PAGE FOLLOWS]
11
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Note as of the date first
written above.
EAGLE EYE TECHNOLOGIES, INC., a
Virginia corporation
By: /s/ Michael H. Stone
--------------------
Name: Michael H. Stone
Title: Vice President
12
<PAGE>
EXHIBIT 10.3
NEITHER THIS WARRANT NOR THE SECURITIES TO BE ACQUIRED UPON ITS EXERCISE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OR APPLICABLE STATE SECURITIES
LAWS. NO SALE OR DISPOSITION OF THIS WARRANT OR THOSE SECURITIES MAY BE EFFECTED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL FOR THE HOLDER, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS
NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, OR APPLICABLE STATE SECURITIES
LAWS OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE
COMMISSION.
THIS WARRANT IS SUBJECT TO RESTRICTIONS ON TRANSFERS AS SET FORTH BELOW.
WARRANT TO PURCHASE COMMON STOCK
--------------------------------
This certifies that, in consideration of the advancing of certain funds and
other consideration, TEMPLATE SOFTWARE, INC., a Virginia corporation (the
"Holder") is entitled to subscribe for and purchase 66,695 shares (the "Warrant
- ------- -------
Shares") of the fully-paid and non-assessable shares of the Common Stock, no par
- ------
value, of EAGLE EYE TECHNOLOGIES, INC., a Virginia corporation (the "Company"),
-------
at the price of $14.99 per share, as adjusted pursuant to Section 4 (the
---------
"Warrant Price"), subject to the provisions and upon the terms and conditions
- --------------
hereinafter set forth.
As used herein, the term "Common Stock" shall mean the Company's presently
------------
authorized Common Stock and any stock into which such Common Stock may hereafter
be exchanged.
1. TERM OF WARRANT. The term of this Warrant shall begin on the
---------------
Notification Date (as defined in the Convertible Promissory Note of even date
herewith, made by the Company in favor of the Holder) and shall end on the date
twelve (12) months after the Notification Date.
2. METHODS OF EXERCISE; PAYMENT. Subject to Section 1, the purchase right
---------------------------- ---------
represented by this Warrant may be exercised by the holder hereof, in whole or
in part, at any time or from time to time, on or after the Notification Date and
through the term of this Warrant or, if either such day is a day on which
banking institutions in Virginia are authorized by law to close, then on the
next succeeding day that shall not be such a day, by the surrender of this
Warrant (with the notice of exercise form attached as Exhibit A duly executed)
---------
at the principal office of the Company and by the payment to the Company, by
cashier's check, of an amount equal to the then applicable Warrant Price per
share multiplied by the number of shares then being purchased. If this Warrant
is exercised in part only, the Company shall, upon surrender of this Warrant,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares purchasable hereunder.
Notwithstanding the
<PAGE>
foregoing, in lieu of payment of the Warrant Price in cash, the Holder may elect
to exercise this Warrant on a cashless basis (based on the fair market value of
the Common Stock, as determined in good faith by the Company's Board of
Directors) through an adjustment in the number of Warrant Shares or otherwise,
as mutually agreed to between the Company and the Holder. In the event of any
exercise of the rights represented by this Warrant, certificates for the shares
of the Common Stock so purchased shall be delivered to the Holder within a
reasonable time. The Company shall pay any and all documentary, stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of the
Warrant Shares; provided that the Company shall not be required to pay any tax
--------
or taxes which may be payable in respect of any transfer involved in the issue
of any certificates for Warrant Shares in a name other than that of the
registered Holder of this Warrant surrendered upon exercise of this Warrant, and
the Company shall not be required to issue or deliver certificates for Warrant
Shares unless or until the person or persons requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have established
to the satisfaction of the Company that such tax has been paid.
3. STOCK FULLY PAID; RESERVATION OF SHARES. All Common Stock which may be
---------------------------------------
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be fully paid and nonassessable, and free from all taxes, liens and
charges with respect to the issue thereof. During the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of the issue upon exercise
of the purchase rights evidenced by this Warrant, a sufficient number of shares
of its Common Stock to provide for the exercise of the rights represented by
this Warrant.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number and
-------------------------------------------------
kind of securities purchasable upon the exercise of this Warrant shall be
subject to adjustment from time to time upon the happening of certain events, as
follows:
(a) In case the Company shall at any time after the date of this
Warrant (i) declare or pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock, (ii) subdivide its outstanding shares of
Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing entity), the kind and number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the Holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive after the happening of any of
the events described above, had this Warrant been exercised immediately prior to
the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
(b) In case the Company shall issue rights, options or warrants to all
holders of its outstanding Common Stock entitling them to subscribe for or
purchase shares of Common
2
<PAGE>
Stock at a price per share which is lower at the record date than the then
current Warrant Price, the number of Warrant Shares thereafter purchasable upon
the exercise of this Warrant shall be determined by multiplying the number of
Warrant Shares theretofore purchasable upon exercise of this Warrant by a
fraction, of which the numerator shall be the number of shares of Common Stock
outstanding on the record date for determining stockholders entitled to receive
such rights, options or warrants plus the number of additional shares of Common
Stock offered for subscription or purchase, and of which the denominator shall
be the number of shares of Common Stock outstanding on the record date for
determining stockholders entitled to receive such rights, options or warrants
plus the number of shares which the aggregate offering price of the total number
of shares of Common Stock so offered would purchase at the then current Warrant
Price at such record date. Such adjustment shall be made whenever such rights,
options or warrants are issued, and shall become effective as of immediately
after the record date for the determination of stockholders entitled to receive
such rights, options or warrants.
(c) In case the Company shall distribute to all holders of its shares
of Common Stock evidences of its indebtedness or assets (including securities
and cash dividends not paid out of funds legally available for the payment of
dividends under the laws of the jurisdiction of incorporation of the Company or
not made in the ordinary course of business), but excluding dividends or
distributions referred to in paragraph (a) above or rights or options or
warrants referred to in paragraph (b) above, then in each case the number of
Warrant Shares thereafter purchasable upon the exercise of this Warrant shall be
determined by multiplying the number of Warrant Shares theretofore purchasable
upon the exercise of this Warrant by a fraction, of which the numerator shall be
the then current market price per share of Common Stock on the date of such
distribution, and of which the denominator shall be the then current market
price per share of Common Stock, less the then fair value (as reasonably
determined in good faith by the Board of Directors of the Company, whose
reasonable determination shall be conclusive) of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights or
securities or warrants applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made, and shall become effective
on the date of distribution retroactive to the record date for the determination
of shareholders entitled to receive such distribution.
(d) In case the Company shall sell and issue shares of Common Stock, or
rights, options, warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase shares of Common Stock (excluding (i)
shares, rights, options, warrants or convertible or exchangeable securities
issued in any of the transactions described in paragraphs (a) through (c) above,
(ii) shares issued upon conversion, exercise or exchange of rights, options,
warrants or convertible or exchangeable securities outstanding on the date
hereof, (iii) the Warrant or any convertible promissory note made by the Company
to Template and any shares issued on exercise thereof, (iv) shares of Common
Stock issued pursuant to a public firm commitment underwritten offering and (v)
options or shares of Common Stock issued to key employees of the Company in an
aggregate amount cumulated from and including the date of original issuance of
this Warrant not in excess of 250,000 shares of Common Stock, but
3
<PAGE>
including shares, rights, options, warrants or convertible or exchangeable
securities issued as consideration in any merger, consolidation or other
business combination) at a price per share of Common Stock (as determined in
accordance with this paragraph (d)) that is lower than the Warrant Price
immediately prior to such sale and issuance, then in each case the number of
Warrant Shares thereafter purchasable upon the exercise of this Warrant shall be
determined by multiplying the number of Warrant Shares theretofore purchasable
upon the exercise of this Warrant by a fraction, the numerator of which shall be
(I) the total number of shares of Common Stock outstanding immediately after
such sale and issuance, and the denominator of which shall be (II) an amount
equal to the sum of (A) the number of shares of Common Stock outstanding
immediately prior to such sale and issuance plus (B) the number of shares of
Common Stock that the aggregate consideration received (determined as provided
below) for such sale or issuance would purchase at the Warrant Price. Such
adjustment shall be made successively whenever such an issuance is made. For the
purposes of such adjustments, the shares of Common Stock that the holder of such
rights, options, warrants, or convertible or exchangeable securities shall be
entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such sale and issuance and the consideration
received by the Company therefor shall be deemed to be the consideration
received by the Company, plus the consideration or premiums stated in such
rights, options, warrants or convertible or exchangeable securities to be paid
for the shares of Common Stock covered thereby. In case the Company shall sell
and issue shares of Common Stock or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase Common
Stock, for a consideration consisting, in whole or in part, of property other
than cash or its equivalent, then in determining the "price per share of Common
-------------------------
Stock" and the "consideration received" by the Company for purposes of the first
- ----- ----------------------
sentence of this paragraph (d), the Board of Directors of the Company shall
determine, on a reasonable basis and in good faith, the fair value of such
property. In case the Company shall sell and issue rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock together with one or more other securities as
part of a unit at a price per unit, then in determining the "price per share of
------------------
Common Stock" and the "consideration received" by the Company for purposes of
- ------------ ----------------------
the first sentence of this paragraph (d), the Board of Directors of the Company
shall determine, on a reasonable basis and in good faith, the fair value of the
rights, options, warrants or convertible or exchangeable securities then being
sold as part of such unit.
(e) For the purpose of this Section 4, the term "shares of Common
--------- ----------------
Stock" shall mean (i) the Common Stock of the Company, or (ii) any other class
- -----
of stock resulting from successive changes or reclassifications of such shares
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to paragraph (a) above, the Holders shall become
entitled to receive any securities of the Company other than shares of Common
Stock, thereafter the number of such other shares so receivable upon exercise of
each Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Warrant Shares contained in paragraphs (a) through (d) above, and the other
provisions of this Section 4 shall apply on like terms to any such other
---------
securities.
4
<PAGE>
(f) Except as provided in paragraphs (a) through (c) above, no
adjustment in respect of any dividends shall be made during the term of a
Warrant or upon the exercise or conversion of a Warrant.
(g) Upon the expiration of any rights, options, warrants or conversion
or exchange privileges with respect to which an adjustment shall have been made
pursuant to paragraph (b) or (d) above, if any thereof have not been exercised,
the number of Warrant Shares purchasable upon the exercise of the Warrant will,
upon such expiration, be readjusted and will thereafter be such as it would have
been had it been originally adjusted (or had the original adjustment not been
required, as the case may be) as if (i) the only shares of Common Stock so
issued were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options or warrants or conversion or exchange rights
and (ii) such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise, conversion or
exchange plus the aggregate consideration, if any actually received by the
Company for the issuance, sale or grant of all such rights, options or warrants,
whether or not exercised.
(h) In the event:
(A) the Company shall authorize the issuance to all holders
of its Common Stock of rights or warrants to subscribe for or
purchase Common Stock or of any other subscription rights or
warrants; or
(B) the Company shall authorize the distribution to all
holders of its Common Stock of evidences of its indebtedness or
assets (other than dividends paid in or distributions of the
Company's capital stock for which the number of shares
purchasable upon the exercise of this Warrant shall have been
adjusted pursuant to paragraph (a) above and cash dividends paid
out of retained earnings legally available for the payment of
dividends under the laws of the jurisdiction of incorporation of
the Company and made in the ordinary course of business); or
(C) of any capital reorganization or reclassification of
the Common Stock (other than a subdivision or combination of the
outstanding Common Stock and other than a change in par value of
the Common Stock) or of any consolidation or merger to which the
Company is a party and for which approval of any stockholders of
the Company is required (other than a consolidation or merger in
which the Company is the continuing corporation and that does not
result in any reclassification or change of the Common Stock
outstanding), or of the conveyance or transfer of the properties
and assets of the Company substantially as an entirety; or
5
<PAGE>
(D) of the voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(E) the Company proposes to take any action (other than
actions of the character described in clause (ii) or (iii) of
paragraph (a) above) that would require an adjustment pursuant to
this Section 4 to the number of shares purchasable upon the
exercise of this Warrant;
then the Company shall cause to be mailed by first-class mail to the Holder, at
least five days prior to the applicable record or effective date hereinafter
specified (10 days in the case of the events referred to in clauses (C) and (D)
above), a notice stating (x) the date as of which the holders of Common Stock of
record to be entitled to receive any such rights, warrants or distributions are
to be determined, or (y) the date on which any such consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding-up is expected to
become effective, and the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities or other property, if any, deliverable upon such reorganization,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding-up.
5. NOTICE OF ADJUSTMENTS. Whenever any Warrant Price shall be
---------------------
adjusted pursuant to Section 4(a), the Company shall make a certificate signed
by its chief financial officer setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, and the Warrant Price or Prices after giving effect
to such adjustment, and shall cause copies of such certificate to be mailed (by
first class mail, postage prepaid) to the Holder at the address specified in
Section 9(c) or at any address provided to the Company in writing by the Holder.
6. FRACTIONAL SHARES. No fractional shares of Common Stock will be
-----------------
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor upon the basis of the
Warrant Price then in effect.
