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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____ to _____
Commission file number 0-21921
TEMPLATE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Virginia 52-1042793
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45365 Vintage Park Plaza
Dulles, Virginia 20166
(Address of principal executive offices) (Zip code)
(703) 318-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO _______
___
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock March 31, 1999
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Common Stock, $.01 par value per share 4,990,630
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TEMPLATE SOFTWARE, INC.
INDEX
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PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF OPERATIONS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 6
NOTES TO THE FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II - OTHER INFORMATION 14
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 14
SIGNATURE 16
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This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
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and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which are intended to be covered by the safe harbors created
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thereby. Investors are cautioned that all forward-looking statements involve
risks and uncertainty, including without limitation, the ability of the Company
to develop its products, as well as general market conditions, competition and
pricing. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Form 10-Q will prove to be
accurate. In light of the significant uncertainties inherent in the forward-
looking statements included herein, the inclusion of such information should not
be regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Template Software, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands)
March 31, 1999 December 31, 1998
(Unaudited) (Audited)
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ASSETS
Current assets:
Cash and cash equivalents $3,147 $1,831
Marketable securities 7,744 8,221
Accounts receivable, net 12,581 15,752
Deferred income taxes 2,036 1,873
Inventory 371 358
Note receivable 538 500
Prepaid expenses 843 732
Other current assets 81 109
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Total current assets 27,341 29,376
Property and equipment, net 5,310 5,423
Software development costs, net 2,854 2,601
Goodwill, net 10,084 10,298
Other assets 1,340 1,367
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Total assets $46,929 $49,065
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $5,718 $6,744
Current portion of long-term debt 377 451
Income tax payable 45 27
Deferred income 1,041 1,437
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Total current liabilities 7,181 8,659
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Long-term liabilities:
Long-term debt, net of current portion 64 77
Deferred income taxes 827 827
Other long-term liabilities 408 421
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Total liabilities 8,480 9,984
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Shareholders' equity:
Common stock 52 52
Additional paid-in capital 36,650 36,619
Deferred compensation (613) (727)
Accumulated other comprehensive income (loss) (689) 154
Retained earnings 3,881 3,794
Treasury stock (832) (811)
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Total shareholders' equity 38,449 39,081
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Total liabilities and shareholders' equity $46,929 $49,065
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The accompanying notes are an integral part of these consolidated financial statements.
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Template Software, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share and share data)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------------
1999 1998
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Revenues:
Products $ 2,202 $ 1,325
Services 10,261 7,233
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Total Revenues 12,463 8,558
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Cost of revenues:
Products 619 335
Services 7,394 4,484
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Total cost of revenues 8,013 4,819
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Gross profit 4,450 3,739
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Operating expenses:
Selling and marketing 2,418 2,247
Product development 368 345
General and administrative 1,601 1,294
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Total operating expenses 4,387 3,886
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Income (loss) from operations 63 (147)
Interest income 92 152
Other income 3 30
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Net income before income taxes 158 35
Income tax provision 71 54
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Net income (loss) $ 87 $ (19)
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Earnings per share - basic $ 0.02 $ 0.00
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Shares used in computing basic earnings
per share 4,982,791 4,864,187
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Earnings per share - diluted $ 0.02 $ 0.00
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Shares used in computing diluted
earnings per share 5,039,671 4,864,187
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Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------------
1999 1998
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Net income (loss) $ 87 $ (19)
Foreign currency translation adjustment
(512) (90)
Unrealized loss on marketable
securities, net of taxes (331) --
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Comprehensive income (loss) $ (756) $ (109)
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The accompanying notes are an integral part of these consolidated financial
statements.
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Template Software, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
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For the Three Months Ended March 31,
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1999 1998
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Cash flows provided by operating activities $ 2,338 $ 519
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Cash flows from investing activities:
Proceeds from sales and maturities of marketable securities -- 3,400
Purchase of convertible note (37)
Capital expenditures and leasehold improvements (317) (245)
Capitalization of software development costs (483) (404)
Issuance of note receivable -- (500)
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Net cash (used in) provided by investing activities (837) 2,251
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Cash flows from financing activities:
Revolving credit facility, net (13) (299)
Note payable, net (58) 225
Capital lease obligations (16) (15)
Income tax benefit related to stock options 9 311
Proceeds from sale of common stock under stock programs 42 527
Purchase of common stock (20) --
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Net cash (used in) provided by financing activities (56) 749
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Effect of exchange rate changes on cash and cash equivalents (130) (40)
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Net increase in cash and cash equivalents 1,316 3,479
Cash and cash equivalents, beginning of period 1,831 3,425
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Cash and cash equivalents, end of period $ 3,147 $ 6,904
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The accompanying notes are an integral part of these consolidated financial statements.
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Template Software, Inc. and Subsidiaries
Notes to the Financial Statements
Note A -- Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated
financial statements of Template Software, Inc. and subsidiaries (the "Company")
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contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the Company's consolidated financial position as of March 31,
1999 and the results of operations and cash flows for the periods indicated.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1998 Annual Report on
Form 10-K. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the operating results to be expected for the
full year.
Note B Acquisitions and Strategic Ventures
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.
On March 30, 1999, the Company entered into an agreement with Precise which
modified the payment terms of the Note Agreement to provide for two payments:
$100,000 due no later than April 30, 1999 and the remainder (including all
accrued but unpaid interest) due and payable no later than May 30, 1999.
Additionally, the Company temporarily abstained from exercising its right of
first refusal and conversion option in the Note Agreement unless Precise does
not make the payments in accordance with the payment schedule.
