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