7. RECLASSIFICATION, REORGANIZATION, CONSOLIDATION OR MERGER. In
---------------------------------------------------------
case of any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock) or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and that does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease, transfer or conveyance to another
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, cause effective provisions to be made so that the Holder shall
have the right thereafter, by exercising this Warrant, to receive in lieu of the
receipt of shares of
6
<PAGE>
Common Stock the kind and amount of shares of stock and other securities and
property (including cash) receivable upon such reclassification, capital
reorganization and other change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock that would have been received
upon exercise of this Warrant immediately prior to such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance. Any
such provision shall include provision for adjustments in respect of such shares
of stock and other securities and property that shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Warrant. The
foregoing provisions of this Section 7 shall similarly apply to successive
---------
reclassifications, capital reorganizations and changes of shares of Common Stock
and to successive consolidations, mergers, sales or conveyances. In the event
that in connection with any such capital reorganization or reclassification,
consolidation, merger, sale or conveyance, additional shares of Common Stock
shall be issued in exchange, conversion, substitution or payment, in whole or in
part, for, or of, a security of the Company other than Common Stock, any such
issue shall be treated as an issue of Common Stock covered by the provisions of
paragraph (d) of Section 4.
---------
8. COMPLIANCE WITH SECURITIES ACT; NONTRANSFERABILITY OF WARRANT;
-------------------------------------------------------------
DISPOSITION OF SHARES OF PREFERRED AND COMMON STOCK. The Holder of this Warrant,
- ---------------------------------------------------
by accepting it, agrees that this Warrant and the shares of Common Stock to be
issued upon exercise hereof are being acquired for investment and that it will
not offer, sell or otherwise dispose of this Warrant or any other shares of
Common Stock to be issued upon its exercise except under circumstances which
will not result in a violation of the Securities Act of 1933, as amended (the
"Act") or applicable state securities laws. Upon exercise of this Warrant, the
---
Holder shall, if requested by the Company, execute and deliver to the Company a
statement, in a form satisfactory to the Company, that the shares of Common
Stock so purchased are being acquired for investment and not with a view toward
distribution or resale. This Warrant and all shares of Common Stock issued upon
exercise of this Warrant (unless registered under the Act) shall be stamped and
imprinted with a legend substantially in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
OR APPLICABLE STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE
EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION
IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE
SECURITIES LAWS OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND
EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT REQUIRED.
By accepting this Warrant, the Holder understands and agrees that the
Company is under no obligation to register, redeem, repurchase or otherwise
create, locate or assist the Holder in finding a market or purchaser for this
Warrant or any Common Stock. The Holder represents that it is either an
accredited investor, or has such knowledge and experience in financial and
7
<PAGE>
business matters that it is capable of evaluating the merits and risks of this
investment and is able to bear the economic risk of this investment.
9. MISCELLANEOUS.
-------------
(a) No Rights as Shareholder. The Holder shall not be entitled
------------------------
to vote or receive dividends or be deemed the holder of Common Stock or any
other securities of the Company which may at any time be issuable on the
exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the Holder, as such, any of the rights of a shareholder
of the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issuance of
stock, reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, conveyance, or otherwise) or to receive notice
of meetings, or to receive dividends or subscription rights or otherwise until
the Warrant or Warrants shall have been exercised and the Shares purchasable
upon the exercise hereof shall have become deliverable, as provided herein.
(b) Exchange, Loss or Replacement. On receipt of evidence
-----------------------------
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Warrant and, in the case of loss, theft or destruction, on
delivery of any indemnity agreement or bond reasonably satisfactory in form and
amount to the Company or, in the case of mutilation, on surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu of this Warrant, a new Warrant of like tenor. This Warrant may
be divided or combined with other Warrants that carry the same rights upon
presentation hereof at the office of the Company or at the office of its stock
transfer agent or warrant agent together with a written notice specifying the
names and denominations in which new Warrants are to be issued and signed by the
Holder hereof. The term "Warrant" as used herein includes any Warrants into
-------
which this Warrant may be divided or for which it may be exchanged. Upon receipt
by the Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Warrant, if mutilated, the Company shall execute and deliver a new Warrant
of like tenor and date. Upon the issuance of any new Warrant under this Section
in replacement of a lost, stolen or destroyed Warrant, the Company may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and any other expenses connected
therewith. Any such new Warrant executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or not the
Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable
by anyone.
(c) Notice. Any notice given to either party under this
------
Agreement shall be deemed to be given when delivered via overnight courier in
person or five (5) days after mailing, certified mail, addressed to such party
at the address for that party as set forth on the signature page, or at such
other address as that party may provide by notice to the other party. Notice to
the Company shall include a copy to: Thomas J. Knox, Esquire, Tucker, Flyer &
Lewis, 1615 L Street, N.W., Suite 400, Washington, D.C. 20036-5612 and notice to
Holder shall include a copy
8
<PAGE>
to Joseph W. Conroy, Esquire, Hunton & Williams, 1751 Pinnacle Drive, Suite
1700, McLean, Virginia 22102.
(d) No Impairment. The Company will not, by amendment of its
-------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith assist in the carrying out of all the provision in this
Warrant.
(e) Registration. This Warrant is numbered and will be
------------
registered in the name of the Holder in a register maintained by the Company, or
by the stock transfer agent or warrant agent of the Company. The Company may
deem and treat the Holder as the absolute owner thereof (notwithstanding any
notation of ownership or other writing thereon made by anyone), for all
purposes, and shall not be affected by any notice to the contrary.
(f) Governing Law. This Warrant shall be governed by and
-------------
construed under the laws of the Commonwealth of Virginia.
[SIGNATURE PAGE FOLLOWS]
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Warrant as of the date
first written above.
COMPANY:
-------
EAGLE EYE TECHNOLOGIES, INC., a Virginia
corporation
By: /s/ Michael H. Stone
--------------------
Name: Michael H. Stone
Title: Vice President
Address:
-------
Eagle Eye Technologies, Inc.
950 Herndon Parkway, Suite 230
Herndon, Virginia 20170
HOLDER:
------
TEMPLATE SOFTWARE, INC., a Virginia corporation
By: /s/ E. Linwood Pearce
----------------------
Name: E. Linwood Pearce
Title: Chief Executive Officer
Address:
-------
Template Software, Inc.
45365 Vintage Park Plaza
Dulles, Virginia 20166
10
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
TO: EAGLE EYE TECHNOLOGIES, INC.
1. The undersigned hereby elects to purchase shares of Common Stock of
EAGLE EYE TECHNOLOGIES, INC. pursuant to the terms of the attached Warrant, and
(i) tenders herewith payment of the purchase price of such shares in full or
(ii) wishes to proceed with the cashless exercise provisions of Section 2 of the
---------
Warrant.
2. Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned.
3. The undersigned represents that the aforesaid shares of Common Stock
are being acquired for the account of the undersigned for investment and not
with a view to, or for resale in connection with, the distribution thereof and
that the undersigned has no present intention of distributing or reselling such
shares. In support thereof, the undersigned agrees to execute an Investment
Representation Statement in the form acceptable to the Company.
WARRANT HOLDER:
--------------
By:______________________________
Name:____________________________
Title:___________________________
Address:_________________________
_________________________________
_________________________________
Taxpayer Identification #:
_________________________________
Note: the above signature should correspond exactly with the name on the first
page of the Warrant or with the name of the assignee appearing in an assignment
notice tendered to the Company.
<PAGE>
Exhibit 10.4
LOAN AGREEMENT
THIS LOAN AGREEMENT, dated as of the 30 day of June, 1998, is made by and
between TEMPLATE SOFTWARE, INC., a Virginia corporation, successor by merger to
Template Software, Inc., a Maryland corporation (the "Borrower"), and FIRST
UNION NATIONAL BANK, a national banking association, successor by merger to
Signet Bank, a Virginia banking corporation (the "Lender").
RECITALS
A. The Lender previously extended credit to the Borrower pursuant to the
terms and conditions set forth in the First Amended and Restated Loan and
Security Agreement executed between them dated as of October 22, 1996, (as
amended through the date hereof, the "Original Agreement", together with the
other documents defined therein as "Loan Documents", the "Original Loan
Documents").
B. The Borrower has requested that the Lender agree to certain modifications
to the Original Agreement, including releasing the Collateral (as defined in the
Original Agreement) securing the Obligations, modifying the Termination Date,
and placing the credit in the Sweep Plus program, and the Lender has agreed to
these and other modifications as set forth in this Agreement, provided that such
agreement is contingent upon the complete execution of this Agreement and the
satisfaction of all conditions precedent set forth herein.
C. The Borrower and the Lender now desire to execute this Agreement to set
forth their agreements with respect to the credit facilities being made
available to the Borrower.
Accordingly, for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Lender and the Borrower agree as follows:
SECTION 1. Definitions. Certain terms used in this Agreement are defined
-----------
in this Section 1. These terms, and the additional terms defined above, shall
have the meanings assigned wherever the terms appear in this Agreement. These
meanings are also applicable to the singular and plural forms of the terms
defined.
"Account Receivable" means collectively and includes any of the following,
whether now owned or hereafter acquired by the Borrower: all present and future
rights to payments for goods sold or leased or for services rendered, whether or
not represented by instruments or chattel paper, and whether or not earned by
performance; all present and future rights to payments arising out of the
licensing of computer software and systems; all accounts, contract rights,
chattel paper, instruments and documents; proceeds of any letter of credit of
which the Borrower is a beneficiary; all forms of obligations whatsoever owed to
the Borrower, together with all instruments and documents of title representing
any of the foregoing; all rights in any returned or repossessed goods; all
rights, security and guaranties with respect to any of the foregoing, including,
without limitation,
<PAGE>
any right of stoppage in transit; together with all property included within the
definitions of "accounts", "chattel paper", "documents" and "instruments" set
forth in the UCC.
"Affiliate" means, with respect to any specified Person, any other Person
which, directly or indirectly, through one or more intermediaries, controls or
is controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of management and policies of a Person, whether
through ownership of common stock, by contract, or otherwise.
"Agreement" means this Loan Agreement, as it may be amended, modified or
supplemented from time to time.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks are authorized or required to close under the laws of the
State.
"Capital Lease" means any lease which has been or should be capitalized on
the books of the lessee in accordance with GAAP.
"CERCLA" shall mean the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
"Closing" means the date on which the initial disbursement of the Loans is
made.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time.
"Commitment Fee" means the quarterly fee to be paid by the Borrower to the
Lender pursuant to Section 2.5 hereof in consideration of the commitment by the
Lender to make Revolving Loans hereunder. The Commitment Fee due for each
calendar quarter (or portion thereof) shall equal the product of the Commitment
Fee Rate in effect for such quarter (or portion thereof) multiplied by the
difference between $3,000,000.00 and the sum of (i) the average daily Principal
Amount during such quarter (or applicable portion thereof) plus (ii) the average
daily face amount of all Letters of Credit outstanding during such quarter (or
applicable portion thereof).
"Commitment Fee Rate" means the rate, expressed as a percentage, calculated
by multiplying 0.25% by a fraction the numerator of which is the number of days
in the calendar quarter, or shorter period, for which the Commitment Fee Rate is
being calculated and the denominator of which is 360.
"Compliance Certificate" means a certificate of the Borrower substantially
in the form attached hereto as Exhibit A (or such subsequent form as the Lender
shall require) executed by the chief financial officer of the Borrower, the
Treasurer of the Borrower or such other financial officer of the Borrower as is
acceptable to the Lender containing a calculation of the financial covenants set
2
<PAGE>
forth in Section 5.12 hereof applicable to the financial statements accompanying
such Compliance Certificate and a certification that no Default or Event of
Default has occurred and is continuing.
"Current Assets" means, as of a specified date, the assets of the Borrower,
determined on a consolidated basis, that in accordance with GAAP are properly
classified as current assets.
"Current Liabilities" means, as of a specified date, the liabilities of the
Borrower, determined on a consolidated basis, that in accordance with GAAP are
properly classified as current liabilities.
"Customer" means any Person obligated on an Account Receivable.
"Debt" means collectively and includes (a) indebtedness or liability for
borrowed money, or for the deferred purchase price of property or services; (b)
obligations as a lessee under a Capital Lease; (c) obligations to reimburse the
issuer of letters of credit or acceptances; (d) all guaranties, endorsements
(other than for collection or deposit in the ordinary course of business), and
other contingent obligations to purchase, to provide funds for payment, to
supply funds to invest in any Person, or otherwise to assure a creditor against
loss; and (e) obligations secured by any Lien on property owned by the Person,
whether or not the obligations have been assumed.
"Default" means any event which with the giving of notice, the lapse of
time, or both, would constitute an Event of Default.
"Default Rate" means, with respect to the Loans, a rate of interest equal
to 3% above the rate of interest otherwise applicable to Loans, and in all other
cases, a rate of interest equal to 3% above the rate of interest otherwise
applicable to Revolving Loans.
"Employee Benefit Plan" means any employee welfare benefit plan or employee
pension benefit plan, as those terms are defined in Sections 3(1) and 3(2) of
ERISA, for the benefit of employees of the Borrower or any ERISA Affiliate.
"Environmental Laws" means all federal, state or local laws, rules,
regulations or orders relating to air, water or noise pollution, employee health
and safety, or the production, storage, labeling, transportation or disposition
of waste or hazardous or toxic substances, including, but not limited to CERCLA,
the Toxic Substances Control Act of 1976, as amended, the Resource Conservation
Recovery Act of 1976, as amended, the Clean Air Act, as amended, the Federal
Water Pollution Control Act, as amended, or the Occupational Safety and Health
Act of 1970, as amended.
"Equipment" means collectively and includes all of the following, whether
now owned or hereafter acquired by the Borrower: equipment and fixtures,
including, without limitation, computer hardware, computer software and systems,
furniture, machinery, vehicles and trade fixtures, together with any and all
accessories, accessions, parts and appurtenances thereto, substitutions therefor
and replacements thereof, together with all other such items which are included
within the definitions of "equipment" and "fixtures" as set forth in the UCC.