Note C Recent Accounting Pronouncements
In December 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-9 (SOP 98-9), "Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions". SOP 98-9 is
effective for all transactions entered into by the Company in fiscal year 1999.
The adopting of this statement is not expected to have a material impact on the
Company's operating results, financial position or cash flows.
Note D - Income Taxes
The Company's effective tax rate of 45% for the quarter ended March 31,
1999 decreased from 154.7% for the quarter ended March 31, 1998. The decrease
in the provision was primarily attributable to the increase in taxable profit
while permanent differences remain constant. In addition, the Company
anticipates the effective tax rate for the year will be 45%.
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Note E Earnings Per Share
Earnings per share is presented in accordance with SFAS No. 128, Earnings
per Share. Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing net income available to common shareholders by the weighted average of
common shares outstanding after giving effect to all dilutive potential common
shares that were outstanding during the period.
The following table reconciles the weighted average number of common shares
outstanding during each period for basic earnings per share with the comparable
amount for diluted earnings per share.
Three Months Ended
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March 31,
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1999 1998
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Weighted average shares outstanding basic 4,982,791 4,864,187
Potential common shares 56,880 --
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Weighted average shares outstanding diluted 5,039,671 4,864,187
========= =========
The Company did not have any dilutive common shares during the three months
ended March 31, 1998. Net income (loss) reported was not adjusted for the
computation of basic or diluted earnings per share.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Results of Operations
Revenue. Total Revenue was $12.5 million for the quarter ended March 31,
1999 compared to $8.6 million for the quarter ended March 31, 1998, an increase
of $3.9 million or 45.6%. This growth resulted principally from volume
increases in sales of software-related services for customers such as the
National Imagery and Mapping Agency ("NIMA") and BULL.
Product Revenue was $2.2 million for the quarter ended March 31, 1999
compared to $1.3 million for the quarter ended March 31, 1998, an increase of
$0.9 million or 66.2%. This increase was primarily attributable to product
sales in connection with the NIMA and Bull engagements. Services Revenue was
$10.3 million for the quarter ended March 31, 1999 compared to $7.2 million for
the quarter ended March 31, 1998, an increase of $3.0 million or 41.9%. This
increase was primarily attributable to the implementation of the NIMA and Bull
software solutions.
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 $8.0 million for the quarter ended March 31, 1999 compared to $4.8
million for the quarter ended March 31, 1998, an increase of $3.2 million or
66.3%. This increase was primarily attributable to additional professional staff
hired to perform the increased volume of software services as described above.
Total Cost of Revenue was 64.3% of total revenue for the quarter ended March 31,
1999 compared to 56.3% of total revenue for the quarter ended March 31, 1998.
This percentage increase was primarily attributable to the Company's
implementation of the
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NIMA service engagement with third party subcontractors and the integration of a
third party software product with the Company's software products.
Cost of Product Revenue was $0.6 million for the quarter ended March 31,
1999 compared to $0.3 million for the quarter ended March 31, 1998, an increase
of $0.3 million or 84.8%. This increase is primarily attributable to an
increase in software amortization associated with the general availability
release of EIT and an increase of royalties associated with an increase in third
party product resales. Cost of Services Revenue was $7.4 million for the
quarter ended March 31, 1999 compared to $4.5 million for the quarter ended
March 31, 1998, an increase of $2.9 million or 64.9%. This increase resulted
primarily from the cost associated with staffing the growth in services
contracts. Service Revenue gross margins have decreased due to the use of third
party subcontractors and the provision and integration of a third party software
product on the NIMA contract. 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
because staffing is relatively fixed in the short term. Any such termination
would have a material adverse effect on the Company's business, operating
results and financial condition.
Selling and Marketing. Selling and Marketing expenses consist primarily of
expenses related to sales and marketing personnel, advertising, promotion, trade
show participation and public relations. Selling and Marketing expenses were
$2.4 million for the quarter ended March 31, 1999 compared to $2.2 million for
the quarter ended March 31, 1998, an increase of $0.2 million or 7.6%. These
increases resulted primarily from additional expenditures targeted towards
increasing market awareness such as public relations and tradeshows.
Product Development. Product Development expenses were $0.4 million for
the quarter ended March 31, 1999, compared to $0.3 million for the quarter ended
March 31, 1998, an increase of $0.1 million or 6.7%. This increase resulted
primarily from the development of enhancements to the Company's Enterprise
Integration Template(TM) (EIT).
General and Administrative. General and Administrative expenses include
costs of corporate services functions including accounting, human resources and
legal services, as well as the corporate executive staff. General and
Administrative expenses were $1.6 million for the quarter ended March 31, 1999
compared to $1.3 million for the quarter ended March 31, 1998 an increase of
$0.3 million or 23.7%. This increase is primarily attributable to increases in
reserves and professional fees.
Income Tax Provision. The Income Tax Provision was $0.1 million for the
quarter ended March 31, 1999 unchanged from the quarter ended March 31, 1998.
The Company's effective tax rate of 45% for the quarter ended March 31, 1999 was
a decrease from 154.7% for the three months ended March 31, 1998. The decrease
in the provision was primarily attributable to the increase in taxable profit
while permanent differences remain constant. In addition, the Company
anticipates the effective tax rate for the year will be 45%.