3
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"ERISA Affiliate" shall mean each trade or business (whether or not
incorporated) which together with the Borrower would be treated as a "single
employer" within the meaning of Code (S)(S) 414(b), (c), (m), (n) or (o).
"Event of Default" means any of the events specified as an "Event of
Default" under this Agreement, provided that any requirement for the giving of
notice, the lapse of time, or both, or any other condition, has been satisfied.
"Financial Institution" means any commercial banking corporation, savings
bank or other financial institution.
"Financial Reporting Month" means a calendar month or such other
substantially equivalent financial reporting period adopted by the Borrower and
approved by the Lender.
"GAAP" means generally accepted accounting principles consistently applied.
"Government" means the United States of America or any agency or
instrumentality thereof.
"Indemnitee" shall mean the Lender, its Affiliates, and its and their
respective directors, officers, employees, agents, successors and assigns.
"Intellectual Property" shall mean all letters patent, licenses, trade
names, trademarks, copyrights, inventions, service marks, trademark
registrations, service mark registrations and copyright registrations, whether
domestic or foreign and applications for any of the foregoing, and all
proprietary technology, know-how, trade secrets or other intellectual property
rights owned or used by the Borrower or any Subsidiary in the operation of their
respective businesses.
"Interest Determination Date" means each Business Day of each calendar
month.
"Interest Payment Date" means the last day of each calendar month.
"Investment" in any Person shall mean, without duplication:
(a) the acquisition (whether for cash, property, services or
securities or otherwise) of capital stock, bonds, notes, debentures, partnership
or other ownership interests or other securities of such Person; and
(b) any deposit with, or advance, loan or other extension of credit
to, such Person or guarantee or assumption of, or other contingent obligation
4
<PAGE>
with respect to, Debt such Person, other than loans and advance permitted by
Section 6.8 hereof or guarantees permitted by Section 6.9 hereof; provided,
--------
however, that the term "Investment" shall not include:
- -------
(i) extension of trade credit and advances to customers and suppliers
and other contractual and trade relationships, requiring repayment within
reasonable commercial periods, to the extent made in the ordinary course of
business consistent with past practice and in accordance with normal industry
practice;
(ii) investments by the Borrower in any Person in the form, or out of
the net proceeds of the sale (other than to a Subsidiary or employee stock
ownership plan of the Borrower) of, capital stock of the Borrower; and
(iii) a merger between the Borrower and another Person in which
the Borrower is the surviving corporation.
"Letter of Credit" means any letter of credit issued for the benefit of the
Borrower by the Lender, but the inclusion of this definition shall not imply, or
be construed as, a commitment by the Lender to issue any letters of credit.
"Letter of Credit Exposure" means, at any given date, the available face
amount of outstanding Letters of Credit on such date plus the aggregate amount
of drafts drawn under or purporting to be drawn under Letters of Credit that
have been paid by the Lender and for which the Lender has not been reimbursed as
of such date.
"LIBO-Based Rate" means the rate per annum determined by the Lender to be
equal to the sum of (a) the applicable LIBOR Market Index Rate plus (b) 1.85%.
"LIBOR Market Index Rate" means that rate per annum (rounded upwards, if
necessary, to the next higher 1/100%) determined by the Lender on each Interest
Determination Date to be equal to the London Interbank Offered Rate for United
States Dollars quoted by the British Banker's Association as set forth on such
Interest Determination Date on Dow Jones Markets Services (formerly known as
Telerate) page 3750 (or appropriate successor or, if the British Banker's
Association, or its successor, ceases to provide such quotes, a comparable
replacement selected by the Lender) representing the offered rate for deposits
in United States Dollars for one (1) month periods that will be in effect on
such Interest Determination Date (and if such rates are quoted based on the
amount of the deposit, in an amount equal to the Principal Amount on such
Interest Determination Date); provided, however, that such London Interbank
Offered Rate shall be determined by the Lender in its sole discretion and the
resulting LIBOR Market Index Rate shall include any adjustment deemed necessary
by the Lender, in its sole discretion, to reflect the cost of the Lender's
reserve requirements as they exist from time to time. If more than one such
rate appears on such page or its replacement, the Lender will use the arithmetic
mean of such rates to determine the LIBOR Market Index Rate. The LIBOR Market
Index Rate is not necessarily the lowest or most favorable rate of interest
charged by the Lender on extensions of credit to debtors.
5
<PAGE>
"License" shall mean any certificate, license, franchise, permit or other
authorization.
"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority, or other security agreement, or preferential
arrangement, charge or encumbrance of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the UCC or comparable
law of any jurisdiction to evidence any of the foregoing).
"Loans" means the loans to be made to the Borrower by the Lender pursuant
to this Agreement.
"Loan Documents" means this Agreement, the Notes, and any other document
now or hereafter executed or delivered in connection with the Obligations in
evidence thereof or as security therefor, including, without limitation, any
guaranty, life insurance assignment, pledge agreement, security agreement, deed
of trust, mortgage, promissory note or subordination agreement.
"Maturity Date" shall mean October 31, 1999.
"Maximum Amount" means, at any time, the difference between $3,000,000.00
and the Letter of Credit Exposure at such time.
"Multiemployer Plan" means a multiemployer plan defined as such in Section
4001(a) (3) of ERISA.
"Note" means either the Revolving Note or the Term Note, depending upon the
context in which the term is used, and "Notes" means the Revolving Note and the
Term Note.
"Obligations" means the Loans, the Notes, all indebtedness and obligations
of the Borrower under this Agreement and the other Loan Documents, as well as
all other obligations and indebtedness of the Borrower to the Lender, now
existing or hereafter arising, of every kind and description, whether or not
evidenced by notes or other instruments, and whether such obligations are direct
or indirect, fixed or contingent, liquidated or unliquidated, including, without
limitation, any overdrafts in any deposit account maintained by the Borrower
with the Lender and all obligations of the Borrower with respect to letters of
credit issued by the Lender for the account of the Borrower, including the
Letter of Credit Exposure.
"Operating Account" means the demand deposit account maintained with the
Lender by the Borrower specified in the Sweep Plus Program Loan Rider as the
"Account."
"Original Agreement Loans" means "Revolving Loans" outstanding on the date
hereof under the Original Agreement.
6
<PAGE>
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, partnership, limited liability partnership,
limited liability company, corporation, business trust, joint stock company,
trust, unincorporated association, joint venture, governmental authority or
other entity of whatever nature.
"Prime Rate" means the rate of interest established from time to time by
the Lender and announced by the Lender as its prime rate. The Prime Rate is not
necessarily the lowest or most favorable rate of interest charged by the Lender
on extensions of credit to debtors.
"Principal Amount" means the aggregate outstanding principal balance of the
Revolving Loans.
"Proceeding" shall mean any action, suit or proceeding before any Tribunal.
"Reportable Event" means any of the events described in Section 4043(b) of
ERISA.
"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System (12 C.F.R. (S) 221), as the same may from time to time be
amended, supplemented or superseded.
"Revolving Facility" means the line of credit established by the Lender for
the benefit of the Borrower in an amount not to exceed the Maximum Amount to be
used by the Borrower only for the purposes specified in Section 2.1 (d).
"Revolving Loans" means Loans made by the Lender to the Borrower under the
Revolving Facility.
"Revolving Note" means the promissory note in form and substance acceptable
to the Lender in the original principal amount of $3,000,000.00 (as it may be
amended, modified supplemented or replaced from time to time) evidencing the
obligation of the Borrower to pay the Principal Amount together with interest on
the Principal Amount.
"State" means the Commonwealth of Virginia.
"Subsidiary" means a corporation now existing or hereafter formed of which
shares of stock having ordinary voting power to elect a majority of the board of
directors or other managers of such corporation are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by the Borrower.
7
<PAGE>
"Sweep Plus Program Loan Rider" means the Sweep Plus Program Loan Rider of
even date herewith between the Borrower and the Lender in the form of Exhibit B
attached hereto, as such rider may be amended, modified or supplemented from
time to time.
"Tangible Net Worth" means, at any date, all amounts which, in accordance
with GAAP, would be included under stockholders' equity on the consolidating
balance sheet of the Borrower on such date (i.e., the Borrower's separate
stockholders' equity); provided that, in any event, such amounts are to be net
of amounts carried on the books of the Borrower for (a) any write-up in the book
value of any assets resulting from a revaluation thereof subsequent to the date
of this Agreement; (b) treasury stock; (c) unamortized debt discount expense;
(d) any cost of investments in excess of net assets acquired at any time of
acquisition; (e) loans or advances to any Affiliate of the Borrower or
Subsidiary, or directors, officers, employees or shareholders of the Borrower,
any Affiliate of the Borrower, or any Subsidiary; (f) patents, patent
applications, copyrights, trademarks, trade names, good will, research and
development costs, organizational expenses, capitalized software development
costs and other like intangibles; (g) deferred assets, other than prepaid
expenses; and (h) any investments in securities which are not actively traded on
a national securities exchange.
"Tax Return" shall mean any federal, state and local income, excise,
property and other tax return or report.
"Term Loan" means the Term Loan made by the Lender to the Borrower under
the Original Agreement in the original principal amount of up to $275,000.00.
"Term Note" means the Term Note dated October 22, 1996 in the original
principal amount of $275,000.00 (as it has been, or in the future may be,
amended, modified supplemented or replaced) evidencing the obligation of the
Borrower to pay the principal amount of the Term Loan together with interest on
the Term Loan.
"Termination Date" means June 30, 1999, and any extension or extensions
thereof granted by the Lender in its sole discretion.
"Tribunal" means any federal, state, municipal, foreign, territorial, or
other court, arbitration panel or governmental body, subdivision, agency,
department, commission, board, bureau or instrumentality having jurisdiction
over the matter concerned.
"UCC" means the Uniform Commercial Code as adopted in the State and all
amendments thereto.
8
<PAGE>
SECTION 2. Loans.
-----
2.1. Revolving Facility Amount and Borrowing Procedure.
-------------------------------------------------
(a) Subject to the terms and conditions of this Agreement, the Lender
agrees to make Revolving Loans to the Borrower from time to time until the
Termination Date unless, after giving effect to any such Revolving Loan (i) the
Principal Amount would exceed the Maximum Amount or (ii) the Borrower then has,
or as a result of such Revolving Loan would have, an obligation to prepay any
Loan; provided, however that, for the purposes of all such calculations,
Revolving Loans to be repaid by Revolving Loans to be advanced on such date
shall be excluded from the Principal Amount. Subject to the foregoing
limitations, the Borrower may borrow, repay without penalty and re-borrow
hereunder from the date hereof until the Termination Date. The obligation of
the Borrower to repay the Revolving Loans, together with interest thereon, shall
be evidenced by the Revolving Note. The unpaid principal balance of the
Revolving Note shall be payable on the Termination Date, subject to
acceleration, termination or prepayment under the terms of this Agreement.
(b) [Reserved]
(c) If the Principal Amount exceeds the Maximum Amount, the Borrower shall
immediately prepay the Revolving Loans to the extent necessary to reduce such
excess.
(d) Effective as of the date of this Agreement, all Original Agreement
Loans shall become Revolving Loans under this Agreement. Except as provided by
the preceding sentence, the proceeds of the Revolving Loans shall be used for
business or commercial purposes and for no other purpose.
(e) Revolving Loans shall be made automatically in accordance with the
provisions of the Sweep Plus Program Loan Rider; provided, however, that the
Lender shall have no obligation to make such Revolving Loans if, after the
disbursement thereof, (i) the Principal Amount would exceed the Maximum Amount
or (ii) the Borrower has, or as a result of such Revolving Loan would have, an
obligation to prepay any Loan; provided, however that, for the purposes of all
such calculations, Revolving Loans to be repaid by Revolving Loans to be
advanced on such date shall be excluded from the Principal Amount. In addition,
the Borrower may request that a Revolving Loan be made. Any request for a
Revolving Loan must be received by the Lender not later than 1:00 p.m.
(Washington, D.C. time) on the date on which the Revolving Loan is to be made.
Each request must specify the amount of the Revolving Loan. The proceeds of the
Revolving Loans will be credited to the Operating Account. Revolving Loans may
be requested by those individuals designated by the Borrower from time to time
in written instruments delivered to the Lender; provided, however, that the
Borrower shall remain liable with respect to any Revolving Loan disbursed by the
Lender in good faith hereunder, even if such a Revolving Loan is requested by an
individual who has not been so designated. The Borrower agrees to confirm in
9
<PAGE>
writing from time to time, when and as requested by the Lender, the purpose for
which the proceeds of each Revolving Loan were used.
(f) [Reserved]
2.2 Term Loan.
---------
(a) The Borrower acknowledges the following with respect to the Term Loan:
(i) the Lender has funded the Term Loan, and as of June 1, 1998 the
outstanding principal balance of the Term Loan is $129,861.09;
(ii) the obligation of the Borrower to repay the Term Loan plus
interest accrued thereon is evidenced by the Term Note;
(iii) the Borrower is obligated to repay the principal amount of the
Term Loan in Thirty-Six (36) equal monthly payments of $7,638.89 on the last day
of each month, beginning on November 30, 1996 and ending on the Maturity Date;
provided that the last such installment shall be in the amount sufficient to
repay the Term Loan in full;
(iv) the obligation of the Lender to make the Term Loan is not a
revolving obligation and amounts repaid may not be reborrowed.