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Liquidity and Capital Resources
The Company's overall cash and cash equivalents were $3.1 million at March
31, 1999, which is an increase of approximately $1.3 million from $1.8 million
as of December 31, 1998. The Company's operating activities provided cash of
$2.3 million for the three month period ended March 31, 1999. During the three
month period ended March 31, 1999, cash flow provided by operating activities
reflected the net income, depreciation and amortization and decrease in accounts
receivable, partially offset by the deferred tax provision and decreases in
accounts payable and accrued liabilities.
Cash used in investing activities totaled $0.8 million during the three
month period ended March 31, 1999. During the three months ended March 31, 1999
the Company invested $0.3 million in property and equipment and capitalized $0.5
million in software development costs.
Cash flow used in financing activities totaled $0.1 million for the three
month period ended March 31, 1999 primarily relating payments on financing
obligations.
The Company has a line of credit under a Loan and Security Agreement (the
"Loan Agreement") with First Union National Bank , previously Signet Bank, (the
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"Bank") in the aggregate principal amount of $3.0 million. As of March 31,
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1999, there were no amounts outstanding under this line of credit. The Company
has been in compliance with all financial and non-financial covenants of the
Loan Agreement. The Loan Agreement 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 March 31, 1999, 856,046FF
(approximately $140,563) was outstanding under the French line of credit and no
amounts were outstanding under the Austrian line of credit.
The Company believes its cash balances, cash generated from operations and
borrowings available under its line of credit, will satisfy the Company's
working capital and capital expenditure requirements for at least the next
twelve months. In the longer term, the Company may require additional sources
of liquidity to fund future growth. Such sources of liquidity may include
additional equity offerings or debt financings. There are no assurances that
such sources of financing will be available to the Company and if they are, that
they will be sufficient to meet the Company's liquidity needs at such time.
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
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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 estimated cost of such
replacement is between $100,000 and $300,000. The Company expects to be in full
compliance with its internal administrative financial systems before December
31, 1999. 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. In the event the Company assesses some risk that
a non-compliant system cannot be implemented before Year 2000, the Company will
develop contingency plans accordingly.
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 June 15,
1999. To the extent that responses to Year 2000 readiness are unsatisfactory,
the Company intends to change suppliers, service providers or contractors to
those who have demonstrated Year 2000 readiness but cannot be assured that it
will be successful in finding such alternative suppliers, service providers and
contractors. The Company does not currently have any formal information
concerning the Year 2000 compliance status of its customers but has received
indications that most of its customers are working on Year 2000 compliance. In
the event that any of the Company's significant customers and suppliers do not
successfully and timely achieve Year 2000 compliance, and the Company is unable
to replace them with new customers or alternate suppliers, the Company's
business or operations could be adversely affected.
COMPANY PRODUCTS. The Company provides its customers with licensed
software products that are manufactured and developed internally and licensed
software products that are obtained from third party software vendors and
resold. The following compliance statement covers the Company's internally
produced software products and is provided to the general public on the
Company's website.
Year 2000 Compliance Statement
The Company recognizes that most customers use Company software products in
business-critical
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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
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developers to introduce code that will make the overall application non-
compliant.
End of Company Year 2000 Compliance Statement
The Company is in the process of contacting each third party software
vendor whose software products the Company resells regarding Year 2000
compliance of those products. It is expected that this investigation will be
completed by June 15, 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks. Though the Company faces and manages
other types of risks, such as credit and liquidity risks, the Company's market
risk arises primarily from risks inherent in currency rate movements and from
risk inherent in the Company's marketable securities. The Company regularly
assesses these risks and has established policies and business practices to
protect against the adverse effects of these and other potential exposures.
A substantial portion of the Company's revenues are generated from
international operations. Revenues from foreign subsidiaries and export sales
accounted for 49.0% and 51.9% of the Company's total revenues in fiscal years
1997 and 1998, respectively, or $12.3 million and $21.2 million, respectively.
As a result, the Company is subject to numerous international risks. These
risks include unexpected changes in regulatory requirements, export limitations
on encryption technologies, tariffs and other trade barriers, political and
economic instability in foreign markets, difficulty in the staffing, management
and integration of foreign operations, longer payment cycles, greater difficulty
in accounts receivable collection, currency fluctuations and potentially adverse
tax consequences. The uncertainty of the monetary exchange values has caused,
and may in the future cause, some foreign customers to delay new orders or delay
payment for existing orders. These factors may, in the future, contribute to
fluctuations in the Company's financial condition and results of operations.
The Company believes that the Company's currency exchange risk is mitigated
somewhat by the fact that the Company conducts operations from international as
well as domestic locations, allowing it to minimize the impact of any currency
movements by, for example, paying its German debtors in German deutsche marks.
Although the Company's results of operations have not been materially adversely
affected to date as a result of currency fluctuations, the long-term impact of
currency fluctuations, including any possible effect on the business outlook in
other developing countries, cannot be predicted.
The fair value of the Company's investments in marketable securities at
March 31, 1999 was $7.7 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 $731,000
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
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unless the investments are liquidated.
PART II - OTHER INFORMATION
Item 3. Legal Proceedings
For a description of certain legal proceedings affecting the Company, see the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 (File
No. 0-21921). There have been no subsequent material developments in such legal
proceedings since such report was filed.
Item 5. Other Information.
Changes in Management
On April 29, 1999, the Company announced the appointment of Peter Russo as
Executive Vice President and Chief Financial Officer. Kimberly Osgood, who
previously served as Chief Financial Officer, will continue with the Company and
support Mr. Russo as Vice President of Finance and Administration upon
commencement of Mr. Russo's employment.
On April 30, 1999, the Company announced that its President and Chief Executive
Officer, E. Linwood Pearce, requested that the Company's Board of Directors to
begin a search for a new Chief Executive Officer. Mr. Pearce cited personal
reasons for his request. To support Mr. Pearce's decision, Joseph Fox, Chairman
of the Company's Board of Directors, will serve as Co-Chief Executive Officer
with Mr. Pearce during the period in which the Company searches for a new Chief
Executive Officer. Mr. Pearce will remain on the Company's Board of Directors.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed herewith:
Exhibit
Number Exhibit Title
------ -------------
10.1 Agreement, dated March 30, 1999, by and between Template
Software, Inc. and PCS Precise Connectivity Solutions Ltd.
(see agreement for omitted schedules and exhibits).
10.2 Employment Agreement, dated as of April 30, 1999, between
Template Software, Inc. and E. Linwood Pearce.
10.3 Employment Agreement, dated as of April 27, 1999, between
Template Software, Inc. and Peter Russo.
27.1 Financial Data Schedule for the three month period ended
March 31, 1999.
27.2 Restated Financial Data Schedule for the three month period
ended March 31, 1998.
______________
(b) Reports on Form 8-K
During the fiscal quarter ended March 31, 1999, the Company did not file
any reports on Form 8-K.
13
<PAGE>
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1999 TEMPLATE SOFTWARE, INC.
By: /s/ Kimberly E. Osgood
Kimberly E. Osgood
Chief Financial Officer and
Chief Accounting Officer
14
<PAGE>
EXHIBIT 10.1
Agreement
Made on March 30, 1999
By and Between:
PCS Precise Connectivity Solutions Ltd. ("Precise")
Of the first part;
and,
Talma Nueva S.A. ("Talma")
Of the second part;
and,
Template Software, Inc. ("Template")
Of the third part;
Whereas the parties hereto, or part of whom, have entered into the following
agreements:
. Convertible Note Purchase Agreement dated March 25, 1998 by and between
Precise and Template (the "Convertible Note Agreement" ).
. Right of First Refusal Agreement dated March 30, 1998 by and between Precise
and Template (the "RFR Agreement").
. Option to Purchase Shares in the form of a letter by and between Talma and
Precise dated March __, 1998 ( the "Option Letter" ).
Whereas: Each of the parties to the Convertible Note Agreement has the right,
after March 30, 1999, to convert the principal amount of the Note, as
defined in the Convertible Note Agreement, and all accrued interest
thereon into shares of Precise, as more fully specified by the
provisions of the Convertible Note Agreement, and
Whereas: As of March 30, 1999, the principal amount of the Note, as defined in
the Convertible Note Agreement, and all accrued interest thereon as
of March 30, 1999 equals U.S. $ 537,500 (the "Debt" ) and
Whereas: In contemplation of a proposed agreement with a third party by Precise
and/or Talma, the parties have agreed as follows:
1. Template and Precise acknowledge that all amounts of the Debt outstanding
(including accrued interest) are due and payable on March 30, 1999.
Notwithstanding that such amounts are due and payable on such date,
Template has agreed that Precise and/or Talma may repay the Debt
<PAGE>
in full in the following manner: (i) U.S. $100,000 of the principal amount
of the Debt, payable no later than April 30, 1999 (the "First
Installment"), and (ii) all remaining principal and accrued interest of
the Debt (in the aggregate amount of U.S. $ 437,500) no later than May 30,
1999 (the "Second Installment"). Such amounts shall be paid via wire
transfer to a bank account to be specified by Template prior to such
payment. The parties acknowledge that Template shall pay the $120,000
purchase price under that certain Software Sales Agreement, dated the same
date as this Agreement, between Template, Talma and Precise, by setoff
against the Second Installment of such Debt. Should Precise and/or Talma
make payment of the First Installment in full to Template by April 30,
1999, then, and only then, the following provisions shall apply:
1.1 Template shall have no rights whatsoever under any of the following:
the Convertible Note Agreement, the Note, the RFR Agreement and the Option
Letter and/or in relation to any and/or all of the above
agreements/documents; provided, that if Precise and/or Talma do not make
--------
payment of the Second Installment in full to Template by May 30, 1999,
then Template shall continue to have all such rights after such date,
subject to modification of its right to convert the Debt into shares of
Precise Preferred Stock equal to that percentage of the fully diluted
issued and outstanding capital stock of Precise which equals the product
of (i) 8% multiplied by (ii) a fraction, the numerator of which is the
amount of the Second Installment and the denominator of which is the total
amount of the Debt outstanding as of March 30, 1999.
1.2 Without derogating from the generality of the aforesaid, subject to the
proviso contained in Section 1.1, no moneys will be owed to Template by
-----------
either of Precise and/or Talma, Template shall have no rights whatsoever
in relation to shares and/or any other securities of Precise and/or of
Talma and/or the purchase of same, and Template shall have no rights of
conversion or rights of first refusal.
2. Upon the payment of the Debt to Template in full under the terms and
conditions provided in Section 1 above, Template shall return the Note to
Precise. Without derogating from Template's obligation to return the Note,
it is agreed that even if the Note is not returned to Precise upon payment
of the Debt to Template in full under the terms and conditions provided in
Section 1 above, the Note shall be null and void and of no effect.
3. Should Precise and/or Talma not pay the First Installment in full to
Template by April 30, 1999, then the provisions of this Agreement
(excluding this Section 3) shall be null and void and of no effect
(provided that Precise and/or Talma shall not be deemed to have been in
default under the Note as of March 30, 1999. .