(b) The Borrower may prepay the Term Loan in whole or in part at any time
without premium or penalty. Any such prepayment shall be applied against the
scheduled principal payments in the inverse order of maturity and shall not
otherwise postpone or change the amount of any subsequent installment.
2.3. Interest.
--------
(a) Revolving Loans.
---------------
(i) General Provisions. Except as otherwise provided in this Section
------------------
2.3, the Principal Amount shall bear interest for each day such Principal Amount
is outstanding until it becomes due at the LIBO-Based Rate. Effective as of the
date of this Agreement, all Original Agreement Loans shall bear interest at the
LIBO-Based Rate. Payments of interest on each Revolving Loan shall be made on
each Interest Payment Date beginning on the Interest Payment Date next
succeeding the date of disbursement of such Revolving Loan. Accrued and unpaid
interest due in respect of Original Agreement Loans as of the date hereof shall
be paid on the Interest Payment Date next succeeding the date hereof.
Notwithstanding the foregoing, at the option of the Lender, the Revolving Loans
shall bear interest at the Default Rate, payable on demand, for each day during
any period of Default hereunder. Failure to exercise this option to assess a
Default Rate of interest shall not constitute a waiver of the such right in the
10
<PAGE>
event of any subsequent Default or at a later date during the same Default. The
rate of interest with respect to any portion of the Principal Amount which,
under the terms hereof, is bearing interest at the LIBO-Based Rate shall change
as and when the LIBOR Market Index Rate changes, and the rate of interest with
respect to any portion of the Principal Amount which, under the terms hereof, is
bearing interest at the Prime Rate shall change as and when the Prime Rate
changes.
(ii) Inability to Determine Rate. In the event that the Lender shall
---------------------------
have determined (which determination shall be conclusive and binding upon the
Borrower) that by reason of circumstances affecting the interbank Eurodollar
market adequate and reasonable means do not exist for ascertaining the LIBOR
Market Index Rate, the Lender shall forthwith give notice (which may be
telephonic and promptly confirmed in writing or by facsimile transmission) of
such determination to the Borrower. If such notice is given, any portion of the
Principal Amount bearing interest at the LIBO-Based Rate shall immediately begin
bearing interest at the Prime Rate. Until such notice has been withdrawn by the
Lender, the Principal Amount shall continue to bear interest at the Prime Rate.
(iii) Illegality; Impracticality. Notwithstanding any other
--------------------------
provisions herein, if any law, regulation, treaty or directive or any change
therein or in the interpretation or application thereof (whether having the
force of law or not) shall or may in the opinion of the Lender make it unlawful
or impractical for the Lender to make or maintain Revolving Loans bearing
interest at the LIBO-Based Rate: (1) the commitment of the Lender hereunder to
make Revolving Loans bearing interest at the LIBO-Based Rate shall forthwith be
suspended and (2) the outstanding Revolving Loans bearing interest at the LIBO-
Based Rate, if any, shall be converted automatically to Revolving Loans bearing
interest at the Prime Rate.
(b) The Term Loan shall bear interest on the unpaid principal balance
thereof from time to time outstanding, for each day until it becomes due, at a
per annum rate equal to the Prime Rate plus 1/4%. Payments of interest on the
Term Loan shall be made on each Interest Payment Date. Notwithstanding the
foregoing, at the option of the Lender, the Term Loan shall bear interest at the
Default Rate, payable on demand, for each day during any period of Default
hereunder. Failure to exercise this option to assess a Default Rate of interest
shall not constitute a waiver of the such right in the event of any subsequent
Default or at a later date during the same Default. The rate of interest
applicable to the Term Loan shall be changed effective as of the date of any
change in the Prime Rate. Any accrued and unpaid interest on the Term Loan due
under the Original Agreement as of the date hereof shall be paid on the Interest
Payment Date next succeeding the date of this Agreement.
2.4. [Reserved]
2.5. Commitment Fee. The obligation of the Borrower to pay the Commitment
---------------
Fee shall commence on the date hereof and shall continue until the Obligations
have been fully and completely paid and discharged. Commencing on September 30,
1998 and continuing on the last day of each subsequent calendar quarter
thereafter (i.e. March 31, June 30, September 30 and December 31) until the
11
<PAGE>
Obligations have been fully and completely paid and discharged, the Borrower
shall pay the Commitment Fee due for the quarter (or portion thereof) then
ending. Any accrued and unpaid portion of this fee shall be paid on the
Termination Date. Any accrued and unpaid commitment fee due under the Original
Agreement as of the date hereof shall be paid on September 30, 1998.
2.6. Payments and Computations. All payments hereunder (including any
-------------------------
payment or prepayment of principal, interest, fees and other charges) or with
respect to the Notes or the Loans shall be made in lawful money of the United
States of America, in immediately available funds without set-off, deduction or
counterclaim of any kind, to the Lender at its office at 1970 Chain Bridge Road,
McLean, Virginia 22102, or at such other place as the Lender may in writing
designate, and shall be applied, at the option of the Lender, first to accrued
Obligations other than principal and interest, next to accrued interest and then
to principal. If any payment of principal, interest or fees is not due on a
Business Day, then the due date will be extended to the next succeeding full
Business Day and interest and fees will be payable with respect to the
extension. If any payment of principal, interest or fees is not made within
seven (7) days of its due date, the Borrower agrees to pay to the Lender a late
charge equal to 5% of the amount of the payment. Except as otherwise
specifically provided, interest and fees shall be computed on the basis of a
year of 360 days and actual days elapsed. The Lender may, but shall not be
obligated to, debit the amount of any payment due under this Agreement to any
deposit account or loan account of the Borrower maintained with the Lender.
2.7. Termination of Revolving Facility by the Borrower. The Borrower may
-------------------------------------------------
terminate the Revolving Facility provided for in this Agreement and discontinue
borrowing thereunder by giving not less than 30 Business Days' prior written
notice of such termination to the Lender. The termination of the Revolving
Facility provided for in this Agreement shall not affect the rights of the
Lender with respect to any Obligations arising prior or subsequent to such
termination and the provisions of this Agreement shall remain in full force and
effect until the Obligations have been fully and completely paid and discharged.
2.8. Extensions of Termination Date and Maturity Date. The Lender may
------------------------------------------------
from time to time, in its sole discretion, extend the Termination Date or the
Maturity Date by giving written notice of such extension to the Borrower.
During any such periods of extension, the remaining terms and conditions of this
Agreement shall remain in full force and effect.
SECTION 3. [Reserved]
SECTION 4. Representations and Warranties. As of the date hereof and as
------------------------------
of each date a Loan is requested hereunder, the Borrower represents and warrants
to the Lender:
4.1. Incorporation, Good Standing and Due Qualification. Each of the
--------------------------------------------------
Borrower and its Subsidiaries is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction of its incorporation;
has the corporate power and authority to own its assets and to transact the
business in which it is now engaged or in which it is proposed to be engaged;
12
<PAGE>
and is duly qualified as a foreign corporation and in good standing under the
laws of each other jurisdiction in which such qualification is required.
4.2. Corporate Power and Authority. The execution, delivery and
-----------------------------
performance by the Borrower of the Loan Documents to which it is a party have
been duly authorized by all necessary corporate action and do not and will not
(a) require any consent or approval of the stockholders of the Borrower; (b)
contravene the Borrower's charter or bylaws; (c) result in a material breach of
or constitute a default under any material agreement or instrument to which the
Borrower is a party or by which it or its properties may be bound or affected;
(d) result in, or require, the creation or imposition of any Lien, upon or with
respect to any of the properties now owned or hereafter acquired by the Borrower
except as specifically created by or permitted under the Loan Documents; and (e)
to Borrower's best knowledge cause it to be in default under any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
applicable to the Borrower.
4.3. Legally Enforceable Agreement. This Agreement is, and each of the
-----------------------------
other Loan Documents when delivered under this Agreement will be, legal, valid
and binding obligations of the Borrower, enforceable against the Borrower, as
the case may be, in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, receivership or by
general principles of equity.
4.4. Financial Statements; Financial Covenants. The financial statements
-----------------------------------------
of the Borrower which have been furnished to the Lender in connection with this
Agreement are complete and correct in all material respects in accordance with
GAAP and fairly present the financial condition of the Borrower, and, since the
date of each such statement, there has been no material adverse change in the
condition (financial or otherwise), business or operations of the Borrower. As
of February 28, 1998, Tangible Net Worth was at least $10,000,000.00 and the
ratio of Current Assets to Current Liabilities was at least 3.0 to 1.
4.5. Litigation. There is no pending or, to the Borrower's best
----------
knowledge, threatened action or proceeding against or affecting the Borrower or
any Subsidiary before any Tribunal, which may, in any one case or in the
aggregate, materially adversely affect the financial condition, operations,
properties or business of the Borrower or any Subsidiary.
4.6. Ownership and Liens. The Borrower and each Subsidiary has title to
-------------------
all of its assets, and none of such assets, to the best of the Borrower's
knowledge, is subject to any Lien, except Liens permitted by this Agreement.
4.7. ERISA.
-----
(a) Prohibited Transactions. No transaction has occurred in connection
-----------------------
with which the Borrower or any Subsidiary would be subject to a liability for
either a civil penalty assessed pursuant to (S) 502(i) of ERISA or a tax imposed
by Code (S) 4975.
13
<PAGE>
(b) Plan Termination. There has been no termination of an Employee Benefit
----------------
Plan or trust created under any Employee Benefit Plan that has or will give rise
to liability to the PBGC on the part of the Borrower or an ERISA Affiliate. No
withdrawal or other liability has been incurred under Title IV of ERISA with
respect to any Employee Benefit Plan by the Borrower or an ERISA Affiliate. The
PBGC has not instituted proceedings to terminate any Employee Benefit Plan.
(c) Accumulated Funding Deficiency. Full payment has been made of all
------------------------------
amounts which are required under the terms of each Employee Benefit Plan to have
been paid as contributions to such Employee Benefit Plan as of the last day of
the most recent fiscal year of such Employee Benefit Plan ended on or before the
date of this Agreement, and no accumulated funding deficiency (as defined in (S)
302 of ERISA and Code (S) 412), whether or not waived, exists with respect to
any Employee Benefit Plan. The Borrower and each ERISA Affiliate are current
with all required installments under Code (S) 412.
(d) Relationship of Benefits to Pension Plan Assets. The current value of
-----------------------------------------------
the benefit liabilities (as defined in (S) 4001(a)(16) of ERISA) of each
Employee Benefit Plan does not exceed the fair market value of the assets of
such Employee Benefit Plan. Neither the Borrower nor any ERISA Affiliate is
required to provide security to an Employee Benefit Plan under Code (S)
401(a)(29). No lien under Code (S) 412(n) or (S)(S) 312(f) or 4068 of ERISA has
been or is reasonably expected by the Borrower to be imposed on the assets of
the Borrower or any ERISA Affiliate.
(e) Multiemployer Plan. Neither the Borrower nor any ERISA Affiliate
------------------
participates in or contributes to or, since September 26, 1980 has participated
in or contributed to, any Multiemployer Plan.
(f) Compliance with ERISA. The Borrower and the ERISA Affiliates are in
---------------------
compliance in all material respects with those provisions of ERISA which are
applicable to them. Any Employee Benefit Plan which is intended to be
"qualified" under Code (S) 401(a) is so qualified. No Reportable Event has
occurred with respect to any Employee Benefit Plan. Each Employee Benefit Plan
has been administered in compliance with ERISA and the applicable provisions of
the Code, and in accordance with its terms and any related agreements or
documents. The Borrower may terminate its contributions to any other Employee
Benefit Plan maintained by it without incurring any liability to any person
interested therein. There is no pending or, to the best knowledge of the
Borrower, threatened assessment, complaint, proceeding or investigation of any
kind before any Tribunal, including, but not limited to, the Internal Revenue
Service, the Department of Labor, the PBGC or any court of competent
jurisdiction, related to an Employee Benefit Plan, nor is there any basis
therefor. The Borrower and each ERISA Affiliate have complied with the
continuation coverage requirements of Code (S) 4980B and Part 6 of Title 1 of
ERISA and any predecessor provisions thereto and, to the extent effective, the
group health plan portability, access and renewability requirements in Code
(S)(S) 9801 through 9806.
4.8. Taxes. The Borrower and each Subsidiary have (a) timely filed or
-----
caused to be filed all Tax Returns required to be filed for all periods up to
14
<PAGE>
and including the date hereof in each jurisdiction in which they are or have
been subject to taxation and such returns and reports are true and correct, have
timely filed all claims for refunds to which they are entitled and have timely
paid or caused to be paid in full all taxes which are due and payable to any
taxing authorities for such periods, (b) fully paid or accrued on their
respective books an amount sufficient to pay all taxes to the extent of known
liabilities therefor which are not yet due and payable, (c) made or caused to be
made all withholdings of taxes required to be made, and such withholdings have
either been paid to the appropriate governmental authority or set aside in
separate accounts for such purposes, and (d) otherwise satisfied, in all
material respects, all legal requirements applicable to them with respect to all
aforementioned obligations of all taxing jurisdictions, and neither the Internal
Revenue Service nor any other taxing authority is now asserting or, to the best
knowledge of the Borrower, threatening to assert against the Borrower or any
Subsidiary any deficiency or claim for additional taxes or any interest thereon
or penalties in connection therewith.