<PAGE>
In witness hereof, each of the parties has executed or caused this Agreement to
be duly executed on its behalf by its duly authorized officer/s, all as of the
day and year first above written.
PCS Precise Connectivity Solutions Ltd.
/s/ Yoram Kariv
- ---------------
Talma Nueva S.A
/s/ [Illegible]
- ---------------
Template Software, Inc.
/s/ E. Linwood Pearce
- ---------------------
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is made and entered into as
---------
of the 30th day of April, 1999 and effective as of May 1, 1999 (the "Effective
---------
Date") by and between TEMPLATE SOFTWARE, INC., a Virginia corporation (the
- ----
"Company") and E. Linwood Pearce (the "Employee").
- -------- --------
RECITALS
A. The Company and the Employee are parties to an Employment Agreement,
dated as of October 24, 1996 (as amended by an Amendment, dated as of October
14, 1997, the "Employment Agreement"), pursuant to which the Employee agreed to
--------------------
accept employment as Chief Executive Officer of the Company.
B. The Company has prepared and forwarded to the Employee a Second
Amendment (the "Second Amendment") to the Employment Agreement, setting forth
----------------
the terms of certain modifications to the terms of Employee's employment by the
Company which have been approved by the Company's Board of Directors, which
Second Amendment is, as of the date hereof, unexecuted.
C. The Company and Employee desire to enter into this Agreement to modify
and amend in their entirety the terms and conditions under which the Employee
will provide services to the Company.
D. Employee 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 Employee and the
-------------------
Employee agrees to work for the Company, subject to the terms and conditions
below, for a term of one year (the "Term"), beginning on the date hereof and
----
ending on the first annual anniversary of the date hereof.
2. COMPENSATION; BENEFITS. Subject to the terms and conditions of this
----------------------
Agreement, the Company shall pay to the Employee a base salary of Two Hundred
Forty Thousand Dollars ($240,000), to be paid each pay period in accordance with
the Company's regular payroll policies. Promptly after the date hereof, Employee
shall also be paid a one-time lump sum cash payment in an amount equal to the
cash value of all of Employee's previously
1
<PAGE>
accrued vacation up to the Effective Date. Employee shall also be entitled to be
paid any portion of the bonus that may have been earned by the Employee through
the Effective Date of this Agreement under the terms previously approved by the
Compensation Committee of the Company's Board of Directors on January 22, 1999.
Employee shall also be provided reasonable office space, reasonable access to
administrative personnel, and the right to retain the laptop computer previously
provided to Employee. The Company shall reimburse the Employee's expenses
incurred in providing services hereunder upon submission of appropriate
documentation by the Employee. In addition, the Employee 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
Employee. In this regard, Employee shall be entitled to acquire the Company's
rights under any life insurance policy held by the Company with respect to
Employee. 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. TITLE; DUTIES. The Employee shall be employed as Co-Chief Executive
-------------
Officer and President of the Company. The Employee shall diligently and
conscientiously devote his best efforts to discharge such duties as may
reasonably be requested of him by the Company's Board of Directors and the Co-
Chief Executive Officer.
4. RIGHT TO CONTRACT; CONFLICT OF INTEREST. The Employee 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 Employee and the performance
of the Employee's obligations hereunder will not conflict with or breach any
agreement, order or decree to which the Employee is a party or by which he is
bound.
5. TERMINATION BY DEATH OR DISABILITY OF THE EMPLOYEE.
--------------------------------------------------
(a) In the event of the Employee's death during the Term of this Agreement,
all obligations of the parties hereunder shall terminate immediately, and the
Company shall pay to the Employee's beneficiary or estate, the salary and other
compensation due the Employee through the day on which his death shall have
occurred. The Company shall also pay to the Employee's beneficiary or estate
the compensation due to the Employee through the end of the Term of this
Agreement, to be paid each pay period (and not in a lump sum) in accordance with
the Company's regular payroll policies.
(b) If the Employee 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 be terminated by the Company, at its
option, by written notice to the Employee, 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 Employee
2
<PAGE>
the compensation due to the Employee through the end of the Term of this
Agreement, to be paid each pay period (and not in a lump sum) in accordance with
the Company's regular payroll policies.
6. TERMINATION BY THE EMPLOYEE.
----------------------------
(a) The Employee may voluntarily terminate this Agreement at any time, for
any reason, by giving 14 days written notice to the Company. Any such
termination 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.
(b) After the date of any such termination, the Employee shall be entitled
to receive from the Company the compensation due to the Employee through the end
of the Term of this Agreement, to be paid each pay period (and not in a lump
sum) in accordance with the Company's regular payroll policies.
7. CONFIDENTIALITY AND NON-DISCLOSURE.
-----------------------------------
(a) The Employee 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 of the Company obtained by the Employee from or through
his employment hereunder. The Employee hereby acknowledges and agrees that all
proprietary information referred to in this Section 7 shall be deemed trade
---------
secrets of the Company and of its subsidiaries and affiliates, and that the
Employee 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. Employee further acknowledges that
the Company's products and titles consist of copyrighted material, and Employee
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 Employee further hereby agrees and acknowledges that any disclosure
of any proprietary information prohibited herein, or any breach of the
provisions of Section 7 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 Employee of the provisions
contained in Section 7.
---------
(c) The Employee further agrees that, upon termination of this Agreement,
3
<PAGE>
whether voluntary or involuntary or with or without cause, the Employee shall
notify any new employer, partner, associate or any other firm or corporation
with whom the Employee shall become associated in any capacity whatsoever of the
provisions of this Section 7, and that the Company may give such notice to such
---------
firm, corporation or other person.