4.9. Debt. Neither the Borrower nor any Subsidiary is in any manner
----
directly or contingently obligated with respect to any Debt which is not
permitted by this Agreement. Neither the Borrower nor any Subsidiary is in
default with respect to any such Debt.
4.10. Corporate Name; Chief Executive Office. During the five years
--------------------------------------
immediately preceding the date of this Agreement, neither the Borrower nor any
predecessor of the Borrower has used any corporate or fictitious name other than
its current corporate name and "Template Software, Inc., a Maryland
corporation." The chief executive office of the Borrower, within the meaning of
Section 9.103(3)(d) of the UCC is 45365 Vintage Park Plaza, Suite 100, Dulles
(Loudoun County), Virginia 20166.
4.11. Environmental and Safety Matters. The operation of the business of
--------------------------------
the Borrower and all Subsidiaries does not violate any applicable Environmental
Laws. The Borrower and all Subsidiaries have timely obtained all licenses and
permits and timely filed all reports required to be filed under any applicable
Environmental Laws. Neither the Borrower nor any Subsidiary has, and, to the
best knowledge of the Borrower, no other Person has, stored any chemical or
hazardous substances, including any "Hazardous Substances," "Pollutants" or
"Contaminants" (as such terms are defined in CERCLA), asbestos, petroleum
products, or polychlorinated biphenyls on, beneath or about any of the owned or
leased properties of the Borrower or any Subsidiary in violation of any
applicable legal requirements, including any Environmental Laws. Except as
otherwise disclosed to the Lender in writing prior to the date hereof, to the
best knowledge of the Borrower, there is no condition relating to or resulting
from the release or discharge into the soil, surface waters, groundwaters,
drinking water supplies, navigable waters, land, surface or subsurface strata,
ambient air or any other environmental medium which has resulted or could result
in any damage, loss, cost, expense, claim, demand, order or liability to or
against the Borrower or any Subsidiary by any Tribunal or other third party
relating to or resulting from the operation of its business or otherwise related
to any real property owned or leased of the Borrower or any Subsidiary,
irrespective of the cause of such condition. Neither the Borrower nor any
Subsidiary has received notice from any Tribunal or private or public entity
advising the Borrower or any Subsidiary that it is potentially responsible for
response costs with respect to a release or threatened release of any Hazardous
15
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Substances. Neither the Borrower nor any Subsidiary has and, to the best
knowledge of the Borrower, no other Person has, buried, dumped or otherwise
disposed of any Hazardous Substances on, beneath or about any property of the
Borrower or any Subsidiary or on, beneath or about any other property in
violation of any applicable legal requirements, including any Environmental
Laws. Neither the Borrower nor any Subsidiary has received notice of violation
of any Environmental Law or zoning or land use ordinance, law or regulation
relating to the operation of the business of the Borrower or any Subsidiary, nor
is the Borrower aware of any such violation.
4.12. Licenses. The Borrower and all Subsidiaries possess all Licenses
--------
from federal, state and local governmental or regulatory authorities that are
necessary for the ownership, maintenance and operation of their respective
businesses as now conducted or as proposed to be conducted and the ownership or
leasing of their respective properties where the failure to possess such
Licenses would have a material adverse effect on the condition (financial or
otherwise), operations, business or property of such Borrower or such
Subsidiary. The Licenses are in full force and effect, and the Borrower and
each Subsidiary, as the case may be, are in compliance in all material respects
with all of such Licenses.
4.13. Intellectual Property. The Borrower and all Subsidiaries own all
---------------------
right, title and interest in and to all Intellectual Property used in and
material to the operation of their respective businesses or, for such
Intellectual Property that is not owned, possesses adequate licenses or other
legally enforceable rights to use the same. The Borrower has no reason to
believe that any valid basis exists upon which a claim adversely affecting any
such Intellectual Property may be asserted against the Borrower or any
Subsidiary. To the best knowledge of the Borrower, no Person is infringing upon
the Intellectual Property used by the Borrower or any Subsidiary material to the
operation of their respective businesses. The Borrower has taken appropriate
steps to protect the secrecy, confidentiality and value of its and all
Subsidiaries' rights in and to such Intellectual Property and to prevent others
from using such Intellectual Property without consent.
4.14. Absence of Payments. None of the Borrower, any Subsidiary, any of
-------------------
their respective directors, officers, agents or employees, or, to the best
knowledge of the Borrower, any other Person acting on behalf of any such Person
has made any unlawful contributions, payments, gifts or entertainment, or made
any unlawful expenditures relating to political activity, to government
officials or others.
4.15. Related Party Transactions. No present or former officer, director,
--------------------------
stockholder or Affiliate of the Borrower is a party to any transaction or series
of transactions with the Borrower which requires payments by the Borrower to
such officer, director, stockholder or Affiliate other than normal and customary
employment compensation and benefits.
4.16. Federal Reserve Board Regulations. Neither the Borrower nor any
---------------------------------
Subsidiary is engaged or will engage, principally or as one of its important
activities, in the business of extending credit for the purpose of "purchasing"
or "carrying" any "margin stock" within the respective meanings of such terms
under Regulation U. No part of the proceeds of any Loan will be used for
16
<PAGE>
"purchasing" or "carrying" "margin stock" as so defined or for any purpose which
violates, or which would be inconsistent with, the provisions of the Regulations
of the Board of Governors of the Federal Reserve System.
4.17. Debarment and Suspension. Neither the Borrower nor any Subsidiary
------------------------
or Affiliate of the Borrower is currently or previously was debarred or
suspended from any contracting with the Government, and no event has occurred
and no condition currently exists that is likely to result in any such debarment
or suspension.
4.18 Disclosure. All facts material to the financial condition, results
----------
of operations, business, prospects and property of the Borrower and each
Subsidiary have heretofore been disclosed to the Lender. No representation or
warranty made by the Borrower in this Agreement or in any of the other Loan
Documents, or in any statement, certificate, exhibit or schedule furnished or to
be furnished to the Lender pursuant to this Agreement or any of the other Loan
Documents or in connection with the transactions contemplated herein and
therein, contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
contained herein and therein not misleading.
SECTION 5. Affirmative Covenants. The Borrower covenants and agrees with
---------------------
the Lender that it will:
5.1. Maintenance of Existence. Preserve and maintain, and cause each
------------------------
Subsidiary to preserve and maintain, its corporate existence and good standing
in the jurisdiction of its incorporation, and qualify and remain qualified, and
cause each Subsidiary to qualify and remain qualified, as a foreign corporation
in each jurisdiction in which to the best of Borrower's knowledge such
qualification is required.
5.2. Maintenance of Records. Keep, and cause each Subsidiary to keep,
----------------------
adequate records and books of account, in which complete entries will be made in
accordance with GAAP, reflecting all financial transactions of the Borrower and
each Subsidiary, and maintain the principal records and books of account of the
Borrower and each Subsidiary at the chief executive office of the Borrower.
5.3. Maintenance of Properties. Maintain, keep and preserve, and cause
-------------------------
each Subsidiary to maintain, keep and preserve, all of its properties (tangible
and intangible) necessary or useful in the proper conduct of its business in
good working order and condition, ordinary wear and tear excepted.
5.4. Conduct of Business. Continue, and cause each Subsidiary to
-------------------
continue, to engage in an efficient and economical manner in a business of the
same general type as conducted by it on the date of this Agreement.
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5.5. Maintenance of Insurance. Maintain, and cause each Subsidiary to
------------------------
maintain, insurance with financially sound and reputable insurance companies or
associations in such amounts and covering such risks as are usually carried by
companies engaged in the same or a similar business and similarly situated.
5.6. Compliance with Laws. Comply, and cause each Subsidiary to comply,
--------------------
in all material respects with all applicable laws, rules, regulations and orders
(including, without limitation, ERISA), such compliance to include, without
limitation, paying before the same become delinquent all taxes, assessments and
governmental charges imposed upon it or upon its property, except as contested
in good faith and through appropriate proceedings deemed reasonably acceptable
to the Lender.
5.7. Right of Inspection. At any reasonable time and from time to time,
-------------------
permit the Lender or any agent or representative thereof to examine and make
copies of and abstracts from the records and books of account of, and visit the
properties of, the Borrower and any Subsidiary, and to discuss the affairs,
finances and accounts of the Borrower and any Subsidiary with any of their
respective officers, directors or shareholders and the Borrower's independent
accountants; and in connection with any such inspection, pay to the Lender upon
demand its then current fee for such inspections to compensate the Lender for
the cost incurred and the commitment of resources required for conducting such
inspection.
5.8. Reporting Requirements. Furnish to the Lender:
----------------------
(a) Quarterly Financial Statements. As soon as available and in any event
------------------------------
within forty-five (45) days after the end of each of the quarters of each fiscal
year of the Borrower, unaudited financial statements consisting of consolidating
balance sheets of the Borrower and Subsidiaries as of the end of such quarter
and consolidating statements of income and retained earnings of the Borrower and
Subsidiaries for the period commencing at the end of the previous fiscal year
and ending with the end of such quarter, all in reasonable detail and stating in
comparative form the respective consolidating figures for the corresponding date
18
<PAGE>
and period in the previous fiscal year and all prepared in accordance with GAAP.
Such financial statements shall be certified by the chief financial officer of
the Borrower, the Treasurer of the Borrower or such other financial officer of
the Borrower as is acceptable to the Lender, to present fairly the financial
condition of the Borrower (subject to year-end adjustment) and shall be
accompanied by a Compliance Certificate;
(b) Annual Financial Statements. As soon as available and in any event
---------------------------
within ninety (90) days after the end of each fiscal year of the Borrower,
audited financial statements consisting of consolidated and consolidating
balance sheets of the Borrower and Subsidiaries as of the end of such fiscal
year, consolidated and consolidating statements of income and retained earnings
of the Borrower and Subsidiaries for such fiscal year, and consolidated and
consolidating statement of cash flows of the Borrower and Subsidiaries for such
fiscal year, all in reasonable detail and stating in comparative form the
respective consolidated and consolidating figures for the corresponding date and
period in the prior fiscal year and all prepared in accordance with GAAP. The
consolidated statements shall be accompanied by an opinion thereon acceptable to
the Lender of an independent certified public accountant firm selected by the
Borrower and acceptable to the Lender and shall also be accompanied by a
Compliance Certificate;
(c) Management Letters. Promptly upon receipt thereof, copies of any
------------------
reports submitted to the Borrower or any Subsidiary by independent certified
public accountants in connection with examination of the financial statements of
the Borrower or any Subsidiary made by such accountants;
(d) Notice of Litigation. Promptly after the commencement thereof, notice
--------------------
of all actions, suits and proceedings before any Tribunal affecting the Borrower
or any Subsidiary, which, in the reasonable opinion of the Borrower, if
determined adversely, could have a material adverse effect on the financial
condition, properties or operations of the Borrower or such Subsidiary;
(e) Notice of Defaults and Events of Default. As soon as possible and in
----------------------------------------
any event within five (5) Business Days after the occurrence of each Default and
Event of Default, a written notice setting forth the details of such Default or
Event of Default and the action which is proposed to be taken by the Borrower
with respect thereto;
(f) Proxy Statements, Etc. Promptly after the sending or filing thereof,
---------------------
copies of all proxy statements, financial statements and reports which the
Borrower or any Subsidiary sends to its stockholders, and copies of all regular,
periodic and special reports, and all registration statements which the Borrower
or any Subsidiary files with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or with any national
securities exchange;
(g) [Reserved]
(h) Government Contract Audits. Promptly after the Borrower's receipt
--------------------------
thereof, notice of any final decision of a contracting officer disallowing costs
aggregating more than $25,000.00, which disallowed costs arise out of any audit
of the Borrower's contracts with the Government;
(i) Notice of Claimed Defaults. Immediately upon becoming aware that the
--------------------------
holder of any Debt or Lien has given notice or taken any action with respect to
a claimed breach, default or event of default, a written notice specifying the
notice given or action taken by such holder and the nature of the claimed
breach, default or event of default by the Borrower thereunder, and the action
being taken or proposed to be taken with respect thereto;
(j) [Reserved]
(k) General Information. Such other information respecting the condition
-------------------
or operations, financial or otherwise, of the Borrower or any Subsidiary as the
Lender may from time to time reasonably request.
19
<PAGE>
5.9. Licenses. Keep, and cause each Subsidiary to keep, all Licenses and
--------
all other agreements necessary to operate the business of such Borrower or such
Subsidiary in full force and effect and free from burdensome restrictions and
comply in all material respects with all terms and conditions thereof.
5.10. ERISA. (a) Make, and cause each Subsidiary to make, prompt payments
-----
of contributions required by the terms of each Employee Benefit Plan and meet
the minimum funding standards set forth under ERISA and the Code with respect to
each Employee Benefit Plan to which such standards apply; (b) notify the Lender
immediately of any fact, including, without limitation, any Reportable Event,
arising in connection with any Employee Benefit Plan which, more likely than
not, would constitute grounds for the termination thereof by the PBGC or for the
appointment by the appropriate United States district court of a trustee to
administer the Employee Benefit Plan; (c) notify the Lender immediately of the
intent by the Borrower to terminate any Employee Benefit Plan; (d) notify the
Lender immediately of the adoption of an amendment to any Employee Benefit Plan
(or of any other event) which causes any Employee Benefit Plan to fail to have
sufficient assets to qualify for a standard termination under Section 4041 of
ERISA or to require providing security under Code (S) 401(a)(29); (e) promptly
after receipt thereof, furnish to the Lender a copy of any notice received by
the Borrower or any Subsidiary from the PBGC relating to the intention of the
PBGC to terminate any Employee Benefit Plan or to appoint a trustee to
administer any Employee Benefit Plan; (f) promptly after receipt thereof,
furnish to the Lender a copy of any notice received by the Borrower or any
Subsidiary from the Internal Revenue Service relating to the intention of the
Internal Revenue Service to disqualify any Employee Benefit Plan or to refuse to
grant a favorable determination letter with regard to any Employee Benefit Plan;
(g) notify the Lender immediately of any lawsuit, claim for damages or
administrative proceeding in which an Employee Benefit Plan or a fiduciary with
respect thereto is a defendant; and (h) furnish to the Lender, promptly upon its
request therefor, such additional information concerning each and every Employee
Benefit Plan as may be reasonably requested, including, but not limited to, the
annual report required to be filed under ERISA and any notices filed or proposed
to be filed in connection with any of the foregoing.