8. STOCK OPTIONS. With respect to all stock options that have been
-------------
granted by the Company to the Employee prior to the date hereof, the Company and
the Employee agree as follows.
(a) On the date of the expiration or earlier termination of this Agreement,
the Board of Directors of the Company has approved an amendment to all of
Employee's stock options whereby all stock options previously granted to the
Employee by the Company that are not vested as of such date shall vest in full.
(b) In the event that this Agreement is terminated by the Employee
prior to the end of the Term (other than by reason of death or disability of the
Employee, which is treated in Section 8(c) below), or following the expiration
------------
of the Term of this Agreement, Employee would, under the terms of such stock
options, have the right to retain the status of any applicable stock options as
"incentive stock options" under the Internal Revenue Code of 1986, as amended
(the "Code"), by exercising any "incentive stock options" within ninety (90)
----
days after the date of such termination by Employee or the expiration of the
Term of this Agreement, as applicable. The Board of Directors has approved an
amendment to all of Employee's stock options whereby the Employee may, at his
election, exercise any or all such stock options until May 1, 2001. In the
event that Employee elects to exercise stock options that were characterized as
"incentive stock options" under the Code on the date of grant at any time after
the date that is ninety (90) days after termination of this Agreement by
Employee or the expiration of the Term of this Agreement, as applicable,
Employee acknowledges that such options will be treated as "non-qualified stock
options" under the Code. With respect to any "incentive stock options" that
have been granted to Employee, Employee shall notify the Company in writing
within ninety (90) days of the termination of this Agreement by Employee (other
than termination arising from the Employee's death or disability) or the
expiration of the Term of this Agreement, as applicable, whether he has elected
to exercise "incentive stock options" for a period of time equal to ninety (90)
days from the date of termination of this Agreement by Employee or the
expiration of the Term of this Agreement, as applicable, and have such options
treated as "incentive stock options," or to exercise stock options until May 1,
2001 and have such options treated as "non-qualified stock options."
(c) Following any termination of this Agreement arising from the death
or disability of the Employee, Employee will continue to have the right to
retain the status of any applicable stock options as "incentive stock options"
under the Code, as well as to exercise all "non-qualified stock options," by
exercising stock options for a period of one (1) year after the date of any
termination of this Agreement arising from the death or disability of the
Employee.
9. SEVERABILITY. The Company and the Employee recognize that the laws and
------------
4
<PAGE>
public policies of the Commonwealth of Virginia are subject to varying
interpretations and change. It is the intention of the Company and of the
Employee 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.
10. 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.
11. 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:
Cooley Godward LLP
2002 Edmund Halley Drive, Suite 300
Reston, Virginia 20191
Attn: Joseph W. Conroy, Esquire
(b) If to the Employee, to
E. Linwood Pearce
5
<PAGE>
12. 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.
13. 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.
14. 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 (including, without
limitation, the Employment Agreement and the Second Amendment). 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 Employee 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/ Joseph M. Fox
-----------------
Name: Joseph M. Fox
Title: Chairman of the Board
EMPLOYEE
/s/ E. Linwood Pearce
---------------------
E. Linwood Pearce
7
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
Executive Vice President of Finance and Administration and Chief Financial
--------------------------------------------------------------------------
Officer
-------
THIS EMPLOYMENT AGREEMENT, is made and entered into as of the 27th day of
April, 1999, by and between TEMPLATE SOFTWARE, INC., a Virginia corporation (the
"Company") and PETER J. RUSSO (the "Employee").
------- --------
RECITALS
--------
A. The Company desires to retain Employee to provide the services hereinafter
set forth.
B. Employee 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 Employee and the
-------------------
Employee agrees to work for the Company, effective as of the date hereof,
subject to the terms and conditions below. This Agreement shall be for a term
of twelve (12) months after the date hereof, provided, that the term of this
Agreement shall automatically extend for one additional month at the end of each
month during the term hereof unless either party provides thirty (30) days prior
written notice to the other of its desire not to automatically extend the term
of this Agreement.
2. Compensation; Benefits. Subject to the terms and conditions of this
----------------------
Agreement, the Company shall pay to the Employee a base salary as set forth on
Schedule A, attached hereto and made a part hereof, payable in accordance with
- ----------
the Company's regular payroll policies. In addition to this base salary, the
Employee shall be entitled to the benefits and bonuses described on Schedule A,
----------
subject to the terms and conditions described therein. In addition, the
Employee shall be entitled to receive such other benefits including, but not
limited to, holidays and sick leave, as the Company generally provides to its
employees holding similar positions as that of the Employee. 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. Title; Duties. The Employee shall be employed as Executive Vice President
-------------
of Finance and Administration and Chief Financial Officer. The Employee shall
also serve as the Company's Treasurer and Secretary. The Employee shall
diligently and conscientiously devote his full time and attention and his best
efforts to discharge the duties assigned to her by the Company.
1
<PAGE>
The Employee shall perform such duties as may be assigned to him from time to
time by the Company.
4. Right to Contract; Conflict of Interest. The Employee 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 Employee and the performance of
the Employee's obligations hereunder will not conflict with or breach any
agreement, order or decree to which the Employee is a party or by which he is
bound. During the term of this Agreement, the Employee 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 in any line of business,
regardless of whether such line of business is competitive with the Company's
business, 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 Employee with his consent to another location, the
Company will reimburse the Employee for all reasonable moving expenses incurred
as a result of such transfer. In the event that the Company terminates this
Agreement with cause pursuant to Section 6 hereby or the Employee terminates
---------
this Agreement without cause pursuant to Section 8 hereof within one year after
---------
any such transfer, the Employee 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 Employee agrees that any
---------
amounts owing to the Company under this Section 5 may be deducted from any
---------
salary, bonuses 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 Employee. 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 this Agreement is terminated by the Company for cause, the Company
shall pay the Employee the base salary due him under this Agreement through the
day on which such termination is effective. In the event that this Agreement is
terminated by the Company without cause, the Company shall pay to the Employee
compensation equal to twelve (12) months of the Employee's base salary plus 100%
of the Employee's maximum incentive compensation payable hereunder.
(b) For purposes of this Section 6, "cause" shall mean (i) a material breach
--------- -----
by the Employee of any covenant or condition hereunder or a material failure of
performance by the Employee under this Agreement; (ii) abandonment by the
Employee of his duties hereunder; (iii) the commission by the Employee 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;
(iv) conviction of, or a plea or nolo contendere by, the Employee of a violation
of any federal, state or local law, rule regulation or ordinance; (v) violation
by the Employee of the Company's
2
<PAGE>
material policies as set forth in the Company's personnel handbook, if one has
been adopted, or announced by Company management from time to time, which
violation remains uncured thirty (30) days after written notice to the Employee
by the Company regarding such violation has been provided; (vi) violation of the
Company's drug and alcohol policy as set forth in the Company's personnel
handbook, if one has been adopted, or announced by Company management from time
to time; or (vii) the performance by the Employee of any act or omission
demonstrating an intentional or reckless disregard of the interests of the
Company.
7. Termination by Death or Disability of the Employee.
--------------------------------------------------
(a) In the event of the Employee's death during the term of this Agreement,
all obligations of the parties hereunder shall terminate immediately, and the
Company shall pay to the Employee's legal representatives the base salary due
the Employee through the day on which his death shall have occurred.
(b) If the Employee 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 be terminated by the Company, at its
option, by written notice to the Employee, 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 Employee the base salary due him through the day on which
such termination is effective.
8. Termination by the Employee.
---------------------------
(a) The Employee may 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 date 30 days after
the date of such notice, provided the Company has failed to cure the cause
specified in the notice. In the event that this Agreement is terminated by the
Employee without cause, the Employee shall be entitled to the base salary due
him through the day on which such termination becomes effective. In the event
that this Agreement is terminated by the Employee with cause, the Company shall
pay to the Employee compensation equal to twelve (12) months of the Employee's
base salary plus 100% of the Employee's maximum incentive compensation payable
hereunder.
(b) For purposes of this Section 8, "cause" shall mean (i) a material failure
---------
by the Company to perform its obligations under this Agreement, (ii) a material
reduction in the Employee's duties or responsibilities hereunder not consented
to by Employee or (iii) a relocation of more than fifty (50) miles from the
Company's principal executive offices not consented to by Employee.
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
3
<PAGE>
notice to the Employee, the Company may but shall not be obligated to suspend
the Employee, 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. Change of Control of the Company. In the event of a Change of Control
--------------------------------
(as defined below) of the Company then, immediately following the consummation
of such Change of Control, the Company (or its successor) shall pay to the
Employee in a gross amount such that the net payments retained by the Employee
after payment of any tax imposed by Section 4999 of the Internal Revenue Code of
1986, as amended, with respect to such payment shall equal eighteen (18) months
of the Employee's base salary. For purposes of this Section 10, a Change of
----------
Control shall mean any of the following:
(a) the merger or consolidation of the Company with or into another
unaffiliated entity, or the merger of another unaffiliated entity into the
Company or any subsidiary thereof with the effect that immediately after such
transaction the stockholders of the Company immediately prior to such
transaction hold less than fifty percent (50%) of the total voting power of all
securities generally entitled to vote in the election of directors, managers or
trustees of the entity surviving such merger or consolidation;
(b) the sale, lease or other transfer of all or substantially all of
the Company's assets to an unaffiliated person or group (as such term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) or the sale
or transfer of more than fifty-one percent (51%) of the Company's then
outstanding voting stock (other than in a restructuring transaction which
results in the continuation of the Company's business by an affiliated entity)
to such persons or group; or
(c) the adoption by the stockholders of the Company of a plan relating
to the liquidation or dissolution of the Company.
11. Non-competition and Non-Solicitation.
------------------------------------
(a) Non-competition. The Employee agrees that, during his employment
---------------
hereunder, and until the later of (i) two (2) months after the effective date of
termination of this Agreement, (ii) the date on which the Employee'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:
(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;
4
<PAGE>
(b) Non-Solicitation. The Employee 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
Employee'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 11 shall have the meanings
----------
set forth below:
(A) The Company's "Business" means the development of enterprise-wide
--------
software solutions for large scale applications.
(B) The term "compete" means to engage in competition, directly or
-------
indirectly, individually or through a family member or other person acting on
the Employee'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 Employee 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.
(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.
(d) The Employee further acknowledges that this Section 11 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 Employee 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 Employee 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.