5.11. Environmental Matters. Notify the Lender immediately of the receipt
---------------------
by the Borrower or any Subsidiary of any notice from any Tribunal that there has
been a violation by the Borrower or any Subsidiary of any Environmental Law and
that remediation of such violation is necessary and assume responsibility for,
and control the process of, any response action, penalties or correction
associated with such violation.
5.12. Financial Covenants.
-------------------
(a) Minimum Tangible Net Worth. Maintain, as of the ending date of the
--------------------------
financial period depicted in each balance sheet required to be delivered to the
Lender under the terms of this Agreement, a Tangible Net Worth of at least
$10,000,000.00.
20
<PAGE>
(b) Current Ratio. Maintain, as of the ending date of the financial period
-------------
depicted in each balance sheet required to be delivered to the Lender under the
terms of this Agreement, a ratio of Current Assets to Current Liabilities of at
least 3.0 to 1.
SECTION 6. Negative Covenants. The Borrower agrees that it will not:
------------------
6.1. Liens. Create, incur, assume or permit to exist, or permit any
-----
Subsidiary to create, incur, assume or permit to exist, any Lien upon or with
respect to any of its properties, now owned or hereafter acquired, except: (a)
Liens in favor of the Lender; (b) Liens which are incidental to the conduct of
the business of the Borrower or any Subsidiary arising in connection with
operating lease obligations evidencing the rights of the lessors under such
leases; (c) Liens on Equipment in existence on the date of this Agreement and
disclosed in Schedule 6.1(c) attached hereto; (d) Liens securing obligations of
a Subsidiary to the Borrower or another Subsidiary; (e) (i) Liens (other than
Liens imposed on any property of the Borrower or one or more of its Subsidiaries
or any ERISA Affiliate pursuant to ERISA or section 412 of the Code) associated
with deposits made in the ordinary course of business in connection with current
taxes, assessments and other governmental charges not yet due and payable or
workers' compensation, unemployment insurance and other types of social
security, (ii) Liens on deposits to secure the performance of utilities, leases,
statutory obligations and surety and appeal bonds and other obligations of a
like nature incurred in the ordinary course of business, and (iii) bankers'
Liens arising by statute or under customary terms regarding depository
relationships on deposits held by financial institutions with whom the Borrower
or a Subsidiary has a banker-customer relationship, but only to the extent any
such Lien described in the foregoing clauses (i) through (iii) is not incurred
in connection with the obtaining of credit or the payment of a deferred purchase
price and does not, in the aggregate with all other such Liens, result in a
material adverse effect on the business, operations, assets or condition
(financial or otherwise) of the Borrower or one or more of its Subsidiaries; (f)
mechanic's, materialman's, carrier's, warehousemen's or similar Liens for sums
not yet due or being contested in good faith by the Borrower or one or more of
its Subsidiaries by appropriate proceedings and for which adequate reserves have
been established by the Borrower or one or more of its Subsidiaries as reflected
in the Borrower's or one or more of its Subsidiaries' financial statements; (g)
easements, rights-of-way, restrictions and other similar encumbrances on the
real property or fixtures of the Borrower or one or more of its Subsidiaries
incurred in the ordinary course of business which individually or in the
aggregate are not substantial in amount and which do not in any case materially
detract from the value of the property subject thereto or interfere with the
ordinary conduct of the business of the Borrower or any of its Subsidiaries; and
(g) purchase-money Liens on any fixed assets provided that (i) any property
subject to any such purchase-money Lien is acquired by the Borrower or any
Subsidiary in the ordinary course of its respective business and the purchase-
money Lien on any such property is created contemporaneously with such
acquisition and (ii) each such purchase-money Lien shall attach only to the
property so acquired.
6.2. Debt. Create, incur, assume or permit to exist, or permit any
----
Subsidiary to create, incur, assume or permit to exist, any Debt, except (a) the
Obligations; (b) other Debt of the Borrower in an aggregate principal amount of
up to $1,000,000, including Debt of the Borrower in existence
21
<PAGE>
on the date of this Agreement and depicted in Schedule 6.2 attached hereto; (c)
subject to the limitations specified in Section 6.8 and 6.11 hereof, Debt of any
Subsidiary to the Borrower or another Subsidiary; (d) ordinary trade accounts
payable; and (e) Debt of the Borrower or any Subsidiary secured by Liens
permitted by this Agreement.
6.3. Mergers, Etc. Merge or consolidate with a Person, or permit any
------------
Subsidiary to do so, except that (a) any Subsidiary may merge into or transfer
assets to the Borrower; (b) any Subsidiary may merge into or consolidate with or
transfer assets to any other Subsidiary; and (c) the Borrower may merge with any
other Person if the Borrower is the surviving entity; provided, however, that
the Lender's consent to any such merger shall be required if the aggregate
consideration paid or to be paid by the Borrower and its Affiliates in
connection with any such merger during the twelve month period beginning on the
immediately preceding July 1 (unless such test is occurring on July 1, in which
event such twelve month period shall begin on such July 1 rather than the
immediately preceding July 1) and ending on the next succeeding June 30 (unless
such test is occurring on June 30, in which event such twelve month period shall
end on such June 30 rather than the next succeeding June 30) plus the aggregate
consideration paid by or due from the Borrower and its Affiliates in connection
with all other mergers and acquisitions permitted under this clause (c) of this
Section 6.10 hereof consummated during such twelve month period exceeds
$5,000,000.00.
6.4. Leases. Create, incur, assume, or permit to exist, or permit any
------
Subsidiary to create, incur, assume or permit to exist, any obligation as lessee
for the rental or hire of any real or personal property, except as is necessary
in connection with such party's normal and customary business activities.
6.5. Sale and Leaseback. Sell, transfer or otherwise dispose of, or
------------------
permit any Subsidiary to sell, transfer or otherwise dispose of, any real or
personal property to any Person and thereafter directly or indirectly lease back
the same or similar property.
6.6. Dividends. Declare or pay any dividends; purchase, redeem, retire,
---------
or otherwise acquire for value any of its capital stock now or hereafter
outstanding; make any distribution of assets to its stockholders whether in
cash, assets or obligations of the Borrower; allocate or otherwise set apart any
sum for the payment of any dividend or distribution on, or for the purchase,
redemption, or retirement of, any shares of its capital stock; make any other
distribution by reduction of capital or otherwise in respect of any shares of
its capital stock; or permit any Subsidiary to purchase or otherwise acquire for
value any stock of the Borrower or another Subsidiary, except that if there is
no Default at such time and no Default would result after giving effect to the
proposed dividend (a) the Borrower may declare and deliver dividends and make
distributions payable solely in common stock of the Borrower, (b) the Borrower
may purchase or otherwise acquire shares of its capital stock by exchange for or
out of the proceeds received from a substantially concurrent issue of new shares
of its capital stock, and (c) the Borrower may declare and pay cash dividends;
provided that the Borrower shall not declare or pay any dividends permitted
under this Section 6.6 until the Lender has received such information as the
22
<PAGE>
Lender may have requested in order to verify the amount of the proposed
dividends and to determine that the conditions precedent to the making of the
requested dividends have been satisfied.
6.7. Transfer of Assets. Sell, lease, assign, transfer or otherwise
------------------
dispose of or permit any Subsidiary to sell, lease, assign, transfer or
otherwise dispose of, any of its now owned or hereafter acquired assets
(including, without limitation, shares of stock and indebtedness of
Subsidiaries, Accounts Receivable and leasehold interests), except: (a) the
sale or disposition of assets in the ordinary course of the Borrower's or such
Subsidiary's business; (b) the sale or other disposition of Equipment which the
Borrower determines in good faith to be obsolete; and (c) the sale, lease,
assignment, or other transfer by any Subsidiary of its assets to the Borrower.
6.8. Loans. Make, or permit any Subsidiary to make, any loan or advance
-----
to any Person except for (i) loans or advances by the Borrower to its employees,
officers or directors and loans or advances by a Subsidiary to its employees,
officers or directors, which loans or advances do not exceed at any time
outstanding the aggregate principal sum of $25,000.00, (ii) reasonable advances
by the Borrower or a Subsidiary for anticipated business expenses of the
Borrower's or such Subsidiary's employees that would be reimbursable to such
employees under the Borrower's or such Subsidiary's expense reimbursement
policy, (iii) loans or advances by any Subsidiary to the Borrower or another
Subsidiary, and (iv) loans or advances by the Borrower to an Affiliate (other
than a Subsidiary), which loans or advances, plus commitments to make loans or
advances, do not exceed at any time outstanding the aggregate principal sum of
$10,000,000.00.
6.9. Guaranties, Etc. Assume, guarantee, endorse or otherwise be or
---------------
become directly or contingently responsible or liable (including, but not
limited to, an agreement to purchase any obligation, stock, assets, goods or
services, or to supply or advance any funds, assets, goods or services, or to
maintain or cause such Person to maintain a minimum working capital or net
worth, or otherwise to assure the creditors of any Person against loss) for
obligations of any Person, except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business.
6.10. Acquisitions and Investments. Purchase or acquire, or permit any
----------------------------
Subsidiary to purchase or acquire, all or substantially all of the assets of any
Person, or make, or permit any Subsidiary to make, any Investments in any Person
except:
(a) the Borrower may maintain its ownership interest in each of the
Subsidiaries listed on Schedule 6.10 at the percentage of ownership disclosed on
said Schedule and may make additional Investments in Subsidiaries, provided that
the aggregate amounts of all such Investments and commitments to such make
Investments shall not exceed $15,000,000.00;
(b) any Subsidiary may make and own Investments in the Borrower;
(c) the Borrower or any Subsidiary may acquire and hold stock, obligations
or securities received in settlement of debts owing to the Borrower or such
Subsidiary;
23
<PAGE>
(d) the Borrower or any Subsidiary may make and own:
(i) Investments in certificates of deposit or time deposits having
maturities in each case not exceeding one year from the date of issuance thereof
and issued by any FDIC-insured commercial bank incorporated in the United States
or any state thereof having a combined capital and surplus of not less than
$500,000.00;
(ii) Investments in marketable direct obligations issued or
unconditionally guaranteed by the United States of America, any agency thereof,
or backed by the full faith and credit of the United States of America, in each
case maturing within one year from the date of issuance or acquisition thereof;
(iii) Investments in commercial paper issued by a corporation
incorporated in the United States or any State thereof maturing no more than one
year from the date of issuance thereof and, at the time of acquisition, having a
rating of A-1 (or better) by Standard & Poor's Corporation or P-1 (or better) by
Moody's Investors Services, Inc.; and
(iv) Investments in money market mutual funds all of the assets of
which are invested in cash or investments described in clauses (i), (ii) and
(iii) of this paragraph (d).
6.11. Transaction with Affiliate. Except as specifically permitted by the
--------------------------
terms of this Agreement, (including, without limitation, Sections 6.8 and 6.10
hereof), enter into any transaction, including without limitation, the purchase,
sale or exchange of property or the rendering of any service, with any
Affiliate, or permit any Subsidiary to enter into any transaction, including,
without limitation, the purchase, sale or exchange of property or the rendering
of any service, with any Affiliate, except in the ordinary course of and
pursuant to the reasonable requirements of the Borrower's or such Subsidiary's
business and upon fair and reasonable terms no less favorable to the Borrower or
such Subsidiary than would be applicable in a comparable arm's-length
transaction with a Person not an Affiliate.
6.12. Change of Chief Executive Office and Corporate Name. Move the
---------------------------------------------------
principal records and books of account of the Borrower or any Subsidiary from
its chief executive office or change its chief executive office or the name
under which it does business without (a) giving the Lender at least thirty (30)
days prior written notice, and (b) executing and delivering financing statements
reasonably satisfactory to the Lender prior to such move or change.
SECTION 7. Conditions of Lending. The making of the Revolving Loans shall
---------------------
be subject to the following conditions:
7.1. Conditions Precedent to Closing. The initial disbursement of the
-------------------------------
Revolving Loans shall be subject to the following conditions precedent:
24
<PAGE>
(a) The Loan Documents shall have been appropriately completed, duly
executed by the parties thereto, recorded and or filed where necessary and
delivered to the Lender, and all taxes and fees with respect to such recording
and filing shall have been paid by the Borrower.
(b) No Default or Event of Default shall have occurred and be continuing.
(c) All representations and warranties contained herein shall be true and
correct at the date of the Closing.
(d) All legal matters incident to the Loans shall be satisfactory to
counsel for the Lender, and the Borrower agrees to execute and deliver to the
Lender such additional documents and certificates relating to the Loans as the
Lender may reasonably request.
(e) If required by the Lender, the Lender shall have received an opinion of
counsel to the Borrower as to such matters as the Lender may request, in form
and substance satisfactory to the Lender and its counsel.
(f) The Lender shall have received a certification by an acceptable
provider of financing statement searches of all financing statements of public
record which relate or pertain to the Borrower and its Subsidiaries, termination
statements shall have been filed with respect to any financing statements not
constituting Liens permitted by this Agreement, and all other required releases
have been obtained, so that no Liens other than Liens permitted by this
Agreement shall exist, and all taxes and fees with respect to such recording and
filing shall have been paid by the Borrower. The Lender shall also have
received a certification by an acceptable provider of judgments and tax lien
searches of the absence of any judgements or tax liens of public record against
the Borrower and/or the Subsidiaries.
(g) If requested by the Lender, the Borrower shall have delivered to the
Lender (i) certified copies of evidence of all corporate actions taken by the
Borrower to authorize the execution and delivery of this Agreement, the
Revolving Note and the other Loan Documents, (ii) a certificate of incumbency
for the officers of the Borrower executing the Loan Documents required herein,
(iii) a good standing certificate dated not more than 30 days prior to the date
of the Closing from the appropriate state official of any state in which the
Borrower is incorporated or qualified to do business, and (iv) such additional
supporting documents as the Lender or counsel for the Lender may reasonably
request.
(h) [Reserved]
(i) The Lender shall have received evidence satisfactory to it that the
Borrower has obtained the insurance required by this Agreement, including,
without limitation, endorsements to the Borrower's insurance policies naming the
Lender as loss payee or additional insured, as applicable.
25
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(j) The Lender shall have received such landlord and mortgagee waivers as
it shall request.
(k) No material adverse change in the financial or business condition of
the Borrower or a Subsidiary shall have occurred since the date of the most
recent financial statements of such Person received by the Lender.
(l) No litigation or proceedings shall be pending or threatened which, in
the Lender's sole judgment, will materially and adversely affect the financial
condition, operation, or prospects of the Borrower or any Subsidiary.
7.2. Conditions Precedent to Subsequent Disbursements. The disbursement
------------------------------------------------
of subsequent Revolving Loans shall be subject to the following conditions
precedent:
(a) No Default or Event of Default shall have occurred and be continuing.
(b) No material adverse change shall have occurred in the financial or
business condition of the Borrower or a Subsidiary.
(c) All representations and warranties contained herein shall be true and
correct at the date of such disbursement.
(d) No change shall have occurred in any law or regulations thereunder or
interpretations thereof which in the opinion of counsel for the Lender would
make it illegal for the Lender to make Revolving Loans hereunder.
(e) The Lender shall have received such landlord and mortgagee waivers as
it shall request from any landlord or mortgagee, and all landlord and mortgagee
waivers previously provided to the Lender by any landlord or mortgagee shall
remain in effect.
SECTION 8. Default.
-------
8.1. Events of Default. Each of the following shall constitute an Event
-----------------
of Default under this Agreement:
(a) The failure of the Borrower to pay any Obligation to the Lender
including, without limitation, the principal of or interest on the Notes or any
of the Loans, when the same shall become due and payable, whether at maturity,
as a result of the Lender's demand for payment or otherwise; provided, however,
that any such failure (other than a failure to make a payment due pursuant to
Section 2.1(c), as to which no notice and cure period applies) shall constitute
an Event of Default only if such failure is not cured within five (5) days after
the date when the Lender's notice of such failure (which notice may be a
computer generated late payment notice) is deemed effective pursuant to Section
9.3 hereof; or
26
<PAGE>
(b) The failure of the Borrower to perform or observe any covenant set
forth herein (except any such failure resulting in the occurrence of another
Event of Default described in this Section) or to perform or observe any other
term, condition, covenant, warranty, agreement or other provision contained in
this Agreement or any of the other Loan Documents; provided that if such failure
is capable of cure, then such failure shall constitute an Event of Default only
if such failure is not cured within ten (10) days after the date when a notice
from the Lender specifying such failure is deemed effective pursuant to Section
9.3 hereof; or
(c) The existence of any material inaccuracy in any representation or
warranty made by the Borrower or any statement or representation made in any
certificate, report or opinion delivered pursuant hereto or in connection with
any borrowing hereunder or the occurrence of any material breach thereof; or
(d) The occurrence of a default under and the acceleration of any other
obligation of the Borrower or any Subsidiary for the payment of any Debt in
excess of $100,000.00, unless and to the extent that the declaration of default
and acceleration is being contested in good faith in a court of appropriate
jurisdiction; or
(e) The making by the Borrower of an assignment for the benefit of
creditors, the filing by the Borrower of a petition in bankruptcy or a petition
or application to any Tribunal for the appointment of any receiver or trustee
for the Borrower or any substantial part of its property, or the commencement by
the Borrower of any proceeding relating to the Borrower under any
reorganization, arrangement, readjustments of debt, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect; or
(f) The failure within 30 days after the filing of a bankruptcy petition or
the commencement of any proceeding against the Borrower seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, to
have such proceeding dismissed, or the failure within 30 days after the
appointment, without the consent or acquiescence of the Borrower, of any
trustee, receiver or liquidator of the Borrower or of all or any substantial
part of the properties of the Borrower to have such appointment vacated; or
(g) The occurrence of any of the events described in the two immediately
preceding clauses with respect to a Subsidiary, or any property of a Subsidiary;
or
(h) The entry of any judgment against the Borrower or any Subsidiary in
excess of $100,000.00 or the attachment of any property of the Borrower or any
Subsidiary having a value in excess of $100,000.00 and the failure by the
affected Person to pay, discharge, bond-off or cause to be dismissed such
judgement or attachment within 30 days, unless and to the extent that the
judgment or attachment is appealed in good faith to a court of higher
jurisdiction and the appeal remains pending; or
27
<PAGE>
(i) The occurrence of a material adverse change in the financial or
business condition of the Borrower or a Subsidiary; or
(j) [Reserved]
(k) [Reserved]
(l) Neither Andrew Ferrentino nor Linwood Pearce remaining active in the
management of the Borrower; or
(m) The issuance to the Borrower or any Subsidiary of (i) a cure notice or
a show-cause notice relating to a possible termination for default under any
contract which is either a contract with the Government or is a subcontract (at
any tier) which is related to a contract between a third party and the
Government and, within thirty (30) calendar days after the date of such notice,
no written notification is received by the Borrower or such Subsidiary from the
cognizant Contracting Officer or Customer official stating that a termination
will not occur or (ii) a notice of actual termination for default (complete or
partial), under any such contract or subcontract; provided, however, that no
Event of Default shall be declared based upon clauses (i) or (ii) of this
Section 8.1(o) if the notice in question is issued at a time when the Unearned
Contract Value of the contract in question is less than $300,000.00 or
subcontract in question is less than $50,000.00. The term "Unearned Contract
Value" shall mean the difference between (1) the then fully funded dollar value
of the contract or subcontract, whether or not earned, and (2) the total amounts
previously billed and properly billable for accepted end items or services; or
(n) With respect to the Borrower or any Subsidiary, the occurrence of any
debarment or suspension from contracting or subcontracting with the Government;
or
(o) The occurrence of any of the following events: (i) the termination of
any Employee Benefit Plan in a distress termination under Section 4041(c) of
ERISA or an involuntary termination under Section 4042 of ERISA; (ii) the
failure to maintain, or the filing of a request for a waiver of, the minimum
funding standard with respect to any Employee Benefit Plan; (iii) the occurrence
of any event which causes any Employee Benefit Plan to cease to have sufficient
assets at all times so as to qualify for a standard termination under Section
4041 of ERISA; (iv) the occurrence of any event which causes the unfunded
liability with regard to all such Employee Benefit Plans in the aggregate to
become an amount in excess of $1,000; (v) the appointment of a trustee by an
appropriate United States district court to administer any Employee Benefit
Plan; or (vi) the institution of any proceedings by the PBGC to terminate any
such Employee Benefit Plan or to appoint a trustee to administer any such
Employee Benefit Plan; or
(p) The occurrence of an event of default under any other Loan Document.
8.2. Remedies upon Default. Upon the occurrence of an Event of Default,
---------------------
the following provisions shall be applicable:
28
<PAGE>
(a) The Lender may, at its option, declare all Obligations, whether
incurred prior to, contemporaneous with, or subsequent to the date of this
Agreement, and whether represented in writing or otherwise, immediately due and
payable without presentment, demand, protest, notice of non-payment or any other
notice required by law relative thereto, all of which are hereby expressly
waived by the Borrower and terminate the Lender's obligation to make Loans
hereunder; provided, however, that upon the occurrence of an Event of Default
specified in Sections 8.1(e) or (f), all Obligations automatically will be due
and payable and the Lender's obligation to make Loans hereunder will
automatically terminate without further action by the Lender. If any of the
Obligations, including, without limitation, the Loans, shall be evidenced by a
demand instrument, the right of the Lender to declare any and all Obligations to
be immediately due and payable, as well as the recitation of the above events
permitting the Lender to declare all Obligations due and payable, shall not
constitute an election by the Lender to waive its right to demand payment under
a demand instrument at any time and in any event, as the Lender, in its
discretion, may deem appropriate.
(b) The Lender is hereby authorized at any time or from time to time,
without notice to the Borrower (any such notice being expressly waived by the
Borrower) to set-off and apply against any and all of the Obligations, whether
or not due, any and all deposits (general or special, time or demand,
provisional or final) at any time held by the Lender, including any certificate
of deposit, and all other obligations and indebtedness at any time owed by the
Lender, in any capacity, to or for the credit or account of the Borrower.
(c) The Lender may itself perform or comply, or otherwise cause performance
or compliance with the obligations of the Borrower contained in this Agreement.
The expenses of the Lender incurred in connection with such performance or
compliance, together with interest thereon at the Default Rate, shall be payable
by the Borrower to the Lender on demand and shall constitute Obligations.
SECTION 9. Miscellaneous.
-------------
9.1. Collection Costs. The Borrower shall pay all of the reasonable costs
----------------
and expenses incurred by the Lender in connection with the enforcement of this
Agreement and the other Loan Documents, including, without limitation,
reasonable attorneys' fees and expenses.
9.2. Effect on Original Loan Documents, Modification and Waiver.
----------------------------------------------------------
(a) The Borrower acknowledges and agrees that its obligations under the
Original Loan Documents remain valid and enforceable obligations and that the
execution and delivery of this Agreement and the other Loan Documents executed
in connection herewith shall not be construed as a novation of any of the
Original Loan Documents. If any provision of this Agreement or any of the other
Loan Documents is avoided or found to be unenforceable, the corresponding
provision of the Original Loan Documents shall be automatically reinstated. The
Borrower further acknowledges and agrees that, as of the date hereof, it has no
29
<PAGE>
offsets or defenses against the payment of any of its obligations under the
Original Loan Documents. As a specific inducement to the Lender without which
the Borrower acknowledges the Lender would not enter into this Agreement and the
other Loan Documents, the Borrower hereby waives any and all claims that it may
have against the Lender, as of the date hereof, arising out of or relating to
the Original Loan Documents, whether sounding in contract, tort or any other
basis.
(b) The terms and conditions pursuant to which the Lender is making the
Revolving Loans available to the Borrower and the other terms and conditions
generally related to the relationship between the Borrower and the Lender are
completely restated in this Agreement and the other Loan Documents executed in
connection herewith. Accordingly, the Original Loan Documents are superseded by
this Agreement and the other Loan Documents executed in connection herewith
except as provided in the immediately following sentence. Notwithstanding the
foregoing, the Original Loan Documents shall survive and remain in effect to the
extent they pertain to the obligations of the Borrower with respect to the Term
Loan and the administration of the Term Loan. In the event of a conflict
between the terms of the Original Loan Documents and the terms of this Agreement
and the other Loan Documents executed in connection herewith, the terms of this
Agreement and the other Loan Documents executed in connection herewith shall
control.
(c) This Agreement, the other Loan Documents executed in connection
herewith, contain the entire agreement between the parties.
(d) No modification or waiver of any provision of any of these documents
and no consent by the Lender to any departure therefrom by the Borrower shall be
effective unless such modification or waiver shall be in writing and signed by
an officer of the Lender with a title of assistant vice president or any higher
office, and the same shall then be effective only for the period and on the
conditions and for the specific instances and purposes specified in such
writing.
(e) No notice to or demand on the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in similar or other
circumstances.
(f) No failure or delay by the Lender in exercising any right, power or
privilege hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided are cumulative and not exclusive of any rights or remedies otherwise
provided by law.
9.3. Notices. All notices, requests, demands or other communications
-------
required or permitted by or in connection with this Agreement or any other Loan
Document, without implying the obligation to provide any such notice, request,
demand or other communication, shall be in writing addressed to the appropriate
address set forth below or to such other address as may be hereafter specified
by written notice by the Lender or the Borrower, as applicable, forwarded in
like manner. Any such notice, request, demand or other communication shall be
deemed to be effective one (1) day after dispatch if sent by telegram, mailgram,
30
<PAGE>
Purolator Delivery, express mail, Federal Express or any other commercially
recognized overnight delivery service or two (2) days after dispatch if sent by
registered or certified mail, return receipt requested. Notwithstanding the
foregoing, all notices, requests, demands or other communications shall be
considered to be effective upon receipt if accomplished by hand delivery.
To the Lender: First Union National Bank
1970 Chain Bridge Road
9th Floor
McLean, Virginia 22102
Attention: Kerry S. Teutschbein
To the Borrower: Template Software, Inc.