12. Confidentiality and Non-Disclosure.
----------------------------------
(a) The Employee 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
5
<PAGE>
or affiliate (as defined in Section 11) of the Company obtained by the Employee
----------
from or through his employment hereunder. The Employee hereby acknowledges and
agrees that all proprietary information referred to in this Section 12 shall be
----------
deemed trade secrets of the Company and of its subsidiaries and affiliates, as
defined in Section 11, and that the Employee 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. Employee further acknowledges that the Company's products and titles
consist of copyrighted material, and Employee 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 Employee further hereby agrees and acknowledges that any disclosure
of any proprietary information prohibited herein, or any breach of the
provisions of Sections 4 or 11 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 Employee of the
provisions contained in Sections 4, 11 or 12. The Employee shall reimburse the
---------- -- --
reasonable legal fees and other costs incurred by the Company in enforcing the
provisions of Sections 4, 11 and 12 of this Agreement.
---------- -- --
(c) The Employee further agrees that, upon termination of this Agreement,
whether voluntary or involuntary or with or without cause, the Employee shall
notify any new employer, partner, associate or any other firm or corporation
with whom the Employee shall become associated in any capacity whatsoever of the
provisions of this Section 12, and that the Company may give such notice to such
----------
firm, corporation or other person.
13. Assignment and Disclosure of Inventions.
---------------------------------------
(a) From and after the date the Employee first became employed with the
Company, the Employee 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 Employee, either alone
or jointly with others, during the period of the Employee's employment, whether
or not in the course of the Employee's employment.
(b) The Employee hereby acknowledges that copyrightable works prepared by the
Employee within the scope of the Employee's employment are "works for hire"
under the Copyright Act and that the Company will be considered the author
thereof. The Employee 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 Employee 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
Employee to the Company.
6
<PAGE>
14. Severability. The Company and the Employee 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
Employee 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.
15. 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.
16. 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
Dulles, Virginia 20166
Attn: Chief Executive Officer
with a copy to :
Cooley Godward LLP
2002 Edmund Halley Drive, Suite 300
Reston, Virginia 20191
Attn: Joseph W. Conroy, Esquire
(b) If to the Employee, to
Peter J. Russo
111 Bringham Street
Unit 27D
Hudson, Massachusetts 01749
7
<PAGE>
17. 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.
18. 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.
19. 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 Employee 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]
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
-------
TEMPLATE SOFTWARE, INC.
By: ___/s/ Joseph M. Fox_____________
Name: Joseph M. Fox
Title: Chairman of the Board
EMPLOYEE:
--------
_____/s/ Peter J. Russo _______________
Peter J. Russo
9
<PAGE>
Schedule A
----------
1. Base salary: $200,000 annually (payable semi-monthly in equal $16,666.66
-----------
installments)
2. Incentive compensation: Up to $100,000 annually, to be earned under terms
----------------------
and conditions to be provided within sixty (60) days after the date hereof.
The incentive compensation for 1999 will be pro-rated based on the
Employee's start date.
3. Vacation: 4 weeks per year.
--------
4. Stock options: On the date of this Agreement, the Employee shall be
-------------
granted an incentive stock option to acquire 200,000 shares of the
Company's Common Stock at an exercise price per share equal to the
closing price of the Company's Common Stock on the Nasdaq National
Market on the date of this Agreement. Such stock options shall be
exercisable as follows: (i) 25% exercisable as of the date of the
Agreement and (ii) 25% exercisable on each annual anniversary hereof.
Notwithstanding the foregoing, upon termination of this Agreement by
the Company without cause (as defined in Section 6), all unexercisable
---------
stock options shall become immediately exercisable for twelve (12)
months following the date of such termination. Furthermore, upon a
Change of Control of the Company (as defined in Section 10), all
----------
unexercisable stock options shall become immediately exercisable for
twelve (12) months following the date of the consummation of such
Change of Control.
The grant of stock options to the Employee hereunder will be evidenced
by a stock option agreement, to be prepared by the Company, and will
be subject to the terms and conditions of the Company's 1996 Stock
Incentive Plan.
5. Relocation: The Employee will be eligible to receive a relocation
----------
reimbursement of actual expenses up to $70,000, subject to applicable
federal, state and local employment and withholding taxes, for which
Employee will be responsible. Should the Employee terminate this
Agreement without cause (as defined in Section 8) prior to completion
of one year of service, the Employee will be required to reimburse the
Company for all such expenses.
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3147
<SECURITIES> 7744
<RECEIVABLES> 13073
<ALLOWANCES> 492
<INVENTORY> 371
<CURRENT-ASSETS> 27341
<PP&E> 7244
<DEPRECIATION> 1934
<TOTAL-ASSETS> 46929
<CURRENT-LIABILITIES> 7181
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 38397
<TOTAL-LIABILITY-AND-EQUITY> 46929
<SALES> 0
<TOTAL-REVENUES> 12463
<CGS> 0
<TOTAL-COSTS> 8013
<OTHER-EXPENSES> 4387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (92)
<INCOME-PRETAX> 158
<INCOME-TAX> 71
<INCOME-CONTINUING> 87
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR
THE PERIOD ENDING MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6904
<SECURITIES> 9960
<RECEIVABLES> 8592
<ALLOWANCES> 532
<INVENTORY> 53
<CURRENT-ASSETS> 27631
<PP&E> 3578
<DEPRECIATION> 1268
<TOTAL-ASSETS> 44104
<CURRENT-LIABILITIES> 5481
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 37440
<TOTAL-LIABILITY-AND-EQUITY> 37490
<SALES> 0
<TOTAL-REVENUES> 8558
<CGS> 0
<TOTAL-COSTS> 4819
<OTHER-EXPENSES> 3886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (152)
<INCOME-PRETAX> 35
<INCOME-TAX> 54
<INCOME-CONTINUING> (19)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