45365 Vintage Park Plaza
Suite 100
Dulles, Virginia 20166
Attention: Kimberly E. Osgood
9.4. Counterparts. This Agreement may be executed by the parties hereto
------------
individually or in any combination, in one or more counterparts, each of which
shall be an original and all of which together constitute one and the same
agreement.
9.5. Captions. The captions of the various sections and paragraphs of
--------
this Agreement have been inserted only for the purpose of convenience; such
captions are not a part of this Agreement and shall not be deemed in any manner
to modify, explain, enlarge or restrict any of the provisions of this Agreement.
9.6. Survival of Agreements. All agreements, representations and
----------------------
warranties made herein shall survive the delivery of this Agreement and the
making and renewal of the Loans hereunder.
9.7. Fees and Expenses. Whether or not any Loans are made hereunder, the
-----------------
Borrower shall pay on demand all costs and expenses incurred by the Lender in
connection with the preparation, negotiation, execution, delivery, filing,
recording and administration of this Agreement and any of the documents executed
or delivered in connection herewith, including, without limitation, the
reasonable fees and expenses of counsel to the Lender, including in-house
counsel for the Lender and local counsel who may be retained by the Lender, with
respect to this Agreement and such documents and any amendments thereof and with
respect to advising the Lender as to its rights and responsibilities thereunder.
9.8. Use of Defined Terms. All terms defined in this Agreement shall have
--------------------
the defined meanings when used in certificates, reports or other documents made
or delivered pursuant to this Agreement, unless the context shall otherwise
require.
31
<PAGE>
9.9. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and bind the respective
parties hereto and their successors and assigns; provided, however, that the
Borrower may not assign its rights hereunder without the prior written consent
of the Lender.
(b) At any time and from time to time, the Lender may grant to one or more
Financial Institutions participating interests in the Lender's commitment to
make Loans hereunder or in any or all of the Loans or the Notes. In the event
of any such grant by the Lender of a participating interest to a Financial
Institution, whether or not upon notice to the Borrower, the Lender shall remain
responsible for the performance of its obligations hereunder, and the Lender
shall continue to deal solely and directly with the Borrower in connection with
the Lender's rights and obligations under this Agreement. Any agreement
pursuant to which the Lender may grant such a participation interest shall
provide that the Lender shall retain the sole right and responsibility to
enforce the obligations of the Borrower hereunder including, without limitation,
the right to approve any amendment, modification or waiver of any provision of
this Agreement; provided that such participation agreement may provide that the
Lender will not agree to any modification, amendment or waiver of this Agreement
which would have the effect increasing or decreasing the Maximum Amount,
extending the Termination Date or the Maturity Date, subjecting the Lender to
any additional obligation, reducing the principal of or rate of interest on any
Loan, or postponing the date fixed for any payment of principal of or interest
on any Loan or fees hereunder or under a Note without the consent of such
Financial Institution. An assignment or other transfer which is not permitted
by subsection (c) or (d) below shall be given effect for purposes of this
Agreement only to the extent of a participating interest granted in accordance
with this subsection (b).
(c) At any time, the Lender may assign to one or more Financial
Institutions all, or a proportionate part of all, of the Lender's rights and
obligations under this Agreement and the Notes, and such Financial Institution
shall assume such rights and obligations, pursuant to an instrument executed by
such Financial Institution and the Lender, with (and subject to) the consent of
the Borrower; provided that if such Financial Institution is an Affiliate of the
--------
Lender, the Borrower's consent shall not be required. Upon execution and
delivery of such an instrument and payment by such Financial Institution to the
Lender of an amount equal to the purchase price agreed between the Lender and
such Financial Institution, such Financial Institution shall become a party to
this Agreement and shall have all the rights and obligations of the Lender to
the extent of such Financial Institution's commitment to make Revolving Loans as
set forth in such Financial Institution's instrument of assumption, and the
Lender shall be released from its obligations hereunder to a corresponding
extent, and no further consent or action by any party shall be required. Upon
the consummation of any assignment pursuant to this subsection (c), the Lender
and the Borrower shall make appropriate arrangements so that, if required, new
Notes are issued to the Financial Institution. If the Financial Institution is
not incorporated under the laws of the United States of America or a state
thereof, it shall, prior to the first date on which interest or fees are payable
hereunder for its account deliver to the Borrower certification as to exemption
from deduction or withholding of any United States federal income taxes.
32
<PAGE>
(d) The Lender may at any time assign all or any portion of its rights
under this Agreement and the Notes to a Federal Reserve Bank. No such
assignment shall release the Lender from its obligations hereunder.
(e) The Lender may furnish any information concerning the Borrower in its
possession from time to time to any Financial Institution which is or may become
a participant or assignee under this Section 9.9 and may furnish such
information in response to credit inquiries consistent with general banking
practice.
9.10. Accounting Terms. All accounting terms used herein which are not
----------------
otherwise expressly defined in this Agreement shall have the meanings
respectively given to them in accordance with GAAP in effect on the date of this
Agreement. Except as otherwise provided herein, all financial computations made
pursuant to this Agreement shall be made in accordance with GAAP and all balance
sheets and other financial statements shall be prepared in accordance with GAAP.
Except as otherwise provided herein, whenever reference is made in any provision
of this Agreement to a balance sheet or other financial statement or the
information depicted therein for performing a financial computation, such terms
shall mean the most recent consolidated balance sheet or other financial
statement received by the Lender pursuant to the terms hereof.
9.11. Consent to Jurisdiction. The Borrower irrevocably submits to the
-----------------------
jurisdiction of any State court sitting in Fairfax County, Virginia or the
United States District Court for the Eastern District of Virginia, sitting in
Alexandria, Virginia over any suit, action or proceeding arising out of or
relating to this Agreement. To the fullest extent it may effectively do so
under applicable law, the Borrower irrevocably waives and agrees not to assert,
by way of motion, as a defense or otherwise, any claim that it is not subject to
the jurisdiction of any such court, any objection that it may now or hereafter
have to the laying of the venue of any such suit, action or proceeding brought
in any such court and any claim that any such suit, action or proceeding brought
in any such court has been brought in an inconvenient forum.
9.12. Enforcement of Judgments. The Borrower agrees, to the fullest
------------------------
extent it may effectively do so under applicable law, that a judgment in any
suit, action or proceeding of the nature referred to in Section 9.11 brought in
any such court shall be conclusive and binding upon the Borrower and may be
enforced in the courts of the United States of America or the Commonwealth of
Virginia (or any other courts to the jurisdiction of which the Borrower is or
may be subject) by a suit upon such judgment.
9.13. Waiver of Jury Trial. AS A SPECIFICALLY INDUCED BARGAIN FOR THE
---------------------
LENDER TO ENTER INTO THIS AGREEMENT AND TO EXTEND CREDIT TO THE BORROWER, THE
BORROWER AND THE LENDER EACH HEREBY WAIVES TRIAL BY JURY WITH RESPECT TO ANY
ACTION, CLAIM, SUIT OR PROCEEDING IN RESPECT OF OR ARISING OUT OF THIS AGREEMENT
AND/OR THE CONDUCT OF THE RELATIONSHIP BETWEEN THE LENDER AND THE BORROWER.
33
<PAGE>
9.14. Service of Process. The Borrower consents to process being served
------------------
in any suit, action or proceeding of the nature referred to in Section 9.11 by
mailing a copy thereof by registered or certified mail postage prepaid, return
receipt requested, to the Borrower's address specified in or designated pursuant
to Section 9.3. The Borrower agrees that such service (i) shall be deemed in
every respect effective service of process upon the Borrower in any such suit,
action or proceeding and (ii) shall, to the fullest extent permitted by law, be
taken and held to be valid personal service upon and personal delivery to the
Borrower.
9.15. No Limitation on Service or Suit. Nothing in this Section 9 shall
--------------------------------
affect the right of the Lender to serve process in any manner permitted by law,
or limit any right that the Lender may have to bring proceedings against the
Borrower in the courts of any jurisdiction or to enforce in any lawful manner a
judgment obtained in one jurisdiction in any other jurisdiction.
9.16. Indemnification. At all times prior to and after the consummation
---------------
of the transactions contemplated by this Agreement, the Borrower will indemnify
and hold each Indemnitee harmless from and against all losses, damages, claims,
fines, costs and expenses (including, without limitation, reasonable attorneys'
fees, costs and expenses) incurred by any such Indemnitee, whether direct or
indirect, as a result of or arising from or relating to any Proceedings by any
Person, whether threatened or initiated, asserting a claim for any legal or
equitable remedy against any Indemnitee arising from or in connection with this
Agreement, the Notes or any of the other Loan Documents, and any of the
transactions contemplated herein or therein, except to the extent such losses,
damages, claims, fines, costs or expenses are due to the willful misconduct or
gross negligence of the Lender; provided that in connection with such
indemnification obligations, the Borrower shall not be liable for any settlement
effected by any Indemnitee without the Borrower's prior consent (which the
Borrower shall not unreasonably withhold, delay or condition) and the Borrower
shall have the right to participate at its sole cost and expense in the defense
of any proceeding for which such indemnification may be sought. In the event of
any Proceeding, the Lender shall promptly and as soon as is practicable notify
the Borrower of the existence of such Proceeding, provided that the Lender's
failure to do so shall not preclude any Indemnitee from seeking indemnification
hereunder. At the request of the Lender, the Borrower will indemnify any Person
to whom the Lender transfers or sells all or any portion of its interest in the
Loans or participations therein on the terms set forth above. The obligations
of the Borrower under this Section 9.16 shall survive the termination of this
Agreement and payment of the Obligations.
9.17. No Partnership, Joint Venture or Agency. Neither this Agreement nor
---------------------------------------
any of the Loan Documents shall in any respect be interpreted, deemed or
construed as making the Lender a partner or joint venturer with the Borrower,
nor shall they be interpreted, deemed or construed as making the Lender the
agent of representative of the Borrower, and the Borrower agrees not to make any
contrary assertion, contention, claim or counterclaim in any action, suit or
other legal proceeding involving the Lender.
34
<PAGE>
9.18. Time of Essence. Time is of the essence of each provision of this
---------------
Agreement and each provision of each other Loan Document.
9.19. Interpretation.
--------------
(a) This Agreement and the rights and obligations of the parties hereunder
shall be construed and interpreted in accordance with the laws of the
Commonwealth of Virginia, excluding principles of conflict of laws.
(b) The Lender hereby acknowledges and agrees that this Agreement shall be
subject to and interpreted in accordance with all applicable legal, regulatory
and contractual obligations of the Borrower with respect to the security,
privacy or nondisclosure of certain information regarding the business of the
Borrower. By way of example and not limitation, the Lender acknowledges and
agrees that the Borrower may be prohibited from (i) disclosing the location of
certain information with respect to certain Accounts Receivable or (ii)
providing access to certain books and records. The Lender hereby agrees that the
compliance of the Borrower with such legal, regulatory and contractual
obligations shall not give rise to an Event of Default hereunder, even if such
compliance conflicts with the representations, warranties, covenants, agreements
and conditions set forth herein.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement
to be signed by their duly authorized representatives all as of the day and year
first above written, with the specific intention that this Agreement constitute
a document under seal.
BORROWER:
TEMPLATE SOFTWARE, INC., a Virginia
corporation
ATTEST: By: /s/ Kimberly Osgood
-------------------------------
Name: Kimberly Osgood
------------------------------
Andrew B. Ferrentino Title: CFO
- ------------------------ ----------------------------
Secretary
[corporate seal]
35
<PAGE>
LENDER:
FIRST UNION NATIONAL BANK, a
national banking association
By: /s/ Kerry S. Teutschbein
-----------------------------
Kerry S. Teutschbein
Assistant Vice President
36
<PAGE>
EXHIBIT A
FORM OF COMPLIANCE CERTIFICATE
<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 FORM 10-Q FOR THE
PERIOD ENDING AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> AUG-31-1998
<CASH> 3,608
<SECURITIES> 10,166
<RECEIVABLES> 11,386
<ALLOWANCES> 549
<INVENTORY> 443
<CURRENT-ASSETS> 27,613
<PP&E> 6,586
<DEPRECIATION> 1,551
<TOTAL-ASSETS> 46,380
<CURRENT-LIABILITIES> 6,136
<BONDS> 0
0
0
<COMMON> 51
<OTHER-SE> 39,685
<TOTAL-LIABILITY-AND-EQUITY> 46,380
<SALES> 0
<TOTAL-REVENUES> 28,162
<CGS> 0
<TOTAL-COSTS> 15,640
<OTHER-EXPENSES> 12,136
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> 994
<INCOME-TAX> 364
<INCOME-CONTINUING> 630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 630
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.11
</TABLE>
<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 FORM 10-Q FOR THE
PERIOD ENDING AUGUST 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> AUG-31-1997
<CASH> 9,307
<SECURITIES> 8,299
<RECEIVABLES> 8,003
<ALLOWANCES> 524
<INVENTORY> 0
<CURRENT-ASSETS> 25,995
<PP&E> 2,985
<DEPRECIATION> 942
<TOTAL-ASSETS> 42,667
<CURRENT-LIABILITIES> 5,797
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 35,367
<TOTAL-LIABILITY-AND-EQUITY> 42,667
<SALES> 0
<TOTAL-REVENUES> 16,037
<CGS> 0
<TOTAL-COSTS> 7,362
<OTHER-EXPENSES> 6,847
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 2,452
<INCOME-TAX> 927
<INCOME-CONTINUING> 1,525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,525
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.29
</TABLE>
